bne:Chairman list 011113

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 Russia shoots up World Bank's Doing Business ranking Russia's brave bet on organic growth Russia's WTO membership - a double-edged sword?

Politics – the good Putin warns United Russia members of bigheadedness and populism New anti-corruption law makes it easier to arrest managers at stateowned companies

Income disclosure rules for state employees expanded to include CEOs Politics – the bad Quarter of Russia's Budget to Become Classified by 2016 All communications traffic to be monitored at Sochi Olympics, report says Putin submits bill on merging Supreme Courts Politics – the ugly

Court ruling opens way for Navalny election runs

Moscow police arrest 1,200 migrant workers after murder of ethnic Russian

Russia's proposed prison amnesty – Pussy Riot and quarter of Russian prisoners to walk free?

Aeroflot union leader caught redhanded denies fraud charges

'Against All' Option Could Reappear on Election Ballots Russia caves in to WTO on automotive recycling fee from 2014 "Golden parachutes" from state companies may be capped

Russian developer quashes rumors of mass sackings amid scandal Duma passes new anti-terror bill following Volgograd bombing Polls, mood, sociology About 60% of Russians see communism as good system

Russians increasingly negative about the west Russians have warmed to Georgia, cooled on Ukraine, EU Navalny’s name recognition up to 50% after mayoral election

VTB buys 25.9% in affiliate from Belarusian government Mobile banking startup Rocketbank gets $2m investment Mortgage lending more than doubles Economics

Majority of Russians think Greenpeace arrests appropriate Consumers disappointed by stagnation in economy Russians believe the cost of living is rising fast Russian Alcohol Consumption Down 13% Wealth inequality levels in Russia among highest worldwide

Russia’s September output & demand soft across the board CBR retains hawkish stance in quarterly review Russian growth expected to recover to 3.3% in 2014-2016 Foreign direct investment in Russia triples in H1 to $55bn Chinese FDI into Russia up 40-fold in last eight years

Putin’s popularity stable at 62%... …Medvedev's approval rating at all time low WEF gives Russian human capital mediocre grade Most Russians believe Arctic should remain neutral Banks and Finance

Americans step up (re)investment in Russian manufacturing Budget surplus reaches 1.2% of GDP, but deficits coming Government to cut non-oil budget deficit to 5% GDP Russia tax revenues under pressure, companies, not oil, major source of funds

Russia's banking system outlook remains negative, stresses at highs all round

Partial freeze on regulated prices hoped to revive Russian economy

Russian banks plea for lower cost of credit

2Q13 GDP growth structure suggests destocking

Sberbank aggressive move to gain market share in consumer loans

Russia has smallest current account surplus since 3Q98

Capital investment still flat or falling

Rosneft, RN Holding agree on buy out price for TNK-BP minorities

Russia Outbound M&A solid performance

Russian equities on the verge of Euroclearability

CBR simplifies the currency band

Russian dividend stocks still the best bet for portfolio investors

Economy faces stagnation unless productivity increases Russia manufacturing PMI stayed at 49.4 in September Capital flight still a problem

Russian Finance Ministry postpones transition to IFRS-based dividends until 2015 Russia's Pension Fund cuts number of private management firms by third

Infrastructure $37bn to be invested in infrastructure from Russian rainy day fund Russia to spend $63bn on arctic development Siemens to invest €1bn euros in Russia in 2013-2015 Aeroflot registers low cost subsidiary Dobrolyot

Russia’s Lukoil mulls listing shares in Hong Kong $30M Tech Investment Fund Expects 45% Annual Return Aeroflot applies for foreign listing of 10% Too much money parked in defensive assets, Great Rotation is inevitable DCM

Russian airlines passenger traffic continues to climb, up 15% to 65m people Jan–Sep ECM

Russia leads record EM bond issuance in September Russia to double net domestic borrowings to RUB800bn by 2016

Alrosa raises $1.3bn IPO TCS Bank raises IPO volume to $1.087bn from $870m

Big company borrowing rebounds as loan prices fall Sectors

Qiwi raises $288m in SPO Vimpelcom may be added to Nasdaq indexes

Medvedev oversees raft of energy deals on China visit Mickey Mouse coming to Moscow in 2014

Favourable investment climate in 28 Russian regions Gazprom European deliveries up by a third Gazprom Completes First Solo Offshore Project Beer Market on Course to Shrink by 25-30% by 2014 One third of 2014 warehouse pipeline in Moscow region is already pre-leased or sold Russian real estate investment volume in 2013 could reach $8bn

US Set to Leapfrog Russia in Oil and Gas Output Toyota to double capacity of St. Petersburg plant Russia's Energy Ministry says profitable oil reserves double Law to open floodgates to foreign oil companies Shopping centres completions in Moscow doubles Russia reintroduces subsidised loans for cars

Top Story

connection times by 40%, with costs reduced by 80%.

Russia shoots up World Bank's Doing Business ranking

The rise up the table is good news for Russia. The economy is flagging and even the Kremlin admits that most of the slowdown, "is structural in nature," according to recent comments by Economics Minister Alexey Ulyukayev. The only hope of recovery is to make a raft of reforms stick and increase both productivity and investment.

Russia has shot up the rankings of the World Bank's annual Doing Business index this year. According to the survey, it's now easier to do business in Russia than in China, the previous stand-out leader in the ranking amongst the five Brics nations.

"Improving the investment climate is a top policy priority for the Russian authorities," Augusto Lopez-Claros, director of Global Indicators and Analysis at World Bank, said in a statement accompanying the report. "The local entrepreneurs are seeing the results."

Russia rose 20 places from 112th out of 189 countries on the list to 92nd, just ahead of China, which dropped five places to 96th. It is also ahead of Brazil, which moved up 14 places to 116th and well in advance of India, which dropped two spots to remain stuck near the bottom of the table at 137th.

This year's report cited Russia's main achievements in five major market indicators, including ease of establishing a business, ease of applying for construction projects, registration of projects and property, improving international trade, and ease of applying for connection to the national power grid. The latter category was an area in which Russia made the most progress: the World Bank said the country has reduced

Moving up the World Bank list has been a top priority for President Vladimir Putin, who signed the first decree designed to get the ball rolling literally minutes after he was inaugurated to his third term as presidential in May 2012. Putin has called for Russia to attain 20th place on the list by 2018.

The jump this year should come as little surprise then, despite the complexity of reforming a country as large as Russia. As East Capital's chief economist Marcus Svedberg pointed out when goal was first set, Russian always had the opportunity to make big gains with relatively little effort.

Within the ten variables that make up the final ranking, Russia was amongst the worst in the world on two: issuing construction permits and connecting business to the electricity grid. However, just fixing these two things should propel Russia to about 80th place, Svedberg said. Fixing the worst five issues would propel Russia into the top 40, he suggested. Russia also does badly on the ease of starting new businesses, protecting

investors and trading across borders.

Meanwhile, Russia is well ahead in terms of the simplicity of tax administration (thanks to its flat tax regime), although its performance is less impressive on getting those taxes actually paid. It also scores extremely well globally on contract enforcement, according to the World Bank, despite its image as a lawless wasteland.

There's more to come, according to government plans. The state has earmarked funds to subsidise lending to small and medium-sized enterprises in a scheme that will kick in next year. Protecting

investors has always been a problem but the on going financial reforms – that include hooking the equity market up to international clearance systems Euroclear and Clearstream as soon as January – is part of improving the whole corporate governance regime. A fundamental reform of the customs service was introduced at the end of last year.

Whether Russia will hit Putin’s target of 20th places by 2018 remains moot. The fact that Russia is successfully making reforms work at all – and to the point where it is easier to do business in Russia than China – is a feather in the Kremlin's hat.

Russia's brave bet on organic growth

Ulyukayev in October. Russia’s economy has stalled.

Russia's growth over the first nine months of this year was 0%, Deputy Economic Development Minister Andrei Klepach said on October 15. While the rest of the world is fixated on trying to spur growth, the Kremlin is largely ignoring the problem of its stagnating economy, preferring to concentrate on the deeper problem of persistently high inflation. It is a brave bet that assumes Russia will be lifted out of its economic malaise by organic growth next year.

Part of the reason is that the Central Bank of Russia has kept interest rates high (8.25%), making borrowing unaffordable for many companies, while the rest of the world has cut rates to near zero to spur growth. Indeed, despite monthly predictions by economists it would cut interest rates, the CBR this month decided yet again to leave them unchanged as inflation was still above target at 6.1% in September.

The first question that springs to mind is: will it work? The short answer is that despite the recent disappointing data, Russia has some really big fundamental advantages – and not just its massive $500bn-plus cash pile (although that helps a lot, of course). Low unemployment, low debt levels and rising incomes all combine to put Russia in a totally different place to the rest of the world. On balance, there is a good chance that the bet will pay off – and if it does, then Russia will be much better placed to put in many years of strong growth.

But first the bad news. After almost a decade of 6-8% GDP growth, much has been made of the economy now effectively stagnating. Nominal GDP growth over the first six months of this year was a meagre 1.5%, but in real terms there was no growth at all, said Trade and Economic Development Minister Alexei

Another reason is that the government has rather perversely chosen now to implement its own version of austerity, imposing the first real budget cuts in a decade and reducing its oil price assumptions used in the budget.

This bucks the global trend of austerity being abandoned and spending increased to pump-prime growth in flagging economies.

Russian government spending has been rising by between 20% and 40% a year for most of the last decade, but this year spending was slashed by 5% in real terms and big expenditure programmes, like re-equipping the military, have been put off until at least 2014. At the same time, tariff hikes on things like power have been frozen for a year – they were supposed to be increased by some 15% this year – which is a throwback to the inflation-busting policies of the 1990s. This starves utilities of investment capital.

And various ad hoc measures have been introduced. There is an unpopular change to the way state pension fund contributions are calculated to create extra cash for the budget, and the Kremlin says it will dip into the Reserve Funds to pay for infrastructure spending next year.

The reason for these measures is that the budget is about to go into deficit for the first time since the Yeltsin-era – as soon as the fourth quarter of this year – and deficits are anathema for this government.

“The annual target for government expenditures this year is RUB13.4 trillion ($419bn) but the government will spend RUB4.4 trillion in the fourth quarter, implying a substantial increase in spending from the average quarterly tally over the first nine months of RUB3.0 trillion. So the budget will run a small deficit for the full year, which will be covered by borrowing,” Evgeny Gavrilenkov, chief economist with Sberbank CIB, said in a recent note.

Maybe the biggest concession to the slowdown has been the decision to borrow more. The budget includes $7bn of international borrowing a year and Russia got a Eurobond issue away in September for this amount. But from next year instead of issuing one bond, the state plans to hold bond investor meetings every three months or so and could increase the amounts offered. The Finance Ministry also just announced it will increase domestic borrowing to RUB800bn ($25bn) by 2016 –

almost double the RUB440bn it is expected to borrow this year.

These measure are all a bodge to keep the show on the road – the economic equivalent of putting duct tape on a hole in the roof. In the meantime, things are continuing to get worse; the economic slowdown is now starting to affect incomes and shopping, which has replaced oil as Russia’s main economic engine. Retail trade decelerated in August by 4% on year on the back a slowdown in growth of real incomes by 2.1%, reports Rosstat. A further drag on consumption comes from the CBR’s decision to crack down on the white-hot consumer lending by imposing much tougher conditions on retail-oriented banks this year.

And domestic companies are equally pessimistic, with growth in corporate borrowing in the red, which in turn meant that capital investment – usually another economic driver – also turned negative again in August. At the same time, capital flight is running unchecked, at about $12.9bn in the third quarter and $48.1bn over the first nine months – way ahead of the CBR’s forecasts at the start to this year of $10bn for the whole year.

