This is bne's Russia chairman’s newsletter, a selection of forward looking stories on development in eastern Europe and the region. Feel free to request topics or ask questions:

editor@bne.eu

Contents: Top Story

Russia’s GDP outlook in 2015 – bad, but not that bad Putin on the job for 15 years Russian working through the pain of crisis faster than expected EU links Russian sanctions to Minsk ceasefire deal, defacto six month extension

Politics – the good

Russia's capital amnesty bill submitted to Duma FSKN cracks down on drug distribution networks Kremlin salaries of top Russian officials to be cut by 10% Russian upper house passes bill creating mechanism to remove NGOs from Foreign Agent list Russia may appoint commissioner for women’s rights Putin signs amendments to lower penalties for bribe taking

Politics – the bad

EU extends sanctions on Russia

More pressure on the Russia's independent media Russian investigation into Browder illegal sale of Gazprom shares extended Top managers of Russian state-owned companies opt out of declaring incomes

Politics – the ugly

Sakhalin Governor arrested for taking $5.5m bribe Report names and shames Russia's worst governors New Corruption Scandal Hits Russian Defence Ministry Former Russian judge arrest on theft charges Liberal opposition leader Ponomaryov accused of corruption Less than one in five Russians go to independent news sites Ketchum quits Russia

Polls, mood, sociology

Three quarters of Russia would vote Putin in as president

Russian support for democracy hits 20 year low Russians’ satisfaction with financial position falling Despair Index 2015: Russia feels the squeeze Russians’ latest reactions to Ukraine, sanctions and Putin China More Popular in Russia Than Elsewhere Russians Smoking, Drinking Less Number of ordinary Russians wanting to emigrate hits all time low Russian oligarchs down on future, moving to London Anti-American sentiment hits record 80% Poorer CEE/CIS nations are fertile ground for public-sector graft Despair Index 2015: Russia feels the squeeze 82% of Russians say inflation is country’s biggest concern Poll shows Russians’ satisfaction with financial status is falling More that half of Russians want to return to planned economy Russian's fear of being fired falls, but people are still being sacked

Banks and Finance

Bank monthly wrap Fraudulent loan volumes double in first two months of 2015 Banks' bottom line under pressure. CBR expects rise in overdue loans and unprofitable banks in 2015 The share of FX in Russian deposit accounts soars EU and US not moving to disconnect Russia from SWIFT Recapitalization remains among the biggest issues. VTB books big fall in profits on massive provisions in 2014 IFRS results Russian government moves to support mortgage market Sberbank lowers rates under subsidized mortgage program to 12% Investment bank Renaissance Capital doubles profit from core business in 2014 Russian government may reduce compensation from deposit insurance Russia's Sberbank to stop financing its branches in Europe

Economics

Russian central bank cuts interest rate 1% to 14% Russian inflation to peak in March and could end year at 10% Was the CBR right to cut the key rate in January? Russia's Business Confidence Index stable in March Russia's PMI shows slower manufacturing downturn in February Dvorkovich meeting approves tax experiment in oil sector Chinese investment in Russia to match European in 2-3 years Russia’s corporate profit growth down 10% y/y in 2014 Putin calls for EEU currency union

MACROWRAP

GDP growth goes negative in first quarter for first time since 2009 Russian ruble seen appreciating by third this year Inflation in Russia spiked to 16.7% year-on-year in February, but stabalises in March Russian CB reserves down by $5bn as of March 14 Russian foreign trade turnover dives 44% y/y, January surplus down 20% y/y

Imports drop to five-year low of $13.2bn in January due to the weak ruble Exports fell to $29.1bn in January due to the slump in the Brent price Germany’s trade with Russia fell by 12%, with Ukraine by 25% in 2014 Capital investment slump intensifies in January Producer confidence improves despite recession Agriculture remains the only growth driver Russian companies make first aggregate loss since 2009 Real wages down 10% in February year-on-year Russians to spend 50% of income on food amid inflation and falling wages Retail trade continues to decelerate Number of unemployed tops 1m Finance ministry expects capital outflow from Russia to reach $90-100bn in 2015 Russia looks to bolster Reserve Fund from oil sales in 2015

BUDGETWRAP

Amendment to the Russian budget for 2015 is attempt to maintain the status quo

Russian deficit surges to 7.4% of GDP in 2M15 due to 76% year-on-year rise in defence spending Russia may spend 80% of reserve fund on financing budget deficit Russia's 2010-2014 privatization plan fell flat, says audit chamber Russian Economic Development Ministry base case oil $50, may review in 2H15 Ruble devaluation to cover half of oil price decline for 2015 budget Ruble remains 10-15% below its fair value despite the moderate recovery in oil prices

Infrastructure

Russia’s energy sector needs $2.5tn of investment Russian recapitalises United Aviation Corporate with $1.7bn Russian regions fail to fulfil Putin road building plans Russian Railways wants $8bn from state to break even, maintain infrastructure 8% VAT cut to save Russian air carriers over $300mn p.a. Aeroflot turnover up 10.6% in February versus 10.0% market decline Russia delays Crimea construction projects for several years

Russian seaport cargo turnover up 10% y/y in January-February

ECM

Has the Russian equity market turned the corner? Russia's Lenta raises $225mn in SPO as foreign investors jump Russian utilities burn bright as double-digit dividends beckon Russian IPOs underwater RDIF to set up $1bn joint fund with Italian partners Baring Vostok delays selling Yandex stake by one year Crisis strengthens link between Russian stocks and oil price What to invest into if Russia surprises on the upside?

DCM

Demand for Russian debt improves on back of rising oil, ruble value Russia MinFin to relax investment rules for National Welfare fund IMF not expecting Ukraine to repay Russia debt in 2015 Russia’s Gazprombank get A- rating from Chinese Dagong Russian ruble and bonds rally to 2015 highs on no bad news Russia submits bill to lay Islamic finance groundwork

Moscow Exchange launches yuan-ruble futures trading CBR expected to issue up to RUB3tr to fund budget deficit Arrears and defaults in Russian securitised mortgage and consumer loans will be limited despite economic slowdown Fitch sees Russia's investment rating shielded by reserves

Sectors

2014 a record year for new housing Russia first in Europe in number of Internet users Britain ready to block North Sea deal of Russian LetterOne fund Car plants shut Gazprom’s output falls again amid lower exports, domestic demand

Mobiles Russian mobile data traffic growth higher than global average in 2014 Russian food retailer freezes prices on soaring inflation Russian retailer Magnit's sales up 34% in February Russia's advertising market to shrink 16.5% in 2015 Russia wins court ruling over Stolichnaya vodka name Bankruptcy of Russian mining giant Mechel is inevitable Total seeks $15bn loan from China to complete Yamal LNG project Russian spending on tourism, luxury falls

Top Story Putin marks 15 years in power with harangue against West Russian President Vladimir Putin on March 26 marked 15 years since he was elected as Boris Yeltsin's successor by summoning the heads of the Federal Security Service (FSB) and warning them sternly that there was a western conspiracy to undermine and contain Russia. Putin struck a dark tone in his address to the chiefs of the FSB, the main successor organization to the Soviet KGB, repeating allegations that Russia's "political opposition is controlled and financed from aboard". He reiterated that dialogue with the West is "pointless" in this case. The president went on to say that western secret services had infiltrated Russia's NGOs and would use them to destabilise future Russian elections, specifically the parliamentary elections due in 2016 and presidential elections in 2018. The speech came as a new poll from the Levada Center shows Russian support for a liberal democratic system has reached a

20-year low. One in two Russians now believe it is better to concentrate power in "one pair of hands", while anti-American sentiment is running at an all-time high. Putin has bolstered his standing in the polls by deftly redirecting anger that should be aimed at him over the faltering economy and falling

standard of living squarely onto western governments. Despite his lack of democratic credentials, Putin has played the populist harp with such aplomb that he now enjoys a unprecedented popularity level of some 80% – even better than when he was first elected. Discovering Putin If one were to look for symbolism in the historic anniversary of Putin's

accession to power, then the conclusion is a chilling one. For the first six months after his election in 2000, the western press wrote endless articles asking "Who is Putin?" At first it was assumed that he was simply a puppet of the oligarchs then ruling the roost. However, Putin rapidly took control by first

attacking two of Russia's most prominent oligarchs – Boris Berezovsky, who was driven into political exile, and Vladimir Gusinsky, who was arrested, Both controlled Russia's leading media outlets. Putin followed up by dismissing the entire Federation Council, which was believed to be populated with proxies for the oligarchs, and replacing them with governors appointed by the Kremlin. Putin finished his coup by calling the now infamous "oligarch meeting" in July 2000, where he told the leading industrialists they could keep what they had stolen but they could steal no more - and stay out of politics. These actions formed the political reputation of an autocratic tough guy with little respect for democratic institutions that Putin still carries today. Less well remembered are the concurrent economic reforms that he put in place. The first thing the new president did was to completely overhaul the tax system, slashing income taxes to a low 13% for individuals and 24% for corporations – among the lowest rates in Europe. At the same time, he overhauled the labour code and launched what became known as the Gref plan, named after the serving minister of economics, German Gref. This change paved the way for an economic boom and the Russian economy expanded by 10% in 2000, a record yet to be bested. Of course, Putin was aided by the rapid recovery of oil prices, which rose from a low of $10 to over $25

by 2001. Al Breach, chief economist at Goldman Sachs and a long-time Russia watcher, famously marked every single Russian stock up to "buy" in 2000. It was a spectacular call that would have made investors rich if they had followed his advice (most didn't) as Russia set off on a multi-year boom, until it finally hit the brick wall of the Lehman Brothers collapse in September 2008. Rejecting the reset For all the good luck Putin enjoyed at the start of his first term, he had an equal amount of bad luck at the end of his second, and ever since, which many would argue has only been made worse by his aggression in Ukraine and rejection of liberal western mores. Rising tension with the West over the inability of Russia to form a true partnership with Europe escalated in the second half of the noughties, eventually culminating in the open military clash in eastern Ukraine. Putin has clearly felt frustrated with his attempts to engage Europe, albeit in his ham-fisted way. In his famous Munich Security Summit speech of 2007, he told the European delegates that "Europe is our natural partner", but added the caveat that Russia's interests must be respected. But an effort to buy German-based carmaker Opel by a consortium of Russian banks, which Russia intended to use to rescue its failing automotive industry, was thwarted by executive interference. Likewise, the Russian purchase of a

large minority stake in the European aviation giant EADS, which was intended to help rescue Russia's ailing aviation sector, was also blocked. On the security front, Washington's decision to unilaterally withdraw from the Anti-Ballistic Missile Treaty (ABM) in 2002, a pillar of European security infrastructure as far as Russian was concerned, followed by the US bid to build a "missile shield" in Central Europe, only undermined relations further. Subsequent attempts to sign a missile reduction treaty and the US "reset" pursued after Dmitry Medvedev's 2008 'interim' election as Russian president came to nothing. Meet the new old president Putin returned to the Kremlin helm in 2012 after side-stepping presidential tenure rules by serving as prime minister for four years. And things were going to be different. According to bne IntelliNews sources that worked with Putin for the last decade, he eventually gave up trying to be friendly and turned his attention to tightening relations with Asia. Relations with Europe from this point on are going to be pragmatic and commercial, but not friendly. Putin is bound to be re-elected in the 2018 presidential election if he chooses to run. That would mean he will remain in office for another 10 years until 2024 when the constitution requires him to stand down. He took office when he was 47 but will probably retire when he is 72.

What the next 10 years hold remains totally up in the air. Russia is at a crossroads (yet again) and the government needs to launch radical reforms if the country is not to slide into stagnation. At the same time, the financial sanctions imposed by the US are likely to remain in place for all of Putin's remaining time in office and will act as a millstone around Russia's economic development. Even if European sanctions expire at the end of this year, as most commentators are expecting, the viral nature of the US financial sanctions mean Russia's major banks and companies are likely to be cut off from the international capital markets from this point onwards, or at the very best will have to pay a lot more for their money. That said, the Russian economy remains entirely self-sufficient, not to mention its treasure trove of natural resources. And it has not been isolated by the showdown with the West, as the process of integration with other emerging markets, particularly the BRIC countries, is on-going. In 2014, China became the largest economy in the world and continues to be one of the fastest growing. Whether this relationship will be enough to offset the lack of business integration with the West remains to be seen.

Russia’s GDP outlook in 2015 – bad, but not that bad Russia’s GDP outlook is still all over the map – but early data suggests a modest recession, not the end of the world How is Russia’s economy doing right now? Pretty clearly, the answer is “not very well.” 2014 was the first year since Putin came to power in which, due to a combination of spiking inflation, plummeting oil prices, and flat-lining growth, real disposable incomes actually shrank. The economy still managed to eke out 0.6% overall growth, but no one, not even the Kremlin, could dispute the blackening outlook and the general sense of malaise. There is a universal consensus that 2015 will be worse. But how much worse? Here the answer is not at all clear. Professor Anders Aslund of the Peterson Institute was a particularly high profile member of what can be called the "disaster caucus," the people who think that Russia's economy is headed for implosion. He predicted that 2015 would see a recession that would lop off somewhere between 8% and 10% of total output, substantially worse than 2009. Needless to say, Aslund's forecasts seems unduly pessimistic. Yes the current mood is grim, but it's nothing like the blind panic, which was gripping the world financial system in the aftermath of the collapse of Lehman Brothers when

the Russian economy shrank by "only" 7%. Russia's current crisis has been a slow-motion one. Market participants are all too aware of what is likely to happen in the near future. That will likely make resolution of the crisis more difficult, it also will likely result in a more protracted recession, but it also means that panicked uncertainty, which was a hallmark of 2009 is absent. Other estimates are for a contraction of somewhere between 4% and 6%. The latter figure is the position of market economists and credit ratings firms while the slightly more optimistic figure is the product of the Russian Central Bank (which estimated that the economy shrank by 0.7% over the first quarter of this year). On their face these estimates seem entirely reasonable and there is no reason to discount them out of hand. But while -4% growth is bad, it’s a lot better than -6%. So which seem more likely? Well Rosstat's initial Q1 GDP estimate has, obviously, not yet been released since we're still in the midst of the first quarter. Rosstat did, however, release industrial production figures for the January-February period. These are the most broad-based and accurate data that we currently possess about the actual state of the Russian economy. And what do they suggest? Well, the

result certainly wasn't overly sunny, total production decreased by 0.4% in comparison to the analogous period in 2014, but neither was it disastrous. On a sector by sector basis the extractive industries were the best performers. Despite the recent swoon in commodity prices their output in the first two months of 2015 actually increased by 0.7%. On the other hand manufacturing fared the worst, with output down by 1.5% in comparison to 2014. Of particular note was the disastrous performance of the automobile sector, where production was down a full 17% from the year before. The month by month breakdown was a bit strange in that January actually saw a small (0.9%) year-over-year increase while February saw a deeper (1.6%) decline. The acceleration of the decline in February is worrisome, and it means that the March data will be very important in more clearly ascertaining the economy's real trajectory. If March’s figures are even worse than February's it would suggest that Russia will experience a recession closer to the expectations of credit analysts and market economists (e.g. a contraction of between 5 and 6%). However if March’s figures are marginally improved it would suggest that Russia is likely to end up on the more optimistic side of the forecasts with a total contraction of between 3 and 4%. Moving forward, the most important variable is going to be the price of Brent Crude, which has been fluctuating wildly as the Fed

debates when or if it will raise interest rates. If oil resumes the modest rally it experienced from late January through mid-February, before retreating against in early March, Russia will probably end up on the optimistic side of the forecasts. If oil resumes its downward march, though, Russia’s economic performance will inevitably deteriorate. That’s the important takeaway, though, the conditional nature of all of these forecasts. No one knows exactly what Russia’s economy is going to do, it’s all a matter of probability. Given what has happened so far in 2015, particularly the relatively modest overall decline in industrial production, it seems as if the looming recession will be on the modest end of the spectrum. That could change, of course, but the data seem to indicate a bit more dynamism and resilience than expected.

Russian working through the pain of crisis faster than expected Russia's economy is working through the pain of currency crisis that hit in December faster than expected, says a report from Alfa Bank. There have been several pleasant surprises in the last few weeks that led Finance Minister Anton Siluanov to say on March 19 "the worst was over" for Russia's economy. “The negative peak is behind us and instead we are seeing certain signs of stabilization,” Siluanov said in Moscow at a conference organized by the Russian Union of Industrialists and Entrepreneurs, Inflation didn’t rise of the first three weeks of March and the economic contraction in February was much milder than most economists were expecting. Alfa has already said that the work through of the devaluation effect on inflation, which usually takes about six months, is going much faster than expected and inflation will probably hit a peak of around 16% in March rather than April or May as was previously expected. "GDP decline is not as strong as expected: Following the dramatic deterioration of the financial markets and economic sentiment in December, we set a GDP growth target of -5% for 2015," said Natalia Orlova, chief economist at Alfa Bank in a note to clients. "However, January-February figures indicate that the actual

scale of the decline may be better than expected. In January, GDP was down only 1.5% and, based on February macro statistics, a 2-3% GDP contraction appears to be a more plausible scenario for 2015." Russian President Vladimir Putin was less sanguine warning that Russia was not out of the woods yet in comments the next day. And even with the most optimistic outlooks still predict a deep recession this year – the first since 2009. Unemployment ticked up by 0.3% in February Rosstat reported on March 20 and is expected to continue to rise this year. Some 127,000 people lost their jobs in February and economists are predicting that a total of 2.4bn will be made redundant this year due to the economic slowdown. However, anecdotal evidence suggests the rate of sackings are much higher, although the recent polls suggest Russians' fear of being sacked has retreated in the last month as the worst of December's panic subsides. And there is even a silver lining to a slight loosing in the previously drum tight labour market. "One of the reasons that GDP contraction will not be as deep as expected is the relative strength of the consumer market. The key explanation here is that the tight

labour market plays in favour of households," says Orlova In February, the unemployment rate increased to 5.8%, which is still dramatically below the 9.2% unemployment peak in March 2009, so despite a little weakening the tight labour market is still pushing up nominal wages (up 5% over the first two months of this year) even if real wages are down dramatically (-9.1%), says Alfa. And Putin's largess on social spending will also buoy the consumer sector. The government announced it would cut 10% off budget spending across the board this year – bar defence. But as the amendments to the budget are prepared for approval next year, other exemptions have crept in, especially to social spending, which will account for 20% of the total spend. This means in reality the government will only cut spending by 2% and some social groups will not get any cuts at all. "Another point in favour of consumption is the 11.4% pension indexation that is occurring this year under budget law. In other words, after the panic jump in consumption in 2014, some cooling is taking place; however, it is unlikely to reach our initially expected figure of 10% y/y for the full-year," says Orlova. An uptick in the inflow of cash to retail bank deposits was another green shoot sign. During the December panic Russian took out cash from banks and converted it to hard currency. But now as the collywobbles die down prudent

Russians are putting their lolly back in banks to keep it safe. Retail deposits were up 3% month-on-month in February. "The best economic indicator is the improvement of the retail deposit market: in January, the 1% month-on-month outflow of retail deposits was not as pronounced as it should have been based on seasonality; while in February, ruble deposits were up 3% month-on-month and no outflow of FX deposits was seen," says Orlova. "At the same time, the retail lending market was down 1% month-on-month in February, which is the worst indicator in five years. We see this as a positive effect of the December tightening in the CBR’s monetary policy." Elsewhere in the banking sector the sector's capital adequacy ratio (CAR) has also improved: prior to the onslaught of the 2008 crisis bank's CAR was typically at 20% or more but has slide continuously since and hit a low of about 12% at the end of last year. However, in February this trend reserved sharply and the average CAR has increased to 12.5% in the last month as the government efforts to recapitalise the most important banks started. In all the state intends to put a fresh RUB1 trillion into the top 27 most important banks (for which read large banks that are actually lending to the real economy). The weak ruble has created some import substation opportunity but not enough to make a real difference to overall growth and certainly not as much as in 1999.

