Russia 090508 Basic Political Developments

National Economic Trends

Medvedev calls for reducing Russia's dependence on food imports

http://www.prime-tass.com/news/show.asp?topicid=68&id=456812

MOSCOW, May 7 (Prime-Tass) -- Russian President Dmitry Medvedev called Thursday for boosting Russia's agricultural output to reduce the country's dependence on food imports, ITAR-TASS reported.

"During the ongoing food crisis we must think of how our consumers can get more (domestic food) products," he said at a meeting with Agriculture Minister Yelena Skrynnik.

Meanwhile, Skrynnik said at the meeting that farmers were expected to save 12 billion rubles as a result of the government's cap on fuel prices for the agriculture industry.

Russian monetary base down 0.01% in week to $117.1 bln

http://en.rian.ru/business/20090508/121498884.html

MOSCOW, May 8 (RIA Novosti) - Russia's Central Bank said on Friday the country's narrowly defined money supply (M1) was 3 trillion 820.2 billion rubles ($117.1 billion at the current exchange rate) as of May 4, down by 0.7 billion rubles ($21.5 million) in the week since April 27.

According to the Bank, M1 money supply consists of the currency issued by the bank, including cash in vaults of credit institutions, and required reserves balances on ruble deposits with the Central Bank.

Russia’s Delinquent Loans Prevent Lending Revival (Update1)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY1eg_z3MHk8
By Paul Abelsky

May 8 (Bloomberg) -- Russia’s failure to rid its banks of delinquent assets has prevented the country from reviving lending, threatening to exacerbate the recession, according to Renaissance Capital analysts.

Non-performing loans may surge to 20 percent of the total loan portfolio, compared with an estimated 3.6 percent in March, Moscow-based Alexei Moiseev and Andrey Markov wrote in a report dated yesterday.

“The renewal of actual lending to the population and the real sector is impossible without addressing the issue of bank capitalization and the problem of bad assets,” Moiseev and Markov wrote.

Russia’s monetary authorities injected more than 2.5 trillion rubles ($76.8 billion) into the banking system through May 1. Still, an “excessively tight” monetary policy has exacerbated the economic crisis and led to a 20 percent drop in the money supply, according to RenCap. Russia lowered the benchmark refinancing rate to 12.5 percent on April 23.

Gross domestic product may shrink 7.5 percent this year after an “extraordinarily severe” first-quarter contraction, the European Bank for Reconstruction and Development forecast yesterday.

‘Fine-Tuned’

While the central bank has provided adequate funding for the banks, the regulator’s tools need to be “fine-tuned” to enable loans with maturities of as long as two years or “unconditional and continuous refinancing”, RenCap said.

The government will probably choose to recapitalize the banks in exchange for common or preferred shares if the problem of delinquent debt worsens, according to RenCap.

“If banks do not aggressively write off toxic assets and are not assisted in capital recovery, it will take a long time before they are able to resume extending new loans to the economy,” the analysts wrote.

The banking system will require $26 billion in state funds if overdue loans reach 20 percent of the total and $71 billion if that rises to 30 percent, the analysts said.

The required level of state support of under $30 billion is “acceptable” because Russia can draw on its sovereign wealth funds, the Reserve Fund and the National Wellbeing Fund, which stood at a combined $193.1 billion at the end of April, according to RenCap.

Still, a “lending revival” will not be sufficient to reverse Russia’s worst economic crisis in a decade, according to the investment bank.

“The only thing, in our view, that can boost investment activity is cheap financing that does not need to be repaid, that is, state subsidies rather than bank loans,” RenCap said.

To contact the reporter on this story: Paul Abelsky in St. Petersburg at [e-mail].

Last Updated: May 8, 2009 04:31 EDT

Business, Energy or Environmental regulations or discussions

MICEX Rises Above 1,000

http://www.themoscowtimes.com/article/1009/42/376926.htm
07 May 2009

By Ira Iosebashvili / The Moscow Times

Surging oil prices, encouraging stress-test results for Russian banks and a series of positive economic forecasts buoyed investor optimism Thursday and lifted the benchmark MICEX Index past 1,000 for the first time since Oct. 1.

