russia investment summit 2014 russia digs in for...

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Russia digs in for stagnation as Western

sanctions bite

Hit by Western sanctions over Moscow’s position in the Ukrainian crisis, Russia’s already slowing economy has weakened

further. The government has repeatedly reduced its growth forecasts and some analysts say the country is on the brink of recession.

Western companies, banks and investors are in-creasingly reluctant to commit funds to Russia, fear-ful that the United States and European Union may impose more sanctions on the economy, and some Russian companies say they are concerned over fu-ture growth.

With capital flight accelerating and inflation in-

creasing, some say Russia may use its resource wealth to prop up the economy.

But where some see difficulties, President Vladi-mir Putin sees opportunity, saying the situation could boost Russia’s attempts to become more self-sufficient and strengthen ties with its partners in the East.

The Reuters Russia Investment Summit brought together some of Russia’s most influential entrepre-neurs, executives and policy makers to offer a deep insight into the country’s future direction and goals. Covered by Reuters journalists, the summit gener-ated exclusive stories and insights for Reuters clients.

RUSSIA INVESTMENT SUMMIT 2014

St.Basil’s Cathedral

is illuminated during

a rehearsal for the

“Spasskaya Tower”

international military music

festival on Moscow’s Red

Square August 30, 2011.

REUTERS/SERGEI KARPUKHIN

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BY ELIZABETH PIPER AND TIMOTHY HERITAGE

MOSCOW, SEPTEMBER 25, 2014

Russian businessmen are backing Vladimir Putin over Ukraine but fear the country is being forced

down a path toward less democracy, more central control of the economy and isola-tion that recalls the Soviet “evil empire”.

Like many other business leaders, Vladi-mir Potanin, one of Russia’s richest men, says Western sanctions and attempts to force the president to change policy risk opening a rift between Moscow and the West that will be difficult to repair.

“What is happening now, namely the isolation of our country from contacts with Europe, America and several other coun-tries, causes real regret,” Potanin, a metals magnate who built his empire soon after the Soviet Union collapsed in 1991, said in an interview at the Reuters Russia Invest-ment summit.

“Because, in a sense, we are returning to the days when Soviet people were regarded as coming from ‘the evil empire’ and now people are starting to place this cloak on Russians’ shoulders again,” he said, using the phrase coined by former U.S. President Ronald Reagan during the Cold War.

There is broad agreement in business circles that the Western sanctions, imposed on Moscow over its policy on Ukraine, have had the opposite effect to the one intended. Instead of undermining Putin, the sanc-tions have - at least so far - united the busi-ness and political elite.

But there is no hiding the growing alarm over the state of the economy and Russia’s increasing isolation from the West, despite attempts led by Putin to develop business and political ties with Asia and boost do-

mestic industry.Many businessmen say the West has

left Putin little choice but to continue on a path that appears to be steering Russia away from democracy and toward a more nationalized economy with fewer opportu-nities for innovation and growth.

Potanin, now 53 and estimated by Forbes magazine to have a net worth of $14.5 billion, recalls the Soviet Union of his childhood, when he was one of the priv-ileged few to see it from abroad as his father worked for the Foreign Trade Ministry.

“Unlike many of my peers, I had the possibility of comparing, of seeing, and that really helped me. Those childhood impres-sions are still with me - that people in our

country, when it was the Soviet Union, were seen differently; that because of isola-tion, there was an element of mistrust,” he said.

“This kind of external pressure ... con-tributes to consolidation and, on a personal level, is deeply unfair because I don’t think the world will benefit from Russia becom-ing more isolated and I don’t think anyone can seriously believe that putting pressure on Russia in general and on Putin spe-cifically will bring a better result and not a worse one.”

Potanin, the chief executive of Norilsk Nickel, the world’s biggest producer of nickel and palladium, chose his words care-fully, saying he did not want to cast blame on any side.

But he concluded: “Now the country is slowing down in terms of economic devel-opment. Yes we are going through difficult times, but Russians have got used to tight-ening their belts and we will survive this period. But those who leave the market will lose out ... It’s madness,” he said.

UNITYRussia’s economy was already slowing this year when the United States and the Eu-ropean Union started imposing sanctions on leading companies, officials and banks to try to force Moscow to change policy in Ukraine.

But Moscow did not change policy, denied arming separatists in east Ukraine and refused to give up Crimea, annexed in March after the Black Sea peninsula voted in a referendum to leave Ukraine and join Russia.

Now economic growth has stalled and analysts say Russia faces years of stagna-tion, with even a government forecast of

Russian business fears return to isolation during ‘evil empire’

Vladimir Potanin, CEO and co-owner of Norilsk

Nickel, speaks as he attends the Reuters Russia

Investment Summit in Moscow September 23,

2014. REUTERS/MAXIM SHEMETOV

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0.5 percent growth this year being seen as optimistic by some. It’s a far cry from when the country enjoyed annual growth rates of 7 percent at the beginning of the century.

A sweeping ban on imports of dairy, meat, fruit and vegetables from many Western countries, imposed by Moscow in early August in retaliation to sanctions, has prompted food prices to edge higher, threatening inflation which is already at an annual rate of almost eight percent.

But Agriculture Minister Nikolai Fy-odorov said most Russians understood why Moscow had to react and would stand firm.

“There has been and is a consolidation of society, despite the threat of rising prices,” he told the summit.

“People are saying ‘Yes, we understand, prices are rising, but there are sanctions against Russia and we, - I don’t want to say this but I hear it - we are surrounded by enemies.”

Russian media, mostly controlled by the state, has whipped up nationalistic fervor, using references to Russia’s role in winning World War Two and taking on shades of Soviet-era propaganda to show the West as a morally corrupt aggressor.

While more than a quarter of Russians see colonization of their country by for-eigners as the greatest threat to the nation in polls, Putin’s popularity rating has stood at over 80 percent since Russia annexed Crimea.

“Ultimately, the only way out is for one side to back down,” said Fyodorov. “I’m sorry, but this is like a Cold War, and in this Cold War there are no grounds to see someone winning in the foreseeable future.”

CONTINGENCY PLANSAnalysts and businessmen do not see any quick resolution to the crisis, with former Finance Minister Alexei Kudrin predicting Russia would have an “exclusionary regime” for several years.

With little certainty over the future, especially since billionaire Vladimir Yev-

tushenkov, seen as a loyal businessman, was put under house arrest last week on mon-ey-laundering charges over a deal that was made five years ago, businessmen are draft-ing contingency plans for all eventualities.

Some Western investors, who cannot easily quit Russia after starting up joint ven-tures with Russian companies, are adapting their product lines to attract families who may now have less money to spend.

Ted Cannis, CEO of Ford Sollers, a 50-50 joint venture between Ford and Russian carmaker Sollers, said he saw no sign that the auto market would improve in the next two years.

“A person who was going to buy a pre-mium vehicle in the C segment (small fam-ily cars) is now going to buy a cheaper ve-hicle of the same size,” he told the summit.