However, it has decreased average labour costs to less than those in China, which will bolster any nascent recovery, according to Trading Economics. But the collapse of the ruble has also badly wounded corporates and their investment plans. Add to this the cost of borrowing is still over 20% for companies – despite a 3% cut in interest rates in two months by the Central Bank of Russia (CBR) – and investment remains moribund. "The flip side of the relatively defensive consumption figures is that the corporate sector remains weak. Investments were down 6.5% year-on-year in February (-6.4% for 2M15) and despite sharp ruble depreciation, we consider the import substitution effect to be modest," says Orlova. "The slight -0.4% year-on-year decline in industrial output is mainly due to the fiscal stimulus that has come through the 33% year-on-year increase in military expenditures in the last 12 months. Corporate segment confidence thus remains very weak, fuelling persisting high net capital outflow, which, for the moment, is neutralizing the positive effect of the 40% year-on-year import drop. Weakness in the corporate sector, therefore, remains a risk factor to the GDP growth trend this year."

EU links Russian sanctions to Minsk ceasefire deal, de facto six month extension The European Union (EU) voted to link the extension of sanctions to the completion of the two Minsk agreements at a summit in Brussels on March 19, however, stopped short of immediately re-imposing sanctions regime on Russia, which is due to start expiring in July. The decision means a de facto six month extension of European sanctions. A formal, legal decision on whether to extend sanctions on Russia's financial, defence and energy sectors that expire in July will only be taken at the next EU summit in June. "This evening, we discussed Ukraine and Russia. Leaders decided to align our sanctions regime to the implementation of the Minsk agreements brokered by [German] Chancellor [Angela] Merkel and [French] President [Francois] Hollande," European Council President Donald Tusk told journalists after the first of two European Council meetings. There have been two attempts to end the bloodshed in eastern Ukraine that produced agreements at summits in the Belarusian capital of Minsk in September and March. A 13-point package on the implementation of a ceasefire and other measures agreed at the September 2014 Minsk summit was adopted at the February talks. Russia still on the hook

Among the main points in the deal is for Russia to secure its border with Ukraine and hand over control of the region to Ukrainian authorities. This week's decision notes that the Minsk II agreement will not expire until December, leaving Russia on the hook until then. Hence the link to Minsk II agreement is a de facto six month extension of sanctions – a compromise between the hardliners like Poland, and Russia's friends in the EU. The decision will come as a blow to Moscow, which had been hoping that divisions within the EU would prevent the sanctions from being extended. The EU's sanctions are due to automatically expire between July and September unless there is a unanimous decision by EU members to extend them. In recent months several members of the EU have expressed their concern over the sanctions and their apparent unwillingness to re-impose them when the current resume expires. This "pro-Russian" group includes countries like Hungary, Spain and Bulgaria, all of which have significant economic ties to Russia. Even Germany is seen to be sitting on the fence: on the one hand Merkel is adamant that Europe should not cave into Russian aggression, but on the other hand the German business lobby, which is heavily invested into Russia, is keen to normalise the situation and get back to work.

Politics – the good Russia's capital amnesty bill submitted to Duma The Russian government is hoping to coax billions of dollars back to the mother land with a capital amnesty bill that was submitted to the Duma on March 27. Following two decades of capital flight Russian businessmen have hundreds of billions of dollars stashed in offshore havens. Under the terms of the amnesty Russians will be allowed to repatriate this money with "no questions asked" and wont incur tax payments. The net outflow of capital from Russia reached $151.5bn in 2014, according to the CBR, by far the highest annual volume since the bank started keeping track of it in 1994. The 2014 flight total was equivalent to about one-seventh of Russia’s gross domestic product of RUB70.9758 trillion, or about $1.1 trillion at December's exchange rate. In 2013, capital flight stood at $61bn. The estimate for 2015 is around $90bn. However, capital repatriation may run foul of the international financial sanctions on Russia and oligarchs that are willing to send their money home may not be able to, the Kremlin said last week. Also the Financial Action Task Force (FATF), the international anti-money laundering

regulator, warned that the capital amnesty should not allow for any exemption from laws combating money laundering and financing of terrorism. Breaching this principle could cause Russia to be placed back on the FAFT black list. Russia was briefly on this list in 2001 until it passed a raft of anti-money laundering laws. The bill is the carrot to the stick of a de-offshoreisation bill that came into effect in January that demands Russian business declare their overseas holding. The deadline for the declaration was due to expire in March, but has been extended into the autumn as this bill was not clear and oligarchs have been slow to comply. The amnesty bill has been forwarded to the State Duma to encourage voluntary declaration of property and personal accounts by individuals overseas. Finance Minister Anton Siluanov said at a government meeting that the bill covers real estate, securities, shares and units of corporate capital and the declaration of foreign-controlled companies, as well as income earned from foreign investments. Declarations have to be submitted either to a local tax agency office or the central office of the Federal Tax Service by December 31, 2015.

Those who declare their property would not be held liable under criminal, administrative or tax law within the established limits, as well as with regard to crimes committed before January 1, 2014. FSKN cracks down on drug distribution networks The Federal Drug Control Service (FSKN) has shut down almost 40 drug dens and several drug distribution networks in March. "FSKN officers shut down a number of large distribution networks and 38 drug dens in the period from March 16 to March 22, 2015. Some 27.5 kilograms of heroin, 230 kilograms of hashish, 226 kilograms of marijuana, 61 kilograms of synthetic drugs and one kilogram of psychotropic substances, in all, 207 wholesale deliveries, were seized," the service said in a report. The service cracked down on drug leaders in the Moscow city and region, St. Petersburg, the Leningrad region, the Krasnodar and Krasnoyarsk territories, the Kaluga, Kursk, Omsk, Samara, Saratov, Sverdlovsk, Ulyanovsk, Chelyabinsk and Yaroslavl regions and the Khanty-Mansi autonomous region. Kremlin salaries of top Russian officials to be cut by 10% Russian President Vladimir Putin has ordered a 10% cut in salaries of presidential staff, presidential officials and lawmakers.

The cuts would come into effect in May. Salaries of the President, the Prime Minister, the Prosecutor General and the Chairman of the Investigative Committee will be cut as well. Russian upper house passes bill creating mechanism to remove NGOs from Foreign Agent list Russia's upper house of parliament, the Federation Council, submitted a bill that creates a mechanism to remove NGOs from the controversial Foreign Agent list. NGO may be excluded from the list upon request after passing an inspection conducted by the Justice Ministry, according to the bill. All NGOs engaged in political activity and receiving finance from abroad have to register as a "foreign agents" or face fines of up to RUB500,000 ($8,200). In February 2013 eleven Russian NGOs, Moscow Helsinki Group among them, lodged a complaint with the European Court of Human Rights (ECHR) protesting against the law. Russia may appoint commissioner for women’s rights Russia's Public Chamber that deals with human and civil rights, and is relatively liberal in its outlook, has proposed establishing the post of women’s ombudsman in Russia to go along with the business

ombudsman and military ombudsman. “Women’s rights and freedom continue to be infringed upon in Russia” and that “the issue has acquired additional urgency due to recent economic problems,” according to Public Chamber member Sergei Markov. For example the Labour Ministry suggested recently reducing women's pensions vs men simply because women needed less. Putin signs amendments to lower penalties for bribe taking Russian President Vladimir Putin signed off on changes to the

Criminal Code that decrease the fines for those caught taking or giving bribes. The changes lower the minimum fine for accepting a bribe from 25 times the amount of the bribe to 10 times the amount. Those caught giving bribes face a minimum fine of five times the amount of the bribe, down from the previous 15 times the amount of the bribe. The move was prompted by the fact that even those convicted of taking bribes rarely pay the fine.

Politics – the bad EU extends sanctions on Russia The European Union (EU) voted to link the extension of sanctions to the completion of the two Minsk agreements at a summit in Brussels on March 19, however, stopped short of immediately re-imposing sanctions regime on Russia, which is due to start expiring in July. The decision means a de facto six-month extension of European sanctions. A formal, legal decision on whether to extend sanctions on Russia's financial, defence and energy sectors that expire in July will only

be taken at the next EU summit in June. European Council President Donald Tusk told journalists: "The European Council agreed that the duration of economic sanctions will be clearly linked to the complete implementation of the Minsk agreements, bearing in mind that this is only foreseen by the end of 2015," he said. In recent months several members of the EU have expressed their concern over the sanctions and their apparent unwillingness to re-impose them when the current resume expires. Amongst this "pro-

Russian" group are countries such as Hungary, Spain and Bulgaria, all of which have significant economic ties to Russia. Even Germany is seen to be sitting on the fence: on the one hand Merkel is adamant that the Europe should not cave into Russian aggression, but on the other hand the German business lobby, which is heavily invested into Russia, is keen to normalise the situation and get back to work. The first round of sanctions are imposed on Russia following its annexation of the Crimea in mid-March 2014 and target Russian officials and companies close to the state. The West announced new, sectorial, restrictions against Russia in late July 2014 and added financial sanctions to that in September and December. More pressure on the Russia's independent media Russia's best known and most highly regarded investigative newspaper Novaya Gazeta may cut its print issue this summer or could be closed down entirely, the newspapers editor said according to local reports. Editor-in-chief Dmitry Muratov said that the paper could not compete with the state-backed rivals. Ironically the Moscow Times ran its longest story ever on exactly this topic the same week, making the point that while the Kremlin didn’t practices Soviet-era style censorship, its adroit use of threats and commercial support was crushing the spirit of independent journalist that sprang up during perestroika.

The campaigning title reports constantly on corruption and abuse of office in the government and several killings are related to the paper's staff. That said US-based CNN is due to receive its licence to broadcast in Russia "within days or weeks" the station said, after it withdrew from the Russian market at the end of last year due to the new foreign media law. Russian investigation into Browder illegal sale of Gazprom shares extended The Moscow City Court has upheld the decision to extend until May the investigation of a case against Hermitage Capital Management CEO William Browder, who is suspected of Gazprom share embezzlement. The case was initiated in March 2013, but the deadline for the investigation has been moved back several times since then, most recently until May 2015. Browder is accused of illegally buying over 130mn Gazprom shares worth at least RUB2bn ($32.6mn) at a lower, intra-market price through a Russian company he controlled, Kameya LLC. This was a grey scheme at a time when foreign persons were not allowed to buy or hold locally traded Gazprom shares, but Russian companies owned by foreigners were. It was a widely used scheme by all the investment banks and technically legal, although obvious not in the spirit of the law.

Foreign investors made a killing on the trade as Gazprom shares soared from under $1 a pop to around $10 at their peak after the so-called ring fence preventing foreigners directly holding the shares was removed in 2006. A Russian court has already sentenced Browder in absentia to nine years in a penal colony. The court found that in 1997-2002, Hermitage Capital auditor Sergei Magnitsky created and applied an illegal tax evasion scheme in the interests of Browder. Top managers of Russian state-owned companies opt out of declaring incomes The top managers of Russian state owned companies have opted out

of a law that requires them to declare their incomes, according to a government decree. The government has ruled that these executives are not public employees but businesspersons, according to Natalya Timakova, the press secretary of Prime Minister Dmitry Medvedev. The fact that the state owns a stake in such a business entity does not change its status, she said. However, the managers will have to submit their income reports directly to the government, but the information will be kept confidential, Timakova said. CEO of oil company Rosneft has already caused a scandal by not declaring his income.

Politics – the ugly Sakhalin Governor arrested for taking $5.5m bribe Sakhalin Governor Alexander Khoroshavin (pictured) was arrested on charges of accepting $5.5m bribe. He was the first governor in almost nine years to be detained while in office. His official residence, dacha and Moscow apartment were all searched before he was flown to the capital on Wednesday, where the Investigative Committee has opened a criminal case into large-scale bribe-taking.

A search of his house found $16m in cash and a pen worth $600,000. The ruling United Russia party has suspended his membership. The

bribe was connected to a construction project and Khoroshavin faces 15 years in prison if convicted. The arrest is as much signal to the other ruling regional leaders as it is to anything that Khoroshavin may have done wrong. Report names and shames Russia's worst governors Following the sacking of Sakhalin regional Governor Alexander Khoroshavin on graft charges the Kremlin has released a report naming and shaming Russia's worst regional governors as part of its on going campaign to clean up Russia's administration. Khoroshavin was arrested in March for taking a bribe of about $5mn, including accepting a pen worth over $600,000. A big part of Russia's reform program currently consists of stamping out corruption, and the campaign has now moved to take on the regional elite. The state backed Civil Society Development Foundation think-tank has rated Russia's 83 regional governors based on their economic performance. Alexander Drozdenko, the head of the Leningrad region, which surrounds St. Petersburg, came in as the best manager. That stands in stark contrast to Georgy Poltavchenko the governor of the city of St. Petersburg, one of only two cities that are regions in their own right (Moscow is the other) came in the bottom ten.

Leningrad has emerged as a major industrial and manufacturing hub thanks to its business-friend administration, large local population (St Petersburg is the second largest city in Europe after Moscow) and proximity to both Moscow and an international port. Yevgeny Kuivashev, the head of the Sverdlovsk region in the Ural Mountains, came in at the very bottom of the list. Kuivashev is currently under investigation for the misuse of public funds earmarked for the development of the Ural Mountains region, reports Rossiiskaya Gazeta. The governors of the Samara, Nizhny Novgorod, Orlov and Primorye regions were all in the bottom five on the list. Samara Governor Nikolai Merkushkin was named the second-worst administrator due to his failure to combat corruption in his region. Nizhny Novgorod Governor Valery Shantsev, a former Moscow deputy in the corrupt regime of Yuri Luzhkov, came in third from the bottom because of a criminal investigation into his associate Oleg Kondrashov, the current mayor of Nizhny Novgorod. New Corruption Scandal Hits Russian Defence Ministry A Moscow court ordered the arrest of Alexander Gorshkolepov, the deputy head of the ministry’s property relations department, who is accused of having taken RUB16mn ($259,000) worth of bribes and kickbacks.

The arrest follows on from the dismissal of Defence Minister Anatoly Serdyukov in 2012, who was also accused of corruption also related to the ministry’s property department. This is the first major scandal since Defence Ministry since Sergei Shoigu was appointed in his place. Serdyukov was not arrested, but was questioned. His deputy and reported girlfriend was jailed on graft charges. Former Russian judge arrest on theft charges A former Russian senior judicial official was arrest on charges of stealing RUB300mn ($5.2mn) in March. The ex-head of the Moscow directorate of the Russian judicial department Vyacheslav Lipezin has been detained on suspicion of embezzlement, the Russian Investigative Committee spokesman Vladimir Markin told TASS. "According to investigators, the management of the Rabikon LLC submitted to the Moscow directorate of the judicial department under the Supreme Court of the Russian Federation fake resolutions of judicial bodies on payment for work of a translator, as a result of which more than 300mn rubles was stolen from Russia’s budget in 2014," Markin said. Rabikon director general Umar Zarobetov has been detained too.

Liberal opposition leader Ponomaryov accused of corruption Liberal opposition leader Ilya Ponomaryov has been accused of corruption and Russia's investigation Committee has asked for his parliamentary immunity to be withdrawn. He is also an opposition party Just Russia Duma deputy and the only man to abstain on the vote to allow Crimea to "return" to Russia last year, Ponomaryov could be guilty as accused as he was caught up in a lecture fee scandal. He accepted a fee of $300,000 for a series of 10 lectures to students of the state-owned Skolkovo institute that apparently never happened. And he was paid another $450,000 for scientific and research work, the Investigative Committee added. The criminal case is the latest of several targeting Skolkovo, including the foundation’s vice president, Alexei Beltyukov, on the suspicion that he gave the large sum of foundation money to Ponomaryov between February 2011 and February 2012. Ponomaryov, who took an active part in the mass opposition protests in Russia last year, dismissed the case as “politically motivated.” Less than one in five Russians go to independent news sites Less than one in five Russians go to independent news sites when using the Internet to find news.

The vast majority use Russian social media sites to get news where Kremlin trolls are most active, says a new report. Authors Pavel Pryannikov of the Tolkovatel portal said: “propaganda in the Internet has shown its effectiveness.” The authors note that about 50% of Russians go online, with the highest share being among young people between18 and 24, with 87% of those questioned saying they followed political news in the Internet every day or several times a week. A third indicated that they were devoting more time to such searches given the events in Ukraine, but “26% of those queried said that information from the Internet had not had an impact on their view of events in Ukraine.” “More than 90% of those questioned positively assessed the activity of the Russian President and in general of Russian government agencies.” Only one

said that she didn’t pay attention to news because “an information war” is going on. Ketchum quits Russia US PR firm has quit its job promoting Russia in the west due to on going tensions. Ketchum earned about $27m between 2006 and 2012 from the Russian government to improve Russia's image in the west (to little effect) and another $17m from state-owned Gazprom over the same period. Ketchum representatives complained to bne IntelliNews that while they were actively setting up meetings between Russian officials and representatives of the European Union (EU), especially in Brussels, the Russian side never bothered to show up. The Russians seemed to take the line that Ketchum had been paid to improve Russia's image, but government officials didn’t expect to participate in the process.

Polls, mood, sociology Three quarters of Russia would vote Putin in as president Three quarters of Russian said that they were ready to vote for Vladimir Putin they've elections were held next Sunday, the state backed VTsIOM pollster found in

March, setting yet another record for putting is popularity. Putin's rating is up from the 71% that said they would vote for putting in election six months ago.

