Last week, the Central Bank of Russia (CBR) cut the key rate by 50bps to 5.5%. In her follow-up statement, Elvira Nabiullina, the CBR Governor, opined “This implies that we have switched to accommodative monetary policy. Moreover, we hold open the prospect of further key rate reduction if the situation develops in line with the updated baseline forecast of the Bank of Russia.”
The CBR forecast the economy will contract by 4-6% in 2020 as the covid-induced global growth shock, the slump in oil prices and the negative impact of lockdown measures on domestic growth take effect. Although Nabiullina noted the economy is then expected to recover: “GDP will expand by 3–5% in 2021 and by 1.5–3.5% in 2022” helped by the implementation of national projects. Key assumptions include a recovery in the oil price which is seen as “slowly growing from the average level of USD 15 per barrel in the second quarter to USD 25 per barrel in the fourth quarter”, gradually rising to USD 45 per barrel in 2022. It also assumes that lockdown restrictions start to be lifted in 2Q allowing economies to start to recover. However, Nabiullina noted the forecasts come with the proviso of a high degree of uncertainty in terms of assumptions regarding the duration of the restrictions and the pace of the recovery and are based on “fiscal decisions already made by the Government”.
In terms of fiscal policy response, Russia looks like it will need to do more and there is certainly scope to do so given its sizeable asset buffers/national wealth fund and low government debt levels. Estimates put Russia’s coronavirus spending at 2.8% of GDP which looks low compared to the US at ~11% of GDP. Thus, it comes as little surprise that the Prime Minister Mikhail Mishustin announced the Economic Development Ministry is working through further proposals to submit to the government on 30th April.
We continue to position in higher quality credits with greater financial reserves/buffers to weather adverse scenarios and put in place appropriate policy responses to counter the downturn. Currently, we favour longer dated (USD denominated) sovereign issues from Abu Dhabi and Qatar over Russian government paper as they also have sizeable asset buffers, are higher rated and also screen more attractively on our RVM model. For example, Abu Dhabi 4.125% 2047 (AA rated by Fitch) trades on a yield of ~3.5% and trades close to 4 credit notches cheap versus Russia 5.25% 2047 (BBB rated by Fitch) which trades on a yield of ~3.9% and over 1.3 notches expensive.