So the Russian economy is going to hell in a hand basket, right? Well, not quite, as there is some good news too.

Focus where focus is needed Despite the economic slowdown, the CBR is probably right to focus on bringing down inflation over boosting growth.

One of the reasons that Europe has to do something about its lack of growth is so it can grow its way out of the debt hole in which it finds itself: between 80% of GDP and 130% for most countries on the Continent. Even the US' debt burden is now over the unsustainable 100% of GDP. By comparison, Russia’s sovereign debt/GDP external debt is only about 14%.

A second reason is that unemployment across Europe is running extremely high, with youth unemployment in countries like Spain at over 50% - a potentially explosive situation. In Russia unemployment is at 20-year record lows.

Third is that the standard of living in the West is falling, with percapita incomes in the US, for example, falling by $1,000 a year for the last five years. In Russia average incomes continue to rise, although the rate of growth has slowed this year.

Thus, the average Russian hasn’t really been affected by the crisis or the subsequent slowdown. Anyone who wants a job has one. Their pay continues to rise. And the chance of another crisis seems remote.

However, having lived through almost a decade of hyperinflation, Russians have a deeply ingrained fear of inflation, which also eats

into their savings; savings they rely on for their old age in lieu of a properly functioning pension system. High inflation is Russians' biggest concern, with 68% of respondents putting it as worry number one in a poll by the Levada centre earlier this year.

The government has a lot more time and space to deal with its economic problems than the rest of the world and has chosen to deal with the deep structural problem of inflation first, banking on a global recovery to provide the stimulus to spur growth, rather than trying to engineer it with rate cuts and stimulus programmes.

And that doesn’t seem like such a poor bet. The global economy seems to have passed through the nadir and economists are almost universal in predicting an upswing in 2014. Russian growth may only be 1.5% this year – the slowest since the 1990s – but the consensus is it will pick up to 3% next year.

Indeed, foreign investors seem a lot more optimistic about Russia’s future than the Russians themselves. Domestic investment may be negative, but Chinese investment in Russia is up 40-fold in the last eight years to $4.9bn by the end of 2012. Likewise, Russia has seen a bum-rush of European retailers arrive in the last few years. Russian President Vladimir Putin said in September that foreign direct investment into Russia has trebled in the first six months of this year alone to $55bn and this shows no sign of slowing down.

The irony here is that the Kremlin needs to do more to convince its own business people to invest in Russia if it wants the boom times to return. As the chart of capital

outflows below shows, it is the return of flight capital that really fuelled growth in Russia in the boom years, not foreign investment.

Russia's WTO membership - a double-edged sword?

Russia recently celebrated its first anniversary as a full member of the World Trade Organisation (WTO). Experts agree that membership will be beneficial for Russia in the long term, as it will improve competitiveness, demand and international investment, as well as driving innovation among manufacturers.

However, the first 12 months have not been easy. There is profound scepticism in the manufacturing sector about what membership means for Russia, particularly within the automotive industry, which is at the centre of the first formal WTO case filed against Russia: EU and Japan have complained to the governing body about Russia’s recycling fees for imported vehicles.

But perhaps even more surprising than what has happened so far is what has not happened. As a member of the WTO family, Russia can now challenge anti-dumping measures and special duties imposed by other countries against Russian goods, but we have yet to see it file a complaint with the WTO authorities.

Is this about to change? Speaking at the Sochi Economic Forum in September, Russian Minister for Economic Development Alexei Ulyukayev said that Russia would use its WTO membership more “actively” to protect the interests of its exporters and manufacturers.

The sentiment was echoed by President Vladimir Putin, who said shortly afterwards at the VTB Capital annual investment forum in Moscow that Russia should learn to actively use WTO mechanisms and protect its domestic market.

So what does the future hold for Russia as a WTO member? And how can it better maximise its membership to promote internal growth?

Recycling news The recycling fee dispute continues to make headlines, amid real concern within Russia that the country’s nascent automotive industry will be made to suffer. The alternative could see Russia become the first exception to the unspoken rule that no action is taken against countries in the first year of membership. What action the WTO authorities could actually take against Russia is an interesting question, however.

The WTO may not impose direct penalties on a member country, so if Russia refuses to scrap the recycling charges for imported vehicles or makes domestic producers pay it too, the only alternative would be for the EU and Japan to impose additional duties for Russian goods.

But what goods would this apply to? Russia’s most important export to the EU by far is oil and gas.

However, imposing additional duties on those would be a case of cutting off your nose to spite your

face, as the EU relies on Russia to meet its energy needs.

The recycling fee dispute is likely to be resolved by applying the levy to all cars sold in Russia to level the playing field – and a bill to that effect was introduced to the Duma earlier this year, although parliamentary holidays began before it could be considered.

This leaves us with the question of which sectors are likely to be the next focus of WTO disputes? One highly contentious area is agricultural machinery.

Earlier this year, the Customs Union began considering the possibility slapping of protective tariffs on foreign-made grain harvesters, following a request from Russian agricultural machinery manufacturers Rostselmash.

Rostselmash’s desire to protect itself is hardly surprising: it is the largest manufacturer of grain harvesters in Russia and competes directly with all imported brands; naturally it wants to protect itself against any competition.

However, the decision on protective duties for Russian grain harvesters has been met with scepticism in Kazakhstan. Thus the tariffs implementation has been delayed pending a final decision by the Supreme Eurasian Economic Council of the Customs Union – in other words, the heads of state or the heads of governments for Russia, Belarus and Kazakhstan.

The Council decided at the end of September to introduce a minute quota for the import of harvesters and ordered the commission to amend its safeguard decision respectively. Could another lawsuit against Russia be on its way to the WTO dispute resolution body as a result?

B WTO membership is actually a double-edged sword for Russia. It has already spelt short-term trubles for certain sectors, but it also means that Russia can use the WTO legal framework to protect its own interests on the global economic stage.

Currently there are over 100 restrictive measures in force against Russian exports globally.

These are largely anti-dumping measures aimed at the steel and chemical industries, and in some cases there is evidence of antidumping rules being abused to disadvantage Russian producers internationally.

Prime Minister Dmitry Medvedev has publicly spoken about the importance of protecting the steel industry and the WTO can offer a good platform for constructive engagement on this internationally.

In the next couple of years, we can expect to see Russia bringing its own court case through WTO channels to protect these critical industries.

Winning a case in the WTO will be a breakthrough for Russia’s standing on the international stage and have obvious economic

benefits. However, bringing a case could have real benefits even if Russia were to lose. It will send out a clear signal to the international community that Russia is an equal player following the rules. Effective use of the WTO legal framework will be a powerful illustration of the fact that Russia can stand up for its producers, takes its obligations seriously and is committed to handling disputes in full accordance with international law.

The Russian economy is facing significant challenges in the wake of the global recession and competitive pressures on the world stage. Russia’s future lies in working constructively within the WTO framework – but we need to see Russia making full use of the advantages conferred by membership over the coming months.

Politics – the good Putin warns United Russia members of bigheadedness and populism The near disaster that was opposition blogger Alexei Navalny’s strong showing in September’s Moscow mayoral election that nearly forced a second round has shaken the Kremlin.

However, rather than cracking down Putin has responded with a series of reforms and changes that represent a softening of the Kremlin line. They are an admission that the opposition is not going away – and even that some of their complaints are justified. Putin has introduced changes that will give more room for the opposition to operate in the future, but in typical Putni style these are being introduced slowly.

One of the more visible moves was Putin’s comments to Russia's ruling party United Russia during its annual congress in October. Putin's meeting with secretaries of United

Russia's grassroot organizations became the key event. Putin called United Russia the most influential people's party, but warned its members against euphoria, bigheadedness and a slide into populism while communicating with voters.

Putin told United Russia deputies (and earlier the regional governors) that they needed to build bridges with the opposition and listen to their complaints, to engage and to understand the issues, rather than simply rely on the power of the government’s party of power to carry them through elections.

New anti-corruption law makes it easier to arrest managers at state-owned companies Changes to the Criminal Procedural Code that went through in October make it easier to prosecute managers at state-owned companies for wrong doing at their companies.

The bill was put forward personally

by President Vladimir Putin as part of his growing war on corruption. It allows law enforcement officers to file abuse of office and bribery charges against state company managers without the consent of their bosses, Vedomosti reported.

Bosses of state-owned companies typically shield their employees from prosecution and managers are prone to help themselves to the company’s assets or to cut poor deals in exchange for kickbacks.

The current version of the Criminal Procedural Code currently requires law enforcement agents to wait until they receive a request from the suspect's boss to press any charges.

The legal procedures for private companies would remain the same, where a manager's request is required to start criminal cases against employees suspected of misdemeanour.

Court ruling opens way for Navalny election runs Russia's Constitutional Court ruled on October 10 to overturn a provision barring people convicted of major crimes from running for public office.

In theory this opens the way for opposition leader and recent Moscow mayoral candidate Alexei Navalny to participate in future elections, however, the court went on to say the rules will not apply to the next presidential election,

meaning the earliest Navalny can run for office is in 15 years time.

The decision is another example of the Kremlin softening its stance and making some more room for the opposition to work, but in keeping with Putin’s grand reform plan running to 2020 these changes will be phased in only slowly.

Russia's proposed prison amnesty – Pussy Riot and quarter of Russian prisoners to walk free?

Putin ordered the Russian presidential human rights council to draw up a proposal for a prison amnesty that could see one in four inmates walk free to mark the 20th anniversary of the country's adoption of its post-Soviet constitution.

Putin tasked his human rights council in September with drawing up a plan by October 15. The proposal now needs to be reviewed and then passed by the Duma. which is responsible for enacting the amnesty. The amnesty marks 20 years since Russia adopted its current constitution, on December 12, 1993, following the collapse of the Soviet Union.

The head of the presidential human rights council, Mikhail Fedotov, has described the amnesty as "broad" and frees whole categories of inmates.

Amongst those eligible are people serving a sentence of up to three years for nonviolent crimes, provided that this is the first time

in jail; people jailed for up to five years for negligence; war veterans, elderly people, pregnant women, women with underage children, people with disabilities, and the terminally ill are also eligible.

However, the council has suggests freeing people sentenced for taking part in demonstrations, which could see the political charged demonstrators charged with rioting on May 6 2012 released. These people are widely seen as political prisoners by both the domestic and international human rights groups.

Most of these demonstrators are still being tried and as long as their sentences, if passed, are less than three years they would be eligible.

The amnesty could also possibly be extended to cover the jailed members of the Pussy Riot punk band. Both Nadezhda Tolokonnikova and Maria Alyokhina of Pussy Riot were sentenced to two years in prison for staging an anti-Kremlin performance in a Moscow cathedral. And both have young children.

Opposition blogger Aleksei Navalny, who was handed a fiveyear suspended prison sentence on embezzlement charges, could also be eligible for an amensty.

onboard a Greenpeace ship, their chances of being amnestied appear slim. The piracy charges they face exclude them from qualifying for the proposed amnesty, the newspaper "Novaya gazeta" reports.

All in all the celebration of the 20th anniversary of the constitution presents a golden opportunity for Putin to get rid of a string of extremely embarrassing and (for the Kremlin) very annoying cases that are causing Russia’s image abroad considerable damage.

'Against All' Option Could Reappear on Election Ballots The "against all" vote, a popular mechanism of protest until it was stricken from the Russian ballot in 2006, may soon reappear on the initiative of the very people who removed it — the ruling United Russia party.