Liberal Democratic Party of Russia (LDPR) leader Vladimir Zhirinovsky is the second most popular, but trails way behind with only 4% of votes on a par with all the other potential presidential candidates. Communist Party leader Gennady Zyuganov scores 3%; leader of A Just Russia Party Sergey Mironov and former leader of the Civil Platform Party Mikhail Prokhorov both score 1% each. None of Russia's opposition leaders, such as anticorruption blogger Alexei Navalny, feature anywhere in the polling data. The poll also found that the majority of those ready to vote for Putin (95%) have a positive view of him. Russian support for democracy hits 20 year low Support for democracy in Russia hit a 20 year low according to a recent poll by the Levada centre. The conflict with the West over the Ukraine and the associated rise in nationalism has undermined Russian's confidence and interest in moving towards a more liberal democracy. The population has almost university rallied around Russian President Vladimir Putin who has been paying the nationalist card to bolster his support at time when the worsening economic situation is starting to visibly undermine the

quality of life for the average person. Putin has effectively redirected the anger that should be directed at him for the state of the economy onto the west and so undermined Russian's faith in a democratic system. "Right across the board, Russians have become substantially more statist and nationalist in their views," says bne IntelliNews columnist Mark Adomanis "This general trend might not be terribly surprising in considering the events of the past year, but the size and speed of this shift in opinion seems to be noteworthy." Putin's role in the changing attitudes is clear from the statistics: support for the current government ruled by exactly the same amount (10%) as support for Western-style democracy decreased, according to the poll. Russians are reverting to the mean and the number that believe power is best concentrated in "a single pair of hands" has risen by 11%. Currently half of the Russian population now think and autocratic style of government is preferable to a system where power is shared between the people. the collapse in the support for western style democracy is disappointing and a reversal of the previous positive trend: between February 2008 and January 2012 Russians’ expressed support for Western style democracy roughly doubled from 15% to 29%.

Despair Index 2015: Russia feels the squeeze In December, bne Intellinews published its Despair Index (click on link for interactive version) – a combination of inflation, unemployment and poverty – to survey the relative prosperity of various countries, with surprising results. Adding poverty to the established ‘Misery Index’ – a combination of inflation and unemployment – saw many emerging market nations stand toe-to-toe with their Western counterparts. Indeed, even with sanction-led inflation increases, Russia was only marginally worse off than the US and UK. Since then, however, continued sanctions and low oil prices have seen Russia’s score worsen considerably, from 24.1 to 31.5 – more than a 30% increase since the year began. Ukraine, too, has continued to suffer as the conflict in the east shows little sign of ending. Its 2013-2014 score rocketed over 113% from 16.5 to 35.2, and has

worsened by a further 32% to 46.5 in the three months since December. Rapidly rising inflation levels have seen to this. While Ukraine’s score uses the country’s latest official inflation figure of 28.5%, the picture could be even grimmer if analysis by the Cato Institute that Ukraine is in fact suffering hyperinflation is accepted. Steve Hanke of the Cato Institute argues that, “the official inflation rate has consistently and massively understated Ukraine’s brutal inflation” and puts actual rate 272%. Taking this into account would mean that Ukraine’s overall Despair Index score would sit at an astronomical 290 – nearly five-times worse than the second-highest scorer, Bosnia & Herzegovina. While the Despair Index would suggest that the prognoses of Russia and Ukraine are far from rosy, one promising result is that the overall emerging market Despair Index score fell from 36.2 to 33.6, despite Kyiv and Moscow’s continued woes.

Russians’ satisfaction with financial position falling Russians satisfaction with their financial standing fell to 64 points in February from 71 in January and 73 points a year earlier as the economic slowdown and soaring inflation begin to bit, according to state owned Russian Public Opinion Research Centre (VTSiOM). Russians’ general satisfaction with life decreased by 6 points from 65 in February 2014 to 59 this month. At the same time, despite economic difficulties, the level of approval of the country’s political development went up from 69 in December to 71 in February. The independent Levada Center got similar results in a related poll in March: general satisfaction with life in Russia stands at an unprecedented 76%, while more than a half of Russians are happy with country’s political course.

Russians’ latest reactions to Ukraine, sanctions and Putin A series of recent polls by Russia’s Levada Center has cast an interesting light on major issues surrounding Russia, such as Russians’ views on the conflict in eastern Ukraine, the effects of continued Western-led sanctions, and the general popularity of the government. As the first bne:Chart (click on link for interactive version) shows, despite claims that it has been Moscow’s intention to annex East Ukraine from the outset of the conflict, only 19% of respondents felt the same, with 60% of respondents preferring East Ukraine to gain either full or partial independence from Kyiv. Only 4% of those polled would want East Ukraine to remain a part of Ukraine.

As well as preferring the formation of new states rather than the absorption of the region within Russia’s borders, those polled also saw the latter as a highly unlikely conclusion to the conflict, with only 6% of respondents predicting it would take place. 26% believe that the Donetsk and Luhansk People’s Republics (DNR and LNR, respectively) will become independent states within Ukraine’s existing borders, while only 8% envisage the DNR and LNR becoming part of Russia. 33% believe the conflict will continue and spread to other parts of Ukraine. Despite Western-led sanctions fast approaching the one-year mark, the majority of respondents said that sanctions have not created serious problems for them and their families. 57% of respondents said that sanctions have either not created any problems for them at all, or have not created any serious problems.

When asked whether they believe sanctions could yet pose serious problems for them, the responses were slightly more varied, with 47% saying that sanctions may yet create either serious or somewhat serious problems. This would suggest that despite Russia’s economic ability to weather sanctions, continued efforts by the US and EU to financially squeeze Moscow could still hurt Putin, by disillusioning his supportive electorate. While obviously aware of the potential negative long-term effects that sanctions could have on them, respondents seemed doggedly supportive of Russia’s current retaliatory stance. As the second bne:Chart shows, a third of respondents supported one or any of a combination of: reciprocal sanctions; the strengthening of economic and military ties with the Middle East, China and India; or ignoring sanctions altogether in an attempt to weather the storm.

When asked whether they would be for or against forcing the current, Putin-led government to resign, 48% of respondents said they would be against – the highest proportion since 2002. As the final bne:Chart also shows, the proportion saying that they would be in favour of forcing the government to resign was the lowest since 2002. Despite this, when asked if they believe that the current Russian government is fulfilling its social

obligations to the population, 49% believed that they only partially were, with 8% believing that that they are not fulfilling them at all. This was, however, a one-off question, with no historical responses to compare with. Another one-off question showed that 46% of respondents believed that the government has not been managing the problems that the country faces, with only 42% believing that it has.

China More Popular in Russia Than Elsewhere Russians have the most favorable view of China among nine states polled in a survey on the country's image carried out by research center of the Chinese Foreign Ministry. Russians gave China's image 7.6 points out of ten, higher than those polled in India, Brazil and even China itself, according to the research. About three quarters of Chinese believe that their military could best both that of Japan and the United States, according to a recent opinion poll.

China's high score among Russians reflects the rapidly developing relations between the two nations, the survey's authors said. Japan gave China the lowest mark — 3.4 points, amid regional tensions and an uneasy historical background to the two countries' relations. China's image improved by an average 0.8 points in comparison to last year's survey. Russians Smoking, Drinking Less Thanks to a series of health reforms and a public health awareness drive Russians are smoking and drinking less.

Russians were the heaviest smokers in Europe, but the proportion smoking has fallen to 28.3% in 2013, down form 33.7% in 2008, according to a Rosstat study, the Moscow Times reports. Likewise, Russians were the heaviest drinkers of spirits in Europe (although the Czechs remain the biggest consumers of beer) but alcohol consumption has decreased from 16.2 liters per capita annually in 2008, to 11.6 liters in 2013. The fall in consumption of hard liquor is partly due to tough new laws that bans stores and kiosks from selling alcohol (including beer) after 11pm along with big increase in tobacco and acohol taxes that came into effect at the start of 2014. The impact on public health has been immediate and dramatic: the death toll from alcohol poisoning is now to 8.9 people per 100,000 in 2014, down from 9.7 people one year earlier. The number of teetotallers is also up to 41.6% of the population (aged 15 years or older), up from 38.2% in 2011. And 29.3% of Russians said they were exercising on a regular basis, up from 20.6% in 2012. These reforms were part of President Vladimir Putin's so-called "May Orders," a series of campaign promises, which he signed the day of his most recent inauguration in May 2012.

Number of ordinary Russians wanting to emigrate hits all time low The number of Russians who want to emigrate has hit all time low on the back of rising nationalism and satisfaction with the way that president Vladimir Putin and his government is running the country, according to the independent pollster Levada Centre. Overall, 83% of respondents surveyed by independent pollster Levada said they would "rather not" and "absolutely not" emigrate from Russia, while only 12% said they would want to leave the country forever. The numbers are down from the last poll in April 2009 during the last crisis, when 80% of Russians said they had no desire to emigrate from their country. Russian oligarchs down on future, moving to London The majority of oligarchs on Russian say they are likely to leave the country in the next few years according to a new study by Campden Wealth, the Daily Telegraph reports. Of the 30 Russian nationals interviewed more than half said that there were likely to move abroad, the study found, although not imminently. Of those living in Russia, more than one in four say they had plans

to leave within five years. The interviewees in the Campden study jointly control $2.5bn and businesses with turnover of $6.5bn last year. New "deoffshorisation" rules introduced at the start of the year

mean that later this year the oligarchs will have to declare their foreign business and both the business and the owners will be subject to Russian taxes. Just 111 individuals control nearly a fifth of all household wealth.

Anti-American sentiment hits record 80% Just over 80% of Russians now see the US negatively, a record post-Soviet high, according to the independent Levada Centre polster.

The poll also finds that 42% of Russians see the US and Russia as "hostile" or as "enemies," depending on the translation.

The bad feelings a reversal from the noughties when the majority of Russians viewed America as a friend. There have been three previous episodes when the US was seen in a negative light -- in the late 1990s during the Kosovo War; in 2003, when the US invaded Iraq; and in 2008, when the US was critical of Russia's war

with Georgia – but none of these were so pronounced as now. The poor view of America is mirrored in the poor view Americans have of Russia, with the two trends usually being a mirror image of each other – except in the past the Russians have usually seen the Americans in a better light than visa versa.

Poorer CEE/CIS nations are fertile ground for public-sector graft Transparency International’s annual Corruption Perceptions Index (CPI) measures the perceived levels of corruption in different countries across a number of studies. Comparing the results of the 2014 CPI with per-capita GDP across Central and Eastern Europe/Commonwealth of Independent States (CEE/CIS) reveals a clear correlation between poverty and corruption. As the bne:Chart shows, countries with low per-capita GDPs appear to suffer higher CPI scores. The same trend exists when GDP is held up alongside the International Centre for Asset Recovery’s Anti-Money Laundering Index, which measures a country’s propensity for money laundering and terrorism financing.

The bottom-right quadrant of the chart represents countries that enjoy a high level of GDP per capita as well as a low score for corruption perceptions. Not a single non-EU country occupies it, while only two EU member states – Romania and Bulgaria – fall outside of it. The undesirable top-left quadrant represents high perceptions of corruption and money laundering combined with low GDP per capita. It is occupied almost exclusively by Western Balkan states whose post-Soviet redevelopment was hindered by drawn-out conflicts in the 1990s, and CIS countries that have little scope for any real political opposition to their current government. The top-right quadrant of the chart represents countries that enjoy a higher income alongside high perceptions of corruption. The two notable occupants of this area are

Russia and Kazakhstan – both big oil and gas producers. Use the bne:Chart below to compare CPI and AML scores with GDP per capita. A high CPI score usually denotes low corruption

perceptions. For the purpose of consistency across both indexes we have recalculated it so that high CPI scores denote high perceptions of corruption.

See an interactive version of this chart here. Despair Index 2015: Russia feels the squeeze In December, bne Intellinews published its Despair Index – a combination of inflation, unemployment and poverty – to survey the relative prosperity of various countries, with surprising results.

Adding poverty to the established ‘Misery Index’ – a combination of inflation and unemployment – saw many emerging market nations stand toe-to-toe with their Western counterparts. Indeed, even with sanction-led inflation increases,

Russia was only marginally worse off than the US and UK. Since then, however, continued sanctions and low oil prices have seen Russia’s score worsen considerably, from 24.1 to 31.5 – more than a 30% increase since the year began. Ukraine, too, has continued to suffer as the conflict in the east shows little sign of ending. Its 2013-2014 score rocketed over 113% from 16.5 to 35.2, and has worsened by a further 32% to 46.5 in the three months since December. Rapidly rising inflation levels have seen to this.

While Ukraine’s score uses the country’s latest official inflation figure of 28.5%, the picture could be even grimmer if analysis by the Cato Institute that Ukraine is in fact suffering hyperinflation is accepted. Steve Hanke of the Cato Institute argues that, “the official inflation rate has consistently and massively understated Ukraine’s brutal inflation” and puts actual rate 272%. Taking this into account would mean that Ukraine’s overall Despair Index score would sit at an astronomical 290 – nearly five-times worse than the second-highest scorer,

82% of Russians say inflation is country’s biggest concern March 17, 2015, 6:21am GMT | Edit article Print E-mail this page Most Russians believe rising inflation is the biggest problem facing the country, according to results of a new poll published by the independent Levada Center on March 16. The number of respondents naming inflation as

the main concern for the government rose to 82% from 71% in August. Poverty was the second most pressing issue, named by 43% of respondents, while 38% cited . rising unemployment. The government was failing to address rising prices and falling real income, another 55% said in the poll conducted on February 20-23

among 1,600 people across 46 of Russia's regions. Ruble devaluation and the Russian embargo on EU food products imposed last August prompted rapid price growth during recent months. Total annual inflation reached 16.7% in February. Food prices grew even faster, to 22% in February, which led to probes into price setting in several major cities across Russia. Izvestia newspaper reported on March 16 that prosecutors have opened more than 1,500 administrative cases this year against retailers. A survey of Russian retail prices conducted by VTB Capital earlier in March showed that by the end of 2015 Russians might spent 50%-55% of their income of food, or 40% more than in 2014. The price growth is expected to stabilize from Q2 at the 9.6% level. However, following stabilization of the ruble and a much-needed rise in oil prices this year, the Central Bank of Russia's decision on March 13 to lower the key interest rate to 14% showed that policy makers now regard economic growth as the priority over inflation. Poll shows Russians’ satisfaction with financial status is falling March 4, 2015, 4:58am GMT | Edit article Print E-mail this page Sociologists at the Russian Public Opinion Research Center (VTSiOM) reported on March 3 that Russians’ general satisfaction with life decreased by 6 points from 65 in February 2014 to 59 this month. The poll was conducted on

February 22-23 among 1,600 people. The poll shows that Russians have started to feel inflation biting. The number of people satisfied with their financial status went down to 64 points from 71 in January. In February 2014, the number stood at 73 points. At the same time, despite economic difficulties, the level of approval of the country’s political development went up from 69 in December to 71 in February. The numbers are in line with another poll conducted by the Levada Center last month. According to its results, general satisfaction with life in Russia stands at an unprecedented 76%, while more than a half of Russians are happy with country’s political course. More that half of Russians want to return to planned economy Russians love affair with the idea of the free market soured at the very beginning. Following the collapse of the Soviet Union 40% of Russians favourite moving to market economy in February 1992. However having into the price socket hyperinflation that meant in practice within the year Russians yet to return to the certitudes of the planned economy. Russians favour for the planned economy has outstripped that for the market based one ever since. However on the back of the brouhaha surrounding versus current economic was the nostalgia

for the planned economy has grown even higher. However, while favour for the planned economy has not quite hit its 2009 peak what is new is the new all-time low for the support of

the market economy, which has dropped to 28% as of August last year according to a recent poll. This is even lower than in the early days of "freedom" at the start of the 1990s.

Russian's fear of being fired falls, but people are still being sacked Russians fear of being fired has declined in recent months as the economic situation stabilise but 32% of Russians say they are still

at seeing colleagues being fired or expect them to be fired according to a poll published by the independent Levada Centre, down from 42% in December. Another 18% expect to be filed in another 22% expect their salaries to be cut in coming months.

Banks and Finance Bank monthly wrap Assets. Assets declined 5.4% month-on-month in February (in part due to 12% ruble appreciation against the dollar). CBR funding refinancing increased from 9.8% to 10.3% of liabilities. Loans. Total loans contracted almost 4% in nominal terms in February but declined only around 0.6% when adjusted for FX. Corporate loans fell 4.7% (down 0.5% when FX- adjusted), while retail loans slid 1.5%.

Year-on-year growth also slowed in both segments, to 10% for corporate loans and 8.5% for retail loans. In nominal terms, Sberbank posted a slightly larger drop in corporate lending than the rest of the sector (5.6% versus 4.1%) and a smaller decline in retail lending (0.4% versus 2.1%). The sluggish lending dynamics suggest NIMs could remain under pressure for some time.

Deposits. Corporate deposits declined in February, shrinking 2% month-on-month net of revaluation, while retail deposits performed better, increasing 1.7% month-on-month net of revaluation. Ruble deposits increased 2.7% in February and FX deposits edged up

0.5% in dollar terms. This brought the FX share of retail deposits down from 30% to 27%. Corporate funds declined 6.6% month-on-month in February, which implies about a 1.3% drop on an FX-adjusted basis. Sberbank was in line with the rest of the sector in FX-adjusted retail deposit growth.

NPLs. The overdue loan ratio, which incorporates only the overdue portion of a loan, rose last

month for both retail (from 6.3% to 6.6%) and corporate (from 4.5% to 4.8%).

P&L. The sector made a net loss for the third consecutive month, losing about 2% of the equity value in February in annualized terms; however, the loss could have been amplified by provisions for bank bailouts. Fraudulent loan volumes double in first two months of 2015 The number of fraudulent loan applications in Russia more than doubled in the first two months of this year as individuals sought to get loans by whatever means possible amid a deepening economic slump, the United Credit Bureau (UCB) said. Fake loan applications were up 45% in January and 35% in February month-on-month. Bad retail loans were 8% of the total loan book in 2014, but S&P estimate they could rise to 17%-23% this year. Fraud was suspected in 2.74% of all loan applications in February, with up to 80% of the fraudulent

applications coming from individuals, the statement said. Fraudulent activity in the unsecured debt segment cost banks more than 40 billion rubles ($700 million) in 2014, according to UCB. Banks' bottom line under pressure. Russia's 30 biggest banks recorded losses of RUB22.8bn ($477mn) in the first two months of this year, according to the CBR. The figures are sharply down in contrast to the same period last year, when the country's top 30 banks made a profit of RUB131.5bn ($2.3bn). The CBR’s latest net income guidance was RUB200bn ($3.3bn) for the sector this year under the base case, down 66% year-on-year, and zero profit in the pessimistic case.

