The detailed breakdown of the 1Q12 GDP increase reveals that local demand remains a key force behind the growth of the economy. Meanwhile, the strong performance from fixed capital investments and household consumption might prove unsustainable later this year due to tighter monetary policy and the lower confidence of economic agents. We have kept our forecast for real GDP growth unchanged at 3.5% YoY in 2012 (a slowdown from 4.3% YoY in 2011). With monthly CPI at 0.6% MoM, inflation would have been at 4.0% YoY in June, higher than the 3.6% YoY in May. The hike in regulated tariffs, coupled with a further acceleration of food CPI, will likely push headline CPI well above 5.0% in July. Uncertainty about inflation later this year could mean the CBR maintains its «wait-and-see» approach until August. Real wages growth rebounded to double-digits in 1Q12. Retail lending growth also exceeded 43% YoY. Coupled with unemployment of 5.4%, this bodes well for consumer spending, but indicates that the economy is at risk of overheating. President Vladimir Putin has outlined the budget priorities: to improve fiscal spending efficiency, to implement the ‘budget rule’ using the ten-year average Urals price, and to keep non oil and gas taxes unchanged until 2018. The record-high current account surplus in 1Q12 worsened significantly in 2Q12 and we expect this trend to continue in 2H12 on the back of lower oil prices and unfavorable seasonality. RUB is set to remain under pressure, but unless Brent is above USD 97/bbl, sharp moves on the market are unlikely in July. Furthermore, the CBR has substantially increased loans to banks (closer to RUB 2tn), preventing a significant increase in the level of money-market rates. The key macroeconomic events this month are: CPI with tariff hike included, customs’ data on imports in June and the CBR's rate decision. We also expect Russia to finalise its accession to the WTO.