economic bulletin - denizbank 2011/economic_bull… · indicator for consumer prices, we estimate...

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ECONOMIC BULLETIN Short term has no future

№ DEB-2011.01-03

Economic News

• Russia's unemployment hit its highest in seven-months in December but remained well below 2009 highs and looked unlikely to deter the central bank from raising interest rates to fight inflation. The number of unemployed in Russia was 5.39 mln at the end of December, taking the jobless rate to 7.2% from November's 6.7% the previous month, exceeding analysts' forecasts of a 6.8% rate. The data underscores the fragility of the Russian economy's recovery since it suffered its deepest recession in 15 years, hit by the slump in the prices of key exports metals and oil in the wake of the global economic crisis. But, despite blips, the recovery continues. For 2010 as a whole, unemployment averaged 7.5%, higher than the 7% percent forecast by analysts but a definite improvement on the six-year peak of 8.6% recorded in 2009. As such, analysts said the CBR would likely continue to focus more on containing runaway inflation and follow up December's hike in deposit rates with further monetary tightening as soon as its end-January meeting. "It (unemployment spike) is a short-term trend ... and it does not mean that the recovery will deteriorate further," analysts said. "Trade and industrial output data show that the fourth quarter will be better after the 'burnt-out' third quarter due to the weather. "There is a very high chance that the interest rates will continue to be raised... Will it happen in January? Most likely. Inflation has deteriorated (since the last meeting)". Consumer prices rose 1.4% in the first 17 days of January, faster than the 1.2% increase seen a year ago. PRICE WORRIES. Officials from the CBR and the EconMin have acknowledged that it will be tough to meet the 2011 inflation target of 6-7%. Inflation is also cited as a top popular concern in opinion polls and the government is likely to want to get prices under control before Russians go to parliamentary polls in December. One glimmer of hope though comes from producer prices, which rose just 1%, month-on-month, in December against forecasts of 2.5%. "PPI is a forward-looking indicator for consumer prices, we estimate the lag between them at 6 months. Therefore inflation should slow down in the middle of 2011, if you do not take into account other external risks," analysts said. In year-on-year terms though their inflation accelerated to 16.7% from the 16% seen in November. / Thomson Reuters Russian inflation may exceed 8% in 2011, surpassing the government forecast of 6 to 7%, RIA news agency quoted a deputy EM as saying on Monday (24 Jan), raising pressure for interest- rate hikes. Russia's consumer prices have grown rapidly since the start of the year after the government failed to meet its inflation target for 2010, building up more pressure on the central bank to tighten monetary policy. Russian inflation was 8.8% in 2010 versus initial expectations of a 6 to 7% increase. "There is a risk that inflation this year will be higher than the estimate included in the (government) forecast and budget and go beyond 7-8%," RIA quoted Andrei Klepach as saying on Tuesday. Klepach said prices would stop growing and possibly even fall in early summer once the inflationary effects of last summer's drought and poor harvest have faded. "But this will only happen after the effect of the drought ends and the new harvest comes to the market. It is difficult to predict now how global prices will behave," Klepach was quoted as saying. The CBR first deputy chairman Alexei Ulyukayev said last week that the 6 to 7% inflation target would be "very difficult" to meet, saying inflation risks in the first half of 2011 were higher than risks to the country's growth rate. Analysts expect the CBR to use a combination of reserve requirements, interest rates and other tools to curb inflation. The CBR, which raised deposit rates by 25 bps in December to 2.75%, is due to meet before the end of the month. Last week, Russia's EM Elvira Nabiullina said inflation in January would be 2.1 to 2.3%. Traditionally, an inflation spike occurs in January due to one-time annual increases in the cost of services like transport, water and heating. / Thomson Reuters

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• Russia's December industrial output rose 6.3% compared with a year ago, and was up 4.3% in month-on-month terms, the FSS said on Monday (24 Jan). Analysts polled by Reuters had expected a 6.2% increase in output in December, year-on-year. For 2010 as a whole, industrial output rose 8.2% after a fall of 9.3% in 2009. / Thomson Reuters

