bne:Chairman's Monthly List - November 2014

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 Europe Divided again - Trading blocs and blows as Russia’s EU forms

Putin gets from push back over the "Rotenberg bill"

Oil and the ruble tank but no crisis on the horizon yet

Moscow Metro Managers Must Take Subway to Work

2015 looks likely to be Russian economy's “Annus Horribilis”

Putin proposes loosening penalties for small bribes

Russian ruble: Do not mistake weakness for fragility

Politics – the good Russia enacts Putin's deoffshorisation legislation Russia's Duma approves expansion of anti-piracy law Russia introduces political campaign financing legislation

Politics – the bad Russia's Sberbank gets poor corporate governance score Switzerland joins latest EU sanctions on Russia Russia's best know NGO Memorial on verge of being closed Russia to launch dozens of foreign language media

Russia's Duma approves expansion of anti-piracy law

Russia to ban state-owned companies from using Big Four audit companies

Russia introduces political campaign financing legislation

Putin says no "colour revolutions" in Russia

Fines for corporate espionage increased Penalties for domestic violence to be stiffened Booze and fags to be banned from Russian supermarkets

Politics – the ugly Russian oligarch Timchenko under US anti-money laundering investigation Russian communications ministry accused to stealing e-government investment funds

Polls, mood, sociology Putin popularity reaches an all time high, propensity to protest close to all time low Russians wise to corruption, but Putin comes out smelling of roses Russia is the biggest threat to global stability, say international investors Russians trust in police up following reform Russia's Business Confidence Index declines in November

Banks and Finance Russia's banks struggle as sanctions bite CBR's headline banking sector data for October Rate hikes means Russian retail deposit may grow in 2015 Russian government may pump more equity into Russian banks Central Bank publishes consumer loan rate caps for 1Q15

Crime pays in Russia

CBR to set up SWIFT replacement in May 2015

Russians don't care, unaffected about food sanctions

Russian banks' assets to grow by 22% to RUB70tn in 2014

Anti-American sentiment soars to third population

Russian banks cut dubious transfers abroad threefold in Jan-Sep

Obama lost popularity among Russians

Retail banks sell off record RUB200bn of NPLs to keep balance sheets clean

One third of Russians polled think Cold War is coming Half French say should sell Mistral to Russia Russians believe state-run media 'objective' Levada Centre poll finds 68% of Russians don’t want their sons to fight in Ukraine Half of Russians think that financial support for Crimea and Ukrainian separatist will cause a crisis in Russia Russians are confused about events in Donbas, but most believe it’s a civil war

Financial sanctions on Russia hurt Ukraine – Putin Russians concerned with fall of ruble but not switching accounts yet Russian banks' ROE falls to 8.1% in October from 13.3% in September

Economics Russia's consumption and investment motors stall Russia's free floating ruble soften blow of falling oil prices Central Bank raises the key rate 150 bps, Nabulina signals more dovish stance next year

Russian slowdown in consumer spending is here to stay

Share of food in Russian basket ticks up on high prices

Putin, Xi promise to use more yuan in mutual transactions

Russia's labour market still strong

Russia cuts investments in US T-bills to $117.7bn Russia's international reserves lose 18.5% y/y or almost $100bn as of end-October CBR buying Russian gold "Suspicious transaction" capital flight slowing, capital flight remains high BUDGET WRAP: Russia's federal budget for 20152017 approved Budget running surplus of 1.9% of GDP through October

Infrastructure Aeroflot's October international traffic slumps Russia deliveries of gas to China could overtake those to Europe United Transport and Logistics Company registered in Moscow Russian Railways' 2015 investment to exceed RUB400bn Russia, China to build a $152bn high speed Moscow-Beijing railroad Aeroflot budget airline Pobeda launched (again)

MACRO WRAP:

Russia to become global planebuilder

Russia's nominal GDP grows 0.7% year-on-year in 3Q14, but zero when adjusted

Ruble devaluation improves prospects for Russia's next generation civilian plane

Russia's capital investments fall 2.9% on year in October

Russian wants to be shipbuilding power

Russia's industrial output surprises with October surge

Chinese to invest $10bn in Yamal LNG plant

Russia's annual inflation moves close to 9%

Arabs to invest in Moscow Central Ring Road

Russia losing $140bn a year from crisis

Russian train maker wins $2.6bn deal after foreigners drop out of tender

Russia’s corporate profit growth drops by 9% y/y in Jan-Sep Russian October retail trade up 1.7% y/y, wages stagnate Russian service sector growth slows sharply in September

Russia sets up 10 new SEZ

ECM Russian stocks' secret membership of Euroclear

Russian blue chips to abandon London for Hong Kong Russia's smartphone maker Yota Devices offer $100mn private placement Daimler’s up share in Russia's Kamaz to 15%

Sberbank launches yuan letters of credit

Sectors AvtoVaz plans to increase output by 20% in 2015

EBRD exits Kamaz

Russian government targets more foreign companies working in Russia in tit for tat reprisals

RTS at five year low, S&P500 at all time high

Russians Set to Double Spending at Foreign Online Retailers

Hopes for Santa rally may be dashed this year

Residential construction continues to rise

Moscow Exchange – Thriving on Adversity

TMT already accounts for a tenth of Russia's economic production

Russia ETF inflows strong in November in spite of turmoil

Falling ruble hits Russian tourism hard

DCM

Russian advertising market slows in 3Q14

S&P threatens Russia with junk rating if it raids National Welfare Fund

Russian Electricity consumption falls for first time in six months

Russia unlikely to borrow abroad in 2015

British retailer New Look pulls out of Russia and Ukraine

Trickle of Russian Eurobond issues

Luxury retail markets to fall 20% this year

VTB Capital warns of ruble bonds defaults in 2015 Volume of bond issues on Russian market down by 40% this year Mobile operator Vimplecom borrows $1bn from Chinese banks

Gazprom’s output down by a quarter in October, production outlook is bleak

Top Story Europe Divided again - Trading blocs and blows as Russia’s EU forms Twenty-five years after the fall of the Berlin Wall and the dreams of a unified global community, enjoying the prosperity of peaceful democracy have been dashed. The world is being divided once again into an increasingly antagonised battle between east and west with competing geopolitical goals.

On January 1, 2015 Russia's version of the European Union comes into being: the new Eurasian Economic Union (EEU) that unites several nations of the Commonwealth of Independent States (CIS) and breaks the European Continent into blocs again.

The EEU institutionalises a break that runs through the heart of Europe. During the Cold War the guards at the gates along the Iron Curtain were soldiers, but in this new Cold War the guards will be replaced by tax it's inspectors and customs officials.

Its an economic war that will be fought not with missiles but "Most

Favoured Nation" status, import tariffs and sanctions.

Ukraine's EU versus EEU choice precipitated the crisis. Russian President Vladimir Putin “anti-EU” makes little economic sense without Kyiv's participation. Putin won the first round of the battle with Brussels when he got former Ukrainian president Viktor Yanukovych to pull out of an EU deal at the last minute in November 2013. However, he lost the war when the Maidan protests in Kyiv ousted Yanukovych the following spring.

A period of titfor-tat sanctions then escalated from a war of words into a war of bullets, as Russia annexed Crimea and then started backing separatists in the east. A year after the confrontation began, initial symbolic sanctions on Russia look now to be a permanent feature of European trade with the east and a shaky ceasefire looks like a frozen conflict.

On the eve of the appearance of the EEU the mood is black. Nato reported Russian troops were massing on the Ukrainian border in November, and German Chancellor Angela Merkel, after meeting with Russian President Vladimir Putin at the G20 summit in Brisbane she gave an unusually outspoken speech suggesting the sanctions regime could become a permanent feature of European trade and financial relations with Russia.

"Russia could seek to destabilise vast areas of Eastern Europe if it is not challenged in Ukraine," Germany's Merkel warned in a speech to Sydney's Lowry Institute for International Policy Studies, the day after the end of the G20 summit. Russia's annexation of Crimea, and subsequent destabilisation of eastern Ukraine has, she said, "called the whole of the European peaceful order into question. This isn't just about Ukraine. This is about Moldova, this is about Georgia, and if this continues, then one will have to ask about Serbia and one will have to ask about the countries of the Western Balkans."

Merkel's tough talk is particularly worrying as Germany has by far the most to lose from an end to friendly relations with Russia. With literally ten-times more companies working in Russia than any other Western European country, Germany has already lost about a third of its business with Russia and exports there fell 16.6% to â‚Ź20.3bn in just January-August.

The business lobby has been beating a dent in the Chancellor's office door, but she is increasingly

turning a deaf ear to their entreaties to roll back sanctions.

The mood in Kyiv is resolute, hardened by nearly 4,000 deaths in the fighting in the east. Tim Ash, head of emerging markets research at Standard Bank, said following a November visit to Ukraine that the Ukrainians he met, from East and West, Russian and Ukrainian speakers, was that: "they did not want to be ruled from Moscow again, or a return to a Yanukovych-style regime set up, and even if that meant a prolongation of the conflict."

The fight has gone too far and the damage done too significant for anyone to be able to engineer a climbdown without someone losing face. Diplomacy is likely to move from the tete-a-tete meetings in exotic locations to meeting rooms of international institutions like the European Commission in Brusselsand the EEU headquarters in Moscow.

That is bad news for everyone.

Russia's economy is hurting – and so is that of Europe, which is slipping back into recession. Putin's decision to pursue geopolitical goals over domestic economic reform has cost Russia dearly. The ruble has lost quarter of its value this year, capital investment is stagnant, growth is meagre and inflation is soaring. The fall in the oil price over lower-than expected global demand, amongst other things, is squeezing the life out of the Russian economy. Some commentators are giving Russia two years before the money runs

out and the entire house of cards collapses.

Things are not much better in Europe.

Italy is already in recession and France and Germany are likely to join it in 2015. The European Bank and the EEU headquarters in Moscow.

That is bad news for everyone.

Russia's economy is hurting – and so is that of Europe, which is slipping back into recession. Putin's decision to pursue geopolitical goals over domestic economic reform has cost Russia dearly. The ruble has lost quarter of its value this year, capital investment is stagnant, growth is meagre and inflation is soaring. The fall in the oil price over lower-than expected global demand, amongst other things, is squeezing the life out of the Russian economy. Some commentators are giving Russia two years before the money runs out and the entire house of cards collapses.

Things are not much better in Europe.

Italy is already in recession and France and Germany are likely to join it in 2015. The European Bank for Reconstruction and Development (EBRD) has identified Russia as "an investment node" and problems in Russia quickly spill over to affect the whole of the CIS. If Russia collapses, then it will take much of the Commonwealth of Independent States (CIS) with it.

Countries like Armenia and Kyrgyzstan are already on the

brink, while more robust countries like Kazakhstan are also feeling the pain. Ironically, crushing the Russian economy would also tip Ukraine's economy over the edge.

Moreover, Europe's "punishment" of Russia has boomeranged on Western Europe.

Russia is already a lot more integrated into the fabric of Europe's economies than most would like to admit.

The anti-EU At first glance the EEU looks like a poor copy of the EU. Less of a "union" and more of a "Russia plus a few baubles."

Russia towers over the other members, Belarus and Kazakhstan, with Kyrgyzstan and Armenia about to join. The total population of 170mn consumers, mostly Russians (143mn), is dwarfed by the EU's 500mn-strong consumer market. And the size of the EU economy of €14.3tn is seven-times bigger than that of the combined GDP of the five EEU states.

If the EEU is designed to challenge the EU, then it’s a match between David and Goliath, without the sling.

But the EEU is not an entirely stupid idea. The formation of a free trade zone amongst the CIS countries, with the unfettered flow of capital, labour and goods, will increase their wealth and also act as a spur for reform. The members have already done a lot of real integration work during precursory

the stage of the Customs Union that was set up in 2010.

Russia’s position in geopolitical terms.

In November 2012, the EBRD judged the Customs Union a "success" in its annual Transition Report. "The Customs Union of Russia, Belarus and Kazakhstan is the first successful example in regional economic integration between countries of the former Soviet Union, according to EBRD economists," the EBRD said in the report. "While many benefits of the union remain to be seen, it is clear that common tariffs and reduced non-tariff barriers are affecting trade both internally, between the three members, and externally with the rest of the world."

Nicu Popescu, a senior analyst at the European Union Institute for Security Analysis (EUISS), argued in a recent paper "Eurasian Union: the real, the imaginary and the likely," that there are actually two EEUs – an economic one and a geopolitical one. Most of the countries that have already signed up voluntarily joined for economic reasons.

First and foremost the EEU is a trading bloc that will capitalize on still close ties between the countries of the CIS. In the longer term global trade is fast expanding: trade's share of global GDP has risen from 39% in 1990 to 61% in 2010 thanks to globalization, bne wrote in its EUski cover story on the bloc in 2012.

The EU leads, accounting for a fifth of global trade volumes, followed by developing Asia, which is quickly closing the gap. But Putin's insight –which may prove prescient – is that the fastest growing global trade route is that between the EU and Asia, and much of this will have to pass through the EEU territories, rising from today's trillions of dollars to hundreds of trillions by 2050, according to Citigroup.

But the point of the EEU is not just commercial, but also to enhance

Kazakh President Nursultan Nazarbayev, who has been pushing for a Eurasian trade club for more than a decade, said in November that membership of the EEU was purely a "practical choice."

But Kyrgyz Prime Minister Djoomart Otorbaev admitted to delegates at the EBRD's annual meeting that Kyrgyzstan didn’t really have a choice, as it is too far from the EU. Russia bullied Armenia into joining through a combination of threats and bribes.

Only Belarus has been a willing and eager participant.

But the geopolitical version, launched by Putin in an article in Izvestia in October 2011, is, according to Popescu, "not just to foster a new round of post-Soviet reintegration: [Putin] also wanted to turn the Eurasian Economic Union into one of the ‘building blocks’ – on a par with the EU, NAFTA, APEC and ASEAN – of global development."

For this reason, Putin has badgered other countries that didn’t want to become pawns in a Kremlin-led

political project. Tajikistan has stayed on the fence and plucky little Moldova rejected Moscow’s offer out of hand, only to be immediately punished earlier this year with trade sanctions. And of course Ukraine has endured a de facto invasion by Russian forces and economic collapse following its decision to go west, not east.

"There is no alternative to European integration," Ukrainian President Petro Poroshenko said during a visit to Moldova to show solidarity in November. "Moldova and Ukraine, supported by Poland, will continue their advancement towards the EU." But Putin's geopolitical vision for the EEU sits very uncomfortably even with Russia's closest allies of Belarus and Kazakhstan, both of which refused Russia's demand to impose trade sanctions on Ukraine.

Moreover, both countries continue to try and develop trade ties with the EU despite Russia's confrontation. There is a future for the EEU as a trade promotion vehicle, but Putin's geopolitical vision for the bloc looks like it may have been still born, especially as it seems Ukraine will never join now.

Shirtfronting Australian Prime Minister Tony Abbott said he would "shirtfront" Putin at the Brisbane G20 meeting (and didn’t) but in effect the east and west have been shirtfronting each other all year.

In theory the EU sanctions are easy to drop as, they were set up with a built-in expiration date. If

the Eurocrats want sanctions to go away, all they have to do is nothing and wait for the deadline to expire.

The US sanctions are more permanent, as they were put in place with by presidential executive order and will need another order to remove them – something that would be extremely embarrassing for President Barak Obama to do.

Now the Republicans control both the Senate and House following the mid-term elections, there is talk about passing more sanctionsrelated legislation on Russia, which could see the sanctions in place for decades.

The Russians are taking an increasingly hard line too. Putin told German broadcaster ARD on the eve of the G20 that the US was not trying to contain Russian but "subjugate" it. He suggested that if the West doesn’t want to make up, "so be it – Russia will continue to develop its relations with the other half of the world.” That's fighting talk.

And there is the rub. Putin can only walk away from the West if he has somewhere else to go. Putin's bet is that he can replace the EU and US with closer relations with China.

While the West takes it as axiomatic their democracies are the most desirable and attractive on earth, they have also just become the poorer half of the world this year. "The GDPs of the BRICS countries calculated at purchasing power parity are greater than those of the G7," said Putin in his German interview before the G20 meeting. "As far as

I know, the GDP of BRICS is $37.4tn, while that of the G7, $34.5tn. What if they (G7) are told: ‘No, thank you, we shall be doing this and that here on our own and we don’t care how you will carry on?’ There will follow nothing but worse imbalance. If we really wish to decide something, we should decide it together."

A recent piece in the New York Times rubbished the idea of a meaningful Sino-Russian relationship, quoting one unnamed government official as saying: "Putin’s efforts at accord with China are seen as a jab at Washington, but one fraught with a complicated history, mutual distrust and underlying economic disparity that ultimately makes it untenable. They’ll use each other.

And when one of them gets tired or sees a better deal, they’ll take it."

Russia and China have always been rivals – amazingly during the Cold War they failed to unite against their common enemy, the "decadent running dogs" of capitalism. However, the new relationship is built on two solid pillars of mutual interest.

The first is Russia's huge reserves of energy and raw materials, which China almost completely lacks.

"It’s the best synergy on the planet," crowed Kingsmill Bond, strategist at Sberbank, last year.

The second is their shared concern with the US' unipolar view of the world, where Washington calls the shots. Both Moscow and Beijing want a "multipolar" world, where the influence of countries is meted

out in proportion to their military and economic might.

By contrast, if any relationship with China is artificial, then it’s surely the one with the US. America takes the benefits of "freedom," "individual choice" and "democracy" as axiomatic, whereas China is a pretty good approximation of the antithesis of these values. In terms of value systems, the two countries have almost nothing in common. The main appeal of the US to China is its rich consumer market, technology and its money.

For an "artificial" relation, Russia’s one with China has recently produced a lot of concrete results.

Their trade turnover reached $90bn this year, with China overtaking the EU to become Russia's biggest trade partner.

Russia has taken in something like $600bn of Chinese investment and Putin signed off on a $400bn energy deal with Beijing earlier this year. And in November the two countries announced they would start holding joint military exercises.

Russian Defence Minister Sergei Shoigu said the Sino-Russian militaryindustrial cooperation with China is "acquiring a special significance," while Colonel General Xu Qiliang, vice chairman of China's Central Military Commission added, "The strategic partnership between China and Russia has entered a new stage of development, which makes us very happy," reported the Moscow Times.

All this contrasts with Barack Obama's meeting with Chinese Premier Xi at the G20 summit where the two counties signed off on a landmark deal on climate change.

Black mood in Moscow The EEU is also a boon to Putin at home. Putin has masterfully played on the restoration of Russians' sense of national pride, as the annexation of Crimea went a long way to undoing the humiliation most felt at the loss of super power status following the fall of the Soviet Union. In November Putin enjoyed an 88% approval rating, while the propensity to protest fell to 7%, close to its all time low, according to a poll by the independent Levada-Centre. The nascent opposition movement that took to the streets in December 2011 for the first time in a decade has been entirely crushed as a result.

But the elite are not happy and these are the businessmen that the government needs to make the growth-building investments. "The food sanctions, travel bans and personal sanctions were all largely symbolic, but the financial sanctions – now those really hurt," the CEO of the family office of one of Russia's richest men, who didn’t want to identify his company or boss' name, tells bne. "[My oligarch] is not on the sanctions list, but even we can't access Western money. No one will do business with us."

The race is on. The Kremlin has to make the EEU work in order to remove the pain of the sanctions and restore domestic business confidence in the future development of the country inside two years – or there is a possibility the entire system created by President Putin will collapse.

Oil and the ruble tank but no crisis on the horizon yet

The Russian market opened on Monday, December 1 to a catastrophe. The price of Brent oil fell to $69.94 as of midday causing the ruble to fall heavily yet again.

There were some signs that the ruble was beginning to make back from the ground lost, but another step down in the price of oil to below the psychologically important $70 mark knick the legs out from under the nascent rally.

The ruble to the dollar exchange rate dropped 9.3% by midday taking the exchange rate below the psychologically important RUB50/$1 for the first time. You have to go back to January 1999 to find a similarly steep fall.

The currency started the year at RUB33/$1 and has gone from the second best performing currency in the world to the worst, loosing over a third of its value.

Analysts are now busy forecasting what the weak ruble and oil price could mean for the Russian economy. According to a study by investment bank Renaissance Capital, at an oil price of $50 Russia's GDP would contract by whopping 5.8%, coming close to the 7% contraction of 2009.

But this should not translate into a full-blown economic crisis, according to Renaissance Capital's

Charles Robertson. "The weaker ruble would be likely to stabilise the current account‌ and alleviate the effects of a drop in oil prices on the budget, with a deficit below 4% of GDP in the worst case," Robertson wrote in the report. At $50 per barrel, inflation would be contained due to the sharp GDP contraction creating an output gap, he believes.

Economy Minister Aleksei Ulyukaev, in comments to newswires on November 30, said that a $70 oil price should not impact significantly on the budget, thanks to the devaluation of the ruble: most budget revenues are dollar-denominated from commodity exports, and given the ruble devaluation, would translate into higher ruble budget revenues.

