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.

Russian Economic News Tuesday July 14, 2009

Summary:

• Macroeconomic projections for the next 3 years are mildly optimistic – based on projected oil prices.
  
• CBR's refinancing rate cut with corresponding ruble devaluation shows the extent of liquidity problem
  

From... Deutsch Bank Morning Comment:

Headline: Government Approves Macroeconomic Projections for 2010-2012

• Projections for 2010-12 based on oil price projectsion -- $54/bbl in 2009, $55-2010, $56-2011, $57-2012
  
• Economy expected to recover from 8.5% contraction to growth of 1% in 2010, 2.6%-2011, 3.8%-2012
  
• Exports will recover by 7-8% after a 50% contraction
  
• Government approved tariff increases on gas, electricity, and railways
  
• The reduction in growth of tariff increases in due to higher concerns on the poor performance of the real sector
  

From... Business New Europe Daily News Letter:

Headline: Rate Cut Proves Fragility of Ruble Appreciation

• CBR announced a cut in the refinancing rate to 11%
  
• Devalued the Ruble in response – underscores the liquidity problem
  
• CBR has been cutting the refinancing rate according t slowing inflation
  
• Cuts are intended to lower lending rates, but there is lack of long-term funding
  
• Decline in value of the Ruble most likely exacerbated to falling oil prices
  
• Could also reflect expectations of further rate cuts; the expectation that poor growth will lead to deflation
  

Russian Economic News Monday July 13, 2009

Summary:

• Central Bank of Russia has cut the rates to promote lending activity
  
• Bank deposits are still high leading to potential liquidity problem
  

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

Headline: CBR Introduces More Rate cuts

• CBR Lowered its major policy rates
  
• Main reason for change was weakening inflation and completion of the correction period on the currency market
  
• CBR Goal: To promote lending activity – fully expected
  
• If inflation proceed to fall, CBR will probably continue cutting rates , which experts say are too high
  

From... Business New Europe Daily News Letter:

Headline: CBR Cuts Refinancing Rate to 11%, Expects Lending to Recover

• Refinancing rate dropped by 50 pts to 11%
  
• Ruble reacted by falling 3%
  
• Cut expected by the markets, authorities are certain that inflation will continue to decline at least until the end of summer
  
• Cut will not have a rapid and direct effect on lending rates.
  
• Nonperforming Loans are still an obstacle to lending recover
  
• Weak economic indicators might create deflationary pressure
  
• Decline in oil prices could also be prompting a new round of foreign-currency buying
  
• If prices keep falling, the ruble will continue to drop
  

Headline: Budget Deficit Reaches 8.8% in June

• Federal budget deficit amounted to R277B, 8% of GDP in June 09
  
• Revenues increased due to increase in oil and gas revenues and increase in prices
  
• Expenditures increased due to increase government support for the financial crisis
  
• Budget is expected to exceed 11% GDP due to increase in budget expenditures
  
• Further anti-crisis expenditures expected
  
• Reserve fund will be the main source of financing
  

Headline: Reserve Fund Declines $6.4B USD in June

• The Reserve Fund amounted to $94.9B – a decline from $101B in June
  
• Due to an oil and gas transfer
  
• Budget situation will become more problematic in 2H09
  
• Although oil and gas revenues will stabilize, non-oil revenues will decline and expenditures will increase
  
• Will lead to a higher budget deficit
  

Headline: Bank Deposits with CBR Rose Another 25% in June

• The growth of the monetary base accelerated to 5.4% MoM from 5.1% in May
  
• The breakdown of the base suggests that lending is still not recovering – banks are continuing to accumulate a liquidity overhang
  
• Main contributor to growth was commercial banks' deposits with CBR
  
• Deposit growth rates suggest that the lending environment is still poor
  
• Banks are still unable to transfer state support to the real economy
  
• Liquidity overhang is a potential threat to the exchange rate market
  

 

Russia and the WTO

The 16-year saga of Russia's accession to the World Trade Organization experienced a new development on Friday. At the G8 conference in Italy, President Dmitri Medvedev announced that Russia will continue negotiations for entering the WTO independently from the trade union with Belarus and Kazakhstan. Such a course would contradict earlier statements from Prime Minister Putin, who unexpectedly stated in June that Russia was abandoning its nearly-completed independent WTO accession in order to join as a trade union. US and EU representatives lamented Putin's announcement, noting that this would delay Russia's accession for many years, as all three countries' trade policies would have to be harmonized with WTO requirements. Before Putin's statement, many negotiators thought Russia could join by the end of the year.

