Russia 101202 Basic Political Developments

Russia! presents a special business issue

http://readrussia.com/blog/media/00328/
A special edition of Russia! will hit bookstores on Dec. 1. Its cover story is the seizure of the Lenta retail chain by the U.S. fund TPG Capital and VTB, a major Russian bank.

Having found itself in a land resembling a latter-day Wild West – where force rules, corruption is everywhere and immense riches are up for grabs - TPG quickly adopted the Russian way of doing business. Find out more about one of Russia’s most shocking corporate raids, involving grenades and machine guns, in our article “Wild East.”

“The rules of doing business in Russia have changed yet again,” says Ilya Merenzon, the publisher of the magazine. “The new edition of Russia! is relevant as never before. Russian firms used to imitate the American way of doing things, but now Western companies are taking their lead from the Russians and have copied some of their ugliest practices. The last year has seen a number of major corruption scandals involving the Russian divisions of prominent corporations. The actions of TPG Capital, which form the theme of this issue, are unique among Western businesses. They behaved no differently to the bandits of the 1990s.”

The article “Wild East,” available online, tells how TPG, a minority shareholder in a major Russian retail chain named Lenta, hoped to take control of the company by seizing its office with the help of a security force. TPG scattered $100 bills around the site to distract reporters and threatened employees with grenades containing tear gas.

The special issue also includes a guide to the changing Moscow skyline (rising alongside the Kremlin and Stalinist skyscrapers is a new business district with dozens of towers); one of the most detailed chronicles of corruption at Russian companies ever compiled, by the rights activist Aleksei Navalny; and the story of an intelligence officer who builds some of world’s most expensive sound systems in his basement.

Read the cover story from the Special business issue here.

National Economic Trends

Are Russia’s sovereign ratings holding corporates back?

http://blogs.ft.com/beyond-brics/2010/12/02/161971/

December 2, 2010 5:00am

by Charles Clover

 Renaissance Capital, the Moscow investment bank, is going on the offensive over Russia’s sovereign bond rating, which it believes is too low and is holding Russia’s corporate issuers back.

The bank believes that with Russia’s foreign exchange reserves the third-largest in the world and its very low debt-to-GDP ratio, the country deserves better than its BBB from Standard & Poor’s and Baa1 from Moody’s - ratings that Renaissance feels are keeping Russia’s borrowing costs artificially high.

“It is quite intriguing to see that countries like Ireland are still rated above Russia, Brazil, and China”, said Renaissance Capital’s Plamen Monovski, CIO of Renaissance Asset Managers, in a recent research note. “Even the most perfunctory comparison of these two countries makes it clear that Russia is nowhere near default, while Ireland is going to be lucky to avoid it”.

He points out that the market rated Ireland’s debt at near-default levels – its 5-year credit default swap spread stands at 587 – compared to Russia’s CDS spread of 154. Ireland, however, has a AA- rating from Standard & Poor’s, and a Aa1 rating from Moody’s, compared to Russia’s BBB and Baa1 respectively.

The rating prevents US-based pension funds, one of the main movers of global credit markets, from buying Russian assets, said a senior banker in Moscow.  It also holds down the ratings of other issuers in Russia, Renaissance believes, though a spokesman for one of the rating agencies said the notion that the sovereign rating was a “ceiling” for a country’s corporates was a myth.

“Ratings are not meant to mimic bond spreads or CDS prices. If they did they would be bouncing around every day”, a manager at one of the rating agencies responded to the criticism.

“A rating provides a long-term fundamental view of credit risk, not a short-term market-sentiment-driven view”, he said.

He pointed out that prior to the eurozone crisis, market spreads for peripheral eurozone issuers were almost identical to that of German bunds, while their ratings were significantly lower. “Now market sentiment has veered to the other extreme, while ratings have been lowered only to a limited extent. That relative stability is what investors look for from ratings. ” he said.

Russia’s sovereign rating rose from default in 1998 to B- in 2000, and hit S&P’s investment grade BBB- in 2005. At the end of last year, the outlook on its current BBB rating was raised from negative to stable.

“I don’t think there is an issuer on the planet who doesn’t think their rating should be higher”, said one ratings agency analyst.

Three pills to fight inflation and limits to RUB support

http://www.bne.eu/dispatch_text13802

VTB Capital

December 2, 2010

According to Interfax, First Deputy Chairman of the CBR Alexey Ulyukaev stated at the annual Adam Smith Russian Banking Forum in London yesterday that i) the CBR continued to move towards greater rouble flexibility by reducing the size of its interventions; ii) the upper limit for monthly FX interventions was USD 6bn; and iii) inflation would moderate in 2Q11.

Later, in an interview with Bloomberg, Ulyukaev announced that the CBR had noticed monetary inflation and would use three pills to fight it: "First, the policy rate; second, the reserve requirements; and third, the exchange rate performance." When answering a question about the recent tight rouble liquidity, Ulyukaev stated that the CBR was not concerned about it now, but would become so if "the situation continued to be like that."

Limits to RUB support. We think the statement about the greater rouble flexibility, combined with the upper limit for FX interventions and possible concerns about a liquidity squeeze mean that the monetary authorities might allow somewhat faster rouble depreciation, were capital outflows to persist.

Less capital outflow in December, but RUB risk-reward profile unattractive. At the same time, the CBR expects capital outflows to moderate to zero in December and, hence, alleviate depreciation pressures on the rouble. Given the political nature of the recent outflows the CBR's expectations might be well informed. However, we think that part of the capital inflows was due to the RUB risk-reward profile being unattractive.

Three pills to fight inflation, a rate hike might be on the agenda. The CBR reiterated the view on the monetary nature of the recent pickup in inflation and even explicitly mentioned that it would use rates to fight it. This supports our view expressed in CBR "Frees up Hands" for a Rate Hike, of 30 November.

At the same time, it is not yet evident from Ulyukaev's comments that the CBR links the need to hike rates to curbing capital outflow. The monetary authorities seem to be continuing to talk up RUB volatility and deterring capital inflows.