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8/17/2012
1
ECONOMIC BULLETIN № DEB-2012.08-03
Economic News
Russia's GDP rose by 4% in the second quarter, year-on-year, compared to a 3.4% rise a year ago,
preliminary data from the FSS showed on Friday (10 Aug). In the first quarter of 2012, the economy
expanded by 4.9% in GDP terms. / Thomson Reuters
Russia's foreign trade surplus fell to $14 bln in June from $17.4 bln in the preceding month, CBR
data showed on Friday (10 Aug). / Thomson Reuters
Russia's CPI were flat in the week to 13 August after rising 0.1% in each of the two preceding weeks,
the FSS said on Wednesday (15 Aug). Since the start of the year consumer inflation has reached 4.6%
compared to 4.9% in the same period of 2011. The CBR aims to keep full-year growth in consumer prices
within its target of 5-6% after inflation hit a post-Soviet record low of 6.1% in 2011. The Reuters monthly
poll showed in late July that full-year rise in the CPI index is seen at 6.6%. / Thomson Reuters
Russia's PPI fell 1.1% month-on-month in July after declining 0.9% in June, the FSS said on Thursday
(16 Aug). Analysts had forecast a month-on-month rise of 0.8%. Year-on-year, the PPI index rose 4.1% in
July, the same pace as in the preceding month. / Thomson Reuters
Russia's industrial output was surprisingly robust in July, data showed on Wednesday (15 Aug), but
analysts said it tends to be volatile and it was too soon to suggest the economy is accelerating. Russia's
economy has been slowing although growth, at 4% in the second quarter year-on-year, is much stronger
than in many other economies and is supported by the high price of oil, the country's chief export. Industrial
output rose 3.4% in July from a year earlier, the FSS said, easily beating economists' forecasts for 2.5%
growth and much stronger than a 1.9% increase in June. "Industrial production will continue to be volatile
but looking at today's release - it signals more positive developments for the coming months," said Vladimir
Pantyushin, chief economist in Moscow. Manufacturing output, which rose 5.7% in July, was the main driver
of growth in industrial production with a breakdown showing that domestic-oriented sectors, such as
construction materials fared particularly well. That points to relatively strong domestic demand. "I would,
however, put more focus on investment - and that is still the weakest link in the whole growth paradigm for
Russia," said Pantyushin. He said he was still considering cutting his 2012 economic growth forecast from
4.3%, despite Wednesday's data. In June, capital investment by companies rose by 4.7% year-on-year,
significantly below analysts' forecasts for a 7% rise. July's investment data, along with data on
unemployment and retail sales, is due within days. Dmitry Polevoy said those releases would give a better
indication of how the economy fared at the start of the third quarter. "We still stick to our view that
domestic demand will moderate in the second half of 2012, thus reducing support for the industrial sector,"
Polevoy wrote. Morgan Stanley last week to slash its forecast for full-year growth to 4.2% from 5%, after
economic growth slowed in the second quarter from 4.9% in the first quarter. The EconMin forecasts 3.5%
GDP growth this year, but officials have mentioned the possibility of raising it to 3.8-4%.
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03
AMMUNITION FOR RATE CUT? If data due this week follows industrial output and surprises on the
upside, that would probably strengthen expectations for an interest rate rise in September to control unruly
inflation. Last week, the CBR kept its key interest rates on hold, but sent the strongest signal this year that
policy tightening may lie ahead if inflation risks from food prices increase. "(The data) may boost talk of a
rate hike, given the CBR was mainly unworried about industrial performance and more hawkish on the
inflation outlook during its last meeting," Polevoy said. CPI rose 5.7% year-on-year in the first week of
August, making the CBR aim of keeping full-year inflation down to a targeted 5-6% more difficult. Pantyushin
said industrial output data would only be one of several factors affecting a rate decision. "The data is not
really placing restrictions on the central bank's decision, as it is always one of many listed factors," he said,
adding that the CBR is likely to focus more on the banking sector and retail banking in particular, while
making its decision. The service provided the following headline data and sector breakdown:
Headline industry output July' 12 June'12 July'11 mth/mth pct change +1.9 -0.6 +0.4 yr/yr pct change +3.4 +1.9 +5.2 Extraction of raw materials mth/mth pct change +3.8 -2.2 +3.1 yr/yr pct change +0.9 +0.2 +1.8 Manufacturing mth/mth pct change +1.2 +1.0 -1.9 yr/yr pct change +5.7 +3.4 +5.5 Production and distribution of electricity, gas, water mth/mth pct change +1.1 -11.2 +2.4 yr/yr pct change +0.8 +2.1 +1.9
/ Thomson Reuters
Fitch Ratings has affirmed Russia's Long-term foreign and local currency Issuer Default Ratings (IDR)
at 'BBB' with Stable Outlooks. The Short-term foreign currency rating and the Country Ceiling have also
been affirmed, at 'F3' and 'BBB+', respectively. The affirmation balances Russia's strong sovereign balance
sheet, net external creditor position and increasing exchange rate flexibility against its hesitant steps
towards greater fiscal consolidation and structural reforms in the face of volatile oil prices and an uncertain
global economic backdrop. Russia retains a strong sovereign balance sheet relative to the 'BBB' category.
