Russia 101027 Basic Political Developments

National Economic Trends

CBR announces preliminary September statistics

http://www.businessneweurope.eu/dispatch_text13311

VTB Capital

October 27, 2010

News: Last evening after the cob, First Deputy Chairman of the CBR Gennady Melikyan announced preliminary September banking sector statistics. Key takeaways are as follows.

- Corporate loan book expanded 2.9% MoM (1.8% excluding the RUSAL loan), while retail portfolio grew robustly 1.8% MoM.

- Share of overdue loans keeps declining for the third month in a row: in corporate segment decreased to 6.00% from 6.15% in August, in retail segment the share backtracked to 7.45% from 7.49%.

- Banks' profitability is recovering with 9mo10 earnings of RUB 367bn, implying ROE of 12.5%.

Our View: The stats confirm the strong turnaround in lending and the ongoing recovery in the Russian banking sector, cementing the base under the October banking rally (VTB Capital banks Russia Index is up 14.4%). While statistics were fully confirmed by Sberbank and BSPB 3Q10 RAS reporting we focus on VZRZ 3Q RAS results due to be issued today.

In the meanwhile, we reiterate our positive view on Russian banks and expect an even better fourth quarter in terms of both lending growth and profitability fuelled by NIM stabilising and provision recoveries.

Dmitry Dmitriev

October 27, 2010 11:10

Combined profits in banking sector totaled 367 bln rubles in 9 mths – Melikyan

http://www.interfax.com/newsinf.asp?id=198156

MOSCOW. Oct 27 (Interfax) - Combined profits in the banking sector continue to rise, reaching 367 billion rubles through the first nine months of 2010, First Deputy Central Bank Chairman Gennady Melikyan told Interfax.

"The profits totaled 367 billion rubles in the first nine months of the year compared with 31 billion rubles in the same period last year. Thus, the net profits rose more than tenfold," he said.

However, "a significant number of banks are posting losses," he said. "The banks are forming into separate categories. That is normal and indicates that the crisis has done its job," Melikyan said.

One hundred seventeen banks posted losses in the nine months. That includes banks currently undergoing rescues, he said.

"We are carefully analyzing information on the loss-making banks. The results of that work have compelled us in particular to send proposals to the State Duma and the Finance Ministry on extending until July 1, 2011 the moratorium on prohibiting banks from taking deposits from the public," he said.

It was reported earlier that the moratorium on excluding banks from the deposit insurance system was established on January 1, 2009 and is set to expire on January 1, 2011. It allows banks to violate standards they must otherwise meet in order to remain members of the deposit insurance system (and thus eligible to take deposits from the public), including indicators based on assets, capital, earnings and liquidity and a qualitative, transparency indicator.

Prior to establishment of the moratorium, a bank that posted losses three months in a row could not accept new deposits from the public.

It was reported earlier that the banks had combined profits totaling 320.1 billion rubles in the first eight months of the year. Central Bank Chairman Sergei Ignatyev forecast in October that combined profits in the banking sector for the full year would reach 500 billion rubles. "In terms of profits, we are approaching the level of the record year 2007," Ignatyev said.

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Russian Money Supply Growth to Fuel Inflation, Citigroup Says

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=a_PanqyWVMIk

By Maria Levitov

Oct. 27 (Bloomberg) -- Russia’s money supply continued its “rapid” expansion last month, threatening to sustain fast inflation through next year, Citigroup Inc. said.

Money supply growth of more than 30 percent in September is set to push up annual inflation to 9.2 percent at the end of the year and 7.6 percent in 2011, Moscow-based economists Elina Ribakova and Natalia Novikova wrote in a research note today.

“Growing producer costs and the acceleration of money supply growth will add to inflationary pressures from the end of 2010 and into 2011,” the note said. “However, we expect the central bank will remain under pressure not to increase rates in order to support a greater issuance of government bonds.”

