bne chairman list 010414

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 Who is Putin?

Politics – the good Duma to consider restrictions on dollars and euro accounts in Russian banks for Russian officials Russia's new Human Rights Ombudsperson is Ella Pamfilova Politics – the bad Navalny loses appeal against his house arrest appeal Putin's annexation of Crimea cripples opposition, puts him back in charge G8 suspend Russia's participation OECD freezes Russia’s membership Bid Over 120 NGOs fail to comply with Russian ‘foreign agent’ law in 2013, but none sanctioned Alexei Navalny blog blacklisted by Kremlin Politics – the ugly Russia’s ChelPipe co-owner arrested for trying to pay bribe Fast Russian passports Kremlin may end mayoral elections

Polls, mood, sociology Putin's approval rating hits all time high of 84% Russians believe state-controlled media coverage of Ukraine events is objective Russians believe the country is back as a superpower on Crimea event Most Russians were impressed by Putin's March 18 speech on Crimea Russians' dislike of Western nations has soared amid the Ukrainian crisis Majority of Russians See Britain as a Friendly Nation Most Russians support integration of Crimea, poll shows Ties to Russia ethnic population Banks and Finance Russia to set up own payment system Venture Capital Market Set to Recover From 2013 Slump Uncertainty backdrop leads to banking slowdown CBR revokes 3 small bank licenses Rapid increase in NPLs Deposit growth strong Russia’s CBR will keep names of strategically important banks secret Tighter funding weighs on the credit profiles of Russia's small and midsize banks

Russia’s 20 top banks lose RUB216bn from Rubles depreciation 81% of adult Russians have bank cards Hike in contributions to the deposit insurance fund for banks will hurt small banks Russia's credit card market increased 47% in 2013, but its growth slowed Retail depositors split money between accounts to stay under RUB700,000 Economics Massive capital outflows drag the economy down Consumption Saves the Day for Russian economy in February Wage growth improves – even from upwardly revised figures Fixed investments fell 5% in January and February 2014 yearon-year Nominal CBR reserves unchanged European Companies' Exposure to Russia Varies Sanctions hurt Finance Ministry's $7bn foreign borrowing plans Russia's Central Bank leaves key rate unchanged in March Russian CBR drops idea of capital controls S&P downgrades outlooks for Russian state-run banks, oil firms Labour market bizarrely stable Russian Industrial output spikes 2.1% year-on-year in February Many Russian regions are on the verge of bankruptcy Ruble’s slide continues Large structural shifts in Russian investment in 2013

Steep slowdown in government budget revenue growth $650bn of Corporate Debt Intertwines Russia and the West ECM Toy store Detsky Mir gets permission for IPO on LSE The state's relaunch of its privatization programme delayed to at least second half of this year Russian shoe retailer Obuv Rossii postpones IPO US government warns investors off Russian stocks Russia’s OTCPharm to offer shares on Moscow Exchange in May Emma Capital to become co-owner of Russian retailer Eldorado Credit Bank IPO Possible for Later This Year Russia’s Mechel plummets 26%, trading suspended Sectors IKEA to double annual sales in Russia to RUB153bn by 2020 Construction Industry Mood Down in Q1 Russia’s automobile sales may fall 2.8–6.5% in 2014 Russia sells over $2bn of arms this year already $192Bn Investment Planned for New Moscow Leroy Merlin to triple Russian network to 80 stores by 2019 Russian government says no new auto loan support

Top Story Who is Putin?

When Putin came to power in 2000 the press corps spent the first six months asking the question: "Who is Mr Putin?"

At first the media speculated he was merely a puppet of the oligarchs as he had clearly been handpicked by oligarch Roman Abramovich and Boris Yeltsin's daughter Tatyana Dyachenko, who were effectively running the country at the time. But after Putin moved forcefully to sweep the businessmen out of the corridors of power and return political control of the country to the centre, everyone had to recalibrate.

"Putin arrived at the famous oligarch meeting [in 2001] and figuratively dumped two bodies on the table – Boris Berezovsky and Vladimir Gusinsky [both of whom owned major TV stations]. Then he made his offer," Stephen Jennings, the founder of Renaissance Capital once told bne. "Keep what you have but stop the stealing."

Having pulled the teeth of most of the oligarchs, Putin followed through by effectively disbanding the Federation Council, the upper house of parliament. He replaced the elected deputies with Kremlin appointees. The upper chamber was stuffed oligarch proxies who lobbied for their interests and state contracts. But the press ignored the obvious corruption and focused instead on the fact the deputies were elected: Putin may have

broken the boyers' hold on power and retaken control of the political process, but he left his democratic credentials in tatters.

Now Putin has done it again.

Russia has made astonishing economic progress during his three terms in office and is today moreor-less a normal country. However, with the de-facto annexation of Crimea Putin has destroyed what little international credibility he has built up in recent years.

Behind the headlines about the crisis in the Crimea stands a spectrum of fears: Putin is Stalin and wants to rebuild the Soviet Union; Putin is Hitler and wants to conquer Europe; Putin is corrupt and wants to steal assets in other

countries; Putin is the Party Chairman and wants to right Cold War wrongs; Putin is a macho, homophobic murderer and is just plain evil. But clearly none of these descriptions is complete, although there is probably some truth in all of them. Politico magazine summed up the West's confusion in an op-ed that asked: "Why are we so utterly perplexed by Vladimir Putin?"

Everyone was expecting Russia to impose economic pain on Ukraine if it chose to go down the European path, but Putin's decision to use force was a shock. However, the even bigger shock was the West's realisation that there is almost nothing it can do to stop or punish him. Putin has totally wrong footed everyone and left the press corps asking the same question: "Who is Putin?"

Honeymoon The Chinese general Sun Tzu advised, "know your enemy," so putting aside the rights and wrongs for a moment, try to see the world through the Kremlin's prism to understand how we got into this mess.

Putin's first term in office got off to a very good start. His first trip as president in 2000 was to Britain, which culminated in him standing on the floor of the House of Commons with then UK prime minister Tony Blair to announce the creation of the TNK-BP oil joint venture – amazingly a straight 5050 split that caused so much truble later on. "Russian-British relations have never been so good," a

British diplomat gushed to bne at the time.

Relations with Washington were excellent too. George W. Bush visited Moscow in 2001 and famously saw Putin's soul through his eyes. Journalist Ron Fournier asked the US president if he could trust Putin at a subsequent press conference. "Yes," Bush replied, before allowing Putin to answer a separate question. A few minutes later, the US president elaborated: "I looked the man in the eye. I found him to be very straightforward and trustworthy.

We had a very good dialogue. I was able to get a sense of his soul, a man deeply committed to his country and the best interests of his country," Bush said, adding a few sentences later, "I wouldn't have invited him to my ranch if I didn't trust him."

In those days Putin was trying hard to build a working relationship with the west and he even suggested that Russia should join both the European Union and Nato.

Putin's former economics adviser Andrei Illarionov told Ukrainskaya Pravda in October 2013: "Putin's personal conviction was that for Russia the most secure and comfortable place would be membership of the western alliance," Illarianov said. "Putin said on several occasions that he wanted Russia to join Nato – both privately and in public. For one and a half years this was Russia's official position."

Putin also secretly knocked on the EU's door, according to reports at

the time. "A few weeks ago, when President Putin's visit to Brussels was prepared, his officials asked me what I thought of a possible Russian accession to the Union," then EU president Romano Prodi told Dutch paper De Volkskrant in 2002. "There had been a poll that showed that more than 50% of Russians favoured joining the EU. When President Putin was visiting us, he asked again. I immediately made clear to him, no, you're too big."

It was the first of many slaps in the face Putin would receive at the hands of the EU. The honeymoon ended in tears following the arrest and eventual jailing of Yukos' owner Mikhail Khodorkovsky in 2003 and the press turned its vitriol on Putin. You can draw a straight line from the storm of Khodorkovsky's plane on the tarmac of Novosibirsk's airport in October 2003 downwards to the annexation of Crimea in March 2014.

The other man's shoes Two themes run through the collapse of polite relationships between Russia and the West. The first is the West's refusal to countenance Russia's interests and the second is its failure to encourage and develop deep economic ties based on anything other than commodities.

It didn’t used to be like that. The West seems to have forgotten the advice of Germany's greatest politician and the newly minted country's first minister president, Otto von Bismark: "The secret to

politics is to make a good treaty with Russia."