• Russia may impose a maximum price level for some foods, such as potatoes, as it faces elevating inflationary pressure after a summer draught ruined a third of the country's harvest, a senior official said on Monday (24 Jan). "This is a tool that can be used and I do not exclude that this kind of constraint could be necessary to use this year for potatoes, for fruit and vegetables," deputy EM Andrei Klepach was quoted as saying by Interfax news agency. He said, however, that such proposals have not been discussed yet by the government. "I just do not exclude this, and it is envisaged by the legislation that we can use this kind of means," Klepach said. Parliamentary elections are due in December, and high prices are cited by voters as a top concern in opinion polls. Capital investment, meanwhile, rose 5.9% in 2010, in line with latest government forecasts and twice as fast as officials had initially expected, EM Elvira Nabiullina told President Dmitry Medvedev. / Thomson Reuters

• The IMF has revised its 2011 outlook for Russia, expecting GDP to grow 4.5 pct vs 4.3 pct predicted in Oct last year, which tops the government forecast of 4.2 pct. After weathering the most rapid contraction in a decade in 2009, when GDP fell 7.9 pct, Russia is recovering, and thus giving the c.bank room to hike interest rates to curb inflationary risks. A hike in rates, widely expected by end of Jan., should boost the rouble, raising its appeal for carry trade. / Thomson Reuters

Global Economy

• The EBRD revised up its emerging Europe 2011 growth forecast to 4.2% on Monday (24

Jan), but said downside risks to the region had increased. The bank forecast 4.1% growth for 2011 in October. The EBRD kept its estimates for 2010 growth unchanged at 4.2%. "Stronger than anticipated growth in the core euro zone, fiscal and monetary stimuli in the U.S., and rising commodity prices are likely to boost growth across the region in an increasingly private sector-led recovery," the EBRD said in a statement. "Risks could emerge if loose monetary policies fuel persistently higher inflation in advanced countries, leading in turn to an earlier than anticipated monetary tightening by major central banks." Emerging Europe was also at risk from a rise in risk aversion due to the euro zone debt crisis, from policies in eastern Europe such as cutting back private pension funds or increasing bank taxes and from the possibility of trade wars, the EBRD said. Hungary and Poland have unnerved investors in recent months with the use of unorthodox measures to rein in budget deficits. The bank sees 3.2% growth in 2011 in Central Europe and the Baltics, 4% in Eastern Europe and the Caucasus, 5% in Turkey, 4.6% in Russia, 6.6% in Central Asia but only 1.9% in Southeastern Europe. Russia is the largest economy in which the EBRD operates. "The outlook for growth in Russia is good, but remains highly dependent on oil and other commodity price developments, as well as on global sentiment affecting capital flows to emerging markets," the EBRD said. The EBRD supports the transition of mainly former communist countries in eastern Europe to market economies, largely through investments in the private sector. It invested a record EUR 9 bln in the region last year. / Thomson Reuters

• People in emerging economies are far more confident about the financial outlook than

those in older economies, with 78% of Brazilians optimistic compared with just 4% of French people, a survey shows. Of the 24 countries polled by Ipsos, people in Brazil were clearly the most confident that the economy will be stronger in the next six months. India came in second, with 61%, followed by Saudi Arabia at 47% and China at 44%, according to 'The Economic Pulse of the World' poll, carried out in December. After France, the least optimistic countries were Japan, Hungary and Britain, raising questions about long-term spending habits there. "People are not in the

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doldrums like they were in 2009. But there's only tepid confidence at this point," said Cliff Young, pollster at Ipsos Public Affairs, referring to overall global sentiment. The outlook for the global economy will be top of the agenda at the World Economic Forum in Davos, which runs from 26-30 Jan. Germany, whose economy grew last year at its fastest pace since reunification, was the most optimistic country in Europe. Even so, just 27% of Germans thought the economy would strengthen further. Despite the country's 2010 bounceback from recession, consumer spending has stayed modest. The Ipsos survey, conducted monthly, also showed Germany's optimism reading tumbled 8 points in December, raising questions as to how sustained its upturn may be. Russia experienced a similarly large decline. Among country groupings, people were most upbeat in Latin America (52%), the BRIC nations of Brazil, Russia, India and China (50%) and the Middle East and Africa (32%). Europe clocked in last (16%). The poll was conducted between 10 Dec and 20, surveying nearly 19,000 people. / Thomson Reuters