Inflation accelerated for a second month in September to 7 percent after the country’s worst drought in at least half a century hobbled agricultural output and pushed up food prices. The central bank left its main interest rates unchanged last month, saying “inflationary risks, shaped by monetary conditions, are at an acceptable level.”

Money supply expanded at an annual rate of more than 30 percent every month for the past seven months, rising 31.2 percent in September, according to Bank Rossii data. The ruble weakened 0.6 percent to 30.57 versus the dollar at 10:51 am in Moscow today.

“We are concerned that, without a significant appreciation, pressure on the ruble and a weak interest rate transmission mechanism, inflation will remain elevated in 2011,” Ribakova and Novikova said.

To contact the reporters on this story: Maria Levitov in Moscow at [e-mail]

To contact the editor responsible for this story: Willy Morris at [e-mail]

Last Updated: October 27, 2010 03:02 EDT

Assessing Moscow’s Management of the Crisis

http://www.themoscowtimes.com/opinion/article/assessing-moscows-management-of-the-crisis/421165.html
27 October 2010

By Anders Aslund

After two years, the global financial crisis has abated and the world economy is set to grow by an impressive 4.8 percent this year. Most governments, apart from some Western culprits, are congratulating themselves for their good crisis management. Astoundingly, this severe crisis has hardly changed political or economic regimes anywhere in the world so far, while many incumbent governments have lost elections.

A comparison between Russia and the 10 new eastern members of the European Union — here called the Central and East European 10, or CEE-10 — offers a perspective on what Russia did well and poorly in the financial crisis.

Eastern Europe was the part of the world worst hit by the financial crisis. Latvia led the pack with a fall of 18 percent of gross domestic product in 2009. On average, however, the 10 new EU members had a GDP decline of “only” 5 percent, about the European average (mainly because of Poland’s growth of 1.7 percent), while Russia’s GDP slumped by no less than 8 percent, more than in any Group of 20 economy.

The direct cause of Russia’s larger contraction was that its exports plunged by 36 percent in 2009, while the CEE-10 exports diminished comparatively little, by less than 10 percent. The Russian export slump was caused by two factors: falling prices of oil, metals and gas and a big decline in gas export volumes. The CEE-10 were saved by their deep integration into the European market and impressive diversification of exports.

In late 2008, all feared that banking systems would collapse, but with the exception of Ukraine that did not happen anywhere in the region. Only one significant bank collapsed, the domestically owned Parex Bank in Latvia. But the bank rescue mechanism was diametrically different. The European Central Bank issued plenty of liquidity salvaging the West European banks, which owned most East European banks and allowed them to share their ECB liquidity. As a result, no single foreign-owned bank in the CEE-10 went under during the crisis.

In Russia, the government bailed out Russian banks through a gradual devaluation during the three months of November 2008 to January 2009. It cost the country $150 billion in reserves, much of which amounted to bank subsidies. In parallel, the government poured money into the already dominant state banks. Presumably, the European crisis resolution was cheaper for the governments and left the economy more competitive.

Only three Central and East European countries required emergency standby programs with the International Monetary Fund — Hungary, Latvia and Romania — although five countries had foreign debts exceeding their GDP, and all had small reserves. Russia benefited surprisingly little from its enormous reserves of $600 billion in August 2008, although its foreign debt was less.

Russia has carried out one important reform during the crisis, characteristically in the macroeconomic realm: a change in the exchange rate policy. The country is now close to inflation targeting, with a floating exchange rate that has worked so well in many countries around the world, from Poland to Chile. This is a good choice for Russia because of its great dependence on fluctuating commodity prices. No CEE-10 country changed its exchange rate policy.

The biggest difference between the CEE-10 and Russia has been in fiscal policy. The Baltic states in particular have undertaken huge cuts in their public expenditures of 8 to 10 percent of GDP, which have facilitated beneficial structural reforms. Many countries have sacked superfluous bureaucrats and other public servants. Latvia has cut public wages by 35 percent and Romania by 25 percent. Latvia has eliminated half of its state agencies and closed half of its hospitals. Finally, teachers have been let go after the number of children has plummeted with lower birthrates. Lithuania has carried out a progressive higher education reform. Yet pensions have been shielded everywhere but in Hungary. As a consequence of all these reforms, the CEE-10 countries are likely to arise more efficient and competitive after the crisis. Like Russia, all of them have already returned to economic growth.

