Russia: Rate decision over sanctions fears

The ruble is trading sideways around 60 ruble and this may not last long as the USDRUB pair is under pressures. While the Russian economic data are improving, there are other geopolitical issues that may have strong consequences on the future of the Russian economy. Indeed, U.S senate has finally approved further strengthening of sanctions which would prevent Donald Trump from lifting them. Now Trump must revise this legislation which sounds contradictory knowing that his relation with Russia during his campaign are under investigation. There may be there a conflict of interest.

Some say that there is now growing risks that Russia, under the US sanctions, could face decades of low growth. Other economic fundamentals such as low oil prices, which remain below $50, are also weighing on the Russian economy. Inflation, even though declining, are still very high and should likely end up to 5% before year-end (4.4% at the moment). We believe that the Central Bank of Russia has some room for normalizing its monetary policy. In addition, the CBR needs to guarantee price stability because of sanctions will which will drive policymakers not tighten rates. As a result, key rate is then set to remain at 9%. We target 58 ruble for one dollar in the medium-term as we consider the ruble is still one good carry trade with, even though existing but limited downside risks.

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