new issue of rbth supplement for the wall street journal issued on november 7

IN THIS ISSUE

PAGES 4-5

PAGE 3

PAGE 8

BUSINESS & POLITICS

SPECIAL REPORT

FEATURE

Russian wine, anyone?Moscow lures foreign capital to the vineyards

Surviving SanctionsRussia’s top banks, backed by the state, take on the world

Siberian Mozzarella...Reinventing classic cheeses amid sanctions

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Russian eSports could bring billions of dollars to investors

MONEY & MARKETS

Stocks Notch Gains as Oil Ticks UpA year of intense volatility continues

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...And Russian RoquefortBut will anyone buy it?

PAGE 6

Moscow Seeks Carbon-Fiber Leadership

Officials boost composite materials

This supplement is produced and published by Rossiyskaya Gazeta (Russia) and did not involve the news or editorial departments of The Wall Street Journal

Saturday, November 7, 2015Distributed with The Wall Street Journal

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RTSI ‘As long as there is civil war

in Syria, the construction of a

gas pipeline on its territory is

out of the question.’

SERGEI ALEXASHENKO, ECONOMIST PAGE 7

Dollar/Ruble

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‘Our current goal is

to make the economy

less dependent on

the price of oil.’

ANTON SILUANOV, MINISTER OF FINANCE PAGE 4

Net capital inflows in the third quarter are being called a sign the country’s finances may be stabilizing despite a recession and international sanctions.

Russia saw a net infl ow of capital for the fi rst time in fi ve years dur-ing the third quarter in a sign that fi nancial conditions are stabilizing despite an ongoing recession and international sanctions.

Capital infl ow into Russia reached $5.3 billion from July through Sep-tember, the Russian Central Bank said.

The last time Russia saw a net inflow of funds into its economy was fi ve years ago, during the sec-ond quarter of April-June 2010.

Finance After years of capital flight, capital inflows to Russia indicate finances are stabilizing

During the first two quarters of 2015, the Central Bank registered a net capital outfl ow from Russia of $45 billion.

“The infl ow was driven mainly by the non-fi nancial sector: the Rus-sian population actively sold for-eign currency during the quarter,” economist Irina Lebedeva at Mos-cow’s UralSib brokerage wrote in a note to investors following the publication of the statistics. “It ap-pears the Russian private sector managed to both refi nance its ma-turing debt and obtain new loans during the quarter,” she continued.

Russia has experienced massive capital fl ight over the past few years as the price of oil, its key export, has fluctuated, and as political events like the outbreak of fi ght-ing in neighboring Ukraine spooked

investors and sent the country’s na-tional currency, the ruble, on a wild roller coast ride.

Russian President Vladimir Putin has said that despite the outfl ows, Russia does not intend to institute capital controls or fi x the country’s exchange rate.

“We are not planning steps of this kind,” Mr. Putin said in a speech at the Russia Calling! economic forum in Moscow this October.

Such measures were tried in the late 1990s, he noted, but did not lead to a signifi cant change in the pace of currency devaluation at the time.

Mr. Putin said that the broader trend of capital outfl ow from emerg-ing markets has a number of fun-damental reasons, including the monetary policy of the U.S. Feder-

Kremlin Sees First Capital Inflow in 5 Years

At the end of the third quarter, the

Russian Central Bank reported a net

inflow of funds into the country for

the first time in half a decade.

ALEXEY LOSSANRBTH

al Reserve. Mr. Putin hailed the infl ow as a

sign that the Russian economy will continue to stabilize, overcoming the current recession and begin pos-itive trends.

“Capital infl ows are connected with the strengthening of the ruble and seasonal factors. Companies more actively obtain funds in ru-bles, giving up external borrowing,” said Freedom Finance Investment Company’s head of operations in the Russian stock market, Georgy Vashchenko.

According to Mr. Vashchenko, real investment infl ow into Russia will start in Russia once oil prices ex-ceed $70 per barrel.

“Until that time, investments will be discrete; the interest in the mar-ket is so far speculative,” he says.

CONTINUED ON PAGE 4

Russian banks have proved surpris-

ingly resilient despite adversity.

The year 2015 should have been the great annus horribilis for Russian banks.

On the high seas of fi nance, the country’s two biggest banks, state-controlled Sberbank and VTB, were like ships beset by typhoons, sea monsters and enemy craft all at the same time.

The price of Russia’s key export, oil, collapsed to half its original value, causing the country’s curren-

Finance Russia’s biggest banks have faced a host of challenges, yet avoided a financial meltdown

cy to plummet. Loan-loss provisions skyrocketed as a painful recession set in, and Russian fi rms’ debts be-came unsustainable.

The U.S. and Europe slapped both banks with sanctions in the sum-mer of 2014, blocking their access to the relatively calm waters of Western fi nance.

Risk management costs and the cost of funding rose perilously.

As the world saw during the fi -nancial crisis of 2008, a shock to a country’s fi nancial network can be like a massive heart attack, disrupt-ing the entire economic system as credit stops fl owing.

Surely U.S. and European poli-cymakers knew this when they took direct aim at Sberbank and VTB,

Russia’s Banking Sector: How To Survive A CrisisAmid recession, loan-loss

provisions and sanctions, Russia’s

banking sector has had more than

its share of adversity this year. Yet

it has avoided full-blown collapse.

ALEXEY SERGEEVRBTH

the main vital organs of Russian fi nance, in an act of economic state-craft intended to punish Russia for its role in the confl ict in neighbor-ing Ukraine.

Lesser Russian banks Gazprom-bank, Vnesheconombank and Ros-selkhozbank were also targeted by Western sanctions.

Against this backdrop, the Rus-sian Central Bank sprang into ac-tion, demonstrating it would stead-fastly ensure the two country’s two most-important banks’ financial stability.

In March, Sberbank sealed a sub-ordinated loan from the Central Bank for 500 billion rubles ($8 bil-lion), while VTB and Gazprombank received a combined 350 billion ru-bles ($5.6 billion) from the state to fi nance infrastructure projects.

Now, while both Sberbank and VTB have seen signifi cant declines in profi tability this year, Russia has so far managed to avoid a full-blown fi nancial crisis.

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NEWS IN BRIEF

• Foreign investment in Russian commercial

property has hit a seven-year high as the weak ruble has made the market more attractive for in-ternational companies, the RBC newspaper report-ed. Foreign capital accounted for 42% of invest-ment in the commercial real estate market in the first nine months of the year, the highest rate since 2008, when foreign capital was used in 77% of the deals over the same period.

• Gas giant Gazprom exported 41.4 billion

cubic meters (bcm) of gas to Europe and Tur-

key in the third quarter, up 23% from the year-ear-lier period, the company’s head Alexei Miller said. In September, gas exports stood at 13.3 bcm, an increase of 24%. European buyers of Russian gas have increased purchases before the cold season and as the price of the commodity, pegged to prices of oil with a lag of six to nine months, fell.

• Czech Airlines plans to fly more routes to

Russia, the Interfax news agency reported, even as other international airlines cut services to the country due to a slump in demand. The Czech na-

tional carrier will add one additional weekly flight from Prague to the Russian cities of St. Petersburg, Yekaterinburg, Rostov-on-Don and Samara start-ing this winter, the company said in a statement cited by Interfax. The decision to increase the fre-quency of the flights was driven by the improving demand for travel between Russia and the Czech Republic.

• Iran will start shipping cheese to Russia a little over a year after Moscow imposed an em-bargo on dairy products from most European coun-tries, a Russian agricultural official said. Iranian dairy products to be supplied to Russia have success-fully passed an inspection by Russia’s agricultural watchdog, Rosselkhoznadzor, Alexei Alexeyenko,

an assistant to the watchdog’s chief, said in an in-terview with the Russian News Service radio sta-tion. Russia is seeking to find new food suppliers after banning a range of imports from Western countries in August last year in response to sanc-tions imposed by the U.S. and EU.

Google has faced steep competition in Russia from the Moscow search en-

gine Yandex, which lodged a complaint against the U.S. tech giant.

The Russian government has given U.S. tech giant Google until Nov. 18 to open up its Android operat-ing system to local competitors, fol-lowing its September ruling that Google’s contracts with mobile de-vice providers violated Russian an-titrust law.

If Google fails to modify its con-tracts in Russia, it could face a fi ne of up to 15% of 2014 revenues on the market for applications that are preloaded onto mobile devices, the Federal Anti-Monopoly Service, Russia’s state antitrust watchdog, said in a statement.

The agency opened a case against Google in February after Yandex, Russia’s largest Internet company and main local competitor, lodged a complaint concerning Google’s contracts with Russian mobile de-vice providers.

The fi ght is over whose applica-tions can be pre-installed to phones and other devices that operate on Google’s Android system. Google typically contracts with providers to have a number of its own ap-plications pre-installed, but — ac-cording to the anti-monopoly watchdog — it bars partners from signing similar contracts with other companies, such as Yandex.

Google did not respond to re-quests for comment.

The company is already em-broiled in a series of other anti-trust investigations across the world, from India to the U.S. to the European Union.

