bne:Chairman's Monthly List — May 2015

This is bne's Russia chairman’s newsletter, a selection of forward looking stories on development in eastern Europe and the region. Feel free to request topics or ask questions: editor@bne.eu

Contents: Top Story Russian Central Bank forced to abandon inflation rate targeting Is Gazprom a "buy"?

Politics – the good Navalny brothers get totalitarian fighters NGO award Some 2,220 prisoners freed in Victory Day amnesty Russian Federation Council passes bill to cap ministers' expenses Deputy chairman of management board of Trust Bank arrested in Russia

Bills to implement reform of arbitration reach Russian parliament Four defendants in Russian arms export agency get 3.5 years in jail and more Former Russian mayor arrested on suspicion of corruption Putin cracks the whip over graft busters with dismissals Politics – the bad Russian officials cancel registration of opposition leader Navalny's Progress Party

Russian government backs bill on amnesty for tax evaders

Over $1.8bn worth of corruption uncovered in Russia's Space Agency audit

Russian bill to strip legislators for withholding income reports

Dozen of protesters arrested in Bolotnaya anniversary rally

Duma approves amendments to “Law on Retail” in first reading

A bill to bans foreign NGOs deemed to be a threat passed in second reading

Russia in top 60 countries to be mother Fallen skyscraper builder Polonsky extradited from Camobodia to Russia

17 LGBT Protesters Detained in Moscow As Police Observe St. Petersburg Rally

Politics – the ugly Russian $60mn military fraud case ends, anti-graft drive hits new targets Over $1.8bn worth of corruption uncovered in Russia's Space Agency audit Embezzlement investigation started at "Kremlin bank" subsidiary Deutsche Bank accused of money laundering in Russia Night Wolves receivedmns in state funds to produce antiwestern children's shows Polls, mood, sociology Russians fear of US attach up to 60% More Russians see China as friendly nation Russia well ahead of BRIC peers in human capital rankings Banks and Finance

Moral hazard in current deposit insurance scheme, risky banks to pay more Mortgage lending up by third in 2014 due to state support Societe Generale posts loss in Russia in Q1, announces lay-offs Bank of Moscow merger with VTB Bank postponed to 2018 Economics Crisis may not be as bad as expected… … but industrial production suddenly slumps 4.5% in April due to ruble recovery Russia's services PMI in positive territory for first time in seven monhts Russia's import substitution program will cost at least $50bn Russian cheese production rose a startling 30% in the first four months

Banking sector April data: still tough times

CBR cuts key interest rate to 12.5%

Only one in five Russians save money

CBR announces Fx purchases, says not targeting specific ruble rate

Russian banks depend on state, loan quality decaying Russian lending plummets in first quarter CBR extends anti-crisis measures, exchange rate pegs

Ruble rallies but running out of steam now Russia's death rate is surging and it's not clear why

FDI to Russia slumps but Chinese investors step in as others pull back

Shrinking Russia Jet Fleet Threatens Airbus-Boeing Order Backlog

Russian firms drop place in global business ranking

China plans slew of rail and port deals with Russia

CBR starts buying FX again Banking woes lead to redollarization of Russian economy MACROWRAP EU puts Russia's GDP contraction at 3.5% in 2015 IMF buffs up economic forecast for Russia as growth beckons Russia's inflation expectedly slows to 16.4% y/y in April

ECM Moscow Exchange reports 127% net income growth in 1Q Russia’s NLMK to pay biggest dividend since 2007 Frontier markets coming to the fore Leading Russian tech company Navigation Technologies files for bankruptcy Sectors

Russian government freezes public wages to contain inflation, but kills demand BUDGETWRAP Federal budget deficit more than doubles month-on-month in April Nonoil and gas revenues strong in April Russian government freezes public wages to contain inflation, but kills demand Culture ministry to slash spending by 30% Infrastructure Russian port operator FESCO reports threefold net income growth under RAS in 1Q

Russian tourism down 30% in first quarter McDonald’s Russia expansion undaunted by recession, antiWestern sentiment All but one segment of Russian advertisement market declines in the first quarter of 2015 Car sales remain weak, slump 41.5% year-on-year in April Car production in Russia plummets 20.5% in first four months Russian oil production stays at post-Soviet high Gazprom cuts 2015 output target, analysts see greater exports ahead

Russia climbs in tourism ranking

Luxury apartment sales in Moscow soared to a record high in April

Russian beer sales fall 9% Apartment sales on the secondary market tumble

Demand for Moscow leading retail streets up but still weak

Top Story Russian Central Bank forced to abandon inflation rate targeting In 2007, the Central Bank of Russia (CBR) made a definitive change in the way it works: it formally dropped attempts to manage the exchange rate and focused entirely on inflation targeting.