Russia has very low foreign debt at around 13% of GDP, so can cope with a steep devaluation. The banking sector is a different story, say analysts, with deterioration in loan books inevitable and some banks likely to go under. "If there are systemic problems emerging in the banks, they think they would rather use their $420bn in FX reserves to clear up the mess afterwards [than support the currency]," believes Ash. The response of the population to the unfolding currency crisis could

decide whether it will stabilise or develop into a full-blown meltdown. According to opinion polls, 45% of Russians are now actively following the ruble exchange rate, up from 32% in July. 50% believe that devaluation has impacted on their lifestyles and 67% believe that a continuing devaluation will impact on their lives. Russians have been actively buying cars, washing machines and apartments this year to protect the value of their savings.

But what is freaking traders out is the Central Bank of Russia (CBR) is standing on the sidelines and has not intervened to support the currency.

"I think the CBR has misread the script: instead of a free floating ruble we have a free falling ruble," said Tim Ash, head of emerging markets research at Standard Bank in a widely quoted note that catches something of the panic that it creeping into the commentary.

Those that were dismissive of a $60 oil price in 2015 only last week are already starting to look out of touch. The CBR has an $80 price in its pessimistic forecast for 2015, but already at the end of last week was suggesting it will have to revise its number down. And the commentary has started to bring up the $10 price that took Russia into the 1998 crisis.

Things are moving very fast now.

The deputy governor of the CBR was on the wires on Monday morning suggesting that inflation next year could rise to 10% in the

first quarter. Unemployment, which ticked up slightly last month to 5.1%, will not be affected in 2015 if oil prices stay low, but the fall in real wages, which has already started this autumn, is expected to accelerate as the Russian population begins to feel the effects of the crisis for the first time – throughout the crisis that started in 2008 real wage rises have stayed ahead of inflation and were running at about 10% until recently because of the historically low unemployment rates.

The impact on political stability in Russia is another unknown.

Russia's annexation of Ukraine's Crimean peninsula in March boosted the popularity ratings of President Vladimir Putin to a historical high of 84%. But with the effects of the ruble collapse already making themselves felt among the population, Putin's personal rating is starting to fall, according to the Levada-Centre pollster, as reported by the Moscow Times.

How bad will it get? bne's columnist and head of Macro Advisory Chris Weafer speculated two weeks ago that economics that pure economic theory suggests the ruble should be at RUB42/$1, but that was before oil prices lost another $10 in the meantime.

Much depends on what you think is driving the oil prices. The key meeting by OPEC in Vienna last week decided not to cut production levels. That has lead to speculation that Saudi Arabia is has started a price war to drive the marginal shale oil producers out of the market. While companies like

Russian oil major Rosneft say they can produce oil at a cost of as little as $5 per barrel, the cost of producing US shale is anywhere between $40 and $80, say experts.

The idea is to put these producers under pressure. They have contributed to the lion's share in the increase in production in recent years in the US' "shale boom" but are not very profitable. Taking oil down to $60-$70 and keeping it there for an extended period would bankrupt many of these producers or at the very least kill off their investment plans that would eventually undermine supply and so drive prices up again.

The other reason being discussed is the International Energy Agency (IEA) forecast that the demand for oil has slowed sharply which is also pushing down prices.

Can Russia afford $60-$70 oil? The knee jerk reaction has been that oil under $100, the break even price for the budget spending, will cause the Russian economy to collapse.

However, this doesn’t seem to be happening.

The irony is that the devaluation of the ruble creates more rubles for the budget as the budget spending is pinned to the oil price in dollars, but the spending is in nominal ruble terms; this means the government is the biggest winner from a devaluation which simply creates more rubles to spend, albeit less valuable rubles, which means it can easily cover its spending targets in rubles.

Although well over half of the Russian budget revenue is derived from oil taxes it is currently

running an unexpectedly large 2% federal budget surplus.

Another assumption is that Russia will burn up its hard currency reserves defending the ruble. But this is not happening either. Russia spend about $200bn of its international reserves in 2009 defending the ruble and managing a 30% devaluation, keeping the exchange rate inside the ruble trading corridor.

This time round it has spent an estimated $100bn managing this devaluation down by a similar amount. However, what changed this month is the CBR decided to completely free the ruble a month earlier than planned. Currency traders have been expecting the CBR to step in as it has always done in the past, but it has stood resolutely on the sidelines and allow the ruble to tank. The upshot is the CBR is not spending its reserves, which stood at $420bn going into this crash, or 1.7 years of import cover, way above the three months economists recommend.

"The total absence of the CBR is interesting since they more or less moved to a free float. The CBR now seems to be defending their FX reserves like a troll on a bridge," said Ash in a note to clients.

That was the point of freeing the ruble: it allows the Russian economy to absorb shocks more effectively: and oil falling $10 in a week counts as a big shock.

The hope is that the cheap ruble will eventually act as an economic

stimulus once the dust settles.

Indeed, the fall in the ruble already cause industrial production to jump by 5% in October and agricultural production has had the added stimulus of the EU agricultural product ban imposed by the Kremlin earlier this year which saw the sector grow by 16.6% in the same month as a limited import substitution effect kicked in.

But none of these benefits will negate the pain of the fall. The spike in inflation will kill investment plans and hurt the consumer that will increasingly feel the pain of falling incomes from here on in.

However, the double whammy of tanking oil prices and currency are unlikely to cause the Russian

economy to crash as $10 oil did in 1998. During the worst of the 2008 crisis oil prices fell to around $40 and Russia bounced back from that without too much effort thanks to the devaluation effects and the recovery in the oil prices.

This time round it seems likely that oil prices will stay low for longer, especially if the Saudi conspiracy against shale theories have any truth to them, but even at $70-$80 oil Russia is no more than wounded. More importantly not only will the Kremlin be forced to make the structural reforms its so obviously needs, but will actually want to do them.

2015 looks likely to be Russian economy's “Annus Horribilis”

In a memorable speech delivered in late 1992, Britain’s Queen Elizabeth II described the year just ending as an “Annus Horribilis” as she referred to a year filled with misery and stress for the royal household. In economic terms, the year just ending in Russia may be similarly described. But better not to use that portrayal just yet. For the economy and companies operating in Russia, 2015 is looking increasingly likely to be more deserving of the dubious title. But for stock market investors, despite the miserable macro backdrop inevitable for the first half of 2015, this coming year may yet end up

being described as an “Annus Mirabilis”.

Whether you are optimistic that sanctions against Russia will start to ease in mid-2015 and the price of Urals crude recover towards $90 per barrel, or you are pessimistic and assume some sanctions expansion, or extension, and lower crude prices, the one fact which both sides have no choice but to agree on is that most macroeconomic indicators for the economy will worsen through the next three quarters and will look a whole lot worse by the time we get to next summer. Where there can be more of a debate is about

whether there will be meaningful recovery from next autumn, offering hope that the current slump will start to end as the next election season starts in 2016, or whether Russia’s economy faces several more years of stagnation.

For investors in Russia’s capital markets that is a key question. If on the side of the optimists, looking at the start of a recovery from next summer, then one should start to add to Russia market exposure from early in the New Year. One factor we have all learned over the past 16 years is that if you wait for solid evidence of economic recovery or an end to crisis in Russia, then you miss the first 30-40% of the rally. During the last economic crisis, the RTS Index hit a low of just under 500 in late January 2009, but then doubled over the next three months (and quadrupled over the next two years), while the country’s macro indicators did not start to show a recovery until the autumn of that year.

Tough times As mentioned, regardless off one’s view of the economic outlook in the autumn, the next three quarters are going to be tough for all and downright miserable for many. The latest update from the Federal Statistics Service showed that GDP rose 0.7% over the first threequarters of 2014. Not too bad given the battering that the ruble and capital flows have endured.

The weak ruble and some sanctions have had a positive impact on demand for domestically produced goods, in particular in the food sectors, while the 33%

increase in defence spending also boosted manufacturing. That has helped compensate for the much slower growth in retail sales, in the service sectors and the decline in investment spending.

But that trend is already starting to decline further. Retail sales in September were boosted because of a one-off rise in non-food sales as people used some of their depreciated rubles to buy goods at risk of scarcity or which might be priced higher over the winter.

Some food items are certainly in both of those categories. Russia imports only about 35% of overall food consumption these days, down from nearly 50% in 2008, but that previous high%age remains in the supermarkets and hypermarkets. Russia never has enough in adequate food storage facilities so higher prices and some shortages are inevitable as the summer/autumn supply ends.

Consumer inflation, which reached 8.5% by mid-November is set to breach 9% by year end and will very likely hit 12% or higher by the spring. Interest rates, pushed higher in 2014 as the Central Bank of Russia tried to control inflation and the ruble, are not going to start falling until there is clear evidence that inflation has started to fall. Again, probably coming into next summer rather than earlier.

High interest rates have eaten into household disposable income at a time when nominal wage growth is slowing. Public sector workers, accounting for almost 20% of the national workforce, may expect a wage increase of 7.5% in 2015 or anywhere between a 3-5% real

decline. High interest rates and a more difficult debt access market is also one of the reasons why investment by companies continues to fall. On top of all that is the prevailing low level of confidence by not only consumers and business owners, but also by those Russians with money to invest and by foreign investors.

Both categories will keep their wallets firmly shut for Russia until there is solid evidence that the crisis has ended.

Over the first half of 2015 we may see Urals crude in the $75-80 per barrel range, inflation at 12%, the ruble trading in the range RUB5560 against the US dollar (RUB6875 against the euro), retail sales growth at less than 0.5% and a continuing slump in investment spending. That may translate into either zero GDP change or a small decline, with only the spending from the military-industrial complex and the modest positives from the weak ruble and sanctions providing some support to the headline number.

But that is where the bad news could end. At Macro-Advisory we are optimistic that full-year GDP growth in 2015 will reach between 0.5 and 1.0%, with most of the recovery back-ended to the second half. We expect inflation to peak in the second quarter and then to fall slowly to a year end rate of 8.0%.

We believe that while the ruble may trade in the mid-50s against the US dollar and the high 60s against the euro, the year-end rates should be a whole lot better.

The table shows our base case assumptions for 2015 -2017 and

those based on a pessimistic scenario, which assumes low oil for longer and tougher sanctions. We dismiss as most unlikely the optimistic case proposed by Russia’s Finance Ministry in its recent 2015-2017 budget submission.

The factors that will determine whether we end up with a pessimistic or base case result will chiefly be; Sanctions: The only sanctions that have hurt the economy are those directed against the financial sector and they have hit hard since September. Interest rates are higher, the forex market is tight and access to capital is expensive.

If the EU does not extend these sanctions when they end on July 31, there will be some improvement but only limited. If the US does not similarly drop its sanctions against Russia’s state banks at the same time, then EU banks will remain closed to Russia regardless of the official EU position. A unilateral EU move would help some areas of trade finance, but the US sanctions will be key to a full easing.

Oil: Opec producers are suffering budget strains just as Russia is.

But the bigger producers, eg. Saudi Arabia, are willing to put up with that for some time while pursuing some important internal Opec objectives and slowing US shale production. Ultimately, the price may be affected by a sharper slowdown in the global economy, but if International Monetary Fund/World Bank growth numbers and the International Energy

Agency’s demand outlook prove correct, then we should see Urals back above $90 per barrel by mid2015.

Policy Actions: Government actions have been more reactive to the unfolding crisis this year. There has been a lot of discussion over what may be done and how financial reserves may be deployed. We have not yet had a clear response but hope to see that coming up to the next St. Petersburg Investment Forum in the spring. Hardly much before then. Already we know that the government’s latest development slogan is “Import Substitution” and while encouraging for long overdue changes in such areas as agriculture, food production, pharmaceuticals and some manufacturing sectors, it is still all too vague to be able to assess the medium-term impact.

Chris Weafer of Macro-Advisory

Confidence: This is a tough ingredient to call. So much is wrapped up in consumer, business and investor – domestic and foreign – confidence. That’s because it is a mixture or perception and reality. The only position we know for sure is that it is a whole lot easier to lose confidence than it is to recover it.

This is one reason why, even under an optimistic view of Russia, sanctions and oil from mid-2015, a return to the targeted 4-5% annual growth will take several years.

Russia is not a market that, beyond blind luck, rewards either the brave or the foolish, or those intransigent in their optimism or pessimism. It is however a market which rewards those who take the time to look past the headlines and who are prepared.

Russian ruble: Do not mistake weakness for fragility

The incredible geopolitical events of the past year have meant that all forecasts about the Russian economy turned out to be spectacularly wrong. The conflict in Ukraine has enhanced a general downward trend caused by a structural slowdown. However, the Russian economy’s weakness does not make it financially fragile, according to East Capital’s Chief Economist Marcus Svedberg.

“There are currently two main factors driving the current economic situation in Russia: the geopolitical situation and a more long-term structural slowdown," Svedberg said during a recent presentation in Moscow. "The Russian market generally is very much driven by macroeconomic factors, and by the current geopolitical situation in particular.

Second, the lack of structural reforms has for several years caused the Russian economy to slow down."

The geopolitical situation as a short-term factor So far this year, both the ruble and the stock index have lost almost 25% of their value (see figure below).

“In the first two months of the year - before the situation in Ukraine we saw a significant fall in the market," Svedberg explained.

"There was a general bearishness across emerging markets, where

many currencies weakened, among them the Russian ruble.

The Ukraine crisis precipitated a significant sell-off on the Russian market during the first two weeks of March. The sell-off was followed by a period of recovery, probably due to the relatively calm elections in Ukraine and because the sanctions imposed on Russia were rather weak. In fact, by the beginning of July the market was almost back as if the Ukraine crisis had never happened. “Then the MH17 plane crash happened and we saw a renewed round of weakness," Svedberg said. "During this period we can also see the effect of the decreased oil prices impacting the market negatively.

So it has been a very volatile year."

The Russian economy’s dependence on a high oil price is well known. After two years of stable oil prices, the price fell by 20 US dollars by the end of June. “My take on why the oil price has fallen is that the US dollar has appreciated, and that both US and OPEC increased their oil production in September. Normally, when global oil supplies increase, the Saudis smooth the price out, but in this instance they did not. Why the Saudis have not done so is currently up for much debate and conspiracy theories," Svedberg said.

Long-term factors The geopolitical situation has also increased uncertainty, further reducing much needed investment.

Because of structural reasons, the Russian market holds a lot of uncertainty in the long term. “The long-term reason for the Russian slowdown is due to the lack of structural reforms. The Russian economy grew around 5% back in 2011 and has since slowed down to about 1%. Now it is probably close to zero growth. The main reason for this slowdown is because of a lack of investment from Russian companies. That has been the story for a long time. What is needed is to improve the investment climate, reduce corruption and bureaucracy, amongst other things."

Even though the Russian economy is structurally weak, it is not financially fragile, according to Marcus Svedberg. “At the end of the 90s, Russia was financially fragile. Debt was at European levels and the foreign reserves were pretty low. Since then very responsible macroeconomic policies have been implemented, helped by high oil prices. Today Russia has large foreign currency reserves and a low debt. These two factors make it possible for Russia to live with the cost of this geopolitical situation. It also means that sanctions will not work, because Russia is both financially strong, and the political leadership is popular. At best, the sanctions will not be very effective and will not change Russia’s behavior, but

actually I think they have the opposite impact. Russia is becoming more nationalistic. It is ironic that the Russians themselves have introduced the toughest sanctions."

Short-term outlook “Two factors will drive things during next year. One is what is happening in Ukraine, where the best case scenario in my opinion is a de-escalation," Svedberg said.

"The second factor is the oil price.

My best case is that it will stabilize somewhere between 90 and 100 dollars. If the situation in Ukraine improves, some of these factors could reverse for the better - with lower inflation and decreased bond yields. However, I doubt that we will return to the situation in the beginning of this year."

Medium & Long-term outlook “The 3-4 year scenario depends very much on structural reforms. I think growth will likely remain below potential growth, which I believe is about 5%. Instead I think we will see a 2-3% growth, primarily driven by consumption," Svedberg said. "Continued low unemployment and a decrease in inflation will help support that consumption. However, investors will wait for structural reforms and a stable resolution to the Ukrainian situation before they start to trust the Russian market. The structural changes are paramount for Russia’s continued growth."

East Capital

Politics – the good

Russia enacts Putin's deoffshoreization legislation Russia's Federation Council, the upper house of parliament, approved a new tax law in November that enacts Russian President Vladimir Putin's legislation banning public officials or the senior managers of stateowned companies from owning foreign assets or holding bank accounts in other countries.

The laws are designed to try and bring some of the billions of dollars held abroad back home to Russia.

They also introduced in parallel with similar laws in other countries.

An attempt to end the abuse of tax havens is one of the very few things that Putin has in common with other western leaders. The laws are designed to reduce corruption – particularly in the government – and increase transparency.

The law introduces amendments to the country’s tax code that will oblige Russian owners of companies registered in offshore tax havens to pay taxes in Russia.

The law also lays out a mechanism for taxation of undistributed profits of controlled foreign entities.

Russian tax residents now have to declare undistributed profits of controlled foreign companies.

Minimum profits subject to declaration are RUB50m ($1m) in 2015, RUB30m ($638,000) in 2016 and 10m ($212,000) after 2017.

The law is expected to bring about 20 billion rubles ($425m) to the budget, Deputy Finance Minister Sergei Shatalov said.

Under the document, a Russian company or individual with ownership of more than 50% of a foreign organization in 2015 and with 25% such ownership from 2016 are classed as “controlling entities.” The individual threshold will fall to 10%, if Russian residents’ total shareholding is more than 50% of a controlled foreign company.

Russia's Duma approves expansion of anti-piracy law Russia's Duma signed off on a new antipiracy law which will improve the protection of intellectual property rights, particularly for products on the Internet.

Piracy has been rampant in Russia for decades. However, with the online and e-commerce sectors in Russia booming the government has moved to shore up the laws protecting people's intellectual property.

Now the owners of intellectual property can demand the closure of sites that abuse their rights until the ownership dispute is settled in a court of law. If the offending site loses two such court cases it will automatically be close down and its URL will be permanently blocked.

Internet companies protested that the bill puts the onus of proof on the website and is unnecessarily harsh. They also said that the bill would allow legitimate owners of intellectual property to effectively blackmail websites by threatening to withdraw rights that they had previously granted.

Russia introduces political campaign financing legislation

rubles ($326) for individuals (currently 1,000 to 1,500), 20,000 to 30,000 rubles ($653) for officials (currently 2,000 to 3,000); and between 200,000 and 300,000 rubles ($6,500) for companies (currently 20,000 to 30,000).

Despite the new laws they are likely to have much impact or improve party politics in Russia.

The bulk of support for political parties comes by the use of "administrative resources." As the Kremlin controls five out of the top six TV stations it's extremely easy for the Kremlin to push its own candidates to the detriment of the independent, such as they are, political parties.

Russia's Duma past in a second reading a bill that imposes fines for the illegal contributions to political parties and voter bribing.

Having said that, Russian newspaper Vedomosti published a report that shows Russian language social media has twice as many uses as the biggest TV station.

While party politics remains almost non-existent in Russia, it still has relatively stringent restrictions on how parties can be funded.

Fines for corporate espionage increased

Administrative fines for bribing voters, referendum voters or for giving any gift to influence a voter in violation of the law on elections and referendums will be ten times more costly. The fine for individuals will be between 20,000 and 25,000 rubles ($435 and $544 current exchange rate). Today the fine is between 2,000 and 2,500 rubles ($54).

The illegal funding of a candidate’s election campaign, electoral union, or campaign support group could result in fines of 10,000 to 15,000

The Russian government has submitted a bill to the Duma to increase the fines for spying on companies and selling their secrets.

The bill proposes fines of up to RUB500,000 ($10,550) or an amount equal to a one-year salary for stealing and selling corporate information that includes commercial, tax or bank secrets through theft, bribes, intimidation or any other method.

The current penalty is a fine of up to RUB80,000 (about $1,700) or an

amount equal to the suspect’s salary for one to six months.

Fines for disclosing or using information that includes commercial, tax or bank secrets without the permission of the owner by those who were entrusted with these secrets or learned about them in the line of duty go up to RUB1m ($21,100 ) or an amount equal to a two-year salary.

The current penalty is a fine of up to RUB120,000 ($2,530) or an amount equal to a one-year salary.

Penalties for domestic violence to be stiffened Federation Council Member Anton Belyakov submitted a bill to stiffen penalties for domestic violence offenders.

Russia remains extremely patriarchal society and domestic violence often goes unreported little unpunished. An estimated 14,000 women die each year from domestic violence.

The draft law improves the definition of what is spousal abuse and expands the legal term of “domestic violence” to make it more general because currently it is limited to extreme forms of violence.

In the majority of industrialized countries it also includes economic violence, psychological pressure and emotional abuse.

