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ECONOMIC BULLETIN № DEB-2012.08-01

Economic News

Russia's CPI rose 0.1% in the week to 30 July after rising 0.2% in the preceding weeks, the FSS said

on Wednesday (1 Aug). This brings inflation since the start of the year to 4.5% compared to 5% in the same

period of 2011. The CBR aims to keep full-year growth in CPI within a target of 5-6% after inflation hit a post-

Soviet record low of 6.1% in 2011. The Reuters monthly poll showed earlier this week that full-year rise in

the CPI index seen at 6.6%. / Thomson Reuters

Russia needs to adopt both a tougher budget and tighter monetary policy to guard against the risk

of overheating and to bear down on inflation, the IMF said in a statement on Thursday (2 Aug). The

statement follows a meeting of the IMF's Executive Board to discuss the results of annual consultations

between the Fund and the Russian government. IMF directors "recommended an ambitious fiscal

consolidation path to reduce overheating pressures and vulnerabilities and ensure intergenerational equity,"

it said. They also "generally recommended a gradual further tightening of monetary policy to contain

underlying pressures and anchor expectations." The IMF has warned repeatedly in recent months that it

fears Russia's economy is in danger of overheating - implying that demand is growing faster than potential

output, leading to higher inflation. In its latest statement, the IMF predicted that Russia's economy would

grow by around 4% in both 2012 and 2013, slightly above its assessment of the underlying growth potential.

The IMF said that although inflation has come down in recent months, the fund's measure of core inflation

remains high at around 6%. It forecast that inflation would rebound to 6.5% by the end of the year,

compared with 4.3% in June. The forecast implies that CBR will miss its 5-6% inflation target for 2012,

increasing pressure on the CBR to raise interest rates.

SCOPE FOR IMPROVEMENTS. The IMF's call for fiscal consolidation also reflects its long-standing

concerns about Russia's high non-oil deficit - a measure of the underlying budget stance that excludes oil

taxes. The statement noted that although the non-oil deficit declined to 9.8% of GDP in 2011, from 12.7% in

2010, the deficit is set to rise by around 1% of GDP this year. The IMF commended Russia for adopting a new

fiscal rule that will base government expenditures on the long-term average oil price. But it also said that it

"saw scope for further improvements to allow for the effective rebuilding of the Reserve Fund." The Reserve

Fund, which is designed to protect the federal budget against a fall in oil prices, is at present worth some

$60 bln (3.2% of GDP), down from $143 bln in 2008. The IMF said that effective fiscal consolidation would

also need to be underpinned by structural reforms, including pension reform. Structural reforms are also

needed to improve the country's investment climate and long-term economic growth, the IMF said,

recommending that Russia improve the rule of law, reduce corruption, and privatise state-owned

companies. "The challenge in the short term is to manage domestic demand in order to avoid overheating

and in the medium term to fully realise Russia's significant growth potential," the IMF said. / Thomson

Reuters

CBR will raise its overnight deposit rate in the third quarter, while leaving other key interest rates

on hold, as it contends with both rising inflation and an economic slowdown, a Reuters poll forecast on

Tuesday (31 Jul). The poll of 15 economists predicted that the CBR would lift the deposit rate to 4.25% in

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ECONOMIC BULLETIN № DEB-2012.08-01 the third quarter, from 4% currently, but keep its one-day fixed REPO rate at 6.25% and its refinancing rate

at 8%. The CBR has left all three rates on hold since last year, but it has hinted in recent weeks that it may

soon tighten policy, as it strives to keep inflation within its 2012 target of 5-6%. As in previous months, the

poll forecast that the CBR would miss its inflation target. It predicted that inflation, which stood at 4.3% in

June, would reach 6.6% by year-end, a more pessimistic outlook than the 6.5% forecast in last month's poll.

Economists have also trimmed their economic growth forecasts. They now see Russia's economy expanding

by 3.7% this year, down from last month's forecast of 3.8%. In the first half of 2012 GDP rose by 4.5%,

according to official estimates.

POLICY DILEMMA. The combination of rising inflation and slowing growth presents a policy dilemma

for the CBR, leading to increasing uncertainty over the outlook for interest rates. "Accelerating inflation is in

the foreground," said Alexander Morozov, chief Russia economist. "Now the question is not whether the

CBR will hit its 6% inflation target this year, but by how much it will miss it ... All the signs are that we can

await a whole series of key rate hikes in the second half of the year." Other economists, however, argue that

an interest rate rise is the wrong medicine for the Russian economy at present. "We think it will be hard to

justify a rate hike while the economy, while still growing robustly, is on a downtrend," Ivan Tchakarov

economist said in a note. The policy disagreement was also reflected in analysts' forecasts, with some

anticipating lower interest rates in the second half of the year, while others expected hikes. On average,

however, the poll predicted that the CBR would confine itself to raising its overnight deposit rate, which

effectively provides a floor for money market rates. In conditions of tight money market liquidity - as at

present - raising this rate would be a largely symbolic step, signalling the CBR concerns about inflation

without imposing a high cost on borrowers. The outlook for the rouble was little changed compared with

last month's poll. The latest poll forecast that Russia's currency will strengthen slightly against the dollar, to

32.1 by the end of this year. It will weaken slightly, to 35.7, against the basket, which the CBR uses to

monitor the exchange rate. Following are the results of a monthly Reuters poll of 15 economists on Russia's

economic and foreign exchange outlook.