• Private money pouring into emerging markets could reach more than $1 trln by 2012, a global bank group said on Monday (24 Jan), warning that curbing the effects of capital flows was becoming increasingly difficult. The Institute of International Finance, which represents more than 430 financial institutions in 70 countries, estimated that net private capital flows to emerging markets would hit $960 bln in 2011. It also revised up its October capital inflows projection for 2010 by $83 bln to $908 bln, a 50% increase over 2009 levels. The global credit crisis has dramatically changed the economic landscape, with emerging market economies now regarded as less-riskier places to invest than advanced economies still recovering from the financial crisis. IIF chief economist Philip Suttle told a news conference that although inflows were growing, the ratio of flows to emerging market gross domestic product was still well below levels seen in 2005-2007. Still, the surge of private capital had complicated policies in emerging markets, which are worried by the potential for inflation, asset bubbles and a loss of export competitiveness. Some countries, such as Brazil, which has one of the world's most overvalued currencies, Chile and Colombia, have imposed capital controls to slow the flow of hot money. Suttle said many emerging market countries were choosing to accept a higher rate of inflation when in his view they ought to allow their currencies to appreciate. He said this was a "worrying" trend and that emerging markets as a bloc should coordinate and agree "to appreciate their currencies a little more and take more of the necessary adjustment on the nominal exchange rate side." Many emerging market countries are grappling with uncomfortably high inflation, both from capital flows and rising commodity prices. "These currency adjustments can be quite painful if they happen quickly over a short period of time, and there is really no way around this. It is in a sense the price of success for the emerging world," Suttle added. The Washington-based IIF said while the surge of private money had picked up across all regions, money flows into China had reached a record of $227 bln in 2010. It said equity investment inflows made up the bulk of private money flows in 2010. But growth in portfolio equity and bank inflows was likely to slow this year and next as equity markets weaken and capital controls slow credit growth in emerging market economies, it added. "With favorable conditions in most emerging markets likely to persist, net private capital flows are projected to increase to just over $1 trln in 2012," the IIF said in an updated report on private capital flows. / Thomson Reuters

• The United States, though badly shaken by the 2008 financial crisis, emerged stronger

than Europe and China and will further deepen its global power in coming years, a prominent U.S. analyst said in a new book. George Friedman, founder of intelligence forecasting firm Stratfor whose clients include big corporations and governments, said the United States, with its huge economic and military power, should be viewed as an empire. In "The Next Decade," published on Tuesday (25 Jan) by Random House imprint Doubleday, Friedman downplays the significance for America of the 2008 financial crisis, which started on Wall Street and rippled around the world. The 2008 crisis, he argues, was no worse than the collapse of emerging markets and the Brady bonds bailouts of the late 1980s or the savings and loans crisis of the 1980s and 1990s. "The United States is coming out of this crisis quite well compared to other countries," Friedman told Reuters in an interview, although he said the coming decade could bring the kind of sluggish U.S. economic performance seen in the 1970s. "The most important impact of the 2008 crisis was

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political, it shattered many easy assumptions of the Europeans about the nature and the health of the European Union and it has created a deep crisis in China. The United States has come through it in a fairly healthy situation." Since 2008, the European Union has seen severe tension, prompting speculation of the possible demise of the euro as countries from Ireland to Greece struggle to avoid default. "The United States has deep power, a combination of economic, military and political power founded on a political system that essentially has a broad consensus," he said. By comparison, he said, "The European Union has economic but not military power and has no political foundation. Every country has its own foreign policy." China, he said, is troubled with deep imbalances, particularly how to get one billion people out of poverty. "As you play the game forward you can see the deepening of this U.S. power," he said. PRAGMATIC APPROACH. Friedman argues the size of the United States economy and its impact on the world coupled with the size of its military, which gives it the power to control the world's oceans and therefore global trade, makes it an empire. "There is a real danger whenever you have an empire that you lose the Republic. The Romans faced that, and I would say that is the major challenge, the political problem of how the United States adjusts its global stance and its domestic stance," Friedman told Reuters in an interview. Among his other forecasts are the United States will reach an accommodation with Iran, Germany may forge an alliance with Russia, and China's growth will continue to slow. For Friedman, forecasting geopolitics is pragmatic. He says, for example, that America's desire to take its troops out of Iraq by the end of this year will cause it to establish some accommodation with neighboring Iran, which has big influence in Baghdad. Friedman says the alliance between Germany and Russia will build on close ties and the fact that Germany's declining population and aversion to immigration means it needs somewhere to put its factories while Russia needs technology. Friedman's predictions are not dependent on changes of leaders, such as if President Barack Obama is re-elected. "Presidents don't really have that many choices," Friedman said. "People think the president is the guy who sits down and sets policy, but policy is normally decided by reality, which is what makes reality predictable." / Thomson Reuters