The existing legislation is extremely weak and deliberate

damage to health or battering your spouse only stipulate minor fines or mere warnings.

Booze and fags to be banned from Russian supermarkets Russia has introduced a draft law that would ban the sale of alcohol and cigarettes from the shelves next to cash registers in supermarkets, The law would only apply to larger stores of over 50 square meters.

Currently cigarettes can be kept above tills but the actual cartons are not visible; the brands available are shown on the outside of the container. Beer is often available in a refrigerator near the checkout tills.

The law is the latest step in a public health campaign to reduce Russia's chronic smoking and drinking habits and follows on from draconian retail restrictions on the sale of alcohol last year and a public smoking ban this year. The life expectance of men has risen above 70 years – its highest ever level.

Putin gets from push back over the "Rotenberg bill" Russia's Supreme Court and the Supreme Commercial Court criticised the so-called "Rotenberg bill," which introduces compensations for Russian nationals that have had their assets abroad seized by other governments that will be paid out of public funds.

The bill was submitted to the lower house of parliament after Italy froze about €28m of assets belonging to Russian billionaire and Putin buddy Arkady Rotenberg as part of EU sanctions introduced in July.

The court ruled that it was unacceptable under the Russian constitution to shift the risks of individuals and companies abroad onto Russian taxpayers, Vasily Nechayev, deputy chair of the Supreme Court, reportedly said.

The bill “actually proposes unsubstantiated privileges” for Russians who are involved in legal proceedings in foreign courts and “shifting the liability of their property losses onto Russian citizens who will in this case receive fewer social benefits and constitutional guarantees than are due to them,” according to Nechayev.

The State Duma adopted the bill in the first or three reading in October, although Economic Development Minister Alexei Ulyukayev warned that it could cause further capital outflow.

Moscow Metro Managers Must Take Subway to Work Moscow Metro managers have been ordered to take the metro to work, instead of riding into town in cars, the Head of the Moscow Metro Dmitry Pegov ordered in November.

"We must personally see and understand what is happening in our departments, how the work is

going, what improvements and reworks are to be done," Pegov said, cited by liberal radio station Echo of Moscow.

Pegov says he only travels by metro in the city, spending about 35 minutes a day in the subway, changing from one line to another and standing in queues as an ordinary passenger.

Putin proposes loosening penalties for small bribes President Vladimir Putin has proposed lowering fines for minor corruption-related violations, in an attempt to fine tune anti-corruption laws to make them work more effectively The Duma will consider the law that increases the fine from the current penalty for accepting a bribe worth up to RUB25,000 (about $540) is a fine that is 25 to 50 times larger than the bribe.

According to the bill, the upper limit for the fine should be RUB1mn ($21,540).

The bill also stipulates alternative penalties such as correctional labour and a fixed fine combined with a ban on holding certain offices for up to three years.

Politics – the bad

Russia's Sberbank gets poor corporate governance score Russia's biggest bank, the stateowned Sberbank, scored poorly in a corporate governance ranking issued by Berlin-based Transparency International.

The bank scored just 1.5 out of 10, with 10 indicating absolute transparency, putting Sberbank behind three major Chinese banks: Bank of China, rated least transparent with a score of 1.0, as well as Bank of Communications and Agricultural Bank of China.

Japanese carmaker Honda was rated second-worst, reports the Moscow Times.

Transparency International based its scores on ratings of companies' anti-corruption measures, the amount of information they provide on subsidiaries and holdings and their openness regarding overseas operations. All combined, the 124 corporations rated are worth some $14 trillion, according to the watchdog.

Russia's state-owned energy majors Rosneft and Gazprom came out near the middle of the pack, with scores of 4.2 and 3.5, respectively.

The list was topped by Italian oil and gas company Eni, a big investor into Russia, and by British

telecommunications corporation Vodafone and Norwegian energy producer Statoil.

Switzerland joins latest EU sanctions on Russia Switzerland signed up for the sanctions regime against Russia in November closing a loophole in the middle of Europe that Russian companies had been using to import goods that are other wised banned.

The otherwise neutral country has decided to take fights in an increasingly acrimonious last showdown between western Europe and Russia.

"In view of the situation in Ukraine, and following decisions taken by the EU, the Federal Council today decided to adopt further measures to prevent the circumvention of international sanctions," the Federal Council of Switzerland decided.

The West announced new sectoral penalties against Russia in late July over Moscow’s position on Ukrainian events, in particular, what the West claimed was Russia’s alleged involvement in hostilities in Ukraine’s embattled east.

In response, Russia imposed on August 6 a one-year ban on

imports of beef, pork, poultry, fish, cheeses, fruit, vegetables and dairy products from Australia, Canada, the EU, the United States and Norway.

Switzerland's decision to join in the sanctions regime will hurt Russia in the pocket. Although financial sanctions specifically target stateowned entities, most Russian banks have become toxic in Western Europe and banks are avoiding any transaction with any Russian entities. While this does not amount to a blanket ban it has increased delays and send costs up for doing financial transactions.

Swiss land has been a favourite depository of Russian money in the last 20 years.

Russia's best know NGO Memorial on verge of being closed Russia's rights group Memorial has exposed Stalin's purges and defended activists for a quarter of a century that was set up in the Soviet days and is one of the country's best known NGOs is on the verge of being closed by the state for accepting foreign donations.

Its first chairman was Nobel Peace Prize-winner Andrei Sakharov, who founded it with other prominent dissidents, most of whom had themselves spent time in prison for their political views. Today it is a huge grass roots organisation and highly respected by society.

But in November Memorial faced off in the Russian Supreme Court with the justice ministry, which is

attempting to liquidate the organisation for alleged infractions in its documentation. The ministry argues that the organisation's charter does not correspond to its actual activities and that it has committed a range of other violations, such as misreporting funding from abroad.

The Kremlin has taken the line that all NGOs are fifth columns as they try and promote values of other countries (for which read: America) and so are politically subversive.

In a similar row Russia's Justice Ministry refused to remove the "foreign agent" label it applied to the St. Petersburg branch of the Soldiers' Mothers NGO in November, saying it had no procedure for reversing the ruling, the group said.

The organization, which defends conscript soldiers' rights and uncovers military abuses, will appeal at a St. Petersburg city court, its spokesman Alexander Peredruk said. The branch came under attack after one of its members public raised concerns about Russian soldiers who were supposed to be "holidaying" in eastern Ukraine were coming back in coffins and being secretly buried.

The Soldiers' Mothers of St. Petersburg appealed to the Justice Ministry earlier this fall to remove the highly loaded "foreign agent" label, arguing that it was no longer merited because the group had stopped receiving funding from abroad.

Memorial says the move to close it and similar groups down is a symbolic final push by the Kremlin against Russia's civil society.

head of Rossiya Segodnya, and Margarita Simonyan, the agency's editor-in-chief and boss of the English language RT broadcaster.

The lawsuit comes after two years of harassment since the so-called "foreign agent" law was passed demanding all NGO register as "foreign agents" if they receive money from overseas. Memorial has suffered from smear campaigns and even vandalism of the group's headquarters in Moscow.

Last month Russian President Vladimir Putin signed off on a law that will cap the foreign ownership of media in Russia at 20%.

The crackdown began two years ago when USAID was forced to close its office and leave Russia after almost two decades of work.

Russia to launch dozens of foreign language media Russian state-run news agency Rossiya Segodnya launched a news channel RT UK in November to take the Kremlin's view of the world to the west and intends to follow up with dozens of different languages stations.

RT quickly followed up with a German language service where it will find a much more sympathetic audience.

The well respected, albeit stateowned, newswire Ria Novosti was retired and replaced by "Sputnik" which is noticeably more rapid when it comes to reporting on the non-Russian story and noticeably more partisan when it comes to reporting on the domestic story.

The new wire is headed by Russia's media bullhorn Dmitry Kiselyov,,

Russia to ban state-owned companies from using Big Four audit companies Russian Duma deputies tabled a bill that would ban big Russian state-owned companies from hiring the foreign-owned "Big Four" audit companies to prepare their accounts.

The deputies from the popularist Liberal Democratic Party, headed by firebrand/clown Vladimir Zhirinovsky submitted a bill on the grounds that it was a bad idea to give foreigners access to sensitive financial information about Russia's strategic companies. The bill calls for a ban on using the Big Four audit firms to do the accounts of any company in which the government owns over 50% stake, Interfax reports on Wednesday.

The increasing activity of the Big Four accounting firms PricewaterhouseCoopers, KPMG, Ernst & Young, and Deloitte & Touche – and other international audit companies is increasing economic risks for Russia, according to the authors of the bill. “Foreign audit companies currently audit the majority of strategically important companies in Russia.

The Big Four account for over 46%

of the aggregate revenue in auditing,� the MPs wrote in an explanatory note reports RAPSI. Putin says no "colour revolutions" in Russia The rhetorical clubs are coming off.

In November Russian President Vladimir Putin said that extremism poses a threat to national security and has called for everything to be done to prevent "colour revolutions" in Russia.

"Extremism is a threat to national security and can radically unbalance the political, economic and social systems. Nationalism, religious intolerance, political extremisms are forms of extremism that are most dangerous for society and the state," Putin told his Russian Security council in widely reported remarks.

The connection between current revolutions and extremism is an obvious reference to Ukraine: Russia has claimed that the Maidan revolution in Kyiv was perpetrated by ne-fascists and they Nazis. It is the storyline is widely believed and accepted by the Russian population which relies almost exclusively on state and TV for the bulk of this information.

"In the present-day world, extremism is being used as a tool of geopolitics and redrawing spheres of influence. We can see the tragic consequences the wave of so-called 'colour revolutions' has led to and what upheavals were and are being experienced by the countries which have gone through

irresponsible experiments of hidden, and at times gross, or "crashing" as we say here, outside meddling in their life," Putin said.

"For us it is a lesson and warning, and we must do whatever is necessary it to prevent something similar from ever happening in Russia," he said.

Politics – the ugly

Russian oligarch Timchenko under US anti-money laundering investigation US prosecutors have launched a money-laundering investigation into billionaire Russian gas trader and close Putin associate Gennady Timchenko.

The US has already placed Timchenko on its sanctions list issued in March.

He is now accused of transferring funds related to allegedly corrupt deals in Russia involving his oil trading company Gunvor Group, which bought oil from Russia's Rosneft and sold it to third parties, the Justice Department said.

He is also co-owner of Russia's second larges gas producer Novatek.

Russian communications ministry accused to stealing egovernment investment funds State Duma lawmakers from A Just Russia party have asked the Prosecutor General’s Office to inspect the Communications Ministry, which is accused of squandering funds and sabotaging the development of the online government.

The government allocated over RUB1.4 trillion ($50bn) to put the

government structures online, including a successful project to put all tax payments online.

However, the complete programme was not completed. The lawmakers say that by this 98% of the government services should be online, but only 3.3% are. In the regions the problem is even worse with 44% of services supposed to be online but only 1.1% are, according to Andrei Krutov from the lower house’s energy committee and Dmitry Ushakov from the budget committee that have brought the matter to the general prosecutor's office.

The Communications Ministry has countered that the services already online are the ones in most heavy demand: 80% of requests by citizens are covered by only 35 priority services and these are in place. Viewed this way the ministry said it hit its target: services provided online reached 30.8% of demand for services was hit from a target figure of 30%.

13mn Russians have already registered on the state services site, which is 86% more than last year. In 2014, 17mn applications for state services were filed online, an increase of 30% year on year.

Polls, mood, sociology Putin popularity reaches an all time high, propensity to protest close to all time low A recent poll by Russia’s Levada Centre showed that despite rocketing food prices, the desire to protest in Russia is close to an alltime low at 12%, while support for President Putin has matched the all-time-high approval rating of 88% - a figure last seen in September 2008.

As our chart shows, Russia’s ban on food imports from countries that have imposed sanctions on it has seen sharp rises in food prices, with the cost of meat and poultry rising by 16.8 per cent in September, according to Russia’s state statistical agency, Rosstat.

Inflation hit 8 per cent in September, while the Ruble’s value plummeted to 47 to the dollar in early November.

Russians wise to corruption, but Putin comes out smelling of roses A recent poll by Russia’s Levada Centre shows that 39% of Russians believe corruption has got worse in the last 15 years, down from 60% in 2010, while 20% of those polled

Asked directly whether or not they believe that President Vladimir Putin has ever abused his power, only 6% of respondents said that he undoubtedly had. Nearly a fifth

believe that levels of corruption have improved.

As the first bne:Chart shows, those who believe that corruption has worsened is at its lowest level since the poll was first conducted in May 2007.

of respondents said that he had never abused his power, and over 30% said that if he had, the overall improvement in Russia under his presidency is more important than any corruption he engaged in.

When asked to rate various types of public officials on their levels of corruption, Putin was judged to be the least corrupt, with only 8% characterising him as very corrupt.

Members of the State Inspectorate

for Traffic Security (Russian traffic police) were judged to be the most corrupt (43%), followed by the Russian police force (39%) and customs officers (35%).

Russia is the biggest threat to global stability, say international investors The Bloomberg Global Poll of international investors found that international investors consider Russia the biggest security risk to world markets and will be the biggest loser from the drop in oil prices, in the company's annual survey.

Asked which of five possibilities posed the greatest risk to global financial markets, 52%of participants chose the RussiaUkraine conflict. 26% cited Islamic State, while Ebola barely registered with 5%. The U.S. was seen as the most likely beneficiary from lower crude prices.

Russians trust in police up following reform A survey found that Russians have become more trusting of police officers since the Interior Ministry underwent wide-ranging reforms in 2011.

The survey, which was conducted by the independent Levada Centre and the Public Verdict Foundation, showed that 8% of Russians expressed complete distrust in police officers this year, compared with 18.3% in 2010, Kommersant reported.

In December 2009, then-President Dmitry Medvedev launched largescale reforms to revamp the country's Interior Ministry, reducing the number of police officers and obliging them to requalify for the force. The measures were aimed at increasing the efficiency of the police force and minimizing corruption.

Russia's Business Confidence Index declines in November The Business Confidence Index in November declined to -5% for extraction (-4% in October), to 8% for processing (-6% in October), and slipped to 6% for utilities (7% in October), according to the data by RosStat.

In Q4 the outlook for both extraction and processing (manufacturing) has as expected deteriorated after improving surprisingly for extraction in September. The deterioration of confidence in the manufacturing sector continues the

negative tendency seen in JulySeptember. October's and November’s survey have likely fully incorporated the effect of the sectoral sanctions introduced against Russia in the beginning of September, the effect of ruble depreciation and low oil prices.

RosStat compiles its index on the basis of the survey of 5,500 companies. In November’s survey the respondents in processing (manufacturing) have increasingly noted insufficient domestic demand. In extraction, high tax levels as limiting growth also increased in the past months.

Crime pays in Russia Nearly two thirds of Russians (60%) think the only way to get rich is to steal, according to a survey by the independent pollster, the Levada Centre.

Another 15% of respondents said that it was possible to become rich honestly 15 to 20 years ago, but that times have changed. Half (49%) of all Russians believe it is impossible get rich legally either then or now.

Respondents also resent the light punishments business caught breaking the law receive. Just over half (53%) say it "isn't right" that penalties for fraud are less severe than for other crimes.

However, these results don’t reprent an anti-business mind-set: 75% of respondents were positive toward private business owners, and 81% were positive toward small business owners. Owners

of large businesses are less popular, with only 57% positive to big business owners.

Russians don't care, unaffected about food sanctions A poll by Russian pollster FOM found that while 71% of Russians are aware of Russian President Vladimir Putin's decision to ban the import of European agricultural products 80% of them say they have not been affected and see little change in the range of the goods on shelves.

The poll contradicts the general impression that the Russian consumer is suffering from the import ban and this will lead to general discontent. The one place where the sanctions are visible is in rising prices, however, 72% of respondents are standing behind their president and back the bans and subsequent inflation in the face of western aggression (as they see it).

It seems that the majority of Russians are unaffected by the disappearance of the little luxuries that Europe used to supply; posh French cheese and Italian cured meats are some of the product that have disappeared from shop shelves, but these don't seem to feature large in the lives of most Russians: 78% of those surveyed said they saw no change in the products available in their local <i>produkti</i> and 91% said that their diet changed in no way

from before the bans were introduced; only 3% said they have had to give up some product they bought regularly before.

Moreover 80% of respondents said they have not had the experience of something that they bought regularly disappearing from the shelves, while only 15% said that they had had this experience.

However the one place where everybody saw a change is in the price of all goods on the shelf: 75% of respondents reported that prices have increased while another 19% said they had not changed. Moreover 11% said they expected prices to continue to rise, far ahead of any other concern.

However the respondents were more confused over the source of the price rises: 42% thought food inflation was due to the sanctions, 24% thought it was not connected and another 20% didn't know.

Almost all Russians (84%) believe that it will be possible to replace the missing European goods with imports of similar goods from other countries. Indeed Russia has already had a lot of success with getting it's BRIC partners to rally round. Belarus has been a big winner from the ban on European food and has seen the exports to Russia of things like cheese soar (as well as shrimp, despite the fact the country has no coast).

Likewise, Brazil, Argentina and China have all massively increased their exports of beef, chicken and pork to Russia this year.

Have you heard of Russia's ban on food imports?

Has this ban affected you?

How has this ban affected you?

Have the products on sale in your shop changed?

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Anti-American sentiment soars to third population Anti American sentiment in Russia has soared to 37% of poll respondents in November, up from 18% in February 2013, according to VTsIOM. Those with a good opinion of the US are also down from 23% to 11% now over the same period.

US President Barack Obama came in for special attention with 40% saying they have a negative view of him, compared with just 8% in April 2011.

64% of respondents described current relations between the US and Russia as "bad," and 70% said the situation worsened within the last year.

Obama lost popularity among Russians The number of Russians who don’t like the policies of the US President’s has surged from 12% in 2009 to 76% this year, according to the an opinion poll conducted by the independent Levada Centre.

Poll results also showed the fall of the%age of Russians with a positive attitude towards Barack Obama – from 21% to just 2% during the same time period.

Five years ago 51% of respondents said they were neutral towards the American leader and this year only 16% said the same. 67% of this year’s responders said that relations between the two countries had become worse than under George W. Bush.

The leaders of Germany, France and the UK claimed approximately the same level of support – 8% of responders had a positive attitude towards Angela Merkel, 5% towards Francois Hollande and 4% to David Cameron. When it comes to a negative image among the Russian public Merkel was first with 50%, followed by Cameron with 35%, and Hollande with 30%.

One third of Russians polled think Cold War is coming A third of Russians believe a Cold War between Russia and the West is in the offing and a quarter said that it has already started.

One in five put their faith in Russia's president and the government to thaw the chill.

Half French say should sell Mistral to Russia Well over half of French citizens (58%) believe the government should go ahead with a deal to sell a Mistral-class helicopter frigate to Russia, despite the showdown over the fate of Ukraine.

The online public opinion poll on Mistral-class helicopter carriers delivery to Russia organised by French newspaper Le Figaro, found that Paris should meet its obligations under a contract to deliver two Mistral-class helicopter carriers to Russia. According to Le Figaro website, over 76,000 people have taken part in an online public opinion poll so far.

Russia and France signed a €1.2bn ($1.5bn at the current exchange rate) deal for two Mistralclass ships in June 2011. The first carrier, the Vladivostok, is expected in Russia by the end of 2014. The second ship, the Sevastopol, is supposed to arrive in 2015.

Russians believe state-run media 'objective' Most Russians believe that the country's state-run news news media are objective in their coverage of the Ukraine conflict, a poll by the Levada Centre revealed in November.

59% of respondents to the poll said they disagreed with Western critics that "Russian media is distorting the facts on the Ukraine crisis," the poll conducted in October found.

Another 13% of respondents said they agreed with the statement: "Russia is conducting an information war against Ukraine — but that it is justified."

Only 11% said Russian media was guilty of biased media reporting and that it was "harmful and dangerous."

Most respondents also said they noticed an information war being waged against Russia as a result of the conflict, with 54% of respondents citing Ukraine as the ringleader of the information war and 55% the US. Levada Centre poll finds 68% of Russians don’t want their sons to fight in Ukraine Russians are happy that Russia has annexed Crimea but they don’t want their children to fight in a war with Ukraine, a poll by independent pollster the Levada Centre found in October.

“Attitudes toward what is happening in the Donbas are changing,” says the head of the Moscow Political Experts Group Konstantin Kalachev, and the break away Donetsk and Luhansk regimes “are not so attractive.”

Some 68% of Russians say they do not want their sons and daughters to fight in southeastern Ukraine on

the side of pro-Moscow militants, according the Levada Centre poll.

Only 13% support an open confrontation with another 19% undecided.

However, the support for the annexation of Crimea remains high with 55% saying they approve of the action, only 2% less than approved of the annexation in March.

These numbers suggest that while Russians were happy with the annexation of Crimea, the enthusiasm for the military adventure in Ukraine is waning.

