Russia in the spotlight Q2 2015

20.07.2015
- The Russian banks: looked after by the Central Bank of Russia but not out of the woods yet
- Driving force behind Russian eurobonds rally
- Pension savings: back on track
- Russian economy: lack of blossom in spring
- Inflation in a downhill ride

The Russian banks: looked after by the Central Bank of Russia but not out of the woods yet

The Russian banking sector is an integral part of the economy and in many ways an indicator of its health. 2015 has not been an easy year so far, with falling profitability, shrinking credit lending growth rates and declining quality of credit portfolios. However, the sector is well looked after by the CBR and is in a relatively stable position in terms of liquidity and capital adequacy. The rest of 2015 should be more positive for the banks due to lower interest rates, however the speed of recovery will depend on the overall macroeconomic tendencies.

Driving force behind Russian eurobonds rally

Russian eurobonds have posted stellar performance for the period with a 15% return for Russia 30 for the first four months of 2015. The rally in the Russia 30 occurred in absence of any changes in fundamental factors, and its yields dropped to June 2013 levels without any progress in geopolitical tensions or oil price movements. Below we review in detail the driving force behind the rally of Russian eurobonds and share our expectations on further developments on this market.

Pension savings: back on track

In April, the government announced that it would resume distribution of the savings’ part of the pension payouts in 2016. This news ended a 16-month-long reform which effectively minimized the activity in the bond market in Russia. We believe that the news is positive for the local corporate bond market and below review the reform and its implications for the bondholders.

Russian economy: lack of blossom in spring

Dynamics of the main macroeconomic indicators were in the red in spring with the situation generally worse than in winter both on supply and demand sides. In March there were signs of improvement in the dynamics of industrial production and investments, but they disappeared in April with further deterioration in May. In contrast, retail sales contraction in annual terms continued to deteriorate in March before showing some improvement in May.

Inflation in a downhill ride

Since peaking in March inflation contracted by 160bps to 15.3% y/y by the end of June; weekly figures for June demonstrate a continued decline. This was largely due to a contraction in food inflation from 23% y/y in March to 18.8% y/y in June offsetting a relatively small acceleration in price growth in the non-food segment. In the services segment inflation dropped by one percentage point, but this had a small effect on the overall figure due to a relatively small share of services in consumer spending.