bne chairman's list September 2014 011014

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 World Bank predicts Russian economic stagnation as consumption wilts Jim Rogers calls West "foolish" and invests again in Russia Politics – the good Banks to identify ultimate owners of foreign trusts established by Russian companies Russian authorities to tighten penalties for Ponzi scheme organizers Government cracks down on tax evasion, offshore schemes and intercompany loan scams Russian Finance Ministry to increase fines for accounting report violations Russia enters world's top 51 for quality of health care ranking Putin signs order reshuffling powers among ministries Fines for anti-tobacco law violations amount to $750K in first half of 2014 Russia makes fighting on planes illegal Politics – the bad Putin party lawmaker drafts bill on foreign-asset freeze Russia's Constitutional Court upholds 'homosexual propaganda' ban

Russia's passes bill to limit foreign ownership of newspapers, magazines to 20% Russia's passes bill to limit foreign ownership of newspapers, magazines to 20% Regional elections for mayors and governors disputed Soldiers' Mothers of St. Petersburg NGO fights against "foreign agent" status Politics – the ugly Fourteen killed in xenophobic attacks in Russia this year Hewlett Packard fined for bribing Russian officials Gazprom employees under investigation in Switzerland Polls, mood, sociology The vast majority of Russian support the Kremlin's decision to sanction European food products.

Majority of Russians see sanctions as an attempt to humiliate Russia Russians' enthusiasm for political protests at historic lows Most Russians are not interested in politics Russia has the highest consumption of locally produced food in survey Poll shows Russians divided on democracy's meaning, importance Russians care less about social status than before

Business confidence index up mildly in the first half of this year, extraction still pessimistic Most Russians Are Against Broadening Foreign Travel Restrictions, Survey Shows Over half of the Russians say there are people close to them who are moral authorities Two thirds of Russians think hostilities will resume in Ukraine 45% of Russians believe shadowy group controls humanity German companies optimistic about Russia's potential Most Russians would sacrifice booze and cigarettes to hurt west TV remains the main source of information for Russians on events in Ukraine and over half believe reporting is unbiased The number of Russians who approve of the annexation of the Crimean rises Study finds Russian women spend most time in front of mirror Banks and Finance Russian Central Bank publishes banking sector data for August Sanctions will increasingly weigh on Russian banks' funding and liquidity profiles (but they will survive) Almost all of Russia's leading retail banks are making a loss First time borrowers number falls as over-borrowed public tightens belts The top-100 Russian banks increased their retail loan portfolio by 11% 8M14 Mortgage lending still fastest growing credit product Russian banking NLPs continue to mount

Russia's state-owned banks continue to grow at the expense of privately owned banks Banks bad debt write offs up a quarter to RUB113.2bn ($2.8bn) in the first seven months of 2014 Deposits increase mildly in second quarter Russian transfers of cash overseas up by 40% in the first quarter of this year Finance Minister pledges to uncork reserves to help sanctions-hit Russian banks Major Russian Bank Opts for Chinese Payment System Over Visa and MasterCard Russia's central bank grants strategic status to 19 banks Central Bank's Loan Growth Forecast Holds Firm Russia's Central Bank Tests Telex as SWIFT Substitute Small Russian banks opening correspondent accounts with Asian banks to hedge against more financial sanctions Cash-Strapped Sberbank turns to Russian pension funds, insurance companies for funding Russia to inject RUB240bn in Vnesheconombank's (VEB) capital A number of Russian banks with foreign capital fell by seven in the second quarter as more banks exit Economics World Bank lowers Russia's 2014 GDP growth forecast to 0.5%, warns of stagnation Zero year-on-year Russian GDP growth in August Third of Russian firms lossmaking in Jan-Sep Russian overdue payments up by a quarter in July

New three budget: Putin must choose: spend now or save for later Facing sanctions and crashing oil prices, Russia's new budget looks for silver linings Russian budget surplus close to RUB900bn in 8M14 Russia’s budget deficit forecasts for the next three years First Deputy Prime Minister Shuvalov says Russia may change tax system Russia's ruble dives to record low as rumours of capital controls spread Russia's capital outflow to slow down to $20-30bn 2016-2017 says MEED Russia's gross international reserves could fall to $400bn by 2015 if the CBR forced to defend the ruble EU’s share in Russia’s foreign trade drops to 49% in Jan-July 2014 Government to raid pension funds for company crisis fund Russian inflation hits three-year highs More rate hikes from CBR are unlikely Capital investment disappoints in August Russian real disposable incomes up slightly in 8M14 Retail trade, domestic producers hit by foreign debt redemption Consumers stay away from Moscow's malls as sanctions deepen Russia's slump Russian industrial output decelerates to zero in August Russia ratifies the EU treaty, launches talk of creating currency union

Russia and China pledge to use less dollars in trade as economic ties deepen IFC, EBRD freeze all Russian projects Investments in Russian startups fall 28.4% to $653m in 2013 Infrastructure Serbia to start South Stream construction by November Kyiv sees chance of EU approving South Stream over 70% Russia may delay 3 auto, railroad projects on lack of funds Power lines through Kerch strait to be ready by mid-2017 Russian Railways may cut '15 investments by RUB20bn 2 Major Russian Airlines Appeal for State Support Russia and China discussing 32 joint projects Russian oil and gas access of independent gas producers to the Power of Siberia pipeline proposed Russia's Yamal LNG might be supported by the government Aeroflot Russia may restrict flights over Siberia Russia Approves Rail Union of 3 Ex-Soviet States to Tap Into China-Europe Trade ECM AFK Sistema New lawsuit filed seeking return of Bashneft shares S7 Group Private airline group mulling London IPO Russia sees biggest inflow among BRICS, EMEA Investors Flock to Russia ETF as Ukraine Tension Eases Gazprom plans IPO for utility unit in 2016 Evraz confirms intentions for IPO of North American assets

Blackstone to withdraw from Russia Western Sanctions Destroy Plans for International Financial Center in Moscow En+ Group mulls spinoff of UC RUSAL’s stake in Norilsk Nickel Euroclear has started to settle trades in Russian equities Mark Mobius raises investments in Russia six times in Apr-Jun DCM Share of non-residents in Russian OFZ market hits all time high in June Kremlin crosses 9% mark to make first issue in months Russia wont borrow to cover Russia's budget deficit Volumes on Russia's debt market fell by 78% to $9.2bn in 1H14 Russia's public debt decreased 1.3% in 7M14 to 11% GDP Domestic bond sales restart VTB insists on Mechel debt conversion into equity Sectors Russian government to support agriculture development as a high priority Danone mulls expanding capacity of Russian plant in St Pete Russia's potash fertilizer exports soar 57% in Jan-Jul Russian oil giant Rosneft to shed a quarter of staff, report says Russia imports more butter, sugar, less meat in 7M Russia, China aim to close military technology gap with U.S.: Hagel Russia on track for bumper grain harvest, record exports Russia's car, LCV sales drop 26% in August as government restarts cash-for-clunkers

Russia third in world for number of tourists traveling to Europe Rosneft first arctic well strikes oil Rosneft establishes JV with PetroVietnam to explore Arctic shelf Magnit is now number nine among the largest importers in Russia Russia's Baltika suspends two plants over low demand Russian travel agencies bankrupted as demand falls up to 50% Russian ads volume indicates flagging demand for advertising in current macro conditions Russia's digital content market to grow to $3.5bn by 2017 IKEA Plans $2.5Bn Expansion Across Russia Russia to produce more pharmaceutical products Russia to allocate 20bn rbl in subsidies to pork producers

Top Story World Bank predicts Russian economic stagnation as consumption wilts

former Finance Minister Alexey Kudrin said at the end of September.

Russia's economy is in truble as the World Bank predicts it's on the edge of stagnation. Investment has stalled, hard-currency reserves are falling, inflation and interest rates are high, and GDP growth even in the optimistic scenario is barely above 1%.

Consumption growth will probably slow to 0.5% in 2015 and 0.6% in 2016 from about 2% this year, under the World Bank’s baseline scenario, which sees a period of “near-stagnation.” Gross domestic product will expand 0.5% in 2014, compared with 1.3% last year, and gain 0.3% in 2015 and 0.4% in 2016, the lender said, Bloomberg reports.

"There are no big ideas in Russia at the moment," complains Tim Ash, the head of research at Standard Bank. "The country is on autopilot."

Russia's "engine of growth" is consumption but a slow down in consumer spending will cause the economy to wilt, the World Bank said in its latest forecast.

Consumption accounts for about half of Russia's $2 trillion economy and rising wages over the last decade has been the backbone of the economy. However, the combination of high inflation, high interest rates, low investment and the political instability cause by the show down with the west over Ukraine's fate is finally starting to weigh on consumer sentiment, the IFI said.

It is highly unlikely that Russia will be able to improve investment climate in the next 1.5-2 years,

“Consumption growth is currently moderating to a new and lower growth trajectory in an environment of subdued consumer sentiments,” the Washingtonbased bank said. “Geopolitical tensions are weighing down further on consumption growth."

Consumption contributed 4.7% points to economic growth in 2012, will be “profoundly” depressed by factors including growing household debt and high inflation expectations, undermining demand for the next two years, according to the World Bank, Bloomberg said.

Consumption only added 0.8% to growth in the second quarter of this year.

The situation in Ukraine is starting to make itself felt. Half of Russia's population said they don’t think the fragile ceasefire currently in place

will hold, according to a recent survey by VTsIOM. Inflation is also worrying Russians who are very sensitive to inflation having lived through the hyperinflation of the 1990s. While core inflation has been running at 4%-5% last year the devaluation of the ruble and capital outflow have forced the Central Bank of Russia (CBR) to keep interest rates high and even to increase them recently. Inflation was running at an annualized rate of about 7.6% in August and is expected to end the year on the order of 8%, before slowing to 7% in 2015 and 6% in 2016.

Without a fall in both inflation and interest rates Russia is unlikely to see the pick up in the all important domestic investment needed to spur higher rates of growth. “A return to higher growth in Russia will depend on solid private investment growth and a lift in consumer sentiment, which will require a predictable policy environment,� the World Bank said.

Tim Ash of Standard Bank said in a note: Pretty realistic summary of the Russian outlook by the World Bank - the key word herein is "stagnation", with weak growth drivers, deep-seated structural problems, a lack of reform initiatives - I have argued that the CIS CU/Greater Russia initiative was Putin's "big vision" and that appears to be in tatters now there is zero chance of Ukraine

partaking in any such initiative now any time soon, and without Ukraine there is no CIS CU/Eurasian Union of any significance. The WB argues that over the MT the ruble is likely to weaken - on that we certainly concur, and even in the near term with oil going lower, the Russian economy looks pretty vulnerable.

Oil @ 90 bucks also suggests further decline/stagnation, given the budget balances at around $110 per barrel still. If oil dropped to $80 a barrel I think Russia would look pretty grim, with recession (minus 1-2%), deteriorating current account and fiscal positions (budget deficit of 45% of GDP), heightened capital flight.

Interesting, that ST Russian debt/equity markets are rallying, on the assumption that with a "frozen conflict" secured in Ukraine, Putin has no reason to reescalate the current crisis further meaning no more sanctions from the West - while the EU will inevitably go soft on Russia and quickly move to backtrack on the sanctions front. On the latter perhaps Russia's move to disrupt gas supplies to Europe in recent weeks is meant to concentrate minds in the EU, and encourage compromise.

What is needed is a change at the top, said Kudrin, who is now one of the most outspoken critics of the Kremlin policies. According to Kudrin, who chairs the Supervisory Board of the Moscow Stock Exchange, the task of improving the investment climate cannot be

accomplished without reshuffles in the ruling elite of the country.

not want to rock his domestic political boat now.

“In the next 1.5 or 2 years, it is hard to expect that the investment climate will improve unless a political task is set and the relative steps are taken. But this demands the renewal of the team and political will. Otherwise, nothing will change in this matter,” Kudrin told reporters in Sochi.

Kudrin has called for making the system of state management in Russia more harmonious and transparent, stressing that this effort could result in the economic growth in the country of up to 2%. “The quality of state management today does not meet the tasks of the economic growth,” he said.

However, major changes are unlikely in the near term as Putin is fully focused on winning the international political game and will

Jim Rogers calls West "foolish" and invests again in Russia

Legendary investor Jim Rogers calls the US government foolish, arguing that the only long-lasting effect which Washington's confrontation with Moscow over the fate of Ukraine will have is to drive Russia into the arms of the Chinese – something that is not in the US' long-term interests.

Best known for being the other half of George Soros' Quantum Fund that forced the Bank of England out of the European Exchange Rate Mechanism in the 1980s and made the two men super-rich, Rogers – who was hired by the Russian investment bank VTB Capital last year as an advisor – said he started to invest in Russia this

March, following Russia's annexation of Crimea. Despite the fraught political situation and fallout from the civil war in Ukraine, he says he is still in the money.

"Two years ago Russia was like the backend of the world and no one was paying attention. Now the US has shot itself in the foot," says Rogers in an exclusive interview with bne from his home in Singapore.

"The conflict in Ukraine has certainly been a setback, but it's not the end of the world. [US oil major] Exxon just announced that it's found oil in the North [Arctic] and [even if] Exxon closes this camp

and goes home, then the oil is still there and it will be exploited by someone. This is a blip and no more," Rogers says confidently.

Commentators have warned that the West's attempts to isolate Russia will set the country's development back and the economy, according to the World Bank's latest economic forecast released in September, is already close to stagnation. However, Rogers takes a longer-term view.

Cut off from Western finance and technology will slow Russia's development, but that does not mean it will be isolated. "The upside of the US actions will be to force Asia and Russia together. It will be exploited and China and Russia are welcoming each other with open arms. In the long run this new relationship will hurt the West more than it hurts Russia," says Rogers, who speaks with just a slight hint of an accent from Alabama where he grew up.

Other places to go The latest round of sanctions imposed on Russia in September have also more-or-less cut the Russian government and the country's leading companies off from the international capital markets in London and New York, but that problem too can be overcome, says Rogers. "Hong Kong and Singapore are not New York and London, but they are both growing rapidly and there are gigantic pools of capital in Asia," says Rogers. "The problems in Eastern Europe will help the Asian market to develop and catch up

with the West. There is a lot of money in Asia and expertise."

Behind the West's actions lie the assumption that cutting Russia off from Western money and technology means it has nowhere else to go. But that is not true, argues Rogers. "I'm stumped when people call South Korea an emerging market. Singapore is also an emerging market, but yet it is one of the richest countries in the world on a per-capita basis," says Rogers. "Emerging markets are only those countries that you read about in the Financial Times or the New York Times."

It is these assumptions that have led policy astray in the West and Rogers thinks the US will pay a price, while investors with the courage to continue to invest in Russia and the other emerging markets will benefit from these misperceptions.

Rogers is quite outspoken, blaming "bureaucrats" for mismanaging US foreign policy. "The USA is acting foolishly and accelerating the change in the geopolitics of the world,� says Rogers, recalling the well-known leaked recording with US Assistant Secretary of State for European and Eurasian Affairs Victoria Nuland telling the US ambassador in Ukraine, "fuck the EU, we want to bring down this government.�

Rogers complains that the US was encouraging people to bring down an elected government. "[President Viktor] Yanukovych may have been a horrible guy, but he was elected.

Presidents George Bush and Barack

Obama may also be horrible, but they were also elected. However, the US set out to destroy a legitimately elected government and it's backfired."

Buy on sound of cannons Rogers is nothing if not a contrarian. Having made his fortune by betting against a central bank, he is playing that role again with his Russian investments.

"Russia is perhaps the most hated market in the world - certainly it's in the bottom five. But the reality on the ground has started to change. [President Vladimir] Putin is also a different man to do what he was in 2000 when he was elected," says Rogers, who says he has been following the country's path since he visited the Soviet Union as a student in 1966.

Rogers began investing in Russia after the market collapsed in March after the annexation by Russia of Ukraine's Crimean peninsula. "You shouldn't listen to me as I'm the world's worst market timer, but I am surprised and delighted that the market today is still above his levels in March," says Rogers.

And he bought again in May, and says he is looking to buy more, although his Russian portfolio still represents a tiny part of his overall investments.

Amongst the companies that Rogers has invested into is the Moscow Exchange that was floated in February 2013 following the merger of Russia's two biggest stock markets, the RTS and Micex.

"Putin has committed himself to

making Moscow an international financial centre. Many may find that laughable, but it doesn't matter if it works; Russia will spend huge amounts of money to try and make it work," says Rogers.

Other companies he's invested in include Aeroflot and fertiliser producer Phosagro, of which he was recently appointed a director.

"I'm wildly bullish about agriculture and definitely bullish about Phosagro," says Rogers. "Phosagro is an opportunity in the agricultural sphere, because agriculture is only going to increase in demand. It's a very well-placed company and even if sanctions are imposed against it, it is still has the opportunity to sell to Asia and other countries."

With peace now possible in Ukraine, Rogers thinks that once investors switch from following current affairs to looking to the future again, investment will return. "There is an old adage: invest when there is blood on the streets and usually it is correct.

Investors have very short-term memories – it’s a fact. Who remembers Tiananmen Square in the 1980s? But today we are pouring trillions of dollars into the Chinese economy," he says. "We need to engage in Russia – open our hearts and minds to Russia – as engagement is always better than isolation."

Politics – the good Banks to identify ultimate owners of foreign trusts established by Russian companies The Russian authorities are intending to close down the major loopholes used by Russian businessmen to find the ultimate beneficial owners of companies.

Companies are often held in blind trusts, which effectively screen out the possibility of regulators and taxmen from seeing who owns the company. This is the dodge specifically aimed at state officials who have made use of the blind trusts for decades to hide companies obviously milking stateowned entities for cash.

It follows on from a rule introduced in 2012 by Vladimir Putin that bans state owned entities from signing contracts with companies where the ultimate beneficial owner was not identified. Following the introduction of this rule stateowned companies had to cancel some 60% of their contracts.

At the moment, the anti-money laundering law doesn't govern relations between banks and foreign legal institutions (trusts), which are not legal entities in Russia. The draft law is prepared

by Rosfinmonitoring.

Russian authorities to tighten penalties for Ponzi scheme organizers Russia’s Finance Ministry has proposed to introduce criminal liability and to significantly increase fines for the organizers of Ponzi schemes.

The most notorious Ponzi scheme was launched in the mid 1990s called MMM run by Sergei Mavrodi and was one of the biggest Ponzi schemes of all time. Mavrodi remains something of an icon in Russia and is still considered by many swindled in the scheme as a financial genius. The problem is the level of financial literacy in Russia it remains extremely low making the population fundable to these sorts of schemes.

The plain vanilla financial Ponzi schemes like MMM have given away to more sophisticated scams where regular Russians answer adverts to invest into "sure fire" offshore investment schemes. The contracts they sign are such that the scammer can simply confiscate their money with recourse to return the invested capital.

The Finance Ministry believes that pyramid scheme organizers have become more active in Russia. “These organizations are negatively influencing the Russian financial market, which can lead to financial loss for a considerable part of the

population,” an explanatory note to the bill says.