Of those who object to the annexation 68% say they are unhappy because of the instability it has caused in the region, another 28% cite the resulting Western sanctions and 19% are unhappy with Russia's violation of its international agreements.

Half of Russians think that financial support for Crimea and Ukrainian separatist will cause a crisis in Russia In an echo of the Soviet campaign in Afghanistan, half of Russians responding to a poll believe that if the Kremlin gives financial support to Crimea and separatist fighters in eastern Ukraine could spark an economic crisis in Russia, a poll by the Levada Centre found.

Some 61% of respondents anticipate an economic crisis and lower living standards due to the show down with the west, with 56% considering these the direct outcome of Russia's actions

in Ukraine â&#x20AC;&#x201D; up from 45% in a survey in July.

The number of Russians who have noticed the price of embargoed goods rising has nearly doubled, climbing from 35% in a survey in August to 64% in October.

Russians are confused about events in Donbas, but most believe itâ&#x20AC;&#x2122;s a civil war Russians are confused about who is fighting for what in Ukraine's eastern region of Donbas, but most believe itâ&#x20AC;&#x2122;s a civil war, according to a poll by Levada Centre.

UP to 58% of respondents believe that Kyiv is conducting a military offense against the people of Donbas, 18% believe that Kyiv is fighting Russian forces, and 14% think that the operation is waged against "separatists," who want to detach a southeastern region from Ukraine."

A majority of Russians believe their country's troops are not fighting in eastern Ukraine, but nearly half would be glad if it turned out they were, according to an opinion poll by the independent Levada research group. Some 25% of respondents did not believe the Kremlin's denials that Russia has sent soldiers to back separatists fighting Ukrainian government forces in the eastern regions.

In a separate poll Levada found most Russians believe that the current cease-fire in Ukraine will eventually give way to renewed military action: 55% of respondents said they believed

that the cease-fire would end with renewed military activity, compared with 46% who said the same thing in an earlier poll on the same subject.

Only 21% of respondents to the latest poll said they believed the cease-fire would end with both sides signing a deal for a peaceful settlement of the conflict. Another 25% expressed difficulty answering the question.

Banks and Finance

Russia's banks struggle as sanctions bite

said 'No', preferring to keep its power dry for the moment.

Profits are tumbling amongst Russia's leading banks as the financial sanctions imposed by the West really begin to bite. The growth rate of retail bank lending for ten months of 2014 was nearly half the rate for the same period in 2013 and 170 of 828 banks were in the red in October 2014, according to the Central Bank of Russia (CBR).

VTB is already cutting back on staff sacking more than a third of its employees in Europe in the last quarter. The bank employed 1,088 people in Europe at the end of September, down from 1,703 in the second quarter, according to a report on its website. VTB eliminated staff in all markets in the third quarter. Its Russian workforce was trimmed by 6.4% report Bloomberg.

The bad news is coming in a steady stream. Last week state-owned VTB admitted that its earnings were down by 87% to RUB6.1bn ($139m) in the third quarter, only to be followed a week later by its sister bank, the retail giant Sberbank, which reported earnings have fallen by just over a quarter (27%) to RUB71bn ($1.6bn). All in all the Central Bank of Russia (CBR) predicts that profits in the banking sector as a whole will fall by 10% this year or more.

Russia's banks are caught between the rock of being cut off from external sources of funding because of western financial sanctions and the hard place of a stagnating economy. VTB has already asked the state for RUB250bn ($5.4bn) in subordinated loans from the National Welfare Fund (NWF) to cover its funding needs. The state

"Management guidance after the third quarter results carried the unsurprising message that the fourth quarter is likely to be as painful as preceding quarters this year," says Andrew Keeley, a bank analyst with Sberbank CIB. "Elevated corporate risk costs will continue to eat up profitability, even as delivery improves in retail banking and cost control."

Moody's was similarly downbeat in a recent report on Russia's banking sector. The ratings agency predicted total lending growth will fall to 5%-10% in 2015 in nominal terms, down from 17% in 2013.

Likewise non-performing loans could increase from 7% of total loans at the start of this year to 9.5% next year, says Moody's.

Russia's banking sector is currency almost entirely reliant on the CBR

for funding and the regulator recently reduced bank's access to ruble liquidity as all the banks were doing was taking the central bank's cash and using it to speculate on the FX market: the ruble's fall and the CBR's efforts to manage the fall with market interventions created a one-way bet for bankers, who were making easy profits using the state's own money.

"The funding profile of the system continues to principally rely on domestic customer deposits (about 55% of total liabilities) and other domestic sources," Moody's said in its report. "Among these domestic sources, the role played by the CBR and its ability to replace diminishing international funding and minimise currency volatility will remain crucial for the stability of funding [in 2015]."

The share of the central bank's money in the liabilities of the sector is creeping up steadily and was 10% in August and will only increase from there, says Moody's.

The slow bleed of gross

international reserves, which have fallen from about $500bn to $420bn as of November, has led some to estimate that Putin has about two years to achieve his goals in Ukraine before the money runs out and spawns another big crisis.

However, the lack of cash is already showing up in bank's capital adequacy ratios (CAR), a measure of solvency. Russian banks typically used to have a healthy CAR of 20% but as the funding dried up increasingly banks have been forced to use their own capital to fund their lending operations. Banks' CAR has been falling steadily towards the mandatory minimum of 10% and edged down from 13% at the start of this year to 12.8% as of the start of November â&#x20AC;&#x201C; still on a par with Russia's emerging market peers, says Moody's. The closer banks get to the minimum 10%, the more vulnerable they become to collapse if a panic causes a run on their accounts.

On the other side of the coin, the CBR's decision to curb retail lending, the most profitable business line available to banks in the current depressed market, has also wounded banks.

More Russians were becoming over-extended because of the high interest rate consumer loans and started to get into trouble. At the start of this year the volume of repayments of credits overtook the volume of new loans for the first time ever and non-performing loans were starting to rise alarmingly. Overdue retail loans reached RUB652.3bn ($14.8bn) for the first 10 months of 2014, up by more than 48.1% since the start of this year â&#x20AC;&#x201C; a record increase over the past few years, according to a survey by collection agent Sequoia Credit Consolidation Collection Agency. "Borrowers started to default on the payment due on a loan for the first time twice as early than they were 18 months ago," the survey found.

The CBR increased prudential reserves a bank has to put aside to cover bad debt, weighing these heavily towards banks offering unsecured loans. In effect the regulator threw a bucket of ice water over the whole business, which has slowed considerably this year.

Retail loans grew just 1% monthon-month in October, the secondlowest increase this year. Retail lending growth continued to decelerate on a year-on-year basis, slowing to 16.6% from 18% in September.

"This, in our view, is a reflection of the trends in the Russian economy as a whole, where industrial production is relatively healthy (partly due to import substitution), while retail trade and real wages remain under pressure. The RAS figures also showed a divergence in the overdue trends: the corporate ratio was down 10 bps month-onmonth to 4.1%, while the retail ratio was up another 10 bps

month-on-month to 5.8%.

However, we expect to see more conservative provisioning on the corporate side under IFRS compared to what the RAS methodology calls for," says Alfa Bank.

The CBR is still concerned enough about the danger of consumer loans that from next year it intends to introduce new regulations that will cap the amount of interest banks can charge on the various sorts of credits made to consumers. The authorities recently published the "full cost of credit" (PSK) calculation for different types of loans and from

But the good news is corporate lending is accelerating on the back of strong state support and growing demand. Although the 3.7% month-on-month growth in corporate loans in September-

January 2015 the pricing of loans may not deviate by more than 30% from this average PSK. "This implies downside risks for the credit card segment (where Sberbank, with its lower risks and lower rates, continues to gain market share) and [online credit card specialist bank] TCS in particular. However, there could be amendments to the regulation, as banks are lobbying for state banks to have a lower weighting in the calculation. Thus, we have not yet incorporated additional pressure on yields in our base case," said Alfa Bank in a note.

October becomes just 2.4% after adjusting for the revaluation of foreign currency loans, this was the highest month-on-month growth in adjusted terms this year, reported Alfa Bank. Year-on-year

the growth in corporate loans came in at 13.4% in adjusted terms (versus 20.7% in nominal terms), slightly above September’s level, but lower than most months this year.

Cut off from almost all the alternative sources of funding, banks have been forced to return to the traditional way of funding lending: by attracting more deposits. Here the CBR's decision to dramatically hike interest rates to over 9% a month ago will help.

Retail deposits grew 2.2% monthon-month in October, but depositors fear of more ruble devaluation was obvious as the share of deposits made in foreign currency rose much faster to nearly 22% from 20% in September.

"However, after the CBR’s 150 bps rate hike in late October, we will likely see higher deposit rates going forward, and in the absence of further shocks to sentiment, we expect Russians to gradually switch into savings mode, so retail deposit growth may accelerate somewhat next year," said Alfa Bank in a note.

Corporate deposits are doing much better and continue to grow twice as fast as retail deposits (24% year-on-year in nominal terms in October compared to 10% yearon-year for retail). But this is partly due to the fact that the state is pumping money into the economy to keep it going: the share of funding from the CBR rose to 9.2%, a new post-2009 high.

For most banks 2014 will be a complete business write off. But what about 2015? What are the prospects for a recovery after the holidays?

Much depends on external factors and here there is little good news to report. Following the OPEC meeting in Vienna on November 25 there is little prospect for pricesupporting oil production cuts.

Indeed the Russian Finance Minister Anton Siluanov warned on the same day as the OPEC meeting that Russia's three-year budget should be adjusted to account for $80 oil instead of the $100 it currently assumes in the next two years.

Likewise, the prospect of sanctions being lifted was fading rapidly.

Following initial hopes that Europe would remove its sanctions at the start of November, by the end of the month German Chancellor Angela Merkel said explicitly that sanctions, including the financial sanctions, will remain in place for the foreseeable future.

“We’re working on a diplomatic resolution to this crisis,” Merkel said on November 25. “As long as Russia contributes very little or nothing to overcome this crisis, we need economic sanctions. They’re unavoidable, although I know they impact the German and the European economies."

On top of these external problems are a raft of domestic difficulties.

First, the high risks are driving up the cost of borrowing. Secondly the net interest margin (NIM, or the difference between what banks

charge in interest and what they pay as interests for their deposits) is being constantly squeezed as the competition for new depositors amongst banks intensifies. The NIM has already fallen 15 basis points year-on-year over the first nine months of this year and will fall more next year with another 18 basis point fall to 4.1%, estimates Sberbank's Keeley.

In the tougher more competitive environment the key factors for banks' success will depend on their access to cheap state money and their ability to control costs.

The current situation is not sustainable but Russia has plenty of money in reserves and can keep propping the sector up for several years still. But the CBR has already started anticipating a further deterioration and has been discussing supportive measure to reassure both bankers and customers.

with cash. This scenario includes a falling number of counter-agents as shrinking confidence in small banks results in a halt of unsecured lending and a freezing of trading on the interbank market.

CBR's headline banking sector data for October Sberbank said in a note: The most interesting thing in these numbers is the stable retail deposits.

Anecdotal evidence suggests that dynamics have remained pretty stable so far. Corporate loan growth looks fairly subdued when adjusted for FX changes, which is likely driven by rising caution over the economic outlook, while retail lending continues to decline in year-on-year terms amid rising inflation and falling real wages.

Assets. Assets grew 4.5% monthon-month, implying growth of 22% year-on-year and 17% YTD.

The Russian government could acquire more preferred shares of banks, such as VTB, using resources from the National Welfare Fund, the Finance Minister Anton Siluanov earlier this month, but if it happens then it is likely to be confined to the leading Russian state-owned banks.

Loans. Corporate lending in Russia is accelerating on the back of strong state liquidity support while retail lending is decelerating as the Russian consumer is over extended and continues to unwind their position. At the beginning of this year for the first time the repayment volume of debts exceeded the volume of new consumer credits.

However, the regulator is still confident that the situation is under control. In its worst cast scenario there could be a RUB84bn ($1.9bn) liquidity crunch next year, the CBR said in November, under its "shock" scenario for the new year, and that amount lies easily within the CBR's ability to cover

Corporate loan growth accelerated to 3.8% month-on-month in nominal terms but only 1.2% if adjusted for significant ruble depreciation (the dollar gained about 10% versus the ruble). This put the YTD and year-on-year

tallies at 19.1% and 20.1%, respectively.

Retail loans grew much slower, adding 1.0% month-on-month (there is almost no FX share here), with year-on-year further slowing to 16% and YTD growth at 12.6%.

Sberbank mildly underperformed the rest of the sector in corporate lending (3.4% versus 4.0%) and outperformed other banks in retail loan growth (1.5% versus 0.8%).

"This, in our view, is a reflection of the trends in the Russian economy as a whole, where industrial

production is relatively healthy (partly due to import substitution), while retail trade and real wages remain under pressure. The RAS figures also showed a divergence in the overdue trends: the corporate ratio was down 10 bps month-onmonth to 4.1%, while the retail ratio was up another 10 bps month-on-month to 5.8%.

However, we expect to see more conservative provisioning on the corporate side under IFRS compared to what the RAS methodology calls for," says Alfa Bank.

Deposits. Retail deposits added 2.2% month-on-month but were almost flat if adjusted for ruble depreciation, which is still not a bad result given the extent of the rubleâ&#x20AC;&#x2122;s fall. In year-on-year terms, retail deposits are running at 10%, and the YTD tally is just 4.2%.

Corporate funds increased 5.4%

month-on-month (circa 1.9% adjusted for FX effects). Perhaps surprisingly, Sberbank underperformed the rest of the sector in retail deposit growth (1.5% versus 2.8%, respectively), but increased its retail deposit rates at mid-month.

Earnings. Total sector EBT was R732bn in 10m14, down 11% year-on-year.

Overdue loans. The overdue loan ratio (which incorporates only the overdue portion of a loan) increased from 5.7% to 5.8% in the retail segment and decreased from 4.3% to 4.2% for corporate loans in October.

But overdue retail loans reached a total of RUB652.3bn for ten months of 2014, up by more than 48.1% since the start of this year record increase over the past few years, according to a survey prepared by Sequoia Credit Consolidation Collection Agency Liquidity: The CBR has a tight monetary policy and is limiting ruble liquidity to banks to prevent them speculating on the currency markets.

â&#x20AC;&#x153;This (tight monetary policy) will help keep inflation within reasonable boundaries and protect the population and Russian producers from external shocks.

The current situation is conducive to import substitution and the development of domestic production. As soon as a steady trend emerges towards lower inflation and inflationary expectations, the Bank of Russia will be ready to ease its monetary policy. However, to cut short frenzied demand on foreign currency market, Russiaâ&#x20AC;&#x2122;s regulator will temporarily limit ruble liquidity provision," Central Bank head Elvira Nabiullina said on November 10.

Rate hikes means Russian retail deposit may grow in 2015

Russian government may pump more equity into Russian banks

In a desperate move to stop the ruble sliding the Central Bank of Russia (CBR) hiked interest rates by a surprise 150 basis points in late October. The move didn't work and the ruble continued to slide, but the one of the knock-on effects is that analysts are expecting bank deposits to rise in 2015 as a result of the higher interest rates on offer.

The Russian government could acquire more preferred shares of banks, such as VTB, using resources from the National Wealth Fund, says Finance Minister Anton SiluaNovember In turn, banks will be used as a vehicle to finance infrastructure projects.

Retail deposits grew 2.2% month-on-month in October or 1.2% month-on-month net of FX revaluation, with the share of FX deposits rising to nearly 22% from 20% in September. Year-on-year growth net of revaluation slowed to 4.7%.

"However, after the CBRâ&#x20AC;&#x2122;s 150 bps rate hike in late October, we will likely see higher deposit rates going forward, and in the absence of further shocks to sentiment, we expect Russians to gradually switch into savings mode, so retail deposit growth may accelerate somewhat next year," says Alfa Bank.

Corporate deposits continued to grow twice as fast as retail deposits (24% year-on-year in nominal terms in October compared to 10% year-on-year for retail), and the share of funding from the CBR rose to 9.2%, a new post-2009 high.

Sector net income was down 10% year-on-year in 10M14, and the CBR expects to see roughly the same rate of decline for the full year 2014.

Some Russian companies applied for financing from the National Wealth Fund for infrastructure projects due to the very limited long-term funding opportunities available on the market. According to the proposal, financing such projects could be carried out via banks rather than directly (banks would also earn a certain margin).

Further down the scale 44 smaller banks are under close supervision by the CBR, but that is down from 70 banks being watched closely earlier this year, the CBR said.

Sberbank said in a note: By adopting this approach, the government will, in essence, try to kill two birds with one stone: fulfill its commitments to finance infrastructure projects and strengthen banksâ&#x20AC;&#x2122; Tier 1 capital (preferred shares are treated as core capital under local regulation).

The state also hopes that its investments in banksâ&#x20AC;&#x2122; equity will multiply given that they will also be using borrowed funds to finance these infrastructure projects. This possibility is likely to be confined to the leading Russian banks.

It is unsurprising that Russian banks want to intermediate in providing long-term financing to the economy (it is also one of the possible ways for them to write new business in the current environment). Using such an arrangement is likely to have a positive impact on the banking system’s stability, provided, however, that the projects the banks are steered toward financing are economically viable.

Central Bank publishes consumer loan rate caps for 1Q15 The Central Bank of Russia (CBR) has published benchmark rates for capping unsecured consumer loans for commercial banks in Q1/15, under a law that was passed in the end of 2013 over increased concerns about overheating in unsecured crediting sector. The CBR calculated that rates on POSloans will not be allowed to exceed 55%, credit card loans 35%, and new car lease rate 20%.

The CBR has issued its first quarterly publication of average consumer loans’ full cost of credit (Russian “PSK”) for different loan types, effectively setting maximum interest rates to be used on new loan contracts in 1Q15.

Before the outbreak of the Ukrainian crisis, the IMF mission to Russia listed rapid growth (30%40%) of the unsecured retail credit sector as one of the main risks to short-to-mid-term outlook.

According to the “Law on Consumer Lending,” the CBR

calculates the average full cost of credit for the 100 biggest lenders in each loan category every quarter, and the rates banks may charge borrowers during the next quarter can only up to one third higher than the average. The first calculation from the Central Bank suggests, for example, that credit card lenders may charge a maximum of around 35% for cards with up to a RUB30,000 credit limit and around 30-32% for cards with limits from RUB30,000 to RUB300,000.

Oliver Hughes from Tinkoff Credit Systems participated in the working group that discussed the changes with the CBR and told Vedomosti that the central bank refused to separate salary-backed loans into a separate category. Yuri Gribanov of Frank RG estimates that the interest on salary-backed consumer loans are 15bps-30bps lower than regular unsecured loans, and many banks with small client base will not be able to compete in the segment.

At the end of 2013. Fitch Ratings commented that planned capping of the maximum retail credit rates for Russian banks will only marginally mitigate the risks in this segment. While the measure could curb the growth of retail loans and lower the debt burden of consumers, it could also harm the pricing transparency and push part of the portfolio into a less regulated micro-financing sector, the agency believed.

Tinkoff Credit Systems (TCS) loan yields, in 1H14 its gross performing loan yield was 49%, of which

generally around 70% relates to a contractual interest rate (i.e. around 34%) and the rest to other charges that are generally not included in PSK calculation (i.e. penalties, cash withdrawal fees, insurance protection fees where the borrower is the beneficiary under insurance contract). While from this point of view the new interest rate caps do not suggest heavy pressure, we also note that according to the capital adequacy reporting to the Central Bank, around 46% of TCSâ&#x20AC;&#x2122; loans with above 25% PSK issued since 2H13 had between 35% and 45% PSK, and around 6% of these loans were above 45% PSK. This looks to be a more serious concern. One

mitigating factor may be that TCS will still be able to issue loans to current clients under existing contracts without substantially changing tariffs, as the new interest rate caps will only apply to new loan contracts.

CBR to set up SWIFT replacement in May 2015

service by the end of May next year.

Russia's Central Bank will finish building its alternative to the SWIFT inter-bank messaging

The regulator will begin providing messaging services to certain banks as early as December this

Our current forecasts imply a 3 pp gross performing loan yield contraction in 2015E, while each additional 1 pp decline in the yield would take off around 14% of 2015E net income (which we expect to be R5.6bn). At first glance, the news look negative for TCS, and we will be following up with the bank for more details about how it evaluates the potential impact.

year, added Ramilya Kanafina, deputy director of the Central Bank's national payment system department, Interfax reported.

The European Parliament in September proposed cutting Russia off from the SWIFT system in an effort to pressure the Kremlin over its foreign policy toward Ukraine.

According to The Moscow Times, Belgium-based SWIFT said last month that it had been urged to cut Russia out of its system, but that it would "not make unilateral decisions to disconnect institutions from its network as a result of political pressure."