Interestingly, a recent poll by VTsIOM showed that 41-44% of Russians think joining the WTO would benefit their country, versus 20% who think it would be against the country's interests.

Some US meat now welcome in Russia

According to the wonderfully-titled Meat International, the Russian government has decided to lift its ban on pork from the US states of Illinois, New Jersey, Pennsylvania, and Texas. The Russian Veterinary and Phytosanitary Monitoring Service (Rosselkhoznadzor) originally imposed the ban to prevent the spread of the A H1N1 swine flu virus, despite the fact that the World Health Organization denied that it was possible to contract the virus from meat. Many saw the ban as a political move to placate Russian producers - Russia also increased tariffs on other types of meat at the beginning of the year. This is important news for the Russia/US trade relationship, as meat represents a substantial portion of trade between the two countries.

Russia to end tariffs on Farm Machinery

Russian Prime Minister Putin announced that the government will not continue the recently-imposed tariffs on agricultural machinery. The tariffs, which increased costs for foreign imports by as much as 25 percent, were aimed at helping domestic producers, who will now benefit from subsidies. US companies John Deere and Caterpillar both saw Russian sales plummet drastically after the new duties were imposed. On a perhaps related note, John Deere announced that it will invest $500 million in Russia over the next few years to develop its Russian manufacturing capacity.

Russian government considers restricting tax-free goods for travelers

A proposal by the Russian Trade Service would limit the value of goods travelers an bring in the country without paying import duties from 65,000 rubles (~$2,000) to 20,000 rubles (~$630). The government is facing budget deficits as it engages on a large fiscal expansion and is attempting to increase government revenues as a result.

From the article:
"Denis Daniilidis, the EU delegation’s spokesman in Moscow, said 20,000 rubles is extremely low. 'Russian visitors are very good shoppers who spend a lot of money. Now one pair of shoes or a camera would already be too much,' he said."

"Experts said such measures would greatly hamper trade and barely help improve customs revenues. Natalya Orlova, chief economist with Alfa Bank, said the sums were too small to effectively battle the problem of falling state revenues. 'This will just be an extra inconvenience for individuals,' she said."

Russian Economic News Thursday July 9, 2009

Summary:

• The Ministry of Finance is going to increase excise taxes to help finance the budget; problems might arise from tax collection rates
  
• Central Bank feels that small banks are setting deposit rates too high, which increases the costs the loans and the potential of bad asset accumulation
  
• Mixed news on Inflation, but generally positive – inflation at the beginning of the month at .2%, but CBR expects it to be 0% for the month
  

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

Headline: Economics – Ministry of Finance to Introduce Higher Excise Taxes

• Initiative to increase future financing of the budget
  
• Will increase taxes on alcohol, cigarettes, fuel, and growth in mineral extraction and export
  
• The increase is estimated to result in a R251.2-271.2B increase in revenues
  
• Tax burden will be on alcohol producers; taxes would increase by 30%
  
• This was expected, and could lead to a lesser burden on reserve fund (which may be already drained; deficit at 6.5% of GDP)
  
• Problems relate to the alcohol industry tax collection rates; currently only at 45%
  

Headline: Banks – CBR Warns Banks Against Deposit Rates Being too High

• CBR announced that scrutiny over the level of the deposit rates in the system needed to be increased
  
• Higher lending rates are due to smaller banks offering deposit rates that are too high; exacerbates the bad loan problem
  
• Loan affordability is related to the cost of funding for Russian Banks
  
• CBR should continue to stimulate reductions in deposit rates which would stimulate growth and lessen asset quality issues
  