“We are definitely seeing a lot of that.”Others see possibilities in forging closer

ties with China and other Asian countries, although some warn that after the honey-moon period, the reality of marriage with

Russia’s eastern allies may not be as profit-able as they initially thought.

Many are drawing up several plans based on different estimates of the big “unknown” - how long sanctions will be in place on Russia.

Some businessmen say Yevtushenkov’s arrest shows a state hungry to fill its coffers by reclaiming assets, sold off after the So-viet Union’s collapse, to ride out sanctions.

“What is going now is a one-way ticket. Unfortunately, there is no normal, demo-cratic way out of this situation,” a senior Russian businessman said.

“We will be lucky if this happens to us more or less smoothly. When? In about 10 years. How are we going to move toward democracy? Through pain. The country is too big.”

Additional reporting by Darya Korsunskaya, Jason Bush, Polina Devitt, Lidia Kelly, Maria Kiselyova, Anastasia Teterevleva, Gleb Stolyarov, Editing by Janet McBride

A September 12, 1990 file photo shows former U.S. President Ronald Reagan holding a hammer and

chisel next to the Berlin Wall on Poltsdammer Platz in East Berlin.

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BY DARYA KORSUNSKAYA AND LIDIA KELLY


Russia’s newly approved budget rests on optimistic GDP forecasts as well as high oil prices, forcing the

government to work hard to meet its pro-jected growth rates, Finance Minister An-ton Siluanov said.

The 2015-2017 budget, Russia’s tight-est since the global financial crisis and its first since the Ukraine crisis erupted, was approved last week. It forecasts gross do-mestic product growth of 1.2 percent next year, and 2.3 percent and 3 percent in the following years.

“There are risks to economic growth rates. It is a rather optimist forecast; there are risks to oil price,” Siluanov told the Re-uters Russia Investment Summit.

“Without a doubt, this and the next year we will have to try very hard to ensure the planned growth rates.”

Russia’s economy has slowed sharply this year, partly due to large flows of capital out of the country and the trade and finan-cial sanctions imposed by the United States and European Union in response to Mos-cow’s role in Ukraine.

Delivery of the budget presents the greatest challenge for 51-year-old Siluanov since he replaced Alexei Kudrin, a veteran fiscal hawk popular with investors, three years ago.

It also tasks the government of President Vladimir Putin with leading the country prudently through the crisis, ignoring calls for more state spending to stimulate an economy that may grow by 0.5 percent at most this year.

“We are preparing and working on dif-ferent scenario options, including a worst-

case scenario,” Siluanov said.

TIGHTENING THE BELTThe West imposed sanctions in retaliation for Russia’s annexation of Crimea in March following the fall of a pro-Moscow Ukrai-nian president and later tightened them to target the financial, oil and defense sectors. Russia has taken counter-measures, includ-ing a ban on many U.S. and EU food im-ports.

The 1.2 percent growth forecast for next year is based on the assumption that the sanctions will slowly start to ease. Kudrin said this week that Russia would flirt with recession next year.

Risks to the budget also come from un-certainty over crude prices as oil and gas provide about half the government’s rev-enues. Many economists see benchmark Brent crude, which usually trades at a slight

premium to Urals URL-E - Russia’s chief blend - at $90 per barrel by the end of next year.

“Today, crude trades already at $92-$93,” Siluanov said. “And we balanced our budget at a price of $100 per barrel.”

Urals traded at around $93.80 per barrel on Friday.

The government may also find it hard to raise debt, which is needed to ensure the deficit keeps to a planned 0.5 percent of GDP. The Finance Ministry wants to bor-row $7 billion abroad next year and 1.1 tril-lion rubles ($28.8 billion) at home.

The domestic sum is twice this year’s planned amount, which the ministry is al-ready struggling to fulfil. “1.1 trillion rubles is a very big amount,” Siluanov said, but would not comment on Russia’s ability to borrow abroad, saying only that his minis-try would “monitor the situation”.

Russia needs to work hard to meet tight budget: finance minister

Russia’s Finance Minister Anton Siluanov speaks during the Reuters Russia Investment Summit in

Moscow September 24, 2014. REUTERS/MAXIM SHEMETOV

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The key to ensure implementation of the budget, he said, was to control spending and under no circumstances overdo stimulus.

“We have to start living in a new para-digm, move toward a new understanding of the economic situation,” he said. “We need to shrink, we need to build an economic model based on a new macroeconomic situation.”

The Economy Ministry has called on the Central Bank to lower borrowing costs and on the Finance Ministry to boost spending, but Siluanov said both the government and the ministry supported the Central Bank’s tight monetary policy.

“We need a hard-line approach toward budget and monetary policies,” he said. “As soon as the central bank lowers rates in this situation, or budget spending increases, this will negatively affect the balance of pay-ments.”

This, he added, could lead to a further weakening of the rouble and send inflation up. Consumer price inflation has already overshot all forecasts, and is expected to climb well above 7 percent this year. “And

that means again high rates, and off we go again,” Siluanov said.

There are risks that revenues will fall short. “We would not want to raise taxes,” Siluanov said. “This is an extreme measure, which we do not envisage implementing.”

Instead, he said, his ministry might do what many economists fear: tap into one of its oil windfall revenue funds, the Reserve Fund. Set up with the goal of covering bud-get shortfalls, this fund stood at nearly $92 billion on Sept. 1.

The 2015-2017 budget allows for use of up to 500 billion rubles from the Fund next year. On Wednesday the World Bank urged prudence in spending cash from the Reserve Fund and its sister, the National Wealth Fund.

“In the early stages, we would definitely use the Reserve Fund (rather than raise taxes),” Siluanov said.

He added that Russia needed a current account surplus of about 4 percent of GDP to make up for capital outflows, which are likely to exceed $100 billion this year. The current account surplus is projected at

around 3 percent of GDP in 2014.“In times of sanctions, it is necessary

to have a strong balance of payments and a strong budget so as not to allow external factors, such as oil price, sales volumes of crude and crude products, to hinder our ob-ligations,” he said.

Sanctions and counter-sanctions threat-en the broad global economy, he said. This could mean the goal, set by the Group of 20 leading nations, to boost growth by 2 per-cent above what’s planned for the next five years, will not be achieved.

“It will not happen if we keep on intro-ducing mutual restrictions or sanctions,” he said. “Restricting trade has a negative effect on investment, both in Russia and in other countries. Therefore, it is certainly a bad tool for solving problems. Political issues must be resolved through negotiations.”

Additional reporting by Timothy Heritage, Elizabeth Piper, Alexander Winning, Jason Bush, Elena Orekhova, Oksana Kobzeva and Katya Golubkova; Writing by Lidia Kelly, editing by Elizabeth Piper and David Stamp

People walk along a street past a board showing currency exchange rates in Moscow, September 29, 2014. REUTERS/MAXIM SHEMETOV

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BY OKSANA KOBZEVA AND JASON BUSH


Russia’s central bank can achieve low inflation despite economic shocks from the Ukraine crisis, the bank’s

Deputy Governor Ksenia Yudayeva told Reuters on Wednesday.