INDICATOR MEDIAN MEAN MIN MAX YR AGO CPI m/m July 1.4 1.4 1.2 1.7 0.0 CPI y/y 2012 6.6 6.7 6.2 7.5 6.1 CPI y/y Q3'12 6.3 6.3 5.1 7.0 N/A PPI m/m July 0.8 1.1 -0.6 3.2 -1.8 PPI y/y 2012 8.3 7.7 4.5 11.2 12 Industry output y/y July 2.5 2.3 0.7 3.4 5.2 Industry output y/y 2012 3.2 3.3 2.5 4.3 4.7 Industry output y/y Q3'12 2.3 2.8 1.8 5.1 5.1 Retail sales y/y July 6.4 6.1 2.3 7.8 6.0 Retail sales y/y 2012 6.1 5.9 4.8 6.5 7.2 Capital investment y/y July 5.3 4.0 -7.0 8.0 7.9 Capital investment y/y 2012 6.4 6.7 3.7 9.0 6.2 Real wages y/y July 11.2 9.5 -3.0 13.1 2.4 Real wages y/y 2012 8.2 7.6 6.0 9.0 3.5 Unemployment rate pct July 5.6 5.6 5.5 5.8 6.5 Unemployment rate pct 2012 6.0 6.3 5.8 8.0 6.6 Unemployment rate pct Q3'12 6.0 5.8 5.2 6.0 6.2 GDP y/y 2012 3.7 3.7 3.0 5.0 4.3 GDP y/y Q3'12 3.4 3.4 2.3 5.2 4.8

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ECONOMIC BULLETIN № DEB-2012.08-01 INDICATOR MEDIAN MEAN MIN MAX YR AGO Budget balance pct GDP 2012 -0.3 -0.5 -4.0 1.0 0.8 Trade balance bln$ June 15.0 15.6 14.7 19.3 16.4 Trade balance bln$ 2012 193.9 191.7 132.8 230.0 198.2 C/A balance bln$ 2012 90.2 80.6 3.5 119.5 98.8 Net capital flows bln$ July -4.0 -4.0 -6.0 -2.0 -0.9 Net capital flows bln$ 2012 -65.00 -49.2 -100.0 70.0 -80.5

INTEREST RATES MEDIAN MEAN MIN MAX CBR Refinance Rate Aug 8,00 8,00 8.00 8.25 end-Q3 2012 8,00 8,00 7.75 8.25 end-Q4 2012 8,00 8,00 7.50 8.75 end-Q1 2013 8,00 8,00 7.00 8.75 end-Q2 2013 8,00 8,00 7.00 8.75 CBR min o/n REPO rate Aug 5,25 5,25 5.25 5.50 end-Q3 2012 5,25 5,25 4.75 5.50 end-Q4 2012 5,25 5,25 4.50 6.00 end-Q1 2013 5,25 5,25 4.50 6.00 end-Q2 2013 5,25 5,25 4.50 6.00 CBR min o/n REPO fix rate Aug 6,25 6,25 6.25 6.50 end-Q3 2012 6,25 6,25 5.75 6.50 end-Q4 2012 6,25 6,25 5.50 7.00 end-Q1 2013 6,25 6,25 5.50 7.00 end-Q2 2013 6,25 6,25 5.50 7.00 CBR o/n DEPO rate Aug 4,00 4,00 4.00 4.25 end-Q3 2012 4,25 4,25 4.00 4.50 end-Q4 2012 4,25 4,25 4.00 5.00 end-Q1 2013 4,25 4,25 4.00 5.00 end-Q2 2013 4,25 4,25 4.00 5.00

ROUBLE OUTLOOK MEDIAN MEAN HIGH LOW USD/RUB 1-month 32.7 32,5 31,5 33.2

3-month 32.7 32,1 29,5 33.5 6-month 32.1 31,9 29,0 33.9

end-2012 31.8 31,7 28,9 34.1 1-year 32.7 32,2 28,6 35.3

EUR/RUB 1-month 40.2 40,3 39,7 41.2 3-month 40.2 39,9 36,2 43.0 6-month 40.2 39,3 33,4 43.6 end-2012 40.5 39,3 33,2 41.9

1-year 41.0 40,3 32,2 46.0 Basket/RUB 1-month 36.1 36,0 35,3 36.5

3-month 35.9 35,6 32,5 37.6 6-month 35.7 35,2 31,0 37.4 end-2012 35.6 35,1 30,8 37.1 1-year 36.2 35.8 30,2 39.0

/ Thomson Reuters

Russian oil output, the world's largest, rose to 10.34 mln barrels per day (bpd) in July from 10.32

mln bpd in June, keeping it just ahead of its nearest rival, Saudi Arabia, Energy Ministry data showed on

Thursday (2 Jul). Saudi Arabia pumped 10 mln bpd in July, a Reuters survey showed. Russia's post-Soviet

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ECONOMIC BULLETIN № DEB-2012.08-01 record was 10.36 mln bpd. In tonnes, the ministry said total crude production stood at 43.74 mln in July.