General government debt is low - 11% of GDP in 2011 - while the government holds USD 112 bln (7% of
GDP) in sovereign wealth funds, which provide fiscal financing flexibility and a buffer against a sharp drop in
oil prices. Externally, sovereign net foreign assets totalled USD 467 bln at end-2011 (25% of GDP), the
highest in absolute terms in the 'BBB' category, bolstered by the fifth largest international reserves in the
world. Banks, a significant source of external stress in 2008-09, have also become net external creditors.
Real GDP growth projections of 3.8% in 2012 and 3.5% in 2013 encapsulate Fitch's view that Russia is
materially less exposed to external shocks than it was in 2008-09, helped by a more flexible exchange rate
that has moderated the budgetary impact of volatile oil prices while reducing net capital outflows.
Nonetheless, Russia has not been immune to the eurozone debt crisis, which is playing itself out through
volatile oil prices, falling asset prices, a weaker exchange rate and deteriorating investment sentiment.
Commodity dependence and the attendant exposure to fluctuations in oil prices remain Russia's key rating
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03 weakness and one that shows no sign of diminishing. Headline budget and current account surpluses mask
structural non-oil deficits of 10%-12% of GDP in 2011, highlighting Russia's vulnerability to commodity price
shocks best exemplified by a high fiscal break-even oil price of around USD 118 bbl. While acknowledging
that recent steps to reinstate a 'fiscal rule' represent a first step towards loosening the link between oil
prices and expenditure, Fitch argues that these imply only a gradual reduction in the non-oil deficit to 8.5%
of GDP by 2015, compared to a pre-crisis medium-term target of 4.5% (which the IMF estimates to be in line
with intergenerational equity). The agency also notes that it remains unclear how President Putin's election
pledges, independently estimated at a cumulative 6% of GDP over six years, will be accommodated within
overall budget targets. Compared to its BRIC counterparts, Fitch believes that Russia has fared relatively well
throughout the current eurozone-led crisis. However, the prospect of Russia revisiting pre-crisis growth
rates of 7% appear remote in the absence of major structural reforms, notwithstanding the country's
imminent accession to the WTO. Russia compares poorly with rating peers on the World Bank's governance
indicators including political stability, rule of law, control of corruption and government effectiveness. These
factors manifest themselves in a poor business climate, heightened event risk and persistent net capital
outflows. In the absence of greater fiscal consolidation, Fitch says that a severe and sustained drop in oil
prices would weaken public finances and the economy and could lead to a downgrade. Conversely, further
steps toward entrenching a 'fiscal rule' that delivered a more ambitious reduction in the non-oil deficit,
coupled with a sustained reduction in inflation, could lead to an upgrade. Major reforms that improved the
business climate, further strengthened the financial sector and made convincing inroads to poor
governance, would also be rating positive. / Thomson Reuters
Global Economy
Investors who have long played safe by using shares in Western multinationals to tap into the
emerging market boom are looking afresh at buying emerging equities instead, seeing prices as cheap
after two dire years for the asset class. Blue-chip companies such as Procter & Gamble and Unilever have
long been regarded as a win-win bet, allowing shareholders to participate in the developing world boom
while avoiding currency, political and corporate governance risks. The trade paid off handsomely, especially
in the volatile post-Lehman years. Data from Goldman Sachs shows a model basket of 50 Western
companies with high emerging markets exposure would have outperformed a group of pure emerging
markets plays by 20% since mid-2010. But the result is that shares in these blue chips are now looking
pricey. The multinationals' basket trades on average at a price premium of over 20% to emerging markets,
based on the ratio of share prices to estimated future earnings. That price gap, Goldman says, is the widest
since 2007. A discount of that magnitude has historically been a "launchpad" for EM outperformance,
according to fund managers at Blackrock who now prefer emerging equities to multinationals with exposure
to the developing world. "Sometimes valuations ... and relative price performance give you a signal as to
where you should be tilting your portfolio. The recent price action in emerging markets gives investors a
strategic and tactical reason to emphasise direct EM investment," said James Bristow, a portfolio manager
with Blackrock's global equity team. That is especially the case for U.S.-based multinationals such as Colgate-
Palmolive which trade at around 20 times forward earnings, more than double the emerging markets'
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03 average. "Mostly for relative valuation reasons, the best way to get into emerging markets and growth
markets right now is go there directly rather than using proxy trades," Jim O'Neill, chairman of Goldman
Sachs Asset Management and the coiner of the BRIC investment concept, told Reuters.
