economic bulletin · 2 economic bulletin short term has no future but in practice everything is...

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ECONOMIC BULLETIN Short term has no future

№ DEB-2011.06-04

Economic News

• President Dmitry Medvedev warned on Friday (17 Jun) that Russia will face stagnation if it fails to modernise and, in veiled criticism of the political system under Vladimir Putin, said it must avoid one-man rule. In bold comments which investors said sounded like a campaign speech before the 2012 presidential election, he said Russia must modernise regardless of who is in power and must reduce the state's dominant role in the economy. Hoping to woo the investors, Medvedev told the government to revise its privatisation plans by 1 Aug to accelerate state sell-offs and said Russia must reduce reliance on the high oil prices that have brought stability in the past decade. "The notorious stability could hide another period of stagnation," Medvedev told the St Petersburg International Economic Forum, Russia's answer to Davos. "Yes, we had a stage of development that is associated with an increased state role in the economy. It was important to stabilise the situation after the chaos of the 1990s (after the Soviet Union collapsed). But now the potential of this path has been exhausted... Such an economic model is dangerous for the country's future." Although Medvedev and PM Putin describe themselves as following the same policies, Medvedev took the unusual step of outlining his own reform plans by using the phrase "my choice". "My choice is the other. The Russian economy should be dominated by private enterprise and private investors. The state should protect property and the choice of those who knowingly risk their money and reputation," he said. Russia has announced a privatisation programme intended to raise about $10 bln this year but, describing the government's plans as too modest, Medvedev said: "The government will have to adjust its programme by 1 Aug." He also said state officials should leave the boards of state companies by autumn to help reduce the state role in Russia's $1.5 trln economy, and repeated promises to deal with rampant corruption and improve the rule of law.

President Dmitry Medvedev delivered a clear message in a speech at a showcase economic forum on Friday: My vision for Russia is the right one, regardless of who is in the Kremlin next year. Medvedev used the address to top officials and foreign investors to warn that Russia can only thrive if it works hard to modernise its resource-reliant economy and avoids the one-man rule that stretches back to tsarist times. He spoke at an investment forum in St Petersburg, but a key member of his audience was back in Moscow, PM Vladimir Putin, the man who steered him into the presidency in 2008 and is expected to decide whether to take the top job back in an election next March. In carefully coded language, Medvedev suggested that would be the wrong choice, and that he is the man for the job. Medvedev warned that stability, Putin's watchword since he came to power in 2000, could hide the seeds of stagnation, and said a system that hangs on the authority of a single man is unsustainable. He took aim at Putin's soft spots, cautioning against an overbearing state role in the economy and saying Russia cannot stake too much on high energy prices, a central factor in Russia's resurgence during Putin's 2000-08 presidency. "I see this as a campaign message: Medvedev has decided to declare clearly that he is planning to stay for a second term, that the decisions he has taken are essential for the country," economist said.

TURNING UP THE VOLUME. The address echoed remarks Medvedev has made with increasing volume as the election draws closer. Despite being the incumbent, he has cast himself as the candidate of change, playing to concerns among Russians and foreign governments alike that Putin's return would be a signal that Russia will not reform. "Medvedev is assertively promoting his agenda," said Boris Makarenko, director of the Centre for Political Technologies, a Moscow think-tank. Makarenko dismissed speculation that Medvedev's statement that Russia must press on with his modernisation programme regardless of who is in power sounded like surrender in the shadow-boxing match with Putin. Medvedev, he said, spoke of the 20-year sweep of Russian history since the Soviet Union collapsed in 1991 but also looked to the future in his address. "That's enough of a clue that a politician has a future and has ambitions," he said. Still, one more speech will do little to fix Medvedev's big problem: the widespread impression that his three years in office have produced plenty of talk but far less action. "All the words that are spoken are the right ones,

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but in practice everything is different," analyst Yevgeny Volk said. Although he has repeatedly promised to decide soon whether he will seek a new term, Putin is still widely seen as the one who will make that choice. "Everyone understands that Putin has the last word," said Shlizhyus. Volk said that despite their differences, Medvedev would not go far as to run for president against Putin, who may wait to decide after he sees how well his United Russia party does in December parliamentary elections. The intrigue continues. / Thomson Reuters

• CBR remains optimistic that inflation will come in at no more than 7% this year and that capital flight from the country will reverse, the CBR first deputy said on Friday (17 Jun). In May, annual inflation stood at 9.6%, but weekly inflation has been easing recently and in the week to 14 June CPI remained unchanged - the first such reading since May of last year. The CBR is also betting on a good harvest this year and an abundant supply of seasonal fruit and vegetables to push foodstuff prices lower in coming months. "We haven't changed our forecast, we expect that we'll be able to meet 7% (inflation) by the end of the year," the CBR First Deputy Chairman Alexei Ulyukayev told reporters on the sidelines of the St. Petersburg International Economic Forum. Ulyukayev reiterated that inflation in June is likely to come to 0.4%, month-on-month, and said that CPI should not rise more than 1.8% in the second half of the year. "Monetary factors pushed inflation higher in the first quarter, now they're easing," Ulyukayev said. The broad money supply indicator M2, key in forecasting inflation as it is used to quantify the amount of money in circulation, rose 24.5% in annual terms last month, easing from 26.7% seen a month earlier. Ulyukayev also said that the rouble's rapid appreciation at the beginning of the year is slowing. "Our participation in the internal (forex) market has been gradually declining," Ulyukayev said. "In June, it will be probably smaller than in May." He said that the CBR has bought $2 bln so far this month in the market, smoothing the rouble's exchange rate. In May, the regulator bought a total of $3.9 bln and EUR 0.4 bln in the forex market.

