Russian Market After Parliamentary Elections And Rate Cut

| About: VanEck Vectors (RSX)

Summary

Russian Central Bank cuts the key rate to 10%.

United Russia is a dominant force in Russian parliament elections.

What is ahead for the Russian stock market?

I have to admit that my April short call on the VanEck Vectors Russia ETF (NYSE: RSX) has mostly been a wash trade.

RSX fluctuated back and forth, first trying to test the lower end of the previous range and then attempting to break to the upside, but it ended somewhere in the middle.

There has been nothing interesting happening in Russia after Brexit. The stock market was mostly dormant, the ruble stabilized in a tight range, the political life was empty despite the upcoming elections and there were no surprising reports on the economic front.

However, the Russian stock market has recently had to deal with two catalysts. First, the Central Bank has finally cut the key rate to 10%, and parliament elections have been held, securing the dominance of the ruling party United Russia. Let's look at these developments and their potential influence on RSX.

Rate cut

As earlier stated, the Central Bank cut the rate to 10% and published its thoughts on the current situation, as well as offered guidance for the future.

The 4% inflation target remains the main point of the Central Bank's plan. In order to reach this level of inflation, it plans to keep the key rate intact at 10% until the first quarter of 2017. It also mentioned that, if necessary, the rate will remain at 10% until the second quarter of the next year.

Here's the reasoning of the Central Bank. Current rate stimulates saving on deposits rather than spending on credit. With inflation around 7%, households are able to get positive returns on their deposits. At the same time, credit is still expensive, which does not allow consumption to grow.

The absence of consumption growth is one of the key factors that should lead to the 4% inflation target. At the same time, the high key interest rates make the ruble attractive to foreign investors. The strategy works on the currency front, as the ruble has been flat to the U.S. dollar since the end of April and the fluctuations have been minor.

The Central Bank expects that GDP growth will be less than 1% in 2017 and, hopefully, 1.5-2% in 2018-2019. This is nonexistent growth for a country of Russia's size and potential. Frankly, the numbers could be interpreted as "there will be virtually no growth for the next three years unless oil rebounds significantly".

At first glance, it is absurd that the Central Bank is happy that consumption does not rise and that wage growth is insignificant. You'll typically see this kind of action in an overheated economy, not in an economy which tries to find its bottom.

I have a theory that the "inflation control" is done to protect the lower-income part of the population, who won't see their income rise in the near term even if the economy starts to pick up.

So, what is the effect of this policy on the stock market? In my view, it means stronger ruble and support for the stock market in the near term. It looks like the Central Bank has hung out a white flag when it comes to growth, and hopes that higher oil prices will ultimately bail out the economy.

Parliamentary election results

Election results which secured the absolute dominance of a ruling party United Russia are no surprise to anyone who is interested in Russia. The opposition is nonexistent, and in my view, things will remain the same in the coming years.

I believe election results have no influence on the Russian stock market. Those who already invested in Russia or planned to do so will continue to execute their plans. Those who viewed any kind of "structural reforms" as a prerequisite for their investments will stay away from the country for the time being.

Bottom line

I believe in the long-term threat from low oil prices as Russia continues to spend its reserve to balance the budget. Short term, I see little, if any, catalysts for a major move in either direction.

The Central Bank's policy has seemingly stabilized both the currency market and the stock market at the expense of economic recovery. Time will tell if this was a wise choice. I will continue to follow RSX and will let you know if something interesting starts to develop.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.