Market volatility increases as geopolitical noise hit Russia

RUSSIA ECONOMICS - In Brief 14 Jan 2022 by Alexander Kudrin

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The Russian economy is waking up after a long New Year holiday break in a volatile environment caused by geopolitical noise. Compared to December 31, the Russian 10Y OFZ yields jumped by around 100 bps on January 14. The Russian ruble nearly attained almost the R/$ 77 benchmark on January 5, ahead of Russia and the US/NATO meetings. On the back of some positive expectations about the outcome of the meetings, it moved back to around R/$ 74 on January 11, i.e., where it was at the very end of 2021. It moved again close to R/$ 77 level on January 14, as no positive news came out from the politicians. This outcome was well expected in Russia’s Pandemic/Political Update “Seeking Points of No Return” published on January 3, 2022. The main economic conclusion of this report was that the volatility of the Russian financial markets was expected to be high. Indeed, amid an increasingly Kafkaesque geopolitical environment, both sides couldn’t, in principle, find any common objectives – at least until some point of no return has become very visible.Russia’s market volatility is currently solely driven by geopolitics as the country’s macroeconomic situation looks not too bad. One may refer to a decent rate of economic growth, high current account surplus, and strong budgetary revenue flow. Weak ruble helps to collect more oil-and-gas revenues, as well as some other taxes, related to imported goods. Therefore, a strong federal budget surplus can be expected this year. Persistently high inflation is currently the main concern, but Russia is not the only country facing it. Meanwhile, high inflation also boosts tax collection. If the geopolitical noise eases, then the ruble and the yie...