CAPITAL FLIGHT TO REVERSE. The CBR believes the capital flight that Russia has seen this year is easing and 2012 should see a reversal of the trend. Around $55 bln has left the country in the past eight months, but Ulyukayev said that by the end of 2011 Russia should see no more than $35 bln in net capital outflows, while next year inflows of around $10 bln-$15 bln are likely. "There are three scenarios for the next year, depending on market environment," he said. "According to our moderate scenario, there should be small inflows of $10 bln-$15 bln." President Dmitry Medvedev's administration has blamed corruption and poor investment climate for the outflows, but economists and investors say it is the political uncertainty ahead of Russia's presidential election. Presidential election are due to take place next March and neither Medvedev nor PM Vladimir Putin have officially declared their candidacy. / Thomson Reuters

• Russia will ramp up privatisation and will not let next year's presidential election divert

it from the task, top Kremlin economic adviser Arkady Dvorkovich said on Friday (17 Jun). Speaking after President Dmitry Medvedev warned of the risks of stagnation at an investment forum, Dvorkovich said the fight against corruption, Russia's No.1 problem, was another priority of the remaining months of Medvedev's presidency. Dvorkovich played down suggestions that Medvedev had made a campaign speech. Regardless of who runs for Russia's highest office next March, Medvedev or PM Vladimir Putin, the thrust of policies would remain the same, he said. "The important thing to understand is that we will follow our strategy independently" of who becomes Russia's next president, Dvorkovich told Reuters Insider television in an interview. "The style will be different, but the overall strategy will be the same. He described Medvedev's speech to the St Petersburg International Economic Forum as a political, but not a campaign, speech. "The election campaign will start in September," he said.

PRIVATISATION. Russia will seek to raise privatisation revenues by half next year, Dvorkovich said. "We can have 50% more next year from privatisation, so instead of $10 bln we can have $15 bln," he said. Dvorkovich said he expected the sale of a 7.6% stake in Sberbank, to be done this year. Another deal the government plans is the partial privatisation of Sovcomflot, Dvorkovich said. A one-quarter stake in the state shipping company is slated for sale according to the government's existing privatisation strategy. Dvorkovich also forecast net private capital

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outflows this year at $30 bln. He described the outflows, which have exceeded $50 bln in the last eight months, as less of a concern than low investment rates in the Russian economy. But he rejected suggestions that Russia was closed to foreign business, saying major investments were coming in to the pharmaceuticals and autos sectors. "If we consistently implement what our president has instructed us to do, then I think outflows will go down," he said. / Thomson Reuters

• Russia is the most attractive of the so-called BRIC markets, and political risk is

concentrated in the West and not there, Steven Jennings, CEO of investment bank Renaissance Capital, said on Friday (17 Jun). In the longer term, the markets of Africa offer the greatest growth potential, said Jennings, who has reprofiled Renaissance as a pan-emerging markets investment bank. "Out of the BRICs from a value perspective, I think Russia stands out, Jennings told Reuters Insider television in an interview at the St Petersburg International Economic Forum, referring to the quartet of Brazil, Russia, India and China. "Investors have done the normal thing at this stage of the cycle and got the sulks about structural issues in Russia. I think that's overdone. From the short-term perspective asset prices are cheap here." Jennings, a New Zealander, founded Renaissance Capital in 1995 as a Russia-based investment bank but has in recent years pushed aggressively into markets such as Sub-Saharan Africa. Rencap now owns the No.3 brokerage in South Africa. "Long term it's obviously Africa, Africa is going to be the fastest growing region in the world, even the IMF is saying that now, and that certainly isn't priced in," Jennings said.

PAN-EMEA FOCUS. Jennings said its cross-emerging markets focus offered huge potential growth for Renaissance Capital as it seeks to capture trading and deal flows. "The whole model has changed," he said. "The idea of being a Russian investment bank is a defunct concept. There's no such thing as a German investment bank, Deutsche Bank is a global business. "If we want to dominate trading flows with our global counterparties, if we want to undertake cross-border M&A, we have to work across a large number of emerging markets. Our pan-EMEA market share has risen very considerably." Renaissance sold a stake to Russian oligarch Mikhail Prokhorov's Onexim group in 2009 after it took a big hit from the financial crisis. After the takeover this year of Troika Dialog by Sberbank, it is the last sizeable independent investment bank based in Moscow, and Jennings has no plans to change that. "We are very happy being private. We see a lot of growth. We continue to build businesses around the investment banking platform," he said. Asked about political risk, a major talking point at the St Petersburg forum, Jennings said he saw greater dangers in the West than in Russia. "I think the main risks in the world are in the West, the economic problems in the world are in the West," he said. "All the growth in the world is in emerging markets. "Obviously, in terms of pricing, there's a bit of a disconnect because of the focus on the West. But clearly, we're going to see very large movements in capital away from the West and to the emerging markets." Perceptions of political risk in Russia were "overstated", Jennings said. "Russia has other issues. Russia has issues about the bureaucracy, about corruption. We've had a lot of political continuity for the last 10 years," he said, adding he expected continuity regardless of who becomes Russia's next president. Russia holds a presidential election next March, and President Dmitry Medvedev and PM Vladimir Putin have agreed that one of them will run. / Thomson Reuters

