Chairman's list 010813

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 Navalny found guilty, but Kremlin got the wrong man Russia’s privatization reversal and government fragmentation Politics – the good Duma breaks up with fewer rich deputies First 13 businessmen released under economic amnesty Finance Ministry Proposes $4Bn Pay Raise For State Officials Russia’s off-the-books salary problem not as big as in G20 Medvedev sacks government agency head and Sechin ally as feud deepens Putin appoints liberal as the new minister for the economy A1 wins a landmark victory to recover a logistics park for the Irish government Russian civil servants to be banned from signing deals with their relatives

Medvedev Extends List Of State Officials To Disclose Income, Spending Putin Signs Bank Data Law, allows checks on money flow Russia Moves Closer to Lifting Foreign Ownership Restrictions Russian prosecutors allow Left Front opposition movement to resume activity Number of political parties eligible to compete in elections up to 55 Russian copyright owners want to create list of pirate Web sites Medvedev Extends List Of State Officials To Disclose Income, Spending Politics – the bad EU Ready to Sue Russia in First WTO Dispute Cold War build up continues with Russian biggest military exercises yet Politics – the ugly ECHR rules that Khodorkovsky, Lebedev broke the law as charged, but Kremlin abused courts in trial

Russian court finds dead lawyer Magnitsky guilty of tax evasion

Foreign Language Skills Valued by Russians

Russia’s corruption ranking up, but so is citizens resolve to resist

Migration biggest threat to Russia’s national security

Yaroslavl Mayor Suspected of Extortion

Russians feel more aggressive than in the 1990s

The ex-governor of Tula gets 9.5 years jail for a $1.2m bribe

Banks and Finance

Defence Ministry corruption scandal witness jailed

Russian MinFin, CBR to try and cut lending rates

Polls, mood, sociology

Green light for financial megaregulator in Russia

Number of Russians Willing to Protest Decreasing

Russian LTRO, Kremlin attempting to push down the cost of borrowing

Russian Attitudes Toward Emigration Softened, actual number very low

Credit card fraud in Russia 10times less than elsewhere says VISA

Housing and Utilities join inflation and corruption as top Kremlin concerns

Basel III requirements in place at the start of 2014

Patriots still top but Reformers are catching up 58% of Russians Now Say Kremlin Using Repression

Putin Officials, Judges Seen Topping Russia Corruption in Survey Vladimir Putin's approval rating is still holding steady Support for reintroduction of the death penalty growing One in two Russians want to work for the state

Russia ranks 24th in global insurance market in 2012 Credit card fraud in Russia 10times less than elsewhere says VISA Basel III requirements in place at the start of 2014 Russia ranks 24th in global insurance market in 2012 Russia's SME Bank to occupy 10– 15% of strategic market segments Russian mortgage lending will rise 20% in 2013 Improving financial literacy is a state priority

Russia’s CBR posts preliminary bank data for June, some improvement

Russia has mixed headline PMIs: manufacturing slightly up; services sharply down

Russia’s Central Bank to Limit Shady Transactions

Consumer confidence grows for second consecutive quarter

Russia’s Ministry Economy plans to ease SMEs' access to loans, grant tax breaks

Russia CPI - June; long-awaited disinflation kicked off

Russian Post to become a bank

Russia Finance Minister Sees Federal Budget $30Bn Short

Troika Dialog ex-owners to get extra $400m from Sberbank

Russia June upturn in unemployment intensified

Russian banks move to plastic cards with chips

Investments has sharpest drop since early 2010

Russians learning to manage their personal loans the hard way

IP bounces back from May decline, but still no growth in June

Russian credit institutions earned RUB491.4 billion in profit in 1Q13, down 3.1% yoy

Annual real retail sales growth bounced back, mainly on non-food

Putin extends list of cases where CBR entitled to appoint external managers Capital adequacy ratio of 51 banks approached the statutory minimum at the end of 5M13 Economics Russia overtakes Germany to become 5th largest economy in the world Russia’s GDP in January-June 1.7%, its official: stagnation Russia has strong 1H13, budget surplus reached 1% of GDP

Russia’s consolidated budget tax collection declines 0.5% y/y in 1H13 Russia sees export earnings and current account surplus shrink in the first half of this year Net capital outflows stabilize at around 2.5% of GDP, CBR hikes FY estimate to $50bn Russia’s REER depreciated 3.3% year-on-year in June – the sharpest move over the last 12 months Medvedev Pledges $9bn for Rural Development Ministries Delay $2.6Bn of Defence Spending MinFin to restart FX purchases

Russia's GIR down by $4.7bn to $513.7bn in June Infrastructure Putin lists flagship infrastructure projects Rosneft Ready to Invest $30bn in Russian Far East Russian Railways invests $18.7bn in Far East Russian Railways on record spending spree Moscow Region light metro to get RUB240bn of investment Railway prices ”mad”, Russian Railways inefficient Moscow and St. Petersburg account for half foreign investments, but the regions on the rise again Russian govt may give RUB12bn for SEZ infrastructure development in 2014 ECM

RDIF and Deutsche Bank may buy Rostelecom shares worth $250m Cukurova may buy Turkcell shares from Russia’s Altimo for $1.6 bln DCM Express lender Russky Standard launches new-style sub debt A second reading the draft law on securitisation of homogeneous assets due in the Duma’s autumn session Russian banks place record volumes of corporate debt Sectors Daimler is looking to gain a controlling stake in KAMAZ, but is more likely to actually increase to 42%-45% Domestic Russian drugs company gets first global license Panasonic Buys Stake in Eastern European Appliance Manufacturer Retail Real Estate Investments Set for Record High

Russian stocks become most attractive EM equities on valuation basis , Citigroup analysts say

Russia announces new subsidies to stimulate car sales

Lukoil’s owner Alekperov continues to buy LUKoil shares

Furniture Company is Russia’s most profitable franchise

Russia’s AvtoVAZ CEO significantly reduces his stake in company

Russia will be Europe's largest car market by 2016 – earlier than anticipated

Moscow Exchange Derivatives Market Grows By 8% In H1 2013

Russia is on course for a good harvest

Investments in the Russian commercial real estate up by third to $3.7 billion in 1H13 Real estate sector companies recovering nicely US Hotels Investing Heavily in Russia Russia was second largest arms exporter in 2007-2011 France’s Danone to invest RUB3bn in Russian dairy plant upgrade Russia falls to 62nd place in Global Innovation Index 2013 Burger King to expand chain in Russia to 500 restaurants by ‘16 Russia’s UAC to boost aircraft production by 50% in 2014 Rosneft could buy Alliance Oil’s oil assets

Top Story Navalny found guilty, but Kremlin got the wrong man A court in the regional city of Kirov found anti-corruption blogger Alexei Navalny guilty of corruption on the morning of July 18 in a closely watched case. Navalny has been sentenced to five years in jail for theft and embezzlement, with Judge Sergei Blinov rulng the anticorruption campaigner had defrauded a timber firm.

The stock market immediately tanked on the news, wiping some $8bn off the market cap.

Bne sources say that liberal businessmen were extremely disappointed wit the result as it shows the hope for change is much reduced. Analysts say the biggest economic impact will be that the verdict will continue to drive capital flight, which the CBR now things will top $50bn this, from the $10bn it was predicting in January.

Navalny kissed his wife goodbye in the courtroom

Bizarrely the judged ordered Navalny released the next day for the 10 days it takes to file an appeal. This means that he has time to run in the Moscow mayor elections.

This decision supports the speculation that the Kremlin is increasingly divided on how to deal with the opposition. As the incumbent Sobyanin has at least 57% of the vote against Navalny’s 6%-8%, according to the latest polls, some in the establishment need Navalny to legitimise the vote.

Others (primarily Alexander Bastrykin the head of the Investigations Committee that is leading the anti-corruption drive) simply want to bang up anyone that stands against the powers that be.

Indeed, the Navalny case suggest, along with other evidence, that Bastrykin is running increasingly out of control and attacking not just those stealing from the state, but any liberal as well. It was a

Bastrykin investigation that caused liberal economist Sergei Guriev to flee the country last month as well.

Many argue that it would have been better to let Navalny stand and lose badly in the mayorial election as that would do him more political damage than any smear campaign.

Indeed, oligarch Mikhail Prokhorov decided not stand after flirting with the idea; and Prokhorov was running an easy second to Sobyanin, albeit with only 12%.

If the Kremlin sends Navalny off to a labour camp in September – as seems increasingly likely – it runs the danger of falling into the same trap that Ukraine did with the jailing of Tymoshenko. It will make Navalny a martyr and force Europe and America to link deals to his release. But once in jail the Kremlin will not be able to let him out again without losing face.

The irony of this whole story is that while Navalny is an international celebrity he increasingly a nonentity at home. The verdict against him can only work to Navalny’s advantage. The only plus for the Kremlin is that he will still be in jail during the 2018 presidential elections.

The verdict in theory bans Navalny from public office for life. According to the law on the main guarantees of suffrage in Russia, those Russian citizens who “are imprisoned some time ago for grave and heinous crimes, except for the cases, when under a new criminal law these offences are not found grave or

heinous crimes,” do not have the right to run in elections.

Navalny has already declared his intention to run for president in the next election in 2018.

If the point of the trial was to neuter a political rival, then Navalny is not that man.

While he serves a useful job as an anti-corruption blogger – three senior Duma deputies have been forced to quit this year on the basis of evidence of dodgy dealing provided by Navalny – he remains a political non-entity amongst the Russian voting population.

Journalist Irina Galushko tweeted from Kirov just before the trial opened a comment by a local passerby: “#Navalny's trial again? so f***** sick of it, when will they finally put him away!” – a sentiment that sums up a widespread attitude to the case by most Russians.

Navalny is not the Nelson Mandela figure that most international press reports make him out to be.

He has not founded a party (he refused to join a political party set up by his own followers.) He has come up with no alternative programme. And he doesn’t even have grassroots support. Indeed, the entire opposition movement is losing its relevancy with the Russian people, as it has failed to offer any ideas other than “not Putin,” which is not a political platform.

The irony here is another poll found that most Russians think Navalny’s trial was politically motivated, but at the same time most Russians could give a monkey’s if he is convicted or not.

Other polls found what Russians really care about is inflation and unemployment – both scoring over 60% in another poll, whereas freedom of speech and rule of law comes way down near the bottom of the list, says Levada Centre research.

The appeal of Putin is that he offers stability and prosperity, whereas Navalny offers change and uncertainty; what most commentators miss is that Russians are making their political decisions in the context of the 1991 collapse of the Soviet Union and the chaos that followed. In this context, uncertainty is very unappealing so most prefer (and polls show increasingly reluctantly) to take the stability over more freedoms. That will change, but it is going to be a long, slow process – perhaps even a generational one.

This is not to say Navalny or his campaign is irrelevant, or that the international press should ignore the case. Navalny is important because he is the personification of the lack of rule of law, the atrophied state of civil society, an illustration of the impunity with which the elite can rob the country of its riches, and, most scary of all, the 1930-esque intolerance in the Kremlin has shown for any sort of organised opposition to its rule.

There has been a lot of wishful thinking on the part of the international press corps when it comes to covering this story.

Those that bother to mention Navalny’s extremely low and falling opinion poll ratings usually prefix this piece of information with the words “for now.” However, there is no evidence that his popularity will change and the reverse is true.

Still, other than Navalny, there is no one else in the opposition that comes anywhere close to donning the mantle of “leader” hence the furore over this case.

Russia’s privatization reversal and government fragmentation The Russian government announced in July that the program to privatize state assets has been considerably scaled back.

The federal budget can now expect a much smaller amount of privatization revenue, and the state will retain direct control of so-called strategic companies indefinitely.

However, in shock admission, Medvedev directly blamed the lobbying efforts of some ministries and other government officials for effectively killing off what was one of the government’s most important policy initiatives.

It has been clear for some time that the government is no longer a fully united team.

The government now comprises of several groups that pursue opposing agendas.

The original privatization plan was published in late 2010 as one of the responses to the economic downturn. Three extremely credible and encouraging reasons for the program were cited at the time.

One reason was to set up an extra revenue stream for the budget at a time when the outlook for oil and gas revenues was very uncertain.

The second reason was to start cutting the state’s direct role in the economy as a means of boosting entrepreneurial activity and reducing bureaucracy.

The third reason was to bring in established international companies as partners for state enterprises who might then raise their game by learning bestindustry practices.

The original plan was to raise between $10bn and $15bn annually over the next five to seven years by selling almost all of state’s equity positions.

