bne:Chairman list 010314

This is bne's Russia chairman’s newsletter, a selection of forward looking stories on development in eastern Europe and the region. Feel free to request topics or ask questions: editor@bne.eu

Contents: Top Story Ukrainian crisis: heightened risk of default Russia’s bank consolidation is going surprisingly smoothly Politics – the good State Duma drafts bill makes individual contests of election results possible Russia's business ombudsman wants to extend economic amnesty for 6 months Russia’s business ombudsman proposes changing system to evaluate tax crimes' gravity Russia to introduce new post of financial ombudsman ECHR turned down 90% of complaints against Russia in 2013 Three Bolotnaya rioters pardoned under Russian amnesty Officials may be dismissed for filing false income declarations First court order to block website piracy in Russia Russia to simplify seizure of foreign criminals' assets Politics – the bad Russia’s Supreme Arbitration Court handling economic disputes abolished Only one NGO registered as "foreign agent" in Russia

Politics – the ugly Navalny under house arrest, fitted with electronic bracelet More than 42,000 financial crimes uncovered in 2013 Press freedoms in free-fall, except Russia sorta Russian Investigators Nab Group for Theft of $114M in Tax Returns Russian banker charged with embezzlement of $55m Bribe-taking more often punished by prison terms than fines Polls, mood, sociology Poll Reveals Widespread Intolerance for Gays in Russia Two thirds of Russians think that the financial standing of their families will not change this year Russians appalled by violence in Ukraine demonstrations Russians in love Americans’ Opinions of Russia, Putin Hit 20-Year Low Banks and Finance Russian mortgages double in 2013 to RUB1.3 trillion Russian bank's profit up 17.5% year on year in January to RUB94.4bn The growth of Russian banks' consumer loan portfolio will slow to 15-18% in 2014

The Bank of Russia is considering introducing an increased capital ratio (N1) for Russian systemically important banks to a max of 1% All Russian banks meet the Basel III requirements for capital VTB Considers Merging VTB24, Bank of Moscow as Banking Growth Stalls Russia’s deposit insurer sees households’ deposits rising 19% in 2014 Russian banks’ foreign currency deposits grew by 21% in 2013 Russia's National Bureau of Credit Histories (NBKI) said the Russian retail borrowers' credit health index has been flat for the last 18 months Banki.ru releases list of most lossmaking banks as of the end of 2013 Number of small Russian banks halves over past two years, more to close Russia’s Bank Saint Petersburg closes deal to buy Bank Evropeisky Russia’s NOMOS-Bank buys controlling stake in Bank Otkritie Growth in Russian bank lending moderated last year, but households continued to pile on debt Russian Credit Card Market Grows to RUB990bn in 2013 Banking fraud more than doubled in 2013 to reach RUB153bn One in two cars bought on credit, shift to premium brands driving borrowing Economics Record demand of currency by Russian households in December as devaluation fears grow, capital flight to stay high

CBR leaves repo interest rate unchanged at 5.5%, but said likely to miss its 5% inflation target this year due to ruble depreciation Sinking ruble leads central bank to unlimited ruble aid Russian companies failing to invest Russian foreign trade figures weaker in 2013 Russian econ ministry says significant acceleration of economic growth delayed to 2016–2020 Russian budget surplus 9.3% of GDP at the start of this year $8bn in Loans For Russian Companies Endangered By Ukraine Turmoil Russian Manufacturing PMI falls to 48.0, the lowest since mid-2009 Practically no growth in Russian manufacturing output last year, slow start to this year Russia's privatisation plans back on for 2014-2016 Russia’s consumer price growth decelerates to 6.1% year-on-year in January, inflation could soar this year Infrastructure Russian rail freight market turnover close to 2012 levels Putin Sochi Bill Seen Rising $7bn After Flame Dies Russia to Spend $4.6Bn on MS-21 Airliner ECM Russia’s Bank Trust plans listing on Moscow Exchange Credit Bank of Moscow to IPO later this year on LSE Russia’s Aeroflot to spend RUB1.13bn on 2014-15 option program

Detsky Mir aims for London IPO in mid-March – sources Russia dividend-based strategies should continue to beat the market Lenta fast growing retailer IPO attractive at lower end of IPO guidance Russia’s Credit Bank of Moscow wants to place shares on LSE Metro C&C may tap the market in April Russia to protect minority holders with corp governance code US’ Waddell & Reed buys 5.3% in Russia’s online payment company Qiwi Russia’s VEB pension savings investments yield 6.71% in 2013 DCM Moody's gives four reasons for Russia's low credit rating

Foreigners’ share on Russian OFZ bond market falls to 24% as of start of 2014 Russia will not cut 2014 borrowing plans despite weak ruble Sectors Car Exports to Exceed 1m units soon Russian deputies want to ban foreign telecom equipment Russia Forecasts Increase in Oil, Gas Output in 2014 Environment for global consumer goods companies in Russia is good Russia preparing tighter rules governing duty-free online purchases from abroad Russia’s Gazprom market share in Europe rises to 30% in 2013

Top Story Ukrainian crisis: heightened risk of default Russia's decision to increase its military presence in Crimea came as a shock. However, despite the hyperbole this is not a Russian invasion nor is a declaration of war. No shots have been fired. No one has died. And Russia has done little more than bring the number of military personal in Crimea up to the 25,000 cap it is allowed to under the terms of the treaty it has with Ukraine that covers the leasing of the Simferopol navy base there that runs to 2024.

Before going further into this story it is important to note that Vladimir Putin is a legalist. He stepped down as president in 2008 as he didn’t want to break the terms of the constitution., which barred him from three consecutive terms has president. As the core goal of the Kremlin's foreign policy is to break the US hold on global affairs and move to a "multipolar" set up, which, by definition, must be governed by international law.

During his press conference on March 4 Putin hammered home the legal grounds on which Russia has upped its presence in the Crimea: while the Rada is a legitimate body, the new 'Maidan-approved' government is not as it came to power via a constitutional coup; Yanukovych remains the legitimate president of the country, by virtue of the fact he was elected in what remains the only truly democratic election in Eastern Europe; Russia

has the right to station up to 25,000 military personal in Crimea; moreover, what (limited) military operations there have been to secure bases etc has been carried out at the behest of the legitimate president Yanukovych. Russia sees this as a security operation, not an invasion, and this point has extremely wide speed appeal amongst the man on the street in Russia, although their feelings about Russian soldiers crossing international boarders is much more mixed.

To be fair, Putin has several strong points, especially questioning the legitimacy of the new government.

But the politics have become extremely messy (and ironically Putin heads a government that was put in place by an almost identical constitutional coup carried out by Boris Yeltsin in 1993). But underlying these confusions is the fact that the Maidan demonstrations never had majority support of the Ukrainian people: polls put support for Euromaidan at about 50% with 42% against them split largely along east/west lines.

Now Yanukovych has been definitely toppled, the Russophiles in the east are alarmed as their interests will not be represented in west-leading government and this has lead almost automatically to 'anti-Maidan' demonstrations in the east that want more of less the same things: self determination and closer ties to Russia, their ethnic and cultural homeland.

The whole Ukraine issue has been extraordinarily badly handled. The

west has blatantly being playing a Cold War-esque game to 'win' Ukraine for the free world, but in the process totally ignored both Russia's legitimate national interests in its large neighbour and trade partners, as well as ignoring the fact that half the country was against a European deal.

And that was lead Putin to act. In 2007 Putin gave a famous speech at the Munich Security Conference where we said that Europe was Russia's "natural partner" but that the west had to meet Russia half way and respect its interests.

Europe ignored the message, going on to block a Russian purchase of Opal and shares in EADS, among other things. Then in 2012 Putin gave another keynote speech, this time at the St Petersburg Economic Forum, where he more or less said that Russia was giving up on any hope of becoming a European partner and would follow its own course, but business from anywhere would always be welcome. Following that speech Russia launched its efforts to modernise its army in earnest and the Ukraine debacle is a natural consequence of this chain of events.

Putin has judged it finally as the war-weary and divided Europe won't and can't react with force.

Moreover, the threats of sanctions and 'punishments' are empty too.

Europe is Russia's second biggest trade partner (after China) but almost all Russia's exports are commodities or food and won't be put under sanctions. Likewise, targeted sanctions against oligarchs are of questionable

legitimacy and due to the financial sophistication of the oligarchs it will be extremely hard to identify their assets anyway. If the international community goes further with UN backed sanctions, then Russia can and will retaliate in kind, firstly by cutting off Europe's gas supplies. The bottom-line is the west if almost powerless to prevent Russia from taking the Crimea if it wants it (back).

And that was the point. Putin has intentionally decided to shock the world. The point he wants to make is that after a decade of dismissing Russia as a basket case with a dysfunctional kleptocratic government, in fact the country has made enormous strides towards remaking itself and is back in the game. (Among other things, UNDP upgraded RUssia to 'high income' economy last year, placing it the same backer as the USA, UK, France, Germany, etc). He is saying that the west can no longer ignore Russia's interests with impunity. It is a rather brutal lesson, but it will probably be effective. The main unknown is how much damage Putin has done to Russia's chances of a working relationship because of the nature of teaching this lesson.

How will this end. If we start from the premise that Putin wants to remain inside international law, this suggests during the referendum in Crimea on March 31, they will chose to become an autonomous republic, but remain inside the Ukraine and manage their relations with Kyiv via treaties between two governments rather than direct administrative control

from the centre. Crimea will then build up a separate foreign policy with Moscow to the rest of the country and will be favoured with investment. Russia will also hand out Russian passports to the locals, although this is also an aggressive move as these passports was the pretext used to grab North Ossetia and ABkhasia from Georgia in 2008.

The most tricky part of this deal will be the presidential elections on May 25. Putin said he 'may' accept them 'depending on how they are conducted.' In other words the Kremlin would like to see a proRussian elected or at least the proRussian fraction doing very well so they have viable candidates for the subsequent parliamentary elections (which may be held soon after the presidential elections). If Russia does accept the presidential election results then this crisis will be brought to an end, bar the inevitable spitting that will follow, and the rest of the world and Kyiv will have to get used to the idea that Russia de facto has annexed Crimea.

The collapse of the Viktor Yanukovych administration in a matter of hours was hailed as a victory for "freedom" but it was a disaster for the country's economy.

A full blown economic collapse is now now on the cards. “The military stand-off heightens Ukraine's risk of default. A combination of factors could render Ukraine unable to meet its external debt-servicing and repayments obligations," says Lilth Georgian from IHS Global.

Reserves have fallen to $15bn as the middle of February, about two months of export cover, and the hryvna has already lost 25% of its value since the start of the year.

The economy was already in recession when the protests started and will certainly contract this year. The government has already asked donors for $35bn, but the EU has promised only $1.6bn in short term funds (and even that will take time to organise) while the IMF, which will have to pick up the cost of this mess, says it can't make any funds available until April at the earliest.

