economic bulletin 20111103 - denizbank · last month the kingdom's output declined to 9.4 mln...

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ECONOMIC BULLETIN Short term has no future

№ DEB-2011.11-01

Economic News

Russian CPI rose 0.2% in the week to 31 October, double the pace seen in the two previous weeks, data from the FSS showed on Wednesday (2 Nov). This brings CPI since the start of the year to 5.1%, compared with 6.8% in the same period of 2010. The recent increase in inflation pace is still relatively mild and should not threaten the official inflation forecast. The CBR has pledged to keep 2011 inflation at below 7%, a new pos-Soviet low, while the EconMin says that the full-year rise could come at not above 6.5%. In the latest week, prices for diesel fuel increased the most, by 1.1%, and most dairy products were slightly more expensive, but prices for fruit and vegetables continued to decline, by 0.6%. Inflation, previously cited as the greatest concern among households ahead of the parliamentary election in December and the presidential vote in March, has slowed down this year thanks to generous harvest which sent foodstuff prices down. / Thomson Reuters

CBR expects $70 bln in capital to leave Russia this year, $20 bln more than the latest

official government forecast, a CBR document obtained by Reuters showed on Tuesday (1 Nov). The EM had said late in October that Russia was unlikely to see any outflow in the fourth quarter, after the draining of money for the year to that date hit $49.3 bln. "A high pace of accumulation of assets abroad by the private sector is expected to continue until the end of the year, together with a lower amount of resources raised abroad. As a result ... net capital outflow will increase and come to $70 bln," the CBR said in the document. Uncertainty over global economic developments and prices for oil, Russia's main export and chief driver of the rouble's performance, have been cited as the main reason for capital flows. "We see two factors underpinning capital outflows: one external and one domestic," analysts at Morgan Stanley wrote in a recent note. "Externally, a new wave of risk-aversion has frozen lending activity to many developing countries and led to a sell-off of many emerging market assets. Domestically, we think that political uncertainty will remain elevated until the formation of a new government in May’12, following the March’12 presidential elections." The CBR has also lowered its forecast for its gold and foreign exchange reserves by $20 bln to $495 bln. This would be mainly a result of the re-evaluation of the currencies that make up the reserves, but indicates also that the CBR envisages that some of the reserves may be needed to prop up the rouble in the last two months of the year. As of summer 2011, the reserves, the world's third-largest, were held 45.2% in the dollar, 43.1% in euro, 9.3% in the British pound, 1.6% in the Japanese yen and 0.8% in the Canadian dollar. The reserves stood at $514.6 bln as of 21 October, little changed from the beginning of October, but $30 bln lower than at the end of August, on the eve of a wave of risky-asset selloffs spurred by euro zone debt concerns. / Thomson Reuters

Cuts in export duty pushed Russia's oil production, the world's largest, to a post-Soviet

high of 10.34 mln barrels per day (bpd) in October, the Energy Ministry said on Wednesday (2 Nov). This compared with a previous record high of 10.30 mln bpd hit in September. But gas output at the Gazprom, slumped year-on-year on high gas prices for buyers. Russia has kept ahead of Saudi Arabia as the world's largest crude producer. Last month the kingdom's output declined to 9.4 mln bpd from 9.5 mln bpd, according to a Reuters survey. October was the first month of the new "60-66" taxation regime for the Russian oil industry, which cut duties on crude oil and some refined products to stimulate output of high-grade oil products and crude. Hydrocarbons are a major source of state revenue, which must be replenished after a rise in spending ahead of parliamentary elections in December and a presidential vote in March. Russia's third-largest oil company TNK-BP, half-owned by BP, contributed the most to the crude production increase, with output edging up 0.2% month-on-month to 6.27 mln tonnes. Small producers, a category which includes joint ventures such as Salym Petroleum, operated by Shell and Gazprom Neft, also made a significant impact with a 2.2% increase to 3.6 mln tonnes. According to the West's energy watchdog, the

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International Energy Agency, Russia's oil production peaked at 11.41 mln bpd in 1988, when it was still part of the Soviet Union. Analysts polled by Reuters at the end of last year, expected Russian oil output would increase by 1.1% to 10.26 mln bpd this year. Year-to-date, output has averaged at 10.25 mln bpd. Russia's overall daily natural gas production increased by 13% to 1.8 bln cubic metres (bcm) last month from 1.59 bcm in September. Gas output at Gazprom rose 15% to 1.35 bcm a day month-on-month. But Gazprom's output dropped 9.2% from October’10 as buyers in Europe struggled to cope with high gas prices, approaching $500 per 1,000 cubic metres, and had bought volumes in advance. "It is the lowest October production in the history of Gazprom," Mikhail Korchemkin of East European Gas Analysis said. The state corporation has been suffering from competition with independent producers including Novatek, whose production jumped by 54% year-on-year to an all time high of 4.8 bcm last month. Oleg Maximov from Troika Dialog brokerage said non-state gas producers were gaining the upper hand on the domestic market. "We estimate that over 9 months in 2011, Russian consumption increased by 10 bcm y-o-y, while the output by the independents rose by 12 bcm, hence leaving no room for Gazprom to participate in growth on the domestic front," he said. Gazprom, which covers a quarter of Europe's gas needs, is also facing competition from the spot market, where prices are cheaper, and alternative fuels, such as liquefied natural gas. It still aims to increase its gas export to Europe to 155 bcm this year from around 138.6 bcm in 2010. / Thomson Reuters