She was cautious about economic growth, though, arguing that low growth was a serious structural problem facing the country which monetary policy was largely powerless to solve. The best the bank could do to help, she said, was to boost the con-fidence of long-term savers by bringing in-flation under control.

Yudayeva, the bank’s head of monetary policy, said the bank could reduce inflation to 4 percent by 2016-17, despite a spike this year which has pushed it well above target.

“The inflationary shocks that we have this year have a temporary character,” she told the Reuters Russia Investment Summit.

Inflation is running just below 8 percent, well above the bank’s 5 percent target for this year, partly as a result of an embargo on many food imports in retaliation for Western sanctions over Russia’s policies in Ukraine.

Prices have also picked up as a result of a weaker rouble, but Yudayeva believed the market was underestimating the currency’s worth. “Now the exchange rate is obviously undervalued,” she said.

Although rising prices largely reflect factors outside the bank’s control, Yudayeva said that the failure to hit the target for a second year running reflected badly on policymakers.

“A significant challenge for us now is definitely the lack of a reputation of a cen-tral bank which is able to meet targets,” she

said. “This is a problem of Russia: society is continually afraid that inflation will get out of control.”

Yudayeva said it was uncertain whether the bank would hit next year’s inflation tar-get of 4.5 percent, with much depending on how long Western sanctions on Russia remain in place.

But the outlook was clearer for subse-quent years, when the bank aims to reduce inflation to 4 percent.

“If we look at inflation in 2016-17 con-sidering the factors we’re talking about now, the situation is a lot clearer,” she said. “Now, according to our forecasts, we can undoubt-edly meet our medium-term goals.”

DOVISH SHIFT?Faced with bouts of currency market tur-moil as a result of the Ukraine crisis, the bank has raised interest rates three times this year, leading to criticism that it is be-

ing too aggressive in its determination to reduce inflation.

But the central bank left rates on hold this month even though inflation remained above target, leading some analysts to de-tect a “dovish” shift in its policy.

Yudayeva, however, said that the bank’s basic philosophy and objectives had not changed.

“The central challenge now is not to lose control of inflation, to prove that it is under control,” she said.

By reassuring long-term investors, low inflation would help boost long-term sav-ings, creating domestic sources of capital that would reduce Russia’s excessive reli-ance on external financial markets, she said.

She rejected criticisms - including from within the Russian government - that the bank should be supporting economic growth by softening its monetary policy.

“Our view is that the falling economic growth that we now see has a structural character,” she said, citing factors such as demographic trends, a weak investment climate, and a rising debt burden on house-holds and companies.

“If (structural problems) aren’t solved, softening monetary policy will lead not to faster economic growth, but inflation.”

Still, the economic growth crunch was the biggest problem for Russia and a major concern for the central bank, she said.

“The fact that the central bank can’t deal with it through monetary policy doesn’t mean that we aren’t worried about this problem, and it deserves serious attention,” she said.

FINANCIAL SHOCKSDespite setbacks in its fight against infla-tion, the central bank has gained kudos

Russia still on track to achieve low inflation: central banker

Ksenia Yudayeva, first deputy chairwoman of

the Central Bank of Russia, takes part in the

Reuters Russia Investment Summit in Moscow

September 23, 2013. REUTERS/SERGEI KARPUKHIN

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from markets and analysts for its ability to weather financial shocks caused by the Ukraine crisis.

The World Bank commended the cen-tral bank on Wednesday for shifting its policy to inflation targeting from next year.

Yudayeva said that steps to allow the rouble to float were back on track, after seri-ous currency market jitters earlier in the year, which led many analysts to expect a delay.

Last month, markets reacted calmly when the central bank abolished currency market interventions until the rouble is at the edge of its corridor against a dollar-euro basket. The corridor will be scrapped altogether by the start of next year.

“We think we have acquired definite experience,” Yudayeva said. “We will act in a way that there won’t be a substantial in-fluence on the market, as with the changes to the (intervention) parameters that took place this summer.”

The relative market calm contrasts with the situation in March, when the central bank introduced temporary emergency measures enabling it to intervene heavily to defend the rouble, preventing more serious financial fall-out.

More recently, too, the bank has re-sponded flexibly to market conditions, with an innovative forex swap facility to meet a shortage of dollars.

Despite its new hands-off role in the currency markets, the bank stands ready to adopt similar tailor-made measures in fu-ture, Yudayeva said.

“If we see definite tendencies, definite in-dicators, showing that problems are forming on markets that could potentially destabilize them, then the central bank will discuss pre-cisely what measures are necessary for secur-ing financial stability,” she said.

Additional reporting by Timothy Heritage, Lidia Kelly, Elena Orekhova, Alexander Winning, Darya Korsunskaya, Katya Golubkova and Dmitry Antonov; Editing by Elizabeth Piper and Susan Fenton

BY ANASTASIA LYRCHIKOVA AND

VLADIMIR SOLDATKIN


Gazprom Energoholding, the util-ity unit of Russia’s top natural gas producer Gazprom (GAZP.MM),

is planning an initial public offering of its shares in 2016, when foreign capital mar-kets may become more open to Russian firms, its director general said.

Russian companies have virtually stopped selling share capital in the form of IPOs as investors shy away from their as-sets due to the deepest West-East rift since the end of the Cold War over Moscow’s role in the Ukraine conflict.

Denis Fyodorov said the company’s Western suppliers were “shocked” because of sanctions over Ukraine and would suffer more from the punitive measures forcing them out of the Russian market than the Russian companies they serviced.

“As for the IPO, we’d like to carry it out in 2016. It would most likely be an IPO, not a sale to a strategic partner, though we do not rule out this option either,” he said in an interview at the Reuters Russia In-vestment Summit.

The company could sell new shares dur-ing the IPO, he said.

Gazprom Energoholding manages power generator OGK-2 (OGKB.MM), power company TGK-1 (TGKA.MM) and power generator Mosenergo (MSNG.MM). It accounts for 17 percent of Russia’s total electricity power capacity.

Fyodorov said the company could sell between 5 and 10 percent of its shares.

“It’s obvious that a big stake (sale) would lead to a price decline,” he said, adding that it was only a proposal, which would need to

be backed by Gazprom.He also ruled out the possibility of

merging Gazprom Energoholding’s assets in order to consolidate its business and op-timize governance as it would require the approval of all the stakeholders, including Finland’s top utility, state-controlled For-tum (FUM1V.HE), which owns 25.7 per-cent of TGK-1.

“Transition to a unified share is too expensive ... We would have to hold talks with TGK-1, Finnish investors, and the Moscow government in Mosenergo,” Fy-odorov said. The Moscow government is a shareholder in Mosenergo.

By announcing the IPO plans, Gazprom Energoholding is following in the foot-steps of Russia’s largest steelmaker Evraz (EVRE.L), which said last week it was considering an IPO of its North American assets, a rare move by a Russian company to raise funds in the United States after Washington imposed sanctions on Mos-cow over Ukraine.