The risk of default could rise if Russia insists on prompt payment of Ukraine's overdue 1.5-billion worth of gas arrears for 2013 and early 2014, and Gazprom has already said it will discontinue the 33% gas price discount agreed with the previous government in December 2013, from 1 April. Just this last measure will cost the new government an extra $7bn a year.

This is on top of the some $73bn in external debt of which some $6bn comes due this year.

"Without the expected financial assistance from Western donors, Ukraine is likely to default. The US and EU have already stated that at least 4bn in loan guarantees will be available in the very short term.

This should prop up the NBU's foreign-currency reserves," says IHS. IHS has assigned 65 on a 100-point rating scale to mediumterm government bonds, defined as Extremely High Payment Risk and equivalent to CCC on the generic scale. The short-term credit rating is at 55 or High

Payment Risk (B on the generic scale). Both ratings have a Negative outlook.”

Russia’s bank consolidation is going surprisingly smoothly The Central Bank of Russia (CBR) officials moved in on its latest two victims on February 11, pulling the banking licenses from Moscowbased European Trust Bank (Eurotrust) and Link-Bank.

Eurotrust was already a zombie.

The stopped taking in new retail customers last November, thanks to the tough economic conditions, the bank said at the time. And Link-Bank was closed down because it was knee deep in dodgy dealings. The CBR said its investigators uncovered RUB20bn ($580m) worth of loans and transfers in 2013 that the bank could not adequately explain.

Moreover, Link-bank had ignored CBR rules on provisioning for bad loans and trashed the regulator’s corporate anti-money laundering rules.

The closures are the latest in the CBR’s new governor Elvira Nabiullina new broom, who took the helm at the regulator in June 2013 and has already closed 29 banks in 2013 leaving a total of 923 banks still functioning at the end of last year.

And more closures are to come.

Stanislav Volkov, Director for Bank Ratings at Expert RA, believes another 50 will be shuttered this year alone.

Indeed, Russian President Vladimir

Putin was explicit on the goals in a speech in January: “Now we have about 1,000 banks, or slightly less.

Of course, it is a large number for our economy,” Putin said. “It means that some financial institutions must increase their capital and assets in order to feel themselves more secure and fight for the quality of their loan portfolio,” Putin said, adding that Germany’s economy is about the same size as Russia’s and it only has 250 banks.

What is so amazing is that both the population and the other banks have taken the new drive so calmly. When the CBR cancelled Sodbiznesbank’s licenses in 2004 for money laundering, the first time the regulator had ever cancelled a banking license, it sparked a mini-banking crisis that saw major retail player Guta Bank collapse and threatened to take out top 10 player Alfa Bank as well.

But this time round barely anyone noticed the demise of Eurotrust or Link-Bank.

However, the closure of Master bank in November 2013, the first retail bank of some real size to be closed, did send shock waves through the sector. However, Nabiullina called in all the senior bankers to the CBR for a meeting and reassured them that everything was under control and liquidity would be made available

to anyone that needed it so nerves were soothed.

The population was also unsettled by the shuttering of Master bank, but not that badly. Both Master bank and the two banks closed in February banks are covered by the deposit insurance scheme that guarantees the first RUB700,000 ($20,590) of deposits so most of the bank’s customers are unlikely to be affected.

“Russia’s deposit insurance agency last year paid out a record RUB110bn (€2.4bn) in compensation, depleting the deposit insurance fund by half,” says Bank of Finland’s Seija Lainela. “The deposit insurance agency, nevertheless, estimates that it will have sufficient funding this year to cover its obligations without having to hike fund contributions of banks.”

Still, some Russians have already started moving their accounts to the state-owned banks that dominate the sector, just to be sure, increasing the state controlled banks’ share of the sector by 2% in 2013 to 53% of total assets.

At the same time the CBR has flooded the bank sector with cash: liquidity in the banking sector was at a record high in February. Since the campaign started the CBR has been offering banks cash through a tide of repo deals and expanded the list of securities that can be swapped for cheap money. The easy and almost unlimited access to money has meant the rest of the banking sector is pretty sanguine about their smaller peer’s disappearance.

Closing so many banks is a dangerous thing to do. While the bottom 700 banks hold only about 5% of all assets, they are heavily dependent on the intra-bank market for most of their funding, a crucial piece of Russia’s financial infrastructure. If the intra-bank market freezes, as it did in 2008 and 2004, then it can quickly cause a system-wide crisis.

But it has to be done. The huge number of little banks is a massive burden to the regulator, which has to supervise them all. In fact it fails to supervise them and as banking sector profits fall these banks are wont to take more and more risks or offer increasingly dodgy services, both of which undermine the stability of the system.

The flip side to the closures is the big banks are going to be encouraged to grow larger still. In January the CBR drew up a list of 15-30 ‘systemically important banks’ that are presumably thought to be ‘too big to fail’ (which has since been expanded to a list of 50 names), but will also be supervised even more closely.

While several lists of names have been circulated, the CBR has not issued a definitive list yet, mainly because it would be a death sentence for any bank that doesn’t find its name on the list.

The next big hurdle will come at the state of 2015 when the CBR says the minimum capital requirement for banks will be increased to RUB300m from

RUB188m in force now. Currently there are 179 banks that don’t meet this requirement and Fitch said in a report that half of these banks will probably fail to increase their capital in time and so be forced to close.

Rating agency S&P says it has already seen the number of offers to sell small bank increase sharply in the second half of last year and expects the trend to grow. But even the bigger banks are under pressure as effectively the CBR has introduced a killing field for any bank outside the top 50. Banks not only need to beef up, but to identify niches where they can compete with the state’s titans such as Sberbank and VTB Bank.

In the middle of February Bank Saint Petersburg, in Russia’s top 30 by assets, closed a deal to buy 100% in Kaliningrad-based Bank Evropeisky that will strengthen its

business in Russia’s north west region and allow it to focus more on small and medium- sized enterprises.

A few days last Russia's Otkritie Financial Corporation bought out the IFC’s 14.3% stake in its own retail arm Bank Otkritie for RUB4.2bn ($123m) and given the stake to its merger partner Nomos bank. Nomos was already easily in the top 50 but Otkritie is not.

However, while Nomos is largely a retail player, Otkritie comes with some useful investment banking lines that will round out the combined bank’s services and give it a niche serving the medium sized companies that don’t want to open their books to state-owned banks.

More deals are surely in the pipeline.

Politics – the good State Duma drafts bill makes individual contests of election results possible The State Duma Committee on Constitutional Law submitted a second reading of a bill to allow individuals to contest election results, Kommersant reported.

Previously Russia's Constitutional Court said only parliamentary, mayoral, gubernatorial and presidential candidates can file lawsuits to contest election results,

and concluded that this provision runs contrary to the constitution.

According to the proposed amendments to the Civil Procedural Code, the courts will have the right to dismiss an individual’s complaint against election results at any given ballot station only if that station’s election commission proves reliably that the said individual did not cast his or her ballot there.

The candidates and parties will retain their right to contest the

results of federal elections, but the deadline for filing these lawsuits has been reduced in the government’s proposal from 12 to three months after the announcement of election results.

Russia's business ombudsman wants to extend economic amnesty for 6 months Russia's business ombudsman, Boris Titov, suggested that the State Duma, the lower house of the parliament, extend the economic amnesty, which ended on January 1, for six months. The amnesty for economic crimes, including frauds and tax evasion, was declared in July 2013, and 2,324 people were released from prison. About 2,000 people will be released in 2014 due to the re-qualification of their cases.

Under the amnesty rules a criminal may be released only if he redeems losses caused by fraud with the payment for the damages already amounting to RUB5.5bn.

Russia’s business ombudsman proposes changing system to evaluate tax crimes' gravity The gravity of tax crimes should be evaluated by the%age of the taxable sum, business ombudsman Boris Titov said.

A law on raising the ceiling for evaluating damages from tax crimes was drafted by the business ombudsman's expert council in November 2013 and submitted to the State Duma via the inter-party working group on the protection of business interests. The group is chaired by Viktor Zvyagelsky, deputy head of the State Duma Committee on Economic Policy.

Titov said these proposals are being discussed at the State Duma Committee for Civil, Criminal, Arbitration and Procedural Legislation. He proposed setting the ceiling for grave damage at over RUB2m ($57,000), provided that the sum equals at least 20% of accrued taxes (the current ceiling is 10%), and exceptionally grave damage at more than RUB10m ($285,000) or 30% of accrued taxes (the current ceiling is 20%).

Titov has also proposed keeping the ceiling beyond which damages shall be assessed regardless of the percentage. Grave damage is to be evaluated at RUB10m (the current figure is RUB6m), and exceptionally grave damage at RUB30m ($854,700). The ombudsman holds that this provision should be ultimately dropped.

Russia to introduce new post of financial ombudsman Following the success of the introduction of a business ombudsman (Boris Titov) now the Russian government will establish a financial ombudsman institution under the central bank at a the cost of RUB120m, according to Deputy Finance Minister Alexei Moiseyev.

The new ombudsman will solve disputes between citizens and banks or insurance companies out of court.

ECHR turned down 90% of complaints against Russia in 2013

with inciting mass riots and using violence against law enforcement officers.

European Court of Human Rights in 2013 turned down 23,845 out of 24,100 complaints received against Russia, Russian Supreme Court Chairman Vyacheslav Lebedev said in February: 129 rulings were made in the cases concerning Russia, and 40 pointed to the violations of the right to fair trial.

As head of The Supreme Court he ordered the 39 lower courts’ rulings to be amended according to the ECHR recommendations.

Rikhard Sobolev has been initially charged with “participation in mass riots” and "using violence against law enforcement officers", his attorney Maxim Korotkov-Gulyayev said. Investigators dropped the charges of using violence and released Sobolev. The cases against Oleg Arkhipenkov and Alexander Kamensky has been also terminated.

According to the ECHR’s annual press release, Russia maintained the highest number of judgments finding at least one violation of the Convention (119 judgments), followed by Turkey (118), Romania (83), Ukraine (65), Hungary (40), Italy (34) and Greece (32). In addition, at 31 December 2013, the majority of pending cases were against Russia (16.8%), Italy (14.4%), Ukraine (13.3%) and Serbia (11.3%).

Three Bolotnaya rioters pardoned under Russian amnesty Three defendants in the 2012 Bolotnaya riots case have been pardoned pursuant to a broad amnesty spearheaded by Russian President Vladimir Putin, their attorneys told RAPSI. Over 400 people were arrested and scores injured in the Bolotnaya Square protest that turned violent on the eve of Vladimir Putin's inauguration to a third presidential term in May 2012. Dozens were later charged

Previously in December the defendants against four defendants in the 2012 Bolotnaya Square riots case – Nikolai Kavkazsky, Maria Baronova, Leonid Kovyazin and Vladimir Akimenkov -- were also dropped by the Nikulinsky District Court of Moscow.

Seperately Dmitry Rukavishnikov, an aide to Russian State Duma opposition lawmaker Ilya Ponomaryov, was also pardoned.