Russia was close to joining the WTO after being offered a "take it or leave it"

compromise on Thursday (27 Oct) by its tiny neighbour Georgia, the last holdout in Moscow's tortuous 18-year path to membership of the global trading club. Russian entry to the WTO would be the biggest step in world trade liberalisation since China joined a decade ago, and the United States and the European Union have urged all sides to try to settle membership terms by the end of this year. Only Algeria has spent longer trying to negotiate WTO membership, and after a big diplomatic push, trade diplomats say the conditions are so favourable for Russia that it's a case of 'now or never.' Georgia, like all WTO members, has an effective veto on Russia's membership, and it is the last to agree. Its offer of a compromise deal was the climax of a long and knotty negotiation, overseen by Swiss mediators, about how to handle trade through two breakaway regions of Georgia that are loyal to Russia. Sergi Kapanadze, deputy foreign minister and the head of Georgia's delegation, said the proposal provides for the electronic exchange of trade data and international monitoring of trade between Russia and the two Georgian regions. "If Russia accepts this proposal, it will become a WTO member ... there is nothing unacceptable for Russia in this proposal," Kapanadze told Reuters. "It is the final proposal, it won't and cannot be changed. The game is really over now and it is up to the Russians to decide." Russian negotiator Maxim Medvedkov said Russia would give its response by early next week. Georgia's ambassador in Geneva, Zurab Tchiaberashvili, said the fact that Medvedkov was referring the compromise back to Moscow suggested that he accepted it. Previous rounds of talks between Russia and Georgia, which went to war over the disputed regions in 2008, have ended much more fractiously. Russian WTO membership could bring rapid benefits for Georgian exports such as mineral water and wine, both popular in Russia until the relationship soured. For Russia, which already has strong exports of oil and gas, the benefits may be slower to materialise, though the World Bank estimates it could increase Russian GDP by 3.3% in the medium term. Advocates of membership say Russian consumers will benefit and Russia will have to become more efficient, making good on the government's mantra of diversification by putting the oil-dominated, state-led economy on a diet of rule-based openness. Russian opponents of accession say a flood of imports will stifle domestic producers, and Russia may be hit by demands that it give up longstanding policies such as the gas export monopoly enjoyed by Gazprom. WTO membership would need to be ratified by parliament, but Prime Minister Vladimir Putin has declared himself in favour, saying its benefits outweigh the disadvantages.

A FEW MORE HOOPS. Although Russia may have overcome the most tricky obstacle, it still needs to jump through some hoops that could produce a last-minute stumble, potentially jeopardising a tight deadline. The first is the WTO's working party on Russia, which will meet informally on 7-8 November to finalise its accession terms. That is very nearly a done deal, but

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Russia still needs to agree to a few small but important matters, such as its definition of high-quality beef, an unresolved issue with meat exporters such as Brazil, Australia and the United States. Russia's candidacy would then go to a formal meeting of the working party on 10-11 November to get the accession package signed off and forwarded to a meeting of ministers in December. Any of the WTO's 153 members can stop a formal meeting of the working party, a rule that provides an effective veto even for small nations like Georgia. But working party chairman Stefan Johannesson said the meeting would go ahead, "strongly supported" by WTO members. Despite Georgia's compromise offer, one western diplomat said Ambassador Tchiaberashvili sent a letter to WTO members insisting Georgia could still block the meeting if there was no deal with Russia. But, in a sign of limited patience with Georgia, he was told he would have to turn up and strike Russia's candidacy from the agenda. "It's perhaps a bit more uncomfortable to have to turn up to block the meeting when you've got an entire room of people glaring at you," the western diplomat said. / Thomson Reuters

Global Economy

Russia is ready to hold talks with individual euro zone member states on providing

them with financial help through the IMF, a Kremlin aide said on Monday (31 Oct). "There have been no formal requests from the European Union but if they make such a request ... the FinMin, the CBR, the government ... will seriously consider it as well as the possibility of support," top economic adviser Arkady Dvorkovich told reporters. Dvorkovich, Russia's sherpa to the Group of Eight industrialised countries and the wider Group of Twenty powers, said Russia had held talks with other emerging economies on aiding the euro zone during its debt crisis. Dvorkovich told Reuters in September that the issue would be discussed during this week's G20 summit in Cannes, and has said Russia could invest up to $10 bln in the euro zone economy through the IMF. He said earlier this month that Russia was ready to buy into Spanish bonds once the euro zone member states put in place a strategy to overcome the bloc's financial problems. / Thomson Reuters

The world's manufacturing economy stagnated in October with the crisis-wracked euro

zone by far the worst performing region, according to a business survey that showed new export orders declining at the fastest pace in almost two-and-a-half years. The JPMorgan Global Manufacturing PMI rose slightly to 50 in October from 49.8 in September, putting it right on the threshold that separates growth from contraction. Survey compiler JPMorgan noted strengthening growth in China, Russia and India, but manufacturers in the United States edged closer to stagnation and euro zone factory activity saw an alarming fall last month. The new export orders index fell to 48.4 in October from 48.8 the previous month, its worst showing since May’09, suggesting world trade has already taken a hit from the huge economic uncertainty surrounding the euro zone's debt crisis. The downturn in euro zone manufacturing in October was even deeper than previously thought, according to "grim" business surveys on Wednesday (2 Nov) that showed the currency union's debt crisis is dragging its economy back into recession. The indicator, produced by JPMorgan with research and supply management organisations, combines survey data from around 20 countries including the United States, Japan, Germany, France, Britain, China and Russia. / Thomson Reuters

Italian PM Silvio Berlusconi denied as "entirely baseless" a report in the daily la