MULTINATIONALS STLL HAVE FANS. This is not to say that multinationals have lost their entire fan
base. First, not all funds have the stomach to invest in emerging markets, where volatile currency and
political swings can wipe out bumper gains in a matter of days. Second, emerging bourses usually are loaded
with commodity and industrial stocks. Pure consumer plays such as retailers, which are sought after by
foreign investors, are rarer and often trade at a premium. And, according to Dale Winner, who runs a global
equity fund at Wells Fargo, it is possible to buy EM-exposed shares that are reasonably priced, particularly in
battered European markets. "I agree there's valuation pressure in U.S. companies - look at the premiums
they are trading on - but it's the opposite in Europe, because of a macro discount," says Winner who holds
Swiss watchmaker Swatch and luxury goods maker Richement. Based on a price-earnings or PE ratio, both
trade 8-10% below their past average, Winner says, in contrast to U.S.-based brands such as Avon or
Colgate that are trading at a premium to their history. All these companies get at least half their revenues
from emerging markets.
WESTERN MARKETS EXPOSURE A DRAG. Emerging equities' lacklustre performance in the past 18
months is partly to do with a slowdown in developing countries' high-octane growth, a weakening that
appears to be confirmed by data showing falling exports and retail sales almost everywhere. The slowdown
is hitting once-booming sales of goods, from mobile telephones to cars, and threatens revenues at emerging
market companies. It is also a worry for multinationals and the investors who have piled into them. But
Blackrock's Bristow argues that valuation - how much of the bad news are the shares pricing in - is key. "We
know global growth is slowing pretty much across the board but ... valuations in emerging markets price in
more of an earnings slowdown than in developed markets. That means your margin of safety is already
higher," he said. And multinationals, for all their much-hyped emerging markets exposure, typically still get
over half their revenues from Western markets, where debt-laden consumers and governments are in
saving rather than spending mode. Take beverage giant Coca-Cola. In the second 2012 quarter its sales
jumped 12% in Africa and Asia, grew 1% in America and dropped 4% in Europe. But the two latter markets
account for over half its business. Similarly, Procter & Gamble, which makes detergent and Olay face cream,
has struggled this year due to big falls in the developed markets, which make up 60% of sales. "You can own
a multinational and get exposure to emerging markets but it's going to be diluted exposure," said Nick Price,
who runs an emerging equities portfolio at Fidelity Worldwide Investments. "You have to accept that 60% of
business is in places where volume growth is close to zero." / Thomson Reuters
BRICs is by no means an obsolete tag. The acronym coined by Goldman Sachs economist Jim O'Neill
in 2001 continues to operate as both a useful shortcut and a fertile provocation to compare and contrast
the world's four biggest developing economies: Brazil, Russia, India and China. But like all neat
catchphrases, there is a danger that one day it will veer into cliché. It's already easy to over-associate the
term with all emerging markets. Ruchir Sharma is anxious to prevent jargon freezing into unassailable truths.
Individual countries are distinct and diverse, even at comparable stages in their economic evolution. This
very simple idea informs Sharma's approach in his new book "Breakout Nations: In Pursuit of the Next
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03 Economic Miracles," in which he identifies which developing countries have the potential for stable growth
worthy of investor attention. Sharma's wealth of knowledge as Morgan Stanley Investment Management's
head of emerging market equities and ample experience on the ground are strong foundations for his
exploration of what makes economies break out, or break down. And his analysis offers the reader a set of
original and actionable revelations about which countries may offer compelling investment prospects.
Among them, he argues that Poland is underrated, Nigeria is on the up and Thailand is at a turning point. He
is less enthusiastic about the directions Brazil, Vietnam and a few other investor darlings are headed.