Dmitry and Anastasia Rybachenko, an opposition activist whose arrest was ordered in absentia in Russia, were pardoned in January.

Officials may be dismissed for filing false income declarations Russia’s Constitutional Court has ruled that officials can be dismissed for filing false income declarations in February.

The decision was taken after Vyacheslav Vorobyov, a former officer in the FSB Primorye Territory Department, filed a complaint against his dismissal over “loss of confidence.”

He was fired because he had filed a false income declaration.

The law on corruption says that officials (including military and security personnel) can be dismissed over "loss of confidence" if they file false income and property declarations. Vorobyov argued that this provision in the Military Duty and Military Service law runs contrary to the constitution, but Constitutional Court has refused to hear his case, saying that dismissal for corruption-related offences can be used as an effective tool in the fight against corruption.

Many officials have been dismissed on these grounds since the anticorruption laws were adopted in Russia in 2008. Approximately 1.5m officials file declarations every year. As many as 322 officials who understated their income on their declarations for the previous year were dismissed for loss of confidence in 2012 and 200 officials in 2013.

First court order to block website piracy in Russia S.B.A. Music Publishing, a subsidiary of Warner Music Russia, has succeeded in a suit to close the www.tracksflow.com domain for copyright abuse in February.

The Moscow Commercial Court ordered domain administrators, Tsifrovaya Laboratoriya company and Boris Golikov, to pay RUB1.5m ($43,165) for copyright infringement for the song by MakSim. The court order sets a precedent that significantly

increases chances for copyright holders to win similar suits, the National Federation of Music Industry believes.

The copyright holders in this case managed to prove that the website was involved in piracy. They provided official letters from the copyright holders, including Sony Music and Warner Music, which deny signing any contracts with www.tracksflow.com. Golikov also admitted on social media that there were no agreements with the copyright holders.

Boris Golikov founded Fidel.ru, a music website that was popular in Russia before it was closed in 2012 because the copyright costs exceeded the profits from the music sold. “Russians prefer pirated music content and are not willing to pay for online music,” Golikov explained at the time.

Russia to simplify seizure of foreign criminals' assets Russia’s Justice Ministry has drafted amendments to legislation and coordinated them with the proper authorities to simplify cooperation with foreign law enforcement agencies in the fight against transnational crime and terrorism that is part of Putin's deoffshorization drive. Putin is trying to stop capital flight and tax avoidance by tightening the rules that cover cross border transfers.

In addition to investigating these crimes, Russian legal authorities will also be able to seize the alleged criminals’ accounts and property at the request of other

countries. These amendments will enable Russian law enforcement agencies to become fully integrated in the international system of fighting money laundering and terrorism financing.

They will be able to take the following actions with regard to foreigners at the request of other countries: expose criminal income; seize property; conduct special examinations, interrogations and

searches; and collect evidence of a crime and other documents for the requesting authority.

The Federal Financial Monitoring Service, which monitors suspicious financial transactions in Russia, has compiled a black list of 363 foreign individuals and 80 companies that are suspected of financing terrorism.

Politics – the bad Russia’s Supreme Arbitration Court handling economic disputes abolished On February 6, president Vladimir Putin signed into law a package of court reform legislation that merges Russia’s two highest courts – the Supreme Arbitration Court, which handles commercial disputes, and the Supreme Court, which handles all other types of disputes. Most of the reforms will come into force in August.

The move was not popular as despite Russia's poor image the Moscow Arbitration Court was seen as fair and effective, underpinning the validity of contracts and supporting a good business environment.

Russia’s arbitration courts are founded on legislation adopted in the 1990s when Russia’s current court system was just being created. Arbitration courts were

created to resolve economic disputes. These courts have generally been considered more impartial and competent than the general courts. For example, over 60% of corporate claims filed with arbitration courts in recent years have succeeded in overturning decisions by the tax authorities and other official agencies. In contrast, it is quite rare for regular courts in Russia to overturn any official decisions. Commercial arbitration courts are considerably more transparent as nearly every ruling is posted online.

The fusion of Russia’s supreme courts is justified by an aim to streamline the legal process. In some cases, the decisions of the Supreme Arbitration Court and the Supreme Court have contradicted each other. It is unclear whether elimination of the Supreme Arbitration Court threatens the existence of the arbitration court system overall.

Only one NGO registered as "foreign agent" in Russia Putin's law to effectively label all NGOs that receive foreign money (almost all the main NGOs) as "spies" is not being enforced, despite the hue and cry that went up following the law's passage.

The non-commercial partnership "Supporting Competition in the CIS Countries" remains the only NGO that registered as a foreign agent in accordance with a law passed in 2012 requiring NGOs funded from abroad to declare their status, according to the Justice Ministry's website.

A federal law was passed in 2012 requiring all NGOs engaged in political activity, and receiving finance from abroad, to register as a "foreign agents," or face fines of up to RUB500,000 ($16,000). Last February eleven Russian NGOs, Moscow Helsinki Group among them, lodged a complaint with the European Court of Human Rights (ECHR) protesting the law.

However, the point of the law was not to close the NGOs but to close those that the Kremlin considered to be engaged in seditious activities, importing foreign ideologies into Russia. The Kremlin believes that many of these organisations are promoting ideas like "democracy", which is code for exporting America's brand of politics to Russia and so has moved against them. Notably USAID was one of the first NGOs to close shop.

Inspections of NGOs began in late March 2013 when the Justice

Ministry said its goal was to check that these organizations' activities corresponded with the objectives of their charters and Russian legislation.

According to the organization's website, it was registered with the Justice Ministry on December 23, 2009 as a non-profit partnership specializing in competition issues and works to participate in drafting an effective state policy with regard to protecting and encouraging competition and competition-related law-making.

The Justice Ministry took the decision to include the non-profit partnership into the register of NGOs acting as foreign agents on June 27, 2013.

According to the ministry, no more organizations have applied for registration since then. Meanwhile, the Prosecutor General's Office reported last year that 22 nongovernmental organizations receiving finance from abroad strictly fall within the purview of law.

Politics – the ugly Navalny under house arrest, fitted with electronic bracelet

More than 42,000 financial crimes uncovered in 2013

Russian prison officials said Tuesday that they have fitted opposition leader Alexei Navalny with an electronic bracelet to monitor his activities for the next two months while he is under house arrest.

More than 42,000 financial crimes involving millions of dollars in losses were uncovered in Russia in 2013, President Vladimir Putin said Tuesday. He gave no figure for the exact losses last year from financial crime, but said that more than 20bn rubles ($554m) in damages had been caused in the past three years.

“An electronic bracelet was put on Navalny on Monday evening, via which employees of the penal inspectorate will monitor compliance with the terms of house arrest,” a Federal Penitentiary Service spokeswoman said.

The anti-Kremlin activist is forbidden from leaving his residence — an apartment in the Moscow suburbs — and from using the Internet, telephone or any other means of communication with the world outside of his family, lawyers and police investigators until April 28.

Navalny, who was permitted to return home Monday after spending a week in detention for taking part in an unsanctioned street protest, was ordered to be put under house arrest by a Moscow court last week. The court ruled that he had repeatedly violated an agreement not to leave the capital during a separate criminal investigation against him.

Press freedoms in free-fall, except Russia (sorta) Reporters Without Borders said the situation with freedom of information in the former Soviet republics is getting "bleaker every year," however, Russia did best of the eastern European countries by maintaining its (admittedly very bad) place in the annual ranking.

On February 12, the Paris-based group published its annual "World Press Freedom Index," measuring the level of freedom of information in 180 countries.

The head of RSF's Eastern Europe and Central Asia Desk Johann Bihr said that authorities in Russia, which came 148th in the survey, have chosen repression with more and more draconian laws being adopted, and are exporting their model throughout the region. "2013 has been marked by a cascade of repressive laws in Russia which have narrowed the scope of free information more and more," he said. "For instance,

traditional values are used to justify new restrictions, including the criminalization of homosexual propaganda or the ban on blasphemy. Journalists are being detained in connection with their work." In Belarus, which came 157th, RSF says journalists who cover street protests are "routinely detained," and authorities often use "combatting extremism" as a pretext for silencing those who refuse to toe the official line. Ukraine ranks 127th, but RSF says the political crisis that began in December 2013 and the government’s adoption of "very repressive policies" came after the period covered by this year’s index.

Bihr says both Kazakhstan (161st) and Azerbaijan (160th) are "on the verge of suppression of any media freedom." RSF says television stations in Azerbaijan are under government control, while recalcitrant journalists and bloggers are exposed to physical attacks, death threats, and abduction. And freedom of information in Kazakhstan is in "free fall," according to Bihr.

The region's four best-placed countries are Moldova (56th), Armenia (78th), Georgia (84th), and Kyrgyzstan (97th).

Russian Investigators Nab Group for Theft of $114M in Tax Returns The Russian Investigative Committee investigators have busted a group suspected of stealing more than $100m in tax returns in St. Petersburg and the surrounding region.

“From 2008, members of the criminal group embezzled about RUB4bn ($114m) from the federal budget by using 39 legal entities to illegally obtain VAT returns,” the committee said in a statement.

Six people have been detained, including 34-year-old dual USRussian citizen Mark Bronovsky, the statement said. Bronovsky is one of the directors of the Sotrans group of companies that organized the criminal scheme, investigators said.

Russian banker charged with embezzlement of $55m The investigation has brought final charges against banker Alexander Gitelson regarding embezzlement of $55m as part of the on going crackdown on corruption.

Gitelson was detained in Austria last April. The Russian Prosecutor General's Office sent an extradition request, saying that Gitelson was sentenced to 5 years in prison in absentia, for defrauding a lawmaker out of RUB500m ($14m). In December, Gitelson was extradited from Austria. The lawmaker was not named, nor did anyone ask where a public servant got $14m from.

Gitelson is suspected of embezzling over RUB1.9bn ($55m), which the finance committee of the Leningrad Region government deposited in his Inkasbank in the period from May 2006 to May 2007.

Bribe-taking more often punished by prison terms than fines Russian courts more often pass sentences than fine bribe-takers, according to the chairman of the Supreme Court of the Russian Federation.

The punishment for taking a small bribe for people without previous conviction is usually a fine equal to the sum of the bribe and applies to 95% of the cases. But in only 10% of the cases were the bribes paid voluntarily. In the rest the courts have moved to jail the wrong doer.

As a result, the number of petitions to replace fines with jailings increased from 21% to 40.5%.

A survey of 1,600 Moscow residents in 2011 attempted to find under what conditions bribery was seen as acceptable. We found that telling respondents that a new

police officer in Moscow makes about $1,000 a month (or a little more than half of the average salary in Moscow) from bribes did not make respondents more likely to say that bribe-taking was acceptable. This is not consistent with the view that it is acceptable to give bribes to public servants because their pay is so low.

Overall the percentage of those agreeing that bribes to the police are acceptable is extremely low; Russians don’t think paying bribes is "normal" and they don’t like doing it.