• World leaders and top executives have plenty of crises to discuss this year. Ballooning

European government debt, rising inflation, fears of trade and currency wars, spiralling food prices and lingering problems in the world financial system provide a sobering array of threats for people attending the World Economic Forum (WEF). More than 30 heads of state, over 1,400 business leaders and eight central bank chiefs will flock to Davos, an expensive Swiss ski resort, for the Forum which opens on Wednesday (26 Jan). The WEF named the risk that parlous government finances will trigger sovereign debt defaults as one of the biggest threats facing the world in 2011 in a report published before the meeting. Klaus Schwab, who chairs the Forum, said nations were suffering from "global burnout syndrome" and were too weak to tackle the plethora of inter-related threats facing business and governments. To help to address the problem, the WEF will launch at this year's Forum a global network designed to help policymakers and corporate chiefs to share information about potential risks. French President Nicolas Sarkozy, chairman of the Group of 20 top developed and developing nations (G20), will focus in a speech on Thursday on his key G20 agenda, new rules to curb commodity price volatility and avoid food riots and weak growth. Rising prices for food, fuel and metals have raised concerns about inflation globally. They could also lead to protectionism and the kind of unrest seen in Tunisia and Algeria in recent weeks. High food prices could also hit consumer spending in fast-growing emerging markets and endanger the fragile recovery in the world economy. "If we don't do anything (about rising food prices) we run the risk of food riots in the poorest countries and a very unfavourable effect on global economic growth," Sarkozy said on Monday. Glitz and hype surround the Davos meeting, sometimes billed "the world's top networking event", though organisers say that it does not set out to solve all the problems it discusses. As always, much of the real business is done on the sidelines of the event, where policymakers and CEOs cut deals away from the glare of publicity in luxury hotel rooms. Sarkozy may use this year's Davos meeting to discuss informally with German Chancellor Angela Merkel options for beefing up the euro zone's crisis-fighting mechanism, the European Financial Stability Fund (EFSF). Analysts believe that sooner or later, some European governments will restructure their debts and impose losses on creditors, forcing more aid for banks

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exposed to such debts. ECB President Jean-Claude Trichet and Greek PM George Papandreou could join euro zone talks. U.S. Treasury Secretary Timothy Geithner will also be in Davos on Friday. From emerging economies, Russian President Dmitry Medvedev makes an opening speech on Wednesday, though the Kremlin said earlier plans for him to meet Swiss leaders were cancelled after a suicide bomber killed 35 on Monday at a Moscow airport. Chinese Commerce Minister Chen Deming is the highest ranking official from the country's government who is in Davos. Michala Marcussen, head of global economics at French bank Societe Generale, says Davos provides a platform for European leaders to explain the region's debt situation to the rest of the world. "What makes Davos unique is the mixing of business leaders and policymakers. Davos will be one of the opportunities for European policymakers to know how the rest of the world sees and understands the European situation," she said. European finance ministers discussing ways to raise the lending capacity of their rescue fund reached no conclusion at a meeting last week. Financial markets are worried that the continent's leaders are taking too long to come up with convincing, long-term solutions to the weight of debt which is crushing weaker euro zone economies such as Ireland, Portugal and Spain. The EFSF, set up in May to provide financing, can borrow money on the market with euro zone government guarantees of up to EUR 440 bln, insufficient if both Portugal and Spain apply for emergency financing. Germany is key to any changes to the euro zone agreement but has so far resisted calls to increase the size of the fund. "We are shifting towards a new economic governance model, a process driven by Germany. It will be done step by step," Marcussen says. / Thomson Reuters

Markets: FX / MONEY MARKET

FX MARKET:

The rouble edged lower versus the euro-dollar basket on Friday, dented by slipping oil prices, but expectations of an interest rate hike by the end of the month still kept it on track for solid weekly gains.

By 0749 GMT, the rouble was at 34.61 against the basket used by the central bank to track the exchange rate, down 3 kopecks on the day but on track for weekly gains of 11 kopecks or 0.3 percent after losses in the previous two weeks. "The area around the 34.60 mark is a bit of a psychologically key level. From here the basket started its autumn rally in 2010. Plus the

central bank does not yet buy foreign currency here (through interventions) so the currency could stabilise here," said one of the dealrs. The price of oil, a key export for Russia's commodity reliant economy, slipped towards 2-month lows. With monthly tax payments coming to an end, the rouble also lost support from exporters converting revenues to pay their dues, giving the market a chance to pause.