Output growth was less than 1% compared to July’11, and Russian oil companies are struggling to maintain

even these lacklustre growth rates as their main fields in West Siberia, the workhorse of the Soviet oil

industry, decline. Russian oil firms raised output by nearly 50% between 2002 and 2010, and are

experimenting with expanded horizontal drilling and multi-stage hydraulic fracturing - technologies which

aided the shale boom in the United States - to squeeze more barrels out of the old province, in addition to

development of new fields. Daily gas production stood at 1.45 bln cubic meters (bcm) in July, down from

1.54 bcm in June. Total output for the month was 45 bcm, down 4.5 percent from July’11 as Russian export

monopoly Gazprom faces weak demand in its main export market, Europe. It had been expected to rise with

the planned June launch of Gazprom's giant Bovanenkovo field, but the launch was delayed to October. /

Thomson Reuters

Russian manufacturing grew at a faster pace in July thanks to rising new orders and production,

although a fall in inventories suggests producers are preparing for hard times, the purchasing managers'

index (PMI) showed on Wednesday (1 Aug). The headline index rose to 51.99 from 50.97 in June, staying

above the 50 mark that separates expansion from contraction. "Some improvement of growth momentum

in the Russian manufacturing sector in July is positive news, which contrasts to weak PMI readings for many

other countries," said Alexander Morozov, chief economist for Russia and CIS. "Yet, the details of the Russia

Manufacturing PMI survey show a mixed picture across different sectors." The new orders index rose to 53.6

bps in July, recovering from 51.6 the previous month. Output has also increased but stocks of finished goods

continued to shrink. "Manufacturers prepare for hard times in advance, and the fastest rate of inventory

reduction since October’09 signals that they are already adjusting output levels to a potential weakening of

demand," Morozov said. While Russia's PMI is still outperforming many other economies, the euro zone's

financial woes pose a threat to risk appetite, commodity markets and thus manufacturing in the major

global oil producer. "The likely moderation of private consumption growth on the back of faster inflation

and lower oil prices could push manufacturing growth further down in the coming months," Morozov said. /

Thomson Reuters

S&P Ratings Services believes banking systems in Russia and the Commonwealth of Independent

States (CIS) are in little danger of a hard hit from the eurozone debt crisis because their direct links with

eurozone banks are limited, according to a report published today titled "Russian And CIS Banks' Low

Reliance On Eurozone Investment Limits Their Contagion Risk." We believe the current economic struggles

of some members of the European Economic and Monetary Union (EMU, or the eurozone) and their banking

systems, along with looming tighter capital and liquidity rules for all banks under Basel III, will likely lead

some Western European banks to scale back their investments in the form of liquidity or capital abroad. But

most Russian and CIS banks don't rely heavily on the eurozone for FDI, which shields them from much of this

risk. "In our view, the major source of risk for Russian and CIS banking systems is deterioration of global

macroeconomic fundamentals rather than direct contagion from difficulties at euro area banks," said S&P

credit analyst Pierre Gautier. If the global economic slowdown weighed on oil and commodities prices or on

local currencies and local stock markets for a long time, Russian and CIS banking systems could suffer.

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ECONOMIC BULLETIN № DEB-2012.08-01 Specifically, the ruble and the Moscow stock exchange could be particularly vulnerable because they tend to

be volatile in periods of crisis. We therefore see the risks to Russia and the CIS banking systems as indirect,

as all major economies are to a certain extent interconnected. We believe the direct contagion risk from the

eurozone to banking sectors in Russia (BBB/Stable/A-2 foreign currency rating, BBB+/Stable/A-2 local

currency rating) and most of the CIS is moderate. Ukraine (B+/Negative/B) stands out as the country whose

banking system is the most vulnerable to falling investments from the eurozone. "Our base-case scenario

assumes an inevitable economic slowdown for Russia and the CIS. But we do not expect it to be a severe

enough shock to plunge these economies and the whole banking system into deep trouble," Mr. Gautier

said. / Thomson Reuters

Global Economy

A key U.S. congressional committee on Thursday (26 Jul) voted overwhelmingly to lift a Cold War-

era restriction on trade with Russia, but the top congressional Republican said President Barack Obama

must do more to get the bill passed into law. The White House and business groups want lawmakers to

approve the legislation before leaving next week for a month-long recess so U.S. companies can share in the

full benefits of Russia's entry in the WTO on 22 August. But House of Representatives Speaker John Boehner

appeared to throw cold water on the idea of final congressional approval next week, despite the bipartisan

vote in the House Ways and Means Committee in favor of the trade legislation. "If the president really thinks

this is an important issue that we have to deal with, then maybe he ought to be out there making the case

for it. I haven't seen that as yet," Boehner told reporters. The White House has said passage of the bill is its

top trade priority. But the measure faces opposition from labor unions, an important Democratic

constituency ahead of the 6 November presidential and congressional elections. "The President is

committed to working with Congress to seek passage of this bill that will enable him to extend Permanent

Normal Trade Relations to Russia and allow American businesses, ranchers, farmers, and workers to receive

the full benefit of Russia's WTO commitments," White House spokeswoman Caitlin Hayden said. "We urge

Congress to take action on this important legislation as soon as possible," she said. Unions contend the deal