Russian banks' assets to grow by 22% to RUB70tn in 2014 Total assets of Russia's banking sector increased 4.5% in October. but if revaluation effects are excluded then asset growth was only 2%. And assets will grow by about 22% to over RUB70tn in 2014, Deputy Chairman of the central bank Vasily Pozdyshev said, Prime reports.

As of November 1, assets of domestic banks amounted to RUB67tn, he said.

Personal deposits with banks will restart growth by the start of 2015, Pozdyshev said. â&#x20AC;&#x153;There are troubles with deposits this year. Retails eposits are rising very slowly due to the exchange rate volatility. They have risen only 4.3% this year. If we do not include foreign currency revaluation, I can say that deposits

are stagnating, but banks have started to change interest rate policies gradually," Pozdyshev said.

Russian banks cut dubious transfers abroad threefold in Jan-Sep Russian banks have cut the amount of dubious operations and transfers abroad by almost threefold y/y in January â&#x20AC;&#x201C; September to $8bn, deputy head of the Central Bank of Russia Dmitry Skobelkin told the press.

The central bank estimated the amount of such operations at $39bn in 2012 and $26bn in 2013.

In 2013 head of the central bank Elvira Nabiullina attributed the increase in such operations to taking advantage of eased procedures under the Customs Union's agreements with Belarus and Kazakhstan.

In spring 2013 ex-head of the CBR Sergei Ignatiev claimed that a web of sham firms is responsible for illegal capital outflow of about RUB760bn ($23.6bn) in 20102012. Ignatiev reminded that the CBR filed a 230-page report to the Interior Ministry on a web of 173 fictitious firms responsible for the outflow and for illegally cashing out at least another RUB21bn.

In 2014 the CBR expects $128bn net capital outflow vs. previous forecast of $90bn.

Retail banks sell off record RUB200bn of NPLs to keep balance sheets clean Russian banks sold off a record RUB200bn of bad retail loans in the

first ten months of this year, nearly twice the amount put up for sale last year, and another RUB80bn is expected to be sold by the end of December.

However the banks are struggling to find buyers are collection agencies can only cope with about a third of the total but have bought half the bad debts on offer according to the National Recovery Service, as prices for overdue loans nearly halved in 2014 compared to 2013. The average price is 2.34% at the moment versus 4-4.8% of the total debt amount in 2013.

"The supply on the market of bad debts exceeds the demand. In the current economic situation, collection agencies are unable to make long-term forecasts as to how much they will gain from overdue loans purchased, and therefore don't hurry to buy them," said Elena Dokuchaeva, Chairwoman of the Board of Directors of Sequoia Credit Consolidation Collection Agency, a market leader in the business.

Financial sanctions on Russia hurt Ukraine – Putin Russian President Vladimir Putin claimed that financial sanctions on Russia would hurt Ukraine in an interview with German TV, pointing out that Russia is one of the biggest lenders to its western neighbour, which has debts to Russia running into the tens of billions of dollars.

“Russian banks have as at today credited Ukrainian economy with $25bn. If our European and

American partners want to help Ukraine, how can they undermine the financial base limiting our financial institutions’ access to world capital markets? Do they want to bankrupt our banks? In that case they will bankrupt Ukraine. Have they thought about what they are doing at all or not? Or has politics blinded them?”

Putin said in his interview with German ARD TV channel.

As part of financial sanctions imposed on Russia earlier this year

by US and the European Union the leading Russian state-owned banks have been locked out of the international capital markets and can borrow for no longer than 90 days.

"According to the European Commission data, the losses from Russia's counter-measures aimed at protecting our economy are estimated as €5–6bn," Putin said in the interview. "Can we estimate the losses that these sanctions have caused Russia? It is rather difficult. To some extent, these are virtual losses. Although we have really sustained losses, it is true," Putin noted.

Putin threatened that Russia banks may demand repayment of this debt if relations do not improve.

For example, Gazprombank has lent Ukraine's national gas company Naftogaz $3.2bn and may ask for this money back.

"This bank [Gazprombank] has the right to demand early repayment because the Ukrainian partners have violated their loan agreement," Putin said. "They are

servicing the loan. Naftogaz is servicing one of the loans.

However, there are some conditions that are being violated.

Therefore, the bank has the formal right to demand early repayment," Putin explained, adding another $1.4bn loan to the chemical industry is not being serviced.

On top of the commercial lending Russia's Ministry of Finance "extended a $3bn loan a year ago, there was a condition that if Ukraineâ&#x20AC;&#x2122;s total debt exceeded 60% of GDP", adding that Russia is entitled to call the loan in. "Again, if we do it, the whole financial system will collapse," Putin stressed.

Finally Russia extended Ukraine $3bn in December 2013 in the form of a Eurobond listed on the Irish Stock Exchange, however, Putin stressed there were no plans to call this debt in early.

"When we extended a $3bn loan a year ago, there was a condition that if Ukraine's total debt exceeded 60% of GDP, we, the Russian Ministry of Finance, would be entitled to demand an early repayment. Again, if we do it, the whole financial system will collapse. We have already decided that we will not do it. We do not want to aggravate the situation.

We want Ukraine to get on its feet at last," Putin said in an interview with the German ARD broadcaster.

Despite the ominous tone of the interview the point Putin was trying to make was that any solution to the situation in Ukraine will have to involve Russia.

"The most important thing is that we do avoid the one-sided perception of the problem," Putin said told the German broadcaster.

Russians concerned with fall of ruble but not switching accounts yet Until dramatic fall in the value of the ruble at the end of November, Russians expressed concern with devaluation but had not switched their rubles to FX accounts.

A poll found that 63% of respondents were concerned over the decline in the ruble exchange rate; 55% of respondents follow the ruble exchange rate fluctuations closely; 21% trying to be informed of the exchange rate several times a week.

And the number of respondents who are not interested in the exchange rate is decreasing: 45% in late November said they were not concerned versus 53% in February 2014 and 68% in December 2008.

However, only 7% of respondents said that they exchanged foreign currency in October and November, according to the Levada Centre.

"A minor part of the population shows a feverish demand for foreign currency," says Marina Krasilnikova from Levada. "The increased volatility of the ruble didn't change the trend."

The data disclosed by the Bank of Russia shows that the people's overall demand for foreign

currency remained at the same level in October as it was throughout 2014 and amounted to $9bn. Moreover, 36% of respondents are sure that keeping savings in rubles is more profitable and safer at the moment (only 21% choose US dollars and euros).

October from 13.3% in September, largely due to the fall in returns of the sector's largest lender Sberbank, which increased reserves against risks specific for loans to debt-ridden metals and mining group Mechel and in Ukraine, Fitch said in a report.

Russian banks' ROE falls to 8.1% in October from 13.3% in September

Average monthly Sberbank's profit slid to RUB7bn rubles in October from RUB32bn rubles over the previous nine months.

The return on equity (ROE) for Russian banks fell to 8.1% in

Economics

Russia's consumption and investment motors stall Russia's economic growth has slowed to a crawl. The latest official forecast is 0.8% growth this year, but a range of analyst and international financial institutions are predicting growth will be lower and there could be no growth at all next year as Russia enters stagflation territory.

The fall of the ruble and the tumbling oil prices are partly to blame but more serious is the lack of domestic investment and the worsening position for Russia's shoppers as real incomes stagnate after almost a decade of strong gains.

"The sanctions are having a very real impact on the [Russian]

economy," EBRD chief economist Erik Berglof said at a press conference. "We think this [Russia going into recession] is even more likely now. It doesn't help that the oil price has come down, it reinforces the secular slowdown in growth."

The latest macro statistics for the first 10 months of this year continue to paint a picture of consumption-driven growth, with retail trade up 2.2% year-on-year and investment down 2.5% yearon-year for the period, reported Alfa Bank.

"However, we expect accelerating inflation, the risk of new rate hikes and the lack of aggressive social spending to weaken retail trade growth in 2015," Natalia Orlova, chief economist with the bank, said

in her monthly economic wrap on November 25. "Meanwhile, no further need to accumulate FX will assist companies in redirecting financial flows to capex, thus supporting our more positive view on investment for next year."

Consumption has been the backbone of Russia's economic recovery in the last decade. Even during the crisis years after 2008 incomes continue to rise at about 10% a year. Meanwhile, companies are increasingly being squeezed between the rising cost of borrowing and lower sales. A drum-tight labour market, with unemployment at historic lows, means they had to continue to increase wages, but this situation is clearly unsustainable.

Retail trade growth stayed at 1.7% year-on-year in October, according to Rosstat, but the underlying fundamentals are deteriorating, said Orlova.

"While the market expected retail trade growth to decelerate to 1.2% year-on-year last month, in reality it was close to our more optimistic expectations, remaining at September's 1.7% year-on-year level, and in the first 10 months of this year growth stayed at 2.2% year-on-year," said Orlova. "The sources financing this growth continued to deteriorate, with unemployment spiking from 4.9% to 5.1%, and real wage growth reported at only 0.3% year-onyear in October versus 2.4% yearon-year in 9M14, which was also anticipated."

The way out of this mess is obvious: companies need to invest and build new production to sustain growth. However despite Russian President Vladimir Putin's success in moving Russia up the World Bank's Doing Business ranking, this hasn't translated into a more appealing investment environment. Business owners have simply suspended investment plans until there is some more clarity about the future.

The latest investment numbers disappointed yet again, despite strong industrial output growth at the start of the autumn. Industrial production soared by more than 5% month-on-month because the sanctions imposed on the European Union by the Kremlin stimulated a measure of import substitution. But economists say the bump is temporary and will not turn into a trend because the constraints on international borrowing hinder any real expansion of industry. If anything the already bad situation with investment is getting worse.

"The investment trend surprised on the downside, decreasing 2.9% year-on-year in October and 2.5% year-on-year in the first two months of this year," says Orlova.

"At the same time, the real [economic] sector kept industrial production growth strong at 2.9% year-on-year in October and 1.7% year-on-year in the first 10 months, reflecting projects sponsored by the Russian military and pipeline construction in Siberia."

The outlook for consumption next year is bleak or poor because of

the exceptionally high rate of inflation. The Central Bank of Russia (CBR) has been struggling to bring inflation down all year but is under pressure to cut interest rates. While inflation was running around 8% until recently, the CBR believes the core inflation was closer to 4%-5%. But Putin has upset the economic balance of forces with his punitive sanctions on EU agricultural imports imposed earlier this year. That pushed food inflation into double digits, something that the central bank can do nothing about.

Then, after the oil price began to slide in September, sending the value of the ruble tumbling, the central bank was forced into hiking interest rates dramatically. That should have brought inflation down, but the rate hike failed to stop the devaluation of the ruble, which continued to slide and will stoke even more inflation. The forecast for this year now is more than 9%. All of this is going to weigh heavily on consumption.

"Deteriorating household income supports our expectations of weaker consumption growth going forward," says Orlova. "The key concern is the above-expected inflation that is growing 0.3% week-on-week and is currently close to 9% year-on-year, and the

recent ruble depreciation will likely push it to 12% year-on-year by mid-2015, limiting real income growth. A new round of rate hikes, which we now see as possible in the first quarter of next year, will also lower households’ ability to boost leverage. Finally, the government’s intention to increase nominal social payments by only 5.5% year-on-year next year underlines the lack of sources to finance retail trade growth, which we now see at 0.5% year-onyear for 2015."

The only good news that Orlova has to offer is that investment might start to recover in 2015 as companies have built up sufficient reserves of hard currency – their main concern for the current quarter was to salt away enough FX reserves in their treasure chests to meet maturing debts.

"Corporate FX accounts with banks increased by $7bn in October and $24bn year-to-date; however, the CBR’s decision in November to introduce ruble free-float has apparently put an end to this process," says Orlova. "We believe that companies have sufficient FX for foreign debt redemption, allowing the real sector to finance more capex in 2015."

Russia's free floating ruble soften blow of falling oil prices Oil prices fell below $80 for the first time in four years on November 5 after as Saudi Arabia and other OPEC group members refused to cut production, but economists say despite the large movements in the price the de facto freely floating ruble will mitigate much of the economic pain.

"The high dependency of the Russian economy on oil is usually surrounded by myths regarding the importance of the fuel sector in Russia’s GDP production," Natalia Orlova, chief economist at Alfa Bank said in a note entitled "Revisiting Russia’s sensitivity."

OPEC collectively supplies 40% of the world's oil but have preferred to keep producing rather than cut production to support prices, <a href="http://www.azernews.az/blo omberg/72837.html?utm_medium =twitter&utm_source=twitterfeed" >reports Bloomberg.</a> The OPEC oil basket fell to $78.67 on November 4, Bloomberg reports. That's the lowest since October 22, 2010, according to data compiled by Bloomberg. US oil production rose to the highest in at least 31 years amid slowing global demand, helping drive crude into a bear market last month.

OPEC's biggest producers -- Saudi Arabia, Iraq and Iran – are also offering biggest discounts to buyers in Asia this month since at least 2009. OPEC meets in Vienna

on November 27 to discuss whether to cut output to support prices.

"With oil price down from $115/bbl mid-year to current $85/bbl and the outlook cloudy, the market is discussing the consequences of this strong move for Russia. We see 3 channels of sensitivity: 1) trade balance and exchange rate; 2) GDP growth; and 3) the budget," Natalia Orlova, chief economist at Alfa Bank said in a note.

Alfa argues that while fuel production is important to Russia, it is not crucial. In physical terms the fuel sector contributes to around 20% of GDP. According to various estimates, the Russian fuel sector generates $40bn-$50bn of profit per each $10 step in the price of a barrel, however around 70% of it is sterilized through taxes, the ultimate effect is to add around $15bn, or 0.5% of GDP, with each incremental change in price, according to Alfa Bank's estimates.

"In the case of sharp oil prices drop a la 2008-09, the negative effect is 0.8% per $10, reflecting contagion effect of lower trade balance and fuel value added on other GDP components," says Orlova. Still, Russia's economy is increasingly sensitive to the really sharp drops in price, but even then it is associated panic that does the real damage.

"According to our estimates, the $33/bbl drop in the average oil price seen in 2009 accounted for

2.4pp out of 7.8% Russian GDP drop, or 0.8% GDP per each $10/bbl. The remaining drop, according to EEG estimates, was attributable to the sudden stop of the global economy, which led to the contraction of the global demand for Russia’s non-oil (mainly metals) exports (40% of

Russia’s 2009 GDP drop) and the closure of the external debt markets, which caused deleveraging on the local market (25% of the 2009 GDP drop), which was previously overheated by massive stockbuilding and debt accumulation," says Orlova.

Moreover, the growth of oil production has lagged far behind the overall growth of the economy and so is not a crucial driver of economic growth. "For the last 10 years, the growth in oil and gas sector has only been around 1% year-on-year, including 1-3% annual growth in the last couple of years. Thus, the direct contribution of the oil sector to the economic growth is modest and the main concern over Russia’s dependency on oil should lie in the area of the financial impact of the oil prices volatility," says Orlova.

effected to the impact in the fall of oil on the country's trade balance.

With fuel accounting for two thirds of Russia’s annual exports, each $10 change in oil prices brings a change of $30bn in annual export revenues and $10-15bn trade surplus.

The major effect on the economic of falling oil prices is to drive down the value of the ruble. The rule of thumb is: each $10 fall in the price of a barrel of oil is equal to a RUB1.5-2.0/$ of exchange rate depreciation. The devaluations is

But the impact on the state's tax revenues is much more noticeable as oil taxes account for up to half the state's revenues, although this is mitigated to an extent by associated devaluation affects.

"Each $10 oil price drop lowers annual budget fuel revenues by $20bn and non-fuel by RUB100bn through the negative effect on overall GDP growth. However, the RUB1.5-2.0/$ depreciation boosts the FX-linked budget revenues by RUB300-400bn, and as a result,

the net effect of the $10 drop is around $10bn of total revenues," writes Orlova.

"The effect of the ruble depreciation in response to the oil prices helps Russia to deliver improvement on terms of current account and budget breakeven.

The import contraction will reduce the current account breakeven from $98/bbl in 2013 to $80/bbl this year. At the budget level, the effect of the fast ruble depreciation was the key reason behind the decline of breakeven from $114/bbl in 2013 to $100/bbl this year," Orlova added.

The big difference to previous oil prices crashes (such as in 1997 when oil fell to $10 and stayed there on the back of the Asian crisis) is this time round the ruble has now been in practice freed to float, which will absorb much of the shock and also allow the state to maintain its hard currency reserves

instead of frittering them away on maintaining the exchange rate.

Alfa offers a fairly upbeat out look for next year as a result based on the expectation oil prices will recover to $100 in 2015. "Under this assumption, we expect 1% GDP growth backed by $110bn current account surplus and a very small 0.4% of GDP ($7bn) budget deficit," says Orlova. "The extra budget revenues coming from the ruble depreciation will keep the Cabinet comfortable with financing investment growth, which we see as a driving force behind our next year growth caseâ&#x20AC;Ś The excess budget revenues which were made in 2014 thanks to the ruble depreciation will be enough to cover the needs of the budget deficit under $100/bbl in 2015 should ruble fluctuate at RUB4045/$ range without borrowing on the market."

Central Bank raises the key rate 150 bps, Nabulina signals more dovish stance next year The Central Bank increased the key rate (minimum repo auction for 17d) 150 bps, to 9.5% on November 5.

The other rates were also raised by the same 150 bps. Thus, the fixed overnight refinancing rate is currently 10.5%, while the minimum auction rate for 3m refinancing against non-market collateral is 9.75%. The maximum auction rate for 1-7d deposit is 9.5%, while the fixed overnight deposit rate is at 8.5%.

"An increase in interest rates will inevitably hurt economic development if it lasts for an extended period of time. In this context, we welcome the Central Bank’s remark, that “if external conditions improve and a sustainable trend of decreasing inflation and inflationary expectations emerges, the Central Bank is prepared to begin easing monetary policy," says Evgeny Gavrilenko, chief economist with Sberbank.

On 26 November, Russia’s central bank governor Elvira Nabiullina gave a dovish speech. She signalled clearly that the regulator is ready to ease its monetary stance from H2 15, as broadly expected by the market. According to Nabiullina, the central bank plans to start expansionary monetary policy ‘as soon as inflation and inflation expectations show they are slowing’. The central banker expects consumer price

inflation to start heading down as soon as Q2 15, as ‘the impact of temporary factors will be played out’. We also expect the CPI to hit its maximum in Q1 15 (9.2% y/y on average), easing to 8.5% y/y on average in Q2 15 as the ruble’s devaluation is fully reflected in prices and the economic recession causes private consumption to shrink in 2015.

Nabiullina unleashed another ‘dove’, saying that the central bank ‘will not fight inflation at the expense of the economy’. This shows its clear understanding that permanently tightening monetary policy in Russia would not prevent accelerating inflation but mostly slash economic growth. As we have been saying, inflation in Russia does not have monetary roots so far but it is rather a derivative of structural imbalances in the Russian economy and the ruble rate, particularly in the country’s large cities. However, in recent months, the CPI has climbed on Russia’s food imports ban introduced in August 2014 as a counter-measure to Western sanctions.

Given the more dovish tone of the central bank, we reiterate our expectation for the next rate decision on 11 December (key rate unchanged at 9.50%) but do not exclude the possibility of a 50bp hike in Q1 15. We estimate the CPI will accelerate clearly over 9% y/y in Q1 15, up from 8.3% y/y in October 2014. On the other hand, the pressure to support the ruble with rate hikes on the falling oil price vanished as the central bank moved to a freely floating ruble. As

seen previously, a total 400bp rate hike in 2014 has not helped the fall

of the Russian currency. We expect the first rate cut late in Q2 15.

Russian slowdown in consumer spending is here to stay

years," the company said in a paper at the end of November.

Consumer spending has been the backbone for Russia's economic growth for much of the last decade and the only thing propping up the otherwise terrible macroeconomic story in the last few years of the decaying economic situation to the current undeclared triple dip crisis.

In addition to the more obvious causes for a slow down like the Ukraine and the last of structural reform the group points to several other factors like wage growth.

London based consultants Capital Economics is even more pessimistic and thinks not only will consumption fall further but it will remain weal for years to come.

"Consumption growth has been the key driver of the Russian economy over the past ten years. And even though overall GDP growth has been slowing for the best part of the past two years, for most of this time, consumer spending has remained relatively robust.

However, this has now started to change. It looks like consumption is on course to grow by just 1.5% in 2014. This compares to annual growth rates of 5-6% in recent

"Real wage growth has been much faster than productivity growth since the early 2000s, which has reduced the competitiveness and profitability of Russian firms. But this cannot continue indefinitely and wage growth will have to readjust to a much weaker pace of productivity growth," says Capital Economics.

Capital Economics goes on to say that oil prices look set to remain weak but more importantly Russian household's ability to borrow has been constrained.

"Householdsâ&#x20AC;&#x2122; balance sheets are starting to look stretched and, at the same time, structurally high inflation and persistent capital

outflows will keep domestic monetary conditions tight."