Those who had paid bribes to the police not only exhibited lower levels of trust in the police but also showed less trust in the parliament and the government.

Polls, mood, sociology Poll Reveals Widespread Intolerance for Gays in Russia

Putin's anti-gay propaganda law has caused international outrage, but at home it is extremely popular. Russians don’t like gays.

This can shortly be explained that the country was behind the Iron Curtain in the 1960s and missed out on the liberal and civil rights movements. The have many of the same prejudice that Americans had in the 50's as the civil society that addresses these sorts of issues is only appearing now for the first time.

The vast majority of Russians find same-sex relationships unacceptable, according to VTsIOM. Lesbian couples were deemed inappropriate by 78% of respondents, with only 3% answering that relationships between two women were normal.

Relationships between men were even more unpopular:82% of people said gay male couples were objectionable, and just 2% consider them ordinary.

The figures reflect deep-seated and widespread anti-homosexual

sentiment that authorities have sought to capitalize upon by passing laws viewed by rights activists as efforts to marginalize and stigmatize minorities.

However, the new law does not target homosexual relations which are allowed since 1996 and Russia's signature to the Council of Europe agreements, but instead bans advertising alternative lifestyles to children.

Authorities insist the measure is part of efforts to promote traditional values and protect children from "gay propaganda."

The survey also suggest levels of homophobia may have risen in previous years.

A VTsIOM poll in May 2012 found that 38% of Russians felt no particular emotions when interacting with a gay person, compared to 45% who said they experienced negative emotions, agitation and stress when thinking about homosexuals.

Two thirds of Russians think that the financial standing of their families will not change this year A fifth of the Russian people (17%) expect a change for the worse in their well-being this year. A year ago, the proportion of pessimists was 12%. People have started changing rubbles for dollars as a result of the recent devaluation of the ruble against the dollar. Others have been buying cars, white gods and the demand for low end apartments is unusually high as

Russia seek to convert their cash into fixed assets that will keep their value as they fear a renewed crisis.

Only 15% of the Russian people expect their financial standing to improve. Such expectations are more frequent among young people (aged from 18 to 24 years; 25% of optimists) and among residents of mid-size cities (19%).

Over the past few years, the Russian people have been indicating a high level of inflation as the main reason for possible deterioration of their financial situation (74% in 2014, 67% in 2008) but devaluation fears have risen more recently.

Another factor has been the slow in the rate of rise in incomes as companies are increasingly squeezed between high interest rates and falling profits.

Pensioners are one exception: the number of respondents who expect an improvement of their financial standing due to pensions of all kinds has doubled over the past year (13% in 2014 versus 7% in 2013).

Russians appalled by violence in Ukraine demonstrations Russians express their disapproval of Ukrainian protesters who cast stones and bottles of incendiary liquid at the police, VTsIOM said in a poll: 55% condemned the aggressive behaviour of Ukrainian demonstrators; 26% admitted their dislike for radically minded Ukrainian opposition activists; 15%

said they were disappointed and 11% had no trust in the demonstrators.

Another 42% believe the change of government was a coup d'etat, but separately 85% do not want to see Russian forces enter the Crimea.

In the opinion of 59% of the respondents, the Ukrainian Interior Ministry's Berkut special police unit was doing its job when it deterred the radical demonstrators. A third (32%) argued that Berkut was saving the country from a split and anarchy, and only 5% claimed that the police were protecting the criminal regime, beating average people and violating human rights.

Some 61% believe it is permissible to use the police force in the protection of administrative buildings and in the dispersal of protest rallies. The opposite opinion was voiced by 29% of the respondents.

Russians in love Almost half of Russians are currently in love, although men with romantic feelings outnumber women, according to the Levada Centre.

Some 48% of Russians admitted to being in love, 4% less than in 211, the survey by the independent Levada Center found.

But, implying some emotional drama, the figure for men stood at 56% compared to just 40% for women. The poll did not give a gender breakdown for respondents.

A shy 10% declined to say whether they were in love, up from 8% in 2011, when the question was first polled.

Americans’ Opinions of Russia, Putin Hit 20-Year Low Americans’ opinions of Russia and its leader Vladimir Putin have reached their lowest point in 20 years, according to a survey by the US pollster Gallup.

Both Putin and Russia registered their highest “unfavorable” ratings – 63% and 60%, respectively – since Gallup began surveying Americans about Russia in 1994, according to the poll.

The results follow a Gallup poll in September showing that for the first time in 15 years more Americans view Russia as an unfriendly or enemy nation than as an ally or friend of the United States.

Banks and Finance Russian mortgages double in 2013 to RUB1.3 trillion The total mortgage loans granted in 2013 increased 1.2 times compared with 2012 and reached RUB1.3 trillion. About 824,000 mortgage loans were granted in 2013.

The secondary home market is a now well established and is being fuelled by the increasingly widespread use of credit. Of these a record 24.6% of residential property rights were acquired using a mortgage loan. Up to 40% of new residential property was sold on some sort of credit. The weighted average interest rate on a mortgage loan was 12.1% in December 2013 versus 11.5% in December 2012, according to Russia's mortgage agency.

The country's dominant mortgage lender, state-run giant Sberbank, issued 55% more mortgages in January this year than in the same month in 2013, and is keen to keep the momentum, the bank's director of retail loans. All the banks are intending to lower mortgage rates and the Kremlin is pushing for the same as it is keen to see homeownership rise.

Russian bank's profit up 17.5% year on year in January to RUB94.4bn Assets of the banking sector increased 1.8% in January, the regulator says. In January 2014, total loans added 2%

(loans to nonfinancial companies up by 2.8% and loans to individuals up by 0.2%). NPLs in the corporate loan portfolio rose 2.7%, NPLs in the retail loan portfolio up by 5.9%. The proportion of NPLs in the corporate loan portfolio decreased from 4.2% to 4.1%.

The proportion of NPLs in the retail loan portfolio increased from 4.4% to 4.7%.

The growth of Russian banks' consumer loan portfolio will slow to 15-18% in 2014 After several years of 40%-plus growth in the highly profitable consumer lending segment, growth in portfolios are expected to slow to 15-18% this year after the Central Bank of Russia imposed new prudential rules to curb lending on the back of rising nonperforming loans, says S&P. "We expect an increase in loan loss expenses in the sector of consumer lending because the increased loan portfolios will come to maturity in 2014," S&P says in a report. S&P experts think that retail lending will slow down to 2025% in 2014 amid tougher regulation, a deteriorating quality of loans and saturation of the consumer loan market.

At the same time, part of trubled corporate loans since the 2008-2009 crisis will not be settled. S&P expects that new provisions for corporate loans will increase to 1.5% in 2014 from 1.2% in 2013.

S&P estimates that the proportion of overdue loans (overdue by more than 90 days) will reach 8-10% in the next 12-18 months versus 6.5% at the end of the last year.

S&P estimates ROE of banks at 13-15% in 2014. The pressure on net interest margin will keep this year amid a not high demand for corporate loans and keener competition, S&P says. Today the level of misbalances in the Russian system is much lower than it was during the recent crisis, and banks' ratings reflect the risks present in the Russian economy, S&P says.

The Bank of Russia is considering introducing an increased capital ratio (N1) for Russian systemically important banks to a max of 1% The Bank of Russia hasn't made the list of such banks public so far, which may include up to 60 names.. Dmitry Fedenkov at Nordea Bank estimates that 20 banks accounting for 4.7% of total assets of the banking system had the N1 ratio of about 10-11% as of January 1, 2014. There are large banks among them - VTB24, Moscow Industrial Bank, and Trust Bank. Most of them will hardly have any difficulties with increasing their capital, except the riskiest ones, says Dmitry Fedenkov.

All Russian banks meet the Basel III requirements for capital Effective January 1, 2014, Russian banks operate in accordance with the Basel III standards and calculate new capital adequacy ratios which will become a "safety cushion" in case of a crisis.

Pursuant to the new requirements, adequacy ratios for common equity (5%) and for Tier-1 capital (5.5%; 6% beginning with 2015) are measured in addition to a total capital adequacy ratio (10%).

VTB Considers Merging VTB24, Bank of Moscow as Banking Growth Stalls VTB, the country's second largest banking group, is considering merging two of its major banks, VTB24 and Bank of Moscow, to cut costs as the economy stalls and growth in the banking sector slows, according to reports.

The state-owned banking group, struggling to boost profitability as opportunities for easy expansion dry up, is putting together a strategy document looking forward to 2017, which should be ready in April.

VTB owns four banks — VTB, the more high-street oriented VTB24, Bank of Moscow, which it absorbed in 2011, and Leto Bank, which focuses on retail loans to low earners.

VTB Capital, the investment arm, has already closed down most of its international branches and is giving up on its hope to establish itself as an international investment bank. Some 95% of its fund business is handling Russian money and investing mostly into Russian assets.

Russia’s deposit insurer sees households’ deposits rising 19% in 2014 Russia's Deposit Insurance Agency (DIA) forecasts a 17-19% growth of households' deposits in 2014, an increase of RUB2.88-3.22 trillion to RUB19.84-20.18 trillion.

The share of deposits in foreign currencies will remain unchanged, the agency said at about 17-19%.

2014, according to the Bank of Russia.

In 2013, the share of foreign currencydenominated deposits grew to 18.5% between January and September and fell to 17.4% as of December.

Russia's National Bureau of Credit Histories (NBKI) said the Russian retail borrowers' credit health index has been flat for the last 18 months

The share of deposits held by top-30 banks rose to 78.6% as of December from 77.1% in September. The share of top bank Sberbank increased to 46.7% from 44.7% in the same period.

The credit health index has been falling alarmingly in recent years as Russians begin to over-borrow for the first time ever.

Russian banks’ foreign currency deposits grew by 21% in 2013 Total foreign currency deposits with Russian banks increased 21.2% in 2013, from RUB13.419tn to RUB16.204tn, according to Bank of Russia.

The growth of foreign currency deposits at the largest banks was even higher than the growth of ruble-denominated deposits on the back of growing fears of a devaluation.

Sberbank is in the lead by the amount of foreign currency deposits raised from individuals.

The top-3 also includes VTB24 and Gazprombank. The following banks are ZAO Raiffeisenbank (up by 18% to RUB114.9bn) and the Bank of Moscow (up by 30% to RUB62bn).

In January 2014, the ruble depreciated by about RUB2 against the US dollar and by RUB2-3 against the euro. The$exchange rate was RUB35.2 and the euro rate RUB47.5 as of February 4,

A critical level of delinquencies depends on retail policies of each lender, he says. For example, the%age of loan delinquencies at the rate of 20% of a loan portfolio will be critical for a monoliner bank, but 25% is an admissible rate for a lender with a diversified loan portfolio, says Alexei Volkov.

As of the end of 2013, overdue debt accounted for 4.4% (RUB440bn) of all loans granted to private borrowers. During the year, this%age increased by 0.4% only, but the growth in absolute terms was rather significant: RUB127bn versus RUB22bn in 2012.