Likewise, Moody's Investors Service said aggregate loss in the banking sector could amount to RUB1.5 trillion to RUB2 trillion, accounting for 20%-25% of the capital in the sector. Bad loans are expected to rise from 9.5% as of the end of 2014 to 15% of the total loan portfolio in 2015, with the cost of risk rising to 8% and the net interest margin declining by 80bp-120bp. Stress tests by Moody's estimate that without state support, capital sufficiency could decline to below the 10% minimum to 8.15%, and to 5.6% in the worst-case scenario. The accumulated loss reached RUB36 bln ($565 mln) in 2M15,

implying negative ROAE of 3%; however, it is too early to draw conclusions without seeing the nature of these losses. We find the CBR’s lending and deposit growth forecasts somewhat optimistic: for example, the CBR forecast 10% growth for consumer loans (we see them contracting about 10%) and 8% expansion of retail deposits, while we find marginal growth of around 2% more realistic. It also guided retail NPLs at 8% (compared to 6.6% in February and 7.5% at the height of the last crisis), which is probably also optimistic given that banks have already added 70 bps in 2M15 to this ratio.

CBR expects rise in overdue loans and unprofitable banks in 2015 Russian banks’ share of overdue loans to corporate sector might reach 7%, according to forecast made by Central Bank of Russia

(CBR) deputy head Mikhail Sukhov on RBC-TV on March 27. The CBR reports that in 2014 the share of overdue loans remained at the end-year level of 4.2%. The share of retail overdue loans grew from 4.4% to 5.9% in the same

period. The share of overdue loans to the non-financial sector will be 7% by the end of this year. The number of profitable Russain banks in 2015 will fall to 550-600 lenders from 707 in 2014, the CBR deputy head also said. But Sukhov said even lenders with low profitability are safe as the level of capital adequacy of most of them is over 12%. According to CBR data, as of January 1, 2015, there were 707 profitable banks in Russia and 126 were unprofitable. In January-February, Russian banks posted losses of RUB36bn versus RUB168bn profit during the same period in 2014. The county's United Credit Bureau in February reported a 50% year-on-year drop in demand across all banking products, as well as a growing share of bad loans and a record surge in fraudulent loan applications. The share of FX in Russian deposit accounts soars The share of FX in Russian deposit accounts has risen from 19.4% to 35.7% in the last year as of February 1, the CBR reports. That is higher than in the 2009 crisis then the share of FX reached 35.3%, but less than the record 40% set in 1999, reports Vedomosti. The growth in FX deposits came mainly from the corporate accounts, which doubled to 41.3%, due to sanctions fears. However, consumers reduced the amount of FX they kept in banks, withdrawing

$5bn, according to the Central Bank of Russia (CBR). the retail demand for dollars is surprisingly low, at $28.6bn in February vs $51.4bn in the same month in 2009, says the CBR. During the first signs of the ruble's meltdown in December last year Russians rushed to buy dollars, but now as the panic subsides they are taking the cash from under their matrass and depositing it back in banks. Overall, FX deposits at banks were falling in February, down by 10.7% to RUB5.1 trillion, while ruble deposits rose by 2.7% tot RUB13.8 trillion. The overall funds in banks was down by 1.3% to RUB19.7 trillion rubles. Corporate loan portfolio of banks in February fell by 4.7% and the retail portfolio by 1.5%. The total assets of banks in February fell by 5.4%. EU and US not moving to disconnect Russia from SWIFT The EU and US have for now opted not to disconnect Russia from the SWIFT global inter-bank payment system as the measure is potentially too harmful for companies trading with Russian partners, Bloomberg reported on March 20, citing officials close to the issue. Western governments have not taken the measure off the table completely though, as they continue to use other instruments to press Kremlin over its foreign policy toward Ukraine.

Among those who want to have Russian banks excluded from the system are US senators John McCain and Marco Rubio. British Prime Minister David Cameron also said “there is a logic” to barring Russia from the Society for Worldwide Interbank Financial Telecommunication. The step would have a precedent: Two dozen Iranian banks were in 2012 blocked from the Belgium-based hub for financial transactions, which is used by more than 10,000 institutions. But Russia has pledged to lash back hard if it is excluded. In January, Prime Minister Dmitry Medvedev said "our economic reaction and generally any other reaction will be unrestricted". SWIFT officials have opposed Russia’s disconnection from the system from the start, when the European Parliament proposed the measure in September 2014. Some European politicians recently reiterated warnings against such a move. Polish Foreign Minister Grzegorz Schetyna this month said a cut-off would be an extreme measure comparable to an "atomic weapon" in its effects for everyone. “There is still a long list of sanctions that can be used before that. But it should be born in mind that this weapon acts in both ways and can strike against all of us," TASS news agency quoted Schetyna as saying. Also this month, SWIFT included a Russian representative in its board of directors, reflecting the

country's deep integration in the system. "According to 2014 results, SWIFT’s growing traffic in Russia allowed us to reach the 13th place in the world," the agency quoted Russia’s RosSWIFT Association executive director Roman Chernov as saying "That is why Russia has increased its share to a level that allows it to nominate its candidate to the board of directors." Recapitalization remains among the biggest issues. Of the 27 banks eligible for the OFZ recapitalization program, Petrocommerz, Novikombank, Sovkombank and Rossiya have reportedly received approval; we believe large state banks should also be approved in the next few months. Discussions are currently taking place to offer state banks Tier-1 capital instead of the Tier-2 capital initially planned. During the last conference call, VTB’s management said the instrument could probably be similar to non-dilutive prefs which banks got in 3Q14. Sberbank, which is not participating in the OFZ program, has brought its RUB500 bln ($8.3 bln) CBR subordinated loan in line with Basel III, so that an additional RUB200 bln ($3.3 bln) will be included in the N1.0 calculation, and there will be no amortization, resulting in a total impact of 1-1.2 ppt on N1.0, which stood at 11% on 1 March. However, there is still no clarity on whether this subordinated loan will be converted into Tier-1 capital.

VTB books big fall in profits on massive provisions in 2014 IFRS results VTB published the fourth quarter of 2014 and 2014 IFRS results in March. Earnings in 2014 were pretty much wiped out by massive provision charges (up from RUB97bn in 2013 to RUB255bn in 2014) and eroded margins. The bottom line would have been far worse but for a RUB99bn gain booked on the 5y extension of the 2011 bailout loan to Bank of Moscow issued at below market rates, which essentially enabled the bank to report a positive bottom line for the year and preserve capital. Beyond this, the main P&L lines were weak in the fourth quarter of 2014 and amply highlighted the stresses the bank has been under on several fronts, including a surging cost of risk (4.6% in the fourth quarter of 2014), plummeting NIM (down 70 bps quarter-on-quarter to 3.4%) and shrinking capital ratios (Tier 1 from 11% to 9.8%, which is below the mandatory minimum). Russian government moves to support mortgage market The Russian government has introduced support measures for the mortgage crediting market after the issue came under discussion in early 2015. RUB20bn ($320mn) will be granted in subsidies to banks, which will cap their mortgage interest rates at 13%. The programme will compensate their reduced interest

and income between a 13% interest marker and the central bank's key interest rate (currently 14%) +350bp, according to a corresponding decree signed by Prime Minister Dmitry Medvedev. Due to operate until March 2016, the programme is open for banks issuing at least RUB300mn mortgages monthly. Of the top five mortgage banks, only the VTB24 retail arm of VTB Bank has so far confirmed its participation, saying it will grant RUB100bn worth of mortgages at 13% in 2015. Russia's largest bank Sberbank, as well as GazpromBank, Delta Credit and RusArgo Bank (RusSelkhozBank) are yet to decide. Sberbank told gazeta.ru that it will issue a decision on March 17, while GazpromBank's representatives said RUB15bn-RUB20bn could be issued under the programme. The average interest rate on mortgage loans in 2014 amounted to 12.5%, with over 1mn loans issued for a total of RUB1.76 trillion. After the surprise key interest rate hike to 17% at the end of December, mortgage rates went up to 14.2% in January, the highest since 2010. Some banks reacted to the key rate increase by adjusting mortgage rates to over 17%-20%. Sberbank lowers rates under subsidized mortgage program to 12% Following adoption of a state support program that envisages subsidies to banks in order to lower mortgage rates to consumers to

13% and in light of the 100 bps cut in the key rate by the CBR in March, the government is considering lowering subsidized rates to 12%. The state has allocated RUB20bn from the 2015 budget to compensate for the difference between the mortgage rate offered by banks – which should not exceed 350 bps over key rate – and the 13% rate to consumers for mortgages issued between March 1, 2015 and March 1, 2016, or until the key rate reaches 9.5%. The program will apply to loans issued for 30 years with a down payment of at least 20% and may not exceed RUB8mn for primary market housing (either completed or under development) in Moscow, Moscow Region and St Petersburg, and RUB3mn elsewhere in the country. The funds allocated under the program should be sufficient for as much as RUB400bn worth of new mortgage loans. Investment bank Renaissance Capital doubles profit from core business in 2014 Leading Russian investment bank Renaissance Capital has doubled profit from his core businesses in 2014, the bank said in a statement yesterday, and continues to expanding its business in frontier markets. Rencap saw its net profit from core business increase to $40.5mn in 2014 from $19.2mn in 2013 thanks to strong revenues from core business and continued to reduce its cost base, which demonstrated

a 17.5% decrease. Total operating expenses fell to $197.1mn in 2014, from $238.8mn in 2013. Total operating income reached $250mn. Renaissance Capital’s balance sheet remains strong with its equity-to-assets ratio at 14.2%, compared with 13.5% at the end of 2013. Total assets and equity stand at $3.31bn and $468.6mn, respectively," the banks said in a press release. The results will come as a welcome surprise for the banks as Rencap has had a hard time in recent years. Shortly after the 2008 crisis hit former CEO and co-founder Stephen Jennings told investors at the bank's annual general meeting that Russia's investment banking business had become a "dumbbell" of extremely large players focused on corporate business and small niche players. Everyone one else would be in the "killing zone" unable to compete. Obviously Jennings placed him self in the large end of the dumbbell but as events subsequently showed the bank was in the killing zone. Rencap had to be bailed out by its largest shareholder oligarch Mikhail Prokhorov and Jennings was forced out as a shareholder and has left the country since. Russian government may reduce compensation from deposit insurance Various media sources report that the government is considering cutting retail deposit compensation, which currently covers sums of RUB1.4m, from 100% to 90% of this amount.

The proposal apparently came from state banks that (1) are the largest contributors to the deposit insurance fund owing to their high market share; and (2) will not suffer the negative consequences of this decision because of their state-ownership status. The government is considering this proposal, as the appetite for deposit insurance payments may increase this year while the deposit insurance fund lacks resources. Russia's Sberbank to stop financing its branches in Europe Sberbank will stop financing its branches in Europe until the crisis passes. Sberbank operates in nine European countries: Sberbank Europe AG manages branches in Slovakia, the Czech Republic, Hungary, Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Germany and Ukraine. A Sberbank representative told Vedomosti that the bank is "perfecting" its business model in Europe in order to create a stable, profitable and independently funded banking group. The source declined to comment on the amount of money and on duration of credit lines that Sberbank Europe had received. Fitch said in a report that Sberbank spent €1.4mn to finance Sberbank Europe in the third quarter of 2013. The figure has changed little since then, Vedomosti says, citing a bank contractor.

Sberbank reported a 20% drop in profit for 2014 at the end of March, hurt by a jump in its funding costs and higher loan-loss provisions as an economic crisis and slide in the ruble weighed. Sberbank said it earned RUB290.3bn ($5.14bn) in 2014, beating analysts' forecasts for net profit of RUB275.8bn. The bank said the main factor weighing on its results was higher loan-loss provisions. They reached RUB357bn last year, more than twice the figure in 2013. It said its Tier 1 capital ratio fell to 8.6% and that its return on equity slipped to 14.8%.

Economics EKN Russian central bank cuts interest rate 1% to 14% The Central Bank of Russia (CBR) on March 13 made a 1% cut in the key policy rate, lowering it from 15% to 14%, the regulator said. The CBR believes the step will reduce pressure on the financial sector without posing an additional threat of increased inflation, the high level of which in recent weeks was caused by ruble depreciation and external trade restrictions, it said: “Their impact is short-term and will be exhausted before the end of 2015," the bank added. According to the CBR's forecast, the current monetary policy and low economic activity “will be conducive to the slowing of annual consumer price growth to 9% over the year (March 2016 on March 2015) and to the target of 4% in 2017.” The regulator also said that as inflation risks abate it will be ready to continue cutting the key rate. The CBR’s decision is in line with most experts’ forecasts, although some had said it needed to keep the interest rate at the same level to target inflation, while others argued that a 2% cut was necessary to normalize interest rate situation and revive the financial sector.

Russian inflation to peak in March and could end year at 10% Inflation in Russia has soared in the first four months of this year, catching many economists by surprise, but the first quarter of this year will probably prove to be the worst and Alfa bank is predicting inflation could fall to 10% by the end of the year. In recent years inflation has been under control running in the range of 6% to 8%, however at the end of 2014 it began to rise rapidly finishing 2014 at 11.4%. However, in March the growth inflation stopped and some analyst believe the worst is already over. The peak is expected to arrive between 15% and 18% in March or April. Natalia Orlova, chief economist at Alfa Bank, points out that historically the effects of a sharp depreciation of the national currency make itself felt for at least a year, with the worst effects coming six months after the currency crisis – ie the biggest impact on prices from the devaluation should hit in May. Typically inflation rises in the first quarter, however, this year the adjustments necessary to the sharp full in the value of the currency and the rising food prices have exacerbated this effect, leading other economists to predict

that inflation may rise as high as 20% in the first quarter. Companies have also been cutting their inventory for all of 2014 and into 2015 as well. Reducing the amount of stock company holds is a typical reaction to a crisis, however, last year Russian companies were cutting stuck in anticipation of a crisis due to the slow-moving devaluation of the ruble last year. However now the companies have been hit by a big shock in December they will not start to build up inventories again, which in turn fuels inflation and depresses economic growth. According to our Rosstat-data-based estimates, retailers have been more cautious with inventory accumulation since start-2014, and following Dec.’s consumption splurge, inventory levels have

dropped to 12 days, which is lower than a year ago. Orlova argues that the pass through from the devaluation to inflation has gone faster than normal and the current inflation rate already incorporates most of the inflationary effect of recent ruble depreciation so, "the peak could be reached as soon as March rather than in May-June, after which fast deceleration should take place," argues Orlova. If she is right about the peak coming in March then the central bank can be expected to cut rates again as soon as April. The CBR already made one surprise 2% cut to the main interest rates on January 30 and has said that it will cut again as soon as it can in an effort to give the flagging economy a shot in the arm.

Was the CBR right to cut the key rate in January? The Central Bank of Russia (CBR) cut its key rate from 17% to 15% at the end of January at a time when inflation was spiking to its highest level in years, leading to a hot debate as to the wisdom of the move. Many argued that the CBR rate cut in January 2015 was premature and will only drive up already high inflation – the Russian consumer's main concern according to the Levada Centre pollster -- but analysts from privately owned investment bank Renaissance Capital and the New Economic

School (NES) do not share these views for several reasons. The debate comes down to balancing the growth boosting effects of a rate cut against the inflation boosting effects of the same. Traditional economics says cutting interest rates will boost growth but fuel inflation. However, the CBR has taken the line that currently inflation is not being driven by monetary factors like interest rates so cutting rates will boost growth, but only have a limited impact on inflation. The experts at Renaissance Capital and NES agree.

"First, we think that the CBR was wise, or lucky, enough to send an important signal to companies and the banking sector that the price shock is temporary and the 17% rate was not forever and could be eased in the next 12 months," Economists Konstantin Styrin and Oleg Kouzmin from the New Economics School and Charles Robertson, the chief economist at Renaissance Capital said in the latest issue of the RenCap-NES Macro Monitor. Russia's Business Confidence Index stable in March Russia's Business Confidence Index remained flat in March at -5% for extraction (-5% in February), at -6% for processing (-6% in February), but declining to -11% for utilities (-8% in February), according to a survey of 3,500 companies by the state statistics office RosStat. The confidence index showed surprising improvement in February and stabilized in March, possibly reflecting the much discussed faster-than-expected adjustment to the new recessional environment. However, the survey omits small enterprises. In February, the number of respondents with a pessimistic outlook on the economic situation of their company exceeded the number of optimists by 8% in extraction and 15% in processing, almost unchanged compared with January. In RosStat's March survey, respondents in processing

(manufacturing) and extraction increasingly cited insufficient domestic demand, economic uncertainty and high taxation levels as the main reasons limiting output growth, as they did in February. Russia's PMI shows slower manufacturing downturn in February After January showed the steepest decline in private output since 2009, Russia's HSBC Purchasing Managers' Index (PMI) compiled by Markit in February indicated a slowing of the downturn in manufacturing conditions. Stronger domestic demand last month drove new orders and a slight increase in production. While inflationary pressures remained severe, they have lessened due to the ruble's recovery in the reporting month. Nevertheless, growth in new orders was weak, new exports business continued to drop sharply, and employment continued a 20-month decline. The manufacturing PMI rose to 49.7 from 47.6 in January, but still remained below the 50.0 points no-change benchmark, thus indicating a fractional rate of contraction in the sector. Without elaborating, Markit's senior economist Trevor Balchin commented that domestic demand has boosted manufacturing output, with import substitution playing some role. January's industrial output data also suggested that the marginal

increase in output was driven by largely state-financed domestic demand (industrial gas engines and steel pipes) and by some food processing branches that benefit from imports substitution. February's business confidence data compiled by the state statistical agency RosStat also showed a recovery in the negative confidence indexes in manufacturing and extraction, suggesting an adjustment to the new recessionary economic environment. However, another

independent survey performed by the think-tank of the Higher School of Economics showed that some 45% of enterprises still could not comprehend the uncertainty of the economic situation. HSBC suggested in January that on the basis of past correlations between GDP and PMI the economy will contract by 1.5% q/q in Q1 if the headline PMI stays at the same level throughout the quarter.

