Russian Inflation Is Easing, But What's Next?

While Russia’s annual CPI growth fell from 16.4 percent in April to 15.8 percent in May, economic conditions in the country and the health of its currency continue to deteriorate. The collapse in oil prices and international economic sanctions relating to the Russia’s actions in the Ukraine continue to weigh on its economy, and investors in Russian stocks and ETFs have been feeling the pain.

Market pain
In just the past week alone, Market Vectors Russia ETF RSX and iShares MSCI Russia Capped Index ETF ERUS are both down more than 8.0 percent, while Direxion Daily Russia Bull 3X Shares ETF RUSL is down a whopping 23.8 percent.

Russian stocks such as Qiwi PLC QIWI and Yandex NV YNDX are also down more than 4.0 percent in the last week.


The numbers
Annual food inflation fell from 21.9 percent in April to 20.2 percent in May. Services prices growth also dropped from 11.8 percent year-over-year (Y/Y) in April to 11.5 percent in May. Non-food price growth actually climbed from 14.1 percent Y/Y in April to 14.2 percent in May.

Implications
In a new report, HSBC analyst Artem Biryukov discusses the implications of the latest Russian data and what the market can expect from here. “We expect this downward inflationary path to support further interest rate cuts and look for the key policy rate to hit 10% by the end of the year,” Biryukov explains. He adds that the risk to both HSBC’s Russian inflation projections is to the downside.