After suffering the hyperinflation of the 1990s (technically definied as inflation above 50% a year) inflation is a highly emotive issue in Russia. For most of last year "inflation" was put at the top of the lists of regular Russian's worries, ahead of the conflict in Ukraine, although since the start of this year "the economy" has overtaken it, as real wages began to fall for the first time in over a decade and unemployment started tick upwards.

However, the CBR lost control of the situation in December last year when the ruble crashed on the back of tumbling oil prices and the regulator was forced to hike rates by 6.5% to 17% in a day. The commercial cost of capital rocketed to an economic-growth killing 20%-25%. Since then the CBR has had one task: get interest rates down as fast as possible as the economy has simply ground to a halt and will stay stopped until interest rates are back into single digits. The CBR surprised analysts

with a 2% cut in January, a 1% cut in March and most recently a 1.5% cut on April 30, bring the minimum repo rate to a better, but still high, 12.5%.

The first question the rush to cut rates raises (and the banks would like to go even faster) is: won't slashing rates send inflation shooting back up?

In a statement accompanying the last rate cut the CBR said inflation was running at 16.5% as of April 27 and was expected to fall to below 8% in 12 months' time and to 4% in 2017.

Economists like Alfa Bank's Natalia Orlova and Sberbank's Evgeny Gavrilenkov have said that upward pressure on inflation caused by the 50% devaluation of the ruble in December has worked its way through the system faster than expected; the spike in inflation caused by a sharp devaluation usually takes about six months to work its way through an economy, but in Russia's case inflation is thought to have peaked in March instead of April or May. That gives the CBR some wiggle room for faster-than-usual rate cuts. The rate cut was further supported by a rally in the ruble vs the dollar and partial recovery of oil prices.

Secondly, the governor of the CBR Elvira Nabiullina believes inflation pressure is mainly coming from factors like soaring food prices (the

price of cabbage has tripled) that are due to agricultural sanctions imposed by the Kremlin last year on EU and US goods, rather than monetary policy decisions – ie. the cause of the current inflation is something that the CBR has no control over.

The upshot of all this upheaval is that the CBR's inflation targeting policy has gone out the window as it administers a string of cardiovascular rate cut shocks in an attempt to revive Russia's moribund economy.

"The main reason given by the central bank for the [April interest rate] cut was 'lower inflation risks and persistent risks of considerable economy cooling,' which reinforces the direction of the monetary policy taken after CBR's U-turn in January 2015," said Danske Bank in a note. "Since then, the central bank is seriously taking into account economic developments rather than purely targeting inflation."

However, independent economists are worried and think that inflation is going to be harder to defeat than the CBR is predicting.

"That the current inflation spike to 16.9% year-on-year is transitory is a view shared by the majority of analysts: the effects of exchange rate depreciation and the import ban will evaporate soon," said Alfa bank's Orlova in a note. "However, CBR expectations of single-digit inflation by January 2016 are optimistic, in our view, as year-todate inflation had already hit 7.5% by the end of the first quarter of

2015 and would have to stay at 0.3% month-on-month for the rest of the year to meet that target.

We, on the contrary, expect inflation at 11% for the full year."

Orlova also pours cold water on the CBR's target of 4% inflation in 2017. The market consensus is for inflation of 7% in 2016 and 6% in 2017.

Part of the problem is Russia's election cycle will end up boosting inflation. Usually inflation is brought down partly by slowing nominal wage growth, but Russia goes to the polls to elect a new Duma in 2016 and to (presumably) reaffirm President Vladimir Putin in his job in 2018, and in the past the government has dramatically hiked both public wages and pensions in the run-up to elections. This time round the Kremlin will have to spend heavily to keep the ruling party of power United Russia in office: it barely cleared the 50% threshold in parliamentray polls in 2011 and has been loosing support steadily since then.

