The Russian economy is facing a shock that is still developing, hence a number of important watch factors have to be monitored in the coming months. One line of expectation is that the unemployment rate is unlikely to jump substantially – in February 2022 it dropped to a new historical low of 4.1% which should help to mitigate the negative effect of the shrinking economic activity on the labor market. The resulting second expectation is that inflation is more likely to surprise to the upside and, after the 16-17% y/y inflation posted in March, we expect the inflation rate to exceed 20% y/y. Thirdly, the inflation trend is expected to deeply depend on the trade balance. According to the Finance Ministry, in March Russian oil was sold with a 20% discount to Brent, implying a $3 bn monthly loss of oil revenues; the disruption in trade logistics also suggests that the cost of imports may increase substantially. We consider the recent ruble appreciation being very temporary which would also maintain inflationary risks.
Russia’s retail trade jumped by 5.9% y/y in February, likely to show an 8,0% y/y increase in March: The growing concerns over sanctions pressure forced the Russian population to increase consumption starting at the end of February and the excessive demand has persisted through the entire month of March. Retail trade was up 5.9% y/y in February, owing to the beginning of the panic buying from the end of the month, a scale similar to the pandemic increase (a jump of 6.9% y/y in March 2020). We expect the March retail trade data to demonstrate an 8,0% y/y increase as stronger demand was observed in both the food segment (triggered by inflationary expectations) and the non-food segment (triggered by penury fear).
Inflation reached 15.7% y/y as of 25 March: The strong jump in panic demand triggered a sharp price reaction. Russia’s inflation rate was reported to accelerate from 9.2% y/y level in February to 15.7% y/y reported as of 25 March. This comes in line with our expectation that for March the inflation rate is very likely to come at 16-17% y/y. This spike is likely to trigger an increase in inflationary expectations and fuel an increased preference for consumption.
Russian banks lost 3.5% of their retail deposits in February: The sharp decline in the level of deposits held in Russian banks is one of reasons behind the strong consumption and inflation figures. Russian households withdrew RUB 1.2 tn from Russian banks in February or 3.5% of their total banking deposits; the outflow would definitely be larger had the CBR not introduced a freeze on forex deposits from 2 March. While the CBR’s decision to increase its key policy rate to 20% helped to push back some of the money, we still consider around RUB1 tn did not return to banks and was possibly invested in the purchase of durable food and non-food products.
Historically low unemployment of 4.1% in February is also an inflationary factor: Inflation could be contained by the weakness in final demand but the labor market looks to be very tight. Rosstat has reported unemployment at 4.1% for February and the decision of a number of global companies to stop exporting technologies to Russia is likely to fuel increased demand for workers in areas that previously were expected to cut jobs because of the technological shift. A temporary increase in unemployment is clearly likely however the unemployment rate is unlikely to come above 6% this year, in our view.
Ruble exchange rate appreciation looks very temporary as Russia lost $3bn of its oil revenues in March due to the Urals oil price discount to Brent: While the recent ruble appreciation to RUB80-85/$ brought some optimism to the market, we consider this move very unsustainable. We attribute it to the period of export revenue sales due at the end of March which were strong because of the high return of the previous months and also because of the large tax payments due quarterly and annually. However, the Finance Ministry has announced that in March Russian crude was sold with a 20% discount to Brent, implying a $3 bn loss of country’s monthly export revenues. Losses in physical volumes of exports in oil and metals are likely to add to the nominal losses from March-April. We would not exclude that from the $45 bn of monthly export revenues in January 2022 Russia could receive only $30-35 bn on a monthly basis in 2Q22. For imports, by contrast, we expect that Russian companies may have to overpay substantially and as a result even if the physical volumes of imports in March show a 50-60% decline from the level of February, in nominal terms imports may stay at pre-crisis monthly level of $25 bn. Put simply, the current ruble strength looks temporary and we do not expect the ruble exchange rate to provide support to the inflation trend.