Russia made to join the WTO is too weak in a number of areas, and the bill would not ensure Moscow lives

up to the WTO pact. Ways and Means Committee Chairman Dave Camp, a Republican, said the House could

take up the measure next week, but only if the Democratic-controlled Senate agrees not to tinker with it

extensively. "We can't send a revenue bill over to the Senate without understanding what they're going to

do with it," Camp said. "Once they commit to a process we can rely on, we can move in the House. But we

can't move in the House until we get a commitment on that process." The uncertain outlook left business

leaders pleading for Congress to act. "It would be the height of irresponsibility to have a situation where our

Chinese competitors have more rights to compete in the Russian market than American companies and

we've got to make sure that doesn't happen," said Bill Lane, director of government affairs for Caterpillar

Inc. Russia is the largest economy still outside the WTO and its entry is expected to help double annual U.S.

exports to that country to about $19 bln over the next five years. If Congress does not act, Moscow could

deny U.S. companies some of the market-opening concessions it made to join the WTO, putting them at a

disadvantage to foreign competitors in one of Europe's fastest-growing economies.

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ECONOMIC BULLETIN № DEB-2012.08-01

MOSTLY SYMBOLIC. The Ways and Means Committee bill establishes "permanent normal trade

relations" (PNTR) between the two countries by repealing a 1974 provision known as the Jackson-Vanik

amendment which tied favorable U.S. tariff rates to the rights of Jews in the former Soviet Union to

emigrate freely. The nearly 40-year-old Jackson-Vanik amendment is mostly symbolic now because both

Democratic and Republican administrations have judged Russia to be in compliance since 1994. But it has

stayed on the books and is at odds with WTO rules requiring members to give equal treatment to exports

from all other members on an unconditional basis. Union groups, bitter over what they call a decade of

broken promises by China since it joined the WTO, have flooded Congress with letters this week against the

pact. "America's working families cannot afford another mistake like the grant of PNTR to China - their

livelihoods depend upon getting trade policy right. That is why we urge you to oppose a premature grant of

PNTR for Russia," the AFL-CIO labor federation said in a letter to lawmakers on Wednesday. The push to pass

the bill comes as U.S.-Russia relations have been strained by disagreements over the crisis in Syria and Iran's

nuclear program, as well as questions about Moscow's commitment to human rights, democracy and the

rule of law. / Thomson Reuters

The business climate in emerging Europe resumed its downward trend in the quarter to July as

direct investors turned gloomier about the outlook for both the economy and their units in the region, a

survey released on Wednesday (1 Aug) showed. The OeKB Central and Eastern Europe Business Climate

index of around 400 Austria-based direct investors slumped to 17 bps in July, from 24 in April, when it had

posted its first quarterly rise since early 2011. OeKB's quarterly survey included a new index, comparing

current business sentiment with levels seen in 2007. Using a scale that puts the average level in 2007 at 100,

the index fell to 83.4 in July from 86 in the second quarter of this year. "Direct investors remain satisfied

with their stakes in the region but business expectations are pointing markedly lower. The economy in the

region will likely lose momentum in the next 12 months," Oesterreische Kontrollbank (OeKB) said in a

summary of the poll's findings. The only countries in the region where business climate did not worsen in

the latest survey were Ukraine - where it held steady at 26 - and last-place Hungary, where it edged up to -8

from -9. Russia and Poland declined but still had the best readings. "The determining factors for judging

countries at the moment seem to be the extent of their economic integration with the EU, market size and

the strength of domestic consumption," OeKB said. Russia and Poland drew the highest number of business

expansion plans, while Poland led for the number of new investment projects, followed by Serbia and

Croatia. CEE REGION III/12 II/2012 I/2012 IV/2011 III/2011 (Survey conducted) (JULY) (APRIL) (JAN) (OCT) (JULY) ECONOMIC OUTLOOK 3 11 -10 -6 32 CURRENT BUSINESS SITUATION 21 24 23 29 30 BUSINESS EXPECTATIONS 13 24 6 6 31 BUSINESS CLIMATE 17 24 14 17 30 INVESTMENT STOCKS 5 7 4 4 11 INDEX 2007 level =100 CURRENT BUSINESS SITUATION 83.6 84.7 84.4 86.6 87.0 BUSINESS EXPECTATIONS 82.9 87.2 80.2 80.2 89.9 BUSINESS CLIMATE 83.4 86.0 82.2 83.4 88.3

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ECONOMIC BULLETIN № DEB-2012.08-01

BUSINESS CLIMATE BY COUNTRY III/2012 II/2012 I/2012 IV/2011 III/2011 RUSSIA 46 58 45 41 51 POLAND 32 38 35 38 48 UKRAINE 26 26 34 29 37 SLOVAKIA 23 25 18 17 30 CZECH REPUBLIC 21 30 25 25 38 ROMANIA 20 28 14 17 29 CROATIA 19 27 21 11 23 SERBIA 10 22 9 10 18 SLOVENIA 9 17 11 9 19 BOSNIA HERZEGOVINA 7 24 15 11 16 BULGARIA 7 20 17 4 14 HUNGARY -8 -9 -31 -4 22

NOTE - Surveyed companies have three options to answer: positive, neutral and negative. The index

shows the balance of positive answers minus negative answers. A value above zero signals more positive

than negative answers, a value below zero more negative than positive answers. The OeKB Central European

Business Climate Index is based on quarterly surveys of around 400 international companies with regional

headquarters in Austria that manage 1,500 affiliate companies in 21 countries in central and eastern Europe.