If the bill is adopted, pyramid scheme organizers could be fined up to 1m rubles ($25,860), or their salary or any other income for the past two years, or sentenced to up to four years of compulsory labour or imprisonment.

Government cracks down on tax evasion, offshore schemes and intercompany loan scams The Federation Council plans to tighten criminal responsibility for tax evasion using offshore schemes and intercompany prices. The number of criminal cases will increase, experts say Amendments to Russia's Criminal Code prepared by the Federation Council provide for adding new circumstances to Article 199 (tax evasion) under which the responsibility will be tightened automatically, including the use of offshore schemes, fly-by-night companies and intercompany prices.

The penalty will be the same as the one provided for tax evasion on a very large scale, for example, imprisonment for up to six years.

Offshore schemes, as defined by the law drafters, including Valentina Matvienko, the Chairwoman of the Federation Council, mean a failure to provide or misrepresentation of information about controlled foreign companies.

Russian Finance Ministry to increase fines for accounting report violations The Russian Finance Ministry intends to significantly increase fines for serious violations of accounting report requirements and to introduce responsibility for repeated violations, according to a draft federal law published on the website of legislative initiatives Tuesday.

Currently, the Code of Administrative Offences imposes an administrative fine of 2,000 to 3,000 ($51 to $77) rubles for accountants and officials who significantly violated accounting report requirements.

The ministry has proposed increasing the fines to 5,000 to 10,000 rubles ($130 to $260).

Additionally, the ministry is suggesting legal liability for repeated violations. The second violation within a year could result in a fine of 10,000 to 20,000 ($260 to $520) rubles.

The draft law also clarified the definition of “serious violation of accounting report requirements.”

Currently it includes misstating the amounts of taxes and levies by more than 10% due to distorted reporting data as well as distortion of any other figures in the report by at least 10%.

Russia enters world's top 51 for quality of health care ranking Russia has for the first time made it onto Bloomberg's list of countries with the most efficient health care — finishing last out of 51 countries polled.

The list ranked countries on criteria including life expectancy, health care cost as a%age of GDP and health care cost per capita.

Singapore topped the list with an efficiency rating of 78.6, while Hong Kong (77.5) and Italy (76.3) came in second and third place, respectively.

Russia, which has the lowest life expectancy of all the countries polled — 70.5 compared to 83.5 in Hong Kong — scored an overall efficiency rating of just 22.5.

Putin signs order reshuffling powers among ministries President Vladimir Putin and Prime Minister Dmitry Medvedev agreed on a major reshuffling of government agencies on Monday that would see the Regional Development Ministry abolished and state defence procurement agencies merged with the Defence Ministry.

Former Finance Minister Alex Kudrin has been calling for a reshuffle amongst the Kremlin today in order to improve the quality of economic meant management - but this is not what he had in mind. The reshuffle is designed primarily to bring defence spending more directly under the

Kremlin's control and to cut corruption and misallocation of resources in regional budget spending. The changes are aimed more at control and boosting efficiency or introducing new ideas.

The Regional Development Ministry was established in September 2004 and has been especially pathetic.

Russia's regions are running themselves into debt and while the overall macro position of the country is fundamentally strong, at least a third of Russians reasons are facing bankruptcy.

Fines for anti-tobacco law violations amount to $750K in first half of 2014 No one believed that the Kremlin's plan to ban smoking in public places – including bars and restaurants -- would be possible to implement in a country as corrupt as Russia. To everyone's amazement not only has the ban come into effect that it is being rigorously enforced.

Russia’s food safety watchdog Rospotrebnadzor announced on Thursday that the total fines which have been imposed during the first half of the year on perpetrators for violations of anti-tobacco legislation amount to 28m rubles (over $750,000).

The law became effective on June 1. It also prohibits the display of tobacco products at the point of sale in stores and smoking scenes on screen and on stage. Social anti-tobacco ads must accompany the broadcasting of old films that include smoking scenes.

Rospotrebnadzor said in a statement that about 3,600 individuals, 970 officials, 518 sole operators and 456 legal entities were called to account for violating the antismoking law in the first six months of 2014.

Russia makes fighting on planes illegal The Duma introduced a new bill in September that seeks tougher penalties for offenses against public order and interfering with public transportation. Specifically the law is designed to make punchups on planes in legal, because Russia has a problem with that.

The bill introducing amendments to the Criminal Code as well as the Administrative Offences Code was proposed and submitted to the State Duma in early June in the aftermath of numerous drunken inflight brawls.

charges and a 15-day administrative arrest. As a rule, they get off with 500-ruble ($14) fines.

Russia’s largest air carrier Aeroflot proposed earlier that in-flight brawls be considered a criminal offence punishable by up to 10 years in prison.

The bill defines “violation of inflight security regulations by passengers” as a crime.

It allows air carriers to refuse to sell tickets to those who have violated the in-flight regulations within the previous five years.

The Russian government says that tougher penalties should be considered for disorderly conduct at transportation facilities including airports, metro stations, motor vehicle stations, and sea ports.

Currently, under Russian legislation perpetrators face hooliganism

Politics – the bad Putin party lawmaker drafts bill on foreign-asset freeze

countries to freeze Russian oligarch asses in Europe.

As the dingdong with the West over Ukraine continues Russia introduced a law that allows counter asset freezes on Western assets in Russia to mirror a western law that allows western

Part of the sanctions regime has been to freeze the assets of the leading oligarchs in Russia – all close personal friends of Russian president Vladimir Putin – so that

the Russians have responded in kind.

In September Italian authorities seized property worth about €30m ($40m) belonging to companies controlled by Arkady Rotenberg, an ally of President Vladimir Putin targeted by European Union sanctions.

A member of Russia’s ruling party United Russia proposed a law that would allow the seizure of foreign states’ assets in the country after the and its allies targeted President Vladimir Putin’s inner circle including a childhood friend with asset freezes and travel bans.

The draft seeks to benefit citizens or companies that had property outside Russia seized under an “unlawful” judgment from a foreign court, according to the State Duma’s website.

The government would use budget funds to compensate the victim, and the courts would have the right to go after foreign states’ assets in Russia, including property under diplomatic immunity, according to the proposal.

Mail.Ru takes over leading Russian social site VKontakte to increase the Kremlin's control of the internet Russia’s Internet group Mail.ru acquired the remaining stake in VKontakte i(VK) in September, making it the sole owner of the country's largest social network.

This concludes the drawn-out battle for control over the

lucrative business and the data ofms of users inside and outside Russia.

Mail.Ru group, which until recently owned 52% of VK, bought the remaining shares of the company for $1.47bn from the Moscowbased fund United Capital Partners (UCP). UCP became owner of this stake in April last year, after it bought the shares from VKontakte co-founders Israeli national and diamond trader Lev Leviev and Viacheslav Mirilashvili for an undisclosed amount of money.

Almost immediately, UCP started to pressure Pavel Durov, VK's founder and CEO, accusing him of various misdeeds. Durov eventually stepped down claiming that VK had fallen under the control of Russian authorities and that he himself was a victim of political games.

The main shareholder of Mail.Ru group—billionaire Alisher Usmanov—isn’t a fan of the opposition, but he is in exactly the Kremlin's stooge either. However he remains malleable to Kremlin pressure and fired the editor of his paper Kommerdant-Vlast after one of the journalists wrote a piece including the phrase: "Fuck you, Putin."

Russia's Constitutional Court upholds 'homosexual propaganda' ban Russia's Constitutional Court has dismissed a complaint filed against the so called “gay propaganda” provision thus recognizing it as lawful in September.

The ruling reads as follows: “The contested provisions are not intended to ban homosexuality as is, and cannot be viewed as allowing to curb the rights of citizens based on their sexual orientation. They also do not imply a ban on any information concerning unorthodox sexual relations” The court ruling stresses that only public actions actively popularizing and enforcing unorthodox sexual relations on minors can be viewed as unlawful. The contested provisions do not allow for the law to be interpreted as discriminatory.

However despite the fig leaf that the law is specifically aimed at protecting minors, the law has been used to impose a blanket ban on any public display of alternative sexualities.

But it should be said that this law is widely supported by Russian society. To understand Russian attitudes to homosexuality it's best to think of America in the 1950s: pressure remains a deeply conservative society and having been behind the Iron Curtain during the Civil Liberties movements of the 1960s Russia has missed out on most of those changes.

Russia's attitude to things like homosexuality and racism is only beginning to change now.

Homosexuality was still in illegal until 1996 when Yeltsin rescinded the law as part of Russia's accession to the Council of Europe - and even then the law was nixed in secret. It will be several decades before Russia brings its discrimination laws in line with those in the western world. On the other hand the west is demanding that Russia bring itself in line with these values immediately, which is leading to a fundamental clash in what is appropriate values for the country today as seen from the inside versus seen from the outside.

The law on “gay propaganda,” levies fines for promoting homosexuality from 800,000 rubles ($24,000) to 1m rubles ($30,500) for legal entities, from 4,000 rubles ($120) to 5,000 rubles ($150) for individuals and from 40,000 rubles ($1,220) to 50,000 rubles ($1,530) for officials. Legal entities may also be suspended for 90 days for disseminating gay propaganda among children.

Russia's passes bill to limit foreign ownership of newspapers, magazines to 20% In September Russia passed a law limiting the ownership of foreign companies in newspapers and magazines to 20%. This law comes on top of an existing law that already limits for ownership of TV stations and radio to less than 50% – which is normal as similar laws exist in most western countries.

However the cap on foreign ownership of magazines and newspapers is seen as another step by the Kremlin to limit foreign interference in domestic politics.

The main target of the law is widely seen to be the leading national newspaper Vedomosti, which is jointly owned by the Wall Street Journal, the Financial Times, and a Finish media group. Since it was set up Vedomosti has become a byword for reliability and independence, often writing scathing criticisms of the governments policies as well as running investigative journalism pieces exposing official corruption and incompetence.

Under the terms of the law which was passed in all three readings in September foreign companies will have to bring their ownership structure into line with the new law (ie sell the bulk of their holding to Russians) by February 2016. For Russian media entities that hold their assets using offshore companies they have until February 2017 to bring their ownership on shore.

The law is expected to cause chaos in the industry has virtually all of the leading magazines are majority owned or controlled by foreign companies. Titles like Forbes and Vogue will have to reorganise themselves and companies like Forbes Russia has already been trying to sell its magazine without success.

Russian GQ was one of the most profitable worldwide. The upshot is that there will be a fire sale and most of these titles will probably

end up in the hands of Kremlinfriendly oligarchs.

The companies and publications affected include: Sanoma (Finland) Publishes: Vedomosti, The Moscow Times, The St. Petersburg, Times.

News Corp (U.S.) Publishes: Vedomosti Pearson (Britain) Publishes: Vedomosti Hearst Corporation (U.S.) Publishes: Elle, Maxim, Marie Claire, Psychologies, Elle Girl, Elle Decoration, Departures.

Axel Springer (Germany) Publishes: Forbes Russia, OK! Magazine, Gala Biography, GEO, GEO Traveller, GEOlenok, and Finanz.ru.

Conde Nast (U.S.) Publishes: Vogue, GQ, Glamour, architecture magazine AD, Tatler, Conde Nast Traveller and Allure.

Burda (Germany) Publishes: Playboy, among others.

Bauer Media (Germany) Publishes: Various CTC Media and Modern Times Group (Sweden) Stations: Entertainment channel CTC, family channel Domashny, male-oriented Perets.

Walt Disney (U.S.) Stations: Disney Channel Thematic Channels including Discovery Communications (U.S.),

Modern Times Group (Sweden), Viacom (U.S.), Sony Entertainment Television (U.S.) EM-Holding (U.S.) Stations: Ekho Mosvky Regional elections for mayors and governors disputed Dozens of regional and mayoral elections were held in October.

However on the back of the tsunami of nationalism that the Kremlin is enjoying thanks to its tough-man stand on Ukraine the Kremlin's representative party United Russia made a clean sweep of most of votes.

Russia's Liberal opposition were hoping at the start of the year to build some momentum and wrestle some of these elections away from the Kremlin. However following the surgeon national pride after Russia's annexation of Crimea in March one of the side-effects has been to completely crush the nascent opposition. Currently Russian president Putin is enjoying an all time high popularity while the propensity of Russians to protest is at an all-time low.

The Moscow Times reported that a maths study on the voting patterns in the regional elections show conclusively the results were fixed.

The study, conducted by the liberal NGO Civil Initiatives Committee, examined the so-called effective number of parties and candidates, a concept used in political studies since the 1970s.

While the number stood at 2.25 during the 2007 State Duma

elections, it slid below 2 during 28 of 30 gubernatorial elections held on September 14 of this year, according to the study. The figure shows there was no real competition at the 6,000 elections held across 84 of 85 Russian regions, including Moscow, St. Petersburg and newly annexed Crimea, according to the study.

Nominees with the ruling United Russia, predominantly incumbents, carried most of the gubernatorial elections this month, many scoring between 70 and 90% of their respective votes.

The Russian opposition party in the Duma, Just Russia said it wouldn’t recognize the elections in St. Petersburg in a token protest.

Oksana Dmitriyeva, the leader of St. Petersburg’s branch of the A Just Russia party, refused to recognize the results of the gubernatorial and the majority of municipal elections in St. Petersburg.

“These elections were not free, the secrecy of voting was not observed, there were no openness and people’s constitutional rights were violated,” she said in a statement posted on the official website of the party’s St. Petersburg branch. Employees of state-funded enterprises had been taken by buses to election commissions during early voting.

More to it, on the day of voting, observers were illegally expelled from a number of polling stations.

The incumbent St. Petersburg governor Georgy Poltavchenko was re-eected by about 74.5% and as

many as 107 municipal entities in the city elected their legislatures, all of which are pro-Kremlin.

The story was similar in Moscow where a total of 44 self-nominated candidates and eight political parties ran, only to be defeated by the United Russian candidates. A total of 7.28m registered voters out of Moscow’s population of 12m were entitled to cast their votes.

According to a federal law, which came into effect in November 2012, the NGOs engaged in political activity and receiving foreign funding are required to register as “foreign agents” with the Ministry of Justice. Last summer the law was amended, and the Ministry of Justice was authorized to add even unregistered NGOs to Foreign Agents List at its own discretion.

Soldiers' Mothers of St. Petersburg NGO fights against "foreign agent" status

The Ministry of Justice blacklisted the Soldiers’ Mothers of St. Petersburg in late August.

Soldiers mothers is one of Russia's very few grassroots NGOs that have grown up since the fall of the Soviet Union. It is made up by the mothers of young soldiers, usually conscripts, who were sent into battle in the two wars in Chechnya.

Many of these young soldiers died through what was widely believed to be the army's incompetence.

The mothers of the killed and injured soldiers formed a group to protest and hold the government to account. However as the NGO receives funding from abroad, and is seen and supported as a prodemocracy movement, it was 18labeled by the government a "foreign agent" (the spy connotation is the same in Russian as in English) earlier this year as the part of a general crackdown on foreign funded NGOs.

Notably, the NGO was put on the list of foreign agents after one of the senior organizers alleged in an interview with television channel Dozhd that Russian soldiers were paid to fight in Ukraine.

Soldiers’ Mothers of St. Petersburg has been protesting against their label and want the Ministry of Justice to remove it from the blacklist.

Politics – the ugly Fourteen killed in xenophobic attacks in Russia this year A Moscow-based think tank that monitors xenophobia and extremism says 14 people have been killed and 77 injured in ethnically motivated attacks across Russia since the beginning of the year.

According to the latest report presented by the Sova Center for Information and Analysis on September 30, 31 individuals have been sentenced for hatred attacks since January 1.

The report did not include ethnically or racially motivated attacks in Russia's volatile North Caucasus region or in Crimea, the Ukrainian region that was annexed

by Moscow in March.

The main victims of the attacks were migrant workers from Central Asia and the Caucasus, as well as representatives of youth subculture groups and sexual minorities.

The Sova Center said that 20 people were killed in ethnically motivated attacks across Russia last year.

by the US authorities in September for bribing Russian government officials.

The Russian subsidiary of the technology company was fined for a "brazen violation of the Foreign Corrupt Practices Act (FCPA)."

Hewlett Packard's Russia subsidiary usedms of dollars in bribes from a secret slush fund to secure a lucrative government contract, according to the US deputy assistant attorney general.

HP Russia, also known as ZAO Hewlett-Packard A.O., pleaded guilty to conspiracy and substantive violations of the antibribery and accounting provisions of the FCPA in California. HP Russia executives admitted creating a multimillion dollar slush fund, at least part of which was used to bribe Russian government officials for a contract valued at more than €35m.

Gazprom employees under investigation in Switzerland

Hewlett Packard fined for bribing Russian officials

Swiss authorities are going to file charges against four people with ties to Russian energy giant Gazprom who are suspected of bribery, money laundering and forgery.

It's not just the Russians who are corrupt, US technology giant Hewlett Packard was fined $108m

The names of the suspects have not been disclosed. One of them was reportedly a Gazprom’s

manager from 1998 until 2008 while another one still holds a senior position in the company.

The charges may reportedly be brought against the suspects in the case by the end of the year.

Polls, mood, sociology The vast majority of Russian support the Kremlin's decision to sanction European food products.

The vast majority of Russians (84%) are right behind Russian president Vladimir Putin's decision to ban the import of a wide range of European food products in retaliation for sanctions imposed by the west on Russia as a result of the conflict in Ukraine.

While Western commentators have suggested that support for Putin will evaporate once Russians are cut off from Parmesan cheese and polish apples, exactly the opposite seems to be happening.

Not only are Russians willing to forego their little edible luxuries they also expect the ban on imported food to provide a boost to domestic economic development.

The Russian citizens were “morally ready for the introduction of the sanctions regime” by the Western countries, a study based on the data received in the first six months of the year says. Since the beginning of the year, opinion polls have shown that Russians “understand that tensions in the

world are running high” and the country’s relations with the West are deteriorating.

Russian citizens harshly criticized the sanctions against Russia, and Moscow’s retaliatory measures, namely the one-year food ban on imports from the countries that targeted Russia, “were perceived as a matter of course even before their introduction,” the study from the Center for Political Analysis found.

Russia food embargo will affect 9.5m EU farmers, according to the European Union's estimates.

Majority of Russians see sanctions as an attempt to humiliate Russia Most Russians (71%) see Western sanctions on Russia as an attempt to weaken and humiliate the country, according to the independent Levada Center. Another 18% of respondents to the poll described the sanctions as an attempt to rebalance the geopolitical scales after Russia's acquisition of Crimea in March. Only 4% think the

sanctions were a genuine attempt to stop the fighting.

Russians' enthusiasm for political protests at historic lows Russians' propensity to protest is at a historic low of 7%, according to a poll from the independent Levada Center.

The independent Levada Center pollster said in September most Russians did not imagine their fellow citizens would take part in protests either— only 12% of those questioned said they expected some kind of politicallymotivated public protest would be staged in their region.