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"The month-end factor has been played out and market players will likely be cautious ahead of the central bank meeting on Monday," said the dealer. Thursday's data offered further proof that the economic recovery is a cautious But slower-than-expected growth in retail sales and real wages also suggested that high inflation is starting to take its toll,

backing up the view that the central bank may need to hike interest rates on Monday. "We believe the data support our expectation of another 25-50 basis points hike in depo rates, with other rates likely to be raised by similar amounts," analyst Vladimir said in a research note. "Rate hikes should be

positive for the rouble, with the continued acceleration of investment demand supportive for local equities exposed to it (for example) steel, real estate, construction and construction materials." Against the dollar, the rouble edged down 0.25 percent to 29.67 after briefly touching 29.50 - its strongest since early May 2010 - in the first trade of the day on the MICEX

exchange. It was slightly firmer at 40.66 per euro.

• Non-commercial speculators were net long the Russian ruble to the total of 10,010 contracts in the week ended 18 Jan, according to data from the U.S. Commodity Futures Trading Commission commitments of traders report released on 21 Jan. The net position was made up of 10,010 long contracts, down 581 from the prior week, and no short contracts. Open interest stood at 58,911 contracts, up 59 from the prior week. Non-commercial reportable long positions represented 17% of open interest. / Thomson Reuters

MONEY MARKET:

The Interbank overnight rates on the market were 2.75-3%. The 3M Mosprime rate was 4 % - stable during the week at . The 1y swap rate stabilized at 4.88%.

Russia's central bank will likely raise deposit rates by 25 basis points on Monday, the second such step in as many months as it seeks to tame inflation. Faced with soaring food prices, Russia switched its focus to fretting about inflation from supporting economic growth with ultra low rates in the autumn, and in December the central bank delivered the first increase in deposit rates. The refinancing rate -- officially seen as the benchmark rate, but in practice less influential on domestic liquidity and money markets -- was left on hold at 7.75 percent at the time and analysts are split on whether it will be increased now.

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Here are the possible outcomes of the Jan. 31 meeting. DEPOSIT RATES RAISED 25 BPS PROBABILITY: Expected by 9 out of 11 analysts. Consumer prices have already risen 1.8 percent in the first 24 days of January, threatening the central bank's target of a full-year price increase of just 6-7 percent. Central bank's first deputy chairman

Alexei Ulyukayev expects price pressures would continue through the first half of the year, while his boss Sergei Ignatyev has said inflation gives grounds for a rate rise. "Almost no one doubts that the central bank will go for another 25 basis point increase in deposit rates," one of the analysts said in a note. Such an increase would take the overnight deposit rate to 3.00 percent from the current 2.75 percent. "Money market rates remain around deposit rate levels, so it is clear that further moves in deposit rates will determine the moves on the money market," he said. The currently ample level of liquidity and the popularity of the central bank's deposit operations back this theory. MARKET REACTION: Markets have already widely priced in an increase in deposit rates, which has helped support the rouble in recent weeks. Bond market yields have surged, leading to weak demand at an auction of Finance Ministry's bonds this week. REFINIANCING RATE ALSO RAISED BY 25 BPS PROBABILITY: Possible. Expected by 4 of the 11 analysts. In addition to the deposit rates, Russia could also raise lending rates, including the benchmark refinancing rate. Arguing against such a move is the central bank's stance that it would like to reduce the corridor between its various interest rates as it strives to increase the impact of rate changes while shifting to inflation targeting. On the other hand, by hiking the refinancing rate the central bank could further strengthen its signal to the markets -- that it is concerned about inflation and ready to act. MARKET REACTION: Likely to exacerbate the current trends of firm rouble and rising bond yields. ALL RATES ON HOLD PROBABILITY: Small chance. Expected by 2 of the 11 analysts. January inflation distorted by the seasonal factors, such as annual hikes in tariffs for transport, water and heating. As such, some analysts say the central bank may wish to wait to see to what happens to inflation later in the year. The economy is still looking relatively fragile, and there is concern that higher rates could stifle a nascent recovery in bank lending. / Thomson Reuters