Russia's interests were easy to ignore in the 1990s when the country was on its knees. Boris Yeltsin's administration was living hand-to-mouth on International Monetary Fund (IMF) handouts.

Putin, who was hired as prime minister by Boris Yeltsin in 1996, had a ringside seat to the chaos and the US policy-makers riding roughshod over the Kremlin. "The White House got used to pushing the Kremlin around under Yeltsin," says New York University professor Stephen Cohen in his book, "Soviet Fates and Lost Alternatives: From Stalinism to the New Cold War".

"The Clinton administration adopted an aggressive triumphalist approach to Moscow. That administration tried to dictate Russia's post-Communist development and to turn it into a US client state."

Under Yeltsin the gold rule was never to listen to what any politician said, but to watch carefully what they did. That changed with Putin who was arguably the first Russian politician in the post-Soviet era who actually tried to do what he said he was going to do. Looking back over the last decade he has consistently stuck to the same message: Russia is back as a world power (albeit still slightly wobbly on its feet) and the rest of the world needs to take its interests into account. As British statesman Lord Palmerston said: "Nations have no permanent friends or allies. They only have permanent interests." The invasion of Crimea is borne out of Putin's

frustration with the rest of the world's refusal to listen to him.

"Russia strived to engage in dialogue with our colleagues in the West. We are constantly proposing cooperation on all key issues... But we saw no reciprocal steps," Putin said in what is already being called an historic speech on March 19 that announced the annexation of Crimea. "On the contrary, they have lied to us many times, made decisions behind our backs, placed us before an accomplished fact.

This happened with Nato's expansion to the east, as well as the deployment of military infrastructure at our borders. They kept telling us the same thing: 'Well, this does not concern you'."

Throwing down the gauntlet Putin has been warning that Russia was getting fed up wth being sidelined for years. In his famous Munich speech in 2007 (https://www.youtube.com/watch? v=wH0eHekt84g), he claimed Nato had promised not to move up to Russia's borders but in the meantime Bulgaria, Slovakia, Slovenia, Romania, Estonia, Lithuania and Latvia have all been admitted into Nato. Now there is talk of adding Georgia and maybe even Ukraine. "This is a provocation," Putin said in 2007, "yet we have done nothing in response."

The Bush administration made things even worse by first rolling back the 1972 Anti-Ballistic Missile Treaty, "which Moscow regarded as the lynchpin of its nuclear security," says Professor Cohen,

and then insisting on building a missile defence system in countries like Poland. Despite Russia's vigorous protestation and even the offer to use a Russian base in the Mediterranean (that is a lot closer to North Korea than Poland), Washington has simply ignored Moscow's complaints.

The election of the more westernised Dmitry Medvedev as interim president in 2008 was another opportunity to make a fresh start, but US President Barak Obama arguably fluffed his own "reset" but sticking to the same policies of containment.

"The Obama administration is squandering the third opportunity to 're-set' by refusing to respond to Moscow's concessions on Afghanistan and Iran with reciprocal agreements on Russia's top priorities, Nato expansion and missile defense," says professor Cohen.

When Medvedev went to Europe on his first overseas trip in 2008 with a proposal to enshrine the "reset" in a badly needed new European Security Treaty, the idea was politely ignored, according to bne's sources.

Exactly the same thing has been happening in business. The Kremlin was hoping to use its newfound petro-wealth to buy western technology to help modernise its own knackered industrial base.

Instead it was shut out of several strategic deals.

Germany's state president of Bavaria, Edmund Stoiber, baldly

told Putin that the Germans would never sell Russia stakes in sensitive European industries after Russia bid for more shares in the European aviation giant EADS in October 2006. "I asked him to understand that in some strategic industries there are limits to taking reciprocal stakes," Stoiber said at the time. "We must both respect each other's interests." (href="http://www.themoscowtime s.com/news/article/germans-sayno-to-putin-on-eads/201735.html) Putin saw it differently: the refusal was all about Germany's desire to remain top dog in European aviation and ensuring Russia couldn’t compete. Putin was forced to do it the hard way, crating the United Aviation Corporate and rebuild the sector from scratch.

The same thing happened with cars. A consortium of leading Russian banks together with Canadian parts make Magna struck a deal to take over General Motor's struggling Opel carmaker in November 2009. The German government killed the deal at the last moment. (href="http://intellibriefs.blogspot. ru/2009/11/russia-collapse-ofopel-deal.html) This time even the Kremlin's best efforts couldn’t save the sector and the company was later sold to Renault-Nissan. Russia no longer has any significant domestically owned automotive maker of its own.

By 2012 Putin said in his keynote address at the annual St Petersburg Economic forum that he was giving up on the west and

called on the G20 to take over as the global leader.

Playing domestic politics Russia and the west are speaking different languages. Putin, like any politician, needs to play to the gallery, but as Russia was behind the Iron Curtain in the 1960s1970s it missed out on the liberal revolution and western values remain alien. Putin is ridiculed in the West for riding about on horses with his top off, but it goes down very well with his core blue-collar supporters. Russians are still new to the voting game and lets just say they are not the most sophisticated electorate in the world.

Putin was roasted for the so-called "gay propaganda" law, but numerous surveys show that some three-quarters of Russians agree with it and see homosexuality as a "sickness" or "perversion."

Likewise, the punk rock group Pussy Riot has been held up in the western world as dissident heroes, but 80% of Russians are Orthodox Christians and were genuinely shocked by Pussy Riots "desecration" of the altar in the Moscow cathedral.

Putin's decision to take the Crimea has been immensely popular at home. His rating immediately skyrocketed to an all-time high of 75% even as the economy is sinking. At a stroke he has restored Russia's sense of pride after 20 years of shame: the independent Levada Centre found 63% of respondents said modern Russia has regained the status of a

superpower, the highest level in the history of the poll.

And the side effect of this groundswell in patriotic fervour is the opposition movement has been side-lined; only one opposition leader, Ilya Ponomarev, voted against the annexation of the Crimea. Putin appears to have recaptured the political initiative that he lost following the street protests of December 2011.

Russia is back What the West has lost sight of is Russia has more-or-less recovered from the collapse of the Soviet Union. Average income levels have overtaken those of Portugal and Russians are by far the richest population of any emerging market; last year the UN Development Programme upgraded Russia to the "high income" category – putting it into the same bracket as the likes of the UK and the US. But the west has continued to treat Russia as a helpless economic basket-case.

The EU's attempt to "take" Ukraine, in the sense that a deal with the EU explicitly excludes a deal to join Russia's Customs Union, was a bridge too far.

Ukraine shares over 1000 years of cultural, historic and ethnic ties with Russia. Russia still has major economic and strategic ties in Ukraine. Threats to the Druzhba gas export pipeline that carries half of all Russian gas exports to its customers in the west and the Simferopol port, home to Russia's navy, are strategically important enough to make any western

power go to war if the tables were turned. It is hard to image another two independent countries in the world that are so obviously mutually tied together. Yet the EU proposed to sign a deal excluding Russia without consulting with the Kremlin or attempting to find compromises.

Russia has been accused of a land grab in Crimea, but from the Kremlin's perspective the EU deal looks like nothing more than a land grab too. There was never any prospect for a diplomatic solution to the show down because the EU refused point blank to engage in three-way talks even after they were offered by Russia and Yanukovych. Given crucial strategic interests were on the line he reached for the one tool that remained – the military.

Neither side can claim the moral high ground. The Crimean "independence referendum" was just as rush was the decision by the Maidan government to sign the EU's Association Agreement, a little over a week later. The dispute between the two sides has long ago turned into a straightforward slugfest of raw geopolitical power.

The surprise is that Russia has become a geopolitically powerful country again and decided to use some of this power for the first time in twenty years. But that is exactly the point Putin has been trying to make all along.

Politics – the good Duma to consider restrictions on dollars and euro accounts in Russian banks for Russian officials Russia's Duma is considering a bill that would prohibit lawmakers from holding foreign currency accounts in Russian banks, as an extension of Russian President Vladimir Putin's de-offshorization campaign.

Last year Putin sponsored a bill that banned deputes and officials from owning foreign assets and bank accounts.

Part of the reason is that the Russian authorities are afraid that sanctions on Russian lawmakers could also affect their accounts even with Russian banks, hence the measure.

