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 Is recovery of Russia's equity market around the corner?
Politics – the bad Lawmakers want foreign internet companies to store users' data in Russia
Politics – the good Politics – the ugly Russia to amend laws on rights and obligations of police MinFin seeks to block state firms from holding accounts in foreign banks Russian econ ministry backs econ amnesty plan for 2015
Kremlin critic’s associates charged with fraud Rosneft declines to publish required income declarations Ex Russian Interior Ministry general kills himself amidst corruption scandal
Russian civil servants could be prohibited from having foreign accounts
Russian lawmakers demand new corruption investigation of Rusnano
Putin supports draft law on tax evasion prosecution
Russian Railways Won't Publish Yakunin's Pay Packet
Tax officials could be fined for damages and losses they cause to taxpayers
Polls, mood, sociology Two thirds of Russian want Putin to serve fourth term
Medvedev delays implementation of anti-offshore law on controlled foreign companies
Russians see no "worthy rival" to Putin in presidential elections
Russian upper house passes bill on citizenship for foreign investors
Russian troop morale reaches 17year high
Russian ministry submits tougher antipiracy bill to government
40% of Russians support action in Ukraine, believe media reports
More punishment sex crimes
Russia Scores High on 'Burden on the Planet' Ranking
Russian probably happiness people in Europe
Interest rates on retail deposits set to rise
Conservatism on rise in Russia Russians Unfazed by Nudists But Outraged by Transsexuals Most Russians don't hate WWII foes of Soviet Union 50% of Russians Think TV Is Most Reliable Source of Information
Russian retail banks have poor first quarter Visa, MasterCard may fail to set up Russian processing by Oct 31 Russia's government limits the amounts of foreign capital in banks
Russia has largest share of female top managers
Russia's Central Bank says stress test shows loan risks rising as of April 1
Russians losing interest in political opposition
South Korea's Korea Exchange Bank opens in Russia
Less Russians want to emigrate hits three year low
Russian banks maintaining last year's return on assets rate
Anti-tobacco legislation in Russia
Russian banks asset growth strong – winners and losers
Anti-European sentiments in Russia soar on Ukraine crisis pressure Russia's international reputation hits 9-year low Banks and Finance Russian banking sector growing liquidity gap Russia to put tens of banks in list for strategic firms Five largest Russian banks to hold 55% of all assets 2014 Russian banking sector earnings fall faster in the first quarter Russian mortgage market booming Russian banks required to provide data to loan history bureaus by law Central Bank could limit bank lending to related parties to 20% of equity
Business booming for bad debt collection agencies VEB capital to be raised this year Russia signs up to share financial data with USA Russian households' foreign cash demand falls to $9.5bn The number of loss-making banks in Russia increased 2.6 times, from 88 to 230 in first five months Foreign shareholders decreased their stake in Sberbank's capital to 43.5% Bill proposed to increase the amount covered in the deposit insurance scheme from RUB700,000 to RUB3m Bank of Cyprus to offload lossmaking Russian lender
Shuttered Russian banks had negative equity of RUB100bn
Russian manufacturing PMI downturn eases in May
Economics Infrastructure Economic growth above expectations in May
Minister proposes splurging welfare fund on infrastructure projects
Third of firms in Russia loss making Is the worst of capital flight over?
Russia's Far East to raise RUB2.4 trillion investments in 3-5 years
Gazprom to settle bills with China in yuan
NWF money to be released for projects according to schedule
Russia's central bank done buying up hard currency for reserve fund
NCSP Turnover grew for the first time since October 2012
Consumption weak despite record low unemployment
Gazprom, Novatek might participate in Far Eastern Shipbuilding and Ship Repair Center
Russia reverses birth decline Russia's capital investments fall 2.6% year-on-year in May Ruble’s real exchange rate strengthens, drop in imports moderates
Russia to invest $1 trillion in oil production, export in East Siberia Russia’s Sheremetyevo airports wins award Moscow pledges $83bn to fight city's massive traffic jams
Piggies driving Russian inflation CBR allows more ruble flexibility Budget was in surplus in 1Q14, could be in surplus at year end Russia's foreign debt down 1.8% to $54.6bn in 5M14 Rosneft-BP deal lifts Russia’s 2013 FDI figures
Russia lauches Dobrolyot budget airline, plans to move to Rameskoye airport in two years Crimean Infrastructure Development Could Cost $33Bn Russia's Sovcomflot to invest $3bn in development by 2020 ECM
Privatization programme on hold due to poor markets
Russian stocks trading at historic lows
Wealth of Russian households up by fifth in 2013
Russia making encouraging progress with pension reforms
Labour force decline to cost Russia 0.5% GDP/year in long term
Investment fund Oppenheimer Quest for Value invests in Gazprom
Last year was good for M&A
PIMCO also buying Russian equities
JP Morgan funds cut Russian investments by 24.6% Nov-Apr
Rosbank may offer bonds to Russian market in Sep-Nov
Metro to Restart IPO Preparations
Global funds up investments in Russian bonds, plus some stocks
Poor markets delay Rostelecom privatization probably until 2016
Russia raises investments in US securities 16% to $116.4bn in April
Euroclearability to start next year
Russia's domestic debt rises to RUB4.5 trillion in May
New customers for Russian mutual funds but redemptions jump Russia's St Pete Stock Exchange to launch foreign shares market Russia's Siberian Anthracite may new IPO
Oppenheimer funds sell almost 70% of Russian bonds Franklin Global sells half of Russian government bond portfolio by May Sectors
Bashneft Mulls $1bn to $2bn London IPO in September
Chinese magnate to invest in Russian cinema chain
Biggest Russian EFT traded in USA sees value rise
Russia's online video services market doubles to $98m in 2013
Russia's Siberian Anthracite may new IPO
Russia's defense revenue up by third in 2013 to RUB1.4 trillion in 2013
Bashneft Mulls $1bn to $2bn London IPO in September
AvtoVAZ warns of job cuts as sales fall
Biggest Russian EFT traded in USA sees value rise
New car sales fall 12% in May
Russian mass media Dozhd, Bolshoi Gorod, Slon.ru to hold IPO by 2015
Russian Real Estate: Buying the Russian troika
Yandex lists on Moscow Exchange
Russia's Mail.Ru Grp founder outruns Google in robotics investing
Central Bank to Sell Shares in Moscow Exchange
Putin expects Internet business to account for 8.5% of GDP
DCM Three Russian bank bonds sparks optimism Russia's Lukoil may offer up to $2bn Eurobonds Sep-Nov Gazprombank Launches â‚Ź1Bn bond
Russia to invest RUB15bn in machine-tool building until 2016 Russia leads LTE (4G) penetration in CIS in 2013 Moscow commercial rents in real estate sector fall
Moscow shops starting to lose tenants Russian hypermarkets fastest growing, first to mature Share of software piracy in Russia falls 1pp to 62% in 2013
EU Takes Russia to WTO Over Ban on Pork Imports Rosneft Ready to Take Gazprom to Court Over Pipeline Refusal
Top Story Is recovery of Russia's equity market around the corner? So far Nathan Rothschild adage "buy on the sound of cannons, sell on the sound of trumpets" is holding true: investors who bought Russian stocks shortly after Russia annexed Crimea in March would have seen a return of 11.6% by the end of June. And a growing number big investors are buying. "Russia is cheap. I am buying," said investment guru Mark Mobius, the founder of Franklin Templeton in early June, after he cut investments into Russian assets from 61% in late 2013 to 46% of the net assets of the fund by the middle of this year, the company's annual report showed.
JP Morgan also released a note on June 19 saying that it was marking Russia up to "overweight" also partly because Russian equities are so cheap, but more importantly because the dividend yields on Russian stocks is above the emerging market average for the first time ever. The revenue-hungry government is now forcing its largest companies to pay dividends which began a general trend amongst privately owned companies that has been running for a few years now, increasing their attractiveness for investors.
"We are [emerging market] bulls. We are raising Russia to [overweight] from [underweight] in our CEEMEA allocation - as the Ukraine crisis subsides, we want to move back into this consensus [underweight] market which should benefit from the value trade as well as faster global growth," David Aserkoff, analyst with the bank, wrote in a note released this week. These punts are based on assessments of political risks associated with the Ukraine crisis are falling. Peter Elam Hakansson, CEO and founder of Russia's leading dedicated investment fund East Capital explains: "The deescalation of the crisis in Ukraine, including a relatively smooth presidential election at the end of the month — combined with large energy deals — supported the market and currency. Many domestic-oriented most sustainable form of growth.
stocks — which corrected a lot in the beginning of the year — rebounded sharply on the improved sentiment, currency appreciation and companyspecific news." The growing interest in Russian equity was given a boost as the Russian economy also performed unexpectedly well in May. Industrial production numbers in particular were much better than analysts were expecting – the fourth month in a row that industrial production has performed better than the analysts' consensus expectations. Industrial output growth rose to 2.8% year-on-year in May from 2.4% in April. Unusually for Russia, the acceleration was driven by a pick up in manufacturing rather than more oil and gas exports, which is very good news as this is Russia's
"Even though we and the market had anticipated a relatively strong figure, accounting for some favourable base effect of a poor May 2013, the actual result still exceeded those expectations, suggesting a stronger trend in industry," Alfa Bank's chief economist Natalia Orlova said in a note. "At the same time, we are not completely surprised by the acceleration, as industry is apparently benefitting from the budget boost we mentioned previously. Budget spending surprisingly continued to accelerate to 25% year-on-year in May and reached 10% year-on-year in the first five months of this year, which is significantly above the 5% annual plan." On the other side of the coin the retail sector is doing badly. Consumption is slowing as is retail borrowing. This is feeding through into the real estate sector where vacancies in retail outlets in Moscow has risen to 8% from the typical 4% (but less than the crisis peak of 14% in 2009) and rents on commercial office space has begun to fall for the first time in years. The jury remains out on if the pick up in economic growth is simply a shortterm blip or something more permanence. However, Renaissance Capital and the New Economic School in Moscow released their latest Russia economic trends report on June 20 with an upgrade for the economic outlook this year and also believe the economy is growing faster than previously thought. chip names.
"The upside revision of the RenCapNES leading GDP indicator signals to us that recovery in Russia might be around the corner. We keep our 1.6% Russian GDP growth call for 2014," the highly respected monthly report said. Other investment banks are still predicting near zero growth for this year, but no one is very certain any more of which way it will go. Certainly the mood momentum in the market is still very negative. A survey held by Bloomberg Markets Global Investor Poll in April 56% of respondents said that Russian market is "the worst in terms of investments" from the world's eight biggest economies and recommend selling Russian assets thanks to the Ukraine crisis. Likewise, only 8% of institutional investors with $30 trillion worth of assets under management consider Russia a promising market making it the least attractive major market in the world, according to another survey by Great Britain's Create Research Center. Much of the money flowing into Russia at the moment is so-called hot money. Inflow into Russia's Exchange Traded Funds (ETFs) was strongest in May, according to EPFR Global that tracks portfolio investments, but money invested into these highly volatile instruments can leave as quickly as it arrived tends to concentrate investments into a few liquid blue
Finally some commentators say that the belief political risks are falling is wrong. Tim Ash, head of research at Standard Bank said in a note: "This rally seems to be driven by the assumption that the sanctions threat has eased, post the Normandy meeting [in May] between Presidents [Vladimir] Putin and [Petro] Poroshenko, and the assumption that peace talks will ensue and succeed in calming the crisis in Ukraine, and the impact of Crimea can be isolated. It also comes against a backdrop of flush global liquidity being pumped back into EM, after the ECB’s recent move to further loosen policy in the Eurozone. Some short covering has also driven the rally in Russian assets. However, is
there any real, fundamental justification for taking a more constructive view on Russia? We would argue absolutely not – Russia is a weaker and more unpredictable investment story as a result of events over the past few months."
Politics – the good Russia to amend laws on rights and obligations of police
RUB16.5bn ($483m) – ie one of the big ones.
The State Duma Committee for Security and Anti-Corruption Measures has introduced a new set of rules for the Federal Law on Police that makes it easier to fire or arrest corrupt police officers, with no chance of appeal; releasing police officers from liability for damage or injuries and to require them to explain an individual’s rights upon arrest – a Russian version of the Miranda rights rule in the USA.
The restrictions would also apply to privately owned companies that were significant for Russia's defence or security, as defined by an existing law on foreign investment in strategic companies. This meant the restrictions would also apply to large commodity producers, telecoms companies and retail chains.
The Interior Ministry will establish commissions made up of personnel and internal security service directors to review the activity of department heads and to submit recommendations on the disposition of internal cases to the minister whose decision would be irrevocable. The police force personnel count was to be reduced by 20% by January 1, 2012. MinFin seeks to block state firms from holding accounts in foreign banks Russia's Finance Ministry has prepared a draft amendments that would bar state companies, as well as strategically important private firms, from holding accounts at foreignowned banks, which will added to Russia's laws on banks, administrative violations and money laundering. Under the proposals, all state-owned companies would be allowed to have accounts only at Russian state-owned banks, or at privately owned Russian banks with capital of at least
However, MinFin later denied it wanted to ban state-owned companies from having overseas accounts. "The draft amendment to the law on banking activities is ready, and its target is to define the list of companies which are of strategic importance for the Russian economy, to define the scope of operations which banks may conduct with these companies," the ministry said. "This draft stipulates that the government and the central bank will set criteria necessary to keep securely the funds of state and private strategic companies," he said. Authorities will focus on the amounts of capital and on the own funds of banks which may be allowed to provide services to state companies, he said. The list of approved banks will include the banks controlled by the central bank or by the government directly or indirectly. Other banks may be included in the list after authorization by the government. The draft includes no names of banks. Russian econ ministry backs econ amnesty plan for 2015 Russia's Economic Development Ministry has supported the idea to announce economic amnesty, or
penalty-free registration of property held by offshore companies, in 2015, but effect of the measure will depend on other de-offshorizing steps, according to a ministry's statement. The Federation Council upper house proposed introducing economic amnesty from January 2015 for eight months. Offshore assets registered in Russia will be charged a reduced 2.5% tax. The measure will help getting back $250bn from abroad, according to the bill. Russian civil servants could be prohibited from having foreign accounts President Vladimir Putin has forwarded a draft law to the State Duma under which civil servants who are involved with sovereignty and national security issues would be prohibited from having foreign bank accounts. According to a statement on the website of the lower house, the amendments would be made to several laws on corruption. Civil servants would also be obliged to provide information about their expenses and the expenses of their spouses and underage children if the total value of their purchases of real estate, vehicles, securities and shares exceeds the civil servant’s and his/her spouse’s aggregate income for the previous three years. Putin supports draft law on tax evasion prosecution President Vladimir Putin has proposed a draft law that would allow Russian law enforcement agencies to bypass the tax authorities and prosecute suspected tax crimes directly. The proposed law reinstates powers taken away from federal investigators under Putin's more liberal predecessor, Dmitry Medvedev, and follow other moves, which critics say strengthen
the role of the police and security forces. Putin is clearly frustrated with the slow pace of the anti-corruption campaign and the lack of results and so is cracking down with reinstating the powers of police to prosecute tax offenders directly. The law would revert to practices from before 2011 when a law was introduced stipulating that the prosecution of suspected tax offenses could solely be based on documents provided by tax authorities under legislation on taxes and levies. Tax officials could be fined for damages and losses they cause to taxpayers Tax officials could be fined for damages and losses they have caused to innocent individuals, according to amendments to the Administrative Offenses Code that were submitted to the State Duma in June. According to the explanatory note to the bill, tax officials enjoy broad powers but are not held accountable for their actions, many of which cause damages and losses to innocent taxpayers. The Administrative Offenses Code does not stipulate punishment for these actions. Under Article 1069 of the Code, damages and losses caused to innocent individuals or legal entities due to the tax agencies’ action or inaction are compensated in full from the federal budget. The authors of the bill believe that it is the guilty officials who should be punished and propose fining them between RUB30,000 and RUB50,000 ($874-$1,455). The bill has been forwarded to State Duma Speaker Sergei Naryshkin for consideration.
Medvedev delays implementation of anti-offshore law on controlled foreign companies Russian Prime Minister Dmitry Medvedev decided to relax an antioffshore law on controlled foreign companies (CFC) proposed by the Ministry of Finance. A transition period has been proposed during which the law will only cover controlling owners. The Ministry of Finance proposed imposing a tax on all shareholders who hold over 10% in a foreign company. A new working proposal is 50% plus one vote unless a court makes a different decision. A transition period may be from 3 to 5 years. Medvedev also recommended that: •
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Offshore companies should be banned from privatization proceedings Offshore companies to be excluded from Russian state procurement bids Russian Investigative Committee proposes liability for offshore tax-evasion schemes Companies may be obliged to provide information on offshore status - MP
Medvedev has ordered the government to improve the bill and submit recommendations by June 30. Russian upper house passes bill on citizenship for foreign investors The Federation Council, Russia's upper house of parliament, passed a bill on granting citizenship to foreigners who invest more than RUB10m ($287,278) in Russia, or who have a Russian diploma and have worked here for at least three years. Self-employed entrepreneurs who have worked in Russia for at least
three years with annual business revenue of more than RUB10m, as well as investors who own at least 10% of a Russian company with the charter capital of at least 100m rubles ($2.9m), can apply for Russian citizenship. Russian ministry submits tougher antipiracy bill to government Russia's communications ministry has submitted an amended antipiracy bill, seeking to ban Web sites for the release of one-two hyperlinks to disputable content and introduce a fine up to RUB1m for a failure to block Web sites with pirated content. Deputy Culture Minister Grigory Ivliyev said that the changes had already been agreed upon with Internet companies. Russia's online e-commerce of all types has increased in the last year and now is worth $5.65bn; a significant and fast growing share of this is releated to media and movies. The bill intends to protect all kinds of content, including audio, video and music, as well as scripts. Web site owners and hosting providers will face fines amounting to RUB150,000RUB300,000 for individuals, RUB300,000-RUB600,000 for officials, and RUB500,000-RUB1m for legal entities. An Internet resource may be banned on the Russian territory for repeated violations of exclusive rights for content. More punishment sex crimes Anton Belyakov, a member of the Federation Council, the upper house of Russia’s parliament, has submitted a bill that calls for harsher punishment for sex trade, managing brothels and advertising sexual services.