Fyodorov said Western companies pro-ducing utility equipment, which have been operating in Russia and will have to leave the local market because of the sanctions, would “lose the market”.

“And it will be extremely difficult for them to return,” he said, adding that the company was trying to forge close ties with utility equipment makers in Asia instead of traditional partners in the United States and Europe.

Additional reporting by Timothy Heritage, Alessandra Prentice and Gleb Stolyarov Editing by Elizabeth Piper and Susan Fenton

Russia’s Gazprom utility unit plans IPO in 2016

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BY DARYA KORSUNSKAYA AND JASON BUSH


Russia faces years of stagnation be-cause of the Ukraine crisis and is ducking decisions needed to

achieve a new economic model, former finance minister Alexei Kudrin told the Reuters Russia Investment Summit on Monday.

Kudrin, a long-time ally of Russian President Vladimir Putin, is one of the weightiest figures questioning government policy at a time when Russia is feeling the economic chill from confrontation with the West over Ukraine.

A leading ‘liberal’, he shepherded Rus-

sia’s finances for over a decade before re-signing in 2011 in a row over rising govern-ment spending.

“There will be stagnation, like now. There could be recession. We will be balancing on the edge of recession all the time,” he said, adding there would need to be a “renewal” of the government to achieve change.

Even if Western sanctions were not in-tensified further, he said, economic growth would be 1 percent lower than it would have been for at least three years. Russia also faces isolation from global market in-stitutions for a similar length of time.

His predictions, which contrast with more optimistic official forecasts, will be sobering for investors hoping that the end

of a conflict in eastern Ukraine would also mean an easing of Russia’s economic prob-lems.

Kudrin told the Reuters Summit that depressed economic growth will be exac-erbated by isolation from global markets. He expected that it would be years before Russia was able to borrow again on global financial markets. “I think that two to three years - this is the minimal time,” he said.

Another case in point is Russia’s attitude to the World Trade Organization, which it joined in 2012, prompting hopes of eco-nomic liberalization. “Russia in essence will temporarily not observe the rules of the WTO,” he said.

“I’m afraid that we’ll have an exclusion-

Graffiti depicting Russian President Vladimir Putin (R) extending a hand to the Ukrainian people is seen on a wall in the Crimean city of Simferopol

March 28, 2014. REUTERS/SHAMIL ZHUMATOV

Russia’s former finance minister Kudrin warns of years of stagnation

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ary regime for more than one year. I think it will happen for several years and it will be difficult to return.”

FAILED MODELAlthough the Ukraine-related sanctions are set to weigh heavily, Kudrin said they were not the major reason why Russian economic growth was now stalling.

“Today the decline of Russian economic growth is not so much the result of sanc-tions as of the lack of reform of the eco-nomic system, at a time when the oil price is not rising but falling. We need another economic model,” he said.

Whereas the oil price rose steadily dur-ing the previous decade, the price has now peaked and is likely to keep falling over the years ahead, Kudrin predicted.

One result, he warned, is that within three or four years Russia would see a fall in its oil-and-gas tax revenues equivalent to around 1.5-2 percent of economic output ($30-40 billion) per annum.

To compensate for these trends, Russia needs to develop new oil-and-gas resources in the Arctic and Far East as quickly as possible, he said. But Western sanctions mean that the process will be slower and more difficult than otherwise, restricting Russian oil companies’ access to needed Western technologies.

Kudrin said that while it was correct to involve Asian partners, they were so far an inferior substitute for Western oil com-panies which possessed the most relevant technologies.

More generally, developing economic ties with Asian countries could only go so far in substituting for relations with the West. China, he said, was weak at innova-tion and lacked many sectors important to Russia.

“We could make a mistake if we only see a Chinese (policy) vector,” he said. “We need to understand that for at least 20-30 years we will continue to receive basic tech-nologies from the West.”

NEW MODELTo create a new economic model, Kudrin reiterated his calls for liberalizing economic reforms, which he said also required a “re-newal” of the government.

Failure to introduce long-discussed reforms was a sign that the government lacked both political will, and people capa-ble of introducing reforms, Kudrin argued.

As an example of what was needed, he said that around 6 percent of gross domes-tic product spent on subsidies should be redirected to areas such as infrastructure investment.

The government also needed to break generous spending promises - known as the “May decrees” - made by Putin after his 2012 election.

“The decrees need to be corrected, be-cause we’re in a special situation,” he said. “The economy can’t stagnate and policy continue as if nothing had changed.”

Instead of facing up to the new realities, a three-year budget approved this month lacked needed reform measures, showing that

the government was ducking hard decisions.“On key matters the government hasn’t

taken decisions, and that’s worrying,” he said.

Kudrin said that, despite the repercus-sions of the Ukraine crisis, he was confident Putin was committed to economic reform in the long term, with no desire to turn Russia into a closed economy.

“But the sequence of events has made it necessary for the time being to carry out in some areas a temporary form of isolation or distancing,” he added.

Describing the political and business elite as “extremely troubled”, he said: “They think that yes, perhaps in these circum-stances one needs to act the way Putin acts. But we don’t understand what will happen in terms of developing our society and the Russian economy in the coming years.”

Additional reporting by Timothy Heritage, Elizabeth Piper, Alexei Kalmykov, Oksana Kobzeva, and Lidia Kelly, editing by Elizabeth Piper and Ruth Pitchford

Russia’s former Finance Minister Alexei Kudrin attends the Reuters Russia Investment Summit in

Moscow September 22, 2014.REUTERS/SERGEI KARPUKHIN

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BY DARYA KORSUNSKAYA AND

THOMAS GROVE

MOSCOW THU SEPTEMBER 25, 2014

Six months after Crimea voted to be-come part of Russia, elation could give way to discontent over prob-

lems such as power and water shortages, the government official responsible for the region said.

“Euphoria cannot be eternal,” Crimean Affairs Minister Oleg Savelyev said in an interview at the Reuters Russia Investment Summit.

Moscow’s annexation of Crimea from Ukraine in March, days after a referendum that backed joining Russia, stirred patri-otic fervor on the Black Sea peninsula and across Russia, sending President Vladimir Putin’s ratings soaring.

The Russian government has promised additional funds to help the region and is trying to build utility and transport lifelines with the peninsula before winter sets in. Ukraine and the West say the annexation is illegal and imposed sanctions on Moscow.

Savelyev acknowledged the Russian government faced a tough task, with prob-lems exacerbated by the sanctions and by a lack of shared infrastructure with Russia.

“In the next few months, we will see the first wave of tension over problems that are still not resolved,” Savelyev said at the sum-mit, held in the Reuters office in Moscow.

Russia is trying to cushion the blow from Western sanctions by seeking new business in Asia and hopes to woo Asian investors to Crimea, which has a popula-tion of more than 2 million.

Projects in which Russia hopes to secure Asian investment include agriculture and power generation, and some were discussed

when Putin met Chinese President Xi Jin-ping in Shanghai in May and completed an accord on natural gas supplies.