As of 12:15 p.m., the 30-stock index was at 1017.5, up 3.2 percent on the day and a stunning 98 percent from its one-year low in October of 515.

The rise in share prices came as benchmark U.S. crude futures topped $57 per barrel, its highest intraday price since Nov. 17, on reports of a smaller-than-expected increase in U.S. stockpiles. The gain represents a 27 percent increase on the year for crude, Russia's main export.

The government has revised this year's budget based on a $41 per barrel price for Urals crude, Russia's main export blend. In April, the Economic Development Ministry said it raised its 2009 average forecast for the blend to $45 amid signs that global demand was steadying.

Investors also took heart at encouraging signs about the health of domestic banks. Central Bank First Deputy Chairman Alexander Ulyukayev published an article in the May issue of the bank's magazine saying Russian lenders could weather a drop in the price of oil to $25 per barrel, provided external debt does not rise above the current level.

Adding to the positive mood was a research note published Wednesday evening by the Bank of Moscow titled "There Will be No Second Wave," referring to a possible aftershock from last fall's liquidity crisis. Top bankers, including Sberbank chief German Gref and Alfa Bank president Pyotr Aven, have warned that rising bad debt threatens to bring about another crisis in the sector.

Bank of Moscow analysts said in the note that the Russian economy would find its bottom within the next three months and predicted 7.4 percent GDP growth next year, as well as further strength in the domestic financial markets.

The government's official forecast is for a 2.2 percent contraction this year, although Deputy Economic Development Minister Andrei Klepach said GDP could fall as much as 6 percent.

VTB Capital said Thursday that its GDP indicator showed that the economic downturn was slowing, however, with a 4.7 percent decline in April compared with year earlier. In March, the survey indicated a decline of 5.4 percent, year on year.

The ruble reflected the strength in commodities and financial markets, climbing for a fourth straight day to 37.61 against its target currency basket just past noon.
Market Overview: Rally continues lead by banks

http://www.businessneweurope.eu/dispatch_text8550

UralSib, Russia

May 8, 2009

Strong fund flows continue into emerging markets. The weekly fund flow data from EPFR showed another very strong week of flows into the emerging market asset class with $1.08 bln invested into the GEM balanced fund category alone. But, unlike the previous week when Russia was the most favored country fund, in the week to last Wednesday investors again strongly favored China and Brazil with inflows of $884 mln and $666 mln, respectively. Russia funds attracted a respectable $81 mln but hardly enough to sustain a bull market rally in isolation. The Moscow bourses will be closed for the Victory Day holiday on Monday and most local investors and market participants will drift off early today. Stock price movements will, as a result, be light and activity all but over by the time the US employment data is reported. The consensus is for a loss of 630,000 jobs, a slight improvement over last month's loss of 663,000 jobs, and an unemployment rate of 8.9%. In reality, investors are hoping for a slight positive surprise to sustain the trend seen in economic reports through April.

MICEX tops 1,000. Russia's bourses recorded another very strong session yesterday, driven by plus $50/bbl oil and the gains in international markets.