Importantly, "Breakout Nations" helps readers recalibrate their assessment of the BRICs and other well-
covered markets. For example, Sharma writes, investors have staked out extreme positions on China: either
extremely negative or excessively boosterish, when perhaps they should just be moderately bearish. China
will grow, but those banking on 9% forever will be disappointed. The book was published a few weeks
before China reported that official GDP for the quarter ending June 2012 had dipped to 7.6%. As with any
rushed trip around the world in 14 chapters, there's still plenty of scope to revisit certain areas. In many
cases, while Sharma's enthusiasm for a particular market is fully explained there is no time to tackle some of
the questions his narrative raises. For instance, while the book highlights the bright side of Indonesia's
"efficient corruption" and low costs, the downside - cronyism and a vast wealth gap - casts a silent shadow
over the argument. For all Sharma's emphasis on acknowledging the developing world's diversity, he could
also do more to fully explore the diversity within important individual markets. Although a large chunk of
the book is dedicated to China, the author appears to have focused his exploration on the industrialized east
coast. Despite a detailed discussion of what lies ahead for the Chinese consumer, he could have delved
further into China's vast, fast-growing interior. Sharma's biggest shortcoming may simply be in the
marketing of his investigation: he lacks a snappy acronym to trump BRICs. Without a catchphrase, Sharma's
investment ideas may prove less memorable than O'Neill's in the long run. But his examinations of how
some countries manage to grow and make both their people - and investors - prosperous will be worth
remembering. / Thomson Reuters
Bioenergy companies and protein producers will be the main losers among EMEA corporates from
record soft commodity prices, Fitch Ratings says. The impact on the food and beverage sector will be more
muted because raw materials represent a smaller fraction of their costs, although subdued consumer
demand and resistance from retailers to price inflation will compound the problem for this sector. The price
rally has been driven by the US drought, primarily affecting production yields for corn and soybeans in North
America. We believe the overall threat to corporates is mild, as weather-driven price shocks are often
temporary - and prices could unwind on improved weather conditions. Tight supply of major grains and
oilseeds associated with the drought is exacerbated by the high demand for food and protein from emerging
economies, leading to tight stock-to-use ratios. Among the affected sectors, the downgrade of Abengoa to
'B+' from 'BB' last month was largely due to poor performance in its bioenergy business in Q1’12. We believe
this segment will not see a meaningful recovery until mid-2013, as profitability depends on crush margins
(the difference between the ethanol sales price and the input cost of corn). Bioenergy also has substitutes
such as gas/oil that are not correlated to higher soft commodities; thus sustained high input costs for
bioenergy make it less attractive relative to oil-based fuels. Protein producers will see the next biggest
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03 impact, as food retailers will be reluctant to accept substantially higher than CPI price inflation. CIS protein
producers, such as MHP or Miratorg LLC, generally benefit from growing their own Tgrain for fodder.
Avangardco could see some pressure as it does not grow its own grain, and feed costs account for as much
as 70% of the cost of producing eggs. However, it benefits from sourcing cheap grain from local farmers and
adequate pricing power. While prices of substitutes often move in tandem, soybeans cannot be easily
replaced as a key fodder component, due to the high protein relative to sunflower. Therefore, for animal
feed producers such as Sodrugestvo, rising soybean prices could result in higher working-capital financing;
this is mitigated by its equity private placement in early July 2012. For the food and beverage sectors, the
impact is muted. Raw materials account for around 30% of the cost of goods sold for a food producer, and
some input costs remain subdued, unlike in 2008 when all commodities were rising. Weak oil and metals
prices will reduce the pressure on packaging costs. We do not expect higher food inflation for the rest of
2012, and do not foresee any extra pressure on profitability for EMEA-based packaged food producers in
2013. Small food manufacturers, or those focused on bakery and pasta with little bargaining power with
retailers or product differentiation (eg Premier Foods, manufacturer of Hovis bread), will suffer more than
global and diversified food companies such as Danone or Nestle. We published a report in May’11 examining
the potential impact of rising agricultural commodity prices, including a scenario in which a supply-driven
price shock - such as drought - was combined with weak consumer spending power (see Related Research).
We found the impact on retailers to be neutral as long as they are able to strengthen their private-label
products, which would become more popular as consumers switch to cheaper alternatives. We expect this
situation to remain through to 2013. Grain producers and exporters such as Mriya or Kernel in the CIS could
be among the few beneficiaries of high demand and prices. However, we do not expect an immediate
impact, as the harvest campaign is only finished for early crops. Ukraine and Russia are not expecting grain
production yields as strong as 2011, as summer conditions are also hot and dry. Both countries may consider
introducing export restrictions. Therefore, higher international prices could be partially offset by weaker
domestic prices and export volumes. / Thomson Reuters
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03 Markets: FX / MONEY MARKET
FX MARKET
On this week
the rouble loosed
0.3% to 31.90 vs the
dollar and eased 0.6%
to 39.40 against the
euro. Against the
basket, the rouble
has depreciated
around 0.45% to
35.26, hovering near
a strong trend line
formed by its 200-day
moving average.
