Russia and viruses: balances to shrink as global recession nears
After the Fed cut its rate nearly to zero and announced plans to massively expand its balance in an attempt to limit the effects of a forthcoming global recession, US stock market futures plummeted by around 5%, followed by a deep contraction in Europe, including Russia. This panic sent the oil price down to nearly $30/bbl. As the virus is spreading exponentially, regions and countries have been locked down, flights have been cancelled and many businesses shut, with increasingly likely chances of a global recession in 2020. The global economy seems to be experiencing a triple shock from the virus of sanctions, the virus of trade wars and the COVID-19.
Risk-off dominated the market, hence the behavior of Russian assets was not a surprise. The most paradoxical evidence was the widening of the CDS spread, which increased from 55 bps to 225 bps since the beginning of the year.
To soften the situation the CBR may start purchasing bonds on the open market, which may be considered as non-QE currently conducted by Fed. Another option is to give the biggest local banks access to its balance sheet via repo operations.
* Russia’s decision to walk away from a new OPEC+ deal in the current environment could be viewed as supportive to global economic growth as lower energy costs would help consumers and businesses to allocate more funds for other needs. The lasting $30/bbl oil scenario, which did not look realistic a couple of months ago, now looks likely.
* The share of non-oil revenues in the federal budget climbed to over 60% in recent years, which implies that less spending is financed with oil-and-gas revenues. A lower level of budgetary spending gives the Russian government more flexibility and allows it to select the best options as to how to finance the deficit.
* Russia’s major balances, such as the budget balance and that of the current account, are not at risk. What looks to be at greater risk this year is economic growth as non-energy exports are likely to contract amid global recession, or just slow down, which may undermine federal budget revenue flow more than one can currently expect.
* Given Russia’s fundamentals, a more-than-quadruple increase of insurance (via CDS) looks excessive and can be explained by exaggerated fears of investors. It promises a quick rebound once the market is back to its normal state.
* The spread between the long-term OFZ yield and the key rate reached a historical high – 200 bps, and the carry trade definitely looks attractive for domestic investors, but the risk of an emergency rate hike by the CBR in response to market volatility is keeping locals cautious despite the fact that the CBR fundamentally has no reason to change the interest rate in the near future as inflation is likely to remain close to its longer-term target in FY2020.
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