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 Great Game II IMF says Ukraine crisis could slow down growth in Eastern Europe Politics – the good Over 21,000 convicts released under presidential amnesty in Russia Russian Ministry of Culture urges to toughen copyright protection FSB kills Chechen terrorist leader Doku Umarov No foreign assets left in Russian lawmakers’ possession NGOs should be put on "foreign agent" registry by court order Politics – the bad Russia Liquidates St. Petersburgbased Memorial NGO Navalny party’s branches prevented from registering Crimea Annexation Spurs Some Russians to Emigrate Politics – the ugly Hewlett-Packard subsidiary guilty of paying millions in bribe to Russian officials Former head of Rostec subsidiary suspected of $10m fraud Over RUB20bn stolen from Russian agriholding firm Russia’s ex-defence minister was pardoned legally Moscow court confirms closer of Navalny’s blog
Polls, mood, sociology A record number of Russians think country is going in the right direction Putin's personal popularity soars to all time high of 82% Russia's happiness index hit postSoviet high Russian Consumer confidence at two year lows, but unaffected by weaker economy in 1Q14
Majority of Russians and Americans view each other's country negatively Russians think war with west unlikely
A quarter of Russians think government is corrupt Most Russians keep their gripes from the state Majority of Ukrainians support EU integration, oppose Russian integration More than half of Russians view Lenin positively 60% of Russians Have Never Been Outside CIS, Poll Says Banks and Finance Russian parliament approves law on national card payment system Visa, MasterCard required to pay $3.8bn security deposit to work in Russia Russian investment bank incomes fall by two thirds this year Russian banks brought cash home due to sanction fears Russian banks suffer mild bank run in March on fear of sanctions The number of unprofitable Russian banks up 1.5-times in first quarter year-on-year Moody's says Russia's weak macro outlook will pressure Russian banks' asset quality and net profits Russian central bank publishes banking sector data for March NPLs up Russia's first indication of potential consumer loan interest rate caps Russian government reintroduces 50% quota on foreign capital in banking sector Russian banks borrow post-crisis record amounts of liquidity from the CBR BinBank to buy the Russian subsidiary of Norwegian DNB Bank
Economics Russian economy already in de facto recession due to flow investment and consumer demand Russia’s economy will rebound over the medium term Russian budget rule debate and the hunt for revenue Russian Finance Ministry proposes cancelling regional tax breaks Alfa Bank Russian economic sanctions minimal damage CBR with surprise interest rate hike at end April Ruble drops to historical lows on massive capital outflows Round tripping Russian capital masquerading as FDI Weak ruble helps to improve the trade balance Lower imports help current account Russian inflation at 7%, to fall in 2H14 Russian Producer confidence improves in manufacturing and resource extraction Russian industrial output up 1.4% y/y in March Russian government to spend RUB1 trillion on improving sectors, productivity Russian industrial output up 1.4% y/y in March Russian government to spend RUB1 trillion on improving sectors, productivity Russian retail trade grew 3.5% y/y in 1Q14 supporting 0.8% GDP growth Gross international reserves fall somewhat Putin floats idea of capital amnesty
Infrastructure South Stream returning to Austria Russia's Nordic Yards to buy shipyard from Germany's P+S Werfen Special econ zone in Russia's Far East must be set up by May 27 Mooted "new Moscow Region" initiative has yet to pass Gazprom, Turkey agree to increase Blue Stream capacity
Majority of Russian corporates able to manage refinancing risks in face of Ukraine dispute Some companies in Russia may be short of money to repay debts in foreign currency says Moody's Renaissance Capital liquidates 80% of the public debt Moscow Stock Exchange enlarged the list of foreign securities that could be used in REPO transactions
ECM Finance Ministry Proposes Tax Hikes to Push Investors Out of Real Estate Resurgent emerging markets see biggest inflows in over a year Polyus Gold Considers Delisting from London Over Ukraine Sanctions CBR gives Credit Bank of Moscow permission to list on LSE
Sectors Investments in commercial real estate in Russia could be 20% less than forecast at the start of the year Moscow Real Estate 1Q14 residential completions up 29% year-on-year Volvo puts partnership with tank maker UVZ on hold over Ukraine Russian year-on-year car and LCV sales dynamics virtually flat in March Russian-Made Films Gross $224m in 2013 Total Sees Russia as Biggest Source of its Oil Output by 2020 Steelmaker Severstal Sees Higher Prices in Second Quarter
DCM Russian companies bonds issues this year down by three quarters year-on-year Russian corporates and banks have to retire $60bn of debt this year Russia's short-term external debts rising
Top Story Great Game II Ben Aris May 2, 14 The April 17 deal that brought Ukraine back from the brink of war may be coming apart at the seams, though its true significance is that it was agreed at all. Rather than an end in itself, the deal is a harbinger of how events will play out in the region for the foreseeable future. The Geneva meeting brought together US Secretary of State John Kerry, Russian Foreign Minister Sergei Lavrov, his Ukrainian counterpart Andrii Deshchytsia, and the EU foreign policy chief Catherine Ashton. The deal agreed after seven hours of tense negotiations calls for the disarming of illegal groups in Ukraine, such as the pro-Russia militia that has taken over police stations and other buildings by force in eastern Ukraine. All the state property captured by the various "separatist" groups is supposed to be returned to the state – though as of the end of April it still had not been – and a
general amnesty was offered to all but those involved in a capital crime, in an effort to restore peace and reduce tensions. In political terms, the interim Ukrainian government agreed to start consultations about devolving more constitutional powers to the regions – a key Russian demand, which hopes to keep Ukraine out of Europe's orbit by building closer ties with the Russophile east of the country. The Organization for Security and Co-operation in Europe (OSCE) will be given the job not only of making sure the agreement will be put into practice, but also of helping to implement it. Inevitably, the showdown in Ukraine this year has started talk of a new Cold War in Europe. But the real danger of a limited Russian military invasion makes this new period a lot hotter than the relatively stable standoff that preceded 1991. Mark Galeotti, professor of Global Affairs at the SCPS Center for Global Affairs at New York University, says what has been going on in Europe for the last six months is more like a "hot peace", and better described as a
new version of the 19th century Great Game than a new Cold War.
market as the basis of their systems – albeit with some pretty wide variations.
Subjugation by economics Rudyard Kipling made the Great Game famous with his novel "Kim", which is set against the backdrop of the struggle between Imperial Russia and Great Britain at the end of the 19th century for control of Central Asia and a route the Russian army could take to attack British India from the north. A similar fight today has broken out between the EU and US on one side and Russia on the other, except this time the threat is not of military invasion but subjugation by economics – trade deals that will exclude one side and sew up the new markets for the benefit of whoever comes out on top. The Cold War legacy is still relevant. Russian President Vladimir Putin complained in his speech of March 18 that the West is still following a policy of containment for Russia. But the big change is that the Cold War was also an existential struggle between ideologies – each side saw the other’s ideology as antithetical. Ironically, the closeness of "war" is what kept the peace: Mutually Assured Destruction (MAD) meant that neither side could actually attack the other. However, in today's "Hot Peace" all the countries involved have the same basic ideology. The fall of the Soviet Union saw the death of the Communist experiment and all sides have accepted democracy and the free
The US condemns Russia's hybrid oligarch-statist version of capitalism, but is not intent on trying to change it. Likewise, Putin has no interest in exporting Russia's model and imposing it on any other country. The salient characteristic of this dispute is the two sides have agreed to disagree. The Cold War standoff was actually a pretty stable system, as an equilibrium between east and west was quickly reached. It was rulesbased and channels for communication were set up to police the system so neither side could win a lasting advantage. Today, there is little stability and new, powerful geopolitical forces are in play. In 1990, the world was roughly divided into 3bn capitalists and 3bn socialists. But following the fall of the Berlin Wall in 1989, the poorer socialists have joined the capitalists in a truly global economy. It was a tectonic shift of unprecedented proportions. After two decades of reform and recovery, all the newly minted capitalist countries of the east are finally finding their feet. The showdown between Russia and the EU in Ukraine is only the most obvious manifestation of this change. Chinese whispers It is not just Russia that is starting to flex its muscles. China too is rising and has been throwing its
weight about in Southeast and Central Asia. US Defence Secretary Chuck Hagel was in Beijing in April to complain about China's attempt to take over disputed islands in the East and South China Seas. He was met by "frank" comments from the vice chairman of the Chinese Military Commission, Fan Changlong, who was "dissatisfied" with Hagel's criticism. "The message to Hagel was intended to reflect China's confidence in its abilities and to reiterate that the relative balance of military power in the region is changing," US think-tank Stratfor said. "In other words, the United States should stop trying to prevent China's emergence as a regional power and adjust its posture and policies to the changing reality of the region. There is indeed a change underway in the relative balance of power in East Asia." The dispute between China, japan and others over who owns the islands is similar to Russia's claims on Ukraine, except the US has significant economic exposure to China and so has been a lot more muted in its criticism of the Middle Kingdom's aggression. At the end of Hagel's visit, the two sides agreed that the way to deal with these disputes was through "more cooperation and engagement" – the opposite of the US approach to Russia, where the de facto policy appears to be direct confrontation. China has also clashed with Russia in Central Asia, the home of the original Great Game. Despite outwardly friendly relations, Beijing
is in competition with Moscow for influence amongst the 'Stans – except instead of using British schoolboys pretending to be Indians and red-bearded horse traders from Lahore, the currency of today's Great Game is investment deals, long-term credits and energy pipelines. Russia has accepted an increased presence of China in the region, partly because it receives tentimes more Chinese largesse than any of the Central Asian republics and it needs China more than ever as an alternative market to Europe. Multipolar The upshot is this new Great Game will be messy. And the April agreement struck in Geneva to lower the tensions in Ukraine is typical of the way it will be played. Putin has made it clear that "taking" Ukraine away from Russia by striking exclusive trade deals with the EU was a step too far. The planned signing of the EU Association Agreement in November by former Ukrainian president Viktor Yanukovych (the failure of which to do ultimately led to his ouster) signalled the end of diplomatic options to Russia, so Putin turned to the only other alternative left to him – the military one. The US has done the same in the many wars it has fought over the last 20 years. But the Kremlin's goal is not to invade Ukraine and rebuild the Soviet Union, but to force the other side to the negotiating table and extract a compromise that is acceptable.
More generally, the fight over Ukraine is crucial for Putin, who has made the establishment of a new multipolar world to replace the unipolar world dominated by the US his key foreign policy aim. Putin is enough of a pragmatist to realize that Russia has forever lost its status as the "other superpower", but nevertheless he wants to build up enough clout so it can, with the world's other major powers (China chief amongst them), force Washington to tempter its actions on the global stage. The new Great Game will be a process of probing enemy defences, politics, insurrection, corruption and liberally investing money in regions to bring them under your sway. These periods are inherently dangerous, as Germany found to its cost at the end of 19th century when it was the rising power in Europe following the unification of all the tiny principalities that created the modern German state. In this new Great Game, the use of military force against the hegemony of the US remains absurd, says Galleotti. Neither China nor Russia could or would confront US military might directly. However, they are both making full use of the palette of alternative tools – military, political, economic, covert action, hard and soft power – to pursue what they see as in their national interest. "One of the particular characteristics of the original Great
Game was that there was little real distinction between the instruments of conventional conflict and competition such as wars, diplomatic missions and treaties and those of the informal realm, from subsidized bandit chieftains to third-party intelligence freelancers," Galleotti says. "Great Game II is one in which open state actions, deniable missions by state agents and the activities of mercenary agents (from computer hackers to local warlords) blend much more seamlessly." The "little green men" – military personnel in unmarked uniforms who there is growing evidence to suggest are in fact Russian special forces – in eastern Ukraine to the Cossack voluntary militia that patrolled the Sochi Olympics (and beat up the punk rock group Pussy Riot when they tried to perform a protest song) are going to become more commonplace. The “patriotic hackers” encouraged to bombard Estonian servers in 2007 were some of the first instances of this, as is the recent appointment of Dmitry Kiselev to run the revamped state-owned press agency RIA Novosti, who told his surviving staff in March: "Objectivity is dead." And as with any good game, you need two people to play. Kerry's comment, "You just don't in the 21st century behave in 19th century fashion by invading another country on completely trumped up pre-text," was met with scorn even by the western press corps.