Dvorkovich meeting approves tax experiment in oil sector Deputy Prime Minister Arkady Dvorkovich yesterday held a meeting to discuss a tax

experiment to implement earnings-based taxation in the Russian oil sector, reports Alfa Bank. Russian oil companies currently pay revenue-based tax, and they

are lobbying to change this regime for some projects. Although Dvorkovich approved the concept of taxation based on financial results, it remains to be discussed as to which particular fields or projects the experiment will be applied – MET will be cancelled and replaced with the financial results tax at the selected fields. The final decision should be taken at a meeting hosted by Prime Minister Dmitry Medvedev. The Energy Ministry has received requests from LUKoil, Gazprom Neft and Rosneft for 35 fields, from which it plans to select 12. Chinese investment in Russia to match European in 2-3 years Chinese investment in Russia is expect to match that from Europe within 2-3 years, the head of the Russian Direct Investment Fund Kirill Dmitriev said on March 11. "We think that this and next year there will be much more money coming from China, replacing the European money. Within 2-3 years the investment inflow from China may be equal to that from Europe in recent years," Dmitriev said, cited by TASS news agency. He added that he was referring to tens of billions of dollars worth of investment all across Russia. Dmitriev also said that a number of new investment projects will be announced during the visit of Chinese President Xi Jinping to Russia planned for May 9. "As part of the visit a large number of deals between Russia and China that are important for joint development

will be announced. I’m referring to projects in the agricultural sector, financial sector and other fields." Russia traditionally sees China as strategic partner. Russian-Chinese business relations became particularly dynamic after Western sanctions were imposed in 2014. The trade between the two countries grew by 6.8% in 2014 despite ruble devaluation, reaching $95.28bn. Russia’s corporate profit growth down 10% y/y in 2014 Local enterprises (excluding banks, insurance companies, agricultural and entities that receive financing from the budget) posted net profit of RUB5.9 trillion ($95.9bn) in 2014, data by RosStat shows, a decline of 10% y/y, following the recovery of the corporate profit in Q2 and Q3 (jumping 16% y/y in H1 and slowing to 5.2% y/y growth as of end of August). To compare, in 2013 corporate profit declined by 14.3% y/y. In December, the decline rate in the corporate profit slowed from 15% y/y seen as of end of November, which is not due to the base effects and is likely due to the effects of ruble devaluation in some of the segments. Extraction was the only major segment that posted strong profit growth, recording 54.4% y/y profit growth to RUB2.65 trillion. Apart from that, extraction of fuel and energy resources posted profit growth of 63% y/y to RUB2.41 trillion. The processing (manufacturing) sector posted

44% y/y profit plunge to RUB877bn in 2014. Domestically oriented wholesale and retail traders saw profit drop by 25% y/y to RUB1.4 trillion and transportation and communication had aggregate net profit dive by 58.5% y/y to RUB308bn. In 2014, the share of unprofitable companies amounted to 28.1% vs. 26.8% in 2013. Meanwhile, extraction that reported the highest growth in profit showed a 36.9% share of unprofitable companies, pointing to high profit concentration in the sector. The share of unprofitable companies was 28% in manufacturing, 20% in trade, 36.5% in transport and communication. In 2014, 41,300 enterprises earned profits worth RUB9.57 trillion; 16,100 entities suffered losses amounting to RUB3.67 trillion.

Total profit increased by 13% y/y, while total losses jumped by 86% y/y. Putin calls for EEU currency union President Vladimir Putin called for a currency union with Belarus and Kazakhstan,during a meeting with the Belarusian and Kazakh presidents in Minsk to discuss the future of the Russian-led Eurasian Economic Union. The other two leaders are reportedly not happy with the idea which would cede more economic power to Russia. Grigory Marchenko, a key Kazakh reformer and former central bank head, has estimated that it would take 10 to 12 years before such a currency is launched.

MACROWRAP GDP growth goes negative in first quarter for first time since 2009 Russia’s economy contracts 2.1% year-on-year in January and was down year-on-year the first quarter of 2015 by 0.4%, according to the RenCap-NES, the first quarter of negative year-on-year GDP growth since the fourth quarter of 2009. And the CBR is even more pessimistic: Russia's GDP may decrease by 5.3-5.8% this year, but is expected to grow by 0.5% next year and by 2-2.5% in 2017 if the Urals oil price falls below $40-$45 per barrel, according to the Central Bank annual report. However, with the price at $50-$55 the GDP will decrease by 3.5% to 4% this year, will lose another 1% t 1.6% next year and increase by 5.5% to 6.3% in 2017, the report says. In general growth and inflation did worse than expected but capital investment, real wage growth and industrial production all did a bit better

than expected. Several economists are now saying that March will be the peak of the consequences of the December 2014 currency meltdown. According to preliminary estimates from Rosstat, Russian economic growth decelerated to 0.6% in 2014 from 1.3% in 2013.

Russian ruble seen appreciating by third this year After crashing in December, Russia's ruble has made a remarkable comeback since February by rising about 15% against the dollar, making it the best performing currency amongst the 14 in Emerging Europe so far this year, according to Bloomberg. And the appreciation of the ruble is not over, argues Alfa Bank chief economist Natalia Orlova; the ruble could appreciate by as much as a third over the rest of this year if things go well. You don’t need a PhD in economics to see that the ruble was oversold during its collapse from the mid-50s in November to a low of RUB80 to the dollar in

the depths of the panic in December. But it bounced back into the 70s and then 60s very fast. "Based on this metric the ruble fair value came out at RUB56/$ by the end of 2014, with this indicator providing correct signal of the ruble depreciation. However, and similar to previous benchmarks, it has underestimated the scale of the ruble’s slump, [and] did not justify a drop to RUB80/$ that was seen in December," said Alfa Bank's Orlova in a report entitled, "Ruble 2015: Appreciation Is In The Air", which was released at the end of February, referring to one of several methods she used to estimate the fair value of the ruble. In general, Orlova concludes that the ruble was overvalued by about 20% in line with other emerging market peers, but the 40% fall in its value was exceptional. Accepting that the ruble was oversold, the difficult part is working out exactly where the "fair value" of the ruble should be now, once investors switch back from judging the situation using their spleens to using their heads. Inflation in Russia spiked to 16.7% year-on-year in February, but stabalises in March Consumer price inflation in Russia expectedly accelerated to 16.7% year-on-year in February 2015, after jumping to 16-year high 15% year-on-year in January, according to RosStat data. However, month-on-month price growth dynamics is slowing, posting 2.2% month-on-month in February vs. 3.9% month-on-month in January. And by March it appears that the rot had stopped: CPI rose 0.2% between March 11 and March 16, -- staying at the same rate for three weeks in a row. Over the first 16 days of March, inflation was 0.5%, and the m-o-m figure may end up being 1.0% or lower. If this is the case, y-o-y inflation would stabilize at 16.7%, or even start slowing. Inflation in Russia was 11.4% in December and exceeded market expectations of 13.5%, according to Bloomberg consensus. Still, inflation is the highest annual CPI print in Russia since the autumn of 2008. The officially measured core inflation that excludes unprocessed food, petrol and regulated prices increased further by 3.5% to 14.7% year-on-year. The recent spike in inflation was driven by higher inflation expectations and the sharp ruble weakness at end-2014. Food inflation rose to 20.7% year-on-year in January, from 15.4% year-on-year in December.

The acceleration in prices growth was quite broad-based across various sectors, with the highest increases registered within vegetables (22% month-on-month, resulting in 41% year-on-year growth) and sugar (19% month-on-month, resulting in 68% year-on-year growth) prices. Non-food prices growth also rose sharply in January, to 11.2% year-on-year, from 8.1% year-on-year in December. Within the non-food category, the highest increases were registered on prices for medicines and electronics. Services price growth accelerated to 12.3% year-on-year in January, from 10.5% year-on-year in December. In line with previous months, tourism services became more expensive (with price growth in January running at 49% year-on-year), while the planned price increase across a broad range of state services also played a role.

Russian CB reserves down by $5bn as of March 14 The FX reserves of the Central Bank of Russia (CBR) continued declining as of the week ending March 13, losing $5bn or 1.4% wow to reach $351.7bn, the regulator announced on March 18. The decline rate remained flat as compared with the previous week, but still pushing the reserves to the minimum since April 2007. The CBR attributed the decline in reserves on the reporting week almost entirely to negative FX revaluation effect, as it did the previous week. Recently head of the CBR Elvira Nabiullina suggested that under a base scenario ($50/barrel oil price) the FX/gold reserves would decline by $50bn in 2015. Under a risk scenario of $40/barrel oil price the reserves could lose $75bn.

Russian foreign trade turnover dives 44% y/y, January surplus down 20% y/y Russia's foreign trade turnover declined by 44% in January to $40bn, while foreign trade surplus shrank by 20% y/y to $15bn, the statistics office RosStat said. Exports of goods declined by 30.5% y/y in January to RUB12.5bn, while imports went down by 40.4% y/y to RUB12.5bn. Trade turnover with non-CIS countries in January fell by 33% y/y to $34.3bn (88.7% of total trade turnover), of which trade turnover with EU countries went down 30% y/y to $17.8bn (45.9% of total turnover). Trade turnover with CIS countries was at $4.4bn (11.3% of total), decreasing by 42% y/y. The Eurasian Economic Union with Belarus, Kazakhstan and Armenia accounted for 7.3% of Russia’s trade turnover in January, declining by 36% y/y to $2.8bn. Trade turnover with China also declined by 36% y/y, accounting for 11.8% of Russia's trade turnover ($4.6bn). Asia-Pacific Economic Cooperation (including US and Japan) accounted for 29% of trade turnover, or $11.3bn, down 25% y/y. Trade turnover with Turkey decreased at a slower pace than with other partners in January, declining by 12.3% y/y to $2.3bn, or 5.8% of total turnover.

Imports drop to five-year low of $13.2bn in January due to the weak ruble Imports dropped to $13.2bn in January from $24.7bn in December The fall in imports is being driven by the devaluation of the ruble, which depreciated 7.8% month-on-month against the dollar in real terms in January. In 2014 machinery and equipment (50.5% of imports from non-CIS countries and 25.3% of imports from CIS countries) and chemicals (16.8% of imports from non-CIS countries and 11.8% of imports from CIS countries) made up the bulk of imports to Russia Russia recorded a trade surplus of $15.9bn in January 2015, 14.9% smaller than the $18.7bn surplus recorded in January 2014; exports fell 26.5% Year-on-year and imports declined 36.9% Year-on-year in January Total imports for this year are expected to total $209bn in 2015.

Exports fell to $29.1bn in January due to the slump in the Brent price Exports decreased to $29.1bn in January from $37.6bn in December The price of Brent dropped 21.3% month-on-month and 53.5% Year-on-year to $49.8/bbl in January Gas prices fell 9.1% month-on-month and 12.8% Year-on-year to $342/1,000 cubic meters in January Metal prices dropped month-on-month in January: the price of aluminum fell 5.5% month-on-month but rose 4.7% year-on-year; the price of nickel dropped 7.2% month-on-month but grew 4.9% year-on-year; and the price of copper declined 9.5% month-on-month and 20.3% year-on-year. Fuel and energy commodities (73.3% of exports to non-CIS countries and 43.9% of exports to CIS countries) and metals (7.9% of exports to non-CIS countries and 10.3% of exports to CIS countries) accounted for the bulk of Russia’s exports in 2014.

Exports are expected to end the year at $338.9bn, if the average Brent price of oil is $60/bbl this year. Germany’s trade with Russia fell by 12%, with Ukraine by 25% in 2014 Germany’s trade turnover with Russia and Ukraine fell 12.09% and 25.01% respectively in 2014, Germany's Committee on Eastern European Economic Relations reported on February 26. According to its report, the trade turnover between Germany and Ukraine was primarily negatively affected by the ongoing conflict in Ukraine. In 2014, German exports to Russia fell by 18% and to Ukraine by 33%. In monetary terms German exports to Russia reduced to €29.3bn from €35.8bn, while German exports to Ukraine were down to €3.6bn from €5.4bn in 2013. In 2014, Russia remained Ukraine’s most important trading partner, with a bilateral trade volume of $22.4bn, compared with $38.2bn in 2013. On February 20, Eurostat reported a 20% decline in Russia-EU trade turnover in 2014. Capital investment slump intensifies in January Capital investment dropped 6.3% year-on-year in January after contracting 1.1% year-on-year in December, even if seasonally adjusted, capital investment declined more modestly by 3.5% month-on-month in January. This was less than the Bloomberg consensus of a decline of 8.1% year-on-year. Investment demand contracted by 2.5% in 2014, which was also better than the Rencap-NES forecast (-3.8%) but well below 2013, which was surprisingly revised upwards to 1.4%, from -0.1% previously. Rosstat revised the capital investment growth figure for 2014 from negative 2.5% to negative 2.7% Uralsib analysts are expecting a dramatic 28.2% contraction in capital investment this year, but the bank has been very pessimistic recently. Sberbank bank is a lot more upbeat predicting 8% drop in 2015, after the actual figures for 2m15 were better than expected.

Producer confidence improves despite recession Producer confidence improved in resource extraction and manufacturing, but weakened in utilities. In February confidence in the manufacturing and resource extraction sectors grew to negative 6% from negative 9% and to negative 5% from negative 7% Confidence in the utilities sector declined to negative 8% from negative 2% in January Among those polled in the February survey, the%age of respondents who expected output to grow in the next three months was higher than the%age that expected output to contract (20 ppt higher for manufacturing and 9 ppt higher for resource extraction) Improvement in producer confidence in the manufacturing sector is consistent with the February manufacturing PMI readings for Russia, which indicated improvement in the sector

Agriculture remains the only growth driver Industrial production contracted 1.6% year-on-year in February due to the 2.8% year-on-year contraction in manufacturing and the deceleration in other segments. Russian industrial output was positive in January up by 0.9% year-on-year, after a 3.9% year-on-year increase in the previous month due to the devaluation effects. Despite the contraction in industry in February, cargo turnover shrank only 1.7% year-on-year in February after contracting 4% year-on-year in January. Construction activity remained weak, shrinking 3.1% year-on-year in February. Agricultural growth accelerated to 3.2% year-on-year growth in February from 2.8% Year-on-year in January. A NES study shows the sector breakdown of Russian growth shows that Russia’s growth drivers in 2014 were dominated by finance (9.6%) and manufacturing (2.5%, also partially supported by a weaker currency) and agriculture (1.4%).

Mining, utilities, wholesale/retail trade, transport/telecoms and various state services stayed broadly flat, while construction and hotels/catering contracted noticeably (by 5.2% and 2.4%, respectively), reflecting weaker investment demand and weaker demand for more expensive services amid a worsening economic environment.

Russian companies make first aggregate loss since 2009 Russia's 50,000-odd companies made a combined loss in the first month of this year for the first time since 2009, reports Rosstat. January saw 33,800 companies in profit in January earning a combined RUB1.6 trillion with another 19,100 companies that lost about RUB1.9 trillion. Corporate Russia made a net loss of RUB152.5bn ($2.7bn) in January, its worst result since 2009. In January of last year Russian companies made a combined profit of RUB352bn ($6.1bn). But the slump is not hitting every industry equally. Oil and gas companies made combined profits of RUB435bn ($7.5bn) in January while manufacturers lost just over RUB500bn ($8.7bn), Rosstat said.

Agricultural firms, utilities, construction companies and retailers all stayed profitable. The fishing industry, railway operators, real estate and services companies recorded losses. Real wages down 10% in February year-on-year Real wages declined 9.9% year-on-year in February and 9.1% for 2m15 due to surging inflation; however, real disposable incomes contracted just 0.6% year-on-year in February and 0.8% year-on-year in January after shrinking 6.2% year-on-year in December Uralsib expects a steep 8.2% contraction in real incomes in 2015 due to the deep recession, massive capital outflows and high inflation, largely because the government does not have as many resources to allocate to social programs as it did in 2009, when real incomes grew 3% despite the severe economic crisis. NES believes that real wages growth is likely to stay in negative territory for 2015, averaging around -6% during the year. This marks the weakest real wages growth print in the 2000s. Nominal wage growth was 5.2% in February and 5.3% in 2m15, but accelerating year-on-year inflation caused a deterioration in real income and retail sales dynamics. That said, inflation seems to be close to peaking, and it may stabilize in spring. This would mean that retail sales growth is close to its local minimum and will start improving later as CPI growth slows.

Russians to spend 50% of income on food amid inflation and falling wages Amid soaring inflation, the average monthly salary across Russia shrank to RUB31,200 ($500) in January, the Economic Development Ministry reported, sending the proportion Russian spend on food soaring. Spending on food could account for 50-55% of household incomes in Russia by the end of 2015, compared to 40% last year, according to a survey of Russian retail prices cited by the business daily Vedomosti on March 3. Inflation and a reduction in real wages, linked to the devaluation of the ruble, are to blame for the predicted hike in food expenditure, the survey by VTB Capital said. Inflation on food products reached 22% in February, but this figure is expected to stabilize in the second quarter and will hover around 9.6% by the end of 2015. Food price inflation has been compounded by a drop in the value of Russians' real wages, which can decrease 6.8% year-on-year by the end of 2015, VTB analysts estimated. Retail trade continues to decelerate The slump in retail trade intensified, as trade volume contracted 7.7% year-on-year in February, and 6.1% y-o-y over 2m15 and 4.5% year-on-year in January – the worst result since 2009.

Both food and non-food sales performed rather poorly. Food sales growth contracted by 5.5% year-on-year, from a 0.4% year-on-year drop in December, while non-food sales made a swing, falling by 3.5% year-on-year, from a 10.5% year-on-year increase a month ago. Services declined 1.5% year-on-year after 0.9% year-on-year growth in January.

Number of unemployed tops 1m The unemployment rate rose for the sixth consecutive month, to 5.8% in February from 5.5% in January and 5.3% in December, which means more than 1mn Russia are now unemployed. Still, the increase in unemployment was fairly small, owing to a labour force shortage, limits potential downside risks for a contraction in consumer demand in 2015. NES estimate the unemployment rate could rise to 6.5%in 2015, compared to 5.3% at the end of 2014. The labour market remained very tight in January, with the unemployment rate in s/a terms declining by 0.2% to 5.0%. The headline unemployment

rate increased marginally to 5.5%, from 5.3% previously, which surprised NES (5.7%) and the market (5.7%, according to Bloomberg consensus). The labour force shortage, attributable to unfavourable demographic trends, limits the room for a spike in unemployment in Russia during this crisis. Experts expect only a moderate increase in the unemployment rate in 2015 to 6.5%. Relatively low unemployment could be one of the factors ensuring social stability amid worsening economic conditions and is likely to limit the potential downside risks for a drop in consumer demand growth. Consumer demand will fall by 3.9% in 2015 says NES.

Finance ministry expects capital outflow from Russia to reach $90-100bn in 2015 Net capital outflow from Russia was $24bn for 2M15, including $9bn in January and $15bn in February, according to VEB estimates. Capital outflow from Russia in 2015 could reach $90-100bn, including $60-70bn spent on payment of external debts, Finance Minister Anton Siluanov said on March 2. January outflows were less than expected; however, February’s result looks disappointing. All in all, this figure suggests little improvement vs. the $15bn monthly average outflow seen in the first quarter of 2014. Even if we target ~$100bn net capital outflow for full-2015, it remains very high and reduces the ruble’s upside potential. According to Russia's Central Bank, capital outflow in 2014 grew to $151.5bn, the highest level on record. In 2013, the outflow stood at $61bn. According to the bank’s January forecast, the amount could reach $118bn in

2015. The regulator predicted that net capital outflow would diminish in 2015 due to a decrease in external debt repayments. Russia looks to bolster Reserve Fund from oil sales in 2015 The Russian Finance Ministry will in the event of improved oil prices send additional revenues to the Reserve Fund for replenishment, Finance Minister Anton Siluanov said on March 5. The Russian Reserve Fund shrunk by almost 10% in dollar terms in February after the state used the money to cover budget deficit, according to a March 3 statement by the Finance Ministry. The Reserve Fund fell by RUB500bn to RUB4.7tn ($77.1bn) in February, and the National Welfare Fund’s value fell by RUB75bn to RUB4.59tn ($75.5bn). The ministry used its existing maximum yearly allowance of RUB500bn ($8bn) after budget revenues fell because of low oil prices. That followed a separate withdrawal of RUB50.48bn in January. In ruble terms the Reserve Fund declined by 20% m/m to RUB4.7 trillion as of end of February vs. RUB5.86 trillion as of end of January.

