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Divergence Persists Between RUB and Russia CDS Market

RUSSIA
  • Ukraine President Zelenskiy called for ‘maximum sanctions’ against Russia including a full oil embargo in Davos speech.
  • The EU is increasingly unlikely to approve a ban on Russian Oil at the next (extraordinary) summit on May 30/31 as Hungary continues to oppose the measure.
    • “Solutions first, sanctions afterwards", said Justice Minister Judit Varga.
  • We continue to see a significant divergence between Russian CDS market, which recently was pricing a 90% probability of sovereign debt default within one year, and the RUB, which continues to ‘strengthen’ against major crosses (nears to 7Y high against the Euro).
  • In the EM world, the currency generally reflects the current state of the economy, where periods of surging uncertainty and slowing economic activity are generally associated with FX weakness and vice versa.
  • Hence, investors have been questioning if the Ruble ‘recovery’ was ‘real’ or just an ‘illusion’ as some analysts are expecting up to a 30% contraction in GDP in 2022.
  • The chart below shows that GS Financial Conditions for Russia are currently ‘tighter’ than in March, and generally tends to lead to a dramatic slowdown in the economic activity.

Source: Bloomberg

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  • Ukraine President Zelenskiy called for ‘maximum sanctions’ against Russia including a full oil embargo in Davos speech.
  • The EU is increasingly unlikely to approve a ban on Russian Oil at the next (extraordinary) summit on May 30/31 as Hungary continues to oppose the measure.
    • “Solutions first, sanctions afterwards", said Justice Minister Judit Varga.
  • We continue to see a significant divergence between Russian CDS market, which recently was pricing a 90% probability of sovereign debt default within one year, and the RUB, which continues to ‘strengthen’ against major crosses (nears to 7Y high against the Euro).
  • In the EM world, the currency generally reflects the current state of the economy, where periods of surging uncertainty and slowing economic activity are generally associated with FX weakness and vice versa.
  • Hence, investors have been questioning if the Ruble ‘recovery’ was ‘real’ or just an ‘illusion’ as some analysts are expecting up to a 30% contraction in GDP in 2022.
  • The chart below shows that GS Financial Conditions for Russia are currently ‘tighter’ than in March, and generally tends to lead to a dramatic slowdown in the economic activity.

Source: Bloomberg