Currently those who are involved in prostitution and receive money from the sex trade can be tried under either the criminal or administrative offences codes. This ambiguity allows law enforcement agencies to qualify pimping not as a crime but as an administrative offence that is punishable with a fine of only RUB2,500 ($70).
The bill he submitted to parliament proposes that pimps be tried exclusively under criminal law, with prison sentences of up to 10 years. Belyakov believes that this could help destroy the business “from within.” He has provided Interior Ministry data that says about onem people were involved in prostitution in 2013.
Politics – the bad Lawmakers want foreign Internet companies to store users' data in Russia Russian lawmakers have introduced a bill that would require foreign Internet companies such as Google and Facebook to store personal information about their Russian users on computer servers inside the country. Online companies have until September, 2016, when the bill will take effect if passed to adjust their systems.
Websites that fail to meet the requirement could be blocked in Russia, said the bill, which was published on the Duma website. The law is being sold as a question of national security: "Those data can be used against the country as well as against a specific individual. We want large Internet corporations — search engines, mail services, social networks and so on — to store information about Russians in data centers on the territory of our country."
Politics – the ugly Kremlin critic’s associates charged with fraud Russian investigators have charged two associates of opposition leader Alexei Navalny with fraud and pushed for the search for another one. The Investigative Committee, which normally deals with high-profile crimes, said on Wednesday that Nikolai Lyaskin and Konstantin Yankauskas have been charged with fraud linked to their work on Navalny’s mayoral campaign last summer. Yankauskas was put under house arrest while Lyaskin was asked not to leave the city. The investigators also said they were seeking an arrest warrant for Navalny’s right hand, Vladimir Ashurkov. Navalny has been under house arrest since February for charges in the second criminal case against him. Rosneft declines to publish required income declarations As part of the anticorruption and transparency drive the government has ordered all state-owned enterprises to submit the incomes of their employees to the state for inspection, yet oil major Rosneft, run by insider Igor Sechin has defied the order. Sechin, a personal friend of Putin and widely considered Russia's highest paid executive, avoided publishing an income declaration for 2013.The publication of income declarations of employees at state companies was made a requirement
by a presidential decree in July 2013. The income declarations contain information not only on the executives' earnings, but those of their spouse and children as well. Rosneft explained its refusal to publish income declarations for its executives by the fact that, though Rosneft is state-run, the company was not set up by federal law — one of the conditions set out in last year's presidential decree, the paper reported. Ex Russian Interior Ministry general kills himself amidst corruption scandal The former deputy head of the Interior Ministry’s Chief Anti-Corruption Directorate, Boris Kolesnikov, jumped to his death from the window of the Investigative Committee building, when he himself came under investigation for corruption. Major General Kolesnikov, his former chief, Denis Sugrobov, and other excolleagues are defendants in an abuse of office case and are accused of trying to extort money from an FSB officer. In early May, Kolesnikov was hospitalized due to a head injury received in a detention facility. There is no confirmed evidence as to how the injury was sustained. The general’s attorney claims that Kolesnikov could not remember the course of events in question due to the injury.
Russian lawmakers demand new corruption investigation of Rusnano Russian lawmakers are calling on the Prosecutor General Yury Chaika to open a corruption investigation into the state technology holding Rusnano and its chief executive, Anatoly Chubais. Chubais, the current chief of Rusnano, has served in several key capacities including head of the State Property Management Committee, finance minister, deputy prime minister, first deputy prime minister and chief of Kremlin staff. He was one of the leaders behind the 1990s economic reforms in Russia. The call is being lead by Oksana Dmitriyeva, first deputy head of the State Duma Budget and Tax Committee. The deputies suspect Rusnano management of committing at least nine violations that are punishable under the Criminal Code. Lawmaker have also asked the Audit Chamber to examine Rusnano operations back in late 2011. Russian Railways Won't Publish Yakunin's Pay Packet Russian Railways also defied the Kremlin's ordered and failed to published the income of its president Vladimir Yakunin, another close personal friend of Putin's and also widely believed to be extremely corrupt after the opposition published pictures of his luxury estate outside of Moscow. Yakunin has also been singled out and appears on the US sanctions list against Russians individuals close to Putin. The company chose not publish his income declaration or those of its
other top managers. Speaking at the ninth International Business Rail Forum in Sochi, Yakunin said stateowned Russian Railways had sent information about the pay packages of its top managers to the tax and government authorities, but will not publish them itself, RBK reported. He said the agencies could publish the documents "if they want."
Polls, mood, sociology Two thirds of Russian want Putin to serve fourth term Two thirds of Russians (66%) want Putin to stand for re-election in 2018 and serve a fourth term in office, according to the Kremlin-friendly Public Opinion Foundation (VTsIOM). Only 14% of the population would prefer that Putin to retire in 2018. Assuming that the presidential term limits remain unchanged, reelection for a fourth term would place Putin at the helm of the country until 2024. In September 2012, a few months into his third term, only 29%
of respondents wished Putin would stay on for a fourth term, according to VTsIOM. The poll also found that 74% of Russians are currently satisfied with the work Putin is doing in office, a figure that has soared 24% since April 2013. More than half of Russians think Putin is now coping better with his presidential duties than he did during his first two terms, the poll revealed.
Russians see no "worthy rival" to Putin in presidential elections
40% of Russians support action in Ukraine, believe media reports
VTsIOM found that 73% of Russian said they would vote for incumbent President Vladimir Putin if he decided to run in the presidential elections in 2018, with only 13% voting against him. Another 14% were undecided.
Russians have become less confident in the leadership of the country approving actions aimed at intervention in the former Soviet republics to protect the rights of the Russian population, although 41% of respondents believe that "Russia must protect our people."
VTsIOM found 54% of those polled said they saw no political figure today who would be able to actually compete with Putin in the 2018 polls and did not believe that such a person would appear any time soon, up from 48% in June 2013. However, 27% of respondents expect such a political figure to surface fairly soon, and 8% said there is a political figure capable of competing with the incumbent head of state in the 2018 elections. The number of Russians thinking that Putin has good political prospects has grown from 40% in 2012 to 69% today. 20% of respondents believe that Putin's political career is already at its highest point, and 5% of those polled claim that Putin's influence and authority are declining. Russian troop morale reaches 17year high Russian military morale is at a postSoviet high, according to Defense Minister Sergei Shoigu. In 2014 the level of troop morale has reached its highest point in the past 17 years, says Shoigu. A poll conducted in late April by stateowned pollster VTsIOM — the month following the annexation of Crimea — revealed that 24% of Russians view the military in a favorable light, up 8% from February 2013.
Most Russians support militia actions in the Donetsk and Lugansk regions in east Ukraine. According to two-thirds (59%), Russia should support pro-Russian forces in the South-East of Ukraine. The main forms of support, for which respondents advocated - is humanitarian assistance (90%), diplomatic (92%) and economic (79%). Military support (weapons, bringing troops) did not resonate with the vast majority of Russian citizens. In general, increased belief that the situation in Ukraine to normal, but a third of Russians (30%) do not rule out civil war. Some 65% of surveys said they were watching events in Ukraine "very closely" or "fairly closely." For 91% of Russian television remains the main source of news about the situation in the region, most of whom (79%) believe in the objectivity of the Russian reporting. Fifth of the respondents (18%) believes that the Russian federal media contributes to the escalation of the conflict, 61% - do not see this as their fault.
Awareness of Ukrainian Russians events and the role of media Do you follow the latest events in Ukraine? apr. 14
may. 14
jun. 14
12
12
20
48
46
45
30
34
29
10
8
6
1
1
1
very carefully pretty carefully without special attention absolutely do not follow nothing heard (a) about them
Do you agree with opinion that the Russian federal mass media contributes to the escalation of conflict and violence in the southeast of Ukraine? I totally agree
3
Tend to agree
15
Rather disagree
32
Strongly disagree
29
Difficult to answer
21
Russia Scores High on 'Burden on the Planet' Ranking A new survey ranking countries' in terms of their contribution to humanity has placed Russia in 95th place — only one place above the Democratic Republic of Congo – out of 125 countries.
The ranking measures the contribution to human wellbeing using data from the World Bank, the United Nations and several other international organizations and NGOs to show whether a country is " a net creditor to mankind, a burden on the planet, or something in between." Ireland topped the ranking in first place, scoring well in the seven separate categories that included "health and well-being," "prosperity and equality" and "planet and climate change." Finland and Sweden finished in second and third, respectively, with the Netherlands and New Zealand completing the top five. The did not even make the top 20 — ranking in 21st place overall due largely to its weak showing in the "peace and security" category, where it ranked 114th. Russia scores particularly poorly in the "prosperity and equality" category. Russian probably happiness people in Europe Russians are the happiest they have ever been during the past 25 years and are probably the happiest people in Europe at the moment, according to a survey from VTsIOM. The happiness index reaching a historical 64 points. This translates into a whopping 78% of the total population who describe themselves as happy. Among the happy faces, 30% said it was primarily due to family well-being thanks to children and grandchildren. 13% of the happy respondents also said they were happy with their studies or work, while another 12% attributed their happiness to the idea that anything in life feels possible.
One of the biggest increases came from happiness through health, which jumped from 6% in 2013 to 11% in 2014. Conservatism on rise in Russia
community traditions also played an important role; 88.9% of people surveyed considered the existence of a common culture and tradition an “important and “very important” factor for Russia’s value system.
Conservative ideas and ideology is rising steadily in Russia. 56% of respondents in a survey in June said they were confident that conservatism helped preserve traditions and social structure. Ten years ago, 44% of people surveyed shared this belief; today this figure is more than half of Russian society, the Foundation for Development of Civil Society found.
Both studies show that conservatism and happiness likely more related than one might think. It is due to the social and economic development of Russia and the preservation of the conservative nature of its society that everyday Russians feel happy. Major investments in the country have positively influenced the quality of life and health of society.
The study showed that almost all social groups in Russia had a desire for more conservative policies and that language, history, culture and traditions were all important components of national identity in Russia.
One-third of respondents (31%) oppose them stating that conservatism impedes the society`s development. Those who think so are mainly young Russians (41%), commercial sector workers (40%), and unqualified personnel (44%). Russians are more or less determined on this issue: whereas in 2003 more than onequarter of Russians failed to define conservatism (29%), in 2014 the share of such respondents has
The study showed that 92.3% of respondents believed that a common history was an important unifying factor while 89.5% said that decreased to 13%.
Russians Unfazed by Nudists But Outraged by Transsexuals Most Russians could not care less about nudists but are outraged at the idea of transsexuals, a poll from the indepdendent Levada Center found. Roughly equal numbers of Russians feel indignation toward transsexuals as indifference to nudists, with 36% and 33% respectively.
A slightly larger number expressed a general sentiment of tolerance, with 8% saying they were completely tolerant toward nudists and 6% of transsexuals.
Most Russians don't hate WWII foes of Soviet Union
50% of Russians Think TV Is Most Reliable Source of Information
Most Russians know WWII foes of the former Soviet Union but do not hate them, yet half of Russians blames these enemies for thems of deaths, Levada Center found in a poll.
Half of all Russians think television is the most reliable source of information, according to the Levada Center -- 65% of Muscovites — and trust television more than any other news source.
The top five WWII allies of the Soviet Union mentioned by respondents include the United Kingdom (55%), the United States (51%), France (24%), Poland (15%) and Czechoslovakia (8%). A quarter (24%) failed to answer the question. As to the foes other than Germany, respondents recalled Japan (45%), Italy (29%), Romania (20%) and Finland (15%). 28% of Russians did not remember any other enemy than Germany. Opinions about Spain differed: 7% of 1,600 respondents said it was a Soviet ally, and 8% branded it as a foe. Most Russians (85%) admitted they did not hate the WWII enemies of the Soviet Union. Only 8% said they wished to avenge the war enemies. More than a half of the respondents (53%) said the Soviet people won the WWII. 7% said the victory was won by Joseph Stalin, and 3% said the Communist Party and the Soviet administration were the victors. A third of the respondents (37%) said all the above contributed to the victory. 1% argued the war was won by miracle. Practically a half of respondents (51%) blamed the enemies for the multimillion casualties suffered by the Soviet Union in that war. 17% accused Stalin, 12% put the blame on the Communist Party and the Soviet administration, and 11% said all of the above were responsible for the losses.
After television, which is largely statecontrolled, the most reliable sources of information were considered to be "friends, relatives and neighbours," followed by news websites, newspapers and radio, according to the Levada Center's latest findings. Television remains the main source of information for a majority of Russians, "regardless of their place of residence, social status and level of education" and that this has been a stable trend for the past few years. Russia has largest share of female top managers In Soviet times you knew when something was about to be fixed when the ladies with the white scarves on the heads turned up with their toolboxes and buckets. Russia has the largest share of top female managers (43%) in Europe – at least twice as many as the rest of western Europe -- according to a survey from Grant Thornton International Business report for 2014. Women in the work place are also enjoying a demographic advantage bequeathed to them by the pain of the 1990s: as men typically died in their late 50s following the collapse of the Soviet Union whereas women lived into their early 70s today Russian women outnumber men 6:5. The relevance of the Soviet past is also seen in other central and eastern European countries, most of which
beat their western peers when it comes to entrusting women with top jobs: Baltic States, Latvia, Lithuania and Estonia (39%), Georgia and Armenia (35%) and Poland (34%). Surprisingly European businesses are amongst the least likely to have women in senior positions with 71% of senior teams in Denmark having no women at all, 67% in Germany and 64% in Switzerland. The liberal Netherlands also fared poorly with just 10% of businesses having women in top positions, reports RT. Very bottom of the ranking is Japan where only 9% of women have top jobs.
Russians losing interest in political opposition Over a half of Russians (57%) believes Russia needs political opposition, Levada Center found, but that number has fallen heavily since its peak of 72% in 2012. 23% of respondents say Russia does not need political opposition and 20% are undecided. The need for opposition was mostly expressed by men (62% vs. 53% of women), Russians aged 25-40 (61%), people with higher education (60%), people with a high consumer status (77%). The opposite opinion was mostly expressed by women (23%), Russians older than 55 (30%), people with primary education (27%), people with a low consumer status (24%) and Muscovites (37%). Less Russians want to emigrate hits three year low Only 17% of the Russian population wants to emigrate, a three year low and less than the Western European average for most of the leading western democracies, according to pollster Levada Center.
crackdown on tobacco consumption in the face of protests from cigarette makers. This legislation became the second part of a large-scale legislation aimed at improving public health that has already seen alcohol taxes rise and restrictions imposed on retail of hard sprits. Smoking is banned in public transport services, trains stations and airports, schools, universities, healthcare and sport facilities, workplaces, state administrations premises as well as in elevators and housing block stairwells. Amazingly the new rule is almost universally accepted and respected. Penalties are imposed not only on smokers, but also the venues including heavy fines. Regular inspections means affected venues have almost universally complied with the new ban. This measure has already bared its fruits: within a year the number of cigarette smokers in Russia decreased by 12%, according to the state statistics agency Rosstat. The anti-tobacco law now includes the following rules: •
The number of people who said they had never even considered leaving the country has also increased over the past three years — from 69% in 2011 to 76% in May, the poll showed.
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Those who said they had considered emigrating, cited better life quality abroad, concern for their children's future and economic instability in Russia as the primary reasons to leave.
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Anti-tobacco legislation in Russia Russia’s ban on smoking in public places took effect on June 1 as the government pressed on with a
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Street kiosks are no longer able to sell cigarettes, only large shops and supermarkets are allowed to sell tobacco. A minimum price for a pack of cigarettes will be set. The new legislature prohibits the displaying of acts of smoking on screen and on stage. Cafe and restaurant owners must remove all ashtrays and hang warning signs to inform customers that smoking is prohibited inside the establishment. The cigarette packs will now be hidden from customers at the point of sale in large shops and supermarkets.
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The legislation bans advertising and sponsorship of events by tobacco companies. All nicotine addicts will be able to get medical help free of charge.
Currently Russians are the heaviest smokers in Europe, but the government hopes to reduce the share of the adult population that smokes to 25% by 2020. According to a poll conducted by Russian Public Opinion Research Center, VCIOM, 76% of Russia’s Europe over Ukraine's fate.