Putin, Xi promise to use more yuan in mutual transactions Moscow is the only place in the world to offer regulated trading in China's national currency, the yuan, outside of China itself.

Trading volumes are still small ($1.1bn in September) but that will change soon.

Russia's President Vladimir Putin and China's President Xi Jinping agreed to increase use the yuan in mutual transactions, Kremlin spokesman Dmitry Peskov said on the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit in Beijing in November.

"As part of our cooperation with this country (China), we intend to use national currencies in mutual transactions," Putin said.

"The initial deals for ruble and yuan are taking place. I want to note that we are ready to expand these opportunities in (our) energy resources trade."

The deal comes as yuan-trading on the Moscow Exchange set up record highs, up 80% month-onmonth to RUB83.5bn ($1.8bn).

Ruble-yuan trading was launched by the Moscow Exchange in 2010 and volumes have grown rapidly this year, although remain a fraction of dollar-ruble trading. A new all-time daily volume record was set on October 16 when CNY1.5bn was sold for RUB9.9bn, according to the Moscow Exchange.

â&#x20AC;&#x153;The Moscow Exchange cooperates with large Chinese banks, facilitating the increased use of their national currencies in settlements between companies of both countries,â&#x20AC;? the Moscow Exchange said in the statement released late Wednesday, report wires.

Currently most international deals are priced and paid for in dollars.

However, with both powers keen to reduce the influence of the US in the global economy the are both moving towards trading in their own currencies as part of the slow move to a multipolar world.

Russia cuts investments in US T-bills to $117.7bn Russia has reduced its investment in US government securities by $$21bn to $117.7bn in September, according to the US Department of the Treasury data.

Russia has started a concerted campaign to get out of dollars and break the "dictatorship of the dollar" in international trade.

Russia is the 12th biggest holder of US debt, with China number one ($1.26 trillion) and Japan number two ($1.23 trillion).

Russia boosted the amount of euros and reduced the amount of U.S. dollars in its foreign currency reserves in the first three months of the year. The Central Bank releases data on its foreign currency holdings with a time lag of several months to minimize its impact on the forex market and this process has certainly been

going on all year. The bank has said it intends to diversify its forex holdings away from the dollar and towards emerging market currencies.

The Central Bank said in a document on its website it had reduced the amount of dollars in its forex reserves from 45.4% on December 31 2013 to 43.3% by March 31 this year. The bank also said it had increased the amount of euros in its reserves to 43.7% by the end of March from 41.1% at the end of last year. At the start of 2014, the Central Bank had 44.8% of its reserves in dollars and 41.5% in euros, the bank said in a separate annual report for last year, Reuters reports.

Russia's international reserves lose 18.5% y/y or almost $100bn as of end-October As of end of October, Russia's international reserves decreased by 18.5% y/y and 5.6% m/m reaching $428.6bn, the Central Bank of Russia (CBR) has reported.

Since the beginning of 2014, Fx/gold reserves dropped by 16% ytd or $81bn.

In 2013 overall, the reserves decreased by 5.2% reaching $509.6bn as of October 1, 2014. In 2012 the reserves recorded a 7.8% y/y growth to $537.62bn.

Previously Fitch expected the reserves to decline to $400bn by end-2015 due to CBR covering Fx liquidity shortages. It could be that the reserves will melt to $400bn already by end-2014.

The reserves continued the decline seen throughout 2014 after a brief increase of 2.4% m/m in June due to calming in geopolitical tension that spiked again since July.

However, due to no currency interventions by the CBR, the m/m decline rate of reserves moderated in August in m/m terms. The introduction of Fx liquidity provision instruments, such as short-term currency swaps, eroded the Fx base of the reserves in September.

In October, the central bank was forced into a policy reversal and spent about $27bn on currency

Central Bank of Russia (CBR) Gross International Reserves Yea Total Reser Forex Gold r ves De 427.08 406.2 14.5 c05 33 08 De 436.267 402.7 22.7 c78 53 09 De 479.379 432.9 35.7 c48 88 10 De 498.649 441.1 44.6 c62 97 11 De 537.618 473.1 51.0 c1 39 12 De 509.595 456.4 39.9 c47 9 13 Jan 498.926 444.1 41.7 -14 49 15 Source: Central Bank of Russia (CBR)

interventions amid sharply depreciating ruble. According to the latest CBR data the Fx component of the reserves declined by $26bn m/m in October.

Previously Standard Bank's Tim Ash estimated that the CBR has lost a total of about $100bn this year through intervention on the currency market and lost value of its gold reserves.

Over the weekend of November 8, the CBR acknowledged panic in the population over plummeting ruble exchange rate and abandoned the trading corridor, effectively free floating the currency. The central bank blamed speculative attacks for overselling the ruble and pledged to intervene on an ad hoc basis to preserve financial stability.

CBR buying Russian gold The Central Bank of Russia (CBR) has been forced to buy up gold produced by Russian miners which can't sell if on the international markets due to sanctions as well as to boost the country's hard currency reserves.

In dollar terms, gold made up 10.5% of the country's international reserves on November 1, up from 8.4% a year earlier.

Much of Russia's gold production is bought by domestic banks and then sold on either to the CBR or on international markets. While there is no specific restriction under the sanctions regime against international banks buying Russian gold or dealing with Russian banks, this year the foreign banks have

turned down their purchases of bullion as part of a general pull back from working with Russia as international banks are afraid of being penalised if the sanctions regime is expanded.

"This is one measure that the central bank has taken to go through this difficult period for commercial banks and most importantly to boost liquidity," a source close to the situation said on the sidelines of the London Bullion Market Association annual conference in Peru, reports Reuters.

The CBR has bought nearly 115 tons of gold in the year to date, taking its total to 1,168 tons â&#x20AC;&#x201D; Russia's gold stockpile is now bigger than China's and the fifth biggest holding by a central bank.

This is against 77.5 tons the bank bought in the whole of 2013 and 75 tons in 2012, according to the World Gold Council, reports Reuters.

"Suspicious transaction" capital flight slowing, capital flight remains high With capital flight expected to hit $130bn this year â&#x20AC;&#x201C; vs $61bn in 2013, and $53.9bn in 2012 â&#x20AC;&#x201C; there was some good news in November.

The net capital outflow from Russian funds exceeded US $110bn between January and October, the Higher School of Economics estimated in a report in November. The Economic Development Ministry's forecast for 2014 capital outflow stands at

$100bn, and the central bank's at $90bn.

However, The volume of "suspicious transaction" of funds being sent overseas has slowed to $8bn in the first nine months of this year from $23bn in the same period last year, the deputy chair of the Central Bank of Russia, Dmitry Skobelkin, said in November. The figure was $39bn in 2012, it fell to $26bn in 2013.

The fall could be connected to Russian President Vladimir Putin de-offshorisation bills that have

banned Duma deputies and state officials from owning assets overseas.

Skobelkin added that the Central Bank's measures have reduced suspicious transactions to sending funds abroad via so-called "Belorussian-Kazakh" schemes to almost nothing.

The highest capital outflow in postSoviet Russia was in 2008 when $133.6bn flowed out of the country amid a global financial crisis and plunging oil prices.

BUDGET WRAP

Russia's federal budget for 2015-2017 approved Russia's State Duma approved the federal budget for 2015-2017 in November, which takes into account joining of Crimea, an oil taxation reform, and western sanctions. However, the government has already said that if oil and the ruble continue to decline the spending targets could be changed.

In 2015, budget revenue is calculated at RUB15.1 trillion ($326bn) and spending at RUB15.5 trillion.

In 2016, revenue will amount to RUB15.8 trillion and spending to RUB16.3 trillion.

In 2017, revenue will amount to RUB16.55 trillion and spending to RUB17.1 trillion.

Budget deficit will amount to 0.6% of gross domestic product (GDP) within the three years.

GDP is expected at RUB77.50 trillion in 2015, RUB83.21 trillion in 2016, and RUB90.06 trillion in 2017.

Inflation will amount to 5.5% in 2015, 4.5% in 2016, and 4.0% in 2017.

Russia will borrow RUB1.28 trillion on domestic and foreign borrowing markets in 2015, RUB1.09 trillion in 2016, and RUB1.23 trillion in 2017.

Spending cuts to follow oil price fall, but not to social spending

Russia will adjust its spending if necessary after the recent heavy fall in oil prices, but never at the expense of social cuts, Russian President Vladimir Putin told a news conference on results of the G20 summit.

He said the average annual oil price would stay at the $95 currently assumed for the state budget in 2014, but conceded the current estimates no longer look realistic.

"Let’s wait and see what happens next year,” Putin said. “If the oil prices fall, we are going to adjust our spending but that will not influence our social obligations,” Putin stressed.

To become law, the budget must be further approved by the Federation Council, the parliament's upper house, before being signed by the president.

Budget running surplus of 1.9% of GDP through October Russia was running federal budget surplus of RUB1.13 tln or 1.9% of GDP in 10M14 versus RUB1.11 tln or 2.1% of GDP in 9M14, according to Deputy Finance Minister Tatyana Nesterenko.

Last year the federal budget surplus reached RUB609bn or 1.1% of GDP in the same period.

Nesterenko also said that yearly budget revenues through the month of October were at RUB11.9 tln or 83.5% of the full-year target (i.e., on pace to hit the target).

Budget expenditures were at RUB10.8 tln or 77.1% of the full-year target (i.e., 6% below where they were planned to be).

Oil and gas revenues were up to RUB6.1 tln or 81.7% of the full-year plan (slightly behind schedule), while non-oil and gas revenues were at RUB5.8 tln or 85.5% of the full-year plan. Oil and gas revenues accounted for 51.4% of total revenues in 10M14.

The weakening ruble affects revenues and analysts calculate that each $1 drop in the price of Brent leads to a $1.9bn drop in federal budget revenues.

However, each 1% drop in the ruble exchange rate adds roughly $2bn to revenues. Thus, the weak ruble mostly offsets the effect of cheaper oil on revenues as both oil and the ruble have fallen by about 30% this year – if anything the ruble is falling faster than the oil prices which generates extra money for the budget.

MACRO WRAP Russia's nominal GDP grows 0.7% year-on-year in 3Q14, but zero when adjusted GDP grew 0.7% year-on-year in 3Q14, according to initial estimates, and 0.8% in 9m14.

Although detailed information on the individual GDP components is not currently available, the picture seems to be as follows. On the supply side, deceleration in retail sales growth and a drop in construction were offset by expansion of agriculture and manufacturing.

Rosstat's data coincided with the calculations of the Economic Development Ministry, which estimated GDP growth in Q3 at 0.7%.

Seasonally adjusted GDP growth in Q3, as in Q2, was nil. Seasonally adjusted GDP contracted 0.5% in Q1.

Import substitution and agriculture were the main drivers of economic activity.

Russia's capital investments fall 2.9% on year in October Russia's investment crisis continues with capital investments falling 2.9% on the year and grew 19.8% on the month to RUB1.446 trillion rubles in October, according to Rosstat.

In January-October, capital investments decreased 2.5% on the year. The Economic Development Ministry expects capital investments to fall 2.4% in 2014.

Without investment Russia's economy is not expected to grow, but he lack of investment testifies to the lack of confidence amongst Russia's domestic businessmen.

Russia's industrial output surprises with October surge Russiaâ&#x20AC;&#x2122;s industrial output in October posted growth of 2.9% y/y, according to RosStat, the fastest y/y increase since December 2012. The result took analysts by surprise: the Reuters consensus forecast was for industry to gain only 1.5% y/y.

October was the second month in a row that output grew unexpectedly, having posted 2.8% y/y in September, after 0% in August on the year. The result took Russia's overall industrial growth in 2014 to 1.7% on the year.

September's surprising growth was especially strong in agriculture: boosted by calendar effects, a good harvest, as well as a Russian ban on food imports from the West, especially meat and cheese. As a result, meat production was up 15%, poultry production up 10% and cheese up 18%. Russia's largest meat producer, Cherkizovo, saw profits surge eightfold on the year in the third quarter to hit $113mn, in results published on November 19.

Production in some sectors spiked thanks to the start of construction of Russia's enormous 'Power of Siberia' gas pipeline to China, which saw output of steel pipes grow by 30%, and of gas turbines by 91%. A cold October also helped, with power and heat generation up 2.8%, and resumption of supply of helicopter motors from Ukraine saw Russia's output of helicopters renewed.

Russia's annual inflation moves close to 9% Inflation came in at 0.3% between November 18 and 24, taking the y-o-y figure close to 9%. YTD inflation now stands at 8.2%, but as the month closed analysts and the CBR said inflation could easily surpass the 10% mark by year end as well as in the first quarter of 2015.

Before the rubble's meltdown in the last days of November the official central bank forecast for inflation in 2014 was 8.2%-8.4%, up from 7.5% at the start of the year.

Although inflation in the meat segment slowed (pork prices, for instance, even fell 0.1% w-o-w), fruit and vegetable prices continued to climb (up 2.5% for the segment as a whole) due to the weak ruble. Surprisingly, cereal grain prices moved up strongly despite the excellent harvest (buckwheat prices rose 16.3% w-o-w and are up 47.7% YTD), which could be attributable to some supply disruption and be temporary.

Generally speaking, inflation continues to accelerate, indicating that inflation expectations remain high and could remain high for a prolonged period â&#x20AC;&#x201C; even after the effect of the weaker currency fades away.

CPI Decinflation, 08 y/y TOTAL 13.3% Food 16.5% Non8.0% food Services 15.9% Source: RosStat

Dec09

Dec10

Dec11

Dec12

Dec13

Jan14

Oct-14

8.8% 6.1% 9.7%

8.8% 12.9% 5.0%

6.1% 3.9% 6.7%

6.6% 7.5% 5.2%

6.5% 7.3% 4.5%

6.1% 6.5% 6.5%

8.3% 11.5% 5.7%

11.6%

8.1%

8.7%

7.3%

8.0%

7.8%

7.6%

Russia losing $140bn a year from crisis The Russian economy is losing $40bn in a year due the western sanctions and another $90-$100bn because of a 30percent drop in oil prices, Russian Finance Minister Anton Siluanov said at the end of October.

“We are losing around $40bn in a year because of sanctions and another $90 to $100bn because of a 30-percent drop in oil prices,” Siluanov said during a forum in Moscow.

Russia’s corporate profit growth drops by 9% y/y in Jan-Sep Local enterprises (excluding banks, insurance companies, agricultural and entities that receive financing from the budget) posted net profit of RUB4.8tn ($101bn) in January-September, data by RosStat shows. In JanuarySeptember, the share of unprofitable companies reached 30% of the total.

This made a sharp decline of 9% y/y, abruptly stopping the recovery of corporate profit growth in Q2 and Q3 (jumping 16% y/y in H1 and slowing to 5.2% y/y growth as of end of August).

Extraction that reported the highest growth in profit showed 40% share of unprofitable companies, pointing to high concentration in the sector. Share of unprofitable companies was 40% in manufacturing, 20% in trade, 38% in transport and communication.

In 2013, 43,100 enterprises earned profits worth RUB 8.43tn; 15,800 entities suffered losses, which amounted to RUB 1.9tn. The share of profitable entities declined by 0.9ppt y/y to 73.2% in 2013.

Russian October retail trade up 1.7% y/y, wages stagnate Rosstat released October macro statistics that suggest little change in consumption growth and an investment rate decline vs. the previous month.

Retail trade growth was 1.7% y/y (1.2% y/y higher than consensus) and generally met our above-consensus expectations. Having said that, we still

expect deceleration once instability on the financial market has ended and when higher-than-expected inflation starts to reduce purchasing power.

Stagnating real wage growth (only 0.3% y/y in Oct) and the increasing unemployment rate from 4.9% to 5.1% support our take. At the same time, the investment trend fails to show any improvement, being down 2.9% y/y in Oct after a 2.8% y/y drop in Sept despite strong 2-3% y/y growth in industrial output in recent months.

Alfa Bank's Natalia Orlova said in a note; "We attribute companies' unwillingness to boost capex in Oct to the accumulation of FX deposits â&#x20AC;&#x201C; a process which is likely to have stopped following the CBR's switch it the ruble free-float. All in all, we still expect next year to rely more on investment growth, while consumption is likely to disappoint."

Russian service sector growth slows sharply in September The slowdown in growth of Russia's service sector in October contracted at the greatest pace since May this year, according to the HSBC Purchasing Managers Index (PMI).

Sanctions and a general pessimistic pall is hanging over the Russian economy, pulling the economy down in to a state of depression that threatens to turn into stagnation.

The service sector PMI of Russia's $2 trillion economy fell to 47.4 last month from 50.5 in September, where 50 represents no change.

Despite Russia's reputation as a petro economy, services is actually the largest part of the economy and accounts for about 60% of Russia's gross domestic product.

The result follows another survey of the manufacturing last month that also showed of the economy was losing steam, with demand for Russian exports falling and a weaker ruble driving firms' input prices sharply higher.

New business received by Russian companies fell for the second straight month, at the fastest rate since May of 2009. Firms reported weaker demand, including from international markets and a lack of funds at clients.

Share of food in Russian basket ticks up on high prices In 2014 expenditures for food will comprise 40% of the income instead of 36% in 2013, according to a report from VTB Capital.

In Germany, Italy and Great Britain expenditures for food amount to 12%13%, in Poland and Turkey - no more than 23%, analysts mention.

Russia's labour market still strong Russiaâ&#x20AC;&#x2122;s economy is obviously in a tight spot at the moment but the one places it still sparkles is in unemployment. Unemployment ticked up to 5.1% in October, but still remains at near record lows, which most of western Europe is struggling with double digit joblessness.

"In general, Western analysts tend to pay far too much attention to measures that donâ&#x20AC;&#x2122;t have much impact on ordinary Russian citizens while significantly under-weighting measures (like the unemployment rate) that do," says Mark Adomanis, a bne columnist. "Even with all of the problems currently besetting the economy (problems that are very real and very serious!) in the entire post-Soviet history of the country it has never been easier for a Russian to find and keep a job."

Infrastructure

Aeroflot's October international traffic slumps Aeroflot’s passenger turnover rose in October to 4.2% y-o-y groupwide in September, slightly below the market (5.1%). Although this represents a continuing slowdown (from 6.7% in September and 7.6% in August), over 10m14 turnover was up by only 5.6% y-oy, according to the Federal Aviation Agency Russian airline industry statistics.

Sberbank said in a note: Passenger turnover was strong in October for Aeroflot standalone (up 9.0%), while the carrier’s regional subsidiaries also reported a decline of a combined 9.5%. This breaks down into charter Orenair posting a 34% y-o-y dip on the back of low confidence in tourist firms given the bankruptcies of several sizable players in the summer as well as affair surrounding Far East Aurora, the restructuring of which is still ongoing, we believe.

Industry-wide, we highlight a further deterioration in Russian airlines’ turnover growth in October: just 5.1% y-o-y versus 6.7% in September and 11.3% in August.

Russia deliveries of gas to China could overtake those to Europe Deliveries of Russian gas to China could overtake those to Europe is the mooted "western route" gas pipeline is built, Gazprom CEO Alexei Miller said Sunday in Beijing said during the Asia-Pacific Economic Cooperation (APEC) summit in Beijing this weekend.

Miller said that "taking into account the increase in deliveries via 'western route,' the volume of supplied [natural gas] to China could exceed European exports in the mid-term perspective," In November China and Russia signed a memorandum of understanding (MoU) to develop the Western route to supply China with natural gas from Russia.However, Gazprom CEO Alexei Miller has also admitted that the $25bn Chinese prepayment for the Eastern route, the Power of Siberia project, was not forthcoming.

The Western route is a lot more welcomed as it would connect producing fields directly to Chinese importers, but pricing and Gazprom’s ability to contain capex for an acceptable IRR will be key to the project’s success. The lack of prepayment on the Eastern route may signify Gazprom’s demoting

its priority relative to the Western route and serve as an incentive for Gazprom to cut down on unproductive capex across the company.

United Transport and Logistics Company registered in Moscow A transport and logisitics company jointly owned by the members of Russian-lead Customs Union, the United Transport and Logistics Company (UTLC), has formally been registered and set a headquarters in Moscow.

The company is designed to coordinate transport between the members of the Customs Union, that will become the Eurasian Economic Union (EEU) as of January 1, 2015, and is supposed to help the formation of a single market amongst members.

“The company was registered with the unified state register of legal entities in Moscow on 13 November. Its authorized capital amounts to RUB39.7bn,” the enterprise said, reports BelTA. The shareholders of the company include the national rail comapenis of the three founding countries, with Russia contributing the lion's share of capital. The shareholders include: Russian Railways (contribution is RUB39.694bn, which accounts for 99.84%), Belarusian Railways and the Kazakh railway operator KTZ (RUB0.032709bn each and 0.08% respectively), reports Prime.

The board of directors will include nine executives. Kazakhstan and Belarus got one place each.

Russian Railways' 2015 investment to exceed RUB400bn Russian Railway's 2015 investment program will amount to over RUB400bn, Prime Minister Dmitry Medvedev said at government's meeting on Thursday.