The fund may drop to RUB519bn by the end of 2016, as the ministry wants to use RUB3.7 trillion this year and RUB1.16 trillion in 2016, it said earlier. The reserves are expected to increase to RUB630bn in 2017.

BUDGETWRAP Amendment to the Russian budget for 2015 is attempt to maintain the status quo Russia needs a new "big plan" to reform the economy and lift it out of its current economic torpor, but the proposed amendments to the 2015 are little more than quick fixes to the immediate problems. There is a chance the government will introduce a new "Gref Plan" at the St Petersburg economic conference in the summer, but no one is holding their breath. On 16 March the government submitted a budget revision for 2015 to the State Duma, based on a new macroeconomic forecast prepared by the Ministry of Economic Development which takes into account the changing domestic and international conditions (the decline in crude oil prices, the devaluation of the rouble, the sanctions by the West and the Russian counter-sanctions) that have brought the Russian economy to the brink of crisis. The spending cuts (10% across the board except for military spending) and budget transfers proposed are not focused on the development and modernisation of the Russian economy, but rather on maintaining the status

quo in which defence spending, internal security and social expenditure predominate. The Kremlin has moved away from undertaking structural changes and unpopular social reforms (such as pension reform), in fear of a rise in social discontent. However, the adjustment to the budget and the anti-crisis measures proposed by the government (especially those concerning the banking sector) may prove to be inadequate, and further budgetary adjustments may have to be made, especially if GDP declines further than expected. Indeed, when all the exceptions are taken into account the spending cuts come out at closer to 2% of GDP than 10%. Russian deficit surges to 7.4% of GDP in 2M15 due to 76% year-on-year rise in defence spending Budget deficit of RUB550bn recorded in February. According to data released by the Finance Ministry, the federal budget deficit widened to RUB765bn, or 7.4% of GDP, in 2M15. The January budget estimate was also revised to a deficit of just RUB216bn (4.2% of GDP) from the previously reported deficit of RUB277.9bn (5.7% of GDP). In February, the budget ran a deficit of RUB549.3bn, or 10.5% of GDP. Last year, the budget ran a RUB30.5bn surplus (0.3% of GDP) in 2M14 and a RUB535bn deficit (9.6% of GDP) in February. Federal budget revenues amounted to RUB2.28 tln in 2M15, or 15.1% of the full-year plan, while expenditures totaled RUB3.04 tln, or 19.6% of the full-year plan. Revenues dropped 28% month-on-month to RUB953.8bn in February as non-oil and gas revenues collapsed 46.7% month-on-month to just RUB428.2bn. Oil and gas revenues were almost flat month-on-month, and their share in total revenues grew to 55.1% from 39.3% in January. Expenditures decreased just 2.4% month-on-month to RUB1.53 tln in February. National defence spending is already well ahead of schedule. Military expenditures stood at RUB1.3 tln, or 40.2% of the full-year plan, just two months into the year. All in all, budgetary revenues dropped 3.8% year-on-year in 2M15, with oil and gas revenues down 15.2% year-on-year, while expenditures grew 30.2% year-on-year, with national defence expenditures up 75.8% year-on-year.

Budget may run a deficit of 2.0-2.2% of GDP in 2015. The Finance Ministry's latest budget forecast has revenues reaching just RUB12.5 tln and expenditures reaching RUB15.2 tln in 2015, implying a RUB2.6 tln drop in revenues and a RUB300bn drop in expenditures. Thus, the Ministry expects a federal budget deficit of RUB2.7 tln this year, or 3.7% of GDP.

Russia may spend 80% of reserve fund on financing budget deficit In the worst-case fiscal scenario under consideration by Russia's Ministry of Finance, almost RUB5 trillion out of the RUB5.9-trillion sovereign Reserve Fund could be spent in 2015 on financing budget deficit, deputy finance minister Tatyana Nesterenko told the press.

Currently the ministry plans to secure around RUB3.2 trillion from the fund to finance the 2015 federal budget with a deficit of RUB2.7 trillion, or 3.7% of GDP, Reuters reported on February 27. This is almost double the RUB1.5 trillion that Nesterenko estimated in mid-October 2014 would be required to support the budget in 2015-2017. However, certain fiscal risks could push up the amount of the Reserve Fund used towards the worst-case figure, to RUB4.9 trillion according to the deputy minister, leaving RUB1 trillion in the fund by the end of 2015. The risks include fallout in revenues, lower borrowings, increasing financing to regional budgets, and uncertain oil prices. Russia's 2010-2014 privatization plan fell flat, says audit chamber Russia's privatization drive in 2010-2014 raised only a fifth of the anticipated funds, the Russian Audit Chamber said in a report on state property privatization released on March 19. Revenues over the five years were RUB256bn ($4.26bn at current exchange rate), or only 21% of the target. When the plan was launched in 2008 by then president Dmitri Medvedev Russia was supposed to earn RUB1 trillion from the sale of state owned assets. The much-discussed plan and continuously delayed plan to reduce the state's dominant role in the economy brought only a handful of large-scale anchor sales. The sale of larger stakes such as in the Inter RAO power utility holding or the country's second largest bank VTB, made up the lion's share of all the revenues (75%, or RUB191bn). These deals were notably forced by a direct presidential or government decision, which did not directly correspond with the the privatization plan, the report says. The privatization plan was “significantly adjusted” each year to meet the actual performance. For example, target privatization revenues in 2013 were cut from the original RUB428bn to RUB52bn.

Russian Economic Development Ministry base case oil $50, may review in 2H15 According to Deputy Minister of Economic Development, now the average annual price stands at $52 per barrel, while the base-case scenario which is the basis for 2015 budget, implies $50 per barrel. Ruble devaluation to cover half of oil price decline for 2015 budget Russia's Finance Ministry estimates that ruble devaluation will bring the 2015 federal budget to RUB2.25 trillion ($36.4bn), with an average RUB61.5 per US dollar exchange rate vs. RUB37.7 previously budgeted, Reuters reports, citing an unpublished draft of budget amendments in progress. Additional ruble revenues will cover around half of the RUB4.26 trillion revenues fallout from the average oil price decline from previously budgeted $100/barrel to $50/barrel. The increased ruble flow will also cover the projected decline of the price of non-CIS natural gas supplies from $316.5 to $222.1 per 1,000 cubic metres. The ministry now officially budgets a deficit of 3.7% of GDP and needs to spend over RUB2.7 trillion from the sovereign Reserve Fund to secure this deficit, possibly tapping into the fund by another RUB0.5 trillion to RUB1 trillion. Spending under the amended budget will reach a record-high RUB15.22 trillion, or 21% of GDP, while revenues are projected at a record-low RUB 12.5 trillion, or 17% of GDP. Meanwhile, TASS on March 2 cited Finance Minister Anton Siluanov as saying that military and law enforcement agencies will account for 40% of pending in 2015, while less than 35% is planned for social spending.

Alexei Devyatov of UralSib believes the ministry's estimates are conservative, arguing that double-digit inflation and ruble depreciation will have a greater compensating effect on the nominal tax and revenue base. Ruble remains 10-15% below its fair value despite the moderate recovery in oil prices In February the ruble gained 0.3% month-on-month against the dollar in nominal terms after depreciating 7.8% month-on-month against the dollar in real terms in January. At the time of writing the ruble was RUB57 to the dollar, which makes it one of the best performing currencies in the world year-to-date. And the expectation is that it will continue to firm over the course of the year. The price of Brent increased 18.2% month-on-month in February However, the ruble remains under pressure due to capital outflows, foreign debt payments and the restricted access to the external capital markets for Russian corporations Based on the current oil prices, analysts believe that the ruble rate remains 10-15% below its fair value Assuming an average Brent price in 2015-16 of $60/bbl and capital outflows in 2015 of $120-130bn, analysts expect the average ruble exchange rate of RUB59.2/bi-currency basket in 2015

Infrastructure Russia’s energy sector needs $2.5tn of investment The Russian Energy Ministry has drafted an energy strategy that sees $2.5tn ($42bn)of investments during next 20 years, the ministry head Alexandr Novak said on March 18, TASS reported. Novak said the project suggests two scenarios, with Western sanctions factored in both of them. The more conservative scenario is based on lower energy prices and suggests slow economic growth, with annual GDP growth forecast at 1.6% till 2035. Russian recapitalises United Aviation Corporate with $1.7bn The Russian government has recapitalised its biggest aircraft maker United Aviation Corporation (UAC) with RUB100bn ($1.7bn) as part of its support for the struggling plane-making sector. The movie is also part of versus import substitution program. Thanks is of hairdresser hard and is the Kremlin wants to reduce is dependent on foreign-made aeroplanes and parts. The state has pushed airlines to buy home made plans before however Russia's aviation industry struggles to meet the quality of foreign-made planes.

The state-owned United Aircraft Corporation was created in 2006 to revitalize aircraft production. The company consists of around 30 aviation firms, including Sukhoi, MiG and Tupolev. UAC's flagship passenger jet, the Sukhoi SuperJet 100, has struggled to compete with the Boeing and Airbus planes and last year delivered just 37 civilian airliners, compared to 124 military aircraft. Half of the company' sdebts of RUB270bn ($4.7bn) as of June 30 last year are foreign currency loans, which have become harder to service due to ruble devaluation, and almost equal to the total 2014 revenue of RUB285bn. UAC has already applied to the government for more than RUB20bn ($345mn) in loan guarantees earlier this year. Russian regions fail to fulfil Putin road building plans Russia's cash strapped regions are in trouble as they have been unable to fulfil Russian President Vladimir Putin orders to double spending on roads. The failure will be a blow to the Kremlin which was hoping to give the economy a

Keynesian boost growth from upping spending on infrastructure. Road building as been a centrepiece of Russia's plans to spend over $1 trillion on infrastructure and an extra ruble of tax was added to the price of petrol to pay for it. However, despite the extra funds the crisis has hit Russia's regions even harder than the federal government and desperately needed spending on road building has been the first victim. Spending on roads was RUB345bn ($5.6bn) in 2014, according to the Association of regional road management (Rador), reports Vedomosti, which is down from the previous year spend and about half of the spending in 2008. In other words the push to remake Russia's road network is going backwards, rather than doubling. The failure of the regions is another worrying sign that some regions are getting into dire financial straights. Since the 2009 financial crisis, the Kremlin has allowed Russia's regions to take the brunt of the country's economic decline in order to keep the federal government seemingly healthy, with a nominally small budget deficit and large currency reserves, Stratfor reported last year. But in 2014 most of the regional governments' debt was climbing into the red zone and the centre has been quietly bailing them out – another drain the cash strapped budget. Things haven’t got much better this year. At the end of February

Moody's downgraded 33 regions, cities and municipalities, which "reflects Moody's assessment of the increase in systemic risks following the weakening of Russia's credit profile. As a result, Russian regions will face increasing pressure on their financial fundamentals while higher borrowing costs could potentially heighten refinancing and liquidity risks." Repairs work covered only 9219km of the country's road surface, or 2% of the total, which is not enough to maintain the existing road system, let alone modernise the whole network. Russia's famously uncivilised weather is hard on roads, which need regular and extensive upkeep each spring to simply keep them functional. And the situation with construction is even worse. The length of highways was supposed to be doubled in the period 2003-2012 at all levels, but regions have failed to come anywhere close to this target. In 2013 regions were supposed to build 1741km but managed 1528km and in 2014 only 1249km of new roads were built. If the regions have any hope of meeting Putin's goal of doubling the length of Russia's roads then they will have to build 1000km more than the previous year every year from now through to 2030. It ain't gonna happen. Currently Russia is averaging about 1700km of new road a year and that number will probably shrink in the next couple of years. Strapped for cash the emphasis all but a handful of well off regions has refocused on maintaining existing roads.

The government is already casting about for a fix to the problem and the Ministry of Transport has floated the idea of raising additional funds from introducing more paid parking schemes across the country. In Moscow the mayor Sergey Sobyanin has managed to dramatically reduce the capital's legendary traffic jams by introducing a paid parking scheme in the centre of the city which is rigorously enforced – which has side effect of bring in fresh revenues. Similar schemes could be set up in some of the other large cities. The most likely scheme to appear is a levy on 12-tonne trucks using federal highways. Tolls may also be introduced on some of the regional highways. Russian Railways wants $8bn from state to break even, maintain infrastructure Russian Railways (RZD) claims will be running at a loss without RUB460bn ($8bn) in direct state support “or other alternative sources of operational income” through 2016, Vedomosti daily reports, citing an unpublished document about the company's long-term strategy. Anticipated annual net losses will create credit repayment difficulties, lower credit ratings, reduced tax payments and a “sharp decline in investment”, the company warned. Meanwhile, and without state support, its revenues and spending by 2020 are

projected to increase to 33% and 36% respectively, to RUB2 trillion each, it said. In a previous strategy submitted in November, RZD sought RUB516bn for capital renovation of the rail network from 2014-2020. The government sent the document back with the instruction to produce a strategy that does not require state support. While still maintaining that state money is essential, RZD did not specify in the latest draft what the requested RUB460bn would be spent on. In 2010-2014, the company received some RUB105bn of “operational support", covering the rest of its deficit with dividends and sales of subsidiaries. These sources of income are now exhausted, a source close to RZD told Vedomosti. The Ministry of Economic Development estimates that by 2017 some 25,000km of rail lines will need replacing. But the ministry also says RZD will not be unprofitable if it pursues a prudent operational and debt strategy. 8% VAT cut to save Russian air carriers over $300mn p.a. March 24, 2015, 12:38pm GMT | Edit article Print E-mail this page The Russian government will seek approval from parliament for amendments to the tax code reducing VAT from 18% to 10% for domestic flights, saving airlines hundreds of millions of dollars, the Vedomosti business daily reported on March 23. The new tax regime

will be effective till January 1, 2017. Minister of Transport Maksim Sokolov said earlier the reduction would help the carriers to annually save up to RUB20bn ($345mn at current exchange rates). Representatives of the carriers Transaero, S7 and UTair said they supported the measure. Aeroflot’s CEO Vitaly Savelyev called earlier for zero VAT for domestic flights but the lower tax rate was still a welcome improvement, a source in Aeroflot told the newspaper. Aeroflot turnover up 10.6% in February versus 10.0% market decline Aeroflot's passenger turnover rose 10.6% y-o- y in February (10.7% in January), outperforming the market, which contracted 10.0%. The number of passengers carried improved 15.8% (18.0% in January), while the broader market slipped 1.3%. Passenger turnover was unexpectedly strong for Aeroflot standalone (up 12.5% in February), Rossiya (up 20%) and

the Pobeda low-cost carrier and its regional subsidiaries. This was due to a strong performance on domestic flights and February flights are unlikely to have been booked before the ruble’s sharp depreciation in the fourth quarter of 2014, which makes the result even more pronounced. Still, that didn’t stop the company from posting a loss in 2014 of RUB17.1bn ($274mn) in 2014 vs. net profit of RUB7.3bn in 2013. The company attributed the loss to non-cash adjustments, such as revision of leasing liabilities and other currency adjustments. Operational profit, not accounting for currency losses, would amount to RUB10.8bn. Industry-wide, domestic turnover rose 4.5% y-o-y in February (15.5% in January) from a high base created by the Winter Olympics in Sochi, at the expense of international traffic (down 17.7%) for an overall decline of 10.0%.

Russia delays Crimea construction projects for several years The Russian government will have to delay the realization of several big infrastructural projects in Crimea, including the construction of highways, because of budget limitations, Crimean Affairs Minister Oleg Savelyev said in an interview with the RBC news agency published on March 16. At the same time, the laying of a cable through the Kerch peninsula to provide electricity to Crimea will be sped up. Construction work will not start in 2017 as planned, but in 2015. It will make Crimea independent from Ukraine’s water and electrical supplies, and make people “feel more confident”, Savelyev said. In 2014, the Russian government signed a RUB680bn programme for Crimea's development to 2020. Next year, the peninsula will get RUB132.4bn, rising to RUB137.2bn in 1917. Russian Economic Development Minister Alexei Ulyukaev has said that despite government plans to decrease budget spendings, the Crimean programme will be spared cuts. Russian seaport cargo turnover up 10% y/y in January-February Throughput at Russian ports increased by 10.3% y/y to 102.2mn tonnes in January-February, the Association of Trade Sea Ports said on March 11.

Coal turnover grew by 5.7% y/y to 17.1mn tonnes, oil product turnover grew by 23.9% y/y to 24mn tonnes, crude oil turnover grew by 8.7% y/y to 33.6mn tonnes, fertilizer turnover rose by 6.2% y/y to 2.2mn tonnes, ferrous metal turnover grew by 7.4% y/y to 4mn tonnes and grain turnover grew 24.3% y/y to 3.3mn tons. Container turnover decreased by 13.4% y/y to 6mn tonnes in January-February. UralSib analysts expect a 31% y/y decline in 2015 container traffic. Crude oil, the largest category in turnover by tonnage, and oil products were the major growth drivers, UralSib analysts said in a comment. “Overall turnover kept growing in February, driven by oil, which is catching up after the weak volumes recorded in December, and oil products. Adjusting for these cargo types, turnover was up 6% y/y in 2M15. Due to shrinking domestic demand, container turnover at Russia's marine container terminals was under pressure in February, down 24% y/y to 327,731 TEU." Export cargo turnover reached 84.1mn tonnes, 12.7% more then during the same period in 2014. Import cargo turnover fell by 22.5% to 4.7mn tonnes. NCSP Group is well positioned in the current environment, as most of its costs are in rubles and the main tariffs at its Novorossiysk marine terminals are in dollars, UralSib noted.

ECM Has the Russian equity market turned the corner? Portfolio investment into Russia grew by $500mn in the first seven weeks of 2015, as the situation in Ukraine has stabilized and the ruble has strengthened while other countries' currencies have weakened, according to data from Emerging Portfolio Fund Research (EPFR). As the Russian equity market turned the corner? Russia emerged as one of the best performing a equity markets this year, up 15% year to date, according to Sberbank CIB, after three straight weeks of inflow following the Minsk II ceasefire agreement signed in February. Some investors, it seems, believe the beginning of the end is here and are taking a punt on super-cheap Russian stocks. And it is a tempting proposition, if the Russian equity market really has hit bottom. The Russian RTS index crashed from an all-time high of 2487.92 on May 19, 2008 to 492.59 on January 23, 2009. However, in the rest of that year oil prices rapidly recovered from a low of around $43 per barrel sending the index soaring back to 1500 by the autumn, trebling the value of investments by those brave enough to take the plunge. It is not often that investors can make those kinds of returns in the

matter of months and clearly some portfolio investors believe that another opportunity is presenting itself. Emerging markets are again coming to the fore as gains on the US market, a star performer over the last year, starts to run out of steam. India remains the most attractive destination taking in $678nm in the last three weeks alone, pushing its one-year gain to $7.4bn, according to Sberbank CIB. Russia is right behind, taking in $40.mn in the same period to bring its one year gains to $525mn, while its stocks have significantly outperformed all its BRICS peers thanks to a very low base effect caused by the Ukraine conflict. Looking at the cumulative fund flow chart and the height of the outflows came in March 2014 when Russia annexed Crimea but started to return afterwards until about October when fighting flared up again in East Ukraine and sentiment turned negative again. Investment fled over the next four months, but the tide seems to have turned once more in February when the German-lead efforts to sign off on another ceasefire deal started to gather momentum. Now that the Minsk II deal is done and a shaky and imperfect ceasefire seems to be holding inflows are starting to return.