Russia's international reputation hits 9-year low Russia's international reputation hit a 9-year low after 45% of respondents across 23 countries said they view Russia in a negative light, with most of the fall coming in the last year, according to a survey commissioned
population – both smokers and nonsmokers – welcomed the idea of banning smoking in all public places. The outlawing of tobacco advertising imposed by the law is supported even more with 79% of Russians supporting the initiative. Anti-European sentiments in Russia soar on Ukraine crisis pressure Anti-European sentiments among Russians have soared to the highest ever level according to Levada, due to the clash with
by the BBC World Service and conducted by consulting firm GlobeScan/Pipa. The three countries where negative views increased the most were Kenya, Spain and Brazil, which each saw jumps of more than 13%age points.
Banks and Finance Russian banking sector growing liquidity gap
system and economy as a whole now have to pay for.
The persistent deterioration in liquidity conditions over the last three years and consequent widening of the banking system’s RUB funding gap, which was covered by CBR lending (REPO, 312-P, FX swap), raises a sensible question as to whether RUB interest rates are high enough to bring about natural equilibrium on the local funding/lending markets.
With consumer lending starting to moderate gradually in 2013, annualised growth in the banking systems’ funding gap also ‘normalised’ towards RUB 1.0tn by 2H13.
If this is indeed the case, the CBR cannot indefinitely increase the share of its lending in banks’ funding sources (no collateral pool will ever be large enough) and higher interest rates should ultimately enforce themselves whether the regulator wants it or not as banks start to fight for depositors. This already seems to be happening (see interest rate note below). Initially it was the consumer credit boom in 2011-2012 that opened up the structural liquidity/funding gap in the banking system as annualised growth in the RUB retail loan book picked up from RUB 550bn at the end of 2010 to more than RUB 2250bn in late 2012. Apart from the shift into a structural liquidity deficit, i.e. the CBR switching from liquidity absorption to liquidity provision, this period was also characterised by the acute fight for retail depositors that pushed market funding rates far above that on the CBR’s short-term refinancing. Unsecured consumer lending was clearly overheating back then and the CBR has been too slow to deflate this bubble – an omission the banking
This trend was cut off abruptly at the start of this year, as both lending surprised on the upside and more importantly savings dollarisation has eaten into the RUB funding base. Hence, the main question is whether the recent widening of the funding gap is a temporary phenomenon or represents some structural shift that requires higher interest rates to bring the system back into equilibrium. The worst of RUB funding base erosion likely behind us. Starting on the funding side, it is worth noting that RUB corporate savings (i.e. sight and term deposits) have actually continued to grow at the same pace as over the last two years (i.e. about 10- 12% year-on-year), suggesting it was the retail deposit base that was hit particularly hard, losing almost RUB500bn YTD. Both slower savings accretion as well as the shift in allocation away from RUB deposits was likely at play. On the first point, slower income growth as well as the yet elevated mandatory payments (debt service in particular) will likely cut the overall savings accretion by about 20-25% this year (vs.30-35% at the worst point of the 2008-2009 crisis). As regards the intensity of savings dollarisation, recent data (cash FX purchases as well as FX retail
deposits) suggests it has subsided significantly since the peak in March, but we conservatively assume about 40% of the total household savings accretion in 2014 will be allocated to non-RUB assets (from 25% last year). Under these relatively conservative assumptions, RUB retail deposits are set to expand by about RUB 1.2- 1.4tn (or 9-10% in year-on-year terms), while corporate funds might add some RUB 1.0-1.2tn (10% year-on-year) to the banking system’s funding base. The current pick-up in corporate lending is unlikely to be sustainable. On the asset side, corporate lending was particularly robust, accelerating to 13-14% YTD in May (from 10% yearon-year in late 2013), which was mainly driven by i) the substitution of funding from external and domestic capital markets – VTB's proxy for total corporate debt financing actually slowed to 10% year-on-year by May (from about 15% in late 2013); as well as ii) corporates’ rush to beef up liquidity buffers in anticipation of tighter market access in the future. The fact that lending growth to nonresidents (offshore holding companies of Russian subsidiaries) was especially strong YTD (up more than 22% since the start of the year) is also revealing in this regard. This pace of corporate lending growth is unlikely to be sustainable, as with the recent upsurge in borrowing costs, corporates would rather prefer to deleverage. Both anecdotal evidence as well as the latest survey on bank lending conditions pointed to the sharpest ever deterioration in credit availability for corporate borrowers (the data goes back to 2Q09) with interest rate hikes cited as the main channel. Consumer credit is now in the doldrums after the central bank
clamped down on it. Retail lending at the same time has continued to cool since the peak in late 2012, even despite the strong pick-up in residential real estate sales and mortgage lending, hinting at a particularly fast slowdown in consumer credit. Indeed, should the pace of mortgage lending in May have remained the same as in April, the ex-mortgage retail loan book likely came to a complete halt in May (in gross terms). There is clearly no reason to expect a turnaround in the downward trend in consumer credit any time soon for both secular (penetration) and cyclical (loan quality) reasons. Even in the unlikely scenario when mortgage lending sustains the current pace of growth throughout the year, the overall retail loan book is set to expand by 15% this year (or RUB 1.4tn) vs. 30% in 2013 (or RUB 2.2tn). On a separate note, it is also worth highlighting that the mortgage market is underpenetrated in Russia and there is no evidence to suggest that the current pace of mortgage lending might bring about imminent overheating on the residential property market – at least housing prices remained in check (below headline CPI) through 1Q14. Funding/lending growth convergence to ease pressure on liquidity. To sum everything up, the gap between RUB funding and lending growth (9-11% and 12-14%, respectively) is likely to remain negative this year, but it will likely moderate considerably from the current 8-10ppt, while in absolute terms year-on-year growth in the funding gap is set to fall back to RUB 1.2-1.4bn, even providing for a slight cushion (from RUB 2.6bn currently) in case of unexpected stress.
Russia to put tens of banks in list for strategic firms The Russian government and central bank will list several tens of banks which will be allowed to open accounts for strategic companies, Deputy Finance Minister Alexei Moiseyev said Monday at a meeting of the financial market committee of the State Duma, the parliament's lower house. "There will not be only five of them (banks on the list), not 10, and not even 20. In my opinion, there will be many tens of them," Moiseyev said, adding that there will not be any restrictions for foreign banks.
The Finance Ministry earlier prepared a draft bill to prohibit state companies from holding accounts with foreign banks and small domestic banks, but the government was opposing the idea, First Deputy Prime Minister Igor Shuvalov said. Five largest Russian banks to hold 55% of all assets 2014 The five largest Russian banks will accumulate a 55% share in all assets of the country's banking system by the end of 2014, Mikhail Sukhov, the central bank's deputy chairman, said on the sidelines of a banking forum on Tuesday.
as some ruble appreciation, and they are running at 17% yearon-year. Retail loans were up 1.0% m-o-m, while year-onyear growth cooled further to 23%. Sberbank grew more or less in line with the sector in corporate lending, but strongly outperformed in retail lending (2.2% versus 0.4%) as consumer lenders continued to slow growth.
"The consolidation of the banking sector makes money being transferred to enterprises and people who mostly need it. Banks, which quit the market, are uncompetitive as compared to these largest banks," Sukhov said. According to Sukhov, 30 largest domestic banks will have an 80% share in the banking system assets by the end of 2014. Russian banking sector earnings fall faster in the first quarter
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Deposits. After some recovery in April, retail deposits fell in May (again no doubt affected by holidays), and they are still down 1.1% YTD with just 10% year-on-year growth.Corporate funds increased 0.8% m-o-m. Sberbank saw a larger fall in retail deposits in May than the rest of the sector (down 0.9% versus 0.1%).
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Earnings. Total sector EBT was R338bn in 5m14, down 14% year-on-year.
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Overdue loans. The overdue loan ratio (which incorporates only the overdue portion of a loan) rose from 4.3% to 4.5% in corporate and more strongly
A moderate deceleration continues in Russia's banking sector. May was good for the economy after industrial production picked up that it was a slow month for the Russian banking sector. The Central Bank published headline banking sector data for May. •
Assets. Sector assets climbed 1.6% m-o-m, implying growth of 19% year-on-year and 6.5% YTD.
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Loans. Corporate loans increased just 0.2% m-o-m due primarily to seasonality from the long May holidays, as well from 5.0% to 5.3% in retail.
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Corporate lending grew just 0.1% month-on-month, the same as Sberbank’s results indicated earlier (although ruble appreciation of 2% month-on-month has eaten up around 50 bps of this growth). Without adjusting for the weaker ruble, corporate loans expanded 18.6% year-on-year vs 19.2% in April; after adjusting for ruble weakness, they grew 16% compared to 15.4% in April. Retail loans added 1% month-onmonth and 22.6% year-on-year (vs 24.6% year-on-year in April), well down on the 45% per annum that retail loans were growing over the previous two years. The sector lagged Sberbank (probably due to latter’s skew towards mortgages); net of Sberbank, growth was just 0.4% month-on-month. However, Sberbank lagged the sector in retail deposits, which contracted 0.9% month-on-month, while the
remaining sector fell just 0.2%. Corporate deposits rose 1.8% monthon-month, or 2% excluding Sberbank. ROAE sinks. In contrast, corporate overdue loans rose the fastest this year, expanding 30 bps month-onmonth to 4.4%. Retail overdue loans also increased 30 bps month-onmonth, to 5.3%. This could be partially due to the long holidays; however, it also reflects the general economic environment, which has not yet started to improve. Banks did not record trading losses this time (in contrast to March and April, securities revaluation resulted in large gains); however, profitability was probably pressured by the creation of additional provisions. Monthly ROAE fell to 6.7%, the lowest level since 2009, which means it is increasingly lagging risk weighted asset growth (19% year-on-year in April), and as a result the pressure on CAR is likely to remain in place.
Russian mortgage market booming Russians like a physical asset in a crisis – and this may have contributed to the substantial growth in mortgages recently. At 3-4% of GDP, mortgages are low in Russia, and despite high home ownership (approx. 80%), the experience of the Baltic states suggest this could increase dramatically for many years. The stock of mortgages provided reached a record level of RUB99bn ($3bn) in April, and rose by RUB759bn over the past 12 months, up 33%. Sberbank’s mortgage portfolio for the to many years.
Group in 1Q14 grew by 42% year-onyear; 87% of this was growth in newly issued mortgages in 1Q14 relative to 1Q13. In addition, there was an increase in the average loan amount from RUB1.35mn in March 2013 to RUB1.52mn in March 2014. The chart below suggests Russians who have put money into housing have done better than those investing in equities, and the flow of cash into the mortgage market suggests this will continue. It is also a signal that the horizon of those able to afford a 12.5% mortgage has moved from months
In the first four months of this year banks issued mortgages totaling RUB496.2bn - 1.38 times more than in January - April 2013 in quantitative terms and 1.45 times more - in monetary terms, the Agency for Housing Mortgage Lending said. Rates on mortgages have fallen to 12.2%, which is 0.6% compared to the same period in 2013. Going forward the pace will be set by what happens to interest rates – interest-rate been creeping up as banks are increasingly finding themselves squeezed by the lack of economic activity. Moreover the central bank has been forced to raise rates recently due to the rube's devaluation. After the central bank clamped down on retail lending banks are looking for new sources of income and have time to mortgages. The danger is of generating sub-prime type crisis in Russia. However given the mortgage penetration is so low – the lowest in Europe – a housing bubble-style crisis is still a long way off. Total mortgage portfolio continues growing and is currently worth more
than RUB2.9 trillion. For the last 12 months mortgage portfolio added RUB743.5bn, which equals 34.4% of the portfolios as of May 1, 2013. Central Bank could limit bank lending to related parties to 20% of equity The Central Bank of Russia plans to introduce a new requirement that limits lending by banks to related parties to 20% of equity, Central Bank head Elvira Nabiullina said at the International banking Congress in St. Petersburg. Nabiullina said it was important to limit risk emanating from the widespread practice of lending to a bank's owners or related parties. "We propose to adopt a regulation that will determine, aide partly by reasoned judgment, the relations between a borrower and a lending institution, its shareholders and themselves," she said.
Russian banks required to provide data to loan history bureaus by law President Vladimir Putin signed a law that requires banks to provide guarantees to credit history bureaus, according to a statement from the official source of legal publications. The law stipulates that credit and microfinance institutions provide the information required to build a credit history of legal entities and individuals to at least one such bureau. The document contains definitions of credit history (data composed according to law and stored at a credit history bureau), credit history record (part of credit history describing the credit history subject’s fulfillment of obligations) and other key terms. Loan institutions will be providing data on when bank guarantees were issued and for what term, as well as on the withdrawal of bank guarantees. An official confirmation can be obtained showing that a bank guarantee exists and has not been withdrawn. Interest rates on retail deposits set to rise Economic stagnation, decrease in external investments, and rising NPLs has put increasing pressure on banks is forcing them to hike deposit interest rates for customers to win fresh cash. Over 60 financial institutions have announced an increase in interest rates since June 1. Among those are Sberbank (rates on online deposits), VTB24 (ruble-denominated deposits), Renaissance Credit, Promsvyazbank, Sviaz-Bank, Baltiyskiy Bank, Svyaznoy Bank, NB Trust, and Rossiya Bank. The maximum interest rate on retail deposits at Promsvyazbank is 11% annual in rubles for a period from 6 to
12 months. Home Credit Bank and Otkritie Bank offer the maximum interest rate on deposits at the level of 10.5% for a period of 18 months and 3 years, respectively. Gazprombank offers deposits under a special promo action at the rate of up to 10% annual. Russian retail banks have poor first quarter Retail lending increased 1.2% in May 2014 (5.9% for five months of 2014), but its growth was still much slower than an average monthly result in 2013 (3%). State banks accounted for nearly 86% of growth in May. Among retail-oriented banks, Tinkoff Credit Systems Bank and OTP Bank reported the growth at the market level; the growth of Renaissance Credit Bank, Home Credit Bank and Russian Standard Bank remained largely unchanged. Sovcombank increased the most up 38%, following the takeover of retail loans from GE Money Bank purchased recently. Total NPL or overdue loans in the sector increased by RUB119bn of which VTB accounts for RUB60bn (10% of regulatory capital) related with ruble loans to nonresidents, according to Fitch. Customer funding (excluding state companies) increased by RUB107bn in May as a result of the inflow of corporate accounts to the amount of RUB195bn and the outflow of retail deposits to the amount of RUB88bn. Corporate funding increased most significantly at private banks: AlfaBank (by RUB33bn, or 7%), Rosbank (by RUB21bn, or 10%), UniCredit Bank (by RUB25bn , or 7%), and Promsvyazbank (by RUB28bn , or 8%). Gazprombank increased corporate accounts by RUB46bn (2%) while other banks related with the government showed a total outflow of
RUB75bn. Retail deposits were decreasing. Annual growth of individuals' deposits slowed from 18.1% as of the end of 2013 to 10.5% as of June 1, 2014, according to the Bank of Russia's preliminary estimates adjusted for foreign currency revaluation. The biggest outflow was seen at Sberbank (minus RUB69bn), which partly reflects its market share. The increases in customer funding only covers 40% of the still moderate growth of lending by RUB279bn in May and the rest was covered by funds raised from government bodies. Funding from the Ministry of Finance increased by RUB125bn to RUB643bn and from regional and federal budgets by RUB76bn to RUB640bn. Funding from the Bank of Russia remained at RUB5 trillion. Public funding made a total of RUB6.5 trillion, which is 12.7% of total liabilities of the banking system as of the end of five months of 2014. The Central Bank of Russia expects to increase funding to the sector to RUB7 trillion until the year-end, although part of this funding may be used for refinancing of a certain seasonal outflow of the Ministry of Finance's deposits. Net profit of banks was RUB93bn in May 2014 (the return on average equity is 17% year on year) and was mainly concentrated with Sberbank (RUB26bn), Group VTB (RUB20bn), Gazprombank (RUB8bn) and Alfa-Bank (RUB7bn). 20 banks from those reviewed were in the red. Capitalization of the sector remains moderate. As of June 1, 2014, 14 banks from those reviewed had a capital adequacy ratio (N1; the required minimum is 10%) below 11%, including five banks below
10.5%: Promsvyazbank (10.4% versus 10.1% in April), Renaissance Credit (10.2%; the decrease is due to losses again), Probusinessbank (10.4%), Tatfondbank and Moscow Industrial Bank (10.3% each). The growth of corporate lending in Russia slowed down to 0.4% in May after a strong growth by 1.8% on average for four months of 2014. Among large banks, a higher growth rate was seen at Credit Bank of Moscow, ZAO Raiffeisenbank and ZAO UniCredit Bank (over 2.5%); a decline was seen at MDM Bank (minus 5.5%) and Rosbank (minus 3.3%). Visa, MasterCard may fail to set up Russian processing by Oct 31 Visa and MasterCard are fighting for their corporate lives in Russia and the approximate $4bn turnover from the use of their cards. Following the imposition of sanctions on Russia the two credit card companies have found themselves in the front line. New laws would force them to pay a deposit to guarantee their payments equivalent to their annual turnover unless they can 'become Russian' by forming partners with locals. Visa and MasterCard are worried that their Russian partners may fail to organize processing in the country by a October 31 deadline. If the don’t make it then the two US companies will remain "foreign" and be forced to pay up. The Finance Ministry can extend the deadline and said it may if the companies involved are making the effort. Russia's government limits the amounts of foreign capital in banks The quota of foreign capital in total authorized capital of Russia's banking
sector is set by the government at 50%, according to a draft law prepared by the government This is actually the reintroduction of a law that was working in the 90s. It is connected with Russia's efforts to extricate itself from the international financial systems and vulnerabilities. When introducing the document to the State Duma, Deputy Finance Minister of Russia Alexei Moiseev reminded that the law on banks and banking activity provides for setting a quota, but "this has not been done until recently." Russia's Central Bank says stress test shows loan risks rising as of April 1 An interim stress-test for Russian banks has demonstrated that loan risks increased as of April 1, First Deputy Chairman of the central bank Alexei Simanovsky told reporters in June. "We hold interim stress-tests to see how the situation is developing at the end of a quarter but it is a little bit homespun, we need it just to look at how the situation is developing in general, it is for internal use," Simanovsky said. Despite the credit risk growth, the general banking sector situation has not changed dramatically since January, he said. South Korea's Korea Exchange Bank opens in Russia Contrary to the general trend of foreign banks leaving Russia, South Korea's Exchange Bank opened a subsidiary in June, the Korea Exchange Bank Russia. European banks are becoming increasingly skittish about investing in Russia, but the opposite is true of Arab and Asian banks.