“The total volume of Russian Railways' investment program for the next year is over RUB400bn.

State support accounts for half of this money," he said, cited by Prime.

The amount of subsidies to Russian Railways will stand at RUB30bn in the period. Rail cargo tariffs will be indexed by 10% in 2015, Medvedev said.

“As for the investment program, its volumes are sufficient enough RUB414bn. Most projects will be connected with the implementation of orders of the Russian president and government, the largest of which will include the development of Amur and Trans-Siberian mainlines, and also a lift of infrastructural restrictions for the whole network of railways," Transport Minister Maxim Sokolov said, cited by Prime.

“The purchase of rolling stock will also account for a large share, exceeding RUB80bn, including RUB66bn for traction rolling stocks." The rail carrier also plans to break even in 2015, Sokolov added.

Russia, China to build a $152bn high speed Moscow-Beijing railroad Russia has agreed to build a highspeed railroad linking Moscow and Beijing that will cost an estimated RUB7 trillion ($152bn), Russian Railways' First Vice President Alexander Misharin said in November.

The route is part of the wider plans to tie the economies of China and Russia more closely together and to capitalise on the fastest growing trade route on the planet at the moment.

“The total amount is about 7 trillion rubles, almost 4 trillion rubles on the Chinese side," Misharin said reports newswires.

The Russian part of the route will run through Kazakhstan may cost about RUB2.6 trillion to RUB2.8 trillion rubles, he said.

Aeroflot budget airline Pobeda launched (again) Aeroflot announced that Russia’s Federal Aviation Agency has granted Pobeda, the low-cost carrier subsidiary of Aeroflot Group, an operator’s certificate and air transportation licence. Pobeda launched ticket sales on 11 November.

This is Aeroflot's second attempt at the budget carrier. Its previous attempted earlier this year called Dobroflot, failed when international sanctions halted the airline's plane to lease European planes.

Pobeda, which means "Victory" in Russian, will fly daily from Moscow to Volgograd, Samara, Ekaterinburg, Perm, Tyumen and Belgorod. Pobeda will make its maiden flight on 1 December from terminal A of Vnukovo international airport in Moscow.

Pobeda’s lowest prices for a oneway ticket will start from RUB 999 excluding taxes and surcharges.

Tickets can be purchased from the carrier’s website, www.pobeda.aero, at the airport or via the call centre at +7-499-21523-00.

The new airline’s fleet will comprise new narrow-body Boeing 737-800 NG aircraft, which can carry up to 189 passengers. As new aircraft join the fleet, flight frequency will increase and Pobeda will launch connections to new destinations.

Russia to become global planebuilder State orders and military investment are going to be used to fulfil Russian President Vladimir Putin demand that Russia become the world third largest plane-maker by 2025.

The drive will be lead by the stateowned United Aircraft Corporation (UAC) hopes to become the world's third largest producer of military and civilian aircraft, behind global aerospace giants Boeing and Airbus, Prime Minister Dmitry Medvedev said in November.

"UAC plans to create the world's third largest aircraft manufacturing

centre in terms of production, after Boeing and Airbus, by 2025," Medvedev said at a meeting on the development of the aviation industry.

Currently over 90% of aircraft used

by Russian airlines are built in the West, leaving the industry vulnerable to potential future sanctions. Sanctions have already lead to the collapse of Aeroflot's budget carrier plans after Boeing refused to deliver planes it had ordered.

Ruble devaluation improves prospects for Russia's next generation civilian plane The devaluation of the ruble improve the prospects for the next generation Russian civilian plan, the MC-21, to get off the ground and win a share of the global airline market.

The plane is still in development and due to be launched in 2016.

Over the half the components are made in Russia. It will be sold in three different versions with various flight ranges and passenger loads. The airplane will compete against ubiquitous workhorses such as the Boeing 737 and Airbus A320.

“The market prospects of the MC21 aircraft remain very optimistic.

Interest in these aircraft is high,” Industry and Trade Minister Denis Manturov was quoted as saying by the RIA Novosti news agency.

Russian wants to be shipbuilding power Russia should become a global player in the shipbuilding business, Russian President Vladimir Putin told a meeting with Russian shipbuilders.

He called on the industry to up standards to be able to compete with the best international builders.

The state will support the industry by using part of its investment into the military plans to order new ships. The Kremlin will invest RUB20 trillion ($500 billion) in a rearmament program through 2020, and military ship orders already account for 81% of all shipbuilding, Deputy Prime Minister Dmitry Rogozin said last month.

Military shipbuilding expanded by 13.8% this year, he said, while civilian shipbuilding grew by only 6.6%.

“Russian shipbuilders need to offer real quality products that are no less inferior to those of foreign [products] in their characteristics, cost, as well as the speed in construction and repairs,” Putin said Sputnik reports.

The domestic shipbuilding has been in focus since the French reneged on a deal to delivery two €1.2bn ($1.5bn) helicopter frigates of the Mistral-class. Part of the point of the deal was as a technology transfer designed to improve Russia's ship building quality.

"The ship construction cluster in the Far East should become the largest production centre that will

launch and service various classes of ships, first of all for our domestic market," Putin said.

"The further development of shelf fields in the Far East and Arctic are in the plans of Russia's leading oil and gas companies," the Russia president added.

The one place Russia is already doing well is with nuclear icebreakers where Russia technology is already world class.

Chinese to invest $10bn in Yamal LNG plant Chinese companies may invest as much in the delayed Yamal LNG plant on Russia's west coast.

Russia already has one LNG plant on the eastern island of Sakhalin, but would like to build a second on the west coast to serve European markets. However, the Yamal plant has been long delayed by the last of financing.

At the start of November Chinese banks said they may invest over $10bn in Yamal LNG plant that will be built by independent gas producer Novatek that is owned by businessman and friend of Russian President Vladimir Putin's Gennady Timchenko. â&#x20AC;&#x153;We are talking about project financing," Timchenko said, adding that negotiations on financing will take place in Beijing.

Timchenko said one fo the options being studied include selling a 9% stake in Yamal LNG to the Chinese as part of the deal.

If built the LNG plant would have an annual capacity of 16.5mn tonnes on the base of the YuzhnoTambeiskoye field in the YamaloNenets Autonomous District.

Proved and probable reserves of the field amount to 907bn cubic meters of gas.

Arabs to invest in Moscow Central Ring Road An Arab sovereign wealth fund will invest into the construction of a new ring road around the Russian capital, according to the Russian Direct Investment Fund (RDIF). â&#x20AC;&#x153;We have agreed on a series of investments in infrastructure," RDIF Director Kirill Dmitriyev. "A new participant in investments in the Central Ring Road has appeared. This is a sovereign fund of one of the Middle East countries." Dmitriyev told told PRIME without disclosing the name of the fund.

The United Arab Emirates fund Mubadala earlier said it will participate in several Russian large infrastructure projects jointly with the RDIF, and listed the Central Ring Road as one of its options.

Russian train maker wins $2.6bn deal after foreigners drop out of tender Russian train maker Metrovagonmash won a RUB130bn rubles ($2.6bn) tender to provide 96 trains for the Moscow metro after its foreign rivals,including Siemens and Bombardier, dropped out of the bidding complaining

about problems with the tender documents.

The Metrovagonmash bid came in RUB2 under the starting price and includes provision and servicing for the trains for 30 years.

Metrovagonmash is a subsidiary of Russia's biggest rail car and equipment producer Transmashholding and has been supplying the metro with trains since it was built in the 1930s.

Metrovagonmash won a similar tender in February to supply and service 832 metro cars worth about $3bn.

Russia sets up 10 new SEZ Russia's Economic Development Ministry set up 10 new special economic zones (SEZ) as part of an on going programme to spur private investment.

The ministry also approved applications from companies in the zones worth RUB23bn, Special Economic Zones coordinating company said in a press release.

The companies plan to set up production in Lipetsk SEZ, Alabuga SEZ (Tatarstan), Titanium Valley SEZ (Sverdlovsk region) and Moglino SEZ (Pskov region).

"The biggest project in terms of investment is from LLC Lifan Automobiles Rus, the Russian plant of Chinese car manufacturer Lifan.

It plans to build the first full-cycle plant in Russia in Lipetsk SEZ. Lifan is willing to invest $300mn in the project," the release says.

LLC Heliotechnics Sirius plans to organize solar panel production at Alabuga SEZ. The company plans to invest RUB5.6bn in the project.

LLC Mir Upakovki plans to set up a food packaging and plastic auto parts production plant in Alabuga SEZ. The project costs RUB4.06bn and should pay for itself after 10 years.

LLC Russky Instrument wants to produce aluminum and steel tools for carpentry, construction, plumbing and other trades at Lipetsk SEZ. Investment will be RUB1.4bn rubles.

CJSC Basalt Materials Plant wants to set up production of basalt fiber with 5000 tonne annual capacity and an engineering centre to develop basalt technology at Titanium Valley SEZ. Investment will be around RUB1bn rubles.

ECM

Russian stocks' secret membership of Euroclear Russian stocks are now clearable by the two biggest international settlement systems, Euroclear Bank and Clearstream Banking. At the press of a button earlier this year it became possible to buy shares in Russia's blue-chip companies listed in Moscow from the comfort of a chair on a London trading desk. It is a huge change in the way that Russia's capital market operates - not that you'd know it from the low-key way the landmark innovation was introduced.

Clearstream announced July 27 that from the following week it would give foreign investors direct access to the Russian equity market. Though just two weeks prior to that, Euroclear said it was delaying its plans to offer the service.

Then on September 18, Alexey Zabotkin, an equity analyst with VTB Capital, informed his clients in an email that he had seen a document published on Euroclear's website detailing how access to Russian equities was now available.

"We believe this indicates that the depositary bank is to start settling Russian equities. However, there has been no official confirmation from Euroclear that this is the case." As the news spread and

bankers began to ask questions, Bloomberg picked up the story and reported that Euroclear confirmed it had started trading accounts for some Russian stocks. "We are waiting for a comment from Euroclear, which has not confirmed this yet, but apparently settlement started on Monday [September 15]," Zabotkin wrote somewhat bemusedly.

First step Euroclear, based in Brussels, is the largest provider of securities settlement services. It began settling Russian domestic government bonds in early 2013, and Russian corporate bonds in January this year. The change was part of the government's plan to transform Moscow into a financial hub and hook up Russia's capital markets to the global financial system.

Being able to buy and sell bonds and stocks through Euroclear makes an enormous difference - it negates the need to open an expensive brokerage account in Moscow (and so will speed the death of the already dying local investment banks), and it allows traders to react much faster to price-moving news.

The effect on the bond market was immediate. International bond traders held about 4% of outstanding Russian state bonds in

2012, the so-called OFZs. But following the link-up to the Euroclear system, their share has soared to 25% of the total outstanding cheap but highyielding OFZ's, according to the Central Bank of Russia (CBR).

The plan was always to add equities to the international system, but the government wanted to study the bond market reaction first, afraid that being able to buy and sell Russian stocks directly in London would accelerate capital flight. Equities were supposed to be included in the first half of 2015.

It seems that the cash-strapped Russian government accelerated its plans. The slowing economy and the stalled privatisation plan, launched in 2008 by then president Dmitry Medvedev, cajoled the government into making the switch almost a year early.

But of course this is not a good year to be buying Russian stocks, while many in the West don't want to be seen climbing into bed with the Russian government with the Ukrainian crisis still raging. And the Kremlin is currently embroiled in a very public spat with the leading US credit card companies VISA and MasterCard, after passing a law earlier this year that effectively expels the two unless they can find a local partner. Given all that, the last thing Euroclear and Clearstream wanted to do was to draw attention to their new Russian business.

Clearstream has been quietly handling Russian equities since

July. There was no press conference, grand announcements or party at the Moscow Exchange.

Instead, the market found out following a few terse statements made to Russian daily Kommersant. The Moscow Exchange confirmed that Clearstream made the first settlements for Russian local shares on July 7.

Euroclear remains more cautious and has said nothing publicly so far. It turns out that while accounts have been set up, full trading will not start until some more amendments to Russian legislation come into force on January 1, 2015, according to press reports.

The new laws allow depositories to vote shares they hold on trust at shareholder meetings on behalf of their beneficial owners.

Still, the entry of the globe's two leading clearance and settlement firms is a landmark event, even if it is not certain how much of a difference it will make in the short term. If equities follow the bonds' lead, then clearly the volume of Russian stock trading will increase.

But by how much remains anyone's guess. Foreign portfolio investors have always played a much bigger role in Russia's stock market than in its bond market, traditionally holding about half of all the tradable shares. Moscow Exchange said it has already seen a bump in volumes in July, but didn't say by how much. "The demand for such settlements from old and new customers of Clearstream exceeded expectations," the exchange said at the time.

Even if the volumes don't quadruple, one tangible change will be to close the spread between the locally listed shares and the depository receipts, or international proxy shares, listed in places like London.

An emerging market calling card, the best emerging market companies have used the DRs, as they are known, to allow them to tap international markets using these proxies based on their underlying locally traded shares.

Differences in the markets' mentalities and size of the respective free floats affect the prices, which are usually a bit different - up to 20% in some of the better names.

Giving international investors direct access to the local underlying shares should squeeze that spread over the DR. The system is up and running, but clearly it is not firing on all cylinders yet as the spreads remain wide: the spread on the mobile operator MTS pair (which trades in both Moscow, and London as a DR) was 16% at the end of September before the recent selloff, and for the supermarket Magnit pair it was 14%.

"The immediate impact of Euroclearability on the market might well be muted, as other events have taken centre stage and are unlikely to fade away," says VTB's Zabotkin. "That said, the improvement of accessibility to Russian equities is positive."

Russian blue chips to abandon London for Hong Kong With East-West relations at rock bottom, Russia's leading blue chip companies are toying with the idea of abandoning the London Stock Exchange as the long time preferred venue of listing their shares and moving to Hong Kong.

In the last month state-owned oil and gas giants Rosneft and Gazprom, together with privately owned oil producer Lukoil, have all said they are thinking about delisting from the LSE and floating their companies on the Hong Kong Stock Exchange instead and denominating their stocks in Asian currencies, according to comments made by Russia's Economic Development Ministry on November 8.

VTB Bank, Russiaâ&#x20AC;&#x2122;s second largest bank by assets, may quit the London Stock Exchange and is currently in talks on raising a loan through an Asian bourse, VTB CEO Andrey Kostin said on November 10.

"The largest Russian companies Gazprom, Rosneft and Lukoil - are considering the Hong Kong Stock Exchange as a suitable trading floor to list their securities denominated in Asian currencies (the yuan, the Hong Kong and the Singaporean dollar)," the ministry said in a statement.

VTBâ&#x20AC;&#x2122;s claims to the London Stock Exchange are related to the bourseâ&#x20AC;&#x2122;s enhanced requirements for the lender, which are tighter than the US sanction requirements,

the VTB head said. VTB Bank is simultaneously holding negotiations on raising a syndicated or a subordinated loan on Asian trading floors.

The banks are also talking the same game: state-owned de facto Russian development bank Vnesheconombank says it may launch an affiliate in Hong Kong next year, while retail banking behemoth Sberbank and leading commercial bank Promsvyazbank are also considering opening branches in Hong Kong, the ministry said citing its head Alexei Ulyukayev.

The comments come as Russian President Vladimir Putin was in Beijing at the Asia-Pacific Economic Cooperation (APEC) summit where he announced with his counterpart China's President Xi Jinping that the two countries would slowly abandon the dollar and use the yuan in mutual transactions, Kremlin spokesman Dmitry Peskov said Sunday.

Both powers are keen to reduce the influence of the US in the global economy the are both moving towards trading in their own currencies as part of the slow move to a multipolar world.

"Much attention has been paid to the topic of mutual payments in diverse fields ... in yuans which will help to strengthen the yuan as the region's reserve currency," Peskov said following a meeting held between Putin and Xi, as quoted by RIA Novosti.

Russia's economy minister Ulyukayev also announced this

week that Russia was looking at China as an alternative source of finances for Russian projects to replace the US and Europe.

Currently only aluminium giant RusAl is listed in Hong Kong, which IPOed in January 2010 and raised $2.24bn in a due listing that also saw its shares listed in Paris on the same day.

For their part the Chinese investors in Hong Kong would be keen to see more natural resource companies listings as their market is almost entire devoid of exposure to these commodity producers.

Russia's smartphone maker Yota Devices offer $100mn private placement Russian smartphone maker Yota Devices has started a roadshow to sell shares privately to raise US $100mn to finance investment into the development of its smartphone YotaPhone 2, which will be presented in December, as well as in the development of new devices and strengthening its position on the world market. â&#x20AC;&#x153;Yota Devices is holding talks with investors to raise money for business developmentâ&#x20AC;ŚIn order to find investors, Yota Devices has started working with UK investment company ZAI Corporate Finance and Europe's Mirabaud," according to reports.

Rostec, which holds 25% in Yota Devices, confirmed that the smartphone maker is looking for investors.

“Yota Devices as any companystartup, which wants to become a global world business, creates an international product and expands onto foreign markets; it is aimed at attracting extra investments to develop business," the spokesperson said.

Daimler’s up share in Russia's Kamaz to 15% Germany's Daimler has acquired 4% in Russian truck producer Kamaz thus driving the stake in its direct ownership to 15%, Kamaz reported.

Daimler earlier had an 11% stake in Kamaz in its direct ownership and managed a 4% stake owned by the European Bank for Reconstruction and Development (EBRD).

According to a Daimler report, a 15% stake in Kamaz was appraised at €140mln as of the end of September, with the price decreasing 9.7% since January.

EBRD exits Kamaz EBRD sells its 4% stake to Daimler.

The price of the deal has not been disclosed, but EBRD reportedly executed a put option contracted in 2010 at approximately $100m, which is in line with the price it paid for the stake in 2010.

Daimler increases stake in Kamaz from 11% to 15%. After acquiring EBRD’s stake, Daimler now owns 15% of Kamaz, while the staterun Rostec remains the controlling shareholder. Daimler’s increased stake will not guarantee it another

seat in Kamaz’s 11-seat BoD, where it currently has one representative.

Deal does not change investment case for Kamaz. Although the rumored price of the deal is well above the current market price of Kamaz shares, it does not reflect the current fundamentals, as it reflects the previously agreed contract rather than the current value of the company. The news is positive for the stock, but it does not change the investment case for Kamaz. We have a Hold recommendation for the stock.

RTS at five year low, S&P500 at all time high Russian stocks are at five-year low, while the US S&P500 reached an all-time high as US dollar strengthens to 2010 highs.

Russian financial markets remain under pressure due to the ruble weakening to record lows. The dollar-denominated RTS index closed down at a five-year low at the end of November, driven by ruble weakness.

In addition to a wave of selling of ruble-denominated debt instruments in expectation of further ruble weakness and another rate hike, there is more evidence that individuals are frantically buying foreign currency.

If true, this would make it increasingly difficult for the Central Bank to fend off attacks on the ruble. Analysts believe the CBR could make an extraordinary intervention any day now but there

was no sign of them as the ruble continued to fall.

Tim Ash of Standard bank said in a note that the CBR is defending its currency reserves like "troll on a bridge."

Hopes for Santa rally may be dashed this year The chances of late-year "Santa rally" faded to nothing at the end of November. The Russian equity markets remain extremely volatile due to uncertainty on the oil price.

Trading on the Russian market became extremely thin as investors hung back for some clarity to return to the market.

"A potential late-year rally may be an especially difficult play this year for two reasons. First, Russia has been a major laggard this year, and investors may continue to shun Russian equities through the end of the year in order to report more winners for 2014 in their portfolios at the beginning of 2015.

Second, the remainder of the year could provide confirmation of an early recession in Russia, giving more firepower to the pessimists," says Sberbank in a note.

Moscow Exchange â&#x20AC;&#x201C; Thriving on Adversity Moscow Exchange has been a star performer on the Russian exchanges and emerging a new darling for foreign portfolio investors.

The exchange turned in another quarter of record earnings that

were well ahead of forecasts, as its diverse business model works nicely in times when volatility, rates and risk are all high.

"Moscow Exchange is trading at P/E of 9.6 for 2014E and 8.3 for 2015E, and it remains our top pick in the financial sector in this challenging environment," Sberbank said in a note.

Net income for 3Q14 rose 17% Qo-Q to R4.1bn, with 9m14 earnings of R10.8bn, up 23% year-on-year, and the EBITDA margin at 71%.

Excellent cost control was the main positive surprise, as opex fell 6% Q-o-Q and 18% year-on-year in 3Q14, bringing cumulative growth to just 3% year-on-year in 9m14.

The management cut its 2014 cost growth guidance to 3-4%, which still looks conservative to us. We now expect 2% this year and 6% next.

Russia ETF inflows strong in November in spite of turmoil Despite the turmoil and political instability in the east inflows into everyone Russian ETFs has been strong in November. The deal is that Russian shares are so cheap that investors have been tempted to take a punt.

