Not oil, but structural reforms could prove key factor for the ruble - Rabobank

Piotr Matys, EM FX Strategist at Rabobank has come out with a research report, highlighting structural reforms as a key driving factor for the ruble in 2018.

Key quotes:

“Not oil prices, but commitment to structural reforms could prove a major driving factor for the ruble this year. While the acceleration in economic activity in 2017 marked the end of prolonged recession, without economic reforms Russia’s growth will be relatively sluggish. The World Bank expects GDP growth to edge marginally higher from the estimated 1.7% y/y in 2017 to 1.8% y/y this year on the back of rising oil prices. To put that into perspective, Poland – the largest economy in the CEE - is anticipated to grow 4% y/y this year.”

“There are reasons, however, to be optimistic about the long-term outlook for Russia. Once reelected in March, President Putin may focus on implementing economic reforms that would boost productivity and at the same time reduce reliance on global demand for Russia’s oil and gas. It is worth noting that for the first time in more than a decade a majority of Russians favour economic reforms over stability, according to a poll by ISRAS. Young people are the strongest supporters of reforms (62%) followed by the group of 31-40 years old (51%). Unsurprisingly the elderly prefer stability.”

“The perception amongst Russians seems to be changing as they expect Putin and his administration to adopt measures that would improve living standards, especially after enduring long recession caused by the collapse of oil prices, Western sanctions imposed for incorporating Crimea and destabilizing eastern Ukraine and the sharp rise in inflation that forced the CBR to raise interest rates significantly.”

“Responding to those expectations President Putin’s economic aide Belousov revealed that government spending on education, health and infrastructure could increase by 1.5-2% of GDP. This would be in line with the economic programme for 2018-2024 prepared by former Finance Minister Kudrin as one of the main pillars of Putin’s presidency. After the presidential election Putin may reshuffle the government. If Kudrin replaces Medvedev as the prime minister, it would be an indication that President Putin endorses structural reforms, which in turn could fuel capital inflows to Russian assets.”

“We are cautiously optimistic about the ruble expecting gradual appreciation in the second half of the year to 52 against the US dollar and to 64.48 versus the euro.”