russian economic developments no.11 2014 · 2014-11-28 · russian economic developments no.11 2014...

RUSSIAN ECONOMIC DEVELOPMENTSNo.11 2014

POLITICAL AND ECONOMIC RESULTS OF OCTOBER 2014 (S.Zhavoronkov) 2INFLATION AND MONETARY POLICY IN SEPTEMBER 2014 (A.Bozhechkova) 6FINANCIAL MARKETS IN OCTOBER 2014 (N.Andrievsky, E.Khudko) 10RUSSIA’S REAL SECTOR OF THE ECONOMY IN SEPTEMBER 2014: FACTORS AND TRENDS (O.Izryadnova) 14THE RUSSIAN INDUSTRY IN SEPTEMBER 2014 (S.Tsukhlo) 17THE STATE BUDGET IN JANUARY SEPTEMBER 2014 (T.Tischenko) 20RUSSIAN BANKS WITHIN THE FIRST THREE QUARTERS OF 2014 (M.Khromov) 24MORTGAGE IN THE RUSSIAN FEDERATION IN JANUARY AUGUST 2014 (G.Zadonsky) 28THE FOREIGN TRADE IN AUGUST 2014 (N.Volovik) 32THE CONSEQUENCES OF THE IMPOSITION OF RESTRICTIONS ON PORK IMPORTS IN 2014 AND THE IMPORT SUBSTITUTION PROSPECTS FOR RUSSIA’S DOMESTIC PIG FARMING SECTOR (N.Karlova) 35

THE IMPACT OF POLITICALY MOTIVATED TRADE SANCTIONS ON RUSSIA’S FOREIGN TRADE SECTOR (A.Pakhomov) 39

FORTHCOMING CHANGES IN RUSSIA’S STRATEGIC PLANNING SYSTEM (V.Tsymbal) 44THE DIFFERENCE IN THE BEHAVIOUR OF DOMESTIC AND FOREIGN PRIVATE INVESTORS IN THE RUSSIAN STOCK MARKET (A.Abramov) 47

MIGRATION PROCESSES IN THE H1 OF 2014 (L.Karachurina) 52A REVIEW OF RUSSIA’S TAXATION REGULATORY DOCUMENTS ADOPTED IN THE PERIOD OF SEPTEMBER OCTOBER 2014 (L.Anisimova) 56

REVIEW OF ECONOMIC LEGISLATION IN OCTOBER 2014 (I.Tolmacheva, Yu.Grunina) 61DECOMPOSITION OF RUSSIA’S GDP GROWTH IN 1999 2014 (S.Drobyshevsky, M.Kazakova) 63

© GAIDAR INSTITUTE FOR ECONOMIC POLICY3 – 5, Gazetny pereulok, Moscow, 125 993, Russian Federa onPhone (495)629 – 67 – 36, fax (495)697 – 88 – 16, Email: lopa [email protected]

RUSSIAN ECONOMIC DEVELOPMENTS No.11, 2014

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POLITICAL AND ECONOMIC RESULTS OF OCTOBER 2014S.Zhavoronkov

As far as the economic-poli cal sphere is con-cerned, October saw neither any stunning nor extraor-dinary news. The realm of Russia’s foreign rela ons con nued to be plagued by severe disagreements between Russia and the OECD states over the ongo-ing confl ict in the southeast of Ukraine. Although the truce declared in early September was generally being honored, the situa on in that region showed a clear trend towards worsening: there was a resump on of heavy fi gh ng around Donetsk airport, and a number of the fi eld commanders of the self-proclaimed ‘peo-ple’s republics’ publicly announced that they would not abide by the truce. The Russian delega on to the Organiza on for Security and Co-opera on in Europe (OSCE) blocked the OSCE’s proposal to extend the mandate of the OSCE Observer Mission to the en re length of the Russian-Ukrainian border in the confl ict zone. As a result, the only op on le for the Observer Mission was to monitor only a stretch of a few kilom-eters out of approximately 300 kilo meters of border that was not under Ukraine’s control. Moreover, the OSCE’s inten on to use drones for monitoring the bor-der was nixed by the ‘people’s republics’ who prom-ised to shoot them down on sight. The restric ons thus imposed on the ac vity of the OSCE Observer Mission

In October the current turmoil in Russia’s interna onal rela ons palpably stagnated. At the same me, Russia’s economic-poli cal scene displayed alarming portents of future troubles in her business environment: it is not an exaggera on to say that, in October, Russia found herself on the verge of taking a number of tough decisions that could signifi cantly worsen the situa on faced by domes c businesses. Thus, the RF President signed a law where-by the base used to calculate property tax rates was to be switched from inventory values to cadastral values. The Federa on Council (the upper chamber of Russia’s parliament) approved a law designed to vest the inves ga ve authori es with an unlimited right to ini ate criminal cases on tax ma ers, bypassing the formal preliminary inves ga on by the Federal Tax Service. Quite unexpectedly, before being approved by the Federa on Council and then signed by the RF President, the dra law had been passed by the State Duma in its ini al version, with-out any amendments. The RF State Duma passed at fi rst reading a dra law designed to increase the amount of compulsory annual contribu ons for high income earners, to be paid by their employers to the Mandatory Health Insurance Fund. Also, a dra law designed to vest regional authori es with the right to scale back by 10 mes the offi cially established small business criteria, thus increasing the number of enterprises which qualify for the be-nefi ts en tled to small businesses, was introduced into the RF Government. The a empts of the entrepreneurial community, including the Russian Union of Industrialists and Entrepreneurs (RUIE), at convincing the authori es not to worsen the exis ng business condi ons, or at least to postpone the implementa on of these decisions in the event of their adop on, have been to no avail. So far, all these appeals to the Government have yielded only vague promises, and nothing concrete that could make the business community feel more or less comfortable. To deepen the gloom, Rosne , Russia’s biggest oil producer, asked the RF Government for more than 2 trillion rubles from the Na onal Wealth Fund (NWF). If this request is accepted, the NWF in its present form will defi nitely cease to exist.

have prac cally invalidated the Minsk Agreement’s s pula ons concerning border monitoring, which were designed to prevent military hardware from crossing the Russian-Ukrainian border. In fact, the only good news about the crisis in eastern Ukraine is the shaky ceasefi re which has already lasted for two months in a row. However, nobody can say whether this ceasefi re will keep holding for long1. It is not by chance that the ‘Minsk Nego a ons’ have ground to a halt – the par es thereto simply have nothing more to say to each other. The trilateral gas talks between Russia, Ukraine and the EU were equally moribund for quite a long period of me, despite being occasionally held at a very high level – as it happened, for example, at the ‘Normandy Four’ nego a ons in Milan, in mid-October, where the par es were represented by their heads of state. According to the offi cial statements of par cipants in the ‘Normandy Four’ nego a ons, the par es were close to reaching a compromise. Nevertheless, no debt repayment agreement was con-cluded because there remained too much discord con-

1 Some observers have expressed concern that hos li es in eastern Ukraine can resume a er the Ukrainian parliamentary elec ons on 26 October and the elec ons in the self-proclaimed republics on 2 November.

POLITICAL AND ECONOMIC RESULTS OF OCTOBER 2014

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cerning both the terms of debt repayment and, most importantly, the legal form of such an agreement be-tween Russia and Ukraine. Russia insisted that a com-promise price for natural gas should be arrived at by reducing the export duty thereon. Ukraine objected to this proposal on the grounds that the determina- on of the size of Russian export du es is a sovereign

preroga ve and not a liability of Russia’s government. In her turn, Ukraine repeatedly requested that the ex-is ng contract on Russian gas supplies (which is valid un l 2019) should be renego ated, and some of its terms be changed. For obvious reasons, these pro-posals were invariably spurned by Russia. In the sec-ond half of October there were a lot of promises of a compromise just around the corner, but no break-throughs. Bearing in mind the approaching winter and higher demand for gas in Europe, a viable gas agree-ment must be reached quickly – otherwise Russia will not be able to fi ll Ukraine’s natural gas storage sites and therefore will not be able to technically sa sfy the peak winter demand in the EU. At long last, at a trilat-eral ministerial mee ng that went late into the night of 30 October, Russia, Ukraine and the EU clinched a tem-porary agreement on natural gas supplies to Ukraine during the winter period of 2014–2015. The so-called ‘winter package protocol’, signed at that mee ng, en-visages that Ukraine should pay $3.1bn by the end of the year to cover debts for previous gas supplies from the Russian Federa on. In order to fi nance this pay-ment, a special fund should be established, apparently with the par cipa on of Ukraine and the EU (Moscow had demanded a bilateral agreement from the EU to guarantee Ukraine’s payments, but no such agreement was actually signed). A er the debt is paid, Russia un-dertakes to supply to Ukraine 4 billion cubic meters of Russian natural gas, by selling it on a prepaid basis at a compromise price of $ 378 per 1,000 cubic meters (preliminary es mates indicate that Kiev needs exactly that amount of gas above what Ukraine currently has in her storage facili es in order to get through the up-coming winter hea ng period). However, it is s ll too early to say that the gas crisis is fi nally over. It will hap-pen only a er Ukraine se les her debt to Russia and executes the prepayments s pulated in the ‘winter package protocol’. As neither the economic confl ict nor the poli cal crisis has yet been resolved, none of the sanc ons imposed on Russia has been li ed. Apparently, the possible mi ga on of EU sanc ons can be expected no earlier than March 2015 (the EU’s decisions on sanc ons against Russia s pulate that they should be formally revised in October 2014 and March 2015).

On 24 October 2014, President Vladimir Pu n de-livered a long and exhaus ve speech at the fi nal ple-

nary mee ng of the Valdai Interna onal Discussion Club’s XI session in Sochi. Devoted to the current state of interna onal poli cs, his speech laid the blame for the current havoc on the global poli cal arena on the USA and its hegemonic aspira ons. Having vowed to oppose such aspira ons, Pu n called himself a na o-nalist (although he had previously instructed Russia’s law enforcers to resist na onalism in all its manifesta- ons). Unlike many experts, the author of the current

review is scared neither by Pu n’s remark about be-ing a na onalist nor by the general toughness of his ‘Valdai speech’. It should be said that, since his famous ‘Munich Address’, Pu n has made a lot of statements in the same vein. And as early as 2008 he called him-self and Dmitry Medvedev ‘na onalists in a good sense of the word’. So what’s the big deal? Vladimir Pu n has also delivered many conciliatory speeches calling for dialogue, partnership etc. As the recent ‘Valdai speech’ contained no defi nite and specifi c promises of ac on with regard to other countries, nor any specifi c proposals thereto, it should be considered primarily as an exercise in poli cal posturing rather than a portent of some new extraordinary developments. First of all, it should be seen as a response to things that have al-ready happened, namely to the obvious deteriora on of Russia’s rela ons with the OECD countries.

A number of budget-related dra laws generally detrimental to the posi on of businesses were intro-duced into the RF State Duma. Formally, some of those dra laws were introduced by MPs, although there can be no doubt that their introduc on had been approved by the Presiden al Execu ve Offi ce – ot-herwise the RF President would not have signed them into law a er their passage through the State Duma. It should be added that October saw the emergence of an interes ng new situa on when the RF Government, when being unable – as it has frequently happened and s ll happens – to coordinate one or other issue between various agencies, is eff ec vely excluded from the lawmaking process. Thus, the State Duma demon-stra vely returned from third to second reading and then passed in its ini al version, without any amend-ments, a dra law whereby Russia’s tax authori es are to be completely deprived of any say in the ini a on of criminal cases. The dra law was duly signed into law by President Pu n. Previously, the authori es had re-peatedly stressed the necessity of reaching a compro-mise on that issue, and a possible compromise (admit-tedly more favorable to the Inves ga ve Commi ee than to the Federal Tax Service) had been even agreed upon. The compromise proposal had envisaged that the inves ga ve body should require the relevant tax authori es to submit, in two weeks’ me, the relevant documents on tax ma ers, and in the event of their


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failure to do so, should be granted the right to ini ate a criminal case on its own accord. The same sequence of events characterized the introduc on into the State Duma of the so-called ‘an -off shore dra law, pre-sented to the fl oor in a version close to the one that had been put forth by the RF Ministry of Finance and had drawn harsh cri cism from the Russian Union of Industrialists and Entrepreneurs. The RF Government had been vainly trying to achieve a compromise be-tween the interested par es for more than a year. As a result of the Government’s a empt at media on, de-pu es from four parliamentary fac ons introduced an ‘an -off shore’ dra law whereby it is envisaged that, during the period 2015–2016, any Russian company or individual who happens to own 50% of shares in a ‘con-trolled foreign company’ (CFC) should be deemed to be the owner of that CFC, and thus become subject to Russian tax on the amount of income derived from the CFC in ques on. From 2017 onwards, the size of such a stake should be set at 25% (or 10%, if Russian ci -zens should collec vely own more than 50% of shares in the CFC). The dra law establishes that profi ts from companies situated in the states that are not included in the list of off shore tax havens should also be levied with Russian profi ts tax in the event of the eff ec ve tax rate on corporate profi ts established in such countries amoun ng to less than 75% of the Russian profi ts tax (as is the case of Cyprus, a country extremely popular with Russian investors). According to the dra law in its current version, the threshold for declarable pro-fi ts in 2015, 2016 and from 2017 onwards should be set at Rb 50m, Rb 30m and over Rb 10m respec vely. However, it should be said that it is way too early to draw any conclusions about this dra law, because it can be signifi cantly altered and amended in the course of its passage through parliament.

The State Duma passed in fi rst reading a govern-ment dra law designed to abolish the cap on the employee income subject to insurance contribu ons to the RF Mandatory Health Insurance Fund. At pre-sent, the threshold of employee annual income is set at Rb 624,000, and the amounts exceeding the thresh-old are subject to contribu ons at a rate of 10%. A er this dra law, in all probability, is enacted into law, the rate of such contribu ons will be increased to 15.1%.

October saw the coming into force of a law envisag-ing that, by 2020, the base used to calculate property tax rates should be switched over from inventory va-lues to cadastral values. As far as Russian homeowners are concerned, the tax rate for apartments, residen- al premises, dachas, etc. will be set at 0.1–0.3%. The

Law provides for a number of exemp ons from the tax base and establishes a number of tax benefi ts that can be granted, at the discre on of regional authori es,

to some categories of ci zens. As regards legal en es (trade and administra ve business centers, trade units and public catering units), the switchover from inven-tory values to cadastral values can become a heavy fi -nancial burden, as they will be obliged to pay tax at 2% of the cadastral value of their commercial real estate, while the other types of their property will be taxed at a tax rate of 0.5%.

There was an inconclusive mee ng between Prime Minister Dmitry Medvedev and representa ves of the Russian Union of Industrialists and Entrepreneurs, who vainly tried to persuade the authori es to post-pone, for a fi xed period of me, the implementa on of any measures designed to toughen the tax regime. So far, such requests have been met with silence on the part of the authori es. Bearing in mind Russia’s rapidly worsening balance of payments and her weak fi scal situa on, this silence can mean only one thing – an inevitable increase in taxa on. At the same me, some agencies seem to be less hawkish on various economic issues than other government bodies. For example, the RF Ministry of Industry and Trade sug-gested that the proposed aboli on, from 1 January 2015, of all open-air markets throughout the whole territory of Russia should be considerably postponed, while the RF Federal An monopoly Service (FAS) voiced objec ons to the already introduced ban on selling beer from kiosks and the restric ons imposed on cigare e sales at small shops. In a separate deve-lopment, the Ministry of Finance introduced into the RF Government a dra law designed to vest regional authori es with the right to scale back by 10 mes the offi cially established small business criteria for trade and public catering units, thus increasing the number of enterprises which qualify for the benefi ts en tled to small businesses, including the simplifi ed taxa on sys-tem. At present, in order to qualify for small business status, an enterprise must meet the following require-ments: its annual income must be less than Rb 60m, the residual value of its fi xed assets must be less than Rb 100m, and it must employ less than 100 workers. Maybe the current fi nancial threshold of Rb 60m per annum is too high, but the proposed 10-fold reduc on thereof is equally excessive, especially bearing in mind that a case in point is income, not profi t.

The RF State Duma passed in fi rst reading a much cri cized dra law whereby Russian ci zens are to be allowed to claim compensa on, at the expense of Russia’s federal budget, for their assets seized abroad. The dra law introduced into the State Duma in the spring of 2014 by United Russia MP Vladimir Ponevezhsky envisages that, in the event that a Russian ci zen suff ers a property loss because of an ‘unjust decision’ of a foreign court, Russia’s federal

POLITICAL AND ECONOMIC RESULTS OF OCTOBER 2014

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budget should be obliged to compensate that ci zen for the loss of property, while the RF Government should be empowered to recover this expenditure from the corresponding foreign state, including by the seizure of its assets subject to interna onal immu-nity. The dra law, dubbed the Ro enberg Law’ a er Russian businessman Arkady Ro enberg whose assets were seized in September by Italian authori es, had been ini ally, in the summer of 2014, rejected by the Russian Government as ‘uncons tu onal’. In October, the Government made a drama c U-turn and whole-heartedly backed the proposed law, and even sug-gested that its applicability should be extended from ‘unjust decisions of foreign courts’ to ‘unjust decisions of foreign courts and other agencies of foreign states’ to include not only ‘foreign courts’, but the other agen-cies of foreign states as well. It is apparent that no fo-reign state is going to be frightened by the new Russian law – simply because all the assets owned by them in Russia are subject to interna onal immunity1. None of the foreign states will be in midated into refraining from seizing the assets of Vladimir Pu n’s friends. If, in response to such ac ons, Russia confi scates, for exam-ple, the building of Italy’s embassy in Moscow, Italy can easily respond by confi sca ng the building of Russia’s embassy in Rome. A far greater suff erer will be Russia’s federal budget, which will be obliged to become the source of compensa on for the overseas losses in-curred by Russian private investors, because the num-ber of persons harmed by foreign sanc ons, as well as the amount of their losses, can drama cally increase. It is also noteworthy that the dra law envisages that the task of compensa ng Russian investors for their sanc ons-related losses abroad should be given the topmost priority (!), although investments within the territory of the Russian Federa on will not be subject to such protec on. Moreover, the dra law does not defi ne the term ‘losses’, which makes it applicable not only to loss of real estate per se, but almost to any-thing, including unachieved profi ts, loss of reputa on, etc. To complicate ma ers further, the dra law does not defi ne any method for evalua ng overseas real es-tate. The dra law has been severely cri cized by the CPRF, the LDPR, A Fair Russia, the non-parliamentary opposi on, and even by some high-ranking offi cials.

1 See, for example, the well-known ‘Noga case’: when a Swiss fi rm a empted to make use of the decision of a foreign court which had ruled against Russia, it turned out that prac cally all ‘Russia’s overseas proper es’ (apart from some pictures being exhibited etc), were subject to immunity, and that property of Russian state-owned companies could not be deemed to be Russia’s property.

Bearing in mind the harm that the ‘Ro enberg law’ can infl ict on the reputa on of Russia’s authori es, it remains unclear whether or not the dra law in ques- on will ever be enacted into law.

In October, Russia’s oil giant Rosne requested that its applica on for funds from the Na onal Wealth Fund (NWF) be increased to a whopping Rb 2.2–2.5 trillion (RF Minister of Finance Anton Siluanov tac ully said that he could not remember the exact fi gures). Bearing in mind that the current cap on infrastructure invest-ments from the NWF is set at 60%, it can be said that if Rosne ’s request is approved, the en re amount of the NWF should be spent on keeping this mega-company afl oat. Even if the cap is abolished, the NWF would all the same be en rely depleted because its money will have to be invested not only in Rosne , but in a number of other major projects as well (the Trans-Siberian Railroad network, the Baikal-Amur Railroad, the Central Circular Road, a railroad linking Tyva with the Trans-Siberian Railroad, and a nuclear power plant to be built in Finland) – the RF Government has al-ready approved the relevant applica ons for NWR funds. To allay these fears, Anton Siluanov remarked that the Government was ready to fi nancially assist Rosne , but that the oil company would certainly get less than requested. It should be added that, when such a large company as Rosne , in spite of its invari-ably high income, numerous export tax benefi ts and other tax breaks, keeps on applying for more and more government funds, it clearly deserves scru ny – not an urgent bailout in viola on of all exis ng rules and regula ons. However, Rosne is by far the only wastrel in Russia – for example, in October 2014, JSC Russian Railways (RZhD) put forth an ambi ous plan of rapidly building a major railroad to Peking at a cost of several hundred billion dollars (!) – an undertaking that would put a tremendous strain on Russia’s already shaky fe-deral budget.

The Russian authori es put forth a very rea sonable proposal that, bearing in mind the current diffi cult eco-nomic situa on, the Finance Ministry should draw up con ngency measures to shave 10% off state spend-ing. The dra federal budget introduced last month into the State Duma and passed thereby in fi rst read-ing has already become obsolete, because it overes -mates the price of oil and underes mates the rate of infl a on. As far as economic analysts are concerned, to work on such measures will be more important and frui ul than to discuss the possibility of embarking on any new mega-projects.


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INFLATION AND MONETARY POLICY IN SEPTEMBER 2014A.Bozhechkova

Infl a on accelerated in the Russian Federa on in September this year: he consumer price index stood at 0.7% at month-end (0.2% in August this year), by 0.5 p.p. above the value observed in 2013. Therefore infl a on reached 8.0% on an annualized basis (Fig. 1). Core infl a on1 stood at 0.9% in September 2014, up 0.2 p.p. against the value observed last year. The in-crease in the core infl a on in 2014 from 5.5% on an annualized basis in January to 8.2% in September amid lower indexing rates on regulated tariff s of the services rendered by natural monopolies vs. 2013 is indica ve of substan al price apprecia on in the consumer mar-ket which is determined by geopoli cal tensions and devalua on of the na onal currency.

Prices of food products in September this year in-creased 1.0% compared to August 2014 (Fig. 2). It’s worth no ng that prices of these categories of goods increased in response to the Russia’s ban on supplies of certain types of agricultural and food products from the United States, Canada, Australia, Norway and the European Union. In par cular, prices of the following food products kept growing in September In par cu-lar, prices of the following food products kept grow-ing: meat and poultry (from 2.5% in August to 2.9% in September), fi sh and seafood products (from 1.4% in August to 1.9% in September). Price growth rates of the following food products slowed down: fruits and ve-getables (from -10.7% in August to -1.2% in September) and eggs (from -4.8% in August to 1.9% in September). Furthermore, the following food products also saw growth in the price: bu er (from 0.5% in August to 0.6% in September), pasta products (from 0.0% in August до 0.5% in September), milk and dairy products (from 0.2% in August to 0.8% in August). Price growth rates

1 The baseline consumer price index is an indicator which de-scribes the level of infl a on in the consumer market, net of sea-sonal factors (prices of fruit and vegetable products) and adminis-tra ve factors (tariff s of regulated types of service, etc.). The index is also calculated by the Federal State Sta s c Service of Russia (Rosstat).

The consumer price index stood at 0.7% in October 2014 (0.2% in September 2013), 0.5 p.p. higher than the value observed in August this year. Therefore, infl a on increased to 8.0% on an annualized basis. The consumer price index reached 0.7% within the fi rst 20 days of October. On September 20 the Bank of Russia for the fi rst me provided commercial banks with $581,4m of foreign currency through foreign exchange swap opera ons. The opera ons are intended to increase commercial banks’ capability to manage their short-term foreign exchange liquidity.

of the following food products slowed down: alco-holic beverages (1.1% in August, 0.6% in September), bread and fl our products (from 0.5% in August to 0.3% in September). Prices of granulated sugar dropped (to - 4.0% in September, up 1.0% in August) while prices of sunfl ower oil remained unchanged (-0.4% in August).

In September prices and tariff s of retail paid servic-es increased 0.3%, while in in August they increased 0.7%. Overall, tariff s of public u li es in September increased 0.6% (0.6% in August). Prices of the fol-lowing services dropped: interna onal travel services (from 1.6% in August to -1% in September), passen-ger transport services (from 0.6% in August to -2.9% in September), sanatorium and therapeu c services (from 0.2% in August to -2.5% in September). Growth rates of prices of the following services saw slowdown: medical services (from 0.8% in August to 0.6% in September), insurance services (from 1.2% in August to 1.1% in September). Growth rates of prices of the following services accelerated: preschool educa on services (from 0.2% in August to 1.1% in September), educa on services (from 1.8% in August to 4.7% in September).

In September, growth rates of prices of non-food products reached 0.6%, up 0.1 p.p. compared to those observed in August. Prices of the following non-food products kept growing: footwear (from 0.4% in August to 0.9% in September), clothes (from 0.4% in August to 0.8% in September), knitwear (from 0.3% in August to 0.8% in September). Growth rate of prices of the fol-lowing non-food products slowed down: motor gaso-line (from 1,5% in August to 1% in September), tobacco products (from 2.0% in August to 1.7% in September).

Overall, in September 2014, food products contri-buted 51.3%, non-food products 26.1%, prices and ta riff s of retail paid services 22.5% to the infl a on growth rate on an annualized basis.

At the end of the 20th day of October the consumer price index was 0.7% (overall 0.6% in October 2013). It’s worth no ng that infl a on will be boosted up ll

INFLATION AND MONETARY POLICY IN SEPTEMBER 2014

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the end of the year through the eff ect of reciprocal sanc ons imposed by Russia and western countries and the devalua on of the ruble. A new round of de-valua on of the na onal currency in October will in-evitably result in further accelera on of infl a on early in 2015, making it basically impossible to reach a tar-get infl a on rate of 4.5% for 2015 as set forth by the “Guidelines for the Single State Monetary Policy …”. The lack of pronounced demand-driven pressure on prices, as well as the Bank of Russia’s measures aimed at ghtening the monetary policy remain the key fac-tors constraining the infl a on.

In September 2014, the monetary base (broad defi ni on) increased 4.3% to Rb 9947.9bn (Fig. 3). The following components of the broad monetary base saw an increase: banks’ deposits (up 61.3% to Rb 216.1bn), banks’ correspondent accounts (up 37.4% to Rb 1359bn). The following components of the broad monetary base saw a decline: the vo-lume of cash in circula on including cash balances in credit ins tu ons (down 0.3% to Rb 7943.8bn) and obligatory reserves (down 4.3% to Rb 429.4bn). The monetary base (narrow defi ni on) (cash plus obliga-tory reserves) in September contracted by 0.5% to Rb 8373.2bn (Fig. 4).

In September, commercial banks’ reserves amount-ed to Rb 1290.5bn, with mandatory reserves on spe-cial accounts with the Central Bank amoun ng to Rb 429.4bn, while the average value of reserves in the period between 10.09.2014 and 10.10.2014 amount-ed to Rb 861.1bn. In the period of 10.08.2014 thru 10.09.2014, the volume of excess reserves at commer-cial banks1 amounted to Rb 355.4bn on average, of which banks’ deposits on accounts with the Central Bank averaged Rb 213.9bn, while correspondent ac-counts less the averaged amount of reserves amounted to Rb 141 on average during the period under review.

As of October 1, 2014, banks’ debt to the regula-tor reached Rb 5.64 trillion, an increase of 3.5% since the beginning of September. Banks’ repo debt reached Rb 2.5 trillion, up 4.3%, while the debt on loans secured by non-market assets reached Rb 2.9 trillion, up 7.0%. According to the data available as of October 28, 2014, banks’ repo debt increased up to Rb 2,9 trillion, while the debt on other loans increased to the same amount (Rb 2,9 trillion). It’s worth no ng that the Bank of Russia used REPO opera ons at a fl at rate, with a daily average of Rb 76.6bn allocated in September, Rb 12,3bn in October.

1 Commercial banks’ excess reserves with the Central Bank re-fer to the amount of commercial banks’ deposits on accounts with the Bank of Russia, regulator bonds held by commercial banks, as well as banks’ correspondent accounts less the averaged amount of reserves.

During the period under review the MIACR on overnight interbank loans denominated in rubles never broke through the interest rate cap. The in-terbank interest rate2 in September averaged 7.9% (7.9% in August 2014). In the period of October 1 thru October 27, 2014 the average interbank interest rate stood at 8.1% (Fig. 5). It’s worth no ng that the bank-ing sector’s demand for the Central Bank liquidity will be growing ll the end of the year because the United States and EU have restricted the access to sources of foreign fi nancing to certain Russian state-run banks. Amid the devalua on of the ruble, however, the liqui-dity provided by the Central Bank is instantly traded in the FX market, thereby increasing the pressure upon the ruble. At the same me, the Bank of Russia keeps spending the reserves to slow down the devalua on of the na onal currency. This policy can, in our opinion, do nothing but just feed the devalua on expecta ons among economic agents, stretching the period of de-valua on. Furthermore, the interna onal reserves are being wasted in many respects.

The Bank of Russia provided banks with Rb 505.5bn at a cut-off rate of 8.26% p.a. as part of a 3-month REPO auction secured by non-market assets held on September 8, 2014. However, only large banks which

2 Interbank interest rate is the monthly average MIACR, an inter-est rate on ruble-denominated overnight interbank loans.

