Russia: Higher FX purchases in August no big deal for the ruble

The Russian Finance Ministry announced today that monthly FX purchases will increase from July's RUB296bn to RUB316bn in August, corresponding to an increase from US$4.0bn to US$4.3bn (Figure 1). This increase is not a surprise to us or to the market (we expected US$4.4bn, in line with Reuters' consensus), as the continued increase in the average monthly Urals price assures higher exports and oil & gas revenues in the budget. We see several reasons why this development should be neutral for the ruble in the near term (apart from the obvious point that the FX intervention merely sterilises the windfall oil revenues):

• FX intervention is unlikely to fully sterilise the entire current account surplus in 3Q21, as non-fuel components of the Russian balance of payments are somewhat stronger than usual this year. As we mentioned earlier, non-fuel exports are growing fast thanks to high demand for metals and chemicals, while imports of services, which are normally strong in 2Q-3Q, are still repressed this year. As a result, contrary to regular seasonality, this year's current account surplus distribution should be more even, suggesting that the monthly current account surplus in 3Q21 is likely to stay close to the US$6-7bn seen in 2Q21. Should these expectations be confirmed (the data for July will be released on 10 August), it will mean that the current account still exceeds the present FX purchase commitments.
• Looking at other non-fuel components of Russia's balance of payments, one can see material improvement in the portfolio flows since the second half of July. According to preliminary estimates, the net capital inflow into the local currency public debt market (OFZ) increased from US$0.6 bn in June to US$2.3bn in July, with inflows continuing in the first couple of days of August. This is the result of the general improvement in emerging market risk appetite and the continued tightening in the Bank of Russia's monetary policy stance.
• The corporate dividend period in Russia this year is somewhat lower in scale and shorter in duration than usual, ending in early August for the largest corporates and suggesting just US$7 bn of dividends are attributable to non-residents since May. This means that some post-dividend FX conversion is still possible in the coming days and weeks, but is unlikely to cause as much pressure as was the case in the previous years.
• Finally, the recent discussion on the potential US$12 bn investment out of the local sovereign wealth fund (NWF) into Gazprom projects in 2021-23, combined with the earlier three-year plans to invest US$19 bn into other local infrastructure projects, could potentially lead to a cut in FX purchases by up to $10 bn per year, starting in 2021. This could be a potential catalyst for some improvement in the mood towards the ruble in the medium term, pending confirmation of those plans.