The number is at its lowest since mid-2000 and marks a dramatic decline from late 1998, when half of respondents said political protests could occur, according to the report.

In the latest poll, 83% of respondents thought it unlikely a political protest would be staged in their region, and an even higher number — 87% — said they would probably refrain from participating in one themselves, the poll indicated.

Most Russians are not interested in politics Russians may give their President Vladimir Putin soaring approval ratings, but more than half of the country's inhabitants take no interest in politics or even dislike it, According to poll from the Levada Center.

About 30% of respondents said they were indifferent to Russian politics and did not care about the country's political affairs, while another 23% said they did not like politics and did not want to be bothered with it.

Another 40% said they closely followed political news in Russia, but did not participate in political parties or movements, according to the poll. Only 2% said they were active in political parties or groups, or actively supported one.

Putin's approval ratings in Russia dipped to 84% in late August from 87% at the beginning of the month, according to previous Levada Center polls, but the difference falls within the 3.4%age point margin of error.

Russia has the highest consumption of locally produced food in survey A survey conducted by the National Geographic magazine found the Russians consume a higher share of locally produced agricultural products (77%) than the other 18 leading countries in the survey.

Russians are the biggest locavores in the survey, eating home produced products daily or several times a week, according to the National Geographic report, released in September.

Russia along with Hungary, Sweden and Germany consumed more organic and natural food as part of the main diets. India ranked first in food sustainability

due to its mostly vegetarian population.

Part of the reason for the higher result is the long-standing tradition of the wide spread ownership of dachas, or summerhouses. In Soviet times one of the luxuries afforded to the entire population was a plot of land to build a house outside of the cities, known as dachas. Even today the traffic leaving the city on Friday nights and coming back in on Sunday night is worse than the traffic during the week is half the population of the city decamps to the dacha.

Often self built part of the dacha's appeal is its kitchen garden. In the 1990s some half of Russia's entire agricultural production was grown in dacha kitchen gardens -- indeed is the reason why Russians got through the collapse of the Soviet union without widespread famine or poverty because everybody grew enough potatoes at the dacha to feed themselves even in the worst years.

This hands-on attitude to the production of fruit and veg means that Russians value naturally produce products over those produced by the food industry.

Ironically the sanctions have removed the most heavily processed food, which will less popular in Russia in the first place.

Poll shows Russians divided on democracy's meaning, importance Democracy is important to most Russians, but they can't seem

to agree on what exactly it is, according to a survey published at the end of September.

The pollster VTsIOM found 63% of respondents said it was important for Russia to have democracy, while another 16% said it made no difference to them personally whether Russia was ruled by a democratic system or not.

27% of respondents said Russia's most democratic period was the current one, under President Vladimir Putin, while another 12% said Putin's previous two terms were more democratic.

But many respondents to the poll seemed to disagree, with one-third saying Russia currently had "as much democracy as is necessary: 22% said there was not much democracy in the country and that transparency and free speech were lacking. Another 11% said there is too much democracy, lamenting the fact that "everything is permitted, and everyone does what they want.

The poll's results also revealed that there was no common consensus on what exactly democracy entailed, with 43% of respondents saying democracy meant "transparency, free speech and free elections" as well as "upholding human rights," while another 12% described it as ordinary citizens taking part in the country's management.

Another third of respondents said they could not define democracy.

Russians care less about social status than before

importance to only half of the respondents (49%).

Social status counts for a lot less today than I did a decade ago according to a poll from VTSIOM published in September.

Business confidence index up mildly in the first half of this year, extraction still pessimistic

According to the pollster Russians’ number one priority these days is security, material wealth and health - of their own and of the whole family. Just as ten years ago 98% of the respondents placed these factors above anything else.

Russians’ attention to the environment at the place where they live has dwindled noticeably: 90% said this is a matter of concern for them - 5% less than in 2005. 80% (5% less than ten years ago) care about the climate of their area.

The economic and political situation in the country is important for respondents to a far lesser extent than it used to be in the past. In 2005 it was in the focus of attention of 91%, in 2009, of 93%, and now, of 87% Social status is far less important to Russians than 5-10 years ago.

Whereas in 2005 it was important to 85% of the polled, now it really matters for 75% Similar changes have occurred to the people’s attitude to their creative selfrealization. In 2009 it was important to 78% of the polled, and now, to 68% Participation in social and political affairs is the least important of the priorities the sociologists offered to the polled audience. It is of some

In September 2014 compared to December 2013, the business confidence index reflecting the generalized state of business behavior increased from minus 5% to minus 1% in extractive industries, from minus 8% to minus 6% in manufacturing industries, and decreased from 6% to 4% in production and distribution of electric power, gas and water, according to Rosstat However pessimism continues to dominate the mining industry: According to estimates made by heads of extractive and manufacturing companies, estimates of the demand for products (stock of orders) totaled minus 21% in extractive industries and minus 37% in manufacturing industries in September 2014 versus minus 16% and minus 33% in September 2013 respectively.

In September 2014, the number of company heads expecting growth of production during the next three months is 14%age points higher in extractive industries and 17%age points higher in manufacturing industries than the number of those expecting a decline in production.

In September 2014, the economic situation in a company is considered favorable by 12% and satisfactory by 71% of company heads in extractive industries and

by 9% and 75% of respondents in manufacturing industries respectively.

Most Russians Are Against Broadening Foreign Travel Restrictions, Survey Shows

The number of respondents who assess the current economic situation pessimistically exceeds the number of optimists by 2%age points in extractive industries and by 6%age points in manufacturing industries.

More than half of all Russians are against the idea of the government broadening a ban on travel to Western countries, a recent survey has shown, but one third considers more groups should be prevented from leaving the country.

Improvement of the economic situation in the next six months is expected by 21% of respondents in extractive industries and 26% of respondents in manufacturing industries.

The number of optimists exceeds the number of those who expect the economic situation to deteriorate by 15%age points in extractive industries and by 17%age points in manufacturing industries.

Respondents estimated the average capacity utilization level at 61% in September 2014. 91% of respondents think their manufacturing capacity is adequate to meet the demand for products expected in the next six months, including 11% of them point to surplus capacity.

Among factors putting a cap on growth of production, company heads mention an inadequate demand for products on the domestic market in respect of manufacturing industries and a high level of taxation in respect of extractive industries.

Out of the 1,600 people questioned by independent pollster Levada Center, only 55% entirely opposed the idea of limiting travel for more Russians, saying it was an inalienable right to travel abroad without restrictions.

Just under a third of respondents — 28% — said travel bans should apply to those holding certain professions, most popularly to those with knowledge of state secrets.

Other, less frequent, answers were that military personnel, judges and other lawenforcement employees should be restricted in their foreign travels.

19% of those who were open to the measure also suggested slapping a ban on civil servants, senior political party members and state-media employees, the survey said.

Over half of the Russians say there are people close to them who are moral authorities Over half of the Russians surveyed by the Public Opinion Foundation (56%) said there are people close to them who are moral authorities to them, while 40% said they do not have such people.

60% of the respondents said they had people that they considered authorities among prominent Russians, including cultural figures, scientists, politicians, and athletes.

point in the future, according to a poll from VTsIOM. 87% of those polled said they were informed about the ceasefire negotiated between Ukraine and pro-Russian separatist fighters, and 12% said it was a revelation for them.

48% of those surveyed said the truce would not lead to an improvement in relations between the conflicting parties, 36% said they were optimistic and 16% were undecided.

To 36% of these respondents, Russian President Vladimir Putin is such a person.

63% of those polled said that fighting would restart, 18% think that the truce would lead to stable peace and 18% were undecided.

Among the other "prominent authorities" are Foreign Minister Sergei Lavrov (6%), Defense Minister Sergei Shoigu (5%), Liberal Democratic Party leader Vladimir Zhirinovsky (4%), Prime Minister Dmitry Medvedev (3%), film producer Nikita Mikhalkov (3%), and Communist Party leader Gennady Zyuganov (2%).

Russians are divided on what the future of the self-declared Donetsk and Luhansk people's republics will be like. 34% of those polled said the republics would become independent, 24% said they would become integrated within Russia, 19% think they would remain part of Ukraine and 20% were undecided.

31% of respondents said they do not have any authorities among prominent Russian people, while 10% of respondents were undecided.

45% of Russians believe shadowy group controls humanity

Two thirds of Russians think hostilities will resume in Ukraine Two thirds of Russians think that the situation in Ukraine is not resolved, despite the ceasefire, and that hostilities will resume at some

"The world is run by some sort of overarching entity that pulls the strings in governments around the globe" is a statement nearly half of Russians would agree with, a state-run pollster revealed in September.

45% of Russians believe in the existence of an omnipotent force that lords over state governments,

controlling the affairs of humanity, the poll found. Only one-third of the population expressly rejects this hypothesis, while another 23% of Russians remain undecided, according to the survey.

German companies optimistic about Russia's potential Recent polls show the Russian companies are pessimistic about the near-term future of the economy, however a poll of German companies found that three quarters of them believe Russia has great potential.

Nearly 75% of German companies with businesses in Russia praise the potential of the Russian market, despite the anti-Russian sanctions adopted by the European Union, chairman of the RussianGerman Chamber of Commerce Michael Harms said during a presentation in September.

More than half of the companies surveyed said that they had been in steady development or significant growth.

However he said the situation differs from industry to industry.

Consumer goods produces are doing a lot better than those who are investing in manufacturing.

Most Russians would sacrifice booze and cigarettes to hurt west More than 70% of Russians would ban imports of booze and cigarettes from Western countries in retaliation for sanctions, but few would give up foreign cars or pay an additional tax on vacations abroad, according to VTsIOM. Other popular measures included blacklisting foreign hotels (supported by 77%) and banning Ukrainian candy imports (79%).

But only 43% of respondents — apparently including those who don't even drive — would approve of restrictions on bringing foreignmade cars into the country, the report said.

The possibility of paying an extra tax to take a vacation abroad was the least favorite measure, though it still got the approval of 38% of respondents.

The poll was conducted on Aug. 16-17 among 1,600 people in 42 Russian regions and had a margin of error of no more than 3.4%age points.

TV remains the main source of information for Russians on events in Ukraine and over half believe reporting is unbiased

15% believe Crimea should be an independent state (11% in March) and 4% argue it should be a part of Ukraine (14% in March).

An overwhelming majority of Russians (94%) are following the events in Ukraine, and television remains the primary source of information for 93% of them, Levada Center found in a poll.

40% approved of Crimea's incorporation by Russia, 37% said it made them proud of their home country, 30% dubbed the event as a triumph of justice and 16% were glad. 8% had negative sentiments (disapproval, concern or protest) and 9% admitted they felt neutral.

Some 58% of the respondents explained the Western reaction to the events in Crimea and eastern Ukraine with "a hostile attitude towards Russia and a wish to take advantage of the situation for pressuring Russia."

A quarter of respondents (25%) also receive news about Ukraine from friends and relatives, 17% from Internet publications, 12% from social media, and 11% from radio, the poll showed.

More than half of respondents (54%) do not agree that Russian federal media outlets are pursuing an information war against Ukraine and believe that they in fact present an unbiased picture of the events in the country.

At the same time, 17% agreed that Russian media are engaged in an information war against Ukraine but called such a policy “right and justified by the situation in Ukraine.� In the view of 12% of those polled, there are some signs of such an information war, and 18% were undecided.

The number of Russians who approve of the annexation of the Crimean rises Nearly three quarters of Russians (73%) support the incorporation of Crimea by Russia. Their number stood at 64% in March, according to the Levada Center.

Study finds Russian women spend most time in front of mirror Russian women place first in the world in terms of how much time they spend in front of a mirror, a study conducted by company Harris Interactive revealed.

57% of Russian women between the ages of 18 and 49 spend at least 45 minutes getting ready before leaving the house. Dutch women came in second place, with 49% of them spending the same amount of time getting dolled up.

British women came in third, with 44%; Polish women took fourth place, with 32%; and Germans placed fifth, with 26%.

Banks and Finance Russian Central Bank publishes banking sector data for August The Central Bank headline banking sector data for August includes: • Assets. Assets edged up 0.5% m-o-m, implying growth of 16% year-on-year and 9% YTD. • Loans. Corporate loans climbed 1.4% m-o-m, helped partly by the revaluation of FX- denominated loans following the 3% ruble depreciation in August (adjusted for that, growth would have been around 0.6%). Corporate loans were up 12.1% YTD and 15.9% year-on-year. Retail loans added 1.3% m-o-m, bringing the YTD tally to just over 10%, while yearon-year growth further cooled to 18%. Sberbank outperformed the rest of the sector in both corporate (1.7% versus 1.2%, respectively) and retail lending (2.1% versus 0.9%).

• Deposits. Retail deposits increased 0.9% m-o-m, though this was also inflated by ruble depreciation (adjusted for this, inflows would have been circa 0.2%). In year-on-year terms, they continued to run at only 8%, with YTD growth at just 1.9%.

Corporate funds increased 1.2% m-o-m. Sberbank slightly outperformed the rest of the sector in retail deposit growth (1.0% versus 0.8%, respectively).

• Earnings. Total sector EBT was R592bn in 8m14, down 9% yearon-year.

• Overdue loans. The overdue loan ratio (which incorporates only the overdue portion of a loan) increased from 5.4% to 5.6% in the retail segment and was flat at 4.5% for corporate loans.

August offered little relief from the ongoing trends of minimal retail deposit inflows and overdue loans gradually creeping higher. One point worth noting is that while Sberbank’s YTD corporate lending growth is in line with the sector, it significantly outperformed other banks in retail lending (16% YTD versus 7%), which we attribute primarily to its focus on mortgage lending as opposed to the trubled unsecured consumer segment.

Sanctions will increasingly weigh on Russian banks' funding and liquidity profiles (but they will survive) Standard & Poor's Sanctions imposed by the EU and on state-related Russian banks following the escalation of geopolitical tensions between Russia and Ukraine could gradually harm the funding and liquidity profiles of the country's banks, in Standard & Poor's Ratings Services view. EU sanctions prohibit the purchase, sale of, or dealing in securities and money-market

instruments with a maturity exceeding 30 days by major stateowned financial institutions: Sberbank, VTB, Bank of Moscow, Gazprombank, Russian Agricultural Bank, and Vnesheconombank.

These measures complement sanctions that apply similar prohibitions for citizens and companies within the U.S. We believe that the credit quality of Russian banks will not suffer immediately from the restrictions on tapping EU and capital markets.

Our analysis suggests the sector has enough liquidity to refinance its international debt falling due until the end of 2015. However, the longer restrictions on capital market access last, the larger funding imbalances will become, potentially calling into question the banks' capacity to adequately finance the economy. Furthermore, we think the indirect consequences of the sanctions are likely to have a more pronounced longer-term impact. In particular, the erosion in investor confidence, a general perception of higher risk of financing Russian banks, plus the possibility of increased flights of capital and weaker economic growth in Russia, could be more painful for the sector as a whole than the immediate consequences.

The banks will also face higher funding costs.

We consider the immediate impact of Western sanctions to be manageable for Russian banks because their reliance on funding from international capital markets is limited.

However, prolonged sanctions, accompanied by an economic slowdown and capital outflow, would drag on the funding and liquidity profiles of all Russian banks by raising the cost of borrowing and cutting customer confidence.

Retail deposits, which have been key in building banks' funding bases since the 2008-2009 financial crisis, are now also stagnating, so that corporate deposit stability is becoming critical to banks' funding profiles.

We believe banks will increasingly rely on central bank funding, which would alleviate immediate refinancing squeezes but will ultimately weaken their funding and liquidity profiles.

We therefore believe that funding and liquidity risks, together with deteriorating asset quality, will be the main triggers for negative rating actions on Russian banks over the next few quarters. More than two-thirds of our outlooks on Russian banks are already negative. The longer sanctions last, the more acute funding imbalances and liquidity pressures could become.

Banks Will Likely Absorb The Short-Term Costs Of Sanctions More than 50% of Russia's banking sector assets are directly affected by external sanctions, aimed at restricting these banks' access to external capital markets. We nevertheless believe that the immediate impact of the sanctions on banks will be limited because

the Russian banking sector doesn't rely strongly on external funding (see chart 1).

According to our analysis, Russian banks will need to refinance about US$57bn of external debt in 20142015, which we believe they will be able to cover with their liquidity reserves. We also expect that the Central Bank of Russia (CBR) would provide funding support to the affected banks, if needed.

In the first eight months of 2014, Russian banks raised about $27bn of funding from the internal and external capital markets--about 6% less than over the same period of the previous year. Yet, notably, they have placed only $9bn international issues so far in 2014

versus $16bn in the corresponding period of last year. We believe this highlights deteriorating investor confidence in Russian borrowers.

We expect that Russian banks will be able to raise only modest amounts on capital markets over the coming quarters to the end of 2015 if the current situation persists and the largest staterelated banks are less able to access the external markets. We nevertheless believe that the amounts the largest banks' raised in the first half of 2014 will sufficiently meet their funding needs for the rest of 2014 and through 2015 given that lending demand from Russian corporate clients is falling and retail lending is also slowing.

Almost all of Russia's leading retail banks are making a loss Eight of nine retail banks from the top-100 by assets made public their H1 2014 financial statements under IFRS. Almost all leading retail banks reported losses in H1 2014.

Three of them are close to the capital requirement minimum set by the Bank of Russia. If banks fail to solve the problem on their own, they will have to entice investors or rely on the government's assistance, experts say All the nine retail banks have been increasing transfers to provisions by 1.5-2 times over the past few years. For example, Orient Express Bank transferred RUB19.864bn to provisions over the period JanuaryJuly 2014 versus RUB11.784bn in the same period of 2013. Russian Standard Bank transferred RUB23.346bn versus RUB16.468bn a year earlier, HCF Bank RUB27.339bn versus RUB21.975bn.

The result of the growth of provisions is that seven banks reported losses as of the end of H1 2014. For example, Orient Express Bank showed a loss of RUB3.45bn, Svyaznoy Bank RUB3.835bn, Home Credit Finance Bank RUB4.018bn, and Russian Standard Bank RUB4.758bn.

The losses of retail banks are caused by two factors. The first one is the aggressive growth of loan portfolios over the past few years which implied a higher risk

appetite and involvement of new customers with no credit history.

The second factor is that the retail banks are highly dependent on the economic situation in the country, which has turned sour.

The losses take their toll on banks' capital: eight of nine banks decreased capital adequacy level in the first 7 months of 2014. Three banks are close to the capital adequacy minimum required by the Bank of Russia of 10%: Svyaznoy Bank (10.73%), Renaissance Credit (10.17%) and Trust Bank (10.25%). On the other hand, Trust Bank, for example, has been keeping the capital adequacy level below 11% for more than two years.

First time borrowers number falls as over-borrowed public tightens belts The number of first-time Russian borrowers is decreasing, as for the first time the volume of debt repayments exceeds the volume of new loans in Russia. Today their share is less than 17%, Oleg Lagutkin, General Director of Equifax Credit History Bureau, said at a conference also warning payment discipline is also deteriorating.