From... Deutsch Bank Morning Comment:

Headline: CBR Expects Inflation to be Close to Zero in July

• Deputy head of CBR expects inflation to be close to 0% in July, and close to 0% in August
  
• Inflation in 2008 for July and August was .5% & .4%, respectively
  
• If inflation is 0-.5% MoM, we can expect YoY terms of 11.4%-12% for July
  
• Minster of Economic Development announced that they will reduce inflation target from 13% to 12-12.5%
  

From... Troika Dialogue Russia Market Daily:

Headline: Inflation at .2% over first six days of July

• CPI rose .2% between June 30 and July 6, same as a year earlier
  
• CPI not expected to exceed .5% for the month
  
• Increased was due to rising oil price and growth in tariffs
  
• Regardless, positive view on inflation this year, annual figure estimated around 10.5%
  
• Central Bank is expected to continue cutting base rates

Russian Economic News - Wednesday July 8, 2009

Summary:

• Economic growth in Russia is expected to presume to be flat for 2010
  
• Recovery is not expected until 2011, based on consumption levels
  
• Recovery plans for Russia are not investment driven – could have a negative impact on the growth of industries
  
• Banking sector has been experiencing an increase in retail deposits
  

 

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

Headline: Banking – New Mechanism for Subordinated Loans for the State is Approved

• The Federation Council has approved amendments to the law
  
• Implied that banks applying to the state for a subordinated loan for a second time will be able to receive triple the amount of funds
  
• Interest rates on such loans will increase from the previous 8% to 9.5%
  

From... Alpha Bank Morning Brief:

Headline: Russian Government Expects Recovery to Start in 2011

• Economic growth is expected to be flat – due to decline I investment and stable unemployment rate
  
• Investment decline in 2010 suggest that the Russian government does not intend to generate an investment-driven economic recovery – expects consumption to remain the key growth driver
  
• Inflation remaining high at 10% in 2010 and 8% in 2011 – recovery based on consumption would trigger increase in imports
  
• The government expect imports to remain stable in 2009 and 2010
  
• This could hurt the trade balance and not lead for growth for domestic industries
  
• .1% GDP growth in 2010 looks optimistic
  

From... Deutsche Bank Morning Comment:

Headline: 2Q09 Net Capital Inflows Amount to $7.2B USD

• Net private sector capital inflows amounted to $7.2B
  
• Factors contributing to the change are: stabilization of the ruble, increase in oil prices, and gains on equity market
  

Headline: Retail deposits grow 2% in June

• Retail deposits at 6 of the leading banks grew 2% in June
  
• Data suggests that the retail deposit market has grown 9% YTD
  
• Provides some upside risk to current estimate of flat growth

Russian Economic News Tuesday July 7, 2009

Summary:

• (Out of office, dealing with POTUS visit)
  

 

From... Troika Dialogue Russia Market Daily:

Headline: Asset Quality Monitor – July 2009

• Central Bank Data for May show that banks remained unwilling to lend
  
• Overdue loans continue to rise, but a slower pace
  
• Deceleration in overdue loan growth in both retail and corporate sectors
  
• As long as banks are unwilling to lend, the share of overdue loans will continue to rise as perceptions about worsening credit quality outweigh high liquidity, falling inflation and funding rates
  

Headline: Central Bank Publishes May Banking Sector Data

• Bank Balance sheets continued to contract and posted minor earnings in May
  
• Central Bank fund dropped $18B USD in May, its role in sector liabilities is high, but gradually subsiding due to customer deposit inflows
  
• Still no lending – Corporate loans down 2% in May
  
• Capital has been reduced
  
• Data shows that bank's ongoing aversion to lending and the contractions of assets on the back of the Central Bank absorbing liquidity, perception of high credit risk continues to be play a negative role
  

Russian Economic News Monday July 6, 2009

Summary:

• Foreign debt is increasing, partially due to gaining access to foreign investment.
  