Tech Following a lawsuit, Google must allow competitors access to its Android operating system

The European Commission, the executive branch of the EU, ear-lier this year opened a formal in-vestigation into Google’s behavior on the European market in regard to its Android system.

“The Commission will assess if … Google has illegally hindered the development and market ac-cess of rival mobile operating sys-tems, mobile communication ap-plications and services in the European Economic Area,” the commission said in a statement.

The United States’ Federal Trade Commission is now also investi-gating whether Google has limit-ed competitors’ access to the An-droid system, Bloomberg reported in September, citing two uniden-tifi ed people familiar with the case.

Russia’s case moved strikingly quickly, however, racing from com-plaint to ruling in just seven months. By comparison, India’s in-vestigation into whether Google’s search engine favors its own ser-vices over other companies’ has stretched on for more than three years.

Russia’s demands also follow on the heels of a series of other rul-ings against Google since the be-ginning of last year, when tensions between Russia and the West es-calated following Russia’s annex-ation of the Crimean peninsula from Ukraine.

Records on the Federal Anti-Mo-nopoly Service’s website show that Google has been hit by a series of small fi nes for various alleged vi-olations, including fi nes for adver-tising abortion and gambling.

The company has also been af-fected by a state effort to seize tighter control of the Internet in Russia and of foreign companies’ activities in particular. A law came

into effect on Sept. 1 requiring all companies that process Russian users’ data to do so on servers with-in the countries, although interna-tional companies have been told that their compliance will not be checked until next year.

This sudden regulatory attention may be raising red fl ags in Google headquarters, but for local com-petitor Yandex, September’s deci-sion comes as a welcome relief.

Yandex, often described as the Russian answer to Google, has fall-en behind on the local market as its better-heeled competitor ad-

vanced. A report issued by Russian lender Gazprombank in February found that Yandex had been losing market share to Google since March of last year.

“The key reason behind this trend is Google’s dominance on mo-bile platforms — in Russia, about 86% of smartphones are powered by Android. Yandex has very lim-ited ability to compete with Google,” Gazprombank analyst Ser-gei Vasin wrote in the report.

Yandex doesn’t expect the fed-eral order to expand its share of the search market, but the move does open doors for the company, a Yandex spokesperson said.

“The decision will without a doubt give us new opportunities,” the spokesperson wrote in an email.

Google Forced to Open OSGoogle is being required to open

its Android operating system in

Russia following a complaint by its

key local competitor Yandex.

DELPHINE D’AMORA SPECIAL TO RBTH

“Yandex has very limited ability to compete with Google,” wrote Gazprombank analyst Sergei Vasin.

A worker operates the machines at a new assembly line in Kostroma.

To stimulate new enterprises, Rus-sia has created a separate organi-zation, the Industry Development Fund, which provides soft loans to promising projects, including those with foreign participation. In an interview with RBTH, the head of the fund, Alexei Komissarov, ex-plained which projects are eligible for funding.

The most recent investment forum in

Sochi mostly featured Russian players.

Can we talk about the isolation of Rus-

sia and how dangerous that is in terms

of technology?

The Sochi forum has always been focused more on internal regional policy, but there have been foreign participants as well. I am convinced that cooperation with other coun-tries is important and necessary for Russia. The Russian economy can-not develop in a vacuum, particu-larly in the area of innovation.

For instance, our fund has a va-riety of projects, including some examples of successful cooperation between Russian and Western busi-nesses. For example, the Kostroma automotive components plant pro-duces pistons for car engines in co-operation with a German engineer-ing company, and they will be used by both Russian and foreign auto-makers who have localized produc-tion in Russia and the CIS, includ-ing Volkswagen, Renault, Nissan, Ford and others.

One of the best and fastest ways to develop the economy is to at-tract companies that have already achieved something in the world. As for technology start-ups, there can be no doubt at all about the need for international relations. In-novation can only be global.

Do you fund projects only at an early

stage?

Not necessarily. The fund was cre-ated to solve the problem of ob-taining fi nancing when creating new or expanding existing produc-tion, but we are not talking about seed or even preseed funding. We are considering projects from ex-isting companies with clear sales markets and customers, where the price is clear and the risk is mini-mal; that is, we are not talking about venture capital investment.

The aim of the fund is to help fund fi nancing in three stages when banks do not give loans: pilot-plant stage, design work, engineering, etc. Our fund provides them with debt fi nancing at 5% per year in rubles for a period of 5-7 years and for 700 million rubles.

The informal mission of the organiza-

tion is to support projects that can-

not be realized without such funds.

Do you have any priority sectors that

you support?

No, our principled position is that we are not limited to a specifi c in-dustry or region, but we try to focus on the support of medium-sized

Russia Extends Credit to New BusinessesRacked by recession and Western

sanctions, Russia is seeking new

methods for spurring the

development of new businesses,

including state-backed credit.

ALEXEY LOSSANRBTH

manufacturing businesses. Small businesses do not often go to the manufacturing sector, while large businesses can fi nd other sources of funding. As of mid-October, we have supported 47 projects for 16.5 billion rubles in industries such as pharmaceuticals, electronics, me-chanical engineering, chemistry, biotechnology and production of new materials.

Do you ask for any guarantees in ex-

change for a loan?

We do not enter into the share cap-ital of the company, we only give a loan for the development on fa-vorable terms, and we are strong-ly against any grant funding pro-grams for industry. As any lender, we want to be sure that our money is returned. We basically work only with fi nancially stable companies, and the condition for obtaining a soft loan is to provide security for the entire amount.

How do you select projects for fund-

ing?

In the fi rst stage, we consider an application for compliance with the formal requirements and give an answer literally within fi ve days. Then we carry out production and technological as well as fi nancial and legal expert analyses.

Then the advisory council, which consists of representatives of busi-ness and banks, takes the fi nal de-cision. In doing so, it relies on very clear demands.

There are three important con-ditions. First, the Fund’s loans should not violate the competitive environment — that is, the appli-cant company must produce a product which has no analogues in Russia, and therefore there is no competition. Secondly, what is im-portant to us is the feasibility of the project, and, thirdly, the export potential of the project.

Are there examples of international

cooperation?

We have a lot of projects that can-not be called “innovative” from a global point of view, but for the Russian market, they represent the most advanced developments and high-tech production.

However, we have some world-class innovative products. For ex-ample, one of the projects support-ed by us is the creation of a domestic processor , which is al-ready being exported to Germany.

QUESTIONS & ANSWERS

Alexei Komissarov

HEAD OF RUSSIA’S INDUSTRY DEVELOPMENT FUND

A native of Moscow, Alexei Komissa-rov trained as an engineer specializ-ing in car repair. He later earned an MBA at Kingston University in the UK. A well-known entrepreneur and busi-ness angel, Komissarov is also head of the Department of Entrepreneurial Leadership at the Moscow School of Management Skolkovo.

HIS STORY

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Business & Politics

NEWS IN BRIEF

• A Russian IT company has launched a proj-

ect to develop a locally built cloud computing

platform, the Kommersant newspaper reported. The new cloud service, used to store data online, will challenge existing U.S. platforms such as Mi-crosoft Azure and Amazon Cloud, the paper re-ported, citing a video presentation of the project by its creator, a company called Parallels.

• The Hong Kong company REX Global En-

tertainment Holdings has bought a 65% stake

in Russia’s Yota Devices, the maker of a two-screened smartphone, for $100 million. Launched in 2013, the YotaPhone, which has an LCD screen on one side and an e-ink screen similar to the one used on Amazon’s Kindle on the other, was Rus-sia’s first entry into the global smartphone market.

• Online retail giant AliExpress will allow Rus-

sian vendors to sell their goods through its web-

site from Nov. 11, as part of the Chinese company’s rapid expansion in the country, news agency RBC reported. The first companies to start selling via AliExpress include Wikimart, an online supermar-ket, electronics brand Technosila and DIY and gar-dening store 220 Volt, as well as official resellers of international brands in Russia.

• A hotel in Russia’s Far East gambling zone

is booked out through the end of the year, the RIA Novosti news agency reported. There are no available rooms in the hotel until next year, Dep-uty Prime Minister and Presidential Envoy to the Far Eastern Federal District Yury Trutnev said, ac-cording to RIA Novosti, adding that most of the rooms had been booked by foreign guests. The five-star hotel, controlled by Chinese hotel opera-tor Summit Ascent, is part of the Tigre de Cristal complex that includes Russia’s biggest casino.

• Russian drivers will be able to buy the world’s

cheapest car — the Indian Bajaj Qute. Prices for the car will start at 250,000 rubles ($4,000). The cheapest car currently available in Russia is Chi-na’s Lifan Smily, which costs 320,000 rubles ($5,000). Sales will begin in March or April next year, once the vehicle is tested in Russia.

Officials in Moscow hope to boost Russian wine output with perks for investors and businesses.

Wine from California? Before the 1970s, no one took it seriously.

Japanese whiskey, too, was a laughable idea until the Nikka dis-tillery’s 10-year Yoichi single malt won “Best of the Best” at the Whis-ky Magazine awards in 2001. Now, Japanese single malts compete with the best Scotland has to offer.

But Russian wine? If officials in the Kremlin have

their way, the idea will, one day, cease to sound like an oxymoron.