The "retail lending boom" of the past few years is the cause. Oliver Hughes, President-Chairman of TCS Bank's Management Board, says banks were increasing the average balance per customer by raising an average amount of one loan instead of acquiring new

customers, which is led to rising on performing loans.

debt consolidation facility" to "put off" payments for some time.

Sergey Kapustin, Deputy Chairman of OTP Bank's Management Board, says real disposable income of individuals doesn't decrease, but it doesn't grow as borrowers expected it to do. Therefore the share of payments in their expenses is rising.

Calculating credit risks has gotten harder too. Earlier, women and senior citizens used to repay loans in a better manner, but this is not the case at the moment. Sergey Kapustin says young people started to repay slightly better and women slightly worse, therefore it's become more difficult to predict the behavior of borrowers.

Banks are toughening requirements and paying much closer attention to a potential client's credit history. If there been any problems whatsoever then almost all banks would automatically reject an application.

This is also leading to a rise in nonperforming loans as since the end of last year Russians have been increasingly taking out fresh loans to pay off the old ones.

The most striking negative trend this year is in the credit card portfolio," Sergey Kapustin said.

One of the reasons is that many customers used credit cards as "a

The National Recovery Service says women become debtors slightly more frequently (49% for women and 51% for men), but the amount owed by women is smaller: RUB95,000 on average (RUB115,000 owed by men on average).

The data compiled by United Credit Bureau shows that retired persons are still the most disciplined borrowers. The share of overdue loans in loans granted to borrowers aged 60+ is 8.65%. Young people repay loans nearly three times worse: the number of loans defaulted by them is 22.95%.

The top-100 Russian banks increased their retail loan portfolio by 11% 8M14 The top-100 Russian banks increased the retail loan portfolio by 11.43% (RUB1.07 trillion) to RUB10.46 trillion over the period January-August 2014 This is far slower than the 40% plus rate of growth in retail lending in the last few years, before the Central Bank of Russia increased prudential requirements in order to deflate and obviously growing consumer credit bubble.

The Bank of Russia expects the growth rate of lending to slow down to 11% in 2015 versus 1517% expected as of the end of 2014. Growth will be driven mainly by corporate lending and partly by mortgage lending Renault-Nissan PH Bank controlled by the French-Japanese automobile alliance showed the highest growth rate of the retail loan portfolio over the period under review - by 2,515% (RUB6.2bn) to RUB6.46bn.

The outsider over the period under review was Sovetsky Bank whose retail loan portfolio shrank 25% (RUB3.9bn) between January and August 2014. At the moment, the bank's loan portfolio is RUB11.7bn.

In August 2014, the retail loan portfolio of the top-100 banks increased 1.01% (RUB138.9bn).

The leader in August was PH Bank (growth by 28%, or by RUB1.43bn). The outsider was Plus Bank (the portfolio decreased 5.2% from RUB9.4bn to RUB8.9bn).

The financial statements posted to the Bank of Russia's website show that the retail loan portfolio in the banking sector in general increased

by RUB138.5bn (1.28%) in August 2014 and reached RUB10.96 trillion.

Mortgage lending still fastest growing credit product Mortgage lending is currently the most rapidly-growing segment of consumer lending. The number of mortgage housing loans granted in H1 2014 reached 448,536 contracts worth RUB769.5bn ($19.23n). The market increased 33.4% in quantitative terms and 41.8% in money terms.

The average size was RUB1.72m, up RUB101,000 (6.3%) compared to H1 2013.

The data compiled by Frank Research Group shows that the total mortgage loan portfolio of banks increased 14.36% in H1 2014, ahead of credit cards up by 12.8%, cash loans up by 5.5%.

POS and auto loans decreased.

This is compared to loans to legal entities that increased only 2% to RUB24.3 trillion. Overdue corporate loans rose from 4.3% to 4.4%.

Mortgage loans were also the only segment of lending in which the share of NPLs didn’t increase increased since the start of the year, but on the contrary decreased and equaled 2.4%, according to the data compiled by National Bureau of Credit Histories (NBKI).

The Moscow region accounted for 19.7% of all mortgage loans granted (same as in H1 2013), St. Petersburg and the Leningrad region accounted for 6.9% (up by 0.6%age points compared to H1 2013), according to DeltaCredit Bank.

July’s pace, while corporate account growth accelerated to 13.9% year-on-year. Thus, the sector loans/deposits ratio remained at a local high of 106% (it peaked at 124% in 2008). The share of CBR funding in liabilities declined slightly from last month’s local peak, dropping 30 bps monthon-month to 8.7%.

In 2014 for the first time ever Sberbank's mortgage portfolio outstripped the volume consumer credits. For the period January June the mortgage portfolio of the state-owned bank grew to RUB1.83 trillion (+16.5%), consumer credits - to RUB1.76 trillion (+5.3%).

The debt/income proxy for the retail segment continued to head north, reaching 23.6% in July, well above the October 2008 high of 16% and nearly double the postcrisis lows in March-April 2010.

Likewise, by July VTB24 mortgage's has already surpassed the volume of cash loans. VTB24's mortgage loans have grown almost twice as fast as cash loans; however, in absolute terms, cash loans amount to RUB648bn, while mortgage are RUB577bn.

Russian banking NLPs continue to mount Overdue loans continued to pile up.

Based on Uralsib estimates, the retail NPL ratio rose 20 bps monthon-month to 5.6% and the corporate ratio rose 10 bps monthon-month to 4.4%.

Higher provisioning has kept net income lower this year (down 9.4% year-on-year in 8M14), but monthly income was strong in August, up 27% month-on-month to RUB79bn ($2.2bn).

On the funding side, retail deposits grew 0.9% month-on-month and 8.3% year-on-year, matching

The retail overdue loan dynamics lag this gauge by 18-24 months, as the gauge reached its post-crisis highs in mid-2010 before bottoming out in December 2012.

We therefore expect a further deterioration in loan quality and higher provisioning for at least the next 1.5-2.0 years.

On the corporate side, bank loans and foreign corporate debt combined are currently around 6.6 times higher than corporate profits, slightly below the recent peak of 7.6x in February but still quite high compared to the post-crisis lows of around 4x. Though we do not expect to see a dramatic deterioration in corporate asset quality, prolonged pressure from the sluggish economy will likely be felt here as well.

Russia's state-owned banks continue to grow at the expense of privately owned banks Private Russian banks continue losing their market share and cutting profits amid the sanctions.

Banks affected by the sanctions see private deposits decreasing.

The Bank of Russia's ongoing efforts to purge the banking market of deadwood make the situation even more difficult.

Assets of Russian banks increased 3% in Q2 2014 to reach RUB61.4 trillion, according to the Bank of Russia. State banks, except Russian Agricultural Bank, increased their assets at a higher pace.

For example, Sberbank's assets rose 6.3% to RUB17.3 trillion, VTB's by 20.2% to RUB6.3 trillion, VTB24's by 11.8% to RUB2.3 trillion. The Bank of Moscow increased assets by 15.4% to

RUB1.9 trillion, Gazprombank by 4.9% to RUB3.7 trillion.

Many large companies, which used to borrow abroad aggressively turned out cut off from cheap funding and had to borrow more from Russian banks. Most of such borrowers resorted to state banks.

Assets of the largest private banks increased much slower. For example, Alfa-Bank increased assets by 2.6% to RUB1.5 trillion in Q2 2014, Otkritie FC Bank by 4.8% to RUB974.2bn, ZAO UniCredit Bank by 1.5% to RUB914.8bn. Uralsib Bank and Citibank decreased their assets by 6.3% to RUB349.4bn and 5% to RUB347.1bn respectively. Bank St. Petersburg and Rossiya Bank covered by the sanctions were the most rapidly-growing banks in the top-20 private banks in Q2 2014.

Both increased assets by 6.8% to RUB442.1bn and RUB440.6bn respectively. SMP Bank added 3.5% to RUB159.3bn.

Banks bad debt write offs up a quarter to RUB113.2bn ($2.8bn) in the first seven months of 2014 Banks wrote off RUB113.2bn worth of bad debts in the first seven months of 2014. That is 27% more than write-offs in the same period of 2013. Since 2013, it has been mandatory for banks to write off debts overdue by more than 360 days. Analysts expect the overall result for the year 2013 (RUB199bn) to be exceeded as of the end of 2014, total debts so written-off to reach the all-time high Financial statements of banks disclosed by the Bank of Russia show that write-offs have been growing progressively over the past few years: banks wrote off RUB36.1bn of bad debts in 2009, RUB67.8bn in 2010, RUB74.1bn in 2011, and RUB126.6bn in 2012. In

2013, wrote-offs increased 57% to RUB199bn.

Bad debts are those which cannot be sold to other lenders and collectors and are overdue by more than 360 days. The debtor either has no property or the creditor is unable to trace the debtor's location. In 2013, the Bank of Russia made it mandatory for banks to write off such debts or charge provisions for them at the rate of 100% of a loan amount.

This is how the regulator encouraged banks to purge their balance sheets.

Two retail banks are in the top-3 by write-offs. State banks accounted for much of write-offs last year. This year's top-10 includes VTB, Urals Bank for Reconstruction and Development, Bank St. Petersburg, and Sovcombank.

New banks in the ranking are Absolut Bank, GE Money Bank (the bank was taken over by Sovcombank, but it still has a separate balance sheet), and SKB Bank. The Bank of Moscow, Promsvyazbank, OTP Bank and Russian Agricultural Bank dropped out of the ranking.

Deposits increase mildly in second quarter After the large-scale outflow of deposits in Q1 in response to the ruble devaluation and the unstable foreign political situation, the situation around private deposits started to improve in the second quarter.

Deposits rose nearly 2% to total RUB16.9 trillion as of July 1, 2014.

However, this is still below their amount as of January 1, 2014 (RUB17 trillion).

Experts estimate that the banking system fell short of nearly RUB1.5 trillion of depositors' money in the first six months of this year. Half of this amount was simply spent by individuals, the other half converted into foreign currency to be kept at home. The Bank of Russia's estimates show that individuals purchased about $20bn in H1 2014 for these purposes.

Russian National Commercial Bank (RNCB) is the leader by growth of deposits. Private deposits with the bank increased from RUB48m to RUB5.8bn. This bank was one of the first to be entitled by the Bank of Russia to operate in Crimea and is now a captive bank of the

Crimean authorities used to pay pensions etc.

Amongst the top-10 Russian banks Sberbank still accounts for 45% of all retail deposits increased deposits by 2.5% to RUB7.5 trillion. Private deposits with VTB24 remained nearly unchanged (up by 0.6% to RUB1.4 trillion). The Bank of Moscow increased deposits by 0.8% (to RUB223bn), Russian Agricultural Bank by 7.2% (to RUB267bn), Gazprombank by 4.4% (to RUB363bn), Alfa-Bank by 2% (to RUB361bn), ZAO UniCredit Bank by 3.5% (to RUB77.4bn).

Otkritie FC Bank decreased deposits by 0.5% (to RUB103bn).

Among the top-100 banks, the steepest decrease in private deposits was seen at Rossiya Bank (down by 26% to RUB27.3bn), Sobinbank (down by 25% to RUB14bn) and SMP Bank (down by 16% to RUB58bn). All these banks are on the sanctions list.

Top 100 banks that attracted inflows of deposits were InvestCapitalBank (up by 6.6% to RUB9.6bn), Expobank (2.5% to RUB16.7bn), and Rosenergobank (2.3% to RUB14bn).

Russian transfers of cash overseas up by 40% in the first quarter of this year In the first quarter of this year money transfers by Russian residents to far-abroad countries increased 40% year on year and made a total of $13.1bn.

This outflow of cash represents a reversal of money flows belonging

to individual accounts. Early this year because of the threat to international sanctions on money held in international accounts rich Russians began sending the money back to Moscow. However as the banking sector at home continues to get squeezed once again it seems safer to deposit money in an international bank as the fear of more sanctions fade.

The rising trend remained in force in Q2, but growth slowed down: residents transferred $10bn (up by 16%). Experts say mainly affluent customers adjusted themselves to the political and financial environment Money transfers to Switzerland increased most significantly in absolute terms. In Q1 2014, $3.3bn was transferred to this country versus $1bn in Q1 2013.

Switzerland is not a EU member country and formally didn't join anti-Russian sanctions.

Money transfers by the Russian people to the USA also nearly doubled in Q1 2014: from $578m in Q1 2013 to $1.1bn in Q1 2014 (this is nearly half the amount transferred last year ($2.8bn)).

During the first three months of 2014, Russian residents transferred $867m (up by 62%) to Great Britain, $688m (up by 226%) to Austria, and $651m (up by 24%) to Germany. $542m (up by 20%) was transferred to China.

Money transfers to the CIS countries decreased 5% to $3.6bn.

Mikhail Krylov, Director of the Analytical Department at United

Traders, explains the desire to invest abroad also by the fact that deposit insurance in Russia is RUB700,000 versus $250,000 in the USA and about EUR 100,000 in Europe.

Finance Minister pledges to uncork reserves to help sanctions-hit Russian banks Russia's Finance Ministry may support leading banks, including those under Western sanctions, with some of the profits of the Central Bank next year, as well as by other means, Finance Minister Anton Siluanov said.

Sanctions imposed by the United States and the European Union over Moscow's role in the Ukraine crisis have cut off Russia's largest banks such as Sberbank, VTB, VEB, Gazprombank and Rosselkhozbank from mediumand long-term Western financing.

The state has allowed some of the banks to convert subordinated loans issued in 2008-09 into equity to boost their capital, strengthening their ability to withstand growing loan-loss provisions and to issue new loans.

"The Central Bank will get higher profit this year, and accordingly more will be transferred to us [into the budget]," Siluanov told the Reuters Russia Investment Summit.

"And we will be ready to send the amount above planned levels to support key banks, including those hit by sanctions."

Siluanov did not give a figure, but Economic Development Minister Alexei Ulyukayev said last week the Central Bank may get about RUB300bn ($8bn) more profit than planned.

The government has already said it will spend 239bn rubles from the National Welfare Fund, which collects oil revenues, to buy preferred shares from VTB and Rosselkhozbank to boost their capital.

VEB, the state development bank, had hoped to have its capital boosted by 100bn rubles each year until 2020, but its chairman Vladimir Dmitriyev said Thursday that the bank would get only RUB30bn next year.

As of Sept. 1, the Reserve Fund stood at $91.7bn and the National Welfare Fund at $85.3bn.

Major Russian Bank Opts for Chinese Payment System Over Visa and MasterCard Russia's third-largest lender, Gazprombank, has started issuing bank cards using Chinese payment system UnionPay, the bank said in September.

The move reflects a desire among Russia's banks to curb their reliance on payment systems, which makes them vulnerable to sanctions on Russia over Ukraine.

State-owned Gazprombank clients can order now UnionPay cards linked to new accounts or as an addition to MasterCard or Visa

cards attached to existing accounts.

Visa and MasterCard have cut services to several Russian banks this year, after they were blacklisted by the in response to Moscow's annexation of Crimea and support of separatists in eastern Ukraine in March.

Many of Russia's biggest banks — including VTB-24, Promsvyazbank, Alfa Bank and MTS Bank — have said they are making technical preparations and running tests with the UnionPay cards.

Nonetheless, Visa and MasterCard still dominate Russia's payments market, servicing over 90% of payments. According to Morgan Stanley, the two companies' joint revenues in Russia are about $600m per year.

Russia's central bank grants strategic status to 19 banks Russia's central bank has granted a strategic status to 19 banks so far, the regulator's Deputy Chairman Mikhail Sukhov said at a banking forum on Thursday. The total list of strategic banks that will certain to get state help (and much closer supervision) is expected to rise to 25 in total. The CBR will encourgage the rest to close or merge with a larger bank.

"We will complete a transfer of 19 largest banks, which form 70% of all assets in the banking industry, under a direct oversight of the regulator's central office by the end of September. We will implement

new regulatory methods with these banks exactly," Sukhov said.

Sukhov also said that there is no task to expand the strategic bank list. Initially, the list was to comprise 20 banks, but one of the banks - TransCreditBank - was integrated into VTB Group.

Central Bank's Loan Growth Forecast Holds Firm The Russian Central Bank is keeping its loan growth forecast unchanged at 15-17% this year and considers banks to be capable of refinancing their debts domestically this year and in 2015, the regulator's deputy head, Mikhail Sukhov, told a conference on Thursday.

Sukhov estimated that Russian banks need to refinance around RUB300bn ($8bn) this year and more next year.

The United States and European Union have imposed sanctions on some largest Russian banks, limiting their borrowing ability on western markets for instruments longer than 90 days.

Russia's Central Bank Tests Telex as SWIFT Substitute Russia's Central Bank is testing Telex as an alternative to interbank financial system SWIFT, on the assumption that the country could be shut out of that system by the and EU over Russia's alleged military support for separatists in eastern Ukraine.

The Central Bank began testing domestic transmission channels and older formats for money transfers like Telex at the end of September.

"The tests show that the data transfers system stays stable even at high levels, and that the transfers work at a reasonably high speed. We can confidently say that a SWIFT shutdown will not affect the country's inter-bank transactions," a Central Bank representative told Gazeta.ru.

Small Russian banks opening correspondent accounts with Asian banks to hedge against more financial sanctions Small Russian banks have started to open correspondent accounts with Asian banks or make more use of existing accounts as a hedge against a freeze of accounts with and EU banks Russian banks open accounts with banks of China and Hong Kong most frequently. The most popular banks are Industrial and Commercial Bank of China (China), Standard Chartered Bank (branches in China and Hong Kong), and Bank of Communications Co (China).

If Russian banks use accounts opened in the Chinese yuan for settlements in US dollars or euros, they may incur conversion losses.

Almost all large banks have accounts with Asian banks and use them on a large scale, especially the leading states owned banks.

Cash-Strapped Sberbank turns to Russian pension funds, insurance companies for funding Effectively cut off from Western capital markets by and EU sanctions, Russia's largest lender Sberbank is seeking financing from pension funds and insurance companies to bolster its strained capital base.

"We are interested in long-term financing — longer than a year," Vedomosti cited an unidentified Sberbank executive as saying.

The CEOs of insurance company RESO-Garantiya and private pension fund Gazfond told Vedomosti that they have observed a steady stream of proposals from state-run banks over recent weeks. "[Major banks] are trying to compensate for a certain deficit in liquidity," Gazfond CEO Andrei Kokin told the newspaper.

Banks have other sources of financing at their disposal, but are likely drawn by the relatively lower rates granted to insurance companies and pension funds, said Sergei Ivanov, chairman of the board at leading insurer Sogaz.

Pension funds will not be interested in deposit rates of lower than 10% at Sberbank or 11 to 12% at large private banks, he added.

Russia to inject RUB240bn in Vnesheconombank's (VEB) capital The Russian government has decided to raise capitalization of state-run development bank Vnesheconombank (VEB) by 240bn rubles, Prime Minister Dmitry Medvedev said in September. “The government, namely, the Finance Ministry and the central bank, have decided to provide VEB with an adequate amount of funding and liquidity totaling RUB240bn."