Repubblica newspaper on Tuesday (1 Nov) that he had held a special meeting with French President Nicolas Sarkozy and German Chancellor Angela Merkel after last week's summit meeting of European Union leaders. He also denied reports that he planned to dismiss EM Giulio Tremonti, with whom he has had repeated disagreements in recent weeks. La Repubblica reported that Berlusconi had said that he had held private meetings with Sarkozy and Merkel to create a "common front" to save the euro. It also said he was counting on help from Russian PM Vladimir Putin, with whom he has good relations, to help Italy deal with the mounting market turmoil that has sent its bond yields to record levels. Berlusconi also denied that report. / Thomson Reuters

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Deleveraging French banks are pushing ahead with global asset sales and are also managing capital aggressively by turning down syndicated dollar loans for corporate clients they have banked before, industry sources said on Monday (31 Oct). A pull-back from unprofitable lending, particularly expensive dollar loans due to higher bank funding costs, is under way globally as French banks try to conserve capital in a move that could reshape project finance and commodity lending. Europe's banks have been told to cut dividends and bonuses to help find EUR 106 bln to shore up their core capital by June, as they get ready to write off half their Greek government debt. French banks are still lending selectively but have been notably absent from several high-profile loans in Europe, the Middle East and Africa (EMEA) including the $6 bln loan for commodity trader Xstrata. A $4.7 bln loan for Qatar's Barzan project financing which is sponsored by Qatar Petroleum and Exxon Mobil also had no French lenders. "Barzan was a profitability issue, the pricing was too low and did not meet our return requirement," a senior French banker said. In Asia BNP Paribas pulled out of a $2.075 bln refinancing for Australian media company Seven West after being shortlisted as one of the leads and Societe Generale declined to participate in a $15 bln, 364-day bridge loan for United Technologies Corp in the United States for the company's acquisition of Goodrich Corp. "We have to manage our balance sheet more carefully and have to be more selective. We are focusing on our core markets and clients. If there is not tangible side business and the deal is not profitable, we prefer to pass," the senior French banker added.

SHORTFALL FOUND - FOR NOW. The drop in demand for dollar assets is currently being met by domestic or regional lenders and US and Japanese banks but is worrying banks that are structuring deals for later this year or early 2012 as the trend accelerates. "Banks structuring deals are mindful of the reduced demand for dollars - you have to factor in a big drop in appetite from the French and Germans. Filling that gap is very deal dependent - I wouldn't bet large sums of money that things always get done," a senior loan distributor said. Loan pricing has risen in EMEA by up to 25 bps for top companies since the summer, but with top firms borrowing at less than 100 bps, it is still significantly lower than banks' funding costs, which can be as high as 300 bps. European banks are also taking steps to limit the impact of unprofitable dollar lending which include reducing the amount of dollar borrowing, even for top blue-chip companies. Swiss-based Adecco, the world's largest staffing company, saw its dollar borrowing restricted to $200 mln of a $600 mln loan. Multi-currency tranches are being created for European banks that prefer euros to dollar loans and banks are also charging a premium of 25-50 bps for dollar borrowing. Companies without enough ancillary business to subsidise low loan pricing face higher loan margins and shorter loan maturities. Banque PSA has a shorter three-year tenor with two one-year extension options for example.

RUSSIA IS 'FRANCE FREE'. The impact of French banks' reduced appetite and unpredictability has been offset by strong demand for Xstrata and Barzan's loans but Russia's active loan market is the next focus for deleveraging and could be more affected. The $6 bln loan for the mining group Xstrata had no commitments from BNP Paribas, Societe Generale, Intesa and ING which would have totalled around $700 mln, bankers said. The deal was heavily oversubscribed, however, and increased from an original amount of $5 bln as existing lenders increased their commitments and new lenders joined. The $4.7 bln project financing for Qatar's Barzan project financing also had no French lenders in a significant about-turn for French banks which have been active lenders to the Middle Eastern loan market and Gulf project financing. The deal, which was two times oversubscribed, revealed surprisingly high dollar liquidity among Middle Eastern banks as high net-worth individuals route savings and investments back from euro zone banks to local lenders, a third banker said. In Russia French banks are pulling out, with the exception of a $1.5 bln loan for Norilsk Nickel. / Thomson Reuters

Japan told the head of Europe's bailout fund on Monday (31 Oct) that it would continue

to buy its bonds, but, like fellow potential investor China, did not commit to putting cash into a mooted special purpose vehicle to enhance the rescue fund's firepower. Other potential buyers, such as Brazil and Russia, have indicated they are willing to support the euro zone either through the IMF or bilateral talks with individual member countries. European Financial Stability Facility (EFSF) CEO Klaus Regling was in Tokyo after courting China over the weekend. His trip

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comes ahead of a G20 leaders' summit in France on Thursday and Friday that policymakers hope will secure pledges of more money to help resolve the bloc's debt crisis. Europe is looking to countries with big foreign exchange reserves, such as China, Japan and major emerging economies, to provide the extra financial firepower to strengthen the fund four- to five-fold, to about EUR 1 trln. Japan is already the biggest holder of EFSF bonds outside of the euro zone bloc and Tokyo has in the past indicated it would be willing to buy more, but first it wanted to see Europe taking decisive steps to contain its sovereign debt crisis. "The Japanese government will continue to buy the EFSF bonds that we have been issuing over the last 10 months and we will continue to be in contact about future operations," Regling told reporters after a meeting with Takehiko Nakao, Japan's vice FM for international affairs. Regling had tried to entice Beijing to invest by saying investors may be protected against a fifth of initial losses and that bonds could eventually be sold in yuan if Beijing desires. China has powerful reasons to contribute, including supporting the recovery of its single biggest export market and protecting the value of the EUR 600 bln of euro zone sovereign debt it already holds, but Regling's pitch drew a cautious response from Beijing. China's careful stance had been underscored on Friday by Vice FM Zhu Guangyao, who said Beijing was awaiting details on new investment options for the EFSF before deciding its next move.