To the Kremlin this message must have translated into: "We can do what we like, but you must do what we say." The mistake Washington has made – or better, the point Putin was trying to make with the annexation of Crimea – was Russia is no longer going to take these kind of orders lying down. "The West is equally guilty of playing the same game. Backing Libyan rebels against Gadhafi and then backing a range of rebel movements in Syria against Assad," says Galleotti. It was the same Great Game thinking that led the Kremlin to effectively close down all the foreign-funded NGOs last year and force them to rebrand themselves as "foreign agents" (the double meaning is the same in Russian as English). Obviously, most of these NGOs are legitimate, but some were not. That is not to say they were simply covers for spies, but some were openly promoting USstyle democracy, which is (righty or wrongly) different to the Kremlin's conception of it and in that sense the NGOs were another play in the game. However, allowing the game to continue will have the pernicious effect of making the Kremlin more paranoid. Just like NGOs, everything and anything can potentially become an agent of conflict, any organization with foreign funding could be considered subversive; journalists, scholars, businessmen and tourists will all come under more scrutiny. Big military
To be a member of a great power – and only great powers can play the Great Game – you need a big military. Like the Cold War, the threat of violence lies behind the machinations and without the threat of military action a player is not a credible force. Russia learned this lesson the hard way during the Cuban Missile Crisis when it realised its navy was no match for that of the US and backed down. Afterwards Nikita Khrushchev invested heavily in the Soviet Navy, sparking a submarine arms race that is still visible today in the port in Crimea – one of the reasons Russia remains so touchy about losing Ukraine. A clash with the West has been on the cards for a while now. bne wrote a cover story in April 2013 on a new brewing Cold War, pointing out Russia was ramping up its military spending to such a degree that the widely respected finance minister of the time, Alexei Kudrin, quit in protest. Russia is now spending more than the US on its military as a proportion of its GDP (although this is still a fraction of US spending in absolute terms). At the same time Europe looks relatively weak, as almost none of the Nato members are meeting their treaty obligations to spend at least 2% of GDP on defence. Another consequence of this Hot Peace is that it is breathing new life into Nato, which was set up to defend the West against a Soviet Union that no longer exists. Over
the first decade of the 1990s, the organisation was slowly atrophying through the lack of use and budget cuts. But Russia's first hostile troop movement in over 20 years when it took over Crimea has suddenly made the organisation look relevant again. The downside of an expanded and real role for Nato will be to lock in the mentality of opposition and reinforce the Cold War perception of Russia as "the enemy" again. Both sides will slip easily back into their traditional roles of "Uncle Sam vs Red Ivan." Tug of war Nothing highlights the parameters of the new Great Game more than the Ukrainian fracas. Europe has little economic interest in the country and the US has none. Russia has huge economic and strategic interests in the country. Ukraine's importance to the West, as Central Asia's importance to Russia last time round, is its location, at a nexus between two great powers. And this political role is also clear in the terms of the deal that Kyiv is being offered. The Association Agreement precludes it from joining Russia's Customs Union, but full EU membership (and even Nato membership) is not on the table. Nor is there much in the way of EU funds. The Economist ran a chart in April showing how EU membership had transformed the standard of living for all the countries that have
joined the EU since 2003, but what is missing from the chart is a measure of the hundreds of billions of dollars the EU has invested in each of these countries. Poland alone has received $150bn in aid: Ukraine is being offered $10bn a year for two years, all of the austerity of a new International Monetary Fund deal, but none of the structural funds granted to EU member states. "Poland is doing well because it has been subsidised by the EU," argues Mark Adomanis, a contributor to Forbes magazine. And Ukraine needs massive investment and reform. It is one of only two (along with Kyrgyzstan) countries in the region that has yet to surpass its Soviet-era GDP levels. In the last decade there are been next to no structural reforms at all; both the "Orange" and "Blue" governments have failed to get to grips with any of the country's myriad problems. Berlinbased corruption watchdog Transparency International called it "the most corrupt country in eastern Europe" in its last ranking. And yet despite having all the problems that Russia suffers from with knobs on, Ukraine has been deemed suitable for "partnership" with the EU. The truth is that Ukraine is important to the EU in the same way that Afghanistan was important to the British Empire 100 years ago – because of where it is situated and nothing else. Without Ukraine, Russia's aspiration to set up a rival trade bloc – the Eurasian Economic Union that is due to come into being next year out of the current Customs Union of Russia, Belarus
and Kazakhstan – will be thwarted. The Kremlin's dream of creating a trading empire to rival the EU would be reduced to one bad-
tempered natural resources producer surrounded by a necklace of poor bit players on the world stage.
IMF says Ukraine crisis could slow down growth in Eastern Europe The International Monetary Fund (IMF) says the escalation of Ukraine's political crisis is putting Eastern Europe's economic recovery at risk. In a report launched in Istanbul on April 29, the IMF says that growth is picking up in most of Central, Eastern, and Southeastern Europe (CESEE) in the wake of the eurozone recovery.
The report, titled "Spring 2014 Regional Economic Issues (REI) for Central, Eastern, and Southeastern Europe (CESEE)," does not include Russia and Turkey, but assesses the regional impact of international sanctions on Russia's economy. It says the economic recovery of the region is expected to continue in 2014, though it will likely be weaker than previously expected.
Several countries -- among them the United States, the European Union, Canada, and Japan -- imposed sanctions on Russia after its
annexation of Crimea, but the immediate market reaction was muted. However, the report says the Ukrainian crisis has brought new risks for the region, with financial markets in Ukraine, Russia, Belarus, and Moldova coming under renewed pressure earlier this year amid concerns about sanctions against Moscow. The report says that more sanctions and countersanctions may lead to a stronger impact on regional trade, remittances, and the banking sector. It says some 40% of Europe's natural gas and one-third of its oil come from Russia, with dependency ratios even higher for most of Central and Southeastern Europe.
severely affected by lower Russian growth. Central European economies - Hungary, Slovenia, the Czech and Slovak republics, and Poland -- and some Balkan countries like Serbia and Bulgaria have only moderate export exposures to Russia and Ukraine. The document also notes that for most countries in the region, real economic interaction with Russia is limited outside the energy sector. The report concludes that overall CESEE growth is now expected to be lower -- at 1.9 and 2.6% in 2014 and 2015, respectively -- than previously estimated in the IMF's "World Economic Outlook" from October 2013.
The IMF report says that Russia's neighbors -- such as Moldova, Belarus, and the Baltics -- would be
Politics – the good Over 21,000 convicts released under presidential amnesty in Russia More than 21,000 convicts have been released in Russia in accordance with the presidential amnesty, which has been arranged to coincide with the 20th anniversary of the Constitution of the Russian Federation. The amnesty applies to individuals convicted of minor offenses and medium-gravity crimes. It most immediately impacts minors, women with minor children,
pregnant women, the elderly and certain disabled people. As of April 18, 21,038 convicts have been released since the adoption of the amnesty decree, the statement says Russian Ministry of Culture urges to toughen copyright protection The Ministry of Culture supports a stricter protection of intellectual property rights and urges the State Duma to approve amendments to the anti-piracy bill, according to Deputy Minister of Culture Grigory
Ivliyev at a meeting of the State Duma Committee on Culture in the middle of March. The State Duma has already passed a bill in its first reading that extends the anti-piracy law to all works under copyright and related rights, including music and literature. This is a big step forwards and is the positive side of the greater control the Kremlin is putting on the internet. Russia's ecommerce and other online companies have welcomed the new tighter controls as they say it will benefit their fast growing businesses. The bill specifies the procedure for blocking illegal content. The explanatory note says that a hosting provider is to block not just a specific part of pirated content, but any pirated content in its entirety according to an enacted court order. If the provider fails to restrict access to the illegally published content, it must restrict access to the website where it was published. The provider itself is free from liability to the copyright holder and users for restricting access to the content. Russia's anti-piracy law took effect on August 1, 2013, despite protests from Internet companies. It sets out the legal grounds and procedure for limiting access to websites that distribute movies and TV films in violation of copyright. The law also sets out the rules for bringing to account or condoning
information brokers (Internet and hosting providers). FSB kills Chechen terrorist leader Doku Umarov Russia’s FSB killed Chechen top terrorist Doku Umarov in April, the leader of the Imarat Caucasus terrorist organization. During the first quarter of 2014, more than 33 anti-terrorist operations were carried out, with more than 36 warlords and 65 active militants having been neutralized. Umarov is one of the most infamous leaders of the North Caucasus extremist underground, allegedly involved in numerous terror attacks. He claimed responsibility for bombings in the Moscow Metro in April 2013 and an attack on Domodedovo International Airport the same year.
No foreign assets left in Russian lawmakers’ possession All the members of the lower house of Russian parliament filed their income declarations in April and have no more foreign assests or foreign bank accounts, the head of income control commission Nikolai Kovalyov said in April. Clearly some deputies have simply hidden their assets – the number of divorces in the Duma surged after Vladimir Putin signed a law banning the lawmakers and state officials, their spouses and underage children to own any foreign assets and accounts in May 2013 – but there now a real risk associated with continuing to hold foreign assets. Moreover, opposition activists, like blogger Alexei Navalny, will continue to dig. Plus Duma deputies themselves can be expected to snitch on rivals as a way of removing them. Ownership of foreign real estate is possible, but has to be declared. The restrictions apply to individuals holding state positions, including prosecutor general deputies and Central Bank board members, and regional officials and federal service officials appointed by the president, the government and the Prosecutor General's Office. The ban also applies to deputy heads of federal executive bodies and to individuals holding positions in state corporations, funds and other organizations established under federal law, appointed by the president or the government.
Judges, State Duma deputies and Federal Council members are also prohibited from having foreign bank accounts. NGOs should be put on "foreign agent" registry by court order Russian Prosecutor General Yuri Chaika softened the law targeting NGOs that receive foreign funds, saying at the end of April they should be put on the foreign agents list not only on a voluntary request, but on a court order as well. Chaika said that so far only one NGO came forward to register as a “foreign agent” although the Prosecutor General's Office said it identified 24 nongovernmental organizations as "foreign agents" last year. The law regarding NGOs foreign funding took effect in November 2012.
Politics – the bad Russia Liquidates St. Petersburg-based Memorial NGO There has, however, been one significant victim of the NGO funding law. The Justice Ministry officially notified ADC Memorial, a St. Petersburg-based human rights organization, of its liquidation for refusing to register itself as a "foreign agent." Memorial is one of Russia's most prominent human rights groups set up in Soviet Times to highlight victims of the regime, especially Stalin's terror. It was a regular port of call for visiting dignitaries. However, the NGO has several other branches and sister branches that are still operating. Memorial was condemned for a report entitled "Roma, Migrants, Activists: Victims of Police Abuse," which it claimed was meant to "influence decisions of State authorities, change their policies and influencing the public opinion," given that it had been distributed to the Russian delegation of the United Nations Committee Against Torture in November 2012.