A license has not been granted to the new financial institution because the declared authorized capital in the amount of RUB840m has not been paid yet, but the official deadline has not elapsed so far. Korea Exchange Bank will own over 99.99% of its Russian subsidiary (RUB840m in the authorized capital). KEB intends to expand retail banking and plans to increase the share of foreign income to 40% of all income until 2025. As is said on the Korean bank's website, the bank has subsidiaries or representative offices in Australia, Bahrain, Brazil, Great Britain, Vietnam, Germany, India, Indonesia, Canada, China, the Netherlands, the United Arab Emirates, Panama, Russia (a representative office), Singapore, the USA, Turkey, the Philippines, France, the Czech Republic, Chile, and Japan. Korea Exchange Bank has had a representative office in Moscow since 2008. Its business is focused mainly on South Korean companies and customers from this country. Russian banks maintaining last year's return on assets rate Rising interest rates on loans kept Russian bank's return on asset rates at last year's level despite the general slow down in the banking business in the first quarter of this year. Despite a sharp slowdown of economic growth, net interest margin of banks is 9.5% in Q1 2014, which is equal to the level of the same period in 2013, according to RusRating. "Amid a rising share of non-performing loans, banks managed to secure this result due to the increase in interest rates on consumer loans as well as due to the write-off of part of loans and the transfer of bad loans to
collection agencies," RusRating says. Same as last year, retail banks achieved the highest return on assets paetly as they include a risk fee in their high interest rate on loans. Russian Standard Bank (24.1%) is the absolute leader by ROE among the top-50 banks in Q1 2014, followed by HCF Bank (22.8%), OTP Bank (21.3%), Orient Express Bank (21.1%), Trust Bank (18.1%), and SKB-Bank (18.1%) which is developing retail lending aggressively coming close to retail banks in this respect. Not all borrowers can cope with high interest rates on loans offered by retail banks, but rising overdue loans have not had any impact on the ROE of such banks so far. While the average market level of loan arrears is over 5%, arrears at retail specialists exceed 15%. In Q1 2014, Russian Standard Bank reported a net interest margin at the rate of 17%, OTP Bank at the rate of 16.9%, HCF Bank at the rate of 15.9%, Orient Express Bank at the rate of 13.6%, Trust Bank at the rate of 11.1%, and SKB-Bank at the rate of 10.9%. Otkritie Bank had nearly 7% and so did VTB24, followed by Sberbank with 5.6% and VTB with 2%. Russian banks asset growth strong – winners and losers Assets of the banking system increased by RUB2 trillion (3.5%) to make a total of RUB56 trillion as of the end of Q1 2014. The leading banks in terms of assets remain the state banks Sberbank, VTB, Gazprombank, VTB24, Russian Agricultural Bank, Bank of Moscow, as well as privately owned Alfa-Bank, NOMOS-Bank, UniCredit Bank (Russia), and Promsvyazbank. The Royal Bank of Scotland (Russia)
ranks 2nd by growth of assets. The bank's assets increased 28% (to RUB54bn). The bank joined the top100 by assets at No.91 (the bank ranked 105th as of the end of the last year). Russian Credit Bank ranks 3rd by growth of assets. Its assets added 27% to RUB91bn (the bank moved up from No.73 to No.63). No change was seen in the top-10 banks by assets. Among outsiders in the top-100 banks by assets, Svyaznoy Bank was losing its positions most rapidly (the bank's assets fell 16% to RUB57bn). Now Svyaznoy Bank ranks 87th (versus No.74 as of the end of 2013). A steep fall in assets was seen at Citibank (by 12% to RUB320bn), NotaBank (by 12% to RUB84bn), and OTP Bank (by 11% to RUB125bn). The Q1 results in general point to a minor decline in profitability of Russian banks. Russian banks received RUB184bn in retained earnings in Q1 2014. Total profit of banks was RUB185bn in Q1 2013. As before, Sberbank accounts for much of the profit of the banking sector - RUB99bn. Despite all expenses for provisions, Sberbank managed to receive more profit than it did a year ago. In Q1 2013, Sberbank's profit was RUB97bn. Alfa-Bank ranks 2nd by profit with RUB11bn. ZAO Raiffeisenbank with RUB7bn comes third. VTB ranks 4th now (RUB6bn) versus No.16 a year earlier (VTB's profit as of the end of Q1 2013 was only RUB1.4bn). ZAO UniCredit Bank with RUB5bn in profit ranks 5th. The bank improved its positions significantly and moved up from No.9 (RUB2bn in profit) in Q1 2013. Gazprombank with RUB4bn ranks 6th; Sovcombank with RUB3bn is No.7. Credit Bank of Moscow
doubled its result and is now found at No.8 (RUB3.4bn versus RUB1.6bn in 2013 (No.14)). Deutsche Bank (Russia) made the biggest leap forward - from No.28 (with RUB0.7bn in profit) in 2013 to No.9 (RUB3bn) in Q1 2014. The top-10 is rounded out by VTB24 which made a profit of RUB2bn in Q1 2014 versus RUB5bn a year earlier when the bank ranked 5th. The greatest losers from the top-100 as of the end of Q1 2014 are Renaissance Credit Bank (with the loss of about RUB2bn), Orient Express Bank (RUB1.6bn), Ugra Bank (RUB1bn), MTS Bank (RUB0.8bn), and the Bank of Khanty-Mansiysk (RUB0.7bn). It is not by chance that three of these five banks are focused on high-risk retail lending. The top-5 leaders are the same: Sberbank with RUB3.449 trillion (3.5%), VTB24 with RUB1.205 trillion (5.2%), HCF Bank with RUB281bn (5.2%), Russian Standard Bank with RUB268bn (-0.6%), and Gazprombank with RUB265bn (3.5%). Banks faced with the outflow of deposits in Q1 2014. Individuals' funds decreased from RUB16.6 trillion as of January 1, 2014 to RUB16.2 trillion. Most of the funds are held with Sberbank (RUB7.3 trillion), but Sberbank, too, faced with the outflow in Q1 2014. Sberbank lost 3.6% (RUB270bn) of retail deposits in total. The following banks are VTB24 with private deposits with RUB1.4 trillion (up by 2%), Alfa Bank with RUB354bn (down by 4.6%), Gazprombank with RUB347.7bn (down by 5.7%), and ZAO Raiffeisenbank with RUB260.8bn (up by 1.5%). The leaders by growth of the share on the deposit market were rather small banks which seem to have managed to attract customers by a good return: Intercommerzbank (up by 33% to RUB26bn), Russian Credit Bank (up by
33% to RUB18bn), Expobank (up by 26% to RUB16bn), Ugra Bank (up by 18% to RUB37bn), and Rosinterbank (up by 17% to RUB25bn). The biggest outflow in the top-100 banks by private deposits was seen at Moscomprivatbank, which is no surprise as the bank is under financial reorganization. Moscomprivatbank lost 43% of deposits (to RUB22.6bn). Deposits were also withdrawn from Russian Regional Development Bank (down by 14% to RUB23.8bn), Svyaznoy Bank (down by 14% to RUB44bn), SMP Bank (down by 12% to RUB69bn), HCF Bank (down by 8.4% to RUB188bn), MTS Bank (down by 7.9% to RUB60bn), Rosgosstrakh Bank (down by 7.7% to RUB38bn), Baltiyskiy Bank (down by 7.4% to RUB61bn), and OTP Bank (down by 7.3% to RUB52bn). Business booming for bad debt collection agencies The share of POS loans handed over by banks to collection agencies increased to a new record. The share of cash loans in the portfolios handed over to collection agencies increased from 38% (RUB58.52bn) to 47% (RUB94.84bn). The share of other types of loans, for example, auto loans or credit cards, changed slightly. Sergey Shpeter, Business Development Director at National Recovery Service, explains the trend by the fact that leading POS lenders either scaled down POS lending largely or transferred borrowers to plastic cards in 2013. Problems with POS loans started in the summer of 2013 when the regulator launched a campaign aimed at putting a cap on high-yield lending. The Bank of Russia toughened requirements to charging provisions for unsecured
loans and increased risk ratios for such loans. As a result, the leading POS lenders started cutting back their business operations in this segment and optimizing costs whilst reducing the staff and offices. In spring 2014, Russian Standard Bank and Svyaznoy Bank decided to cut the staff by 10%, HCF Bank by 1%. In 2013, Orient Express Bank cut the staff by 20%.
dilutive conversion option, namely perpetual debt. In contrast, in the 1Q14 conference call, VTB’s management discussed prefs as a potential scenario, saying that dividends could be set at the current coupon rate paid to VEB (and probably be set at a floating rate in the future). Banks estimated that conversion of Tier-2 subords into Tier-1 capital could add about 150 bps to Sberbank's Tier 1 CAR and about 250 bps to VTB's.
In 2H 2013, total outstanding POS loans increased by not more than 15% versus 36% in 2H 2012, according to Frank Research Group. The growth of cash loans slowed down, too: 12% in 2H 2013 versus 16% in 2H 2012.
Pre-crisis the sector's CAR was averaging between 18% and 20%, but since then it has fallen to between 10% and 13%. Banks offering retail loans have been particularly hard hit. The mandatory minimum level is 10%.
VEB capital to be raised this year
The Russian government will decide on increasing the capital of state-owned Vnesheconombank (VEB) this year, Economic Development Minister Alexei Ulyukayev told press in June.
Russian President Vladimir Putin set your speech engine and that the capital of Russia's leading estate on one should be increased. Capital adequacy ratios (CAR) have been falling steadily over the last six years.
Russia signs up to share financial data with USA
The government submitted a draft law to the Duma on June 27 with more details on the proposed conversion of subordinated debt into prefs issued by VEB and the CBR to 18 banks in 200809; each case will be discussed separately.
Russia's Ministry of Finance and the Bank of Russia approved amendments to the bill which allows financial institutions and participants of the financial market to disclose information about their customers to the USA in June.
The document states there will be no guaranteed dividends for these preferred shares, to allow them to be accounted for as Tier 1 capital under Basel III. As a special case, will have a choice whether to convert its remaining RUB300bn (RUB200bn was redeemed earlier) subordinated debt issued by the CBR into prefs or perpetual (50- year) debt. In addition, Sberbank will be able to raise new perpetual subords for up to RUB500bn from the CBR.
Most countries has signed an intergovernmental treaties with the USA to exchange information at the level of tax authorities, however due to the clash with the US over Ukraine there is no state to state agreement but Russian banks are free to sign off on an agreement with Foreign Account Tax Compliance Act (FATCA) on an individual basis and many have: 515 Russian banks agreed to disclose information about accounts of customers to the authorities – or slightly more than half of all Russia's banks. The new law is supposed to provide such authorization.
Earlier Sberbank’s management said that it would rather choose a non-
The new law says the information may be disclosed to the IRS only with the consent of the customer. If a customer objects or if a customer is subject to a 30-percent levy under FATCA, a Russian bank may refuse to service such customer. FATCA binds over non-American banks to transfer information about accounts of residents, both individuals and legal entities, to the IRS. If banks do not make a respective agreement with the USA, sanctions will be imposed against them. A 30-percent levy will be charged on all payments in favor of such banks made via correspondent accounts with banks: the levy will be first charged on the passive income received in the USA (for example, interest) and on income from the sale of securities and transit payments beginning with the year 2017. Furthermore, an improper disclosure of information will be subject to a fine at the rate from $10 to $50,000. Banks have already started announcing their intention to refuse to service customers who are taxpayers. One of such banks is Group VTB, which has about 2,000 such customers. "VTB has registered in the U.S.' Internal Revenue Service (IRS) to comply with the FATCA and is ready to operate in accordance with it on its own. To minimize the risks VTB has ordered its branches to gradually stop providing services to American taxpayers. This refers to households and corporate bodies," a VTB spokesman told Izvestia. The group does not plan to terminate current agreements with the clients, but will not prolong them. The total number of bank customers falling within FATCA is not clear. "Our survey of banks showed that an average bank has not more than
several tens of such customers," says Andrei Yemelin. Russian households' foreign cash demand falls to $9.5bn Following a rush to convert rubles for dollars during the height of the Ukraine crisis in March and May demand for dollars is falling off again. Russian households' demand for cash foreign currency fell 34% on the month to $9.5bn in April and returned to usual figure of about $2bn a month after jumping 50% in March, the highest level since January 2009, the central bank said in a statement Monday. The households' dollar demand fell by 37% to $5.6bn, while the euro demand decreased 29% to $3.7bn. The net demand for foreign cash stood at $1.9bn. The number of loss-making banks in Russia increased 2.6 times, from 88 to 230 in first five months About one out of four banks in Russia is currently making a loss, according to the Central Bank of Russia. The greatest loser is Orient Express Bank whose loss jumped to RUB1.84bn. Globex Bank with the loss of RUB1.83bn comes next. The top-3 by losses is rounded out by Ogni Moskvy Bank (the loss is RUB1.2bn) whose license was revoked. Foreign shareholders decreased their stake in Sberbank's capital to 43.5% Long the darling of international portfolio investors, recently froeign investors have been selling their shares in state-owned retail giant Sberbank, says Bella Zlatkis, Deputy CEO of Sberbank. The stake of foreign investors in
Sberbank's capital decreased by "slightly more than 1%", Bella Zlatkis said. As of the end of May 2013, foreign shareholders held 44% of Sberbank's capital, their shareholding increased mainly due to the SPO in September 2012. "Today we can state that most of this 43% are foreigners. We think that the absolute majority are foreigners," Bella Zlatkis stressed. A 50% plus one share of Sberbank (the controlling stake) is owned by the Bank of Russia. Bill proposed to increase the amount covered in the deposit insurance scheme from RUB700,000 to RUB3m State Duma deputy Ivan Nikitchuk introduced to the State Duma a bill specifying that in case of a bank's failure, depositors will be repaid RUB3m instead of RUB700,000 The deputy is sure that it will help not only improve the level of social protection of the population, but also strengthen the position of the Russian banking system "due to inflow of additional financial resources". Earlier, the State Duma approved in the first reading a bill on increasing the deposit insurance ceiling from RUB700,000 to RUB1m. However, the bill has not been considered in the second reading so far. Experts think that the insurance amount is more likely to be increased to RUB1m than to RUB3m because sources are needed to finance payments to depositors of failed banks. The Deposit Insurance Agency currently doesn’t have the funds to more than triple the amount it covers. Its resources are currently about 4% to total deposits, and it would like to have 5%, but increase the insured
amount to RUB3bn would force the agency to massively increase its resources by imposing a much higher tax on banks. The fund held RUB140bn rubles at the end of 2013. Bank of Cyprus to offload lossmaking Russian lender Bank of Cyprus plans to sell its Russian operation as part of a restructuring launched by its new chief executive John Hourican to shore up the lender's capital and refocus on its domestic market a year after it collapsed. Before the crisis, the bank attracted big inflows of deposits, many from Russian oligarchs. But most of these were bailed in after the lender collapsed last year. Hourican, who joined Bank of Cyprus last year after quitting as head of Royal Bank of Scotland's investment bank under a cloud, told the Financial Times that it would "seek a new owner" for Uniastrum Bank, the lossmaking Russian lender it bought in 2008. Bank of Cyprus paid $576m to buy an 80% stake of Uniastrum from its founders who retained 20%. The Russian operation accounts for more than half of Bank of Cyprus's 300 branches and a third of its 7,700 staff. Bank of Cyprus, which last week reported its first quarterly profit for nearly two years, had â‚Ź1.2bn of exposure to Russia at the end of March. Hourican has completed a string of disposals since arriving last October, including the sale of its Ukrainian operations to Russia's Alfa Group. It also sold a minority stake in Romanian Banca Transilvania and some Serbian
loans. Shuttered Russian banks had negative equity of RUB100bn The 30 something small Russian banks that the Central Bank closed in 2013 had negative equity on the order of RUB100bn, the CBR said in June. The central bank instead of the campaign to clean out the dead wood in the sector. This year and another 50 banks are expected to be closed. Russia has over 800 banks that the top 30 banks how the bulk of the sectors assets. Russian President Vladimir Putin has said that Russia should have a system similar to Germany's where there are some 250 banks in total
Economics Economic growth above expectations in May Russia's economy ministry reports that according to preliminary estimates, economic growth accelerated to 1.3% year-on-year in May from 1.1% yearon-year in April and 0.8% year-onyear in March. Growth thus accelerated for the second month in a row. All in all, GDP grew 1.1% year-on-year in 5M14. However, seasonally adjusted GDP posted zero growth in May after growing 0.1% month-on-month in April. The official estimates for this year had fallen to 0.5% but now an increasing number of economists are predicting growth for the full year on the order of 1.5-1.6%. The debate is coming down to what effect consumption will have on growth: retail sales are slowing, but some argue that even at the slower pace the demand still outweighs supply by enough to ensure continuous growth regardless. Growth in retail trade decelerated to only 2.1% year-on-year in May, retail for this year."