• Russian PM Vladimir Putin said on Thursday (23 Jun) that the government has not yet

found the money to pay for a payroll tax cut proposed by President Dmitry Medvedev. "Lost revenue resulting from a cut in the payroll tax amount to hundreds of blns of roubles. Honestly speaking, I do not know yet where to get it from," Putin told a farmers conference. Medvedev said last week that a decision has been taken to cut the tax to 30% from 34% for all and to 20% for small manufacturing businesses from next year. FM Alexei Kudrin estimated lost revenues from the cut at between RUB 100 and 160 bln. The government is currently drafting the budget while Medvedev is due to hold his annual budget speech later this month. The government hiked payroll taxes, which cover pensions, health and jobless insurance, to 34% from 26% on 1 Jan, putting what Medvedev described as an "unbearable" burden on some sectors of the economy. Business lobbies have complained to Medvedev that the hike is forcing firms to freeze investment plans and pay increases, holding back Russia's economic recovery, and said some firms reverted to cash-in-hand

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wage payment schemes. Putin has dragged his feet over the cuts plan, demonstrating the limits of Medvedev's power. Although he holds Russia's highest office Medvedev is still widely regarded as the PM junior partner. / Thomson Reuters

• Russian ESPO crude is being offered into the Mediterranean market from Asia as the

high price of Brent has opened up an unusual east-to-west arbitrage, a trade source said on Friday (17 Jun). "A lot of crude oil is offered into the Meditarranean market because Brent is expensive. I have seen ESPO offered into here. This is very unusual," the source said. / Thomson Reuters

• Russia's No. 2 oil producer LUKOIL said on Thursday (23 Jun) it can work in any price

climate after Brent futures fell $8 to $106.21 per barrel on International Energy Agency (IEA) plans to release oil stocks. "We think the comfortable oil price for producers and consumers this year is $100-$120 per barrel, but we can work in any price climate," LUKOIL spokesman Vladimir Simakov told Reuters on Thursday. "Our experience in 2008 when oil fell to below $40 per barrel showed that we can withstand different prices," he said, adding that the IEA's move to release 60 mln barrels of oil over 30 days will not affect the company's production plans. "60 mln barrels is only eight million tonnes, that's only 1.5% of Russia's production last year," he said. / Thomson Reuters

• PM Vladimir Putin said on Thursday (23 Jun) Russia had agreed the size of its

agricultural subsidies during the WTO accession talks although meat trade still remained an issue. Russia wants to increase farm subsidies to $9 bln in 2012 from $4.6 bln now in order to sustain growth in the sector, and phase them back down to the current level by 2017. "We won everything that we wanted to squeeze out," Putin told workers at a farm in Rostov-on-Don region. "Our negotiators are very experienced, they are gaining good terms on the whole and on subsidies in particular." Russia aims to become a member of the global trade watchdog in December. The outstanding issues include agriculture subsidies and meat quotas, a car assembly regime as well as food, plant and animal import safety rules. A source familiar with the negotiations said the deal on subsidies would not be officially announced until there was an agreement on meat quotas since the two issues were linked. Russia applied to join the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), in June’93 and its $1.5 trln economy is by far the largest economy outside the 153-member WTO.

RUBBING HANDS. The sentiment towards WTO membership among Russian farmers and industrialists is generally negative with negotiators seen to be making too many concessions. Putin often plays up to this sentiment using anti-WTO rhetoric. "Wherever we see that some proposals can be damaging for our agriculture, we will not accept them," Putin said. "We will approach it very carefully and will not accept conditions which put our producers into an unfavourable environment." Putin sees agriculture as a priority sector which can help Russia's economic growth while farmers are the core constituency for his United Russia party which will seek to maintain its majority in parliament during the election in December. Russia has spent $25 bln in the past five years to support growth in the agriculture sector and rose to rank as the world's third largest grain exporter in 2009. The country also wants to achieve self-sufficiency in poultry and meat. Putin said Russia was ready to introduce more import bans similar to the one still in force for fresh vegetables from the European Union following a deadly E.coli outbreak, despite an EU warning that such blanket moves contradicted the WTO rules. "We just need an excuse. If there is an excuse, (head of of state consumer protection agency Gennady) Onishchenko is already rubbing his hands, waiting for orders," Putin said after farmers asked him to ban imports of dairy substitutes. Putin said he wanted to change the attitude of Western food exporters who view the Russian market as their "turf where they can do whatever they want". Speaking to French investors in Paris on Tuesday, Putin said Russia would stick to its policy of luring major global auto makers into the country through import duty breaks on parts to be assembled at plants in Russia, despite EU objections. "The only ones we could not agree with (on the car assembly rules) were the bureaucrats from the EU. But life goes on, contracts are being signed, work is being done," Putin said. / Thomson Reuters

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• Group of 20 nations support Russia's bid to complete negotiations this year to join the WTO, the conclusions of a G20 farm ministers meeting said on Thursday (23 Jun). After years of talks, Russia aims to become a member of the global trade watchdog in December, but Russian EM Elvira Nabiullina warned recently that entry could be delayed for years if key issues were not settled by the end of next month. Leaders of the G8 group of most advanced economies called last month for Russia, by far the biggest economy not in the WTO, to join the 153-member body by the end of the year. "Russia's partners in the G20 welcome the considerable progress made by Russia to complete its accession to WTO and reaffirm their commitments to working closely with Russia, with the intention to finalize this process in 2011," the written conclusions of the G20 meeting in Paris said. Russian President Dmitry Medvedev said earlier this month that there was a "very high chance" Russia would become a WTO member in 2011 but complained about delays in negotiations. / Thomson Reuters