Navalny party’s branches prevented from registering The political party of opposition blogger Alexei Navalny was denied registration at the start of April on technical grounds. The applications to register the branches of the Party of Progress, established by the allies of opposition leader Alexei Navalny, was rejected because the party’s Central Council secretary is not authorized to sign the documents from regional branches, the Justice Ministry said. The Party of Progress was registered on December 25, 2013. Initially called People’s Alliance, it was denied registration because its name was confusingly similar to an existing registered party. The party convention then amended its charter to rename the party the Party of Progress and appointed Vladimir Ashurkov secretary of its Central Committee. Under Russian law the Party of Progress must have a branch in at least half of Russia’s regions
. Crimea Annexation Spurs Some Russians to Emigrate There was wide spread support for Russia's annexation of Ukraine's Crimea in March, but some Russians saw it as the last straw and have decided to emigrate. The emigration of members of the intellectual elite has been a persistent problem for postSoviet Russia, and several highprofile liberal figures have left the country in recent years,
including opposition leader and former chess champion Garry Kasparov and economist Sergei Guriev. On the flip side, thousands of Ukrainians have decided to emigrate to Russia where living and working conditions are much better. The per capita in Ukraine is on the order of $4000 a year, whereas in Russia it is $15,000$17,000 according to various sources.
Politics – the ugly Hewlett-Packard subsidiary guilty of paying millions in bribe to Russian officials US computer firm Hewlett-Packard admitted it and its subsidiaries will have to pay over $108m in fines after pleading guilty to US foreign bribery charges for corrupt practises in its Russian business. The biggest deal was a large-scale bribe paid in 1999 for a contract with Russia’s federal prosecutors’ office for phones and computers. HP structured the deal to create a, "secret slush fund totalling several million dollars, at least part of which was intended for bribes to Russian government officials,” the company said in a statement. HP Russia also admitted to created excess profit margins by selling hardware to a Russian partner, and
then buying the goods back at a mark-up and with purported service payments. The funds were then transferred through various shell companies and then laundered through off-shore bank accounts. HP Russia was charged in California with conspiracy as well as substantive violations of the Foreign Corrupt Practices Act’s provisions on bribery and accounting. Former head of Rostec subsidiary suspected of $10m fraud The former head of a subsidiary of the state-owned high tech holding company Rostec Corporation was arrested in April on suspicion of embezzling RUB350m ($9.8m) worth of real estate from the state-
owned Medical Polymer Research Institute.
send a message to all the high-ups that everyone is vulnerable.
Over RUB20bn stolen from Russian agriholding firm
His pardon however a reversion of the mean as Putin rarely punishes any senior official and typically moves them sideways into less important, but senior, jobs.
Three managers stolen more than RUB20bn from Russia's largest agriholding company and were arrested. The police have not revealed the name of the company, but sources familiar with the situation told RIA Novosti that ex-managers of major agriculture company Razgulay Group were detained, one of the biggest agri companies in Russia. Russia’s ex-defence minister was pardoned legally Scandal riven former Russian defence minister Anatoly Serdyukov was legally pardoned in April, after being dismissed for embezzling RUB13bn ($363m) of state property in November 2013. He was included as part of a general amnesty that freed largely small businessmen convicted of petty crimes.
Serdyukov was the first ever sitting minister to be accused of corruption and dismissed. The scandal kicked off a serious scaling up of the Kremlin's antigrapft drive and his dismissal was designed to
Moscow court confirms closer of Navalny’s blog A Moscow court dismissed an appeal filed by opposition stalwart Alexei Navalny at the start of April challenging the blocking of his LiveJournal blog, for which he is most famous. Russia's Prosecutor General's Office earlier ordered telecommunications agency Roskomnadzor to blacklist Navalny’s blog, which contained calls for unapproved mass protests. Navalny participated in an unauthorized protest in February following the sentencing of several activists for their participation in riots that swept central Moscow in May 2012. He is currently under house arrest as a result. On February 1, Russia's communication watchdog Roskomnadzor started blocking websites containing prohibited information without a prior court ruling. The decision to blacklist the website may be taken by the watchdog at the request of the Prosecutor General or his deputies. More than 14,000 online resources were blacklisted in 2013 following the activation of Roskomnadzor's website blacklist.
Polls, mood, sociology A record number of Russians think country is going in the right direction Six out of 10 Russians think that the country is going in the right direction under Putin -- the highest number in more than two decades. A total of 58% of respondents were pleased with the nation's present course, up from 43% in January and 51% in early March, according to the independent pollster Levada Center. The number had peaked at 60% on March 21-24, shortly after Crimea's referendum on joining Russia and at a time when Moscow was completing its annexation of the Black Sea peninsula. The number of those who said that Russia was heading in the wrong direction fell to 26%, the same as in late March and down from 41% in January. The remaining 16% were undecided. Overall, 56% of respondents approve of the government's performance and 49% are pleased with how the State Duma is working.
60% of those surveyed said they were generally satisfied with the work of their governors (of the Moscow mayor), and 38% said they disapproved of their governors' work, down 5% points, compared to 43% in January. Putin's personal popularity soars to all time high of 82% The public trust in President Vladimir Putin and approval of his actions as president soared to an all time high in Paril reaching 82% of those polled by the Levada Center pollster. Putin's approval rating went up by 10% points over the month from 72% in early March and by 17% points from 65% in January. 17% of respondents said they were dissatisfied with the president's performance, compared to 34% in January, the poll indicates. Prime Minister Dmitry Medvedev's performance also improved and was positive rated by 60% of those surveyed in April, compared to 48% in January. 16% of respondents do not trust any of the Russian politicians.
Most trusted politicians and public figures Name
April
January
Russian President Vladimir Putin Defence Minister Sergei Shoigu Foreign Minister Sergei Lavrov Prime Minister Dmitry Medvedev Liberal Democratic Party leader Vladimir Zhirinovsky Communist party leader Gennady Zyuganov
53% 23% 17% 16% 9% 7%
34% 19% 6% 13% 8% 9%
Russia's happiness index hit post-Soviet high Russia's happiness index has reached a post Soviet high of 78%, according to a survey published by the All-Russia Public Opinion Research Centre (VTsIOM) in April. More likely to consider themselves happy young people aged from 18 to 24 years (92%). Such a high number of happy people in Russia maintained for the past two years (77% in 2012 and 2013). For each third happiness is inextricably linked to the welfare of the family. Some people find joy in her children and grandchildren, in addition, an important factor is the presence of happiness interesting work and study. Half was more of those who explains the state of happiness that just live happily. Those who consider themselves unhappy, mostly complain about the low level of income or illness. Russian Consumer confidence at two year lows, but unaffected by weaker economy in 1Q14 Consumer confidence remains flat in the first quarter at minus 11% after dropping for two consecutive quarters, according to Rosstat. The indicator remains at the lowest level since the beginning of 2011. While the composite index was unchanged, there was some improvement in the material
situation component and a decline in the expected economic changes and expected change in material situation components. The index of expected near-term changes in the economic situation dropped to minus 11% in 1Q14 from minus 9% in 4Q13: the share of respondents expecting the economic situation to worsen in the next 12 months grew to 30% in 1Q14 from 28% the previous quarter. The index of recent changes in the economic situation was unchanged at minus 13% in 1Q14; the percentage of both positive and negative assessments of recent economic changes was higher. The index of expected changes in personal material situation declined 1 ppt QoQ to minus 6%, with the share of respondents expecting their material situation to worsen in the next 12 months rising to 20% in 1Q14 from 19% in 4Q13. The index of recent changes in personal material situation grew 3 ppt QoQ to minus 7% in 1Q14. The index of favorable conditions for large purchases declined 1 ppt QoQ to minus 20%, and the index for savings dropped 1 ppt to minus 37%. Consumer confidence decreased among the younger and older age groups surveyed but remained unchanged among middle-aged respondents.
Majority of Russians and Americans view each other's country negatively The number of Russians and Americans who view each others' country negatively has soared during the Ukraine crisis says the Levada Centre. The number of Russians whose attitude toward the USA is "bad" or "very bad" is 61%, compared to 56% in early March, and 44% in January. The number of Russians whose attitude toward the USA is "good" or "very good" has dropped to 26%, compared to 34% in early March, and 43% in January.
Americans' views of Russia have undergone similar changes with 68%, or more than two-thirds, viewing Russia as "unfriendly" or an "enemy," a Gallup poll released last week showed. That figure has soared from 44% in the second half of 2013 and just 20% in 2006, following the Russian-Western dispute over Ukraine and Moscow's annexation of Crimea in March.
The number of Americans who view Russia as an "ally" or a "friendly" country has plummeted to 26% in 2014, compared to 50% in 2013 and 73% in 2006, survey results published on the Gallup website show.
The number of Russians who think the NATO countries have grounds for fearing Russia is up to 44%, compared to 33% in 2008 and 29% in 2002, the Levada poll shows. 62% of respondents believe that Russia has grounds for fearing the NATO countries, up from 54% in 2000. The poll also shows that 70% of Russians think that their country's influence in the world is "large" or "rather large," compared to 51% who thought so in 2011, while the number of those who think that Russia's influence is "not very large" or that it wields "no influence at all" has dropped to 25%, compared to 46% in 2011. Russians think war with west unlikely
The vast majority of Russians (61%) think that a military conflict between Russia and Western countries is unlikely, according to the Levada Centre. Just 16% of Russians think that a military conflict with the West is possible. Nine% are undecided.
Russians (62%), however, think that there are reasons to fear NATO member states, 27% see the opposite. The number of respondents who think that Russia enjoys a lot of influence in the world grew from 51% in 2011 to 70% in March 2014. The poll also showed that the attitude of Russians to Western countries and Ukraine changed
greatly in two weeks of March. A poll conducted on March 7-10 indicated that 34% had positive attitudes towards the United States. The figure stood at 26% in March 21-24 poll. Sixty-one% had negative attitudes compared to 56% in early March. Some 32% of respondents are positive over the EU (45% in March 7-10 poll), 53% are negative (41%). Ukraine received a positive attitude from 52% (63% two weeks earlier) and negative attitude from 37% (25%). A quarter of Russians think government is corrupt One in four Russians think that the current government is corrupt and self-serving, while about one in eight have nothing bad to say about it whatsoever says the Levada Centre. The number of Russians who think that the government is "corrupt and acts primarily to protect its own interests" totalled 25%, compared to a mere 7% a decade ago. The number had previously peaked at 22% in 2006 and seemed to have reached a relative plateau of 24% in 2012. The most common complaint of the government (41%) is its perceived inability to deal with price inflation and a decline in income. Around a quarter of Russians (26%) take issue with what they perceive as a lack of a coherent economic development program.
A slightly lower number (23%) cited the government's inability to provide jobs, a lack of concern for social programs (22%) and a focus on serving the interests of big business (20%) as the government's main faults. Most Russians keep their gripes from the state A poll highlighted the classic fatalism of the Russian people is alive and well. A majority of Russians think they should solve their own problems instead of depending on the state to deal with them. Nearly a third believe they are fully dependent on the government, according to the independent Levada Centre pollster. 59% of respondents opted for selfsufficiency, down 5% from last year, Another 28% of respondents said that their lives fully depend on the authorities, compared to 22% in March 2013. Only 5% said they take their grievances to state officials. Majority of Ukrainians support EU integration, oppose Russian integration Only 7.5% of Ukrainians support support Ukraine merging with the Russian Federation, while nearly 85% are against. About 54.5% of Ukrainians support joining the European Union, compared to 24% for the Customs Union, according to a poll conducted by the Razumkov Centre
and Reitynh Sociological Group that was released on April 23. More than 60% support the Association Agreement, compared to 25% against. Nearly 36% of respondents support NATO membership, while 48% are against. Only 8.5% support their oblast of residence joining the Russian Federation, compared to 85% against. The poll involved 3,011 respondents who were questioned between March 28 and April 2. These are merely the latest round of overwhelming evidence that the residents of southeastern Ukraine have no interest in the Russian federalization campaign, let alone annexation. Yet the problem lies in their passivity, which is paving the way for pro-Russian radicals to set the political agenda. More than half of Russians view Lenin positively Vladimir Lenin's positive rating has been increasing steadily since 2006, when only 29% of Russians viewed him favourably. Today 51% view the influence of Bolshevik leader Vladimir Lenin on Russian history as "entirely positive" or "mostly positive." Says the Levada Centre. Lenin's positive rating has been increasing steadily since 2006, when only 29% of Russians viewed him favorably.