trade remains the main growth driver, says Rencap. The deceleration in retail trade growth was compensated by growth accelerating in industry (to 2.8% year-on-year in May from 2.4% year-on-year in April), services (to 0.5% year-on-year from negative 0.2% year-on-year) and transport (to 1.3% year-on-year from negative 0.6% year-on-year). Provided tensions do not escalate further in Ukraine, there is a high likelihood that the Russian economy will grow 0.7-1.0% year-on-year in 2Q14 says Rencap one of the more upbeat forecasters. "We also continue to believe that Russia’s economy will accelerate in 2H14 due to a reduction in capital outflows, economic improvement in Europe and the regulated tariff caps. In May capital outflows declined to $7.4bn from $8.8bn in April (1Q14 saw $50.6bn in outflows)," Uralsib said another bull. "We think that a small inflow is possible in June due to seasonal factors and the easing of political risks. In light of the betterthan expected GDP growth in 2Q14, we now see upside to our current economic growth forecast of 0.5%
Third of firms in Russia loss making The share of loss-making firms share in Russia rose to 35.4% in JanuaryApril, up by 0.6% points, the Federal State Statistic Service said in a statement on Thursday. The net profit of all organizations except banks, small enterprises, insurance companies and public services firms was RUB1.935 trillion. The share of loss-making firms in the land transport industry, except for railway and pipeline transport, was 59.8%, in the mineral resource development industry it was 48.1%. In the pipeline business only 17.9% of firms ran at loss, in the agriculture industry this share was 23.2% and in the car repair business, 25.5% of companies had losses. Is the worst of capital flight over? There is a great deal of confusion over what's capital flight will do this year. The direction of the flow of capital will determine Russia's economic fate this year. Some economists believe the capital flow will reverse and money will begin to return to Russia this year. Others, such as Deputy Economic Development Minister Sergei Belyakov, argue that the Ukraine crisis means capital flight will accelerate and could top $100bn dollars in 2014. The Economics ministry earlier forecasted that the outflow will stand at $90bn in the end of the year, while it was $80bn at the beginning of June. But according to Belyakov, the capital outflow will slow down in JulyDecember. However, VTB released a long note that argues that "real" capital flgith is slowing. Looking at the balance of
payments statistics the bank broke capital flight down into parts: •
Inflows: inbound FDI of $10bn$15bn and equity and debt of $30bn-$35bn on average;
•
Grey Flight: due to corruption and other illegal activities of $40bn a year;
•
Genuine cross-border M&A: of Russian companies investing overseas of about $5bn-$10bn on average in recent years;
•
Trade Credits: to pay for noncommodity exports (like arms, nuclear plants) of $5bn-$10bn;
•
Legal Capital Flight: the use of tax havens etc of $30bn on average;
•
Internal Capital flight/dollarization: the population's regular exchange rubles for dollars and putting under the mattress of $20bn a year. Plus another $10bn$20bn in times of panic.
Totting this all up and it comes to some $100bn with a financing gap (outflows minus genuine FDI and portfolio inflows) of about $55-60bn. This tallys with the gross international reserves numbers: Russia had reserves of $500bn at the end of last year, which have fallen to about $460bn as off June 2014 and the CBR says it has spent some $40bn on supporting the currency this year. VTB concludes that unless there is some new shock Russia needs about 2.5%-3% of GDP of current account surplus to make sure the currency is in equilibrium. And it is getting that too: in 2013 the current account surplus was $33bn leaving the government
short about $7bn that can easily be raised from the domestic bond market. Moreover, Russia's foreign trade surplus increased 8% on the year to $77.7bn in January-April, the Federal Customs Service says. Exports fell 0.5% to $170.2bn, and imports decreased 6.8% to $95.2bn. With imports depressed by the fall in the ruble's value and oil prices remaining high Russia is on course to enjoy an even higher current account surplus this year.
Gazprom to settle bills with China in yuan
Central Bank chief Elvira Nabiullina said at a State Duma session.
Russia’s energy giant Gazprom says it sees no risk in using the Chinese yuan or the Russian ruble in accounting practices with Chinese companies, the company’s head of finance and economics, Andrei Kruglov.
Central Bank purchases of roughly $100m a day in June that weighed on the value of the ruble, although pressure has abated since the Finance Ministry revised the program to link the volume and timing of purchases to market conditions as it moves towards inflation targeting.
The move to settle bills in yuan/rubles and avoiding the dollar is part of Russia's "pivot to the east." The one place where Russia remains vulnerable to US pressure is through its use of the dollar in international trade. Kruglov said earlier in the day that the Chinese yuan is expected to be fully convertible in the next year or two. Gazprom and China National Petroleum Corporation (CNPC) signed a 30-year contract in late May for the sale of Russian gas to China at a volume of 38bn cubic meters per year. The deal is estimated to be worth $400bn. Russia is planning to invest $55bn and China around $22bn in the gas deal. Shortly after the deal was signed, Russian Energy Minister Alexander Novak said payments under the contract would be made in US dollars. Russia’s Finance Ministry is currently investigating the idea of switching to ruble calculations for some export goods. Russia's central bank done buying up hard currency for reserve fund Russia's Central Bank has completed purchases of foreign currency used by the Finance Ministry to replenish the budget's Reserve Fund. The Central Bank of Russia spent $40bn on currency interventions during the first half of the year,
Under a plan outlined in January, the Central Bank has sold RUB202bn ($6bn) for foreign currency on behalf of the Finance Ministry, which is using the money to replenish its $87bn Reserve Fund, one of two sovereign wealth funds financed from oil taxes. That has meant the Central Bank purchasing the equivalent of RUB3.5bn ($104m) on the open market each day. The purchases were initiated in February but temporarily suspended in March as the Ukraine crisis raised market volatility, before being resumed in April under the revised conditions. The central bank itself is not presently making daily forex purchases, as the ruble is trading in a range, near the center of its floating corridor against a dollar-euro basket, where the bank makes no interventions. Consumption weak despite record low unemployment Despite unemployment reaching a historical low of 4.9%, as well as strong real salary growth in May, retail trade growth continued to decelerate to 2.1% y/y. This coincided with a 0.5% y/y decline in deposits in Russian banks, weak consumption cannot be seen as a sign of higher preference for savings, and
analysts have linked this to an increase in debt servicing pressure. Budget easing is a key factor to watch in 2H14, which may support the above-average growth predictions of 1% or more. Real salary growth recovered in firstquarter to a strong 5.0% y/y, but consumption failed to react to the higher wages. Due to weakness in the food segment, retail trade continued to slow to 2.1% y/y in May from 2.7% y/y in April. Growth was only 3.1% y/y in 5M14 vs. 3.6% y/y in 1Q14. Industrial output also accelerated, but capex growth still weak: Industrial output managed to accelerate to 2.8% y/y in May and 1.7% y/y in 5M14; however, this was not the result of better investment growth, as investment dropped 2.6% y/y in May, showing almost no improvement vs. the 2.7% y/y decline in April. For 5M14, investments are down 3.8% y/y, close to our -3.0% y/y target. Consumers are probably under debtpayments pressure having over borrowed in the recent consumer lending boom. The deceleration in retail trade growth was particularly surprising, as it coincided with a decline in retail deposits in Russian banks by 0.5% m/m in May. (Sberbank in particular saw a strong outflow of funds.) While a number of experts link the poor deposit growth to seasonal
factors, we believe that the strong 2% m/m deposit outflow from banks in March should have resulted in strong inflow in April-May, which was not the case. The strong ruble environment indicates that this could hardly be explained by a new run on deposits to forex cash, but purchases of dollars also slowed in May. Alfa Bank believes there was a panic spike in consumption in 1Q14, brought on by the Ukraine crisis and saw people rush to buy expensive cars or investing in real estate. Now the panic is subsiding things are returning to normal and the slower pace of retail lending is having an impact on consumption. Retail loan growth is below 30% y/y (the actual growth slowed from 29% in 2013 to 23% y/y in May) is not enough to cover the interest on the accumulated debt. This suggests that households now have to pay interest out of their own pockets, whereas these expenses were previously covered by new borrowing. The CBR’s recent hawkish comments intensify our concerns, as higher interest rates may slow market growth more than expected. Budget easing is the key factor to watch for 2H14: The continuing decline in the unemployment rate indicates the additional upside potential of income growth, preventing us from cutting our FY 3.5% retail trade growth forecast at the moment.
Russia reverses birth decline All major negative demographic trends — including alcohol poisoning deaths, murder and suicide — have been receding in Russia in the last five years, with life expectancy reaching an all-time high of 71 years in 2013.
in 1991, with the number of births exceeding the number of deaths by 24,013. The trend continued through the beginning of this year, according to data released by the State Statistics Service at the end of May.
When Russia annexed Crimea in March, it added 2.4m people to the country's population of 143.7m, prompting several Western observers to put forward the theory that the Kremlin's aim was to offset the effect of the country's longdeclining population.
However due to the catastrophe in life expectation during the 1990s the number of young people joining the work force in the next decade is expected to fall by as much as 40%. In 2019 there will only be 12.9m women of the most active maternity age of between 20 to 35, while in 2013 there were 17.2m.
Yet last year, long before the events in Crimea, Russia recorded its first year of natural population growth since the Soviet Union collapsed
The birth rate in Russia began to grow after the government introduced financial incentives for mothers in 2007, which was an unequivocal
success, but in order to face new challenges in the future, even more effective measures are needed. Russian families are entitled to a certificate for 429,408 rubles ($12,500) after the birth or adoption of a second child. The money can be put toward buying real estate or toward the child's education, or be deposited into the mother's pension account. The Finance Ministry considered scrapping the incentives in 2013, but backed off after widespread opposition among experts and the general public. The mortality rate has dropped rapidly in the last few years, mainly due to new legislation restricting the sale and advertisement of alcohol in 2006, demographers interviewed by The Moscow Times said. The general growth of the economy and subsequent rise in prosperity has also contributed to increased longevity, they said.
One change that are bound to appear soon is a hike in retirement ages: The current ages of 55 for women and 60 for men is more than the country can afford. Russia's capital investments fall 2.6% year-on-year in May Russia's fixed capital investments fell 2.6% on the year and increased 31% on the month in May, the Federal State Statistics Service said in June. In absolute terms, fixed capital investments amounted to RUB1.0071 trillion rubles, the service said. In January-May, capital investments decreased 3.8% on the year, it said. In May 2013, fixed capital investments grew 0.1% on the year and rose 30.8% on the month. The Economic Development Ministry expects capital investments to decrease 2.4% in 2014. The lack of investment is proving to be the biggest drag on growth.
Ruble’s real exchange rate strengthens, drop in imports moderates The ruble’s nominal exchange rate, which had weakened since spring 2013, began to appreciate last April. During April and May, it gained over 4.5 % in value relative to its tradeweighted currency basket. The stronger exchange rate has been boosted by both trade and capital flows. The contraction in imports drove up the trade surplus to seasonal highs not seen since the 2009 recession. Central Bank of Russia governor Elvira Nabiullina reports that net privatesector capital outflows from Russia and various ruble-denominated asset groups shrank in April and May to
Piggies driving Russian inflation Russia's Central Bank expects consumer price inflation to peak at between 7.7% and 7.9% in June before slowing to 6.8-7.0% by September, according to a policy document published this week.
levels less than half of the first quarter of this year. The ruble’s real exchange rate strengthened in April- May by nearly 5.5 % against the currency basket, because inflation in Russia continued to run well above that of Russia’s main trading partners (the inflation disparity was around 4 percentage points in 12month terms). Although it was still 10 % weaker year-on-year against the euro in May, the ruble’s real exchange rate against the currency basket was down less than 6 % year-on-year. Forecasters expect the ruble’s real exchange rate to fall only slightly this year or perhaps even stabilise. If the real exchange rate remains at its May level, it would end this year down just 1 % year-on-year.
The inflation rate is significantly higher than the Central Bank's target of a 5% rise in consumer prices, with the increase spurred by a weaker ruble and an asset sell-off on emerging markets earlier this year.
Looking closer at the details, it is clear that the latest run-up in inflation since April was to a large extent fuelled by the shock on the pork market following a round of self-imposed trade restrictions. To remind, Russia has introduced a ban on pork imports from EU countries, which used to be the source of almost 80% of total pork imports or ~22%/10% of the overall domestic pork/meat consumption. As local production could hardly compensate
for this shortfall in the short run, it resulted in a severe price spike on local markets that has propagated down the value-added chain (meat products) and also affected substitute products, chicken in particular. Overall, food inflation, stoked by several idiosyncratic shocks on different product markets (dairy, eggs, pork, fish, vegetables) and to a lesser extent by a weaker exchange rate, has been the most prominent inflation driver ever since the disinflation trend reversed last autumn.
CBR allows more ruble flexibility The CBR eased its approach to ruble exchange management by first, and most importantly, reducing the amount of accumulated interventions needed to make a 5-kopek shift in the band corridor from $1.5bn to $1.0bn. Secondly, ruble flexibility within the CBR’s RUB7-wide corridor was relaxed, with the zero intervention zone being expanded from RUB3.1 to RUB5.1. This move may signal that the tightening of the FX management regime seen in March was a temporary reaction to market turmoil.
The timing of the easing is also appropriate, as financial markets are rather calm at the moment, and the ruble is trading in the middle of the CBR’s band. Overall, we welcome this move, as the negative inflationary consequences of likely budget easing render the CBR’s commitment to tight exchange rate management unsustainable in the long term. The higher flexibility should allow the exchange rate to reach RUB38/$ by year-end, following the dynamics of the fundamental exchange rate.
Budget was in surplus in 1Q14, could be in surplus at year end Federal government ran a surplus of 1.4% of GDP in 5M14 of RUB394bn compared to a surplus of RUB128bn (0.6% of GDP) in 4M14. Last year the government recorded a RUB128.4bn surplus (0.5% of GDP) in 5M13. In May the budget ran a strong RUB266bn surplus. The April budget deficit was also revised to RUB47.7bn from the RUB109bn reported earlier. Revenues are currently on track to exceed plan for this year. Through 5M14 revenues stood at RUB5.8 trillion, or 43.3% of this year’s plan, almost 2% higher than the planned revenues for the period. Budget expenditures stood at RUB5.5 tln, or 39.3% of the plan for this year, 2.3% behind planned expenditures. National defense (53.9% of this year’s plan), education (39.1%) and interbudget transfers to bail out struggling regions (41.4%) were the biggest areas of spending in 5M14.
The Finance Ministry is expecting an extra RUB668bn in revenues. The federal budget has been supported by the weaker ruble: oil and gas revenues grew 21% year-on-year in 5M14, while non-oil and gas revenues increased just 9% year-on-year. Under the recently proposed amendments to the federal budget, ruble weakness and higher inflation would add an extra RUB668.2bn (1.4% of GDP) in revenues for 2014 despite the slowing economy. These extra revenues would be aimed at reducing the budget deficit, which is currently planned at RUB389.6bn for the year (0.5% of GDP). Thus, the budget may run a RUB278bn surplus (0.4% of GDP) this year. At the same time, the government plans to redirect RUB221bn of budget expenditures to the Republic of Crimea, but we would not be surprised if the final number is higher, as the costs of Crimean infrastructure projects may be higher than expected.
Russia's foreign debt down 1.8% to $54.6bn in 5M14 Russia's foreign debt fell 1.8% on the year in January-May to $54.81bn as of June 1, the Finance Ministry said. In 2013, the country's foreign debt grew 9.9% in dollars and 5.9% in euros.
Eurobonds Debt to countries outside the Paris Club Debt to former members of the Council for Mutual Economic Assistance Debt to Paris Club members
DEBT AS OF JUNE 1, $bn 40.020 1.026 0.936 0.108
Rosneft-BP deal lifts Russia’s 2013 FDI figures Flows of foreign direct investment into Russia reached $80bn in 2013. FDI outflows from Russia amounted to $95bn. Although FDI inflows were significantly higher than in 2012, the growth was largely due to the buyout of BP’s stake in its joint venture with Rosneft (TNK-BP). The outlook for this year is bad with the Vienna Institute for International Economic Studies (WIIW) predicting that the FDI inflows could fall by half vs last year to $41bn, due to uncertainties caused by the Ukraine crisis. FDI inflows to Russia dropped in the first quarter and were “sluggish” in the Baltic nations and Bulgaria -- the EU members most reliant on trade with Russia, WIIW said.