The proposed amendment to election laws is another sign of the Kremlin’s attempt to defang popular dissent by making some more concessions to opposition demands and in general ‘politicising’ itself.

There is a big question mark over the possible release of oil executive Mikhail Khodorkovsky, who is unlikely to be released as the length of his terms seems to preclude is release.

Valentina Matviyenko, who is the Federation Council's Speaker, a United Russia member and very close Putin ally, said in a letter published by Izvestia that she will submit a draft bill to the State Duma for the reintroduction of the "against all" option.

As for the 28 environmental activists and two journalists detained last month in the Arctic

The bill was prepared by Matviyenko and other members of the council, who believe that the

return of the "against all" vote will "more fully reflect in the election process the diversity of political opinions, of public interests, which is characteristic of our country today," Matviyenko wrote.

If the Duma approves the bill, the "against all" vote will be added to ballots for all elections except for the presidential election. So this is a consession, but not a very big one.

Russia caves in to WTO on automotive recycling fee from 2014 The Russian Duma passed legislation under which recycling fees on cars will be applied to all domestic auto producers from 2014. Currently, the fee is only paid by importers, which have said that this violates Russia's WTO commitments.

The recycling fee was the cause of Russia’s first big row with the WTO and has been widely seen as an administrative barrier to imported cars set up to protect the domestic industry.

Russia the fee, which varies depending on a vehicle's size and age, for importers was adopted shortly after Russia’s accession to WTO. Currently, all importers pay the fee at customs, while domestic producers assume an obligation to scrap their vehicles after their useful life is over.

"Golden parachutes" from state companies may be capped The government said on Octber 29 that it would limit the size of severance payments made to senior executives leaving statecontrolled companies.

Under the proposed changes to the Tax Code, the upper limit for "golden parachutes" for top managers in companies in which the state holds more than a 50% stake will be restricted to six times their average monthly salary.

The move appears aimed at addressing deep-set public unhappiness over perceived wealth inequality in the oil-rich nation.

These payments became an issued after the head of Rostelecom was paid RUB201m ($6.3m) after quitting his job.

Income disclosure rules for state employees expanded to include CEOs Russian Prime Minister Dmitry Medvedev issued a list of statecontrolled companies, whose CEOs as well as their wives and underage children, must disclose their revenues and spending on October 10.

The new list comprises 63 staterun organizations, including oil major Rosneft and gas giant Gazprom, other large fuel and energy, transport and defense companies.

Apart from the CEOs and their families, deputies and chief

accountants must also report their incomes.

Politics – the bad Quarter of Russia's Budget to Become Classified by 2016 Almost one-quarter of government spending in Russia is to become classified within the next three years, according to findings by a Moscow research institute that will raise concerns of decreasing economic transparency in a country already plagued by corruption.

A study by the Gaidar Institute for Economic Policy detailed the 24.8% of federal spending will become classified by 2016. The institute estimates that almost 16.7% of the state budget will be classified in 2014, and that the figure will rise to 21.4% the following year.

Typically western governments only classify a few% of their budget spending. The USA classifies about 8%.

All communications traffic to be monitored at Sochi Olympics, report says Telecommunication networks in Sochi may have been modified with the intention of letting the FSB monitor virtually all phone and internet traffic in the city during the 2014 Winter Olympics, said reports.

Phone and Internet networks in Sochi have already been retrofitted with a surveillance system, known

by its Russian acronym Sorm, which allows the FSB to eavesdrop on phone and data communications in the city.

Putin submits bill on merging Supreme Courts Putin submitted a bill to merger of the Supreme Court (SC) and the Supreme Arbitration Court (SAC) into a new super court on October 8 – a move that was met with mixed reactions.

The bill, with respective amendments to the Constitution, has a good chance of being passed into law by the end of the year.

The merger has officially been motivated by the desire to increase the uniformity of court practices and eliminate precedents of contradicting rulings on the same cases obtained from the two separate systems.

A similar move was recently seen with the creation of a megaregulator for the financial sector.

However, observers have mixed feelings about the move: the SAC is the supreme court for commercial litigation and is now generally regarded to be effective and reliable. Indeed, Russia scores in the top 15 in the World Bank’s Ease of Doing Business on contract enforcement – about the only thing it does really well in in the ranking.

They worry the court will work less well if it is expanded.

The bill proposes a six-month transition period.

Politics – the ugly Moscow police arrest 1,200 migrant workers after murder of ethnic Russian Moscow police rounded up and arrested more than 1,000 migrant workers at a vegetable warehouse in southern Moscow after race riots broke out leading to violent clashes with the police in the middle of October.

More than 3000 people went on the rampage after an Uzbek national killed a Russian street vendour at the market in a brawl.

However, the crowd then clashed with the police after they moved in to restore order. Russian rioters staged the most violent nationalist unrest in the capital in three years.

More than 300 people were arrested.

The following days saw the Kremlin attempt to deflect the anger onto immigrants by launching a citywide sweep for illegal immigrants.

About 100 people were deported.

We have been writing in this newsletter that nationalist sentiment has been rising fast in the last months and the police actions will only serve to further increase tensions.

Vigilante groups worked with police in the following days to ensnare gypsy cab drives, who are largely illegal immigrants, who were arrested or had their cars impounded, as only one example of the government use of nationalism to form a political profile.

However, the Kremlin rejected a law that would have introduced visas for the ex-Soviet Republics.

The Kremlin is caught on the horns of a dilemma: it wants to use the nationalist sentiment to create a popular political platform to counter the opposition, but it also needs the cheap labour of immigrants to counter its demographic problems.

Aeroflot union leader caught red-handed denies fraud charges A second member of an Aeroflot pilots' union accused of taking advantage of a pay dispute to defraud the flagship airline was remanded in custody by a Moscow court in October.

Alexei Shlyapnikov is the second of two union leaders to be jailed after the pair reportedly attempted to solicit RUB100m ($3.1m) from Aeroflot and obtain a part of the sum in cash from a VTB 24 bank deposit box.

Russian developer quashes rumors of mass sackings amid scandal Rosgranstroi, a developer that builds border checkpoints and other facilities for the Russian government, dismissed rumors of mass sackings on October 24 amid a scandal over mismanagement of state funds. Kommersant reported that five employees had been detained on suspicion of misspending state funds.The head of Rosgranitsa, Dmitry Bezdelo was reportedly fired after police checks

revealed that RUB1bn ($31m) was placed into accounts at the bank Agrosoyuz, whose main beneficiary is his father.

The checks were launched in October 2012 after Deputy Prime Minister Dmitry Rogozin criticized the work of the state agency, saying it used shady financing schemes when constructing facilities for last year’s Asia-Pacific Economic Cooperation summit in the Far East and for the 2014 Winter Olympics in Sochi.

US company finedms for Russian ATM bribery case US automated teller machine manufacturer Diebold Inc. has been fined $48m for bribing officials in Russia, China and Indonesia to illicitly sell its ATMs to banks in the three countries, the US Securities and Exchange Commission (SEC) has said.

In a statement released at the end of October, the SEC said that Diebold "falsified books and records to hide approximately $1.2m of bribes paid to employees at privately owned banks in Russia" from 2005 to 2008.

Duma passes new anti-terror bill following Volgograd bombing The Duma passed a new law on October 24 that requires terrorists' relatives to pay for the damages caused in attacks. The bill came suspiciously soon after a female suicide bomber killed six after detonating a 2kg bomb inside a bus.

The terrorist attack raised questions amongst journalists after the attackers personal details came out extremely fast – within hours – of the attack, including a picture of her apparently undamaged passport with her in a Hijab. It later became clear the passport photo had been crudely doctored and the whole media circus surrounding the attack suggests the authorities manipulated the situation.

However, the new terrorist laws come as part of the prepations for the 2014 Winter Olympics in Sochi in February, which is in a potentially unstable region.

The document says that training for terrorist activities, something which is not spelled out in current law, is punishable by up to 10 years in prison. At the same time, it envisages that those involved in such training would be absolved of any punishment if they report it to the authorities.

For the first time, the new bill makes relatives of a terrorist responsible for paying damages resulting from an attack.

Polls, mood, sociology About 60% of Russians see communism as good system About 60% of Russians believe there were more positive than negative aspects to life in the former Soviet Union, an opinion poll held by Russia's Public Opinion Foundation (FOM) suggests.

14% said the word communism had "very pleasant," "positive" or "wonderful" connotations for them and 12% said they were nostalgic about the Soviet era. Communism was just a thing of the past for only 11% of Russians. To 7%, the word communism gave a sense of "disgust" or "sad associations" or meant "something negative" generally.

Asked by pollsters to explain the meaning of the word communism, 23% said that for them it meant a just society where everyone is equal and all property is common.

For 9%, the word primarily stood for a specific economic and social system, while for 8% it represented a life better than today's ("we were better off, people were taken better care of," and "people were more plain and life was more plan as well").

Five% dismissed communism as a utopia or fairytale.

By and large, 59% of respondents believed there were more positive than negative aspects to communism. In that category, 69% were people aged 60 or more

and 47% people aged between 18 and 30.

Russians increasingly negative about the west Russians’ attitudes to the United States and European Union have dramatically worsened since 1997, according to a new survey.

The number of Russians regarding the US “generally badly” rose to 36% this year, up from 31% last year and just 12% in 1997. A further 13% this year said they regarded the US "very badly," according to Levada Center.

Only 3% of Russians regarded the US “very well,” down from 12% in 1997, the survey showed. That was slightly better than in 2008, when positive opinions of America reached a record low, with only 1% giving that answer.

Similarly, Russians’ attitude towards the European Union have also worsened, with 24% regarding it “generally badly” last month, while a decade ago the figure was just 9%.

Russians have warmed to Georgia, cooled on Ukraine, EU Dwindling numbers of Russians see Russian-Ukrainian relations as good or have any likening for the European Union, but more and more Russians are warming up toward Georgia, according to the Levada Centre.

In the 2013 survey, 46% said they essentially liked Georgia. The proportion for 2012 was 41%, that for 2011 38% and that for autumn 2008 – the year of the war -- was 17%. Proportions of those hostile toward Georgia plummeted to 43% in the 2013 poll from 75% in the 2008 survey.

The number of Russians that like the EU has fallen to 56% in 2013 from 63% in the 2012 survey.

Proportions disliking the EU was up to 29% in the 2013 poll from 18% in the 2012 one.

As in last year's survey, 81% felt friendly toward Belarus. In a 2011 survey, those liking Belarus made up 75%.

Navalny’s name recognition up to 50% after mayoral election Opposition blogger Alexei Navalny name recognition has risen from 35% in March to 50% following his bid for the mayor of Moscow’s job in September’s poll. This is up from a poll by the Russian Public Opinion Research Center in April that

showed that only 14% knew that he was with the opposition.

Out of those who are aware of the opposition leader, 49% know about Navalny’s embezzlement charges brought against him, a Levada Center poll indicates.

Majority of Russians think Greenpeace arrests appropriate The majority of Russians approve of the piracy charges against 28 Greenpeace activists who were detained in late September after trying to climb an Gazprom-owned oil drilling rig in the Arctic to protest its environmental impact.

A survey from state pollster VTsIOM published Wednesday showed that 60% of the respondents believe the

In July, Navalny was sentenced to five years in prison after being convicted on charges of stealing timber from the KirovLes company in 2009, which allegedly cost the state $490,000.

government measures applied to the activists were "appropriate."

17% of respondents thought that the arrest and detentions were too harsh, while 8% said they thought the government's response was too soft.