Yet Russia knows it needs out-side help.

The Ministry of Agriculture has launched a new program to attract foreign investors to fund Russian vineyards, with a goal of quadru-pling the area used to grow wine grapes from 90,000 to 400,000 hect-ares. As a lure, the government plans to offer special protections against competitors and sharp dis-counts on imports of winemaking materials.

Yet if the very idea of Russian wine strikes you as unusual, you’re not alone.

Should the average American wine enthusiast stumble across a bottle of Russian vino, chances are they wouldn’t like it much. Or at least they’d fi nd it perplexing.

That’s because four-fifths of wines sold in Russia are poor qual-ity semi-sweet varieties involving the use of concentrate.

The reasons for this date back to Soviet times, when the Russian taste for semi-sweet and sparkling wines was formed.

Many Russians today consider dry wines too sour.

It was Joseph Stalin, an ethnic Georgian, who did most to foster this tradition.

It may be hard to believe but, according to the International Wine Office, the Soviet Union ranked fi fth in the world in terms of area under vines and seventh in terms of wine output by the end of the 1950s.

The young Soviet winemaking industry found enthusiastic sup-port from Stalin and from Anas-tas Mikoyan, his Armenian minis-ter for food production. Both Georgia and Armenia, in the fer-tile, Mediterranean-like climate of the South Caucasus, have a rich tradition of winemaking that pre-dates even the ancient wine cul-ture of Greece.

Wine was drunk in Russia only by the aristocracy before the 1917 Revolution. But all this changed

Wine Russia is reaching out to foreign investors to quadruple its wine output and improve quality

under Stalin, who believed wine had to be affordable for every So-viet citizen.

Scientists managed to produce frost-resistant, high-yielding vari-eties of grape.

But the quality suffered: wines made from such grapes were bare-ly palatable because of their high acidity and lack of taste.

To remedy this fl aw, grape sugar and often ethyl alcohol were added to the wines — a practice that is still widely used in the Russian wine industry to this day.

Investor interestBy attracting foreign investors, Rus-sia hopes it can reboot its wine in-dustry with foreign expertise, and produce vintages with more for-eign appeal.

“Many foreign wine companies have technology and knowledge. Russia has a good school of wine-making, too, but we were mainly focused on the production of des-sert wines,” said Boris Titov, one of the most famous winemakers in Russia and owner of the Abrau-Durso winery

The cheapest Russian wines sell for about $3 a litre and are mostly sold in the box.

And indeed, even by local stan-dards, the quality can be uneven. Several Russian wine producers have recently lost their licences for making poor-quality products.

The concentrate used by many Russian winemakers is basically “an ideal camoufl age for swill,” said Yelena Denisova, who chairs the board of directors at Château le Grand Vostok, one of a handful of high-quality Russian wine produc-ers.

“This concentrate is added to poor, sour, semi-wine at the fer-mentation stage or mixed in with

ready fermented wine material in an attempt to correct its awful taste. On top of that, artifi cial fl avours and colours are added,” she said.

In Soviet times, workers proud-ly raised their glasses at parties, toasting Comrade Stalin with wine that would horrify a native of Bor-deaux, and Russians’ preference for sweet wines persists. Russia’s Union of Viticulturists and Wine Makers says semi-sweet and sweet wines account for 80% of the Russian market.

In the economy segment, Rus-sia’s largest, their share exceeds 90%.

Spurring investmentAccording to the new initiative being worked out by the Ministry of Agriculture, foreign investors will get a plot for a term of three to 15 years.

“We do not object to a reason-able number of respectable, strong, foreign investors working in the Russian soil,” Agriculture Minister Alexander Tkachyov said in an in-terview in the state-run newspa-per Rossiyskaya Gazeta.

In exchange for compliance with the necessary conditions, the Rus-sian government is ready to pro-tect wine producers from compet-itive cheap imports.

According to Mr. Titov of the Abrau-Durslo winery, foreign com-panies account for only 10% of wine production in Russia.

Russian Wine? It’s More Serious Than It SoundsRussia hopes financial incentives

and other perks can tempt foreign

investors to bring expertise and

capital to put its local vintages on

the map.

ALENA UZBEKOVA SPECIAL TO RBTH

is the total number of hectares cur-rently growing grapes for wine in Russia.

is the total number of hectares grow-ing wine grapes Russian officials hope to reach.

is the share of Russian wines in the country’s domestic market for econo-my class wines.

90,000

400,000

90%

IN FIGURES

Russia, so far, has not said it will support oil prices by cutting output.

Russia, the world’s top energy pro-ducer, met with Organization of Petroleum Exporting Countries (OPEC) and non-OPEC oil produc-ers in Vienna in late October to dis-cuss forging a common response to falling prices in global oil mar-kets.

The meeting comes as Venezue-la, a member of OPEC, pushes the group to return to its previous pol-icy of actively supporting oil pric-es, advocating a potential target of $88 per barrel.

But the idea of cutting oil pro-duction to support prices was not discussed at the meeting on Oct. 21, officials said after the event.

Nevertheless, observers called the meeting unusual, in part because it brought together energy-power-house Russia and four other large oil producers who are not formal-ly part of OPEC.

OPEC, formed in 1960, is a

Oil Russia holds talks with the world’s top oil exporters, seeking a common response to low prices

12-member group whose official purpose is to “coordinate and unify the petroleum policies” of its mem-ber states and “ensure the stabili-zation of oil markets.”

The gathering in Vienna comes as global crude oil prices fl ounder around $50 per barrel, less than half the price from a year ago.

The world’s biggest oil countries are producing crude at full-tilt in a global battle to hold on to mar-ket share.

Analysts have said that Saudi Arabia appears to be attempting to drive American shale oil pro-ducers out of business in the wake of a dramatic upswing in U.S. out-put. So far, however, U.S. produc-tion volumes have proved resilient.

Meanwhile, OPEC’s own fi gures indicate the group produced 31.57 million barrels of oil per day (bpd) in September, even though the group’s official target currently stands at 30 million bpd.

Before the meeting, Russian En-ergy Minister Alexander Novak said he expects Russia to produce an average of 10.5 million barrels of oil per day in 2016.

Although the group took no steps towards supporting oil prices, en-

ergy traders closely watched the proceedings. Just the news that Russia was planning to meet with OPEC officials in early October was enough to push oil prices upwards.

Analysts say Russia has histori-cally preferred to to reap the ben-efi ts of OPEC’s role in supporting oil prices while not joining in pro-duction cuts itself.

“Russia may discuss production reductions with both OPEC and non-OPEC states; however, such hopes in the past have led to little action,” wrote Cole Akeson, an an-alyst at Moscow’s Sberbank, in a note to investors circulated before the meeting.

The decrease has put severe pres-sure on the state budgets of coun-tries like Russia and Venezuela that earn much of their income from oil export receipts. Russian officials are facing difficult choices for han-

Russia, OPEC Meet to Discuss Oil MarketsLow oil prices are hammering the

budgets of big energy exporters

like Russia and Venezuela,

prompting calls for a coordinated

response from oil producers.

DAVID MILLERSPECIAL TO RBTH

dling a looming budget crunch amid lower energy prices as the country’s state tax receipts have been slashed.

Russia relies on revenues from oil and gas exports for about half of its government budget.

While state planners based bud-getary plans on assumptions of an oil price of $100 per barrel a year ago, crude has since fallen to less than half that level.

As a result, the government is facing a shortfall of some $50 bil-lion. This year the state fi lled the gap by tapping its sovereign wealth funds, which are currently worth roughly $144 billion.

But Russian Finance Minister Anton Siluanov warned in Septem-ber that the funds could be fully depleted in 16 months to two years if the state doesn’t reduce spend-ing levels.

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How much pressure the system can take remains to be seen. At the start of 2015, analysts at France’s BNP Paribas estimated that Rus-sia may have to spend a whopping $42 billion this year alone to avert a banking crisis and keep the sys-tem well capitalized.

Sberbank versus the WorldSpeaking to the CNBC network re-cently, German Gref, the Chief Ex-ecutive Officer of Sberbank, said his fi rm, which is the biggest lend-er in Russia, had faced three “black swan” events at the same time, re-ferring to unpredictable, major events that have enormous impact on a fi rm’s long-term well-being.

“We are being attacked by new businesses. We are being attacked by new regulations. We have to make newer and newer investments in technologies and this has to be done simultaneously. So we got not one Black Swan but three Black Swans,” he told the network. “The past year was an extremely tough year for both Russia and for the Russian banking sector…the next year, in our opinion, is going to be much better even if oil prices re-main the same,” he said.

Earlier in October, Mr. Gref said he expected the bank’s net profi ts to fall by either a third or half in 2015 compared to a year earlier, after posting earnings for the sec-ond quarter that had declined 44% compared to the same period a year earlier.