President Vladimir Putin endorsed the original plan in one of the seven policy essays he published as part of the March 2012 election campaign. In late January last year, in an essay published in Vedomosti, Putin strongly endorsed the privatization plan and the reasons for it.

He targeted a figure of $100bn as the total that might be raised by selling almost all of the state’s equity in existing listed companies and by pushing ahead with the outright sale or partial sale of other state enterprises that might benefit from cooperation with established foreign competitors.

In that essay, however, Putin did clearly state that assets would not be sold without regard to valuation and that there would be no fire sale. He also said equity in the most important enterprises should be sold to domestic investors rather than to foreigners.

Putin therefore linked the sale of the most sensitive assets to the creation of a bigger domestic investor base, which he suggested might be achieved with the restructuring and regulation of the pensions and insurance industries, as well as persuading people to switch their savings from purely cash deposits to longer-term mutual funds.

Neither of these things has appeared. The 2010 plan has been all but abandoned and replaced with a more modest version which targets not $10-$15bn annually for the federal budget but a more modest $19bn over a four to five year period starting next year.

That leaves the budget with a revenue hole of almost $12bn for this year alone.

Of course, one important reason for scaling back the original privatization plan is because investor appetite for equities in

emerging markets has been nearly nonexistent since mid 2008.

involvement with AvtoVAZ is a good example.

Today, the value of listed companies which are controlled directly and indirectly by the state is about $320bn, or just about 45% of the total of all of the country’s listed equities.

The fact that Russia does not have a large pool of domestic investment capital is another important factor. Reversing the more than $400bn in capital that has fled Russia since 2008 — an amount equal to more than half of the stock market’s current valuation — would certainly help, as would the much-needed pension reforms.

Vested interests have also slammed the door on efforts by some foreign companies to establish closer working links via an equity partnership. Renault’s

Politics – the good Duma breaks up with fewer rich deputies The nine members of the 166-seat Federation Council who have left since President Vladimir Putin first floated the asset ban in December do not openly attribute their decision to the tighter rules.

But at least five of them figure in Forbes magazine's rating of richest Russians.

The most recent defector was Dmitry Ananiev, whose resignation was approved Wednesday, the last day of the senate's spring session.

Ananiev jointly controls Russia's second largest privately owned bank, Promsvyazbank, with his brother Alexei Ananiev. As of this year, the two men were together worth $3.4bn, according to Forbes.

Other departures from the Federation Council in 2013 include majority owner of fertilizer company Phosagro Andrei Guriev, valued at $4bn; private investor Nikolai Olshansky, worth $750,000; portfolio investor Vitaly Malkin, valued at $850,000; and construction company owner Andrei Molchanov, who has $1.65bn, by Forbes's estimates.

Federation Council Speaker Valentina Matviyenko said that the trend could continue, with two more unspecified senators -- both ranked by Forbes in its list of top 200 wealthiest Russians -- possibly quitting the house in the autumn.

The departures, however, have not been limited to senators, with businessmen lawmakers stepping down from other legislatures as well.

The State Duma, parliament's lower house, accepted the resignation of billionaire Anatoly Lomakhin in February -- the same month the new legislation was submitted for consideration, and less than six months after he took up the post.

And earlier this month Roman Abramovich, Russia's 13th richest man, worth $10.2bn according to Forbes, left his position as chairman of the legislature in the remote region of Chukotka.

First 13 businessmen released under economic amnesty The first thirteen businessmen have been set free in Russia as part of an economic amnesty for white-collar criminals that came into effect earlier this month, Eight people have left pre-trial detention centers and five have left prisons, according to business ombudsmen Boris Titov who masterminded the bill.

The amnesty, which began on July 4, is due to be implemented over the next six months and will pardon first-time offenders convicted of economic crimes, as well as those who have not yet been sentenced.

The number of those expected to be affected has been continually revised downwards.

Titov originally said the amnesty would affect 100,000 people, including 13,500 people serving prison sentences. But the list of crimes that the amnesty covers

was reduced by the State Duma.

Now “thousands� are expected to benefit.

High-profile prisoners such as former oil tycoon Mikhail Khodorkovsky and opposition leader Alexei Navalny, who was given a five year prison for embezzlement at the end of July will not be included.

The process of carrying out the amnesty is being slowed by footdragging from government agencies and the legal requirement that those who are freed must first pay financial compensation, Titov said.

Finance Ministry Proposes $4Bn Pay Raise For State Officials The Finance Ministry has written pay raises for government employees costing RUB135bn into a 2014-2016 budget.

The pay rises are part of the ongoing anti-graft measures and designed to bring public pay up to that in the private sector.

By 2018 civil service salaries will increase by 2.6 times and exceed the average national salary by 70%, First Deputy Finance Minister Tatyana Nesterenko said.

Russia’s off-the-books salary problem not as big as in G20 The problem of salaries paid via illegal procedures to avoid taxes is not as bad in Russia as in other G20 countries, the OECD said in a report.

According to the OECD, the share of those employed illegally currently stands at 12% in Russia.

In China and South Africa the rate is 30%, while in India the figure is over 80%.

However, Russian Deputy Prime Minister Olga Golodets earlier said that nearly half of the wages received by Russians are off-thebooks.

Medvedev sacks government agency head and Sechin ally as feud deepens PM Medvedev sacked a senior resources official, believed to be a close ally of Igor Sechin, the boss of state oil firm Rosneft, in a move analysts said was a sign of growing confrontation between the two men.

Medvedev is on his back foot but he has a strong following amongst the more liberal business elite.

Putin has been actively side lining the PM taking many of the key policy makers into the presidential administration as well as appointing loyalists to posts like the head of the CBR. However, Medvedev, while weakened still so some resolve to fight his corner.

It is unlikely this will escalate into a head to head confrontation between Putting and Medvedev, but it is possible.

Popov was an aide to Sechin when Sechin oversaw Russia's energy sector as deputy prime minister.

Putin appoints liberal as the new minister for the economy On 24 June, Putin appointed former CBR First Deputy Head Alexey Ulyukaev to chair the Ministry for the Economy.

The incumbent, Minister Andrey Belousov, was moved to the job of presidential aide on economic policy.

Ulyukaev is well liked by the market and a liberal. He has consistently said that structural reforms are the only way to speed up growth – and this allies himself with MinFin, which shares the same view.

A1 wins a landmark victory to recover a logistics park for the Irish government The M&A arm of the Alfa Group won a landmark victory on July 17, after a court in Kazan decided that a state-of-the-art logistics park in the autonomous republic owed $60m to its former owner thus effectively returning control of the asset to the Irish government.

It is the first time that a Russian entity has acted on the behalf of a foreign government to recover assets in Russia. A1 is the special situations vehicle of the Alfa Group (formerly known as Alfa Ekho) that specialises on recovering distressed assets.

In April this year A1 went into a joint venture with the Irish Bank Resolution Corporation (IBRC), which has been trying, so far unsuccessfully, to recover 12

assets that used to belong to Ireland's now defunct Quinn Group.

Sean Quinn, the founder of the group, defaulted on loans worth â‚Ź2.8bn from the Anglo Irish Bank, which went bust and its assets were taken over by the stateowned IBRC, which has been trying to convert them back into cash.

Russian civil servants to be banned from signing deals with their relatives Russian civil servants will be banned from signing contracts with companies run by their relatives under legal amendments to the law on corruption sent to the State Duma by a group of Russian lawmakers, Izvestia reported on Monday.

The amendments will oblige federal and municipal organizations to prohibit payments to companies whose managers or accountants are close relatives of the managers or accountants of state organizations, Izvestia writes.

The amendments define "close relatives" as parents, spouses, children, grandchildren, grandparents, sisters and brothers, as well as the sisters, brothers, parents, grandparents and children of spouses, Izvestia said.

Those caught breaking the proposed law face dismissal.

Medvedev Extends List Of State Officials To Disclose Income, Spending The Russian government is taking under its direct control the income and expenditure of the management of 29 institutions that are one way or another federally funded.

A resolution was signed by Russia's PM Medvedev at the end of July.

The list of institutions includes companies, state-run corporations, non-budgetary foundations, universities and staff of the Public Chamber.

Their senior managers already for some years have been declaring their income, as well as the income of their spouses and minor children, and now their expenditure will also be controlled.

The deputy heads of the agencies and their chief accountants from now on will also submit the relevant information to the government’s civil service and personnel department.

Amongst the companies affected are: JSC Russian Railways (RZD), three state-run corporations, six universities, three research institutes, three research centres, two research foundations, independent NGOs and other agencies.

Putin Signs Bank Data Law, allows checks on money flow

This is the first increase in taxes on the people in 13 years.

Putin has signed a law aimed at fighting illegal financial operations that gives permission to tax officials to check the bank accounts of individuals.

Obviously it is crowd pleaser as it will hurt the very obviously rich the most. It will also bring in some extra cash for the budget.

This is the practical follow on from former CBR Sergei Igantiev’s comments earlier this year that half the capital flight is coming from one group (ie government officials). The point is not only is the Kremlin threatening its employees, but now the state as the power to check up on their bank accounts.

The Federal Tax Service can now request that banks confirm the presence of an individual account but still needs a court order to obtain detailed information on transactions.

The new legislation will also allow tax authorities to claim damages on behalf of the state against company owners whose actions have caused losses to the federal budget.

The law also gives authorities power to freeze the accounts of people suspected in terrorist activity. Furthermore, it prohibits individuals convicted of economic crimes from owning more than 10% of an insurance company.

Putin signs luxury car tax bill into law, the first tax hike in 13 years Putin has formally approved a bill setting higher transportation tax rates on luxury cars in July.

Conversely in July the Kremlin also announced it will re-introduce tax breaks and subsidies on the purchase of cheap cars to support the sector. Another crowd pleaser.

Cars that cost between RUB5m and RUB10m ($155,000 and $315,000) and are not more than five years old will be taxed at double the rate.

Cars that cost RUB10m to RUB15m and are not more than 10 years old as well as cars that cost over RUB15m and are not more than 20 years old will be taxed at a triple rate.

Russia Moves Closer to Lifting Foreign Ownership Restrictions Russia's lower house of parliament gave its final approval for a bill to lift restrictions on foreign ownership of small and midsized businesses.

Currently, foreign citizens and legal entities are not allowed to own more than 25% of the capital of a Russian company.

The bill seeks to enable foreigners to create small and midsized businesses without any restrictions.

Russian prosecutors allow Left Front opposition movement to resume activity Moscow prosecutors have permitted the Left Front movement, headed by opposition firebrand Sergei Udlatsov, to resume its activity.

Authorities say that the movement took notice of the violations that led to the suspension of activities.

The Left Front corrected the violations and sent documents proving as much to the prosecutor's office.

The movement's leader, radical leftist activist Sergei Udaltsov confirmed that the Front has been cleared by the prosecution via Twitter.

The Left Front is a far-left political movement encompassing organizations that support socialist development in Russia and the post-Soviet states. Left Front coordinator and opposition leader Sergei Udaltsov and two front members Konstantin Lebedev and Leonid Razvozzhayev have been charged with organizing mass riots.

Number of political parties eligible to compete in elections up to 55 A total of 55 out of 72 political parties registered in Russia have the right to participate in elections, the Russian Central Election Committee posted on its website referring to its information as of July 3, 2013.

Almost six weeks ago, only 48 parties had such a right.

The remaining 17 parties registered by the Russian Justice Ministry do not have the right to participate in elections, because as of today, they do not have the necessary number of registered regional branches, the Central Election Committee said.

The high number of parties is a mix blessing and analysts say the Kremlin is hoping to fragment the opposition between too many choices – a strategy that seems to be working.

Russian copyright owners want to create list of pirate Web sites Russian copyright owners want regulators to create a list of Web sites that continually release pirated content and allow for their blocking without a court’s decision.

Members of copyright lobbies such as the National Federation of the Music Industry, Russian Book Union, Nonprofit Partnership of Software Suppliers, and Coordination Committee for Intellectual Property Protection have submitted the relevant proposal to Sergei Naryshkin, speaker of the State Duma, the Russian parliament’s lower house.

Naryshkin has held a meeting with the lobbyists to discuss amendments to the law allowing operators and hosting providers to block Web sites containing pirated movies and TV shows.

The move is likely to be supported by the government, partly because it is obliged to do something under the terms of its WTO membership,

and partly because the Kremlin launched a programme to support the domestic film industry that includes grants and tax breaks.