Russian authorities said the arrests were warranted because the activists' actions took place in Russia's exclusive economic zone and could have endangered those working on the Prirazlomnaya oil rig. Greenpeace insisted that the

Arctic Sunrise was located in international waters and that the protest was peaceful.

Consumers disappointed by stagnation in economy

future dropped to minus 3% in 3Q13 from minus 0.5% in 2Q13: the share of respondents expecting the economic situation to improve in the next 12 months decreased to 18% from 20% in 2Q13.

Consumption has held up Russian economic growth this year, but as the economy continues to slow even consumption has started to slow by the third quarter.

Despite the gradual improvement in Europe this has yet to feed through to Russia, which historically lags Europe by 2-3 months.

Rosstat published the consumer confidence index for 3Q13, which declined 1% QoQ to minus 7% after two quarters of growth.

In addition, Russia is enduring large capital outflows are negatively affecting the ruble and hence, consumer sentiment.

The index of expected changes in the economic situation in the near

Russians believe the cost of living is rising fast

one," Komsomolskaya Pravda notes.

Russians believe that the cost of everyday life has increased dramatically. Half of the population thinks that a family of three needs RUB60,000 to RUB90,000 rubles a month to have a “normal life�, according to a poll by the Romir holding.

Russian Alcohol Consumption Down 13%

This poll highlights the main concern for the average Russia is not the economic stagnation but inflation. The CBR has chosen to target inflation over growth for the meantime.

The estimating for the cost of living of RUB60,000-RUB90,000 is up from RUB45,000-RUB60,000 a year ago. A total of 52% of respondents gave such answers, 27% of those polled named smaller sums while 21% named larger ones.

The increase in Russians' expected family income is up 16.5% in two years, slightly more than the official inflation rate over the same period, but far below the nominal increase in the average monthly wage (+26%) in the same period.

According to the Rosstat Federal Service for State Statistics, the average after-tax income of a family of three in the summer of 2013 made up RUB66,000 a month.

Muscovites estimate the cost of "normal life" at RUB114,000 ($3,552) a month for a family of three, on the average. It is the only city where the actual average income approximates the "desired

Alcohol consumption in Russia is down 13% this year, but growing drug use among young people and poor drinking habits mean Russia’s demographics is not out of the woods yet.

Recent figures from the Health Ministry show that 13.5 liters of alcohol are consumed annually per person, a reduction over previous years. The drop is due to the government's well thought out anti-alcohol policy, including an increased excise tax that was introduced at the start of this year.

However, the trend towards drinking less hard liquor was already well established thanks to the prosperity of the boom years and a growing awareness for the need for healthy living.

Wealth inequality levels in Russia among highest worldwide Russia has one of the highest levels of wealth inequality in the world, surpassed only by a handful of tiny Caribbean states, with the country's 110 billionaires controlling 35% of its wealth, a report published in October by Credit Suisse indicates.

The growth of world prices for oil and other natural resources -Russia's main exports -- has spurred a rise in average household wealth from $1,650 in 2000 to $11,900 in 2013, but

wealth per adult is still below its 2007 peak.

The gap between the country's richest and the rest of its

Putin’s popularity stable at 62%...

The rating of supporting President Vladimir Putin’s activities over recent months has remained at about the same level of slightly over 60%, VTsIOM said in October.

The surveyed also said about Putin’s most attractive features, naming his political experience (47%), energy and determination (33%), and vision (22%).

population is one of the starkest in the world, surpassed only by small Caribbean nations with resident billionaires.

Over latest six months the share of respondents who believe Putin is able to fulfill his election promises has grown. In April, only 21% believed so, while now the survey demonstrates the result of 32%.

The polling institution’s Director General Valery Fedotov relates the stable level of support for the president with stabilization of the domestic political situation.

…Medvedev's approval rating at all time low Prime Minister Dmitry Medvedev’s rating has fallen to an all time low in late 2013, dropping below the 50% market for the first time, according to a poll by the Levada Center.

Medvedev’s popularity has always been lower than Putin’s but the two ratings essentially moved in unison. While Putin’s rating has been essentially flat for nearly two years, Medvedev’s has started to diverge and sink recently. The gap between their respective approval

WEF gives Russian human capital mediocre grade Russians are highly educated by international standards, but the quality of education in the country received low scores from business executives, contributing to Russia's

rates (15%) is now the largest it has been since Medvedev first assumed the presidency in May of 2008.

Medvedev’s falling popularity makes him a very convenient scape goat for all the current economic ills (which technically he is responsible for as head of the government). However, Putin is unlikely to ditch Medvedev anytime soon as the population’s situation of employment and income is still improving, albeit more slowly and so unlikely to complain much at the moment.

middling rank in the latest study of human capital by the World Economic Forum.

The forum's Human Capital Index, which identifies the ability of 122 countries to develop and nurture

their workers, placed Russia in 51st place.

Russia ranked second among the BRICS countries, behind China, which occupied the 43rd spot.

Over half of those already in the labor force hold a university level degree. Coupled with high current university enrollment rates, which stand at 76%, this indicates that the future workforce will be among the most highly educated in the world.

However, the quality of that education is rated low by business executives, particularly the quality of management schools, where Russia is ranked 98th in the world, she said.

Part of the problem is that while Russian receive a good classical education, executives complain it is not relevant for the modern working environment.

Consequently business executives point to difficulties in finding skilled employees with Russia ranking 102nd on this variable, the survey found.

Most Russians believe Arctic should remain neutral

convinced that the territories should remain neutral and outside the boundaries of any country.

Nearly half of Russians (45%) favor the extraction of hydrocarbons and other natural resources in the area, while 42% consider it inadmissible.

When asked to list associations with the area, only 1% mentioned the Greenpeace ship arrested recently after activists tried to scale an Arctic oil platform run by an affiliate of state-controlled energy giant Gazprom in protest at offshore drilling in the area.

Banks and Finance Russia's banking system outlook remains negative, stresses at highs all round The outlook for the Russian banking system remains negative, unchanged since October 2011, according to Moody's. The sector is being squeezed by the regulator on one side, which has put in much tougher prudential rules, and the slowing economy on the other side.

More than two thirds of Russians believe that Arctic territories should not belong to any state, a poll carried out by the Kremlinbacked pollster Public Opinion Foundation (FOM) found in October.

Banks has seen their asset quality eroded, suffer from weak capital buffers, and have had a decline in profitability due to the requirement to increase loan loss reserves.

These problems are partial offset by strong support from the Central Bank that is supplying liquidity and funds.

Only 17% of respondents said the Arctic territories should be divided between states, while 69% are

The lack of monthly growth in either retail or corporate funding led to a sharp increase in demand

for state funding, which reached a post-crisis high of 8.6% of assets.

Both lending and funding growth were below expectations in September, and the sizeable increase in retail NPLs was a negative surprise.

Both retail and corporate loan growth came in below expectations in September, at 31% y/y and 13% y/y, respectively. While corporate NPLs were stable at 4.3% of the loan book, retail NPLs increased from an already high 4.4% in August to 4.5% in September, this year’s high.

Funding growth was equally weak, with retail deposits unchanged m/m in September. In addition, corporate deposits have been virtually flat for three months, suggesting slow economic growth is hitting savings growth.

In this stagnant environment, banks appear more concerned about funding than lending. In September, exposure to state funding rose by RUB440bn (as much as the state intends to borrow from the domestic market this year), including RUB310bn to the CBR and RUB130bn to the

Finance Ministry. The two combined currently account for 8.6% of total banking sector assets, a post-crisis high.

On October the CBR also started to provide funding for banks on a daily basis. Previously it was holding auctions only once every two weeks.

Given that the disposable income growth remains strong, the current increase of the share of retail NPLs is a result of slowing market growth and that Russians consumers have over borrowed.

However, the 35% YTD jump in nominal NPLs is itself pushing banks to tighten their approach to borrowers, which will likely trigger a further increase in NPLs, as Alfa Bank has been arguing that consumers are now increasingly borrowing to refinance old loans from 2012. The peak in NPLs is anticipated to reach around 2025%.

Corporate NPLs are also likely to rise, despite low levels of borrowing all year. Strong income growth, while positive for consumers, lowers the competitiveness of local producers.

However, corporate NPL growth is mild as yet. This may change in 2014, especially after the tariff freeze comes into effect in 2014 as some companies may see deterioration of their cash flow.

The CBR’s and Finance Ministry’s exposure to the banking sector has grown by RUB1.3tr since September 2012 and now totals RUB4.7tr. Starting in November, the Finance Ministry is expected to

withdraw money from banks due to the seasonality of the budget execution, increasing demand for CBR support and possibly putting upward pressure on market interest rates.

Even in this poor environment no one is expecting a revision to the CBR interest rates in next 6 months. At its latest meeting, the

Russian banks plea for lower cost of credit A group representing leading Russian banks called for the Bank of Russia to sacrifice its ambitious plan to tame inflation in order to support flagging economic growth and cut the cost of borrowing.

A real debate is emerging between the businesses that complain with overnight rates at 8.25% vs next to nothing in the rest of the world,

CBR left the policy rate unchanged and provided no clear guidance for the future moves. We believe that given uncertainty over Fed policy, as well as the fact that capital outflow was $48bn in 9M13 while the current account surplus for the same period was just $30bn, including a mere $1bn in 3Q13, there is little reason for the regulator to cut the rate.

the cost of borrowing is simply too high for businesses to function.

The CBR on its part argues that the output gap is very small and so cutting rates would only stoke inflation without producing more growth.

The Association of Regional Banks of Russia, a lobbying group that represents nearly half of all Russian banks, wrote in an open letter to the central bank's governor in the middle of October

saying that the bank's attempt to bring inflation down to 5% next year is unlikely to succeed, and could impede growth that has already slowed to 1.5% in the first nine months of this year.

In the meantime the banking sector is being squeezed and

Sberbank aggressive move to gain market share in consumer loans

starting to struggle. Increasingly banks have been forced on their own resources and this has seen capital adequacy rates fall from over 20% in the boom years to about 13% -- above the 10% mandatory minimum – where they have stabilised more recently.

credit counters of many banks, should be closed down.

Sberbank aggressively cut rates on consumer loans with 3-12 months maturity to 14.6%, for street and payroll customers, from 20.5% for the former and 16.5% for the latter as the Russian banking giant revs up to win back some of its market share.

The former Soviet savings bank used to have two thirds of the retail market but today commands a bit more than a third. The government has been pushing banks to cut their lending rate to bolster growth, but Sberbank is taking it further to improve its market position.

Sberbank CEO German Gref lashed out at the retail banks last month saying that the point-of-sales (POS) operations, the in-store

Sberbank’s rate cut is a seasonal offer that applies until midFebruary and currently makes Sberbank's uncollateralized loans

the cheapest on the market, Vedomosti reported.

The selection criteria to be eligible for these cheap loans is quite strict – indeed, Russia’s banks are seeing consumer loan NPLs rising – and only applicable for large-ticket loans for clients with aboveaverage income.

Sberbank's loan pricing saves CAR from coming under pressure from the new RWA calculation rules effective since 3Q13; this move can help win back some market share from specialized retail lenders, say analysts.

And the bank is already outpacing the sector in retail lending growth in the third quarter this year, as it was already aggressively expanding its retail business since the 2008 crisis – that has turned out to be a boon for the bank.

According to Frank Research, the consumer loans segment added 18% in 8M13, while Sberbank’s consumer loans have grown 14%YtD. Asset quality remains the biggest risk: Sberbank had already seen COR for consumer loans rising above 3% in 1H13, which is a milder version of the upward trend faced by retail banks.