Yet Mr. Gref said Oct. 22 that the bank will seek new efficiencies to cut costs and boost profi ts through 2018, predicting that net profit could rise by 10% as a compound annual growth rate from 2013 to 2018. One of Sberbank’s key ad-vantages is its legacy position as

IN FOCUS RUSSIAN BANKS

BANKS FACE A SERIES OF SIMULTANEOUS CRISES

RUSSIA’S BANKING SECTOR CAME UNDER FIRE FROM WESTERN SANCTIONS AT JUST

THE MOMENT THE COUNTRY’S ECONOMY SPIRALED INTO RECESSION

CONTINUED FROM PAGE 1the retail bank of choice for most Russians, having been originally created as the Soviet Union’s key domestic retail savings bank. As a result, today, Sberbank holds some 30% of Russia’s total banking sec-tor assets, and can rely on its mas-sive cushion of average Russians’ retail savings.

Alexander Morozov, Sberbank’s Chief Financial Officer, added that the bank will continue to pay div-idends of 20% of net profi ts on its 2015 results and onward through 2018.

“Given its solid reputation, ex-tremely low cost of funds and rel-atively small share of bad loans compared to its peers, Sberbank is by all regards an excellent bank, and it has a huge potential in the long term,” Bill Mann, Chief Invest-ment Officer for Motley Fool Man-agement LLC, told the Bloomberg News agency in October.

Mr. Mann has 2.4% of his $381 million Motley Fool Independence Fund invested in Sberbank shares, which he purchased in March 2014.

Despite a roughly 50% loss on the investment so far, Mr. Mann told the Bloomberg agency that he re-mains convinced the shares will rally. Bloomberg noted that Mr. Mann is not alone in this convic-tion: about two-thirds of the 22 re-search fi rms that rate Sberbank shares recommend that investors buy the stock.

Not your father’s crisisVasily Yakimkin, associate profes-sor of the Faculty of Finance and Banking at the Russian Presiden-

tial Academy of National Econo-my and Public Administration, said that the last time the Russian bank-ing market experienced anything similar was during the global fi -nancial crisis of 2008-2009.

“It was easier then than it is now [for Russian fi rms], because exter-nal sources of borrowing for Rus-sian banks were not closed. This pro-vided not only liquidity but also appreciable amounts of funding, the recession in the real sector was short, and there were no sanctions,” he said.

According to Mr. Yakimkin, the Russian banking sector at the be-ginning of the crisis in 2014 had worse capital adequacy indicators than in 2008.

Government support for Russian banks over the past nine months has been crucial, Mr. Yakimkin said.

“The growth of own funds in that period was mainly due to the larg-est state-owned banks,” says Mr. Yakimkin.

According to him, the decline in GDP in the fi rst eight months of 2015 was 3.8%, but in September, an increase in economic activity was recorded at 0.3%, granting a sliver of optimism that the situa-tion is gradually improving.

“After the devaluation of the ruble, certain industries gained competitive advantages that allow them to increase production and sales of products,” says Promsvy-azbank’s principal analyst, Dmitry Monastyrshin.

At the same time, he said, ex-porters and companies that can re-place imports have supported the banking sector, taking out loans they can fully expect to repay while also facilitating fi nancial activity throughout the economy more broadly.

According to Mr. Monastyrshin, the most serious problems with non-repayment of loans are in the construction and air transporta-tion sectors, where the share of non-performing loans is already 19% and 24%, respectively.

In the entire banking system, the share of overdue loans to legal en-tities increased since the beginning of the year from 4.2% to 5.8%.

“The key difference between the current situation and the past cri-sis is that in 2009, oil prices showed a rapid recovery. After a drop in oil prices to $36 per bar-rel in late 2008, prices rose to the

QUOTES

AntonSiluanov

ElviraNabiullina

" Our current goal is to make the economy less dependent on the price of oil. Our fis-cal projections for next year are based on

the assumption of $50 per barrel — the level we have today — and we have this year experienced a significant reduction in oil and gas revenues within the budget, and next year we estimate this revenue at 43% out of all budget revenue. It was around 52% a while ago. With the depreciating ruble, coupled with sanctions imposed on Russia, we will have to develop other industries.

" Indeed banks were in a difficult situation at the end of last year and the beginning of this year. The cost of funding increased

sharply for them. They cut lending to the economy. But the situation started to change. Already from May the banks started to boost lending to the economy, and deposits from the population re-turned to the banking system. Over nine months the growth of deposits among the population was a bit more than 13%, and that’s why the banks have the resources and the opportunity to provide lending to the economy. Basically their condition is quite stable. And we continuously analyze all the indicators in the banking system and we monitor the situation with bad assets.

RUSSIAN FINANCE MINISTER, INTERVIEW WITH CNBC ON THE PROB-LEMS OF THE RUSSIAN ECONOMY, OCT. 13, 2015

GOVERNOR OF THE RUSSIAN CENTRAL BANK, INTERVIEW WITH CNBC, OCT. 13, 2015.

The number of Rus-

sian bank licenses

revoked in 2015.

of credit institutions were

loss-making in Russia during

the first eight months.

of loans are non-

performing in Russia’s

construction sector.

61 30% 19%

IN FIGURES

“The past year was an extremely tough year for both Russia and for the Russian banking sector,” said German Gref.

“After the devaluation of the ruble, certain industries gained competitive advantage,” said Dmitry Monastyrshin.

Russia is creating a massive new bank based on the postal system.

Russia’s government approved the establishment of a massive new bank based on the country’s post-al service, a move that will even-tually create an institution with more retail branches than all other Russian banks combined.

The new entity, called Post Bank, is a joint venture between Russian Post and one of the country’s larg-est lenders, state-owned VTB Bank.

Post Bank is being established in part to provide banking servic-es across Russia’s far-fl ung, near-empty regions, and to target pen-sioners. VTB will fuse one of its subsidiaries, Leto Bank, into the new institution.

The partners say the new insti-tution will begin giving out loans as early as January 2016, with a pilot project to be launched in Mos-cow this fall.

Over the next three years, the bank will open outlets in no less than 15,000 Russian Post offices. After this initial rollout, the bank should start operating in all the 42,000 offices of the national op-erator. The current leader, Sber-bank, has more than 17,000 out-lets.

Once it is completed, Post Bank will have more retail locations than all other Russian banks combined, according to the Russian banking portal Banki.ru.

Post Bank’s Board of Directors will be headed by Russian Com-munications Minister Nikolai Ni-kiforov. “The question of the cre-ation of Post Bank has been discussed for 15 years; eventually we came to the conclusion that it would be created in partnership with the VTB Group,” Mr. Nikifo-rov told reporters at a conference in September.

According to the minister, after the renaming of Leto Bank as Post Bank, VTB will keep 50% plus 1 share of the new entity while the rest will be acquired by Russian Post. VTB will invest 16 billion ru-bles ($246 million) in Post Bank. In turn, Russian Post will assume the costs for modernizing its post offices to accommodate the bank-ing operations.

The government won’t back Post Bank up with fi nancial help, so-cial benefits or donations, Leto Bank’s press office said, adding the new institution aims to bring more Russians into the banking system.

“Today only 50% of Russia’s pop-ulation [over 18 years old] uses banking services. In China the share is 70%, and in Scandinavian counties it’s over 97%. The creation of Post Bank should change this situation”, Leto Bank press service said. “The experience of France, Japan and China proves that a bank project like this is relevant and rather successful. Moreover, Post Bank should decrease the share of cash payments and in-crease the competition in some areas where only one or two banks operate,” the bank said. The suc-cess of the new bank will largely

depend on how well it combines banking processes with the work of Russian Post, which is broadly considered to be notorious for in-efficiency and poor organization, analysts said.

“The low efficiency of Russian Post is largely due to the low cost of the services, which is important to ensure the availability of post services to the broad public,” said Dmitry Monastyrshin, the princi-pal analyst at Russia’s Promsvy-azbank.

However, he said, the use of VTB Bank’s up-to-date banking tech-nologies, coupled with Russian Post’s extensive infrastructure and access to its customer base, should create synergies and ensure the profi tability of the new group.

“But for all that, a lot will de-pend on the new bank’s approach to the formation of the loan port-folio,” Mr. Monastyrshin said.

Increased efficiency is a question of time under proper management, said Sergei Deineka, an expert with the BKS Premier bank.

“A striking recent example is Sberbank. Even 10-15 years ago, it was considered just as clumsy and ineffective an organization as Russian Post, and was associated exclusively with huge queues by the public,” he said.

“After a total restructuring, the

Moscow Creates Vast New Bank From Post OfficeRussia’s postal service joined forces

with VTB Bank to establish Post

Bank, a new retail lender with three

times as many retail branches as

the current leader, Sberbank.

KIRA EGOROVARBTH

situation has changed dramatical-ly, and now instead of the usual Sberbank, we see quite a modern bank, keeping up with the times.” Mr. Deineka believes that Russian Post can repeat this success.

According to VTB chief Andrei Kostin, Post Bank aims to serve as many as 20 million people, half of whom will be pensioners. Post Bank’s loan portfolio will grow to 418 billion rubles ($6.43 billion)over 10 years, and its deposit base will reach 577 billion rubles ($8.87 billion), he said.

“Post Bank will offer pension de-livery with special cards and ac-counts. Special deposit and credit services will be available for pen-sioners,” Leto Bank press service commented.