Banki.ru releases list of most loss-making banks as of the end of 2013 88 of 902 credit institutions that post their financial statements on the Bank of Russia's website were in the red as of the end of 2013.

Their losses made a total of RUB19.8bnbn ($583m). The first ten banks account for 83% of total losses. 58 credit institutions were in the red as of the end of 2012.

In the first six months of 2013, banks' losses were explained mostly by the regulatory tightening of provision requirements and a seasonal decline on the consumer loan market. In the second half, the most widespread reasons were write-offs and sale of bad debts and the Bank of Russia's enhanced supervision.

Number of small Russian banks halves over past two years, more to close

The Top-20 Loss-Making Banks as of the End of 2013, RUBm

The law raising the minimum required amount of a bank's capital from RUB180m to RUB300m with effect from January 1, 2015 was approved over two years ago. The minimum required amount of equity capital for newly established banks was increased to RUB300m in 2012.

Position, Bank, Loss (RUBm) 1 Petrocommerz -7,096.7 2 MDM Bank -2,834.8 3 Solidarnost (reorganization) 2,247.2 4 Ellips Bank (reorganization) 2,221.1 5 My Bank (license revoked) 436.5 6 IsBank -427.9 7 Cetelem Bank -376.0 8 Bank BCC-Moscow -360.7 9 Uniastrum Bank -327.2 10 Roseximbank -265.2 11 Credit Suisse -242.3 12 Mir Business Bank -217.0 13 Pervomayskiy -212.8 14 Russky Zemelny Bank -168.6 15 RN Bank -167.4 16 PSA Finance Bank -142.7 17 Rosprombank -101.5 18 Uralcapitalbank -97.1 19 Imbank (license revoked) -94.5 20 Accent Bank -90.4 More details are available at http://www.banki.ru/news/daythe me/?id=6219515

The number of Russian banks with capital under RUB300m has halved to 179 over the past two years.

Their assets make a total of RUB188bn which is 0.4% of assets of the Russian banking system.

Since January 1, 2012, the number of banks which fell short of capital requirements has decreased by 125, say analysts: 101 banks increased capital, including 46 banks had done it by beginning of 2013. "The other 24 were either stripped of their licenses or merged with other banks or became nonbank credit institutions," Vedomosti reported.

More sales, mergers and closures of small banks are expected this year. The Bank Ratings at Expert RA says that up to 50 bank licences may be revoked in 2014 after 32 were nixed in 2013.

Russia’s Bank Saint Petersburg closes deal to buy Bank Evropeisky Russia's Bank Saint Petersburg, one of the country's 30 largest lenders, completed a deal to buy 100% in Kaliningrad-based Bank

Evropeisky on January 23, Bank Saint Petersburg said Tuesday in a statement.

The value of the deal was not provided.

Growth in the stock of household credit slowed from nearly 40% in 2012 to 29%.

Russia’s NOMOS-Bank buys controlling stake in Bank Otkritie

Corporate borrowing last year was reined in by the economic slowdown and stagnating investment.

Russia's Otkritie Financial Corporation has bought a 14.3% stake in Bank Otkritie from the International Financial Corporation (IFC) for 4.235bn rubles and has granted it to its affiliate NOMOSBank which consolidated a controlling stake in the bank, the corporation said in a statement late Thursday.

The Central Bank of Russia has become quite concerned about the rapid build-up in household debt, particularly the increase in unsecured loans. Unsecured credit now accounts for over 60% of household borrowing. Unsecured loans carry larger risk than secured loans.

"The granting of this stake was made with Otkritie Financial Corporation's permission. It was made in accordance with the corporation's plans to build a consolidated banking group, in which minority shareholders will participate only in NOMOS-Bank's charter capital," Otkritie Financial Corporation Chairman Ruben Aganbegyan said.

According to the corporation's plans, NOMOS-Bank will focus on providing services to corporate clients, Otkritie Bank will focus on retail lending, and regional KhantyMansi Bank, which will also be controlled by NOMOS-Bank, will develop as a universal bank.

Growth in Russian bank lending moderated last year, but households continued to pile on debt Corporate borrowing rose 13% last year, matching the 2012 pace.

With households taking on heavier debt burdens and slowing income growth, the stock of nonperforming loans in bank portfolios has begun to rise. Households with loans devoted on average nearly 25% of their income to debt servicing last year.

To calm the credit boom, the Central Bank of Russia last year increased the reserve requirements concerning household loans with further hikes planned this year.

The requirements target unsecured loans.

The CBR is also investigating high interest rates charged on some loans. At the end of 2013, the average rate charged on a household consumer loan for over a year was around 18%, while inflation was 6.5%. Interest rates on unsecured loans are particularly high. The new consumer credit law, which will come into force at the beginning of July, grants the CBR

authority to restrict rates charged on consumer loans.

Russian Credit Card Market Grows to RUB990bn in 2013 The growth of credit card lending in Russia has slowed to 47% year-onyear, compared to 86% year-onyear in 2012, according to Tinkoff Credit Systems (TCS), however the total credit card portfolio increased to RUB990bn (2012: RUB675bn).

The market grew consistently in the first three quarters of the year, showing the highest growth per quarter in Q3 2013 before slowing down in Q4 2013. The slower growth at the end of the year was the result of tighter capital adequacy requirements introduced by the Bank of Russia (CBR) as of 1 July 2013, particularly the increase of risk ratios for consumer loans with an annual effective interest rate above 25%.

In 2013, the market concentration continued to increase with the top five banks by credit card portfolio accounting for 61.3% of the market, compared to 58.1% in 2012. The top 20 retained its combined market share of about 90% in 2013. Sberbank remains a leader with its market share rising to 25.5% (2012: 22.1%) and credit card portfolio up to RUB 252.4 bn (2012: RUB 149.3 bn).

Russian Standard Bank maintains second place with a market share of 16.3% (2012: 15%) and credit card portfolio of RUB161bn (2012: RUB 100.9bn). TCS Bank increased its credit card portfolio by 54% year-on-year to RUB 74 bn (2012: RUB 48.0 bn) and has retained the

third place since the beginning of 2013 with a market share of 7.5% (2012: 7.1%). According to the CBR, as of 1 October 2013, Russian banks issued over five million credit cards since the beginning of 2013, bringing the total number of issued credit cards in Russia to over 28m.

Banking fraud more than doubled in 2013 to reach RUB153bn Russia has an estimated 600,000 fraudsters operating actively to defraud banks. A drastic increase in the number of loans with signs of fraud appeared in 2013. The number of suspect loans was about 577,000 as of beginning of 2013 (banks' losses were RUB67bn) and doubled to 1.2m as of January 1, 2014 (RUB153bn).

Fraud is playing for an increasing share of NPLs: according to the Bank of Russia, total arrears of retail loans increased 40.6% to make a total of RUB440.3bn in 2013, the retail loan portfolio being RUB9.96 trillion.

The increase in fraud is partly due to banks increased efforts to find new customer segments. Banks started lending to young people (the number of borrowers aged under 24 increased 38%) and senior citizens (up by 56%) on a larger scale.

Secondly over 80% of loans with signs of fraud are issued to third parties. Using forged documents, loans are executed in the name of law-abiding citizens. One fraudster may obtain two and more loans

from different banks simultaneously.

One in two cars bought on credit, shift to premium brands driving borrowing Almost every second car was purchased on credit in 2014 and the share of cars purchased on credit, could reach 60% this year.

Despite the decline in overall sales of new cars by 5.5% to 2.6m vehicles in 2013, in terms of money the decline was only 1.9%,

to $73.9bn, according to Avtostat.

The demand for vehicles for $25,000-35,000 increased by 36.5% to 468,000 cars, premium brands were especially popular.

The sales of Mercedes, BMW, Land Rover increased by 7.9-18.5% in 2013.

The proportion of new cars purchased on credit, increased by 10-12%, to 45.7% in 2013. Over the past two years the volume of car loans had increased by 2030%.

Economics Record demand of currency by Russian households in December as devaluation fears grow, capital flight to stay high The net demand (the difference between demand and supply for foreign currency from Russian households) soared to $4.3bn in December from $1.19bn in November, a record high since January 2009, the central bank said in a statement Wednesday.

“In December 2013, ahead of the New Year holidays households’ activity on the market was traditionally higher. At the same time households boosted the volumes of rubles conversion into foreign currency with the aim of saving money against the background of expectations of a further ruble weakening against core international currencies,” the bank said.

Local banks raised foreign currency imports to $3.7bn from $1.4bn a month earlier.

The amount of foreign currency taken out of the country fell 52% to $400m in December.

Russia’s foreign exchange and gold reserves decreased by $8.7bn, or 1.7%, to $490.2bn, in the period from January 31 through February 7. In 2013, the reserves fell 5% to $510bn.

Russia's economic woes, coupled with the political crisis will continue to drive capital flight this year despite the CBR's optimistic outlook at the start of the year: Russia's January net capital outflows reached $17bn in January, the same level as a year earlier. A year ago the outflows were technical and were effected by currency swap transactions, the

government said, while this year they reflect actual market movement.

Between February and December 2013 net capital outflows were $46bn, but analysts think that this year could be worse. The CBR is expected to try and keep the exchange rate to the dollar for the full year to about RUB36/$1.

CBR leaves repo interest rate unchanged at 5.5%, but said likely to miss its 5% inflation target this year due to ruble depreciation The interest rate of a weekly auction repo of 5.5% has been used as the key interest rate of the money market since September 2013, the refinancing rate (8.25%) used for reference. The next meeting of the Bank of Russia's Board of Directors is scheduled to take place on March 14.

The decision to leave the key rate at the current level was made "following the analysis of current trends and based on the macroeconomic forecast according to which inflation will be close to the target level at the end of 2014 provided that the focus of the monetary policy remains unchanged while the growth of Russia's economy will not be high," the regulator says in the press release.

The Bank of Russia estimated the contribution of the ruble depreciation to inflation for 2013 (6.5%) at 0.3-0.5% and a potential contribution of the ruble

decline in January to inflation for 2014 at 0.5%.

Elvira Nabiullina, Chairperson of the Bank of Russia, said: "One of factors we are unable to assess adequately at the moment is how the weakening of the ruble and future exchange rate trends will affect inflation expectations and prices."

In 2013, the ruble fell in price against the dual currency basket by 9.4%. Since beginning of 2014, it has decreased 6%. Inflation in January slowed down to 6.1% year on year, but speeded up to 6.2% over the week ended on February 10. It had a minor effect on inflation expectations in the meantime.

The Bank of Russia decreased the GDP growth estimate for 2014 to 1.5-1.8% in response to a worse than expected result for 2013 (1.3% instead of 2% expected).

Like in 2013, external factors, including a weak growth of demand and no rise in prices for export, will continue having a retarding effect on the economy, the Bank of Russia thinks. As before, consumer demand will be its key support, but this demand is limited by a slower increase in personal income and consumer lending. The trend of corporate lending doesn't appear as a deterrent of economic activity, the Bank of Russia thinks: the reasons for economic slowdown are structural rather than cyclical.