Global Economy

• The world economic recovery remains "slow and fragile" with the outlook uncertain,

but China will promote its own rapid and stable growth, Chinese President Hu Jintao said on Friday (17 Jun). Hu, addressing an economic forum in St Petersburg, also said it was vital to press ahead with reforms to the international financial system that would give emerging markets a greater say in global governance. While noting positive developments in the global economy, he said it was vital not to lose sight of the potential risks. "More than two years after the international financial crisis the world economic recovery remains slow and fragile. The underlying impact of the crisis is still with us, and the outlook for the world economy is uncertain," Hu said. "In addition, international and regional hot spot issues keep flaring up. Uneven development between the north and south is more acute, and protectionism in various forms is resurfacing." Some economists, backed up by recent downbeat data, have warned that China, the world's fastest-growing major economy and second-largest after the United States, is set to slow substantially. Hu rebuffed such concerns. "China will ... advance reform and opening up, promote long-term, steady and fast economic growth and enhance social harmony and stability," he said.

GREATER SAY. Hu added that on the global front, emerging markets needed to be given a greater voice in the international financial system as countries emerge from the effects of the crisis. Hu made no direct mention, however, of the race to replace Dominique Strauss-Kahn, who has been charged with sexually assaulting a New York hotel maid, with French FM Christine Lagarde the front-runner to replace him. "Today emerging markets and developing countries are taking a growing share of the global economy and playing a bigger role in global governance," Hu said. "The global economic governance mechanism should adapt to the new changes in the world's economic landscape and observe the principles of mutual respect and collective decision making. It is of special importance to increase the representation and voice of emerging markets and developing countries in the new mechanism." China's rapid development over the last few years, which has been accompanied by an increasingly assertive tone in its diplomacy and growing military might, has unnerved countries around the region, especially Japan and Taiwan. Hu repeated what has become China's mantra, that its rise is not a threat. "China will remain committed to the cause of peace, development and cooperation ... and follow the path of peaceful development and pursue a win-win strategy of opening up," he said. / Thomson Reuters

• Concerns about China and Russia are overblown and offer investors a chance to buy

into booming growth stories, Jim O'Neill, chairman of Goldman Sachs Asset Management, said on Friday (17 Jun). O'Neill, who coined the BRIC term in 2001 to describe how the clout of Brazil, Russia, India and China would challenge the West's economic dominance, said jitters about such markets were overblown given such swift growth forecasts for the next decade. "For those who have a little bit of foresight, it gives them the chance to get in at sensible levels," O'Neill, who helps oversee $677 bln in assets at Goldman, told Reuters Insider television at the St Petersburg Economic Forum in Russia. "China and Russia are both looking quite interesting because they are

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cheap," he said. "Contrary to the email I get every two hours about why I should drop the R from BRIC, I quite like Russia." Anxiety about a U.S. slowdown and inflation in China have prompted the likes of U.S. market strategist Richard Bernstein to talk of "monstrous" risks to emerging markets. O'Neill said the short-term worries about the BRICs did not undermine the attractive long-term growth story. "The long-term trend is for the BRIC economies and the BRIC investment theme to continue to be the dominant themes of our generation," he said. He said that apart from Russia, his other top pick was financial stocks in developed countries, though he declined to name specific stocks. But O'Neill did say the future of China, and inflation in particular, was the one issue that kept him awake at night. "If this view that is growing, particularly in the (United) States, that China is already going down the hard landing path, that would be a big deal ... I think China is slowing because the authorities are deliberately trying to slow it," he said. "As soon as we see the slightest sign of inflation starting to turn around, the markets will stop worrying about more tightening," he said. O'Neill said China, Russia, Brazil and India would collectively have economies bigger than the U.S. economy by the end of this decade and this would have a big impact on who runs financial institutions such as the IMF. He said he thought the slowdown in U.S. growth was temporary but, if it was not, investors should expect a third round of quantitative easing, or QE3, a term that describes treasury bond purchases by the central bank to stimulate the flow of credit and investment. "I am a bit surprised and confused by the evidence that the U.S. has slowed so much. I still suspect it is only temporary and might have something to do with the Japanese supply disruption. If I am wrong then we will get QE3, though it might not be described that way," he said. / Thomson Reuters

• Greek will keep moving closer to default unless European Union policymakers stop

sparring in public about its debt crisis, Jim O'Neill, chairman of Goldman Sachs Asset Management, said on Friday (17 Jun). "It is like open theatre," O'Neill told Reuters Insider television in an interview at the St Petersburg International Economic Forum in Russia. Asked if he thought Greece would default, he said: "I think the risk of it is getting closer unless European policymakers are a bit more sensible." He urged European policymakers no to "keep on publicly sparring with each other, like some game theory between the ECB, the French and the Germans." He said the risk of Greece leaving the euro was probably some way off and that Greece did "not matter economically". But he warned that contagion did matter and that if Italy and Spain were badly affected it would be a "big problem". He said the euro was unlikely to remain above $1.4. "I cannot really see how it can stay above 1.4," he said. / Thomson Reuters