26% of Russians view Lenin as "entirely negative" or "mostly negative." 60% of Russians Have Never Been Outside CIS, Poll Says Some 60% of Russians have never been outside the former Soviet Union, and only 28% of Russians have foreign travel passports (which are different from the domestic passports or personal ID that everyone has), according the Levada Centre pollster. However in the capital 60% of Muscovites said they have
a foreign passport, and a third of them said they travel abroad at least once a year. All Moscow trends tend to be several years ahead of the rest of the country. Respondent most likely to have never traveled outside the former Soviet Union were pensioners (69%), housewives and other homemakers (65%), blue-collar workers (74%) and the unemployed (77%). Overall, only 4% said they travel abroad about once a year for business, and 7% for recreation.
Banks and Finance Russian parliament approves law on national card payment system The one place Russia is vulnerable to the low watt sanctions the EU and USA have been imposing is with its exposure to the international payment system. Russia runs the most open capital account of any of the major emerging markets and the one place the Kremlin has succeeded to put in place deep and wide reforms is with anything that concerns moving money about. The danger is that a sanction placed on a person or company that freezes their assets and accounts means that not only does it become illegal for an American bank to do any business with them, it also becomes illegal for
the American bank to do business with any other bank or business that is doing business with the sanctioned person. The problem is that because the world's financial system is so integrated now and almost every major bank has a US correspondent account, the up shot is these sanctions in effect cut the sanctioned person off from doing business with any bank anywhere. In effect the sanctioned person can no long do business in dollars. Bank Rossiya, that was on the first sanctions list and belongs to Russian President Vladimir Putin's close confident Yury Kovalchuk, who was also sanctioned, announced at the end of April that it would only do business in rubles from now on.
While sanctions are still at their weak "phase II" stage there is a very real danger that if the dispute between Russia and the west over Ukraine's future is not rolled back the sanctions will go to "Phase III" or the so-called sectorial sanctions that could target, among other things, banks. This would do real and lasting damage to Russia's economy. Ironically it is Russia's very openness and sophisticated financial system that would make these sanctions even more effective at isolating Russia than the Iran-style sanctions that have been in place for years on that country's trade. To head off the problem the Kremlin has rushed through legislation to set up its own payment system. The Federation Council, the upper house of Russia’s parliament, approved the law on creating a national card payment system on April 29, in its first of three readings. To get things moving the government intends to put all state payments – such as payroll – through the new system initially. The cash flow the government may invest in the future national payroll system (NPS) is over RUB4 trillion. Payroll expenses of the consolidated regional budget were about RUB2.2 trillion in 2013; about RUB2 trillion goes for payments to federal public-sector employees, says Karen Vartapetov, an analyst at Standard & Poor's. These payments are exclusive of salaries of employees of state companies, state unitary enterprises and similar organizations, he notes.
A fee charged by payment systems from an issuing bank is about 0.1%, says the director of a card business of a retail bank. Thus, RUB4 trillion may yield RUB4bn in revenue. The system would be structured as an open joint-stock company fully owned by the Central Bank, which would maintain complete control of the clearing centre and will take two years to build. After that, the Central Bank would be able to sell part of its stake, but the buyer could not buy more than 10%. The strategy of the national card payment system would be developed by a nine-person board of directors. The idea of creating a national card payment system crystallized after Visa and MasterCard stopped servicing the transactions of Bank Rossiya and SMP Bank (that was also sanctioned). According to the Central Bank’s calculations, it would take six months to create the infrastructure of the national card payment system, and the printing of at least 100m cards would take up to two years. The state investment fund, the Russian Direct Investment Fund (RDIF), has invited China's UnionPay as the most suitable foreign partner to create a national paying system, which the country wants to set up after the slapped sanctions on some local banks
following Russia's annexation of Crimea from Ukraine. Even if the NPS is established, it will not work abroad at first, which will create difficulties for the Russian people - they will have to acquire an "American" card for travelling abroad and transfer part of money to it. Raising the national system to an international level and entering into agreements with foreign banks will take more than a year. Visa, MasterCard required to pay $3.8bn security deposit to work in Russia The State Duma passed a law at the end of April tightening requirements on embattled foreign payment systems Visa and MasterCard. The law will require the two companies to pay "deposits" to the CBR to ensure uninterrupted service. The payment will also be used to guarantee their good behaviour. Visa and MasterCard together processed $1.9bn per day last year, meaning that they will together be obliged to relinquish about $3.8bn to the Central Bank. The legislation comes into force on July 1, after which payment system operators will begin handing over the deposits in quarterly instalments worth 25% of one day's transaction volume.
Russian investment bank incomes fall by two thirds this year Since the start of this year the income of Russia's investment banks have fallen by 64% to $108m as of April 20. The income is a third of what they earned a year earlier, or $325m. The fall hurt even the most profitable segments. For example, income from mergers and acquisitions had fallen by 33% to $ 46m, charges of organizing of syndicated loans had decreased by 88% and amounted to $13m, the proceeds of the bonds had decreased by 76% to $28m, and commissions on transactions with shares had fallen by 24% to $21m. Russian banks brought cash home due to sanction fears On the back of sanction fears most of Russian large banks transferred their currency from western banks to the Bank of Russia and are holding it in cash. Sberbank and Gazprombank are among leaders in this. Most of Gazprombank's currency liquidity (RUB236bn) that in late 2013 was placed in foreign interbank credits, was transferred to the corresponding account in the CBR in March. Gazprombank volume of loans issued to nonresident banks also shrank by RUB217bn and as of March 31 it held RUB248bn worth of currency in accounts at the CBR. Likewise, VTB Bank foreign deposits shrank by RUB273bn, the
Bank of Moscow - by RUB53bn, Sberbank - by RUB44bn, VTB24 by RUB34bn.
Russian banks suffer mild bank run in March on fear of sanctions
In March banks withdrew $21bn from non-resident banks, analysts of Raiffeisenbank, report. Some money was deposited in the Bank of Russia and also it was used in currency swap operations with the regulator.
In March Russia's ten largest banks lost about RUB130bn from deposits – mostly physical persons taking money out of their deposits and current accounts, which accounted for 40% of the total outflow of deposits. The leader by the outflow was Sberbank, which accounts for about half of all deposits in the country
Moreover, "state-owned banks are stocking up with currency in cash in order to protect themselves from sanctions", analysts of Raiffeisenbank state. According to them, in March banks acquired cash for $9.5bn. Sberbank purchased currency for RUB117bn, Gazprombank - for RUB56bn, VTB - for RUB25bn, the Bank of Moscow - for RUB15bn, analyst of a big bank says.
The March results suggest that the decline in deposits was not limited to state banks, but reflected a sector-wide run on bank deposits in response to the Crimea situation. Instead of accumulating savings in banks, the population increased its forex cash cushion by $20bn in 1Q14, which is the highest panic purchase since 4Q08. The panic was also visible in the retail trade where the purchase of car has soared as they keep their value in a crisis and are easy to convert back into cash. Likewise, there was a peak in real estate sales as Russians sought to put their spare cash in bricks and mortar.
These two facts indicate a decline in trust in the banking sector related to the fear of sanctions, and this development is putting pressure on the CBR. While the monetary authority had previously been increasing the refinancing volumes of the banking sector in order to offset the increased dollarization of deposits, in March, it had to boost its presence by RUB700bn to compensate for the run on deposits. As a result, the CBR is funding almost 8% of bank assets, which is close to the 12% seen at the peak of the 2008-09 crisis. In March the depositors withdrew RUB51.8bn from the accounts of Sberbank, according to the circulate list on April 1, 2014. Sberbank's own data on a net outflow of individuals differ from those of the circulate list. The press service of the bank said that clients had withdrawn RUB68bn, which includes certificates, promissory notes and accrued interest for March. Gazprombank was second with outflow of RUB22.7bn, and PSB was third (RUB14.2bn). As Central Bank had reported before, in general, in March the outflow of the banking system totalled RUB344.3bn: ruble accounts decreased by RUB303.5bn, foreign currency accounts lost RUB40.8bn. The outflows in March are very unusual: normally there are strong outflows in January after which inflows resume.
The number of unprofitable Russian banks up 1.5-times in first quarter year-on-year Over the first three months of this year the number of unprofitable banks reached 181 out of a total of 880 credit institutions according to the CBR, up from 124 loss-making banks in the same period a year earlier. Total losses amounted to RUB17.2bn, the top-20 leaders account for 74% of the total amount lost, which was up from the RUB9.9bn banks lost in the same period a year earlier. The number of lost making banks was up despite the fact that the total number of operating banks in the market was down by 66 due to mergers and acquisitions and the CBR's active campaign of closing down dodgy banks. Leaders by the losses were Renaissance Credit (RUB1.79bn), Orient Express (RUB1.6bn), Yugra (RUB1.08bn), National Business Development Bank (RUB1.07bn), National Reserve Bank (RUB1.03bn). Moody's says Russia's weak macro outlook will pressure Russian banks' asset quality and net profits Russian banks' asset quality and profitability will weaken as the country's economy is likely to contract this year, said Moody's Investor's Service on April 18. As noted in March, Moody's believes that Russian GDP will
contract by around 1% in 2014. This deterioration in the operating environment has led Moody's to maintain a negative outlook on Russia's banking system for some time, and has contributed to many of the rating agency's recent negative rating actions on Russian banks.
margins will cause a decline in profitability. With low demand for new loans outside the consumer segment, banks have only limited ability to pass onto borrowers their increased cost of funding following the central bank's rate hike and increased risk premia for Russian banks given the current volatility.
As a result of the structural issues that have reduced Russia's medium-to long-term growth outlook, which have been exacerbated by recent market volatility, Moody's expects a slower rate of credit growth in 2014, at around 10% in nominal terms -compared with 17% in 2013, and 20%-30% in 2011-12 -- that could reveal weaknesses in some banks' previous underwriting criteria and practices.
Although lower profitability will affect banks' ability to generate capital, Moody's does not expect capital buffers to shrink further because slower loan growth should offset the reduced returns on equity. However, capital buffers have declined in recent years as a result of rapid credit expansion.
Banks that have shown the fastest growth in recent years have unseasoned loan books and are thus vulnerable to the weakening macro scenario now unfolding. By segment, loans to consumers and small- and medium-sized enterprises are the most exposed. However, Moody's expects that weaker corporate profits, slower growth in household income and higher interest rates for some loans will foster asset-quality deterioration across all loan segments. Growing loan-loss provisions and negative pressure on net interest
A key challenge for Russian banks in the coming years will be to adjust to this secular low-growth environment, characterised by higher levels of credit risk, more intense competition for the more creditworthy clients, and lower profits. The banks best positioned to meet these challenges will have large loss-absorption cushions in terms of capital, reserves, and recurring pre-provision income. Those banks with low funding and operating costs are also well positioned to meet these challenges. Moody's believes that the new conditions will tend to favour the large governmentowned institutions and create an incentive for further consolidation in the banking sector, particularly for larger private banks.