The Bank of Russia's statement destroyed any hopes, including those of the Kremlin, that the Bank

of Russia might ease the monetary policy drastically facing with the possibility of long-lasting stagnation: the key repo rate of 5.5% is most likely to stay unchanged until the year-end.

Thus, the ball passes definitively to the government which will have to carry out a number of reforms if there is to be any increase in economic growth.

Amid a weak growth of the economy, capital outflow and a shrinking current account surplus, the ruble is likely to continue weakening with chances to hit the inflation target growing weaker every month.

Since last autumn, the Bank of Russia has stepped up refinancing drastically, including refinancing of loans against nonmarket assets; outstanding debt increased from RUB80bn in July to about RUB1.5 trillion in February.

The refinancing system is in pieces.

There are a number of banks which receive a good deal of money from the Bank of Russia and this money goes to the Forex market - while trying to prevent a crisis of liquidity, the Bank of Russia drove the situation to extremes, says Dmitry Miroshnichenko at the Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF), "However, there is no good way out. The Bank of Russia is hostage to economic slowdown: the regulator counts on expansion of the interbank market to improve the situation in the banking system, but a normal banking system is possible only if the economy is in a normal condition.

It means that economic growth is needed."

Sinking ruble leads central bank to unlimited ruble aid The Russian ruble exchange rate sunk to RUB41.8 against the dualcurrency basket, comprising $0.55 and â‚Ź0.45 in the middle of February and the rout is likely to continue as the ruble falls to record lows. The Central Bank has been trying to stay out the market, but has been forced back in and went as far as "temporarily" hiking rates by 150bp in the last days of February to prop up the currency.

The hike will only inflict more pain on the economy where businesses have been complaining bitterly about the high cost of borrowing.

The ruble breached the psychologically important RUB50/EURO and RUB36/$at the end of the month.

On the one hand the CBR was trying to manage the ruble lower in order to boost growth. But on the other the falling currency has lead Russians to start converting rubbles into dollars that has seen the currency fall faster and further.

The falling ruble value is also starting to hurt economic activity.

The drop in investment of 7.0% y/y in January came as a negative surprise, while retail trade growth of 2.4% y/y was also below expectations. Investments suffered because of companies’ preference to play the ruble depreciation game, with corporate forex deposits increasing by $12bn in January alone vs. $23bn for all of 2013. Analysts say that growth in

January could show a decline of 1% year on year, which would likely fuel additional flight from the ruble.

28% y/y in January, but did not feed through to the retail sales, which suggests Russians are borrowing to pay off old debts.

Retail trade growth also decelerated materially, delivering a poor increase of 2.4% y/y in Jan. after growth of 3.8% y/y in December 2013. The unemployment rate, on the other hand, was better than expected, remaining low at 5.6%, while real wages were up 2.5% y/y. Retail loan growth was rather strong at

Flight to forex savings is key explanation for poor investments.

The ruble exchange rate instability and poor growth outlook compelled companies to search for alternative investments, and forex savings appear to be the most attractive way to realize financial returns at the moment.

Russian companies failing to invest Rosstat’s annual investment survey finds that just 49% of firms responding (compared to 56–60% in the previous three years) are planning to increase their fixed capital investments this year.

Companies planning to reduce their investments increased to 31% from 23–26% during the previous three years. The survey polled over 10,000 firms, including 6,400 large and mid-sized companies. This is very bad news for economic growth that will probably come down to

closer to the same 1.3-1.5% as in 2013 as a result; Russia's economy is stalling thanks to the lack of investment.

The investment plans of companies surveyed apparently reflect largely investment of privately held companies, suggesting that growth in private company investment could slow down a bit this year.

Economy minister Alexei Ulyukayev reported investment of private firms increased by 7% last year.

However, state-owned enterprises account for a large share of capital investment in Russia. Ulyukayev

noted that the 20% cut in investment of state enterprises last year was the main reason the investment growth overall dropped to zero last year.

The survey found that the biggest factor limiting investment was again the lack of available out-ofpocket funds (nearly 60% of firms). Other most commonly cited reasons for not investing were still the high cost of credit, risks associated with investment, uncertainty about the Russian economy (26–27% of firms) and lack of demand for a company’s products (just over 20% of firms).

Russian foreign trade figures weaker in 2013 The value of goods exports in 2013 contracted by 1% year-on-year to $523bn. The reduction in exports reflected drops in export volumes and prices of crude oil and metals, as well as a contraction in exports to CIS countries. Exports to Belarus fell 20% year-on-year on economic weakness. The 13% drop in exports to Ukraine reflected largely political tensions. In contrast, exports of petroleum products and natural gas to nonCIS countries grew briskly. Export volume of gasoline increased by more than 50%, while natural gas exports were up over 20% from a year earlier. Gazprom reports its share of the European market increased last year to a record 30%.

Over 70% of Russian goods exports last year consisted of oil, petroleum products and natural gas. Metals and chemicals were the

next largest export good categories. Even machinery & equipment accounted for over 5% of total goods exports last year.

The top export destinations were the Netherlands, Italy and Germany. EU countries took over half of all exports, while Russia’s customs union partners Kazakhstan and Belarus, accounted for 7%.

Growth in the value of goods imports slowed last year to below 3% year-on-year with the level of imports reaching $344bn. Chemical products and foodstuffs continued to drive import growth, even as imports of machinery, equipment and vehicles declined slightly.

Looking at individual product categories, there was a drop of nearly 20% in imports of passenger cars, while imports of milk more than doubled.

About half of imports still consisted of machinery, equipment and vehicles. Chemical products and foodstuffs were other major import categories. China continued to be Russia’s top source of imports, accounting for 17% of Russia’s total imports last year. EU countries accounted for just over 40% of imports to Russia, whereas the share of the customs union partners Belarus and Kazakhstan in Russian imports was 7%.

Russian econ ministry says significant acceleration of economic growth delayed to 2016–2020 Russia’s Economic Development Ministry hopes for a significant acceleration of economic growth in 2016–2020, but warns of a possible slump in the world’s economy in 2018, according to Deputy Economic Development Minister Andrei Klepach.

“We have the task of speeding economic growth up. But under the current situation, the years of 2014–2015 will not be the years of high growth. In fact, 2016, 2018 and 2020 are the years when we could expect growth rates to pick up strongly,” Klepach said.

Structural reforms in transport, healthcare and education are impossible without economic growth.

“At that, we must bear in mind that the development has a wave-like character. According to our estimates, with a high degree of probability, we can expect the next significant world cyclical decline, a recession, in 2018–2019 and in 2028,” Klepach said.

Russian budget surplus 9.3% of GDP at the start of this year The one bright spot in the economic picture was the budget had a strong start to the year. The Finance Ministry reported a federal budget surplus of RUB466bn, or 9.3% of GDP, for January, up from a deficit of RUB15.6bn, or 0.3% of GDP deficit, in January 2013.

However, the State Treasury reported a sharp deterioration in the consolidated budget balance in 2013 from a surplus of 0.4% of GDP (RUB260bn) in 2012 to a deficit of 1.3% of GDP (RUB850bn) in 2013. This deterioration is considerably deeper than the federal budget balance, which posted a deficit of 0.4% of GDP in 2013 after an almost balanced 2012.

Revenues rose 21% year-on-year in January to RUB1.32 tln, or 9.8% of the forecast for this year, while expenditures contracted 21.2% year-on-year to RUB858bn, or 6.1% of the forecast for the year, although economists say the relief is temporary.

Oil & gas revenues grew 32% yearon-year to RUB615bn, thanks to export volumes growth, despite the average Brent price declining 4.6% year-on-year. Non-oil & gas revenues grew 13.1% year-onyear to RUB709.3bn in January, including a profit of RUB15.8bn

from the Central Bank. The share of oil & gas revenues in total revenues rose to 46.4% from 42.6% in January 2013.

Expenditures contracted to RUB858bn from RUB1.1 tln in January 2013, with interest payments down almost 18% yearon-year to RUB23.5bn.

Ruble weakness could virtually eliminate budget deficit. Compared to the federal budget deficit at the beginning of the past two years, the budget was exceptionally strong in January 2014, partly thanks to a substantial increase in revenues, but primarily as the result of a sharp year-on-year contraction in expenditures. The strong increase in revenues will not be sustained in the next few months, while expenditures will accelerate during the year.

Analysts expect an end of year budget deficit of 0.6% of GDP this year, but the ruble weakness, if it persists, could reduce the budget deficit to just 0.1% of GDP this year.

$8bn in Loans For Russian Companies Endangered By Ukraine Turmoil

Russian companies took on $52bn in dollar-denominated loans last year, up from $38bn in 2012.

Loans worth $8bn being sought

by Russian companies from international banks are in danger of falling through because of the crisis in Ukraine. billionaire Mikhail Fridman's telecoms company VimpelCom is among 10 Russian firms who had been in negotiations to receive loans from U.S., European, and Japanese banks.

Moves by foreign banks to lower the cost of debt and attract greater involvement have spurred Russian companies to increase their borrowing. VimpelCom is currently seeking a $2bn credit line, according to sources familiar with its financing. Among other companies seeking loans are Petrochemicals company Sibur, owned by billionaire Leonid Michelson, miner and metals company Metalloinvest and Novolipetsk Steel, industry

insiders said. Potash producer Uralkali, state nuclear corporation Rosatom and Slavneft have also held talks with banks.

Russian Manufacturing PMI falls to 48.0, the lowest since mid-2009 According to the PMI survey for January, the pace of the drop across Russian manufacturing industries deepened, with the headline index sliding to 48.0, the lowest since June 2009. The output sub-index registered the sharpest fall, to 48.5, on a slump across investment-related industries, and a marginal contraction in the production of consumer-related goods.

Despite output cutbacks, outstanding business continued to fall at a relatively fast pace as the rate of decline in new orders accelerated while firms reported that lacklustre order inflows had freed up capacity. Meantime, labour shedding continued apace (admittedly, the pace of job cuts has moderated from multi-year lows), while input purchases dropped to the lowest since May 2009. Surprisingly, cost inflation edged down in January to 54.9 (normalising after a sharp upturn in December to 57.7) despite the weaker ruble, while the passthrough to final prices ticked up slightly (to 53.0), but overall remained historically muted.

Practically no growth in Russian manufacturing output last year, slow start to this year

There was almost no growth in manufacturing in 2013, but there were big variations across sectors.

Among the largest sectors, production in the chemicals branch (up 5% yoy) and the foodstuffs branch (up over 2%) were supported by continuing growth in consumer demand. Oil refining also rose 2%.

The worst-performing branches were found in industries related to capital investment. Machinebuilding contracted 8% yoy and metals over 2%. Many metals industry companies have found themselves struggling under mountains of debt on falling demand for their products and declining prices. Since the end of last year, some firms have sought state assistance to help deal with their debts. Also the outlook for metal and machinery manufacturers in January was the bleakest among sectors compared to the situation a year ago.