2,0%

4,0%

6,0%

8,0%

10,0%

01.0

1.11

01.0

4.11

01.0

7.11

01.1

0.11

01.0

1.12

01.0

4.12

01.0

7.12

01.1

0.12

01.0

1.13

01.0

4.13

01.0

7.13

01.1

0.13

01.0

1.14

01.0

4.14

01.0

7.14

Source: The Federal State Sta s c Service of Russia (Rosstat). Fig. 1. CPI growth rate in 2011 to 2014 (% y-o-y)

02468

10121416

01.0

1.08

01.0

5.08

01.0

9.08

01.0

1.09

01.0

5.09

01.0

9.09

01.0

1.10

01.0

5.10

01.0

9.10

01.0

1.11

01.0

5.11

01.0

9.11

01.0

1.12

01.0

5.12

01.0

9.12

01.0

1.13

01.0

5.13

01.0

9.13

01.0

1.14

01.0

5.14

food products non-food products paid services

Source: Rosstat. Fig. 2. Infl a on factors in 2008 to 2014

(%, rela ve to the corresponding month of the previous year)


8

have the required collateral can aff ord such ac ons despite very benefi cial terms of lending at a fl oa ng interest rate. The regulator allocated Rb 596.1bn at a rate of 8.25% p.a. to credit ins tu ons as part of a 3-month auc on held on October 13, 2014. It’s worth no ng that in September the regulator has increased to Rb 700bn the maximum amount of money to be allocated due to the projected seasonal increase in commercial banks’ demand for liquidity. In November this value was set Rb 900bn. It’s worth no ng that on November 10, 2014 the Bank of Russia plans to hold an repo auction secured by non-market assets for 18 months. Rapid growth by the regulator in volumes of loans secured by non-market assets of commercial banks is associated with the deple on of the collateral for repo transac ons, as well as moun ng banks’ debt on refi nancing opera ons.

On September 30, the Bank of Russia provided commercial banks with $581.4m through foreign ex-change swap opera ons. The opera ons amounted to $473.1m on the 2nd of October, $285.0m on the 3rd of October, $137m on the 7th of October. This instru-ment is designed to narrow the gap between the fo-reign currency demand and supply on specifi c dates. It’s worth no ng that a rela vely weak demand for such opera ons is determined by high level of inte-rest rates (the interest rate on the ruble and foreign currency part of a transac on is 7% and 1.5% p.a. re-spec vely). It’s worth no ng that the Bank of Russia plans to hold a 28-day and one-week USD repo auc on on October 29–30, 2014. Repo transac ons can be se-cured by all of the securi es, except shares, included in the Lombard List of the Bank of Russia. These opera- ons are intended to extend banks’ poten al to ma-

nage short-term foreign currency liquidity amid strong demand for the same.

As of September 1, 2014, the Central Bank’s international reserves amounted to $454.2bn, shrinking by 10.9% year to date (Fig. 4). At the same me, the monetary gold reserves shrank by $2.5bn in

in September 2014 due to a nega ve revalua on of as-sets.

In September the regulator didn’t undertake cur-rency interven ons (Fig. 6). However, the volume of currency interven ons aimed at selling foreign cur-rencies reached $18.6bn within 27 days in October. In the period of October 1 thru October 27, the lim-its of the fl oa ng currency trading band of acceptable ruble denominated values of the dual-currency bas-ket were shi ed repeatedly (a total shi was Rb 3) to reach Rb 38.4–47.4. It is falling crude oil prices, as well as persis ng geopoli cal tensions amid deteriora ng economic situa on in the Russian Federa on that be-came the key factors of the ruble devalua on.

0

2000

4000

6000

01.0

1.20

08

01.0

6.20

08

01.1

1.20

08

01.0

4.20

09

01.0

9.20

09

01.0

2.20

10

01.0

7.20

10

01.1

2.20

10

01.0

5.20

11

01.1

0.20

11

01.0

3.20

12

01.0

8.20

12

01.0

1.20

13

01.0

6.20

13

01.1

1.20

13

01.0

4.20

14

01.0

9.20

14

Billi

ons o

f rub

les

Overnight loans' debt Other loans' debt Lombard loans' debt

REPO debt Unsecured loans

Source: The Central Bank of Russia. Fig. 3. Commercial banks’ debt owed to the Bank of Russia in 2008 to 2014

370

470

570

670

770

3600

4600

5600

6600

7600

29.1

2.07

-4.0

1.08

3-9.

05.0

86-

12.0

9.08

10-1

6.01

.09

16-2

2.05

.09

19-2

5.09

.09

22-2

8.01

.10

28.0

5-3.

06.1

01-

7.10

.10

7-13

.02.

1114

-20.

06.1

118

-24.

10.1

121

-27.

02.1

226

.06-

2.07

.12

30.1

0-5.

11.1

25-

11.0

3.13

15-2

0.07

.13

18-2

5.11

.13

28.0

3-04

.04.

2014

04-0

8.08

.201

4

billi

ons o

f dol

lars

billi

ons o

f rub

les

Monetary base (billion rubles)

Gold and Foreign Currency Reserves (billion dollars)

Source: The Central Bank of Russia. Fig. 4. Dynamics of the monetary base (narrow

defi ni on) and gold and foreign currency (interna onal) reserves of the Russian Federa on in 2007 to 2014

4

6

8

10.0

1.20

1213

.02.

2012

20.0

3.20

1223

.04.

2012

29.0

5.20

1203

.07.

2012

06.0

8.20

1207

.09.

2012

11.1

0.20

1215

.11.

2012

19.1

2.20

1230

.01.

2013

05.0

3.20

1309

.04.

2013

20.0

5.20

1324

.06.

2013

26.0

7.20

1329

.08.

2013

02.1

0.20

1306

.11.

2013

10.1

2.20

1321

.01.

2014

24.0

2.20

1431

.03.

2014

06.0

5.20

1410

.06.

2014

15.0

7.20

1418

.08.

2014

19.0

9.20

1423

.10.

2014

MIACR rate on ruble loans for 1 day in the interbank market

Minimum REPO rate at Auction for One Day and for One Week

Deposit Rate for One Day

The Fixed Rate on Operatons to Provide Liquidity

Overnight Rate

Maximum rate at Deposit Auction for One Week

Source: The Central Bank of Russia. Fig. 5. Bank of Russia’s interest rates band and dynamics of the interbank lending market in 2012 to 2014 (% p.a.)

INFLATION AND MONETARY POLICY IN SEPTEMBER 2014

9

According to the Bank of Russia’s preliminary es -mates, net capital ou low from the country reached $13.0bn in Q3 2014, 1.25 mes the amount observed during the same period in 2013. Overall, capital out-fl ow amounted to Rb 85.2bn withing the past three quarters, 1.9 mes the amount observed in the period between January and September in 2013. Russia saw $61.0bn of capital ou low within 12 months in 2013. Within the past three quarters net capital exports by the banking sector and other sectors reached $16.1bn and $69.1bn. A substan al capital ou low from Russia was determined by economic slowdown in the country as well as the geopoli cal turmoil.

In September 2014, the real effective exchange rate of the ruble weakened by 2.1% (-2.4% in August 2014). Overall, in Q3 2014 the real eff ec ve exchange rate increased 0.2% against Q2 2014. In the period of January 2014 to September 2014 the real eff ec ve ex-change rate lost 4.8% compared to the corresponding period in 2013 (Fig. 7).

In September, the dollar-ruble exchange rate in-creased 5.6% to Rb 39.4, while the euro-ruble ex-change rate gained 2.1% (Rb 49.98). The euro-dollar exchange rate averaged 1.29 during the same month. In the period of August 2014 to October 2014 the US dollar exchange rate gained because market play-ers were expec ng higher FRS interest rates and the Eurozone was facing an adverse economic situa on. The dual-currency basket gained 3.8% to Rb 44.15. Upon the fi rst 29 days of October the dollar-ruble ex-change rate increased 7.6% to Rb 42.4 while the euro-ruble exchange rate went up 7.8% to Rb 53.9, thereby increasing to Rb 47.6 the value of the dual-currency basket, up 7.7%. The euro-dollar exchange rate ave-raged 1.27 in October this year.

-10000

0

10000

20000

30000

Jul 1

0O

ct 1

0Ja

n 11

Apr 1

1Ju

l 11

Oct

11

Jan

12Ap

r 12

Jul 1

2O

ct 1

2Ja

n 13

Apr 1

3Ju

l 13

Oct

13

Jan

13Ap

r 14

Jul 1

4

0

10

20

30

40

50

mill

ions

of U

S do

llars

Rubl

es

Currency interventions ("+" - net purchase, "-" - net sales)

Official currecy basket / Rub (end of period)

Source: The Central Bank of Russia. Fig. 6. Bank of Russia’s currency interven ons

and ruble exchange rate vs. the currency basket in March 2010 to September 2014

0

50

100

150

200

20

30

40

50

60

jan

05ju

l 05

jan

06ju

l 06

jan

07ju

l 07

jan

08ju

l 08

jan

09ju

l 09

jan

10ju

l 10

jan

11ju

l 11

jan

12ju

l 12

jan

13ju

l 13

jan

14ju

l 14

Official USD/RUR exchange rate (end of period)

Official EUR/RUR exchange rate (end of period)

Value of the two-currency basket

Real effective exchange rate index (right scale)

Source: The Central Bank of Russia. Fig. 7. Ruble exchange rate indicators in January 2005 to September 2014


10

FINANCIAL MARKETS IN OCTOBER 2014N.Andrievsky, E.Khudko

In October 2014, the list of sources having an ad-verse eff ect on the Russian economy, already includ-ing tense geopoli cal situa on and western sanc- ons, was updated by falling crude oil prices and

Moody’s Baa2к downgrade of sovereign credit ra ng for Russia. This has resulted in the revision of the forecasts of the key macroeconomic indicators such as GDP and infl a on rate. In par cular, the World Bank es mates GDP growth rate in Russia at 0.5%, which basically implies a stagna on, although the Ministry of Economic Development doesn’t rule out that the Russian economy might grow at a faster rate. Furthermore, infl a on is expected to be higher than 7.5%, the latest offi cial forecast of the Ministry. The Central Bank of Russia shows similar projec ons for infl a on1. 2014 year-end infl a on is therefore most likely to be higher than the key rate set by the fi -nancial regulator. Forecasts for 2015 are also being downgraded.

The worsening of the economic situa on in the Russian Federa on has resulted in that interna on-al ra ngs agencies have downgraded credit ra ngs for major corporate market players such as Russkiy Standart Bank, Vostochny Express Bank, Asian-Pacifi c Bank, Renaissance Credit Bank, Home Credit Bank, etc., while the long-term ra ngs forecast for the lar-gest banks and manufacturers with state par cipa on has been revised, with the outlook changed to nega- ve. Nonetheless, some Russian companies hope that

the geopoli cal situa on will improve and they have access to western markets. For example, OJSC Russian Railways prepares a Eurobond road show2 in Europe and Asia3 in 2015.

1 Based on the informa on provided by Cbonds informa on agency. 2 Road Show refers to the prac cal prepara on of an issuer in issuing its securi es (bonds, shares, ets.), including IPO.3 Based on the informa on provided by Cbonds informa on agency.

In October 2014, the MICEX Index saw a downtrend caused by falling crude oil prices. The MICEX Index lost 1.4% in the period between October 1 thru October 24 . The MICEX capitaliza on amounted to Rb 22,0 trillion as of October 24 (34.0% of GDP). The accelera on of the average weighted yield of bond issues (especially in the produc on sector) and the downtrend in the market index dynamics remained the major adverse eff ect in the Russian corporate bond market. At the same me, no deteriora on in issuers’ failure to discharge their obliga- ons to bondholders was observed.

Dynamics of the Russian stock market basic structural indices In October, the MICEX Index followed the down-

trend in crude oil prices. The Index lost 1.4% in the period of October 1, 2014 thru October 24, 2014, reaching 1380.4 points by October 24. In the period between October 1 and October 24 the MICEX Index averaged at a level of 1383.2 points, hi ng the lowest level of 1360.3 points on the 16th of October and the highest level of 1418,1 points on the 6th of October.

The downtrend in the MICEX Index in October can be explained by adverse dynamics of highly liquid stocks. In the period of October 1 thru October 24 common shares in Sberbank lost 2.38% and its preferred shares lost 4.79% from the beginning of the month ll the 16th of October, but bounced back to the ini al value by the 24th of October 24. It’s worth no ng that shares in Gazprom, Lukoil and Rosne also lost 1.8–2.2% since the beginning of the month ll October 24. The oppo-site dynamics in October 2014 was showed by shares in Norilsk Nickel, gaining 6.6% since the beginning of the month to the 24tn of October. Shares in VTB gained 0.5% (with visible fl uctua ons within the inter-val) over the same period.

80

85

90

95

100

105

110

115

120

1200

1250

1300

1350

1400

1450

1500

1550

1600

01.0

1.00

13.0

1.00

25.0

1.00

06.0

2.00

18.0

2.00

01.0

3.00

13.0

3.00

25.0

3.00

06.0

4.00

18.0

4.00

30.0

4.00

12.0

5.00

24.0

5.00

05.0

6.00

17.0

6.00

29.0

6.00

11.0

7.00

23.0

7.00

04.0

8.00

16.0

8.00

28.0

8.00

09.0

9.00

21.0

9.00

03.1

0.00

15.1

0.00

the MICEX Index Brent crude oil prices (right-hand scale)

Source: RBK Quote. Fig. 1. Dynamics of the MICEX Index and futures prices of Brent crude oil in the period between

October 1, 2013 and October 24, 2014

FINANCIAL MARKETS IN OCTOBER 2014

11

The annual yield on corporate shares kept declin-ing in October 2014. For example, in the period of October 25, 2013 to October 24, 2014 Sberbank lost 29.6%1 on its common shares while preferred shares lost more than 30.5% during the same period. VTB, Rosne , Lukoil and Gazprom also met with losses within a range of 6.9% and 10.7% on an annualized basis. It is Norilsk Nickel that saw a substan al growth earlier in 2014, as well as the growth in October 2014 resulted in an annual yield of 53.0%.

The machine-building sector index kept fall-ing in October 2014 a er a loss of more than 7% in September, and lost 6.7% by the 24th of October since the beginning of the month. Shares in Sollers Holding saw a fall during the month, losing 10.5% between October 1 and October 24, 2014. Furthermore, shares in GAZ and KAMAZ lost 10.3% and 9.7% respec vely in October 2014. It is only the metallurgical industry in-dex that saw no fall by the 24th of October since the be-ginning of the month. But the index gained only 0.34% in the period of October 1 to October 24.

Trading turnover in the Moscow Exchange in the period between October 1 and October 27, 2014 amounted to Rb 578,3bn, 9.3% below the same period in September. In October, Sberbank’s total turnover on common and preferred shares contributed 32.6%

1 Annual yield on shares is calculated on the basis of shares price movement and doesn’t include dividends paid to sharehold-ers following the results of the annual general mee ng of share-holders

-7,5-5,0-2,50,02,55,07,5

01.1

0.14

02.1

0.14

03.1

0.14

06.1

0.14

07.1

0.14

08.1

0.14

09.1

0.14

10.1

0.14

13.1

0.14

14.1

0.14

15.1

0.14

16.1

0.14

17.1

0.14

20.1

0.14

21.1

0.14

22.1

0.14

23.1

0.14

24.1

0.14

Sberbank Sberbank pref. Gazprom LUKOIL Rosneft Norilsk Nickel VTB

Source: RBK Quote, author’s es mates. Fig. 2. Growth rates of most highly liquid Russian stocks in the Moscow Exchange in

October 2014 (in the period between October 1, 2014 and October 24, 2014)

-29,6 -30,5 -10,7

-6,9 -10,4

53,0

-9,9

-35

-10

15

40

Sberbank Sberbankpref.

Gazprom LUKOIL Rosneft NorilskNickel

VTB

Source: RBK Quote, author’s es mates. Fig. 3. Growth rates of most highly liquid Russian

stocks in the Moscow Exchange in the period between October 25, 2013 and October 24, 2014

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

6,0

01.1

0.20

1402

.10.

2014

03.1

0.20

1406

.10.

2014

07.1

0.20

1408

.10.

2014

09.1

0.20

1410

.10.

2014

13.1

0.20

1414

.10.

2014

15.1

0.20

1416

.10.

2014

17.1

0.20

1420

.10.

2014

21.1

0.20

1422

.10.

2014

23.1

0.20

1424

.10.

2014

Financial and bankingcompanies

Machine buildingcompanies

Oil and gascompanies

Energy companies

Metal & miningcompanies

Consumer sectorcompanies

MICEX-innovationindex

Source: RBK Quote, author’s es mates. Fig. 4. Growth rates in various sector stock indices in the Moscow Exchange (in the period between

October 1, 2014 and October 24, 2014)

0,0

10,0

20,0

30,0

40,0

01.1

0.20

14

02.1

0.20

14

03.1

0.20

14

06.1

0.20

14

07.1

0.20

14

08.1

0.20

14

09.1

0.20

14

10.1

0.20

14

13.1

0.20

14

14.1

0.20

14

15.1

0.20

14

16.1

0.20

14

17.1

0.20

14

20.1

0.20

14

21.1

0.20

14

22.1

0.20

14

23.1

0.20

14

24.1

0.20

14

Sberbank (com+pref) Gazprom LUKOIL Rosneft Norilsk Nickel VTB Magnit Total turnover

Source: RBK Quote, author’s es mates. Fig. 5. Trading turnover structure in the Moscow Exchange (in the period between October 1, 2014 and October 27, 2014)


12

on average to the stock exchange trading turnover. It’s worth no ng that Sberbank contributed 3.6% less on the trading turnover on shares compared to September. On the contrary, Gazprom increased by 2.8% (up to 15.3%) its contribu on to the turnover of the Moscow Exchange in October 2014. Therefore, the two most highly liquid shares accounted for more than 47.9% of the Moscow Exchange trading turnover. The other top-5 shares with the highest trade volume accounted for an average of 27.6% of the Moscow Exchange daily trading turnover, while the eight most traded shares accounted for up to 79.6% of the daily trading turnover.

According to the Emerging Por olio Fund Research (EPFR), founda ons inves ng in Russian shares saw $96,3m of capital infl ow in the period between September 28 and October 24. Moscow Interbank Currency Exchange (MICEX) total capitaliza on amounted to Rb 22,0 trillion (34.0% of GDP) as of October 24, 2014, losing Rb 454,2bn (2.0%) since the 1st of October. In October, the share of fi nancial compa-nies shrank by 0.56% to 12.2% in the MICEX capitaliza- on structure. Furthermore, the share of the transport

and communica ons sector shrank by 0.45% to 8.4% of total capitaliza on. The shrinking share of both sec-tors was set off by growth in the share of retail and wholesale companies and manufacturing industries.

Corporate bond market The Russian domes c corporate bond market vo-

lume (measured by the par value of outstanding se-curi es denominated in the na onal currency, includ-ing those issued by non-residents) remained basi-cally unchanged in October 2014, like in the previous month. By the end of October the indicator amounted to Rb 5,633,2bn, only 0.8% higher than that observed as of the end of September1. At the same me, the number of bond issues kept growing over the elapsed period (1041 corporate bond issues registered in the na onal currency against 1031 issues as of the end of September), whereas the number of issuers in the debt segment remained unchanged (345 issu-ers in September against 344 companies in the pre-ceding month). There were 17 outstanding issues of USD-denominated bond issues of Russian issuers (a total of more than $2,7bn) and an outstanding JPY-denominated bond issue.

Investment ac vity in the secondary corporate bond market in October 2014 increased substan ally. For instance, the total volume of transac ons in the Moscow Exchange amounted to Rb 102,3bn in the period between September 25 and October 24, 2014

1 According to the data reported by Rusbonds Informa on Agency.

(to compare, trading volume amounted to Rb 97,0bn in the period between August 26 and September 24), which is the average annual value. The number of transac ons in the period under review also increased a bit to 27,700 (26,400 transac ons in the preceding month)2.

For a second me during the year the Russian cor-porate bond market index IFX-Cbonds saw a new trend (downtrend). By the end of October the index lost al-most 1.5 points (or 0.4%) compared to the value ob-served as of the end of the preceding month. At the same me, the corporate bond average weighted yield showed a record growth rate up to 11.83% by the end of October from 10.72% earlier in September, the high-est value since the end of the crisis-hit 2009 (Fig. 7)3. The corporate bond por olio dura on began to de-cline a er a short period of growth: the dura on was 428 days as of the end of October, 28 days less than the period observed as of the end of the preceding month. The decline can be easily explained by a substan al growth in interest rates in the bond market.

In October, the most highly liquid segment of the corporate bond market saw an accelerated growth in the yield of bond issues. Certain issues of manufactur-ers, namely OJSC ALROSA, LLC EvrazHolding Finance, OJSC Norilsk Nickel, once again saw the highest growth in rates (more than 2 p.p.), although no sellout of these securi es was observed. A downtrend, insignifi cant though, was observed on certain bond issues of major fi nancial issuers, namely Agency for Housing Mortgage Lending (AHML), Vnesheconombank, Gazprombank, and the overall yield of issues in the fi nancial sector was growing in October 2014, with ac ve sellouts of certain bond issues. The strongest growth in rates was observed in the produc on and energy segments of the market (by an average of 0.6–0.7 p.p.), while high-tech companies showed the lowest vola lity, with the de-

2 According to the data reported by Finam Investment Company.3 According to the data reported by Cbonds Informa on Agency.

Mineral extraction

industry; 47.9

Manufacturing industry;

14,4

Production and distribution of electric power, gas, and water:

4.42

Wholesale and retail industry;

repair services ; 10.5

Transport and communications;

8.9

Financial business ; 12.7

Other types of activity; 1.1

Source: The Moscow Exchange’s offi cial website, authors’ es- mates.

Fig. 6. Stock market capitaliza on structure by type of economic ac vity

FINANCIAL MARKETS IN OCTOBER 2014

13

mand for these securi es being very strong. Therefore, it was the produc on sector that came to be most vul-nerable to adverse external developments1.

The indicators of registra on of new bond issues increased a bit in October upon the slackening of is-suers’ ac vity in new fundraising in September, but didn’t reach the average annual level. For instance, 16 issuers registered 27 bond issues at an aggre-gate par value of Rb 88,6bn in the period between September 25 and October 24, 2014 (to compare, 29 bond issues at Rb 67,3bn were registered in the period between August 26 and September 24). Major bond issues were registered by CJSC Novikombank, LLC RGS Nedvizhimost, CJSC Sukhoi Civil Aircra com-pany2. Exchange traded bonds accounted for more than 50% of the registered issues, however there were also a few debut issues among the registered bond issues.

The situa on in the primary market again was found to be op mis c compared to the registra on fi gures, and investment ac vity was substan ally higher than the average annual value. For instance, in the period between September 25 and October 24, 2014 this year 22 issuers placed 34 bond issues at an aggregate par value of Rb 178,4bn (to compare, only 13 series of bonds at a par value of Rb 79,1bn were placed in the

1 According to the data reported by Finam Investment Company. 2 According to the data reported by Rusbonds Informa on Agency.

period between August 26 and September 24) (Fig. 2). OJSC Russian Railways, Transne , CJSC TPGK-Finance and OJSC Transfi n-M placed the largest bond issues3 Exchange traded bonds accounted for more than 50% of the placed bond issues. In October 2014, unlike the preceding period, many issuers managed to raise for long-term.

Earlier in September–October the Bank of Russia declared void three corporate bond issues of a single issuer for non-placement of a single bond (no such cases were observed in the preceding period, although several bond issues were previously declared void on the same grounds every month)4.

All of the six issuers redeemed their bonds at an ag-gregate par value of Rb 33,8bn in the period between September 25, 2014 and October 24, 2014 (one issuer failed to honor its obliga ons and declared a technical default in the preceding period). Fourteen corporate bond issues at a total of Rb 58,6bn are to be redeemed in November 20145.

No real defaults were observed in the bond market in the period between September 25 and October 24, 2014.

3 According to the data reported by Rusbonds Informa on Agency.4 According to the data reported by the Bank of Russia.5 According to the data reported by Rusbonds Informa on Agency.

190210230250270290310330350370390

0

5

10

15

20

2524

.09.

2007

24.1

2.20

0724

.03.

2008

23.0

6.20

0824

.09.

2008

24.1

2.20

0824

.03.

2009

25.0

6.20

0925

.09.

2009

23.1

2.20

0925

.03.

2010

24.0

6.20

1024

.09.

2010

22.1

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1024

.03.

2011

23.0

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1123

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2011

22.1

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2012

25.0

6.20

1225

.09.

2012

21.1

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2013

24.0

6.20

1323

.09.

2013

19.1

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1324

.03.

2014

23.0

6.20

1424

.09.

2014

Inde

x IF

X-Cb

onds

Effe

ctiv

e yi

eld,

%

Effective yieldIndex IFX-Cbonds

Source: According to the data reported by Cbonds Informa on Agency .

Fig. 7. Dynamics of the Russian corporate bond market index and average weighted yield

0

10

20

30

40

50

60

70

80

0

50

100

150

200

250

300

350

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rubl

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Total emission Amount of placed issues

Source: According to the data reported by Rusbonds informa- on agency.

Fig. 8. Dynamics of ini al public off erings of corporate bonds denominated in the na onal currency


14

RUSSIA’S REAL SECTOR OF THE ECONOMYIN SEPTEMBER 2014: FACTORS AND TRENDS

O.Izryadnova

In 2014, the macroeconomic situa on is charac-terized by gradual slowdown of development. In H1 2014, the index of GDP in physical terms amounted to 100.8% with a forecast at the level of 100.1% in H2 2014.

A decrease of 2.5% in investments in capital as-sets as compared to January–September 2013 had a considerable eff ect on the dynamics of the domes c demand. In September 2014, due to growth in the cost of credit funds, limita on of companies’ access to borrowing on global fi nancial markets and prevalence of high geopoli cal risks a year-on-year drop of 2.8% in investments was observed. The situa on is ge ng worse due to a higher ou low of capital – in January–September 2014 it amounted to $85.2bn which is 1.93 mes higher than the respec ve index of the previous

year – and a twofold reduc on of the volume of direct foreign investments. Despite an adjustment change in the dynamics of producer prices and posi ve dynam-ics of growth in the balanced fi nancial result of enter-prises’ and en es’ performance, their ability to invest in produc on out of profi t available to them amounts to 85% of the level of January–September 2012.

The main factor behind the posi ve trend of deve-lopment of the Russian economy is consump on by households, however contribu on of both the above factor and public administra on to the GDP dynamics is ge ng much weaker. The dynamics of consumer de-mand is greatly aff ected by slowdown of growth rates of real income, growth in a load on households as re-gards repayment of loans and growth in infl a onary expecta ons with preserva on of a high share of con-version of income into foreign currency. In September 2014, households’ year-on-year real disposable cash income rose by the mere 0.6% due to growth in the share of social payments and revenues from property in households’ cash income. For the fi rst me since January 2010, in September 2014 real wages which ac-count for a domina ng por on of households’ income decreased by 1.0% year-on-year.

In September 2014, the trend of slowdown of economic dynamics by the baseline types of economic ac vi es stopped. Growth in industrial output, manufacturing and mining amounted to 2.8%, 3.6% and 2.4%, respec vely, as compared to September 2013. However, the situa on is complicated by the con nued drop in investment ac vi es. Investments in capital assets decreased by 2.8%, while the volume of jobs in building, by 3.7% as com-pared to September 2013. In September, year-on-year growth of up to 8% in the infl a on rate and a 1% reduc on in real wages caused a sudden slowdown of households’ consumer ac vi es and the retail trade volume.

In January–September 2014, growth in the re-tail trade volume and paid services to households amounted to 2.3% and 1.1% on the respec ve period of the previous year. In 2014, sustained slowdown of the retail trade volume takes place simultaneously both in the segment of food products (100.2% and 99.6% in January–September and September 2014, respec vely, on the respec ve period of the previ-ous year) and the segment of non-food products (104.0% and 102.9%). In September 2014, the index of year-on-year consumer-price infl a on amounted to 108.0%. Growth in prices on food products makes the largest contribu on to the infl a on rate: 11.0% year-on-year in September 2014 with the index of 4.8% a year earlier. In September 2014, the indices of prices on non-food products and paid services to households grew slower: 103.8% and 105.9%, re-spec vely.

The consumer behavior is aff ected by the situa on on the labor market. In September 2014, the number of the gainfully employed popula on decreased by 425,000 persons or 0.6% as compared to the previous month. For the fi rst me since the beginning of the year, in September the number of the unemployed (according to the methods of the ILO) exceeded by

95

100

105

110

I II III IV I II III IV I II III

2012 2013 2014

Households’ real disposable cash incomeReal wagesRetail trade volume

Source: The Rosstat.Fig. 1. Indices of households’ real income and retail trade

volume in the 2012–2014 period as % of the respec ve period of the previous year

RUSSIA’S REAL SECTOR OF THE ECONOMY

15

57,000 persons the index of the previous year and amounted to 3,720,000 persons: in September 2014 the level of unemployment amounted to 4.9% of the gainfully occupied popula on against 4.8% in August. Late in September, 796,000 persons (4.8% lower as compared to August 2014) were registered as unem-ployed with the state offi ces of the employment ser-vice. In September 2014, among the unemployed the share of persons who le their jobs due to a reduc on of the number of workers and liquida on of their com-pany or own business amounted to 16.6%, while the share of persons who le their job due to а voluntary resigna on, to 25.1%.

In 2014, the dynamics and pa ern of economic growth are determined by advanced growth in trad-ing sectors (mining, manufacturing and agriculture) – 101.7% on the basis of the results of H1 2014 – as compared to growth in non-trading sectors at the level of 100.4%. A posi ve contribu on to the dynamics of economic development is made by agriculture: in September 2014 the output in that sector increased by 16.6% as compared to September 2013, while in January–September 2014, by 7.7% on the respec ve period of the previous year.

In September 2014, the index of industrial produc- on was equal to 102.8% and 101.5% as compared

to September 2013 and January–September 2013, respec vely. Such dynamics of industrial output is jus fi ed by advanced growth rates of manufacturing. The index of manufacturing amounted to 102.3% and 103.6% in January–September 2014 and September 2014, respec vely, as compared to the respec ve pe-riod of the previous year.