Likewise Bank Rossiya, which is the only bank placed on the US sanction list, has also announced that it will stop foreign currency operations entirely, presumably for the same reasons.

Russia's new Human Rights Ombudsperson is Ella Pamfilova Russian President Vladimir Putin has appointed the well respected Ella Pamfilova as the new Human Rights Ombudsperson. She is the latest in appointments of liberals who are supposed to bring some real change to Russia's poor record on human rights and corruption.

Pamfilova is a former parliamentary and chair of the presidential human rights commission and replaces the respected Vladimir Lukin, who during his two terms for 10 years confronted the Russian leadership in annual reports and personal meetings regarding poor prison conditions, mistreatment of migrants, and suppression of press freedoms.

She was also the first woman in Russian history to run for president, standing against Putin in 2000.

Politics – the bad Navalny loses appeal against his house arrest appeal A Moscow City Court upheld on a ruling of a lower court to place anti-corruption crusader and opposition leader Alexei Navalny under house arrest, Prosecutors moved for more limited restrictions against Navalny after he participated in an unsanctioned protest in central Moscow, where he was accused of making a scene and resisting arrest.

Moscow's Basmanny District Court granted the motion in late February, ordering that Navalny should be placed under house arrest in connection with the Yves Rocher embezzlement case.

Navalny has been prohibited from using any communication devices, as well as the internet.

Navalny and his brother Oleg stand accused in a fraud case involving cosmetics company Yves Rocher Vostok. Investigators allege that the Navalny brothers embezzled upwards of 26m rubles (over $730,000) from the cosmetics company, as well as upwards of 4m rubles (over $110,000) from the Multidisciplinary Processing Company by way of a fraud scheme. The brothers were further charged with having laundered 21m rubles.

Putin's annexation of Crimea cripples opposition, puts him back in charge Riding high on a wave of popular nationalism, Putin's popularity has soared to an all time high of over 84%. After 20 years of humiliation Russians feel they have their superpower status back. One of the side affects of Putin's triumph is that he has totally side-lined the opposition and taken back the initiative in policy debates that he lost following the December 2011 protests.

In the face of massive public support for the move to take control of Russia's former region, the Crimea, only one opposition deputy, Ilya Ponomarev, had the courage to vote against the bill that formally welcomed Crimea back into the federal fold and even then only because the move would antagonise foreign powers, not because it was "wrong."

Putin stressed that his policy was supported by an "absolute majority of Russians," during his historic March 18 speech, adding those who opposed it were "national traitors" acting on behalf of Western countries.

The Crimea situation has split members of the opposition because they all belong to different parts of the political spectrum — from radical nationalists to moderate liberals. Earlier, they

had almost managed to find a mutual solution to oppose the Kremlin, but now the Crimea issue has made that more difficult.

Nationalist forces, including outspoken Kremlin opponent Eduard Limonov, are organizing pro-Russian rallies in support of Crimea returning to Russia, leftist movements like the Left Front are picketing the Ukrainian Embassy in Moscow demanding the return of Crimea to Russia, while liberal groups are attending anti-war demonstrations to call for the withdrawal of Russian troops from Ukraine.

G8 suspend Russia's participation "I would never want to be member of a club that wanted me as a member," Groucho Marx once famously quipped.

Russian Foreign Minister Sergei Lavrov adopted pretty much the same line after Russia was suspended from participating in G8 meetings and global leaders cancelled their next meeting that would've been held in Sochi.

Lavrov said Russia couldn't technically be kicked out of the G8 (currently Russia's participation is only "suspended", according to German Chancellor Angela Merkel), because it is not a formal organization but an informal grouping that meets occasionally.

Bravado aside, Russia really doesn’t care that much about the G8, as it has been hoping to sideline it and make the broader

G20 the key international body.

Russian President Vladimir Putin said explicitly in his keynote speech in 2012 that it was time for the G20, which includes many of the world's emerging markets, to take over the reins of global coordination, as it fits better with his concept of a "multipolar" world.

OECD freezes Russia’s membership Bid The Organization for Economic Cooperation and Development said on Thursday it had put Russia’s accession process on hold amid the on-going international standoff over Ukraine's autonomous republic of Crimea.

Troops lacking official insignia but widely believed to be under Russian command have seized military bases in recent weeks in the Russian-speaking republic, which has scheduled a referendum on secession and annexation by Russia for Sunday.

The OECD also said it would respond positively to a request by Ukraine to boost cooperation with Kiev.

Over 120 NGOs fail to comply with Russian ‘foreign agent’ law in 2013, but none sanctioned Russia's Ministry of Justice has found that 122 non-governmental organizations (NGOs) failed during the course of 2013 to reveal their foreign sources of finance, in violation of the “foreign agent” law.

A federal law was passed in November 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 500,000 rubles (app. $16,000). The law was passed amid protests of NGOs declining to register as foreign agents and critics from international human rights groups.

28 NGOs were held liable of submitting "misleading information." Other NGOs managed to escape liability by waiting out the statute of limitations, the ministry said.

In February 2013 eleven Russian NGOs, Moscow Helsinki Group among them, lodged a complaint with the European Court of Human Rights (ECHR) protesting the law.

Human Rights Commissioner Vladimir Lukin and various citizens and NGOs filed applications with

the Russian Constitutional Court contesting the law.

By May 2013 not a single Russian NGO financed from abroad and engaged in political activity registered as a "foreign agent". A number of cases against NGOs were filed by authorities with courts, but so far none of the NGOs have been penalised.

Alexei Navalny blog blacklisted

by Kremlin Russia’s telecoms watchdog blacklisted the LiveJournal blog of opposition leader Alexei Navalny and several other independent websites in the middle of March.

The move is the latest in the Kremlin's war of attrition against opposition and creeping control over the media.

Politics – the ugly Russia’s ChelPipe co-owner arrested for trying to pay bribe The co-owner of Russian pipe maker Chelyabinsk Pipe-Rolling Plant (ChelPipe) Andrei Komarov and his lawyer Alexander Shibanov were arrested for attempting to bribe an officials, the police said on Thursday.

The police have revealed that one of ChelPipe’s subsidiaries illegally received RUB1.8bn from the budget in 2011. In order to conceal this fact, Komarov and Shibanov

offered $300,000 to an official, who was in charge of verification of the validity of budget funds’ spending, to falsify documents.

The Investigative Committee spokesman Vladimir Markin said that Shibanov was detained while passing money to the official, and Komarov was arrested later.

Fast Russian passports

The Duma has proposed legislation that would fast track native Russian speakers in applications for Russian

citizenship. Experts say that the law is designed to lure highly qualified specialists and successful entrepreneurs into Russia, but will also be used to quickly complete the take over of Crimea.

bound to bring down yet another torrent of criticism.

The legislation was introduced on March 6 and Russian Prime Minister Dmitry Medvedev said that it would allow Russian speakers who had lived on territories that were subject of the Russian Empire or the Soviet Union to obtain Russian citizenship without getting permanent residence permits.

The reform would apply to 67 large cities, including 56 regional capitals. The mayors of affected cities would be elected by city councils from among their members, while the city councils would consist of deputies delegated by newly created assemblies of city districts.

Kremlin may end mayoral elections Lawmakers from pro-Kremlin parties United Russia and LDPR have submitted a bill to the Duma that would abolish popular elections of mayors and city councils in major cities.

The end of mayoral elections has been rumoured for a while, but the Kremlin is loathed to cancel them outright as such a move would be

The bill is not given to pass and may be yet another trial balloon to gauge public reaction to the move.

City governments would be headed by city managers — executives appointed by commissions, half of which would be chosen by governors and the other half by city councils.

The change is being sold as complying with Putin's call on local government to get closer to both the local populations and opposition leaders in a "hunt for new ideas."

Polls, mood, sociology Putin's approval rating hits all time high of 84% Russian President Vladimir Putin's approval rating hit an all time high of 82.3% at the end-March according to pollsters, following his decision to annex the Crimea.

The majority of Russians believe the country is heading in the right direction, the VTsIOM (All-Russia

Public Opinion Research Center) showed. 71% said Crimea's accession was the reason for Putin's rise in popularity.

Approval of President Putin's work has grown sharply among residents of Moscow and St. Petersburg and has reached a record level of 81.5% for the last week in the last six years.

Rating of ruling United Russia party has also increased in the last few months reaching the highest level of 56.2% for the last five years.