There was a bounce in December in industrial production, but it looks like that was an aberration. Even though the Russian economy as a whole continued to stagnate in December, manufacturing grew 1.6% year-on-year -- the first growth in manufacturing since April 2013 -- following a 0.9% year-onyear drop in November.

Russian industrial output began sliding again in January down by 0.2% year-on-year. While raw materials extraction expanded 0.9% year-on-year, manufacturing remained flat and supply and redistribution of electricity, gas and water declined 3.9% year-on-year.

Manufacturing output dynamics were mixed. On the one hand, the food industry saw an upturn (meat production rose 16.5% year-onyear, juices 17.0%, oils 43.7%).

Construction material output increased across the board (bricks 3.6%, cement 2.2%, metal 16.8%).

On the other hand, passenger car production dropped 14.1%, and production of investment machinery declined as well (turbines down 75.7% year-onyear, tractors 15.7%, combines

72.7%). The statistics indicate that household consumption continued to be the key driver of economic performance, but acquisitions of durable goods contracted as consumer debt servicing at high interest rates has reduced household purchasing power.

Elevated interest rates combined with the uncertain trends on the forex market have eroded investment activity, which negatively affects the production of investment goods.

Russia's privatisation plans back on for 2014-2016 The results of Russia's privatisation programme since it was relaunched in 2008 have been more than disappointing, but the Kremlin is hoping a general global recovery will allow sales to restart in 2014.

The first auctions could come as soon as the second quarter of 2014, the head of the Russian Federal Property Agency (Rosimushchestvo) Olga Dergunova told journalists at the end of February.

The combined value of deals to sell the Russian government’s stakes in the largest state-run companies amounted to RUB585.7bn in 2011– 2013, the Economic Development Ministry said in a report in February. In 2013, the value of such deals amounted to

RUB286.4bn. This is way below the trillions of rubbles the government was hoping to raise when the plan was launched in the summer of 2008. The Federal State Property Management Agency sold stakes in 815 companies, 522 treasury property and 216 federal state unitary enterprises in 2011–2013.

However, the Russian government hopes to fully complete the 20142016 privatization plan, but this will largely depend on the market situation, Prime Minister Dmitry Medvedev said at the end of February.

According to the privatization plans approved in 2013, the government will sell stakes in telecom operator Rostelecom, state-owned shipping company Sovcomflot, United Grain Company and Novorossiysk

Commercial Sea Port (NCSP) in 2014-2016.

The government may also sell stakes in national flag carrier Aeroflot Russian Airlines, oil pipe monopoly Transneft, and other companies, Medvedev said.

The government expects to receive RUB200bn in revenue from stake sales in 2014.

The Russian budget may receive about RUB150bn in 2014 from the sale of a stake in Rostelecom, the Federal State Property Management Agency Director Olga Dergunova said.

In 2013, Communications and Mass Media Minister Nikolai Nikiforov said that the government could sell its entire 51.1% common stake in Rostelecom for at least $5bn. However, Rostelecom's management has repeatedly said that privatization will be reasonable only in 2015-2016 after the company increases its market value.

According to Dergunova, the privatization of 5% in Russian Railways will not begin until the company receives National Wealth

Fund subsidies on Trans-Siberian Railway development. The state property management agency earlier planned to sell 5% in Russian Railways by the end of 2015 and 20% more by the end of 2015. The executives of the railroad monopoly said earlier that the privatization is impossible before 2018.

Russia’s consumer price growth decelerates to 6.1% year-onyear in January, inflation could soar this year Rosstat reported that consumer prices rose 0.6% month-on-month in January after rising 0.5% month-on-month in December; however price growth decelerated to 6.1% year-on-year from 6.5% year-on-year a month before. For the second month in a row, core inflation grew 0.4% month-onmonth, but core inflation growth decelerated to 5.5% year-on-year from 5.6% year-on-year in December.

Independent experts think that inflation in Russia may be 10-12% in 2014, on the back of the weakening ruble. The value of some consumer goods, for example, gasoline, may go up 15-18%.

Infrastructure Russian rail freight market turnover close to 2012 levels Russian Railways has published preliminary operating data for January that show rail freight volumes rose by only 1.2% yearon-year to 96.3m tonnes, although rail freight turnover jumped 7.1% year-on-year to 191bn tonne-km, down to 2012 levels, a record high for a January.

January is typically the seasonally weakest month of the year, which explains the m-o-m dynamics (freight volumes down 6.8% and turnover down 4.1%). Last month was also impacted by the low base effect, as freight volumes last year saw the biggest drop in January.

Nevertheless, rail freight turnover, which we believe is a much better indicator for railcar demand, was very close to the January 2012 figure.

Coal freight showed steady improvements edging up 0.4% year-on-year to 26.9m tonnes.

Overall, coal remains the main contributor to overall volumes,

accounting for 28% of total railcar load. It is also an important contributor to the overall growth in rail freight turnover, as it typically involves the longest transportation distances.

Metallurgical cargo results were more mixed. Metallurgical cargoes increased 0.5% year-on-year to 16.9m tonnes, while performance was mixed across categories. Iron and manganese ore volumes were up 4.7%, which was almost fully offset by declines for ferrous metal (down 3.4%), scrap (down 2.3%) and non-ferrous ore (down 5.9%).

Metallurgical cargoes were in positive territory in terms of volumes loaded for the second month in a row.

But building materials were the worst performer. Building materials volumes posted the largest decline, shrinking 9.3% to 8.8m tonnes, which we attribute to lower construction activity (as large projects for the Sochi Olympics were completed last year) and slowing economic activity.

Putin Sochi Bill Seen Rising $7bn After Flame Dies Russia spent some RUB1.53 trillion ($44bn) to host its first Winter Games in Sochi, may have to spend as much as $7bn more in the next three years just to maintain the venues and other new infrastructure around Sochi, according to two officials involved in the planning.

However, the Kremlin has repeatedly said (and has been widely ignored) that the actual games-related spending was on the order of $5bn-$7bn: the rest

was on infrastructure for the entire region. While clearly there has been a lot of stealing and waste during the Sochi preparations, the idea was to use the games as a template for general regional development, the sort of spend all of Russia's regions need.

Still, Sochi runs the danger of becoming something of a white elephant. The government hasn’t decided exactly what to do with the Olympic venues yet, the officials said, asking not to be identified.

What’s clear is that in the rush to get Sochi ready, the post-Olympic plans weren’t thought through. As

a result, annual spending will be tens of times higher than

estimated, widening budget deficits, they said.

Russia to Spend $4.6Bn on MS21 Airliner

The MS-21, currently in development, is designed to carry between 150 and 212 passengers and is expected to make its maiden flight in 2015 with first deliveries due in 2017.

Russia will spend RUB164bn ($4.6n) to develop and produce its MS-21 medium-range passenger aircraft, a government official said, which is part of the Kremlin's plan to rebuild the domestic aviation sector.

The MS-21 is intended to replace all models of the outdated Soviet-

era Tu-154 and Tu-134 aircraft, as well as the Yak-42 in Russia.

The plane will be produced in three versions – MS-21-200 (150 passengers), MS-21-300 (180 passengers) and MS-21-400 (212 passengers).

It will be Russia's first plane with components made of carbon fiber.

The new technology can save 25% in fuel and 15% in maintenance costs, as well as reduce harm to the environment, according to the designers.

ECM Russia’s Bank Trust plans listing on Moscow Exchange Russia's Bank Trust, one of the country's leading retail lenders, plans to list its shares on the Moscow Exchange. However, the listing is unlikely to succeed as the bank is struggling and rumoured to be carrying heavy debt. Bank Trust said it will issue RUB6bn worth of

additional shares this year. The bank will publicly offer 97.32m shares at the price of RUB61.65 per share.

The bank's capital adequacy was already below the level that the CBR is believed to start to think about closing banks and stood at 10.72% as of January 1 with the

minimum level set by the central bank at 10%.

should be well received by investors.

Bank Trust is 93.77%-owned by the Management Company Trust, whose beneficiary owners are members of the bank's board of directors: Ilya Yurov, Sergei Belyaev, and Nikolai Fetisov.

Russia’s Aeroflot to spend RUB1.13bn on 2014-15 option program

Credit Bank of Moscow to IPO later this year on LSE CBM said it wants to list in the second half of 2014 and hopes to raise no less than $500m. CBM is a niche player specialising in servicing the accounts of large retailers and distribution companies based in Moscow and the Moscow region. It also has the second largest cash handling service with over 200 armoured cars after Sperbank.

In addition it has developed the traditional credit products being a pioneer in car loans and more recently moving into mortgages.

However, it has been extremely caytious in building up its client base and turns four out five applications for loans down. This has resulted in a very low NPL ratio. The banks is well capitalised by a committed owner, who controls 85% of the banks with the IFC and EBRD owning the rest.

Finally the bank operates the biggest payment terminal network in Russia, which gives it additional valuable information on its customers spending habits and credit history. Although the bank is not well known it is already a top 20 bank by assets and the IPO

Russian national flag carrier Aeroflot Russian Airlines will spend RUB1.13bn out of its 2013 net profit on the share option program for executives in 2014-2015, the company said in a statement.

The payments under the option plan will amount to RUB754.5m in 2014.

The new program will evaluate the company's capitalization and position among peers.

Detsky Mir aims for London IPO in mid-March – sources Russian children's goods retailer Detsky Mir, owned by oil-totelecoms conglomerate Sistema, is aiming to IPO on the LSE in midMarch, according to reports.

The company is aiming to raise around $300m to $400m, one of the sources said. The offering will include new shares, the source added.

JPMorgan, Credit Suisse, Citi and Renaissance Capital will be working on the offering, the sources said.

Russia dividend-based strategies should continue to beat the market Dividend-based strategies have continued to beat the overall equity market performance this year and

hold their appeal for investors in the medium term. With the economic stagnation in Russia, the undemanding valuations in equities and the lack of viable alternatives for income-focused investors at the current low rates, Russian stocks offer an impressive 3.6% dividend yield. A basket of the top-five dividend-yielding stocks beat the market by 21.5% since May of last year, as it rose by 19.5%.

Furthermore, due to new legislation, top dividend stocks this year may be in especially good demand all the way into July, past the usual range of January-May as

the government is increasingly using dividends as a way to tap their state owned companies for cash.

Historically, the best month of the year for holding high-dividend stocks has been February, when the dividend basket has returned an abnormally high average of 5%.

When held through May, the basket beats the index by 14.6% on average. Favourite names include: Bashneft, SurgutNG, Gazprom Neft and Lukoil in oil, as well as MTS, GlobalPorts and E.ON Russia.

Lenta fast growing retailer IPO attractive at lower end of IPO guidance Russia’s sixth-largest food retailer Lenta has announced plans for an IPO in London. It reportedly intends to raise up to $1bn through a secondary share offering. Lenta offers investors an opportunity to gain exposure to one of Russia’s most efficient, fast-growing, highmargin food retailers. The company is also expected to benefit from modern retail expansion and growing hypermarket penetration.