Advanced growth as compared to the average one in manufacturing was registered in produc on of food products (103.6% in January–September 2014), oil products (106.0%) and rubber and plas c ar cles (105.0%). Instability of dynamics of engineering and iron and steel complexes is determined by a decrease in investment demand registered from November 2012. In January–September 2014, produc on of machines and equipment fell by 7.5%, while that of electric, electronic and op cal equipment, by 0.6% as compared to the respec ve period of the previous year. In produc on of transport vehicles and equip-ment, diversifi ca on of the results of ac vi es by the type of products intensifi es: in January–September 2014 in motor industry the output gap amounted to 9.8% (18.4% in September), while in produc on of ves-sels and fl ying and space vehicles there was growth of 28.5% (30.3%) as compared to the respec ve period of the previous year. As a result, growth in general by the type of ac vity – produc on of transport vehicles and equipment – amounted to 23.4% as compared to

January–September 2013 and was completely jus fi ed by growth in state orders.

During the past four months, in the consumer sector of industry a drop in annual growth rates was observed. In September, in tex le and sewing in-dustry, a year-on-year drop in output amounted to 12.9%, while in produc on of leather, leather ar cles and footwear, to 0.2%. Downward dynamics of pro-duc on in those types of ac vi es overlaps with the trend of reduc on in import of the respec ve com-modity items.

In 2014, the quarterly dynamics of mining is characterized by some accelera on. In January–September 2014, the mining index amounted to 101.0% as compared to the previous year (102.4% in September), including in produc on of fuel and en-ergy primary products – 100.9% (102.5%). As com-pared to 2013, in January–September 2014 growth in produc on of oil amounted to 1.2% with growth of 5.1% in processing volumes. A speed-up of growth rates of export of oil products with a reduc on of vo-

94

98

102

106

I II III IV I II III IV I II III

2012 2013 2014

Industry Manufacturing

Production of power, gas and water Dynamics of mining

Source: The Rosstat.Fig. 2. The index of industrial output by the type of economic ac vi es in the 2012–2014 period

as % of the respec ve quarter of the previous year

98

100

102

104

106

108

I II III IV I II III IV I II

2012 2013 2014

Internal demand External demand/export GDP

Source: The Rosstat.Fig. 3. Dynamics of GDP by components of domes c

and external demand in the 2012–2014 period as % of the respec ve quarter of the previous year


16

lumes of export of crude oil was jus fi ed by advanced growth in produc on of oil products. As compared to January–September 2013 and September, produc- on of gas fell by 5.4% and 16.9%, respec vely.

The analysis of the main indices of produc on and u liza on of GDP in H1 2014 points to the fact that the main factor behind of economic growth in 2014 is external demand. The dynamics of domes c demand is nega vely aff ected by narrowing of investment de-mand.

n 2014, a sudden drop in the volumes of import as compared to the indices of the previous year was registered; it is to be noted that though weak growth in produc on of goods and services for the domes c market recovered it is explicitly insuffi cient to stop a quarterly trend of shrinking of domes c demand both on consumer and investment markets.

In H1 2014, recovery of the posi ve dynamics of output was ensured by growth in manufacturing and agriculture which situa on resulted in advanced growth rates of produc on volumes of goods for do-mes c consump on as compared to the dynamics of the export-oriented produc on.

It is to be noted that low growth rates of the Russian economy point to the fact that the poten al for devel-opment is diminishing. The evidence of the above is the pre-crisis maximum level of loading of produc on capaci es, a lack of large-scale investments and the record-low level of the rate of unemployment.

92,0

97,0

102,0

107,0

112,0


2012 2013 2014

Internal demand

domestic goods and services for domestic consumption

import supplies

Source: The Rostat.Fig. 4. Dynamics of domes c demand by components

in the 2012–2014 period as % of the respec ve quarter of the previous year

98

100

102

104

106

108


2012 2013 2014

for domestic market for export domestic production

Source: The Rosstat.Fig. 5. Dynamics of domes c produc on of goods

and services by components in the 2012–2014 period as % of the respec ve quarter of the previous year.

THE RUSSIAN INDUSTRY IN SEPTEMBER 2014

17

THE RUSSIAN INDUSTRY IN SEPTEMBER 2014S.Tsukhlo

The Demand on Industrial Produce1

In September, the dynamics of demand on indus-trial produce showed some worsening on the basis of the ini al data, but with clearing of the seasonal fac-tor it recovered (Fig. 1). As a result, the rate of change in demand remained at the same level which was re-gistered by means of business surveys for fi ve months running. So, according to the es mates of enterprises no principal changes in the dynamics of sales volumes took place.

However, such stabiliza on is assessed diff erently by enterprises. In August–September, sa sfac on with demand rose to 60%, while in June–July it amounted to 53%. It turns out that such a modest dynamics of sales and its result in present-day condi ons are re-garded by enterprises as success.

In the past few years, forecasts of demand showed a fair level of op mism which reached the 16-month maximum in September.

Stocks of Finished ProductsIn September, es mates of stocks of fi nished prod-

ucts underwent the same modest changes as those of sales volumes (Fig. 2). The balance of the index got worse by 1 point, while for the past two months it fell by 3 points a er reaching the 40-month maxi-mum level in July. At the same me, maintaining of stocks at the minimum level of redundancy may point to uncertainty as regards demand growth in the near future.

The OutputUnlike the data of the past three years, the ini-

al data on the dynamics of the actual output in Q3 2014 is much be er; it points to higher and more

1 Surveys of managers of industrial enterprises are carried out by the Gaidar Ins tute in accordance with the European harmo-nized methods on a monthly basis from September 1992 and cover the en re territory of the Russian Federa on. The size of the panel includes about 1,100 enterprises with workforce exceeding 15% of workers employed in industry. The panel is shi ed towards large enterprises by each sub-industry. The return of queries amounts to 65–70%.

According to the data of business surveys of the Gaidar Ins tute1, September showed that most indices remained at the same level. The stable dynamics of demand permi ed to maintain the previous growth rates of output with invariable es mates of reserves of fi nished products and stable pricing policy of producers. Posi ve changes were registered in forecasts of sales and produc on, while nega ve ones, in availability of loans.

Fig. 1

Fig. 2

Fig. 3


18

stable growth rates of output. With the data of busi-ness surveys cleared of a seasonal factor, in July-September 2014 the output growth rates turned out to be the best ones in the past two years and a half (Fig. 3).

A similar situa on takes place with output plans of enterprises. From May, they have remained almost at the same and very op mis c level, though usually a er a surge in January–February they lose op mism and enter the nega ve zone in October–December (that is, expecta ons of a decrease in output should prevail over plans of its growth). As a result, clearing of a seasonal factor showed that in September the op- mism of output plans reached the 3-year maximum

and did not look incidental a er consistently high ex-pecta ons of June and August.

Prices of EnterprisesIn 2014, enterprises’ pricing policy is character-

ized by a rela ve stability (as compared to previous years) at the level of the index’s moderate growth. An excep on so far is April and par ally May when the Ukrainian confl ict aff ected the exchange rate of the ruble. However, a er that even growth in tariff s in the beginning of H2 2014 and Russia’ retaliatory food sanc ons did not have an eff ect on the dynamics of prices of Russian enterprises. As a result, from June growth rates of prices have been virtually at the same level and in line on average with enterprises’ pricing forecasts of July-September (Fig. 4).

Actual Dynamics and Lay-off plansIn September, the actual dynamics of employment

in industry did not undergo any changes. As before, lay-off s of workers prevail by 7 p.p. over hiring (Fig. 5). A similar situa on has remained in industry from February, except for May-June, when the balance of changes of the index fi rst rose to -2 points and then fell to -13 points. A similar situa on was also observed in 2013. In the 2010–2012 period, industry managed to achieve prevalence of hiring over lay-off s late in Q1 and early in Q2 a er large-scale exits of workers in January. In the past two years, enterprises failed to do that.

Lending to IndustryIn September, industrial enterprises started to ex-

perience worsening of the terms of lending which situa on was long expected by experts. The aggre-gate availability of loans fell to the 54-month mini-mum (Fig. 6). At present, only 61% of enterprises is sa sfi ed with the off ered terms of lending. In the past four and a half years, the above index did not fall be-low 65%.

However, so far the industry retains a high po-ten al to service the exis ng loans. Moreover, in Q3 2014 it rose to 89%. Such is the share of enterprises which are able to service the exis ng loans. At pre-sent, that index reached the maximum level through-out the en re period of monitoring (from the begin-ning of 2009).

Enterprises’ Investment Plans In September, the industry’s investment plans con-

solidated at the level which was not observed du-

Fig. 4

Fig. 5

POTENTIAL

AVAILABILITY

THE SHARE OF ENTERPRISES WITH A NORMAL AVAILABILITY OF LOANS AND SUFFICIENT POTENTIAL TO SERVICE THEM, %

Fig. 6

THE RUSSIAN INDUSTRY IN SEPTEMBER 2014

19

ring the past two and a half years (Fig. 7). In August–September, the balance of the expected changes in the index exceeded the level of June–July when the industry’s investment plans entered for the fi rst me in 12 months the posi ve zone. At present, only 22% of enterprises plan to reduce investments in their own produc on; the above value is the minimum (that is the best result) since April 2013.

Despite slowdown of investment ac vi es and modesty of investment plans which situa on is of great concern to the authori es, enterprises regard the situ-a on quite diff erently. In Q3 2014, 62% of Russian in-dustrial enterprises is sa sfi ed with investments.

Fig. 7


20

THE STATE BUDGET IN JANUARY SEPTEMBER 2014T.Tischenko

Execu on of the Federal Budget in January–September 2014In January–September 2014, the federal budget

revenues amounted to Rb 10,697.7bn or 20.4% of GDP which is 0.8 p.p. of GDP higher than in the respec ve period of the previous year (Table 1). The oil and gas revenues were at the level of 10.4% of GDP which was 0.6 p.p. of GDP higher than for 9 months of 2013; at the same me on the basis of the results of January–September 2014 the non-oil and gas revenues rose to 10% of GDP which was 0.2 p.p. of GDP higher as compared to the respec ve period of the previous year. In January–September 2014, federal budget ex-penditures amounted to Rb 9,585.3bn (18.2% of GDP), which is 0.2 p.p. of GDP lower than for 9 months of the previous year. On the basis of the results of January–September 2014, the federal budget was executed with a surplus of 2.2% of GDP (Rb 1,112.4bn) which is 1.0 p.p. of GDP higher than that of execu on of the federal budget in January–September 2013. It is to

According to the data of the Federal Treasury, in January–September 2014 federal budget revenues rose by 0.8 p.p. of GDP as compared to the respec ve period of the previous year. Within 9 months of 2014, oil and gas revenues of the federal budget increased by 0.6 p.p. of GDP, while non-oil and gas revenues, by 0.2 p.p. of GDP as compared to the respec ve period of 2013. Within the same period, federal budget expenditures decreased by 0.2 p.p. of GDP as compared to January–September 2013; on the basis of the results of execu on of the federal budget in January–September 2014 a surplus of 2.2 p.p. of GDP of the federal budget was registered. Despite the forecasted further decrease in oil prices to $80 a barrel, the Government of the Russian Federa on does not plan to introduce changes in the dra federal budget for 2015 and the 2016–2017 period which is currently considered in the State Duma.

be noted that the volume of non-oil and gas defi cit in shares of GDP decreased by 0.2 p.p. of GDP as com-pared to the respec ve period of the previous year and amounted to 8.3% of the GDP.

For 9 months of 2014, federal budget revenues in shares of GDP rose as regards most tax revenues as compared to the same period of 2013 (Table 2).

In January–September 2014, revenues from foreign economic ac vi es did not change as compared to the same period of 2013 and amounted to 7.4% of GDP; in absolute terms year-on-year growth in those revenues amounted to 7.3% with general increase of 11.4% in federal budget revenues in January–September 2014 as compared to the respec ve period of the previous year.

Within 9 months of 2014, severance tax revenues in shares of GDP rose by 0.3 p.p. of GDP or 16.3% in absolute terms as compared to January–September 2013. For nine months of 2014, domes c VAT rev-enues rose by 0.3 p.p. of GDP (18.3% in absolute

Table 1THE MAIN PARAMETERS OF THE FEDERAL BUDGET OF THE RUSSIAN FEDERATION

IN JANUARY SEPTEMBER 2013 2014January–September 2014 January–September 2013 Devia on,

p,p. of GDPBillion Rb % of GDP Billion Rb % of GDPRevenues, total:including 10697.7 20.4 9603.5 19.6 0.8

Oil and gas revenues 5494.7 10.4 4774.2 9.8 0.6Non-oil and gas revenues 5203.0 10.0 4829.3 9.8 0.2Expenditures, including: 9585.3 18.2 9010.3 18.4 -0.2Interest income 341.4 0.6 300.0 0.6 0.0Non-interest income 9243.9 17.6 8710.3 17.8 -0.2Surplus (defi cit) of the federal budget 1112.4 2.2 593.2 1.2 1.0Non-oil and gas defi cit -4382.3 -8.3 -4181.0 -8.5 0.2Es mate of GDP 52540 48869

Source: The Ministry of Finance of the Russian Federa on, the Federal Treasury of the Russian Federa on and calcula ons of the Gaidar Ins tute.

THE STATE BUDGET IN JANUARY–SEPTEMBER 2014

21

terms), while import VAT revenues fell by 0.2 p.p. of GDP and increased by the mere 1.7% in absolute terms as compared to January–September 2013. In January–September 2014, corporate profi t tax rev-enues in shares of GDP increased by 0.1 p.p. of GDP or 23.6% in absolute terms as compared to the re-spec ve period of the previous year. For 9 months of 2014, domes c excises revenues rose by 0.3 p.p. of GDP (77.5% in absolute terms) as compared to January–September 2013, import excise revenues re-mained at the level of January–September 2013, that is, 0.09% of GDP (+19.2% in absolute terms).

Within 9 months of 2014, federal budget expendi-tures (Table 3) in shares of GDP changed as follows as compared to January–September 2013:

There was growth in the following items: Na onal Issues (0.1 p.p. of GDP), “Na onal Defense (0.4 p.p. of GDP), “Na onal Economy (0.3 p.p. of GDP), “Protec on of the Environment (0.02 p.p. of GDP),

“Healthcare (0.1 p.p. of GDP) and “Inter-Budgetary Transfers (0.2 p.p. of GDP);

There was a decrease in the following items: Na onal Defense (0.1 p.p. of GDP), “Housing and Public U li es (0.1 p.p. of GDP), “Educa on (0.2 p.p. of GDP), “Social Policy (0.9 p.p. of GDP) and “Physical Culture and Sport (0.03 p.p. of GDP).

As regards other items of the federal budget, with-in 9 months of 2014 expenditures in shares of GDP re-mained at the level of January–September 2013.

As of October 1, 2014, the aggregate volume of re-sources of the Na onal Welfare Fund (NWF) and the Reserve Fund in the ruble equivalent amounted to Rb 2,847.3bn and Rb 2,795.8bn, respec vely. Within 9 months of 2014, the exchange rate diff erence from revalua on of funds amounted to Rb 162.6bn and Rb 196.7bn as regards the NWF and the Reserve Fund, respec vely. In September 2014, from the deposit ac-count of the Vneshekonombank Rb 214.0bn worth of

Table 2REVENUES FROM THE MAIN TAXES TO THE FEDERAL BUDGET IN JANUARY SEPTEMBER 2013 2014

January – September 2014

January– September2013

Devia on, p.p. of GDP

Billion Rb % of GDP Billion Rb % of GDPTax revenues, total: including 9707.7 18.5 8625.5 17.6 0.9Corporate profi t tax 320.7 0.6 259.4 0.5 0.1VAT on goods sold in the territory of the RF 1663.8 3.2 1406.4 2.9 0.3VAT on goods imported to the RF 1230.8 2.3 1210.0 2.5 -0.2Excises on goods produced in the RF 376.4 0.7 212.1 0.4 0.3Excises on goods imported to the RF 50.3 0.09 42.2 0.09 0.0Severance tax 2174.5 4.1 1870.3 3.8 0.3Revenues from foreign economic ac vi es 3891.2 7.4 3625.1 7.4 0.0

Source: The Federal Treasury of the Russian Federa on and calcula ons of the Gaidar Ins tute.

Table 3FEDERAL BUDGET REVENUES IN JANUARY SEPTEMBER 2013 2014

January–September 2014 January–September 2013 Devia on, p.p. of GDPBillion Rb % of GDP Billion Rb % of GDP

Expenditures, total: including 9585.3 18.2 9010.3 18.4 -0.2Na onal issues 624.3 1.2 557.0 1.1 0.1Na onal defense 1858.9 3.5 1444.7 2.9 0.4Na onal security and law enforcement 1377.1 2.6 1332.7 2.7 -0.1Na onal economy 1250.8 2.4 1049.6 2.1 0.3Housing and u li es 80.0 0.1 87.5 0.2 -0.1Protec on of the environment 30.8 0.06 18.6 0.04 0.02Educa on 480.1 0.9 523.6 1.1 -0.2Culture and cinema 63.2 0.1 52.7 0.1 0.0Healthcare 358.5 0.7 299.3 0.6 0.1Social policy 2441.3 4.6 2781.1 5.7 -0.9Physical culture and sport 31.5 0.06 42.9 0.09 -0.03Mass media 53.6 0.1 51.9 0.1 0.0Servicing of the public debt 341.4 0.6 300.0 0.6 0.0Inter-budgetary transfers 593.5 1.1 468.4 0.9 0.2



22

fi nancial assets of the NWF in the currency of the RF was placed in privileged shares of the Vneshtorgbank. In September 2014, there were no opera ons with ac-counts of the Reserve Fund.

Within 9 months of 2014, the dynamics of chang-es in the pa ern of the NWF and the Reserve Fund (Table 4) has shown the following:

Reduc on of the volumes of the NWF in foreign currency, including those in the US dollars (0.6% – $157,400) and euro and GBP (0.5% each) (that is, euro 114,500 and GBP 20,700);

Growth in the volumes of the Reserve Fund in fo-reign currency, including those in US dollars (7.2% – $2,736,400) euro (6.8% – euro 1,994,800) and GBP (6.7% – GBP 362,300).

So, within 9 months of 2014 a change in the pat-tern of accounts in foreign currency points to the fact that the Ministry of Finance of the Russian Federa on keeps maintaing the balance between foreign curren-cy accounts and does not single out any currency as a priority one for preserva on of the reserves.

Execu on of the consolidated budget of cons tuent en es of the Russian Federa onin January–August 2014According to the data of the Federal Treasury, for

8 months of 2014 revenues of consolidated budget of cons tuent en es of the Russian Federa on amounted to Rb 5,704.7bn or 12.4% of GDP which is 0.3 p.p. of GDP or 10.5% higher in absolute terms than the level of January–August 2013. Within the same period of 2014, revenues of the consoli-dated budget of cons tuent en es of the Russian Federa on fell by 0.1 p.p. of GDP in shares of GDP as compared to the respec ve period of 2013 and rose in absolute terms by 6.7% to Rb 5,421.7bn (11.8% of GDP) (Table 5).

In January–August 2014, revenues of the consoli-dated budget rose in shares of GDP only as regards the profi t tax as compared to the respec ve period of 2013: growth of 0.3 p.p. of GDP up to 2.9% of GDP, while in absolute terms growth amounted to 21.8%. As regards other tax and non-tax revenues, revenues

Table 4CHANGES IN THE PATTERN OF THE NWF AND THE RESERVE FUND IN JANUARY SEPTEMBER 2014

Fund/AccountBalance Annual change

As of the beginning of the year

As of the end of September

Currency accounts in million %

NWFaccount in rubles, million 0.0 0.0 0.0 0.0account in USD, million 24576.8 24419.4 -157.4 -0.6account in euro, million 24089.4 23974.9 -114.5 -0.5account in GBP, million 4375.0 4354.3 -20.7 -0.5

Reserve Fundaccount in rubles, million 0.0 0.0 0.0 0.0account in USD, million 38084.1 40820.5 2736.4 7.2account in euro, million 29395.8 31390.6 1994.8 6.8account in GBP, million 5399.3 5761.6 362.3 6.7

Source: The Federal Treasury.

Table 5THE MAIN PARAMETERS OF THE CONSOLIDATED BUDGET OF CONSTITUENT ENTITIES

OF THE RUSSIAN FEDERATION IN JANUARY AUGUST 2013 2014January–August 2014 January–August 2013 Devia on

p.p. of GDPBillion Rb % of GDP Billion Rb % of GDPRevenues, including: 5704.7 12.4 5161.6 12.1 0,3corporate profi t tax 1354.3 2.9 1112.4 2.6 0,3severance tax 1658.1 3.6 1550.6 3.6 0,0domes c excises 319.5 0.7 321.8 0.7 0,0aggregate income tax 235.0 0.5 219.4 0.5 0,0property tax 645.8 1.4 614.2 1.4 0,0free-of-charge receipts from other budgets of the budgetary system of the RF 1028.1 2.2 929.1 2.2 0,9

Expenditures 5421.7 11.8 5080.6 11.9 -0,1Surplus (defi cit) of the consolidated budget of cons tuent en es 283.0 0.6 81.0 0.2 0,4

Es mate of GDP 45867 42676Source: The Federal Treasury of the Russian Federa on and calcula ons of the Gaidar Ins tute.

THE STATE BUDGET IN JANUARY–SEPTEMBER 2014

23

in shares of GDP remained at the level of the respec- ve period of the previous year, namely:

• as regards the individual income tax: 3.6% of GDP (+7.0% in absolute terms);

• as regards the property tax: 1.4% of GDP (+5.0% in absolute terms);

• as regards domes c excises: 0.7% of GDP (-0.01% in absolute terms);

• as regards the aggregate income: 0.5% of GDP(+7.3 % in absolute terms);

• as regards free-of-charge receipts from othe r levels of budgets of the RF: 2.2% of GDP (+10.6% in absolute terms). On the basis of the results of 8 months of 2014, expenditures of the consolidated budget of cons tuent en es of the Russian Federa on (Table 6) as regards most items changed insignifi cantly in shares of GDP or remained at the level of January–August 2013; in par cular, there was a decrease of 0.2 p.p. of GDP in expenditures as regards the Na onal Economy item and growth of 0.1 p.p. of GDP in expenditures as regards the Social Policy item.

On the basis of the results of January–August 2014, consolidated budgets of cons tuent en es of the Russian Federa on were executed with a surplus of Rb 283.0bn or 0.6% of GDP which is 0.4 p.p. of GDP higher than the level of 8 months of 2013.

Despite consolida on of external nega ve factors, in par cular, a decrease in oil prices which started in summer 2014, slowdown of growth rates both of the global economy and the European economy forecast-ed by the IMF1 and fi nancial and economic sanc ons against the Russian Federa on, no revision of the dra federal budget for 2015 and the 2016–2017 period is planned2. At the same me, in condi ons of high vola lity of oil prices it is highly likely that in 2015 re-sources of the Reserve Fund may be u lized to cover the defi cit of the federal budget. However, the prob-lem of a budget defi cit can be solved at the expense of reserves only during a short period of me and un-less a solid basis for ins tu onal restructuring and a change in the budget pa ern is created during that pe-riod risks to stability of the budget system will increase many mes over by 2016.

1 Early in October 2014, the IMF revised downward the forecast of growth rates of the global economy in 2014 and 2015 from 3.7% to 3.3% and from 4.0% to 3.8%, respec vely; in 2014 growth of the mere 0.8% and 0.9% in GDP in the euro area and Japan, respec- vely, is forecasted. Source: h p://money.cnn.com/2014/10/07/

news/economy/economy-imf-outlook2 As regards the general parameters of the dra federal budg-et for 2015 and the 2016–2017 period and the judgment of the Gaidar Ins tute on the dra budget for the 2015–2017 period, see: h p://www.iep.ru/ru/ins tut-gaidara-predstavil-zakliuchenie-na-proekt-biudzheta-na-2015-2017-gg.html

Table 6EXECUTION OF THE CONSOLIDATED BUDGET OF CONSTITUENT ENTITIES OF THE RUSSIAN FEDERATION

IN JANUARY AUGUST 2013 2014 January–August 2014 January–August 2013 Devia on,

p.p. of GDPBillion Rb % of GDP Billion Rb % of GDPExpenditures, total 5421,7 11,8 5080,6 11,9 -0,1includingNa onal issues 351,8 0,8 327,7 0,8 0,0Na onal security and law enforcement 58,8 0,1 53,7 0,1 0,0Na onal economy 894,6 1,9 888,1 2,1 -0,2Housing and public u li es 457,5 1,0 440,1 1,0 0,0Protec on of the environment 13,1 0,03 13,0 0,03 0,0Educa on 1533,2 3,3 1432,1 3,3 0,0Culture and cinema 187,6 0,4 170,6 0,4 0,0Healthcare 804,6 1,8 777,9 1,8 0,0Social policy 913,6 2,0 806,3 1,9 0,1Physical culture and sport 105,4 0,2 91,5 0,2 0,0Mass media 26,1 0,06 25,0 0,06 0,0Servicing of the state and municipal debt 69,4 0,1 48,1 0,1 0,0



24

RUSSIAN BANKS WITHIN THE FIRST THREE QUARTERS OF 2014M.Khromov

The last year’s record with regard to the number of banking license revoca ons was nearly repeated in September 2014: during the month the regulator re-voked the banking license from 10 credit ins tu ons, just one less than in March 2014 when 11 ins tu ons lost their banking license. In September, however, ins tu ons of smaller size (whose assets averaged Rb 3,6bn1) than in March (Rb 6,9bn) had to leave the market, making a total of Rb 5,6bn during the fi rst nine months of 2014. Seven of these 10 ins tu ons provid-ed retail banking services. Their bank deposits totaled Rb 12bn (an average of Rb 1,7bn per bank). Nine bil-lion rubles, or ¾ of the total retail deposits, were cove-red under the deposit insurance scheme.

Mul ple revoca ons of banking licenses under the new management of the Bank of Russia have resulted in substan al contrac on of the obligatory insurance fund. Deposit Insurance Agency’s (DIA) liability to the depositors of the license-revoked banks increased Rb 278bn in the period of July 2013 to September 2014 inclusively. The obligatory insurance fund, net of the provision for insured events, saw a contrac on of Rb 82,5bn as of October 1, 2014.

The banking sector’s total assets increased 1.0%2 in September, gaining 6.9% since the beginning of the year, and 12.8% during the 12 months. The la er indi-cator (annual growth rate) dropped to its lowest level since the end of 2010.

The book value of the equity in the banking sector increased 4.3% (Rb 280bn) in September 2014 which is associated with the rescheduling of VEB’s subordinat-ed loans to VTB bank funded with the resources of the Na onal Wealth Fund (NWF) to directly increase the state par cipa on in VTB by inves ng the NWF’s re-

1 As of the latest repor ng date preceding the license revoca- on.

2 Growth rates in balance-sheet indicators are hereina er pre-sented with allowance for revalua on in foreign currency, but without taking account of banks whose banking license was re-voked, unless otherwise stated.

Over the past three quarters of 2014 the Russian banking sector encountered a constric on of growth in all of its key resource sources. Retail accounts and deposits and foreign liabili es contracted while growth in corporate customers dropped to low levels. Monetary authori es’ resources, which contributed most to the growth of the banking sector’s resource base during the foregoing period, were used as compensa on. The banking sector’s resources were used primarily for lending purposes, yet facing a downtrend. Nonetheless, it is only the retail seg-ment of the lending market that has so far been facing deteriora on of the quality of loans.

sources in VTB preferred shares, Rb 214bn. The regula-tory capital of the banking sector remained unchanged a er this opera on, because the subordinated loan, a fundraising by nature, was previously accounted as er 2 capital in VTB.3

The profi t of the banking sector in September 2014 amounted to Rb 93bn, corresponding a 1.8% return on assets and 16.8% return on equity on an annual-ized basis. Within the fi rst nine months of 2014 the profi tability of the banking sector reached Rb 927bn, down 8.5% compared to the same period of 2013. The

3 Calculated according to balance sheet accounts (form No. 101).

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State-run banksPrivate banksThe share of state-run banks in the Russian banking system

Fig. 1. Dynamics of assets in state-run banks and other banks (trillions of rubles), and the share

of state-run banks in the assets (%, right-hand scale)

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14State-run banksOther banksThe share of state-run banks in the Russian banking system

Fig. 2. Dynamics of equity3 in state-run banks and other banks (trillions of rubles), and the share of state-

run banks in the capital (%, right-hand scale)

RUSSIAN BANKS WITHIN THE FIRST THREE QUARTERS OF 2014

25

return on bank assets in the period of January 2014 and September 2014 stood at 1.5% on an annualized basis (2.0% within the fi rst nine months of 2013), while the equity was 14.1% on an annualized basis (17.2% in 2013).

Fundraising Within the elapsed nine months of 2014 the bank-

ing sector totally lost two of its primary sources of the resource base, while the third source showed a mini-mum growth: Retail accounts and deposits and foreign liabili es contracted since the beginning of the year, whereas corporate accounts and deposits increased insignifi cantly. Accordingly, in the same period the banking sector relined primarily upon public resourc-es, namely Bank of Russia loans and Minfi n (Ministry of Finance) deposits. Furthermore, the contrac on of liquid ruble-denominated assets and investment in fo-reign assets served as addi onal source of resources.

Retail bank deposits contracted 1.1% (by Rb 189bn) in September and 1.7% (by Rb 289bn) since beginning of the year. The annual growth of retail accounts and deposits in banks dropped to 4.4% as of the end of September, the slowest growth rates in retail deposits a er the recovery from the 1998 crisis.

It’s worth no ng that the September contrac on of retail bank accounts had an eff ect on the assets denominated both in rubles and foreign currencies. Despite the ongoing devalua on of the na onal cur-rency in September1, the volume of resources denomi-nated in foreign currencies contracted even more than that of ruble-denominated resources: 4.0% against 0.4%. As a result, the dollar equivalent of retail ac-counts and deposits in banks dropped to the level ob-served in the summer of 2013, amoun ng to $87,4bn as of October 1, 2014.