Russia, by contrast, has pursued the opposite policy, carrying out small cuts in many areas and not promoting structural reforms. Strangely, the government has raised pensions this year by 30 to 40 percent. After having carried out an admirably conservative fiscal policy since 1999, the Russian government has suddenly turned populist. It is no problem that the budget deficit will be 4 to 5 percent of GDP this year, which makes perfect sense as stimulus, but public funds are being spent on pensions rather than on the modernization of Russia. Structural reforms remain stalled since 2003.

The key difference between the CEE-10 and Russia in their anti-crisis policies is that the CEE-10 turned against populism during the crisis, while the almighty Russian prime minister embraced populism. This difference derives from the political systems. In a democracy, people mature in crisis. In the CEE-10, social unrest has been minimal, while it has grown in Russia and frightens the White House. Today, moderate center-right parties rule all but one of the CEE-10 countries, and this year responsible center-right parties have won three surprise victories — in the Czech Republic, Slovakia and Latvia.

As the new Czech Foreign Minister Karel Schwarzenberg stated: “We won by telling the truth. Populism is no longer popular.” Most remarkable was the victory of Latvian Prime Minister Valdis Dombrovskis on Oct. 2. His coalition extended its share of the parliamentary seats from 45 percent to 63 percent, despite the shocking fall in GDP. However, Dombrovskis blamed his irresponsible predecessors and voters clearly saw him as the most credible and honest problem solver. Voters are not as irredeemably irresponsible as the Russian elite thinks. The liberal right has never been stronger in this part of the world. The communists have been wiped out and the socialists badly weakened.

Russia would be better off economically if it had offered its citizens the right to influence its government as the democratic countries in Central and Eastern Europe do.

Anders Åslund is a senior fellow of the Peterson Institute for International Economics and author of the book “The Last Shall Be the First: The East European Financial Crisis, 2008-10.”

October 26, 2010

Warning Signals

http://www.russiaprofile.org/page.php?pageid=Business&articleid=a1288109014


By Tai Adelaja
Russia Profile

The Complex Challenge of Attracting Foreign Investment Cannot Be Resolved by Simply Privatizing Key State Assets

The latest government privatization program may not be the “silver bullet” it hopes will attract foreign direct investment (FDI) into Russia, since the government is continuing to tighten its stranglehold on the strategic industries that are a magnet for foreign investment, experts say. And with Transparency International’s latest corruption report offering a less than positive view of the Russian business climate, industry executives are warning the government against overly high expectations of a windfall from its new privatization program.

First Deputy Prime Minister Igor Shuvalov announced last week that the government intends to raise nearly $60 billion in 5 years by selling stakes in about 900 companies. Government stakes earmarked for sale include 15 percent of Rosneft the country’s largest oil company and 25 percent of the rail monopoly Russian Railways. There are also plans to sell 50 percent minus one share of the Russian shipping company Sovkomflot and state industrial agro-leasing company Rosagroleasing. The new privatization program could also see 8 percent of RusHydro, the nation’s largest hydroelectric company, sold to private investors while the government has declared its intention to reduce its role in the banking sector by selling stakes in VTB, Rosselkhozbank and Sberbank, the country’s largest lender.

"We're sending investors a clear signal for the next three years, and we're prepared to discuss the sale of even larger stakes," Shuvalov, who is also the nation’s investment ombudsman, said. Russian equity trading edged up in other emerging markets as investors reacted positively to the government’s plans to sell off “surplus” equity in existing listed state companies and to accelerate plans to sell equity in other state owned companies, Chris Weafer, chief strategist at UralSib Capital said in a note to investors on Monday. “Investors interpreted the move as meaning that the government will need to take actions to try and improve the attraction and valuation of these assets and, thereby, boost the overall market,” Weafer said. The Russia domestic story is good and improving, albeit slowly, Weafer said. “The government’s very strong commitment to privatizing “surplus” equity and pushing ahead with other IPOs is part of the continuing effort to improve investor perception of Russia and is contributing to a positive backdrop for the domestic market.”