The main competitive advantage of such a bank is a broad infra-structure and access to the large customer base of Russian Post, whose regional network covers even the smallest and most remote com-munities of the vast Russian terri-tory, said Mr. Monastyrshin.

According to him, the national operator serves approximately 150 million addressees and has been familiar to the public for many years. “Customer confi dence in Rus-sian Post will translate into loyal-ty to Post Bank,” Mr. Monastyrshin said.

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Special Report

Vladimir

KorovkinEXPERT

Recently my colleagues and I undertook a study of the dynamics of economic growth for all independent countries of the world during the 40 years from 1970 to 2010, with

a separate analysis of top and bottom performers. Our initial goal was to determine and describe the structural models that led to fast growth, as repre-sented by countries like China during the 1990s-2000s, Russia in the 2000s and — more recently — by African nations like Nigeria, which is current-ly on the path towards becoming one of the world’s 20 biggest economies. We did identify a few mod-els of quick growth that spanned several consecu-tive years. Yet the key outcome of our research was this: the growth that we observed was very much dependent on the international context prevalent at the time. Because this context evolves constant-ly, no single model sustained growth over a long period. What was effective one year led to stagna-tion or even decline a few years later. A common view on growth is that economic activ-ity is fundamentally cyclical in nature, and that this cyclicality can be used as the basis for country-lev-el strategic planning. This view implies that when a structural model stops working effectively, patience must be exercised to live through the “lean years” and wait for the good times to return. At the mo-ment, one can see such sentiments in Russia with regard to oil prices. But our research suggests that if national econom-ic planners opt to simply wait for good cyclical phas-es to return, such a plan carries high strategic risks.What, then, constitutes a superior national econom-ic strategy? In our research we have found no coun-try that was among the top performers for every one of the four decades. In fact, the group of coun-tries in the top for the whole period of 40 years has a few peculiar members like Brazil, Turkey, Ireland or Australia. Those did not have starring success in any single decade in the past 40 years, but achieved stronger long-term progress than some “stars” of the past. In our view, there are sprints and mara-thons in economic development. An anxious sprint-er faces the risk of burning himself out. So what is behind the success of “marathoners”? It is rather difficult to find structural similarities; actually they are amazingly diverse in the key metrics of struc-ture. The commonalities lie rather in the ways they managed their economic growth. Our key finding sounds a bit recursive: growth is the result of a na-tional effort to manage growth. It does not “just happen.” Nor is it a result of a smart one-off deci-sion to make the right structural bets and win. More precisely it is about a prolonged effort coming from high consort of the intentions and actions of soci-ety, government and the business community.

Vladimir Korovkin is the head of innovation and dig-ital research at Moscow School of Management-Skolkovo.

VIEWPOINT

Setting Russia Back on Track For Growth

range of $60-80 per barrel in the second half of 2009,” says Mr. Monastyrshin.

But the current excess supply of oil on the world market creates ex-pectations for a prolonged period of low prices, he said.

Such a period of low energy pric-es would have a strong impact on the Russian economy and its bank-ing sector.

“Now the Russian economy and the banking sector will probably require a longer period of recov-ery,” he says.

For his part, Premier’s analyst Sergei Ilyin recollects that the cur-rent situation is different from that in 2008-2009 — then it was a “fast” V-shaped crisis; the situation de-teriorated sharply, but started to recover fairly quickly.

At the same time, an important factor was that the markets were awash with money from foreign regulators, thanks in part to low interest rates set by the U.S. Fed-eral Reserve.

“The deterioration in asset qual-ity, overdue loan growth, borrow-ers’ defaults — it was much more massive, but it all happened pret-ty quickly, and then the situation slowly began to improve,” says Mr. Ilyin.

“The government supported banks at this short and difficult moment,” he said.

“Then the system was restored to a large extent on its own due to

providing them with much-need-ed liquidity at the right moment,” says Mr. Yakimkin.

The Russian Central Bank ex-pects a considerable slowdown in lending in 2015 — down to 11% from the forecast 15-17% for 2014, a conclusion that has been gener-ally supported by private analysts.

Now, according to the data from the Russian Central Bank, for the fi rst eight months of 2015, 30% of operating credit institutions are loss-making — or 232 out of 774.

Russian Finance Minister Anton Siluanov, during an interview with CNBC, said that the Russian econ-omy may begin growing as soon as 2016.

“We experienced a slowdown in growth this year. We estimate it to be minus 3.8% in 2015, but the third quarter and the end of the year are proof that we are turning the corner. In 2016, we expect pos-itive growth of around 0.7%”, Mr Siluanov said.

The minister said the economy has started to adapt to the new conditions, and noted that Russia still maintains a strong balance of payments, with a current account surplus of 6% of GDP.

“I think that whenever the lift-ing of sanctions happens it’s going to be a major positive shock,” the chief executive of one of Russia’s largest investment banks, VTB Cap-ital, Alexei Yakovitsky told CNBC in an interview in Moscow.

Financial managers have hung

tight as Russian assets fluctu-

ated during a wildly volatile

year in 2015.

Germany’s Deutsche Bank and Switzerland’s UBS are on opposite paths.

Russia’s economic downturn is forc-ing big foreign banks to make a decision: either cut and run, or hun-ker down and weather the storm.

Two of Europe’s biggest lenders, Deutsche Bank and UBS, are on divergent paths.

While Germany’s Deutsche Bank is unwinding the vast majority of its operations in the country, Swit-zerland’s UBS is doubling down, and may even pick up some of Deutsche’s former employees.

Deutsche’s move to shutter most of its operations in Russia was an-nounced in early October, and comes as the fi rm makes broad-based changes aimed at shrinking the bank’s global footprint under the leadership of its new Chief Ex-ecutive Officer John Cryan.

The long-term plan, known as Strategy 2020, will refocus Deutsche as more of a regional player with global connectivity, rather than as an outright worldwide financial powerhouse.

Prior to the announcement, Deutsche Bank maintained one of the largest presences in Russia of any of the big foreign banks, al-though its operations there have been a small part of Deutsche’s overall business.

The initiative is “part of an on-going review of its global footprint,” Deutsche said in a statement.

“This decision has been made in order to reduce complexity, costs, risks, and capital consumption,” the bank said.

“Deutsche Bank’s Russian Cor-porate Finance and Markets busi-nesses will now operate from in-ternational hubs,” Deutsche

continued.Deutsche has said that it plans

to maintain its transaction servic-es business in Russia.

The move to pull out of Russia follows years of rising pressure on Deutsche Bank over poor profi t-ability, as well as mounting high-profile lawsuits and regulatory probes.

It also comes amid an investiga-tion in the U.S. and Europe into share trades carried out at Deutsche’s Moscow office that is causing a headache for Deutsche in Russia.

As a result of the retreat from Russia, Deutsche Bank will cut about 200 jobs in the country by the end of the year.

UBS stays the courseOne of Deutsche’s main competi-tors, UBS, is taking a different tack in Russia, despite the country’s re-cession and sanctions imposed by the U.S. and European countries.

UBS isn’t planning to cut jobs in its investment banking or wealth-management businesses in Russia and is in fact considering

hiring former Deutsche employees, Elena Titova, chief executive offi-cer of UBS’s Russian unit, told the Bloomberg news agency in an in-terview in early October.

“Clients appreciate when banks stay with them, even if they can’t work properly due to sanctions” against the country, Mrs. Titova

said, Bloomberg reported. “Such consistency with time turns into income.”

The bank’s Russian operations are a “material and meaningful part of UBS’s business,” Mrs. Titova told Bloomberg, adding that the fi rm has more than 100 employees in Moscow.

UBS is “growing” its wealth-management business in Russia, she said.

“We keep looking at the possi-

Deutsche, UBS Take Divergent PathsDeutsche Bank is shuttering its

operations in Russia while UBS

stands fast, hoping to wait out the

country’s recession and maintain

market share.


bilities to upgrade the team,” Mrs. Titova said, Bloomberg reported.

“This doesn’t mean we hire a lot, but if we see interesting options, like in the case with the former Deutsche Bank employees, then we’ll consider them seriously,” she said.

Decisions amid recession The differing calculations by Deutsche and UBS come as Rus-sia’s economy suffers through a painful recession this year, and amid questions over how quickly it can return to growth.

Western countries have also slapped sanctions on two of Rus-sia’s biggest homegrown banks, Sberbank and VTB, making life harder for foreign banks attempt-ing to continue operating normal-ly in the country.

Russia’s Gross Domestic Prod-uct is set to contract 3.9% in 2015 according to government estimates, and the International Monetary Fund has predicted sanctions may shave 9% off Russia’s GDP in the medium term.

Meanwhile a decrease in dispos-able income and corresponding de-cline in consumption will push Rus-sia’s poverty rate from 10.8% in 2013 to 14.2% in 2015 and 2016, the World Bank has predicted.

Ratings agency Standard & Poor’s has said that even after Rus-sia returns to growth, it expects the country’s economy to expand at a sluggish rate of 0.4% annual-ly through 2018.

That weak growth rate refl ects “a lack of external fi nancing due to the introduction of economic sanctions and the sharp decline in oil prices,” the agency said.