Corporate accounts and deposits with banks in September increased 1.8%, including ruble-denomi-nated ones (up 1.0%), while the dollar equivalent of those denominated in foreign currencies gained 3.8%. The share of corporate accounts and deposits denomi-nated in foreign currencies reached 28.2% of their to-tal volume as of October 1, 2014.

Fixed-term deposits denominated in foreign curren-cies saw the fastest growth, up 5.4% in dollar terms, in September. Overall, the share of fi xed-term depoists in the total volume of corporate accounts and deposits reached another highest value of 57.7%.

Annual growth of corporate accounts and deposits was 11.0% as of the end of September, 13.9% less than the value observed as of the end of 2013 and 15.3% less than in 2012.

1 During the month the ruble weakened against the US dollar and the Euro by 6.6% and 2.8% respec vely.

The state accelerated its support to the bank-ing sector in September 2014. The debt owed to the Bank of Russia grew up to Rb 191bn during the month and Rb 1,2 trillion since the beginning of the year. Minfi n deposits in commercial banks increased Rb 205bn during the month and Rb 790bn since the beginning of the year. Banks’ total debt to the mon-etary authori es increased Rb 2,0 trillion since the beginning of the year, reaching Rb 6,5 trillion as of October 1, 2014. This accounts for 10.2% of the to-

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State-run banksPrivate banksThe share of state-run banks in the Russian banking system

Fig. 3. Dynamics of retail deposits in state-run banks and other banks (trillions of rubles), and the share of state-run

banks in the retail deposit market (%, right-hand scale)

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State-run banks

Other banks

The share of state-run banks in the Russian banking system

Fig. 4. Dynamics of corporate accounts with state-run banks and other banks (trillions of rubles), and the share of state-run

banks in the corporate account market (%, right-hand scale)

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State-run banksOther banksThe share of state-run banks in the Russian banking system

Fig. 5. Dynamics of Bank of Russia’s loans extended to state-run banks and other banks (trillions of rubles), and the share

of state-run banks in Bank of Russia’s loans. (%, right-hand scale)


26

tal assets in the banking sector, including the equity, and 9.1% of GDP. The state support to banks already exceeded as a percentage of GDP the crisis value of 8.2% in Q4 2008.

Loans issued Despite the fundamental changes in the structure of

fundraising in 2014, on-lending to corporate and retail customers con nued, although at slower rates. The in-crease in the credit por olio in the period of January to September 2014 accounted for 75% of the growth in the total bank assets during the same period.

In September, retail customers’ debt owed to banks increased 1.0% (Rb 120bn) and 10.4% (Rb 1,11 trillion) since the beginning of the year. The annual growth as of the end of September was 16.8%, indica ng that the downtrend towards growth in banks’ retail credit por olio was s ll there.

At the same me, according to Gaidar Ins tute’s preliminary es mates, within the fi rst nine months of the year retail customers paid Rb 1,36 trillion of interest on loans. This suggests that this year bank lending has begun to deteriorate the fi nancial situa- on of households – growth in debt has begun to fall

behind the amount of interest payments. Therefore, consumer lending has begun to weaken the fi nal demand instead of encouraging the consumer de-mand, shrinking by Rb 250bn the disposed fi nancial resources of households since the beginning of the year.

The quality of the credit por olio kept deteriora ng at the backdrop of the foregoing. The share of delin-quent loans increased to 5.8% in September against 5.7% in the preceding month and 4.5% earlier in the year. As of October 1, 2014, the volume of provisions for losses reached 8.8% of the volume of retail debt on loans against 8.6% in the preceding month and 7.1% earlier in the year.

Corporate customers’ debt on loans increased 1.4% (by Rb 315bn) in September and 8.7% (by Rb 1,82 trillion) since the beginning of the year. The annual growth was 9.7% as of the end of September, the lowest level over the period since the beginning of 2011.

At the same me, slowdown in the corporate credit por olio’s growth rates had, incredible as it may seem,

Table 1 RUSSIAN BANKING SYSTEM’S STRUCTURE OF LIABILITIES AT MONTH END , AS A PERCENTAGE OF TOTAL

12.08 12.09 12.10 12.11 12.12 06.13 12.13 03.14 06.14 07.14 08.14 09.14 Liabili es, billions of rubles 28022 29430 33805 41628 49510 52744 57423 59377 61385 62127 62464 64073 Equity 14.1 19.3 18.7 16.9 16.2 16.3 16.0 16.0 15.8 15.8 15.9 16.1 Loans from the Bank of Russia 12.0 4.8 1.0 2.9 5.4 4.4 7.7 7.9 8.7 9.0 8.7 8.8 Interbank opera ons 4.4 4.8 5.5 5.7 5.6 5.2 5.1 4.7 5.9 5.5 5.6 5.5 Foreign liabili es 16.4 12.1 11.8 11.1 10.8 10.8 9.9 10.6 9.4 9.5 9.6 9.6 Retail accounts and deposits 21.5 25.9 29.6 29.1 28.9 29.6 29.4 27.8 27.4 27.5 27.6 26.9 Corporate accounts and deposits 23.6 25.9 25.7 26.0 24 23.5 23.8 23.9 22.9 22.4 22.4 22.6

Accounts and deposits of government agencies and local government authori es

1.0 1.0 1.5 2.3 1.6 2.4 0.9 1.8 2.3 2.5 2.9 2.9

Outstanding securi es 4.1 4.1 4.0 3.7 4.9 5.1 4.5 4.2 3.9 3.9 3.9 3.8 Source: Central Bank of Russia, Gaidar Ins tute’s es mates.

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Fig. 6. Dynamics of retail loans issued by state-run banks and other banks (trillions of rubles), and the share of state-

run banks in the retail loan market (%, right-hand scale)

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Fig. 7. Dynamics of corporate loans issued by state-run banks and other banks (trillions of rubles), and the share of state-

run banks in the corporate loan market (%, right-hand scale)

RUSSIAN BANKS WITHIN THE FIRST THREE QUARTERS OF 2014

27

no eff ect on the quality of the same. Due to a me lag between the issue of loans and suspension of servicing a part thereof in periods of slowdown in growth in the total volume of loans, the overdue debt tends to keep growing at faster rates corresponding to the growth in the credit por olio a few months (or quarters) earlier.

In 2014, growth rates in corporate customers’ over-due debt corresponds approximately to the growth in

Table 2 RUSSIAN BANKING SYSTEM’S STRUCTURE OF ASSETS AT MONTH END , AS A PERCENTAGE OF TOTAL

12.08 12.09 12.10 12.11 12.12 06.13 12.13 03.14 06.14 07.14 08.14 09.14 Assets, billions of rubles 28022 29430 33805 41628 49510 52744 57423 59377 61385 62127 62464 64073Cash and precious metals 3.0 2.7 2.7 2.9 3.1 2.4 2.8 2.8 2.4 2.3 2.3 2.3 Deposits with the Bank of Russia 7.5 6.9 7.1 4.2 4.4 3.3 3.9 3.5 3.3 3.1 2.8 3.4

Interbank opera ons 5.2 5.4 6.5 6.4 6.8 6.0 5.7 5.3 6.9 6.5 7.2 7.4 Foreign assets 13.8 14.1 13.4 14.3 13.0 15.1 13.3 14.4 14.1 14.2 13.5 13.1 Retail sector 15.5 13.1 13.0 14.4 16.8 17.9 18.5 18.4 18.5 18.5 18.7 18.4 Corporate sector 44.5 44.5 43.6 44.0 41.3 40.8 39.3 39.6 38.8 39.0 39.3 39.3 State 2.0 4.2 5.1 5.0 3.2 3.2 3.1 3.0 3.4 3.4 3.6 3.2 Property 1.9 2.7 2.6 2.3 2.2 2.2 2.0 1.9 1.9 1.9 1.9 1.9

Source: Central Bank of Russia, Gaidar Ins tute’s es mates.

the total volume of the credit por olio. As a result, the share of overdue debt in the total debt on loans re-mained the same as of the end of September as it was earlier in the year, 4.1%, while the ra o of provisions for losses to corporate customers’ total debt on loans even improved to 6.5% as of October 1, 2014 from 6.7% as of January 1, 2014.


28

MORTGAGE IN THE RUSSIAN FEDERATIONIN JANUARY AUGUST 2014

G.Zadonsky

According to the data of the Central Bank of the Russian Federa on, as of September 1, Rb 1,104.05bn worth of 650,570 housing loans (HL) was extended including Rb 1,070.34bn worth of 619,026 mortgage housing loans which is 27.47% and 36.33% more in quan ta ve terms and monetary terms, respec vely, as compared to September 1, 2013. Within August 2014, the outstanding debt on HL rose by 2.11% to Rb 3.32 trillion, while that on MHL, by 2.12% to Rb 3.2 trilllion. As of September 1, 2014, the la er ex-ceeded by 33.44% the debt on MHL as of September 1, 2013. As of September 1, 2014, the overdue debt on HL and MHL amounted to Rb 45.01bn and Rb 41.78bn, respec vely (Fig. 1).

According to the data of the Central Bank of the Russian Federa on, as of September 1, 2014 the debt on MHL with payments overdue for over 180 days (de-faulted loans) amounted Rb 54.06bn or 1.69% of the total amount of the debt (Fig. 2), which is 0.38 p.p. and 0.03 p.p. lower as compared to September 1, 2013 and August 2014, respec vely. Within August 2014, the debt on MHL without overdue payments rose to Rb 3.06 trillion, while as compared to the total amount of the debt it increased by 0.12 p.p. and amounted to 95.59% (Fig. 2). Within August 2014, the overdue debt on MHL rose (Fig. 1) by 0.52% in monetary terms, while as percentage of the outstanding debt it decreased by 0.02 p.p. and amounted to 1.31%.

As of September 1, 2014, as regards the number of MHL extended from the beginning of the year with a cumula ve eff ect per 1,000 persons of the popula on the Privolzhsky Federal District and the Urals Federal District are rated the fi rst and the second, respec ve-ly; the above districts changed places as compared to September 1, 2013 (Table 1). As of September 1, 2014, on average in the Russian Federa on 4.31 MHL per 1,000 persons were extended (a 27.24% increase as compared to September 1, 2013). Among cons tuent

In January–August 2014, growth in mortgage housing lending con nued. As of September 1, 2014, Rb 1.07trillion worth of 619,026 mortgage housing loans was extended; that is 27.47% and 36.33% more in quan ta ve terms and monetary terms, respec vely, as compared to the respec ve period of 2013. As of September 1, 2014 the outstanding debt on MHL in the amount of Rb 3.2 trillion exceeded by 33.44% the debt as of September 1, 2013. There is s ll a posi ve trend of decrease in the share of the overdue debt on MHL in rubles in the outstanding debt (0.87% as of September 1, 2014) and growth in the volume and share of the debt on MHL without overdue payments (95.59% as of September 1, 2014) in the total debt. In August 2014, the weighted average monthly rate on MHL in rubles increased by 0.05 p.p. and became equal to 12.27% against 12.2% as of June 1, 2014.

en es of the Russian Federa on, the highest index (7.38 loans per 1,000 persons) was registered with the Republic of Komi against 6.73 MHL with the Yamal-Nenets Autonomous Region which was the leader as of September 1, 2013 (Table 1). The highest overdue debt

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7.13

01.0

9.13

01.1

1.13

01.0

1.14

01.0

3.14

01.0

5.14

01.0

7.14

01.0

9.14

2012 2013 2014

Trill

ion

Rb

Billi

on R

b

The volume of MHL extended within a month, billion RbThe overdue debt on MHL, billion RbThe debt on MHL, trillion RbThe debt on HL, trillion Rb

Source: on the basis of the data of the Central Bank of the Russian Federa on.

Fig. 1. Dynamics of extension of mortgage housing loans

0,0

0,6

1,2

1,8

2,4

94,6

95,0

95,4

95,8

96,2

01.0

9.13

01.1

0.13

01.1

1.13

01.1

2.13

01.0

1.14

01.0

2.14

01.0

3.14

01.0

4.14

01.0

5.14

01.0

6.14

01.0

7.14

01.0

8.14

01.0

9.14

2013 2014

With

ove

rdue

pay

men

ts

With

out o

verd

ue p

aym

ents

, %

Without overdue payments, %With overdue payments 1–30 daysWith overdue payments 31–90 daysWith overdue payments 91–180 daysWith overdue payments more than 180 days

Source: the data of the Central Bank of the Russian Federa on .Fig. 2. Grouping of the debt on MHL by the period of delay

in payments as a percentage of the total amount of the debt

MORTGAGE IN THE RUSSIAN FEDERATION IN JANUARY–AUGUST 2014

29

as percentage of the outstanding debt was registered with the Central Federal District (2.46%) and Moscow (3.82%) among federal districts and cons tuent en - es of the Russian Federa on, respec vely (Table 1).

According to the data of the Central Bank of the Russian Federa on, from May 2014 ll September 1, 2014 the weighted average rate (12.21%) on MHL in

rubles extended from the beginning of the year in-creased by the mere 0.01 p.p. (Fig.3). Within August 2014, the weighted average monthly rate on MHL in rubles increased by 0.05 p.p. and amounted to 12.7%. In August 2014, the weighted average rate on MHL in foreign currency extended from the beginning of the year decreased by 0.11 p.p. and amounted to 9.37%.

Table 1DISTRIBUTION OF REGIONS BY THE NUMBER OF MHL PROVIDED FROM THE BEGINNING

OF THE YEAR WITH A CUMULATIVE EFFECT PER 1,000 PERSONS

Region

Per 1,000 persons

Ove

rdue

deb

t as %

of

the

outs

tand

ing

debt Place of the region as regards

loan

s, u

nits

volu

me.

m

illio

n Rb

debt

, mill

ion

Rb

num

ber o

f MHL

pe

r 1,0

00 p

erso

ns

over

due

debt

as

% o

f the

out

-st

andi

ng d

ebt

num

ber o

f MHL

as

per

1,0

00

pers

ons

over

due

debt

as

% o

f the

out

-st

andi

ng d

ebt

01.09.2014 01.09.2013PRIVOLZHSKY FEDERAL DISTRICT 5,316 7,146 19,597 0.75 I III II VII

Udmurt Republic 6,759 7,637 22,024 0.54 4 41 4 53Chuvash Republic 6,719 9,032 24,321 0.45 5 33 14 34Ulyanov Region 6,634 8,086 22,245 0.43 6 32 8 29Perm Territory 6,252 8,202 22,968 1.38 10 75 10 75URALS FEDERAL DISTRICT 5,075 8,941 34,566 0.71 II II I VIIIYamalo-Nenets Autonomous Region 6,762 18,055 74,920 0.14 3 4 1 6

Tyumen Region 6,392 14,296 62,980 0.30 8 18 3 16Khanty-Mansiisk Autonomous Region 5,771 13,709 76,383 0.21 15 8 2 9

NORTH-WESTERN FEDERAL DISTRICT 5,070 9,469 26,282 0.91 III V IV V

Republic of Komi 7,379 12,296 31,478 0.23 1 9 5 11Vologda Region 6,254 8,075 24,711 0.63 9 50 11 52St. Petersburg 5,027 11,640 32,254 1.25 30 73 41 70SIBERIAN FEDERAL DISTRICT 5,023 7,555 23,610 0.89 IV IV III VINovosibirsk Region 6,609 9,954 31,143 0.96 7 66 6 65Tomsk Region 5,896 8,360 29,343 0.46 13 34 16 44THE RUSSIAN FEDERATION 4,309 7,450 22,266 1.31 V VII V IIFAR EASTERN FEDERAL DISTRICT 3,862 8,144 24,991 0.45 VI I VI IX

Magadan Region 5,868 13,099 33,963 0.08 14 1 9 2Republic of Sakha 5,167 11,637 36,750 0.24 26 12 20 3CENTRAL FEDERAL DISTRICT 3,748 8,351 24,343 2.46 VII IX VII IKostroma Region 5,286 6,173 15,328 0.48 22 36 24 20Ryazan Region 5,214 7,536 19,485 0.37 25 24 32 35Moscow 2,544 9,532 29,779 3.82 77 85 74 82SOUTHERN FEDERAL DISTRICT 3,494 5,442 15,080 1.03 VIII VI VIII IIIAstrakhan Region 3,976 5,868 15,801 0.32 56 21 51 28Volgograd Region 3,655 5,195 14,483 1.24 67 72 64 71NORTH CAUCASIAN FEDERAL DISTRICT 1,421 2,201 6,653 1.44 IX VIII IX IV

Stavropol Territory 3,167 4,518 13,579 0.94 72 64 71 59Republic of North Ose a 1,794 3,067 9,115 3.15 80 82 77 80



30

In July and August 2014, the weighted average period of lending as regards MHL in rubles extended from the beginning of the year rose by 0.2 years and amounted to 14.9 years as of September 1, 2014. As regards MHL in foreign currency, the weighted average period of lending decreased by 0.3 years and amount-ed to 12.0 years (Fig. 3).

In 2014, the average value of MHL in rubles ex-tended from the beginning of the year increased by 5.9% as of September 1 and amounted to Rb 1,722m (Fig. 4); as compared to September 1, 2013 it rose by 7.66%. From February 1, 2014 ll September 1, 2014 the respec ve value in foreign currency virtu-ally doubled (95%), having amounted to Rb 9.616m (Fig. 4).

The share of loans in foreign currency in the vo-lume of MHL extended from the beginning of 2014 amounted to 0.5% as of September 1 (Fig. 5). Due to a low volume of lending in foreign currency the share of foreign currency in the debt on MHL kept decreas-ing and amounted to 3.27% as of September 1, 2014. However, a high level of the share of the overdue debt on MHL in foreign currency in the total overdue debt prevailed and amounted to 35.4% as of September 1, 2014 (Fig. 5). So, the share of the overdue debt on MHL in foreign currency in the total overdue debt ex-ceeded 10.8 mes over the share of debt on MHL in foreign currency in the total debt.

In January–August 2014, the share of fi ve large banks (the 1st group of credit ins tu ons) ranged by the value of their assets in the total number of MHL extended to individuals increased to 77.63% (Fig. 6) against 75.3% in the same period of 2013. For com-parison: as of September 1, 2012 that share amounted to 58.92%. In January–August 2014, as compared to the respec ve period of 2013 the overdue debt as a percentage of the outstanding debt of group 1 fell from 1.47% to 1.08% which was below the average value of 1.31% by all the groups (na onal average). The average value by all the groups fell by 0.46 p.p. as compared to the previous year. The worst quality MHL por olio was observed with group 5 whose share of the overdue debt (3.32%) exceeded signifi cantly the average value by all the groups (Fig. 6).

As of October 1, 2014, the OAO AHML refi nanced 21,251 MHL for the amount of Rb 32,917bn which is 6.88% and 0.2% lower as regards the number of the loans and in monetary terms than in the respec ve period of 2013.

As of September 1, 2014, the share of loans refi -nanced by AHML in the total number of the extended loans with a cumula ve result amounted to 3.05%, which is 1.15 p.p. lower than that as of September 1, 2013.

8,0

10,0

12,0

14,0

16,0

18,0

8,5

9,5

10,5

11,5

12,5

01.0

9.11

01.1

1.11

01.0

1.12

01.0

3.12

01.0

5.12

01.0

7.12

01.0

9.12

01.1

1.12

01.0

1.13

01.0

3.13

01.0

5.13

01.0

7.13

01.0

9.13

01.1

1.13

01.0

1.14

01.0

3.14

01.0

5.14

01.0

7.14

01.0

9.14

2011 2012 2013 2014

Perio

d of

lend

ing,

yea

rs

Rate

, %

The weighted average rate on MHL in rubles, %

The weighted average rate on MHL in foreign currency, %

The weighted average period of lending as regards MHL in rubles, years

The weighted average period of lending as regards MHL in foreign currency,years

Source: on the basis of the data of the Central Bank of the Russian Federa on

Fig.3. Dynamics of the weighted average rate on and the weighted average period of lending as regards

MHL extended from the beginning of the year

4

5

6

7

8

9

10

1,2

1,4

1,6

1,8

2,0

2,2

2,4

01.0

9.11

01.1

1.11

01.0

1.12

01.0

3.12

01.0

5.12

01.0

7.12

01.0

9.12

01.1

1.12

01.0

1.13

01.0

3.13

01.0

5.13

01.0

7.13

01.0

9.13

01.1

1.13

01.0

1.14

01.0

3.14

01.0

5.14

01.0

7.14

01.0

9.14

2011 2012 2013 2014

The

aver

age

valu

e of

MHL

in fo

reig

n cu

rren

cy, m

illio

n Rb

The

aver

age

valu

e of

MHL

in ru

bles

, m

illio

n Rb

The average value of MHL in rubles extended from the beginning of the year,million RbThe average value of MHL in foreign currency extended from the beginning ofthe year, million Rb


Fig. 4. The dynamics of the average value of MHL extended from the beginning of the year

0%10%20%30%40%50%

0%2%4%6%8%

10%

01.0

9.12

01.1

1.12

01.0

1.13

01.0

3.13

01.0

5.13

01.0

7.13

01.0

9.13

01.1

1.13

01.0

1.14

01.0

3.14

01.0

5.14

01.0

7.14

01.0

9.14

2012 2013 2014

The

shar

e of

the

over

due

debt

The

shar

e of

loan

s

The share of loans in foreign currency in the volume of MHL extended fromthe beginning of the year, left-hand axis, %The share of loans in foreign currency in the debt on MHL, left-hand axis, %

The share of the overdue debt on loans extended in foreign currency as %of the total overdue debt, right-hand axis


Fig. 5. The dynamics of the ruble/foreign currency ra o in mortgage housing lending

MORTGAGE IN THE RUSSIAN FEDERATION IN JANUARY–AUGUST 2014

31

In H1 2014, there were 12 issues of mortgage-backed securi es whose aggregate issuing volume amounted, by the AHML es mates, to Rb 108bn which was nearly 3 mes higher than in the respec ve period of the previous year (Rb 36.5bn). In the total volume of MHL extended within that period the share of funds a racted by means of issuing of mortgage-backed se-curi es amounted to 11%.

According to the data of the Central Bank of the Russian Federa on, by the mid-2014 in banks’ mort-gage por olio the share of MHL with an ini al contri-bu on of less than 30% increased and amounted to nearly 50%, including 34% of those with the ini al con-tribu on of less than 20%. The above points to a re-duc on of requirements to borrowers which situa on, experts believe, can produce system risks.

0,5%

2,5%

4,5%

0%

50%

100%

1 - 5 5 - 20 21-50 51-200 201-500 501-947 Total

The number of MHL extended by the group to individuals as % of the total number of MHL in January–August 2014, left-hand axis;The number of MHL extended by the group to individuals as % of the total number of MHL in January–August 2013, left-hand axis;The overdue debt as % of the outstanding debt of the group in January–August 2014, right-hand axis The overdue debt as % of the outstanding debt of the group in January–August 2013, right-hand axis


Fig. 6. Dynamics of volumes of the extended MHL and the overdue debt by groups of credit ins tu ons ranged by the value of their assets


32

THE FOREIGN TRADE IN AUGUST 2014N.Volovik

In August 2014, the Russian foreign trade volume calculated on the basis of the methods of the balance of payments amounted to $66.0bn which is 7.3% lower than the respec ve index of 2013. In August 2014, ex-port amounted to $40.9bn having decreased by 3.7% as compared to August 2013. The import fell by 11.5% to $25.1bn. As a result, the trade balance surplus in-creased: in August 2014 it amounted to $15.8bn which is 13.4% higher than in August 2013.

Having achieved the 15-month maximum – $111.87 a barrel – in June 2014, the Brent oil price started to fall due to growth in supply and decrease in demand on the global market. In August, the Brent oil price depreciated for two months running due to slow economic growth in China and Europe and excessive supply. So, produc- on of oil in the US rose to the 28-month maximum.

Libya increased oil produc on from 100,000 barrels a day in the beginning of the year to 612,000 barrels a day in August. Iraq keeps expor ng record-high volumes of oil despite hos li es with Islamists in the north of the country, while the northern province of Kurdistan sup-plies oil via Turkey despite the protests of Bagdad.

It is to be noted that the OPEC revised downward the forecast of demand on its oil in 2014 and subse-quent years, having stated that with preserva on of the current volume of oil produc on by the cartel in 2015 there would be a surplus of over 1m barrels on the market.

On September 5, 2014, for the fi rst me in the past 14 months the Brent oil price fell below $100 a bar-

In August 2014, the Russian foreign trade volume decreased. Western sanc ons against Russia and Russia’ coun-ter-sanc ons have resulted in a considerable drop in export of goods to Russia.

rel and kept going further down. On October 20, 2014, the Brent oil price depreciated to $84.42 a barrel, that is, the minimum level since November 2010. The OPEC countries will discuss the limita on on produc on – 30m barrels a day – at the mee ng on November 27, 2014, however, there is no agreement between the OPEC member-states to reduce produc on in order to support oil prices.

In August 2014, the average Urals oil price fell by 9% as compared to August 2013 and amounted to $101.09 a barrel ($111.11 a barrel a year before).

In January–August 2014, the average Urals oil price was formed in the amount of $106.28 a barrel which is 1% lower than that in the same period of 2013.

According to the monitoring of oil prices carried out by the Ministry of Finance of the Russian Federa on from September 15 ll October 14, 2014, the average Urals oil price amounted to $669.8 a ton. As a result, from November 1, 2014 the export duty on crude oil will amount to $316.7 a ton which is 8.1% lower than in October ($344.7 a ton). In November, the duty on pet-rol is set in the amount of $285 a ton against $310.2 a ton in October, while that on diesel fuel, at the amount of $205.8 a ton ($224 a ton in October). In November, the duty on other oil products is set at the amount of $209 a ton against $227.5 a ton a month earlier.

Prospects of growth in output in China and the US supported prices on non-ferrous metals. However, late in July a six-month ban on export from Indonesia of green ore expired. It is to be reminded that the govern-

0

10

20

30

40

50

60

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may sep

jan

may

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Balance Export Import

Source: The Central bank of the Russian Federation. Fig. 1. The main indices of the Russian foreign trade (billion USD)

THE FOREIGN TRADE IN AUGUST 2014

33

ment of Indonesia introduced a ban on export of green ore in January 2014 in order to increase domes c pro-cessing of minerals. Prior to the ban, Indonesia was one of the largest exporters of nickel ore, iron ore and aluminum ore. A return to the market of Indonesian suppliers slowed down a posi ve price trend which had just emerged in the market.

According to the data of the London Metal Exchange, in August 2014 as compared to the previous month prices on aluminum rose by 4.4%, while those on cop-per and nickel fell by 1.5 % and 2.5%, respec vely. As compared to August 2013, prices on nickel and copper rose by 29.9% and 11.7%, respec vely, while prices on copper fell by 2.7%. In January–August 2014, as com-pared to the respec ve period of 2013 aluminum and copper were traded on average 4.0% and 6.3% lower, while nickel appreciated by 9.8%.

In August 2014, for fi ve months running the FAO food price index fell having hit the lowest level since September 2010. As compared to July, the index fell by 7.3 points and amounted to 196.7 points. It is to be noted that there was a no ceable decrease in prices on all the products on the basis of which the index is calculated, except meat. Dairy products are at the top of the list of products in respect of which depre-cia on of prices was observed. The index of prices on those products amounted to 200.8 points which is 25.3 points and 46.8 points lower as compared to July 2014 and August 2013, respec vely. It took place as a result of growth in export in combina on with a de-crease in demand on import.

In January–August 2014, the foreign trade volume of the Russian Federa on amounted to $549.5bn which is 1.9% lower than the respec ve index of 2013. It is to be noted that the export of Russia grew by 1%, having amounted to $342.5bn, while the import fell by 6.3% to $207bn. In January–August 2014, the trade balance surplus of the Russian Federa on amounted

to $135.5bn which is 14.7% higher than in January–August 2013.

Insignifi cant growth in export tool place due to an increase in supplies abroad of food products and ag-ricultural primary products (mainly wheat), mineral products (oil products), wood and pulp and paper products and tex le, tex le goods and footwear. In January–August 2014, the monetary volume of ex-port of those groups of commodi es rose by 28.6%, 1.4%, 10.8% and 34.7%, respec vely, as compared to January–August 2013.

As regards other groups of the expanded nomencla-ture of goods the export shrank as follows: chemical industry produce (a decrease of 7.9%), rawstock, furs and fur ar cles (38.2%) primary metals and fabricated metal ar cles (1.2%) and machines, equipment and transport vehicles (7%).

The import decreased over the en re expanded no-menclature of goods, except for mineral products (due to growth in the import of petrol) and precious stones, precious metals and ar cles in which they are used.

During the fi rst month of a ban on the import to Russia of food from the EU states, Norway, the US, Canada and Australia, in August 2014 the import of food products from far abroad countries fell by 7.5% as compared to July 2014. The highest drop in import was observed as regards dairy products, pork and ve-getables. The only product which was subject to sanc- ons, but showed growth in supplies in August and

September was beef; it was imported from Argen na, Brazil and China. Growth in the monetary volume of the import of beef took place due to growth in prices on the global market.