And 72% of Russians approve of Vladimir Putin's job performance as the Russian president, according to the findings of a poll conducted by the Levada-Center.

Russians believe statecontrolled media coverage of Ukraine events is objective Russian citizens trust state mass media outlets (62%) and believe the their reporters are professional (54%), the Public Opinion Foundation (FOM) fond in a poll.

Moreover a total of 63% of Russians think that Russian mass media outlets cover current events objectively in general including the events in Ukraine, while 23% disagree and 17% had no opinion.

Most respondents (62%) admitted they trust state media more than non-state (16%), while 21% could not answer, the survey showed.

Russians believe the country is back as a superpower on Crimea event

A mere 8% of those polled described this event as the "forceful annexation of Crimea by Russia," Levada Center sociologists have said.

On the whole, 88% of respondents spoke in favor of Crimea's accession to Russia, and 7% took the opposite view.

Most Russians were impressed

by Putin's March 18 speech on Crimea The majority of Russians (87%) loved Putin's belligerent speech on March 18 where he announced the annexation of Crimea. Another 66% said they were impressed by it, shows a poll conducted by the Public Opinion Foundation.

The things the respondents remember the most from the president's speech are his words on the joining of Crimea (17%), on the protection of the interests of Russians (6%), and on financial assistance to the region (6%).

Russians' dislike of Western nations has soared amid the Ukrainian crisis

The majority of Russians (86%) believe the country is back as a "great power" following the annexation of Crimea the Levada Center found in a poll in March.

An increasing number of Russians think that Moscow should side with China, India, North Korea and Syria in its foreign policy, a poll shows, as attitudes to western countries cool.

They also believe that Crimea's secession from Ukraine and its accession to Russia was the realization of the Crimean people's legal right to self-determination.

The number of Russians whose attitude to the is either "bad" or "very bad" to western nations as a class of country has grown to 56% in March 2014 from 39% in March

2013, according to a survey published by the Levada Centre.

The number of those who look negatively upon the European Union rose to 41% from 25% over the same period.

When assessing the state of the Russian-relations, 35% of Russian citizens said they were tense, 30% cold and 12% hostile, while 14% of respondents think that the two countries cooperate normally and calmly and 6% believe that Moscow and Washington have friendly and good neighborly relations, sociologists said.

Russians are far more welldisposed to the EU than to the 45% have positive attitude to the EU (against 58% in 2013), the attitude of 41% is negative and 14% failed to answer, the poll showed.

Russian-EU relations are cold (31%), tense (27%) and hostile (5%), while 25% of respondents believe that the Russian-EU dialog is calm and 7% see it as friendly and good neighborly, the survey showed.

At the same time, 40% of Russian citizens said that developed countries currently treat Russia as a competitor and 16% of respondents said that Russia has become an enemy for many states.

27% of Russians think that the developed world treats Russia as a partner and 8% believe no special attention is paid to Moscow, sociologists said.

Majority of Russians See Britain as a Friendly Nation A majority of Russians (53%) see Britain in a favourable light and would like to visit it , while 29% said Britain was hostile in its stance toward Russia.

Asked whether they had noticed a change in Russia's relationship with Britain over the past year, 66% of respondents said that relations had not changed or gotten better.

This result contrasts with the attitudes to the USA where an increasing number of Russians see America in a negative light. And the feelings are reciprocated: Both Putin and Russia registered their highest “unfavorable” ratings – 63% and 60%, respectively – in a Gallup poll in March, the worst result since the survey was launched in 1994.

Most Russians support integration of Crimea, poll shows An overwhelming majority of Russians support the inclusion of Crimea as part of Russia, a poll from VTsIOM has shown.

Conducted just ahead of the Crimea referendum on March 16, the poll found that 93% of those questioned supported Russia's annexation of the breakaway Ukrainian region. Another 80% of respondents said Russia should "fight to the end" for the right to control the region, up from 67% a week before.

Two thirds of Russians (63%) said the peninsula was "historically our territory," until Nikita Khrushchev gifted the region to Ukraine in 1954.

The second most popular reason for annexation, backed by 22% of respondents, was that ethnic Russians comprise a majority of the region's population.

Ties to Russia ethnic population The annexation of Crimea has sparked fears that Russia will "liberate" other enclaves of Russian-speaking citizens of other countries in the former Soviet Union.

And the leaders of these countries are clearly unsettled by the president set by the move. The Baltics have been named and

Latvia in particular has a large Russian minority, but as a member of Nato it is highly unlikely that Russia would use force or occupy the Russian speaking regions as that would automatically trigger a military response by the rest of Nato.

Belarus is a lot more vulnerable and Belarus’ president Alexander Lukashenka has clearly been made nervous and failed to overtly support the Russian annexation.

Likewise, Kazakh president Nursultan Nazerbayev has a similar problem: the country is divided into two by a desert and most of the people that live along the northern border are ethnic Russians with close ties to the Russian city of Perm.

Banks and Finance Russia to set up own payment system With international sanctions threatening settlement of Visa and MasterCard payments in Russia, the Kremlin is pushing to set up it own payment system.

Visa and MasterCard stopped processing payments by cardholders at Russian banks targeted by the United States for financial sanctions in the middle of March. The move was the first impact on ordinary Russian citizens by a series of Western sanctions against Russia over the ongoing crisis in Ukraine.

On March 24, Elvira Nabiullina, Head of the Bank of Russia, gathered participants of the payment and card market to discuss the future of the national payment system (NPS).

The most probable scenario is a platform of OAO Universal Electronic Card (its trade name is Pro100) with the participation of Sberbank. To begin with, its cards may be issued to public-sector employees as payroll ones Pro100 cards are issued by four banks: Sberbank, Uralsib, Ak Bars, and Moscow Industrial Bank. 14 more banks act as partners of the UEC. The meeting also discussed an option of establishing the NPS on the basis of a non-bank credit

institution United Settlement System, WHICH HAS 170 partner banks, but doesn’t issue cards and the system is owned by Rosbank, which is owned by Societe Generale.

"It is clear that as far as the infrastructure is concerned, the UEC meets the idea of the national payment system in the best way," says a representative of a state bank. "However, since it is a subsidiary of Sberbank, it would be wrong to provide it with such business advantages."

Experts estimate the share of the payment system Visa on the Russian market at 60% and the share of MasterCard at 35%.

Venture Capital Market Set to Recover From 2013 Slump Russia's venture capital market, after tumbling from the heights it reached in 2012, is set to stabilize in 2014, Russia investment firm Rye, Man & Gor Securities said in a report.

Total venture capital investment in 2013 dropped by 33% year-onyear, from $907m in 2012 to $622m in 2013. Investment fell across the board as private funds continued to favour the profitable IT sector and the government supported biotech and industrial tech projects.

The 2012 peak in investment came as the government ramped up

spending on innovation, funnelling money through recently created institutions like the Skolkovo centre and the state-owned Russian Venture Company.

By 2013, however, fewer investment projects and a contraction in government funding dampened venture capitalists' enthusiasm.

Uncertainty backdrop leads to banking slowdown Corporate lending: CBR data shows that corporate lending growth was weaker month-onmonth in February – 1.2% vs 2.7% in January. However, considering the ruble lost 7% month-on-month in January versus only 2% in February, the difference is not so pronounced.

Year-on-year, February was actually better than January, 14.3% vs 13.3% (vs 12% in December), adjusting for 17% year-on-year ruble depreciation. In actual fact, the 14% year-on-year growth in ruble-adjusted terms is the highest since early 2013.

Retail lending: On the retail side, growth accelerated to 1.2% month-on-month vs 0.2% in January, but slowed further to 27.4% year-on-year vs 28% in January.

NPLs: The up-surge in retail overdue continued – it rose 20 bps month-on-month to 4.9% of loans; corporate overdue also expanded, adding 10 bps month-on-month to 4.1% of loans. The sector has not seen such monthly growth in provisions (4% month-on-month in

January and 3% month-on-month in February) since 2009.

Lending growth forecasts: The weak economy creates downside risks for lending growth forecasts.

The worsening asset quality on the retail side looks like a continuation of the old trend: unsecured loans causing problems, while mortgages retain good quality. Ruble weakness could also have contributed; and can weigh on corporate NPLs too.