Russian central bank publishes banking sector data for March The Central Bank published headline banking sector data for March. Assets. Sector assets edged up 0.4% m-o-m, implying growth of 19% year-on-year and 3.4% YTD. Loans. Corporate loans increased 1.8% m-o-m and 18% year-onyear. Retail loans were up 1.3% and 26%, respectively. Sberbank was in line with the rest of the sector in corporate lending and outperformed in retail (2.0% versus 0.9%). Deposits. Sector retail deposits saw 2.0% outflow in March against a backdrop of higher political and economic uncertainty, while yearon-year growth slowed to 12.4%. Corporate funds were largely flat (up 0.2%), while still showing rather high year-on-year growth of 22.4%. Retail deposit outflows from Sberbank were lower than for the rest of the sector (0.9% versus 3.0%). Earnings. Total sector EBT was R233bn in 3m14, down 3% yearon-year. Overdue loans. The overdue loan ratio (which incorporates only the overdue portion of a loan) was stable in both the corporate (4.2%) and retail segments (4.9%). Corporate loan growth has outperformed retail YTD, the former up 5.9% and the latter only 2.7% (albeit if we adjust for 9%
ruble depreciation, corporate loan growth could be closer to 3.7%), on potentially some reintermediation of Russian corporates. We would not read too much into this for the whole year, as there is still much uncertainty about economic growth. Another point from this data release is that retail deposits lost 2.0% in March (about R340bn) which we view as a reaction of the population to some forex and economic stability concerns driven by the situation in Ukraine (some people possibly reallocating savings into real estate). We will be watching closely to see if it eases or reverses in April. NPLs up Russian banks accumulated RUB620bn worth of troubled retail loans (overdue by more than 90 days) as of March 1, 2014, according to the Bank of Russia's statistics. This is a post-crisis high of 7.25% of total loan portfolio now bad. Bad loans are growing fast and a portion of the Russian population are getting quickly into trouble: total bad debts increased by RUB70bn during two months of 2014 and nearly doubled during a year. The retail loan portfolio grew at a much slower pace - by 28% over a year to RUB9.67 trillion. Having had no debt for nearly two decades for the first time some Russians are now over-borrowed. The state of portfolios of the largest retail lenders confirms the trend. In 2013, Sberbank saw
badretail loans increasing by 38% to RUB106bn versus growth of the retail loan portfolio by 32%. At the same time commercial retail lender HCF Bank stepped up the loan portfolio by 29%, but its bad loans more than doubled to RUB39bn. Bad retail loans to the amount of RUB620bn accumulated on banks' balance sheets are not all bad debts of the Russian people. There are also portfolios sold by banks to collection agencies, as new prudential rules have lead banks to sell their bad loans. Last year, such transactions made a total of RUB150-155bn. The amount will increase to RUB220bn this year. Since 2007, banks have sold nearly RUB450-500bn worth of debts to collectors, say experts. 69.9% of households in Russia have not more than one loan while only 2.4% of borrowers have 4 loans and more, according to a recent survey "The Trend of Using Bank Loans and Debt Burden on the Russian People" conducted by the Higher School of Economics. However, the calculations show that 41% of borrowers have the amount below the subsistence level (RUB7,429 as of the end of 3Q 2013) left in hand after payments of the loan. Russia's first indication of potential consumer loan interest rate caps The Central Bank has reportedly done a preliminary calculation for the average full cost of credit (PSK) for different types of loans, which RBC Daily released yesterday.
To recap, according to the law on consumer lending that is coming into force July 1, the Central Bank can establish maximum interest rates for specific loan types by publishing average interest rates for the 100 biggest players and setting the maximum deviation at 1/3 of the average rate. If the data provided by RBC Daily proves to be reliable, it seems that the Central Bank has preliminarily decided to outline 20 loan types for calculating averages, differentiating by the nature of the loan (auto, credit card, cash or point-of-sale), size and maturity. For credit card loans, there are four subdivisions according to credit card limit, including less than R30,000, R30,000-100,000, R100,000-300,000 and greater than R300,000. The maximum credit card PSK that is implied in the preliminary calculations (which probably incorporate data only from the dozens of leading consumer finance players at present, not from all 100 biggest banks) are respectively 45.9%, 34.4%, 32.3% and 28.9% for the abovementioned categories. By comparison, Tinkoff Credit Systems’ tariffs envisage interest rates between 24.9% and 45.9% – not incorporating cash withdrawals or credit insurance charges, the same as with general PSK calculation – and the 45.9% rate usually applies only to lower-limit new customers. Given that the high end of Tinkoff Credit Systems’ interest rate range
does not exceed the implied maximum rate for low-limit cards and that around 40% of their clients had less than a R30,000 limit at end 2013, the implied limits seem not to be a concern. However, the apparent 34.4% maximum rate for loans of
R30,000-100,000 would at first glance appear to be more of a risk for the bank. We are waiting for clarification from Tinkoff Credit Systems about how its average rates look in the R30,000-100,000 loan bracket.
Russian government reintroduces 50% quota on foreign capital in banking sector
organizations with foreign investments to the total authorized capital of banks registered in the country.
The bill assigns a quota of foreign capital in the aggregate authorized capital of credit organizations operating in Russia, at 50%. The list of investments is defined that will not be included in the calculation of quotas, and the convention of Central Bank when it is exceeded. Quota is set by federal law by the government's proposal, agreed with the Bank of Russia. It is calculated as the ratio of total capital, owned by non-residents in the authorized capital of credit
Russia had been moving to liberalising this limit and allows higher quotas on the special permission of the CBR. Russian banks borrow postcrisis record amounts of liquidity from the CBR In March Russian banks borrowed a record post-crisis amount of RUB735bn via REPO transactions as well as credits under nonmarket assets (bank-bills, rights of
claims on credit agreements, other banks guarantee) form the CBR.
November - RUB945.4bn, in October - RUB944.6bn.
Now banks owe an all-time high of RUB4.7 trillion to the central bank by April 1, 2014.
The state-owned banks were the most active borrowers accunting for the lion's share: Sberbank took out loans via REPOs totalling RUB199bn, the Bank of Moscow RUB144.7bn, Gazprombank RUB87.7bn, VTB Bank RUB82.3bn.
The amounts are comparable to what banks borrowed from the CBR during the onset of the crisis in 2008: in December 2008 banks took out loans of RUB1.3 trillion, in
BinBank to buy the Russian subsidiary of Norwegian DNB Bank Mikhail Shishkhanov, owner of BinBank, is preparing to buy DNB Bank - a Russian subsidiary of a Norwegian banking group DNB Bank is a 100% subsidiary of Norwegian group headquartered in Murmansk. Bank does not have a big network in Russia - only 7 offices and 1 out-of-the-office cash counters that are located mostly in the Murmansk region.
Economics Russian economy already in de facto recession due to flow investment and consumer demand The International Monetary Fund has slashed its growth forecast for Russia for the second time in less than a month at the end of April as international sanctions threaten to tip the already weak economy into recession. Russia’s economy is on track to grow by just 0.2% this year, rather than the 1.3% it forecast earlier this month, the IMF said on April 30, warning that further downgrades were likely unless the Ukrainian crisis abated. Other analysts say growth is already in the negative numbers. There seems little doubt now that despite more optimistic government forecasts, the Russia’s economy will dive below zero in 2Q14 thanks to the massive capital outflows. The economy will contract until at least the autumn say many analysts. According to the Economy Ministry, real GDP decelerated to 0.1% year-on-year nominal growth in January and then slightly accelerated to 0.3% year-on-year in February. At the same time, capital flight surged to $20-25bn in March, which implies that GDP growth for March may be negative. Despite a substantial reduction in capital
outflows in 2Q14, the shock from recent political events will persist. In 2H14 Russia’s economy will benefit from the cap on regulated tariff growth, which could add 0.30.4 ppt to real GDP growth in 2014 and 0.6-0.8 ppt in 2015-16. In addition, the economy will be moderately supported by economic improvements in developed countries. Because capital outflows have profound negative effect on capital investment, we believe that an extra $60-80bn in outflows could knock 3-4 ppt off investment growth in 2014. In addition, because 35.3% of capital investment is machinery and equipment, investment could be seriously hit by ruble weakness. We believe that ruble weakness could depress capital investment by another 4-5 ppt this year; thus, we expect investment to contract 6.7% in 2014. In the medium term, we believe that investment activity will rebound due to moderation in capital outflows and deferred demand and we expect it to return to 4-5% growth in 2015-16. Massive capital outflows and ruble weakness have negatively impacted real disposable incomes, which will in turn weaken consumer demand. In 2014 real income growth will decelerate to just 0.6%. As a result of sluggish real income dynamics and a
deceleration in retail loan growth, private consumption growth will decelerate to 3% this year after 4.7% growth in 2013. Still, we expect that consumer demand will remain the key driver of economic
growth in 2014. We expect that real government consumption will stagnate this year, while net exports will grow moderately due to a contraction in import volumes.
Russia’s economy will rebound over the medium term The Russia’s economy is expected to accelerate in 2H14 due to a reduction in capital outflows, further economic improvement in Europe, and cap on regulated tariff growth. Capital outflows should decrease to $35-40bn in 2H14 vs. $85-90bn in 1H14 (we expect $60-70bn in 2015
Long-term growth will be moderate due to a lack of structural reforms. We continue to believe that Russia needs to intensify deep structural reforms to realize its long term growth potential, including a reduction in the tax load on business, large scale privatization,
and $50-60bn in 2016 to leave Russia). The cap on regulated tariffs could add 0.3-0.4 ppt to real GDP growth in 2014 and 0.6-0.8 ppt in 2015-16. Thus, we believe that Russia’s economy will accelerate to 1.31.5% year-on-year in 2H14 and to 2.8-3% in 2015-16. The recovery will be helped by the on going recovery in the rest of Europe.
better protection of property rights and legal system improvements. The new state procurement system seems to be unable to substantially reduce corruption or boost budget spending efficiency. We see growing risks that Europe may
gradually reduce its dependence on Russian energy good supplies. This carries risks for Russia’s long term fiscal stability and economic
growth. In our view, deep structural reforms could provide the hedge against these risks.
Russian budget rule debate and the hunt for revenue
the sustainability of the budget rule, introduced only a year ago.
Budget debate is gaining importance as the government is on the hunt for more revenues.
In 2013, the deficit was higher than prescribed, and the Reserve Fund was not replenished as it should have been. However, we still saw the budget rule as a policy anchor, allowing the government to cut federal expenditure growth to just 4% y/y, after 18% y/y in 2012, as planned.
There is a very obvious policy wrangle between the ministries of economy and finance that ratcheted up at the end of April. After the economy ministry’s latest economic forecast included a recommendation to increase state spending, the finance ministry believes that more spending will not produce more growth and will only fuel inflation and imports. So far the Finance ministry has the upper hand in the debate and Putin has thrown his support behind sticking to the budget rule, which will automatically curb government spending. The commitment to controlling budget risks while stimulating the economy through loose monetary policy, which we identified in previous years, is now under pressure due to Fed Reserve tapering and Russia’s geopolitical tensions. The recent proposal to ease the budget rule is a sign that with the slowdown in economic growth and Crimea accession, calls to ease the budget policy have intensified. This puts our expectations of a stable $110$115/bbl budget breakeven oil price for the coming years under question. Budget rule was not followed to the letter, but helped assure only 4% federal expenditure growth: The market has an ambiguous take on
Tight federal expenditures were assured by pushing spending to the regional level and squeezing out investment spending. That said, the tight 4% federal expenditure growth in 2013 was made possible by two factors. First, regional budget expenditures grew above expectations, causing a 1.3% GDP deficit at the consolidated level vs. 0.5% GDP at the federal one. Second, social payments and state sector salaries represented 90% of total expenditure growth, squeezing out investment spending. Cabinet this year may consider tackling National Welfare Fund. With limited room to maneuver on expenditures, the recent decision to retain the budget rule suggests that the Cabinet is considering other options to fund extra spending. One way is to tackle the National Welfare Fund directly, which is particularly appropriate for Crimea infrastructure construction. However, the $85bn fund is not unlimited, especially as $35bn of it is already reserved for other infrastructure projects.