The US deprived Russia of a number of trade privi-leges: the general system of preferences (GSP) stops working in respect of Russia from October 3, 2014. The system of GSP measures was adopted in 1964 in order to render assistance to developing countries. The GSP

Table 1MONTHLY AVERAGE GLOBAL PRICES IN AUGUST OF THE RESPECTIVE YEAR

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014Oil (Brent), USD/a barrel 29.9 42.8 61.9 71.7 72.1 118.3 73.06 77.18 109.9 113.3 110.96 101.92

Natural gas*, USD/1m of BTU 3.98 4.34 6.56 8.71 8.34 14.64 6.92 8.45 10.81 11.18 11.64 9.14

Copper, USD/a ton 1731.0 2835.8 3800.0 7689 7510.5 7645.6 6165.3 7284 9001.0 7515.5 7192.9 7001.8

Aluminum, USD/ a ton 1457.0 1694.3 1868.0 2460 2515.2 2780 1933.8 2118.4 2379.0 1845.4 1817.6 2030.5

Nickel, USD/a ton 9365.0 13723 14894 30872 27600 18581 19642 21413 21845 15735 14315 18600

* The market of Europe, average contract price. Franco-border.Source: calculated on the basis of the data of the London Metal Exchange (London, the UK) and the Intercon nental Oil Exchange

(London).


34

includes an aggregate of norms regula ng provision to developing countries of tariff preferences on the part of developed countries. The GSP grants US trade partners the right to supply duty-free a wide range of goods. A year ago, Russia’s 425 trade items enjoyed those preferences.

In the le er of the US President to the Congress, the abolishment of trade privileges for the Russian Federa on is explained by the fact that “in economic terms Russia is developed enough to manage with-out privileges meant for developing countries”. From now on, customs du es will be imposed on export of Russian goods to the US on a common basis.

On October 20, 2014, the US Department of Commerce announced termina on of the agreement on supply of hot-rolled steel ar cles from Russia.

It is to be reminded that on July 12, 1999 Russia had to sign with the US the Agreement on Trade in Some Types of Steel Products from the Russian Federa on approved by Resolu on No.1261 of November 14, 1999 of the Government of the Russian Federa on. According to the above agreement, issuing of export licenses was carried out by the Ministry of Economic Development of the Russian Federa on within the export limits determined by the US Department of Commerce.

Simultaneously, the Agreement on Suspension of An -Dumping Inves ga on in Respect of Some Types of Hot-Roll Flat Carbon Steel Products from the Russian Federa on was concluded. The agreement permi ed Russian steel companies to avoid high an -dumping du es on hot-rolled steel. Instead of du es,

the US imposed then a quota and the lower limit of prices.

Earlier this year, steel-making companies Nucor Corp, U.S. Steel Corp, ArcelorMi al USA LLC and other complained to the US Department of Commerce that the 1999 agreement on limita on of trade in steel did not control supplies from Russia at an -dumping pri-ces; as a result, in the fi rst six months of 2014 sheet products export to the US increased 15 mes over as compared to the respec ve period of 2013.

By its le er, the US Department of Commerce no fi ed Russia about termina on of the Agreement in 60 days and informed that “a er termina on of the Agreement provisions of the US Law on An -Dumping Duty would be applied”. As a result, an an -dumping duty of 73.59% will be introduced in respect of Severstal, a Russian com-pany, while in respect of the Magnitogorsky Integrated Iron-and-Steel Works and the Novolipetsk Integrated Iron-and-Steel Works, a duty of up to 184.56%.

The idea of termina on of the Agreement on Suspension of An dumping Inves ga ons is com-pletely within the logic of toughening of the US posi- on on Russia a er growth in tensions between the

two countries over the situa on in Ukraine; as a re-sult of the above the US has already cancelled trade privileges for Russia.

In January–August 2014, the share of the US in the foreign trade volume of the Russian Federa on increased to 3.8% against 3.2% in January–August 2013. It happened due to a 29.4% growth in Russian import from the US and a 0.8% growth in Russian ex-port to the US.

Table 2THE IMPORT OF FOOD PRODUCTS TO THE RF FROM FAR ABROAD COUNTRIES IN 2014

% OF THE RESPECTIVE PERIOD OF 2013January February March April May June July August September

Food products and primary products for produc on thereof 103.3 100.9 102.4 93.0 99.8 99.6 100.3 92.5 92,4

including:Meat and by-products 81.2 70.2 67.7 60.3 70.5 83.2 102.3 88.9 75,6including: beef 46.7 81.2 82.3 73.5 69.6 91.3 105.8 146.9 119,1pork 123.2 65.9 62.5 46.5 64.0 70.0 119.9 55.4 42,0poultry meat 65.6 97.1 70.3 81.7 129.3 141.0 99.4 61.1 46,5Fish and water invertebrates 104.8 106.9 100.5 92.2 106.6 93.0 110.3 69.9 87,4including: frozen fi sh 96.2 107.8 116.1 92.2 103.5 95.4 125.0 95.8 108,4Fish fi llet 103.1 131.0 87.4 105.2 115.8 67.2 112.9 83.9 93,6Dairy products 121.9 140.9 128.3 117.0 114.5 96.4 95.6 42.8 24,8Vegetables 102.6 113.3 128.0 111.1 118.3 132.9 125.4 56.0 48,5Fruits and nuts 90.1 86.8 90.5 91.1 92.8 98.2 95.0 89.1 88,9

Source: The Federal Customs Service of the Russian Federa on.

THE CONSEQUENCES OF THE IMPOSITION OF RESTRICTIONS

35

In 2014, the RF Government imposed a number of restric ons on pork imports from some foreign coun-tries into the territory of the Russian Federa on. The fi rst shot in the current ‘Pork War’ was fi red by Russia in late January when she introduced an embargo on live pig, pork and pork product imports from EU coun-tries in response to fi ndings of African swine fever vi-rus (ASFV)1 in Lithuania and Poland. This measure was followed by RF Government Decree No 778 of 7 August 2014, whereby a ban for a period of one year was im-posed on imports into Russia of some agricultural food products origina ng from the USA, the EU, Canada, Australia and Norway. The ban was the government’s response to the sanc ons previously slammed on the Russian Federa on by a number of countries. The list of banned agricultural products, raw materials and foodstuff s includes the most commonly consumed kinds of meat – pork, beef and poultry.

The upshot of the restric ons was a drama c shrink-age of imports. According to data released by Russia’s Federal Customs Service (FTS), over the fi rst 8 months of 2014 the volume of meat and semi-processed meat products imported into the Russian Federa on dropped on the same period of last year by 30.3% – to 925.2 thousand t2. Within the meat product spectrum, the dee pest fall was demonstrated by pork imports – by 35.3%, while the decline in poultry and beef imports was less drama c – by 16.3% and 9.2% respec vely.

Although over the period from 2011 through 2013 the share of domes cally produced pork in total do-mes c consump on of this type of meat increased from 66% to 74%3, imports con nued to play a very

1 The causa ve agent of African swine fever (ASF).2 Less the data on trade with the Republic of Belarus and the Republic of Kazakhstan.3 Based on data published by the Na onal Union of Swine Breeders (NUPB).

THE CONSEQUENCES OF THE IMPOSITION OF RESTRICTIONS ON PORK IMPORTS IN 2014 AND THE IMPORT SUBSTITUTION PROSPECTS FOR RUSSIA’S DOMESTIC PIG FARMING SECTORN.Karlova

signifi cant role on the Russian market. The main sup-pliers of pork in recent years have been those coun-tries that are now subject to the bans introduced in 2014. Thus, in 2013, they supplied to Russia 71% of all imported pork: the EU – 57.2%, Canada – 12.8%, and the USA – 0.9%4.

The imposi on of bans on pork imports dras cally altered the structure of imports and gave rise to tem-porary problems in the logis cs of import supplies. A er supplies from the EU had been discon nued in early 2014, 40% of pork imported into Russia in the fi rst half year was shipped from Canada5. And a er the issuance of RF Government Decree No 778 of 7 August 2014, Brazil became the main supplier of pork to the RF. From August onwards, the list of Brazilian companies cer fi ed by the RF Federal Service for Veterinary and Phytosanitary Surveillance (Rosselkhoznadzor) to be pork exporters to Russia has been extended. Besides, several Chinese companies have been allowed to sup-ply pork into the Russian market. In October, for the fi rst me in a decade, China began to supply pork to Russia – which previously had been banned for sani-tary reasons.

Supplies from Brazil and China can only in part compensate for the exis ng meat defi cit on the mar-ket, as they cannot fully replace the imports from the presently banned countries. Besides, in view of the changed geographical structure of imports, some me had elapsed before new contracts could be concluded with importers, and so in the fi rst few months a er the introduc on of bans there was a gap in raw meat supplies. This was the major factor that infl uenced the price movement on the market.

4 Calcula ons based on data released by the RF Federal Customs Service (FTS).5 Based on data published by the Na onal Union of Swine Breeders (NUPB).

The short-term consequences of the bans imposed in 2014 on pork imports into Russia from the countries that used to be major suppliers of meat to this country are as follows: an altered geography of import supplies, rising prices on the pork market and related markets, and plumme ng consumer demand for meat and meat products. At the same me, the medium-term perspec ve off ers some favorable opportuni es for turning the domes c pig farming sector into the main source of import subs tu on. The present course towards boos ng import subs tu- on is fraught with the risk of overinvestment into that sector with the resul ng market oversatura on, while the

rate of return on investment in the sector is too low to ensure loan repayment.


36

A er the rapid downfall of prices that resulted from Russia’s accession to the WTO, and their subsequent par al recovery in response to the introduc on of government measures designed to support the pig farming sector, by early 2014 the average purchasing price for pork (in terms of live weight) had been at the level of 68.9 Rb/kg, and in terms of dressed weight – 111.4 Rb/kg (Belgorod Oblast), both indices being be-low their average 2012 level (Fig. 1). The restric ons on pork imports imposed in January 2014 began to push the prices upwards, and so by April they had already climbed back to their level observed prior to Russia’s accession to the WTO. The imposi on of fur-ther restric ons in August 2014, when the prices were already suffi ciently high, was another yet factor con-tribu ng to their upward movement, and so the aver-age price of pork in terms of live weight in mid-Octo-ber was recorded at the level of 116.1 Rb/kg, and in terms of dressed weight – 187.6 Rb/kg. Thus, the total growth of purchasing prices for pork since the year’s beginning amounted to more than 65%.

The growth of prices in the pork market is caused not only by the recently emerged defi cit of raw meat, but also by the shi in supplies from more highly com-pe ve importers towards those with a lower com-pe ve poten al. Prices for Chinese pork are among the highest in the world market – about 3.3 USD/kg. The interna onal prices of their products off ered by Russia’s former suppliers of pork are defi nitely lower: in Canada – 1.8 USD/kg, in the USA and the EU – ap-proximately 2.2 USD/kg1.

The defi cit of raw meat products on the pork mar-ket triggered price growth on the related markets. The eff ects of restric ons on imports could also be felt by meat-processing combines, which use imported fro-zen meat products as their raw material. Pork fat – the main component in sausage produc on – became more expensive. So the meat processing companies had to switch over, in part, to a cheaper raw material (poultry), and to replace imported pork fat by beef fat. According to data released by Rosstat, since the year’s beginning Russia’s average poultry producer price in-dex gained 32.6%, rising from 74.2 Rb/kg to 98.4 Rb/kg.

The rising prices for pork and pork products will also have a nega ve eff ect on consumer demand. In 2013, food accounted for 37.08% of the popula on’s consumer expenditures2. The highest share in the structure of foodstuff s was taken up by meat pro-ducts (9.25%). the growth in prices for these products will push up the consumer basket’s value. Against the

1 As of early September 2014. Based on data released by the Federal State Budget-funded Ins tu on ‘Specialized Record-keeping Center in the Agroindustrial Complex’.2 Data released by Rosstat.

backdrop of plumme ng eff ec ve consumer demand, this process will result in a shrinkage of the demand for meat and meat product, or consumer switchover to cheaper products of lower quality.

In early October 2014, prices on the pork market began to decline (Fig. 1), their downward movement being caused by the eff ects of several factors. First, there is the shrinking demand for the products of the pig farming sector. In response to the weakening eff ec- ve demand, the popula on is consuming less meat

and meat products, while some of the meat processing companies have switched over to poultry. Secondly, pork supply on the market is currently on the rise. Q4 is tradi onally marked by a seasonal increase in pig slaughter in farmer households followed by a surge of pork products onto the market. Besides, the market is replenished by addi onal meat supplies from Brazil and China. In view of the rising supply coupled with shrinking consump on, the moderately downward trend will be displayed by pork prices un l December, when it is going to change direc on in expecta on of New Year’s fes vi es.

Another factor capable of playing down the market prices of pork can be the necessary redistribu on of the meat quotas. As reported by the Na onal Union of Swine Breeders, as of mid-August 2014, only 47% of the pork quotas, 52% of the beef quotas, and 46% of the poultry quotas was actually realized. If towards the year’s end the quotas are not bought out, and are redistributed, the result will be a surge of raw meat supplies on the market, and consequently a decline in the level of prices.

A er the introduc on of sanc ons restric ng the volume of food imports, the RF Government’s main goal has become an accelerated rate of import sub-s tu on. Over the period from 2005 through 2013, the volume of industrial3 pork produc on increased by more than 4.8 mes, amoun ng in 2014 to 2041 thousand t (Fig. 2). The import subs tu on process in

3 Produc on by agricultural companies and farmer households.

40

90

140

190

240

20.0

1.20

12

20.0

3.20

12

20.0

5.20

12

20.0

7.20

12

20.0

9.20

12

20.1

1.20

12

20.0

1.20

13

20.0

3.20

13

20.0

5.20

13

20.0

7.20

13

20.0

9.20

13

20.1

1.20

13

20.0

1.20

14

20.0

3.20

14

20.0

5.20

14

20.0

7.20

14

20.0

9.20

14

pork, live weight, Rb/kg (Belgorod Oblast)

pork, dressed weight, Rb/kg (Belgorod Oblast)

Source: Ins tute for Agricultural Market Studies (IKAR). Fig. 1. The Movement of Purchasing Prices

for Pork (Rb/kg, VAT including, Belgorod Oblast)

THE CONSEQUENCES OF THE IMPOSITION OF RESTRICTIONS

37

Russia’s pig farming sector was launched in 2013, while previously, in 2006–2012, the rate of domes c produc- on growth could only match the posi ve movement

of the rate of pork consump on.Russia’s domes c pork produc on was boosted

by the ac vity of agricultural companies and farmer households. Thus, the share of industrial produc on in total produc on от increased from 28% to 72%. Over that period, the volume of pork produc on by private households dropped by 28.2% (to 790 thousand t) as a result of the recent outbreaks of African swine fe-ver and the low compe ve capacity of small private farms by comparison with modern industrial pig farm-ing complexes.

Over the period 2015–2017, the RF Government envisages to allocate some addi onal funding to ag-ricultural budget items in order to implement the import subs tu on program in the agro-industrial complex (AIC). As es mated by the Na onal Union of Swine Breeders, Russia’s pig farming sector indeed has a poten al for boos ng the domes c produc on volume at the expense of big pig farming companies, many of which have already made public their plans of construc ng new pig farming complex (Table 1). The Na onal Union of Swine Breeders predicts that the top 20 pork producers will be able to increase their produc on volume by 2.4 mes over the period 2013–2020. As a result, the total pork produc on vo-lume in this sector will increase from 2,528 thousand t to 4,243 thousand t (in terms of live weight). The share of the top 20 companies in Russia’s total pork produc on volume will expand to 76% (vs. 52.7% in

2012). Thus, the sector will con nue the process of its consolida on.

As es mated by the Na onal Union of Swine Breeders, in 2014–2020 the pig farming sector, in order to successfully implement the accelerated import sub-s tu on program, will need addi onal investment and support in a total amount of approximately Rb 270bn, of which approximately Rb 200bn will be invested in order to ensure produc on growth (by crea ng gene- c selec on centers, slaughter and dressing sta ons,

feed compounders), and approximately Rb 70bn will be used as subsidies to cover loans granted from the federal and regional budgets to boost produc on. For

420 542810 932 1090

1297 14241656

2041

2833

4246

50

5659

65

72

20

30

40

50

60

70

0

500

1 000

1 500

2 000

2005 2006 2007 2008 2009 2010 2011 2012 2013

%

thou

sand

t

Pork, dressed weight Share of industrial production, %

Source: Na onal Union of Swine Breeders (NUPB) ‘On the Necessity of and Prospects for Accelerated Import Subs tu on on the Pork Market in the Russian Federa on’. Report at the con-ference held within the framework of World Food Moscow, 16 September 2014.

Fi g. 2. The Movement of the Industrial Pork Produc on Index in Russia (in terms of dressed weight)

Table 1PLANNED INVESTMENT PROJECTS BY RUSSIA’S BIGGEST PORK PRODUCERS

Holding companyRegions where project is to be implemented

Available pork pro-duc on capaci es

in 2014-2015 (thou-sand t, live weight)

Produc on growth in 2017-2020 (thousand t, live weight)

Investment, total

(bn Rb)

Planned pork pro-duc on capaci es in 2020 (thousand

t, live weight)Agribusiness Holding Company MIRATORG Kursk Oblast 360 444 75.0 804

RUSAGRO Group Tambov Oblast, Primorsky Krai 200 259 40.5 459

CHERKIZOVO Group Lipetsk Oblast 180 135 13.5 315AgroPromKomplektatsiya Group

Kursk Oblast, Tver Oblast 87 75 15.0 162

SibAgroGroup

Krasnoyarsk Krai, Republic of Burya a,

Tyumen Oblast, Tomsk Oblast

79 73 14.9 152

Agroeko Group Voronezh Oblast, Tula Oblast 70 110 27,0 180

OJSC Kambekon Republic of Tatarstan 50 50 7.4 100TOTAL 1,026 1,146 193.3 2,172

Source: Na onal Union of Swine Breeders (NUPB) ‘On the Necessity of and Prospects for Accelerated Import Subs tu on on the Pork Market in the Russian Federa on’. Report at the conference held in the framework of World Food Moscow, 16 September 2014.


38

reference: over the period 2006–2011, in the frame-work of government programs (Na onal Agroindustrial Complex Development Project and the 2008–2012 Government Program), more than Rb 250bn was in-vested in the pig farming sector (of which Rb 50bn was covered by investor funds, and Rb 200bn – by subsi-dized bank loans), and so the pork produc on volume shot up more than threefold in 5 years.

As demonstrated above, the declared amount of in-vestment by 7 biggest companies (Table 1) will alone ensure pork produc on growth in the amount of 1.1m t in terms of live weight, or approximately 0.8 t in terms of dressed weight. In recent years, the volume

of imports of pork and live pigs in terms of dressed weight has never exceeded 0.8m t, and including pork by-products and pig fat – 1.2m t1. In this connec on there may arise the risk of overinvestment in this sec-tor, with the possibility of market oversatura on due to the increased domes c produc on volume, which in its turn will push down prices and the rate of return on investment in the sector, making it too low to en-sure proper loan repayment.

1 Based on data released by the Na onal Union of Swine Breeders (NUPB); data on trade with the Custom Union’s member states is included.

THE IMPACT OF POLITICALY MOTIVATED TRADE SANCTIONS

39

THE IMPACT OF POLITICALY MOTIVATED TRADE SANCTIONSON RUSSIA’S FOREIGN TRADE SECTORA.Pakhomov

Taken together, these circumstances have given rise to a spectrum of nega ve synergic eff ects that have af-fected, among other things, the volume of Russia’s na- onal exports, their sectoral structure and geographi-

cal distribu on, as well as the results of government support rendered to exports of products other than raw materials.

In this connec on, Russia’s foreign trade sector is going to func on under en rely new condi ons, and so the newly emerging external challenges and inter-nal limita on will have to be seriously taken into con-sidera on during the implementa on of the RF go-vernment’s plans in the fi eld of export policy1, with a view towards their inevitable adjustment at some later date.

The government promises support to domes c exporters when they enter global markets, includ-ing protec on of their interests through the mecha-nisms available in the framework of the World Trade Organiza on (WTO). However, the developments ob-served in recent months in Russia’s foreign trade sec-tor have been quite controversial. Thus, it has been suggested that certain measures should be taken in order to implement the policy of de-off shoriza on, which may have very drama c consequences for do-mes c exports. The business community fears that the adop on of the proposed dra law (designed to toughen the rules for off shore companies) in its cur-rent wording may disrupt export supplies, including exports of technologies.

It should be emphasized that one of the main rea-sons for Russian companies to operate in off shore zones has been their desire to lower the possible risks for creditors who par cipate in the funding and imple-menta on of large-scale export contracts. However, problems may arise not only with regard to newly in-troduced legisla on, but also as a result of implemen-ta on of certain law enforcement prac ces in the fu-ture.

1 Government Program ‘Foreign Trade Development’; the Agency for Strategic Ini a ve’s (ASI) Roadmap ‘Support for Access to Foreign Markets and Export’, etc.

The specifi c situa on at the current stage of development in the sphere of Russia’s foreign trade (including ex-ports) has been shaped by the infl uences of the following three key factors: low ac vity on world markets due to the con nuing uncertainty in the global economy; stagna on in Russia’s na onal economy and its major sectors; and the introduc on of poli cal sanc ons and restric ons in the sphere of trade and economic exchange.

Another natural growth-restric ng factor to be taken into considera on is the shrinking export po-ten al of the Russian Federa on, coupled with the de-grada on of its structure. Thus, for example, according to data released by Russia’s Federal Customs Service (FTS), exports of goods from Russia in 2013 increased by only 0.3%, while exports to the CIS member coun-tries shrank by more than 7%. The share of energy car-rier supplies amounted to 74.5% of Russia’s aggregate exports, and by the end of the fi rst half year of 2014 it had already increased to 75.5%. The share of the so-called ‘machine and technologies’ exports in total exports amounts to only 5.4%, while the products sup-plied by the defense-industrial complex (DIC) account for more than 50% of that amount.

As a result, over the fi rst eight months of 2014, the growth rate of Russia’s exports dwindled to almost zero (resul ng in a hardly no ceable 0.6% growth on the same period of last year), while exports to the EU – Russia’s principal sales market – shrank by 1.5%, and exports to some of Russia’s tradi onal partners in trade – by 35–40%. Exports to the CIS dropped by 4.5%, and specifi cally exports to Ukraine – by 1.5%2.

The confl ict with Ukraine is bound to drama cally bring down the scale of Russia’s export to that coun-try (which in 2012 rated fi h in importance among Russia’s markets for exports) – including not only natural gas supplies, but also the supplies of a broad range of other commodity items. This trend is being sustained by the increasing risks associated with any such deals, as well as the possibility of restric ons that Ukraine may impose in the future.

Such a trend can hardly be compensated for by increased exports to other countries across the post-Soviet space (regarded as sales markets comparable in scale to Ukraine), in view of the newly emerged and palpably growing uncertainty in the poli cal and eco-

2 Vneshniaia torgovlia Rossiiskoi Federatsii po osnovnym stra-nam i gruppam stran v ianvare – avguste 2014 [Foreign Trade of the Russian Federa on, by Major Country and Country Group, in January–August 2014]. Federal Customs Service (FTS), 8 October 2014.


40

nomic situa on within the framework of the CIS. Given the current broader geopoli cal environment, it is also unlikely and highly improbable that exports to the de-veloped countries may be increased.

Besides, stagna on in the na onal economy, and especially in the industrial sector, results in shrinkage of export-oriented industries, and fi rst of all those un-related to the produc on of raw materials. Latest ex-pert’s es ma ons, and even offi cial forecasts, directly point to the possibility of further decline in the value of exports – among other things, because of the rapi-dly falling oil prices.

Moreover, the successful implementa on of go-vernment programs for exports support will depend crucially on alloca on of substan al budget resources, needed primarily in order to boost fi nancial support measures designed to promote Russia’s non-raw ma-terial exports (through Vneshekonombank and its af-fi lia ons). However, in the current situa on of budget constraints such a prospect appears to be unlikely even in the medium term.

There is li le hope that instruments applicable within the framework of the WTO can actually be used in order to protect and promote the interests of Russia’s domes c businesses (at least in the medium term), because – as demonstrated by our unhappy ex-periences of recent years – one must fi rst learn how to apply these instruments on a professional level. Moreover, it seems that the RF Government no longer believes in exports being the driving force of develop-ment; the main source of hope at present is the possi-bility of budget funding, as well as investment and cre-dits – including foreign borrowings; these are viewed as growth boosters, but in view of the toughening sanc ons such sources are becoming unavailable.

Success of the implementa on of plans aimed at gaining access on world markets and suppor ng ex-ports has become far less certain since the spring of 2014, when nearly all the developed countries launched a campaign of step-by-step interna onal sanc ons against Russia. This campaign has been joined by approximately 40 countries led by mem-bers in the Organiza on for Economic Co-opera on and Development (OECD). Besides, some countries (primarily the states belonging to the ‘Anglo-Saxon bloc’) have introduced some addi onal sanc ons on a na onal level. On the whole, these countries and interna onal groupings (the EU, the European Free Trade Associa on (EFTA), the USA, Canada, Australia, etc.) account for approximately two thirds of Russia’s commodity turnover and exports as well as for a large share of services and technologies imported by Russia. Moreover, they also represent Russia’s major source of foreign direct investment (FDI).

It should be emphasized that so far we could fi nd few in-depth reviews of the theore c aspects of eco-nomic sanc ons in literature on the theory of econo-mics1. Therefore, many Russian and foreign experts base their analysis of the interna onal sanc ons against Russia and their possible consequences on the similari es between the current situa on and the de-velopments in Iran and other countries over the past 8–10 years, which we believe to be a fundamentally erroneous approach.

In view of the depth and scale of the current geo-poli cal confl ict, it must be compared with the policy of Western countries towards the USSR in the 1980s in response to the Soviet military interven on in Afghanistan in December 1979. As early as January 1980, the USA and her allies launched all-embracing blanket sanc ons against the Soviet Union, including the boyco of the 1980 Olympic Games in Moscow. Coordinated measures in the sphere of trade and fi -nance were introduced at once and involved an em-bargo on the supplies of technologies and other items of cri cal importance for the USSR (including imports of high-strength large-diameter pipes for natural gas pipelines, and even such trivial products as cereals), restric ons on the key items of Soviet exports, a ban on lending and off ering credit to the Soviet Union, and so on. These measures delivered a heavy blow to the poorly balanced administra ve-command economy of the USSR, which was based on central planning.

Besides, without embarking on a discussion of con-spiracy theories, one can simply point to the fact that, over the period 1985–1986, Saudi Arabia tripled its oil output. This pushed down prices on the world oil market from $ 30 to $ 12 per barrel, which exerted a strong nega ve impact on the na onal economy of the USSR, with its very heavy reliance on exports of oil and foreign credits2. During the period of perestroika the afore-said sanc ons were gradually li ed, but these posi ve developments came too late to signifi cantly improve the situa on in the USSR economy chronically plagued with serious systemic problems.

It is noteworthy that the Soviet Union got observer status in the General Agreement on Tariff s and Trade (GATT) only as late as 1990 (a er a decade of fruitless nego a ons on the issue), thus drawing a line under the long saga of the ‘Afghanistan sanc ons’. Judging

1 See, e.g., Economic Sanc ons Reconsidered, 3rd Edi on by Gary Hu auer, Jeff rey Scho , Kimberly Ellio and Barbara Oegg. Peterson Ins tute for Interna onal Economics, Wash., 2009, 248 р.; Pape R. Why Economic Sanc ons S ll Do Not Work, Interna onal Security, Vol. 23, Issue 1, Harvard, Summer 1998, pp. 66–77.2 For further detail on this issue, see Gaidar Ye. T. Collapse of an Empire: Lessons for Modern Russia. 2nd ed., revised. – M.: Rossiiskaia poli cheskaia entsyklopedia [Russian Poli cal Encyclopedia] (ROSSPEN), 2006. – 448 p.


41

from the past, it can be confi dently assumed that to-day’ Russia has found herself in a posi on of de facto interna onal isola on, which will probably last for years. The USA and the EU treat the Crimea’s acces-sion to the Russian Federa on as Russia’s blatant an-nexa on of an integral part of the territory of Ukraine. It should be said that this stance is defi nitely fraught with grave consequences for Russia1.

Even if some of the restric ons are eventually li ed, li le will be changed in the long run. In this connec on it should be borne in mind that both in the EU countries and the USA the legal framework governing interna- onal rela ons is constructed in such a way that sanc- ons can be introduced promptly, without much delay,

if considera on is given to the poli cal resonance of a given event. However, these measures will not be easy to abolish due to the infl uence of various involved par- es who have vested interests in the ma er.

For example, this was the case with the notorious Jackson-Vanik Amendment (1974), which was at long last abolished by the USA in 2012 for the sole reason of Russia’s accession to the WTO (to comply with the so-called requirement of most favored na on status in trade), only to be replaced by another discriminatory bill – the Magnitsky Act.

It must be understood that interna onal economic rela ons are complex dynamic systems, which nor-mally operate in condi ons of equilibrium. In case of any disrup on of this equilibrium, due to the global character and mutual dependence of all the poli cal and economic processes involved in it, it can only be restored over a lengthy period of me, with a lot of eff ort. So, the combina on of both direct and implicit sanc ons can be expected to produce the following nega ve eff ects on Russia’s exports sector in the short- and medium-term perspec ve:

• the introduc on of sanc ons on the interna o-nal and na onal levels (importantly, they do not contradict the established norms of the WTO) against the Russian Federa on, its legal en es and physical persons will generally downgrade the image of Russian exporters and make more diffi cult their opera on in complicate on the ex-ternal markets of some countries and regions;

• the suspension of the major forms of offi cial contacts between the developed countries and Russia on the intergovernmental level in the sphere of trade and economic coopera on pulls down the quality of governance, monitor-ing and planning across the en re network of

1 For example, the USA never recognized the accession of the Bal c republics to the USSR in 1940. The US standpoint on that issue remained unchanged for half a century, un l the Bal c coun-tries regained their independence in 1991.

foreign trade rela ons between domes c and foreign partners in the public and private sec-tors conducted in bi- and mul -lateral formats2;

• the selec ve withdrawal from coopera on with Russia in the framework of NATO, NASA, etc. does not aff ect the foreign partners’ key inter-ests, but restricts their Russian counterparts in their access to the most a rac ve fi elds (fund-ing for joint programs, supplies of technologies, access to informa on, exchange of human re-sources, etc.);

• the downgrading of the sovereign (credit) ra ng of the Russian Federa on3 will make it more diffi -cult or more expensive for some Russian compa-nies and banks to a ract new foreign loans and to apply for debt restructuring (re-credi ng)4, in-cluding the requests for loans to fund the deve-lopment of exports; the primary targets here are state-owned companies – the leaders in the ex-ports of raw materials and industrial products. In eff ect, the most destruc ve blow to the Russian economy has been the ban on off ering medium- and long-term credits to Russian state banks and state-owned companies, which also includes the sphere of export contracts;

• the freezing of joint projects with the par cipa- on of foreign capital (those that are currently

being implemented and those that are planned for the future) will reduce the infl ow into this country not only of FDI, but also of related state-of-the-art technologies and best manage-rial prac ces, with the inevitable nega ve im-pact on the prospects for developing the most promising sectors of the economy, including exports.