Politics – the bad EU Ready to Sue Russia in First WTO Dispute

that is thought to be the largest of its kind in the post-Soviet period.

The EU says it will sue Russia for imposing trade barriers on car imports in the first WTO trade dispute case since Russia joined last August.

It includes naval forces, strategic bomber aircraft, missile-defense teams, tactical and strategic missiles, infantry, and armored vehicles. In all, some 160,000 soldiers, 1,000 tanks, 130 aircraft, and 70 naval vessels were participating.

At issue is Russia's vehicle recycling levy out that has been imposed on imported foreign-made cars, but not Russian ones.

The EU says the levy is a protectionist move under the guise of an environmental measure.

Under WTO rules, Russia has 60 days to settle the EU claims regarding the recycling levy through negotiations. After that, the EU may ask the WTO to pass a ruling, which could force Moscow to change the rules or face trade sanctions.

Cold War build up continues with Russian biggest military exercises yet Russia held a massive militaryreadiness drill in the Far East in July. President Vladimir Putin ordered the surprise drill on July 12 – the third one this year alone –

Also an unspecified number of Tu95MS strategic nuclear bomber aircraft reportedly were being readied for combat missions at an airbase in the Amur region.

Previous drills had under the 7,500 people that Russia is allowed to hold without informing NATO first.

Putin is clearly intent on both building up the military over the next decade, but he is also cracking the whip over the generals to show he is serious as well as sending a message to the west that Russia is not to be trifled with.

In March, Putin ordered a snap readiness drill involving Russia's forces in the Black Sea region. The Defense Ministry reported that forces in all of those exercises had fulfilled their objectives.

Politics – the ugly ECHR rules that Khodorkovsky, Lebedev broke the law as charged, but Kremlin abused courts in trial In a turn up for the books, the European Court of Human Rights (ECHR) said on July 24 tycoons Mikhail Khodorkovsky and Platon Lebedev were guilt as charged of tax evation etc, but that the Kremlin had abused the court system while prosecuting them.

The court said the charges filed against jailed former had a “sound basis”, but that their “rights had been violated” in connection with the court proceedings and their placement in remote Siberian penal colonies.

Khodorkovsky and Lebedev both formerly served as top managers of Yukos, which was once one of Russia's largest oil companies.

In the early 2000s, Russian authorities accused Yukos executives of embezzlement and tax evasion. In 2005, the court sentenced Khodorkovsky and Lebedev to eight years in prison for fraud and tax evasion.

Both men specifically raised their rights under the European Convention of Human Rights (Convention) to a fair trial within a reasonable time.

On this point he ECHR disagreed, finding that there had been no violation of the relevant article of the convention in connection with

the judge's impartiality, or with the time and facilities allocated for the defence team's preparation.

A violation of the Convention's article guaranteeing fair trial rights was found however with regard to breaches of lawyer-client confidentiality and the trial court's unfair taking and examination of evidence.

With respect to their transfer to penal colonies in remote corners of Russia, both raised their right to respect for family and home. On this point the ECHR agreed, finding that their right to such had been violated on account of their transfer to distant penal colonies thousands of kilometers from Moscow.

They both further argue that they were subjected to a novel and unpredictable interpretation of the tax law, raising the Convention's prohibition on punishment without law. The ECHR disagreed on this point, explaining that the application of the tax law to convict the men had been reasonable and had corresponded to common sense.

Further alleging that their prosecution was politically motivated, both men raised the Convention's limitation on use of restriction on rights. On this point, the ECHR disagreed, finding that there had been no violation of the Convention's relevant article in connection with the complaint that the hearing had been politically motivated.

Khodorkovsky further raised his rights to the protection of property based on having been ordered to reimburse Yukos' tax arrears to the State, and to individual petition, based on allegations that his lawyers had been subjected to harassment. On the first point, the ECHR agreed. On the latter point, the ECHR agreed as well.

In connection with the conditions of his detention and with having been placed in a metal cage during court hearings, Lebedev raised the Convention's prohibition of inhuman and degrading treatment.

He further raised his right to liberty and security in connection with the length of his detention. The ECHR held that there has not been a violation of the prohibition of inhuman and degrading treatment in connection with Lebedev's detention conditions, but that there had been a violation in connection with his placement in a metal cage.

The Court drew mixed conclusions about his claims of his right to liberty and security having been violated, holding that had been violations in connection with the length of his detention on remand and with delays in the examination of a detention order of December 14, 2004. However, the Court found no violations of the Convention's protection of the right to liberty and security in connection with the fairness and speediness of the other detention proceedings Lebedev had complained of.

Unrelated to the present ECHR case, but relevant to Khodorkovsky's present legal

situation, in 2010, a Moscow district court sentenced Khodorkovsky and Lebedev to 14 years in prison for oil theft and money laundering.

They were expected to be released in 2017, taking into account the time that they had already served for their convictions from their first trial in 2005. However, on May 24, 2011, the Moscow City Court reduced their sentences by one year. They now may be released in 2016.

Khodorkovsky is currently serving out his prison sentence in a Karelia Region penal colony. Lebedev is presently serving out his own in the Yamalo-Nenets region of Russia's western Siberia.

Russian court finds dead lawyer Magnitsky guilty of tax evasion In a truly bizarre ruling a Moscow court on Thursday found deceased whistle-blowing lawyer Sergei Magnitsky guilty of tax evasion – the very charge he was investigating that prompted his arrest in the first place.

Magnitsky, who worked as a tax lawyer for the British investment fund Hermitage Capital Management in Russia, was arrested in 2008 on tax evasion charges after exposing what he believed was a $230m tax fraud carried out by Russian officials.

He died in disputed circumstances while in pretrial custody in 2009, but nevertheless was subsequently

prosecuted on tax evasion and embezzlement charges.

This is not the first time a dead Russian has been convicted by a court posthumously. The laws covering trials of dead people were introduced in Soviet times as a way of exonorating or clearing the names of Stalin’s victims in cases brought by the victims children.

But it is only recently that the same rules have been used in a criminal context. In a similar case earlier this year a senior oil company prosecuted a woman that was killed in a car crash between the two successfully. The dead lady was convicted of reckless driving and causing the accident. Her family have disputed the result.

respondents have paid a bribe over the past 12 months, nine out of ten said they were ready to fight corruption.

In Russia 50% said the level of corruption had increased in the country over the last two years, while 37% believe it had increased “significantly.”

On the other hand, 39% said that corruption has remained at the same level as before. While 79% of respondents admitted that corruption was a “serious problem,” 1% said they did not believe it to be a problem at all.

As many as 77% of respondents assessed the government’s anticorruption efforts as ineffective.

The Magnitsky case highlights how bitter and personal this conflict has become on both sides. Magnitsky's former boss, Hermitage Capital CEO William Browder, a British citizen, was tried in absentia on charges of tax evasion and found guilty. He has been running a highly emotive campaign ever since he was refused entry to Russia and his fund folded as a result.

State and government agencies are considered the most corrupt institution by 92% of Russians, followed by the police (89%), the parliament (84%) and the judiciary (83%).

Russia’s corruption ranking up, but so is citizens resolve to resist

Only 20% admitted paying a bribe to police officers.

Transparency International fodn corruption levels around the wodl have gone up in the last two years, however, people’s resolution to fight bribery has gone up too.

The 2013 Global Corruption Barometer found 27% of

As many as 75% said healthcare workers were corrupt. Forty-nine% said they had paid a bribe to a healthcare worker and 47% to an education worker.

The majority of Russians – 56% – do not believe that people “in the street” can effectively fight corruption. At the same time 92% of respondents said they were ready to try.

Yaroslavl Mayor Suspected of Extortion Investigators have launched a criminal case against Yevgeny Urlashov, the mayor of the central Russian city of Yaroslavl, and three of his subordinates on suspicion of extortion, the Investigative Committee's regional department reported.

Commentators say the charges are politically motivated.

From December 2012 to July 2, 2013, the mayor of the city of Yaroslavl and his subordinates extorted from the director of a commercial company a bribe worth RUB14m [$422,600] from a sum transferred to the company for performed work, the investigators claim.

Urlashov, a member of the ruling United Russia party in 2008-2011, who later became a candidate from the opposition, achieved a landslide victory in the city's April 2012 mayoral elections over a United Russia candidate.

A member of billionaire and politician Mikhail Prokhorov's Civic Platform party, he planned to head the party's list at the September 8, 2013 elections to the regional parliament.

The ex-governor of Tula gets 9.5 years jail for a $1.2m bribe A court in Russia's Tula Region sentenced the former governor to 9.5 years in prison Monday after finding him guilty of taking a RUB40m ($1.2m) bribe.

The court also ordered former governor Vyacheslav Dudka to pay a fine of 900,000 rubles ($27,800).

Dudka's co-defendant, Viktor Volkov, was sentenced to 2.5 years in prison after the court found him guilty on the same counts.

According to investigators, in November 2010, then governor Dudka and Volkov, who headed the regional property and land management department, took a 40m ruble kickback from the GRINN corporation, in return for leasing it a plot of land in Tula for three years for the corporation to build a supermarket there.

The prosecution had previously called for Dudka, who served as Tula Region governor between 2005 and 2011, to be sentenced to 9.5 years in prison and Volkov to four years.

Defence Ministry corruption scandal witness jailed A witness in a high-profile corruption scandal that erupted under the Defence Ministry last year was sent to prison for two years and eight months by a Moscow court on Wednesday, the RAPSI legal news agency reported.

Dmitry Mityaev, formerly the top lawyer at construction company MIRA, was convicted of soliciting a 3m ruble ($92,000) bribe to “expedite� directives issued by former Defence Minister Anatoly Serdyukov.

Serdyukov was fired last year amid a corruption scandal around Oboronservis, a Defence Ministry holding company, and several of its top executives have been arrested on charges related to fraudulent property deals.

Mityaev is accused of working in conjunction with Nikolai Lyubutov, a former sales director at legal center Ekspert, who was sent to

Polls, mood, sociology Number of Russians Willing to Protest Decreasing The number of Russians willing to participate in street protests has declined since its 2011 peak, a new poll from Levada Center indicates.

Only 11% of respondents said they would join political protests, while 16% said they would rally for social issues, according to the poll released Thursday.

The survey indicated that interest in protests has waned since 2011, when 17% of respondents said they would participate in political protests compared to 23% in social protests.

Having said this between 156 and 254 people were held at unsanctioned protest rallies in Moscow and St. Petersburg following the conviction of Russian opposition blogger Alexei Navalny.

Some 6000-8000 people marched

prison for two and a half years earlier in 2013. Lyubutov was also a witness in the Oboronservis case.

Prosecutors had requested a five year jail term.

Serdyukov has yet to be charged or arrested, although he has been called in for questioning and is also officially a "witness."

in Moscow after Navalny was sentenced to five years in a labour camp.

Still, Since the early 2000s, Levada Center's results show that an increasing number of people believe protests won't happen in their region, with 73 and 68% of Russians saying that political and social protests respectively were "unlikely." These numbers saw a small dip last year following the 2011-2012 anti-Kremlin demonstrations.

The statistical margin of error in the Levada Center poll was 3.4%.

Russian Attitudes Toward Emigration Softened, actual number very low The attitudes of Russians toward their compatriots who have emigrated are softening, according to a poll carried out by the Russian Public Opinion Research Center.

There have been a round of articles recent of polls that show lots of

Russians want to leave – a recent poll found half of Russia’s youth want to leave the country.

However, the actual emigration numbers are amongst the lowest in Europe.

Forty-eight percent of those surveyed said they understood why other Russians had left the country, citing personal comfort and security as justifiable priorities. This is up from 37 percent in 2008, Kommersant reported Thursday.

But 46 percent of respondents said that it is unpatriotic for Russians to leave the country they were brought up in.

Just 13 percent said they were considering emigrating permanently.

According to the state statistics service, Rosstat, the numbers of people leaving Russia had been steadily decreasing up until 2009.

Emigration has been back on the rise since then though, with 36,774 people relocating from Russia in 2011, according to the latest figures.

Housing and Utilities join inflation and corruption as top Kremlin concerns The main concerns for Russian people are poor housing conditions and unreliable or poor utilities, according to VTsIOM. Corruption has slipped marginally from second spot last year.

The Kremlin does pay attention to these surveys as its key priority is

to remain popular ahead of parliament elections in December 2016 and presidential elections in March 2018.

Corruption and Inflation topped last year’s survey and over the past twelve months we have seen a much more intense focus on inflation control and a very big escalation in the campaign against corruption in the bureaucracy.