• Euro zone unadjusted trade swung to a deficit in April from March, with seasonally

adjusted imports growing almost twice as fast as exports month-on-month on a spike of oil prices, data showed on Friday (17 Jun). The European Union's statistics office Eurostat said the unadjusted trade gap was EUR 4.1 bln in April, up from a downwardly revised EUR 1.6 bln surplus in March and a EUR 700 mln deficit in April’10. Year-on-year, imports rose 18% in April, while exports grew only 15%. "This indicates that euro zone exports continued to benefit from decent global demand," said Howard Archer, economist at IHS Global Insight. Adjusted for seasonal swings, the deficit in April was EUR 2.9 bln, Eurostat said, as exports grew 0.6% on the month and the value of imports jumped 1.1%. "While this points to improved euro zone domestic demand, it needs to be borne in mind that oil prices peaked in April and that will have pushed up import values," Archer said. April saw a further sharp increase in the price of oil, which rose above $114 per barrel towards the end of the month. Detailed data for April was not yet available, but figures for the January-March period showed the euro zone's trade deficit in energy, which includes oil imports, jumped to EUR 79.9 bln from EUR 61.6 bln in the same period of 2010. The euro zone's trade deficit with oil exporter Russia in the first quarter jumped to EUR 17.1 bln from EUR 13 bln in the first quarter of 2010. Net trade has been contributing to euro zone economic growth by 0.1-0.2% over the last four quarters, but Archer said euro zone exports may be under pressure. "Although exports held up well in April, there are worrying signs that a recent slowing in global growth could now be weighing down on foreign demand for euro zone goods," he said. "In particular, the export orders index of the manufacturing purchasing managers' survey retreat appreciably to an eight-

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month low in May, although it remained well above the 50 level that indicates flat orders," he said. / Thomson Reuters

• Clear signs the global economy is cooling prompted analysts to trim their outlook for

most of the world's major stock markets compared with three months ago, according to a Reuters poll that still pointed to meaty gains from here. Thursday's quarterly survey of 350 equity strategists from all over the world showed only the U.S., Taiwanese and Russian stock markets escaping downgrades, with Moscow again expected to lead the way with double-digit gains. While the latest poll lacked the sheer exuberance seen in the March survey, perpetually optimistic equity bulls were again out in force. They shrugged off the fact that 11 out of the 17 markets covered by the poll are so far deep in the red for 2011, and instead projected strong gains from here for every one of them. In comparison with oil and commodity markets that have proved hugely volatile this year, and with the fiscal crisis in Greece wreaking havoc on currency and government bond markets, some respondents pointed to stocks as the best alternative. "Equities still look attractive when compared to other global asset classes," said Angus Campbell, head of sales at London Capital Group. The search for yield has become difficult for investors. High inflation has eroded cash assets, safe government bond yields are at rock-bottom and gold's heady ascent to record levels leaves it looking expensive to many. Still, the extent of the slowdown in Western economies is unclear and there has been no solution yet to the Greek sovereign debt crisis. Both could yet tame the bulls and bring out the bears. European politicians are scrambling to avert a Greek sovereign debt default in mid-July, which if realised has the potential to hurl the financial system in Europe and elsewhere back into systemic chaos.

AMERICAN STOCKS ARISE. The Dow Jones Industrial Average, containing some of the world's most famous companies, was the only index based in an advanced economy to be upgraded compared with the March poll. Despite dismal labour market data and growing signs the U.S. economy is cooling fast, analysts were very upbeat about the prospects for the Dow and S&P, which have each gained around 90% since their nadir during the Great Recession. There seemed to be little concern among equity bulls about the imminent end of the Federal Reserve's quantitative easing (QE) programme that coincided with a sharp rise in asset prices. The poll was conducted before the Fed cut its U.S. growth forecasts on Wednesday, with no hint of any further QE in the pipeline. "We are still double from where we were two years ago; I think the market is doing great. We are in slowdown and correction but that's following a 30% gain from the August lows," said Bob Doll, chief equity strategist at BlackRock in New York. Economists polled by Reuters last week were less sure of the outlook than equity analysts. They slashed their outlook for major Western economies in the 15 June poll, reacting to a raft of dire jobs and industrial production figures. Strategists saw the Dow rising 7.4% from its Wednesday close of 12,109.7 to 13,000 by the end of the year, up from 12,700 seen in March, and then to 13,700 by around this time next year. Similarly, the S&P is seen soaring nearly 9% to 1,400 by end-2011, from Wednesday's 1,287.1.

ASIAN ASCENT. Asian stocks have largely endured a torrid time in 2011, with most indexes stuck in the red, since surging inflation in India and China and the subsequent tightening of interest rate policy has rocked share markets in emerging Asia. But with double-digit gains expected for indexes in Hong Kong, China and India from now until this time next year, the poll suggested Asian shares might have bottomed already. Japan's Nikkei, 6% in the red this year after the 11 March devastating earthquake and tsunami, should likewise start racking up gains soon of over 9% between now and the year-end. "We may see a lull until this summer. But the overall market may rise on expectations for a sharp recovery in corporate earnings after that," said Fumiyuki Takahashi, managing director of equity research at Barclays Capital. / Thomson Reuters

Markets: FX / MONEY MARKET

FX MARKET:

The rouble loosed 16 kopeks on this week from 28.05 to 28.21 against the dollar, more than 100 kopecks away from its strongest level since late 2008 hit in the previous month. The rouble was steady vs the euro and traded around 40.1. Vs the basket, the rouble eased 0.4% from 33.45 to