The bank sector shares, in particular, led the extended rally, as financial stocks globally remained buoyant ahead of the US stress-test report. At the close, the RTS was up 5% at 942.3, only 6% off our mid-year target for the index, and while MICEX gave up some gains over the last hour, it ended above the 1,000 level for the first time since October, rising 2.6% over the session. Sberbank rose 10.5% on the RTS and 6% on MICEX, while VTB gained 6.5% on the latter exchange. Norilsk Nickel was the other big gainer, rising 4.1% on MICEX (up 8.7% on the RTS) as industrial metals prices rose with the general optimism that global growth will resume in early 2010. The oil stocks were a little more muted. The utilities sector was also a very strong driver of performance as hopes rise that capex will be spread over a longer time frame and tariffs can grow more than the worst case scenario that led valuations so low only a few months ago. RusHydro rose 5.7% on the RTS but the big gains where on MICEX, led by TGK's with a 25% rise. TGK-1 and TGK-14, however, bucked the trend with a loss of 15% each. In London GDR trade, buying was again well spread with evidence that institutional investors are moving slowly back to the market. Gazprom and the liquid oil stocks rose between 2% and 4% each, a similar patter for most of the steel names. Evraz was the exception, suffering a slight profit taking dip after the recent strong run and closed down 1.8%. Chelyabinsk Zinc followed Wednesday's 25% gain with a closing gain of 13%. VTB rose 7.1% with the positive bank sector momentum. As always, the volatile real estate sector threw up some double-digit gains. LSR Group followed Wednesday's 10% rise with another 23% yesterday and Sistema-HALS added 20% on very thin volume. Our media top pick CTC Media added 6.3% on better-thanexpected 1Q09 financials released yesterday.

Chris Weafer
Russian bank stress test says system OK down to $25 oil

http://www.businessneweurope.eu/dispatch_text8550

bne
May 7, 2009

The Central Bank of Russia carried out its own banks sector stress test to gauge what the impact of a sharp fall in oil prices would have on the financial sector.

With some macroeconomic indicators starting to move back into the back a certain amount of optimism is creeping back into the market, however a collapse in oil prices from the relatively current $50-plus remains one of the key dangers Russia's faces. Some investment banks have predicted the Urals oil prices will fall again to about $25 if there is another bout of instability.

The CBR said that the bank sector could weather a shock like this provided the external debt doesn't rise above the 20% level says CBR First Deputy Chairman Alexei Ulyukayev in an article in the CBR's journal. Russia's banks have an external debt of 17.4% of liabilities at the beginning of the year, compared with 20.4% in October last year. (and 10.9% in 2003).

"The results of the stress test show that the current level of banking sector foreign debt is acceptable from the point of view of the banking sector's sustainability in the event the crisis escalates. Total banking sector losses would be approximately RUB766bn if oil falls to $25 a barrel. The equity ratio would decrease to 12.9% from 16.1%," the article says.

A high, 30% foreign debt level would weaken the Russian banking sector in the stress scenario, and the authors conclude that the proportion of this debt in liabilities must not be allowed to rise above 20%.

Russia’s VEB Tightens Bank Borrowing Rules to Stimulate Lending

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGRfl_wqmJes
By Torrey Clark

May 8 (Bloomberg) -- Vnesheconombank, which dispenses Russia’s economic stimulus funds, will grant subordinated loans only to banks that have 3.5 billion rubles ($108 million) of capital, limiting access to fewer than 100 lenders.

VEB also will require banks to lend the money they borrow to priority industries as the government seeks to revive the shrinking economy, the Moscow-based state lender said in an e- mailed statement late yesterday.

Prime Minister Vladimir Putin pledged last month to “tightly” tie some of Russia’s 3 trillion rubles of stimulus measures to lending to the real economy after business leaders complained banks were holding up funds as the economy slides into recession for the first time in a decade.

Banks that take subordinated loans through VEB will have to prove they’ve lent the money to priority industries at rates of no more than the central bank refinancing rate plus 3 percentage points and for periods of no less than one year, VEB said.

VEB’s supervisory board, headed by Putin, approved 19.2 billion rubles in subordinated loans to 10 banks, the bank said.

To contact the reporter on this story: Torrey Clark in Moscow at [e-mail].

Last Updated: May 8, 2009 03:27 EDT
Mosenergo: investment policy awaits end to capacity market problems

http://www.businessneweurope.eu/dispatch_text8550

Troika, Russia

Friday, May 8, 2009

Mosenergo will wait to make up its mind on its investment policy over 2010 12 until after the problems with the capacity market have been resolved, Interfax reports, citing Gazprom utility arm Gazoenergeticheskaya Kompaniya (GEK) CEO and Mosenergo board member Denis Fedorov. A speedy launch of the capacity market with transparent and clear terms for the return on investment, as well as the meticulous fulfillment of the obligations that the Market Council undertook to account for missed profits from operating the new blocks, will determine the company's investment policy over 2010 12, Fedorov clarified.