EUROPE DEAL. EFSF chief Regling travelled to Asia after European leaders on Thursday struck a hard-fought accord aimed at tackling the two-year crisis that has already required financial rescues of Greece, Portugal and Ireland. A key element of the agreement is to leverage the EFSF to EUR 1 trln, though Europe has yet to work out the details and European governments remain wary of pledging more money. Market economists have been calling for a rescue fund with twice the resources under discussion in Brussels, and the deal failed to ease bond market pressure on major economies Italy and Spain. One idea for boosting the fund is to offer insurance, or first-loss guarantees, to those buying euro zone debt in the primary market. Another is to set up a special purpose investment vehicle (SPIV) aimed at attracting investment from cash-rich emerging powerhouses such as China and Brazil. Japan holds about EUR 2.7 bln, or 20%, of the total bonds issued by the EFSF after it purchased them in January and June. But it is not clear whether it would be interested in investing some of its $1.2 trln in currency reserves in the new special vehicle. Brazil has given a cautious response to buying EFSF bonds in the future, saying it needs more information about the SPIV. Indeed, the South American country is willing to help the euro zone via a bilateral agreement with the IMF, a senior government source said on Friday. Russia is also ready to support the bloc, but through bilateral talks with euro zone members or via the IMF, the Kremlin's top economic adviser, Arkady Dvorkovich, said on Monday. Beijing, which holds the world's largest foreign exchange reserves of some $3.2 trln, has expressed confidence that Europe can overcome the debt crisis, but has made no public offer to buy more European government debt. Jean-Claude Juncker, chairman of the Eurogroup gathering of euro zone FMs, said on Sunday that it made sense for China to invest its surplus in Europe but this would not involve political concessions. The appeal for Chinese help has come under fierce criticism for potentially weakening Europe's negotiating position in political and economic disputes with Beijing. "The fact that China and others might be involved in a comprehensive solution does not make me worry in the slightest, because China has an improbably large surplus so it makes sense for China to invest this in Europe," Juncker told German public broadcaster ARD. / Thomson Reuters

Markets: FX / MONEY MARKET

FX MARKET:

The Russian rouble was lower on this week, on fears that Greek voters may reject a new aid package and as investors squared positions ahead of a three-day long weekend in Russia. The external background was gloomy after the U.S. Federal Reserve offered no further steps to prop up the financial system, but cut its economic growth forecast, while Germany and France told Greece it would not receive any funding aid before it decides if it wants to stay in the euro zone. The overall market nervousness affected the rouble, while relatively light demand for foreign currencies pushed up the basket on the thin market. No one wants to hold risks now. The rouble eased 2.85% to 30.66 against the dollar. Vs the euro, the rouble gave down 0.5% to 42.33 and weakened 1.7% to 35.91

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against the basket. The basket could rise to 36-36.1 where it will be awaiting the outcome of the ECB meeting and news from G20. Profit taking ahead of a three-day long weekend in Russia also pressured the market. Friday is a national holiday in Russia.

CBR sees no

need to change the level of its key interest rates this month, although it may loosen its grip on the rouble rate by changing forex policy in the near future, the deputy chairman said on Wednesday (2 Nov). The CBR put key interest rates on hold

last week, indicating that current rate levels balance inflationary risks and risks to the sustainability of economic growth. It will next meet on monetary policy at the end of November. "We do not see a necessity to change interest rates," Sergei Shvetsov told journalists after a briefing at the Duma, the lower house of the parliament, referring to this month's meeting. Shvetsov also said that currency policy could be changed in coming months. "We plan to carry out less interventions (next year). Our presence on the market will be decreasing," he said, adding that there was

a chance that the CBR could widen the rouble's trading band before the end of this year but this was not very likely. The CBR keeps the rouble within a floating band against the basket, which now stands at 32.7-37.7, and sells foreign currencies to prop up the rouble in the upper range of the band. It does not intervene in the middle range of the corridor and starts buying dollars and euros when the rouble firms towards the lower boundary. In the first 10 months of 2011 the CBR net

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purchases in interventions, which is a positive difference between the buying and selling of foreign currencies, totaled $16 bln, Shvetsov said. / Thomson Reuters

MONEY MARKET:

On this week Money Market rates fluctuated around 4.75-5.75%.

The FinMin will

provide the banking system, struggling through liquidity strains, with rouble injections in amounts similar to what banks have to repay into the budget, the FinMin

said on its website on Tuesday (1 Nov). "In order to maintain ... liquidity in the banking system, in November the FinMin and the Federal Treasury will continue placing federal budget funds at banks' deposits on a regular basis in volumes, equivalent to deposits that are being returned by lenders," the FinMin said. In November, the Russian banking system is due to redeem RUB 480 bln to the FinMin, which placed RUB 55 bln of temporarily free budget funds at banks' deposits earlier this day. The tenor of these deposits varies from a few months to one year and carries interest rates of between 7.5-8%. Russia entered the recent phase of liquidity shortage in September after the CBR interventions, aimed at defending the rouble from excessive depreciation, dented the balance between supply and offer on the money market. This pushed interbank overnight lending rates to their highest since January’10 of above 5.5% and made the CBR REPO operation the main source of rouble funding for the market. Market players say strains will ease in coming months when the government is expected to start regular year-end spending, injecting money into the country's financial system. / Thomson Reuters

