Macro: COVID-19 Update Russia: Geopolitical tensions rising, while pandemic impact on economy is milder

COVID-19 development: Starting from September the number of new infections has been above 5,000 for several days already, which indicated a reversal in the downtrend. Still, all major quarantine restrictions have been lifted and Russia began to re-open its borders. In August Russia registered the first Covid-19 vaccine (Sputnik V), with trial phase ongoing in Russia and 5 other countries.

Economic development: For the economy, the first shock appears to be moderate, yet the recovery may take a longer time given the risks of a Covid-19 second wave globally. Still, despite the improving outlook we stick to current GDP forecast of -4.9% yoy for 2020 to capture any possible negative effects of a Covid-19 second wave in case of weaker than expected recovery. Although the pace of the recovery in consumer and production segments is encouraging, the household services and mining remain among the weakest sectors. Other sectors continue to demonstrate largely positive dynamics. Moreover, numerous consumers had to make undesired and/or precautionary savings (deposits and cash increase) during pandemic, so this money may go to fund further consumption recovery.

Fiscal policy implications: The government support measures have already resulted in expenditure growth and an expectedly large fiscal deficit. The deficit financing required a dramatic increase of the OFZ issuance and the use of the National Wellbeing Fund for the first time since 2017.

Inflation and interest rate outlook: We do not see substantial inflationary factors that could push CPI above 4% this year due to generally depressed consumption. At the same time, we believe that the easing cycle in Russia is close to an end given the notable easing the CBR has already made. Also, the regulator has to take into account other factors, such as global monetary trends, capital outflows and external risks (i.e. new sanctions, etc.), which are putting pressure on the RUB. In this context we penciled a final 25bp rate cut for this year, while geopolitical tensions remain a key risk to our scenario.

This Research was produced and first published by Raiffeisen Bank International AG which is supervised by the Austrian Financial Market Authority and the National Bank of Austria.