2 As early as March 2014, many government agencies of the developed countries refused to hold mee ngs of the correspond-ing Intergovernmental Commissions on science & technology and economy & trade coopera on with Russia, as well as to par cipate in other offi cial events in the framework of their Intergovernmental interac on with the Russian Federa on.3 A er the sanc ons have been declared, the top three interna- onal ra ng agencies (Moody’s, Fitch, S&P) promptly revised their

sovereign ra ng for Russia and the credit ra ngs for the companies and banks subject for restric ons, downgrading them from ‘stable’ to ‘nega ve’, thus automa cally pushing down the ra ngs for all Russian legal en es of the same class. 4 As of early 2014, foreign debt of Russia’s corporate sector amounted to $ 653bn, that of the public sector – to $ 79bn. Over the period from March through December 2014, Russian compa-nies will have to redeem their debt in the amount of $ 67bn, and banks – their debt in the amount of $ 36bn. Biznes-Zhurnal [The Business Journal], 3 April 2014. The RF Central Bank believes that Russian banks and companies will have to pay a total of $ 134bn by the end of 2015 (in December 2014 alone, the colossal sum of $ 32bn will have to be redeemed). Finansovaia gazeta [The Financial Newspaper], 23 October 2014.


42

In this connec on it should be remembered that the law-abiding businesses in the developed countries, in spite of their explicit protests, will generally follow in the wake of the poli cal course taken by their na onal governments instead of demonstra ng independence in the commercial sphere. The hopes of Russian com-panies that their Western partners would be able to fi nd ways to bypass the sanc ons are proving to be un-realis c, because the la er do not want to take risks. Foreign suppliers and economic operators in this case are faced with some real dangers, and therefore their reac on is quite understandable. Thus, last summer, BNP Paribas had to pay nearly $ 9bn in its se lement over viola on of sanc ons imposed against Sudan, Iran and Cuba. In late summer, a similar punishment was levied against Germany’s Commerzbank – the amount of fi ne may amount to no less than $ 650m. In such a situa on, it will be simpler and cheaper for foreign companies and banks to weigh anchor and leave the Russian market for good;

• the refusal of the leading developed countries and groups of countries to further discuss with their Russian partners the prospects of coopera- on agreements in key areas of trade and invest-

ment policies seriously undermines the possi-bili es for developing any new forms of interac- on, including in the sphere of Russia exports of

goods, services, technologies, and FDI.Thus, in par cular, in early March 2014 the EU re-

fused to carry on the nego a ons with Russia concern-ing the New Basic Agreement on the Simplifi ca on of Visa Formali es; the USA discon nued nego a ons on the dra trade and investment agreement; Japan can-celled the conclusion of a new investment agreement, and so on;

• the discon nua on of coopera on in the fi eld of military technologies between the developed countries and Russia coupled with targeted sanc ons against certain Russian military enter-prises will suppress the scale and diversifi ca on of Russia’s exports of armaments and dual-use technologies in the medium term1.

In addi on, in July 2014 the EU and some other developed countries agreed upon an embargo (i.e., a complete ban) on imports and exports of military equipment and related technologies to and from Russia, which is directly detrimental to Russia’s na o-nal defense-industrial complex and armaments ex-ports as a major source of its development ($15bn in 2013).

1 According to data released by the European Commission (EC), Russia’s exports of weapons to the European Union amount on the average to € 3.2bn евро, and European exports – to approximately € 300m. Kommersant, 20 July 2014.

Firstly, Russian companies are losing their sales mar-kets to the value of several billions USD per annum – which include not only the developed countries, but also their allies, as armaments trade is very highly poli cized. Secondly, although imports of military equipment, spare parts and technologies from the de-veloped countries into Russia is es mated to amount only to a few hundred million USD, these imports are crucial for state-of-the-art arms produc on oriented both to the domes c and foreign markets;

• the interna onal sanc ons per se and the sus-pension of the nego a ons to establish free trade zones (FTZ) between the member states of the European Free Trade Associa on (EFTA) and New Zealand, on the one hand, and the Customs Union, on the other, will defi nitely exer t indirect nega ve eff ects on various aspects of the integra on processes going on within the framework of the Common Economic Space (CES). Some other geopoli cal consequences arising as a result of the confl ict in Ukraine will have adverse eff ects in Russia’s rela ons with the other CIS members2;

• the suspension of Russia’s membership in G-8, the discon nua on of the nego a ons on Russia’s accession to the OECD, and Russia’s dwindling ac vity in interna onal organiza ons will not only be detrimental to this country’s reputa on, but will also exclude it from taking part in discussions and the decision-making process with regard to the most important global problems, thus no ceably undermining its posi on in the world economy.

Taken together, all these consequences will be detrimental to all the par es involved, but it certain-ly seems that Russia will be by far the biggest loser. This will happen due to the fact that the degrees of dependence on trade of Russia and the countries that have ini ated the sanc ons are spread asymmetrically. So, it is necessary to take an objec ve view of the situ-a on and evaluate it without fear and without exces-sive op mism, always remembering that the trade and economic poten als of the par es are indeed incom-parable (Russia’s poten al being 15–20 mes lower than that of her opponents).

On the whole, the aggregate loss resul ng from the sanc ons is es mated by experts to be at the level of 1–1.5% of Russia’s GDP. This sum is derived on the basis of the capital ou low volume, the drop in the capitaliza on of Russian Blue Chips on the MICEX and the London Exchange, the rise in the price of credits,

2 In this context, the signing of agreements with the EU on in-depth and comprehensive associa on not only by Ukraine, but also by Moldova and Georgia appears to be quite logical.


43

and other losses, including the loss of profi ts. At the same me, the aforesaid factors have emerged in con-junc on with the overall worsening on the situa on in Russia’s na onal economy and fi nance, thus giving rise to a nega ve synergic eff ect.

It should be noted that a threat of sanc ons per se adds an element of uncertainty to the economic situ-a on, which some mes works even more eff ec vely than the actual restric ons or embargo. In this connec- on, one should react reasonably to the threats and

refrain from aggrava ng the situa on s ll further by invented ‘asymmetrical’ retaliatory measures. Russia’s economy strongly depends on exports and imports, and so serious restric ons imposed from inside on im-ports and exports of goods and services may promote stagna on and deepen the other problems faced by the na onal economy.

In view of these facts, the declara ons of many Russian poli cians and experts that the sanc ons are not associated with any serious risks and threats sound like empty bravado. The most vivid example of such an approach is the introduc on of retaliatory sanc ons in the form of a complete ban on food imports into Russia from the developed countries. As stated by the RF government, ‘all this is our response to the sanc- ons imposed by the West, who by doing so made

more harm to themselves than to Russia’1. However, one must be fair and admit a certain evolu on in the government’s approaches to economic ma ers, which are becoming more realis c.

One can indeed adapt to sanc ons, and even learn how to bypass them, because new opportuni es for doing business are emerging even in condi ons of im-posed sanc ons. In this case, one interes ng example is the mobiliza on poten al of South Africa’s na onal economy during the period of interna onal embargo.

1 Nezavisimaia gazeta [The Independent Newspaper], 19 Au-gust 2014.

Besides, some preven ve measure can be implement-ed in order to minimize losses.

The Russian government is a emp ng to elaborate measures designed to alleviate the eff ect of sanc ons and reduce losses, but these a empts rely on the con-cept of isola onism – enforced se lements in rubles, the crea on of a na onal payment system, the pur-suance of a tough de-off shoriza on policy, a cutoff of economic es with the developed countries, and the implementa on of the RF government’s new foreign trade strategy which envisages Russia’s turn to the East.

In eff ect, the leaders of this country are pu ng forth a policy of import subs tu on as a na onal idea, with reliance on certain sectors of the na onal economy, which can be explained in part by the ruble’s deprecia- on, the current shortage of loanable funds, and the

eff ects of interna onal sanc ons. The domes c eco-nomic policy is based on the old recipes applied dur-ing the recent crisis, such as recapitaliza on of state banks and fi nancial ins tutes, and the gran ng of pre-feren al loans and government guarantees to ‘system-forming’ companies. This approach also appears to be aimed at large-scale import subs tu on by mobilizing biggest economic players.

Even if the current geopoli cal crisis (the confl ict with Ukraine) should be resolved in the foreseeable future, the eff ects of sanc ons will be such as to re-quire many years of coordinated professional eff orts of the Russian government in order to bring back to normal the situa on in the foreign trade sector, and fi rst of all to ensure smooth development of this coun-try’s export poten al. The main goal in this case will be to minimize losses, iden fy external risks and fi nd the necessary internal reserves, make the economy more open, and – most importantly – take advantage of new opportuni es for implemen ng reform.


44

FORTHCOMING CHANGES IN RUSSIA’S STRATEGIC PLANNING SYSTEM

V.Tsymbal

The very fi rst ar cle of a new Federal Law No. 172 of June 28, 2014 On the Strategic Planning in the Russian Federa on reads that it is not only establishes legal frameworks and powers of (federal, regional and mu-nicipal) government authori es, but also “the proce-dure for their interac on with non-governmental, sci-en fi c and other organiza ons in the fi eld of strategic planning”. Although it remains to be clarifi ed who are the “others”, the law is obviously intended to be all-inclusive.

Not least important is that the new law considers as integral the two principal components of our fu-ture, namely the socio-economic development of the Russian Federa on and its na onal security policy. The need for this very linkage of interests and state ad-ministra on poten als restricted by the law with the society’s interests and poten als was analyzed in the research works of many scien fi c centers.

However, the previously noted harmful spli ng of the state administra on system into the na onal economic block and the so-called “power” or “state-security” block is s ll there, as evidenced by the lack of a principal strategic document which would con-sider these separately planned blocks as interac ng and establish between them a balance of distribu on of common resources of the state and society. Two baseline strategic planning documents have to date been iden fi ed in the Russian Federa on, namely The Na onal Security Strategy of the Russian Federa on (NSS-2020) and the op ons of another strategy called The Concept of Socio-Economic Development of the Russian Federa on.

A strategic planning document named the state program of the Russian Federa on is men oned in Ar cle 3, Clause 31 of the new Federal Law No. 172. The document must contain “the package of planned policies interlinked through tasks, ming, contractors and resources, and state policy instruments ensuring as part of the key public func ons the accomplish-ment of the priori es and goals of the policy regard-ing the socio-economic development and na onal security of the Russian Federa on”. However, analy-

Legisla ve ini a ves on the strategic planning system of the country are s ll remaining in the shadow of the topical military and poli cal developments having impact on the economy and na onal security of the Russian Federa on. In the mean me, further applica on of the “manual mode” in managing the economy is fraught with heavy costs.

sis of other ar cles of the Federal Law shows that the document is actually “excluded” from the strategic planning scope of ac ons, because the law provides no informa on on when and by whom the document is to be developed, by whom, how and when it is to be applied and implemented. If a body of programs (there are about 40 programs in place) is meant here, then who is to be responsible for its integrity and consistency.

In prac ce, the development strategy of the Russian Federa on is now determined primarily by the body of presiden al decrees singed by the President shortly a er the inaugura on, and his subsequent execu ve orders, instruc ons and decrees, rather than strategic planning documents. Given the globally exis ng pub-lic administra on tradi ons, the state strategy must be guided by complying with the Cons tu on of the Russian Federa on and the framework of other docu-ments comprising:

• interna onal law documents and interna onal trea es;

• cons tu onal and federal laws of the Russian Federa on, as well as presiden al decrees on the problems not promptly refl ected in the le-gal framework;

• non-formalized, subject to discussion, prio-ri zed by the na onal consciousness, socio-economic and poli cal living condi ons, cul-tural and scien fi c and technical achievements, as well as the balance of interests, threats, risks and other factors available in this country and the rest of the world.

However, the new law substan vely shows an at-tempt to legalize the prevailing prac ce. In Ar cle 11 thereof the main sources of targe ng in strategic plan-ning at the federal level fi rst of all refer to annual pre-siden al addresses to the Federal Assembly and only secondarily the documents such as socio-economic development strategy, na onal security strategy, as well as the basic principles of state policy, doctrines and other documents on the na onal security of the Russian Federa on.

FORTHCOMING CHANGES IN RUSSIA’S STRATEGIC PLANNING SYSTEM

45

It remains to be clarifi ed how annual (!) presiden al assignments can be matched with long-term (!) stra-tegic provisions of the state policy. This is obvious dis-advantage of the law. Nonetheless, the law has some advantages.

Among the advantages are that the concept of strategic planning covers all of its key components and stages: targe ng, forecas ng, planning and pro-gramming, as well as monitoring and control over the implementa on of strategic planning documents. It would be more reasonable to speak about the need to analyze not only and not just documents, but the extent to which actual objec ves of the development of the society and the state are fulfi lled. Since it would otherwise be impossible to fi nd reasons for possible failures of plans, explain involuntary adjustments, learn any lessons.

A special issue is the civil society engagement in the process of strategic planning. Strategic plans should be understood and approved by the society. However,

no na onals are men oned among the par cipants of strategic planning at the federal, regional, and even municipal levels.

At the same me, public discussion of dra strategic planning documents (Art. 13) hasn’t been neglected. There is a goal “to ensure that informa on of the ge-neral provisions of strategic planning documents is open and available”. However, for some purpose or o ther the new law repeats a cut and dried wording expressing care about “state, commercial, offi cial or any other le-gally protected secret”. Who and on what grounds will include various, not only state but other, secrets into public strategic planning documents? What, in par cu-lar, is the strategic commercial secret, hidden from the ci zens, that is being taken care of by those bureaucrats who wrote this wording in the law? How does this agree with the strategic planning objec ve (Art. 8, c.10) which provides for “the crea on of condi ons to engage indi-viduals and economic en es to par cipate in the pro-cess of strategic planning”?

Table 1 PERIODIZATION OF THE STRATEGIC PLANNING PROCESS

Ar cle and clause of the Federal Law No. 172

Defi ni ons and wording of ac ons in the process of strategic planning Stages, periods and ming

Art. 15 Presiden al address as the basis for defi ning stra-

tegic goals and priori es, as well as presiden- al decrees in furtherance of the address

Annually

Art. 16 Socio-economic development strategy of the Russian Federa on (the basis for mak-ing and upda ng the list of state programs)

Developed once in every six years on the basis of presiden al addresses

Art. 18 Na onal Security Strategy of the Russian Federa on Developed and updated once in every six years on the basis

of presiden al addresses

Art. 19 -21 Strategies: sectoral, inter-industry, special de-velopment of the Russian Federa on, socio-

economic development of macroregions

Developed and updated for a long-term period

Art. 22 Scien fi c and technological forecast Developed and updated once in every six years for a period

of six years and beyond

Art. 23 Strategic Forecast of the Russian Federa on Developed and updated once in every six years for a period

of six years and beyond

Art. 24 Long-term projec on of socio-economic de-velopment of the Russian Federa on

Developed and updated once in every six years for a period

of six years and beyond Art. 25 Long-term budget projec on According to the budget code

Art. 26 Mid-term projec on of socio-economic de-velopment of the Russian Federa on Annually for a mid-run period

Art. 27 Main trends in the ac vity of the Government of the Russian Federa on Annually for six years

Art. 28 State programs of the Russian Federa on ap-proved by the Russian Government

For a period set by the Government of Russia

Art. 29 State arms program approved by the President of Russia For a period set by the President of Russia

Art. 31 Ac on plan for federal execu ve authori es For six years, can be updated


46

The issue of periodiza on of the strategic planning process is worth no ng too. Table 1 shows upper level periodiza on of the process.

However, no frequency has been established for the development of a single coordina ng state program of the Russian Federa on or coordina on of many stand-alone programs. According to the wording of the law, formally individual presiden al addresses to the Federal Assembly will remain the reference genera-tor of the strategic planning framework in the Russian Federa on.

Six-year (!) frequency for all long-term cycles will be the most prominent novelty in the strategic planning framework in the Russian Federa on. Perhaps, the frequency off ers advantages. However, there is obvi-ous disadvantage though. The forecast horizon will be shortened annually within six years. It would be more logical to introduce a “sliding” mode of planning, allow-ing all planning documents (basic development trends, forecasts, programs and plans) to be developed from scratch or annually extended to the required depth, as is the case with budget planning.

Finally, it’s worth no ng the following. The new law considers the two most important

branches of strategic planning – socio-economic de-velopment of the Russian Federa on and na onal security – simultaneously, but without the required interac on. In par cular, the issue of distribu on of limited (human, material, fi nancial and other) resour-ces between these branches (respec ve public admin-istra on bodies) hasn’t received due considera on. Double-purpose works will not be defi ned, which may lead to irra onal spending of funds. Perhaps, the same content should have been embedded into a special coordina ng state program of the Russian Federa on. Otherwise it would be diffi cult to ra onally transfer new knowledge, technologies and component parts, as well as human resources from the “defense” or “power” block of the economy into the na onal eco-nomic block and vice versa. The degree of engaging the civil society to par cipate in strategic planning appears to be low, making it impossible to count on meaningful and wide social assistance of the plans and their successful fulfi llment.

THE DIFFERENCE IN THE BEHAVIOUR OF DOMESTIC AND FOREIGN PRIVATE INVESTORS

47

The role of domes c investors The data of the na onal accoun ng system shows

(Fig. 1) that households is the key generator of exces-sive savings in Russia, which are used to fi nance the development of other economic sectors. In 2012, households accounted for 69.8% (Rb 3,0 trillion) of the total amount (Rb 4,3 trillion) of sources of net lending.

Regre ully, Russia cannot set up a mechanism of their transforma on into long-term investment in the stock market. Most of these resources take the form of rela vely long-term bank deposits or capital ou low as gains in foreign-exchange holdings by individuals. The lack of households’ confi dence in long-term in-vestment in risk-bearing assets is determined by many factors, one of which is poor awareness of the factors which have a material eff ect on the prices of stocks. This can be perfectly seen in comparing the behavior of unitholders in Russian unit investment funds (here-ina er UIFs) and foreign private investors who invest in investment funds specializing in investment in Russian companies (hereina er IFSRCs).

Foreign private investors’ behavioral features Emerging Por olio Fund Research (EPFR), an infor-

ma on resource, has long been publishing its weekly sta s cs of cash fl ows of foreign private investors who invest in IFSRCs established under foreign jurisdic ons. The behavioral features of this group of investors can be summarized as follows. Their behavior is cyclical, upon a strong downtrend/uptrend signal they invest or, conversely, withdraw their funds from IFSRCs within a period of several years; and they keep on un l there is another strong signal making them change the forego-ing behavior. From what we have observed, the signal represents a dras c change in 24-month forecasts of GDP growth rates, above all, in the United States and Russia. Any substan al downgrading of such forecasts is a sign of downtrend in prices of e nergy resources exported by Russia and devalua on of its na onal cur-rency.

IFSRC investors’ behavior resembles a child’s game called the “musical chair”. While the music is ply-

THE DIFFERENCE IN THE BEHAVIOUR OF DOMESTIC AND FOREIGNPRIVATE INVESTORS IN THE RUSSIAN STOCK MARKETA.Abramov

ing investors run around chairs, altogether invest-ing in or withdrawing their money from funds. Their task upon any informa on signal is seat down on a chair at the right me, i.e. change inversely their in-vestment behavior. At the same me, the behavior is based on serious and simple informa on signals. We assume that this is fi rst of all Consensus Economics, an informa on resource which is ac vely used by in-terna onal fi nancial ins tu ons and investment en - es. Understanding that key investment decisions are

based on serious informa on signals is very important for investors, because it makes them feel they can con-trol the situa on in any case, rather than the reverse. This is why such investors don’t get pessimis c even in the case of long periods of exits from the Russian market. They know that such investment is exposed to risks but the rules are clear for them.

IFSRCs saw a con nuous infl ow of investment a er Russia was ranked late in 2004 by major interna onal ra ng agencies (Fig. 2). In May 2006, the trend reversed abruptly and investors began to withdraw their money from special-purpose funds within a period of three years un l April 2009 when the trend reversed again and investment funds began to return back to IFSRCs. Another change took place in May 2011, the begin-

The issues of irra onal behavior of domes c private investors in the Russian stock market come from their poor awareness of the events having a material eff ect on the prices of stocks. This is a major factor that lowers the confi dence of domes c private investors in risk-bearing assets and long-term savings opportuni es.

-6 000 000

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Source: the author’s es mates based on the data provided by the Federal State Sta s cs Service (Rosstat).

Fig. 1. Volumes of net lending (+) and net borrowing (–) in Russia in 1995–2012, millions of rubles


48

ning of a long-las ng period of ou lows from special-purpose funds which is s ll in place. Nine billion U.S. dollars were withdrawn from special-purpose foreign funds in the period of May 2006 to March 2009, and $7,3bn between May 2011 and September 2014.

We will refer to two surveys in order to prove as-sump ons regarding the reasons for the behavior of IFSRC private investors.

Factors that predetermine adverse changes in the behavior of global por olio investors in emerging markets were explained by IMF experts in the Global Financial Stability Report, September 20111. They used the EPFR data regarding the fl ows in special-purpose equity investment funds worldwide, in Asia, La n America, Europe, Middle East and developed economies in the period between January 2005 and May 2011. The survey shows that the infl ows/ou lows were basically infl uenced by the following key factors:

• offi cial forecasts of real GDP growth rates2 (po-si ve);

• vola lity of GDP growth rate forecasts (nega- ve);

• vola lity of the exchange rate of foreign curren-cies (nega ve);

1 IMF. Financial Stability Report. September 2011, pp. 11–18. Available on www.imf.org. 2 GDP growth forecasts and their vola lity were es mated on the basis of the Consensus Economics database.

• stock market vola lity indicator – Vola lity Index (VIX) (nega ve).

Indicators of interest rates and currency regula ons came to be among less important factors.

Our survey – the results of the survey were pub-lished in the Gaidar Ins tute’s Russian Economy Review in 2013 on the basis of the Consensus Economics’ data available for IFSRC private investors in May 2006 – showed that ou lows from IFSRCs since the forego-ing month might have been triggered fi st of all by the informa on about dras c downgrading of consensus forecasts of GDP growth in the U.S. economy in 20073. Similar ou lows from IFSRCs almost repeated when forecasts were changed in May 2011.

Russian UIF unitholders’ behavioral features Over the past decade the behavior of unitholders

of Russian open-end equity UIFs diff ered from that of IFSRCs (Fig. 3). In the period of booming Russian stock market ll August 2007 private investors kept invest-ing in unit equity investment funds. In May 2006, un-like IFSRC foreign private investors, the signal about global growth downtrend had no eff ect whatsoever on Russian UIF investors. It wasn’t un l September 2007 that Russian investors began to withdraw their funds from equity UIFs, when Russian stock indices driven by full-thro le ou lows from foreign IFSRCs began to fall

3 Russian Economy in 2013. Trends and Outlooks. (Issue 35) – M.: Gaidar Ins tute, 2014, pp. 119–124.

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RTS Index growth (left-handaxis)

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Inflows/outflows fromfunds investing in Russia(right-hand axis)

July 2005

April2009

April 2011

April 2006

Source: es mated on the basis of the data provided by IFS IMF, Moscow Stock Exchange and EPFR. Fig. 2. Growth in the RTS Index and crude oil prices, infl ows (ou lows from) to

funds inves ng in Russia (November 2000 – September 2014)


49

while crude oil prices were s ll growing. Furthermore, later, at the very height of the crisis, in September–November 2008 Russian UIF investors were s ll try-ing to play the game of “buying shares while they are cheap”, not realizing yet the severity of the developed fi nancial crisis.

Naturally, showing such an irra onal behavior, Russian UIF unitholders sustained material investment losses which totally undermined their credibility in the Russian stock market. However, the problem was ac-tually the lack of services allowing investors to make reasonable investment decisions. At the same me, private investors’ sha ered confi dence in the domes- c stock market (Fig. 3) shows the onset of non-stop

ou lows from equity UIFs, which are s ll there. While exi ng such UIFs, domes c investors ignored the sig-nal of recovery in the global and Russian economies in March 2009; they s ll keep exi ng. This points to the fact that during the crisis private investors have lost confi dence in equity unit funds, while investors them-selves lost the ability to see any posi ve signals of stock market recovery. Unlike Russian UIF unitholders, foreign IFSRC investors didn’t miss the chance to make money on the recovery growth in the market of shares of Russian issuers through ac ve investment in these

funds in March 2009 ll April 2011. In other words, fo-reign private investors again showed a more systemic and informed approach towards pooled investment in the Russian stock market.

Massive retarge ng of investment strategies from equity UIFs towards bond UIFs was another behav-ioral feature of unitholders of Russian unit invest-ment funds as a result of the 2008 crisis. The lat-ter saw substan al infl ows in the period between March 2009 and February 2014. The curves of post-crisis cumula ve infl ows/ou lows in both equity and bond unit investment funds intersect in the form of a cross (Fig. 3). Such a “unit cross” shows that a sub-stan al part of unitholders’ funds previously invested in equity UIFs were reinvested in bond unit invest-ment funds a er the crisis. Unitholders’ retarge ng towards bond UIFs was interrupted in March 2014 due to the devalua on of these funds’ por olios driven by growth in rates in the domes c market in response to western sanc ons against Russia over the events in Ukraine and because the Bank of Russia li ed the key interest rate.

Furthermore, studies of the so-called sales curve of the units of these funds show the irra onal behavior of Russian equity UIF private investors. According to the

*the diagram shows monthly infl ows (+) / ou lows (-) from unit investment funds and foreign investment funds as calculated on a cumula- ve total; the ini al value for the series as of December 2004 is taken as zero.

Source: www.inves unds.ru with regard to the sales balance data in Russian unit investment funds, EPFR with regard to informa on on infl ows/ou lows in foreign funds specializing in investment in the shares of Russian issuers.

Fig. 3. Compara ve analysis of OUIF unitholders and foreign por olio investors in funds specializing in investment in Russian joint-stock companies in the period of December 2004 to September 2014

(millions of U.S. dollars on a accrual basis: December 2004 = 0 USD)

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Capital inflows/outflows to investment funds investing in Russia (right-hand axis) Equity OUIFs Bond OUIFs


50

model of Berk J. and Green R.1, mutual funds the sales balance is a func on of excess return of such funds in the previous period (hereina er – the sales curve). The curve in the loss zone has a convex form (Fig. 4). The convexity of the sales func on refl ects irra onal be-havior of mutual fund investors, i.e. when funds face growth in losses the investors are not so quick in exit-ing as it could be expected from a ra onal behavior of investors2. At the same me, fl ows are more sensi ve to changes in returns of “young” rather than mature investment funds.

3According to some researchers4, the sales curve’s convexity in the loss zone can be explained by inves-

1 Berk, J. and Green, R. (2004) Mutual fund fl ows and perfor-mance in ra onal markets, Journal of Poli cal Economy 112 No. 6, 1269–1295. 2 The phenomenon of convexity of the curve of dependence of sales balance on mutual funds’ returns is somehow similar to the abnormal behavior in the loss zone of the u lity func on bind-ing returns on investment with their u lity for ra onal investors caused by the human cogni ve ap tude, namely, the fear of loss-es. The foregoing abnormality in the behavior of ra onal investors was discovered by Kahneman and Twersky. 3 More specifi cally, excess returns compared to the Carhart four-factor model.4 See Ippolito R. 1992. Consumer reac on to measures of poor quality: Evidence from the mutual fund industry. Journal of Law & Finance 35, 45–70; Chevalier J., Ellison G. 1997. Risk taking by mu-tual funds as a response to incen ves. Journal of Poli cal Economy, 105, 1167–1200; Sirri E.R., Tufano P. 1998. Costly search and mu-tual funds fl ows. Journal of Finance. 53, 1589–1622; Lynch A., Musto D. How Investors Interpret Past Fund Returns. The Journal

tors’ strong tolerance to mutual funds’ losses, because such funds are quick in announcing the replacement of loss-making por olio managers and investment strategies. Goetzmann W. and Peles N.5 explained this phenomenon by the fact that investors in ineff ec ve investment funds fell into a state of cogni ve disso-nance and overes mated (whitewashed) to a certain extent the performance of such funds, staying more tolerant in making decisions to withdraw their money from such funds. Explaining the convexity phenome-non, Huang J. at al6 tried to off er an integrated model of convexity factors through analysis of investors’ costs of obtaining informa on on mutual funds and their transac on costs.