“(Cooperation) was confirmed during the president’s trip to Shanghai and work is still being carried out,” Savelyev said of the discussions on Crimea, giving few details.

He said Russia planned to turn Crimea and the Black Sea into an alternative to shipping hubs on the Baltic Sea for Asian companies sending goods to Europe.

“Variants are being worked out that would develop port infrastructure to take into account the transit of Asian cargo - because shipping from Asia, not through the Baltic, but through the Black Sea, may be advantageous for Asia,” he said.

PRESSURE ON BUSINESSESSavelyev, who has worked in the United States, was included on a sanctions list that bars his entry to the country.

He played down the sanctions on him personally but said Western sanctions, which had limited deliveries of equipment needed for Crimea’s energy sector, were a problem because they appeared designed to bring down living standards.

“The position of the governments (in-volved in sanctions) is directed at trampling people back into the stone age - so that no one under threat of punishment is brave enough to invest in Crimea,” he said.

The United States and the European Union have imposed several rounds of sanctions on Russia over its role in Crimea and in mainly Russian-speaking eastern Ukraine, where the West accuses Russia of directly backing separatists.

Moscow denies this and says it could not ignore the referendum in which Crimea voted to rejoin Russia, 70 years after former

Soviet leader Nikita Khrushchev gifted it to Ukraine, then still part of the Soviet Union.

Savelyev said the sanctions have scared away some businessmen although others, from Finland, Sweden and Switzerland, had traveled to Crimea to explore oppor-tunities.

In some case, he said U.S. authorities were pressuring European partners not to work in Crimea, including officials from an unnamed Italian firm who he said had de-layed a trip to Crimea earlier this year.

This, he suggested, followed pressure from the U.S. embassy in Italy.

Savelyev also said Russia planned to boost troop numbers in Crimea, home to its Black Sea Fleet, by establishing a base in the Southern Military District at Novoros-siysk in addition to the one it already has in the port city of Sevastopol.

Vice Admiral Alexander Vitko, the commander of the fleet, said on Tuesday Russia planned to increase its Black Sea fleet with more than 80 new warships by 2020.

Writing by by Thomas Grove, Editing by Timothy Heritage and John Stonestreet

After euphoria, Russia may face discontent in Crimea

http://www.reuters.com/video

http://www.reuters.com/summits

11


BY SVETLANA BURMISTROVA AND

OLESYA ASTAKHOVA


Russian pipemakers are benefiting from the standoff between Rus-sia and the West, receiving multi-

billion-rouble orders as work on new pipe-lines to Europe and Asia is fast-tracked, the owner of trading firm PIT told Reuters.

Gazprom (GAZP.MM) has acceler-ated work on the South Stream natural gas pipeline, which will carry gas to Europe by-passing crisis-hit Ukraine, while work has begun on the “Power of Siberia” pipeline to China - the result of Russia’s pivot toward Asia as relations with the West have cooled.

Russian steel pipe producers including Severstal (CHMF.MM) and ChelPipe (CHEP.MM), which together spent around $12 billion on new capacity in 2000-2012, now stand to reap the reward at a time many other firms are struggling with a tough business climate and an economy at near-standstill.

“This is the only industry that is on the rise. We see a sharp increase in supplies in 2015 and 2016. Profit will rise ... Indirectly, this is a result of the sanctions,” Pipe Innova-tion Technologies’ (PIT) Ivan Shabalov told the Reuters Russia Investment Summit.

Shabalov said demand from Gazprom for large-diameter pipe (LDP) would be 1.2 million tonnes this year, while in 2015-16 this would grow to 2 million tonnes per year - good news for the pipemakers, whose LDP capacity has been underutilised at about 36 percent this year.

South Stream, which will cost an es-timated $40 billion, is designed to carry Russian gas to the center of Europe. The project has yet to be approved by the Euro-

pean Union, which is trying to become less dependent on Russian gas, but the Russian side is confident it will go ahead.

“It (the project) has been frozen because of politics, but at the moment Europe does not have viable alternatives,” Shabalov said.

Around half of Russian gas exports to Europe flow via Ukraine, and months of conflict and a fragile ceasefire have spurred work on gas projects such as South Stream, whose routes to Europe bypass the country.

While Shabalov did not discuss the value of potential deals, in July a tender for pipe sup-plies to one stretch of the Southern Corridor link to South Stream was worth $1 billion.

Following Russia’s annexation of Ukraine’s Crimea in March and Western sanctions in response, Moscow embarked on a strategic shift toward Asia, signing trade and business agreements, including a 30-year gas supply deal with China.

Construction of the giant “Power of Si-beria” pipeline, which will start shipping $400 billion worth of gas to China by 2019, began in September, and only Russian firms are likely to participate, Shabalov said.

“Foreign suppliers will not be involved in the Power of Siberia,” he said, adding that ChelPipe would have a logistical ad-vantage over other Russian firms in supply

terms. ChelPipe’s production is particularly focused on LDP.

Infrastructure spending on the project is expected to be over 770 billion rubles ($20 billion).

BAD ATMOSPHEREWhile a boon to Russian pipemakers, worsening relations between Russia and the West are not good news for business in general, Shabalov said.

“I don’t believe those people who talk about the sanctions’ positive effect on inter-nal development. If someone can only grow under sanctions, it’s not good. There’s a bad atmosphere,” he said.

“Taxes are changing, credit provision and state bank support are being discussed, tariff policies are being revised. We’ve crossed into a period of instability. Compa-nies do not know what to budget for next year. In business you need to be able to look ahead and at the moment nobody knows what tomorrow will bring.”

As credit conditions worsen, pipemakers are optimizing costs and building contin-gency plans in case further sanctions im-pact their supply chain, Shabalov said.

“There are many ways to avoid sanctions, for example by buying the same items, but in different countries. Of course this leads to a certain increase in costs and possible questions about quality,” he said.

Russia’s top steel pipemakers are TMK (TRMK.MM), United Metallurgical Company (OMK) [METKSV.UL], Sev-erstal and ChelPipe.

Additional reporting by Timothy Heritage and Alessandra Prentice; Writing by Alessandra Prentice; Editing by Elizabeth Piper and Mark Potter

Russian pipemakers find silver lining in standoff with West

Ivan Shabalov, CEO and owner of Pipe Innovation

Technologies. REUTERS/MAXIM SHEMETOV

12


BY POLINA DEVITT


Russia, one of the world’s larg-est wheat exporters, will use only state purchases of grain from the

domestic market if it needs to regulate its market, Agriculture Minister Nikolai Fy-odorov said on Wednesday.

A grain export ban, with which Russia shocked markets in 2010 when drought ravaged its harvest, is now seen as an “abso-lutely unacceptable” instrument for market regulation, Fyodorov said at a summit held at the Reuters office in Moscow.

“Russia’s reputation as a reliable trade partner is seen among two (other) values: maintaining market balance and ensuring price acceptability,” the minister said.

“That’s why ... we will use civilised in-struments of influence,” Fyodorov said in his first major interview to foreign media since his appointment two years ago.