Oil prices have fl oundered at near $50 per barrel this year. In Octo-ber, Russia’s Economy Minister warned the country must prepare for the likelihood that oil prices will remain low for a long time.

“Clients appreciate when banks stay with them,” Elena Titova, CEO of UBS’s Russian unit, told Bloomberg News.

New app by Natalia Vodianova: ‘Love’ is better than ‘Like’rbth.com/50277

cheap money and an infl ux of li-quidity because of high oil prices,” Mr. Ilyin said.

Possible prospectsAccording to Mr. Ilyin, it is not yet clear if this crisis is deeper than the previous one, but it will defi -nitely be longer, and short-term one-off support measures will hard-ly change the situation.

“Now the situation is growing more slowly, there are no such shocks, no wave of corporate de-faults, delinquency is not rising so much, and the banks have learned a lot and were able to promptly minimize the losses,” says Mr. Ilyin.

The current situation may yet prove to be more severe, he said, because it has been caused by a

systemic crisis that will not be eased with outside money due to low oil prices and the sanctions.

“The banks that received addi-tional capitalization from the gov-ernment did not run to build port-folios, as it was last time, but began to cut spending and curtail unprof-itable operations, preparing for a long hibernation,” says Mr. Ilyin.

As a result, in the first nine months of 2015, 61 commercial banks had their licenses revoked by central regulators.

“Nevertheless, we can conclude that the Russian banking sector is so far going through crisis satis-factorily, and in many respects it is an achievement of the state, which offered additional fi nancing to banks at the right time, thereby

The Ruble-Dollar Rate vs Interest Rates

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Money & Markets

Russian stock and bond markets swung upward as summer faded to autumn, defying dreary news about the country’s economy and continuing what has been an ex-tremely volatile year for Russian fi nancial markets.

Analysts attributed the rise to an uptick in the price of oil, Rus-sia’s key export, which rebounded off six-year lows touched in Au-gust.

Political headlines, such as Rus-sia’s military actions in Syria, didn’t seem to dent Russian markets.

According to a calculation by the fi nancial news agency Bloomberg, the Market Vectors Russia ETF (ex-change-traded fund) had returned 15% for the year as of Oct. 11, the best performance of 776 U.S.-do-miciled ETFs with assets of at least $100 million.

Yet this year, volatility has been the rule for Russian markets. The agency noted that just seven weeks earlier, the Market Vectors Russia ETF had trailed 260 of its compet-itors, having fallen 1.6% for the year.

Meanwhile, Russian government bond prices rose for eight weeks straight amid speculation that a rise in the exchange rate of the ruble, which closely tracks the price of oil, will give the Russian Cen-tral Bank the freedom to continue cutting interest rates. The ruble gained 5.4% against the dollar from Oct. 1 to 19.

The price of Brent crude recov-ered about 15% from mid-August to mid-October.

Yet many questions hang over Russian markets, potentially re-

Stocks & Bonds Amid sanctions and recession, Russian assets have been on a wild ride in 2015

straining asset prices from future growth.

Russia’s economy is grinding through a deep recession this year. The country has launched contro-versial military operations in Syria, and remains under economic sanc-tions imposed by the U.S. and Eu-rope over the confl ict in Ukraine.

These issues, among others, may drag on Russian asset prices.

“The problems for the market are well known: low payout ratios, low earnings growth, high oil de-pendence,” analysts at U.S. broker-age J.P. Morgan Cazenove wrote in a note to investors.

The analysts added that accord-ing to their calculations, the Rus-sian stock market appeared to be about “20% overvalued near-term” as of mid-September.

Stocks Flip From Annual Losses to GainsRussian stocks swung from losses

to gains from August to October as

oil prices ticked upward. Yet what

remains for the rest of the year is

yet to be seen.


But, looking further into the fu-ture, the analysts, including David Aserkoff and Alex Kantarovich, wrote that potential economic re-forms and periodic fast-moving ral-lies in Russian equities could help the Russian market outperform U.S. stocks in the medium term.

Looking back at the past 20 years of Russian stock market perfor-mance, “we note 13 rallies of 50% or more in 6 months or less,” the analysts wrote. Economic reforms by the government could help un-lock market growth, they said.

“We see more easy wins in Rus-sia in terms of economic reform than any big market in CEEMEA bar Saudi,” they wrote, using the acronym that stands for Central and Eastern Europe, Middle East and Africa.

Meanwhile, U.S. brokerage Gold-man Sachs downgraded Russian energy giant Gazprom on Oct. 19, saying it expects the Russian nat-ural gas exporter to report weak fi nancial fi gures in the third quar-ter due to both lower gas prices and sales volumes.

The energy giant is also likely to accelerate spending on new pipe-lines, and could face increasing competition in its key European markets in the form of tanker-born liquefi ed natural gas, Goldman said.

But while advising investors to sell Gazprom shares, Goldman rec-ommended investors buy Russian crude oil giants Rosneft and Lu-koil, calling the fi rms “resilient to a lower oil price, owing to their ruble cost bases and the progres-sive tax rate.”

“We forecast an improving pro-duction outlook for Lukoil and Ros-neft versus declining production for Gazprom,” Goldman analysts Geydar Mamedov and Elena Ma-lareva wrote.

Russia’s volatile 2015 follows a disastrous 2014 in which the RTS index tumbled 45%.

Russia’s sovereign 10-year bond yield

Russian assets have swung between losses and gains in a turbulent year.

Russia is pouring resources into the development of composite materials.

There was a time when the Soviet Union’s quest to supply itself with building materials suitable for con-structing its glorious communist future was a key part of the na-tional zeitgest, to the extent that it was even romanticized, as in Fly-odor Gladkov’s 1925 novel about love and hardship set in a factory, “Cement.”

Today, the romance may be over, but Russia is plotting a return to its mid-20th century leadership in the development and use of tech-nology for production of carbon fi bers — the basis of strong, light-weight composite materials with a wide variety of uses in industri-al and consumer goods.

Materials based on carbon fi bers have unique properties, being 10 times stronger and 4 times lighter than metal.

And demand for composites in the automotive, shipbuilding and aircraft construction is rising at a rate of 10-15% annually.

Overall, the world market of composite materials is now esti-mated at 12 million tons a year and amounts to about $483.5 billion, while the volume of production of composite materials in Russia is estimated at tens of thousands of tons, and is only 0.3-0.5% of the world market.

According to Sergei Vetokhin, Ex-ecutive Director of the Union of Composites Manufacturers, Rus-sia has unique developments in this fi eld; for example, a mobile road surface that allows heavy vehicles to pass in difficult terrain, even through swamps. It is used mainly in the oil industry.

“Excellent solutions exist for the construction of nuclear power plants; their technology, too, has no analogues in the world,” said. Mr. Vetokhin.

Manufacturing Russia is seeking a strategic advantage in the production of carbon fiber materials.

To bring Russia back to the world market of composites, the Russian government approved in 2013 a “roadmap” for the development of the composite materials industry.

According to this document, Rus-sia’s domestic production of com-posite materials and products by 2020 will amount to 120 billion ru-bles ($1.9 billion), with consump-tion of output per capita of 1.5kg a year, and a 10% share of exports.

The composite industry in Rus-sia is historically closely connect-ed with the nuclear industry.

Domestic carbon fi ber produc-tion technology was developed at the enterprises involved in the nu-

clear industry as early as in the 1980s.

Government programCurrently, the state corporation Ro-satom is involved in the creation of the full-fledged carbon fiber market in Russia and organizes the export of these products to other countries.

Rosatom and the Komposit Hold-ing Company intend to create low-cost production of world-class quality polyacrylic fi bers.

“This requires a very expensive infrastructure,” says Alexander Uvarov, the head of independent nuclear online newspaper, Atom-info.

In the spring of 2015, Russia launched the Alabuga-Volokno fac-tory, which was commissioned by Rosatom and built by the Kom-posit Holding Company.

The cost of the first phase amounted to 3.3 billion rubles ($52.3 million).

Russia Seeks Carbon-Fiber LeadershipRussia aims to regain its leadership

in the carbon fiber sector and the

production of strong, lightweight

composite materials used in

construction and industry.

ANDREI RETINGERRBTH

“The new facility will enable us to quadruple the production of composite materials, which means reducing the cost of raw materials and extending the range of appli-cability. That is why we believe that Alabuga-Volokno will help get rid of dependence on imports,” says Al-exander Lokshin, First Deputy CEO of Rosatom.

For the time being, the plan is to produce two brands of carbon fi ber: Umarex UMT42-12K (this class of products is used in aviation, auto-mobile and shipbuilding, as well as in wind energy production) and Umatex UMT42-24K for other in-dustrial purposes.

A technical feasibility study for the use of composite materials in nuclear power plants has already been developed on the order of Rus-sian nuclear scientists.

It deals with the use of compos-ite reinforcement in the produc-tion and installation of concrete structures, as well as the use of composite pipes in cooling towers.

It is expected that the use of such materials will improve the quality of the nuclear plants under con-struction.

The urgency of replacing metal for composites is due to the effects of corrosion on metal — for in-stance, metal pipes rust in cooling towers and require constant main-tenance.

In contrast, composite reinforce-ment is not subject to corrosion and is superior to metal because of a number of other important char-acteristics.