In July, the and the E.U. restricted VEB's access to long- and mid-term financing on their markets.

Earlier in September, CEO Vladimir Dmitriyev said that VEB does not plan to increase its capital in 2014, but in 2015 the bank may need an about RUB100bn injection.

A number of Russian banks with foreign capital fell by seven in the second quarter as more banks exit The number of banks with foreign shareholders in Russia decreased by 7 in Q2 2014, from 245 to 238, according to the statistics disclosed by the Bank of Russia.

Nonresidents' investments in authorized capitals of the existing credit institutions made a total of RUB400.617bn as of July 1, 2014.

The amount decreased by RUB7.21bn (1.77%) during the second quarter.

The Bank of Russia says there are 75 credit institutions 100% owned by foreigners operated in Russia as of July 1, 2014. During the quarter, their number decreased by three, total investments of nonresidents in authorized capital of such credit institutions down nearly by RUB5.01bn (2.1%) to about RUB233.45bn.

There are another 42 credit institutions are owned by foreigners less than 100%, but more than 50%. During the quarter, the number of such credit institutions increased by one, total investments of nonresidents in authorized capital of such credit institutions up by nearly RUB3.851bn (5.17%) to RUB78.334bn.

The Bank of Russia says the fall was due to two differently factors: transfer by foreign shareholders of their shares in favor of Russian residents (the impact of the factor was minus 3.19%age points) and purchase by nonresidents of shares of credit institutions on the

secondary market (the impact of the factor was plus 1.42%age points).

The most significant transactions included the sale by Ukraine's PrivatBank of its Russian subsidiary to B&N Bank, the change of owners of BTA-Kazan Bank as part of the bank's reorganization (the largest shareholder had earlier been Kazakh BTA Bank), and the revocation of licenses from AF Bank (Kazakh capital), Atlas Bank (a subsidiary of a Montenegrin bank) and First Republican Bank (as of the date of the license revocation, a large stake in the bank was owned by a US fund RenFin II; before April 23, a significant stake had also been owned by a Swiss resident Anselm Schmucki).

The share of nonresidents in paidin authorized capital of all credit institutions operating in Russia decreased to 24.96% as of July from 26.18% as of April 1, 2014.

Economics World Bank lowers Russia's 2014 GDP growth forecast to 0.5%, warns of stagnation The World Bank has lowered Russia's 2014 gross domestic product (GDP) growth forecast to 0.5% from 1.1%, the bank said in a report in September.

basic scenario: geopolitical tensions around Ukraine will not escalate further and no new Western sanctions against Russia will be imposed. In 2015 and 2016, the Russian economy will continue growing insignificantly by 0.3%

and 0.4%, respectively, the bank said.

2014, 1.2% in 2015 and 2.3% in 2016.

pessimistic scenario: growth of tensions which will lead to a lingering recession. Under this scenario, Russia's economy may also rise 0.5% in 2014, but then contract 0.9% in 2015 and 0.4% in 2016.

Former finance minister and close personal Putin buddy Alexei Kudrin also threw his hat in the ring saying Russia faces years of stagnation because of the Ukraine crisis and is ducking decisions needed to achieve a new economic model.

optimistic scenario: Russia's economy may grow 0.5% in 2014, 0.9% in 2015 and 1.3% in 2016 if geopolitical tensions completed ceased and all the sanctions are abolished by the end of 2014.

To spur the country's economy the bank suggests that Russia should conduct structural reforms and pursue a new development model focused on diversification.

Russia's Economic Development Ministry earlier forecasted the country's GDP to grow 0.5% in

"There will be stagnation, like now.

There could be recession. We will be balancing on the edge of recession all the time," he said, adding there would need to be a "renewal" of the government to achieve change.

Even if Western sanctions were not intensified further, he said, economic growth would be 1% lower than it would have been for at least three years. Russia also faces isolation from global market institutions for a similar length of time.

Zero year-on-year Russian GDP growth in August

the economy grew 0.2% monthon-month in July).

At the end of September the Economy Ministry reported that GDP growth was zero year-on-year in August.

Seasonally adjusted, capital investments and construction dropped 1.7% month-on-month and 0.8% month-on-month in August, while industry contracted 0.2% month-on-month and retail trade decelerated to 0.2% monthon-month. All in all, the economy grew 0.7% year-on-year in 8M14.

July growth was revised upwards to plus 1% year-on-year from the previously reported negative 0.2% year-on-year due to a revision of export data. Seasonally adjusted, the economy shrank 0.4% monthon-month in August after growing 0.4% month-on-month in July (the Ministry previously reported that

The trade balance surplus reached $16.6bn in August, up 17.1% year-on-year. Exports dropped 2.4% year-on-year to $41.5bn and imports declined

12.3% year-on-year to $24.9bn in August. The trade balance surplus expanded 14.7% year-on-year to $136.5bn in 8M14.

The main factors behind the slowdown in year-on-year economic growth in August were capital investments (negative 2.7% year-on-year growth in August versus negative 2% year-on-year in July), cargo turnover (negative 1.3% year-on-year in August versus 0.3% year-on-year growth in July) and agriculture (4.6% year-on-year growth in August versus 8.5% growth year-on-year in July).

The weakening ruble will have a slightly negative effect on the economy. On the one hand, a weaker currency will improve the trade balance, expand manufacturing production and increase federal budget revenues, but on the other hand, it will increase inflationary pressure and harm real incomes, thus weakening consumer demand. We believe that the economy will show moderate growth in the medium term. We forecast the economy to grow 0.5% in 2014.

Third of Russian firms lossmaking in Jan-Sep The share of loss-making companies in Russia increased 0.2%age points on the year to 31.9% in January-September, the Federal State Statistic Service said in a statement on Tuesday.

The net profit of all organizations except banks, small enterprises, insurance companies and public

services firms amounted to 4.749 trillion rubles.

The share of companies running at a loss in the mineral extraction sector grew to 41.3% from 39.1% in the same period a year ago, in the fuel and energy extraction sector rose to 40.3% from 38.5%.

The share of loss-making companies in the processing industry increased to 31.9% from 31%. In the power industry, the share slightly fell to 52.2%.

In wholesale trade and retail the share of companies running a net loss grew to 21.8% from 21.1%.

Russian overdue payments up by a quarter in July Overdue accounts payable in Russia's economy increased more than 26% in July 2014 year on year to reach RUB1.8 trillion, which is equivalent to 6% of all accounts payable as of the end of the month shared among suppliers, employees, the state budget and banks, Rosstat reports.

A significant increase in overdue loans year on year is seen in all sectors, except fishing and health care, but the most rapid increase is in manufacturing industries (by 49% to RUB568bn in July).

Manufacturing industries also account for much of overdue loans in the economy.

However, bad debts in manufacturing industries grow unevenly. Rosstat's statistics shows that manufacturers of coke and oil products account for half of

this amount. Late payments on their loans increased more than three times in July 2014 compared to July 2013 (no such growth was seen in the previous years) and accounted for nearly 90% of growth of loan arrears in manufacturing industries and for half of growth in the economy in general.

It is not clear what is causing the rising debt, but experts speculate that it is partly due to companies inability to raise loans with banks and are increasingly forced to rely on their own dwindling resources.

New three budget: Putin must choose: spend now or save for later The Russian government will submit its draft of the federal budget for 2015-2017 to the State Duma on Tuesday. The draft has been postponed for weeks while the elites within the Kremlin battled over what the government's priorities should be at a time when the Russian economy is slumping near recession.

Previews of the budget suggest a fairly optimistic strategy in the Kremlin. The economy is currently projected to grow by 0.5% in 2014; foreign investment into Russia has dropped 50% compared with 2013; and capital flight is projected to reach $100bn by the end of the year. Negative attitudes toward Russia, combined with Western sanctions against the country because of the crisis in Ukraine, are the primary factors behind Russia's economic decline.

But the upcoming budget forecasts 1.2% gross domestic product growth in 2015, followed by 2.3% and 3% in the next two years. The budget also projects the deficit to stay at around 0.5%. Finally, it expects the central bank and Finance Ministry to return to borrowing and trading on the international markets, a development that would require the European Union and United States to ease sanctions. Overall, the draft budget shows that the Kremlin believes the worst of the pressure from the West over Ukraine is behind it. Whether that's true is unclear.

The Kremlin's priorities, as reflected in the draft budget, were the source of a brutal battle within the Kremlin in recent weeks.

Moscow has been divided over defence spending, whether to bail out Russian firms affected by sanctions, oil price forecasts and what is a tolerable level of debt and inflation for Russia.

Something that has not been under debate is the government's focus on social spending. The Kremlin is still prioritizing social spending with a series of projects: new infrastructure, cultural projects, pension reform and even expanding Wi-Fi access in Moscow's subways. Russian President Vladimir Putin understands that at this point in his leadership, he must maintain an overwhelming level of popularity among the people.

Beyond social spending, the government must decide how it will

parse out funds for its two other primary focuses: defence and energy.

for 25% of the country's GDP and approximately 50% of the government's budget.

The Kremlin originally planned on a massive increase in defence spending — some $770bn between 2014 and 2024. Because of increased budgetary demands resulting from Russia's economic decline and higher spending on issues such as Ukraine, the plan to boost the defence budget was postponed earlier this year. The increased spending plan was unlikely to pass because many within the Kremlin, particularly within the Economic and Finance ministries, were opposed to such a lofty scheme. In early September, however, Putin shifted decisionmaking on Russian defence spending under his office, quashing the Cabinet's ability to continue postponing the increased spending.

With both the defence and energy sectors needing more cash in the years to come, Putin will probably draw on Russia's massive reserve funds rather than depend on the state's budget. Russia has approximately $641bn in reserves: $467.2bn in currency reserves, $87.32bn in the National Wealth Fund and $87.13bn in the Reserve Fund.

It is unclear how the Russian budget will work with increased defence spending, but with security crises along its borderlands and with pressure from NATO building, Russia has no other option but to bolster its defences.

But these funds are intended to be used when oil prices fall below $100 per barrel in the 2015 budget ($114 per barrel in the current budget). With the budget pinned on such a high price point, the robustness of these funds and conservative use of them have always been critical to the stability of the Russian government. In 2008, the Russian government sped through more than $200bn in the reserves to stabilize the economy during the financial crisis.

Moreover, there is no guarantee that oil prices will remain in the triple digits in the years to come.

Decreased investment in Russia is starting to plague the energy sector. Rosneft, Novatek and LUKoil have all asked for financial assistance totaling more than $50bn thus far. The Russian government has started to draft a bailout for Rosneft, and a decision on Novatek's request is due in October.

Putin has been left with a choice.

He can use the reserve funds now to bolster Russia's defences and maintain the robustness of the energy sector while risking the country's future financial stability.

Or he can leave Russia vulnerable in the short term in these critical sectors to have cash on hand in the future.

Russia's energy sector, particularly its oil exports, is the lifeblood of its economy. Energy exports account

At this point it seems the Kremlin has decided to tap the rainy day finds to help the economy.

Facing sanctions and crashing oil prices, Russia's new budget looks for silver linings Russia's newly approved budget rests on optimistic GDP forecasts as well as high oil prices, forcing the government to work hard to meet its projected growth rates, Finance Minister Anton Siluanov said.

The 2015-17 budget, Russia's tightest since the global financial crisis and its first since the Ukraine crisis erupted, was approved at the end of September. It forecasts gross domestic product growth of 1.2% next year, and 2.3% and 3% in the following years.

Russia would flirt with recession next year.

Risks to the budget also come from uncertainty over crude prices as oil and gas provide about half the government's revenues. Many economists see benchmark Brent crude, which usually trades at a slight premium to Urals — Russia's chief blend — at $90 per barrel by the end of next year. Crude prices have fallen recently to $92$93 where as the budget balances at a price of $100 per barrel.

The 1.2% growth forecast for next year is based on the assumption that the sanctions will slowly start to ease. Kudrin said this week that

In 2015, federal budget expenditures will reach R15.5 trln, an increase of 11% year-on-year.

Revenues are forecast at R15.1 trln. The government expects next year’s oil price at $100/bbl Urals, economic growth at 1.2%, inflation at 5.5% and a $/RUB exchange rate of 37.7. But this implies the breakeven oil price for Russia's 2015 budget increased to $108/bbl.

Urals prices fell below $100 a barrel on August 18 and averaged

$98.28 from Aug. 15 to Sept. 14, the first time the average price for a month was below $100 a barrel

Tightening the Belt

since June 2012, according to the ministry.

A $1 drop in the price of oil deprives the budget of about 80bn rubles ($2.1bn) in revenue,

The government may also find it hard to raise debt, which is needed to ensure the deficit keeps to a planned 0.5% of GDP. The Finance Ministry wants to borrow $7bn abroad next year as it does every year, and RUB1.1 trillion ($28.8bn) at home, which is more than the usual RUB800bn it borrows.

The domestic sum is twice this year's planned amount, which

according to Oreshkin, while a RUB1 increase in the dollar’s exchange rate boosts income by about RUB200bn.

the ministry is already struggling to fulfill. "RUB1.1 trillion is a very big amount," Siluanov said, but would not comment on Russia's ability to borrow abroad, saying only that his ministry would "monitor the situation."

The key to ensure implementation of the budget, he said, was to control spending and under no circumstances overdo stimulus.

"We have to start living in a new paradigm, move toward a new understanding of the economic situation," he said. "We need to shrink, we need to build an economic model based on a new macroeconomic situation."

The Economic Development Ministry has called on the Central Bank to lower borrowing costs and on the Finance Ministry to boost spending, but Siluanov said both the government and the ministry supported the Central Bank's tight monetary policy.

"We need a hard-line approach toward budget and monetary policies," he said. "As soon as the Central Bank lowers rates in this situation, or budget spending increases, this will negatively affect the balance of payments."

This, he added, could lead to a further weakening of the ruble and send inflation up. Consumer price inflation has already overshot all forecasts, and is expected to climb well above 7% this year.

"And that means again high rates, and off we go again," Siluanov said.

There are risks that revenues will fall short. "We would not want to raise taxes," Siluanov said. "This is an extreme measure, which we do not envisage implementing."

Instead, he said, his ministry might do what many economists fear: tap into one of its oil windfall revenue funds, the Reserve Fund. Set up with the goal of covering budget

shortfalls, this fund stood at nearly $92bn on Sept. 1.

The 2015-17 budget allows for use of up to RUB500bn from the Fund next year. "In the early stages, we would definitely use the Reserve Fund [rather than raise taxes]," Siluanov said.

He added that Russia needed a current account surplus of about 4% of GDP to make up for capital outflows, which are likely to exceed $100bn this year. The current account surplus is projected at around 3% of GDP in 2014.

Russian budget surplus close to RUB900bn in 8M14 Surplus grows to 2% of GDP in 8M14. The federal budget ran a surplus of RUB905.5bn or 2% of GDP in 8M14. The 7M14 surplus was revised upward to RUB739.1bn from RUB675.5bn, as the budget had a surplus of RUB20.3bn compared to the RUB43.3bn deficit reported in July. The federal budget surplus reached RUB389.3bn or 0.9% of GDP in 8M13. In August, the federal budget ran a surplus of RUB166.4bn.

Revenues in line with plan but expenditures lag. Budget revenues reached RUB9.4 tln or 66.3% of the plan for the year, while budget expenditures were recorded at RUB8.5 tln or 61.1% of the plan for the year. Thus, budget revenues are in line with the plan, while expenditures are lagging close to 5% of the plan.

In August, budget revenues grew 4.3% month-on-month to RUB1.18 tln due to the 16.3% month-onmonth growth in non-oil and gas revenues to RUB609.7bn with zero profit from the Central Bank. Oil and gas revenues dropped 6.1% month-on-month to RUB573.5bn

as a result of the 5.6% month-onmonth drop in oil prices. The share of oil & gas revenues in total revenues in August declined to 51.5% from 53.8% in July.

Expenditures declined 8.8% month-on-month to RUB1.02 tln in August.

Russia’s budget deficit forecasts for the next three years

Oils and gas incomes will be 7.884 trillion rubles (208.6.4bn dollars) and non-oil-and-gas incomes will reach 7.650 trillion rubles (202.4bn dollars).

Russia’s budget deficit will be 0.5% of GDP in 2015 and 0.6% of GDP in 2016 and 2017, Russian Finance Minister Anton Siluanov said in September.

In 2015, budgetary revenues will be 14.79 trillion rubles (391.4bn dollars) and spending will be 15.12 trillion rubles (400.1bn dollars).

Oils and gas incomes will be 6.818 trillion rubles (180.4bn dollars) and non-oil-and-gas incomes will reach 7.746 trillion rubles (205bn dollars).

In 2016, budgetary revenues will be 15.49 trillion rubles (409.9bn dollars) and spending will be 15.97 trillion rubles (422.6bn dollars).

In 2017, budgetary revenues will be 16.3 trillion rubles (431.3bn dollars) and spending will be 16.89 trillion rubles (447bn dollars). Oils and gas incomes will be 7.986 trillion rubles (211.3bn dollars) and non-oil-and-gas incomes will reach 8.364 trillion rubles (221.3bn dollars).

First Deputy Prime Minister Shuvalov says Russia may change tax system Russia’s First Deputy Prime Minister Igor Shuvalov did not rule out Russia may have to change the existing tax system due to the current conditions and insufficient economic growth.

In an interview with the Vesti television programme on September 13 he said the government had promised not to do so till 2018, but said “we now live in very tough conditions,” and “perhaps, we shall have to change the approach.”

Another factor, which may cause changes to the tax system, is that “economic growth [in Russia] is not high enough.”

The deputy prime minister said many governors had suggested introducing regional sales taxes. As for other taxes - VAT and income tax - the decision as yet is not to change those.

He is adamant under the conditions of sanctions, the Russian economy should not “get closed.” He compared the current sanctions with those, which China introduced in 1989 following the tragedy in Tiananmen Square. “Back then China used the sanctions greatly, though it sounds weird: they had one of first breaks-through which developed the country into China we know.”

“Never ever mobilising economy or closed economy,” the deputy prime minister said.

“As we now have mobilised around the president, on the other hand we should offer as much as possible freedom of economic development,” which is an option for making Russia booming. “Thus, the key result for today is the open economy and support for each other.”

Russia's ruble dives to record low as rumours of capital controls spread Russia's currency dropped sharply on September 30 to new historic lows following a media report that the Central Bank was looking at the introduction of capital controls.

The ruble fell to 39.71 against the dollar, its lowest level since the currency was restructured in 1998, while the Central Bank's currency basket dropped to 44.36, a hair's breadth away from the point at which the regulator has said it will intervene on currency markets.

Russia's Central Bank will look into possible attempts at market manipulation after a Bloomberg report claiming Russia was intending to introduce capital controls caused the ruble to crash against the dollar. The CBR immediately denied there was any truth in the report that cited two unnamed sources.

Capital controls are very unlikely as the Russian government has been extremely careful not to interfere with the free flow of capital, even in the depths of the 2008 crisis.

The sharp dive came after a report issued by Bloomberg news agency that quoted two unidentified officials saying that the Central Bank was discussing the implementation of restrictions on the free flow of money out of the country.