Russia is harvesting its largest grain crop in six years and the second largest crop in its post-Soviet history, amid worsening relations with Western countries, which sanctioned it for the Kremlin’s role in the Ukraine’ crisis.

To protect its economy, in early August Moscow reacted with a one-year ban on most food imports, worth about $9 bil-lion, from the European Union, the United States, Canada, Australia and Norway, in its strongest response to sanctions so far.

Fyodorov said in an interview at the Re-uters Russia Investment Summit that the food ban was a forced measure after West-ern sanctions had been imposed on some of Russia’s banks - key creditors of the agri-culture sector.

“It was an indirect hit on our agriculture

development programme, on how our cred-it organisations will return and prolongate 1.8 trillion roubles ($47 billion of debt from the sector),” the minister said.

Russia imposed the ban on all meat, fish, dairy, fruit and vegetable imports, but the list of banned countries and products can be changed if tensions ease, he said.

“In the president’s order (about the food ban) it said that all this (list) can be reviewed ... depending on how trade and political relations with these countries de-velop,” Fyodorov said. “We are ready to re-turn to this decision review ... as soon as a signal comes from our partners who started this sanctioning activity.”

The ministry currently sees the 2014/15

grain crop at more than 100 million tonnes of grains, including at least 56 million tonnes of wheat, Fyodorov said.

The country will have a 2014/15 export-able surplus of 27 million to 30 million tonnes of grains, of which wheat is likely to account for 70 percent, if the crop exceeds 100 million tonnes, he said.

Russia had already harvested 92.4 mil-lion tonnes of grains before cleaning and exported 9.9 million tonnes of grains since the start of the 2014/15 marketing year on July 1. The ministry plans to start its in-terventions, purchases from the domestic market, on Sept. 30.

In late August, the Agriculture Ministry said in a letter to Prime Minister Dmitry Medvedev that export restrictions could be an option if exports exceeded 26.9 million tonnes of grain out of the expected crop of 100 million tonnes this year.

However, officials said the government was not considering an export ban and the letter only included a list of options related to monitoring the grain market situation, not proposals.

Fyodorov added that Russia, which is turning east after the Western sanctions, was considering two joint projects with China: to build a railway grain terminal and to build an agro-industrial complex.

Discussions on both projects are at an early stage, the minister said.

Additional reporting by Timothy Heritage, Olga Sichkar and Gleb Stolyarov; Editing by Elizabeth Piper and Dale Hudson, Larry King

Russia’s reputation as reliable trade partner is a key value: minister

Russian Agriculture Minister Nikolai Fyodorov

speaks as he attends the Reuters Russia

Investment Summit in Moscow, September 24,

2014. REUTERS/MAXIM SHEMETOV

Follow Reuters Summits on Twitter: @reuters_summits

13


BY DARYA KORSUNSKAYA AND

OKSANA KOBZEVA


Russia’s Finance Ministry may sup-port leading banks, including those under Western sanctions, with

some of the profits of the central bank next year, as well as by other means, Finance Minister Anton Siluanov said.

Sanctions imposed by the United States and the European Union over Moscow’s role in the Ukraine crisis have cut off Rus-sia’s largest banks such as Sberbank (SBER.MM), VTB (VTBR.MM), VEB, Gaz-prombank and Rosselkhozbank from me-dium and long-term Western financing.

The state has allowed some of the banks to convert subordinated loans issued in 2008-09 into equity to boost their capital, strengthening their ability to withstand growing loan-loss provisions and to issue new loans.

“The central bank will get higher profit this year, and accordingly more will be transferred to us (into the budget),” Silu-anov told the Reuters Russia Investment Summit.

“And we will be ready to send the amount above planned levels to support key banks, including those hit by sanctions.”

Siluanov did not give a figure, but Econ-omy Minister Alexei Ulyukayev said last week the central bank may get about 300 billion rubles ($8 billion) more profit than planned.

The government has already said it will spend 239 billion rubles from the National Wealth Fund (NWF), which collects oil revenues, to buy preferred shares from VTB and Rosselkhozbank to boost their capital.

VEB, the state development bank, had

hoped to have its capital boosted by 100 billion rubles each year until 2020, but its chairman Vladimir Dmitriev said on Thursday the bank would get only 30 bil-lion next year.

Siluanov said that amount would come from the budget special reserves pool, set up for next year.

He added that the Finance Ministry may start investing its fiscal reserves, held in the Reserve Fund and the National Wealth Fund, in assets issued by the BRICS coun-tries, a group of emerging economies com-prising Brazil, India, China and South Af-rica, as well as Russia.

Russia will most likely invest in Bra-zilian assets and Eurobonds issued under

English law to “diversify risks”, he said. “Of course, these are more high-margin but also riskier tools, so it could be done to diversify risk. I don’t think there would be large vol-umes ... There is no decision yet,” he said.

As of Sept. 1, the Reserve Fund stood at $91.7 billion and the National Wealth Fund at $85.3 billion.

The Reserve Fund, according to its cur-rent requirements, can be invested in the U.S. dollar, euro and the pound sterling as well as debt securities of a small group of Western countries and a few international institutions.

The National Wealth Fund has a riskier investment strategy, which includes spend-ing parts of it on domestic infrastructure projects and supporting companies hit by sanctions.

Siluanov added that gas producer No-vatek (NVTK.MM), which is subject to the sanctions, had asked for help from the National Wealth Fund of up to 150 billion rubles.

“But we think it (the support) could be less,” Siluanov said. Under the proposed scheme, sanctions-hit firms would issue bonds to be bought by NWF.

He added he had no information on whether the state oil company Rosneft (ROSN.MM), also under sanctions, had officially asked for help from the National Wealth Fund. Follow Reuters Summits on Twitter @Reuters_Summits

Additional reporting by Lidia Kelly, Elizabeth Piper, Timothy Heritage, Jason Bush, Alexander Winning, Elena Orekhova, Dmitri Antonov, Olga Sichkar and Katya Golubkova; writing by Katya Golubkova, Editing by Elizabeth Piper and David Stamp

Russian banks may get state help from central bank profits: finance minister

Russia’s Finance Minister Anton Siluanov attends

the Reuters Russia Investment Summit in

Moscow September 24, 2014. REUTERS/MAXIM

SHEMETOV

14


BY GLEB STOLYAROV AND MARIA KISELYOVA


Russia’s auto market shows no signs of improving in the next two years having been hit by an economic

slowdown and weak rouble, the head of Ford Motor Co’s (F.N) Russian venture told Reuters.

Sanctions over Ukraine have hurt the

Russian economy, hitting car sales to a growing middle class while imported car parts have become more expensive.

“There is no sign that things will rapidly improve in the next two years,” said Ted Cannis, CEO of Ford Sollers, a 50-50 joint venture between Ford and Russian carmak-er Sollers (SVAV.MM).

“To improve the car business, we need interest rates to come down, we would need

more certainty in the business climate and the customer climate,” Cannis said in an interview at the Reuters Russia Investment Summit.