This means that the emergence of nuclear power plants, consist-ing at least partially of composite materials, can be expected in the near future.

At present, the enterprise in Al-abuga is operating in test mode; it produces pilot batches and sends product samples to potential cus-tomers. Later this year, dozens of contracts with customers in many countries are expected to be signed.

Rosatom’s plans also include the construction of the second stage of the plant with four production lines, which the company hopes will allow annual production ca-pacity to be increased to 10,000 tons by 2020 and occupy 7% of the global carbon fi ber market. Com-posite materials account for a quar-ter of the dry weight of the Rus-sian fi fth-generation fi ghter T-50, created within the PAK FA (front-line aviation aircraft system) pro-gram.

“Excellent solutions exist for the construction of nuclear power plants, with no analogues in the world,” said Mr. Vetokhin.

Alexey

LossanRBTH

Recently a debate has begun over whether the crisis in the Russian economy has ended. Russia’s Economic Development Deputy Min-ister, Alexei Vedev, announced at the end of

October that economic growth is on the horizon, and by one metric, has even begun. According to Mr. Vedev, Russian GDP growth in September was 0.3% compared to August. The Economic Devel-opment Ministry expects growth in the fourth quar-ter compared to the third quarter. Mr. Vedev’s im-mediate superior, Economic Development Minister Alexei Ulyukayev, said: “there is no more crisis.” And he continued: “I am confident that we will not fall further.” Representatives of the ministry were fol-lowed by the head of Russia’s second largest state-owned bank VTB, Andrei Kostin, who also announced the end of the crisis. “There is no crisis in Russia,” he told the Russia Calling! forum in Moscow.

Certainly the Russian economy is still showing mixed trends. According to the Federal State Sta-tistics Service, agricultural production increased by 4% in September 2015. The decline in investment in the first ten months amounted to 5%, however, as the slowdown in production moderated, from 3.7% to 3.2%, over the same period.

The slowing pace of economic decline, although gradual, has given economists reason for optimism. Moreover, positive prognoses have been supported by Russia’s experience in the 2008-2009 crisis, when the economy recovered fairly quickly after the ini-tial deep shock.

After the last crisis of 2008-2009, Gross Domes-tic Product returned to growth after two quarters of decline. This means that in the event of a repeti-tion of the scenario, Russia’s GDP will start to grow in six months — in the second quarter of 2016.

However, during the previous crisis, the econo-my was supported by growing consumption. This time there will be no such luck. The decline in real wages reached 10%, and the reduction of retail spending — a significant indicator of the actual in-come of the population — amounted to 10.4%.

Therefore, warn analysts at Barclays Bank, the economic dynamic from here on may be more L-shaped than V-shaped, as it was in 2009.

Many economists now say, furthermore, that a return to constant GDP growth in Russia will be possible only if the authorities are willing to take on structural reforms to reduce dependence on oil.

As analysts from Citi showed in a recent report, every $10 decrease in the price of a barrel of oil will lead to a reduction of Russia’s GDP by 0.8%.

After the crisis of 2008-2009, a quick recovery in oil prices led to post-crisis return to growth. If one assumes current oil prices are here to stay, then the Russian economy will have to find new horizons for development in the future.

Alexey Lossan is executive editor of Russia Beyond the Headlines for Business

VIEWPOINT

Has Russia’s Economy Reached the Bottom?

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Opinion

TPP FREE TRADE PACT DOES NOT MAKE SENSE FOR RUSSIA

THE WAR IN SYRIA AND RUSSIA’S ECONOMY

RUSSIA-CHINA: TAKE A CLOSER LOOK

Free trade agreements like the Trans-Pacific Par-tnership (TPP) practically seem to have been designed to marginalize or isolate Russia in the global economy. But there is another key rea-

son why Russia will distance itself from the TPP. The recent history of free trade negotiations has

been characterized by secrecy, subterfuge and pro-cedural chicanery. Mistrust has only increased as a result of the stumbling path being followed by the U.S. Congress to invest President Barack Obama with fast track authority to conclude the Trans-Pacific Par-tnership. How mega-trade agreements are hamme-red out — behind closed doors by vested interests — is controversial, to say the least.

Nobel Prize laureate Joseph Stiglitz noted in the New York Times earlier this year that the Office of the United States Trade Representative negotiates these agreements, supposedly on behalf of the Ame-rican people. In practice, he concluded, the trade re-presentative’s office is inescapably linked to large corporations and their interests.

Restricting intellectual property rights, which are frequently at the center of controversies over free trade, represents more than a war on pirated music and video downloads. In the case of the TPP, for ins-tance, Stiglitz suggests that new “anti-piracy” rules could help big pharmaceutical companies increase their monopoly profits on brand-name drugs. He wor-ries that the TPP will “trade away our health.”

According to Mr. Stiglitz, these anti-piracy laws would also limit competition from generic drug ma-nufacturers, not allow real price competition in any of the 12 TPP signatory countries, and have the knock-on effect of putting pressure on producers of phar-maceuticals in other countries such as India. The health of billions of people may be affected by the TPP.

This may appear to be an over-the-top conclusion, but there’s an important truth here. Pharmaceuticals are just one piece in a much bigger puzzle affecting citizens everywhere. Free trade deals are the basis

Like any other war in the Middle East, the war in Syria has an important economic subtext. Traditionally, this is because the war in ques-tion takes place adjacent to the world’s largest

oil and gas fields, in a region crisscrossed by impor-tant pipelines. For this reason alone, one might ex-pect the war in Syria, and Russia’s involvement in it, to create short- and long-term consequences.

Yet Syria itself is not a major player on the global hydrocarbon market. Even in the most prosperous years in the early 2000s, Syria was producing little more than 520,000 barrels of oil per day, slightly more than 0.6% of world production.

Since the beginning of the civil war in Syria and the introduction of European sanctions, oil produc-tion in the country has begun to fall rapidly. By the beginning of this year, according to official statistics, it was a little over 30,000 barrels per day.

Gas production in Syria is also not large by world standards — about 5.5 billion cubic meters (bcm) per year at present (compared to 9 bcm in 2010). In this context, we can safely say that no matter how

Chinese official statistics revealed that bilateral trade between Russia and China in 2014 was $95 billion, raising hopes that the countries could breach the $200 billion mark this year. However, due to the fall in energy prices and the 50% devaluation of the Rus-sian ruble in the first half of 2015, trade volumes de-creased by 30%.

Although a growing number of experts have star-ted talking about the futility of Russia’s turn towards the East, a careful analysis paints a different picture.

For starters, we should take into consideration the currency factor. At the moment, calculation of bila-teral trade figures in dollars presents a distorted pic-ture. Since 2008, Russia and China have been wor-king to establish payments in national currencies. Frontier trade in the Far East has almost completely changed to mutual payments in ruble-yuan, and oil and gas contracts between Gazprom, Rosneft and Sinopec are already stipulated in national currencies. The volume of VTB Bank’s yuan settlements in the Far East in the first half of 2015 reached 150.4 million yuan ($23.7 million), which is almost twice as much as the indicators from the same period in 2014.

Secondly, with a 34% overall reduction in Russia’s foreign trade, the 30% fall with its southern neigh-bor means that China’s relative share in Russia’s foreign trade in the first half of 2015 basically grew. In com-parison, Russia’s trade with the EU declined by 36%.

When it comes to Sino-Russian trade, not all sec-tors have been affected by slow economic growth and turbulent financial markets. Many areas of coo-peration received additional stimuli for development. Russia’s agricultural produce and bottled water consti-tute a good source for growth and expansion of ex-ports to China. The Narzan mineral water producer plans to export 100 million bottles to China annually. Miratorg, a Russian food company that runs a chain of supermarkets, intends to export pork to China this year with estimated volumes of 2,000 tons per month.

There is also a lot of potential for the export of na-tural gas to China, since the Chinese government is focused on reducing dependence on dirty energy.

Although there has been a reduction in the ove-rall trade volumes, the electronic commerce sector is growing. Yandex, Russia’s largest IT company ope-ned an office in Shanghai and the Yandex.Kassa pay-ment service’s Chinese turnover has increased se-venfold in the last year. Moreover, in September the Chinese TradeEase online platform began operating in Russia, helping people buy Chinese goods online.

Overall indicators often distort the general picture. Cooperation between Russia and China is witnessing qualitative improvement. Even if bilateral trade fi-gures don’t touch $200 billion by 2020, a new, im-proved and more diversified structure of economic interaction will likely be in place by then.

Oleg Remyga is the director of the China Laboratory at the Moscow School of Management Skolkov’s Cen-ter for Asian Studies.

of greater socio-economic inequalities as they ruth-lessly transform the world into haves and have-nots.

This year the UK-based charity Oxfam reports that by 2016 the combined wealth of the richest 1% will be greater than that of the other 99% of the world’s population. A growing share of the 99% is now for-ced into conditions which can only be called slavery.

It is as if the secret, inscrutable, and hurried free trade pacts among already wealthy countries are ne-cessary to ensure that such already outrageous le-vels of economic inequality will only increase further.