• Trade balance is positive; lack of import growth suggests room for an import substitution effect
  
• Reliance on oil is becoming an evident problem for economic recovery
  
• Economically, with residential summit, Russia hopes to attract more capital from the US
  

From... United Bank of Switzerland Daily News Report 7/6/09:

Headline: Economics -- Rollover ratios for Russian Debt Rising

• External debt rose $24.3B USD from 1Q09 - to 2Q09
  
• Banks reduced foreign debt by $4B
  
• Gov't debt steady @ $27.7B
  
• CBR recorded $8B (up from $0 in 1Q09)
  
• Commentary: Select Russian companies have access to foreign loans. Good sign - it means that interest rates have fallen to levels that are attractive for borrowers, rather than dependence on public sector structures for refinancing.
  

Headline: Banking -- State Duma Approves the Law on Recapitalization of Banks via Federal Bonds

• The law states that a bank's capital will be increased by state OFZ bonds (Облигации Федерального Займа, federal coupon bearing bonds), in exchange for preferred shares to the state.
  
• Bonds set to mature 2019 @ w/ dividends at a margin of 3% of the coupon
  
• Bank shareholders can repurchase the bonds until 2014, after 2014, the state can sell it stake to other investors
  
• If bonds not redeemed by 2019, preferred shares will be converted into common stock
  

From... Alpha Bank Morning Brief 7/6/09:

Headline: Equity Market -- What Goes Up...

• Market performance was poor late last week; erased all gains from earlier in the week -- based on falling oil prices
  

Headline: Russia's Foreign Debt Increased by $24.3B USD in 2Q09

• Large portion due to oil companies borrowing from China
  

From... Deutsch Bank Morning Comment 7/6/09:

Headline: CBR - Russia's External Debt at $475.1B USD end June 2009

• Corporate rebounded by end of 2Q09 after a decline due to improvement in attitude towards global capital markets, ruble appreciation, higher oil prices
  
• The slowdown in the decline in corporate external debt suggests that with new borrowings and significant rollovers, the high-debt stock in corporate sector is still a problem
  

Headline: Russia's trade balance expands in 2Q09

• Russia's trade surplus expanded by $24.1B USD in 2Q09 due to the rise in fuel exports
  
• Growth of imports partly due to ruble appreciation
  
• Growth in fuel exports reflects the effects of the resumption of oil price growth
  

From... Troika Dialogue

Headline: Balance of Payments Remains Stable in 1H09

• Debt increased mostly due to borrowing by non-financial sector; banks kept paying foreign liabilities
  
• Illustrate that financial situation eased in 2Q09
  
• Balance of Payments indicates that there was no acceleration of imports growth May-June
  
• Lack of growth in imports left some room for important substitution
  

From... Business New Europe

Headline: Russia-US Summit – Investment Angles

• Russia needs access to US investment capital because oil revenues can not continue to pay for investment
  
• Investment in Russia have been either negative or insignificant due compared to other developing economies
  
• Factors include: high oil vulnerability, declining economy, bigger bank debt problem, and poor perception of Russia amongst international investors
  
• US would like Russia to back off its efforts to undermine the role of the dollar as the global reserve currency
  

Headline: Kudrin says 2010 Budget Could Assume Oil at $55 per Barrel

• FinMin forecasts crude oil averaging $55/barrel in 2010 and $54 in 2009
  

Headline: Russia's Foreign Debt Grows by 5.4% in 2Q09

• Two main factors leading to increase in debt: weakening of the dollar (which increased the value of non-dollar part of debt) and repatriation of capital to Russia by direct investors
  

Headline: 3Q Outlook – Russian Finance: Signs of Life

• Demand for Ruble debt is based on the appreciating Ruble, rising reserves, and falling interest rates
  
• The government is encouraging and demanding banks to start lending
  
• Interest rates will likely be cut by the CBR
  
• Fiscal stimulus planned in response to the crisis should start having an impact in 2H09
  

Headline: Inflation .6 % Inflation in June, 7.4% Jan-Jun

• Russia had .6% Inflation in 6/09 compared with .6% in 5/09 and 1.0% in 6/08
  
• Jan-Jun inflation was at 7.4%, 1.3 points lower than 8.7% the same period last year