Dollarization: Switch to FX deposits and CBR rate hike threatens NIM. Ruble depreciation of 9% in 2M14 pushed the population to partially switch to FX deposits, the share of which rose to 20% in February vs 17% in December – we do not exclude the trend continuing.

CBR revokes 3 small bank licenses The central bank continues to close small banks and revoked the banking license of Moscow-based Stroycredit and С bank, both among Russia’s top 200 lenders, a smaller Russian Land Bank and money transfer office Migom.

The central bank has stripped more than 30 banks of licenses since Elvira Nabiullina took the helm in June 2013. The prediction are for another 50-70 more banks this year.

Rapid increase in NPLs 2013 results surprised on retail NPL, better-than-expected funding growth: While 2013 loan growth

was in line with our expectations, we had not anticipated the very rapid increase in retail NPLs. Last year corporate and retail funding surprised on the upside, but higher dollarization prevented banks from reducing exposure to the CBR, and state funding stood at 8.5% of total banking assets at end-2013.

Credit card debt and POS loan growth decelerated: Decelerating retail lending came on the back of tighter regulatory requirements and materialized in the credit card and POS segments. As a result, NPLs last year jumped by 50% in nominal terms from 4.0% of the retail loan book to 4.7%.

We expect 25% retail loan growth this year thanks due to two reasons: First, the mortgage segment kept growing by 30%, which we see as a supportive factor for this year’s non-mortgage loan growth. Second, improvement in credit risk management posted since February 2013 is also a positive sign.

Corporate NPL growth was 6% YTD vs. an increase of 1% YTD in 2M13; and retail NPL growth for 2M14 was 11% vs. 6% in 2M13.

Corporate loan growth likely to decelerate to 10% this year: Despite slower economic and

investment activity, corporate loan growth of 13% last year came close to our expectations; however, almost 50% of this increase was due to lending to the real estate and trade sectors, while loan growth in investment-focused areas decelerated sharply.

Despite slow loan growth, corporate leverage jumped to a new historical high of 34% of GDP; therefore, we reiterate our concern over corporate NPLs this year, especially given that loan growth is likely to slow to 10%.

Deposit growth strong Corporate, retail deposit growth exceeded expectations in 2013: The change in global market sentiment has caused some changes in the local funding base.

Companies have demonstrated an increased preference for accumulating a financial cushion in preparation of the US Fed Reserve’s policy changes.

Unstable ruble exchange rate also points for higher preference in precautionary forex savings. We expect this to justify 17% and 14% retail and corporate deposit growth, respectively, this year.

Russia’s CBR will keep names of strategically important banks secret The Central Bank of Russia (CBR) will keep the names of the 50-odd largest banks considered to be “strategically important” secret, the Deputy Central Bank Chairman Mikhail Sukhov said in a recent interview.

Sukhov said the reason was the CBR has not yet decided on the definition of what a strategically important banks is. “It is more important for us now to find a consensus regarding the distinctions between systemically important banks and other banks…

Only then we can decide on how to make the layout of these banks

public,” Sukhov told PRIME in an interview.

However, the real reason is obvious: any large bank that is not the list is dead in the water. Other banks will be less willing to lend to it and the population will be less willing to deposit their money in its branches.

The list is part of the CBR’s general drive to clean up the massively overbanked sector. While being on the list means that a bank will get a de facto state guarantee, however, these banks will also have to raise capital and are subject to closer scrutiny.

Sukhov also said that the central bank’s proposal to set a capital

adequacy threshold and add 1% to the figure for systemically important banks to distinguish them from others meets recommendations of the Basel committee.

Banks will be able to operate with their capital adequacy rate below the regulator’s requirements, but their shareholders will not receive dividends.

“Banks may exist even with a 5% capital adequacy. But their shareholders cannot receive dividends until banks reach 5.625% for instance, and systemically important banks – 6.625%, in 2016… All banks now meet capital adequacy requirements. They have 12.9% on average in the sector as of February 1,” Sukhov said.

Tighter funding weighs on the credit profiles of Russia's small and midsize banks The funding profiles of some small and midsize Russian banks are likely to weaken this year, possibly resulting in some negative rating actions, in Standard & Poor's Ratings Services view.

We see an increasing risk that these banks could suffer outflows of funds, not least because customers have become more nervous after the Central Bank of Russia (CBR) recently revoked the licenses of several banks, including some midsize names.

Furthermore, financial markets are affected by the ongoing turmoil in Ukraine, in our view.

Added to this, some banks are increasingly relying on borrowing from the CBR as a funding source to expand their asset bases, making them vulnerable to changes in the CBR lending policy.

Furthermore, this funding source is limited by depleting eligible collateral available at the banks.

Russia’s 20 top banks lose RUB216bn from Rubles depreciation Russia’s 20 largest banks have lsot lose RUB216bn from a 20% ruble depreciation, the central bank said on Tuesday.

The ruble has tumbled 9% to a dual-currency basket since the start of the year. The price of the basket at times hit historical highs of RUB43.21/$1.

The RUB216bn loss consists of a RUB122bn loss from a revaluation of a short net foreign exchange position in the short term and RUB94bn as overdue foreign debt is mounting.

81% of adult Russians have bank cards The figure was 74% in 2012, 67% in 2011, and 55% in 2010. The number of respondents using cards for the sole purpose of cash withdrawal at ATMs has decreased from 56% to 25% over the years under review.

The survey says that 85% of cardholders are users of payroll cards.

Their number has been keeping stable since 2010.

The number of holders of debit cards issued on a customer's initiative increased from 12% to 21%. About a third of respondents (29%) are holders of credit cards versus 18% in 2010. 11% of respondents have social cards.

The number of active bank card users has doubled over the past three years and reached 41%, including 7% pays by card every day, 22% several times a week and 12% once a week. 34% of card-holders pay by card less than once a week.

Hike in contributions to the deposit insurance fund for banks will hurt small banks Russian President Vladimir Putin has signed off on an increase in banks mandatory contribution to the deposit insurance fund that will hit small banks the hardest.

At the moment, the rate of contributions to the deposit insurance fund is one for all - 0.1% of the deposit base per quarter. It makes 0.4% for a year. The revision of contributions is being lobbied by the biggest banks which are the main contributors to the deposit insurance fund.

Deputy Finance Minister Alexei Moiseev says that amendments will be approved for a transition period according to which higher contributions will be made by banks offering much higher interest rates on deposits compared with average market ones.

The Ministry of Finance's proposals are as follows: if a bank offers a return on deposit by 2% above the average maximum interest rate of the top-10 banks (8.37% annual as of the end of February), contributions to be made by this bank to the deposit insurance fund will increase 50% (to 0.6% for a year); if a return is 3% above the average maximum rate, contributions will be increased 6 times (to 2.4%). The maximum rate of contributions will be established by law, the amount of contributions to be fixed by the Board of Directors of the Deposit Insurance Agency, Alexei Moiseev specified. Afterwards, allocations to be made by banks will depend on their financial strength.

Russia's credit card market increased 47% in 2013, but its growth slowed The number of credit cards in use increased by half in 2013, the pace of growth has slowed drastically compared with preceding years (61% in 2011 and 82.5% in 2012).

Today the market is estimated at RUB995.3bn ($27.6bn), which is about 10% of all loans granted by banks to individuals, according to a survey conducted by a collection agency Sequoia Credit Consolidation.

The agency forecasts that credit cards will increase not more than 25% in 2014 Customers apply for or activate credit cards mostly in the run-up to holidays or for the purpose of making a large purchase (36% and 34% of card-holders respectively), the survey says. 28% of respondents use credit cards in case of shortage of money until salaries are paid. 7% of respondents acquired credit cards because they have no need of holding cash money or needed a card to pay for purchases on the Internet. 5% of respondents needed a card to travel abroad.

Retail depositors split money between accounts to stay under RUB700,000

according to the Deposit Insurance Agency.

Clearly Russian depositors are nervous and have been breaking up their savings, sharing them amongst several bank accounts to make sure the sums remain below the RUB700,000 maximum covered by the deposit insurance scheme.

Polls show that 85% of depositors know about the details of the insurance scheme and 5% have already benefited from it when a small bank was closed.

Deposits to the amount of RUB700,000 to RUB1m increased most rapidly during the first three quarters of 2013, but the trend changed in favor of smaller deposits in the fourth quarter,

Depositors have also been moving money to one of the big stateowned banks as a precaution and the state banks share of deposits has increased decent to rise above the 50% mark, despite the fact that the state banks offer lower interest rates on savings.