We will try to assess how this regularity can be seen in average values of quarterly NAV (NAV means the net asset value) and sales balance for all open-end equity unit investment funds in Russia (Fig. 5) in the period beginning 2005 and ending Q2 2014. Although the ob-tained diagram failed to reveal the presence of the sales curve in its classic form, the key ap tude of mutual fund

of Finance. Vol. LVIII, No. . 5, October 2003; Berk, J. and Green, R. 2004. Mutual fund fl ows and performance in ra onal markets, Journal of Poli cal Economy 112 No. 6, 1269–1295. 5 Goetzmann W., Peles N. Cogni ve dissonance and mutual fund investors. The Journal of Finance Research. Vol. XX, No. 2, 145-158, Summer 1997. 6 Huang J., Wei K., Yan H. Par cipa on Costs and the Sensi vity of Fund Flows to Past Performance. The Journal of Finance. Vol. LXII, No. 3, June 2007.

* The diagram shows diff erent curves for investment funds with diff erent life me. Source: Berk, J. and Green, R. (2004) Mutual fund fl ows and performance in ra onal markets, Journal of Poli cal Economy 112 No. 6,

pp. 1269–1295. Fig. 4. An illustra on of convexity of the func on of dependence of sales balance of the current

period (Y axis) on mutual funds’ excess returns3 in the preceding period of me (X axis)


51

investors’ behavior in Russia was proved to be present. The diagram of polynomial func on with a determina- on factor of 0.192 shows that UIFs saw infl ows growing

at faster rates than ROE while the RTS Index grew up, but they slowed down unexpectedly as equity unit funds saw their losses rising. This is indica ve of unitholders’ irra onal behavior. They are too op mis c about fur-ther investment in funds, with growing returns in the stock market, while in the face of rising losses they are too slow in withdrawing their money, for fear of losses. This corresponds to the behavioral fi nance postulates formulated by Kahneman and Twersky.

Investment in Russian companies has always been exposed to risk. The issues of economic growth stag-na on and western sanc ons make more diffi cult to invest. The recovery of investment growth and private investors’ confi dence in this market requires ac ons

aimed at building up a culture of domes c savings based on private persons’ objec ve and comprehen-sive awareness of investment assets opportuni es and risks. The example of foreign investors inves ng in fo-reign IFSRCs shows advantages of systemic investment based on signals and projec ons from stable and me-honored sources of informa on. However, Russian pri-vate investors are exposed to more serious risks in the stock market of domes c issuers, as they are le to themselves in the aggressive environment of informa- on asymmetry and tend to listen to their heart rather

than head in making decisions. This in many respects is the source of moun ng nihilism of individuals when it comes to investment in risk-bearing assets, which has to be overcome before dreaming of any investment growth.

R² = 0,1922

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Equity OUIF Polynominal (Equity OUIF)

Source: the authors’ es mates on the data of sales of the units in UIFs from www.inves unds.ru and equity UIFs’ NAV from www.nlu.ru. Fig. 5. The dependence of quarterly balance of sales of the units at Russian equity ОUIFs on their

returns in the preceding quarter, on the basis of the data on the period of 2005 to Q2 2014


52

MIGRATION PROCESSES IN THE H1 OF 2014L.Karachurina

Migra on Growth Russia’s migra on growth index over the period

of January–July 2014 amounts to 144.1 thousand, thus being approximately 15 pp. below its value for the same period of 20131. Such a decline, in a classi-cal migra on model, would have become an indicator of economic trouble, as migra on fl ows are believed to be highly sensi ve to slightest changes in the eco-nomic situa on – that is why migra on is o en con-sidered to be people’s way of ‘vo ng with their feet’. However, at the moment there is no reason to view Russia’s sta s cs of migra on fl ows as a refl ec on of certain dynamic trends that can be correlated with economic processes. Since 2011, many signifi cant al-tera ons have been introduced in the methodology of keeping sta s cal records of arrivals in and departures from Russia, as well as the migra on growth index. The number of arrivals, which subsequently is used to cal-culate the migra on growth index, from that year on-wards has been incorpora ng all instances of migrants’ registra on at their place of residence and their place of stay for period longer than 9 months. Departures have been now registered automa cally at the end of the permi ed period of registra on (of course, the migrants thus registered may remain in the Russian territory, or they may leave Russia at some date later or earlier than the registra on end date, while at the same me being calculated as ‘an input’ to the migra- on growth index). In 2014, we are faced with a newly

emerging situa on that can be described as a ‘col-lapsed fi nancial pyramid’: the decline in the migra on growth index has largely been caused by a surge in the number of departures from Russia – which, in its turn, occurred due to the previously accrued number of ar-rivals for a period under 2 years (Fig. 1).

In a number of Russian regions this process has brought up some paradoxical results (if we are to con-

1 For the sake of more accurate comparison, the sta s cal data for both 2014 and 2013 also include the sta s cs for the Crimean Federal District.

The migra on processes in Russia over the spring and summer of 2014 were being shaped by the deteriora ng situa on in foreign poli cs (the events in Ukraine) and by the looming threat of stagna on and recession faced by the Russian economy. As the latest data on migra on processes in Russia have not yet been refl ected the of-fi cial sta s cs released by the Federal Migra on Service of Russia (FMS of Russia) and the Russian State Sta s cs Service (Rosstat), our analysis of these processes is based mainly on the statements on this issue recently made by public offi cials in the mass media.

template them from the point of view of common sense. Thus, in 2014, regions like the city of Moscow, the city of St.Petersburg, Krasnodar Krai, Tyumen Oblast and Novosibirsk Oblast demonstrated a mani-fold drop, on 2013, of their net migra on indexes. For the fi rst me over the en re post-Soviet period, the migra on growth index in the city of Moscow dwin-dled to less than one half of that registered in St. Petersburg – in fact, it almost disappeared.

Migra on from UkraineIn 2014, similarly to the situa on observed

20 years ago, Russia has been faced with an infl ow of refugees into its territory. But in contrast to the early 1990s when there had been no legisla ve framework for receiving refugees, now they had several op ons for obtaining an offi cial status – these op ons being available even before the issuance of special educts concerning displaced persons from Ukraine. In ac-cordance with the Federal Law ‘On Refugees’2 there exist two variants of a refugee status: that of refugee proper – obtained through a very intricate applica on

2 Federal Law of 19 February 1993, No 4528 ‘On Refugees’.

0

50

100

150

200

250

300

350

2007 2008 2009 2010 2011 2012 2013 2014

jan–jul, thousand persons

Arrivals in RF Departures from RF MG in RF

Note. MG – migra on growthSource: Sotsial’no-ekonomicheskoe polozhenie Rossii [The

Socioeconomic Situa on in Russia], Rosstat, 2007–2014. Fig. 1. Arrivals, Departures, and Migra on Growth

as Components of Russia’s External Migra on, January – July 2007 – 2014, Thousand Persons

MIGRATION PROCESSES IN THE H1 OF 2014

53

procedure, and that of a temporary refuge. However, the status of a refugee allows one to hope that the State will take care of his or her residence and accom-moda on, while that of a temporary refugeе is only equivalent to a permit for legally staying in the ter-ritory of Russia and ge ng a job there, without any special permits that foreigners must apply for. But, like in most other countries, it is by no means very easy to obtain either of these two statuses. By early 2014 (that is, prior to the onset of the drama c de-velopments in Ukraine), there had been less than one thousand persons with the refugee status in Russia, and approximately three thousand persons with the status of a temporary refuge. Due to the diffi cul- es associated with the legaliza on procedure and

the limita ons associated with the subsequent sta-tus in Russia (for example, the impossibility to cross the border once again, if the refugee should want to return home permanently or for a temporary visit), Ukrainian ci zens, a er the onset of hos li es, began to ac vely apply to Russia’s Federal Migra on Service agencies for other types of foreigner status – fi rst of all for temporary residence permits, permit for resi-dence in Russia, or Russian ci zenship (not coun ng those who have applied for a work permit or patent). By late August 2014, the applicant distribu on by the type of status they have applied for was as follows: 117 thousand Ukrainian ci zens had expressed their desire to obtain a refugee status or applied for a tem-porary refuge (the la er category represen ng the overwhelming majority of 108 thousand persons), 136 thousand people opted for some other form of legaliza on: 75 thousand applied for temporary residence permits, 33 thousand applied for Russian ci zenship, and 21 thousand applied for permits for residence in Russia. Another 7.2 thousand applied for par cipa on in the program of compatriot rese le-ment1.

In late July, during a conference call held by Prime Minister Dmitry Medvedev on issues rela ng to the accommoda on and social integra on of persons in-voluntarily displaced from the territory of Ukraine, a number of stopgap solu ons were put forth by its par- cipants2. These had to do with simplifi ca on of the

procedure for ge ng a temporary refuge status for ci zens of Ukraine: the period of considering an ap-plica on for temporary refuge was to be shortened from three months to three days; besides, temporary

1 Gorodetskaia N. Bezhentsy ne kho at udaliat’sia ot granitsy [Refugees Do Not Want to Go Far from the Border] //Kommersant. 28 August 2014.2 Decree of the RF Government of 22 July 2014, No 690 ‘On Gran ng Temporary Refuge to Ci zens of Ukraine in the Territory of the Russian Federa uon in a Simplifi ed Procedure’.

refuge was now to be granted on a group (or country) basis – that is, the Federal Migra on Service’s offi cials were no longer to be required to scru nize the individ-ual informa on concerning each applicant3. It was to be made suffi cient, for those refugees who wished to properly formalize their stay in the RF, to fi le an appli-ca on with an FMS offi ce, in which they were to state that they had escaped from combat zones in Ukraine. The period of stay in the RF for refugees would be au-toma cally extended to 270 days, while previously ci zens of Ukraine had been allowed to stay in Russia without properly formalized documents for a period of no more than 90 days.

Besides, some addi onal temporary residence quo-tas were granted, backed by the alloca on of substan- al fi nancial and material resources for rese lement

of the displaced persons4. The existence of mul ple ins tu onal corridors

makes it possible for migrants to pick the one that most appropriate for each of them; at the same me, this is also the factor responsible for distor ons in the number of migrants reported in sta s cs. Thus, the to-tal number of arrivals in Russia from Ukraine over the period since 1 January through August 2014 is more than 800 thousand persons, over August this index in-creased by 84 thousand persons; very o en this num-ber is subs tuted by the number of refugees; diff erent government departments off er varying es mates as to how many persons are receiving aid, and so on5.

According to data released by Russia’s Federal Migra on Service, the majority of displaced per-sons are staying in the regions close to Russia’s bor-der with Ukraine – Rostov Oblast, Belgorod Oblast, Krasnodar Krai, and the Crimea, the la er being a very a rac ve des na on for migrants from Ukraine. By late August 2014, according to the RF Ministry for Regional Development, a total of 906 temporary

3 A similar approach to gran ng the status of a refugee and the status of an involuntarily displaced person was prac ced in the early 1990s.4 The money allocated from the RF federal budget alone amounts to Rb 6bn, which is three mes more than the annual bud-get alloca on to the implementa on of the Government Program Compatriots // Domcheva E., Panina T. Dom i Khata [House and Hut]. Rossiiskaia gazeta [The Russian Newspaper]. 23 September 2014. 5 For example, as early as June 2014, Speaker of the Federa on Council Valen na Matvienko said that more than 500 thousand Ukrainian refugees were staying in RF territory. At the same me, head of the Federal Migra on Service Konstan n Romodanovskiy spoke of the arrival of 500 thousand ci zens of Ukraine. For its part, the Offi ce of the United Na ons High Commissioner for Refugees (UNHCR) released the informa on that, as a result of the war, a total of 168 thousand persons escaped from Ukraine to Russia // Kozlov V. Kak Rossiia spravliaetsia s potokom ukrainskikh bezhentsev? [How Is Russia Coping with the Infl ow of Ukrainian Refgugees?] Open Democracy, 11 August 2014.


54

placement points were established in Russia (or 899 – according to the Federal Migra on Service)1, which housed more than 58 thousand displaced persons, while another 298 thousand persons were billeted in the private housing space. However, the overwhelm-ing majority of them chose to stay with their Russian rela ves of friends in the hope of b eing able to return home as soon as the situa on got back to normal, or acquired one of the ‘non-refugee’ statuses in Russia, which make it possible for them to live without re-lying on government aid. In late August, the situa- on of the refugees fully dependent on government

assistance became extremely complicated when the Crimea’s ac ng Prime Minister Sergei Aksyonov declared that, from 21 August onwards, Ukrainian refugees would be en masse transported from the Crimea to ‘small towns in the RF, raion centers at most, where jobs will be found for them’2. The cor-responding Decree of the RF Government3 follows the same line, eff ec vely forbidding the administra- ons of the Crimea, the city of Sevastopol, the city of

Moscow, Moscow Oblast, the city of St. Petersburg, Rostov Oblast and the Chechen Republic to grant the status of a temporary refugee to ci zens of Ukraine4; this policy is aimed at direc ng displaced persons from Ukraine towards the less a rac ve regions of Russia, and within those regions – towards the less a rac ve popula on units. By doing this, however, the government is delivering a serious blow both to the displaced persons, who are thus forced to set-tle in problem-ridden raion centers situated in ‘de-pressed’ Russian regions, and to the local authori es of the relevant municipal forma ons – who even in condi ons of the recently favorable economic situ-a on could not raise suffi cient fi nancial resources to enable them to exist from the systemic crisis of the 1990s, and who are faced with problems on their lo-cal labor markets. Besides, we should remember the experiences of the 1990s, which demonstrate that it were those refugees and displaced persons se ling in bigger ci es who got jobs on their own (the so-called ‘get a gob’ model) and relied largely on their

1 Bezhentsy ne kho at udaliat’sia ot granitsy [Refugees Do Not Want to Go Far from the Border] // Kommersant. 28 August 2014.2 Kozlov V., Tumanov G., Nikiforov V. Materikovaia uchast [The Mainland’s Fate] // Kommersant. 20 August 2014.3 Decree of the RF Government of 22 July 2014, No 691 ‘On Approving the Urgent Procedure for Large-scale Distribu on, Among Subjects of the Russian Federa on, of Those Ci zens of Ukraine and Persons without Ci zenship Who Had Been Permanent Residents in the Territory of Ukraine and Arrived into the Territory of the Russian Federa on’. 4 Under the same Decree of the RF Government, the quotas for another four regions – Leningrad Oblast, Belgorod Oblast, Voronezh Oblast and Kursk Oblast – are reduced no nearly zero (to 0.01% each of the total number of persons being distributed).

own eff orts, and not on government aid, that in the end turned out to be much be er off than those who chose the ‘get more aff ordable housing’ model (ap-plicable in rural areas and small towns) and/or go-vernment aid 5. At the same me, the distribu on of ‘refugee quotas’ across Russian regions points to the existence of a situa on where some regional heads, being faced with workforce shortage and local de-mographic problems, deliberately choose to receive more displaced persons, in excess of the targets origi-nally planned for them by the federal government. In other words, they give priority to strategy (workforce availability) over tac c (diffi cul es in dealing with the new arrivals). Among these, there are Kaluga Oblast, Kaliningrad Oblast, Nizhny Novgorod Oblast, Samara Oblast, Saratov Oblast, Sverdlovsk Oblast, Novosibirsk Oblast, and the Republic of Bashkortostan.

In September and October, the diffi cul es associ-ated with the infl ow of refugees were already less of a problem, as the combat opera ons in the east of Ukraine had become less violent, and there emerged a trend of refugees returning back home.

Labor Migra onThe number of issued work permits over the period

of January – September 2014 remains prac cally un-changed by comparison with the same period of last year, amoun ng to 948.6 thousand. At the same me, the number of work patents issued to physical persons con nues to display a no ceably high growth rate, their total number now approaching 2m. The budget revenues generated by the proceeds from patents have been rising accordingly.

The by-month data almost exactly mirror the trend displayed by the number of issued work permits. At the same me, the number of patents issued over the period of January–April 2014 more than doubled on the same period of last year; from May onwards, growth on last year can s ll be noted, but its rate has become much lower.

Evidently, the situa on observed with regard to la-bor migra on resembles that in the autumn of 2008. Then, the infl ow of foreign workforce signifi cantly in-creased in the fi rst half year, and later on a er the of-fi cial recogni on of the fact of ongoing crisis was fol-lowed by sequestra on of the labor migrant quotas established for the CIS member states and work invita- ons for migrants from the countries that had entered

5 For more detail on this issue, see G. S. Vitkovskaia. Vynuzhdennaia migratsiia v Rossiiu: itogi desia le ia // Migratsionnnaia situatsiia v stranakh SNG. [Involuntary Migra on in Russia: the Outcome of a Decade // The Migra on Situa on in the CIS]. Zh. A. Zaionchkovskaia (Ed.). M.: Complex-Progress, 1999. P. 159–194.

MIGRATION PROCESSES IN THE H1 OF 2014

55

into visa agreements with Russia. So far, no crisis has been declared in Russia, so the factors responsible for quota cuts may be the shrinkage of Russia’s domes- c labor resources (in 2008, this downward trend was

only just becoming visible, its fi rst manifesta ons had been recorded a year earlier, but these were observed in the main in the youngest age group among the able-bodied popula on, whose real employment rate in the last few decades has been low). At present, the declin-ing number of employable popula on is already infl u-encing the general employment trends, as this trend has spread beyond that age group. At the same me,

so far Rosstat has not reported any unemployment growth – the published sta s cs only point to declining real wages; the ac ve migra on from Ukraine supplies labor resources necessary to ‘fi ll up’ the exis ng quo-tas, and Russia feels it to be her special duty to care for this cohort. The forced popula on migra on, just as it did in the 1990s, is transforming itself into labor migra- on. Such a transforma on may bring specifi c benefi ts

to Russia, as Ukrainian workforce shares with Russians a nearly similar ethnic and linguis c background, and their qualifi ca on is generally higher than that of mi-grants from other CIS members.


56

A REVIEW OF RUSSIA’S TAXATION REGULATORY DOCUMENTSADOPTED IN THE PERIOD OF SEPTEMBER OCTOBER 2014

L.Anisimova

1Western economic sanc ons against Russia can hardly be li ed in the short run. The economy can-not advance at outstripping growth rate, the Russian President spoke of, unless the country is appealing for investors. From the economic standpoint, inves-tors consider the imposed sanc ons, high taxes and heavy administra ve pressure mechanism (with heavy penal es) as a type of fi nancial risks they have to as-sume while opera ng on a certain territory. The risk is compensated by higher returns – this is the general rule in a market-driven economy. If Russia today has no extra returns for investors, the same should be cre-ated by forcing down tax and administra ve burdens. Otherwise capital would fl ight, specialists with com-pe ve competences seek to leave this country and sell their competence in other countries where it can be appraised at a market value (drain of brains and young hopefuls), and Russia would face less develop-ment prospects.

The a empts to replace western with eastern money should be supported indeed, because Russia needs investment for the development, but the diff e-rence between the money should be understood. The interests of market manufacturers and free market shouldn’t be iden fi ed with the interests of govern-ment-owned corpora ons (both Russian and foreign ones). Chinese investment in Russia mostly refer to government-owned corpora ons (en es with strong state support). In our previous reviews we already pro-vided examples of sha ering impact of government-owned corpora ons on free markets: making use of state fi nancial support , government-owned corpora- ons can, for as long as they wish, keep prices (includ-

ing interest on loans) lower than the prices at which independent manufacturers (independent credit ins -tu ons) sell their products (render services), driving

1 The socio-economic development forecast of the Russian Federa on in 2015 and the planning period of 2016–2017 (deve-loped by the Ministry of Economic Development of Russia (MED)).

It’s worth no ng that administra ve bodies in the period under review made ac ve eff orts in rule-making regard-ing the issues within the scope of their competence. Considering the challenging situa on faced by Russia due to western sanc ons, there are two reasons that might cause such an ac vity. On the one hand, the quality of regulatory documents and administra on schemes should be enhanced, because the role of public funding be-comes cri cal, compe on for resources gains momentum amid projected growth in investment capital ou lows in 20141 and falling crude oil prices during 2014. On the other hand, ac ve rule-making eff orts amid crisis may refl ect exacerba on of the struggle for survival between diff erent government agencies.

the la er out of business. This results in a global turn of cash (fi nancial) fl ows towards government-owned corpora ons controlled by foreign states – the funds would be transferred from the country or used to ex-pand into and gradually capture the “alien” market, i.e. squeeze domes c manufacturers out of the mar-ket and make them bankrupt). Even with a small gap in prices of goods (works, services), the sha ering im-pact of the government-owned corpora on presence in the market manifests itself quickly and irrevocably: the banking business would be weakened, domes c manufacturers would fail to stand the compe on in the internal market (they wouldn’t receive the same support as their Chinese counterparts have). No won-der that market-driven economies allow foreign go-vernment-owned corpora ons to enter their internal market on the condi ons that the la er take no advan-tage of unlimited opportuni es to cover their losses with state budget resources. Turning towards eastern countries, Russia should draw on the European coun-tries’ experience of dealing with “alien” government-owned corpora ons. It can be assumed that facing no compe on from private foreign investment in Russia, Chinese investors would off er any kind of extra encum-brances on loans, e.g. loans may include labor costs of specialists whom government-owned corpora ons send to work under contracts in Russia, costs of ma-chinery opera on training and provided technologies. Furthermore, one should remember proposals to allo-cate unpaid or late-paid interest on loans to the capital of joint produc ons, and other forms of state capital in-growth into the economy of other country. In our opinion, rela onships with major eastern investors concerning the development of hydrocarbon depo-sits should adhere to the legal schemes developed as part of the decisions made by the Eurasian Economic Commission (EEC). The principle of making tariff s on hydrocarbons pumping will presumably be provided for explicitly in the text of pipeline construc on con-

A REVIEW OF RUSSIA’S TAXATION REGULATORY DOCUMENTS

57

tracts with Chinese counterpar es. This is why such contracts should s pulate that state support through the Russian budget of investment in a pipeline con-struc on project may not be deemed to be subsidy of subsequent product pumping services, lowering the tariff s1 (otherwise the project pay-back period for the Russian counterparty may extend indefi nitely, whereas the Chinese counterparty would benefi t from a cheap pimping cost).

In our opinion, it is cri cally benefi cial for Russia to become more appealing in terms of investment for independent, private entrepreneurs, which should be done by easing tax and administra ve burden on busi-nesses. This is why we consider that the adop on of regulatory documents without in-depth considera on of their poten al impact on the behavior of business en es will not be able to address the issues faced by the modern economy of Russia and by contrast might eventually provoke further crisis developments result-ing from ineffi cient use of the available resources and escala on of social tensions.

1. The Ministry of Economic Development (MED) suggests that a moratorium on tax burden growth should be introduced. The MED and the Federal An -Monopoly Service of Russia (FAMS) published a joint informa on le er on the possibility to allow small-sized business en es and socially-focused non-profi t organiza ons (NPOs) to lease state-owned property at preferen al interest rates less than a market value appraised by an appraiser, and also renew lease con-tracts. At the same me, the Ministry of Finance of Russia suggested that small-sized businesses should be limited in accessing tax allowances2. As one can

1 See the text of the Recommenda on of 7.10.2014, No.10 of the Panel of Eurasian Economic Commission includes “On the Unifi ed Methodology of the Tariff Policy of Natural Monopolies”: “….Funds allocated to the implementa on of special-purpose in-vestment projects shall be considered in construc ng the invest-ment program of a natural monopoly en ty, but shall not be con-sidered in calcula ng tariff s (RGP)”. For informa on purposes: RGP stands for required gross proceeds. Furthermore, there are other noteworthy reserva ons with regard to the calcula on of tariff s of natural monopolies . In par cular, ac-cording the Recommenda ons, “…Natural monopoly’s costs saving … shall not be considered in tariff calcula on (costs (expenses) are calculated without regard to saving) within a period of the com-mencement of the forma on of costs saving un l the expira on of three years from termina on of the payback period of the costs on op miza on measures” etc.2 «Минфин предложил ограничить доступ малого бизнеса к налоговым льготам», сайт lenta.ru/news/2014/10/09/fi n-business/ от 9.10.2014 [“Minfi n suggests limited access to tax allowances for small-sized businesses, available (in Russian) on lenta.ru/news/2014/10/09/fi nbusiness/ от 9.10.2014]; «Глава Минэкономразвития предложил запретить рост налогов», сайт lenta.ru/news/2014/10/08/ulykaev/ dd. 9.10.2014. [“The Head of the Ministry of Economic Development suggests a ban on

see, the former measure is exactly the opposite of the la er. The reasoning of the Ministry of Finance needs to be further explained: if the objec ve is to eliminate channels of tax avoidance as downsizing of businesses to meet the established criteria en tling them to pre-feren al tax treatment, another simple lowering of the criteria cannot, in our opinion, address the issue of tax avoidance.

2. The role of the state budget as source of funds for investment becomes increasingly important amid li mited access to external resources. The Execu ve Order of the Russian Government of 11.10.2014 No. 1044 approved the Program for Support of Investment Projects Implemented on the Territory of the Russian Federa on (project fi nancing program focused on the engagement of business en es and banks).

The Program established criteria for eligible pro-jects; criteria and procedure for qualifying Russian credit ins tu ons and interna onal fi nancial organiza- ons eligible for the Program; procedure for gran ng

public guarantees on loans issued for the implementa- on of investment projects.

A special feature of the Program is that the Ministry of Finance is assigned to appropriate federal budget funds, 25% of the value of loans issued under invest-ment projects, to discharge the obliga ons on the state guarantees granted for investment projects. VEB is as-signed as the agent of the Russian Government for the implementa on of the Program (analy cal accoun ng of granted guarantees, as well as debt recovery under the loans of authorized banks).

The Program establishes the following terms and condi ons for obtaining loans from par cipa ng banks. Loans may be issued against the guarantee of the Ministry of Finance by the authorized Russian banks and interna onal fi nancial ins tu ons in Russian rubles at an interest rate equal to the Central Bank’s key interest rate increased by 1%.

An authorized bank may be a Russian bank with at least Rb 100bn of equity working capital as of the last accoun ng date, not banned for accep ng retail de-posits, with at least 10-year experience in investment projects with a value of at least Rb 3bn each within the past three years. An auth orized interna onal fi nancial ins tu on may be an interna onal fi nancial ins tu- on in which Russia has an interest of at least 30%,

with PIO experience on the territory of the Russian Federa on, with at least 20% capital adequacy as of the last accoun ng date, with its credit por olio in-cluding at least 25% of loans to Russian en es or

tax growth”, available (in Russian) on lenta.ru/news/2014/10/08/ulykaev/ dd. 9.10.2014.]


58

invested in securi es of Russian issuers, with at least 3-year experience in investment projects.

Investm e nt projects are qualifi ed based on the fol-lowing criteria: a project is located on the territory of the Russian Federa on, covers a priority line for the economy of the Russian Federa on, the project value ranges within Rb 1bn and Rb 20bn. Borrowed funds account for 80% or less of the project value.

Upon closer examina on, the funding scheme of investment projects appears to be disputable. Having selected VEB as the agent, the Russian Government basically allows the bank to generate risk-free extr a profi t from fees. At the same me, the qualifi ed a uthorized banks must issue loans for low-margin projects (Central Bank’s interest rate plus 1%) against ruble-denominated guarantees by the Ministry of Finance (amid the weakening ruble, and the guaran-tees will be covered only 25% with budget resources, which presumably make it diffi cult for banks to be re-imbursed in case of project failures). VEB will keep account guarantees, as well as recover debts, pre-sumably charging a fee for both. On an even closer examina on, the scheme appears to be benefi cial for all but individuals who eventually might pay for all. Banks will par cipate in investment project fi nancing despite small returns, because the Central Bank is as-signed to make sure their loans for projects are refi -nanced (i.e. banks will eventually be paid back and have the guaranteed profi t equal to a central bank’s interest rate increased by 1%). The Bank of Russia can use only two sources of resources, namely reserves and ruble devalua on, to refi nance the par cipa ng banks’ loans. In other words, one cannot rule out the possibility of fi nancing investment projects with infl a- on tax on individuals.

In other words, to make the foregoing scheme up and running properly, projects should off er extremely high returns. Otherwise projects will receive loans but it is individuals who will have to pay.

3. Another fi nancing scheme which raises ques- ons about its effi cient implementa on is a model

designed by the Ministry of Industry and Trade for prequalifi ca on and compe ve selec on of Russian organiza ons to be en tled to subsidies covering a share of R&D costs in priority areas of the civil industry based on the Order of September 26, 2014 No. 1931 issued for the purpose of The Industrial Development and Compe ve Growth state program of the Russian Federa on approved by the Execu ve Order of the Russian Government of 15.04.2014 No. 328 and the Rules for Gran ng Subsidies from the State Budget approved by the Execu ve Order of the Russian Government of December 30, 2013 No. 1312 .

The developed Procedure establishes that legal en - es with at least 50 qualifi ed employees on a full- me

basis may be en tled to the said subsidy on a com-pe ve basis; whose technical and test equipment is worth at least Rb 150m; with premises as buildings, structures measuring at least 500 square meters.

Without going into the compe on’s subject mat-ter which is planned to cost billions of rubles1, let’s focus on the scheme of gran ng subsidies. Formally, the compe on deals with the reimbursement of R&D costs incurred by customers, rather than R&D fi nanc-ing. Under the law on science, scien fi c research can produce either an intangible asset recognizable in the balance sheet or no results. In the former case, the Ministry of Industry and Trade of Russia presumably must transfer funds to reimburse the customer’s costs incurred on the purchase of the R&D item from the contractor. In the la er case, the customer’s costs in-curred as payment for R&D which has produced no re-sults in the form of intangible asset are to be wri en off to the customer’s current expenses and recognized as customer’s overhead costs reducing the taxable profi t. In the la er case, the Ministry of Industry and Trade must from me to me grant a subsidy to the customer to cover his unsuccessful costs so that he can recover his working capital loss. As one can see, there is no economic basis whatsoever behind any kind of compe ons on subsidies to reimburse costs incurred on R&D2.