/ Thomson Reuters

Factories across the world cut jobs for the first time since November’09 as the global manufacturing

economy slipped into a second month of decline in July, a business survey showed on Wednesday (1 Aug).

The JPMorgan Global Manufacturing PMI fell to 48.4 in July from 49.1 in June, dipping further below the 50

threshold that signifies growth. Citing weak demand and a sharp drop in backlogs, more job losses could be

on the way, warned survey compiler JPMorgan. "Recent cost reductions are providing some respite, but this

will be of little long-term benefit if underlying demand fails to pick up," said David Hensley, director of global

economics coordination at JPMorgan. The U.S. ISM survey, released earlier on Wednesday, showed the

American manufacturing economy shrank slightly again in July, against expectations for modest growth. /

Thomson Reuters

Two Chinese private equity funds are reported to be close to finalising a deal to buy the asset

management arm of Franco-Belgian financial group Dexia, as part of the wind down of what was once the

world's biggest municipal lender. Reuters reported in June that Dexia was seeking to sell its Dexia Asset

Management unit for about EUR 750 mln, although a report in Friday's (27 Jul) Financial Times put the figure

at EUR 500 mln. The asset management sale would be welcome news for the French and Belgian

governments, which have been grappling both with the spiraling costs of the Dexia wind down as well as

how to replace it as a municipal lender. Dexia was forced to divest businesses after becoming the first bank

to require a rescue during the euro zone crisis. Belgium, France and Luxembourg joined forces to bail out the

lender last October after it was brought down by a funding crunch. It has already sold Banque Internationale

a Luxembourg, the half of RBC Dexia Investor Services that the group owned. And, in early June, Dexia

signed a deal to sell Turkey's DenizBank to Russia's Sberbank for EUR 3.09 bln. One of China's largest private

equity groups, Hony Capital, is teaming up with GCS Capital and the pair has been selected as the preferred

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ECONOMIC BULLETIN № DEB-2012.08-01 bidder to buy the business, the Financial Times said, citing people familiar with the situation. An agreement

in principle was reached during talks in Paris on Wednesday, and was set to be signed next week. The funds

had offered more than EUR 500 mln for the unit, the newspaper said. Dexia and Hony both declined to

comment. GCS could not immediately be reached for comment. Dexia is one of a handful of European banks

looking at selling off asset management operations, which for buyers offer the upside of steady cash flow

and little regulatory risk. Belgium, which last year bought Dexia's Belgian retail arm for EUR 4 bln, has been

negotiating to get France to assume a bigger chunk of up to EUR 90 bln in state guarantees needed to cover

its funding requirements. Under a preliminary agreement, which Belgium is seeking to modify, it is

responsible for 60.5% of the guarantees, France for 36.5% and Luxembourg for 3%. The states have

currently made available up to EUR 55 bln in guarantees, of which Dexia is already using EUR 49 bln. At the

same time, the European Commission has expressed concern that the guarantees could constitute state aid

and has said it had doubts that they were compatible with the European Union single market. French FM

Pierre Moscovici said on Thursday that an agreement with the Commission on the aid package was expected

soon. France is meanwhile struggling to find new sources of financing to replace Dexia, which until recently

was its dominant lender to local governments and other public entities like hospitals. France's La Banque

Postale, which has been designated to succeed Dexia as the country's main municipal lender, said earlier this

month it would double its capacity to lend to local governments after a spike in demand for credit. /

Thomson Reuters

Markets: FX / MONEY MARKET

FX MARKET

On this week the

rouble has loosed

1.5% to 32.56 vs the

dollar but has not

changed against the

euro at 39.67. Vs the

basket the rouble has

depreciated around

1% to 35.73.

Russia's gold

and foreign

exchange reserves

fell to $505.5 bln in the week to 27 July from $507.7 bln a week earlier, CBR data showed on Thursday (2

Aug). The reserves include monetary gold, special drawing rights, reserve position at the IMF and foreign

exchange. / Thomson Reuters

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ECONOMIC BULLETIN № DEB-2012.08-01

MONEY MARKET

On this week money market rates have decreased and stabilised at 5.0-6.0%.

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ECONOMIC BULLETIN № DEB-2012.08-01 Markets: FIXED INCOME

The Russian FinMin sold less than half the treasury bonds on offer at two separate auctions on

Wednesday (1 Aug), providing no premium to the secondary market but nevertheless attracting some bids

on the back of redemption of a previous issue. Investors' activity was hampered by uncertainty around

consequences of the U.S. Federal Reserve meeting, which is due to finish later in the day, while demand for

OFZ bonds particularly was limited by a weaker rouble due to sell-off in oil prices. At the first auction, the

FinMin raised RUB 9.32 bln in OFZ bonds maturing on 20 July’22, out of RUB 15 bln on offer. The average

yield was set at 7.92%, at the upper boundary of 7.87-7.92% yield guidance. A fair yield of the issue stands at

7.94%, according to market’s estimates. At the second auction, the FinMin managed to sell RUB 13.01 bln in

OFZs maturing on 19 April’17 out of RUB 35 bln. It set the average yield at 7.68%, also the upper edge of