Markets: FIXED INCOME

• Vimpelcom is planning 5-year and 10-year benchmark Eurobond issues, a banking source told Reuters on Monday (24 Jan). The company is guiding investors toward a mid-swaps plus 450 basis points yield. Vimpelcom, which needs funds for a potential takeover bid worth more than $6 bln for Egyptian company Orascom Telecom and Italian group Wind, is due to hold meetings with investors in London and New York this week on the issue, a source said earlier. The company is considering a dollar Eurobond the source said. / Thomson Reuters

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• Akado, a major broadband and cable television provider, has secured a long-term RUB

5.6 bln credit from Sberbank, a bank said on Monday (24 Jan). Akado, majority owned by Russia's tycoon Viktor Vekselberg's Renova Group, will use the loan to balance its credit portfolio, the bank said. Akado, last year valued by local media at $1 bln, including the debt, was considering an IPO in 2011, its second shareholder, Yuri Pripachkin, has said. / Thomson Reuters

• Municipal bond funds suffered a record outflow of cash in the week ended 19 Jan while

U.S. and European equity funds saw inflows as more cash moved off the sidelines, fund-tracker EPFR Global said on Friday (21 Jan). The Cambridge, Massachusetts-based company said municipal bond funds had net redemptions totaling $3.6 bln, in line with data from Lipper, a Thomson Reuters service. "The combination of municipal and state budget woes, with some threats of impending bankruptcy and possible defaults, and a U.S. tax deal extending the Bush-era tax cuts for two years lessening demand for tax-exempt investments such as muni bonds are all weighing on investor minds," EPFR said. Although municipal bond funds suffered, cash moved off the sidelines with $30.4 bln in outflows from money market funds. The outflows from municipal bonds created a drag on the overall U.S. bond fund sector, EPFR said, causing outflows of $2.5 bln. America's $2.8 trln municipal bond market has been battered in the last 10 weeks by rising fears over the hard-pressed finances of state and local governments. In the last few days, however, prices have risen as the tax-free investments attracted non-traditional investors hungry for yields in the 5% range. The latest pricing on AAA-rated 30-year muni bonds was 4.95%, according to Municipal Market Data. A 30-year municipal bond is currently giving investors an extra 8 bps of yield vs a comparable U.S. Treasury. European bond funds, suffering under the weight of the debt crisis, had outflows of $1.1 bln in the latest week. High-yield bond funds had their second highest week of inflows on record, according to EPFR with inflows of $1.26 bln. Emerging market bond funds had modest inflows of $143 mln, all due to inflows into local currency bonds. EQUITIES. Fresh cash moving into all-equity funds hit a five-week high of $10.1 bln, with U.S. equity funds taking in a net $6.9 bln. Developed Europe had $968 mln in inflows. "Nine out of 10 of those dollars going into European stock funds was destined for German equities," said Cameron Brandt, global markets analyst at EPFR, adding that German funds took in a net $895 mln. EMEA funds also had a solid week, taking in $715 mln, the best performance since the second quarter of 2008. "The interest really was there for Russia, which had a weekly record inflow of $724 mln. Russian valuations are pretty reasonable if you factor out the political risk. Russia also offers very direct exposure to the global commodities story," he said. Japan funds had an inflow of $455 mln, their best performance in 41 weeks. China equity funds had modest inflows of $55 mln while greater China funds that include Hong Kong and Taiwan had outflows of $254 mln, their worst week since early in the second quarter of last year. Asia ex-Japan funds took in a net $42 mln. The story was rosy for the so-called BRIC nation funds (Brazil, Russia, India, China), which had outflows for an eighth straight week. Redemptions totaled $82 mln. But frontier market funds continued to attract cash, marking a 34th straight week of inflows by taking in a net $103 mln. In the sector funds, commodities has outflows of $495 mln. / Thomson Reuters

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Markets: STOCKS

Between 21-th January of closing time and 28-th of January at 16.15 MICEX Index was traded around 1743 bps. RTS Index has increased from 1884 to 1902 bps.