Top Public Concerns: Mid Poor Housing Utilities Inflation Low living standards Corruption Poor healthcare Alcoholism Unemployment Pensions worries Drug abuse Future for young people Education Moral standards Crime Ecology Immigration Influence of Oligarchs

-2013 55% 55% 47% 46% 44% 43% 38% 36% 32% 29% 28% 25% 25% 25% 25% 21% 20%

Source: VTsIOM

Patriots still top but Reformers are catching up A VTsIOM survey about people’s preference for political style found that a majority of people still prefer so-called “patriot” politicians but support for the “reformers” group is growing steadily.

The current survey shows that 59% of people now support

reformers and that is up from 35% in the 1990’s.

Political Style Preference: 2013 V 1991 Patriots 85% Reformers 59% up from 35% in early 1990’s Democrats 54% unchanged from the 1990’s Liberals 26% double the 13% rating in 1990’s Conservatives 21% was at only 5% in the 1990’s Nationalist 14% was at 3% in the 1990’s Radicals 14% down from 17% in the 1990’s 58% of Russians Now Say Kremlin Using Repression The Levada Center reports that 58% of Russian believe that the charges the government has brought against the Bolotnoye demonstrators are “an instrument of political repression” being used by the Kremlin against its opponents.

The demonstrators were arrested in May 2012 after fighting broke out between demonstrators and police.

The opposition claim the aggression was provoked by the police for political purposes.

Center’s survey also found that ever fewer Russians and especially those in the major cities trust state television, the main channel the current regime has used to promote its ideas. In Moscow, for example, 57% said they

do not trust state television on the Navalny trial. The figure for the country as a whole is 44%.

Putin Officials, Judges Seen Topping Russia Corruption in Survey Police, judges and lawmakers, as well as bureaucrats, are seen in Russia as the most corrupt groups, fueling popular discontent with the government, according to a global survey by Transparency International.

5% of Russian respondents rated President Vladimir Putin’s anticorruption campaign as effective, a sharp drop from a 2010 poll, according to the survey of people in 107 countries released today.

It’s part of a global trend in which half of those surveyed perceive corruption as worsening in the past two years, according to the Berlinbased watchdog’s report.

Russia is one of only seven nations, including Libya, Pakistan and Serbia, where public servants are seen as the most corrupt of 12 institutions, according to the survey. Putin’s third term as president has been marked by high-profile probes, including one that led to the ouster of Anatoly Serdyukov as defense minister, while no top government officials have been charged. Russia remains the world’s most corrupt major economy, according to a 2012 report by Transparency International.

92% of Russian respondents said bureaucrats enrich themselves and abuse their positions more than

other groups. Police were seen as second-most corrupt, followed by judges and lawmakers. Business was ranked 10th in Russia, while religious bodies were last, tagged by 40%.

Vladimir Putin's approval rating is still holding steady In June 2013 Putin’s approval rating of 63% was at the same exact level that it was in December 2011, November 2012, and April 2013.

Support for reintroduction of the death penalty growing

One in two Russians want to work for the state More than 55% of economically active Russians would like to work in public sector or at state-owned enterprises, according to an opinion poll carried out by a research center of the Superjopb.ru recruitment portal.

A stable salary and “guarantees that an organization will not shut down in a month” were one of the main arguments in favor of public service.

total of 38% Russians support the resumption of death penalties in the country, against 33% in 2012, a poll, carried out by Levada Center on June 6-10 showed.

Public service attracts not only the older generation but also youth.

58% of respondents under 24 years old said they would like to work for state-owned companies compared to 57% among people older than 45.

Russia hasn’t repealed capital punishment, but there has been a moratorium on it since Yeltsin’s days and no one has been executed for well over a decade.

The poll was carried out in MayJune 2013 among 14,000 respondents older than 18 in over 500 populated localities in all Russian Federal Districts.

Sixteen per cent, against 28% in 2012, said it was necessary to expand the death penalty application.

Foreign Language Skills Valued

by Russians

Twenty three percent respondents supported keeping the existing death penalty moratorium, while only 14% said so in 2012.

A total of 13% Russians said capital punishment had to be cancelled completely and 10% shared the same point of view in 2012.

Eleven per cent failed to answer.

Russians are a cosmopolitan bunch. Nearly 60% of the Russians speak at least one foreign language, while almost half would like to learn one, a poll conducted by the Public Opinion Foundation found.

Fifty-seven% of the poll's participants said they know a foreign language with English the most common at 38% of respondents.

German was the second most common language at 19%, while knowledge of French and Spanish was claimed by three and one% respectively.

Migration biggest threat to Russia’s national security One in three Russians thinks migration is the most serious threat to national security, and is more dangerous than terrorism and environmental disasters, according to VTsIOM. Migration was cited as a “very real” threat by 35% of Russians polled by state-run VTsIOM, while almost every fourth Russian thinks low birth rates are similarly dangerous for their nation’s future.

Russia’s population has become increasingly diverse in the last decade, due to a combination of a fall in the ethnic Russian population and an influx of migrants, attracted by almost a decade of strong economic growth fueled by high oil prices.

Most migrants come from the impoverished and overpopulated republics of ex-Soviet Central Asia.

More than 11m foreigners were living in Russia in June, migration authorities said.

Russians feel more aggressive than in the 1990s Russians are feeling increasingly frustrated with this situation and this is leading to increased aggression. At the same time these sentiments have been whipped up

by the state’s policies against minority groups such as homosexuals as well as the rising nationalist rhetoric – both of which have lead to violent attacks against minorities increasing.

Moscow sociologists say levels of aggressiveness in Russian society are especially high today.

Such feelings lie behind events like those in Pugachev where locals beat ethnic minorities from the Caucasus to death this month.

These social forces are potentially destabilising if there is a suitable trigger, says the sociologists.

In support of their contention that aggressiveness is increasing among Russians, the sociologists provide the following data based on three questions: “people of my nationality have lost much over the last 15 to 20 years,” “all means are good for the defense of the interests of my people,” and the expulsion of those of different nationalities from where the respondents live is appropriate.

In 1995, 45% of the sample said they frequently felt that way, while 24% said they never did. In 2000, these figures were 54 and 18, and in 2008, they were 55 and 16. But now those saying they frequently think that way outnumber those who never do by 34 to 28%.

Banks and Finance Russian MinFin, CBR to try and cut lending rates The high cost of borrowing is killing the Russian economy which is now stagnating, according to finance officials.

The Kremlin has ordered the regulators to come up with ways of reducing the cost of borrowing – using administrative methods if necessary.

Putin has already called all the senior bankers to his dacha in July and told them to reduce their rates.

A bit of a row is developing. The bankers say that the rates are high because the risks are high.

However, the former governor of the CBR Sergei Ignatiev told Putin in front of the bankers that they regularly “overstate” the risks.

The Kremlin has already moved to introduce new legislation on the classification of what is “high risk” for money that is transferred abroad and expect more of the same.

In the meantime Deputy Finance Minister Alexey Moiseev has said that the government and the CBR are to discuss a set of measures to reduce lending rates to the real economy.

These include cost cutting, increasing liquidity through MinFin deposits and refinancing

instruments, protection of lenders and support of market competition through additional requirements to consumer lending banks.

The implementation of MinFin’s initiative might take one to two years.

If all the measures proposed by MinFin are approved, the minimum interest rate for blue chip companies would be reduced by 2% from about 9.9% now.

Green light for financial megaregulator in Russia The Russian State Duma has okayed a unified financial regulator that will be lead by the CBR. The new watchdog will oversee both Russia’s banking and its financial market.

The Duma adopted a bill in its third and the final reading in July that extends the CBR’s remit to include the functions that used to be performed by the Federal Financial Markets Service (FFMS).

The new CBR governor Elvira Nabiullina will take charge of supervising 4,500 financial institutions and 10,000 companies with traded securities as well as supervising the banking sector, oversight of the money supply, interest rates and the estimated $518bn of foreign currency and gold reserves.

The law governing the CBR will get a provision, saying that "main goal of the Bank of Russia's monetary policy is protecting and ensuring the stability of the by supporting

price stability, including for the establishment of conditions for balanced and sustainable economic growth.”

A mandate to promote growth has not been included in the new CBR functions.

Russian LTRO, Kremlin attempting to push down the cost of borrowing On 4 July President Vladimir Putin called a meeting to discuss the banking sector’s prospects. Putin’s key message was that Russian corporates need cheap, long money and he asked the Central Bank to seek a balance between inflation and better credit availability for the economy.

At the same time, Putin said any decisions should be ‘marketdriven’, and not ‘administrative.’

At the CBR meeting that followed, the regulator managed to find sufficient market reasons to introduce ‘Russian LTRO’ on 12 July.

‘Russian LTRO’ is a 12-month refinancing instrument for banks at a minimum rate of 5.75% (clearly very low, at just the weekly repo rate plus 25 bpts).

Respective loans will be collateralised by non-market assets, and the first RUB500bn repo auction is set for next Monday, 29 July. (This is just for starters, most likely.)

Large corporates (the majority of borrowers and most likely the ones

Putin cares about) can be divided into two distinct groups: 1) those who do not require credit and are sitting on bulky cash piles having refinanced anything and everything over the past two years at exceptional terms; and 2) those to whom banks would rather not lend anything more: companies with huge debt burdens who are in constant need of refinancing.

It is conventional wisdom that VTB is the bank for the latter but we note that there is evidence of Sberbank’s increased exposure to these lower-quality corporates in the past 18 months.

Sberbank has been compensated for this by being showered with cheap CBR money, allowing Sberbank to earn some positive margin on these loans. However, it is exactly this exposure that Sberbank would rather not have, and its risks are not compensated by the alleged profitability of these loans.

The LTRO will not stimulate the economy. We think it is simply the price the state pays to maintain the status quo, that is, state banks continuing to refinance large poorquality borrowers.

In this regard, the LTRO is positive, but in the short term only. It will help to avoid corporate defaults in the nearest future but cannot eradicate them altogether. These toxic loans will not disappear simply because they are out of

sight; far more likely is that they will return in a far more noxious form.

Credit card fraud in Russia 10times less than elsewhere says VISA Despite its image as a den of high tech thieves international credit card company VISA reports that fraud in Russia is 10-times less than in its other markets.

The company said that card fraud in Russia costs it 5 kopecks per 1,000 annually, a tenth of the company’s global average, VISA said.

“The level of fraud with Visa cards in the world is falling constantly.

Now we are at a historical minimum in this area…The number of real fraudulent cases was reduced by two thirds over the last two decades,” Oleg Skorodumov, director of Visa’s risk management department in Russia, CIS, and South East Europe, told reporters on Wednesday.

Russia has 100 million Visa cards in circulation. In 2012, the turnover on Visa cards, issued by Russian banks, rose 28% to RUB13 trillion.

Basel III requirements in place at the start of 2014 The CBR proposed delaying the scheduled launch of Basel III capital adequacy requirements from October 1 to January 1, 2014.

The CBR is proposing less onerous capital adequacy requirements

compared to earlier, but these new requirements remain in line with the Bank for International Settlements (BIS) guidelines.

The BIS guidance calls for an overall capital ratio of 8 % (Tier I + Tier II), while the CBR wants to maintain its current overall capital ratio requirement of 10 %.

The delay comes as it was clear that quite a few banks (Alfa-Bank, Bank St Petersburg, Promsvyazbank, Nomos, etc) would not have been able to expand their risk-weighted assets at a decent pace, as the tier-1 CAR (N1.2) levels would have been quite close to the minimum level.

Basel III will be credit positive for Russian banks as it will improve the quality of the banks' capital, Moody's said.

However, Moody's also believes that Basel III has credit-negative implications for the junior creditors of the banks, due to the introduction of burden sharing for Tier 2 and hybrid instruments.

Russia ranks 24th in global insurance market in 2012 Russia ranked 24th in a list of countries with the highest premium collection rates in 2012 with a 0.56% share of the global market, Swiss Re said in a survey Monday.

The global premium collection amounted to U.S. $26.027 billion.

In 2011, Russia ranked 19th with premiums of $43.257 billion and a market share standing at 0.94%.

Swiss Re included obligatory health insurance in the list of services qualified in the rating.

Russia's SME Bank to occupy 10–15% of strategic market segments Russian Bank for Small and Medium Enterprises Support (SME Bank) plans to occupy 10% to 15% of the market in some segments, the bank said Tuesday, citing the 2013–2015 development strategy approved by its supervisory board.