Sberbank increased its stake in JV Cetelem Bank up to 74% Sberbank and BNP Paribas Personal Finance completed a deal under which Sberbank increased its stake in Cetelem Bank up to 74%.

Sberbank and BNP Paribas Personal Finance agreed to expand the activity of their joint venture Cetelem Bank after its good performances in the Russian car financing market.

Sberbank has strengthened its strategic positions in the car loan market by transferring its car loan business, generated through partnerships with car manufacturers and car dealers (9 programs in total), to Cetelem Bank.

In accordance with the terms of the transaction, Sberbank had to increase its stake in Cetelem Bank in 2013 from 70% up to 74% leaving the governance unchanged.

After three years, Sberbank has an option to increase its stake in the Cetelem Bank up to 80% subject to achieving certain agreed business performance metrics.

VTB buys 25.9% in affiliate from Belarusian government Russia's VTB Bank has purchased a 25.9% stake in its local affiliate, VTB (Belarus), from the Belarusian government in October.

The amount of the deal was not disclosed.

According to Belarusian news agency Belta, the Russian bank paid $19.1m for the stake. The money will be injected into the country's budget.

Belarus is on verge of a crisis and desperate for money. Russians are taking advantage of the situation

to buy up a few more assets at fire sale prices.

RUB100bn in mortgage loans in September.

Mobile banking startup Rocketbank gets $2m investment

The weighted average interest rate on mortgage loans in rubles fell to 12.6% as of September 1 from the peak of 12.9% reached late March.

RocketBank, a Moscow-based banking application startup, announced that it received $2m in funding from Runa Capital, a Moscow-based fund operating internationally.

RocketBank's application, currently available only on iOS, allows users to complete money transfers that necessitate no bank details of a recipient, simply an e-mail address or e-wallet number, which the startup calls "mobile addressbook money transfers.�

RocketBank is not a bank, and, as such, there are no associated RocketBank branches. Instead, it has partnered with Intercommerz Bank to support its mobile banking services. Users receive a Visa debit card in addition to its iOS application and benefit from free card loading and cash withdrawal at any ATM worldwide and money transfers, among other services.

Mortgage lending more than doubles Over the period January-August 2013, Russian banks granted 485,430 mortgage loans to a total of RUB784.9bn. This is by 1.3 times more year on year in money terms, according to the Agency for Housing Mortgage Lending (AHML).

AHML analysts forecasted earlier that banks would provide about

Economics Russia’s September output & demand soft across the board With sharp deceleration in retail sales, declining employment and contracting investments, September’s monthly data package draws a worrisome picture and analyst are saying that even their paltry 1.7% growth targets for this year are now in danger to the downside.

Retail sales remain at multi-month low. In September, official headline retail sales annual growth slowed 1% to 3.0%, the second lowest point since February 2010, owing to a simultaneous moderation in food and non-food components.

This tightly coincides with the gradual deceleration in retail lending (to just 31% year-on-year in September), persistent drop in car sales, stagnant consumer imports and rather odd strength of food inflation (partly due to an increase in dairy products and eggs caused by heavy rain).

Investment stuck in the red, ignoring heavy technical support.

The biggest negative surprise was from investments, which continued to contract, shrinking 1.6% year-

on-year despite the favourable base effect.

SA unemployment ticked up; set to expand. Last month, the unemployment rate increased 0.1% to 5.3%, while the SA rate continued to crawl up to 5.6%, reflecting overall sluggish economic activity.

Contraction in manufacturing advanced. In September, better momentum in electricity output thanks to the cold weather and beneficial calendar factor, as well as surging gas output (to a great extent for exports), spurred IP year-on-year growth slightly higher. Meanwhile, manufacturing

output continued to contract despite the additional working day and we see little to suggest a turnaround in the months to come.

The only bright spot was a a pickup in wages growth, but this comes mostly on the back of the public sector (23% year-on-year in nominal terms in August), while in the private sector the pace of wages indexations was relatively moderate (10.9% year-on-year).

Both public sector and SOEs are to become less generous if the economic sluggishness persists.

CBR retains hawkish stance in quarterly review

before the year end. Further disinflation is foreseen in 2014, conditional on a continued downtrend in inflation expectations. The FX pass-through is judged to be moderate and the key upside risk for next year is related to the harvest outlook.

The CBR has released its flagship Quarterly Monetary Policy Report (QMPR) in October. The key messages are as follows.

•

•

Economic slowdown. The regulator retains its relatively hawkish rhetoric that the economic slowdown is, to a large extent, a structural phenomenon.

Growth forecasts. The regulator expects economic growth to pick up to 1.51.8% year-on-year in 3Q13 and 1.8-2.1% year-on-year in 4Q13, mainly on the back of the favourable base effect in agriculture.

For 2014, the CBR’s baseline is 2.0% growth and downside risks prevail, as there is the potential for a further decline on stagnant investment activity.

•

•

Output gap. On the back of its conservative assessment of potential growth, the regulator sees the negative output gap as relatively moderate (-0.1-0.5%).

Given its expectations of the economy picking up in 2H13, it does not expect the gap to widen sharply.

Inflation. The current disinflation in both food and core basket is welcomed and the CBR expects headline CPI to fall below 6.0%

•

Policy stance. The current policy stance is considered relatively tight, but monetary easing is judged ineffective at this juncture.

Nevertheless, easing steps are not ruled out, conditional on inflation expectations and growth outlook.

Russian growth expected to recover to 3.3% in 2014-2016 The growth of Russia's GDP is expected to speed up to 3.3% in the years 2014-2016 from 1.8% in 2013 driven by a recovery of investments in fixed assets, according to the Economic Development Ministry of Russia.

Today investments in fixed assets of Russian private companies are mainly in the form of foreign loans and the Kremlin needs to make it easier to borrow at home.

Currently the cost of borrowing is too high for most companies.

Alternatively the rate of capital flight has to be reversed.

Investment and capital flight figures are the key ones to watch in the next two years as they will

determine the strength of any recovery.

and for the first seven months of 2013 they were up by $250m.

Foreign direct investment in Russia triples in H1 to $55bn

"Since 2004 Chinese investments in Russia rose on the average by 60% per year which is higher than rates of Chinese investments abroad growth," Tan Hua, head of the policy and regime department at China's National Reform and Development Commission

Foreign direct investment in Russia’s economy in the first six months of this year reached nearly $55bn, three times more than in the first half of last year, President Vladimir Putin told an investment forum in October.

Putin highlighted a deal between the government’s Russian Direct Investment Fund (RDIF) and Abu Dhabi’s state-owned Mubadala Development Company to invest up to $5bn in Russian infrastructure in September. The UEA signed off on a similar $3bn the same month and China has become a regular investor into Russia.

In terms of gross domestic product, Putin said, Russia is close to becoming “Europe’s first economy and the world’s fifth economy.” Last year Russia’s GDP was $3.373 trillion, compared with Germany’s $3.378, Putin said, citing the Organization for Economic Cooperation and Development.

Chinese FDI into Russia up 40fold in last eight years Over the last eight years China's foreign direct investments into the Russian economy has increased 40-fold.

By the end of 2012 foreign direct investments amounted to $4.9bn

Between January and July 2013, Chinese companies invested $246m in non-financial sectors of the Russian economy, which represents an increase of 23% if to compare with the same period of 2012.

Americans step up (re)investment in Russian manufacturing Cumulative investments of all kinds in Russia reached $11.5bn as of the end of June 2013 ($7bn as of January 1, 2013), according to Izvestia, against the total FDI in first half of this year of $55bn.

The increase in investment is due to the business expansion of companies present in Russia already and not due to big new entrants.

Russia's Economic Development Ministry says that the largest investments made in Russia this year include the projects implemented by Ford (the enlargement of the range of models - $600m over the years 2012-2013, the construction of the engine plant in Yelabuga - $274m in 2013) and by Guardian Industries (the launch of a glass

manufacturing plant in the Rostov region - $240m).

Budget surplus reaches 1.2% of GDP, but deficits coming Russia’s fiscal position is strong at the moment. The federal budget surplus increased to RUB591bn, or 1.2% of GDP, in 9M13 from RUB440bn, or 0.9% of GDP, in 8M13.

Revenue collection is on target with RUB9.6 tln or 75% of the plan for this year, while expenditures amounted to RUB9 tln or 67% of the plan for this year. The share of oil & gas revenues in total revenues was again unchanged at 50% in September.

Expenditures are currently below the planned amount for this year, and RUB4.5 tln must be spent in 4Q13.

The Finance Ministry forecast the federal budget deficit at RUB480bn this year, or 0.6% of GDP. The ministry plans to finance the deficit by borrowings and sees risks that it will be unable to borrow the amount planned for this year. In particular, the ministry said that it might need to use RUB200bn from the Reserve Fund this year to cover the deficit.

The finance ministry needs RUB680bn this year to cover a deficit of RUB280bn and pay RUB400 as interest payments.

However, the ministry has already borrowed RUB580bn domestically and $7bn on external markets, which should be enough to cover the deficit and the interest payments.

Government to cut non-oil budget deficit to 5% GDP The Russian Finance Ministry says it will cut the non-oil deficit to 5% of GDP, only slightly higher than the pre-crisis level.

The non-oil deficit is the deficit if all the revenues from exporting oil and gas is not counted into the state’s revenues and is a better deficit number to concentrate on than the headline rate.

In the first half of last decade Russia really was dependent on oil and gas as the non-oil deficit was over 15% of GDP. However, in the boom years both the headline and non-oil deficit were in the black.

During the crisis heavy government spending sent the non-oil deficit down to some 13% of GDP even if the headline rate has remained positive.

Now the government wants to bring the non-oil rate back to about 5%, which will mean the headline rate will be positive or flat. The government considers this to be the right balance between having a balanced budget in absolute terms and using oil revenues to subsidise growth.

In 2013, the non-energy deficit will amount to 10.3% of the GDP. In 2014, 2015, and 2016 it will amount to 9.4%, 9.6% and 8.4% of the GDP, respectively the ministry thinks.

Russia tax revenues under pressure, companies, not oil, major source of funds

income tax collection still equals only 3.4% of GDP, only one-tenth of consolidated budget revenues.

Russia’s consolidated budget revenues are under pressure. In 7M13, all revenue items as a%age of GDP were below the level of 7M12.

The second challenge for the budget is the strong social preference. Though the elections are over, salaries in the public sectors keep growing faster than the average rate. In 8M13, real disposable income grew 4.1% y/y, up from 3.5% y/y in 8M12 and almost in line with the 4.4% y/y growth seen in election year 2012.

It remains driven by state sector salaries, which in 1H13 grew at 1525% y/y in nominal terms vs. the Russian average of 13% y/y.

Corporate taxes in Russia account for the highest share of revenues, so budget receipts are vulnerable to stagnation in the industrial sector.

Profit tax collection fell sharply, from 4.4% of GDP in 7M12 to only 3.1% of GDP in 7M13. Despite continued income growth, personal

Partial freeze on regulated prices hoped to revive Russian economy The government has decided to freeze hikes to several key tariffs in the hope accelerating the fall of persistently high inflation rates, which have been keeping borrowing costs too high for banks and businesses.

Regulated prices of goods and services produced by “natural monopolies” have been increased a pace higher than inflation in recent years to achieve cost recovery levels. Such rate hikes have been a major factor in keeping inflation high.

The government plans to limit rate hikes of natural monopolies over the next few years. The measure reduces cost pressures on other sectors of the economy and shifts revenues from infrastructure monopolies to the manufacturing sector. This is hoped to encourage investment in diversification of production. Restraining rate hikes should also lead to a situation where infrastructure monopolies are forced to become more efficient.

