Russia: the fundamental story is intact, sanctions pose downside risks

• The macro outlook: The outlook for the Russian economy is positive, supported by expansive monetary policy, robust global trade and increasing oil price, even though the current context has deteriorated on the back of the last round of sanctions. Russia external position makes the economy resilient to external shocks. The biggest risk is rapresented by a decline of the oil price, although the recent adoption of a new fiscal rule has made the country fiscal accounts less vulnerable than before to oil price swings.

• Rouble: We expect that the Rouble will continue to be a shock absorber given the tail risks brought up by the latest round of US sanctions. However, from a valuation perspective, our model shows USDRUB to be fairly valued at 61-62 range, as the oil price remains supported. We do not expect Central Bank of Russia (CBR) to hike rates in near term but CBR might take a pause in 1H18 from its current easing stance and re-estabilish it once the ‘dust’ settles.

• Equity: We remain constructive on Russian equity however risks of further additions of new firms or businessmen to the list of sanctions will remain an overhang. The Russian equity index appears quite cheap, we believe it will be crucial to select the names and the sectors less exposed to chain distruptions and more sheltered from potential future sanctions.

• Fixed income: We maintain a constructive stance in the Russian fixed income market, preferring sovereign, quasi-sovereign issuers and financials on the credit side. We see limited risk of broad contagion to other EM countries, Russia being an idiosyncratic story.

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