The valuation of $4.9-5.4bn implies an 2014 EV/EBITDA of 9.6- 10.2, which is in line with analysts estimates. The chain is also priced at a 25-31% discount to investor's darling Magnit on 2014 EV/EBITDA. The offering is expected to be allsecondary, which may somewhat cool investor appetite for the stock.

permission to place shares on the London Stock Exchange (LSE), Credit Bank of Moscow said late Thursday.

Credit Bank of Moscow intends to offer more than 4.822bn new shares. Deutsche Bank Luxemburg will act as the issuer.

The bank's shareholders decided in January to increase the capital by 9.645bn rubles from 14.468bn rubles via an additional share offering. CEO Vladimir Chubar said earlier that the bank will hold the IPO by July to raise at least $500m.

The Rossium company, whose beneficiary owner is businessman Roman Avdeyev, owns 85% in Credit Bank of Moscow. The European Bank for Reconstruction and Development holds 7.5% in the bank.

In 2013, Lenta leapt ahead of rival O’Key to become Russia’s sixthlargest grocery retailer. Having boosted its retail sales by an impressive 31.3% year-on-year last year, Lenta effectively became the fastest growing chain among Russia’s food retail majors. Despite the lowest retail markup among its analogs, Lenta enjoys the industry’s highest EBITDA margin, which is attributable to a high sales density and opex efficiencies.

Metro C&C may tap the market in April

Russia’s Credit Bank of Moscow wants to place shares on LSE

According to sources close to the deal, Metro will begin conducting a preliminary evaluation of market conditions in March. If management sees a positive response from investors, the Metro Group may decide to go ahead with

Russia's Credit Bank of Moscow, which is considering holding an initial public offering (IPO), has asked the central bank for

Germany's Metro Group may hold an IPO for 25% in its Russian grocery subsidiary as early as April on the LSE, according to reports, and hopes to raise $1.2bn-$1.7bn.

The German company is listing its Russian subsidiary as management believe it is the cheapest form of financing the company's on-going expansion in Eastern Europe.

the equity offering in April. Metro C&C operates 73 cash-and-carry centres across Russia and is currently the fourth-largest Russian food retailer in terms of sales.

The IPO of Metro C&C will likely depend in large part on the success of the upcoming IPO from Lenta, a competing Russian food retailer.

Russia to protect minority holders with corp governance code The Russian government has set a target to protect minority shareholders of local companies through a new corporate governance code and amendments to the civil code, First Deputy Prime Minister Igor Shuvalov said in February.

“Compulsory patterns of conduct… which will provide a completely different view of minority shareholders’ rights… in the modern Russian economy. They are as important as the majority shareholders,” he said.

Prime Minister Dmitry Medvedev said that he will support an obligatory corporate governance code implementation for state-run companies.

US’ Waddell & Reed buys 5.3% in Russia’s online payment company Qiwi The U.S.' management company Waddell & Reed (W&R) bought a 5.26% stake in Qiwi Plc, the owner of Russian e-payment system Qiwi,

in July-December 2013, according to reports.

Russia's internet and e-commerce sectors remain the most dynamic part of the economy and is increasingly attracting investors' attention.

W&R bought a total of 2,743,600 of Qiwi's shares, which were distributed among funds Ivy Investment Management Company, Waddell & Reed Financial, and Waddell & Reed Investment Management Company.

In May 2013, Qiwi held an IPO on NASDAQ with the price of $17 per share, which valued the entire company at $884m. Qiwi's shareholders managed to raise around $213m during the IPO. Russia’s VEB pension savings investments yield 6.71% in 2013 The yield received by Russia's state-owned Vnesheconombank (VEB) from investing pension savings amounted to 6.71% in 2013, the organization said in a statement.

The yield exceeded the inflation which stood at 6.50% but it was below the 2012 yield which was 9.21%. The yield of the state securities' portfolio was 6.90%.

VEB manages the pension savings of individuals who do not have a private management company or a private pension fund for these purposes.

DCM Moody's gives four reasons for Russia's low credit rating: corruption, the ineffective public sector, counterproductive law enforcement and uncontrolled budget spending.

Russia has been complaining for year that its credit rating from the international rating companies are too low given its sparkling fundamentals. By overall public debt, Russia holds the second to last position among 50 countries monitored by Bloomberg. However, in February Moody's spelled out some of the reasons for the country's poor marks.

Moody's cited the scandal over spending for the Sochi Olympic games as an example of the problem's Russia faces. "Many host cities of the Olympic Games face with excess expenditures, but their scale in Russia is much larger," said Thorsten Nestmann, an analyst at Moody's Investors Service. "An upgrade of the rating might be driven by higher effectiveness of the public sector, a decline in corruption and improvement of law enforcement."

Moody's hasn't changed Russia's rating since July 2008 when the rating was increased by one step.

Standard & Poor's downgraded Russia's rating to BBB in December 2008, after the start of the crisis.

Fitch Agency, in its turn, downgraded Russia's rating in February 2009.

However, Russia's excess expenditures for the Olympic Games lay bare one of the country's main disadvantages - the lack of independent government institutions which might put a cap on corruption and keep budget expenditures under control, Moody's says.

Foreigners’ share on Russian OFZ bond market falls to 24% as of start of 2014 The share of foreigners on the market of Russian Finance Ministry’s fixed-rate OFZ bonds went down by 1%age point on the month to 23.9% in January, the central bank said in February.

The size of the market stood at RUB3.735 trillion and foreign investments amounted to RUB894bn.

Russia will not cut 2014 borrowing plans despite weak ruble The Russian Finance Ministry did not reduce its $7bn plans this year despite the weakening of the ruble exchange rate, Minister Anton Siluanov said in February. Russia has issued $7bn of Eurobonds every year for the last years, more as a benchmark-setting exercises for subsequent corporate bond issues, rather than from any need to raise cash.

The weaker ruble “will give more sources to finance the budget deficit,” Siluanov said.

The date of Eurobonds placement has not been scheduled yet, he said. There will be no special road-

show this year, only regular meetings with investors, and the first one will be held in Hong Kong before February 24.

Sectors Car Exports to Exceed 1m units soon The export of passenger vehicles from Russia will exceed 1m units, auto industry experts predicted in a survey of 200 executives conducted by KPMG. Some 44% of respondents believe that number will be hit in three to five years, while 33% think it will take six to years.

In 2013 Russia exported 142,000 cars, up 26% from 2012, according to ACM Holding. The majority — about 88,000 — went to Kazakhstan, which is the thirdlargest car market in the former Soviet Union, after Russia and Ukraine, and grew 80% last year.

AvtoVAZ is the largest exporter, and increased its sales abroad by 11.4% in 2013 to hit 78,602 units. The lion's share, at 72%, went to Kazakhstan. Europe took 4% of that volume.

Exports are growing along with production capacity of the factories built in Russia by the international majors, which have committed themselves to expanding production at least five-fold under the terms of a new investment deal

signed last year. Planned capacity for light vehicle production in Russia is more than 3m units per year on top of existing capacity of 3m. Domestic sales in 2013 were at 2.6m units, ACM said.

Russian deputies want to ban foreign telecom equipment Deputies of the State Duma, the lower house of Russian parliament, have prepared and submitted for consideration a bill prohibiting telecom companies to use foreign equipment while building their networks, according to reports.

Under the bill, Russian companies will be allowed to purchase and use foreign telecom equipment only if there are no Russian-made analogues available.

The authors of the bill said in an explanatory note that foreign equipment was used for the construction and operations of more than 90% of all telecom networks in Russia threatening the country's security and defense abilities, and could have a negative impact on the economy.

According to 2011 regulations of the Economic Development and Industry and Trade ministries, if

any equipment was designed abroad and has foreign software, but was assembled in Russia, it can be recognized as Russian-made equipment.

Russia Forecasts Increase in Oil, Gas Output in 2014 Russia will increase oil production this year by 0.3% to 525m tons and boost its natural gas output by 4.8% to 700bn cubic meters, the country’s deputy energy minister said in February.

“We could increase gas production even more, but there are issues with storage, transportation and consumption,” said Kirill Molodtsov.

The boost in oil output is expected as a result of launching new fields last year, he said.

In 2013, Russia produced just over 523m tons of oil and 668bn cubic meters of gas, according to state statistics.

Environment for global consumer goods companies in Russia is good

Russia preparing tighter rules governing duty-free online purchases from abroad

Russia's state owned Sberbank CIB made the following comments on the retail sector:

E-commerce is booming in Russia; trouble is that Russian consumers are increasingly buying goods in online shops overseas because the goods are cheaper. The flood of parcels from Europe caused the Russian postal system to collapse in January and has lead the government to consider changing the duty charges on imported retail purchases to take the pressure off.

• Slowing growth. Sales growth rates were 15-20% for many years but started to soften in 2013 and are now running at 5-7%. It is interesting to see that the growth lasted for longer than rising oil prices and is still rising faster than GDP, as there are still penetration gains to be made in many areas.

• New growth drivers. Companies are shifting into smaller cities, selling goods in smaller sizes, working harder to understand and segment their customers, focusing on value for money, and making cheaper, own-brand goods. Some are now focusing on efficiency and cutting costs.

• Russia is still attractive. Russia is still the highest growth market in Europe remains a key global market for many companies.

Around 80% of companies said they were thinking of increasing investments in the country.

• Switch to localization of production. Companies are increasingly switching to producing goods in Russia. The weaker currency will no doubt encourage this, and in turn this is helpful for the long-term shift away from oil dependency.

While there has been no official decision on the matter, the most often mentioned amendment is to lower the ceiling of duty-free purchases to €150 per imported order. On orders valued at more than €150, the purchaser should pay a duty equivalent to 30% of the good’s valuation. Russians can currently purchase up to €1,000 worth of goods from online sources outside the country each month without having to pay any import duty.

Rapid growth in Russian online shopping recent years has given a push to the officials for more regulation in the sector. In 2012, imports constituted about 10% of Russia’s total online shopping market, which was estimated at about $10bn.

Russian online sellers also want the changes as obviously it is good for their businesses. They point out the current arrangement incentivizes buyers to use sellers located outside Russia as long as

they avoid the customs charges on foreign purchases.

Many observers note that the change is likely to have little impact in the end as most Russian purchases from abroad are below the planned €150 ceiling. Larger purchases could also be transhipped via Kazakhstan to avoid customs duties.

Russia’s Gazprom market share in Europe rises to 30% in 2013 The European market share of Russian gas giant Gazprom increased to 29.9% in 2013 from about 26.0% in 2012, the company said in a statement.

The consumption in the region fell 1% to 541bn cubic meters while Gazprom’s supplies grew 16.3% to 161.5bn cubic meters. European countries’ gas imports fell 0.6% to 253bn cubic meters and their own output fell 1.4% to 288.1bn cubic meters.

Gazprom expects to keep the amount of exports flat at 161.5bn cubic meters or at least at 150bn cubic meters in 2014.