Russia: Economic effects of sanctions

  • Our model of the ruble-oil price correlation indicates that sanctions pressure – with help from wider EM risk-off – has caused a 27% deviation from the ‘natural’ level for USDRUR.
  • This effect – reflected in an all-time high ruble oil price and reinforced by the imminent VAT hike – is boosting external demand, while domestic demand growth will flag.
  • The strategic policy framework makes domestic investment demand a potential exception to this rule; but this effect will not be felt before H2/19.
  • While not boosting domestic demand, fiscal and monetary policy will avoid weakening it further: specifically, the CBR will leave its policy rate unchanged tomorrow.
  • The surging current account and budget surpluses will cushion the effect of outflows from the local debt market, while in equities, materials (metals & mining and chemicals) should catch up with outperforming oil stocks in this sanctions-driven economic environment.

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