SME Bank intends to nearly triple the volume of support it provides to small and medium-sized businesses in strategic segments to RUB146.3 billion by early 2016 from RUB50.9 billion in 2012.

The strategic segments include lending to innovative small and medium-sized business, which will rise to 57% of its loan portfolio from 45%. Other segments include participating in the capitals of innovative businesses, long-term lending to non-trade and noninnovative businesses, leasing operations, excluding the leasing of rolling stock and automobile vehicles, factoring services for nontrade enterprises, and micro financing.

Russian mortgage lending will rise 20% in 2013 Russian banks may increase mortgage lending by 20% in 2013 to RUB1.2 trillion, according to the Agency for Housing Mortgage Lending's (AIZhK) analytical center.

Earlier the agency projected mortgage lending at RUB1.0 trillion- RUB1.2 trillion, but strong growth in mortgage loans provided in January-May cause the agency to upgrade its forecast.

Banks provided 270,108 loans in January-May, up 12% on the year.

In monetary terms, loans exceeded RUB435 billion in January-May, up 25% on the year.

Improving financial literacy is a state priority Improving financial literacy amongst the Russian population has been set as a state priority as part of the broader capital market reforms.

Consumer credit took off in 2001 with the advent of express loan specialist Russky Standard, but most Russians are still struggling to come to terms with the terms of the loans they take out. Most only look at the monthly repayment schedule to see if they can afford it and concepts by APR are totally alien. That is a big problem when the effective interest rate regularly top 50% or 60%.

At the other end of the scale the Russian population invests next to nothing in its own stock market – either directly or via mutual funds, known as PIFs in Russian and created in law Boris Yeltsin in 1996. Regular surveys conducted by the CBR have found the population has some 3% of its assets invested in equity and that has not changed for years.

And they have not learned to trust the bank system suffering from multiple bank crises. The one time the state tried to encourage people to invest it went horribly wrong: the state heavily promoted the socalled people's IPOs of VTB in 2007. Russians put their money in only to watch the share price cut in half a year later.

With the Kremlin keen to create a pension industry to deal with its rising obligations and aging population as well as to create some desperately needed longterm capital, it has launched an effort to explain how capital markets work and how to benefit from them to its people.

The government has been trying to increase financial literacy for six years, and this year the issue has been in the spotlight. General financial literacy and Russia's contribution to global action on it is on the agenda during the country's Group of 20 presidency this year.

"The issue of effective use of financial services is becoming more and more urgent, as these services become more various," Deputy Finance Minister Sergei Storchak said last month.

According to a National Agency for Financial Studies survey earlier this year only 2% of Russians claim to have a thorough understand the markets with another 11% that say their knowledge is “good.” 50% say they don’t understand finance.

That means most people borrow badly. According to a survey carried out by privately owned

Uniastrum bank between February and June, 85% of its customers do not know their credit history, which increases their chances of falling victim to fraud.

However, both banks and experts say the situation is gradually improving. Sberbank said that many of its customers request individual financial plans and created over 150,000 over the first six months of this year.

In 2011, the Finance Ministry launched a $113m program to improve financial literacy, working with pupils, students and low and middle income categories of population. The government is setting aside $88m from the federal budget to 2015. The remainder is being provided as a World Bank loan.

Russia’s CBR posts preliminary bank data for June, some improvement Russia’s corporate loan books grew 1.4% month-on-month and retail 2.6% month-on-month.

On a year-on-year basis, the corporate loan book growth stayed broadly flat at 11.9% in June and retail decelerated to 33.9% from 34.8% the previous month.

Retail deposits increased 2.7% month-on-month and corporate accounts 3.5% month-on-month (or 2.0% and 2.4%, excluding the FX effect).

Russia’s Central Bank to Limit Shady Transactions

over the next year and stronger growth.

The Central Bank is trying to limit Russian banks depositing money with their foreign counterparts by reclassifying the transactions as high-risk regardless of how reliable the foreign recipient bank is, which would make them more expensive and less attractive.

However, the impact will not be that large, as RUB100bn is only 0.5% of the total corporate lending portfolio.

The reclassification focuses on transactions that require the involvement of a third party, but also operations with nonresident banks that lend to offshore companies and are then unable to return the money to the Russian bank when the debtor defaults on repayments.

Banks could have their licenses revoked if they don't comply with the new regulations.

Russia’s Ministry Economy plans to ease SMEs' access to loans, grant tax breaks SMEs are back in vogue with several schemes and accouncements aimed at boosting their share of the economy.

MinEconomy plans from June that the National Wealth Fund is to place RUB 100bn on VEB's deposits at 5.25% for 10-12 years.

In turn, VEB is to lend this money to commercial banks for long and cheap loans for SMEs at not greater than 10%.

This programme would support a turnaround in the lending cycle

Entrepreneurs starting businesses from scratch are soon likely to be exempted from paying taxes for two years.

The Economic Development Ministry, the Finance Ministry and the Labor Ministry must review ways to implement such a measure

by August 5.

This work should be carried out jointly with business lobby group Delovaya Rossia, which is controlled by Russian business ombudsman Boris Titov.

Entrepreneurs who have registered their first startups should be exempted from all taxes for a twoyear period, the document said.

Russian Post to become a bank Pochta Rossii, the Russian stateowned post office, will be granted a bank license to provide financial services to the public together with a private investor.

The post office is expected to apply to the Central Bank after the government makes a decision about the company's new strategy in September.

The Federal State Unitary Enterprise expects to return its leading position in the market of money transfers within and

between countries of the CIS, as well as to grow in the private lending and small business markets.

Troika Dialog ex-owners to get extra $400m from Sberbank Russia’s biggest lender Sberbank will pay an additional U.S. $400 million for the purchase of 100% stake in investment bank Troika Dialog to its former shareholders ahead of schedule, the bank said this month.

The first stage of the deal was complete in January 2012 when Sberbank acquired a 100% interest for $1 billion. The second stage envisages a payment of $400 million award to the ex-owners of Troika-Dialog for the bank’s financial performance in 20112013.

Standard Bank held a 36.427% stake in the investment bank while Limited Partnership, headed by Ruben Vardanyan, had a 63.573% stake.

Russian banks move to plastic cards with chips The Central Bank of Russia conducted a survey of 83 banks developing the card business aggressively and accounting for at least 80% of all transactions.

Representatives of 51% of the surveyed banks said that they issue chip cards. 28% of banks completed the transition to such cards (they don't offer cards only with a magnetic stripe). 53% of the surveyed banks plan to do so in the near-term.

70% of the surveyed banks offer equipment for the acceptable of chip cards to retail outlets. The findings of the survey made by the Bank of Russia will be used to decide whether banks should be obliged to issue only chip cards which are considered safer compared with cards with a magnetic stripe (skimmers can read out data from a magnetic stripe).

Russians learning to manage their personal loans the hard way In 57% of cases a consumer loan becomes non-performing if the debt load makes up over 50% of a borrower's salary, according to GE Money Bank. The most frequent reason for such debt is that borrowers take out loans in several banks. About 7% of the population has over 5 credit products at a time.

The government has introduced a draft bill to better regulate personal borrowing and is intending to increase its efforts to educate the population.

81% of the Russian population was involved in credit relations as of June 1, 2013, according to the National Credit history Bureau (NBKI). A year ago, it was 70%.

The proportion of non-performing or risky loans is increasing along with the number of loans granted.

Residents having more than one loan apply to other banks for new loans as a source of refinancing.

This backs up Alfa Bank's research

that suggests while consumer borrowing continued to rise in 6M13 the effect was not seen in retail turnover, which suggests Russians are now increasingly borrowing to refinance old loans rather than to shop.

The securities portfolio increased 1.7% during the month mainly due to investments in debt obligations and equity securities which increased 2.0% and 2.2% respectively. Investments in discounted bills fell 3.0%.

The Credit Health Index measured

by NBKI and FICO has been showing the deterioration of the overall situation since January 2012 In 2012, some banks started revising their range of products and changing their requirements to customers in order to avoid a jump in overdue loans. The CBR has also moved to tighten restrictions on consumer lending.

The growth of customer funds was the main factor of the resource base expansion in June: total retail deposits increased 2.7%, corporate deposits up by 2.7%. Funds on settlement and other corporate accounts increased 4.9% in June (if currency revaluation is excluded, the increase would be 2.0%, 1.4% and 4.2% respectively). Amounts owed by credit institutions to the Bank of Russia were decreasing (by 6.3% in June).

Russian credit institutions earned RUB491.4 billion in profit in 1Q13, down 3.1% yoy

Putin extends list of cases where CBR entitled to appoint external managers

In June 2013, assets of the banking sector increased 2.2% mainly due to the ongoing growth of the loan portfolio (if currency revaluation is excluded, the assets would increase 1.4%).

President Vladimir Putin extended the list of cases where the Central Bank of Russia is allow to effectively take over a bank and appoint its own external managers.

Total corporate and retail loans increased 1.5% during the month.

Loans to nonfinancial companies increased 1.4%, loans to individuals up by 2.6% (if currency revaluation is excluded, the increase would be 0.5% and 2.4% respectively). Arrears of corporate and retail loans decreased 2.7% and 0.2% respectively. As a result, the proportion of overdue corporate loans fell from 4.7% to 4.5% and that of overdue retail loans from 4.4% to 4.3%.

Articles 13 and 76 of the law on the Bank of Russia are amended accordingly. The State Duma approved the law in the third reading on June 11, the Council of Federation on June 26, 2013.

Under the law, the regulator is entitled to appoint its representative if a lender's assets are RUB50bn and more and or if funds raised from individuals under deposit and bank account agreements are RUB10 billion and more.

Furthermore, the Bank of Russia is required to provide to the National Bank Board information about the activities of authorized representatives appointed to banks on a quarterly basis.

At the moment, the Bank of Russia has a right to appoint authorized representatives to banks which received support as part of the anti-recessionary package.

Capital adequacy ratio of 51 banks approached the statutory minimum at the end of 5M13 Russian banks have to maintain a capital adequacy ratio of at least 10%. The level of this permissible minimum has long been a stumbling point in the relations between the Bank of Russia and banks.

Pre-crisis almost all banks maintained a CAR of over 18% but on the back of strong retail loan growth the ratio has been falling.

In addition new tough rules on reserve requirements for retail lends have put even more pressure on the ratio this year. The problems has lead the CBR to delay the introduction of the new Basel III rules.

Effective 2014, banks will have to calculate their equity under the Basel III standards (since March 2013, they have been doing it for reference purposes). As a result, the capital adequacy level may decrease even more. The Basel III standard toughen the criteria for the calculation of equity capital, provide for the introduction of two new ratios (minimum common

equity and core capital adequacy) and impose restrictions on the use of subordinated loans for capital formation.

Since beginning of 2013, the number of banks whose CAR is close to the minimum (in the range from 10% to 11%) has become 1.6 times larger: up from 30 to 51 banks. The trend is particularly obvious in large banks: since January 2013, the number of such banks has increased by six in the top-100 banks in terms of assets, by 1 in the second 100 banks, by 7 in the third 100 banks, and by 3 in the fourth 100 banks.

The number of banks with capital adequacy ranging from 11% to 12% has increased from 108 to 121 (up by 12%). The number of banks with capital adequacy ranging from 10% to 15% has increased from 322 to 374 during five months of 2013. The number of banks with the N1 above 15% has decreased from 372 to 344.

The trend of the overall decline in capital adequacy of the banking system, particularly among large banks, is obvious.

The most interesting situation is among small credit institutions in terms of assets. The smaller size of a bank's assets the higher capital adequacy ratio this bank has. however, many of these small banks are little more than glorified treasury operations for their corporate owners.

For example, as of June 1, 2013, only 19 banks from the top-100 had the capital adequacy ratio of over 15%, including six had the N1

of over 20%. The number of such banks as of January 1, 2013 was 23 and 9 respectively. In the eighth 100 banks in terms of assets, 85 banks had the N1 of

over 20%. All of 88 banks included in the ninth 100 banks had the CAR of over 20%.

Economics

terms of year-on-year growth, the situation has improved,” he said.

Russia overtakes Germany to become 5th largest economy in the world

GDP growth in June was 1.5% on June 2012, and “net of the seasonal and calendar factor, that means 0% growth.”

Russia overtook Germany to become the biggest economy in Europe in terms of purchasing power parity and the fifth largest economy in the world.