"Trading activity
remains low... The
rouble has support
from high oil prices
and support should
also emerge from tax
payments," analysts
said. Month-end tax
payments are
expected to bolster
the rouble as
exporters step up
conversion of foreign
currencies to meet
local liabilities. "Taxes
will play on the
rouble's side for a
while but then its
dynamics could
change," analysts said
in a note.
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03
Russia's gold and foreign exchange reserves rose to $510.0 bln in the week to 10 August from $507.4
bln a week earlier, CBR data showed on Thursday (16 Aug). The reserves include monetary gold, special
drawing rights, reserve position at the IMF and foreign exchange. / Thomson Reuters
MONEY MARKET
Due to
beginner of tax
payment period on
this week money
market rates have
increased around
100 bps and
stabilised at 5.0-
6.0%.
CBR sent
the strongest
signal this year on Friday (10 Aug) that policy tightening may lie ahead if inflation risks from food prices
increase, while keeping its main interest rates unchanged for now at a monthly meeting. Russia's
economic growth slowed to 4% in the second quarter compared with a year earlier, the FSS confirmed on
Friday, but is still much stronger than many other economies, helped by a strong oil price, the country's chief
export. The CBR, which has kept monetary policy unchanged since cutting some lending rates in December,
said it did not see an increased risk of slowing economic growth at the moment as domestic demand
remains robust. It sounded more concerned about inflation, which is nearing 6%, the top of the CBR target
range. "The worsening situation in the global and Russian food markets, as well as estimates of harvests of
main agricultural crops in the current year is an important source of inflationary risks, particularly given the
influence of these factors on inflation expectations," the CBR said in a statement after the meeting. For the
first time this year it refrained from commenting on whether it deemed current rates to be at an
appropriate level in the near term - which analysts read as a clear indication that monetary tightening is in
the pipeline. "The CBR is definitely more committed now than before to start the path of policy tightening,"
said Alexander Morozov, chief economist for Russia. The CBR kept as expected the fixed one-day REPO rate,
the de-facto ceiling for the money market, at 6.25%. It held the overnight deposit rate, a floor for interbank
rates, at 4%. The more symbolic refinancing rate, the cost of borrowing overnight from the central bank,
stayed at 8%. That was broadly as expected although analysts had seen some risk the CBR could make a
surprise move on policy given growing supply-led pressure on prices. Latest polling last month predicted a
rise in rates before the end of the third quarter. The IMF, which forecasts Russia's economy will grow by
around 4% this year and next year, this month urged Russia to tighten monetary policy to guard against the
risk of overheating and bear down on inflation. Prices of goods for consumers in Russia rose 5.7% year-on-
year as of 6 August, making the CBR aim of keeping full-year inflation down to a targeted 5-6% more
difficult. "When making (future) decisions the CBR will focus on the medium-term targets for inflation and
8/17/2012
9
ECONOMIC BULLETIN № DEB-2012.08-03 the assessment of economic growth prospects as well as the dynamics of inflation expectations," the CBR
said in its statement. The slowdown in economic growth in the second quarter to 4%, announced by the
EconMin last month and confirmed by the statistics service on Friday, marked a slowdown from 4.9% annual
growth in the first quarter. "One gets the feeling that there is no final decision yet whether to raise rates or
not," Dmitry Polevoi, an economist in Moscow, said. "That is, (the CBR) is clearly preparing the stage, but
there is no clear signal as uncertainty remains: how bad will the harvest be, by how much food prices will
rise and how it will affect inflation expectations and the core inflation."
CREDIBILITY ISSUE. Morozov reckoned the CBR made a mistake by holding rates: inflation is likely to
exceed 6% next month. And although the recent spike in inflation comes from higher food prices, which are
beyond the CBR control, rather than rising money supply, which the CBR can mitigate, raising rates
marginally could lower inflation expectations, he said. This, in turn, could tame real price rises. "(The
decision) puts the CBR in a certain extent behind the curve rather than ahead of the curve," Morozov said.
