WOOD Flash – Russia: reassessing the macro outlook

The latest round of sanctions have surprised us in their intensity, and thus call for a reassessment of the growth and currency outlook. As much depends on the political relation between the US and Russia, we have identified three likely scenarios from here: i) a de-escalation of tensions; ii) one where further sanctions materialise, but do not preclude Russia from tapping global equity and bond markets; and iii) one where Iran-style sanctions are put in place. We see the first two scenarios as most likely; in fact, full de-escalation would make sense from both sides, in our view. Our real GDP growth estimates had been erring on the side of caution, given the unknowns related to the sanctions, and it appears appropriate to trim our forecasts further. In our view, the central bank of Russia has enough means and probably the inclination to facilitate the rollover of the external debt maturing this year, as long as the sanctions do not escalate materially. The fundamental case for significant rate cuts ahead remains, in our view, but the depreciation is likely to make the easing slower.