Economics Massive capital outflows drag the economy down Economic growth almost stopped in 1Q14 due the economic effects of the Crimea crisis on Russia and the collapse of confidence at home.

Presidential aide Andrei Beloussov said that net capital outflow may reach $100bn this year, suggesting an acceleration vs. $63bn net outflow last year, and representing material deterioration from the previously officially expected $2550bn.

Goldman Sach economists were even more pessimistic predicting $130bn for the full year. Some $50bn -$70bn is thought to have left already in the first months of the year.

The rule of thumb is that $10bn of capital outflow cause a 0.5 ppt decrease in capital investment growth and a 0.2 ppt decrease in GDP growth.

With $100bn of capital flight economic growth will slow to 0.6% in 2014 and investments will fall 1.3% if net private capital outflow reaches $100bn, Economic Development Minister Alexei Ulyukayev said in March. Bankers think that capital flight may reach $120-150bn this year, which will knock off 1.2-2% from economic growth in 2014.

Deputy Economy Minister Andrei Klepach said that real GDP growth decelerated to just 0.3% year-onyear in February. In addition, the GDP growth figure for January was revised to a nominal 0.1% year-

on-year from 0.7% year-on-year earlier.

5% core inflation rate the CBR was hoping for this year.

But Klepach said that despite the weak dynamics, Russia’s economy is not in recession. He added that the economy should pass a trough in 1Q14, but the key question now is when economic growth starts to accelerate.

This will force the central bank to keep interest rates high which is also cooling the economy.

Klepach expects that inflation will accelerate to 0.9-1% month-onmonth and 6.9-7% year-on-year in March – much higher than the 4%-

Capital flight has also sent the value of the ruble falling and is eating into the countries hard currency reserves: the CBR continues to intervene with $200$400m/day in March.

Consumption Saves the Day for Russian economy in February

13-month high annual gain of 6.4% (vs. 3.4% in January).

Official headline annual retail sales growth almost doubled in February to 4.1%, mainly due to the nonfood component as households rushed to buy things like cars before the prices increase due to devaluation. Retail sales posted a

The decline in investment of 3.5% year-on-year in February was in line with expectations.

The spike in shopping was driven by a 6.4% year-on-year jump in non-food sales (the highest in 13 months), and was supported by

unchanged low unemployment of 5.6% and an acceleration in real wage growth from 5.2% year-onyear in January to 6.0% year-onyear in Feb. The key reason behind the betterthan-expected macro stats was a dramatic 50% year-on-year increase in federal budget expenditures after a 30% year-onyear drop reported for January.

However, while we initially expected this to help investment growth, unfortunately, the effect came only from the consumption side. We take it as confirmation that the budget policy remains primarily focused on supporting households as opposed to investing.

Wage growth improves – even from upwardly revised figures Real and nominal wages grew 6.0% year-on-year and 12.6% year-on-year in February, vs. 5.2% year-on-year and 11.6% year-onyear a month ago.

but the pace of its decline decelerated two times to 3.5% year-on-year.

In February 2014, investments in fixed assets in Russia amounted to RUB650.2bn ($18bn), Rosstat says.

Investments increased 30.7% compared with January 2014 and decreased 3.5% compared with February 2013.

Better budget execution of defense expenditures last month, after a 50% drop in January, could be the reason, to a certain extent.

Looking ahead, faced with stillelevated uncertainty, firms will likely delay investment, while government infrastructure spending is still under preparation.

Investment is key to economic recovery but has been flat or falling in the last two years.

Nominal CBR reserves unchanged

Last month, figures had been significantly revised upward from depressing levels, as industry details (which come with a onemonth lag) pointed to a less pronounced pay slowdown across the public sector. That said, there is no way to escape further wage/income slowdown in the quarters to come.

The CBR reported nominal international reserves of $493bn as at March 14 – down only $2bn on the previous week and nearly in line with the beginning of March.

Fixed investments fell 5% in January and February 2014 year on year

As only 40% of CBR reserves are US$-denominated, so nominal reserves are subject to a significant revaluation effect, so they could be misleading.

In February, fixed capital investment remained under water

The market did not expect this, as the figure does not initially reflect the CBR’s $25bn in interventions during the month.

As an overall result of US$ exchange rate volatility, nominal CBR reserves were down only $16bn YTD despite the $40bn spent on supporting the ruble.

European Companies' Exposure to Russia Varies Below is a table of the 100 European listed companies with the biggest exposure to Russia, in terms of percentage of overall revenues.

COMPANY NAME (COUNTRY) Coca-Cola HBC (Greece) Tele2 (Sweden) Nokian Renkaat (Finland) Immofinanz (Austria) Raiffeisen Bank (Austria) KBC Groupe (Belgium) Fortum Corp (Finland) Carlsberg (Denmark) Unicredit (Italy) Metro (Germany) Henkel (Germany) Neste Oil (Finland) Saipem (Italy) Ryanair (Ireland) Umicore (Belgium) Rexam (Britain) Adidas (Germany) Coloplast (Denmark) Enel Green Power (Italy) British American Tobacco (Britain) SAP (Germany) Heidelbergcement (Germany) Total (France) Scania (Sweden) Lindt and Spruengli (Switzerland) Source: MSI data

EXPOSURE (%) 32.34 29.69 26.41 22.49 21.52 19.11 16.71 16.63 14.30 11.56 10.21 8.03 7.68a 7.56 7.49 6.79 6.75 6.57 6.53 6.24 6.06 6.01 6.00 5.91 5.76

Sanctions hurt Finance Ministry's $7bn foreign borrowing plans The Finance Ministry said it may be forced to cancel its annual $7bn international Eurobond issue, admitting that sanctions imposed by the West are already stinging.

"It is clear that prices of our bonds can change and the cost of our borrowing could rise," MinFin Siluanov said. "If the situation remains as it is now, we will probably cancel our foreign borrowing and reduce domestic debt issuance."

Russia borrows $7bn every year, but the amount is tiny compared to the budget needs and the bulk of budget financing is done on the domestic market with ruble denominated OFZ bonds.

The Eurobond issue is more of a benchmarking exercise that helps Russian corporate borrow more cheaply in the international markets.

Russia's Central Bank leaves key rate unchanged in March On March 14, the Central Bank left the key rate unchanged, despite the acceleration of inflation and strong pressure on the ruble.

The decision was welcome as the bank is able to tighten monetary policy (if necessary, of course) by reducing refinancing to the banking system.

In its press release, the Central Bank formulated its view on

economic development: inflation will remain relatively high on the back of the ruble depreciation and disinflation can be expected only in 2H14; the economy is operating below its potential; and investment activity is being held back by increased uncertainty.

The CBR also said that whatever positive effect of the devaluation for domestic producers is outweighed by the reduction in investment activity on the back of the increased risks.

Russian CBR drops idea of capital controls Despite the threatened financial sanctions and upsurge of capital flight the Central Bank of Russia (CBR) said in March that it has not plans to introduce any capital controls.

“There was a question about foreign currency control. Our position is that this is not effective in any circumstances. We would not like to introduce this kind of measures… We found out one thing (when we) studied the influence of sanctions in details – the ruble is the currency most protected from sanctions,” a spokeswoman at the bank said.

S&P downgrades outlooks for Russian state-run banks, oil firms International rating agency Standard & Poor's (S&P) downgraded the outlooks on credit ratings of Russian state-run banks Vnesheconombank (VEB), VTB, Gazprombank and their affiliates,

Russian Railways, Federal Passenger Company and four oil and gas companies to negative from stable, on the back of the damage done to the slowing economy.

The agency downgraded its rating for Bank Rossiya to negative from stable following its inclusion into a sanction list of the in line with its co-owner Yury Kovalchuk.

The oil and gas companies, whose outlooks were changed, are Rosneft, Transneft, Lukoil, and Gazprom.

The agency attributed the changes of outlooks for most of state-run banks and companies to their close links with the government.

The agency also said that Lukoil, which is a private company, "is unlikely to withstand a sovereign default should one occur."

Labour market bizarrely stable This winter was odd in terms of unemployment data, which showed a stable unemployment rate at 5.6%, meaning, in seasonally adjusted terms, gradually declining unemployment rate to 5.1% in February.