In Ukraine, whose economy the EBRD predicts will shrink by 7% this year, investments will probably fall 47% to 1.5bn euros this year. The BP deal made the British Virgin Islands Russia’s top destination for FDI outflows last year because TNK-BP was domiciled there. The BVI, Cyprus and the Netherlands account for over half of Russia’s total inward and outward FDI stocks. Even without the TNKBP deal, FDI inflows to Russia were up last year. Cyprus restored its position as the largest source of investment flows after a dramatic drop in 2012. As in previous years, other large FDI inflows came from e.g. Luxembourg and Ireland. Growth in French FDI was rapid, while the Swedes focused on repatriation of assets, especially in the second half of the year. In recent years, service branches have been the top recipients of FDI in Russia. Over half of FDI inflows last year went to trade or financial services. In contrast, FDI outflows from Russia actually fell if the TNKBP deal is excluded. FDI outflows to Cyprus fell to half last year in the wake of the Cypriot financial crisis. In addition, the net FDI flow to the Netherlands turned negative as Russians’ repatriated asset flows exceeded new investment. FDI outflows to Austria and Switzerland rose significantly. Russian FDI outflows typically originate from Moscow, which accounted for about 80 % of total FDI outflows last year. Some 8 % of FDI outflows came from the oil-and-gasproducing region of Tyumen and 4 % from St. Petersburg.
Privatization programme on hold due to poor markets
Wealth of Russian households up by fifth in 2013
A government minister admitted Russia was putting off the privatization of three companies, which had been planned for this year, Rostelecom, shipping company Sovkomflot and sea port Novorossiysk. The government hoped to raise RUB200bn ($5.8bn) by selling stakes in state companies this year.
Wealth of Russian households increased 21.9% in 2013 to reach $1.92 trillion, according to a study conducted by the Boston Consulting Group.
The government officially is now only expecting to raise RUB170.8bn ($5bn) for privatization this year. This is way down on the original estimates when the programme was launched in early 2008 that the sales could bring in as much as RUB800bn a year from the list of several thousand government objects slated for sale. Only a few stakes in a few prominent companies have been sold so far; the stated goal of "getting the state out of the economy" has failed to appear.
Whilst calculating overall wealth, BCG took account of total cash savings and deposits of individuals as well as the value of various securities owned by them. What is interesting is that wealth of Russian households grew at a much slower pace earlier: by 17.4% on average over the period from 2008 to 2012. As before, the Russian people prefer to keep money on deposits or in cash ($1.2 trillion or 60%). Shares ($0.6 trillion or 33%) are the second most popular means of keeping money. A minor part of savings is placed in bonds ($0.1 trillion or 7%). Over the
past five years, the share of funds invested in various securities has increased from 37% to 43%. Russia is still in the top-15 countries by the number of millionaire households: their number was 213,000 in 2013 (No.13). It is 0.4% of the total number of Russian households in 2013 (0.3% in 2012). The number of ultra-rich households holding over $100m reached 536. Russia ranks 5th in the world in this respect. A year earlier, there were only 328 ultra-rich households in the country. Wealth of households holding from $5m to $100m increases most rapidly: their wealth increased nearly 34% compared with 2012. The poorest segment of the population (wealth below $100,000) showed the slowest growth of wealth - they became richer by 11% only. Wealth of individuals worldwide increased 14.6% in 2013 to $152 trillion (8.7% in 2012), according to BCG. The growth of wealth was driven mainly by investments in shares, which rose in price, BCG notes. Labour force decline to cost Russia 0.5% GDP/year in long term Russia's Higher School of Economics believes the labor force decline due to kick in in the coming years will cost Russia 0.5% GDP/year in long-term. Even though an increasing labor force added around 0.5ppts to GDP growth per year over the last decade of economic growth, it is expected to decline 8-15% from 2013-31, deducting the same 0.5ppts from annual growth. This will be a new drag on growth to add to the sorry state of domestic fixed investment which has stalled since 2007. The deteriorating
demographic situation has meant the labor force has stopped growing in recent years, holding unemployment at a historical low of ~5% despite a significant deceleration in the economic growth rate. Last year was good for M&A In 2013 Russian M&A market volume hit $86bn, AK&M reports, of which $55bn was due to takeover of TNK-BP by Rosneft alone. Another two transactions with telecoms company Tele2 Russia accounted for $5bn with another almost $3bn from the purchase of MOEK by Gazprom Energoholding. Russian manufacturing PMI downturn eases in May HSBC PMI data compiled by Markit continued to indicate a downturn in Russia’s manufacturing sector in May. Output fell further, as did employment and new export orders, but total new work increased for the first time since last November. Cost pressures remained high, linked to the weak ruble exchange rate, and prices charged for final manufactured goods rose at the strongest rate since April 2011. The survey’s headline figure is the Purchasing Managers’ Index (PMI), which remained below the 50.0 nochange mark for the seventh consecutive month in May. That said, the PMI rose to 48.9, from 48.5, indicating the slowest overall deterioration in business conditions since November. The upward movement in the PMI mainly reflected the new orders component, which registered a positive contribution for the first time in six months. Output, employment and stocks of purchases continued to weigh on the headline figure.
The volume of new business received by Russian goods producers increased in May, following a five-month sequence of contraction. Consumer goods registered a solid increase during the month. That said, the overall rate of growth was only marginal, reflecting a further fall in new export orders. New work from export markets has declined continuously since September 2013, although the rate of reduction slowed in May to the weakest since the start of the year. Output continued to decline, despite the resumption in new business growth. The rate of contraction was unchanged from April’s marginal pace. Firms continued to complete existing work at a stronger rate than incoming new business, although backlogs ince April 2011.
declined at the weakest rate since March 2013. With a lack of pressure on capacity, firms continued to shed staff mid-way through the second quarter. Manufacturing employment has fallen continuously since July 2013, and the rate of decline accelerated to the fastest in five months. Purchasing activity was broadly flat during the month, while firms linked longer supplier delivery times to import delays. Input price inflation remained strong in May, but eased further from March’s three-year peak. Firms continued to link upward pressure on input prices to the weak ruble exchange rate. Meanwhile, output price inflation accelerated for a record fifth successive month, to the highest
Infrastructure Minister proposes splurging welfare fund on infrastructure projects Russia should take all of the money from a fund earmarked to cover future pension deficits and invest it in profitable infrastructure projects to generate good returns, Economic Development Minister Alexei Ulyukayev said in June. The government earlier raised the cap on spending from the National Welfare Fund, which collects revenue from oil and gas sales. It now allows 60% of the fund to be spent on domestic infrastructure projects, up from an earlier 40%. The fund, designated to cover the future pension deficit of the country's rapidly aging population, was $87bn at the beginning of the month. The Finance Ministry had long opposed greater spending of the fund's money on domestic projects and economists warn that in a country with such a high level of corruption the cash can be lost. Russia's Far East to raise RUB2.4 trillion investments in 3-5 years State support of prioritized investment projects will help Russia's Far East raise more than RUB2.4 trillion in the next 3-5 years, Deputy Prime Minister Yury Trutnev said in June. Trutnev said that in the last nine months the government formed a new model of the region's development, prepared the legal framework for the creation of territories of advanced development, considered the projects of their establishing and their sites.
At the moment the ministry is considering 32 investment projects with 20 of them allowing to create 53,000 jobs and to increase production in monetary terms by 656bn rubles annually. However, several federal programs in the region are underfinanced, Far East Development Minister Alexander Galushka said. Per capita funding of the region's culture and tourism development program is more than 99% lower than in the country's central regions. The funding for the health service, science and the social support are 95.8%, 90% and 89.8% lower than all-Russia ones respectively, Galushka said. NWF money to be released for projects according to schedule Russia's Finance Ministry will develop a schedule for releasing money from the National Welfare Fund (NWF) for financing of infrastructure projects so that this money does not end up being stuck in bank deposits earning interest for someone else, Deputy Finance Minister Sergei Storchak told reporters in June. In particular Russia is to disburse RUB27bn from wealth fund to Rostelecom and Russian Railways (RZhD). Deputy Economic Development Minister Nikolai Podguzov said that the government had expanded the list of projects to be co-financed from the fund compared to the previously approved reconstruction of the Trans-Siberian Railway (Transsib) and the Baikal-Amur Mainline (BAM), as well as the construction of the Central Ring Road in Moscow.
Rostelecom's project to liquidate digital inequality was earlier estimated at 46bn rubles, including 18bn rubles from the National Wealth Fund. The project was supposed to receive financing at inflation plus one%age point for about five years. The fund will also pump RUB86bn rubles into the Kyzyl-Kuragino railway project and RUB1.1bn rubles into a project of power utility Russian Grids, if its project proves efficient. According to the official, the fund may allocate the first tranche for the KyzylKuragino project by the end of 2014 after a syndicate of banks, which will provide 35% of financing, is formed. The project comprises the construction of a railway line and the development of the Elegesta coal mine in the republic of Tuva. Storchak said money had been trapped in banks in the past and the Audit Chamber has reported it. Prime Minister Dmitry Medvedev earlier raised the limit on NWF money that can be used to help finance infrastructure projects that will recoup their costs to 60% from 40%. He signed a resolution that sets the limit for NWF money that can be used to implement infrastructure projects that will pay for themselves and placed in deposits and accounts at banks, lending institutions and Vnesheconombank (VEB) at 40% of the total amount of NWF funds as of January 1, 2014, at 10% for projects implemented with the participation of the Russian Direct Investment Fund (RDIF) and 10% for projects implemented by state corporation Rosatom.
NCSP Turnover grew for the first time since October 2012 The fall in cargo turnover in Russia reversed in May and was up 1.8% year-on-year. Russia's major Black Sea port Novorossiysk Commercial Seaport (NCSP) reported consolidated 5M14 operating results in June, which showed cargo turnover growing 1.8% year-on-year in May to 12.0m tons. Oil product turnover grew 30% yearon-year to 2.5m tons, ferrous metals turnover was up 31% year-on-year to 921,800 tons and container handling increased 9% year-on-year to 59,700 TEU, while grain handling nearly doubled to 0.4m tons from last year’s low base. However, consolidated crude oil turnover continued to decline, down 12% year-on-year to 7.0m tons in May. The cargo turnover growth in May marks a break in the negative operating trend that had been in place since October 2012. The growth was driven by oil products, ferrous metals, grains (which grew from the low base in 2013) and containers. However, crude oil (the biggest contributor to turnover by weight) and iron ore turnover continued to decline. In 5M14 NCSP’s cargo turnover declined 5.2% year-on-year to 12m tons, while overall cargo turnover at Russian seaports grew 6.7% year-onyear to 252 tons.
Gazprom, Novatek might participate in Far Eastern Shipbuilding and Ship Repair Center Gazprom and Novatek have agreed to participate in the Far Eastern Shipbuilding and Ship Repair Centre through a joint venture with Rosneft, Sovkomflot, Gazprombank, OSK and the Ministry of Industry and Trade, according to Kommersant. The companies are expected to buy shelf equipment from there. The agreement has been made only in the form of a memorandum at this point, so final decisions with exact terms are expected later. The key asset of the Far Eastern Shipbuilding and Ship Repair Center, the Zvezda Shipyard, might be constructed by 2018, with a total estimated capex of some $4bn. All in all, we do not expect to see any material market reaction to the news. Previously, Rosneft and Gazprombank intended to create a JV, which was set to buy out 75% less two shares of the shipbuilding centre. It was widely reported that the shares in the JV would be evenly split.
Russia to invest $1 trillion in oil production, export in East Siberia Russia will invest $1 trillion in the development of eastern fields and infrastructure to increase oil exports to Asian countries in the next two decades, Deputy Prime Minister Arkady Dvorkovich said in June. Russia’s Sheremetyevo airports wins award Moscow’s Sheremetyevo International Airport was recently dubbed the best airport in Europe at the Airports Council International (ACI) annual Airport Service Quality (ASQ) awards. These annual awards recognize the best airports in the world according to the ACI’s ASQ passenger satisfaction survey, which is based on passengers’ flight experience from beginning to end at 285 of the world’s airports. The Zurich Airport and Francisco Sa Carneiro Airport (Porto, Portugal) took second and third place, respectively, after Sheremetyevo. This is a remarkable turn around as Sheremetyevo was famously rubbish for more than a decade, marred by long queues and dark halls.
Moscow pledges $83bn to fight city's massive traffic jams Moscow City Hall has pledged to commit RUB2.9 trillion ($83bn) through 2020 on resolving Moscow's infamously traffic jams and other transportation problems. About a fifth of Muscovites spend more than three hours a day in transit, an "unacceptable" situation, Deputy Mayor Maxim Liksutov, the head of the city's transportation department said. The main thrust of the plan is to persuade people to abandon their cars and use public transport instead. The city plans to accelerate its investment programme including building 130 kilometers of new subway lines by 2020, on top of the 25 kilometers built since 2011. Another 400 kilometers of road will be re-built, 240 kilometers of new railroad connections will appear in the city and surrounding regions, and passengers will finally be able to climb aboard the Moscow Ring Railway — a revamped Soviet-era freight line, which will be used to connect suburban trains with the Moscow metro. The city will also make travelling by cars more expensive. It has already introduced bus lanes, steep fines for ignoring them and paid-parkign in the centre of the city.
Sheremetyevo but the plan is to move it to its on airport of the Moscow Region's Ramenskoye in two years, Aeroflot CEO Vitaly Savelyev says. Savelyev also said that the relocation into the airport designated for the lowcost transport could cut the fares by 50% on average. In January, the country's state defense conglomerate Rostec and Lithuania's Avia Solutions said they will create a joint venture to upgrade the Ramenskoye airport. Crimean Infrastructure Development Could Cost $33bn The Regional Development Ministry has proposed spending up to RUB1.15 trillion ($33bn) on infrastructure in the new Russian territory of Crimea by 2020, financed by federal budget. Obviously for political reasons the Kremlin is keen to transform the Crimea now that it's joined Russia. However other Russian regions are complaining that they are not getting anything like as much money or attention from the centre. Regional Development Minister Igor Slyunyayev earlier estimated that between $9.1bn and $34.2bn would need to be invested in Crimea.
Russian monsters and version on EasyJet-sky, called Dobrolyot (which roughly translates as "Good Fleet"), a low cost Russian airline that belongs to state carrier Aeroflot, in June.
After nearly two decades of economic chaos as part of Ukraine the Russian ministry has described Crimea as one of the most underdeveloped regions in Europe. Only 46% of Crimean homes have access to gas compared with 65% in Russia, while the region's own energy grid supplies a mere 17% of homes. The peninsula's transport system also needs to be upgraded to cope with the summer influx of tourists.
Currently the new landline flies fromthe Moscow airport of
Economic Development Minister Alexei Ulyukayev said last month that
Russia launches Dobrolyot budget airline, plans to move to Rameskoye airport in two years
the government is going to scrap plans to finance the construction of a deepwater port in the Krasnodar region and a bridge across the River Lena in eastern Siberia so that it can divert money to Crimea. Russia's Sovcomflot to invest $3bn in development by 2020 Russian giant state-owned shipping company Sovcomflot plans to invest $3bn in development until 2018-2020, the company said in a report Monday.
Sovcomflot will finance the investment program with its profit from main operations, additional shareholders' equity, and expanded borrowings, the company said. The company also expects its net revenue to double to $2bn from around $1bn, the EBITDA (earnings before interest, taxes, depreciation and amortization) margin to reach 50% in four to six years, and the return on investments to amount to 810%, under the program.
ECM Russian stocks trading at historic lows Russian shares are trading at historic lows thanks to the ongoing political and economic turmoil. Good news out of Ukraine when Ukrainian president Petro Poroshenko announced a unilateral ceasefire sent the RTS index over the psychologically important 1400 mark at the end of June. But only days later Poroshenko launched a major military assault on eastern Ukraine which sent share prices tumbling again.
year. RTS rebound to above 1,350 corresponds to a mild recession. We believe that the RTS dropping below 1,100 to the lowest level since August 2009, and then rebounding to above 1,300 is a reflection of investor uncertainty regarding the economic prospects and profit dynamics of corporate Russia over the next few quarters."
Nevertheless investors are increasingly curious about Russian stocks simply because they've never been so cheap. Some brokerages are already upgrading the end of year target for the index.
Historically low trailing P/E multiples. The Russian stock market is currently trading close to historic lows on the most commonly used valuation multiples. Based on the 12M trailing P/E, the MSCI Russia index is trading at 4.7 compared to the 10year average of 8.5, implying a discount of roughly 45%. Furthermore, this is one of the lowest levels in the past ten years.
