The RUB REER appreciation in May (following two months of depreciation) was mainly a result of headline CPI increasing to 7.4% YoY (from 7.2% YoY in April) and the relative strength of RUB against both major and EM currencies. YTD, RUB REER has gained 1.9%, which is already above our expectations of a 1.5% gain for the full year. Since January 2008, RUB REER has gained 17.5%, despite only a minor improvement in the terms of trade.
June will likely bring RUB REER depreciation as the Russian currency has significantly weakened against major currencies on the back of the broad EM sell-off, while CPI growth is likely to be milder. In the coming months we expect negative pressures on BoP side to result in RUBBASKET staying close at 37 (after a positive correction in the near term), given no dramatic moves on the oil market.
In the medium and long term, we see the terms of trade being stable to worsening (implying that Russia is unlikely to receive more imports for a unit of its exported goods or services). Therefore, we anticipate the pace of RUB appreciation slowing to 1.0-1.5% YoY. That will depend heavily on what level of productivity growth Russia can achieve.