Nomura Comments on Russia Emergency Rate Hike

Strategist Dmitri Petrov at Nomura weighed on Russia's second emergency rate hike, which put the key rate at 17% (up from 10.5%). So far, the rate hike has done little with the Rouble crashing further to nearly 80 versus the dollar and 100 versus the Euro.

So far, comparing the CBR's actions to the TCMB emergency hike (from January) helped us to assess the situation, leading us to conclude that is it better not to jump into the RUB currency long or go long Russia credit too soon. Unlike in Russia, market had a clear idea about what needed to be done in Turkey, for changing negative expectations: A tighter monetary policy. In Russia, however, further complications have been present:

1. The basis and FX liquidity problem made monetary policy less effective
2. The FX regime shift arguably overshot the RUB
3. There is a lack of stability in the oil market

For Russia, the FX regime problem and FX liquidity seem to be gradually being addressed with FX repo and a change in FX policy (see Russia: Further degrees of freedom). However, additional factors behind the recent weakness seem to have
emerged:

1. Dollarization (as both corporate / individual currency expectations deteriorate)
2. Low oil prices making the feedback loop worse for growth and financial stability, even though some of the fiscal problems have been reduced with RUB weakness.

For the second point, in contrast to Turkey (Q1 experience), the net benefits of the current aggressive hike in a lower oil price environment are less clear, as it makes the growth prospect even weaker, which is a concern in itself. To address some of the
criticism around growth implications from the industry, the CBR left the rate of specialised instruments relating to infrastructure projects unchanged. This would help to finance projects, mostly coordinated by state-owned enterprises, at below the policy rate.
However, the net effect of the overall adjustment is likely to remain growth-negative.

Overall it seems that for the CBR, policy priorities have clearly changed. In contrast to Turkey, there is a greater uncertainty whether the current adjustment will be enough to motivate enough de-dollarization, or further adjustment would be necessary given the extent of the problem. But this is a positive signal and markets can potentially welcome this. It is also a positive signal that taking market measures to affect the currency remain the preferred policy tool. For now, it remains uncertain whether the hike would be enough to lead to exchange rate stability, or if after brief optimism, we see further deterioration as fundamental factors prevail.

We also remember that easier trade for USD/TRY shorts in Q1 came after emergency hike once realized volatility started to fall. That “easier trade” missed the initial big move, but captured a more tradable fall from 2.25 to 2.18. We will remember that while
watching RUB next few days.

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