Russia abolished capital controls eight years ago in a landmark reform, but capital outflow has

Russia's capital outflow to slow down to $20-30bn 2016-2017 says MEED The official forecast for capital flight this year is $100bn, but several commentators have put the number even higher, closer to $120bn. Even if capital flight is only $100bn, this is still a 60% increase on the year earlier.

However, the Russia's Economic Development Ministry says capital

ballooned this year on the back of international tension over Ukraine and the imposition of Western sanctions on Moscow.

The Economic Development Ministry has said that capital outflows could reach as much as $120bn this year, the highest level since the 2008 financial crisis and a sum equal to 6% of Russia's gross domestic product.

flight could fall sharply next year.

It expects net private capital outflow to slow down to $20bn$30bn in 2016-2017, Minister Alexei Ulyukayev said in the last week of September at a government meeting. “We expect (capital) outflow to decrease to $30bn in 2016 and to $20bn in 2017", Ulyukayev said.

Earlier, the Bank of Russia said that under the basic economic

development scenario, the net capital flight this year would make up $90bn, while in 2015 it may be

down to $35bn, in 2016, to $29bn and in 2017 to $18bn.

Russia's gross international reserves could fall to $400bn by 2015 if the CBR forced to defend the ruble

Department at the Finance Ministry, announced: this was the price for the closed external markets.

If the Bank of Russia is forced to maintain the exchange rate of the ruble, Fitch forecasts Russia's international reserves would shrink from $465bn on September 1 to $450bn in the end of 2014 and to $400bn in the end of 2015 because of the sanctions.

The fall in oil prices from $110/barrel to $93/barrel initiated a comparable shock: according to the Finance Ministry estimates, fall by $17 means slowdown in exports by $55bn per year - it is also about 2% of GDP - losses on the trading account. Therefore, total negative effect for the balance of payments amounted to about $100bn.

Financial account of the balance of payments has already experienced direct negative effect from sanctions equaled 2% of GDP, Maxim Oreshkin, Director of the

Oil price is the major risk for the budget - forecast for 2015 expects that oil would amount to

$100/barrel, now the price is $93.

The budget includes rise in expenditures amounting for 11% with a full employment of oil and gas income and in order to finance the deficit the Government will have to borrow RUB800bn on the domestic market and $7bn on external market, Maxim Oreshkin reminded: "Any risks for the income and loans will exert pressure on the Reserve Fund".

According to the project of the budget 2015, the Government could spend RUB0.5 trillion from the Reserve Fund.

The Bank of Russia is going to let the ruble float free beginning with 2015 and minimized its presence on the money market: since the start of July the ruble weakened by 12.4% against the dollar, the Bank of Russia has not sold currency to support ruble.

EU’s share in Russia’s foreign trade drops to 49% in Jan-July 2014 The European Union’s share in Russia’s foreign trade dropped to 49.3% in January-July of this year, the Federal Customs Service said at the start of September.

The EU’s share was 50.2% in the same period of last year.

CIS countries accounted to 12.7% of Russia’s trade turnover in the first seven months of 2014 (13.3% in January-July 2013); Customs Union countries (Belarus and Kazakhstan) 6.6% (7.1%); Eurasian Economic Community (EurAsEC) countries 6.9% (7.4%);

and APEC countries 26.3% (24.5%), the Service said Russia’s principal trade partners in January-July 2014 were China ($51.8bn - increase of 4.6% from the same period of 2013), the Netherlands ($45.1bn - down 0.1%), Germany ($41.2bn (down 0.2%), Italy ($30.2bn - down 2.2%), Turkey ($18.4bn - up 1.5%), Japan ($18.2bn - down 3.2%), the ($18.2bn - up 21.8%), the Republic of Korea ($16.2bn up 14.3%), Poland ($14.7bn down 3.2%), and Great Britain ($12.3bn - down 6.8%).

Government to raid pension funds for company crisis fund Russia will create a multi-billion dollar anti-crisis fund in 2015 of money destined for the pension fund and some left over in this year's budget to help companies hit by sanctions, Finance Minister Anton Siluanov said in September.

Several waves of Western sanctions against Moscow for its involvement in the Ukraine crisis have limited access to foreign capital for Russia's largest banks and key oil companies.

Some companies have asked the government for help, including the country's top-oil producer Rosneft, which said it would need 1.5 trillion rubles ($39.70bn) in aid.

Siluanov was quoted as saying by Russian news agencies that the decision to stop transferring money to the pension fund would hand the budget an extra 309bn rubles ($8.18bn).

He said not all of that sum would go into the anti-crisis fund, but that it would also receive at least 100bn rubles of money left over in this year's budget.

It was not clear how big the fund would be.

It will be the second year running that Moscow has stopped transfers of funds from the budget to the pension fund, which provides benefits for Russia's pensioners, some invalids and families who have lost their breadwinners.

Russian inflation hits three-year highs Russian weekly CPI inflation reached 7.9% year-on-year on September 25, a 3-year high as the pass-through from Russia's food import ban came slightly earlier than expected.

Rosstat reports that the CPI added 0.49% over 1-22 September, with the average daily inflation ticking up a bit to 0.024% during 16-22 September from 0.020% in the previous week.

Component-wise, the increases in the prices of pork (1.0% WoW), cucumbers (2.8%), chicken (0.8%), tomatoes (2.7%) and gasoline, as well as meat-related goods and cheese, were the key inflation drivers last week, while the deflation in vegetables kept softening (to -0.2%).

The acceleration in the pace came earlier than we expected and by the end of this month the headline

CPI growth might reach 8.0% year-on-year (if the average daily inflation remains flat at 0.024%).

The import ban is the key driver for the time being: the pass-through from it into the headline year-onyear increase is 0.25-0.28pp, mainly in the meat-related categories (circa 0.18pp).

More rate hikes from CBR are unlikely CBR governor Nabiullina is clearly worried about growth. She highlights the CBR's assumption that geopolitical risks will remain elevated for some time, and that even the existing sanctions will weigh on the economy for some time.

But the debate in the government over rates is still raging. The Economy Ministry’s criticism of the central bank intensified this summer after the CBR raised its key rate in July by a half%age point to 8%.

Hackles were further raised by the fact that the CBR raised rates without first consulting the government. The CBR justified the rate hike, citing the inflationary pressures created by e.g. the tense international climate and the government’s planned tax hikes next year.

The economy ministry responded that a more relaxed monetary stance is needed to promote economic recovery. Economy minister Alexei Ulyukayev proposed to president Putin that the economy ministry, finance ministry

and CBR jointly decide the inflation target. Putin accepted Ulyukayev’s proposal at the end of August. The economy ministry and finance ministry are already heard by the central bank when it prepares its policies as both ministries have consultative representation at the CBR board.

It remains to be seen whether the new approach will influence CBR monetary policy. The CBR has a fixed medium-term inflation target of 4 % with a 1.5%age point deviation up and down. The economy ministry wants the inflation target to be adjusted in response to changes in economic circumstances.

The CBR is expecting 0.4% real GDP growth for the economy this year, and then growth a moderate acceleration in growth next year (0.9-1.1%), which might be a brave assumption.

But inflation is rising, due to the weak ruble, and also due to the impact of the self-imposed sanctions on Western food imports - and headline inflation is likely to be up at 8%+ by year end, well over target.

Recent rate hikes in had less to do with inflation and more to do with trying to stabilise the ruble, or at least provide reassurance so as not to risk a rout. However, orderly depreciation is an attempt to provide a bit of a kicker for the real economy. I think long term, and given the economy's weak growth drivers, that the CBR is under no illusions that the RUB should be

weaker, even from current depreciated levels.

As for holding to the inflation targeting agenda, the CBR is trying to signal that it is business as usual, so not doing anything that might signal panic.

There is clearly an unwillingness to further hike rates, even a desire to cut to help real GDP growth, and the ruble will continue on a weakening trend, almost come what may given the assumption of an extended period of weak growth, weaker oil/energy prices, plus continued uncertainty/instability in Ukraine and strains in the relationship with the West.

Capital investment disappoints in August Rosstat released a set of key economic indicators for August.

After dropping 2% year-on-year in July, capital investments dropped 2.7% year-on-year in August, coming in well below expectations.

Russian had forecast a 1.9% yearon-year drop, while Interfax consensus had investments contracting 1.8% year-on-year.

Capital investments declined 2.5% year-on-year in 8M14.

Russian real disposable incomes up slightly in 8M14 Real disposable cash income of the Russian population (income less obligatory payments adjusted for the consumer price index) rose 0.7% over the period JanuaryAugust 2014, according to preliminary estimates, Rosstat reported in September.

Real disposable cash income increased 3.9% in August 2014 year on year.

Average monthly salary payable was RUB31,540 in August 2014, which is 9.1% more than in August 2013 and 10.2% more than over the period January-August 2014.

Retail trade, domestic producers hit by foreign debt redemption August retail trade growth of 1.4% y/y was very close to Alfa Bank's forecast, but this does not strengthen the consumption outlook.

Consumption is set to stagnate, at best. A slight uptick in retail sales growth, +0.2pp year-on-year (due to a slower decline in the food component), is not positive, as the prospects for household spending are becoming increasingly bleak.

In particular, growth in public sector wages slowed abruptly in July (the latest available data point) to 7.6% year-on-year (vs.

12.0% in June, in nominal terms), mainly due to a just 5.2% annual increase in the education segment

(as compared to around 16% yearon-year in 1H14).

Even though such a blip might be followed with a reversion, it highlights that the downward trend in incomes is entrenching. Also, the SA unemployment rate started to crawl upward, conforming with the generally sluggish economic backdrop.

Accelerating inflation and the CBR’s hawkish stance suggest a downgrade in retail trade expectations for 2H14. At the same time, August was marked by disappointing industrial output and investment figures relating to foreign debt redemptions and budget support moderation.

Retail trade managed to accelerate to 1.4% from a very low 1.2% y/y result in July thanks to some recovery in the food segment; and,

while it came close to our 1.5% y/y expectation, it was still 2.3% y/y for 8M14, below the 2.7% y/y seen in 1H14. Unemployment was at a new historical low of 4.8% y/y; however, real wage growth was a rather weak 1.4% y/y, being pressured by accelerating inflation.

which was a huge disappointment compared to the 1.5% y/y growth in 7M14 and our 1.2% y/y expectation for the month. The deepening fall in investment – by 2.7% y/y in August and 2.5% y/y in 8M14 after 2.0% y/y in July – also came as a negative surprise to us and the market.

Producer side disappointed: August industrial output stood flat y/y,

Consumers stay away from Moscow's malls as sanctions deepen Russia's slump

in the last week of August, traditionally one of the year's busiest for retailers.

Nearly 25% fewer people visited Moscow's malls in the week leading up the start of the school year than in the same period of 2013, consumer market research firm Watcom said, as Western sanctions bite into Russian consumption.

Shopper numbers were down 23%

Consumer visits to shopping malls went down in March — when Moscow's annexation of Crimea from Ukraine prompted the first wave of sanctions against Russia — and only returned to 2013 levels in the last week of July, before

dipping again in August, according to Watcom.

Finnish department store operator Stockmann, whose first quarter revenues fell 15.4% year-on-year to 145.5m euros ($188m), said in mid-August the situation on the Russian market had become complicated thanks to economic slowdown and the devaluation of the ruble.

Russia's biggest home electronics retailer, M.Video, 90% of whose stores are in shopping malls, also saw the flow of customers into its branches drop 6.1% in the first half of this year, according investment bank VTB Capital.

Russian industrial output decelerates to zero in August On September 17 Rosstat reported that industrial output dropped 0.2% month-on-month in August after 2.2% month-on-month growth in July; thus industrial growth decelerated to zero yearon-year growth in August from 1.5% year-on-year growth in July.

The figures for August were disappointing: the Interfax consensus expected 1.5% year-onyear growth and Uralsib forecasted 2% year-on-year growth.

Industrial growth slowed to the weakest level year-on-year since January. Seasonally adjusted, industrial growth contracted 0.6% month-on-month after 0.5% month-on-month growth in July.

Industry grew 1.3% year-on-year in 8M14.

Industrial output decelerated in August mainly due to the manufacturing sector.

Manufacturing production dropped 1.2% month-on-month after 2.3% month-on-month growth in July and thus shrank 0.6% year-onyear in August after 2.4% year-onyear growth in July.

Manufacturing output contracted for the first time since August 2013. In August, month-on-month growth slowed in the automobile industry (as several producers closed plants due summer holidays and weak demand) and in the production of building materials, fertilizers, rubber, and bricks. The manufacturing sector grew 2.2% year-on-year in 8M14. Output in the extraction sector increased 1.1% month-on-month in August after 2.2% month-on-month growth in July and accelerated to 0.8% year-on-year growth from 0.2% year-on-year in July.

Production in the extraction sector grew 0.8% year-on-year in 8M14.

Output in the utilities sector rose 1.5% month-on-month after 1.8% month-on-month growth in July and growth accelerated to 1.2% year-on-year in August from 0.8% year-on-year in July. Production in the utilities sector contracted 1.9% year-on-year in 8M14.

Cars might be a bright spot as the government has decided to restart its "cash for clunkers" scheme in September and will continue until the year end. RUB10bn of the federal budget will be spent on the program, which aims to increase car sales by 170,000. The program worked well in 2010-11 when

RUB30bn was spent on it. The program helped to increase car sales and production at the time;

hence, we assume that it will also work this time.

Russia ratifies the EU treaty, launches talk of creating currency union

create both the system of confidence and in fact discuss the issue of the further integration phase, the possibility of creating the currencies union,” Khristenko said.

The ratified of the Eurasian Economic Union (EEU) Treaty in September that creates the possibility for further establishment of a single currency union between Belarus, Russia and Kazakhstan, Chairman of the Eurasian Commission Viktor Khristenko said at the end of September.

Kazakhstan and Belarus are likely to do the same in the first weeks of October.

The EEU is due to be launched on January 1, 2015 and the talk immediately turned to creating a currency union.

The document for the first time foresees the path for establishing “single financial markets and markets of financial services in all the directions” and also says that the single financial regulator could appear on the territory of the Union in 2025.

“Such systematic unification is an absolutely essential element to

Russia and China pledge to use less dollars in trade as economic ties deepen Russia and China pledged on September 9 to settle more bilateral trade in ruble and yuan and to enhance cooperation between banks, First Deputy Prime Minister Igor Shuvalov said, as Moscow seeks to cushion the effects of Western economic sanctions.

Shuvalov told reporters in Beijing that he had agreed an economic cooperation pact with Chinese Vice Premier Zhang Gaoli that included boosting use of the ruble and yuan for trade transactions.

The pact also lets Russian banks set up accounts with Chinese banks, and makes provisions for Russian companies to seek loans from Chinese firms.

"We are not going to break old contracts, most of which were denominated in dollars," Shuvalov said. "But, we're going to encourage companies from the two countries to settle more in local currencies, to avoid using a currency from a third country."

For China, curtailing dollar's influence fits well with its ambitions to increase the clout of the yuan and turn it into a global reserve currency one day. With 32% of its $4 trillion foreign exchange reserves invested in government debt, Beijing wants to curb investment risks in dollars.

IFC, EBRD freeze all Russian projects The IFC, the World Bank Group's investment arm, has no official restrictions on doing business in Russia. However, no projects have been submitted for consideration of the Board of Directors and no money has been allocated for three consecutive months.

Likewise, the EBRD has frozen all its projects and investments in Russia, say bne sources, following pressure from western shareholders in the bank to stop work due to the situation in the Ukraine.

Both institutions are amongst the biggest investors into the Russian economy.

Investments in Russian startups fall 28.4% to $653m in 2013 Russian startups raised $653m investments in 2013, down 28.4%, Russian Venture Company (RVC) said in September in an annual report.

The total volume of venture deals in Russia - including grants, investments in infrastructure development and deals encompassing investors' withdrawal from projects increased 46% to $2.9bn.

The number of venture investment funds, working in Russia, rose by 25% to 200. Their total capitalization swelled 21.4% in the reported period to $5.5bn.

Investors backed up 222 projects, up 18%. The average volume of a deal was at $3.1m, down 44.6% on the year.

RVC was established by the Russian government in 2006 and is one of the country's key tools in building its own national innovation system.

Infrastructure Serbia to start South Stream construction by November While the EU is still blocking plans to build the South Stream pipeline, construction outside the EU is due to forge ahead this autumn. There are plans to start building both the section of the pipeline across Serbia, and part of the offshore section linking Russia to Bulgaria within the next two months.

The director of Serbian state gas company Srbijagas said on September 26 that he expects work on the Serbian section of the €16.6bn pipeline project to start in late October or early November, depending on weather conditions.

Funding for the pipeline has already been lined up, Bajatovic said. Russia’s Gazprom is due to complete 60% of the Serbian section of the pipeline, with a local company to handle the remainder.

A permit for the work is expected to be issued soon.

“The capacity of the pipeline has not been changed, so it remains 41bn cubic metres (bcm) of gas.

The only changes are that the output of the South Stream in Serbia will be in Subotica, instead of near Sombor, as previously planned,” Bajatovic said at the Uniting Europe exhibition in Novi Sad.

Since Serbia is not yet an EU member state, its government is not bound by the EU decision to halt work on the project in protest against Russia’s annexation of the Crimea.

Meanwhile, in Bulgaria (which is an EU member), a spokesperson for the South Stream Transport consortium, which comprises Gazprom, Eni, EDF and Wintershall, told local newswire BTA that pipes would start being laid on the Black Sea bed from November. Again, since the pipes will be laid in Russian and international waters, this is not subject to the EU ban.

Kyiv sees chance of EU approving South Stream over 70% The chance of Russia's South Stream gas pipeline project being approved by the E.U. is over 70%, Bloomberg reported late Tuesday citing Ukraine's state-owned energy company Naftogaz Ukrainy CEO Andrei Kobolev.

Kobolev also said Ukraine will have to decrease domestic gas consumption by 5bn cubic meters if Russian gas supplies are still shut off.

The E.U. authorities earlier blocked implementation of South Stream saying that the pipeline laying must be suspended until the

project is fully adjusted to the union's legislation, including the third energy package, which prohibits the same company, Russian gas giant Gazprom in this case, to be engaged in production, transportation, and sales of fuel.

South Stream will run under the sea to the Bulgarian Black Sea port of Varna before extending overland through Bulgaria, Serbia, Hungary, and Slovenia to supply gas to Western Europe via Italy and Austria. The pipeline's capacity amounts to 63bn cubic meters.

On June 16, Russia's Gazprom switched Ukraine off gas supplies over the unpaid debt.

Russia may delay 3 auto, railroad projects on lack of funds The terms of completion of Russia's Baikal-Amur Mainline, TransSiberian Railway and the Central Ring Road may be postponed because of lack of financing, the Economic Development Ministry said in a statement Friday. “Due to an unfavorable situation in the economy there is a risk of further decline in financing, firstly, from the federal budget, as compared with the options we have now. If this occurs, the main damage will be made to the kinds of transport where the federal budget is of the most significance for their financing structure. These kinds of transport are railroad and car transport," the ministry said.

