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Macro Insights
AB-ICI: CBR to Kill the Mood?
Natalia Orlova
Dmitry Dolgin
(+7 495) 795-3677
(+7 495) 780-4724
June 1, 2015
NOrlova@alfabank.ru
DDolgin@alfabank.ru
www.alfa-bank.com
Moscow
Investment Summary
 AB-ICI spiked 13% m/m in April thanks to the improvement in all three key components.

Better sentiment toward Russia was observed among financial markets and households.

The CBR’s return to the FX market is a negative sign for the ruble, which is a risk to further AB-ICI recovery.
AB-ICI up 13% in April, 22% YTD
AB-ICI jumped 13% in
April thanks to
improvement in
sentiment towards
Russia
AB-ICI posted a sharp and positive 13% m/m increase in April, after climbing
5-7% in February-March. The good news is that confidence increased among all
economic agents, mainly reflecting the return of interest from local households,
businesses and foreign investors in ruble assets. Our concern however, is that the
resulting 35% ruble appreciation since February has triggered reinstatement of the
CBR’s FX interventions, which might be a strong drag on further ABI-ICI recovery.
Households started to
return their savings to
rubles

Economic confidence increased materially, reflecting a return of savings
from under mattresses to banks, with ruble retail deposits increasing 3%
m/m in April and 6% YTD, and dollarization dropping to 24% from the
27-30% peak near the beginning of the year. The higher preference for
rubles among households is also confirmed by the anecdotal evidence of
increased FX cash conversion to the national currency.
FDI inflows improved –
possibly thanks to
sanctions

Foreign confidence increased, reflecting some improvement in FDI inflows
in 4Q14, and suggesting that the sanction environment may have stimulated
repatriation of the Russian capital. Another positive is that the share of
foreign banks’ assets in Russia also increased; however, this partially
reflects the revaluation effect.

Market confidence continued to rally in April, further narrowing the lag to
other EMs that had emerged at YE14. The drop in yields on Russian local
and foreign bonds, as well as the continuing increase in the RTS index
reflected a return of foreign capital to the Russian markets and supporting
ruble appreciation. The recent CBR decision to purchase FX on the market
raises questions over the longevity of this rally.
Figure 1: AB-ICI jumped 13% in April
3000
RTS
RTS (LHS)
AB-ICI (rebased)
AB-ICI
1000
900
2500
800
2000
700
600
1500
500
1000
400
300
500
200
0
100
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Russian FX, equity and
bond markets rallied in
March-April, after being
extremely oversold in
YE14
Source: New Economic School, RTS, Alfa Bank
Alfa Bank Investor Confidence Index
June 1, 2015 AB-ICI: CBR to Kill the Mood?
1
Macro Insights
AB-ICI: CBR to Kill the Mood?
AB-ICI is up 22% YTD
on better sentiment
towards Russia;
stronger ruble was the
key component
The growth in the AB-ICI by 13% in April was a positive surprise. As a result of this
growth, the index is now up 22% YTD, indicating that in the four months of 2015,
Russia has managed to restore most of the confidence lost in 2014, when the ABICI collapsed 25%. We welcome the most recent developments, which, in addition
to a very shallow 1.9% y/y GDP drop in 1Q15, included a rapid recovery in the
financial markets in March-April after being oversold in YE14. The return of oil
prices from the low of $55/bbl to $65-70/bbl and the easing of geopolitical tension
resulted in a material drop in the yields on Russian Eurobonds to 3.8% and the
growth of the RTS index by 25% to 1000 points in two months. The most visible
sign of better sentiment toward Russia was the ruble appreciation to 50/$ by the
end of April, after touching RUB70/$ only two months prior. However, in May, the
ruble’s attempts to enter the much expected RUB45-50/$ range failed, raising
questions about the prospects for investor sentiment.
CBR blocks further
ruble appreciation
through higher FX
repo rates, lower key
rate and FX
interventions
The reason the rally hit the wall was the CBR, which, despite the nominal shift to a
free-float, has recently been sending strong signals to the FX market that it is still
targeting the ruble exchange rate. First, since April, the bank has raised interest
rates on FX repo instruments and ceased offering 1-year repo (in May), lowering
the supply of FX to the markets. Second, it lowered the key rate 150bp (450bp
YTD) despite still high inflation, reducing the attractiveness of ruble assets to
foreign capital. Finally, and the most importantly, since May 13, it has reinstated
FX interventions, so far buying $100-200m daily but not excluding higher volumes
in future.
3,0%
30
2,0%
20
10
19-Dec
26-Dec
19-Jan
26-Jan
3-Feb
16-Feb
20-Feb
3-Mar
16-Mar
23-Mar
31-Mar
13-Apr
20-Apr
28-Apr
8-May
18-May
26-May
0
Source: CBR, Alfa-Bank
CBR’s shift back to
exchange rate
targeting is damaging
for its credibility, can
create expectations of
a weaker ruble, and
depress the investor
sentiment
May-15
Mar-15
500
37
0
42
-500
-1000
52
-1500
57
0,0%
Feb-15
32
47
1,0%
Dec-14
Nov-14
Sep-14
Aug-14
Jul-14
40
May-14
$ bn
Apr-14
1M & 1W FX repo, $bn
1Y FX repo, $ bn
Interest on 1Y FX repo (LHS)
Feb-14
4,0%
Figure 3: $/RUB and daily CBR FX interventions
($ m)
Jan-14
Figure 2: CBR FX repo operations structure ($
bn) and interest on 1-year auctions (%)
-2000
62
67
72
-2500
FX interventions, $ mln
$/RUB (LHS)
-3000
Source: CBR, Alfa-Bank
While the CBR might well reason that its explicit attempts to influence the FX
market are excused by fears of higher capital outflows following a too sharp ruble
appreciation, our concern is that those actions contradict the commitments the
CBR undertook late last year, when it announced a transition to a ruble free-float.
First, shifting back to FX management before bringing down inflation (which is still
high, at 16-17% y/y) to the 4% target appears premature. Second, FX
interventions do not appear justified to us when the ruble is trading at 50-55/$, in
line with the fair value and representing no apparent risk to financial stability.
Comparing this behavior with allowing the ruble to free-fall to RUB80/$ last year,
the market might draw the conclusion that the asymmetric approach to ruble
management signifies reduced CBR independence and a need to satisfy
budgetary needs with a weaker ruble. This environment damages sentiment by
making the economy more focused on playing exchange rate fluctuations rather
than on ruble savings and investments. We consider the CBR’s recent actions as
a strong factor limiting the further recovery in the AB-ICI.
Alfa Bank Investor Confidence Index
June 1, 2015 AB-ICI: CBR to Kill the Mood?
2
Macro Insights
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Alfa Bank Investor Confidence Index
June 1, 2015 AB-ICI: CBR to Kill the Mood?
3
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Macroeconomics
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Dmitry Dolgin
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research@alfabank.ru
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Alfa Bank Investor Confidence Index
June 1, 2015 AB-ICI: CBR to Kill the Mood?
4