Free trade negotiations may be so secretive be-cause they are polarizing and acrimonious. But under a winner-takes-all system, the principle of democra-tic centralism prevails: a defeated minority must com-pletely submit to the will of the victorious majority. For Russia, free trade agreements like TPP seem de-signed to marginalize or isolate the country. These ac-cords are sometimes given a political reading in which analogies with hostile military and politic blocs are

made. It is a mistake to draw such comparisons.Russia has many reasons to avoid becoming stig-

matized as seeking a return to state socialism or to be cast as an intransigent opponent of the global market economy. “Authoritarian,” “backward,” and “Oriental” are negative images of Russia propagated in much of the West. Ranting against the TPP in Mos-cow might reinforce this image.

But Russia can capture much-needed moral high ground by distancing itself from the “globaloney” hype around the TPP.

Raymond Taras is a visiting scholar at the School of Global Studies, Sussex University, and a professor of Political Science at Tulane University. The article was first published at Russia Direct.

the war unfolds in Syria, no matter who wins, any development of the situation in the oil and gas in-dustry in this country will not have a serious impact on the global oil market.

Much more serious economic consequences for Russia may be caused by its direct interference in the Syrian crisis. Although Russian officials claim that the Russian air force is bombing the positions of ISIS militants, numerous sources in the region say that the main target of these attacks is the «moderate» Syrian opposition fighting against the forces of Sy-rian President Bashar al-Assad.

Given that the key states in the region — Turkey and Saudi Arabia — support the Syrian Sunni oppo-sition, then the longer and larger the Russian armed forces’ involvement in the Syrian civil war, the more political and economic problems will arise for Rus-sia in the region.

For example, the Russian Direct Investment Fund has announced the creation of investment par-tnerships with the sovereign wealth funds of Saudi Arabia and the United Arab Emirates.

As part of these plans, these funds have expressed their willingness to invest, respectively, $10 billion and $7 billion in Russia.

In a situation in which Western financial capital

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markets have effectively been closed to Russian banks and companies, the capital from the Gulf countries is being considered by the Russian autho-rities as one of the possible and desirable alterna-tives.

Obviously, in the case of a protracted military ope-ration of the Russian army in Syria, the probability of the realization of these plans will fall sharply.

Turkey, due to its geographical position, is begin-ning to play a key role in the construction of trans-port infrastructure between Europe and Asia. By all appearances, the country will start the construction of several pipelines in the coming years, which would be able to deliver gas from Iran, Azerbaijan and Turk-menistan to Europe.

In addition, the pipelines may be laid to Turkey through Syria from Israel and Qatar. But if the Israe-li project provides for the construction of the offs-hore gas pipeline outside the territorial waters of Turkey, the pipeline from Qatar must inevitably pass through Syria.

It is clear that as long as there is civil war in Syria, the construction of a gas pipeline on its territory is out of the question.

In theory, this situation could be to the benefit of Gazprom, which is heavily promoting its Turkish Stream project, but is faced with serious constraints in terms of access to the Turkish market and big pro-blems in relations with its Turkish partners after lame statements by representatives of Gazprom on the active involvement of Greece.

However, Gazprom cannot seriously expect that the inability to get gas from Qatar will make Turkey softer in negotiations with the Russian company, since the country’s gas needs will be satisfied wit-hout restriction in any case.

In addition, it seems that the Qatari gas pipeline to Europe has already moved to the front of the line. To start a cost-effective supply of gas through Turkey, the ability to pump 15-20 bcm a year is needed, and that amount of gas is already there in Azerbaijan, Iran, Iraq and Turkmenistan. These countries could increase production while the pipeline is being built.

As a result, the Russian military operation in Syria, in the short term, neither holds any significant losses (expenses) for Russia, nor promises any significant gains.

At the same time, in the event of a more serious and long-term involvement in the civil war in Syria, Russia may face significant economic losses.

Sergey Alexashenko is a non-resident senior fellow at the Brookings Institution (Washington D.C.) and ser-ved as the first deputy chairman of the Russian Central Bank from 1995-1998.

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POLITICAL SCIENTIST

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Feature

When civil war broke out in Ukraine, surely no one imagined that among the unforeseen consequences would be a revolution in the Russian cheese industry.

Yet through a series of knock-on events, that’s what happened. It went like this: the U.S. and Europe hit Russia with sanctions over its pol-icies in Ukraine, prompting Russia to retaliate by banning American and European imports from Russian supermarket shelves. Among the biggest casualties, from the Russian shopper’s perspective, were creamy, fragrant European cheeses.

The standoff has turned Russia into a nation

of cheesemakers, as ordinary Russians began making cheese in their homes.

Now, to alleviate the cheese drought, a team of Russian gastronomical specialists in Siberia has dedicated itself to pioneering local versions of European classics. At the forefront of the ac-tion is the wonderfully-named Siberian Sci-entifi c Institute of Cheesemaking, with a his-tory dating back to Soviet times.

Take, for example, “Altarelli,” the Russian an-swer to Mozzarella, with a name that nods to the Siberian Altai mountain range. Altarelli does indeed bear a passing resemblance to its classic forebear, being made of normal-ized cow milk plus Siberian starter cultures and organic acidifi ers. The developers claim the process does not require the addition of any harmful stabilizers or preservatives.

Another sanctions-buster is the smooth cream cheese that takes aim at Italy’s sweet, spread-able mascarpone, with fat content as high as 70%. Like its Italian counterpart, the Siberian version is intended to be used in desserts. To get the fl avor right, the Siberian cheese scien-tists invented a new ingredient: a glucose de-rivative used as an alternative to starter cul-tures.

Another new invention has been dubbed Sursele, and is a version of the moldy, pungent French Roquefort cheese.

Sales problemsThe next part: how to bring the new Russian cheese to the masses. Russian middlemen have already purchased the technology for producing the new Siberian delicacies, but the fi nished products may not reach grocery shelves in Rus-sia’s biggest cities, Moscow or St. Petersburg, anytime soon. Despite the high consumer in-terest, distributors and retailers have been cau-tious about the new items, fearing shoppers will be suspicious about new products with fun-ny-sounding names of local origin.

Russia’s Siberian Scientific Institute of Cheese-

making has developed local versions of

Mozzarella, Mascarpone and Roquefort, taking

traditional cheese-production methods and

adding new innovations, including new starter

cultures and enzymes.

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On the Siberian Scientifi c

Institute of Cheesemaking

The Siberian Scientific Institute of Cheesemak-ing was established in 1958. It has developed doz-ens of cheese production technologies, as well as experimental equipment, starter cultures and en-zymes. Currently, it is developing cheese with im-munomodulating properties. It is planned to create a group of cheeses with a longer shelf life, based on enzyme preparation from new types of raw ma-terials. The Institute is located in Barnaul in the Al-tai region in western Siberia. The region ranks first in Russia in terms of cheese production. In 1935, the famous Sovetsky cheese was created there.

In Cheese Drought, Russia Aims For Local Classics

Cuisine Sanctions have blocked European cheeses

According to Vladimir Tkachenko, deputy di-rector at the Siberian Scientific Institute of Cheesemaking, entrepreneurs interested in cheese production are also hampered by tight credit conditions and logistical issues related to long-distance shipping.

So far, “most of it is sold only in Siberia and Russia’s Far East,” Mr. Tkachenko said.

So now, work at the institute is focused on the creation of a new group of cheeses with

a longer shelf life, based on an enzyme prep-aration made of new types of raw materials.

If Russia does manage to craft a line of close-enough-for-comfort European-like cheeses, far from those products’ traditional home turf, other countries may be keen to learn how they did it. Indeed, manufacturers from Thailand have already reached out to show interest, sending representatives to meet with the Altai Territory Governor, Alexander Karlin.

A Brief History of Cheese in Russia

Cheese production in Russia increased by 30% in 2014 with the imposition of sanctions against Eu-ropean foods, according to data from the company Market Analitika.The total volume of consumer goods imported in-to Russia fell by 42.4% in 2014 and by 87% for the first five months of 2015 compared to the previ-ous year.Sanction restrictions and a general decline in living standards have led not only to an increase in do-mestic production, but also to a number of nega-

tive trends. In Russia, according to analysts, the popularity of “cheese product” is growing instead of natural cheeses, since it is in the low price segment. The in-crease in these products so far this year amounts to 53%.Manufacturers are increasingly moving to small-er package sizes while keeping the old prices for products. The total reduction in consumption of cheese in Russia so far amounts to 30% compared to 2014.

Restaurants

In 2015, you can sample masterpieces by the capital’s chefs without much damage to the budget. The average bill.

Average cost of transfer to the airport.

Taxis

Rent a carIn September, the car-sharing system – short-term car rental services – started to operate in Moscow.

Average price of group tour.

City tours

T RAV E L 2 MO S COW. COM The Russian ruble has lost around 40% of its value against the U.S. dollar over the course of the last 12 months. The

decrease has made many products and services cheaper for foreign visitors

in Russia.

* Source: Federal State Statistics Service of Russia, Jones Lang LaSalle Incorporated, 2GIS. Prices are calculated at the exchange rate on 07.10.2015

Only half of the cost of most musical theaters in the world.

The Bolshoi Theater

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