This achievement comes on top of the World Bank's decision a week earlier to upgrade Russia from a "middle-income" to a "high income" country after per-capita income passed the $12,616 threashold.

Russia is now the only one of the five BRICS - Brazil, Russia, India, China, South Africa - that is a highincome country and no longer an emerging market.

Russia’s GDP in January-June 1.7%, its official: stagnation Russia’s economic growth in January-June 2013 was 1.7%, and 1.5% June-on-June, Russian Deputy Minister of Economic Development Andrei Klepach said.

However, he admitted that the economy is stagnating. “But in

However, second quarter saw somewhere around 1.9% growth, thanks to the low base effect yearon-year.

Russia has strong 1H13, budget surplus reached 1% of GDP The Russian federal budget surplus increased to RUB306.8bn or 1% of GDP in 1H13 versus RUB128.4bn or 0.5% of the GDP surplus in 5M13.

Last year the federal budget surplus reached RUB 270.7bn or also 1% of GDP in the first half.

In 1H13, revenues reached RUB6.2 tln or 48.6% of the full-year plan, while expenditures reached RUB 5.9 tln or 44.4% of the full-year plan.

Both revenues and expenditures surged month-on-month in June.

Revenues jumped 28% month-onmonth and reached RUB1.14 tln in June.

Russia has mixed headline PMIs: manufacturing slightly up; services sharply down

harmful calendar factor, we expect IP to print a modest rebound in year-on-year growth in June.

June Manufacturing PMI edged up slightly (to 51.7 from 50.4 in May), showing the first rise this year, with most of its sub-indices pointing to faster growth (albeit near their long-term averages).

Meanwhile, Services PMI continued its downward path, plunging sharply to below the 50 mark for the first time since August 2010, when activity was badly hit by a heat wave.

Rail cargo volume activity improved, but remained in the red.

In June, the drop in rail cargo volumes eased to 2.8% year-onyear (from 3.4% year-on-year in May) on the advance in iron ore and cement transportation volumes. However, oil and oil products, construction-related goods and grain remained the major drags.

Gas, oil and electricity data prove IP growth in June almost stalled.

Last month, gas production growth returned to the red with a 2.4% year-on-year decline, while growth in oil output moderately ticked up (according to CDU TEK). Besides, the annual change in electricity output stayed only slightly above zero at 0.4% despite the hot weather (which triggers additional demand from air conditioning) and a better calendar impact. Given the above-mentioned factors and an anticipated recovery in manufacturing output after the post-crisis low in May, owing, among other things, to a less

Consumer confidence grows for second consecutive quarter Signs of growing consumer optimism after Rosstat published the consumer confidence survey for 2Q13, which showed that the index grew 1% QoQ to minus 6%.

However, the share of respondents expecting the economic situation to improve in the next 12 months declined to 20% from 21% in 1Q13.

13% of the respondents expected their material situation to improve in the next 12 months (compared to 14% in 1Q13).

Analysts say the results mean moderate support for economic growth in 2H13.

federal budget could fall short RUB1 trillion ($30bn), and that the Reserve Fund, a safety net of oil windfalls, may be used to cover the gap.

He cited unfavorable global economic trends as impairing Russia’s tax collection and privatization plans.

The Finance Ministry previously projected budget revenues at about RUB13 trillion ($400bn) this year.

Under the new budget projections, Russia’s budget deficit may hit 0.4% of GDP or RUB327.1bn ($10bn) in 2014, 0.56% of GDP or RUB455.5bn ($13.8bn) in 2015, and 0.6% of GDP or RUB543.7bn ($16.5bn) in 2016.

Russia CPI - June; long-awaited disinflation kicked off VTB Capital July 7, 2013 Headline CPI declined sharply in July to below the 7% mark mainly on the favourable base effect in food prices.

Core inflation also softened despite recent RUB weakness. Early July inflation data confirms the disinflation trend.

Inlflation is expected to come in at 5.4% year-on-year for headline CPI. Russia Finance Minister Sees Federal Budget $30Bn Short Russian Finance Minister Anton Siluanov said that this year’s

Russia June upturn in unemployment intensified June saw a strengthening in the turnaround on the labour market, with unemployment jumping to a one-year high.

In a surprise move in June, unemployment increased to 5.4%, from 5.2% in May. More importantly, SA unemployment picked up to 5.7%, the highest level since June 2012.

The increase flags a visible deterioration on the labour market which has been lagging the overall slowdown in the economy during recent quarters.

Investments has sharpest drop since early 2010 Investment growth contracted 3.7% year-on-year in June following almost zero growth over 5mo13.

The recent decline in investment might be linked to a sharp deterioration in construction activity after a rather strong (and also surprising) increase in May. Analysts think the weakness in June was a one-off think ‘normal’ investment growth pace is just near zero.

IP bounces back from May decline, but still no growth in June Although the less negative calendar factor last month helped the IP reading to recover from the drop in May. Overall growth in industrial output was almost stalled both in June and in the whole 1H13 (0.1% vs.

3.1% year-on-year in 1H12), implying flattening local demand and a weak external conjuncture.

All in all, industrial output continues to stagnate, growing a marginal 0.1% year-on-year in 1H13.

Annual real retail sales growth bounced back, mainly on nonfood In June, the official headline retails sales number increased to 3.5% year-on-year, from a three-year low of 2.9% year-on-year in May, mainly due to non-food annual sales growing 1% faster than a month ago.

In monetary terms, retail sales amounted to RUB1.933 trillion in June, or three times their total in 2011. The official forecast for the growth of retail sales in 2013 amounts to 4.3%. In 2012, retail sales rose 5.9%.

The latter contradicts the persistent double-digit year-onyear decline in car sales in June, but is in line with less negative technical factors.

Noticeably, annual retail sales growth halved in 1H13 from 1H12 (3.5% vs. 7.7%).

Russia’s consolidated budget tax collection declines 0.5% y/y in 1H13 Russia’s consolidated budget tax revenues dropped 0.5% y/y in 1H13 vs. 12% y/y growth in total revenues in 1H12.

This is bad news and how the global slowdown and freeze in domestic investment is hurting the government worst.

Despite the high oil prices the lack of new activity in economy means the tax is under pressure.

The uncertainty has also reversed a general trend amongst companies to “go white” and anecdotal evidence suggest tax evasion, especially amongst smaller companies, has risen that also depressed the tax take.

Poor tax collection creates a risk that the government will not be able to build the Reserve Fund this year and is a threat to next year’s spending plan.

Spending by Russian travellers abroad as well as other services imports rose nearly 20 % in the first half. Services imports accounted for over 25% of all spending on imports.

Due largely to the weak trend in export earnings, the goods trade surplus has been contracting but still exceeded 8 % of GDP in the previous four quarters.

The current account surplus fell below 2.5% of GDP (4–6 % during 2010–2012). In the second quarter, the current account surplus reached its lowest level since the end of the 1990s.

Slower economic growth is damaging budget execution, especially on the profit tax and VAT items, which account for around 25% of consolidated revenues.

Preliminary balance-of-payments figures show Russia’s export earnings fell in both the first and second quarters by 2–3 % yoy.

Apart from a surge in exports of services, export earnings in the biggest export categories were flat or down.

Revenues from exports of gas remained unchanged, while earnings from exports of oil, petroleum products and other goods declined. The reason was that both export volumes and prices declined.

Growth in Russian spending on imports continued to slow in the second quarter, even if growth was still running at 5–6 % a year.

Net capital outflows stabilize at around 2.5% of GDP, CBR hikes FY estimate to $50bn Russia’s net capital outflows stabilized at around 2.5% of GDPin line with their value during ‘normal times’.

Balance of payment data for 2Q13 shows that, according to the 4-

quarter moving average as a share of GDP net capital outflows have stabilized at around 2.5% of GDP, broadly on par with its 2.3% of GDP print in 1Q13.

This is far off the 10-12% of GDP capital outflows seen during the 1998 sovereign crisis and the 15% of GDP capital flows experienced during the 2008/09 Great Recession.

The magnitude of net capital flows is now more in line with the ‘normal times’ between the two crises.

Russia’s REER depreciated 3.3% year-on-year in June – the sharpest move over the last 12 months The real effective exchange rate (trade-weighted and adjusted for inflation (REER)) depreciated 3.3% month-on-month in June after a 1.1% monthly decrease in May. In real terms, RUB weakened 3.0% month-on-month against $(vs. +0.8% month-on-month a month ago) and 4.5% month-on-month against EUR (+1.0% month-onmonth over the last spring month).

However, the CBR says that capital flight will probably reach $50bn this year vs the $10bn it was predicting at the start of the year.

What is more worrying is the continuing decline in the current account surplus.

The 4-quarter moving average has now decreased to only 2.5% of GDP, just covering the deficit on the capital account.

Russia will soon transition from a classic twin surplus economy (surpluses on the fiscal and current accounts) to one of twin deficits and maybe as soon as next year, even at current relatively high oil prices.

That will make even the relatively modest net outflows on the capital account dangerous.

Medvedev Pledges $9bn for Rural Development The Russian government will spend RUB300bn ($9bn) on a new state program to finance social development in the countryside in the next three years, PM Medvedev said.

The program will run from 2014 through 2017.

Funds from the federal budget will go to the regions in the form of subsidies, while regional governments will have to prepare their own programs based on plans for developing local agribusiness, Medvedev said.

Ministries Delay $2.6Bn of Defence Spending The Finance Ministry and the Defense Ministry have agreed to delay until 2017-2018 a total of RUB87.1bn rubles ($2.61bn) of spending planned for weapons procurement over the next three years.

At the same time, an additional RUB100bn rubles annually will be provided in 2014-15 to reimburse defense enterprises that were forced to borrow to fulfill orders, Deputy Finance Minister Tatyana Nesterenko said.

Over the next two years, the resulting federal budget spending on arms production will be higher than previously planned, but the government outlay will remain within the RUB20 trillion rubles allocated for the period to 2020, Nesterenko said.

MinFin to restart FX purchases Deputy Minister of Finance Alexey Moiseev stated that from the end of August the Ministry could start purchasing up to $40-50mn per day on the open market to replenish the Reserve Fund.

Currently the FY13 transfer to the Reserve Fund is estimated at RUB149bn.

MinFin says the transfer to the Reserve Fund is set to be cut to RUB67.5bn from the RUB 373bn set in the Budget Law (base case).

The Reserve Fund could even be unwrapped and RUB241.5bn transferred to finance the budget deficit (in a conservative scenario of lower non oil & gas revenues).

Hence, even under the base case scenario we are unlikely to see more than $25mn of daily purchases at the start of the programme at the end of August.

Russia's GIR down by $4.7bn to $513.7bn in June Russia's gold and foreign currency reserves shrank by USD 4.7 billion from USD 518.431 to USD 513.772 billion in June , according to the CBR. For the period January - June gold and foreign currency reserves decreased by USD 23.8 billion from USD 537.618 as of January 1.

Russia's gross international reserves (GIR) are still healthy, but have fallen from the pre-crisis high of over $600bn. The reserves have been depressed by the on going capital flight and razor thin budget surplus.

The main danger here is that reserves will fall so much that it will be impossible to replenish the Reserve Fund as Russia is expected to suffer from deficits going forward and will need this extra money to fill the budget funding gap in the next few years.

Infrastructure Putin lists flagship infrastructure projects At the St Petersburg conference Putin named the top three infrastructure projects.

•

The Moscow-Kazan highspeed railway (RUB363bn for 2014-16),

•

The Central Ring Road in the Moscow Region

•

Increasing the throughput capacity of the TransSiberian railway

These are the top priority infrastructure projects for the near future.

The investment remains subject to the preparation of detailed project documentation.

Russian Railways has notified the government that spending on the project to modernise the TransSiberian railway would have a negative rate of return.

Rosneft Ready to Invest $30bn in Russian Far East Russia’s state-controlled oil giant Rosneft is ready to invest RUB1 trillion ($30bn) in the development of East Siberia and the Russian Far East over the next five years, Rosneft CEO Igor Sechin said in July.

Rosneft will invest RUB52bn ($1.6bn) this year in developing its core activities in the Russian Far East, Sechin said, including RUB27bn ($830m) in exploration and production, and RUB23bn ($705m) in refining.

Russian Railways invests $18.7bn in Far East On July 18, Russian Railways and the Ministry for Development of the Russian Far East signed a cooperation agreement.