In September, the government decided that rates of goods and services sold by monopolies to the corporate sector would not be raised at all next year. In 2015 and 2016, rates will only be increased to the extent of the previous year’s inflation.

Rates paid for household heating, water, electricity and gas will be increased during 2014–2016. The average increase is to match the inflation rate of the previous year minus 30 %. Using this formula, the average rate hike next year would amount to 4.2 %.

The downside of reduced rate hikes is that they lower the revenue projections of infrastructure monopolies and limit their investment possibilities in a situation where all investments would be important in order to accelerate economic growth.

To off set these problems the government is looking at measures that lower the monopolies’ operating and investment costs without harming their operations or reducing their investments. One of the ways of doing this would be the introduction of public control over infrastructure monopolies. The government is also considering partial financing of monopoly investments out of the federal budget, pension fund or oil tax revenues set aside in the National Welfare Fund.

2Q13 GDP growth structure suggests destocking The consumption-based structure of GDP growth in 2Q13, released

by Rosstat in October, brought some surprises. Net exports contributed positively to growth for the first time in three years, accounting for 0.9pp of the 1.2% GDP growth for 2Q13, reflecting

higher global demand for local products.

However, instead of triggering a recovery in industrial output, this higher demand was overwhelmed by local destocking, which reduced GDP growth by 1.9pp. That said, the strong growth in consumption, which remained the key driver of overall GDP growth, leaves room for possible improvement in the industrial trend once destocking is finished.

Russian companies typically destock in a crisis and so this behaviour highlights the fear of more volatility amongst Russian owners.

Russia has smallest current account surplus since 3Q98 Russia’s current account continued to shrink in 3Q13 heralding the next economic problem the government will have to start dealing with in the new year.

The current account surplus reached $1.1bn in 3Q13 and $29.5bn in 9M13, according to the Central Bank. In 3Q13, the current account surplus dropped to the lowest level since 3Q98, when it was $775m.

The trade balance was at $42.8bn in 3Q13 and reached $133.5bn in

9M13. Capital outflow reached $12.9bn in 3Q13 and $48.1bn in 9M13.

The fall in the current account was due to decrease in service balance and investment income balance.

The current account surplus declined 52% year-on-year in 9M13 due to deterioration in the service balance (minus $20bn compared to minus $15.4bn in 3Q12) and investment income balance (minus $15.9bn versus minus $11.6bn in 3Q12).

Exports grew 3.7% year-on-year to $130.1bn in 3Q13 and imports increased 0.5% year-on-year to $87.4bn.

The financial account rose to minus $3bn in 3Q13 from minus $4bn in 3Q12, despite the increase in capital outflow to $12.9bn in 3Q13 from $7.9bn in 3Q12.

Direct investments to Russia grew 6.3% year-on-year to $15.3bn in 3Q13 and $66bn in 9M13, while portfolio investments were minus $2.9bn in 3Q13 and minus $6.6bn in 9M13. Direct and portfolio investments from Russia were $17.9bn in 3Q13 and $88.9bn in 9M13, exceeding investments to Russia.

Capital investment still flat or falling

2.5% but the slowing economy has put that number in doubt.

Capital investment decreased 3.9% year-on-year in August after 2.5% year-on-year growth a month before. Capital investment remains volatile due to global volatility and large capital outflows.

The capital investment number is growing in importance as consumer spending is also staring to weaken and the economic drive for 2014 is likely to be more on the investment side of the balance than consumption.

Analysts have been predicting fullyear capital investment growth of

Russia Outbound M&A solid performance Over the past 20 years the Russian economy has developed into a global powerhouse and is already in the top 10 largest economies in the world. The growing dynamism is beginning to feed into M&A.

Domestic activity has been sustained by state-owned enterprises and publicly listed companies acting as serial acquirers. Although Russian outbound M&A represents a relatively small proportion of overall deal-making in the country, it is an increasingly important component of the Russian M&A landscape.

Excluding the frenetic levels reached in 2007 and 2008, Russian outbound M&A continues and is now also being driven by a desire amongst domestic owners to diversify their assets away from the domestic political risk.

In H1 2013 outbound M&A declined in volume 40% year-on-year to 18 deals, and dropped in value 60% year-on-year to US$2.1bn.

However, dealmaking at the upper end of the market has remained relatively consistent since the crisis.

Russian best year for outbound M&A was 2007 by volume and value over the past eight years.

There were seven deals over $500m in 2007, and five deals of this size in 2012. Already in 2013, there have been three deals over $500m, two of which were announced in Q3 2013.

However, the number of deals has contracted noticeably since the onset of the global financial downturn: there were 34 deals under $100m in 2007, there were 19 in 2012, or a 44% decrease.

Russian M&A is spread over a range of industries. In recent years, this spread has become increasingly evident by volume: in

2005 through 2010, the three biggest industries by volume (Industrials & Chemicals, Energy, Mining & Utilities and TMT) comprised 66% of total dealmaking. In 2011 through 2013 year-to-date (YTD), these industries by volume comprise 57% of deal flow. That said, energy, mining and utilities remains Russia’s standout sector.

The telecommunications, media and technology (TMT) sector has also seen notable activity over the past few years, and has grown in significance. Although TMT’s market share by volume has dropped 6% to 13% in 2011 through 2013 YTD, its share by value has grown 4% to 21% of overall M&A. Russians are still largely looking to the “near abroad” for acquisition targets. Combining Ukraine with the rest of the CEE, the region is the target of more than one third (36%) of all Russian outbound M&A in 2011 through 2013.

But when examining deal value, the CEE and the CIS’s predominant position is less evident, accounting for 19% of the total of deals by value.

CBR simplifies the currency band

just a two-level band, with $200m and $400m.

As part of the CBR on going financial system reforms and opening of its capital markets, the regulator announced changes to its system of FX interventions.

Now, the ruble exchange rate can fluctuate freely within a RUB3.1 range around the average of the RUB32.3-39.3 ruble-to-basket range instead of the RUB1.0 range that previously triggered the CBR to intervene.

Previously it employed a threelevel band, with $70m, $200m and $400m targeted interventions. As of the start of October, it will use

In effect this change was another step towards allowing a freer floating ruble.

Economy faces stagnation unless productivity increases

such as Hungary, Latvia and Lithuania.

The Russian economy will stagnate if companies do not increase their labour productivity, which currently averages at 40% of that of the Fortune 500 Global companies, according to an annual ranking that Expert Rating Agency in October.

Productivity levels among Russia's largest companies were on average $183,000 per worker in 2012, which was 3.4 times below the productivity of Japan's largest companies, three times lower than in the companies from Western Europe and the U.S., and 1.7 times lower than in the BRICs.

The total revenues of the 400 largest companies in Russia were $1.4 trillion in 2012, which is a record amount since Expert started compiling the rating in 1995.

However, the actual growth rate in revenues hit a record low of 10.4%, as compared to 23.4% in 2011. A lower figure was only recorded during the 2009 crisis year.

Growth rates will likely be cut in half for the 2013 rating, the experts said. The agency estimated that total revenues of the 400 largest companies in 2013 will be $1.5 trillion.

One of the factors weighing on Russian producers is they no longer have the cheap energy advantage: local industries pay 55% more for electricity than their counterparts in the U.S., while gas and coal prices for Russian power stations are on par with the American ones.

And labour is also getting expensive. The average net salary in Russia was RUB23,410 ($731) per month in 2012, which is higher than the wages in all other countries in the Commonwealth of Independent States as well as some European Union members,

Russia manufacturing PMI stayed at 49.4 in September Industrial production in Russia remains stagnant. Manufacturing PMI remained at 49.4 in September, similar to August’s level, as demand remains meagre.

The new orders sub-index printed the second lowest level over the two recent years, at 50.4, while export orders sank below the 50mark (to 48.7) for the first time since April 2013.

The employment sub-index edged up a notch to 46.2, staying near the lowest level of the past four years that was hit in August.

Meanwhile, output prices remained unchanged at 52.2, as well as input prices at 56.4.

It was also noticeable that manufacturers kept cutting their workforce numbers for the tenth time in eleven months and in September the pace of this reduction remained close to August’s four-year low (46.2 vs.

46.1).

This slowdown in manufacturing is now beginning to feed through to

consumption.

Capital flight still a problem

2010, before it started rising again to $80.5bn in 2011.

Russia’s Economic Development Ministry recently increased its net capital outflow forecast for this year to $30bn.

The CBR is especially pessimistic about the amount of capital that is likely to leave this year: the CBR put the figure at a total of $62bn this year at the start of October, more than the $56.8bn that left last year.

Capital flight from Russia peaked at $133.7bn in 2008, when the global economic crisis broke out, and declined to $56.1bn in 2009, then fell further to $34.4bn in

Infrastructure $37bn to be invested in infrastructure from Russian rainy day fund Russia's Economic Development Minister says that up to RUB1.2 trillion ($37bn) could be taken from a rainy-day windfall oil revenue fund and invested in infrastructure projects as the Russian economy faces a growing risk of stagnation.

The amount is 40% of the contents of Russia's National Welfare Fund, a key fiscal buffer built up by the Kremlin during years of high energy prices.

President Vladimir Putin announced in a keynote June speech on economic policy that up to RUB450bn would be invested from the National Welfare Fund on an expansion of the Trans-Siberian Railroad, a new multilane highway encircling Moscow, and a new high speed railroad between the Russian capital and Kazan. Last week, Putin did not rule out that more money for other infrastructure ventures would also be required.

Economic Development Minister Alexei Ulyukayev said that other projects are “likely going to be added to the list.”

The National Welfare Fund, which currently contains the equivalent of about 4.3% of Russia's GDP, is forecast to contract to about 3.2% of Russian GDP by 2016, the World Bank said in a recent Economic Report.

Another similar fund, the Reserve Fund, currently holds the equivalent of about 4% of the country's GDP, according to World Bank figures.

Russia to spend $63bn on arctic development Russia plans to spend 2 trillion rubles ($63bn) by 2020 on a strategic program to develop the Arctic, a senior government official said Friday.

Regional Development Minister Igor Slyunyayev said the draft program for economic and social projects in the Arctic could be submitted to the Cabinet by November 1.

Siemens to invest €1bn euros in Russia in 2013-2015 Germany’s engineering giant Siemens will invest €1bn in Russia in 2013-2015, according to the company’s CEO Joe Kaeser.

Siemens is participating in the modernization of state-owned Russian Railways, which it has supplied with eight high-speed passenger trains for the St. Petersburg-Moscow and MoscowNizhny Novgorod routes.

In December 2009, Russian Railways and Siemens signed a deal for the design and delivery of 38 suburban electric trains (Swallow) to transport passengers during the 2014 Sochi Winter Olympics.

Aeroflot registers low cost subsidiary Dobrolyot Russia's flagship air carrier Aeroflot has registered its low cost subsidiary Dobrolyot, in October, which the company said will break before 2017, Aeroflot CEO Vitaly Savelyev said.

The capitalization of the company will be $1.4bn within three or four years following the start of operations, and investments will total about $100m by 2017. The passenger traffic will initially stand at 1bn people and the company is

targeting popular Russian holiday destinations like Turkey as well as to the regional capitals.

The first low cost tickets will be sold in July-December 2014. The first routes will include Moscow, St. Petersburg, Kaliningrad, Samara, Yekaterinburg, and Sochi.

Russian airlines passenger traffic continues to climb, up 15% to 65m people Jan–Sep Russians love to travel. The passenger traffic of Russian airlines grew by 14.5% on the year to 65.14m people in January– September, the Federal Air Transport Agency said on Monday, equivalent to half the population.

year, following the IPO of Tinkoff Credit Systems on the LSE earlier in October, that marked the opening of a window for Russian IPOs after nearly a four year hiatus.