Russia's RTS share market index could reach an all-time high this year as commodity prices and Russian GDP grows on the back of strengthening emerging markets worldwide, according to analysts. Emerging markets have gained critical mass in the past 10 to 20 years and will continue to do so the share of the US and Eurozone in the global market will be falling for many years. An unofficial target of 2,500 points for Russia's dollar-traded RTS index in 2011, up 41 percent on last year's close of 1770.28. The highest RTS has ever traded was 2,498.1 points, on May 19, 2008, while a poll of 13 analysts told Reuters in December they expected RTS to end 2011 at 2,100 points. / Thomson Reuters

• Sberbank saw 2010 net profit surge to RUB 183.6 bln under RAS, as the economy's

recovery enabled it to spend less on bad loan provisions. The profit figure, which does not take into account events after the reporting date, was sharply up from the RUB 21.7 bln reported in crisis-hit 2009 and also higher than Sberbank's expectations of around 160 billion roubles for 2010. Money allocated to bad loan provisions fell to RUB 86.6 bln from RUB 387.3 bln in 2009, the state-controlled lender said in a statement on Tuesday (25 Jan). Sberbank's RAS results are seen as a good barometer for its performance to IFRS, results for which be known later. / Thomson Reuters

• Russia should continue its privatisation programme after the end of its current $32 bln

three-year plan, FM Alexei Kudrin said on Monday (24 Jan). "Beyond three years we will continue the privatisation of stakes in state companies," Kudrin said. / Thomson Reuters

• Alfa Bank wants to buy up to 100% of Bank of Moscow and is calling for an open sale

rather than a private disposal to VTB, Vedomosti reported. Alfa Bank has already expressed its intent to buy the city-government-controlled bank to Moscow mayor Sergei Sobyanin, the business daily reported in its Monday (24 Jan) edition. Alfa is willing to take an initial 46.48% stake in the bank and eventually hopes to boost that to 100%. The City of Moscow, short of funds, is looking at various options for selling its Bank of Moscow stake, Sobyanin has said. A closed sale to VTB was

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seen as the most likely option by analysts. Disposal via an open tender would take longer. / Thomson Reuters

• Norilsk Nickel said on Friday (21 Jan) it had increased the size of its share buyback,

aimed at twisting the arm of major shareholder RUSAL into selling up, because of strong demand from investors. Its Corbiere Holdings unit said the world's largest nickel and palladium miner had raised the buyback to 13.9 mln shares, or 7.3%, from 11.9 mln, as bids from 13.1 mln shares had already been submitted. Norilsk management and 25% owner Vladimir Potanin are locked in a row with Oleg Deripaska, whose RUSAL also owns a quarter of the world's biggest nickel and palladium miner. Corbiere Holdings Ltd had initially offered to buy up to 6.2% of shares and American depositary shares (ADS) for $3 bln, in a move analysts said was aimed at further reducing Deripaska's influence. TWISTING ARMS. Deripaska's RUSAL has filed three lawsuits demanding the overturning of some Norilsk board decisions aimed at strengthening rival Potanin's position, including the buyback and the sale of an 8% stake to trading company Trafigura. All three deals were opposed in board votes by Deripaska, who lacks sufficient representation to block major transactions. The buyback is widely seen as a means to force Deripaska, who is at odds with Potanin over the ways to manage the company, to sell RUSAL's stake. Norilsk offered last year to buy RUSAL's stake for an above-market $12 billion, but Deripaska refused to sell, although Norilsk had hinted it could increase its offer. / Thomson Reuters

• Russian coking coal producer KOKS set a price range for its IPO of $6.25-$8 a share, valuing the company at up to $2.6 bln and kick-starting what could be a rush of Russian firms to the stock-market. The Siberia-based company, which is planning to list in both London and Moscow, said on Monday the offering could make up at least 20% of the company's shares, raising an estimated potential $500 mln for the business and its owners. KOKS is one of four Russian firms expected to begin bookbuilding in London this week in a bumper start to the year for the Russian IPO market that could raise a combined $3 bln, over half the total raised in the whole of 2010. KOKS is owned by resources tycoon Boris Zubitskiy and his two sons, who the company said would keep all the proceeds from the sale of their shares in the IPO. KOKS will also issue treasury shares, the cash raised from which will be invested in the company. Bookrunners will have the option of buying additional shares from the founding shareholders to cover over-allotments. / Thomson Reuters

• Rusagro is mulling a second attempt at an IPO as buoyant capital markets prompts a string of private Russian companies to go public, Vedomosti newspaper reported on Monday, citing three banking sources. The agricultural group, which was forced to pull an IPO at a late stage last May due to market volatility, could be looking to raise $400-500 mln, one of the sources said. Two sources said the deal could take place in London. Rusagro could not immediately be reached for comment. Rusagro had been aiming for around $300 mln last year, based on a float of 20% of shares and a estimated valuation of up to $1.55 bln. The company is controlled by lawmaker Vadim Moshkovich. / Thomson Reuters