Russia had been expected to overtake Germany as Europe’s biggest auto market earlier this decade, but its progress has been delayed. Car sales have fallen rapidly this year to be down 26 percent year-on-year in August.

Russian car industry facing lackluster two years: Ford’s Russian venture

A 2015 Ford Mustang is on display during the Moscow International Automobile Salon in Krasnogorsk outside Moscow, August 27, 2014.

REUTERS/SERGEI KARPUKHIN

15


There were 1.58 million new passenger cars sold in Russia between January and August 2014, according to the Automobile Manufacturers Committee of the Asso-ciation of the European Businesses. In the same period 2.02 million passenger cars were registered in Germany, according to the European Automobile Manufacturers Association.

The Russian government said late last month it would earmark 10 billion roubles ($260 million) to fund incentives for new vehicle purchases until the end of the year - a measure Cannis said was certainly helpful but short-lived.

“Clearly the budgeting process is a chal-lenging one for the government, trying to integrate different demands. But if there isn’t additional action (to support the car industry) after 2014, there will be an imme-diate and very significant downturn in the first six months of next year,” Cannis said.

“In our business the key is a horizon – I need policies with at least 12 months - and that’s for production. For investments in the car business – three to five years. It’s horizon that is important, something fixed so I know what to tell my shareholders and my investors,” Cannis said.

On top of that, Western sanctions mean a lot of downward pressure and huge amounts of uncertainty, he said at the sum-mit, held at the Reuters office in Moscow.

“Uncertainty in a car business is a big problem - people don’t make big purchases when they are uncertain about the future ... The car business is a long business with long pipelines and long investment deci-sions where continuity and visibility are key,” Cannis added.

ADJUSTING SUPPLYFord Sollers, formed in late 2011, an-nounced in April the layoff of 700 staff - around 13 percent of total headcount - and reduced working hours at all three Russia plants.

In August, Ford’s sales in Russia were

down 57 percent year-on-year, one of the deepest falls among all brands, which Can-nis attributed to its focus on the C segment - small family cars - where demand has shrunk more than other types of vehicles.

“A person who was going to buy a pre-mium vehicle in the C segment is now go-ing to buy a cheaper vehicle of the same size. We are definitely seeing a lot of that. And an exchange rate impact - we do im-port a lot of materials from Europe for Fo-cus and the cost of materials has been dif-ficult for us,” he said.

Cannis said the company had shifted some of its sourcing of steel and plastics to local producers to offset the impact of the weaker rouble and would localize more production next year, both on the raw ma-terials and components side.

It is also adjusting its range of models for the market, launching production of a small SUV (Sport Utility Vehicle) Ford EcoSport this year and a small hatchback Ford Fiesta next year “to address some of this demand for more affordable vehicles”.

“We think we have the right set of ve-hicles now and we are not changing our plans, which we have just reconfirmed again with the shareholders. We think we have exactly the right plan and will be in-creasing production, assuming the industry does not deteriorate more,” he said.

He added the company had no plans to lay off any more staff.

WINNERS AND SURVIVORSCannis said he did not expect Russia to take any retaliatory measures against the West, that would hurt foreign carmakers who made cars locally - such as an import ban on car parts.

“It would be odd to me that they would want at this point to disadvantage local production with no other source of vehicles other than imports and a lot of those com-ing from the West. And I am not sure that would fit with the overall philosophy which seems to be develop Russian capability and

support the Russian companies in the face of the geopolitical crisis,” he said.

At the same time, a possible ban on car imports would have no impact on Ford as 95 percent of its sales in Russia were local-ly-built cars.

He said the carmakers with the deep-est localization rate, such as the Renault-Nissan (RENA.PA) (7201.T)-controlled Avtovaz (AVAZ.MM), were the main win-ners in the current conditions.

“It moved ahead of us in localization but I think we are going to catch the gap very quickly. Last year 37 percent of our (car parts) was locally sourced and we will grow to 40 percent over this year,” Cannis said.

Japanese car makers have also been ben-efiting from a weak yen. “We are seeing a big increase in Japanese imports and ag-gressive actions in the marketplace,” he said.

Cannis said overall the Russian market potential was determined by the relatively small number of cars per capita.

“I think we need enough time for things to get quiet and people to start investing again across the country and feel - Yep, that’s behind us. I would say that’s one to two years.”

“But long-term, from the Ford-Sollers view and the partners we have, Russia still has the potential to be the largest market in Europe. The opportunity is there for those who survive.”

Additional reporting by Elizabeth Piper, Alexander Winning, Polina Devitt and Andrey Kuzmin; Editing by Elaine Hardcastle

http://www.reuters.com/summit/Russia14

16


BY ZLATA GARASYUTA AND

ALEXANDER WINNING


Trading volumes in China’s yuan cur-rency have risen almost nine times on the Moscow Exchange this year

compared to 2013, its head said, as RUS-SIA expands trade with China in response to a chill in relations with the West over Ukraine.

Alexander Afanasiyev, chief executive of the Moscow Exchange, told Reuters that 164 billion roubles ($4.6 billion) worth of yuan had been traded on the exchange so far this year, compared to 18 billion roubles in the same period last year.

“The yuan/rouble pair has taken off like a shot,” Afanasiyev said in an interview at the Reuters Russia Investment Summit.

“Only one thing is limiting its growth: Russian companies don’t have investor sta-tus in China, so the demand for the yuan is currently only covering trade needs be-tween Russia and China,” he said.

According to the latest data from the ex-change, trading volumes in the yuan/rouble pair have reached 31.1 billion roubles so far in September, compared to 2.4 billion roubles a year earlier.

The volumes still pale in comparison with trading in the rouble/dollar pair, in which an average of $17 billion to $27 billion is traded every day on the Moscow Exchange, but Afanasiyev said he expected yuan/rouble trading to continue making up ground on the greenback as trade ties deepen.

Following Russia’s annexation of Ukraine’s Crimea region in March and the West’s imposition of sanctions over that move and over Moscow’s support for pro-Russian separatists in eastern Ukraine,

Russia has pushed to expand ties with Asia, signing a series of trade and business agree-ments, mainly with China.

The most prominent was one signed by state company Gazprom in May to supply China with $400 billion worth of gas over a 30-year period, although analysts question whether the deal was signed on terms fa-vourable to the gas producer.

Capitalising on the move East, the Moscow Exchange plans to launch trading in yuan/rouble futures, Afanasiyev said, as well as a Hong Kong dollar/rouble curren-cy instrument aimed at Russian firms active in the Chinese autonomous region.

UKRAINE BOOSTAfanasiyev said the Ukraine crisis, coupled with reforms the exchange had made in the past year, had helped boost trading volumes in most asset classes on the exchange, Rus-sia’s largest.

“We are seeing an increase in trading volumes in many instruments, especially in

shares and currencies swaps. There is also rising demand for money market products. The market where volumes are down is bonds,” he said at the summit, held at the Reuters office in Moscow.

“Bond volumes are down, it seems, for obvious reasons that issuers aren’t yet ready to borrow at higher interest rates, while investors are cautious to put money into rouble-denominated instruments.”