Russia's Lenta raises $225mn in SPO as foreign investors jump Russian retailer Lenta raised $225mn during its SPO on March 24 on the London Stock Exchange. In accelerated-book-build the company placed 35.2mn new shares, or 8% of its capital, in the form of GDR for $6.4 per receipt. Credit Suisse, J.P. Morgan and VTB Capital organized the placement, which Lenta will use to finance its expansion programme. The Russian chain plans to open 20-25 hypermarkets and 10-15 supermarkets next year.

More than 60% of the GDRs were bought by foreign investors, Interfax reported, citing the head of equity capital markets at VTB Capital Elena Khisamova. “Investors from continental Europe bought 30% of the placement, British investors bought 18%, investors from US - 17%,” Khisamova said. Russian investors, including Russian Direct Investment Fund that acted as a lead anchor investor, acquired 35% of the placement. “Lenta’s and Magnit’s placements showed that the market is open for quality players from Russia, as both companies’s shares were in

demand,” Khisamova noted, referring to Russia's biggest retailer. In February, Magnit placed 1% of its shares to fund its projects, raising RUB9.8bn ($143mn), filling its book in several hours. Russian utilities burn bright as double-digit dividends beckon Russia's utility sector is in excellent shape, with a reliable generation system and some of the lowest electricity tariffs in developed markets for both the economy and households, Renaissance Capital said in a research report published on March 26. “The reliability of the system is on par with the best global standards, we estimate, with the reserve margin exceeding 9%, and utilisation of the system at only 48% and ready to withstand even the accelerated decommissioning of aging equipment,” the banks analysts noted. Investors may therefore expect significant revenue growth across the sector in 2015 and dividend yields to rise to double-digit average levels over the next 24 months, the report said. This year is expected to be especially profitable for Russian generation companies (GenCos), “with capex likely to drop substantially, accelerated deleveraging in the sector and free cash-flow yields reaching the high ‘teens’ level, on average, which should translate into double-digit dividend yields by 2017.” Over the

next six-to-12 months investors will see Russian GenCos as dividend stories with decent yields in developed markets, which will result in attractive upside potential. Despite bright prospects, GenCos currently trade with 50% discount to peers. “We believe this gap will close quickly as dividends become sustainable and see this as an opportunity to buy utility stocks, in particular, InterRAO, E.ON Russia, Mosenergo and OGK2,” Renaissance Capital concluded. Russian IPOs underwater It has become an extremely rare event: on March 24 one of Russia's leading supermarket chains, Lenta, held a successful $225mn secondary public offering (SPO), pretty much the only significant new issue of shares since Lenta IPO'd last year. The issue went off with a little help from the state backed Russian Direct Investment Fund (RDIF), a $10bn sovereign wealth fund, which was the anchor investor in the new issue. The RDIF participated in an accelerated placement of global depositary receipts representing newly issued shares in Lenta Ltd. The proceeds will be used to pay for Lenta's rapid store expansion programme across Russia, the fund explained in a statement. “This placement is notable because it represents strong interest of geographically diverse group of foreign institutions to invest in a leading Russian company despite

the challenging market environment. RDIF is pleased to have helped Lenta in sourcing not only Asian and Middle Eastern investors, but a number of major European funds as well," Kirill Dmitriev, CEO of RDIF, said in a statement. Obviously, investors who bought the new shares hope they will go up, but as our interactive

bne:Chart shows, that is unlikely. Russian IPOs have a terrible record: over the last eight years all but six of the 87 IPOs have lost money, and the ten worst are all down by over 90%. Even investors who bought into Lenta's IPO almost exactly a year ago must be disappointed: the company's stock is trading at a 30% loss since its IPO in March 2014.

Longstanding investors in Russian shares know that Russian IPOs almost never outperform the market. In the past, owners (and investors) have been greedy and overpriced their stock. They have gotten away with it, as the bulk of Russia's IPOs naturally happened during the boom years that were brought to close by the 2008 crisis.

Now Russia is stuck in an economic and political quagmire, the number of new issues in recent years have been few and far between, and of the 18 IPOs that were held since 2008 all but four have lost their investors money. Interestingly, three of the four were from the tech sector: software engineers EPAM and Luxoft as well as

payment service Qiwi. The tech sector is currently the only part of the Russian economy that is flourishing and managing to pique the interest of international investors, based on Russia's

143mn population and the fast growth of internet penetration. The only other company to make investors money was fertiliser producer Acron.

Technology is the only sector in Russia that has produced positive returns for investors, producing an average return of 16% since their IPOs. All the other sectors have lost anything between 8.25% (chemical and fertilisers) to 88% (restaurants). If four money-makers out of 18 sounds like a poor record for IPOs, actually 2009 to 2014 has been the least risky time to buy into a Russian IPO. As the bne:Chart shows, if you count in all the IPOs since they began in the mid-noughties, you can add only two more names to the money-making list: gas producer Novatek, which IPO'd in July 2005 and is trading at 349% over its offer price; and the Chelyabinsk Zinc Plant, which IPO'd in November 2006 and is trading at 82% over its offer price.

Given almost all of Russia's money-making IPOs have been issued in just the last three years and almost all are tech- or telecom-related, Russia's TMT companies should be rushing to sell shares. RDIF to set up $1bn joint fund with Italian partners Russia’s Direct Investment Fund is establishing jointly with Italian partners a $1bn fund, Russian President Vladimir Putin said on Thursday after talks with visiting Italian Prime Minister Matteo Renzi. "With an eye of further growth, the Russian Direct Investment Fund jointly with its partners from Italy is setting up a fund worth $1bn,” Putin said, cited by TASS. He said that Italy is Russia's fourth largest trade partner. According to

the president, the Italian investments in Russia has exceeded $1.1bn, while Russia’s investments in Italy stands at $2.3bn. "Despite the fact that due to known reasons Russia-Italy trade last year dropped by 10%, Italy is still among Russia’s leading foreign trade partners," Putin underscored. Also, Putin said he and the visiting Italian prime minister had discussed a range of measures to invigorate cooperation "so that not only preserve but to augment" positive tendencies of the past decades. Italy’s economy could lose around $4.6bn due to the European Union sanctions against Russia, according to a study published by the Bocconi University in the end of 2014. Baring Vostok delays selling Yandex stake by one year Terrible market conditions and awful Russian sentiment have meant that Russia's biggest investment fund Barings Vostok Capital has put off selling more of its stake in Europe's biggest tech company Yandex.ru for at least a year. Yandex has been one of the funds many "homeruns" as the fund's lead manage and founder Michael Calvey describes his best investments. Barings was a very early investor in Yandex which floated in New York in 2011 raising $1.3bn on a market value at the time of $11.2bn. It remains an outstanding Russian company that has out googled Google with

innovations like its Yandex.maps and Yandex.taxi since but its share price has been badly hit by Russia's ongoing political and economic troubles: the company's market capitalization was $4.7bn as of March 20. Baring has been selling down its shares in bits and piece over the last few years but as of March 16 still owned 14.9m shares, or 4.5% of the share capital and 6.2% of the free float worth $215m at current market prices, reports Sberbank. "This means that over the last nine months the fund sold 5.4mn shares, which is a mere 27% of the stake it was supposed to dispose of by June of this year," Anna-Lepetukhina, an analyst with Sberbank said in a note to clients at the end of last week. Baring Vostok submitted a filing to America's SEC with amendments to a plan to sell almost its entire stake in Yandex via Morgan Stanley over the course of a year starting in July 2014, but obviously with the Russian stock market being the worst performing in the world in 2014 the plans have been delayed. While the statement to the SEC gives few details analysts at Sberbank believe the stake will now be sold over the course of the year to July 30, 2016. The fund has not sold a single share since the beginning of this year. The number of shares it filed as of end 2014 matches its holding as of March 16, 2015 as Yandex’s share price is down 19% YEAR-TO-

DATE to just $14.5 per share. Crisis strengthens link between Russian stocks and oil price Russian stocks have always been tied to the price of oil, but the collapse of the cost of a barrel of Brent in December has increased the relation.

"Despite the dramatic changes that both have undergone in recent months, their relationship has actually strengthened. The R2 coefficient, which illustrates the strength of the dependence of one factor upon changes in another, rose to 0.96 vs 0.90 at the end of last year," Aton said in a report in March.

"The same can be said of the Russian equity market: the dollar-denominated RTS index has an R2 of 0.79 vs the oil price for the 2013-2015 observation – a slight

increase from 0.76 in our last update (Figure 4). Another dollar-denominated index, MSCI Russia, shows an R2 of 0.81 for that period," Aton said.

What to invest into if Russia surprises on the upside? Analysts are maintaining a negative outlook on the Russian economy and the potential short-term performance of its capital markets. However, discerning investors will have noticed the nearly 30% oil-price rebound since mid-Jan 2015, and the 15% appreciation of the rouble since the end of January. As a result, the Russian market has gained over 40% in dollar terms (20% in rouble terms) after hitting its 16 Dec trough. There is a possibility of a faster oil price rebound and rouble appreciation than expected and a improving Russia’s GDP

outlook for this year. Investment banks have been revising their outlooks and putting together an "optimistic" investment portfolio in case Russia's recovery turns out to be faster than anticipated. Russia's winter was warm, but storms wracked the financial markets. The ruble fell by as much as 70% at its worst point following oil prices down, which fell by 40%, and is still down 30% vs the dollar year to date, says Aton. The Central Bank of Russia (CBR) was forced to hike rates to 17% and inflation spiked to 16.7 year-on-year in February.

"We now forecast Russian GDP to contract 4% in 2015 and another 1% in 2016 on low oil prices ($60/bbl at the end of 2015 and $65/bbl the following year). While we expect the inflationary pressures to ease later in the year, our full-year forecast for 2015 stands at 13%. Several past Aton reports have argued that the local economy is facing numerous structural challenges that could keep dragging it down even if the oil price recovers. None of these challenges has been addressed," said Aton analysts in a note on March 11. Still, the report goes on to point out that some investors think the economy is about to turn the corner and large gains are on offer for the brave, if things pan out. "As a result we saw a 40% gain in Russian market indices and an inflow of funds to Russia focused funds and ETFs," which lead Aton to release a set of recommendations in case these brave investors are right. "We still strongly advocate maintaining a cautious stance towards Russian equities. Nevertheless, we believe that certain risk-inclined investors would be willing to reposition their holdings to capture

potential further growth in Russian equities resulting from a stronger oil price and ruble." Amongst the companies that are likely to do well at the first signs of some green shoots of recover are retailers and banks. Aton's top picks are supermarkets X5, Lenta, and O’Key, as well as electronic goods store M.Video and the state-owned retail banking giant Sberbank. Telecom (MegaFon, MTS) and internet stocks (Yandex, Mail.ru) would also benefit from a stronger ruble, says Aton. Obviously an oil price recovery would also be good for the leading oil names (LUKOIL, NOVATEK, Gazprom Neft, and Surgut’s prefs), but while metal and mining stocks have already done very well thanks to the devaluation effects – their costs are in devalued ruble but revenues are in hard currency – Aton says this story has probably already run its course. "Still, certain stocks (Norilsk Nickel, NLMK, MMK) may still be worth holding on to. In utilities we recommend E.ON Russia, as the best quality name in the sector," Aton says.

DCM Demand for Russian debt improves on back of rising oil, ruble value Demand for Russian debt improved in February since the central bank unexpectedly cut its benchmark interest rate by 200 basis points to 15% on January 30. The growing demand for local debt amid a recovery in oil prices, which are up by about a third since the start of the year, and a cease-fire in eastern Ukraine has helped Russia boost fundraising by 83% compared with the same period last year, reports Bloomberg. The yield on five-year government bonds fell 31 basis points to 13.91% as of March 6 year to date. Russia is stepping up its fundraising efforts as it has a target to sell RUB150bn rubles of local OFZs in the first quarter of this year according to the budget. So far this year the Ministry of Finance Russia has sold RUB68.8bn of debt at par value this year, a bit less than half of what was planned in the budget, which is still better than last year when it raised RUB158bn rubles on the local market, less than a fifth of the target. The Ministry of Finance has been struggling to raise money at home and was forced to cancel 27 bond sales in 2014 due to surging

borrowing costs caused by a slow motion devaluation of the ruble over the course of the whole year that accelerate in December and a gradual up-creep in borrowing costs that also jumped in December with the CBR's emerging rate hike of 10%. The bond sales at the end of February was the Finance Ministry’s fifth offering of so-called "floaters" since reintroducing the instrument, a short-term ruble instrument, in January for the first time in more than a decade. The notes are linked to the Ruonia overnight rate, which was at 15.7% on March 2, reports Bloomberg. Russia MinFin to relax investment rules for National Welfare fund Russia's Ministry of Finance intends to reform the rules governing the investment of the rainy-day National Welfare Fund (NWF) and to drop the requirement restricting investments to sovereign Treasury bills with investment grade ratings. THE NWF is one of two sovereign wealth funds and is normally cash put aside out of oil revenues to cover social and pension payments in the future. As of the start of March it has some $77bn, but the government is intending to tap this

fund in order to close a federal budget deficit expected this year. Currently the rules governing investments of the NWF stipulates that at least half of the fan has to be invested into bonds of other countries with an investment grade rating no lower than AA- from Fitch and Standard & Poor's or Aa3 from Moody's. If the funds are deposited in banks and they must have at least the same ratings. The Ministry of Finance has complained the recent downgrades on Russian and sovereign debt to below investment-grade was politically motivated. However the Ministry of Finance has not said

where it will invest this money if not in US to bills or other western government debt. The result of this decision will only put more downward pressure on Russia's ratings as it will be seen as undermining macro stability. Investments into US T bills have returned very little to the Russian Exchequer. In 2014 the NWF investments made a 0.67%. The other problem with these investments is that a large chunk of it is going to the US. As VTB's CFO Herbert Moos pointed out to bne IntelliNews in a recent interview: "why should we finance the deficit of our new enemy?"

IMF not expecting Ukraine to repay Russia debt in 2015 The International Monetary Fund (IMF) is not expecting that Ukraine will repay its $3bn debt to Russia in 2015, the Financial Times wrote on March 23. As a part of an IMF rescue to plug a $40bn hole in the country’s finances, the Ukrainian government has to restructure $15bn of its debt before creditors over the next four years. The IMF expects creditors to agree to some sort of restructuring, although resistance to a significant haircut is stiffening. However, Russia will not discuss any restructuring of the Ukrainian debt, which it expects to be paid in full by the year's end. Finance Minister Anton Siluanov said on March 16. "We have stated our position several times and are not changing it," Siluanov said. "We expect $3bn in December of the current year, as was promised by the Finance Ministry of Ukraine." Russia previously said it regards Ukraine as being in breach of the bond covenant but had no plans to exercise the right to early redemption. According to the IMF, Ukraine will be able to “win” $5.2bn due to debt restructuring. Meanwhile, according to its current debt obligations, it currently has to come up with $7.7bn. So if Ukraine is following IMF instructions, the $3bn will not be paid to Russia by the end of 2015. “It is rather clear that the IMF is assuming that Russia’s $3bn bond is included in this year’s $5.2bn

financing from a “debt operation”, writes FT, citing Charles Blitzer, principal at Blitzer Consulting and a former IMF staff member. At the same time, the IMF said that it had not made assumptions about specific debt restructuring measures. Ukraine's leading bondholders have formed a bloc to negotiate with the government in Kyiv as it proceeds with plans to give them a haircut. Blackstone's advisory arm has been hired to represent the interests of the bloc, which unites investors holding over half the country's debt, according to media reports. The Lazard investment bank has been retained by Kyiv on its side. There is doubt, however, about the effectiveness of any restructuring talks without Russia's participation. Siluanov maintains that his ministry has not received any request from Kyiv to take part. Timothy Ash from Standard Bank believes that the Russians can extract more leverage by being involved in the process of restructuring. Russia will play “very hard ball” and demand wider geopolitical concessions from the West and Ukraine, Ash predicted. Ukraine's gross foreign debt contracted by 11.1% y/y to $126.31, the National Bank of Ukraine (NBU) said on March 20. At the same time, due to the devaluation of the hryvnia and contraction of the economy, the ratio of gross external debt to GDP

has worsened from 75.4% of GDP to 96.5% of GDP. "The financial and corporate sectors of the economy have reduced the amount of liabilities to non-residents by $19.1bn, while public sector debt increased by $3.4bn (up to $35.1bn) as a result of borrowing from international financial organizations," the NBU said in a statement. Russia’s Gazprombank get A- rating from Chinese Dagong China's biggest rating agency Dagong assigned Russia's Gazprombank an 'A-' foreign and local currency credit rating with stable outlook, the bank said on March 18. The rating is at the same level as the US rating and one notch below Russia's sovereign rating. Gazprombank already has three rating from world’s leading agencies: BB+ from Fitch and S&P, and Ba2 from Moody’s, all with negative outlook. Dagong notes in its statement the bank’s high capital adequacy and high liquidity. Gazprombank with its significant market share has a competitive advantage amid the process of decentralization of Russian banking sector, it added.. Wires reported earlier that Gazprombank was planning to place so called ‘panda bonds' on China's domestic market. For a foreign borrower it is necessary to have a rating from the Chinese agency to enter the local market. State-owned VTB Bank is also seeking a rating from Dagong.

Russian ruble and bonds rally to 2015 highs on no bad news The Russian ruble continues its strengthening and bonds have also climbed to 2015 records, but commentators are saying the recovery is fragile and can be hobbled by any of the usual bad news blows: falling oil prices, geopolitical tensions, and sanctions over Russia's involvement in Ukraine. On March 25 the ruble marched on during a strong week, testing the RUB57/dollar mark for the first time in 2015. As of 6pm MSK ruble traded at RUB57.26 to the dollar, gaining 0.75% d/d, and at RUB62.8 to the euro, up by 0.3% d/d. Demand for ruble liquidity on a thin currency market was supported by a surge of payments of excise duties, extraction tax and VAT, and was estimated by Promsvyazbank to see the withdrawal of RUB510bn from the banking system on March 25 alone. Low demand for Fx is also attributed by traders to dropping imports and corporates already having stocked up on currency necessary to repay external debt peaking at over $20bn in March. Public demand for currency has also ebbed, with the Central Bank of Russia (CBR) saying individuals sold more currency than they bought in January, for the first time in two years. Brent oil, used to benchmark the price of Russia's Urals blend, is stable at around $55/barrel.