Net inflows into the 23 Russian tracking ETFs with net inflows past the $1bn mark.

The inflows have also come in spite of the rubleâ&#x20AC;&#x2122;s 25% decline against the US dollar this year.

DCM

S&P threatens Russia with junk rating if it raids National Welfare Fund Russia's sovereign credit rating risks being downgraded to "junk"

by Standard & Poor's if the government carries through a proposal to raid its so-called rainy day wealth fund, the ratings agency said on November 26.

The cash-strapped Russian government is hunting for ways to finance budget spending and money to prop up indebted stateowned companies without raising taxes. It has proposed to release money from the National Welfare Fund, a reserve of money siphoned off in previous years from oil taxes and intended to support future pension payments.

S&P warned that the government has only "limited room" for using money from the fund to cover budget spending without getting a ratings downgrade.

Russia's rating was marked up to "investment" grade by the agency in 2003, but with public finances deteriorating through a combination of poor economic growth and sanctions, its financial standing has weakened.

“If money is spent to support the economy, to support specific companies -- that would lead to a

decline of those fiscal buffers beyond what we currently expect,” S&P analyst Christian Esters said in an interview in Moscow, reported Bloomberg. The rainy-day funds “are strong mitigating factors for the stresses Russia has been experiencing".

Currently the fund, one of several, contains $82bn but has already fallen 13% from its peak in 2011.

The state has proposed releasing RUB100bn ($16bn) from the fund to support state-owned companies that have a heavy external debt repayment schedule to the end of the year, but have been cut off from international capital markets by the west's sanctions regime.

S&P said that if the government sticks to this amount then that “alone would probably not breach a threshold for us", but that a downgrade is possible if such a decrease were compounded by additional sanctions and a prolonged decline in oil prices.

Some analysts were surprised by the S&P's tough talk, which appeared to contrast with its own note that said Russia is not in immediate danger of a downgrade.

"Surprisingly harsh statement I thought from S&P - I have argued that Russia is a long way from seeing its IG status removed, but maybe the rating agencies have a lower threshold than I imagined,"

said Tim Ash, head of emerging markets research at Standard Bank, in a note to clients.

Several state-owned companies such as Rosneft and VTB bank have already been to the government with their hands out for money, but so far the finance ministry has rebuffed their pleas for bailouts.

S&P last month kept Russia’s sovereign rating at BBB-, an investment grade that is only one notch above "junk" status. Junk status precludes some investors, such as international pension funds, from taking buying Russian assets. A downgrade would add to Russia's funding woes and reduce the size of the already limited pool of international money it can tap.

S&P's next review is slated for April.

However, sentiment is definitely flowing against Russia. Both its debt and equities are trading well below "fair value" estimates based purely on macroeconomics and companies' earnings performance.

"Some would argue that the market is already trading Russian sovereign as "junk" with Russia 5Y CDS at 300bps, that is 130bps wide of Turkey now which S&P only rates BB+, with a negative outlook, and also 30bps wide of Croatia which S&P also rates as junk these days, at BB. Meanwhile - and some would say quite remarkably, Russia trades wide even of Egypt, by 15bps, which is rated B- by S&P," says Ash.

Apart from the lack of cash, Russia's economic fundamentals are strong otherwise. It is currently running a triple surplus – the federal budget, current account and trade balance are all positive – which remains unusual on the planet. Also the government's net external debt is very low by international standards at about 35% of GDP. However, a sliding ruble and tumbling oil prices have put the state's finances under a great deal of pressure. The official forecast for GDP growth this year is 0.8% but economists say it could be lower and the outlook for next year is flat growth or recession according to most experts. Russia's gross international reserves have been under pressure after the state spent some $100bn in managing the currency lower and other growth-boosting schemes. The ruble has been one of the worst performing currencies in the world this year.

Russia’s “usable” currency reserves will shrink to about four months of imports by 2017, down from eight months this year, as a result of “liquidity support” provided by the central bank to the economy, according to S&P, reports Bloomberg. On a gross basis Russia has 1.7 years of import cover, where three months is the recommended minimum by economists. Usable reserves are defined as total holdings adjusted for investments made by the central bank on behalf of the government.

As Russian borrowers struggle to access foreign capital markets amid US and European sanctions over Ukraine, the government approved channeling more than RUB400bn ($8.6bn) from the Welfare Fund to Russian Railways and other companies including fixed-line operator OAO Rostelecom and Avtodor and the state road-building agency. The Economy Ministry has also given its preliminary approval for allocating another RUB300bn from the fund .

Russia unlikely to borrow abroad in 2015 Russia usually borrows $7bn abroad each year, more as a benchmarking exercise than anything else, as all its budget financing needs are covered with domestic borrowing.

However, in 2015 the Minister of Finance Anton Siluanov told the Federation Council that foreign borrowing was "highly unlikely."

What's the point in setting a benchmark if no one else can borrow either. â&#x20AC;&#x153;We will almost surely not borrow any funds from external markets, though we have such a right. We will have to find sources inside our country," Siluanov said.

According to a 2015-2017 federal budget draft, external borrowings are planned at $7bn per year, while net borrowings may stand at $3.696bn in 2015, $5.686bn in 2016, and $3.720bn in 2017.

Trickle of Russian Eurobond issues Russia's Alfa-Bank has sold a US $250mn 10-year subordinated Eurobonds with a call option after five and three years at 9.5%, in November. Investors from the U.S. and the U.K. acquired 77% of Russian gas giant Gazprom's U.S. $700 million 1-year Eurobond with the yield rate standing at 4.3% shortly after.

The high yields, limited demand and dearth of RUssian issues is indicative of how tough market conditions are for Russian issuers who were only 18 months ago enjoying a bond bonaza. â&#x20AC;&#x153;This is the first subordinated Eurobond deal on the market. At the same time this is the longest deal among Russian issuers since the beginning of this summer," Alfa bank said in a statement. In June, the bank sold 350mn euro 3-year Eurobonds at 5.5%.

Where Russian issuers were paying on the order of 4% in 2012, now the non-state issuers are being asked to pay up to 20% if they want to place a bond in the market. Renaissance Credits has the highest Eurobond yield among retail banks - 26.7% on dollardenominated securities maturing in 2018. Russian Standard Eurobond yield (maturing in 2016) rose to 24.3%. In March yield in both banks was to 16%-17%. Gazprom plans to raise 90 billion rubles of foreign debt in 2014. In February, the company sold 750 million euro 7-year Eurobonds at 3.6%.

In a similar deal Bank Otkritie Financial Corporation raised a syndicated loan from foreign banks worth $120m at a low rate of 2.5%. however the rate was low as the money is to be lent exclusively to development of gold mines. The lead arrangers are Raiffeisen bank International AG, Commerzbank, Citi, ING, etc. The loan worth USD 120 million will mature in one year was raised under a three-month LIBOR (0.23% annual as of November 11) +2.5% annual VTB Capital warns of ruble bonds defaults in 2015 The investment arm of Russia's second-largest bank VTB, VTB Capital, does not exclude a wave of defaults on ruble bonds in 2015, the bank's officer Alexei Konochkin said at the financial forum of business daily Vedomosti. VTB Capital already sees some warning sings on the market and currently high interest rates point to a possible wave of defaults on corporate ruble bonds. Konochkin reminded that in 2008-2009 there were dozens of defaults on ruble bonds, with many issues having covenants restructured and renegotiated. Most recently in the fall of 2014 some corporate issuers, such as Utair air carrier and Russian Railways subsidiary, could not pay out on their ruble bonds.

Volume of bond issues on Russian market down by 40% this year The volume of bonds Russian banks and companies have issued this year is down by 40% over 10

month year-on-year according to C-bonds, while the payout on exercised call options is up by 15% over the same period.

The total amounted of bonds issued was RUB800.8bn in 10 months instead of RUB1.36 trillion for the same period of 2013.

Volume of call-options to be executed by the issuers have increased almost twofold as compared with a 10-month period of 2013 - to RUB420.8bn, while volume of redemptions lowered by 9% to RUB525.8bn.

In total, volume of redemptions and call-options exceeds volume of the issue by 15%, in 2013 the difference amounted to 42% in favor of the bond issue.

Mobile operator Vimplecom borrows $1bn from Chinese banks Apart from the government the only sources of finance available to Russian corporates these days is Asia and this is only available to the very biggest.

Amsterdam-based VimpelCom Ltd., the sole owner of major Russian mobile operator VimpelCom, signed agreements to borrow $1bn from China Development Bank and the Bank of China for eight years, VimpelCom Ltd. said in a statement.

The loan is unsecured and guaranteed by VimpelCom Amsterdam B.V. VimpelCom Ltd. took out a $500mn loan from China Development Bank in

December 2012. The loan will be used to fund capital expenditures for various operating companies.

Sberbank launches yuan letters of credit Sberbank became the first Russian bank to offer yuan-denominated letters of credit in November.

One complex transaction for a major corporate client calling for yuan letters of credit has already been completed the bank said.

"An important aspect of these transactions is that post-import financing was attracted in CNY, which is especially relevant given the existing market environment.

The completion of these transactions in Chinese yuan allowed the client to not only meet its current financing and settlement

needs, but also to continue actively cooperating with Chinese suppliers," Sberbank said in a statement.

“We are witnessing a positive trend of strengthening partnerships with Chinese banks, especially after the signing of a number of agreements at the APEC summit in Beijing this November. Currently we are seeing growth in Russian companies’ interest in settlements using national currencies, in particular Chinese yuan, and of course, Russian rubles,” commented Andrei Ivanov, Head of Sberbank CIB’s Trade Finance and Correspondence Relations Division. “Sberbank’s trade finance instruments allow clients to complete settlements and receive financing in the currencies that best suit them."

Sectors

AvtoVaz plans to increase output by 20% in 2015 AvtoVaz plans to increase its total vehicle output by 20% in 2015, the CEO of the company Bo Andersson told the press. Andersson acknowledged that 2014 has been a difficult year with sales diving by 18% and output declining by 0.083mn units. However, output in 2015 is still expected to surge by 20%, on the most part due to

assembling Renault and Datsun models, and launching AutoVaz's own LADA Vesta model. In 2014 AvtoVaz plans an output of 0.6mn vehicles.

After sliding since February AvtoVAZ's car sales in Russia increased 1% YoY to 37,788 units in October, the company has reported. That's against a poor performance of the sector. Russia's sales of cars and light commercial

vehicles (LCVs) fell 9.9% on the year to 211,400 units in October and dropped 12.7% on the year to 1.99 million units in JanuaryOctober, the Association of European Businesses (AEB) said.

Company’s net debt as of end of H1 amounted to RUB50.6bn. The company has RUB4bn of debt with breached covenants, and RUB34.3bn worth of unused credit lines with Russia’s largest banks.

"We believe that this latest improvement is largely due to the recently launched 'cashforclunkers' programme, as AvtoVAZ is the key beneficiary of this programme. This improvement in sales supports our positive view on the stock, which is based primarily on our expectations of a financial turnaround at AvtoVAZ. We also believe that the Russian car market remained in the negative territory in October, although the rate of decline likely moderated further," VTB said in a note.

At the same time Russian car imports fell 20% to 537,900 vehicles in January-September and were worth U.S. $10.46 billion, a 18% decrease, the Federal Customs Service said.

AvtoVaz reported a net loss under IFRS of RUB4.88bn ($121mn) in H1/14, almost doubling y/y vs. net loss of RUB2.6bn for the same period of 2013. The company’s revenues increased by 9% y/y to $90.4bn. In H1, the company’s output of Lada vehicles declined by 15% to 0.192mn. The growth in revenues is to be attributed to assembly under the contract with AvtoVaz shareholder RenaultNissan.

At the same time, VTB Capital estimated AvtoVaz EBITDA at RUB2.3bn in H1 vs. negative EBITDA of RUB 203mn a year ago.

This is attributed to the assembly contracts, and efficiency measures (the company has underwent a lay-off program in the beginning of 2014).

Russian government targets more foreign companies working in Russia in tit for tat reprisals Russian branches of McDonalds are been closed but the Russian government has been widening the circle of foreign companies coming in for criticism and inspections as the tit-for-tat reprisals continue.

The Russian subsdiary of French food-market Groupe Danone demanded an apology from the country's Agriculture Minister after he slammed the company for the use of "substandard dairy products" at the end of November.

Agricultural minister Nikolai Fyodorov accused the multinational Danone, which runs Unimilk, and PepsiCo, the owner of WimmBill-Dann dairy line, of diluting their dairy products with cheap additives, during a trip to Omsk.

"These products contain a maximum of 20% real milk; the rest is coconut, palm oil and other additives processed into a dairy mixture," Fyodorov was quoted as saying by Tass.

He said Russian regional authorities should "prevent them [Danone and PepsiCo] from pumping out funds from the regions and skimming the 'cream' off the cheap raw product that our poor peasants produce," TASS reported.

Danone has been working in Russia for two decades and has 20 factories in the country making it one of the biggest investors into the country. It has done a lot of build up the food processing industry and in particular invested into milk production, where Russia has a deficit in raw milk production.

Danone was not amused and called Fyodorov's statement "slander, which damages our reputation in Russia, as well as in the whole world," on its website, demanding a public apology.

Russians Set to Double Spending at Foreign Online Retailers Wishes in, business continues to flourish. The volume of goods purchased by Russian consumers in foreign online stores is set to double this year to $5.1bn, relying on Russian Post to delivery the goods. Even including the delivery costs, purchases in offshore shops are still significantly cheaper than the same goods cost at home despite the fall of the ruble and high inflation, RBC reports.

China has already overtaken Europe as the main source of ecommerce shopping this June with

Chinese retail giant Alibaba's AliExpress accounting for 35% of cross-border online trade. US website eBay took second place with 30% of the market, and US retailer Amazon was in third place with 7.5%. AliExpress has a slightly lower spend of $20, but is especially popular in the regions according to INFOline-analitika, reports RBC. Just under half (48%) of all spending is on clothes, followed by accessories (34.6%). The average spend is RUB2,700 ($58.6) although half the shoppers donâ&#x20AC;&#x2122;t spend more than RUB1,500 ($32).

Russia's Association of Online Vendors expects the online market to grow by 20% in 2015. Russia's e-commerce market was valued at $17bn in 2013, a 30% increase over 2012, according to a March report by the Association of Online Vendors.

Residential construction continues to rise Residential construction volumes continues to rise, but prices have peaked and have been taken as a harbinger for a slowdown from here.

Between January and October 56.1mn square meters of housing, or nearly 730,000 apartments, were built in Russia, a 23.7% increase from the same period last year, reports Rosstat.

However, earlier this year the prices on the primary market fell for the first time in nearly a decade and sellers on the secondary

market are fining it increasingly difficult to find buyers, reports Vedomosti.

Analysts say that rising inflation, a fast-weakening currency and falling real wages could affect the next development cycle as investors may wait until the economic uncertainty blows over before buying a new apartment.

Separately Russia's Vnesheconombank (VEB) has a deal with China Development Bank to invest billions of dollars in Russian real estate, according to VEB head Vladimir Dmitriyev.

"China has huge experience building high-quality, cheap housing," Dmitriyev said, adding that the deal could "solve [Russia's] problem with affordable and comfortable housing."

Under the government's "Housing for Russian Families" program, Russia aims to boost its stock of affordable housing by 25m square meters by 2018, or about 500,000 typical two-room apartments.

TMT already accounts for a tenth of Russia's economic production The share of high tech, media and telecommunications accounts for 10% of Russia's GDP, according to Alexander Zharov, director of the Federal Service for Supervision of Communications, Information Technology, and Mass Media.

That's only a bit less than the oil and gas sector which account for some 15% of GDP. Zharov said these industries have a strong potential and should become a economic growth driver.

Falling ruble hits Russian tourism hard The number of Russians traveling to European countries has seen the biggest drop ever, while fall in the number of visits to popular mass market destination like Turkey, Thailand and Egypt has been least affected. Outbound Russian tourism has been badly hurt by the fall in the value of the ruble this year, down by 24% year to date.

“The situation stems from a range of factors,” he said. “Number one, Interior and Armed Forces servicemen can’t go abroad now and, number two, the ruble is sliding versus the US dollar and the euro and this sends the prices of tours up," Oleg Safonov, the acting director of the federal agency for tourism (Rostourism) said reports TASS. “This year has been a highly complicated one, as twenty tour companies stopped operations,” Safonov said. “The organization for helping Russian tourists in distress, Turpomoshch, and our federal agency helped return home about 38,000 tourists (from aboard) and prevented the use of tour vouchers by about 100,000 people.

Russian advertising market slows in 3Q14 Russian advertising market growth slowed in 3Q14 to a mere 3% year-on-year. Total ad spending in Russia increased by a mere 3% year-on-year to RUB77.5bn ($2.1bn) in 3Q14, according to statistics released by AKAR, marking a slight slowdown from the 4% year-on-year growth seen in 1H14.

TV ad spending (ex pay TV) was up 4% year-on-year to RUB33bn ($0.9bn) and radio ad revenues increased by 3% year-on-year to RUB3.9bn ($107m), while revenues from print media dropped 10% year-on-year to RUB7.0bn ($193m).

Decline in spending on online display ads surprised: the online context ad segment was the only segment that demonstrated rapid growth in 3Q14, expanding by a solid 28% year-on-year to RUB15.9bn ($437m), supported by increased broadband penetration in the regions and growing recognition of the Internet as an

effective advertising channel, particularly for small and medium businesses. However, online display ad sales declined 9% yearon-year to RUB4.9bn ($135m) in 3Q14, or to 24% of total internet advertising revenues, as the market grew more aware of the advantages of context-based advertising.

Yandex in safest position as leader in online context ad segment. The 3Q14 ad market statistics from AKAR showed a slowdown in the market, and analysts say growth could be even weaker in 4Q14 as advertisers become more conservative in their spending in response to the general macroeconomic situation, with declining real wages and stagnant consumer spending. Yandex, as the leader in the context-based advertising market, which has continued to demonstrate rapid growth, is best-positioned to withstand the macroeconomic risks. The advertising revenues of Mail.Ru and CTC Media, the other hand, may come under further pressure.

Russian Electricity consumption falls for first time in six months Russia's System Operator says that Russia's electricity consumption fell for the first time in six months, grew 1.4% YoY in October (on absolute numbers), which is a fall in real terms.

"Our analysis shows that the 1.4% YoY growth in demand was mainly a result of temperatures being 2.4 degrees cooler than a year ago, which increased the demand for power. Adjusted for the temperature factor, electricity consumption dropped 0.8%. This rather significant drop in power consumption is the first negative reading in six months (the previous

five months had all shown positive readings for power consumption), and implies a negative cross read for industrial activity in October.

On a weather adjusted basis, we note that the change in power consumption YTD is near zero," VTB said in a note.

The lower than initially planned consumption for electricity adds to the oversupply on the electricity market, in turn dampening the investment case for Russian utilities.

British retailer New Look pulls out of Russia and Ukraine British fashion retailer New Look said Tuesday that it would leave both Russia and Ukraine due to

"political uncertainty," the Financial Times reported.

"All retailers are having an extremely tough time in Russia, not just in clothing," the FT quoted CEO Anders Kristiansen as saying.

The retailer had in August put plans for expansion in Russia on ice as the standoff over Ukraine spiralled into Western sanctions and a retaliatory ban by Russia on select food imports.

New Look’s move followed other foreign retailers, who decided to close down entire chains in Russia.

In late September, Empik Media & Fashion said it would close its Esprit and OVS stores. In October, Finnish department store Stockmann announced plans to close 20 of its clothing stores in Russia.

Luxury retail markets to fall 20% this year The value of the luxury retail market in Russia will fall by an estimated 18% this year to a total value of worth €4.6bn, according to consultancy Bain & Co. Luxury goods are all imported and so being hammered by the drop in the ruble value against the dollar, down by at least 30% at the end of November.

Luxury brands are usually less affected by economic crises as the rich are still rich, but this year retailers report they can see an impact on sales.

Gazprom’s output down by a quarter in October, production outlook is bleak Gazprom appears to be moving inexorably into an unprecedented production trough. Although the company’s output was up 20% month-on-month in October on seasonal factors, the score of 34.9 bcm was down 24% y-o-y, and dragged down the Russian-wide number by 15%, according to Sberbank.

Should it manage to pick up the pace to match the monthly figures seen in 2013, Gazprom’s full-year score would be a mere 434 bcm, well below its recent forecast of 460 bcm. Its 10m14 production of 347 bcm was about 11% under last year’s score, which hardly lends assurance to the company’s optimistic forecast of 5% output growth for next year.

Even resuming its modest gas exports to Ukraine (probably 4 bcm over the next few months) would not seriously improve Gazprom’s gas balance for the full year.

Gazprom’s production woes could entail total Russian production this year coming in closer to 640 bcm (down 4-5%), instead of 650 bcm as forecast by the energy minister last month.