• Yug Rusi, whose name translates as South Russia, is planning an IPO in London this year, having earlier been unsure of whether to go in 2011 or 2012, the sources said. A spokesman for the group declined to comment. Four private Russian firms have announced plans to list in London already this year and could raise around $2 bln, closing in on half the amount raised by private issuers during the whole of 2010. The farming company was the first in Russia to export vegetable oil and now owns more than 20 agricultural enterprises based in the southern regions of Rostov, Volgograd and Krasnodar. / Thomson Reuters

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Macroeconomic indicators of Russia

ECONOMIC INDICATORS PERIOD LATEST PREV YR AGOGDP Y/Y Q3 +2,7 +5,2 -8,9CPI M/M Dec +1.1 +0.8 +0.4CPI YTD Dec +8.8 +8.1 +8.8PPI M/M Dec +1.0 +4.4 +0.5PPI Y/Y Dec +16.7 +16.0 +13.9Ind output M/M Dec +4.3 +0.1 4.6Ind output Y/Y Dec +6.3 +6.7 +6.9Retail sales Y/Y Dec +3.4 +4.6 -2.9Unemployment (mln) Dec 5.4 5.0 6.2Real disposable income Y/Y Dec +3.3 +2.6 +12.2Real average wage Y/Y Dec +1.3 +3.2 +1.3Nominal average wage (rbls) Dec 26.643 21.599 N/A Capital investment (blnR) Dec 1625.0 957.7 N/ACapital investment Y/Y Dec +8.4 +8.4 -11.9Trade surplus ($bln) Nov +10.9 +10.5 +11.5Exports ($bln) Nov 35.4 35.0 30.9Imports ($bln) Nov 24.5 24.5 19.4Budget balance (bln rbls) Jan-Nov -912.0 -784.0 -1,755.0CBR reserves ($bln) 21-Jan 482.0 477.5 436.0Monetary base (blnR) 27-Dec 5,636 5,531 4,487M2 (blnR) 1-Nov 18,100 17,909 13,875REER rouble Jan-Dec +9.6 +3.1 -5.6Oil output (mln bpd) Dec 10.18 10.25 N/AOil output (mln T) Dec 43.05 41.94 42.49Gazprom gas output (bcm) Dec 49.44 46.50 50.41URALS oil, $/bbl 28-Jan 93.5 90.74 70.15BRENT oil, $/bbl 28-Jan 96.85 93.99 71.15

ANNUAL DATA 2010 2009 2008 2007 2006 2005GDP (pct) n/a -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) n/a 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) n/a 298 326 315 309 298Grain (mln T) 61 97 108 82 79 78Beet Sugar (mln T) n/a 3.3 3.6 3.2 3.2 n/aGold (T) n/a 205 184 163 164 168

GOVT FORECASTS 2010 2011 2012GDP Y/Y (pct) +3.8 (+4.0) +4.2 (+3.4) +3.9 (+3.5)Industry output (pct) +8.3 (+2.7) +4.1 (+3.2) +3.8 (+3.1)CPI Y/Y (pct) 8.3-8.5 (7.0-8.0) 6.0-7.0 (5.5-6.5) 5.0-6.0 (5.5-6.5)Cap. Investment pct +2.9 +8.8 (+7.9) +6.3 (+10.3)Retail Sales pct +4.4 (+3.3) +4.5 (+4.1) +4.8 (+4.1)Exports $ bln 373.4 (357) 383.8 (387) 402.9 (409)Imports $ bln 237.5 (226) 273.7 (253) 304.5 (280)Trade Balance $ bln 135.9 (131) 110.1 (134) 98.4 (129)

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Urals oil, ave., $/bbl 75 (71) 81 (75) 83 (78)Rouble rate/$1 30 (29.1) 29.3 (28.1) 28.4 (27.6)

BALANCE OF PAYMENTS ($bln) Q3 2010 Q2 2010 Q3 2009Current account 60.9 52.2 33.3Cap/fin account -6.7 -2.3 -56.3Net errors/omissions -8.8 -7.2 -2.4Reserve assets -45.4 -42.7 25.4

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] Mine 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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