Investments in the upgrade of the Baikal-Amur Mainline and the

Trans-Siberian Railway may amount to RUB562bn, while investments to build the Central Ring Road are estimated at RUB300bn.

The ministry's estimate for costs to upgrade automobile roads important for the FIFA World Cup to be held in 2018 grew by RUB3bn to RUB26bn, it said.

Power lines through Kerch strait to be ready by mid-2017 The Crimean "electricity bridge" across the Kerch Strait will be built by the middle of 2017, a year earlier than the transportation bridge, Minister of Crimean Affairs Oleg Savelyev said.

"This will be two 'double chains,' each with throughput capacity of 220 KW. It will be possible to send up to 500 MW to Crimea via these lines. If necessary, it will be possible to send over another highvoltage line across the strait. We are including such a possibility in the design for the transportation overpass," he said in an interview with Interfax.

Savelyev added that the federal targeted program for the development of Crimea and Sevastopol envisioned new power plants being built and commissioned in Crimea within the same timeframe.

Russian Railways may cut '15 investments by RUB20bn The investment program of Russian Railways may be reduced by 20bn rubles in 2015, CEO Vladimir Yakunin said at InnoTrans trade fair in early September. “This will depend on the final decision which the Russian government, the sole shareholder of Russian Railways, will make. We assume in our projections that that next year the investment program will be cut by about RUB20bn. This is not crucial but everything will depend on the final projections which the government will approve," Yakunin said.

The company said earlier that the amount of its investment program will stand at RUB415bn.

Russian Railways is preparing to hold a road show for its bonds in 2015 in Europe and Asia, Yakunin said separately. “We traditionally consider borrowing about 1bn euros. This will depend on budget projections which we will approve," he said.

2 Major Russian Airlines Appeal for State Support Russia's second and third largest airlines have appealed to the government for financial assistance as local demand for international travel tumbles, Kommersant newspaper reported in September.

Senior executives from Transaero and UTair, the country's biggest carriers after market leader Aeroflot, are among those who

have approached ministers in search of aid, Kommersant said citing unnamed sources.

Demand for flights abroad has declined sharply this year amid international tensions over Ukraine and heavy fighting between separatists and troops loyal to Kyiv in the east of the country. Western sanctions against Moscow have forced some of Russia's largest companies to seek multibillion dollar aid packages from the government.

Russia and China discussing 32 joint projects Russia and China are discussing more than 30 joint economic projects in a variety of areas from petrochemicals to banking, Russia's First Deputy Prime Minister Igor Shuvalov said following a visit to China at the start of September.

"Yesterday in China we discussed 32 projects. And they cover absolutely everything: petrochemicals, the banking sector, work in the area of food products, and very, very varied projects," Shuvalov said during an appearance on "Vesti on Saturday with Sergey Brilev", a TV discussion programme.

"It isn't just gold, oil, gas and copper that we discussed yesterday," Shuvalov said. "And in general many people in Russia are under the impression that China is only interested in natural resources."

Russian oil and gas access of independent gas producers to the Power of Siberia pipeline proposed The Ministry of Energy has proposed several ways to provide independent gas producers with access to the Power of Siberia pipeline to China, Vedomosti reports.

The document provided to the government discusses several options: the situation is left unchanged (no access of independent producers to the pipeline); Gazprom might buy gas from independents at the export netback price or at cost plus model; a consortium of independent gas producers might be created to finance the construction of the pipeline.

It is unclear when the government will come up with the final decision on access to the Power of Siberia pipeline. It was reported in July, that the government might allow independent gas producers to export gas from new fields in Eastern Siberia and the Russian Far East. Gazprom might buy gas from independents at the export netback price. The independents might also be obliged to construct new gas transport infrastructure.

Gazprom agreed to supply China with up to 38bcm of gas per year for 30 years. First gas is to flow to China in 2019.

Russia's Yamal LNG might be supported by the government Novatek’s Yamal LNG project might be supported by the government, according to Prime Minister Dmitry Medvedev, Vedomosti reports.

Given that neither the terms of any financial support nor the final decision to provide funds to Novatek’s Yamal LNG project are clear yet, we view the news as neutral.

The Yamal LNG project is owned by Novatek (60%), Total (20%) and PetroChina (20%), with total capex needs at $27bn, on our numbers.

It had previously been reported that possible difficulties accessing financing or technologies might delay Yamal LNG. The project could require as much as $5bn this year.

Aeroflot Russia may restrict flights over Siberia According to Prime Minister Dmitry Medvedev, Russia could restrict flights over Siberia as retaliation against the sanctions imposed against Russia by the EU and US. Counter sanctions are being discussed, including the implementation of some restrictions for EU airlines for overflights across Siberia.

Implementation of the restriction would be negative for state-run Aeroflot, which remains the main beneficiary from international airlines’ overflight royalty payments.

Russia Approves Rail Union of 3 Ex-Soviet States to Tap Into China-Europe Trade Russia's government green-lighted a joint venture between the state railway companies of Russia, Belarus and Kazakhstan that aims to grab up to a 2% share of container traffic between China and Europe currently worth a $1 trillion a year.

According to an official decree, Russia's Cabinet approved the transfer of 50% plus two shares in Transcontainer, Russia's largest intermodal container operator, and 100% minus one share in Russian Railways subsidiary Russian Railways Logistics to the joint venture.

In 2013 the three ex-soviet nations' railway companies agreed the principal terms of a joint venture called United Transport and Logistics Company, or UTLC, that would operate within their customs union and handle transit cargo between the economic hubs of China and Europe.

Annual trade between Europe and Asia is estimated to increase to $2 trillion by 2020. Mostly traveling by sea, some of these goods could be redirected to an intercontinental ground corridor passing through the territory and the transport network of the former Soviet Union.

ECM AFK Sistema New lawsuit filed seeking return of Bashneft shares The prosecutor general’s office has filed a civil lawsuit against AFK Sistema and its subsidiary Sistema-Invest in a Moscow arbitration court seeking the return of Bashneft shares to the government at the very end of September.

The court also granted a request from the prosecutor general’s office to seize AFK Sistema’s shares in Bashneft. An initial hearing has been scheduled for 9 October. The

new lawsuit comes not long after the prosecutor general’s office launched an inquiry into the legality of the Bashneft privatization.

In addition to the civil case against AFK Sistema, the company’s chairman and controlling shareholder Vladimir Yevtushenko remains under house arrest on charges of money legalization in connection with the privatization of Bashneft.

The Sistema chairman will remain under house arrest until at least 16 November. Sistema has denied all

of the allegations against Yevtushenkov and continues to claim that the privatization of Bashneft was in complete accordance with the law.

The case has seriously unsettled investors as no one is really very sure what is actually going on here. The working assumption is that Rosneft is making a play for Bashneft, but the company has adamantly denied it would like to acquire Bashneft.

S7 Group Private airline group mulling London IPO Leading Russian private airline S7 Group may hold an IPO in London in 1Q15. Company representatives refused to comment on the story.

S7 Group’s main assets are the Novosibirsk-based S7 Airlines, Russia’s fourth-largest airline, and Globus, Russia’s ninth-largest airline.

Last year, Natalya and Vladislav Filev, the majority owners of S7 Group (which own more than 99% of the company), acquired the government’s 25.5% stake in S7 Airlines for RUB1.13bn ($35m).

In 2013, S7 Group’s passenger traffic grew 11% year-on-year to 9.2m passengers (29% of Aeroflot Group’s traffic). Traffic continued to grow in 7M14: the combined passenger traffic of S7 Airlines and Globus was up 9% year-on-year to 5.6m passengers.

As a member of the Oneworld global alliance, the company flies to 83 destinations in 26 countries, with a fleet of 59 aircraft, including

Airbus A320s, Boeing 737s and Boeing 767s. S7 Airlines recorded RUB62.7bn ($1.9bn) in revenue and RUB703m (22m) in net profit under RAS in 2013 (the last time the company reported RAS results). Compared to its local peers, the company’s leverage remained low.

Russia sees biggest inflow among BRICS, EMEA In the week ending September 24, EM equity funds demonstrated outflows for the second week running, $596m versus the previous week’s $1,084m. The pace of the outflows declined as global sentiment slightly improved on the easing tensions in Eastern Ukraine, which are hoped to lead to some positive political developments between the EU and Russia.

Most regions posted outflows, especially the Asia-Pacific with $989m exiting. The biggest losers there were Japan and China. Latin America continued to demonstrate solid inflows, this time $112m versus the previous week’s $46m.

EMEA posted a surprising $116m in inflow versus $189m in outflow the previous week. Much of this inflow was driven by new money into Russia in the week leading to September 24.

Investors had been increasingly nervous about conflict risks, but the ceasefire has continued holding and countersanctions seem unlikely to follow from Russia, hence we should expect a decline in market

beta and some new inflows in the next week.

Some investors are stepping back into the Russian market on the basis of the break out of peace in Ukraine and the extremely low valuations of Russian stocks.

Investors Flock to Russia ETF as Ukraine Tension Eases Investors betting on a rebound in Russian stocks are piling into the benchmark exchange-traded fund for the market at the fastest pace in six months.

They poured $183m into the Market Vectors Rusian ETF in the

eight days through Sept. 23, the longest streak of daily inflows since March, data compiled by Bloomberg show. The shares gained 2.3% to $23.98 yesterday, reducing their decline to 1.9% the annexation of Crimea in late February.

The ETF and the Bloomberg Russia-US Equity Index rallied amid mounting speculation that Ukraine will reach a peace accord with rebels as a cease-fire entered its 20th day. NATO said on Sept.

22 that Russia, which denies involvement in the conflict, has embarked on a “significant� withdrawal of its forces from the former Soviet republic.

Gazprom plans IPO for utility unit in 2016 Gazprom Energoholding, the utility unit of Russia's top natural gas producer Gazprom, is planning an initial public offering of its shares in 2016, when foreign capital markets may become more open to Russian firms, its director general said.

Russian companies have virtually stopped selling share capital in the form of IPOs as investors shy away from their assets due to the deepest West-East rift since the end of the Cold War over Moscow's role in the Ukraine conflict.

Denis Fyodorov said the company's Western suppliers were "shocked" because of sanctions over Ukraine and would suffer more from the punitive measures forcing them out of the Russian market than the Russian companies they serviced.

"As for the IPO, we'd like to carry it out in 2016. It would most likely be an IPO, not a sale to a strategic partner, though we do not rule out this option either," he said in an interview at the Reuters Russia Investment Summit.

The company could sell new shares during the IPO, he said.

Evraz confirms intentions for IPO of North American assets Evraz officially confirmed at the end of September that it is currently considering an IPO of the Evraz North America division.

According to the press statement, although the company has not yet filed a registration statement with the SEC, it may do so in the foreseeable future.

While the deal structure and other details are still unknown, the most likely scenario is a sale of a minority (up to 50%) stake in the business, as the management earlier stressed that it remains committed to the asset and considers it as core.

Overall, the idea of monetizing the North American operations is good, as the timing is favorable (steel demand in the western hemisphere remains robust) and it would help the company deleverage and unlock additional value (this business is now effectively valued at Evraz’s low multiples of4.4_4.6 EV/2014_15E EBITDA versus 7.0_8.0 averages for North American producers). Although a full sale to strategic buyers (as Severstal did) is probably the best option, it can still be the next step after a partial disposal is executed.

Blackstone to withdraw from Russia Private equity group Blackstone Group LP is "giving up on Russia," highlighting how even wellconnected Western investors are turning away from the country, a news report said.

Blackstone has chosen not to renew the contracts of the consultants it hires in Russia, bringing an end to the buyout group's attempts to break into the country, the Financial Times

reported Sunday, citing a person familiar with the matter.

En+ Group mulls spinoff of UC RUSAL’s stake in Norilsk Nickel

Among other things Blackstone had a seat on the Russia Direct Investment Fund (RDIF) board and was supposed to co-invest in large projects with the fund. But in the end the fund couldn’t find any deals it fancied and it decision to pull out is as much to do with the lack of business as with politics.

UC RUSAL key shareholder En+ Group, owned by Oleg Deripaska, may consider the spinoff of its 28% stake in Norilsk Nickel ($8.8bn at the current price of $20/GDR) to deleverage and open up the path to paying dividends. En+ Group CEO Maxim Sokov indicated that there has been no active discussion on the matter in comments to Bloomberg but added that En+ Group may initiate talks with other UC RUSAL shareholders.

It hired Dmitri Kushayev, the former head of investment banking at ING in Russia and a former private equity executive, as senior adviser to assist on deals in the country, and the "pull out" will actually consist of sacking its one consultant.

Western Sanctions Destroy Plans for International Financial Center in Moscow The Russian government has dropped plans to build an international financial center just outside Moscow once meant to mark Russia's emergence as a hub for global capital.

Instead, apartment blocks will be built on the site, according to business daily Vedomosti.

The newspaper said last week that it had obtained a copy of the development plan for New Moscow — the vast territory southwest of Moscow that was added to the capital in 2011 — and much-trumpeted idea to build financial center in the prestigious region of Rublyovo-Arkhangelskoye was no longer part of it.

If the proportional value of the company’s debt is transferred from UC RUSAL’s balance sheet, the aluminum producer’s pro forma net debt would drop to just $1.8bn, or below 1.5 2014E net debt/EBITDA. An indication of forthcoming dividends would be a strong trigger, in our view, as payouts are currently not expected to come earlier than 2017, when the company’s leverage is hoped to fall below 3.5 net debt/EBITDA, assuming no disposals.

Euroclear has started to settle trades in Russian equities Euroclear has started to settle trades in Russian equities connecting the Russian stock market directly to the international financial system. Previously portfolio investors needed to set up an account with a broker in Moscow but now they can buy and sell Russian shares from anywhere in the world. Russian bonds were hooked up to the international system at the start of last year.

However, there has been no official confirmation from Euroclear that this is the case but Moscow Exchange has confirmed that some stocks are indeed available to settlement via Euroclear.

The tricky point is the list of stocks that are being settled. According to the document posted by Euroclear Bank, it does not accept securities subject to EU sanctions.

Templeton Developing Markets Trust fund, run by Mark Mobius, increased its investments in Russian shares to $147m from $24.7m in April-June, as seen by PRIME in the fund's materials Friday.

The fund purchased shares of diamond mine Alrosa.

Mark Mobius raises investments in Russia six times in Apr-Jun

DCM Share of non-residents in Russian OFZ market hits all time high in June Russia's Central Bank published a list of the OFZ (Russian TBills) holdings of non-residents. As of July 1, foreign-based investors held RUB945bn ($23.6bn) in OFZs, which is RUB40bn more than one month ago.

This is an all-time high (the previous high of RUB933bn was recorded on November 1, 2013), which begs a certain amount of skepticism given the difficult environment this year.

It may be the case that the heightened interest from foreigners for OFZ was due to the somewhat lower geopolitical tension during the first month of summer.

However, it also could be that the higher figure is due to a number of technical deals being executed that resulted in non-residents becoming the direct holders of the paper.

It is interesting to note that the overall rate of growth of the OFZ market was relatively modest, which allowed the share belonging to non-residents to climb to 25.6%. However, this figure remains rather far off the record share of 28.1% recorded on May 1 2013.

It cannot be ruled out that the market environment may undergo significant change in the near future. Media reports indicated that the EU may impose restrictions on the purchase of Russian state debt.

If this does happen, a further increase in the holdings of non-

residents is unlikely, and in fact many of them will be looking to reduce their OFZ portfolio.

Kremlin crosses 9% mark to make first issue in months Ninth time luck: the Ministry of finance placed its first bond at the very end of September after eight failed auctions, but had to pay over 9% to get the bond away, a pricing level the government has not been willing to for money until now.

After shunning bond auctions for nine weeks amid the worst quarter for ruble debt since 2011, Russia indicated it’s prepared to borrow at more than 9% for the first time in almost five years.

In its first auction since July 16, the Finance Ministry sold all RUB10bn ($262m) of August 2023 notes on offer to a single bidder on Sept. 24 at an average yield of 9.37%. Current yields are “acceptable” and the finance ministry plans to fulfill this year’s bond sale plan, it said in an emailed response to questions on Sept. 26.

With the government budget surplus running at $23bn in the first eight months of 2014, Russia refrained from borrowing because of the political premium in the market, where a large supply of new bonds could send borrowing costs still higher, Finance Minister Anton Siluanov said on Sept. 11.

Yields surged in the third quarter as President Vladimir Putin’s standoff with Europe and the over Ukraine sparked escalating sanctions and a market selloff.

Russia wont borrow to cover Russia's budget deficit Increasing borrowing to cover Russia's budget deficit will not benefit the economy and will lead to the growth of uncontrolled borrowing or an increase in the tax burden, Finance Minister Anton Siluanov believes.

"If we go into debt, then ultimately this will lead to either uncontrolled borrowing or an increase in the tax burden. In the current conditions, to say that now we'll borrow, divide it up and this will benefit the economy - this is a mistake," Siluanov said at a business breakfast organized by Sberbank at the investment forum in Sochi.

"It would seem that to take more money from the market and divide it up through the budget, well that would be great. This is sheer delusion. If we will take even more resources from the market and divide them up through the budget, it's not a fact that this will be effective," the minister said.

He said that if borrowing is increased to cover the deficit other commercial players will be deprived of these resources.

Volumes on Russia's debt market fell by 78% to $9.2bn in 1H14 In the first half of the year Russia's debt market fell by 78% to $9.2bn.

Sanctions imposed in recent months worsened the situation having closed traditional capital markets for Russian issuers.

Investors' caution and bureaucracy hold down borrowing in Asia.

Russia's public debt decreased 1.3% in 7M14 to 11% GDP Russia's foreign debt fell 2.2% in January-August to $54.55bn as of September 1, the Finance Ministry said in a report.

Russia's public debt decreased 1.3% (by RUB193.8bn) in the first seven months of 2014 and, according to the Audit Chamber of Russia, was RUB7.74 trillion (10.8% of the forecasted GDP) as of August 1, 2014

The internal public debt increased 1.2% to RUB5.79 trillion in the first seven months of 2014 while the external debt fell 2.1% ($1.19bn) to $54.6bn. The external debt in the ruble equivalent increased 6.8% (RUB124.8bn) to RUB1.95 trillion.

DEBT AS OF SEPTEMBER 1, $bn Eurobonds 39.99 Debt to countries outside 0.925 the Paris Club Debt to former members of the Council for Mutual 0.898 Economic Assistance Debt to Paris Club 0.106 members Domestic bond sales restart After a hiatus caused by political and economic turmoil Russian banks are slowly coming back to the fixed income markets.

Total investments in fixed assets in Russia reached RUB1.16 trillion in August 2014, down by 2.7% compared to August 2013, Rosstat reports Three big credit institutions - AlfaBank, Raiffeisenbank and Gazprombank - have sold their securities on the debt market recently. Money are becoming more expensive for the credit institutions but they still can raise it Long-awaited rally in autumn on the debt market started immediately after meeting of the Bank of Russia where the regulator decided to keep the key rate unchanged - 8%.