Budget Rule… almost A little over a year after the introduction of the budget rule at end-2012, the market has to question its sustainability. Strictly speaking, the rule was never followed to the letter. It has prescribed that (1) the federal budget deficit under the “budget rule oil price” assumption of $91/bbl (five-year historical average) for 2013 must not exceed 1.0% GDP; and (2) any revenues coming from the oil price above the “budget rule oil price” must be transferred to the Reserve Fund ($1.9bn per each extra $1/bbl). Neither of the two conditions was met in 2013: the deficit under $91/bbl oil price would have been 1.9% of GDP (actual deficit was 0.5% of GDP under a $110/bbl oil price); and the Finance Ministry is now struggling to put $6bn in the Reserve Fund vs. the $36bn implied by the budget rule. Having said that, the rule was broken because of poor revenues collection, while control over spending was efficient, limiting federal budget expenditure growth at 4% y/y in 2013, in line with the initial plan, after an 18% y/y increase in 2012. Thus, we believe that the budget rule still played its fundamental role in assuring control over the spending side. We now see that the strong appetite for state spending will render the budget rule unsustainable. In the short run in 2014, additional spending,
currently proposed at around RUB400bn, can be financed from the National Welfare Fund, allowing the government to keep this year’s federal expenditure growth plan at 5%, creating the opportunity for a decline to $110/bbl in 2014 thanks to ruble depreciation. However, later on, the government will not be able to maintain such a tight approach to spending, and by 2015, pressure on the budget will intensify.
Raising taxes One option is to raise the tax burden. However, international comparison suggests that Russia’s total 37% GDP tax revenues are already higher than the OECD average. Non-fuel corporate taxes, including profit, payroll and property taxes, represent 11% of GDP, which is higher than the 9% OECD average. Another 11% GDP reflects hydrocarbon extraction and exports taxes paid by the fuel sector. The total corporate sector tax burden in Russia is actually rather high, but compensates for the very low taxation on households. The key taxes – personal income and property taxes – contribute only 4% GDP in Russia vs. 14% GDP in the OECD. Indirect taxes on consumption (VAT, import duties) are also not high at 8% GDP in Russia vs. 11% in the OECD. However, we doubt that in the environment of slower economic growth that the government will be able to consider higher taxation on the population, while increasing the corporate tax burden would be an additional blow to economic growth. Thus, it
appears that the tax debate will face opposition from both economic and political considerations, and a major change in the tax burden structure is unlikely. Depreciation easiest way to raise budget money With no ability to raise the tax burden deliberately, the government’s only safe bet to improve revenue collection comes from macro factors. In our view, ruble depreciation is the only factor that may play in favor of the budget and could be the reason that the government has decided to keep the budget rule unchanged for now. In our estimate, each RUB1/$ depreciation provides the budget with additional annual revenues of RUB200-300bn, implying the revaluation of FXdenominated fuel revenues (export duties and UPT) and import duties.
Thus, this year’s ruble depreciation may bring the budget an additional RUB1tr in revenues. In addition, should ruble depreciation favor recovery of local growth, this would also be positive for budget revenues. Each extra 1% of GDP growth brings the federal budget around RUB200-400bn in additional revenues a year. Thus, the government’s position is important, as it is a strong indirect sign for the preference of a weaker ruble. And we see it being particularly strong in case acceleration in the growth rate does not meet initial expectations, which we see as very likely. This is confirmation of our take that the budget position will be the key risk for inflation in the longer run.
Russian Finance Ministry proposes cancelling regional tax breaks Alfa Bank The Finance Ministry yesterday presented proposals to amend the tax policy for 2015-17. Specifically, the Ministry suggests cancelling the current exemptions on regional taxes, including on corporate profit, property, transport and land taxes, which together cost regional budgets RUB1tr, or ~1.5% GDP, of lost tax revenues annually, according to the Ministry. We believe this proposal reflects the Ministry’s concern on the recent sharp deterioration of the consolidated budget balance, which posted a 1.3% GDP deficit last year vs. a 0.5% GDP deficit of the federal budget that same year. That said, nearly all the regional tax exemptions listed in the Ministry’s document target corporate taxpayers; therefore, revoking said exemptions would result in up to a 1.5% GDP increase in the corporate-sector tax burden that is already high by global standards. Russian corporates currently contribute 11% of GDP of non-oil tax revenues in the country, which is higher than the OECD average of 9% GDP. As a result, if the
government proceeds with revoking the existing regional tax breaks, it would be rather damaging for the economic growth outlook. Russian economic sanctions minimal damage Direct impact of economic sanctions is likely to be minimal. The direct economic effect of Western sanctions on Russia will be small provided that there is no escalation of the situation between Russia and Ukraine. So far, it looks like Western sanctions will be confined to visa restrictions for a relatively small group of individuals, the termination of some programs (most likely military), and economic restrictions against a relatively small number of companies, which have close ties with Russia’s elites. In addition, Russia’s membership in some international organizations may be temporarily suspended. We emphasize that Russia is well integrated into the global economy, thus deeper sanctions could seriously hurt developed countries themselves.
Restrictions on the banks could do more damage (see banks above) as these could interfere with Russia's ability to make payments or raise debt on international markets.
The rationale behind sending this strong message is primarily driven by credibility considerations, although no one doubted the CBR’s credibility after its bold move in March when last it hiked rates.
CBR with surprise interest rate hike at end April
The central bank has guided for no rate cuts over the coming months – although neither do we think rate hikes will be on the agenda unless there is severe pressure on the ruble.
In a surprise move, the CBR has raised policy rates 50bp to 7.50% at the end of April. Russian companies were already complaining that rates were too high, but thanks to the political turmoil, on going capital flight and devaluation, the CBR has raised rates twice in the last month – a growth killer.
Looking beyond the short term, ultimately, significant disinflation is on the cards down the road and hence substantial policy easing; however, the timing looks uncertain and, while tentatively penciling in 100bp cuts in 2H14, we recognise that risks are tilted to the later part of the year.
Ruble drops to historical lows on massive capital outflows In April the RUBEUR rate broke through 1:50 and RUBUSD rate through 1:35 for the first time, unsettling the exchange rate-savvy population. Russians have lived through several bouts of devaluation and the falling ruble's value was immediately visible in the reaction in the banking sector (see above) with mild runs as the population took refugee in cash or currency accounts.
After a period of relative strength in 1H13, the ruble moderately depreciated in 2H13 on capital outflows caused by mounting economic problems in EM countries and expectations of policy tightening in the US. In addition, despite relatively stable oil prices, Russia’s current account surplus dropped below zero (minus $1.5bn in 3Q13) due to deterioration in the balance of services (to a large extent due to increase in foreign tourism) and the investment income balance.
However, the ruble plummeted in March due to the dramatic increase in capital flight driven by tensions between Russia and Ukraine. As a result, in spite of strong intervention by the CBR, the ruble dropped to a historical low of RUB43.08 against the bi-currency basket on 14 March. Still the ruble is expected to rebound in the short term. Provided there are no further
According to CBR data, the current account surplus for 1Q14 reached $27.6bn (up 13.6% year-on-year); decent fundamentals in 1H14 will
tensions between Russia and Ukraine, analysts expect a substantial reduction in capital outflows after the substantial $50.6bn that exited in 1Q14. Uralsib says capital flight will decrease to $35- 40bn in 2Q14, $20-25bn in 3Q14, and $10-15bn in 4Q14, and believes that the ruble is currently undervalued with a moderate improvement in the current account balance.
moderately support the ruble for the short term.
Ruble will return to moderate depreciation over the medium term. However, a seasonal deterioration in the current account during the summer, which will lead to moderate ruble depreciation in 2H14. Recent monetary tightening will have almost no impact on ruble dynamics: capital outflows are driven primarily by politics, global concerns, and a poor investment climate in Russia. So the average
ruble rate should be about RUB40.7 for the bi-currency basket in 2014. Over the medium term, analysts expect the ruble to moderately weaken in nominal terms (an average rate of RUB41.1 for bicurrency basket in 2015 and RUB41.6/basket in 2016), but it will slightly appreciate in real terms (1-2% in 2015-16).
Round tripping Russian capital masquerading as FDI While the huge headline net private sector capital outflow figure of $63.8bn came as little surprise, the details look much more interesting, bringing further evidence that the underlying picture might be improving. ‘Grey’ capital flight – which we define as the sum of dubious operations and errors and omissions – almost halved yearon-year to $8.4bn in 1Q14. This trend looks to have persisted over the last four quarters and the rolling annual figure is now running at $30bn (vs. $40-50bn over 201112). The CBR’s crusade against misbehaving banks must have
borne fruit, or at least made those considering capital flight more ingenious. On a less encouraging note, adjusted for paper capital flows (i.e. reinvested earnings) and the Rosneft deal in 1Q13, we estimate that the net FDI balance reversed its nascent rising trend and dipped into the negative area (-$5.6bn in 1Q14 vs. +$11.3bn last year). Given that FDI flows by and large represent round-tripping of Russian capital, this, together with the suspiciously robust growth in outbound crossborder lending by the non-banking sector, does indeed suggest that capital flight might simply be reshuffling towards less outrageous forms
Weak ruble helps to improve the trade balance
$344.3bn (down 9.6% year-onyear) last year.
In 2014, analysts expect Russia’s exports to decrease to $505.3bn from $523.3bn in 2013 (3.1% year-on-year contraction) due to an expected decrease in the average Brent price to $105.9/bbl from $108.7/bbl last year (down 2.6% year-on-year).
Thus, the trade balance will improve to $193.9bn in 2014 from $177.3bn in 2013. In addition, we believe that a weak ruble will improve the balance of services due, in particular, to the reduction in foreign tourism this year. Thus, we expect a moderate improvement in the current account balance to $40bn this year from $33bn in 2013. Massive capital outflows will take a sizable chunk off Russia’s international reserves, which will shrink to $430bn by year-end vs. $509.6bn on 1 January 2014.
Most of Russia’s exports are fuel and energy goods; thus a weak ruble will have almost no impact on the physical volume of exports. On the other hand, its is expected ruble weakness to cause a material contraction in imports, which will decline to $311.4bn in 2014 from
Lower imports help current account The Central Bank of Russia’s preliminary balance-of-payments first-quarter figures show the current account surplus was slightly larger than in 1Q2013. The current account surplus for the past four quarters, however, was still well below 2 % of GDP. The goods trade surplus rose slightly and for the past four quarters amounted to nearly 9 % of GDP. On the other hand, deficits in the services trade balance and other current-account components deepened a bit, to 7 % of GDP. Earnings from Russian exports of goods and services fell in the first quarter a couple of% year-on-year. Export earnings have been falling for over a year now. Export earnings on services continued to increase. Export earnings from goods exports contracted overall, as well as with respect to exports of crude oil, petroleum products, natural gas, and other goods. The export volume of crude oil fell strongly early this year, and petroleum products took a dip. Export prices for oil, petroleum products and gas were also slightly lower than a year ago. The value of goods and services imported to Russia in the first quarter was down considerably from 1Q2013. The value of goods imports contracted by nearly 10 %.
Spending on services imports was still slightly larger than a year earlier. This was due almost entirely to Russian travellers spending abroad, even if annual growth in spending during foreign travel slowed to less than 10 %. Russian inflation at 7%, to fall in 2H14 In annual terms, inflation continues to accelerate and has reached 7% (versus 6.5% at the beginning of the year and 6.9% at end March). Inflation started to accelerate in March, but is expected to drop from 7.4% year-on-year in June to just 5.2% year-on-year in December, due to the government's cap on tariffs. This is still above the 5% government target, which, in light of the hawkish stance of the CBR, leaves little room for monetary easing this year. Inflation in the import segment (especially for fruit and vegetables) was just one of the drivers of overall CPI growth. The weakening ruble seems to have spurred inflation expectations in other segments (such as food produced locally). However, decelerating money supply growth and the stabilization situation on the forex market could contribute to disinflation in 2H14.