Moreover, he added, the wait-and-see approach the CBR adopted on Friday somewhat discredits the CBR
goal to shift its main monetary policy focus to inflation targeting from controlling the rouble rate. The CBR
widened the rouble's trading band by one rouble last month, aiming to increase currency flexibility which
will allow it to cut down on forex interventions as it moves away from targeting the exchange rate and
towards inflation targeting. "From the credibility perspective it would have been more advisable to raise
rates now rather than in September." Not all agree. "We believe raising policy rates in the current
environment is premature, as local lending remains quite expensive, thus limiting investments and growth,"
analyst at Barclays wrote in a note prior to Friday's meeting. Below in the table you could find all key
effective rates of CBR:
KEY RATES CURRENT LEVEL PVS LEVEL refinancing (refi) rate 8.00 pct 8.25 pct min one-day repo rate 5.25 pct 5.25 pct 1-day overnight deposit rate 4.00 pct 3.75 pct 7-day deposit rate 4.00 pct 3.75 pct 30-day deposit rate 5.50 pct 5.50 pct 90-day deposit rate 6.50 pct 6.50 pct fixed rate 1-day repo 6.25 pct 6.50 pct fixed 1-day lombard rate 6.25 pct 6.50 pct fixed 7-day lombard rate 6.25 pct 6.50 pct fixed 30-day lombard rate 6.25 pct 6.50 pct swap (rouble) 6.50 pct 8.00 pct overnight credit rate 8.00 pct 8.25 pct 90-day gold-backed loans 6.75 pct 6.75 pct market assets and guarantees 7.00 pct 7.00 pct market assets and guarantees 7.50 pct 7.50 pct market assets and guarantees 8.00 pct 8.25 pct min 7-day repo rate 5.25 pct 5.25 pct min 3-month repo rate 6.75 pct 6.75 pct min 6-month repo rate 7.25 pct 7.25 pct min 12-month repo rate 7.75 pct 7.75 pct min 3-month lombard rate 6.75 pct 6.75 pct min 6-month lombard rate 7.25 pct 7.25 pct
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03 min 12-month lombard rate 7.75 pct 7.75 pct BANKS' MINIMUM RESERVE REQUIREMENTS for liabilities to non-resident corporates 5.50 pct 5.50 pct for liabilities to private individuals 4.00 pct 4.00 pct for liabilities to other liabilities 4.00 pct 4.00 pct
/ Thomson Reuters
Markets: FIXED INCOME
Russia attracted bids for less than half the five-year OFZ treasury bonds it offered at an auction on
Wednesday (15 Aug), as local liquidity strains, a weaker rouble and globally increased risk aversion
dragged on demand. The FinMin sold RUB 6.5 bln of OFZs due 19 April’17, having offered to sell up to RUB
15 bln of the bonds. The FinMin met all bids, setting the average yield at 7.62%, the top end of a guideline
yield range of 7.57-7.62% announced overnight. "We believe that today's weak auction results are linked to
the banking sector's liquidity shortage," analysts said in a note. Russian interbank overnight lending rates
rose to 5.5% on Wednesday, the deadline for banks and companies to meet monthly social security
payments, from levels of around 4.2% last week. A tick lower in the rouble on Wednesday also eroded the
appeal of buying into rouble-denominated bonds for holders of foreign currencies, while a sell-off in stock
markets underlined widespread wariness about taking risky positions. "Demand from foreigners was also
weak due to unclear global dynamics and the lack of progress on liberalising access for foreign depositaries
to the Russian market," analysts wrote. "Moderate rouble weakening failed to boost interest in rouble
bonds either." The Russian bond market had been expected to adopt international settlement system
Euroclear's trading rules in July, effectively opening its doors to global investors, but implementation has yet
to be completed. / Thomson Reuters
Sberbank has added $300 mln to its outstanding Eurobond issue maturing in 2017, a trader who has
seen details of the deal told Reuters on Friday (10 Aug). He said the deal was priced at the initial yield
guidance of 3.95%. Sberbank was not immediately available for comment. Russian borrowers have raised
almost $30 bln since the start of the year, more than in the whole of 2011.