The CBR is renewing agreements with banks on collateral-free lending to prepare for

possible worsening of liquidity strains, but sees no need to use the tool this year, the CBR officials said on Wednesday (2 Nov). Collateral-free lending was widely used during the crisis of 2008-2009 to prop up liquidity in the banking system, but was scrapped later as funding strains eased. Russian authorities have said that they do not see any signs of systematic liquidity shortage at the moment, and are using short-term REPO operations and placing budget cash on banks' deposits to support the sector with additional money. Alexei Simanovsky, a supervision veteran recently appointed deputy chairman of the CBR, said on Wednesday the regulator is not going to relaunch collateral-free lending now but wants to be ready if any urgent need arises. "There is a decision to renew general agreements (with banks) but it does not mean that the CBR is going to use it in a concrete way... It will decide if there is any necessity," he said. His comments came after the Russian stock and forex markets suffered the worst sell-off since mid-September on Tuesday, battered by an increased capital outflow forecast and a global flight from risky assets after Greece called a referendum on its bail-out deal from the European Union. Simanovsky said the CBR will use the tool in case of "a very high liquidity deficit" but did not provide any figures. Another CBR deputy chairman, Sergei Shvetsov, said later on Wednesday that the CBR sees no need to relaunch collateral-free lending this year, echoing his comments to Reuters last week. "We have a sufficient number of instruments (for now)," Shvetsov told the Duma, the lower house of Russia's parliament. / Thomson Reuters

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The CBR left all key rates unchanged on Friday (28 Oct), taking a pause from gradual narrowing of the spread between lending and deposit rates, and indicating that it sees the current shortage of liquidity as a near-term supply shock. The decision, widely expected by economists and market alike, came at a time when interbank money rates rose to levels of early 2010 and the amount of cash sought from the central bank via repurchasing auctions reached its biggest since 2009. The CBR said in a statement that it sees a growing need for refinancing instruments and that it would ease borrowing requirements, but it stopped short of restarting the collateral-free loans used widely during the 2008-2009 crisis. "The CBR is not planning to consider relaunching the practice of providing collateral-free loans in the foreseeable future," CBR Deputy Chairman Sergei Shvetsov told Reuters after the decision. Banking liquidity, on both correspondent and deposit accounts with the central bank, was at RUB 750 bln, half the level seen before the August-September global turmoil that tightened credit and spurred further capital flight form Russia. "In the current tense situation with rouble liquidity (the CBR) could have lowered the REPO rate, which guides the market now and which is quite high and, as such, raises banks' borrowing costs," Stanislav Yarushevichus, chief forex dealer with ING Bank in Moscow told Reuters. Russia still has a complex system of rates whose importance changes along with market conditions. The one-day REPO rate, now an effective benchmark for money market rates, stands at 5.25%. But the CBR reiterated that the current level of rates provides an adequate balance between easing inflation and a slowdown in economic growth. "The decision was based on an assessment of inflationary risks and risks to the sustainability of economic growth, including lingering uncertainty about external economic developments," the CBR said in a statement. CPI have risen 4.9% so far this year and are set to come in at a post-Soviet record low for the whole of 2011. The economy expanded a robust 5.1% in GDP terms in the third quarter, but both the government and economists alike expect it to slow down to around 3.8-4% in the last three months of the year. The CBR kept its benchmark refinancing rate, which serves as a guide for retail lending, at 8.25%. The deposit rate, which in times of ample liquidity has the biggest impact on the market, was left at 3.75%, as predicted by 14 out of 15 economists in a Reuters poll earlier this week.

SMALL STEPS TO EASE LIQUIDITY. To ease borrowing strains, the CBR will offer from 1 November loans, backed by non-market assets and second-party guarantees. We believe that demand for such loans will be small: the rate is high. "Nonetheless, this is a very good indicator of demand for liquidity - if banks start to use this tool, then it will be the time to start thinking of a more serious infusion of money into the system." The regulator has also extended the tenor of gold-backed loans to 180 days from 90 days with a rate of 7.25%, saying that its increased liquidity supply will help to limit a rise in money market rates. "We expect liquidity conditions to improve as well, as the rouble is strengthening on improving global risk sentiment. We believe the rates are appropriate for now, so the CBR is likely to be on hold for the rest of the year as well," said Sanna Kurronen, analyst with Danske Bank in Copenhagen. The next interest rate meeting is scheduled for the last decade of November, the central bank said. Below is a table of the central bank's interest rates: KEY RATES CURRENT LEVEL refinancing (refi) rate 8.25 pct min one-day repo rate 5.25 pct 1-day overnight deposit rate 3.75 pct 7-day deposit rate 3.75 pct 30-day deposit rate 5.50 pct 90-day deposit rate 6.50 pct fixed rate 1-day repo 6.50 pct fixed rate 7-day repo 6.50 pct fixed rate 30-day repo 6.50 pct fixed rate 1-year repo 7.75 pct fixed 1-day lombard rate 6.50 pct fixed 7-day lombard rate 6.50 pct fixed 30-day lombard rate 6.50 pct swap (rouble) 8.25 pct

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KEY RATES CURRENT LEVEL overnight credit rate 8.25 pct 90-day gold-backed loans 6.75 pct up to 90-day loans backed by non-market assets and guarantees 7.00 pct 91-180 day loans backed by non-market assets and guarantees 7.50 pct 181-365 day loans backed by non-market assets and guarantees 8.25 pct min 7-day repo rate 5.25 pct min 3-month repo rate 6.75 pct min 6-month repo rate 7.25 pct min 12-month repo rate 7.75 pct min 3-month lombard rate 6.75 pct min 6-month lombard rate 7.25 pct min 12-month lombard rate 7.75 pct

BANKS' MINIMUM RESERVE REQUIREMENTS for liabilities to non-resident corporates 5.50 pct for liabilities to private individuals 4.00 pct for liabilities to other liabilities 4.00 pct