While in December we linked this to warmer weather (and consequently the extended construction period), we believe that January-February highlighted that it was not economically-sound – because we have certainly not come across any news or rumours of massive hiring in Russia over the recent months.

Indeed, cars and metals producers, as well as banks, all reported layoffs. All in all, a declining unemployment rate is still a story with no rhyme or reason as a slowing economy that was just hit by an uncertainty shock (in addition to all other issues) cannot sustain full employment.

Russian Industrial output spikes 2.1% year-on-year in February

Rosstat reported that industrial production jumped 2.1% year-onyear after a 0.2% year-on-year decline in January, materially exceeding market consensus of +0.5% year-on-year and our +1.2% year-on-year expectations that were based on low base effect considerations.

We attribute the better-thanexpected growth rate to the abnormally generous budget execution in February, when government spending jumped 50% year-on-year after dropping 30% year-on-year in January With budget expenditure growth planned at 5% year-on-year for the full year, we take the February spike in real sector growth as temporary.

Many Russian regions are on the verge of bankruptcy While the federal government has plenty of reserves the regions do not. Many regions are struggling under debt burdens and close to bankruptcy. However, they can country on support by the federal

government so none are expected to go under.

However, the level of total debt is not large and the government should be able to manage this situation comfortably: As of end2013, federal debt (including guarantees) was just over 11% of GDP, while the debt of regions and municipalities was only about 2.5% of GDP. Amongst the regions in the worst shape are: Republic of Karelia, the Omsk, Bryansk, Nizhniy Novgorod and Murmansk regions.

The public debt of the Astrakhan region reached nearly a critical level of RUB16bn (67% of own income) at the end of 2013. This is

by RUB3bn more than a year earlier. A similar situation is in the Bryansk region - the debt increased by RUB2bn to reach RUB8bn.

The cause is improper administration of the regions and the desire of regional leaders to raise as much funding as possible, the government said.

The quality of management in regions is increasingly becoming an issue that the federal government is paying more attention to; less successful regions without natural resources such as the Belgorod, Voronezh and Lipetsk regions are still doing rather well simply because they have more responsible leaders who have built up economic policy without piling up loans.

In September 2013, Finance Minister Anton Siluanov said that the deficit of regional budgets more than doubled during 2013 and reached RUB700bn.

The deficit was covered by what had been accumulated by the regions over the previous years but these reserves are now almost exhausted.

Ruble’s slide continues In March the dollar-ruble exchange rate fell to 36.46 and the euroruble rate hit 50.81. Both were record lows for the ruble.

After the massive forex sale of $11.3bn to support the ruble on March 4, the Central Bank of Russia’s daily interventions were $400m, a pace of operations similar to the daily average in the first two months of this year. On March 13, however, CBR forex sales increased to $1.7bn.

Given the already weak outlook for Russian economic growth, the political and economic uncertainty generated by the Crimea crisis makes the outlook for the ruble rather bleak.

Most observers have lowered their targets for the ruble’s exchange rate in the coming nine months.

For example, Citibank and the Russian Alfa Bank expect the ruble’s exchange rate to end this year at around 38 rubles to the dollar.

Liquidity has tightened on Russian money markets in March and interbank rates are up. After averaging 6% in January and February, the one-day credit rate (MIACR) hit 7.9% on Wednesday (Mar. 12).

Prices of Russian sovereign bonds have come down on international financial markets. The major international credit ratings agencies have left the creditworthiness of Russian sovereigns unchanged for the time being. Moody’s and Fitch, however, have both warned about possible rating downgrades for Russia if the Crimea crisis escalates into a shooting war or the West moves ahead with economic sanctions on Russia. Despite heightened market risk, Moody’s noted it remains quite unlikely that the Russian government would default on its international obligations.

Large structural shifts in Russian investment in 2013 Although fixed capital investment did not increase overall last year, investment of small firms and investment in the grey economy increased considerably.

Investment in other parts of the economy declined nearly 6%. For example, investment of large energy-sector firms fell substantially on the completion of a number of large projects.

Investment in oil & gas production was also down 6%, as was investment in the electrical power sector. Investment in oil and gas pipelines was off by about a third.

Manufacturing investment rose slightly. However, that growth was due to a boom in investment in oil refining capacity.

Government leaders are particularly distraught by the precipitous drop in investment of large state enterprises. Some observers claim the drop has been caused by the government’s decision to freeze for this year wholesale prices of goods and services provided by state-owned enterprises. The price freeze is intended to restrain inflation, and concerns e.g. rates of energy and rail shipping.

At president Putin’s behest, the government is using “manual steering” to incentivise investments by state enterprises.

The government wants to improve their efficiency and get a better volume from money invested. It is also imposing savings targets on state-owned enterprises. One approach is to limit price-setting by firms that supply goods and services to state enterprises.

Steep slowdown in government budget revenue growth

the federal budget as transfers and subsidies.

Revenues to the consolidated budget (combined federal, regional and local government budgets, plus state social funds) increased just 3% in nominal terms last year, i.e. declined in real terms.

Government budget revenues from taxes and duties on production and export of oil, petroleum products and natural gas recovered strongly after the 2009 recession. Last year, however, growth in these revenue streams virtually halted despite an increase in the gas production tax. The share of these streams in consolidated budget revenues shrank slightly, but was still 27%. Their share in federal budget revenues remained at 50%.

Spending growth slowed to below 8%, an increase of only about 1.5% in real terms. The government budget deficit rose to 1.3% of GDP. Budget income fell to 36% of GDP (down from 38% in 2012). Spending, meanwhile, remained above 37%. Federal budget revenues increased just 1%, while expenditures climbed 3 to 4%. Regional and local budget revenues also rose only about 1%.

Regions and municipalities get about a fifth of their revenues from

Tax revenues from corporate profits fell sharply on lower company earnings. Growth in VAT revenues halted. Income tax, mandatory social security contributions and hikes in excise

taxes helped support budget revenues.

The fastest-growing item in state spending was still pension costs (up nearly 20%), as well as spending on defence and national security (up 14%). Spending on

$650bn of Corporate Debt Intertwines Russia and the West While the federal external debt is rather modest $30bn company borrowing abroad has soared in the last five years and totals some $650bn – about $150bn more than its pre-2008 crisis levels.

The maturities of this debt are much longer than they were in 2008 so these debs do not pose an immediate danger to the economy, however, they do make

education was increased notably.

The growth in healthcare spending essentially plateaued. So did the growth in spending on the economy, too, although spending on roads continued to increase rapidly.

imposing financial sanctions on Russia extremely difficult as the companies, especially state-owned companies, can claim force majeure and walk away from their obligations. And that would hurt the west much more than it would hurt Russia.

Moreover, despite the Crimea crisis western banks are still keen to work with Russia and lend it still more money.

Russian state oil company Rosneft is working to obtain up to $5bn from oil major BP, which owns a fifth of Rosneft, in exchange

for oil supplies over five years. BP is in turn syndicating the money from a consortium of banks including Lloyds, partially owned by the British government, and Germany's top bank Deutsche.

During the 2008 global financial crisis, it was the heavy external debt of private Russian companies, of about $400bn, which almost paralyzed the economy.

Fast forward five years, and the country's total foreign debt rose to $732bn as of January 1, 2014, from $636bn a year earlier and $464bn at the start of 2008, according to the Central Bank, with the bulk of new debt raised

by Russian state companies.

According to Nomura, Russia's external debt stands at 34% of GDP and only Singapore and China, with $1.2 trillion and $812bn respectively, have a higher debt among emerging market economies.

The debt of the Kremlin oil and gas majors Rosneft and Gazprom stands at a combined $90bn and four state banks Sberbank, VTB, VEB and Rosselkhozbank have at least $60bn in foreign credits.

According to ratings agency S&P, Rosneft alone faces maturities of $15.9bn and $16.2bn this year and next.

Regulatory filings by the top four commercial banks — Citigroup, Bank of America Corp, JPMorgan Chase and Wells Fargo — show they have about $24bn in exposure to Russia.

For most of them it is tiny compared to the much heavier exposure of European banks. Some of the debt is traded on the secondary market so it can be held by institutions ranging from hedge and insurance to mutual and pension funds.

ECM Toy store Detsky Mir gets permission for IPO on LSE

an initial public offering (IPO) on the London Stock Exchange (LSE).