Russian Producer confidence improves in manufacturing and resource extraction In March, producer confidence improved in manufacturing and in resource extraction, and dropped in utilities: Confidence in manufacturing increased to negative 2% from negative 4% Confidence in resource extraction improved to negative 1% from negative 3% Confidence in utilities decreased to negative 9% from negative 5% Among those polled, the%age who expected output to grow in the next three months was higher than the%age of those who expected output to contract (28 ppt higher in manufacturing and 22 ppt higher in resource extraction, compared to 25 ppt and 17 ppt in January) We expect producer confidence to deteriorate in 2Q14 due to economic contraction triggered by massive capital outflows Russian industrial output up 1.4% y/y in March Rosstat reported March industrial production growth of 1.4% y/y. Even though this is a deceleration vs. growth of 2.1% y/y in February, the figure materially exceeded market expectations of 0.5% y/y, which is a positive surprise. It suggests that the March turmoil on the financial markets that cost
the banking sector 2% of its retail deposit base failed to hurt the real sector. Apparently, industry found support in budget spending, which posted unexpectedly high 13% y/y growth in March and 8% y/y in 1Q14, including a 50% y/y spike in defence spending in 1Q14. Thus, further growth in industrial production will largely depend on resolving the budget discussion. If the government does relax the budget rule and allows this year’s state spending growth plan to increase from the current 5% to 8%, a further positive surprise in output growth cannot be excluded in the short term. However, in the longer term, the inflationary consequences of such a decision will eventually render this boost a zero-sum game. Russian government to spend RUB1 trillion on improving sectors, productivity The Russian government plans to allocate RUB1.06 trillion for the development of industry until 2020 to improve the sector's competitiveness, the government. The revised financing program was approved by the government on April 15. In addition, the government plans to spend RUB444.5bn on the federal program on the innovative economic development, which is to be implemented in 2017-2020. The program is aimed at increasing economic growth rates, higher investment activities and labour capacity.
The government will also allocate RUB438.5bn to develop the country's external economic activities in 2013-2018. In this period, the government plans to strengthen Russia's positions in the global economy. The volume of the government's program on the development of the pharmaceutical and medical industry until 2020 has been approved at RUB99.42bn, which is 8% lower than the previous program approved by the government in November 2012. The allocations from the federal budget for the development of the aircraft industry in 2013-2025 have been decreased to RUB714.18bn from RUB1.7 trillion planned previously. The financing of the government's program on the development of the transportation system will require about RUB6.85bn rubles from the federal budget, the government also said. The program will be implemented in 2013-2022. Russian retail trade grew 3.5% y/y in 1Q14 supporting 0.8% GDP growth In March, retail trade jumped 4.0% y/y after 3.2% y/y in 2M14, reaching 3.5% y/y in 1Q14. This growth remains driven by the non-food segment, which was up 6.9% y/y in March and 5.6% y/y in 1Q14, reflecting households’ reaction to the instability on the financial markets.
The positive fact, however, is that the underlying trends were also strong, with unemployment down to 5.4% in March and real wage up 4.2% y/y in 1Q14. Gross international reserves fall somewhat As of March 21, international reserves of the Russian Federation amounted to $486.6bn having fallen $6.6bn the previous week due to CBR interventions on the FX market. What should surprise is that despite rapid growth of the net capital outflow and increase of the Bank of Russia's interventions on the money market, international reserves have not fallen much from the post crisis level of about $500bn. To a large extent the capital outflows have been matched by inbound FDI. Strong pressure on the ruble and growth of the Bank of Russia's interventions on the open market, reduction of the private banks' currency residuals in the Bank of Russia and negative revaluation of the currency and gold in the reserves structure were among major factors that exerted negative influence on dynamics of the reserves for the period March 14 March 21. Putin floats idea of capital amnesty During a meeting with members of the Council of the Federal Assembly Chamber in NovoOgarevo in April, Russian President Vladimir Putin floated the idea of
announcing an capital amnesty, but asked not do it in a hurry The question of a possible amnesty of capital was raised at the meeting by Valentina Matvienko, the Chairman of the Federation Council. "I think it is very important to send the right signal to national business in the current situation," she said. "Business, both national and foreign, will believe your word, Vladimir Vladimirovich," the speaker is sure.
an amnesty of capital, except for those who are related with drugs and terrorism," Valentina Matvienko said. "Let these capitals come back from offshore countries to the Russian jurisdiction," she added. Over 20 years from 1990 to 2010, $798bn was removed from Russia to offshore jurisdictions, out of a total of $32 trillion held in offshore haven globally, says the Tax Justice Network Analytical Group.
"Along with this, some offbeat measures are needed, for example,
Infrastructure South Stream returning to Austria
implement the project within Austria's borders.
Gazprom has returned to the option of building the South Stream gas pipeline to Europe to the Austrian city of Baumgarten instead of to Ratece on Slovenia's border with Italy. This will reduce costs from 6.6bn euros to 5.8bn euros (in 2010 prices) and bring nearer the completion times for the final links of the gas transport system.
It was reported earlier that routing the pipeline to northern Italy through Slovenia - considered the basic version - ran the risk of triggering contract reviews due to changes in the acceptance and delivery points. That compelled Gazprom to return to the idea of laying the pipeline to the Baumgarten hub in Austria.
Route Gazprom CEO Alexei Miller and the head of Austria's OMV, Gerhard Roiss signed a letter of intent on Tuesday to implement the South Stream project in Austria, the Russian gas giant said. Roiss also gave Miller a letter from Austria's economy minister that expresses support for the parties' efforts to
Russia's Nordic Yards to buy shipyard from Germany's P+S Werfen Nordic Yards, owned by Russian businessman Vitaly Yusufov, will buy a shipyard in Germany's Stralsund from struggling P+S Werften, the buyer, an operator of shipyards in local cities of Wismar, Rostock, and Warnemunde, said in a statement at the end of April.
The value of the deal was not disclosed. Nordic Yards plans to create 250 new jobs at the new asset by the end of 2014, and expand the number of jobs to 500 by the end of 2017. Special econ zone in Russia's Far East must be set up by May 27 Presidential envoy to Russia's Far East Yury Trutnev has instructed the government to set up a special economic zone in the city of Vladivostok by May 27, according to a publication released on the government's Web site. "The government must) create a special industrial economic zone in the city of Vladivostok and ensure financing of the construction of necessary infrastructure facilities. The deadline is May 27, 2014," Trutnev said. Earlier, President Vladimir Putin said that the special economic zone in Vladivostok must be created no later than on June 15. Mooted "new Moscow Region" initiative has yet to pass In a push to improve the quality of housing and living standards in Moscow Region, the regional government has come up with a new initiative to ban construction of certain types of panel buildings on its territory (31 in total, mostly old-style and outdated panel housing, but also a few fairly modern but high-rise series) starting from May of this year, Vedomosti reported . However, the
ban, similar to another meaningful change reviewed last year – the height restriction – was put on hold. The regional administration decided to work with homebuilders to improve some building series on the initial ban list in order to avoid a collapse in housing construction, as the proposed list accounts for circa 40-50% of all panel housing and 12-15% of total housing delivered in Moscow Region, according to sources cited by Vedomosti. It promised to come up with an augmented list, planning to revisit all new housing project developments by June 1. The list, as the initiative itself (published in yesterday’s Vedomosti), has failed to materialize into a legislative act so far, and the Moscow Region administration seems to have backtracked on this idea. However, the list of building series proposed to be banned in new construction projects will be augmented and likely go live at some point this or next year. Gazprom, Turkey agree to increase Blue Stream capacity Gazprom April 25 agreed with Turkey on increasing Blue Stream pipeline (under the Black Sea) capacity from 16bcmpa to 19bcmpa (+3bcmpa) by increasing the pressure of Russia’s Beregovaya compressor station (may cost ~$150m), which will not require constructing new pipeline strings.
Gazprom shipped 26.7bcm of gas to Turkey in 2013 (~55% of Turkey’s gas consumption), of which 13.7bcm were delivered through the pipeline. Turkey insists on gas price discounts as well – Turkey’s Botas currently pays $420/mcm for Russian gas shipped via Blue Stream. Gazprom’s interest in the decision is driven by the ongoing political hints after the Ukraine situation and threats of economic sanctions
from the EU. Moreover, gas deliveries via Blue Stream are fully exempted from export duty, thus increasing the economic attractiveness of extra volumes for Gazprom. Turkey is interested in extra gas volumes in order to meet its gas needs before the second phase of Azerbaijan’s Shah Deniz project is launched in 2018 (should bring 6bcmpa to Turkey).
ECM Finance Ministry Proposes Tax Hikes to Push Investors Out of Real Estate In an attempt to hike government earnings and push capital into the shaky Russian stock market, the Finance Ministry has proposed amendments aimed at taxing investors who have safeguarded their savings in residential real estate. Currently, the entire profit from the sale of a house or apartment is tax-exempt if the person has owned the property for more than three years, which has led to sellers simply holding on to their properties until the period passes. Under the new system, owners of more than two apartments would have to pay a 13% tax on the revenues, regardless of the length of ownership, Deputy
Finance Minister Sergei Shatalov told Vedomosti. People selling their only property, meanwhile, would get to keep all proceeds. Similarly, income from the sale of the ubiquitous family dacha, or small country summerhouse, will be tax-free provided that the building has an area no greater than 50 square meters, Shatalov said. The tax exemption can apply to owners of two properties in certain circumstances. When someone purchases a second apartment and then sells the first one, they can receive an exemption on the sale, as can those who sell a second residence valued at no more than 5m rubles ($140,000) that they have owned for more than three years, Shatalov said.
This 5m is a "very strange bar" for Moscow, where there are very few properties to be found at such a price either on the primary or secondary market, said Maria Litinetskaya, general director of Metrium Group. Resurgent emerging markets see biggest inflows in over a year A shift by investors' back into emerging market assets gathered pace in the middle of April, with China and Russia seeing some of the biggest demand as EM inflows reached their highest rate in over a year, following on from some of the biggest falls previously. Banks and investors have started buying back into the emerging market story in recent weeks, noting that sector valuations now are so cheap that they compensate for economic weakness and political risks.
$11.3bn at start of the year, down 19%. The total amount invested in Russia was down 10% from January levels at $51.7bn. Polyus Gold Considers Delisting from London Over Ukraine Sanctions Russia's biggest gold miner Polyus Gold is considering delisting from London, the country's first company to suggest it may heed a call by officials to bring assets home to survive Western sanctions. Polyus, a London-listed and Jerseyregistered firm with assets in Russia, plans to discuss the possible delisting at the next meeting of its board of directors. Polyus, part-owned by businessman Suleiman Kerimov, declined to comment. CBR gives Credit Bank of Moscow permission to list on LSE
A breakdown of EPFR's data showed $2.9bn had gone into EM stocks over the week in the middle of April with a smaller $1.8bn flowing into bonds. Russian dedicated funds were the one of best performers with inflows of $164m, up 1.8% in terms of assets under management (AUM). Since the start of the year inflow in Russian funds amounted to $271m. At the same time volume of short positions in them lowered.
The Russian central bank has allowed Credit Bank of Moscow to float shares on the London Stock Exchange (LSE), Credit Bank of Moscow said in a statement Thursday.
However, they still had a long way to go to recover the outflows seen since the crisis in Ukraine erupted. AUM were at $9.1bn versus
Deutsche Bank Luxemburg is the issuer of the global depository receipts program.
Credit Bank of Moscow, whose shareholders voted in January for an increase the bank’s capital by 9.645bn rubles via a share issue, intends to offer more than 4.822bn shares.
Businessman Roman Avdeyev owns 85% in Credit Bank of
Moscow through Rossium company.