The Russian government and the republic of Yakutia, where Alrosa is based, sold a combined 14% stake in the offering, with the company selling 2% itself.

The stock sold at RUB35 a share, the lowest end of the price range.

60% was allocated to investors and 14% to Russian buyers, Vedomosti reported. Lazard bought $300m of the shares, according to the newspaper.

Airlines transported 730,320 tonnes of cargo and mail during the period, up 1.6%, while the cargo turnover fell 1% to 3.684bn tonne-kilometers.

Funds from Lazard and Oppenheimer took a “significant volume” of the portion available to investors, said Sergei Arsenyev, managing director of investment banking at Goldman Sachs Group Inc. Alrosa will trade the shares on the Moscow exchange and has no plans to list them overseas, he said.

ECM

TCS Bank raises IPO volume to $1.087bn from $870m

Alrosa raises $1.3bn IPO

Russia's Tinkoff Credit Systems (TCS Bank), a unit of TCS Group Holding, has increased the volume of its IPO to $1.087bn from $870m, on October 21.

The passenger transportation grew by 15.7% to 172.57bn passengerkilometers.

Russia’s diamond producer Alrosa raised about $1.3bn in an oversubscribed share sale from investors including Oppenheimer Funds Inc. and Lazard Ltd. This was the first major Russian state-owned asset to be sold this year and market restarting the stalled privatisation programme. It is also the second major IPO this

The float was a huge success and the target to be raised was lifted from $750m to over a $1bn in the space of a few weeks.

Oleg Tinkov [sic], the owner, is a famous serial entrepreneur, who got his start selling beer.

The enthusiasm for the offer was TCS managed to sell itself not as a retail banking play (which would have been popular enough) but as an internet play: TCS has no branches and offers its services – principally credit cards – exclusively via the internet.

exchange index before the end of October, the exchange said.

Traders were expecting a big up tick in the stock following the inclusion as more index tracking funds are forced to buy the stock.

The inclusion is indicative of the emerging class of Russian blue chip and world class companies that are starting to appear.

Foreign investors have become increasingly interested in Russia’s tech space which is booming with several companies already commanding over $1 bn dollars in valuations and many showing strong revenue growth.

Telecoms was the very first reform pushed through by Putin in 2000 and was completed before the war with the oligarchs broke out in about 2003 that ended with the jailing of Yukos owner Mikhail Khodorkovsky.

Qiwi raises $288m in SPO

Rosneft, RN Holding agree on buy out price for TNK-BP minorities

Plc, the owner of Russian epayment system Qiwi, has raised $287.5m through a SPO held on the NASDAQ. During the SPO, Qiwi's managers and shareholders sold 9.427m shares at $30.5 per paper.

Credit Suisse, VTB Capital, William Blair, and Aton, which acted as the organizers of Qiwi's IPO in May, fully sold 1.230m shares under an option right assigned to them earlier. The remaining 8.197m type B shares were publicly sold on the stock exchange.

Vimpelcom may be added to Nasdaq indexes Vimpelcom, one of Russia’s three big mobile phone companies, will be included in Nasdaq stock

On 16 October the board of stateowned Rosneft approved the buyout prices of RUB67 ($2.1) and RUB55 ($1.7) for ordinary and preferred shares, respectively.

This is in line with current market prices, but is still a hefty discount to where the price was prior to the Kremlin’s take over of the privately owned TNK-BP company (RN Holding).

Minorities shareholders are not happy and continue to lobby Rosneft CEO Igor Sechin for a better price, particularly the executive director of Templeton Emerging Markets, Mark Mobius, who has proposed a formula to derive a “fair” buyout price.

This formula accounts for the market price of the company on the date of the Rosneft and TNK-BP acquisition announcement, a control premium and the amount of cash on the company's balance as well as the amount of dividends, which were to have been paid out.

Since Sechin took over RN Holdings has significantly reduced its dividend pay out proportion.

However, Sechin has dug his heels in. Indeed, Sechin initially didn’t intend to pay minorities anything as he is not obliged in law to do so.

But it seems the Kremlin finally woke up to the need to placate investors and ordered him to strike a deal.

Observers don’t expect Sechin to improve his offer irrespective of how many fund managers he meets with.

Russian equities on the verge of Euroclearability Deputy Finance Minister Alexei Moiseev has said that Euroclear and Clearstream might start Russian Equities and Corporate and Municipal bond operations as soon as 1 January 2014.

non-residents getting access to local securities. The acceleration of the legislative process, and reiterated commitment to capital market infrastructure reforms, means that the chances of resolution by the end of this year have significantly increased.

Russian dividend stocks still the best bet for portfolio investors The Russian dividend yield has tripled since 2007, and the MSCI Index trailing dividend yield is 4.4%, higher than that of any other major emerging market.

Investors who woke up to this fact in 2012 when the trends began have handsomely outperformed the market. And this trend is expected to continue as the state is increasingly forcing its companies to pay dividends to generate new sources of revenues.

Government pushing yields higher.

Government-controlled stocks pay 55% of total index dividends.

Meanwhile, the state continues to push companies under its control to increase payout ratios, so the index yield in 2014 is likely to exceed 5%.

Originally the plan was to introduce international settlement for Russian listed equities no earlier than the middle of 2014, but the experiment with opening up the bond markets was such a success the move to do the same for equities has been brought forward.

Dividend plays have been outperforming. Russia's highyielding dividend stocks have outperformed the market since 2011 by 6%, and they arguably represent a lower-risk way to play the market.

The Ministry of Finance has prepared amendments to legislation to remove obstacles for

There are six distinct groups made up of 19 stocks that we believe can yield over 5% in the medium term:

Gazprom, two oil companies, three telecom operators, two low-cost miners, two deep-value utilities, five privately controlled companies and four preferred shares.

Gazprom pays 29% of the dividends of the MSCI Index. In 2013, the expected dividend yield of Gazprom is 4.8% based on a payout ratio of only 15%. Although hedged with uncertainty, our official forecast is for this to rise to a 25% payout ratio in 2014, implying a dividend yield of nearly 8%.

Key risks. Apart from the obvious dependency on Gazprom, just 10 stocks are responsible for 90% of MSCI Index payments. Oil and gas stocks pay 60% of index dividends, implying that if oil prices fall, so will the capacity to pay dividends.

Russian Finance Ministry postpones transition to IFRSbased dividends until 2015 The Ministry of Finance expects state-owned companies to start paying dividends based on IFRS net income only for 2015 (to be paid in 2016), as indicated in the current draft budget for 2014-16.

Gazprom earlier announced that it could transition to IFRS-based dividends in 2014 (to be paid in 2015), though it may now postpone higher dividend payments for another year.

At the same time there is still talk of increasing some state-owned company dividends to 35% of profit – and if IFRS is used instead of Russian standard accounts this

would become a significant source of cash for the government.

Russia's Pension Fund cuts number of private management firms by third Russia's Pension Fund has prolonged the pension savings management contracts for the next five years with 34 private companies, or one third less than the previous 51 firms.

The source said that 17 companies, with whom the contracts were not prolonged, must return the managed pension savings to the fund within days. The fund re-signs the contracts every five years and holds corresponding auctions to choose new firms.

The government decided to hand all the pension savings of citizens for 2014 over to the budget. The savings will remain in the fund and will not be transferred to management companies and nonstate pension funds.

Russia’s Lukoil mulls listing shares in Hong Kong Russian oil major Lukoil is considering possibilities to list its shares in Hong Kong, CEO Vagit Alekperov said on October 14.

“The listing will be an important step towards Asia,” he said.

He said that an absence of agreement which would let Russian companies place shares on the Hong Kong Stock Exchange directly is a real barrier for this initiative.

$30M Tech Investment Fund Expects 45% Annual Return Former executives of Finam Global, the venture arm of leading Russian financial group Finam, have launched a $30m high-tech fund to invest in "fast-growing markets of considerable size."

Christened "Flint Capital," the fund comes as the fourth sizable one launched in Russia since the beginning of the year after FRII, a $200m state-owned seed stage fund; Maxfield Capital, a $100m fund linked to Russian oligarch and Skolkovo President Viktor Vekselberg; and Genezis.

Aeroflot applies for foreign listing of 10% Aeroflot has applied for LSE and NYSE listings that might happen next year.

In June 2013 the government disclosed its 2013-16 privatization program envisaging the reduction of its stake from 51% currently to 25%. Reportedly, Aeroflot management indicated plans to sell

a total of 15.5% (10.12% treasury shares, 4.1% Rostekhnologii's stake, 1.17% Rosimushestvo).

Too much money parked in defensive assets, Great Rotation is inevitable Global uncertainty has forced investors to hoard defensive assets and VTBC estimates the US alone has some $9 trillion of money in cash waiting for something to do.

In Russia equity has clearly fallen out of favour in 2007 as the global debt crisis grew. And inflows since then have actually fallen somewhat.

On the other hand, thanks to Russia’s fabulous macro fundamentals money has poured into the Russian bond market.

Both these flows are aberrations and caused by on going uncertainty. However, VTB speculates (along with a lot of people): “It is only a matter of time until a correction occurs, reversing flows from fixed income into equities.”

DCM

RUB750-800bn by 2016," Siluanov said.

Russia leads record EM bond issuance in September

Under the 2014-2016 draft budget, the total borrowings will rise to RUB809bn in 2014, including RUB485bn of net domestic borrowings; RUB1.15tn in 2015, including RUB677bn; and RUB1.24tn, including RUB745.5bn.

September was a record month for sovereign debt auctions.

Ever since the US Federal Reserve first hinted in May at a possible “tapering”, emerging market countries have found borrowing much tougher and more expensive.

But the Fed decided to delay the tapper reopened the window and Ems rushed through. September ended up being the best month for EM sovereign debt issuance this year.

Emerging markets issued $23.6bn of sovereign debt in September.

About $7.2bn was Russian debt, $3.9bn was Mexican debt and $3.8bn was China’s. Armenia also held its first international debt auction, issuing $690mn of socalled “Kardashian bonds” (named after the prominent US celebrity family, for readers of more rarefied tastes).

Russia to double net domestic borrowings to RUB800bn by 2016 Russia plans to raise net borrowings from the domestic market to RUB750-800bn in 2016, Finance Minister Anton Siluanov said, Prime reported.

"This year the net borrowings will amount to around RUB435-440bn.

We plan to gradually raise them to

International borrowing could be raised too. Currently and for the last few years Russia has included $7bn of international borrowing in the budget – but more to set a sovereign benchmark in the international markets as a reference point for Russian commercial bond issuers to be measured again.

However, there are proposals on the table to increase the number of MinFin road shows to four a year from next year with a view to issuing more but smaller Eurobonds on international markets.

Big company borrowing rebounds as loan prices fall The country's top companies, including oil producer LUKoil and Russia's fourth-largest oil company Gazprom Neft, are raising new syndicated loans to take advantage of falling loan pricing, bankers said.

Likewise oil company Bashneft, fertiliser company EuroChem, and banks Gazprombank and Promsvyazbank are also in the market for deals.

Russia's second-biggest oil producer, LUKoil, is talking to

banks about a potential new loan of up to $1.5bn, and Gazprom Neft is raising a second $1bn loan after tapping the market in April.

Lending to Russia is rebounding after falling during the eurozone crisis, when rising bank funding costs made dollar lending difficult for international banks and many pulled out of the country' dollarbased loan market.