7.63-7.68% yield guidance. Despite the falling rouble, replenishment in market liquidity after the end of tax-

payment period together with today's retirement of finance ministry's OFZ bonds helped to draw investors'

interest. "Apparently, today's redemption of OFZs in amount of RUB 150 bln allowed substantial demand to

build at the FinMin auction," analysts said in a note. Expectations that OFZ bonds will be in greater demand

after Russia opens domestic government debt market to international settlement systems also played into

the finance ministry's hands. Euroclear and Clearstream, the two major international clearing systems for

bonds, would be able to start trading Russian OFZ treasury bonds as soon as Russia completes the creation

of a new central securities depository, FM Anton Siluanov said earlier this week. / Thomson Reuters

The opening of Russia's domestic government debt market to international settlement systems will

boost foreign investors' demand for its treasury bonds and help the government to meet borrowing plans,

Russia's FM said on Monday (30 Jul). "Many investors have the possibility and desire to participate in the

market for our securities, but working directly, not through intermediaries," Anton Siluanov said. "Therefore

we think that the demand for our papers will increase." He said that Euroclear and Clearstream, the two

major international clearing systems for bonds, would be able to start trading Russian OFZ treasury bonds as

soon as Russia completes the creation of a new central securities depository, a process that he expected to

be completed within the next two months. Analysts have predicted that once Euroclear and Clearstream are

able to trade the bonds, there may be up to $50 bln in additional foreign investment into the market during

the next two years. Siluanov declined to put a figure on the impact, but said that it was "entirely possible"

that the volume of the OFZ market would see an immediate increase of 15%, as predicted by some analysts.

OFZs have seen high demand at recent auctions, which Siluanov attributed to a government decision last

month to proceed with the liberalisation move, despite opposition from some Russian banks and brokerages

who fear a loss of business. He said that the opening of the market would help the government attract

foreign demand to finance significant local borrowing targets. Russia plans to raise RUB 1.3 trln via the local

bond market during 2012, of which around RUB 850 bln has yet to be raised, he said. "There's quite a big

volume of funds that needs to be borrowed on the market," he said. "The question is who will buy it: our

residents or foreigners?" "It's important for us of course that there will be more possibilities for foreign

investors," he said. / Thomson Reuters

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VTB will provide a RUB 18.4 bln loan to Rosneft, the oil company said in a statement on Friday (27

Jul). Rosneft, Russia's top crude producer, did not elaborate on what was the purpose of the loan. /

Thomson Reuters

Russia's VTB will likely still need to resort to a share issue to boost its capital reserves, analysts said

on Friday (20 Jul), after the bank hailed an unusually-structured bond issue as offering a vital repair to its

capital levels. VTB needs to bolster its finances to keep up its strong lending growth, after its ill-fated

takeover of Bank of Moscow last year knocked its core capital position, also under pressure from loan

provisions and a weak rouble. The bank which expects its Tier 1 capital adequacy ratio, a measure of a

lender's ability to absorb shocks, to improve by up to 1% following a $1 bln perpetual bond issue, CFO

Herbert Moos told Reuters on Friday (27 Jul). The first of its kind to be issued in Russia, perpetual bonds are

permanent interest-only loans that issuers do not have to repay, allowing them to count the money raised

towards capital. But analysts say the bond deal would only postpone an inevitable additional share issue,

needed by the state-controlled lender to boost its capital longer term. "A deal (bond) of this size does not

seriously address VTB's weak capital position ... While this Tier 1 bond placement ... is not a panacea, it

could be regarded as a viable short-term alternative to equity raising," broker said in a note. CFO Moos did

not provide specific figures or estimates of the bank's current Tier 1 level. VTB's Tier 1 capital ratio stood at

9.6% at the end of March, compared to a ratio of 11.8% at its larger peer Sberbank. Broker estimates VTB's

current Tier 1 at 9.4%. According to other estimates, the bond will add about 50-60 bps to VTB's Tier 1 -

smaller than Moos' expectation of the impact.

"A LONG WAY TO GO". Eugene Tarzimanov, vice president at Moody's in Russia, said the bond deal

would increase VTB's Tier 1 capital to around 10.1%, assuming its capital adequacy level stood unchanged as

of end-March. "VTB has a long way to go because its Tier 1 will still remain below an average 13% Tier 1 for

large Russian banks with similar ratings," Moody's Tarzimanov said. VTB priced its bond deal at the lower

end of an initial guidance of 9.5-9.75%. Analysts viewed a similar deal by Banco do Brasil, Latin America's

biggest bank by assets, as a guidance for VTB's issue. Banco do Brasil sold $1 bln in perpetual bonds with a

yield of 9.25% in January, topping up the issue later. A banking source previously said that VTB's bond

attracted strong demand of around $1.65 bln, meaning there is still room to increase the volume of the

issue. However, Moos said that the lender has no such plans at the moment.

CAPITAL RAISE CONUNDRUM. Analysts warned VTB might need to raise cash to allow it to continue

lending after it bought Bank of Moscow last year, which triggered a $13 bln state-run bailout, hitting its Tier

1 capital. Lending grew by 50% last year, helping to boost VTB's profit by 65%. But analysts say that even

after the bond issue, VTB's capital ratio will not be sufficiently high to show much strength in its lending

growth, estimating a rise of 14% for the year. VTB's core capital is also under pressure because of extra

provisions for deteriorating loans, VTB said earlier this week in a prospectus marketing the perpetual bond,

adding its capital adequacy ratios may suffer further. Also other estimates that a weak rouble in the second

quarter, hit by global risk aversion due to European debt issues, has eroded VTB's Tier 1 level by 20-30 bps.