The agreement encompasses the reconstruction of the railroad infrastructure in the district—in particular, the construction of a bridge to Sakhalin Island, the modernization of the Baikal-Amur Mainline, the reconstruction of the Trans-Siberian Railway, and the connection of the Trans-Korean Mainline to the network of RZD. According to Vladimir Yakunin, president of Russian Railways, executing the top-priority development and modernization measures for the Far East railroad infrastructure by 2018 will cost around 562bn ($18.7 dollars).

However, Russian Railways notified the government that spending on the project to modernise the Trans-Siberian railway would have a negative rate of return.

National Wellbeing Fund money is to be deployed on infrastructure projects with positive returns only, while in the budget for 2014-16 there is no room for such additional expenditures.

Russian Railways on record spending spree Russian Railways (RZD) invested $18bn last year, even as rising operating costs cut into profit.

While turnover increased a mere 4percent and profits were down versus 2011, the country's largest employer and one of the biggest transportation firms in the world, saw expenditures climb.

Russian Railways results showed the company generated RUB1.5 trillion rubles ($45bn) of income last year, up a little more than 4percent compared to the results of the previous year.

Earnings before interest and taxes, EBITDA, corrected to exclude state subsidies, were down 10% compared to last year and amounted to RUB263bn rubles.

Net revenue fell by over 50%, to 78bn rubles compared to 169bn rubles in 2011, due to the fact that it sold 75% minus two shares in First Freight Company in 2011 for over 125bn rubles and that had an impact on financial results.

Moscow Region light metro to get RUB240bn of investment It will be the Docklands Light Railway of Russia: a RUB240 billion yet-to-be-built light metro will run through all large towns located close to Moscow, Acting Governor Andrei Vorobyov said in an interview.

The lines will run through the suburban towns of Khimki,

Mytishchi, Vidnoye, Krasnogorsk, and others, while the end stations will be located in Kryukovo, Sheremetyevsky, Pushkino, Balashikha Zheleznodorozhny, Lyubertsy, Domodedovo, Podolsk, Odintsovo, and Nakhabino, Vorobyov said.

The first line, which will be built by Russian Railways, will open in Khimki in 2015.

The funds will be provided from the federal and regional budgets, as well as from Russian Railways’ own funds and other sources, Vorobyev said.

Railway prices ”mad”, Russian Railways inefficient Russia’s railway transportation pricing system is “mad” and the country’s railroad monopoly is inefficient, Federal Antimonopoly Service’s (FAS) Director Igor Artemyev told reporters at the end of July.

“The system borders madness. The existing tariffs are created only to ensure the survival of a large monopoly. It all works thanks only to the consumer, the monopoly itself…not only failed to succeed, but it seems to me that all its programs are empty,” Artemyev said.

He said that Russian railway prices have recently became the world’s highest and since transportation is priced in all goods, Russian Railways lives off the consumer.

Artemyev said that vegetables from the Krasnodar Region are now

being transported to the Siberian city of Novosibirsk by road, rather than by rail, which damages the ecology and jams roads up.

“This example must say to everyone involved, primarily the tariff service: what are you doing?” he said.

FAS is a power in the liberal part of the increasing split Russian government.

Moscow and St. Petersburg account for half foreign investments, but the regions on the rise again Pre-crisis the fastest growth and best margins were to be had in Russia's regions. As Russia slowly recovers the same is becoming true again.

Although Moscow and St. Petersburg account for about a half of foreign investments, foreigners are deciding in favour of regions once more.

That's the conclusion of "The Appraisal of the Investment Climate of Russian Regions through the Eyes of Foreign Investors" survey conducted by KPMG and the Russian Union of Industrialists and Entrepreneurs (RSPP).

Foreign businessmen have been targeting the largest regional cities including: Sakhalin, Tatarstan, Kaluga and Ulyanovsk regions where foreign capital raising programs have long been in force.

Most of 200 surveyed investors see the investment climate improving.

The Kaluga and Ulyanovsk (Lenin's birthplace) regions in particular and the Republic of Tatarstan received a lot of favorable comments.

Moscow accounts for a third of total foreign direct investments in the country. However Sakhalin (18%) ranks 2nd in this respect.

The Moscow region comes 3rd, St. Petersburg 4th. The most depressive regions are Chechnya, Kabardino-Balkaria, KarachaevoCherkessia and Ingushetia.

Russia's transport network is the main cause of complaint amongst foreigners.

The quality of Russian highways has long been a joke but the railway network has developed much better, says the report.

Russian govt may give RUB12bn for SEZ infrastructure development in 2014 The Russian government may provide RUB12bn from the federal budget for the development of infrastructure in all of the country’s special economic zones (SEZ) in 2014, Mikhail Trushko, CEO of RusSEZ, the operator of the SEZ, said in July.

“The optimistic variant of budget (for next year) stipulates RUB12bn.

But this figure will largely depend on the fulfillment of our investment program this year,” Trushko said.

The government will also spend RUB13bn on SEZ’ infrastructure by the end of 2013, he said.

ECM

borrowing money to buy more stock.

Russian stocks become most attractive EM equities on valuation basis , Citigroup analysts say

He reportedly holds a 21.04% stake in the company and has been buying LUKoil for some time.

The current price of stocks of Russian companies is the lowest among 21 emerging markets monitored by Bloomberg. The MICEX Index is traded only five times higher than total profits of companies whose quotations are included in it. The average ratio for emerging markets is 9.5 to 1.

Since beginning of 2013, the MICEX Index has decreased by over 100 points. As for macroeconomic indicators, Russia's GDP increased 1.6% in 1Q 2013 compared with the same period in 2009.

The analysts used to highlight that Russian stocks often traded below expectations. By the price/earnings ratio, the Russian market has been keeping at the bottom of the list in recent years.

At the end of July Morgan Stanley also upgraded Russian equities to “overweight” on the basis of their cheapness and Russia’s excellent fundamentals.

Lukoil’s owner Alekperov continues to buy LUKoil shares LUKoil’s CEO and main shareholder, Vagit Alekperov, continues to buy LUKoil shares.

Bankers speculate that he is so sure the shares will rise he is

Russia’s AvtoVAZ CEO significantly reduces his stake in company The CEO of AvtoVAZ, Igor Komarov, has reduced his stake of the company's ordinary shares from 2.19% in June to 0.61% now, while his total stake in the company (taking into account both ords and prefs) has declined from 2.19% to 0.49%, AvtoVAZ reports.

The numbers imply that Komarov sold his entire stake of preferred shares, which was about 2.2% in June, according to VBT estimates.

He had been building his stake of ordinary shares since 2Q10 and his stake of preferred shares since 4Q12, based on the company's official disclosures.

Moscow Exchange Derivatives Market Grows By 8% In H1 2013 The total value traded on Moscow Exhange"s Derivatives Market grew by 8% year-on-year to RUB26.4 tn in H1 2013. The number of active

accounts reached 31,012 as of the end of June. Average daily trading volume of all derivatives instruments was up 13.9% yearon-year to reach RUB221 bn.

In H1 2013, trading volume of commodity derivatives grew by 61% year-on-year to RUB741 bn.

Gold and Brent oil were the most popular instruments, with trading volume reaching RUB333.6 bn and RUB327.4 bn, respectively.

Average daily trading volumes of these instruments were RUB2.8 bn and RUB2.7 bn, respectively.

RDIF and Deutsche Bank may buy Rostelecom shares worth $250m The Russian Direct Investment Fund (RDIF) together with Deutsche Bank may buy Rostelecom shares worth $250m, ahead of the company’s privatisation.

The target block of shares consists of treasury stock owned by Rostelecom's subsidiary Mobitel.

If the shares are purchased at the current market price RDIF and Deutsche Bank may end up owning approximately a 3.2% stake of the company's stock and reduce the amount of treasure shares owned

by Rostelecom by about two thirds.

Rostelecom originally bought the shares RUB 167 per share, while the current market price is RUB 89.66.

Rostelecom's new CEO Sergei Kalugin recently stated that the stock was purchased using debt

and the company would be very interested in reducing these costs.

Cukurova may buy Turkcell shares from Russia’s Altimo for $1.6 bln U.K.’s Privy Council, the highest British court of appeals, has ruled that Turkey’s Cukurova Group must pay U.S. $1.565 billion to Russia’s Altimo to recover shares of mobile operator Turkcell used as collateral against a defaulted loan, the court said in a statement at the start of July.

Under the court’s ruling, Cukurova Group can buy shares from Altimo, the telecommunications arm of industrial conglomerate Alfa Group, within 60 days.

In 2005, Alfa Group agreed with Cukurova Group to buy a 49% stake in Cukurova Telecom Holding, while the remaining 51% stake was kept by Cukurova Group.

As a result of the deal, Altimo gained control over a 13.22% stake in Turkcell. In exchange, the Russian company provided a U.S. $1.707 billion loan to Cukurova Group, which used a 13.80% stake in Turkcell as collateral.

Altimo said that Cukurova Group had violated the terms of the loan and failed to repay the loan. The Russian company applied to the international courts seeking to recover the stake in Turkcell from Cukurova Group, which, in turn, contested Altimo’s claims.

Due to the shareholders’ conflict, Turkcell has been prohibited from paying dividends for several years.

In January 2013, the U.K. court sided with Altimo in a dispute over the Turkcell shares and said that Cukurova Group must transfer the securities to the Russian company.

DCM Express lender Russky Standard launches new-style sub debt As part of the Basel III reforms the rules covering subordinated debt, a popular form of credit, were changed at the start of this year.

Russian Standard Bank was marketing its new-style subordinated bond with 10.5 years maturity, callable in 2018, with the coupon reset based on the fiveyear mid-swap rate. The initial yield guidance is in the "11.5% area".

A loss absorption event is defined as a breach of the 2% base capital adequacy ratio or the regulators implementing "bankruptcy prevention measures". The bank tried to issue the debt in May but postponed.

Loss-absorbing structure. The structure replicates that of the new style Tier II paper issued by Sberbank and Credit Bank of Moscow, except the new RUSB is callable.

In March media reported that Cukurova Group is negotiating a $3 billion loan to repay its debt to Russia’s Alfa Group and recover its 13.8% stake in Turkcell.

This is a permanent write down, 'low-trigger' loss absorption deal structured in line with the CBR's new capital requirements. Fitch rates bonds of this type one notch below an issuer's senior debt ('B' in the case of RUSB); the other two agencies have left this unrated.

Relative to the bank’s old-style sub (RUSB18), trading at 800bp over mid-swaps (about 1,000bp over mid-swaps if priced to call), the guidance implies a 200bp premium.

The sub-senior ratio would be next to 1.5x for the deal unless the guidance is tightened (which we think is unlikely). The guidance is also close to where Tinkoff and RCCF's old-style subordinated paper is currently priced. From a relative-value perspective, this is fair, although we are not convinced that there is sufficient demand for B-rated hybrids.

The regulatory environment is getting tougher for consumer finance in Russia: starting as early as in July, Russian banks have to allocate more capital against newly originated consumer loans that have effective interest rates of

25% or above (1.1-2.0x risk weights to be applied, depending on the interest rate range).

business, says Alexei Moiseev. The instrument will be in demand in this segment.

A second reading the draft law on securitisation of homogeneous assets due in the Duma’s autumn session

Russian banks place record volumes of corporate debt

Russia's MinFin put up a draft bill to the Duma that will make it possible to issue securitised bonds based on homogenous assets in July.

The bill has already passed the first reading was in 2009. Then the law got bogged down in approvals.

Deputy Finance Minister Alexei Moiseev says the draft law will be introduced during an autumn session.

Now banks can issue bonds backed by mortgage loans. This is done by mortgage agents of banks and the state owned mortgage agency.

After the draft law is approved, financial backing of bonds may be formed out of monetary resources in rubles and foreign currency, monetary claims, liens and other injunctive remedies, as well as securities.

Any homogeneous assets may be securitized, for example, standard loans to small and medium-size

Russian banks placed RUB790.6bn worth of corporate debt in the first quarter of this year. -- a record.

If to compare with 2012, the volume was up 64% from RUB480bn.

VTB Capital was the leader among investment banks in terms of arrangers of the issues and responsible for RUB222.5bn of the total.

State owned Gazprombank ranks second with RUB133.1bn, Sberbank CIB third with RUB121.1bn. Raiffeisenbank was fourth with RUB58.9bn. Rosbank was fifth with RUB42.5bn.

Issuers were trying to place their securities as the rates were record low in the first half of the year.

Despite the flurry of activity the market remains open only the large issuers. the situation for debt issuance in the second half of this year is expected to be a lot tougher.

