Russia’s Monetary Bandwidth

 

Russia's central bank cut its refinancing rate 50bps to 12% yesterday, the second cut in the last month. 

 

We've had our EYE on Russia this year and have been in and out of the Russian etf RSX on the long side. (We currently do not have a position). The Russian stock market (RTS) has now moved to +50% YTD, overtaking China as the best performing stock market YTD across the globe.  

 

This year we've been cautious in pointing out the risk premium associated with owning Russia, yet assertive that Russia's commodity based economy stands to benefit greatly from commodity reflation and its ability to supply China with the resources it needs for domestic growth. Further we believe that Brazil, Australia, and Canada share in this thesis. Yesterday we bought Brazil via the etf EWZ and Australia via EWA. Last week Andrew Barber noted in his post "Meet The New Boss: China" that Brazil's total exports to China exceeded those to the US for the first time in March, with iron ore leading the charge. Clearly getting long countries that can feed China's appetite has worked this year. Brazil is up 30% YTD and Russia (especially mining companies) will push higher from increased Chinese demand, which is now being confirmed by copper shipments. 

 

And there's continued confirmation that Russia understands who the client is.  Yesterday President Medvedev met with Wu Bangguo, chairman of the National People's Congress, to discuss their "strategic partnership" and a number of meetings are scheduled for the two nations this year.

 

Yesterday's interest rate cut will help to arrest the deflationary environment Russia is experiencing and in theory decrease the cost of borrowing.  In the case of Russia, it is worth noting that the central bank has room to cut, unlike major economies such as the US, UK, Japan, Switzerland, Sweden, and ECB-countries, all of whom are hovering at or around zero percent.  For the commodity levered Russia, inflation is a double edged sword. On the one hand it increases the price of its commodity exports that drive growth, yet on the other puts extreme pressure on domestic prices. By some estimates, inflation could slow to 9% this year, down from the central bank's target of 13%. In any event, Russia enjoys the ability to cut rates due to the stability of the Ruble versus the USD and Euro in the last months.

 

Look for use to get in on the long side of Russia via RSX at the right price.

 

Matthew Hedrick
Analyst

 

Russia’s Monetary Bandwidth  - russia


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