Uralsib revised its year-end RTS target to 1,520 implying a 14% upside. "We see the earnings recession ending next year. The Russian equity market has been in an earnings recession since mid-2012, and we do not expect to see a reversal in this trend until next
However, these multiples were even lower in 2Q13, 3Q11 and 4Q08. Hence, from the value perspective this appears to be a good entry point; however, we note the unusually high level of uncertainty with respect to economic growth and future corporate
earnings in Russia, as discussed above. Russia trading at 2001 levels on P/BV. The MSCI Russia index is trading at very low levels in terms of book value. The current P/BV is an undemanding 0.61, which is extremely rare historically. It is 17% lower than the 2008-09 crisis level of 0.73 registered in 4Q08. As the graph below shows, this is also the case with P/E multiples, which are at a substantial discount of over 50% to the 10-year average multiple of 1.29 – a level last seen in 3Q01. Global equity valuations rise above 10-year averages. Meanwhile, global equities have risen from the valuations trough observed in 2009 and 2011. The P/BV and P/E levels recovered to 2.1 and 19.1 at the end of last year. They are now just slightly above the 10-year average of 2.06 in terms of P/BV and 14% higher than the 10-year P/E average of 16.8, but below the levels seen in the 1990s. However, the growth rate of both the broader economy and corporate profits is also well below the levels seen in the 1990s or 2000s. Should the global economy deteriorate over the next 6-12 months, the de-rating of global equities would also affect the otherwise undemanding valuations of the Russian market. EMs trading at slight discounts to their 10-year averages. EM valuations have stabilized in the past few years and are now at a P/E of 12.2, 7% below the 10-year average of 13.1, while the discount of the current P/B multiple (1.5) to the 10year average (1.87) is a more significant 22%. EM discounts to DMs widen substantially. However, emerging market equity valuations have recovered to 10-year highs relative to DMs: P/BV and P/E discounts almost
fully converged to 31% at the end of last year. Such significant discounts on 12- month trailing profits were last seen in 4Q08 when foreign capital was fleeing emerging markets to the safety of home markets. P/BV discounts above 30% were also last seen ten years ago in 1H04, when EMs, as an asset class, were only just coming into favor. Russia trading at 60-70% discounts. The Russian stock market’s discounts have recently widened close to historic highs. The current discounts in terms of both P/BV and P/E to the MSCI World are above 70%, which has not happened since 2002, when Russia was still recovering from the consequences of the 1998 default. Russia has also derated to 58-60% discounts relative to EMs, which is also the highest level since 2001-02. Recovery to normal profit margins would result in 25% earnings growth. Profit margins on the Russian market shrank to 13.3% early this year, which is normal for an economy in recession, as it is 3.4 ppt below the 10-year average of 16.7%. Recovery to the average level would result in net profits expanding 25%. However, the current margins are still well above the recessionary levels of 8.5% seen in mid-2009. Hence, investors need to see a turning point for the economy and the elimination of geopolitical threats before they take advantage of this opportunity. Profit growth expected to recover this year followed by another slowdown next year. The current consensus sees profits of the RTS index expanding 15.4% this year, followed by 2.1% growth next year. However, earnings contracted 28.2% last year, steeper than the 25.6% drop calculated in 2009. Nevertheless, we believe the consensus could still reduce its bullish estimates for this
year, as our aggregate estimates for our coverage universe point to low single digit earnings growth this year. Lower earnings volatility a common trend in EMs. Although Russia appears to be fairly weak compared to the profits forecast for EMs and the S&P500, EMs are also not particularly strong. The increased power of the consumer as well as higher disposable incomes has already resulted in significantly higher unit costs in many emerging markets, which has lowered competitiveness. Furthermore, although capital outflows weakened EM currencies last year, they are not going to completely reverse the profit dynamics. This has become a common trend in emerging markets, which Uralsib noted in our October 2013 strategy publication on the potential effect of the tariff cap “Russia Freezes”. Russia does not appear particularly attractive in terms of earnings growth prospects over the medium term, which is a challenge to its investment case. However, in the longer term, the tariff decision should increase the competitiveness of the
economy and can thus be interpreted as a welcome development. Current sentiment on Russia and EMs approaching multi-year lows. Last year was the worst on record in terms of market sentiment towards Russia-dedicated funds, as 24% of AuM left country funds. Sentiment towards Russia was initially negatively affected by macroeconomic weakness in the eurozone, Russia’s largest trading partner. This was followed by an economic slowdown and falling corporate profits, which further damaged the investment case. As shown in the graph below, there have been just a few years when either Russia or GEM funds reported net outflows. This year is on track to be only the second one with net outflows from both GEM and Russia country funds –the first time since the difficult year of 2001. In terms of outflows from GEM funds, this year has been the worst on record. The poor sentiment towards EMs and Russia currently should improve together with macro and micro fundamentals.
Russia making encouraging progress with pension reforms
pension funds for only one such move every five years.
Liberals in the Russian government have introduced sensible reforms of the Russian pension system that should have an impact on markets in 2015.
One official expects pension funds to see inflows of RUB270bn in the coming 12 months. We assume there will be an increased allocation to equities. If this rises from 3% to 19% between 2013 and 2018, it implies a rise in dollar allocation from $4bn to $31bn. As a share of the equity market freefloat, it implies a rise from 1% to 7%. What we cannot be sure of is how pension fund managers will in fact react – whether they take the Japanese/German stance in favour of bonds, or the Anglo-Saxon preference for equities.
Until recently, pension funds were banned from making an annual loss on their portfolio so they allocated just 23% of assets to equities, which were too volatile. Now they will be given flexibility to invest over a five-year period, so they can take more risk. They will be benchmarked by the CBR every five years. The ban on their participation in IPOs and SPOs was removed in 2013. Previously, individuals could move their pension from fund to fund at any time – which deterred pension funds from taking risks that could hurt assets in the short term. Now the state will guarantee the principal in the
The growth in pension funds is not going to be explosive – Chile saw a much more rapid rise from 1% of GDP in 1980 to 24% by 1990 and 38% of GDP by 1996 (the same 16-year period as in the graph below). As we noted earlier – this is not an India/Mexico reform story in Russia today, but it is not egative.
Investment fund Oppenheimer Quest for Value invests in Gazprom Russian equities are cheap, even by Russia's low standards, and some international portfolio investors are beginning to buy again on the hope of an end to the economic and political crises. The Investment fund Oppenheimer Quest for Value, part of the Oppenheimer Group, invested in Gazprom's securities. As of April 30, 2014, the fund owned Gazprom's ADRs to the amount of $1m (about 139,000 ADRs). Oppenheimer Quest for Value had no Gazprom's securities as of January 31, 2014. The investment portfolio of Oppenheimer Quest for Value includes shares of six more Russian companies: NOVATEK, Yandex, ALROSA, Magnit, Eurasia Drilling, and the Moscow Exchange. The fund has increased investments in these shares slightly over the past three months. This represents a turnaround in the front attitude to Russian equity. It was reported early June that the funds of the group Oppenheimer International Bond Fund and Oppenheimer Global Strategic Income Fund had sold nearly 70% of Russia's sovereign bonds owned by them. Their investment in these assets decreased by over $700m in total. Oppenheimer Group is one of the world's largest investors in Russian securities. In the portfolio of Oppenheimer Developing Markets Fund, investments in Russia rank 6th after investments in India, China, Brazil, Mexico and Great Britain.
PIMCO also buying Russian equities Pacific Investment Management Co (PIMCO belongs to global insurance corporation Allianz) that manages the world's biggest mutual fund, has started purchasing Russian shares because they are so cheap. In late 2013 assets under PIMCO management and its subsidiary companies amounted to $1.91 trillion; asset portfolio amounted to more than $2 trillion The investment fund does not disclose in what companies they are interested in, but traders told the press that the American fund prefers investing in Alrosa, Bashneft and Eurasia (drilling company). JP Morgan funds cut Russian investments by 24.6% Nov-Apr The funds of JP Morgan International Equity Funds have decreased their investments in Russian stocks by 24.6% in the period from November 2013 through April. The Russian portfolio of the funds stood at $246.13m as of April 30, while as of November 30, 2013, the portfolio amounted to $326.34m. Three out of 10 funds of JP Morgan International Equity Funds group invest in Russian stocks. Mobile operator MTS, top bank Sberbank and retailer Magnit with $48.8m, $38.5m and $26.8m investment account for the bulk of the portfolio.
Metro to Restart IPO Preparations Cautious optimism is also beginning to emerge in Russian-based companies' plans to list on international and domestic exchanges. German retailer Metro may restart preparations in September for the stock market listing of a quarter of its Russian cash-and-carry wholesale operation that it postponed in March due to the Ukraine crisis, sources close to the matter said. Company and financial sources said re-launching the initial public offering, which had been expected to fetch at least 1bn euros ($1.3bn), would depend on developments in Ukraine and the level of the Russian ruble. Metro wants to use the proceeds to invest in the fast-growing Russian business and other emerging markets and pay off debt. Metro declined to comment but CEO Olaf Koch has said in the past the planned IPO had been well received by investors and should still proceed if the turmoil on Russian markets abated. Poor markets delay Rostelecom privatization probably until 2016 Volatile markets and a low share price have forced the Russian government to drop the idea of selling its 51% stake in telecom giant Rostelecom in 2014 with analysts saying the new date will depend on the company's regional expansion. The Federal State Property Management Agency owns a 46.99% common stake in Rostelecom; Mobitel, a 100%-owned unit of Rostelecom, holds 9.38%; state-owned bank Vnesheconombank (VEB) holds 4.13%, and the Russian Direct Investment
Fund and Deutsche Bank each own 1.35%. Euroclearability to start next year Russian stocks may be added to the Euroclear settlement and clearance system will not start operations in July. Stephan Pouyat, Head of International Markets at Euroclear as confirming that the depository bank will not be able to open equities accounts to its clients starting from 1 July, but could start at the start of next year. Russian domestic be traded bonds have already been added to the international system in February of last year and immediately saw foreign investment into the assets quadruple. The original plan was to add stocks only in 2015, but given the success of the changes to the bond market the government has tried to accelerate its plans. There are only a few remaining legislative obstacles notwithstanding. Euroclear is working closely with the authorities on an interim solution to speed up the process. Local DR spreads are at the lows of 2013 and could move to new highs, once Euroclear opens accounts in the Central Securities Depositary. Euroclear said the difficulty is the required legislative changes create a more standardised treatment of corporate actions and the ability to vote with shares electronically is not ready. An ‘interim’ workaround solution based on the existing regulatory setup is also being evaluated as a backup plan.
New customers for Russian mutual funds but redemptions jump In 1Q 2014, 15 largest asset management companies acquired about 30,000 new customers, according to the Bank of Russia's statistics, but the funds saw heavy outflows of cash. The 15 largest asset management companies had over 1.8m retail customers as of the end of March 2014. The number of unit-holders increased 1.6% compared with the end of 2013. A year ago, the same asset management companies saw the outflow of 26,800 customers. The inflow of customers to mutual funds started in 4Q 2013 - about 30,000 customers per quarter. Until then, retail customers had quit mutual funds more frequently or the number of new customers had been minor. However, in May net outflow from open-end mutual funds exceeded more than RUB1.29bn, National League of Management Companies announced. It was the second largest negative result for last 1.5 years, only in March 2014 big funds were losing more RUB2.3bn. Funds have been announcing about net outflow for the sixth month in succession: private investors withdrew from funds more than RUB6bn. Only in 2011-2012 clients were withdrawing their assets for 14 month and open-end mutual funds lost almost RUB14.6bn. Sberbank Asset Management is the absolute leader in bring in new retail investors into Russian mutual funds 14,500 new customers. Raiffeisen Capital Asset Management (7,200 new customer accounts) ranks 2nd and Russian Standard Asset Management (3,400) comes 3rd. Asset management companies not affiliated with banks showed much more moderate results. For example,
TCB BNP Paribas Investment Partners acquired 444 new unit-holders, Ingosstrakh Investment Asset Management only 20 new customers. An exception from the rule is AlfaCapital Asset management which faced with a decrease in the number of customer accounts by 815. Russia's St Pete Stock Exchange to launch foreign shares market As part of the ongoing capital market reforms Russia's St. Petersburg Stock Exchange plans to launch a foreign issuers market in July-September, Roman Goryunov, CEO of the exchange's major shareholder, nonprofit organization RTS, said in June. Goryunov said that the most liquid shares from the S&P 500 list will be traded, adding that the exchange will define the list of foreign issuers with the market participants after regulation matters are dealt with. The foreign issuers' shares will be traded anonymously under T+3 trading date, quotations and settlements will be carried out in dollars. In June the exchange launched trading with 20 Russian issuers, including gas giant Gazprom, independent gas producer Novatek, fertilizer producer Uralkali, oil company Lukoil, metal giant Norilsk Nickel, VTB Group, the country's top bank Sberbank and telecom giant Rostelecom. Russia's Siberian Anthracite may new IPO Russia's Siberian Anthracite, one of the world's top anthracite producers, whose share floatation flopped in 2013, does not rule out trying to hold an initial public offering (IPO) again, CEO Dmitry Shatokhin in June.
Cyprus-based Sibanthracite, which owns Siberian Anthracite, cancelled an IPO on the London Stock Exchange in 2013 because of poor market conditions.
returning in Russia - the index gained 9.3%. Particularly, growth was due to rise of securities of such companies as Sberbank and Yandex, Bloomberg says.
Bashneft Mulls $1bn to $2bn London IPO in September
Depositary receipts of Sberbank in the USA for a month added 19.6% and shares of Yandex on NASDAQ - 17%. Thus, it decreased somehow losses of the companies, stock quotes of which since the start of the year fell by 18% and 26% respectively.
Privately-owned Russia oil company Bashneft may seek to raise $1bn to $2bn with an IPO on the London Stock Exchange in September, provided that market conditions are favorable, the company's CEO, Alexander Corsica, said in June. No final decision to float shares has been made, according to an interview with the Russian daily Vedomosti that quoted Corsica, but the company is "ready" to IPO if conditions improve. The company's board has recommended paying dividends of RUB36.48bn ($1.08bn) on the company's 2013 net profit — which, added to the RUB45bn ($1.3bn) of dividends already distributed over the first three quarters of 2013, would bring Bashneft's annual payout to a record $2.4bn. Biggest Russian EFT traded in USA sees value rise In May shares of Market Vectors Russia ETF, the biggest US exchangetraded fund that holds Russian shares, rose by 11%, the New York Stock Exchange announced. For the first time since October 2013 Market Vectors Russia ETF registered monthly growth (a record high since January 2012) in May. Investors believed in political settlement of the conflict in Ukraine but the situation can change if military operation in the east of the country expands Bloomberg Russia-US Equity index proves that investments have started
Russian mass media Dozhd, Bolshoi Gorod, Slon.ru to hold IPO by 2015 Russian television channel Dozhd and online editions Bolshoi Gorod and Slon.ru will make their initial public offerings (IPOs) on the Moscow Exchange by the end of 2014, the assets' owner Alexander Vinokurov said in June. According to earlier reports, the assets may be merged into a single media company in order to get the listing on the Moscow bourse. In 2012, Dozhd received RUB285.6m of revenue, Slon.ru - RUB89.7m , and Bolshoi Gorod - RUB59.8m, as calculated under Russian Accounting Standards. Yandex lists on Moscow Exchange Following a super successful IPO in the USA in 2011, the Russian answer to Google, Yandex has listed on the Moscow Exchange. The shares of Dutch company Yandex N.V., the sole owner of Russian Internet giant Yandex, edged up 0.6% to 1,546.8 rubles (U.S.$ 44.03) at 11 a.m. Moscow time on the first day of trading on the Moscow Exchange, according to the bourse's data. The Moscow prices are almost 36%
higher than those on the NASDAQ, where they closed at $32.40. Central Bank to Sell Shares in Moscow Exchange The Central Bank of Russia has decided to sell the shares it holds in the Moscow Exchange and offered half these shares to the public at the end of June.
The Central Bank had initiated an accelerated secondary public offering to sell an 11.75% stake, representing 50% of the bank's holding in the exchange. A financial source said that the organizers are aiming for a share price of about 60 rubles ($1.75) per share and to raise up to $500 million.
DCM Three Russian bank bonds spark optimism The successful launch of eurodenominated bonds by two Russian banks has fuelled hopes that tensions easing in Ukraine will allow more Russian companies to access global capital markets.
Dealogic, the data provider. This month it had topped $2.1bn before the Gazprombank deal. The Sberbank deal had a very good reception from investors, being more than two times subscribed with more than 200 investors participating.
Sberbank, Russia’s largest lender, last week sold €1bn of bonds, testing investor appetite for the first time since President Vladimir Putin’s annexation of Crimea. It was quickly followed by Gazprombank, which also raised €1bn.
Analysts said that while the fact that the first bonds issued since the crisis had been in euros might reflect a political wish to diversify from dependence on the dollar, Russia’s longer-term financial needs meant it would have to return to the dollar market eventually.
The two bonds follow a smaller one from Alfa Bank for €350m which was also successful placed with European investors a week earlier. Alfa Bank issued a €350m ($476m) bond at a yield of 5.5% on June 4.
Sberbank’s five and-an-half-year bond was priced to yield 3.35%, less than a similar dollar bond sold before the country annexed Crimea. The five-year Gazprombank bond offered a yield of 4%.
The deals mean that so far this month, Russia has issued more debt than it did in March, April and May combined.
More Russian banks and companies are expected to come forward now to also offer investors bonds.