Sberbank is gauging international lenders' demand for a three-year syndicated loan, in a move that
could boost this year's muted Russian deal flow, bankers close to the company said. "Sberbank is gauging
market appetite, and only after they have an understanding of what they could collect will they define the
volume," one European banker said. Russian borrowers have raised $11 bln in loans this year, marking a 59%
drop on the same period in 2011, Thomson Reuters LPC data shows. Of this, Russian banks have raised $750
mln. Russian banks' liquidity has meant that many Russian borrowers have tapped domestic lenders rather
than international banks. The yield on the loan will need to be above 300 bps all-in (or combining margin
and fees) to attract lenders, many of which are grappling with tightened liquidity amid the eurozone debt
crisis, the banker added. Other bankers said Sberbank's prominent standing in Russia and its position as a
frequent borrower means the bank has historically managed to snap up large amounts at highly competitive
rates. Pricing on Sberbank's last internationally syndicated loan of $1.2 bln in November was competitive,
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ECONOMIC BULLETIN № DEB-2012.08-03 with a margin of 150 bps, bankers said. Sberbank declined to comment. A second Russian bank,
Gazprombank, is also in talks with lenders over a $600 mln, one-year deal with all-in pricing of 275 bps, one
banker said. Sberbank posted a seven-month net profit of RUB 212.4 bln on 7 August, up 6% on the same
period last year, helped by strong growth in net fee commissions and net interest income. / Thomson
Reuters
Markets: STOCKS
Russian shares
rose on this week,
outperforming other
emerging markets on
a spike in oil prices he
dollar-based RTS
index climbed 0.55%
to 1435 bps and the
rouble-denominated
MICEX was up around
1% at 1456 bps, just
below strong resistance at its 200-day moving average. Trading activity was low at what is the peak of the
August holiday season. "The whole process of trading now is just attempts to find a local low and then to
lock in profit after a short-lived rise," said a dealer at a Western bank in Moscow. A rise in Brent crude price
to above $116 for the first time since early May supported Russian assets, but they remain vulnerable to
changes in global risk sentiment. Analysts said the main driver of Russia's shares "for some time has been
the trend in global emerging markets and investors' assessment of risk". "Still, the rising (oil) price is a
positive for the budget and gives the government more spending firepower to sustain economic growth
around the 4% level we forecast," they wrote. The European benchmark for oil has risen by more than a
third in less than two months on worries that a conflict over Iran's disputed nuclear programme could
escalate, disrupting supply, and as investors lock in positions on hopes of more stimulus measures from
central banks.
The CEO of Sberbank, German Gref, hopes the bank's delayed 7.6% stake sale will take place this
year, if the markets allow. "We are ready. If the market situation is better than today, I hope that it will be
possible before the end of this year," Gref told journalists late on Saturday (12 Aug) in London. Gref said
September "will be a good time" for the stake sale, which is worth worth nearly $5 bln, but repeated that it
would depend on how favourable the markets are. Sberbank, Europe's second-largest lender by market
value after HSBC, initially planned to sell its 7.6% stake in via secondary public offering last year but
postponed the deal due to fragile markets. Sberbank's stake sale was a part of the CBR total holdings of
57.6% and a wider state privatisation drive aimed at raising funds and improving corporate governance. So
8/17/2012