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33.58. The rouble retains its dependence on oil which has risen. That's why the basket will be near the previous session's closing level. Oil prices plunged on Thursday after the International Energy Agency said it would release 60 mln barrels of oil over 30 days. Futures for Brent crude recovered to trade at around $106 per barrel on Friday morning, ensuring inflows of dollars into Russia's economy. It hit its lowest level since early May, $105.72, in the previous session after the IEA

decision. Kremlin aide Arkady Dvorkovich said the IEA move to release oil supplies onto the market is unlikely to pose risks to Russia, but could cause "small fluctuations" in the rouble. The rouble is likely to receive support from month-end tax payments that usually prompt export-focused companies to convert dollar revenues into roubles to meet local liabilities. "Today we will see profit taking in long positions in foreign currencies, and exporters selling (dollars)," said a dealer at a major Russian bank in Moscow. Analysts say excise and mineral extraction tax (MET) payments, due by 27 June, and income tax payments due on 28 June will withdraw some RUB 400 bln.

• The rouble's trading band is currently at 32.25-37.25 vs the basket, the CBR First Deputy Chairman Alexei Ulyukayev said on Friday (17 Jun), confirming a broad market view. "As of today, this is

the corridor," Ulyukayev told journalists on sidelines of the St Petersburg International Economic Forum. The CBR keeps the rouble within a trading band against a currency basket made up of 0.45 dollars and 0.55 euros. In the lower part of the corridor the CBR buys foreign currencies to ease

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upside pressure on the rouble, while in the upper part of the corridor it sells dollars and euros from its reserves to limit the rouble's losses. Interventions come in two forms. Planned, or 'target' interventions have a set daily limit based on forecasts for the budget balance, FinMin operations and oil prices. Any interventions on top of the planned daily limit count as cumulative interventions. Once they total $600 mln, the CBR shifts the floating rouble corridor by 5 kopecks. The CBR bought $15.8 bln and EUR 2.3 bln in the first five months of the year to stem the rouble's oil-driven rally that helped the Russian unit to firm about 8% vs the dollar. Moving towards inflation targeting policy, the CBR pledges to gradually increase the rouble's flexibility. Russia last widened the corridor by 100 kopecks to 32.45-37.45 roubles vs the basket on 1 March, in a move that enabled faster appreciation of the rouble to its strongest levels since late 2008, thereby helping the CBR in its battle against inflation. The latest comment on the corridor implies the CBR has moved the band 4 times since early March. The CBR officials said another widening of the corridor is possible later this year. / Thomson Reuters

• Greek debt problems pruned Russia's gold and forex reserves, the world's third largest,

by $7.7 bln in the week to 17 June. The fall in the euro subtracted $7.1 bln from reserves, while a weaker sterling took away $0.8 bln. The CBR said reserves were at $520.2 bln as of 17 June, down from $528.0 bln a week ago. Another $0.3 bln loss is attributed to lower gold prices. The CBR underpinned reserves by FX interventions of around $0.56 bln. / Thomson Reuters

• Russia keeps 37% of its foreign exchange reserves in various U.S. assets and has no

plans to cut the size of the investment, CBR First Deputy Chairman Alexei Ulyukayev said on Friday (17 Jun). "Generally, in all the tools it is 37% - all, including deposits, banks, all," Ulyukayev told Reuters Insider television in an interview at the St Petersburg International Economic Forum, adding that the regulator has no plans to cut the share. Russia's gold and forex reserves, the world's third largest hit a new post crisis peek at $528 bln in the week to 10 June.

The Australian dollar's share in Russia's forex reserves will not exceed 1%, CBR first deputy chairman Alexei Ulyukaev told journalists on Friday. When asked what the share of the Australian dollar will be in Russia's reserves, the world's third largest, Ulyukayev said it will be "not very big ... no more than 1%." Earlier this week, Ulyukayev said the CBR will add the Australian dollar into its reserves in autumn in order to diversify its holdings. / Thomson Reuters

MONEY MARKET:

The Interbank overnight rates on the market fluctuated at 3.25-4.25%. The 3M Mosprime rate was stable at 4.21-4.24%.

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Markets: FIXED INCOME

• Russian coking and pig iron producer KOKS issued $350 mln in Eurobonds with an annual coupon of 7.75%, the placement organiser told Reuters on Friday (17 Jun). Andrei Solovyov also said they received orders worth $2 bln for the bonds. Earlier this year Siberia-based KOKS postponed the listing of its shares. It planned to raise $520 mln in IPO in Moscow and London in February but postponed the issue due to market conditions. / Thomson Reuters Markets: STOCKS

Between 17-th June

of closing time and 24-th of June at 16.30 the MICEX Index has decreased around 0.55% from 1646 to 1637 bps. RTS Index has decreased around 1.45% too from 1879 to 1852 bps.

