Russian Economic News Wednesday July 22, 2009

Summary:

• Banks have applied for subordinated debt under the government's recapitalization plan
  
• Putin announces that more emphasis should be placed on social sector and hi-tech industry
  

From... United Bank of Switzerland Daily News Report:

Headline: Banks – Seeking Additional Capital

• 6 banks have applied for $15.2B USD of subordinated debt
  
• Amount exceeds the amount budgeted thus far
  
• Under government program, banks can receive 3 times the amount of subordinated debt that their private owners are willing to put into banks themselves
  
• UBS views this as positive – it will raise the capital base of the system by 17%
  

From... Business New Europe Daily News Letter:

Headline: Putin Says Budget Should Prioritise Social Sector and Hi-Tech Industry

• Putin says that the federal budgets for 2010-12 should prioritize social sector and hi-tech industry
  
• Says that the budget should be maintained balanced and endorse sources for financing the budget deficit
  

Russia and Belarus, at it again

A trade war between Belarus and Russia looks increasingly likely. Following announcements a few days ago that Belarusian milk products may be 'reviewed for sanitary violations', the Russian government banned meat imports from several Belarusian producers. The Russian health watchdog group also stated that it will increase its inspections of meat and dairy imports from Belarus, raising the possibility of additional import restrictions. In a seemingly unrelated development, Belarus shut down a Russian diesel fuel pipeline due to structural defects. Of course, all of these policies could be justified. Given the two countries' recent trade spats, however, this is somewhat unlikely.

Russian Economic News Tuesday July 21, 2009

Summary:

• New macro statistics from Rosstat reveal mixed signals – some improvements on investment, but consumption remains a problem
  
• Increased budget deficits are forecasted to be problems as it will likely increase throughout 2H09
  
• CBR introduced new changes to the deposit insurance law, but the change should be temporary and changed once profitability is reached
  

From... United Bank of Switzerland Daily News Report:

Headline: CBR Introduces Changes to the Deposit Insurance Law

• CBR intends to relax requirements fro banks participating in the Deposit Insurance scheme by eliminating the rule that bans bank participation if they are loss making for two consecutive quarters
  
• UBS comments that it seems sensible as a temporary measure as banks are building provisions
  
• Significant number of players, including state-owned banks do not generate positive returns
  
• Once levels normalize, the CBR will have to introduce a new tool that appropriately tracks the profitability of Russian banks
  

From... Deutsch Bank Morning Comment:

Headline: Rosstat releases Key Economic Indicators for June

• Investment has improved since May while consumption has weakened further
  
• Main factor for improvement in investment is business inventories – inventories have bottomed out and companies are likely to start rebuilding them which would be positive for investment
  
• Weakening consumption could be due to the lag effect of unemployment on consumption
  

From... Business New Europe Daily News Letter:

Headline: June Macro Data: Still a Mixed Bag

• Russian economy should show stronger signals of recovery in 2H09
  
• Modest improvement in some key indicators – overall mixed
  
• Upcoming months should show clearer signals of gradual recovery in output and investment
  
• Budget situation expected to be more problematic due to an increase in expenditure dealing with anti-crisis measures
  
• Russia's reserve fund should be the main source of financing
  

Russian Economic News Friday July 17, 2009

Summary:

• Russia's reserves have declined significantly to prevent reduction in ruble's value
  
• Depreciation was due to reduction in in oil prices

From... Deutsch Bank Morning Comment:

Headline: CBR Reserves Contract by Over $8B USD in the Week Ending 10 July

• Russia's forex reserves declined by $8.4B USD to reach $4007B
  
• Valuation effects not significant – implies that the change in CBR reserves was due to interventions by the CBR
  
• Last week marked by sizeable ruble depreciation due to reduction in oil prices
  
• CBR intensified Forex interventions; $2B to support ruble
  
• Implies further reduction in CBR reserves

Big Trouble in White Russia

Just when you thought it was safe to enjoy milk from Belarus, Gennady Onishchenko, head of Russia's Consumer Protection agency, announced that Belarusian dairy producers are violating the sanitary standards agreed upon in June. Last month, the two countries were engaged in a 'milk war' for a few weeks after Russia found that Belarusian producers did not meet new sanitary and packaging standards. As a result, the Russian government imposed an almost total ban on Belarusian dairy imports. This had massive repercussions for the Belarusian economy, as 95% of Belarus' dairy exports go to Russia. Many speculated that the ban was politically motivated, as Belarus seemed to be turning westward by joining the European Union's Eastern Partnership and drumming up Western investment. In any case, it remains to be seen if new trade restrictive measures will be imposed.

Russian Economic News Wednesday July 15, 2009

Summary:

• Ruble depreciation attributed to declining oil prices – budget deficits and tight liquidity may possibly prevent acceleration of depreciation
  
• PPI has increased significantly over the past month signaling a build up of inflationary pressure.

From... Troika Dialogue Russia Market Daily:

Headline: Ruble Depreciation May Half as Excessive Free Liquidity Evaporates

• Recent ruble depreciation triggered by declining oil prices
  
• The increase exchange rate sensitivity to oil prices is connected to the ruble liquidity injection through budget channels
  
• Budget ran a significant deficit in June, banking accumulated more than R1.1T in deposits
  
• Since banking system is demonstrating increased demand for rubles, and oil prices are increasing, ruble is not expected to fall dramatically
  

From... Business New Europe Daily News Letter:

Headline: PPI Hits 2.2% in June

• PPI Growth points to a build up of inflationary pressure – producer prices increased by 2.2% MoM – significantly over the 1.3 MoM estimate
  
• Suggests that the inflationary pressures have stared to build up
  
• CPI rate has lagged behind closing at 7.4% YTD
  
• Oil and Gas prices push PPI up – wholesale prices rose 14.3%
  

  
  

Russia's lack of infrastructure

Tuesday's Vedomosti has a very interesting article on the impediments to modernization in the Russian economy. The author, Vladislav Inozemtsev, Director of the Center for Post-Industrial Research, points out the woeful lack of infrastructure within the country: communications, transportation, and power supply, all of which are necessary to develop a competitive modern economy. There has been little expansion in paved roads and railway lines in the last 15 years, and maritime and air travel levels have actually fallen since 1989. He compares this to China and Brazil, which have both experienced massive expansions in infrastructure. The reason for the divergence? Excessive costs faced in Russia, which Inozemtsev relates to corruption and lack of a competitive bidding process. For example, to build a kilometer of highway, it costs on average $2.9 million in China, $3.6 million in Brazil, and $12.9 million in Russia. The figure rises to as much as $134 million for highway between Moscow and St.Petersburg and a shocking $400 million for parts of the ring road around Moscow. Warehouse construction costs more in Russia than in Germany and France.

A recent study by McKinsey also highlighted the widening labor productivity gap between Russia and China, which it also attributed to administrative barriers. Such a productivity gap helps explain the comparatively high costs. If Russia is going to develop any kind of competitive industry, there needs to be some drastic changes in the government's infrastructure development policy, as the country is being ill served by the current status quo.

UPDATE: The LA Times has an interesting article that puts the infrastructure problem in perspective by interviewing people who know the roads better than anyone: truck drivers.