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ECONOMIC BULLETIN № DEB-2012.08-03 far, the state managed to sell 10% in VTB last year, while other deals stalled due poor conditions in the
markets, which have been hit by the European debt crisis. / Thomson Reuters
Macroeconomic indicators of Russia
ECONOMIC INDICATORS PERIOD LATEST PREV YR AGO Nominal GDP (bln RUB) Q1 13.491 15.462 11.680 GDP Y/Y Q2 +4.0 +4.9 +3.4 CPI M/M Jul +1.2 +0.9 +0.0 CPI Y/Y Jul +5.6 +4.3 +9.0 PPI M/M Jul -1.1 -0.9 -1.8 PPI Y/Y Jul +4.1 +4.1 +15.1 Ind output M/M Jul +1.9 -0.6 +0.4 Ind output Y/Y Jul +3.4 +1.9 +5.2 Retail sales Y/Y Jun +6.9 +6.8 +5.8 Unemployment (mln) Jun 4.14 4.09 4.61 Real disposable income Y/Y Jun +3.0 +4.1 +2.4 Real average wage Y/Y Jun +12.9 +12.4 +2.4 Nominal average wage (rbls) Jun 28.232 26.385 24.137 Capital investment (bln RUB) Jun 1015.6 866.3 n/a Capital investment Y/Y Jun +4.7 +7.7 +4.9 Trade surplus ($bln) Jun 14.0 17.4 16.4 Exports ($bln) Jun 40.8 45.2 44.2 Imports ($bln) Jun 26.8 27.8 27.8 Budget balance (bln rbls) Jan-Jun +247.4 +120.1 +703.5 CBR reserves ($bln) 3-Aug 507.4 505.5 n/a Monetary base (bln rbls) 1-Aug 8.06 8.129 7.147 M2 (blnR) 1-Jul 24.764 24.45 20.745 REER rouble Feb/Jan +3.5 +0.7 +1.8 Oil output (mln bpd) Jul 10.34 10.32 n/a Oil output (mln T) Jul 43.7 43.8 n/a Gazprom gas output (bcm) Jul 45.0 n/a n/a URALS oil, $/bbl 17-Aug 114.82 113.93 111.12 BRENT oil, $/bbl 17-Aug 114.94 113.88 112.17
ANNUAL DATA 2011 2010 2009 2008 2007 Nominal GDP (bln USD) 1692.4 1479.2 1292.1 1403,8 1349,3 GDP (pct) +4.3 +4.3 -7.8 +5.2 +8.5 CPI Y/Y (pct) +6.1 +8.8 +8.8 +13.3 +11.9 M2 (bln R) 24,543 20,012 15,698 13,490 13,27 Oil/gas cond.(mln T) 511 505 494 488 491 Natural gas (bcm) 671 650 582 665 653 Coal (mln T) n/a 323 298 326 315 Grain (mln T) n/a 61 97 108 82 Beet Sugar (mln T) n/a 2.7 3.3 3.6 3.2 Gold (T) n/a 201 205 184 163
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ECONOMIC BULLETIN № DEB-2012.08-03
GOVT FORECASTS 2012 2013 2014 Nominal GDP (bln USD) 1 913.3 n/a n/a GDP Y/Y (pct) 3.5 (3.8-4.0) +3.8 (+3.9) +4.4 (+4.6) Industry output (pct) +3.1 (+3.6) +3.4 (+3.8) +4.1 (+4.2) CPI Y/Y (pct) 5.0-6.0 (5.0-6.0) 4.5-5.5 (4.5-5.5) 4.0-5.0 (4.5-5.5) Cap. Investment pct +4.0-5.0 (+6.6) +7.1 (+7.1) +7.0 (7.2) Retail Sales pct +5.5 (+5.5) 5.3 (5.3) 5.5 (5.5) Exports $ bln 513.4 (533.1) 515.0 (535.9) 543.4 (565.3) Imports $ bln 368.6 (397.4) 412.7 (444.6) 454.0 (486.1) Trade Balance $ bln 144.8 (135.7) 102.3 (91.3) 89.4 (79.2) Urals oil, ave., $/bbl 106-108 (115) 97 (97) 101 (101) Rouble rate/$1 29.20 (31.1) 31.3 (29.4) 31.80 (30.50) Rouble REER +0.2 (+3.5) +2.0 (0.0) 1.2 Reserve fund, trln RUB as of yearend 1,568 1,619 1,624 Revenue, trln RUB 12.588 (11.779) 12.729 (11.674) 14.116 (12.646) Expenditure, trln RUB 12.656 (12.185) 13.766 (13.418) 14.631 (14.294) Budget deficit, trln RUB -0.068 (-0.877) -1.037 (-1.744) -0.514 (-1.648) Budget deficit, % of GDP -0.1 (-0.3) -1.6 (-2,7) -0.7 (-2.3) Real incomes, % 4,2 (4.8) 4,8 (4,8) 5.3 (5.3) Capital outflow, bln USD -50.0 (-25.0) n/a n/a
BALANCE OF PAYMENTS ($bln) 2011 2010 2009 Current account 98.8 71.1 48.6 Cap/fin account -76.2 -26.0 -43.5 Net errors/omissions -10.0 -8.3 -1.7 Reserve assets -12.6 -36.8 -3.4
LONG-TERM FOREIGN CURRENCY RATINGS Moody's (December 12, 2008) Baa1 (outlook stable) S&P (June 27, 2012) BBB (outlook stable) Fitch (August 16, 2012) BBB (outlook stable)
CJSC Denizbank Moscow Treasury Ksenia Mayorova ksenia.mayorova@denizbank.com Alexander Shetler alexander.shetler@denizbank.com +7 (495) 789-97-20, +7 (495) 783-31-41 Corporate Banking Savas Citak savas.citak@denizbank.com Oguz Yalcin oguz.yalcin@denizbank.com Koray Akefe koray.akefe@denizbank.com Mine Arpadji mine.arpadji@denizbank.com Elena Kislova Elena.kislova@denizbank.com Roman Otavin roman.otavin@denizbank.com Marina Kalashnik marina.kalashnik@denizbank.com Oksana Korzhuk oksana.korzhuk@denizbank.com +7 (495) 783-31-40, +7 (495) 725-10-20
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