• Russian stocks

will stage a second half rally on the back of high oil prices and

economic growth but only after lingering uncertainty over who will be the country's next leader is resolved, a Reuters poll showed. The poll of 13 analysts, taken this week, showed a median end-2011 forecast of 2,200 bps for Russia's dollar-traded RTS index, up 17% percent on Wednesday's (22 Jun) close of 1,878.38 bps. The increase will be driven by an oil price that has held above $100 a barrel since February, and a growth in retail and telecoms stocks based on higher consumer spending. "This year, the domestic story will be at the forefront. Consumer financials and telecoms will be the drivers for the index," analysts said. The RTS index will deliver a 24% gain in 2011 if the Reuters poll is correct, slightly more than last year. So far this year it has gained around 6%, making it the best performing index of those polled. The 2,200 bps forecast is slightly ahead of the 2,150 bps predicted in the equivalent Reuters poll three months ago, as a handful of strategists edged targets higher. "I think RTS will perform better in the second half than in the first (of the year). Oil has found a level, which is good for Russian stocks," analyst said, who hiked his target to 2,300 from 2,200.

PRESIDENTIAL ELECTION. Analysts said much of the anticipated growth will come in the fourth quarter, after President Dmitry Medvedev and predecessor Vladimir Putin announce who will contest next year's Presidential election. Both have repeatedly refused to say which of them will run and have occasionally appeared to differ in recent months, prompting speculation about a split between Russia's leaders. A resolution to the current uncertainty surrounding who will run for President might significantly reduce the high risk priced into the Russian market. The RTS index has shed around 8% in the second quarter to date as blns of dollars in capital outflows linked to the uneasy political situation cut into early year gains. "Until we see clarity on the Presidential election we see no reason for anyone, Russian companies included, to commit long term investment to Russia," analysts said. "We expect RTS to be flat until the end of September, then see growth in Q4," they added. Most analysts expect a decision on who will run to come in early autumn, ahead of a parliamentary election in December. / Thomson Reuters

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• Privatisation of Russia's recently beefed-up state telecoms company Rostelecom would be a logical step, the EconMin said on Friday (17 Jun), driving its shares up 30%. "We understand that the most logical option would be selling such a big company into the market," said Alexei Uvarov, director of the EconMin Department of Property Relations. Rostelecom has been recently enlarged through a merger with seven regional operators, also controlled by the state, with the aim to boost efficiency and allow the government to play a bigger role in the sector. The company plans to hold a technical listing in London before the end of the year. / Thomson Reuters

• Sberbank will meet with U.S. private equity firm TPG Capital about the privatisation of a 7.6% stake in the lender, CEO German Gref said on Friday (17 Jun). "We are not in talks now but we will talk during the roadshow (for the share sale)," Gref told reporters at an economic forum in St Petersburg. TPG took part in the secondary share placing of VTB earlier in the year.

Sberbank will launch its long-awaited depositary receipts programme on 27 June, the Bank said on Thursday (23 Jun). "The programme becomes effective from Monday," Graham Marshall, the head of Russia & CIS Depositary Receipts Division, told a conference call. "Within the United States, given that the instrument Sberbank is introducing is a level one ADR, that will trade on a purely OTC basis, there is no U.S. exchange listing or quotation of the DR proposed," Marshall added. This is the first step enabling them to figure out future moves. The full-fledged listing, which has yet to be obtained, will help Sberbank attract foreign investors, providing them with a play on the lender's strong margins. Getting the listing before the privatisation makes sense, otherwise they (Sberbank) are limiting their investors base. Sberbank's depositary receipts programme comes ahead of the lender's up to 7.6% stake sale later this year, seen as part of a broader state privatisation drive worth RUB 1 trln over three years. Sberbank will follow in the footsteps of VTB, which sold a 10% stake sale in February worth $3.3 bln. Analysts said Sberbank leads VTB in the Russian beauty contest, with return-on-equity staying on 20.6% last year, twice more than its closest peer, meaning VTB stock may come under pressure after Sberbank's DR programme gets under way. Sberbank's CFO Anton Karamzin did not comment on Thursday on a timeframe for the listing. Sources told Reuters on Wednesday the lender planned to arrange investors meetings ahead of its partial privatisation next month, selling a stake of up to 7.6% by mid-September. / Thomson Reuters

• Russian gas producer Itera said it is considering raising capital via an IPO or private placement and may also sell a stake to Sberbank. Sberbank said on Friday (17 Jun) that the gas company had appointed it to handle a capital raising, which could be in the form of an IPO. "We are mandated to raise (Itera's) shareholders' capital. This could be a private placement, IPO or a sale to a strategic investor," Sberbank's management board member Alexander Bazarov told reporters. The companies also agreed to look at the possibility of Sberbank buying a 5% stake in Itera, which is owned by private investors. Itera, which produces over 20 bln cubic metres of gas a year, was the monopoly trader of Turkmen gas via Russia to Ukraine in the 1990s. But it lost its exclusive rights after a management shake-up at Gazprom and has failed to regain its position since then. Last October a local newspaper said that TNK-BP was looking to increase its presence in the gas sector by buying a 50% stake in Itera. / Thomson Reuters

• Russian fertiliser producer Phosagro, which plans a more than $500 mln IPO this

summer, expects to pay 20-40% of net profit in dividends, its CEO said on Friday (17 Jun). Maxim Volkov, speaking to reporters on the sidelines of the St Petersburg International Investment Forum, said the board had approved a dividend policy that would see its shareholders get paid 20-40% of earnings after the London float. The company launched the offering on Tuesday, planning to float 10-15% of its existing shares, and sources said that depending on where the price range is set, the offering could be between $500 mln and $1 bln. Volkov confirmed on Friday the company was seeking to raise between $500 mln and $1 bln from the IPO. The organisers of the offering had valued Phosagro in the range of $6.04-$8.77 bln, banking sources said on Wednesday. / Thomson Reuters

