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Rosbank- Eco Analysis- Russia, New CBR governor - same (responsible) policy, Mar 13, 2013.

Russia: New CBR governor - same (responsible) policy

In a somewhat asurprising' move President Vladimir Putin yesterday named Elvira Nabiullina, former head of MinEco in his government and his current chief economic aide, as his nominee for the next CBR Chairman. We believe under the new stewardship CBR will continue to pursue the same policies - gradual shift to inflation-targeting and floating FX -

but the bias might tilt slightly to the dovish side. Nevertheless we do not change our current policy calls and continued to expect rate cuts only in Q3, while changes to the refinancing system may be introduced in Q2. Possible steepening of the government bond curve if market starts to price in much softer monetary stance is likely to be short-lived and we would tend to view at as a buying opportunity.

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First lady CB Governor in G8

What proved to be a leak to the local press a couple of days ago was confirmed yesterday in the evening when President Putin named Nabiullina as his nominee for the next CBR Chairman. There is still formal approval by the State Duma to take place, but with majority controlled by the ruling party (and not much opposition from other parliamentary parties) it is effectively a done deal.

No radical changes to the policy

Elvira Nabiullina used to be the head of the Ministry of Economy during Putin's term as primeminister and became his economic aide when he returned to presidency last year. Having an impeccable reputation as liberal economist and technocrat as well as well-established network of connections at the very top level of policy-making circles there should be no concerns weather she suits for the job. Radical policy changes are thus fairly unlikely we believe and under her leadership the CBR will continue to pursue gradual shift to inflation-targeting and more flexible FX policy. Nomination of Mr. Ignatiev (current CBR Chaiman) as her advisor might be the first signal of pursued policy continuity while changes to the current CBR team will be important to watch in this regard.

Slightly more dovish bias

Mrs. Nabiullina's background in the growth-focused MinEco argues for a slightly more dovish monetary bias under her stewardship of the CBR. For instance, she was in favour of the idea of granting the CBR a FED-style dual mandate (inflation and growth). The shorter-term policy implications, however, are not as straight-forward we believe given the precarious state of the Russian economy which faces significant economic slowdown and (what we believe temporarily)

elevated inflation.

No changes to our forecasts

Any new Chairman, and Mrs. Nabiullina in particular, face aindependence' test and in this light we are not inclined to change our policy calls (at least not just yet). To be sure, given the grim growth statistics and tightening policy mix elsewhere (fiscal and macro prudential) we do believe that time is ripe for monetary easing in Russia and just recently we revised our rates call to add additional 25bp cuts (to a total of 50bps this year), but we expect rate cutting cycle to start only in Q3 after headline CPI takes a decisive turn for the better in June. The risk is that with more dovish governor

rate cuts may be frontloaded, but we believe there are other ways to ease the policy before rate cuts - reform of the refinancing system (. This reform is necessary in any case and should be viewed positively, while hasty rate cuts are controversial in the face of still high headline CPI and, moreover, may be interpreted as weaker CBR independence. So the best (and our baseline) case is reform of the refinancing system first and rate cuts later (see latest Focus Russia- All you need to know about monetary policy in Russia and more).

Possible market impact

As regards the currency market, pricing of more dovish policies may result in a weaker RUB, especially as its performance since the start of the year failed to impress despite the high hopes. As for the fixed income market, as an initial reaction local government bond curve might continue to steepen pricing in large and front-loaded policy easing and possible deterioration of long-term inflation expectations, but we would tend to see it as a buying opportunity at the long end as we do not believe long-term inflation risks change in any significant way. In rates space we would be

looking for news to introduce changes to the refinancing system to position for lower moneymarket rates environment, but for now expected liquidity squeeze in March-April argues for caution and probably more interesting entry levels (for IRS receivers and XCCY tighteners).


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Publication:Russian Banks and Brokers Reports
Geographic Code:4EXRU
Date:Mar 13, 2013
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