Sectors

in Eastern Europe, as it aims to tap growing demand in the region.

Daimler is looking to gain a controlling stake in KAMAZ, but is more likely to actually increase to 42%-45%

Retailers of all colours are increasing Russia’s ranking in importance due to its large population and growing spending power.

Daimler is looking to increase its stake in KAMAZ to a controlling stake.

But according to Rostec CEO Sergey Chemezov the company's stake will actually increase from 11% to 42%-45%.

Chemezov said that Rostec does not plan to sell KAMAZ shares to Daimler.

Domestic Russian drugs company gets first global license R-Pharm has become the first domestic drug maker to get a worldwide license for developing and selling a medication with an international non-proprietary name.

Panasonic says it wants to tap into growing demand in emerging markets in Europe, particularly Russia.

Retail Real Estate Investments Set for Record High Investment in retail real estate in Russia could reach record highs this year, according to experts from Cushman & Wakefield.

Retail was the most attractive sector for real estate investors in the first half of 2013, bringing in $2.06bn and accounting for half of all investment over the period.

Total annual investment in 2011 in the sector was $2.04bn, while last year it was $2.59bn.

The Moscow-based firm signed an agreement with the Belgian drug giant UCB to develop, register and sell olokizumab — a medication for rheumatoid arthritis — both in Russia and abroad.

Investment into commercial real estate in the first half of 2013 came to $4.63bn, almost unchanged from the same period last year, but an 82% increase on investment volumes in the second half of 2012.

Panasonic Buys Stake in Eastern European Appliance Manufacturer

Investment in office space was $1.71bn in the first half of 2013, while warehouses and industrial real estate received $600m.

Japanese consumer electronics firm Panasonic Corp. will buy up to 13% of Gorenje, one of the biggest household appliance makers

Though up to 85% of commercial real estate investment is still targeted at Moscow, investors are

shifting their attention to the regions.

Furniture Company is Russia’s most profitable franchise

Between 1.6 and 2.8m square meters of shopping center space will open across Russia over the next two years.

Furniture retailer and manufacturer Feliks has been ranked top of Forbes magazine's list of the 25 most profitable franchises in Russia.

Russia announces new subsidies to stimulate car sales In the first six months of this year, car sales were down 6% from the same period in 2012. Car production fell 2 % and imports declined 8% during January-April.

Russia's car market is expected to decline by up to 4% this year, Russia's deputy trade and industry minister said, as the country's $2 trillion economy falters.

The forecast is slightly less pessimistic than that given by the Association of European Businesses (AEB), which tracks the Russian car market and recently released data showing that car sales have fallen for four straight months.

To boost the car market, the government hopes to introduce an interest subsidy programme for car buyers this month similar to the one that ran from 2009 to 2011.

The plan calls for an interest subsidy on car loans of about 5.5%age. The maximum price of a car eligible for the programme is 700,000 (€17,500).

To avoid breaking WTO rules, Russia would this time make the subsidy available also for imported cars.

The Russian-language version of the magazine reported that shops opened as part of the Feliks franchise are recording profits of up to 40%.

Supermarket chain PerekrestokExpress took second place, followed by Positronika electronics stores. InCity clothes stores came fourth and another furniture retailer Mr.Doors was fifth.

The ratings were based on several criteria, including the margin between a business's initial investment and its profits, as well as the size of turnover recorded in a single outlet.

Only companies with 30 or more outlets were considered by the magazine in compiling the list.

Also, an investment of 300,000 ($10,000) must have been spent on the opening of each stores.

Russia will be Europe's largest car market by 2016 – earlier than anticipated The Russian automobile market is poised to overtake Germany and become Europe’s largest by 2016, and the world’s fifth biggest, by 2020, according to a new report.

A growing middle class, an increase in car ownership, low fuel

prices, and Russia’s expanding economy are all factors that will drive the Russian car market, according to a forecast by the Boston Consulting Group.

"Fundamentally it’s an attractive market in terms of cars per thousand inhabitants and therefore we are bullish long-term - but that doesn't mean that every year will be a good year," Ewald Kreid, an author of the report and partner at BCG in Vienna, said.

Russia’s auto market is slated to grow by an annual rate of 6% through 2020, when annual sales will reach 4.4 automobiles and Russia will become the world’s fifth largest automobile market, by volume of sales.

The report forecasts emerging markets will dominate global car sales by 2020, and will account for 65% of global sales, more than double in 2000.

China, the US, India, and Brazil will occupy the first four places, displacing Japan, which is currently the third largest market. Russia, which was ranked seventh in 2012, will surpass Germany, currently the fifth largest consumer and Europe’s largest economy.

Increase in car sales is an indication of Russia’s overall integration into the global economy, as its economy is pegged by the World Bank to grow by 2.2% in 2013 and 3% in 2014, far ahead of its European counterparts who are struggling to keep their economies from contraction.

There has been a lot of speculation over when this milestone will be passed and 2016 is one of the earliest predictions. Until this report the consensus was for 20182020.

Russia is on course for a good harvest Good news for the economic recovery, Russia’s Agriculture Ministry confirmed its forecast for the 2013 grain harvest of 95m tonnes, up from 70.9m tonnes in 2012.

Ukraine is also on track to produce 10m-12m more grain this year than it did last year, according to Ukrainian Premier Mykola Azarov.

Investments in the Russian commercial real estate up by third to $3.7 billion in 1H13 The number of transactions with commercial real estate worth over USD 300 million increased in the first half-year, Jones Lang LaSalle says.

Their share is 12% of all transactions (6% for the same period in 2012) which makes 61% of total investments (32%). The first half of the last year was less successful: total investments in commercial real estate decreased 29.4% to USD 3 billion. The record over the same period was set in 2011 when investors spent over USD 4 billion on offices, shopping malls and hotels.

The growth is largely due to a number of large transactions, including the sale of Metropolis Mall

(205,000 m2) to Morgan Stanley Investment Fund for USD 1.1 billion.

Jones Lang LaSalle explains the changes in investments by the speed of making decisions by each investor as well as by the fact that in 2012, large transactions were closed in the second half-year. For example, the total amount of transactions as of the end of 2012 was larger than in 2011 (USD 8.7 billion versus USD 8.5 billion).

Moscow accounts for 89% of total investments made in the first six months of 2013.

39.4% is the share of transactions with shopping malls, 49.3% with offices, 6.4% with hotels, and 1.7% with warehouses.

Real estate sector companies recovering nicely

year-on-year. As a result, 1H13 volumes stood at 284,000sqm (up 43% year-on-year), or 50% of the aggressive FY13 guidance of 570,000sqm (implying a 28% year-on-year advance). Such a strong performance was primarily driven by the boost in pre-sales launches, yielding over 2mn sqm in 1H13.

And listed PIK Group has shown impressive operating and financial performance in 2013 too, says analysts, reflecting the strong fundamentals of the residential real-estate market, as well as improving financial performance at the corporate level. PIK has taken advantage of the favorable market situation to boost property sales and reduce leverage.

US Hotels Investing Heavily in Russia

The leading companies in Russia’s real estate sector are reporting health growth as the sector begins to recover.

Russia has become one of three top priority markets for InterContinental Hotels Group, because travel to and from Russia is growing fast the company says.

The sales of Russian real estate developer Open Investments (OPIN) doubled on the year to RUB3bn in January-June, the company said in July, attributing the positive change to the launch of two housing districts.

Hoteliers say Russia is a prosperous country and it's relatively underdeveloped, the group says which already has 13 hotels in Russia now, with five more scheduled for the near future.

Rival firm LSR reported the best results in the sector for 2Q13 and reiterated its sales expectations in building materials and aggregates.

The company plans to open its first Holiday Inn Express, a moderatelypriced hotel chain, in Veronezh next year, with a total of 15 Holiday Inn Express sites scheduled to open across the country by 2019.

In 2Q13, the company reported 164,000sqm in new sales contracts, an increase of 86%

Other US hotel chains with a presence in Russia include Marriott, Hilton, Radisson, Sheraton and the Ritz-Carlton.

The Chicago-based Hyatt Hotels Corporation announced this month it will open a second Hyatt Regency in Moscow, with 168 guest rooms and 52 extended-stay apartments, by 2017. It will be the sixth Hyattbranded hotel under development across Russia.

Russia was second largest arms exporter in 2007-2011 Russia was the world's second largest exporter of weapons after the United States in 2007-2011, according to the Stockholm International Peace Research Institute (SIPRI).

The volume of international trade of major conventional weapons grew by 24% between 2002-2006 and 2007-11. The five largest suppliers in 2007-11-the United States, Russia, Germany, France and the United Kindom – accounted for three-quarters of export volume.

States in Asia and Oceania received nearly half of all imports of major conventional weapons in 2007-11. Moreover, the five largest recipients of major conventional weapons-India, South Korea, Pakistan, China and Singaporewere all located in this region.

France’s Danone to invest RUB3bn in Russian dairy plant upgrade There aren't many foreign investors in Russia, but those that are already there love it.

French food producer Danone will invest RUB2.8 billion in 2013-2015 in the reconstruction of its Russian dairy plant Yalutorovsky, located in the Tyumen Region, after which production capacity will increase by 40%, the company says.

After the upgrade the plant will process up to 1,000 tonnes of milk on a daily basis. The plant will supply products to Ural area, Siberia, and Central Asia. It will create 100 new jobs after the upgrade.

Russia falls to 62nd place in Global Innovation Index 2013 Russia was ranked 62nd in the Global Innovation Index 2013 released by Cornell University, INSEAD, and the World Intellectual Property Organization (WIPO), down 11 positionsfrom last year’s rating.

This year Russia made significant progress in the Input Sub-Index (from 60th in 2012 to 52nd) closing gaps in Institutions (from 93rd in 2012 to 87th), Human capital and research (from 43rd to 33rd), Infrastructure (from 54th to 49th), and Market sophistication (from 87th to 74th), the report reads.

However, it dropped nine slots in Business sophistication (from 43rd to 52nd).

Its relatively strong position in Knowledge and technology output was maintained this year, even though it fell slightly, from 46th to 48th place, the study reads.

Burger King to expand chain in Russia to 500 restaurants by ‘16 Burger King Russia, the holder of the general franchise for the development of U.S. fast food chain Burger King in Russia, will expand its local presence to 500 outlets by 2016, Burger King Russia's Financial Director Mikhail Katsnelson told PRIME on Thursday.

"Our aim is to have 500 restaurants, not (about) the 100 that we have now," Katsnelson said.

Burger King Russia plans to increase the number of its restaurants to 180 units by the end of 2013. "We should reach a rate of launching 10 new restaurants per month," he said.

Burger King Russia does not close its restaurants. "If we see that the margin level falling, we start promoting the outlet," Katsnelson said.

Burger King Russia intends to enter the Far East market in 2014-2015, but may do it in 2013, he said.

Russia’s UAC to boost aircraft production by 50% in 2014 Russia’s United Aircraft Corporation (UAC) expects to produce more than 40 civil aircraft in 2013 and 60 aircraft in 2014, CEO Mikhail Pogosyan said in July.

“An increase in production requires a decision to create appropriate mechanisms that would comply with the WTO guidelines which would give us the possibility of competing not only on the technical characteristics of our planes, he told reporters.

He said the company needed a support system for sales and postsale servicing.

UAC is working on compensating interest rates for leasing firms for local and foreign firms, Pogosyan said.

UAC is completing the formation of a consolidated state order for civil aircraft, under which the company would mass-produce planes and specialized models, Pogosyan said.

Rosneft could buy Alliance Oil’s oil assets Russian privately owned oil company Alliance Group, which owns 43.3% of Alliance Oil Company, is negotiating with state owned oil major Rosneft on selling its oil assets.

Rosneft could buy a stake in Alliance Oil Company, a refinery in Khabarovsk (capacity of 4 mtpa) and a stake in the JV with Petrol.

According to sources close to the situation, Alliance Group oil assets are valued at $7.6bn (including all stakes in JVs), though the share of Alliance Group in its core asset Alliance Oil Company is worth $560m (as of yesterday’s market cap).

The news is mixed because on the one hand, there may be some synergies with Rosneft’s existing business (e.g. the upstream business in Samara region, downstream business in Far East, etc.), though the value-accretion of this deal depends on the price paid for the asset, which remains vague.

On the negative side, investors may be disappointed by Rosneft’s M&A activity given its fairly high debt burden. Moreover, there are a number of problems with Alliance Oil in the meantime as it has several projects with a risky production profile.