Russian loan volume was 149% higher in the first nine months of the year at $38bn, compared to $15.3bn in the same period of 2012, Thomson Reuters LPC data revealed.

Russia's loan market is being driven by repeat club loans from a small number of large companies looking to lock in low loan pricing.

Still, the volume of deals is still a tenth of what it was in the boom years.

Sectors Medvedev oversees raft of energy deals on China visit Russian Prime Minister Dmitry Medvedev oversaw a series of energy agreements in the last week of October during a two-day visit to China.

There were rumours on Tuesday October 21 that Medvedev had signed off on a long awaited deal that would set the price for Russian gas to Chinese customers, but the price question has still not been settled.

However, Gazprom and CNPC say they are planning to finalise the gas deal by the end of the year. A deal would increase total demand for Russian gas by 6bcm in 2020.

The general consensus on the price is that it will not be below the European netback, i.e. $370400/kcm at the Chinese border.

The price Russia will charge China for gas has been a sticking point in a energy supply deal that has been holding up talks for seven years and if a price were agreed it would be a major break through.

Russia is under pressure to do a deal after China signed off on a similar gas deal with the Turkmens in September and is now running the danger of losing the contract completely, which would be a major blow to the Kremlin's ambitions to re-orientate its foreign policy away from Europe and towards Asia.

Rosneft and CNPC signed a memorandum at the same time calling for the creation of a joint venture to explore and produce oil in east Siberia. Development of Srednebotuobinsk, a world class oilfield sitting close to the East Siberia Pacific Oil export pipeline (Espo), will serve as the foundation of the future venture, Rosneft said in a statement.

Mickey Mouse coming to Moscow in 2014 The US entertainment giant the Walt Disney Company says it plans to open three themed stores in Moscow and St Petersburg in 2014

as yet another international retailer sets out its stall in Moscow.

Favourable investment climate in 28 Russian regions

The merchandising arm of the film and cartoon maker will launch toy and garment retail networks.

Twenty-eight of Russia’s 83 regions have a favourable investment climate, according to the latest Business Pulse rating. Business conditions are neutral in 26 other regions and negative in 21.

The company is looking at medium-sized shop space on the order of 300-500 square meters located in the burgeoning malls in Russia’s twin capitals.

Specifically it has been checking out space in the Mega brand hypermarkets in Moscow, which are already home to IKEA as well as several French and German retailers, and the giant Galeria shopping center in St Petersburg.

The company will spend an estimated $2.7m just on the retail space.

Walt Disney has also opened a tender for a local partner to operate two retail chains of its new format: Disney Play and Disney Style, which sell toys and garments respectively, the paper reports.

Walt Disney intends to open 100 stores with 100-150 square meters of retail space for each branch, to cooperate with suppliers, and to pay royalties for the use of the brand name, the paper reports.

Last year Russia overtook Germany to become the largest toy market in Europe, worth an estimated RUB662bn ($21.3bn) at the end of 2012 and continues to grow in double digits.

Traditionally about a dozen regions have been seen as positive investment destinations – either mega cities like Moscow or resources rich ones like those in Siberia. This result suggests an increasing number of progressive regions with nothing special in the way of natural resources are coming to the fore on the basis of their efforts only.

Assessments gauge the business environment across the regions, taking in business sentiment, development dynamics in companies and people’s attitudes to business alongside the effectiveness of business and regulator relations, regulation quality, and available infrastructure. The survey covered 65,800 respondents in 75 regions over the past month.

Besides traditional leaders in investment ratings, namely the Republic of Tatarstan and Kaluga region, the group included the regions of Central Russia, East Siberia, and the Far East, northern regions famous for oil and gas extraction, as well as two North Caucasian republics, Karachay Cherkessia and Kabardino-Balkaria.

Gazprom European deliveries up by a third In the first half of October, Gazprom increased gas exports to Europe 30% year-on-year to 6.8bcm.

According to Alexey Miller, the CEO of Gazprom, demand for Russian natural gas is growing continuously. Gazprom exports in 1H13 were up 9.6% year-on-year to 79.5bcm and increased 15.5% year-on-year to 119.4bcm in 9mo13.

The news is supportive for Gazprom and the increased sales are likely to have a positive effect on the company's third and fourth quarter financials.

Still-strong European spot prices ($370kcm) mean that Gazprom's European counterparties cannot ask for retroactive discounts as they have done in the last two years. The company earlier guided that its European sales may exceed 160bcm this year.

Gazprom Completes First Solo Offshore Project

Gazprom has bought control in another Sakhalin offshore project, which had taken off thanks to Shell and Japanese companies, but has never gone it alone to extract gas from under the seabed.

Beer Market on Course to Shrink by 25-30% by 2014 The beer sector was an early success story in the 1990s as foreign manufacturers flooded into Russia to set up shop and produce a quality local product. Today Russian beer is one of the few nonraw material exports the country has.

However, a flat economy and escalating government regulation is hurting the sector, which is on course to shrink by 25-30% from its 2008 size by the end of 2014, according to the Union of Russian Brewers.

By this estimate, beer production will decrease to between 7.7bn and 8.2bn liters by the end of the year, down from 9bn liters in 2012 and 8.1bn liters in the first half of 2013.

Gazprom has started to operate the first offshore field that it has developed on its own, in a test of its power to perform the challenging task without foreign partners.

A big part of the slow down was the government’s decision to impose new steep taxes on the sale of alcohol and cigarettes at the start of this year as part of a quiet drive to improve Russia’s public health.

Sitting off the Pacific island of Sakhalin, the Kirinskoye field will feed natural gas to Asia, as demand from Europe — Gazprom's key market — remains uncertain.

Advertisements for alcoholic beverages have been banned from the streets, mass media and the Internet. Street stands, formerly prime locations for beer sales, are

now off-limits, and stores are only allowed to sell alcohol until 11 p.m.

Excises on beer sales have also soared, from 2.74 rubles in 2009 to 15 rubles in 2013, and are expected to rise even further.

One third of 2014 warehouse pipeline in Moscow region is already pre-leased or sold Activity in the warehouse segment of the real estate sector is almost back to its pre-crisis levels. The new completion volume continues to increase reaching pre-crisis levels: about 433,000 sq m of warehouse space entered the market in Q3 2013 which is 44% higher than in Q3 2012, Jones Lang LaSalle analysts reported.

Despite high completion volumes, there is almost no vacant space on the market (overall vacancy rate

does not exceed 1%) as the majority of Q3 2013 projects (82%) were pre-let or sold before completion. The deficit will remain in the next 6 months as almost all warehouse space expected in Q4 2013 and 30% of 2014 pipeline is already contracted.

In Q3 2013 more than 50% of transactions were executed by manufacturing companies and 37% by retailers. As of Q1-Q3 2013 retail sector remains to be the main driver of the demand activity with 40% market share, following by manufacturing companies (28%).

Prime rent remains stable at the level of $140/sq m/year. Due to the large number of pre-leases average rent is lower, at $130135/sq m/year.

Russian real estate investment volume in 2013 could reach $8bn Russian real estate investment market showed slight growth, at 1.3%, during 9M 2013 compared to the same period of previous year, despite the sluggish economic growth, to result in $5.3bn, according to Jones Lang LaSalle analysts. This number includes $1.5bn of Q3 investments, down by 37.8%year-on-year.

Regional growth continues, with regional investments amounting to $299m, or 20% of total Q3 deals volume compared to 13% in Q2.

The closure of the historically largest regional deal, the sale of Aura shopping centre in Novosibirsk of about $260m, was a significant contribution to regional investment share.

Investor interest is still focused in office and retail market segments, their shares accounted to 38% and 35% in Q1-Q3 2013 respectively.

The share of foreign capital accounted to 42% for Q1-Q3 2013 vs. 19% in respective period of 2012. The same indicator in Moscow accounted to 46% in Q1Q3 2013 vs. 19% in the same period of 2012.

US Set to Leapfrog Russia in Oil and Gas Output

of total production of oil and gas, the IEA said.

The United States is expected to leapfrog Russia as the world’s largest producer of oil and natural gas this year thanks to a surge in USA fuel production driven by technology that allows energy companies to tap into oil and gas in underground shale rock formations, according to IEA.

The third quarter forecast for US oil and gas production was 10.3m barrels per day or just 500,000 barrels a day less than Russia’s.

The IEA said in its Oil Market Report (OMR) for September that “the USA is set to become the leading non-OPEC liquids producer” in the world as of the third quarter of this year, if biofuels are included in the calculations.

Even if biofuels – which Russia produces in very small amounts while USA production has risen sharply – are taken out of the equation, the United States is still nipping at Russia’s heels in terms

According to the IEA’s Key Energy Statistics report, the United States was the world’s largest producer of natural gas last year, producing 681bn cubic meters compared to 656bn produced by Russia.

Toyota to double capacity of St. Petersburg plant Toyota wants to double capacity at its St. Petersburg plant by 2016 to 100,000 cars per year, the company said in October.

The plant will start full circle production of the crossover Toyota RAV4 in 2016 and investment in that project will be around

RUB5.9bn, the company said in a press release.

The cars will go the Russian and Belarusian markets. The Toyota RAV4 will join the model range at the plant, which has been producing Toyota Camry cars since 2007.

The European Business Association reports that Toyota RAV4 sales in Russia climbed 44% in JanuaryAugust 2013, compared to the same period of 2012, to 26,931.

The model is the most popular of the Toyota cars in Russia.

Russia's Energy Ministry says profitable oil reserves double The amount of oil reserves that are profitable to develop has doubled to more than 20bn tonnes in 2013 from 12bn tonnes in 2012 due to an adjustment in the tax incentives to stimulate works at hard-todevelop deposits, Deputy Energy Minister Anatoly Yanovsky said on October 29.

Law to open floodgates to foreign oil companies A law is raising the spectre of a new era in the development of the country's offshore oil and gas riches by streamlining the involvement of foreigners.

Taking effect in January, the law allows state-controlled behemoths

Gazprom and Rosneft to take on foreign companies to help extract reserves from under the seafloor and provides a partnership model that may prove lucrative for the foreigners.

Several big deals such as the development of Shtokman field in the Barents Sea have been scuppered by poor regulatory regime and high investment costs.

Shopping centres completions in Moscow doubles The total area of new shopping mall space built in the first three quarters of this year reached 142,000 sq m – almost double that of the same period a year earlier, according to Jones Lang LaSalle.

Jones Lang LaSalle also forecasting that Q4 will be the strongest quarter of 2013 for completions in Moscow with more than 100,000 sq m still to come from five new shopping centres.

If all the announced projects are completed on time, 2013 completions will exceed the level of 250,000 which is the highest figure in three years.�

In 2014 forecasted completions are even higher. The announced pipeline is a little less than 1m sq m though, according to Jones Lang LaSalle new supply is not likely to exceed 500,000 sq m.

Russia reintroduces subsidised loans for cars The government reintroduced a state program of preferential car loan in June and extended over 100,000 loans, which is expected to rise to 215,000 loans by the end of the year.

The Ministry of Industry forecasts this will lead to the sale of an additional 120,000 units this year or an extra 5% of sales.

The government is subsidizing part of the banks interest rates on autoloans and lowering rates for borrowers by about 5.5%. The loan only apply to cars worth less than RUB750,000 ($23,000).

The major share of loans was issued by Sberbank (18.2% of car loans), VTB 24 (16.6%), UniCredit Bank (14.1%). 4 and 5 places were taken by a subsidiary of Rosbank Rusfinance Bank and close to Sberbank Setelem Bank, they have 13.3% and 10.5%, respectively.

The programme is due to run until April 2014.