DCM Russian companies bonds issues this year down by three quarters year-on-year In 2014 Russian companies and organizations issued bonds for $9.1bn - 74% less than for the same period of 2013, according to Dealogic. Only Sberbank and Gazprom have issued bonds this year for $1bn each. Experts say that it was due to the situation in the Ukraine. "It is quite clear that political risks are very important now as they exert pressure on the economy," James Percell, analyst from UBS, mentioned. Russian corporates and banks have to retire $60bn of debt this year Russian corporates and banks have to retire RUB790bn of rubledenominated bonds, Eurobonds for $7.3bn and credits in foreign currency of $25.5bn and EUR1.3bn, Uralsib Capital said. And they are going to find it difficult as international capital markets are more-or-less closed to Russian entities. So the problem is how this is going to be managed. In June and July corporate sector will have to retire RUB350bn. For summer the sector will have to refinance bonds for RUB305bn,
Eurobonds for the same period for about $2.9bn, December will be the most difficult month - when RUB680bn is to be refinanced. Rosneft will have to pay most of all - $12.7bn. The company will have to repay a credit taken to buy TNKBP in December; however, Rosneft is trying to do it ahead-ofschedule: $10.6bn has been already repaid ($5.5bn in 2014). "That is why in December the company will have to repay much less than $12.7bn. In 2014 VTB will have to repay $1.25bn on bonds and $3.1bn on credit. Gazprom will have to repay $2.3bn, Gazprombank - $3bn, Russian Agricultural Bank (Rosselkhozbank) - $1.8bn, Sberbank - $2.1bn, VEB - $2.4bn. Uralsib Capital says that Rusal is in the most difficult situation: in September the company will have to repay $2.35bn on credits but it has only $716m. The company is considering sale of non-core assets and it will help raise more $200m $350m. At present moment RUSAL is negotiating with creditors regarding refinancing of some syndicated loans.
Russia's short-term external debts rising CBR data in April showed Russia's short-term external debt by remaining maturity - still Russia's soft underbelly – is falling due over the next 12 months rose to $192bn as of the end of 2013, up from $155bn as of third quarter of 2013. The maturity distribution was $56bn, $31.2bn, $27.8bn and $47.7bn. This debt will be increasingly difficult to refinance, if as seems likely now that relations with the West further deteriorate over Ukraine, as the sanctions list is expanded and few foreign institutions are willing to finance Russian entities. What does that mean? Likely more debt restructurings out of Russia, and higher financing costs, which will hurt the Russian economy over the longer term, that is unless the Russian state comes in and repeats what it did in 2008/09 and pumps in FX liquidity into banks/corporates via VEB to allow them to cover/payoff external liabilities. Looking at the bank/corporate breakdown, this was composed of $60.4bn in terms of banks, and $98.4bn from corporates maturing over the next 12 months. Note that it also ignored the $43bn which was due for immediate repayment. The total stock of external debt stood at $727bn, which is only around one third of GDP, but as in 2008/09, Russia's problem is not necessarily a stock but a flow problem.
Majority of Russian corporates able to manage refinancing risks in face of Ukraine dispute The aggregate exposure of rated Russian non-financial corporates to debt denominated in foreign currency is manageable, says Moody's Investors Service. Substantial foreign currency cash balances and export revenues help reduce the risk, while financing from local banks could provide a fallback if access to global financial and debt capital markets dried up. "The sectors with the least overall exposure to refinancing risk are the oil & gas, telecoms, utilities and infrastructure sectors, since we estimate that their aggregate cash and deposits would be sufficient to cover most or all of their debt maturities until end-June 2015," Moody's said. "Conversely, the chemicals and mining sectors are the most exposed to refinancing risk as, based on our estimates, their aggregated cash and deposits would only cover 42% and 25%, respectively, of their debt maturities between 1 January 2014 and 30 June 2015," says Moody's. Moody's notes that among the 60 rated issuers it analysed, 47 have a total of $64.2bn of debt maturities denominated in foreign currency, of which more than $14.7bn is in public debt instruments including Eurobonds.
Some companies in Russia may be short of money to repay debts in foreign currency says Moody's
Ore mining and chemical companies are very sensitive to risks related with refinancing of foreign currency debt, Moody's says. Total cash and deposits of companies from these sectors cover only 25% and 42% of debt liabilities due within 18 months (from January 1, 2014 to June 30, 2015) respectively. These liabilities in foreign currency which are actually shortterm may be a key source of risk to companies overburdened with debt in the event that access of Russian companies to global financial and debt markets is restricted. 47 of 60 companies rated by Moody's have debt liabilities in foreign currency maturing until June 30, 2015 to the total amount of $64.2bn, Moody's says. Renaissance Capital liquidates 80% of the public debt On April 20, 2014, Renaissance Capital liquidated 80% of the public debt having purchased Eurobonds for $260m. Investors now have only 20% of the issue; the investment bank does not have public debts any more.
Eurobonds worth $325m were placed in April 2011 with the yield of 11% annual.
"At first we thought that investors would call for redemption about half of Eurobonds but there were almost 80%," Igor Vain, a Chairman of the Board of Directors at Renaissance Capital, told RBC. According to him, all investors could call for redemption for the period February 21 - March 21. "This period was synchronous with aggravation of the country risks - conflict in the Crimea escalated. Investors called for redemption not after appraisal of the credit quality of the issuer but because they wanted to decrease share of Russian assets in their portfolios," he is sure. All securities were redeemed at the expense of company's assets and money of shareholders. Shareholder of the holding, Onexim Group submitted most of the securities for redemption. Moscow Stock Exchange ups list of foreign securities for REPO transactions Moscow Stock Exchange has enlarged the list of foreign securities that could be used in REPO transactions having added 6 issues of depositary receipts and 4 shares of issuers registered abroad (companies with Russian assets mostly). Since April 7, the stock exchange admitted 24 issues of depositary receipts and foreign shares of 2 companies to interdealer REPO operations.
Sectors Investments in commercial real estate in Russia could be 20% less than forecast at the start of the year In 2014 investments in commercial real estate in Russia could be 20% less as it was planned before, real estate consultants say. Instead of $7bn - $7.5bn, investments could fall to $6bn. "We are reconsidering our investment forecast, it will be lowered," Tom Mandi, Head of Research Department at JLL, warns. Optimistic forecast - $6bn (some time before - $7.5bn) and even this forecast could be reconsidered, Cushman & Wakefield says. In late 2013 Colliers International even hoped for $8.2bn but also has lowered their forecast to $6bn $7bn. As for office real estate, developers started rescheduling the dates of closing transactions. According to Valentin Gavrilov, in Q1 demand for offices decreased by 5% - 15% but there is no huge falling back.
estate will be 2.5 times less as compared with the same period of 2013. Moscow Real Estate 1Q14 residential completions up 29% year-on-year Moscow Real Estate 1Q14 residential completions up 29% year-on-year to 823,0000sqm, 3.2mn sqm planned for 2014, fundamentals remain robust Moscow state authorities have reported 1Q14 residential completions of 823,000sqm, implying a 29% year-on-year advance. For 2014, the volumes are viewed at 3.2mn, comparable to the 3.1mn in 2013. The 1Q14 surge represents the volatile nature of the reallocation of residential volumes between quarters, while the steady growth in annual figures shows that the situation with construction approvals has stabilised. Volvo puts partnership with tank maker UVZ on hold over Ukraine
Owners of warehouses lowered rent rates by 7% - 9% ($10 - $15) for a quarter per year. However, on qualitative objects average rent rates remained unchanged - $135 per 1 square meter per year.
Sweden's Volvo, the world's second biggest truck maker, has put a partnership with Russian battletank maker Uralvagonzavod on hold due to increasing tensions between Ukraine and Russia.
Colliers International says that summarizing results of Q1 volume of investments in commercial real
The early-stage partnership between Volvo's trucks business in France and Uralvagonzavod
(UVZ) was announced in September last year when the two companies said they would jointly develop a new armoured vehicle. Russian year-on-year car and LCV sales dynamics virtually flat in March Sales of cars stabilize in March says the Association of European Businesses (AEB) which says new car and LCV sales in Russia declined 0.4% year-on-year to 243,335 units in March and 2.3% year-on-year to 602,523 units in 1Q14. Avtovaz, the maker of the Lada, sales volumes dropped 8% yearon-year to 37,060 units in March and 15% year-on-year in 1Q14, underperforming the market. The decline in Russia's other big car company Gaz Group’s LCV segment decelerated, with sales volumes dropping 8% year-on-year in March and 17% year-on-year in 1Q14. Sales volumes for UAZ, SsangYong and Ford, represented by Sollers in
the Russian market, dropped 21%, 10% and 33% year-on-year in March, and 25%, 19% and 27% year-on-year in 1Q14. There as an upswing in consumer demand in anticipation of higher prices as Russians look to invest their cash withdrawn from banks in physical goods that will hold their value in times of crisis and easily sold later. The flat sales dynamics in March were driven by an upswing in consumer demand in anticipation of a rise in car prices. Automakers will inevitably continue increasing prices in response to the depreciating ruble, so the negative trend in sale volumes continuing through 2Q14. Over the 12 months since the end of 1Q13, the USD and EUR strengthened 15% and 23% against the ruble, while the JPY appreciated only 6%, supporting sales volumes for Japanese auto manufacturers, which outperformed Russian carmakers in 1Q14.
Russian-Made Films Gross $224m in 2013 Films produced in Russia took nearly RUB8bn ($224m) at the domestic box office last year, as the number of movie-goers reached 35m people, the Culture Ministry said in April. A total of 423 films premiered in Russia last year, with one out of every seven — or about 60 movies in total — having been produced in Russia, the ministry said in a report published Wednesday on the Cabinet website. The Russian film industry has seen a revival in recent years, thanks to a string of domestic box-office hits including historical epic "Stalingrad," New Years' comedy
"Yolki-3," and hockey biopic "Legend No. 17," the report said. Fond Kino, the agency responsible for developing cinema for the mass audience, help fund the production of 23 films through a program to support the domestic industry, the report said. Of Fond Kino's 2013 budget of 6.7bn rubles ($186m), studios will pay back about 30%, Culture Minister Vladimir Medinsky said last month. Total Sees Russia as Biggest Source of its Oil Output by 2020 France's Total expects the biggest share of its oil and gas output to come from Russia by 2020 and plans to stay there for the long haul despite recent tensions with the West over Ukraine.
Total executives said they expected its production in Russia to soar to 400,000 barrels of oil equivalent per day, or boe/d, by around 2020, almost doubling from 207,000 boe/d last year, thanks to its partnership with Russia's Novatek and their giant Yamal LNG project in Siberia. Its Russian operations would therefore overtake those in Norway and Nigeria, which have been vying for the top position in its production portfolio in the past few years but have struggled to keep output rising at mature oil fields. Total made a final investment decision last December on the $27bn Yamal liquefied natural gas, or LNG, project, which is slated to start production in 2016 and ship 16.5m tons in 2018. It holds 20% in the joint venture. The project, operated by Novatek, fits well with Moscow's more aggressive push to sell oil eastward, since the and European Union have imposed trade sanctions as a result of the Ukraine crisis and Russia's annexation of Crimea last month. Instead of sending gas by pipeline to long-standing EU customers, Russia aims to ship LNG from the Yamal peninsula by sea largely to Asian buyers such as China, which has avoided confrontation with Moscow over the Ukraine crisis.
Steelmaker Severstal Sees Higher Prices in Second Quarter Severstal, Russia's second-biggest steel producer, has reported a first-quarter net loss of $100m, due to a foreign exchange loss and forecast higher steel prices in the second quarter. Steelmakers have been battling low steel prices and weaker demand in the past three years, but confidence in the sector, a major industrial indicator, has improved slightly, even while large overcapacity persists. Excluding the $321m foreign exchange loss, Severstal would have posted net profit of $221m in the first quarter, 45% higher than an average forecast from a Reuters poll of analysts who had not accounted for the loss.