The Russian central bank has permitted Russia's biggest toy store Detsky Mir-Tsentr, the management company of children's goods retailer Detsky Mir, to hold

Detsky Mir intends to offer more than 184.7m shares, or 25% of its total shares. The placement will be organized by Citigroup.

Detsky Mir is the largest retailer of children's goods in Russia and other CIS countries. Detsky Mir-

Tsentr is owned by Vladimir Yevtushenkov's AFK Sistema.

The IPO was initially planned for the first half of this year but the company said it may delay for a year due to the Ukrainian crisis and an economic troubles in Russia, a source close to the organizer said.

The state's relaunch of its privatization programme delayed to at least second half of this year The government had been hoping to take advantage of the IPO window that opened in 2013 and re-start its long delayed privatization programme. However, like everyone else it said in March that it was delaying plans to at least the second half of this year.

"Our objective is to prepare a transaction in such a way that when an opportunity presents itself on the market, we should find this optimal point between the interests of a company in selling at as high price as possible and the interests of the government in disposal of an asset," a spokesperson for the state property committee said. "We won't hurry. We'll wait for an opportunity and make good money."

The company said it will try again in July–December if the situation improves.

“Obuv Rossii is not in a hurry to enter the equity market because it does not need additional funds to finance its business expansion program,” the spokesperson said.

“The 2014 investment program will be financed with the company’s own and borrowed funds. The IPO will not take place in spring for sure, may be in the second half of the year.”

Obuv Rossii planned to offer a 25% stake to raise 1.5-2bn rubles to fund its network expansion at a rate of 100 shops a year until 2018 to become one of Russia’s top three shoe retailers by the number of outlets and cities of presence.

US government warns investors off Russian stocks US financial officials have contacted investment funds with Russian assets and advised them to inform clients about potential risk associated with the crisis in Ukraine.

Russian shoe retailer Obuv Rossii postpones IPO

Russian stocks lost an average of 14% of their value in the first half of March, which analysts largely attributed to the political crisis in Ukraine.

Leading regional middle of the market shoe retailer Obuv Rossii has put plans to IPO this spring on ice due to the poor market conditions.

According to bne sources, the US state department has also pressuring US firms to boycott the upcoming St Petersburg Economic Summit, organised by the Kremlin.

Russia’s OTCPharm to offer shares on Moscow Exchange in May Russia’s OTCPharm, a spun off over-the-counter (OTC) business of major pharmaceutical maker Pharmstandard, will offer common shares on the Moscow Exchange in May. OTCPharm intends to receive permission the central bank to issue global depository receipts (GDRs) in July–December.

According to earlier reports, OTCPharm’s capital will amount to RUB15.117m ($416,000m) and be split into 151.17m shares.

Emma Capital to become coowner of Russian retailer Eldorado Investment group Emma Capital has agreed with international financial holding PPF Group to enter the capital of major Russian electronics retailer Eldorado.

PPF, which is now the only owner of the retailer, said that parameters of the deal will be made public within several months after the preparation of documents.

Credit Bank IPO Possible for Later This Year Credit Bank of Moscow, which is contemplating a possible London initial public offering, is aiming to increase the proportion of retail loans in its portfolio betting on the capital's resilience to Russia's spluttering growth.

The bank, 13th in Russia by assets according to Interfax data, has a loan portfolio made up of 70% corporate loans and 30% retail.

The retail loans part has grown 5%age points from a year ago and the bank aims for it to increase to 40% in the coming three to four years.

Russia’s Mechel plummets 26%, trading suspended Beleaguered Russian metals and mining group Mechel saw its shares tumble again, slumping 26% on the Moscow Exchange to 28.9 rubles, in the middle of March, triggering a suspension of trade from 10:53 Moscow time for a half of an hour.

The heavly indebted company has seen massive volatility in its share price since the onset of the crisis.

Sectors IKEA to double annual sales in Russia to RUB153bn by 2020 Swedish homeware retailer IKEA plans to double its sales revenue in Russia to around RUB152.8bn ($4.2bn) a year by 2020, the company’s Retail Director Walter Kadnar said.

The company’s sales revenue in Russia rose 18% to RUB76.4bn in the previous financial year, which run from September 2012 through August 2013.

IKEA does not expect a growth of its sales in Russia to exceed 20% in the current financial year, Kadnar said. In absolute figures, the revenue may amount to RUB91.7bn.

The company also plans to invest €2bn in the development of its production and sales operations in the country by 2020, Kadnar said.

The company also wants to increase the share of its goods produced in Russia to 75% by 2020 from the current 59%, he said.

Construction Industry Mood Down in Q1 The construction industry continues to contract on the back of poor economic sentiment, according to the Higher School of Economics.

A survey showed declining financial security, credit financing

and investment among construction companies.

Construction company directors, however, continued to report that their businesses remained profitable.

The main reason for the worsening view of the business climate was the decline in new construction contracts. The average company had an average of 6 months of contract work, while 30% had contracts for only 1 to 3 months of work.

The price of construction materials has also risen, and 24% of company directors say that this is a factor negatively impacting their business. A full 68% of those surveyed predicted that the price of building materials would continue to go up in the next financial quarter. Prices for finished projects are also rising. Just more than half of construction companies have increased their prices, and 53% intend to raise prices even higher in the future.

The slowdown in construction is due to low demand from commercial firms, government agencies, and the population as a whole, the Higher School of Economics said.

Russia’s automobile sales may fall 2.8–6.5% in 2014 The sales of cars, light commercial vehicles, trucks and buses in Russia will fall 2.8–6.5% in 2014,

according to the Deputy Industry and Trade Minister Alexei Rakhmanov.

According to an optimistic forecast, sales will shrink by 0.7% in 2014 to 2.89m units. The basic scenario stipulates a 2.8% fall to 2.83m units. The pessimistic scenario sees sales to drop 6.5% to 2.72m units.

“We looked at the main factors influencing the market and came to the conclusion that we should be guided either by the basic or a pessimistic scenario,” Rakhmanov said.

Russia’s car output decreased 8.2% on the year to 274,000 units in January–February, according to the data of the Federal State Statistics Service.

Truck output dropped 27.1% on the year to 16,000 units in January–February, and bus output plunged 56.6% on the year to 4,000 units.

Production of trolleybuses tumbled 57.9% no the year to 32 units.

Russia sells over $2bn of arms this year already The volume of Russia’s arms exports this year has topped the $2bn mark, with outstanding weapons orders standing at $47bn, a senior government official said Monday.

Last year, Russia exported $15.7bn worth of weaponry, up $2.5bn from 2011, with plans to increase annual arms sales to $50bn by 2020 in a race for the top spot.

Russian shipments accounted for 27% of global arms exports last year, just behind the United States at 29%, according to a report published last week by the Stockholm International Peace Research Institute.

Among the major importers of Russian weapons and military equipment are India, China, Vietnam, Indonesia, Venezuela, Algeria and Malaysia. $192Bn Investment Planned for New Moscow Moscow City Hall wants to sink RUB7 trillion ($192bn) into developing New Moscow by 2035, the extensive region to Moscow's southwest that was added to the capital's territory in 2012.

But the bulk of investment is to come from the private sector.

City Hall will allocate a maximum of 8.3% of the capital's budget for the new territory, or 580bn rubles, Vedomosti reported.

City Hall's development plan envisions building 100m square meters of real estate, in which 45m square meters will commercially zoned. The city also plans to build 600 kilometers of new roads, some of which will be toll roads.

1.5m people will live in the territory, and 1m jobs will be located there, according to Moscow's planning department.

Leroy Merlin to triple Russian network to 80 stores by 2019 French company Leroy Merlin, focusing on selling home improvement and gardening items, will boost the number of its stores in Russia to 80 units by 2019 from 28 outlets now.

The company’s network in Russia spreads across 16 cities and will expand over the coming years. In 2013, Leroy Merlin opened six stores in Russia. The company wants to increase the rate of its chain growth and launch 10 stores per year.

Russian government says no new auto loan support The government said that it is not planning new car loan subsidies to support the sector. Earlier, a government official had mentioned that the programme, which was effective in 2H13, could be resumed in April to support car sales.

The programme had a fairly limited impact on the overall market trend in 2H13, which continued to slow down. In our view, it would only make sense to resume such a programme in the event of a very sharp market downturn, as under this scenario it would likely soften the negative effects of extreme market volatility on the market players.