However, the Russian government has hinted it may sacrifice privatisation plans aimed to fulfil its budget

and instead dilute state stakes in Sberbank and VTB through capital increases, a measure needed by VTB,

8/3/2012

12

ECONOMIC BULLETIN № DEB-2012.08-01 two high-ranked banking sources told Reuters earlier. The government owns 75.5% of VTB, while the CBR

owns 57.6% of Sberbank. / Thomson Reuters

VTB added $500 mln to an outstanding Eurobond issue maturing in 2017, IFR, a Thomson Reuters

news and market analysis service, said on Thursday (2 Aug). The yield was set at 5.267%, IFR added. The

state-controlled lender raised $1.5 bln in April, pricing five-year Eurobonds at a yield of 6%. / Thomson

Reuters

Russian state development bank VEB may raise $500-750 mln via rouble-denominated Eurobonds

and a further $250-300 mln in a Swiss francs deal by the end of 2012, Deputy Chairman Alexander Ivanov

told reporters on Thursday (2 Aug). He said both deals were subject to market conditions. In June, VEB

raised $1 bln via a 10-year Eurobond issue. / Thomson Reuters

The EBRD will grant a RUB 9.6 bln loan to Russia's state electricity holding firm InterRAO and may

later convert it into the company's shares, InterRAO said on Tuesday (31 Jul). The deal comes as InterRAO,

in which several state-controlled entities own nearly 60%, is preparing to sell a 2-3% of its own stock to a

strategic investor ahead of a potential secondary share placement by 2013. The EBRD may convert the loan

into InterRAO shares at 5.5 kopecks per share within four and a half years starting from the date the loan is

provided. InterRAO shares traded at 2.6 kopecks on Tuesday, meaning the value of the whole company

stands at $8.2 bln. Boris Kovalchuk, CEO with InterRAO, told journalists that the EBRD may get around 1-

1.8% stake in the company. The EBRD, set up in 1991 to manage the transition of former communist

countries to market economies, invests in a wide range of businesses. Depending on the business, the EBRD

may later sell holdings at a premium. / Thomson Reuters

Markets: STOCKS

Stock market

has not changed on

this week. RTS

Index has traded

around 1352 bps,

MICEX Index at

1394 bps.

Russian

EconMin believes

that the sale of a

7.6% stake in the

Sberbank might

happen by the

end of 2012, the

8/3/2012

13

ECONOMIC BULLETIN № DEB-2012.08-01 EM Andrei Belousov said on Friday (27 Jul). "I think there are all the chances (to sell the stake) if the market

allows," he told journalists, declining to detail further. The CBR was planning to sell a 7.6% stake in Sberbank

out of its total holding of 57.6% last year but postponed the deal due to volatile markets. / Thomson Reuters

Sberbank, Russia's top lender, is creating a new captive investment fund to invest into shares,

derivatives and structured instruments, it said in a statement on Monday (30 Jul). Sberbank, with equity of

RUB 1.6 trln and one the highest return-on-equity (ROE) ratios in the world, is already exploring new sectors,

buying Russia's oldest brokerage Troika Dialog last year and recently starting international expansion.

"Sberbank Merchant Banking will have the task of creating a high-yield securities portfolio of the clients of

the corporate investment block - key representatives of various sectors of the economy," the lender said.

Sberbank, whose market capitalisation of $63 bln makes it Europe's No.2 bank after HSBC, accounts for

around one third of overall lending in Russia, a country with a $1.9 trln economy. It recently started an

international foray, snapping up Eastern European lender VBI and agreeing to buy Turkish DenizBank. Oscar

Ratsin, the head of the new merchant banking division, told Reuters the unit will invest between $5 mln and

$50 mln into each project or even more, depending on the business and the particular client. "We are trying

to invest into clients to whom Sberbank is already lending and knows pretty well... We are looking at such

options as a direct participation in capital, investments into derivatives, call-options, financing ahead of

IPO," he said. Ratsin, who has worked for Sberbank for three years, said that Sberbank Merchant Banking is

aiming to show ROE at the same level as its parent bank, which delivered 27% last year. "Depending on the

projects, we may think who might be our co-investor in each particular deal," he said, adding that Sberbank

Merchant Banking may also invite foreign partners to some of its projects. The new unit already has over 20

