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

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

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

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