Total debt issuance fell to only $198m in March as the US imposed sanctions on Russia over its part in the Ukraine crisis, according deals monitored by
Russia's Lukoil may offer up to $2bn Eurobonds Sep-Nov
Rosbank may offer bonds to Russian market in Sep-Nov
Russia's oil company Lukoil hopes to place 5-year Eurobonds worth up to $2bn in September-October, Senior Vice President for Finance Alexander Matytsyn said in June.
Rosbank, part of French banking group Societe Generale, is considering offering bonds on the Russian market in September-November, CEO Dmitry Olyunin said Tuesday on the sidelines of the St. Petersburg International Banking Congress.
Matytsyn said that American banks JP Morgan and Citi will organize the placement. According to an agreement with the banks, if conditions for the placement are bad, the banks are to provide Lukoil with a 3-year bridge loan worth up to $2bn. The company plans to issue the Eurobonds to cover this year's investment program deficit, and the management decided to borrow no more than $3.6bn for this purpose. Russia's top bank Sberbank and Promsvyazbank have already provided Lukoil with $1.5bn and $300,000m loans respectively, Matytsyn said. Gazprombank issues â‚Ź1bn bond Gazprombank launched a five-year 1bn euro ($1.4bn) bond at a yield of 4% at the end of June. The bid book was three times oversubscribed. The bank twice lowered the yield rate during the placement, from 4.375 to 4.125 and finally to 4% yearly. Gazprombank became the first Russian state-owned issuer to borrow money in the international bond market since the political crisis with Ukraine began in late February. Credit Suisse, Deutsche Bank, GPBFinancial Services and SG CIB are lead managers. Demand for the bond exceeded 5bn euros ($6.8bn).
"We plan to come to the Russian bond market this year although we have no problems with liquidity. We had a historic peak of balance on accounts of our corporate clients in the second quarter. We have no plans to enter the Eurobond market because we have no need in foreign currencies. We have an oversupply of dollars and euros," Olyunin said Global funds up investments in Russian bonds, plus some stocks Global funds increased their investments in Russian bonds by $727.3m, in Russian shares by $240.9m in March and April, according to Russia's Central Bank. In March after beginning of the Ukrainian crisis and imposing sanctions against Russia, foreign investors were withdrawing their funds from Russian market. For February March global funds lowered their investments in bonds and shares by $888.2m and $1bn respectively, the Bank of Russian announced in its report about monetary policy. But the trend reversed in the next two months. The Bank of Russia mentions in its report that first of all nonresidents were interested in sovereign bonds: in May their amount on the primary market raised to 49.3% (by about RUB11bn, according to Raiffeisenbank), market participants invested in OFZ (federal loan bonds) most of all. At the same time their amount in January - February lowered
from 30% to 17.2% in April. Investors enjoyed strengthening of the ruble as compared with currencies of other countries - by the end of May the exchange rate of the ruble returned to the level of the second half of January 2014, as well as reduction of the foreign political tension and increase of the key rate by 2% in order to control the inflation, the Bank of Russia enumerates. As a result Russian bonds' yields grew - the Finance Ministry placed the last OFZ issue under 8.47% annual. Russia raises investments in US securities 16% to $116.4bn in April Russia raised the investments in securities 15.9% on the month to $116.4bn in April, a first increase in investments since October 2013, the Department of the Treasury said in a report in June. Russia currently ranks twelfth in terms of investments in treasury bonds. The leading investors are China, Japan and Belgium. Russia's domestic debt rises to RUB4.5 trillion in May Russia's domestic debt in rubledenominated securities increased by RUB24.634bn in May to RUB4.464 trillion as of June 1, according to the Finance Ministry. The volume of OFZ-PD fixed-rate government bonds grew to 2.623 trillion rubles. The volume of OFZ-AD bonds with sinking fund provisions remained flat at 1.043 trillion rubles. The volume of GSO-PPS savings bonds with a fixed coupon rate stood at 575.55bn rubles. The volume of GSOFPS savings bonds with a fixed coupon rate was flat at 132bn rubles.
Oppenheimer funds sell almost 70% of Russian bonds The funds of the Oppenheimer Group, one of the world's largest investors in Russian securities, have sold almost 70% of Russian bonds in JanuaryMarch. Oppenheimer Group said that the growth of geopolitical tension around Ukraine and Russia as well as worsening of long-term fundamental factors pushed it to cut the bond portfolio. The investment of Oppenheimer International Bond Fund in Russian bonds decreased to $226m from $703.5m, while the investments of Oppenheimer Global Strategic Income Fund fell to $114m from $340.6m. Franklin Global sells half of Russian government bond portfolio by May Franklin Global, part of Franklin Templeton Investments, halved its investments in Russian sovereign bonds to $5.35m as of early May since January. Franklin Global owned an issue of bonds with maturity in 2030 with a 7.5% yield. The fund also reduced its portfolio of Ukrainian bonds to $2.5m from $6.16m.
Sectors Chinese magnate to invest in Russian cinema chain
sector controlled by the ministry stood at 68.8%, Nikitin said.
Real estate magnate Wang Jianlin, one of China's wealthiest businessmen, will come to Moscow this summer to discuss possible investments in the city's real estate, Deputy Mayor Marat Khusnullin said in June.
AvtoVAZ warns of job cuts as sales fall
Jianlin's Dalian Wanda Group, the world's largest movie theater chain, is interested in building entertainment centers and hotels in the Russian capital, Khusnullin said Russia's online video services market doubles to $98m in 2013
Russia's largest carmaker, AvtoVAZ, has announced that it expects to cut 13,000 staff — more than previously indicated — at its plant in the city of Tolyatti due to falling sales of its flagship Lada. AvtoVAZ slumped to a loss last year, and recently appointed CEO Bo Andersson is battling to revive business in a tough economic environment amid the crisis over Ukraine.
The Russian market of Internet video services more than doubled to $98m in 2013 from about $45m a year earlier, according to a research of J'son & Partners Consulting.
The Swede, who was given the job in November, was previously credited with turning around Russian bus and truck maker Gaz.
The consulting company expects the market to soar to $470m in 2017. The share of Russian companies on the world market of online services will grow to 1.56% in 2017 from 1.00% in 2013.
AvtoVAZ said earlier this year it would reduce staff by 7,500 in 2014 to help the business back into profitability, while the governor of the Samara region last week cited Andersson as saying that up to 8,500 will be laid off.
The subscriber base of domestic Internet video services will reach 91m people in 2017 from 35m in 2013. Penetration will rise to 63% from 37%. Russia's defense revenue up by third in 2013 to RUB1.4 trillion in 2013 Sales of Russian arms rose by just under a third (31%) to RUB1.4 trillion in 2013, the government said in June. The share of the largest holdings in the overall revenue of the defens
New car sales fall 12% in May Car sales fell in June to 201,487 new vehicles, or 28,019 fewer than in May 2013, according to the AEB's Automobile Manufacturers Committee. New cars sold in Russia dropped by 12% in May compared with
Russian Real Estate: Buying the Russian troika Despite the general economic problems the leading real estate companies are doing well with strong cash flow generation in 2013 and robust outlook on 2014 financials. Russian residential market. In 2013, we saw record high deliveries of 69.4mn sqm and the number of registered housing rights hit 11.6mn. The political uncertainties and RUB devaluation skewed the annual demand to 1Q14 and is likely to cool
the same month last year, the Association of European Businesses, or AEB. The domestic market for new cars has been badly affected by Russia's weak economy and the uncertainty caused by the standoff between Russia and the West over Ukraine.
activity in the coming quarters, capping the price inflation behind the CPI in the Moscow and St Petersburg metropolitan areas. Mortgage origination also topped RUB1.35tn in 2013, as banks switched their focus to more secure lending and the investment attractiveness of housing over deposits grew in times of declining interest rates. The economy deceleration is to slow the portfolio growth by 6pp year-on-year to 25% in 2014.
LSR Group: top pick and best performer operationally. In 2013, new sales contracts grew 70% and outperformed original annual guidance by 30%. The deferred booking of those volumes points to a 45% surge in EBITDA, and net income doubling, in 2014. The ZIL acquisition increased the portfolio 16% to 9mn sqm and made LSR one of the key players in Moscow. The company remains a growth story (6% sales volume and 38% EPS 2014-18 CAGRs) and is among the top dividend plays in Russia (6% yield).
In June 2012, Grishin set up investment fund Grishin Robotics. Its co-investors comprise The Foundry Group and SheaVentures. Putin expects Internet business to account for 8.5% of GDP The Russian Internet has become a profitable business, which accounts for 8.5% of the country's GDP, President Vladimir Putin said Tuesday at an Internet business forum, according to Prime.
Etalon preferred to PIK; property tax threatens AFI’s earnings. Etalon’s 2013 construction plans were met in full, with 29% year-on-year growth in volumes, strengthening reliance on the current schedule. We now see 2014-18F CAGRs for sales volumes and EPS at 15% and 23%, respectively. PIK is suffering from weak pre-sales launches, as its land acquisitions were modest during the times of tight liquidity, and it offers modest corresponding CAGRs compared with peers (5% and 16%). The story is also dividend-poor on the 12-month horizon vs. LSR’s yield of 6% and Etalon’s 2%. AFI Development is our least preferred sector exposure due to the state’s excessively high valuation of its key properties, which is threatening the EPS outlook.
The government set up a fund last year to back Internet start-ups, which currently has RUB6bn.
Russia's Mail.Ru Grp founder outruns Google in robotics investing
The production of machine-building tools with digital control on the domestic market will triple until 2020 thanks to these steps, which will favor industry modernization and the development of competitive machinebuilding in Russia, according to the statement citing Minister Denis Manturov.
Founder of Russian Internet company Mail.Ru Group, Dmitry Grishin, said at an Internet business forum in Moscow that he has been ahead of giant Google by investments into robotics by a year. The robotics field will be actively evolving in the future, he said without forecasting when the sphere could become popular with customers.
The government's mission “is to help people, working in this extremely prospective field," so that they “could become independent and be free to express their point of view", the president said, adding that the government will benefit from this activity. Russia to invest RUB15bn in machine-tool building until 2016 The Russian government will spend about 15bn rubles on the development of machine-tool building until 2016, the Industry and Trade Ministry said in a statement Tuesday.
The demand for new equipment will amount to 615bn rubles until 2020, the ministry said.
Russia leads LTE (4G) penetration in CIS in 2013 Russia leads the countries of the Commonwealth of Independent States (CIS) in terms of the penetration of the fourth generation (4G) Long Term Evolution (LTE) mobile phone network at 1.6% in 2013, according to J'son & Partners Consulting. In April, Russia counted over 2m LTE connections in more than 50 of its 85 regions, J'son & Partners Consulting said. The highest mobile Internet penetration, calculated as a number of connections per 100 people, was registered in Armenia with 68%, Kazakhstan with 67%, and Russia with 63%. In each of these countries, services on the basis of the third generation networks 3G/HSPA are provided by four operators, and LTE networks have already been launched. Moscow commercial rents in real estate sector fall Rental rates in the office and retail segments of Moscow commercial real estate are expected to decline for the first time in years, as increased availability gives tenants a leg up in negotiations and poor economic forecasts spur them to strike a hard bargain. In both segments, the situation depends on the class of the space in question. Prime retail properties, such as the Metropolis shopping center in northwest Moscow, are still in low supply, meaning that tenants are for now happy to accept their landlords' terms. But the decline in the exchange rate of the ruble earlier this year, which pushed up the cost of imported products for merchandisers and increased the price of their dollar or eurodenominated rents relative to ruble-
denominated revenues, has put other retailers on the hunt for ways to trim costs. All told, rents on average retail spaces could fall 10 to 15% by the end of the year, Mundy said. In the long term, however, the high cost of borrowing will force Russian landlords to keep the rental rates in Russian malls higher than those on offer in Europe in order to maintain projects' profitability, said Nikolai Kazansky, managing partner of Colliers International. Rents for Moscow retail space are currently two to three times higher than those found in most European cities. Moscow shops starting to lose tenants The total vacancy rate in street retail in the Russian capital has more than doubled since January, going from the stable 4% it has enjoyed in recent years to 8% and rising, but still less than the crisis peak of 14% in 2009. The poor economic situation has had an impact, the life cycle of standard rental agreements is also to blame, according to the consultancy. A typical rental agreement in street retail lasts five years, resulting in a sudden wave of exits when contracts expire. The last such wave was seen exactly five years ago, in 2008 and 2009. However, other consultancy also point out that the rampant development of shopping malls are cutting into the street level retail appeal. Following the crack down on parking in Moscow city centre shoppers increasingly visit the big malls where parking is not a problem and malls offer a wider selection of stores. The consultancy expects the vacancy rate to continue rising, growing to at least 10% by the end of the year.
Russian hypermarkets fastest growing, first to mature Hypermarkets are Russia’s fastestgrowing food retail format with a market share likely rising from 13% in 2013 (840 stores) to 20-25% in 201719E (2,500 stores). They are also arguably be the first format to mature due to (1) natural socio-economic constraints; (2) infrastructure limitations; (3) high capital intensiveness; and (4) mounting competition. VTB Capital gave a snap shot of the leading supermarket chains and their exposure to hypermarkets. Dixy highly profitable, but not a growth area: Dixy operates Megamart hypermarkets (small size of ~2,000 m2; normally located within walking distance; super/hypermarket hybrid assortment). In our view, Megamarts will remain contained to the Urals area due to (1) high capital intensity; (2) elevated share of local suppliers; (3) lack of logistical infrastructure; (4) limited scalability (stores are independently operated); and (5) strategically, Dixy gives “big boxes” another three years before the current boom is over. Lenta 2014 store opening target likely to be met: Lenta’s new store opening decisions remain based on target IRR, incorporating population density, average income, location within a 5-10 minute drive (40% of shoppers walk) and competitive environment. The average store size is likely to decrease gradually as Lenta opens more
compact and super-compact stores (82% of stores are currently standard size) as the retailer moves into lesspopulated cities (focus is currently on cities with populations of 100k+). Magnit focus on smaller stores: Magit targets its “Magnit Family” stores (purposefully omitted from the Figure 1 comparison due to the high level of non-hypermarket features) in 2015E to account for more than two-thirds of newly opened hypermarkets vs. 50% in 2014E and 43% in 2013, thus further distancing itself from the classic “big box” concept toward a hybrid, easily adaptable format. O’Key betting on new management: We envisage that the new CEO’s mandate will be increasing the pace of O’Key’s new store rollout (has consistently missed on guidance thus far) and improving overall management accountability. We highlight the upside risks to the scalability of O’Key’s hypermarket format starting in 2015 (42 hypermarkets and 28 supermarkets are in the pipeline). X5 focus on refurbishment of existing base: X5’s hypermarkets have seemingly stabilized, as attested by improvement in LFL sales traffic in 2013. A new CEO, Vardan Dashtoyan, will join the format on July 21, and he will be tasked with further optimizing what remains of a very mixed bag of concepts and designs (X5’s goal is to refurbish ten stores per annum) united under the “Karusel” brand. We do not expect material expansion of Karusel until 2016 at the earliest.
Share of software piracy in Russia falls 1pp to 62% in 2013 The share of pirated software in Russia decreased by 1% point in 2013 to 62%, according to a BSA Global Software Survey. The share of pirated software shrank by 25% points over the past 10 years. The total value of the country's identified software piracy reached RUB87bn in 2013. The research said that only 45% of companies in the country have requirements to use licensed software. In the world, the share of pirated software rose by 1% point in 2013 to 43%, while its value stood at $62.7bn due to the growth of the number of personal computers in developing countries. EU Takes Russia to WTO Over Ban on Pork Imports Efforts to lift the pork ban have been complicated by tensions over Russia's annexation of Ukraine's Crimean peninsula. The European Union is taking Russia to the World Trade Organization to try to overturn a ban on pork exports from the bloc, escalating a dispute that has been aggravated by the crisis in Ukraine.
The trade row is the fifth between Brussels and Moscow in the two years that Russia has been a member of the WTO. It centers around a swine fever outbreak in Poland and Lithuania that the Kremlin says poses a risk to Russian consumers. Since the outbreak was confirmed on Jan. 24, all EU trucks carrying pork have been halted at Russia's borders. The EU says the ban is unfair because many areas of Europe are unaffected by the African Swine Fever. Rosneft Ready to Take Gazprom to Court Over Pipeline Refusal Rosneft, Russia's biggest oil firm, said Tuesday it would take gas producer Gazprom to court if it refused to offer the state-controlled company access to a gas pipeline due to be built to China. Rosneft and Novatek, Russia's largest private gas producer, last year broke Gazprom's monopoly on shipping gas abroad, getting permission to export liquefied natural gas (LNG) but not getting access to pipelines. Since then Rosneft has pushed for access to the 'Power of Siberia' pipeline, which has yet to be built but will link east Siberian gas production with China, as part of a deal clinched by Gazprom to supply China with gas over 30 years.
On Tuesday Rosneft said Gazprom as "an infrastructure monopoly" was obliged to give access to its pipelines to independent gas producers so gas Rosneft planned to produce in eastern Siberia could give "light and heat" to the regions. "We will ensure that our citizens' right to have a life they deserve will be protected through talks ... and using court procedures if needed," it said in a statement. A spokesman for Gazprom declined to give any immediate comment.