1. Low r*, GDP* – a global phenomenon, but Russian equilibrium estimates are peculiar
World long-term natural rate
BoR estimates for Russia
Potential growth (GDP*)
1.5-2%
Long-term natural rate (r*) 3%
CB’s own alternative estimate of r* 1%
Source: Federal Reserve Bank of Dallas,
“Measuring the World Natural Rate of Interest”,
June 2017.
Source: Bank of Russia, “Natural rate of interest: estimates for Russia”, July 2016. 1 1

2. Countries with a similar CPI structure: little experience to borrow
Sources: VTB Capital, own calculations. 2

3. The problem of measuring inflation expectations in Russia
Assigning a large weight to past inflation occasionally led to misjudgements on current inflation.
Past inflation matters to general public’s inflation expectations, but they are of limited use in Russia.
Floating-rate debt linked to the CPI seems to be a natural decision, and it has already proven to be efficient.
Sources: FOM, Bloomberg, own calculations. 3

4. Conclusions
There is a reason to assume that inflation regime might have changed, which questions the extent of use of past data. At the same time, there is an opportunity to move closer to a complete inflation market.
Now that the target is de-facto achieved, the central bank might consider communicating its readiness to tolerate moderate deviations to either direction from the target.
Debt markets in Russia are pricing in the so-called “all stars aligned” scenario, and excessive hawkishness might reverse the drop in yields.
Sources: VTB Capital, own calculations. 4