/ Thomson Reuters

Markets: FIXED INCOME

The FinMin sold less than half the six-year OFZ it offered on Wednesday (2 Nov), declining to offer a premium to investors unnerved by the worsening debt crisis in the euro zone. The FinMin sold RUB 4.25 bln in bonds maturing on 14 June’17 out of RUB 10 bln on offer at 8.2%, the upper boundary of the 8.1-8.2% yield guidance announced the day before. On Tuesday, six-year OFZ bonds were trading at 8.29% on the secondary market. Global risk aversion has been elevated since Greece said it would call a referendum on austerity measures linked to a euro zone rescue plan. Lingering domestic liquidity strains due to CBR interventions aimed at easing downside pressure on the rouble also put pressure on demand at Wednesday's sale. Analysts wrote in an earlier note that the auction was unlikely to be as successful as last week's, when the FinMin sold nearly all of RUB 10 bln offered. OFZ bonds are considered to be relatively low-risk instruments that are widely used as collateral in REPO operations with the CBR. The government is under less pressure to find buyers for its debt due to higher than expected oil prices that have boosted revenues and narrowed the 2011 budget deficit forecast. The FinMin has raised RUB 1.111 trln in bond sales so far this year, after promising in September that it would fulfill a reduced RUB 1.4 trln target for the full year. / Thomson Reuters

Russia's Siberian Coal Energy Company (SUEK) said on Friday (28 Oct) it had secured a $1.3 bln five-year syndicated pre-export loan facility. The credit facility, which carries a margin of 270 bps, will be used to refinance existing debt and for general corporate needs, SUEK said in a statement. / Thomson Reuters

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Markets: STOCKS

On this week the dollar-based RTS index fell 6.1% to 1512 bps and the rouble-traded MICEX was down 3.2% at 1,478. Given such great turbulence it is a better idea to stay away from the market or, at least, to keep short positions.

Sberbank may

start to prepare for a stake sale if its share price edges closer to

100 roubles, CEO German Gref said on Friday (28 Oct). "In the past three weeks our shares rose by 25-30% and if the price is close to 100 roubles we may talk about preparing for privatisation," Gref said. Sberbank planned to sell a 7.6% stake last month but postponed the deal until situation on the global markets improves. / Thomson Reuters

Russia's stock market could rise and foreign manufacturers of consumer goods may

benefit if the country ends years of negotiations and joins the WTO, while local manufacturers could suffer from the increased competition. "(WTO entry) is one of the major indicators that the market is looking for to show that Russia is becoming part of the global financial community," said Roland Nash, chief strategist at hedge fund Verno Capital. "This is one of those events that the market has been waiting for, for at least 15 years." Nash forecasts a possible 5 to 10% rise in Russian stocks if an announcement is made. "There's bound to be some losers in the equation but net-net it should be a major benefit for Russia," said Nash. "Prices should go down (for consumers) - it increases competition and lowers some trade barriers." Kingsmill Bond, Russia strategist at Citi said: "The losers are easier to identify than the winners." The losers are the local Russian producers of tradable goods, meaning large manufacturers, as in the long term tariff barriers will fall (for importers). Below is a rundown of potential winners and losers:

CONSUMER ELECTRONICS RETAILERS – POSITIVE. Consumer electronics and white goods retailers such as M.video and Germany's Metro may benefit through more favourable import conditions and see sales volumes rise amid improved affordability. Prices of popular electronic goods such as MP3 players, tablet computers and flat-screen TVs and smart phones are now much higher in Russia than in many other countries.

FOOD RETAIL – NEUTRAL. Analysts do not see any material impact on grocery chains already operating in Russia, such as France's Auchan and Russia's X5 and Magnit. Food retailers which have yet to tap the market, such as U.S.-based Wal-Mart, may now consider Russia more attractive on the assumption that the overall investment climate will improve.

FOOD PROCESSING, AGRICULTURE, FERTILIZERS – MIXED. International and U.S meat producers may gain if tariff quotas and state subsidies change in their favour, potentially hurting Russian meat producer Cherkizovo, but analysts cautioned that it was hard to predict the precise impact. Fertiliser prices could rise in theory, though the government keeps a close watch on agricultural inputs after several tough years for its farmers, and some producers have accepted price limitations on the domestic market for political expedience.

TELECOMS – POSITIVE. Telecoms operators such as MTS, Vimpelcom, Tele2 and Rostelecom, may feel benefits through lower import tariffs on network equipment, all of which is imported, analysts said.

PHARMA – POSITIVE. WTO accession would be positive for pharmaceutical companies operating in the country, said Vladimir Shipkov, chairman of the Association of International

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Pharmaceutical Manufacturers. It will mean both Russian and international drugmakers will get stimulus to bring more products to the domestic market and invest in local production and research and development. "Russia's entry to WTO will increase the attractiveness of the sector as it brings more protection of intellectual property and ...therefore gives more guarantees that drugmakers rights to their innovative products will be safe," Shipkov said. Among those operating in Russia are: Swiss drug maker Novartis AG, Anglo-Swedish drug company AstraZeneca Plc and Russian drugmaker Pharmstandard.

AEROSPACE - NEGATIVE FOR DOMESTIC INDUSTRY. Planemakers Boeing and Airbus have been vocal supporters of WTO entry. Accession means import tariffs on planes are likely to be reduced, allowing more competitive pricing when selling to Russian customers. This may hold back Russia's own plane making industry, which has re-emerged following years of post-Soviet decline with the launch of Sukhoi's Superjet 100 passenger aircraft and the forthcoming MS-21. Boeing says tariffs have already been reduced for all sizes of aircraft except the 170-219 seater, the segment targeted by the MS-21, which is due for delivery in 2017. That and the need to replace aging Soviet models has led to Russian orders for more than 100 Boeings in the past year. Russia also generates around $300 mln a year in fees for using its airspace. Foreign airlines would receive a financial boost if these charges were reduced or waived.