The decision to start the non mandatory investment program is based on the projects' economic feasibility.

Mosenergo was the first genco to start an investment program and has commissioned the most (1,325 MW). To date, three new blocks have been constructed with proceeds from a new share issue in favor of Gazprom, Fedorov said. He specifically stressed that Mosenergo was under no legally formalized obligation to fulfill these investment projects (i.e. it did not sign a capacity supply agreement). It is not experiencing problems with financing sources for the new block at TETS 26.

We regard the statements as positive for Mosenergo. It is determined to get a "fair"

return on investments made and on future possible investments (via a proper capacity market) if it is to undertake the third stage of the investment program. Minority shareholders should benefit from this. In line with what we have been arguing, Fedorov confirmed that Mosenergo did not sign a capacity supply agreement. Hence, it seems to be relatively free to decide on the non mandatory third stage of its investment program and can at least delay the capex, which is positive for the company's valuation. Its BoD recently approved a R11.5bn ($350m) 2009 investment program, which implies a 71% cut from what we had modeled. The stock looks attractive at a 2009E EV/EBITDA of 7.3 versus the EM peer average of 8.3.

Generally, once the mandatory investment program is completed, investors will require a fair return in order to invest. Thus, if the government wants to see investments after the mandatory programs are completed, electricity and capacity prices will have to be high enough to ensure that investors at least break even, we believe. The capacity market concept could be submitted to the government during 2Q09.

Alexander Kotikov

Railway cargo turnover down 14.6% in April vs. 20.1% drop in

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VTB Capital

May 8, 2009

Russian Railways has released the highlights of its April transportation statistics. Railway cargo turnover in April dropped 14.6% YoY vs. the 20.1% YoY decrease in March.

View: Railways account for 85% of cargo transportation in Russia, so their dynamics are a good proxy for changes in industrial output. According to our estimates, the deceleration in the decline in transportation might imply that the slowdown in industrial production has also decelerated, from 14% in March to 10-12% in April. This would correspond with the ongoing improvements in the Russian Manufacturing PMI, which rose to 43 in April from 42 in March

Peter Hambro Mining reports robust 1Q09 production update

http://www.businessneweurope.eu/dispatch_text8550

Troika, Russia

Friday, May 8, 2009

Peter Hambro Mining has released 1Q09 operational data that we view as robust.

Production increased 72% y o y, as the mill at Pioneer is now fully operational and output is being aggressively ramped up. Considering that 10.8 koz of gold was produced from the ore trucked from Pioneer to the Pokrovsky mill and accounted for in Pokrovsky's production numbers for 1Q09, output at Pioneer was a healthy 56 koz, while Pokrovsky churned out 52 koz. It is important to note that as almost all of the ore from Pioneer will be processed at the expanded mill in 2009, Pokrovsky's production will decline by some 34% y o y to 177 koz, also affected by lower grades at the deposit. Placers and affiliates did not operate during the winter months.

Promisingly, further exploration at Pioneer continues to bring some encouraging results from the high grade Andreevskaya zone and other ore rich zones (Yuzhnaya, Vostochnaya and Bakhmut) that have the potential to meaningfully improve the average grade at the deposit. The second line at the mill is to be commissioned in July, as planned, and ramped up to the full capacity by September.

The road to Malomir has been completed and power line construction is on track.

Separately, Peter Hambro Mining reiterated that it is seeing strong interest from Chinese counterparties to participate in various forms in the development of the iron ore assets.

At present, though, the company is still evaluating the available options and monitoring the rapidly evolving market environment, though any kind of visibility should be positive for the stock.

Mikhail Stiskin