4. There is another subsidy distribu on scheme that raises as many ques ons as the previous one. The Execu ve Order of the Government of Russia of October 2, 2014 No. 1006 for the purposes of the pro-visions of the Budget Code of the Russian Federa on approved a method designed to calculate standards of maintenance costs on the government bodies of a con-s tuent territory of the Russian Federa on. The size of a standard sets the ul mate share of maintenance costs on government bodies of a cons tuent territory

1 The order of the Ministry of Industry and Trade of August 26, 2014 No. 1919 established the subject ma ers, предельные объемы of subsidies and maximum number of or-ganiza ons en tled to the subsidy per each subject ma er of the Compe on.2 The Execu ve Order of the Government of Russia of 15.04.2014 No. 328 approved The Industrial Development and Compe ve Growth state program.The Execu ve Order of the Government of Russia of 30.12.2013 No. 1312 approved the Rules for gran ng subsidies from the fed-eral budget to Russian organiza ons to reimburse a share of the R&D costs in priority areas of the civil industry as part of the imple-menta on of The Industrial Development and Compe ve Growth state program. Under clause 20 of the Rules, the subsidy may not exceed 100% of the research costs as part of the implemented in-vestment project specifi ed in the contract.

A REVIEW OF RUSSIA’S TAXATION REGULATORY DOCUMENTS

59

of the Russian Federa on in the total value of tax and non-tax revenues of the consolidated budget of a con-s tuent territory of the Russian Federa on and grants to equalize fi scal capacity of a cons tuent territory of the Russian Federa on.

The foregoing method supersedes the previous standards established by the Execu ve Order of the Russian Government of December 29, 2007 No. 990.

It should be noted that the Ministry of Finance has long been refi ning the method designed to defi ne the ra o of budget revenues of a cons tuent territory of the Russian Federa on and grants to equalize fi s-cal capacity of a region. This work is important, be-cause it will allow subjec ve factors to be excluded in the evalua on of grants from the federal budget. However, according to the cons tuent territories of the Russian Federa on, the applicable criteria and cal-cula on techniques are excessively complex, itemized on many indicators, which in prac ce only strengthens the status quo, off ering no opportuni es for the deve-lopment of the regions.

In our opinion, the regions’ point of view appears to be reasonable. The method sets a standard limit – under no circumstances the subsidy may exceed 10% y-o-y for a cons tuent en ty1. However, the idea of these extremely sophis cated mul factor es mates remains unclear if the subsidy eventually may not in-crease more than 10%, and infl a on (which must be considered in the distribu on of budget subsidies) will be 8.5% in 2014.

5. Another controv ersial example of ra oned distri-bu on of federal budget funds are the rules approved by the Execu ve Order of the Russian Government of September 30, 2014 No. 999 for the forma on, grant-ing and distribu on of subsidies from the federal bud-get to the budgets of the cons tuent territories of the Russian Federa on to co-fi nance capital investment in state-owned property of the cons tuent territories of the Russian Federa on (municipal property, execu- on of measures regarding design and/or construc on

(reconstruc on with some restora on, technical up-grade) capital construc on projects and/or purchase of items of immovable property).

The Rules contain a formula for calcula ng a reduc- on of the subsidy’s volume for the ensuing fi scal year,

if the obliga ons under the subsidy agreement were violated in the preceding period of gran ng the subsi-dy, and the viola ons haven’t been dealt with in me, before the fi rst date of repor ng on the compliance with the performance measure of using the subsidy in accordance with the agreement in the year following the year of gran ng the subsidy.

1 Paragraph 25 thereof.

Simplifying the stat ement of the problem, the fol-lowing should be noted. The method introduces an es mate of incompliance with the i performance mea-sure of using the subsidy. In case of incompliance with the subsidy performance measure in the repor ng year, the subsidy is to be reduced for the year to come.

The Ministry of Finance monitors the gran ng of subsidies, compliance with the performance measures of using the subsidies by the cons tuent territories of the Russian Federa on, keeps the register of subsidies which also includes subsidies for co-fi nancing of capi-tal investment in state-owned assets of the cons tu-ent territories of the Russian Federa on (municipal property), as well as the register of agreement.

Regre ully, the performance measures seem to be ar fi cial to a certain extent. Subsidies for capital investment and specifi c works are earmarked funds, i.e. they originally must be provided for in the re-quired volumes and appropriated on the dates set for the fi nancing of a project or performance of a work. The use of the es mate for reducing the subsidy al-located for the ensuing fi scal year creates an illusion of control instead of addressing the foregoing issue. The issue can be addressed by freezing the fi nancing of a project (works) un l goal-achievement condi ons are clarifi ed.

Therefore, as one can see, the programs designed to s mulate investment are disputable. There is, in our opinion, no reason to believe that such programs can replace the development of a free market.

The following taxa on regulatory documents are worth no ng.

6. The Federal Law of 4.10.2014 No. 284-FZ made amendments to the Tax Code of the Russian Federa on. The rights granted in C.4, Art.12 thereof to the representa ve government bodies of Moscow and St. Petersburg to defi ne specifi cs for assessing the tax base for local taxes, tax allowances, the grounds and procedure for their applica on are extended to the representa ve government bodies of the city of Sevastopol.

Clarifi ed was the procedure for adjus ng the cadas-tral value in assessing the corporate property tax with regard to the immovable property of administra ve and business and trade centers, nonresiden al pre-mises, items of immovable property owned by foreign organiza ons which are not opera ng through perma-nent establishments. Clarifi ed was the accoun ng pro-cedure for the adjusted cadastral value of land plots for the purpose of land tax.

Personal property tax was introduced. Resident buildings (premises: apartment, room); garage (car


60

parking space); construc on project in progress, o ther buildings, structures, premises were recognized as taxable items. The tax base is assessed on the basis of cadastral value. The tax was introduced across the en re cons tuent territory of the Russian Federa on un l 01.01.2020. Allowance was made for deduc- ons from cadastral values: for a stand-alone hose –

50 square meters, apartment – 20 square meters, room – 10 square meters. The tax base assessed on the basis of cadastral value is subject to tax rates of 0.1% or less (for residen al premises, garages, busi-ness structures with a fl oor space of up to 50 square meters), 2% (for premises in administra ve and busi-ness and trade centers, items of immovable property owned by foreign organiza ons not opera ng through permanent establishments), 0.5% for other taxable items. Tax allowances are allowed for certain catego-ries of taxpayers.

Adjus ng (decreasing) coeffi cients to the tax base are applicable within the fi rst four years (0.2 to the fi rst fi scal period, 0.4 to the second one, 0.6 to the third one, 0.8 to the fourth one).

7. The Federal Law of 4.10.2014 No. 285-FZ es-tablished that employment income of refugees and persons granted temporary asylum in the territory of

the Russian Federa on, who are not tax residents of the Russian Federa on, shall be subject to taxa on at a general rate of 13% (not 30%). This tax allowance was introduced in response to fl ows of refugees from Ukraine.

8. The Federal Law of 04.10.2014 No. 287-FZ a share of the profi t to be transferred by the Bank of Russia to the federal budget was li ed to 75% from 50%.

9. The Execu ve Order of the Russian Government of 20.09.2014 No. 963 approved a mechanism of bank supply of very large contracts on supply of goods (works, services) for public needs. This refers to trans-ac ons of more than Rb 10bn (under construc on, reconstruc on contracts, with a single supplier). It is assumed that banks will open special accounts for se lements, as well as monitor contract execu on monitoring, provide services allowing accepted goods, works (results thereof), services to comply with the contract terms and condi ons. It was recommended to enter into similar bank support agreements for transac ons of at least Rb 1bn for a cons tuent ter-ritory of the Russian Federa on, at least Rb 200m for a municipality. The bank support is subject to a fee of 1–1.1% of the contact value.

REVIEW OF ECONOMIC LEGISLATION IN OCTOBER 2014

61

REVIEW OF ECONOMIC LEGISLATION IN OCTOBER 20141

I.Tolmacheva, Yu.Grunina

I. Federal Laws of the Russian Federa on1. Federal Law No.301-FZ of October 14, 2014 on

INTRODUCTION OF AMENDMENTS INTO ARTICLE 14 OF THE FEDERAL LAW ON THE FOUNDATIONS OF THE SYSTEM OF PREVENTIVE MEASURES AGAINST NEGLECT OF MINORS AND JUVENILE DELINQUENCY1

In accordance with Ar cle 14 (1) (4) of the Federal Law on the Founda ons of the System of Preven ve Measures Against Neglect of Minors and Juvenile Delinquency, the authori es carry out management in the sphere of educa on, including accoun ng of minors who do not a end classes or miss classes at educa onal establishments systema cally without a reasonable ex-cuse. For the purpose of bringing the defi ni ons used into compliance with the Federal Law on Educa on and the Federal Law on Introduc on of Amendments into Individual Statutory Acts of the Russian Federa on and Recogni on as Null and Void of Statutory Acts (Individual Provisions of Statutory Acts) of the Russian Federa on in Connec on with Approval of the Federal Law on Educa on in the Russian Federa on, the word “establishments” is replaced by the work “en ty”.

II. Resolu ons of the Government of the Russian Federa on 1. Resolu on No.887 of September 2, 2014 on

INTRODUCTION OF AMENDMENTS IN RESOLUTION No.260 OF AUGUST 27, 2005 OF THE GOVERNMENT OF THE RUSSIAN FEDERATION

Public ins tu ons are excluded from the list of par- cipants in the tender. The above situa on is related

to the fact that grants are provided in the form of sub-sidies which are not allocated to public ins tu ons.

Budget-funded and autonomous en es which are not under the jurisdic on of the Ministry of Educa on

1 The Review was prepared with assistance of the KonsultantPlus legal system.

In September–October 2014, the following main changes were introduced into the legisla on: the terms of the Federal Law on the Founda ons of the System of Preven ve Measures Against Neglect of Minors and Juvenile Delinquency were brought in compliance with the Federal Law on Educa on in the Russian Federa on; the pro-cedure for selec on of foreign na onals for educa on in the Russian Federa on within the limits of the quota set by the Government of the Russian Federa on was determined; the procedure for provision of grants of the President of the Russian Federa on to young scien sts was specifi ed; in Q2 2014 the subsistence per capita level in Russia in general rose from Rb 7,688 to Rb 8,192 as compared to Q2 2014; the procedure for entering into a license agreement on provision to the state customer of the right to use the outputs of intellectual ac vi es for public needs on the basis of a royalty-free (nonexclusive) license was determined.

and Science of the Russian Federa on provide in the applica on form for par cipa on in the tender a writ-ten approval by the authority which carries out func- ons and powers of the founder of those en es.

Provision of grants is carried out in accordance with agreements with en es par cipa ng in the tender and having labor rela ons with young scien sts and mem-bers of teams of the leading scien fi c schools of the Russian Federa on whose work was presented by those en es to the tender and who became the winners.

Opera ons with grants provided to a budget-fund-ed (autonomous) en ty which is under jurisdic on of the Ministry of Educa on and Science of the Russian Federa on are accounted for in a separate account opened in favor of that en ty with the authority of the Federal Treasury in accordance with the established procedure and meant for accoun ng of opera ons with such funds of budget-funded (autonomous) en - es as are allocated to them out of the federal budget

in the form of subsidies for other purposes and for making of capital investments.

If a budget-funded (autonomous) en ty – the win-ner of the tender – is not under the jurisdic on of the Ministry of Educa on and Science of the Russian Federa on, opera ons with grants allocated to the budget-funded (autonomous) en ty are accounted for in the separate account opened to that en ty in accordance with the established procedure with the authority of the Federal Treasury and meant for ac-coun ng of opera ons with funds of budget-funded (autonomous) en es.

Grants to other recipients (except for budget-fund-ed and autonomous en es) are transferred to set-tlement accounts opened with a bank or other credit ins tu on.

2. Resolu on No.905 of September 6, 2014 on SETTING OF THE VALUE OF THE SUBSISTENCE


62

PER CAPITA LEVEL AND BY THE MAIN SOCIAL AND DEMOGRAPHIC GROUPS OF THE POPULATION IN THE RUSSIAN FEDERATION IN GENERAL IN Q2 2014.

As compared to Q1 2014, in Q2 2014 the sub-sistence level rose as follows: for the able-bodied popula on from Rb 8,283 to Rb 8,834; for pensioners: from Rb 6,308 to Rb 6,717 and for children: from Rb 7,452 to Rb 7,920.

3. Resolu on No.914 of September 6, 2014 on APPROVEL OF THE STATUTE ON CARRYING OUT BY THE STATE CUSTOMER ON BEHALF OF THE RUSSIAN FEDERATION OF AUTHORITIES OF A LICENSEE IN CASE OF UTILIZATION FOR PUBLIC NEEDS OF THE OUTPUTS OF INTELLECTUAL ACTIVITIES CREATED IN FULFILMENT OF SCIENTIFIC AND R&D PROGRAMS AND PROJECTS FINANCED BY THE RUSSIAN SCIENTIFIC FUND.

On request of the state customer, the holder of the right to the output of intellectual ac vi es created in fulfi llment of programs and projects, including those holders of the rights which were contractors of such programs and projects grants the state customer the right to u lize the outputs of intellectual ac vi es for public needs on the basis of a royalty-free (nonexclu-sive) license.

For the purpose of entering into a license agree-ment, the state customer provides the holder of the right the signed dra license agreement in 3 copies.

In case of evasion by the holder of the right from en-tering into a license agreement or inclusion in the dra license agreement of terms which infringe upon the rights of the Russian Federa on, the state customer has the right to turn to the court to protect the interests of the Russian Federa on and no fy the Russian Scien fi c Fund of ac ons (inac on) of the holder of the right.

A condi on of the license agreement is the right of the state customer to enter into a sub-license agree-ment. The sub-license agreement is an assignment of the right to u liza on of the output of intellectual

ac vi es to a third party. Such an agreement may include provisions on payment by the sublicensee of royal es to the author.

The above royal es are paid out of revenues re-ceived by the state customer or the sublicensee from realiza on of goods (services) with u liza on of the outputs of intellectual ac vi es or means received by the state customer as a result of entering into a sub-license agreement.

III. Instruc ons, Le ers and OrdersA procedure has been established for selec on of

foreign na onals for educa on in Russia within a quo-ta set by the Government of the Russian Federa on in accordance with the admission plan prepared by the Ministry of Educa on and Science of the Russian Federa on.

In the above plan, a number of places is specifi ed for each country for admission of foreign na onals for training in each voca on and line of profession of the secondary voca onal educa on and higher educa on, as well as addi onal voca onal programs.

Selec on is carried out in the following two stages:• the fi rst stage includes a selec on in the terri-

tory of a foreign state of candidates for admis-sion for training;

• the second stage of the selec on is carried out by educa onal establishments which are pre-pared to admit for training foreign na onals out of the number of candidates selected at the fi rst stage.

On the basis of the 1st stage selec on arrange-ments, in the period ll March 1 of the year of admis-sion the list of candidates formed by the authorized agency or ins tu on of a foreign state is determined. At the 2nd stage, selec on of candidates is carried out by educa onal establishments in the period not later than June 15 of the year of admission.

DECOMPOSITION OF RUSSIA’S GDP GROWTH IN 1999–2014

63

DECOMPOSITION OF RUSSIA’S GDP GROWTH IN 1999 2014S.Drobyshevsky, M.Kazakova

The Gaidar Ins tute developed a comprehensive methodology for decomposing the growth rate of Russia’s GDP into its structural, foreign trade and situa onal components, which is based on the same decomposi on algo-rithm as applied in the analysis of macroeconomic indicators of the developed countries (OECD), adjusted with due regard for the specifi ci es of the Russian economy with its high dependency on foreign trade (more specifi -cally, the movement of world prices for oil). On the basis of es ma ons yielded by this methodology we could iden fy several phases of economic growth in Russia over the period from 1999 through 2014: recovery growth (1999–2000); growth sustained by investment and capital load (2001–2003), and then growth sustained by fa-vorable foreign trade condi ons (2004–2008.); overheated economy and economic crisis (2008–2009), followed by a new, lower phase of the business cycle (2010–2014).

At present, Russia’s expert community is involved in an ac ve discussion of the issue as to how close the Russian economy has come to exhaus ng its produc- on poten al – and, consequently, if the measures de-

signed to boost economic growth, including budgetary and monetary policy measures, are going to yield suc-cessful results in our current situa on1. There exists an opinion that the previously applied economic growth model, which was oriented to favorable movement of world prices of energy carriers and relied on growth sustained by means of boos ng domes c demand, is no longer viable2. Although oil prices are s ll high, they are no longer capable of providing the same im-pressive input into Russia’s GDP growth rate as in the period 2000–2007. The cushion of high oil prices only so ened the downfall of the Russian economy during the world crisis in 2008–20093, and nowadays their ef-

1 See, in par cular, S. Drobyshevsky, P. Kadochnikov, S. Sinelnikov-Murylev. Nekotorye voprosy denezhnoi i kursovoi poli ki v Rossii v 2000–2006 godakh i na blizhaishuiu perspek vu [Some Issues of Monetary and Exchange Rate Policy in Russia in 2000—2006 and in the Short-term Outlook] // Voprosy economi-ki [Issues of Economics]. 2007. No 2. P. 26–45; A. Ulyukaev, P. Kadochnikov, P. Trunin. Vzaimosviaz’ fi skal’noi i denezhno-kredit-noi poli ki (analiz al’terna vnykh sposobov upravleniia sredstvami SF RF [The Interac on of Fiscal and Monetary Policy (The Analysis of Alterna ve Methods of Stabiliza on Fund of RF Resources Management)] // Ekonomicheskaia poli ka [Economic Policy]. 2008. No 1. P. 29–38; A. Knobel. Riski biudzhetnoi poli ki v stranakh bogatykh prirodnymi resursami [The budgetary policy risks faced by countries rich in natural resources] // Ekonomicheskaia poli ka [Economic Policy]. 2011. No 5. P. 29–38.2 V. A. Mau. Mezhdu modernizatsiei i zastoem: ekonomiches-kaia poli ka 2012 goda [Between Moderniza on and Stagna on: Economic Policy in 2012] // Voprosy economiki [Issues of Economics]. 2013. No 2. P. 4–23.3 V. A. Mau. Ekonomicheskaia poli ka 2009 goda: mezhdu krizisom i modernizatsiei [Economic Policy in 2009: Between the Crisis and Moderniza on] // Voprosy economiki [Issues of Economics]. 2010. No 2. P. 4–25.

fect can only help Russia’s economic growth rate to be kept slightly above zero4.

To decompose the rate of economic growth into a number of diff erent components, including those dependent on the situa on in the sphere of foreign trade, is a diffi cult task. We off er a methodology based on decomposi on of macroeconomic indexes into structural, foreign trade and situa onal components (the la er includes factors like business cycles and ac-cidental shocks); this is the methodology applied in the developed countries (OECD) and adjusted to suit the specifi city of the Russian economy. This specifi city is essen ally the na onal economy’s high dependence on the condi ons in the foreign trade sector, which are approximated by the index of the movement of world oil prices.

Following the logic of our calcula ons, the fi rst stage in the decomposi on of the GDP growth rate into its components consists in separa ng the structural com-ponent in accordance with the methodology prac ced in the OECD countries.

The structural component of the economic growth index is the fundamental one. The most important property of the structural component is the slow movement of its value over me. In contrast to the structural component, the situa onal component, which is determined by a current situa on in the mar-ket, is a rapidly changing value.

One of the most frequently cited examples of ex-trac on of the structural component of the macroe-conomic index is the es mate that describes the po-ten al (structural) GDP index (as well as the output gap) which, in accordance with one of the exis ng

4 B. A. Zamaraev, A. M. Kiyutsevskaya, A. G. Nazarova, E. Yu. Sukhanov. Zamedlenie ekonomicheskogo rosta v Rossii [The Slowdown of the Russian Economy] // Voprosy economiki [Issues of Economics]. 2013. No 8. P. 4–34.


64

defi ni ons of poten al GDP, represents the maximum output level achieved when all produc on factors are used in full and the capacity load is at its normal level (60–65%). It should be noted that, in the framework of our decomposi on methodology, the terms ‘struc-tural’ and ‘poten al’ will be applied as synonyms, with due regard for the existence of diff erent interpreta- ons of the no on of poten al GDP.

In order to es mate the aggregate factor produc -vity index, the poten al (structural) GDP, and the out-put gap, the OECD Economics Department applies the produc on func on methodology1, whereby it is pos-sible to derive the poten al GDP value by separately es ma ng the inputs of produc on factors into the rate of economic growth. This method applies the fol-lowing log linear equa on, where GDP is es mated on the basis of labor input, capital input and aggregate factor produc vity (AFP) values (1)2:

ln( ) ln( )ln( ) (1 ) ln( )t t

t t

Y EK L

(1)

where Y is actual GDP volume,K is actual capital volume,L is actual labor volume,E is AFP, is elas city of capital input in output; the value of

returns to scale eff ect is assumed to be constant, i.e. = 0.3, and 1 – a = 0.73.

Once the average es mated labor and capital in-puts in GDP are found (the coeffi cients applied to loga-rithms of the variables of labor and capital inputs), the value of aggregate factor produc vity can be found; its smoothed-curve representa on is obtained by ap-plying the Hodrick-Presco fi lter, which demonstrates ‘trend’ or ‘poten al’ factor produc vity. Then the resul ng value is once again entered in the produc- on func on equa on alongside the values of actual

capital reserves and the es mated ‘poten al’ labor

1 Giorno C., Richardson P., Roseveare D. and van der Noord P. Es ma ng Poten al Output, Output Gaps and Structural Budget Balances // Economics Department Working Papers. 1995. No. 152. OECD.2 For the purpose of our calcula on, this func on is expressed as logarithmic increments, i.e., growth rates.3 In our calcula ons, we apply the empirically obtained es -mates of labor input elas city and capital input elas city for the developed countries, which are also compa ble with Russia’s sta- s cs (for further detail, see Bessonov V. A. O dinamike sovokup-

noi faktornoi proizvoditel’nosto v Rossiiskoi perekhodnoi ekono-mike [On the Aggregate Factor Produc vity Movement in the Russian Economy in Transi on] // Ekonomicheskii zhurnal VShE [The Economics Journal of the Na onal Research University Higher School of Economic]. 2004. No 4. P. 542–587.

vo lume (based on the already known non-accelera ng rate of unemployment (NAIRU)), and the resul ng GDP growth rate is taken to be the poten al GDP.

The Hodrick–Presco fi lter was applied to the struc-tural component of the GDP growth rate obtained by applying the method described above in order to re-move the fl uctua ons that are diffi cult to explain in economic terms.

The second stage of Russia’s GDP growth rate de-composi on consists in separa ng its foreign trade component explainable by specifi c trade condi ons, in par cular the movement of world oil prices.

The theore c substan a on for the hypothesis that explains the infl uence of the oil price growth rate and the price level on the growth rate of GDP relies on the mechanism whereby oil prices infl uence the rate of economic growth in the long run (cointegra on ra o) and over short-term periods (error correc on model)4; and on the analysis of household behavior in terms of changes in their inclina on to save and to consume in response to temporary and constant increases in the level of household income (microeconomic level).

The dependence of the level of GDP on the move-ment of oil prices can be described by an investment mechanism within the framework of the Solow model, which works as follows: an improvement in trade con-di ons causes a transfer of income, which is subse-quently invested, in its turn increasing the amount of capital and pushing up GDP. Thus, in a long run, a de-pendence can be observed between the levels of GDP and oil prices (or, which is the same thing, between the growth rate of GDP and the growth rate of oil prices). At the same me, over the en re period under considera on, we observe a rising level of world prices for oil and the transi onal movement between diff e-rent phases of economic development, with their spe-cifi cally diff erent rates of GDP growth. I other words, we follow the correla on between the level of world prices for oil and the growth rate of GDP (and not GDP level), which can be es mated by using cointegra on ra os and the error correc on model5.

The strength of this dependence can be further en-hanced by the eff ects of the mechanism of economic agents’ response to changes in the level of income re-ceived by them. The logic of analysis of the eff ects of

4 For more detail, see Kazakova M., Sinelnikov-Murylev S. Kon”iunktura mirovogo rynka energonositelei i tempy ekonom-icheskogo rosta v Rossii [Economic Situa on on the World Energy Carriers Market and Rates of Economic Growth in Russia] // Ekonomicheskaia poli ka [Economic Policy]. 2009. No 5. P. 118–135.5 Kazakova M. V. Vklad ne egazovogo sektora v dinamiku eko-nomicheskikh pokazatelei v Rossii i v mirovoi prak ke [Input of the Oil and Gas Sector in the Movement of Economic Indexes in Russia and in the World Prac ces] // Rossiiskii vneshneekonomicheskii vestnik [Russian Foreign Trade Herald]. 2009. No 8. P. 66–72.

DECOMPOSITION OF RUSSIA’S GDP GROWTH IN 1999–2014

65

temporary and constant income increases corresponds to the permanent income hypothesis suggested by M. Friedman in 19571. In case of an unexpected income increase, an individual considers it to be only a tem-porary phenomenon, and so a considerable por on of the income increment is saved instead of being spent on current consump on. If later on the income remains high, the individual adapts (get used) to this higher in-come level and begins to consume more, while the sav-ing norm is reduced. Consequently, the inclina on to consume is low if the increase in income is temporary. When this principle is applied to our mechanism of re-sponse to income movement, it means that economic agents, while adap ng to new levels of oil prices, do not believe that this higher level of oil prices will stay over a long-term period (or become permanent)2.

In our model, the logic employed in es ma ng the consequences of changes in the level of oil prices is a nalyzed in rela ve terms; in other words, the im-portant factor is the star ng oil price level before the onset of its growth/decline – that is, returns to scale related to the movement of oil prices. Thus, in order to iden fy the foreign trade component within the rate of GDP growth dependent on the devia on of the actual price of oil from its mul year average es mate (i.e. trade condi ons), it is feasible to es mate the interdependence between the ‘residual values’ a er subtrac on from the value of actual structural GDP growth (GDP growth unexplainable by the movement of the fundamental factors), , and the ra o of the ac-tual price to its mul year average:

0 1__

resid tt t

t

P oilYP oil

(2)

The es ma on derived from equa on (2) makes it possible to iden fy the GDP growth component dependent on trade condi ons, with due regard for the scale of devia on of the actual price of oil from its mul year average. The foreign trade component of GDP growth rate, explainable by favorable trade condi- ons, is es mated by the theore c signifi cance of the

relevant variable applied in the regression described above (2) (i.e., the theore c signifi cance of the diff e-rence between the actual and structural GDP growth rates at a given actual ra o of the current oil price to its mul year average).

1 Friedman, M. A Theory of the Consump on Func on. Princeton. NJ: Princeton University Press, 1957. Ch. 2, 3.2 For more detail, see Sinelnikov-Murylev S., Drobyshevsky S., Kazakova M. Dekompozis ia tempov rosta VVP Rossii v 1999–2014 godakh [Decomposi on of Russian GDP Growth Rates in 1999-2014] // Ekonomicheskaia poli ka [Economic Policy]. 2014. No 5. P. 7–37.

At the last stage of the decomposi on of GDP growth rate into its components, its situa onal com-ponent is separated, which incorporates the business cycle component and the component of accidental shocks. This component can be interpreted as residu-als in equa on (2) obtained a er subtrac on from the actual GDP growth rate of its structural and foreign trade components.

As a result, the actual, structural and foreign trade components of Russia’s GDP growth rate, as well as its situa onal component (i.e. the sum of the business-cycle component and the accidental shock compo-nent) – the calculated residuals of regression (2)), will appear to be as follows (Fig. 1).

On the basis of the results of decomposi on of GDP growth rate into its components, we were able to es- mate Russia’s output gap, i.e., the devia on of the

current GDP volume from its value derived by applying the structural GDP methodology described above – an index which, as shown earlier, in some condi ons may be treated as the poten al GDP volume (Fig. 2).

As can be seen from Fig. 1, in the period 2012–2014, the Russian economy entered the lower phase of the economic cycle a er having been overheated and, consequently, the situa onal component shi ed into the nega ve zone. The aggregate rate of econo-mic growth is near zero, because the nega ve value of the situa onal component is set off against the posi- ve foreign trade component.

At the same me, over the period from 2010 through 2014, the situa onal component of the eco-nomic growth rate was nega ve, while the output gap was posi ve at the level of 2–3% – because the actual GDP level was higher than its structural level (Fig. 2).

-15%

-10%

-5%

0%

5%

10%

15%

1 99

9

2 00

0

2 00

1

2 00

2

2 00

3

2 00

4

2 00

5

2 00

6

2 00

7

2 00

8

2 00

9

2 01

0

2 01

1

2 01

2

2 01

3

2 01

4

actual GDP

structural GDP

foreign trade GDP

summary business cycle and accidental shock components

Source: Rosstat, authors’ calcula ons.Fig. 1. The Actual, Structural, Foreign Trade, and Situa onal

(the Sum of the Business-cycle Component and the Shock Component) Components of the Growth Rate of GDP,

As a Percentage of the Previous Year, 1999–2014


66

Nevertheless, contrary to expecta on, the economy was showing no signs of overhea ng, because the actual GDP growth rate was lower than its structural growth rate: when oil prices are high, the use of pro-duc on factors amounts to 100%, and so they do not grow in volume.

For more detail on the methodology used to decom-pose the growth rate of Russia’s GDP, as well as the in-terpreta on of our results, see Sinelnikov-Murylev S., Drobyshevsky S., Kazakova M. Decomposi on of Russian GDP Growth Rates in 1999–2014 // Economic Policy. 2014. No 5. P. 7–37; also see h p://iep.ru/ru/publikatcii/7125/publica on.html

-8%

-4%

0%

4%

8%

12%

16%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: authors’ calcula ons.Fig. 2. Output Gap in the Russian Economy (%), 1999–2014

russian economic developments no.11 2014 · 2014-11-28 · russian economic developments no.11 2014...

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