MINING – MIXED. The impact on most mining companies will likely be minor, since few countries have import duties or other restrictions on metals that would be lifted on WTO accession on products such as nickel, copper and aluminium, Barry Ehrlich, Senior Analyst at Alfa Bank in Moscow, wrote in an email. The impact on steel producers is difficult to analyze because it depends on the specific terms of the treaty, he wrote. Access to European markets may be improved as quantitative limits may be gradually lifted. However, Russia has import duties and quantitative limits of its own on certain steel and pipe products, which it may have to eliminate as part of the treaty. The net result may be greater export volume into Europe and a more competitive domestic market and lower domestic price premium, Ehrlich wrote. Russia's steelmakers include Severstal, Evraz and Magnitogorsk Iron & Steel Works.

OIL AND GAS - NEUTRAL/POSITIVE. There will be no impact on Russia's gas sector and minor impact to its oil producers, said Alexander Burgansky, Head of Research at Otkritie bank. Russian opponents of accession say Russia may be hit by demands that it give up longstanding policies such as the gas export monopoly enjoyed by Gazprom. However, Russia's senior WTO negotiator Maxim Medvedkov said recently it was happy with the conditions set for it to join, having successfully fended off attempts to split up Gazprom. "The WTO side did ask for a lot of things; to break up Gazprom, to equalise exports and domestic gas prices, and they asked for the liberalisation of the domestic gas tariffs and for third-party access. Ultimately Russia refused all that and the WTO said 'OK'," said Burgansky. "So, there's absolutely no impact at all. The greatest impact on the oil and gas sector will be felt through a reduction in the total cost of equipment imports. Oil companies such as Rosneft, TNK-BP and LUKOIL are still far from being able to produce clean, European standard fuels and must invest heavily in expensive, often foreign-produced refinery equipment to bring their refineries up to standard, but the cost could be marginally reduced by WTO-related tariff changes.

AUTO INDUSTRY - NEUTRAL/NEGATIVE. Russia has already launched a system for encouraging both foreign and local manufacturers to ramp up car production and better utilise its sprawling Soviet-era plants. Known as Decree 166, the proposal demands manufacturers commit to production of 350,000 vehicles a year in return for lower import tariffs for parts. Companies including Renault, Ford and General Motors have signed up, agreeing joint ventures with local players including Lada-maker AvtoVAZ, Sollers and GAZ Group. The existence of this system means that joining the WTO would have little impact on the industry. Duty on imported cars is expected to be cut to 25% from 32%, said VTB Capital autos analyst Vladimir Bespalov, but this will have only a minimal effect on the market. "Importers will benefit, but it will not cause a revolution," he said. "Joint ventures between foreign manufacturers and local players will ramp up and continue to drive the market.

BANKING AND INSURANCE – NEUTRAL. Banks will be broadly unaffected. International players will still be required to set up a Russia-registered subsidiary that is regulated by the central

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bank. Insurers, a far less mature sector, may have certain restrictions eased to allow for greater distribution of life insurance and mortgage products. This would benefit the Russian consumer, who would be able to buy a wider range of products at a more competitive price. The key restriction relates to the share of foreign capital in the total capital of insurance companies, currently set at 25%. "This is a major issue, the industry has been trying to negotiate with the government the lifting of this ceiling independently of the WTO negotiations," said Christos Adamantiadis, head of Chartis Russia. / Thomson Reuters

Dividend payments by companies in emerging markets are set to rise, offering

opportunities to offset declining yields in developed markets, a fund manager at ING Investment Management said. "We will face a tough macro-economic environment. The euro zone is probably already in some kind of a recession ... In this type of environment, you look at equity returns. Dividend will be much more important than it used to be," said Nicolas Simar, head of ING Investment Management's high dividend team. Simar runs the EUR 1.1 bln ING Euro Dividend Fund and heads ING's European high dividend team, which is part of a global team managing EUR 8 bln. He recently launched ING's Emerging Markets High Dividend fund, which had EUR 225 mln under management at the end of September. The fund is modeled on a closed fund which ING launched in the United States at the end of April. The fund's performance in the last three months has been a 10.7% decline, against a 3.4% drop in the MSCI Emerging Markets Index, though since April its 16.8% drop is in line with a 16.6% index drop. Simar prefers companies in China and Russia, which offer an average historic dividend yield of close to 4.5%. "Of course it is lower than what you can find in Europe or in the euro zone, where we have 6 to 6.5% yields in our portfolio." Simar notes however the growth potential is much bigger. "Dividend in the emerging markets is expected to grow by 11%." The current 4.5% dividend yield is already outperforming the MSCI emerging markets index, which has an average yield of 3.5%. "Already today emerging markets companies have a higher average (dividend) yield than in the United States and Japan," Simar said, adding the S&P 500 has an average yield of 2.5% and Japanese companies of between 2 and 2.5%. "And it is growing ... much faster." Simar likes utilities and has China Resource Power as one of his favorite picks. The stock suffered from high coal prices, but depressed expectations may now make it a major beneficiary of potential lower coal prices. Another stock that could benefit from lower input prices is South Korea's Posco, Simar said. He also likes Gazprom. "It is only a 2.5 dividend yield stock right now. But the coverage is huge, above 15 times by earnings. It is one of the biggest gas and oil reserves you can find. The potential for them to grow their dividend is much bigger than you can find with integrated oil companies in Europe or the United States." He also likes Telecom Indonesia for its prospects. "Competition is easing in Indonesia and the company is gaining market share again. The 5% dividend yield is attractive and the return on equity is 25% with upside potential," he said. / Thomson Reuters