"The Bank of Russia's decision opened the door for borrowing on the primary market. Three banks announced about new offerings Alfa-Bank, Raiffeisenbank and Peresvet," analysts from Promsvyazbank

Alfa-Bank was the first one to offer two 15-year issues worth RUB5bn each. Put options in 2 years on one issue and in 3 years on the other one are provided. The coupon rate on the first issue amounted to 11.65% annual, on the second 11.95% annual.

The bond was considerable more expensive than money sold just a few months ago: in late June AlfaBank sold bonds for RUB5bn under 10.25% annual. Dynamics of the exchange rate of the ruble that was falling fast in mid-September, exerted considerable pressure on the demand.

Raiffeisenbank closed the bid book for the bonds worth RUB10bn on September 16. It managed to sell securities with a put option in a year under 10.5% annual.

Moreover, 1-year issue was in greater demand among investors if to compare with Alfa-Bank's 2-year or 3-year issues. The bid book was oversubscribed and the coupon rate was determined at 10.50%10.75%.

Gazprombank also placed its bonds under 10.8% on a week ended September 19. The credit institution managed to raise RUB10bn.

Second tier banks are also getting into the action but have to pay a higher price. Only issuers willing to borrow for short periods at high rates are able to issue paper.

Zapsibkombank held technical placement on Moscow Exchange on September 8. In early September

the bank closed the bid book amounting to RUB2bn. The coupon rate on 3-year securities was set at 13%, which implies a premium to the secondary market totaling 2030 basis points. At the same time a 6-month call option is provided.

Only a year and half ago the bank was paying 11.5% for this money.

VTB insists on Mechel debt conversion into equity VTB insists that the Mechel coal and steel group's debt be converted into equity, the bank's chief, Andrei Kostin, told reporters on the sidelines of the investment conference in Sochi.

"If the company is unable to bear its debt burden, the only and most rational means would be to convert the debt into equity, which would not in fact be all that good for the

bank. But we are prepared for this because we don't currently see how the debt burden might be serviced. We've suggested this option, but it hasn't yet received support," Kostin said.

"If this does not [occur], we do not have any other choice but to take measures of a legal nature in terms of filing a suit since Mechel's proposed plan does not suit us. It does not resolve the main problem.

No matter how much debt you restructure, this burden is crippling in our opinion," he said.

However, by the end of September is appeared that a white knight had been found and the company's stock soared. VTB said if the debts could be settled then it would not pursue planned legal actions.

Sectors

Russian government to support agriculture development as a high priority Agriculture is a high priority but a difficult problem. This is one of the highest priority investment projects for the government. We heard this first after the agriculture failure in August 2010 and several times since. The President cites the need for investment in terms of national security and as a means of creating greater diversity, including regional

diversity, in the economy. There is no doubt, however, that the industry has been badly damaged after nearly two decades of neglect, and remedial actions will be both expensive and lengthy.

State support is being increased.

State support for the agriculture sector currently is expected to exceed RUB2.5 tln ($66bn) until 2020, of which RUB500bn ($13.5bn) is to be allocated in 2014-16.

Speaking at a government meeting in August, Agriculture Minister Nikolai Fyodorov told Prime Minister Dmitry Medvedev that the ministry had drafted a new plan for 2015-20. The current plan envisions RUB 1.6 tln ($44bn) in investments from the federal and regional budgets. The Minister has said that farmers need RUB636bn (US$17.1bn) of extra state support in 2015-20 to boost output, mainly of pork and poultry.

Move towards self-reliance. The dairy industry alone requires RUB600bn (US$16.5bn) in investment through 2020 in order to expand production to meet government aims of satisfying 90% of the population's dairy needs. It has been reported that if the program was accepted precisely as is, it would take five to seven years to "make a breakthrough" on the domestic market. Currently, about 66% of Russia's milk needs are met by domestic commercial production and 78% if you include small private farmers, according to the Agriculture Ministry.

Danone mulls expanding capacity of Russian plant in St Pete Dairy producer Danone Group is considering a possibility of expanding production capacity of a St. Petersburg-based plant by launching two new products, Dmitry Zubov, director of the plant Petmol says.

The project may require “a considerable amount of

investment," Zubov said, without providing any figures. “(The launch of production of) a couple of new products, which are unique for Russia, is being considered," Zubov said. The company will decide on whether to execute the project in JanuaryMarch 2015, while the new products lines may be launched in the course of the next year.

Petmol is a unit of Russian dairy maker Unimilk, which merged with Danone Group in 2010. The plant, the second largest among Danone assets in Russia, produces 400-600 tonnes of products per day, while its projected capacity amounts to 1,000 tonnes per day.

Russia's potash fertilizer exports soar 57% in Jan-Jul Following last year's showdown between Russia and Belarusians leading producers of potash the two companies have buried the hatchet and gone back to work.

Russia's potash fertilizer exports went up 57% on the year to 5.7m tonnes in January-July, amounting to $1.477bn, a 12.7% increase, the Federal Customs Service said in a statement Thursday.

Nitrogen fertilizer exports rose 5% to 7.168m tonnes and cost $1.938bn, an 8% decrease.

Exports of compound fertilizers fell 7% to 5.07m tonnes for $1.82bn, a 20% drop.

The key variable in the potash businesses is how much China is

willing to pay for the fertiliser. In the heyday China was playing around $400 per ton but that felt $300 per ton last year. However by the middle of this year the price is starting to creep up again adding to the bottom line of the major producers.

Russian oil giant Rosneft to shed a quarter of staff, report says State-owned oil giant Rosneft could fire as many as 1,000 employees, or 25% of the people working at the company, in an ongoing economy drive, a news report said in September.

Times are hard for the oil major which is struggling to refinance some $40bn worth of borrowing following its deal to acquire the British oil company shares of BP. Times are also hard for other large companies: AvtoVaz and GAZ, leading car companies, have also been shedding tens of thousands of staff this year due to the soggy economy.

The criteria for Rosneft's layoffs are currently being worked out and firings could begin as soon as October, business daily Kommersant reported, citing unidentified sources at Rosneft.

The world's largest publicly traded oil company, Rosneft has been affected by recent Western sanctions against Russia over the Ukraine crisis, with chief executive Igor Sechin's assets frozen by the United States

and potential deals reportedly being shelved amid tensions.

Russia imports more butter, sugar, less meat in 7M Russia imported more butter and sugar and less meat in the first seven months of 2014, the Federal Customs Service (FCS) reported on Thursday.

Russia imported 538,600 tonnes of fresh and frozen meat (worth $2.198bn) in January-July, 19.5% less than in the same period last year.

Poultry meat imports declined to 263,700 tonnes (worth $419.5m) from 266,400 tonnes ($418.5m) a year earlier. Imports of fish edged up to 389,600 tonnes ($1.153bn) from 382,200 tonnes ($1.155bn).

Milk and condensed cream imports declined to 95,700 tonnes ($371.6m) from 100,900 tonnes ($324.4m).

Butter imports rose to 96,500 tonnes ($488.9m) from 73,800 tonnes ($320.9m).

Citrus imports declined to 860,400 tonnes ($847.9m) from 905,300 tonnes ($923.9m).

Russia imported 82,800 tonnes of coffee in the period, up from 73,600 tonnes, while tea imports declined to 97,600 tonnes from 99,400 tonnes.

Raw sugar imports totaled 502,300 tonnes ($214.1m) up from 372,100 tonnes ($180.8m) and white sugar imports totaled

184,700 tonnes ($123.8m) up from 39,900 tonnes ($24.4m).

Imports of grains totaled 711,600 tonnes ($388.8m), including barley - 150,100 tonnes ($35.8m), down from 232,900 tonnes ($79.6m), and corn - 39,400 tonnes ($173.7m), down from 43,100 tonnes ($119.9m).

Russia, China aim to close military technology gap with U.S.: Hagel Russia and China are trying to close the technology gap with the military and developing weapons systems that appear designed to counter traditional advantages, Defense Secretary Chuck Hagel said in September.

Defense officials have watched as Moscow and Beijing have tested a string of sophisticated weapons, from radar-evading aircraft and anti-ship missiles that fly many times the speed of sound, to integrated air defenses.

While the US Defense Department's spending of around $500bn is still more than the next six or seven countries combined, research and development spending has fallen more than 20% since President Barack Obama took office.

In contrast, China and Russia have been rapidly increasing their security spending and have passed new technological milestones in recent years.

"China and Russia have been trying to close the technology gap by

pursuing and funding long-term, comprehensive military modernization programs," Hagel said.

"They are also developing antiship, anti-air, counter-space, cyber, electronic warfare and special operations capabilities that appear designed to counter traditional military advantages."

Russia on track for bumper grain harvest, record exports Russian wheat prices have been rising thanks to a record pace of August exports, high domestic demand and weak ruble that offset continuing harvesting.

Russia, one of the world's largest wheat exporters, has supplied its highest ever monthly export level of 4.7m tons of all grains including pulses to its customers abroad in August. Its top customers are in North Africa and the Middle East.

Wheat exports also hit an all-time record of 4.2m tons.

Russia is set to harvest the largest wheat crop in six years thanks to favourable weather this year and has already harvested 50m tons from 62% of the planned area, according to Agriculture Ministry data.IKAR expects the country to harvest 60m tons of wheat, 20.2m tons of barley and 12.7m tons of maize.

Russian prices for milling wheat with 12.5% protein content were up $2 last week at $246 per ton, IKAR said. The quote was on a free-on-board, or FOB, basis in the Black Sea compared with a week

earlier. Barley prices were flat at $212 per ton, while maize prices fell $3 to $180 per ton, it added.

Russia's car, LCV sales drop 26% in August as government restarts cash-for-clunkers Russia's sales of cars and light commercial vehicles (LCVs) continue to fall and were down 25.8% on the year to 172,015 units in August, the Association of European Businesses (AEB) said in September, as the government relaunches its cash-for-clunkers scheme to prop the sector up.

Car sales have been falling all year leading several of the leading companies to cut production hours and lay off thousands of workers.

In September the government restarted the bail out scheme that will continue until the year end.

RUB10bn of the federal budget will be spent on the program, which aims to increase car sales by 170,000. The program worked well in

2010-11 when RUB30bn was spent on it. The program helped to increase car sales and production at the time; hence, we assume that it will also work this time.

In January-August this year, cars and LCVs sales in the country dropped 12.1% on the year to 1.583m units. “August was another difficult month for car sales, which hardly surprised anyone in the industry.

The recently announced government incentive for the scrappage and trade-in of vehicles raises hopes that the market slide can be stopped," AEB Chairman Joerg Schreiber said, as quoted in the statement.

The sales of Russia's largest car producer AvtoVAZ fell 32.3% on the year to 26,467 cars in August, while in January-August its sales decreased 18.5% to 247,289 cars, according to the association's data.

Russia third in world for number of tourists traveling to Europe Russia was the third in the world in 2013 for the number of tourists traveling to Europe on holiday, the Association of Tour Operators of Russia said on its website on Tuesday, citing the data of the European commission on tourism.

The leader was Germany, which accounted for 14% of all the tourist visits in Europe. It was followed by Great Britain with 9%, and Russia was the third with 6%, but it had the highest growth in the number of visits to Europe, which increased by 13% as compared to 2012, while Great Britain and Germany showed lower rates.

Rosneft first arctic well strikes oil Rosneft announced that the first exploration well in the Kara Sea had discovered significant oil reserves of over 100mmt, along with 338bcm of gas.

Dubbed Pobeda (“Victory”), the field confirms that there is large production upside locked beneath Russia’s frigid Arctic waters; and future progress there depends heavily on how sanctions materialize, as Rosneft’s key US partner, ExxonMobil, must now exit the project, leaving very slim chances of Rosneft’s proceeding with Kara Sea exploration.

This is a watershed for Rosneft, but this is only the first step and Rosneft must now carry on alone.

Meanwhile, this discovery certainly underscores the significant longterm upside potential for Rosneft; however, the first oil will likely be extracted well beyond 2020.

Rosneft establishes JV with PetroVietnam to explore Arctic shelf Rosneft and PetroVietnam have agreed to establish a joint venture (66.7% Rosneft and 33.3% PetroVietnam) to explore the Arctic shelf, according to the Russian company, Vedomosti reports. The companies are to drill five exploration wells in the YuzhnoRussky and Zapadno-Matveevsy fields in the Pechora Sea, which have 367mnt and 64bcm of recoverable oil and gas resources.

Initial expenses of $1.5bn are to be covered by the Vietnamese company.

Magnit is now number nine among the largest importers in Russia Leading Russian supermarket chain and darling of the international investment community Magnit, broke into the top ten largest importers in the country and the largest in the food supply category.

Magnit is a pioneer in the direct import business among food retailers and launched its first operations in 2009-2010.

Infranews data indicates that Magnit increased direct imports 23.8% in 1H14.

For the same period, Dixy delivered a 19% advance, while

X5's direct import operations dropped 30%.

Further development of Magnit's direct import operations is positive for the investment case, as it ensures greater control of the supply chain of a notable part of the trading assortment (some 10% as per the latest Magnit data) and is supportive for profitability.

Russia's Baltika suspends two plants over low demand Russian brewer Baltika, owned by Danish Carlsberg Group, has suspended production on its plants in Chelyabinsk and Krasnoyarsk cities, Deputy CEO for corporate communications and information Alexei Kedrin told PRIME. “The plants in Chelyabinsk and Krasnoyarsk are continuing to operate, but beer brewing and filling will start only after the market is restored," he said, adding that there have been no decisions on suspending other beer plants.

Beer consumption is Russia shrunk by 8% on the year to 59 liters per capita in 2013, and the market contracted by 7.7% to 83.4 hectoliters due to stricter regulations and higher excise duties, which accounted for 67% of Baltika's taxes in 2013. Carlsberg expects Russia's beer market will fall by up to 9% on the year against earlier expected 4-6% in 2014.

Carlsberg owns over 10 breweries in Russia, the largest of which is located in St. Petersburg. Baltika's

brand portfolio includes over 30 beer and nine non-beer brands.

Carlsberg's business in Russia accounts for 35% of its operational profit.

Russian travel agencies bankrupted as demand falls up to 50% Some 130,000 Russians have lost money or needed emergency help with air tickets to return home from interrupted overseas vacations after more than a dozen travel agencies went bankrupt over the past two months, Interfax reports.

At least 14 travel agencies in Russia folded between mid-July and mid-September as part of a "deep systemic crisis exacerbated by political and economic factors," with demand for tour packages falling 30-50% this year alone, Irina Tyurina, spokeswoman for the Russian Tourism Industry Union, said in comments carried

by Interfax.

About 56,000 Russians needed emergency help overseas after their travel operators went bust, leaving clients facing eviction from hotels over unpaid bills and without air tickets home, Tyurina said.

Russian ads volume indicates flagging demand for advertising in current macro conditions Most of Russia's leading TV advertisers are reducing ad volumes due to falling consumption. Twelve out of

Russia’s top-20 TV advertisers reduced advertising volume (in GRP terms) on federal and local TV channels in January-August, Kommersant reports referring to a study by MediaLogic consultancy agency.

The data was based on an audience aged 18 and above.

According to AKAR, the total Russian TV advertising market rose 4% to RUB78.6bn ($2.2bn) in 1H14 and CTC Media (CTCM US – Hold) is expecting total Russian advertising market to grow 5% year-on-year in ruble terms this year.

Procter & Gamble, which had the largest TV advertising budget in Russia last year (RUB7.1bn or ($187m), reduced its advertising volume by 12% year-on-year in January-August, while Unilever reduced its advertising volume by 7% year-on-year. Pepsico, which spent RUB6.8bn ($179m) on TV advertising in Russia last year, reduced its purchases of GRP by 10% in January–August and Henkel reduced its advertising volumes by 16% year-on-year.

However, among the 20 largest TV advertisers in Russia, seven increased their ads volumes, including Novartis, Sanofi Aventis, Bayer, Johnson & Johnson and Mega- Fon (MFON LI – Hold).

However, Internet companies are less vulnerable to macro risks than TV. The Russian advertising market is highly sensitive to a macroeconomic slowdown and the restriction on imports could have an additional negative effect on demand for advertising in the short

term. Nonetheless, the internet segment is less vulnerable and will probably continue to grow rapidly, increasing its market share at the expense of traditional media. Thus, companies including Yandex and Mail.ru should be able to continue delivering strong revenue growth.

We reiterate our Hold recommendations for Yandex, Mail.ru and CTC Media.

Russia's digital content market to grow to $3.5bn by 2017 The digital content market in Russia will grow to $3.5bn by 2017 from $2.0bn in 2013, research company J'son & Partners Consulting said Monday in a statement.

Russia occupied only 2% of the world's digital content market in 2013. The whole market was estimated by J'son & Partners Consulting at $106bn, up 12%.

The largest player was the with the share of 27%.

The game content share in Russia slipped 8%age points in 2013 to 91% that hinted at a shift from an emerging state to the development state, the research company said.

IKEA Plans $2.5Bn Expansion Across Russia Swedish retailer IKEA plans to break out of a period of consolidation and invest 2bn euros ($2.5bn) through 2020 on expanding its network of shopping malls across Russia's regions, business daily Vedomosti reported.

IKEA Shopping Centers Russia already operates 14 vast shopping centers under the "MEGA" brand, located on the outskirts of Russia's biggest cities.

He noted that the issues surrounding the import substitution for drugs are closely linked with the development of technologies relating to their production.

By 2018, the company plans to build a new 215,000 square meter mall in Mytishchi, northeast Moscow region. More centers will be constructed in St. Petersburg, Voronezh, Perm and Krasnoyarsk, Armin Mikaeli, the head of IKEA Shopping Centers Russia, said in a statement.

"If you take the drug production in 2009-2010 and now, [you can see] it has doubled. This is already more than 200bn rubles [$5.18bn].

All this is due to the fact that technologies and companies with competence in the production of these drugs appeared," the deputy minister said.

In recent years, the Swedish retailer refrained from opening new stores and instead focused on developing the existing ones.

In 2011, the company said it was freezing investment in Russia because of excessive and unpredictable bureaucracy in some of Russia's regions.

The "tolerance to corruption" displayed by some of its own staff also contributed to the decision to stall expansion efforts, the company said at the time.

Russia to allocate 20bn rbl in subsidies to pork producers

Mikaeli said IKEA had decided to review its policies because the situation has improved on both fronts.

Russia to produce more pharmaceutical products Pharmaceutical companies in Russia will be able to produce the bulk of vital and essential drugs in two or three years, Deputy Industry and Trade Minister Sergei Tsyb said at an international pharmaceutical forum in Tomsk last month.

Russia's Agriculture Ministry will approve RUB20bn in subsidies to sugar and pork producer Rusagro and other pork producers, Reuters reported last month, quoting Agriculture Minister Nikolai Fedorov.

The state subsidies look realistic in light of Western sanctions against Russia, and Moscow's retaliatory import embargo on and E.U. food.