Russia’s central bank has raised its key rate by a cumulative 250 basis points this year in response to high inflation and mar-ket turbulence linked to the Ukraine crisis.

Trading volumes in stocks were up more than 23 percent on the Moscow Exchange in the first eight months of the year, while bond trading volumes were 37 percent low-er, exchange data show.

Additional reporting by Yelena Orekhova and Nikita Pavlov; Writing by Alexander Winning, editing by Elizabeth Piper and Gareth Jones

Yuan trading soars as Russia boosts trade with China: exchange

Russia’s President Vladimir Putin (L) and China’s President Xi Jinping attend an agreement signing

ceremony during a bilateral meeting at Xijiao State Guesthouse ahead of the fourth Conference on

Interaction and Confidence Building Measures in Asia (CICA) summit, in Shanghai May 20, 2014.

REUTERS/CARLOS BARRIA

17


BY KATYA GOLUBKOVA

SOCHI, RUSSIA, SEPTEMBER 22, 2014

Promsvyazbank, one of Russia’s largest private banks, sees its corporate loan book growing by around 30 percent

this year on demand from large companies which cannot tap Western markets due to sanctions, its CEO said.

After winning business from some of Russia’s top companies, Promsvyazbank, the country’s 11th largest by assets, “in theory” may agree to the state supporting it via subordinated loans or boosting Tier 1, which would allow the bank to make ac-quisitions.

“The geopolitical situation has helped us,” Artyom Konstandyan said in an in-terview at the Reuters Russia Investment Summit.

He said the bank, majority owned by tycoons Dmitry and Alexei Ananyev, had lent $300 million to oil producer Lukoil (LKOH.MM), $200 million to state ener-gy company Rosneft (ROSN.MM), $250 million to potash firm Uralkali (URKA.MM) and $250 million to petrochemical company Sibur among others over the last three to four months.

Promsvyazbank, almost 12 percent of which is held by the European Bank for Reconstruction and Development, had once chased small and medium-sized com-panies and retail clients.

But since sanctions imposed on Russia by the European Union and the United States over Moscow’s policy in Ukraine all but closed Western markets to most big firms, the bank expects an overdue consoli-dation of the banking sector and said state

support would help it finance any acquisi-tions and make it a bigger player.

“I do not exclude we may do something in the nearest future (in terms of consolida-tion) but we are not active now,” Konstan-dyan said. “There is not much capital and we don’t want to waste it. With the help of the state we could work it out.”

Konstandyan said one of the many ad-vantages Promsvyazbank had now was the speed of transactions in foreign currencies, processes which have slowed across the board but especially at those banks hit by sanctions.

Russia’s largest banks - Sberbank (SBER.MM), VTB (VTBR.MM), VEB,

Rosselkhozbank and Gazprombank - are under sanctions limiting their ability to raise funds on Western markets.

“Many banks face tougher compliance from their foreign counterparties. We also see delays in payments coming through but for us, delays are for hours only. At some banks, it takes weeks,” he said.

LOAN PORTFOLIOThe bank’s total loan portfolio increased 11 percent in the first six months of the year, with corporate loans rising 13 percent - the same rate as in retail loans, which usually grow faster.

Konstandyan said corporate loans could

Promsvyazbank benefits as sanctions force Russian companies to raise finance at home

Promsvyazbank CEO Artyom Konstandyan speaks during the Reuters Russia Investment Summit in

Moscow September 25, 2013. REUTERS/GRIGORY DUKOR

18


grow by as much as 30 percent this year, with lending rising by 5 percent to small and medium-sized businesses, and by 15 percent to retail clients.

For the Russian banking system as a whole, corporate loans increased 12 percent in the first eight months of this year, com-pared with 9 percent growth in the same period last year. Retail loans rose just 10 percent in January-August, after increasing nearly 20 percent in the same period last year, central bank data shows.

Active lending is pressing capital ad-equacy levels across the sector, including for Promsvyazbank. As of Sept. 1, its N1 capital adequacy level stood at 11 percent, close to the minimum level of 10 percent required by the central bank.

“When large clients started to come we faced a dilemma - to maintain the capital buffer or to take an advantage - we used the advantage. And we were right,” Konstan-

dyan said.Since the start of the year, the bank has

raised around $440 million to beef up its capital level and plans a perpetual subor-dinated loan of up to $100 million - par-tially provided by its core shareholders, the Ananyev brothers - soon.

Thanks to that deal, its capital level should not fall below the level at the start of the year, Konstandyan said. Then it was at almost 12 percent.

Konstandyan, at the helm of Promsvy-azbank since 2010, said he expected con-solidation among Russia’s 900 banks as the Economy weakens to growth around zero this year.

“There could be as many banks as you like, but there should be at least 10 large banking groups in Russia which would compete and move the economy forward ... But capital is needed for the consolidation,” he said.

Konstandyan added that “in theory”, the bank would be in favor of the state support-ing it via subordinated loans or boosting Tier 1 capital.

The bank would be obliged to hold a share offering (IPO) as one of the options for the state to make a return on its invest-ment. The bank postponed a share offering in 2012 due to unfavorable market condi-tions.

Alexei Ulyukayev, Russia’s economy minister, said last week the state could boost banks’ capital by as much as 1 tril-lion rubles ($26 billion) from the National Wealth Fund.

“To become a public (bank) is our desti-ny,” Konstandyan said, adding that an IPO would be possible when the economy start-ed to recover. He did not give a timeframe.

Editing by Elizabeth Piper and Susan Fenton

People pass by an office of Promsvyazbank in Moscow, October 4, 2012. REUTERS/MAXIM SHEMETOV

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19

FOR MORE INFORMATION:Timothy [email protected] [email protected] [email protected] [email protected] [email protected] [email protected]


Alexander Afanasiev

CEO

Moscow Exchange

Ted Cannis

CEO

Ford-Sollers

Oleg Deripaska

CEO, co-owner

Rusal

Sergei Donskoi

Minister

Natural Resources ministry

Denis Fyodorov

CEO

GazpromEnergoHolding

Nikolai Fyodorov

Minister

Russia’s Agriculture Ministry

Alexei Kudrin

Former Russian Finance Minister

Sergei Mikhailov

CEO

Cherkizovo, Russian poultry and pork

producer

Sergei Petrov

Founder

Russian car dealer Rolf

Oleg Petrov

Head of Sales

Uralkali

Vladimir Potanin

CEO and co-owner

Norilsk Nickel

George Rizhinashvilli

Deputy CEO

RusHydro

Oleg Savelyev

Minister for Crimean Affairs

Russian government

Ivan Shabalov

Owner

Pipe Innovation Technologies

Anton Siluanov

Minister

Finance Ministry

Mikhail Slobodin

Head of Russian unit

Vimpelcom

Ivan Svitek

CEO

Home Credit and Finance Bank

Ksenia Yudaeva

Head of Monetary Policy

Russia’s Central bank

Summit Speakers

russia investment summit 2014 russia digs in for...

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