deals in the pipeline, Ratsin said, declining to elaborate. / Thomson Reuters

8/3/2012

14

ECONOMIC BULLETIN № DEB-2012.08-01 Macroeconomic indicators of Russia

ECONOMIC INDICATORS PERIOD LATEST PREV YR AGO Nominal GDP (bln RUB) Q1 13.491 15.462 11.680 GDP Y/Y Q2 +4.0 +4.9 +3.4 CPI M/M Jun +0.9 +0.5 +0.2 CPI Y/Y Jun +4.3 +3.6 +9.4 PPI M/M Jun -0.9 -2.4 -2.3 PPI Y/Y Jun +4.1 +3.1 +18.4 Ind output M/M Jun -0.6 +3.2 +1.1 Ind output Y/Y Jun +1.9 +3.7 +5.7 Retail sales Y/Y Jun +6.9 +6.8 +5.8 Unemployment (mln) Jun 4.14 4.09 4.61 Real disposable income Y/Y Jun +3.0 +4.1 +2.4 Real average wage Y/Y Jun +12.9 +12.4 +2.4 Nominal average wage (rbls) Jun 28.232 26.385 24.137 Capital investment (bln RUB) Jun 1015.6 866.3 n/a Capital investment Y/Y Jun +4.7 +7.7 +4.9 Trade surplus ($bln) May 17.4 18.8 15.5 Exports ($bln) May 45.2 45.5 43.7 Imports ($bln) May 27.8 26.7 28.2 Budget balance (bln rbls) Jan-Jun +247.4 +120.1 +703.5 CBR reserves ($bln) 27-Jul 505.5 507.7 n/a Monetary base (bln rbls) 1-Jul 8.129 7.728 7.410 M2 (blnR) 1-Jun 24.450 24.247 20.196 REER rouble Feb/Jan +3.5 +0.7 +1.8 Oil output (mln bpd) Jul 10.34 10.32 n/a Oil output (mln T) Jul 43.7 43.8 n/a Gazprom gas output (bcm) Jul 45.0 n/a n/a URALS oil, $/bbl 3-Aug 108.0 106.3 112.19 BRENT oil, $/bbl 3-Aug 108.31 107.05 114.59

ANNUAL DATA 2011 2010 2009 2008 2007 Nominal GDP (bln USD) 1692.4 1479.2 1292.1 1403,8 1349,3 GDP (pct) +4.3 +4.3 -7.8 +5.2 +8.5 CPI Y/Y (pct) +6.1 +8.8 +8.8 +13.3 +11.9 M2 (bln R) 24,543 20,012 15,698 13,490 13,27 Oil/gas cond.(mln T) 511 505 494 488 491 Natural gas (bcm) 671 650 582 665 653 Coal (mln T) n/a 323 298 326 315 Grain (mln T) n/a 61 97 108 82 Beet Sugar (mln T) n/a 2.7 3.3 3.6 3.2 Gold (T) n/a 201 205 184 163

8/3/2012

15

ECONOMIC BULLETIN № DEB-2012.08-01

GOVT FORECASTS 2012 2013 2014 Nominal GDP (bln USD) 1 913.3 n/a n/a GDP Y/Y (pct) 3.8-4.0 (3.7-4.0) +3.8 (+3.9) +4.4 (+4.6) Industry output (pct) +3.1 (+3.6) +3.4 (+3.8) +4.1 (+4.2) CPI Y/Y (pct) 5.0-6.0 (5.0-6.0) 4.5-5.5 (4.5-5.5) 4.0-5.0 (4.5-5.5) Cap. Investment pct +4.0-5.0 (+6.6) +7.1 (+7.1) +7.0 (7.2) Retail Sales pct +5.5 (+5.5) 5.3 (5.3) 5.5 (5.5) Exports $ bln 513.4 (533.1) 515.0 (535.9) 543.4 (565.3) Imports $ bln 368.6 (397.4) 412.7 (444.6) 454.0 (486.1) Trade Balance $ bln 144.8 (135.7) 102.3 (91.3) 89.4 (79.2) Urals oil, ave., $/bbl 106-108 (115) 97 (97) 101 (101) Rouble rate/$1 29.20 (31.1) 31.3 (29.4) 31.80 (30.50) Rouble REER +0.2 (+3.5) +2.0 (0.0) 1.2 Reserve fund, trln RUB as of yearend 1,568 1,619 1,624 Revenue, trln RUB 12.588 (11.779) 12.729 (11.674) 14.116 (12.646) Expenditure, trln RUB 12.656 (12.185) 13.766 (13.418) 14.631 (14.294) Budget deficit, trln RUB -0.068 (-0.877) -1.037 (-1.744) -0.514 (-1.648) Budget deficit, % of GDP -0.1 (-0.3) -1.6 (-2,7) -0.7 (-2.3) Real incomes, % 4,2 (4.8) 4,8 (4,8) 5.3 (5.3)

BALANCE OF PAYMENTS ($bln) 2011 2010 2009 Current account 98.8 71.1 48.6 Cap/fin account -76.2 -26.0 -43.5 Net errors/omissions -10.0 -8.3 -1.7 Reserve assets -12.6 -36.8 -3.4

LONG-TERM FOREIGN CURRENCY RATINGS Moody's (December 12, 2008) Baa1 (outlook stable) S&P (June 27, 2012) BBB (outlook stable) Fitch (January 16, 2012) BBB (outlook stable)

CJSC Denizbank Moscow Treasury Ksenia Mayorova ksenia.mayorova@denizbank.com Alexander Shetler alexander.shetler@denizbank.com +7 (495) 789-97-20, +7 (495) 783-31-41 Corporate Banking Savas Citak savas.citak@denizbank.com Oguz Yalcin oguz.yalcin@denizbank.com Koray Akefe koray.akefe@denizbank.com Mine Arpadji mine.arpadji@denizbank.com Elena Kislova Elena.kislova@denizbank.com Roman Otavin roman.otavin@denizbank.com Marina Kalashnik marina.kalashnik@denizbank.com Oksana Korzhuk oksana.korzhuk@denizbank.com +7 (495) 783-31-40, +7 (495) 725-10-20

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