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• Russian electricity firm EuroSibEnergo may hold an IPO "within a year or sooner," its board chairman said on Friday (17 Jun). The company, controlled by Russian oligarch Oleg Deripaska, had earlier this year pushed back its planned $1 bln Hong Kong listing due to volatile markets. "We want to fully form the company and offer it to the market. We plan to do it (the IPO) quite soon, within a year or maybe sooner," Andrey Likhachev said during the St Petersburg International Investment Forum. China's Yangtze Electric Power Co is committed to buying into EuroSibEnergo's IPO, the company's CFO Bai Yong said. "All agreements regarding participation in EuroSibEnergo's IPO remain in place," he told reporters. Yangtze said in December it would invest $168 mln as a cornerstone investor in EuroSibEnergo's IPO. / Thomson Reuters Macroeconomic indicators of Russia

ECONOMIC INDICATORS PERIOD LATEST PREV YR AGOGDP Y/Y Q1 +4.1 +4.5 +2.9CPI M/M May +0.5 +0.4 +0.5CPI Y/Y May +9.6 +9.6 +6.0PPI M/M May +1.2 +2.0 +2.7PPI Y/Y May +19.2 +20.2 +19.1Ind output M/M May +0.8 -4.7 +1.2Ind output Y/Y May +4.1 +4.5 +12.6Retail sales Y/Y May +5.5 +5.6 +7.0Unemployment (mln) May 4.9 5.4 5.6Real disposable income Y/Y May -7.0 -3.2 +1.7Real average wage Y/Y May +2.6 +2.4 +5.8Nominal average wage (rbls) May 22,520 20,519 20,279Capital investment (blnR) May 752.9 590.1 632.2Capital investment Y/Y May +7.4 +2.2 +5.6Trade surplus ($bln) May 19.3 17.3 14.3Exports ($bln) May 46.1 44.1 33.5Imports ($bln) May 26.8 26.8 19.2Budget balance (bln rbls) Jan-Apr 134.0 121.3 -445.0CBR reserves ($bln) 17-June 520.3 528.0 458.5Monetary base (blnR) 6-June 5,948 5,956 4,883M2 (blnR) 1-May 20.047 19.817 16.098REER rouble May +1.3 -1.2 +0.7Oil output (mln bpd) May 10.26 10.24 10.08Oil output (mln T) May 43.38 41.92 43.63Gazprom gas output (bcm) May 44.33 44.11 39.14URALS oil, $/bbl 24-Jun 105.03 111.64 74.52BRENT oil, $/bbl 24-Jun 107.83 114.59 75.67

ANNUAL DATA 2010 2009 2008 2007 2006 2005GDP (pct) +4.0 -7.9 +5.2 +8.5 +8.2 +6.4CPI Y/Y (pct) +8.8 +8.8 +13.3 +11.9 +9.0 +10.9M2 (bln R) 20,173 15,698 13,493 13,272 8,996 6,046Oil/gas cond.(mln T) 505 494 488 491 480 470Natural gas (bcm) 508 582 665 653 656 641Coal (mln T) 323 298 326 315 309 298Grain (mln T) 61 97 108 82 79 78Beet Sugar (mln T) 2.7 3.3 3.6 3.2 3.2 n/aGold (T) 201 205 184 163 164 168

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GOVT FORECASTS 2011 2012 2013GDP Y/Y (pct) +4.2 (+4.2) +3.5 (+3.9) +4.2 (+4.5)Industry output (pct) +5.4 (+4.1) +3.5 (+3.8) +4.0 (+4.7)CPI Y/Y (pct) 7.0-7.5 (6.0-7.0) 5.0-6.0 (5.0-6.0) 4.5-5.5 (4.5-5.5)Cap. Investment pct +6.0 (+9.0) +8.8 (+4.0) +7.7 (+7.4)Retail Sales pct +4.5 (+4.1) +4.8 (+4.1) N/AExports $ bln 504.0 (414.0) 494.0 (435.0) 512.0 (455.0)Imports $ bln 309.0 (286.0) 352.0 (315.0) 396.0 (352.0)Trade Balance $ bln 195.0 (128.0) 142.0 (120.0) 116.0 (103.0)Urals oil, ave., $/bbl 105 (81) 93 (83) 95 (84)Rouble rate/$1 28.4 (31.3) 27.9 (31.3) 27.9 (31.6)Rouble REER +7.7 (+2.6) +3.5 (+1.1) +2.0 (0.0)

BALANCE OF PAYMENTS ($bln) Q1’2011 2010 2009Current account 31.8 71.1 48.6Cap/fin account -15.9 -26.4 -43.5Net errors/omissions -5.8 -8.0 -1.7Reserve assets -10.1 -36.8 -3.4

LONG-TERM FOREIGN CURRENCY RATINGS Moody's (December 12, 2008) Baa1 (outlook stable) S&P (December 21, 2009) BBB (outlook stable) Fitch (September 08, 2010) BBB (outlook positive)

JSC Dexia Bank, Moscow Treasury Ksenia Mayorova [email protected] Shetler [email protected]+7 (495) 789-97-20, +7 (495) 783-31-41 Corporate Banking Savas Citak [email protected] Oguz Yalcin [email protected] Koray Akefe [email protected] Arpadji [email protected] Olga Volkova [email protected] Marina Kalashnik [email protected] Otavin [email protected]+7 (495) 783-31-40, +7 (495) 725-10-20

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