The government has been pinning its hopes on its latest privatization program as a vehicle to spur a significant increase in total FDI inflows into the economy, Vremya Novostei reported Tuesday. Economic Development Minister Elvira Nabiullina told the cabinet meeting last week that the worst of the financial crisis that hit the country in 2008 was over and that the government expects growth to be around four percent this year. In previous years, revenue from privatization was about $600 million-a-year, the paper cited Nabiullina as saying. "In the future we plan to increase this figure to 10 billion dollars-a-year,” Nabiullina said, Vremya Novostei reported.

Other state officials also said the latest privatization efforts will positively impact the economy unlike the widely-criticized privatization of the 1990s. Viktor Pleskachevsky, chairman of the State Duma Property Committee said unlike Russia's last major privatization in the 1990s, when huge chunks of former state assets were widely sold to powerful individuals, the latest privatization would help entrench a market economy and expand the private sector by reducing government involvement in the economy. “Privatization failed in the 1990s because it had no legal basis,” Pleskachevsky said. “This time around, the country has successfully introduced a raft of regulations to accompany the government privatization drive.”

Prime Minister Vladimir Putin was also upbeat with investors’ response so far to various government initiatives aimed at stimulating foreign investment to modernize the economy. Putin said at a VTB Capital investment forum on October 6 that foreign direct investment has reached $25 billion so far this year. The second wave of privatization is expected to lead to an influx of capital investment in the near future, presidential aide Arkady Dvorkovich said at the same forum. He said however that investment activity is not keeping pace with current economic growth. “Investments aren't yet growing the way we want them to grow," Dvorkovich said, adding that the government's economic growth forecast was unlikely to be reached without increasing investment in the coming months.

But experts say that most of the latest government efforts including its well advertised second wave of privatization did not go far enough to guarantee significant inflow of foreign investment. “The political elite must reach a consensus on whether or not the Russian government is prepared to develop the private sector or keep its stranglehold on key sectors of the economy that are more attractive for private investors,”  Alexander Chepurenko, director for international relations at the Higher School of Economics said. “The issue of foreign investment in Russia is both complex and complicated and cannot be resolved by isolated measures such as privatization of key state assets.” There are a whole lot of systemic issues such as unfair competition and the desire on the part of the political elites to tighten their grip on certain segments of the economy even when they cannot effectively control or monitor those sectors, he said.  “But above all, there is corruption which is so endemic that other issues pale in comparison,” Chepurenko said. 

Russia slipped eight places to 154th in Transparency International's 2010 Corruption Perceptions Index published on Tuesday. Russia performed worse than its former Soviet peers, outdone by countries like Estonia which ranked 26th, Lithuania 46th, Latvia 59th and Georgia in 68th place. Kazakhstan, Moldova, Armenia and Belarus all fared better than Russia which is close to the end of the pack. “The fact that corruption is viewed as worsening in Russia is one of the major reasons why strategic investors remain wary of investing in the country. It is also one of the factors why the equity risk premium in valuations is so high in Russia relative to other big developing economies,” UralSib’s strategist Chris Weafer said. “A number that is as bad, if not worse, than last year’s score of 2.2 will make it a lot tougher for the government to attract foreign strategic investors from risk-adverse industries,” he warned. Russia this year scored 2.1.

In addition to opening up the economy to private investors, the government needs “to soften its requirements for foreign investment in the so-called strategic industries if not completely removing them,” Evsei Gurvich, head of the Moscow-based Economic Expert Group, a think tank said. While the size of government stake in a particular industry does not necessarily deter foreign investors, limiting investment in certain strategic industries still shake investor confidence, Gurvich said.