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Macroeconomic indicators of Russia

ECONOMIC INDICATORS PERIOD LATEST PREV YR AGO Nominal GDP (bln USD) Q2 457,9 401,5 340,1 GDP Y/Y Q3 +5.1 +3.4 +3.1 CPI M/M Sept 0.0 -0.2 +0.8 CPI Y/Y Sept +7.2 +8.2 +7.0 PPI M/M Sept -0.7 +4.6 -1.3 PPI Y/Y Sept +18.0 +18.5 +5.9 Ind output M/M Sept -0.8 +1.1 +1.5 Ind output Y/Y Sept +3.9 +6.2 +6.2 Retail sales Y/Y Sept +9.2 +7.8 +7.5 Unemployment (mln) Sept 4.62 4.67 5.01 Real disposable income Y/Y Sept +3.2 +1.6 +1.6 Real average wage Y/Y Sept +6.2 +3.9 +3.2 Nominal average wage (rbls) Sept 23.628 23.051 20.999 Capital investment (blnR) Sept 1 035.5 920.0 882.9 Capital investment Y/Y Sept +8.5 +6.5 +7.8 Trade surplus ($bln) Aug 14.7 14.9 8.0 Exports ($bln) Aug 44.6 42.6 31.8 Imports ($bln) Aug 29.9 27.7 23.8 Budget balance (bln rbls) Jan-Sept +1 090.0 +759.0 -645.8 CBR reserves ($bln) 21-Oct 514.6 517.7 481.3 Monetary base (blnR) 12-Sept 6,295 6,242 5,075 M2 (blnR) 1-Aug 20.848 20.743 17.063 REER rouble Aug -3.1 +0.2 +0.1 Oil output (mln bpd) Aug 10.28 10.26 10.06 Oil output (mln T) Aug 43.46 43.38 42.54 Gazprom gas output (bcm) Aug 32.83 35.74 32.86 URALS oil, $/bbl 3-Nov 110.02 110.06 84.34 BRENT oil, $/bbl 3-Nov 110.37 110.56 85.79

ANNUAL DATA 2010 2009 2008 2007 2006 2005 Nominal GDP (bln USD) 1457,0 1291,7 1403,4 1349,3 1022,5 751,9 GDP (pct) +4.0 -7.9 +5.2 +8.5 +8.2 +6.4 CPI Y/Y (pct) +8.8 +8.8 +13.3 +11.9 +9.0 +10.9 M2 (bln R) 20,173 15,698 13,49 13,27 8,996 6,046 Oil/gas cond.(mln T) 505 494 488 491 480 470 Natural gas (bcm) 508 582 665 653 656 641 Coal (mln T) 323 298 326 315 309 298 Grain (mln T) 61 97 108 82 79 78 Beet Sugar (mln T) 2.7 3.3 3.6 3.2 3.2 n/a Gold (T) 201 205 184 163 164 168

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GOVT FORECASTS 2011 2012 2013 Nominal GDP (bln USD) 1609,9 n/a n/a GDP Y/Y (pct) +4.1 (+4.2) +3.7 (+3.5) +4.0 (+4.2) Industry output (pct) +4.8 (+5.4) +3.4 (+3.6) +3.9 (+4.0) CPI Y/Y (pct) 6.5-7.0 (7.0-7.5) 5.0-6.0 (5.0-6.0) 4.5-5.5 (4.5-5.5) Cap. Investment pct +6.0 (+9.0) +8.8 (+4.0) +7.7 (+7.4) Retail Sales pct +4.5 (+4.1) +4.8 (+4.1) N/A Exports $ bln 527.5 (503.8) 533.1 (494.4) 535.9 (512.3) Imports $ bln 340.0 (308.7) 401.4 (352.4) 449.3 (396.0) Trade Balance $ bln 187.5 (195.1) 131.7 (142.0) 86.6 (116.3) Urals oil, ave., $/bbl 108 (105) 100 (93) 97 (97) Rouble rate/$1 28.6 (28.4) 28.4 (27.9) 30.1 (27.9) Rouble REER +7.7 (+2.6) +3.5 (+1.1) +2.0 (0.0) Reserve fund, trln RUB as of yearend 1.450 (1.408) 1,568 1,619 Revenue, trln RUB 11.008 (10.303) 11.779 (10.615) 12.729 (11.674) Expenditure, trln RUB 11.008 (11.023) 12.670 (12.185) 13.766 (13.418) Budget deficit, trln RUB 0 (-0.720) -0.891 (-1.570) -1.037 (-1.744) Budget deficit, % of GDP 0 (-1,3) -1.5 (-2,7) -1.6 (-2,7)

BALANCE OF PAYMENTS ($bln) Q1’2011 2010 2009 Current account 31.8 71.1 48.6 Cap/fin account -15.9 -26.4 -43.5 Net errors/omissions -5.8 -8.0 -1.7 Reserve assets -10.1 -36.8 -3.4

LONG-TERM FOREIGN CURRENCY RATINGS Moody's (December 12, 2008) Baa1 (outlook stable) S&P (August 31, 2011) BBB (outlook stable) Fitch (September 02, 2011) BBB (outlook positive)

CJSC Dexia Bank, Moscow Treasury Ksenia Mayorova [email protected] Alexander Shetler [email protected] +7 (495) 789-97-20, +7 (495) 783-31-41 Corporate Banking Savas Citak [email protected] Oguz Yalcin [email protected] Koray Akefe [email protected] Mine Arpadji [email protected] Olga Volkova [email protected] Marina Kalashnik [email protected] Roman Otavin [email protected] +7 (495) 783-31-40, +7 (495) 725-10-20

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