While Rosbank analysts believes the ruble strengthening is also a reflection of optimism and improving outlooks for 2015. Dimtry Polevoy of ING said ruble strengthening exceeded even the optimistic forecasts. He believes that such shift gain could encourage exporters and the public to sell Fx even outside the tax payment period. Russia submits bill to lay Islamic finance groundwork On the hunt for alternative sources of international capital, Russian law makers have submitted an long anticipated bill that would lay the legal groundwork for Islamic finance and especially sukuk bonds. A few loans and syndications that are compliant with sharia law have already done in Russia, largely in the predominately Islamic autonomous republic of Tatarstan, however, Russia's financial regulatory system lacks the laws that underpin Islamic finance, that would allow large corporates or the government to issue sukuk bonds. Although European Union (EU) sanctions are widely expected to expire in December, including its financial sanctions, because of the global nature of the international capital markets the sanctioned banks will still not be able to tap capital markets. The US sanctions are not like to repealed for years and so any European bank that does business with an American bank (ie all of them) will not be able to do business with Russia

without falling foul of the US sanctions. Russia is turning to the deep pools of Middle Eastern capital to close at least part of its financing gap and Arab banks have little business with the US and so are not affected by the US sanctions. The draft law proposes allowing banks to engage in trade activities, a concept central to many of the structures used in sharia-compliant financial products. The bill is a first step to spur development of a sector which has posted double-digit growth in several Gulf and Southeast Asian countries. Even European governments like Germany and Britain have floated sukuk bonds. Interest is prohibited on religious grounds, so Islamic finance relies on banks charging service fees and depositors sharing in bank profits. Also as there is no interest payments the loans tend to be made for projects that are backed by concrete real economy projects and assets and can't be used for speculation in financial markets which is believed to improve their risk profile. The bill would also require changes to the taxation laws and will take at least a year to go into effect. Moscow Exchange launches yuan-ruble futures trading Moscow Exchange has begun trading in futures on the currency pair Chinese yuan - Russian ruble after trading volumes with yuan in 2014 grew eight times to

RUB400bn, the exchange said on March 17. The number of conversion operations with yuan also increased, according to the exchange. The minimum margin requirement is 12%. Contracts on the pair will be executed on March 15, June 15, September 15 and December 15. The exchange group's first deputy head Andrey Shemetov said the new instrument is a “next step by Moscow Exchange to offer a full range of yuan instruments and hedging tools to participants”, TASS reported. The new instrument should facilitate trade turnover between Russia and China, the management believes. Moscow Exchange and Bank of China signed a cooperation agreement last year. In November 2014, SWIFT reported that the yuan was among the top five most commonly used currencies, topping the Canadian and Australian dollars. However, the head of Moscow Exchange's market division Igor Marich told a press conference that companies from Russia and China still rarely use yuan in trade with each other. “Many Russian companies said before that they were planning to switch to yuan in deals with their Chinese partners. We heard it many times, we talked to banks that served these deals but to be honest I haven’t noticed any real progress beyond the talks,” Interfax quoted Marich as saying.

CBR expected to issue up to RUB3tr to fund budget deficit The CBR has indicated that it is ready to issue up to RUB3tr to purchase the Finance Ministry’s FX savings from the Reserve Fund in order to finance the expected budget deficit this year. According to CBR this should not be considered as an inflationary step; however, this view requires an explanation: It would be true should CBR reserves increase following this type of transaction; but, unlike a number of countries, state savings in Russia are included in the CBR’s international reserves figures, thus, following this transaction, the monetary supply would increase while the CBR’s reserves would remain unchanged. Therefore, the only way for the CBR to make it inflation-neutral would be to sterilize it by withdrawing the same amount from the banking sector. De jure, it seems possible, as Russian banks owe RUB7.7tr to the CBR; however, de facto, it is unlikely to be very easy. Arrears and defaults in Russian securitised mortgage and consumer loans will be limited despite economic slowdown International ratings agency Moody's release a report on March 11 that predicts the rise in arrears and defaults in Russian securitised mortgage and consumer loans, "will be limited, despite the looming possibility of a recession of a greater magnitude than that experienced during the 2009

sovereign debt crisis," according to Maria Divid, an analyst at Moody’s in the report titled "Russian Securitisations Will Weather Upcoming Domestic Recession, Owing to Resilient Loan Credit Profiles." The reason is the underlying loan characteristics with fixed interest rates for life and modest loan-to-value ratios, support borrowers' ability to repay. "However, if the recession turns out to be considerably deeper than we currently expect, the ensuing performance deterioration would be much more severe, notwithstanding these mitigants,"

says Maria Divid, the author of the report. In general Moody's says that ratings in Russian transactions have remained fairly stable so far, supported by fast deleveraging and performance remaining consistent with its assumptions. Moody's expects that the deterioration in asset performance will not be as dramatic as that observed in some European periphery countries during the crisis. The extent of the deterioration will be more moderate than that recently seen in Ireland or Spain, for example.

Fitch sees Russia's investment rating shielded by reserves Fitch Ratings, the only major rating agency assessing Russia's sovereign foreign currency rating at investment-grade category of BBB-, will revise the rating in April, the agency's senior director Paul Rawkins told Bloomberg. Rawkins views the rating as being shielded by high foreign currency reserves of $360bn, wider current account surplus, and fast reaction by authorities to recession as was shown by a more realistic budget. There is no question that Russia is “facing severe external shocks”, Rawkins said, while arguing that it was “important to keep in mind its

strong starting position”. This is a “slow-burn” situation and the factors keeping Russia at investment-grade are not going to disappear overnight, the Fitch director believes. Fitch expects Russia's GDP to contract by 4.5% in 2015 and by 1% in 2016. Protracted recession will carry over to 2016 if sanctions remain in place, oil prices remain low, and investment growth remains negative. Low oil prices and continued recession in 2016 were seen as having adverse effect on public finances and financial sector stability and could be a potential negative rating trigger.

Sectors 2014 a record year for new housing Last year appears to have set a record for new housing in post-Soviet Russia, with delivery of 81mn m2 in new homes, a 14.9% boost y-o-y. Of this, 43.5% was in private homes, according to the State Statistics Service. The impressive volumes of new home deliveries for 2014 are hardly surprising given the pace of construction we have witnessed in the last year as developers tried to satisfy record-high demand.

However, the elevated levels of inventory and declining demand hit the market in January when the rate of residential construction outside of Russia's urban centres dropped by as much as 40% since the start of this year, Deputy Prime Minister Dmitry Kozak as said at the end of March. Home building in Russia as a whole fell 10%in the first two months of this year, Housing Minister Mikhail Men said in March. Developers have been slammed by the ruble's fall of around 40% to the U.S. dollar since last year, which raised the price of building materials

and forced the Central Bank to hike interest rates to rein in volatility on the currency markets. The collapse in demand will possibly create pressure on pricing in some markets this year. December completions, seasonally the highest throughout the year, were actually down 2.9%, which may have been caused by a delay in commissions as consumers and homebuilders start to work through the tighter credit environment. Russia first in Europe in number of Internet users More than 60 million Russian surf the Internet every day making the country with the largest number of Internet users in Europe. Internet-related business already accounts for about 10% of GDP, President Vladimir Putin told a presentation of the Internet Startups project on March 26. "This is a substantial%age," Putin said. Britain ready to block North Sea deal of Russian LetterOne fund The press office of British Prime Minister David Cameron has issued a statement demanding an explanation within seven days of why the Luxembourg-based fund LetterOne controlled by Russian billionaires Mikhail Friedman and German Khan should be allowed to retain ownership of 12 British North sea natural gas fields recently acquired from the German energy utility RWE.

On March 2, RWE announced completing the $5.6bn sale of its hydrocarbon extraction unit Dea to LetterOne, of which North Sea assets account for about 20%, despite the objections of UK Energy Secretary Ed Davey. Davey said in a statement that he “would be minded to require" a further sale of the stakes in the assets to a third party, out of unvoiced concerns that LetterOne could potentially become a target of expanded Western sanctions against Russia. LetterOne CEO Jonathan Muir replied that the parties were “deeply disappointed and concerned”, given the “extensive efforts” the fund and RWE had made to meet the concerns over the British assets. LetterOne and RWE have reportedly sought to keep the assets separate for a number of years and committed the German energy company to buy them back should any sanctions be imposed on LetterOne owners by the EU or US. LetterOne investment group was set up in August 2013 with an initial investment of $15.4bn by Russia’s investment fund Alfa Group controlled by Mikhail Friedman. The fund was set up with $14bn proceeds that Alfa raised from the sale of the TNK-BP oil company, Russia's third-largest oil producer at the time. TNK-BP was a 50/50 joint venture of British Petroleum and the Russian investment consortium AAR (Alfa-Access-Renova of Mikhail Friedman, German Khan, Victor Vekselberg, and Len Blavatnik) and

was sold to the Kremlin-controlled Rosneft oil major. Meanwhile, direct connections are regarded as unlikely between Friedman's LetterOne and pro-Kremlin business circles so far santioned by the West. Following the sale of TNK-BP, Russian President Vladimir Putin repeatedly “expressed hopes” that the offshore proceeds of the deal would be invested in Russia. The fund effectively defies this through acquiring Dea as a springboard for foreign energy operations. Car plants shut Nissan Motor decided to suspend production at its St. Petersburg plant between March 16 and March 31 due to weak sales in the Russian market. Several Russia-based foreign car makers have enforced holidays and reduced work weeks as demand for new cars fell by 38% in February year-on-year. The tough market has also prompted General Motors Co to announce plans to idle its Russian plant for eight weeks starting in late March, after it had already cut one of the two shifts at the factory in September.

Nissan has plans to eventually double production capacity in St. Petersburg to 100,000 vehicles a year, and said Russia remains an important long-term investment, but those plans are now delayed. The figures were the result of several negative factors outweighing the cash-for-clunkers program, which is still ongoing. The Russian government will prolong the scheme in 2015 to help boost the flagging car industry, the minister of trade and industry Denis Manturov told the press on March 16. Manturov estimates that at least an additional RUB5bn ($8mn) will be granted for the programme, after the government already approved RUB10bn of support. These factors include higher price tags largely stemming from the weaker ruble, prohibitive terms on auto loans and the Russian economy approaching recession (private consumption is expected to drop 5% in real terms in 2015). Moreover, healthy sales in 2H14 likely ate into 2015 volumes given elevated ruble depreciation expectations (people rushed to buy cars ahead of anticipated price hikes prompted by the falling ruble).

Gazprom’s output falls again amid lower exports, domestic demand Gazprom’s output dropped 9.0% y-o-y, the weakest January outcome in the last 13 years covered by our monthly database. The weather was clearly unhelpful, as it was mild in Europe and Russia. In addition, Gazprom and Novatek were offloading the high storage levels they accumulated during the unusually warm November-December 2014. Despite the recent commissioning of the second stage of the huge Bovanenkov project on Yamal, we are not surprised by Gazprom’s low production figures. The company’s 2015 production score could be aided by a roughly 10 bcm increase in non- FSU exports and a just announced reduction in gas imports from Central Asia of some 9 bcm. However, the economic downturn in the country and intense competition from gas independents expected to add some 20 bcm to their production score will make it difficult for Gazprom to keep its production flat this year, let alone increase it.

Mobiles Russian mobile data traffic growth higher than global average in 2014 Russian mobile data traffic increased 89% year-on-year to 91.5 PB/month in 2014, according to an annual report published by Cisco. Russian growth exceeded the global average (69%), as well as the growth rates in developed markets such as the US (63% year-on-year) and Western Europe (45%). It was also about on par with growth in Central and Eastern Europe (91% year-on-year). Mobile data traffic in 2014 exceeded 2009 traffic by a factor of 52. Cisco forecasts that Russian mobile data traffic will expand at a CAGR of 72% through 2019, reaching 24% of total internet traffic compared to just 5% in 2014. According to the report, the average mobile device user in Russia generated 372 MB of traffic per month in 2014. Smartphone traffic increased by 90% year-on-year to 817 MB/month, while traffic for tablet users was up 220% year-on-year to 2,092 MB/month. Revenues from mobile data naturally grew at a slower pace than traffic (35% year-on-year in the first nine months of 2014, according to AC&M Consulting), as

higher penetration of smartphones and tablets and better coverage by 3G/4G networks fueled higher adoption of mobile data services by mass-market subscribers, which was in turn supported by an effective decrease in mobile data tariffs with more customers opting for bundled tariff plans. Mobile data should remain a key revenue driver for the industry. Cisco’s report confirms that Russian mobile operators have somewhat better growth prospects than their developed market peers (at least in local currency terms), that data will remain a crucial revenue driver in the medium term and that the ability to offer quality mobile data services will remain a major competitive advantage in the Russian mobile market. We thus favor the mobile operators with the strongest positions in mobile data, MTS (MBT US – Buy) and MegaFon (MFON LI – Hold), which are also the most attractive investment options from a dividend perspective. Russian food retailer freezes prices on soaring inflation Russia's third-largest food retailer Dixy group imposed a one-month price freeze on February 9 as prices soar due to rising inflation in a marketing stunt to keep its stores full. Rosstat reported that January's inflation rose to 15% year-on-year – well ahead of the 11% reported for the full year in 2014. Dixy said it was holding the price of staples such as buckwheat, rice, pasta, sunflower oil, flour, frozen fish and

pelmeni (Russian ravioli) unchanged for the next month in a statement. Since Russia imposed a ban on the import of European agricultural goods last year, food prices have soared well ahead of headline inflation, as Russia imports nearly half of its processed food. Buckwheat (which the EU doesn’t produce but Russians love) has seen prices rise by half in the second half of last year and most other foodstuffs have increased in price well head of the headline inflation rate. So far Dixy's decision seems to be a company decision and a marketing gimmick, but the government has threatened to re-impose price controls on essential food stuffs if prices continue to climb. During the 2008-9 crisis the government unofficially strong armed retailers into holding down the cost of things like milk, but at the time exports said that since the fall of the Soviet Union, the state no longer has the means to impose price controls and the most it could hope for was to hold down prices for about six months on a voluntary basis. Dixy Group is 54% owned by Mercury Group, an investment vehicle controlled by billionaire retailers Igor Kesaev and Sergei Katsiev. Russian retailer Magnit's sales up 34% in February Magnit, one of the biggest retailers in Russia, reported 34% y/y sales growth in February on March 10.

Revenues grew by 34% and reached RUB70.3bn over the same period. January’s growth amounted to 35.3%. The company opened 91 convenience stores in February compared to 62 in 2014, 3 hypermarkets (1 in 2014), 1 Magnit Family store (2 in 2014), and 50 cosmetics outlets (13 in 2014). At the start of 2015, Magnit’s founder Sergei Galitsky said the company expected revenues to grow by 26%-32% during the year. Magnit predicted record growth of the chain in 2015, while capital expenditures will remain at the 2014 level of RUB65bn. Next year the company plans to open 1,200 convenience outlets, 90 hypermarkets, and 800 cosmetics shops. Russia's advertising market to shrink 16.5% in 2015 Russia's advertising market will shrink 16.5% in 2015, the ZenithOptimedia agency, part of the Publicis Groupe holding, said in March. That's a turnaround from 2014, when the market expanded for the first time since the crisis began in 2008, growing from a low base by 4.3% in money terms. The problems of sanctions, an economic downturn and the outflow of foreign investment were aggravated by the steep decline in the oil prices, the ruble devaluation and the collapse of imports.

Belarus and Ukraine are suffering even more than Russia where spending on advertising is forecast to decline 33.5% and 62.3% respectively in 2015. The global advertising market is forecast to grow 4.4% to $544bn in 2015 and 5.3% in 2016, driven by spending associated with the Olympic Games in Rio de Janeiro and the US presidential elections. Russia wins court ruling over Stolichnaya vodka name A Dutch court has ordered the Netherlands-based Spirits International to transfer ownership of the Stolichnaya, Moskovskaya and Na Zdorovye vodka brands to the Russian state agency Sojuzplodoimport under threat of heavy fines. The company, a subsidiary of the Luxembourg-registered SPI Group, must comply within three months or pay a $55,000 fine for every day it delays, the Rotterdam District Court ruled on March 25. It may no longer call its vodka “Russian”, although the claims on the “Stoli” nickname of the brand were rejected by the court. While the ruling only extends to the Benelux countries, Sojuzplodoimport lawyers said they hoped this will set precedents for other EU countries too. SPI said it will study the ruling before deciding whether to appeal. SPI Group's owner Yuri Shefler has been locked in a legal battle over the brand name for over a decade. Hoyng Monegier,

representing Russia in the case, claims that Shefler "took possession of the vodka trademarks after the collapse of the Soviet Union and has exploited them since”. Sojuzplodoimport initiated the case in 2003 and has tried to force Shefler to pay Russia damages for the duration of the use of the brands. A US appeals court in 2013 rejected a similar suit by Russia against SPI. Bankruptcy of Russian mining giant Mechel is inevitable Russian Economy Minister Alexei Ulyukayev said in March that the looming bankruptcy of mining company Mechel was "inevitable." Mechel lost more than 75% of its market value last year as it struggles to repay the remaining debt in excess of $6 billion to lenders, including Russia's state-run VTB and Sberbank. Mechel, founded in 2003, is one of the world’s leading mining and metals companies, which has production facilities in 11 Russian regions. The company, which produces coal, iron, ore, electric power and other products, has around 80,000 employees. Total seeks $15bn loan from China to complete Yamal LNG project French oil giant Total asked China for $15bn loan to finance a major Russian LNG project in Yamal after US sanctions on Moscow have

blocked access to dollar funding from the rest of the world. Total CEO Patrick Pouyanne told The Wall Street Journal that Chinese lenders could grant the company the equivalent of $10bn to $15bn in euros and yuan to fund Yamal LNG, a $27bn liquefied natural gas mega project in Russia's Arctic. Russian spending on tourism, luxury falls Spending on international travel by Russians fell by 6% in 2014, according to the UN World Tourism Organization, a sharp drop from growth of more than 20% previous years. According to tax-refund company Global Blue, spending by Russian tourists fell 17% last year, and plunged 51% in January following a 44% fall in December. Although there was an unexpected spike in sales for some in December as Russians offloaded the fast-depreciating rubles for durable luxury goods such as Cartier watches, many brands are preparing for a tough 2015. Italian fashion group Roberto Cavalli expects Russian sales to drop 20% this year, while LVMH's watch brand Hublot has already seen sales decline 20% in Russia since January, a source close to the company said.