Splashing money about in the public sector might stem that slide, since about half Russia's population is directly or indirectly dependent on state wage spending and state social spending accounts for 20% of household incomes, according to Alfa Bank. Adding to this, the extremely tight labour pool is about to get tighter after Russia's population growth trend abruptly went negative in the first quarter of this year and this will also push wage growth up.

Is Gazprom a "buy"?

With the RTS up 30% year-to-date foreign investors are drifting back into Russian shares simply because they are so cheap, but is the bluest of Russian blue chips and long time market proxy Gazprom a buy again?

Russian investment bank Renaissance Capital, or Rencap as it is affectionately known in Moscow, certainly thinks so. In a report entitled "Gazprom: Discount season is ending" the bank market the stock up to "buy."

"We raise Gazprom’s [target price] to $9.0 (from $7.1), following better cost control demonstrated in the recent FY14 results, an improved outlook for exports and lower purchase costs on Central Asian gas. We re-iterate our BUY rating on Gazprom and prefer it to the three other largest Russian energy companies: Lukoil (HOLD, TP $52.0/GDR, CP $51.0/GDR), Novatek (HOLD, TP $105.0, CP $97.5) and Rosneft (HOLD, TP $4.1/GDR, CP $5.0/GDR)," the bank's analysts Ildar Davletshin and Evgeny Stroinov wrote in the note.

Gazprom has made a lot of investors a fortune in the past as the stock's price soared following the government's decision to remove the so-called ring fence, special restrictions that banned foreigners from owning shares in Russia's most powerful company.

During the boom years in the midnoughties the stock rose to an all time high of RUB365.26 ($15.41) on May 16, 2008 on the local market just before the Lehman brothers storm broke, then tanked to an all time low of RUB86.60 ($3.19) on October 24 that same year. Current the shares are trading at RUB155.46 ($3.10) as of May 6, almost exactly where it was five years ago to the day in ruble terms, although less in dollar terms, RUB155.0 ($5.08).

Rencap's target prices are referring to the price of the shares on the international markets where the stock trades significantly higher, despite the lack of the ring fence, and cost $5.92 per share as of May 5. Still, irrespective of if an investors buys the stock in London or Moscow, Rencap are saying the upside in the stock is just over 50%.

Looking at the stock in purely financial terms then buying Gazprom now is a no-brainer. But if you add in the political risks to both the state-owned company, and Russia as a whole, then the trade looks extremely risky indeed.

Rencap's upgrade comes partly as the company was minting money in the last quarter of 2014 after gas prices recovered and the company slashed its capex spending: capex was about $55bn in 2011 but Rencap estimate that this will fall to around $20bn a year. Given the company is generating cash of

about $40bn a year, says Rencap, it will be spitting out some $20bn a year of free cash flow that can be returned to the government and minority investors. And it seems the process has already started.

"In 2014, Gazprom generated its highest free cash flow ever, at almost $17bn ($5.9bn of that in the fourth quarter of 2014). A large reason for that was an $11bn drop in capital expenditures to just $33bn (although attributable capex was almost unchanged year-onyear in ruble terms)," analysts at Sberbank CIB said in a note on April 30.

Gazprom shares are undeniably cheap when compared to pretty much any previous year and thanks to the government order it has started paying out dividends that are only going to go up (see related story). But Rencap are arguing that the nature of the company's business has fundamentally changed. It won't spend as much on capex; the EU demand for gas can only go up; and to an existing $400bn supply deal to China, a second gas deal could be signed as soon as next

week when Chinese president Xi Jinping is in town for the May 9th Victory Day parade.

"We think the biggest future driver will be the dramatic increase we expect in earnings cash conversion – from just 6% in the past five years to 55% in 2019E. We expect this to come from weaker capex (mainly benefiting from a weaker rouble) and stronger sales, as EU demand recovers and China starts importing Russian gas from 2019," Rencap said in its report.

Despite all the rhetoric about reducing Europe's dependency on Russian gas, the volumes exported there went up 8% year-on-year in April and are likely to climb further this year as western Europe's economies recovery. Likewise, despite the on going slug fest with Ukraine, it too doubled imports of gas from Russia in April as it starts stockpiling for later in the year while prices are low(ish).

Taken all together and Rencap says that in the "new" Gazprom the stock will re-rate by 2019 when the China deal comes on stream, from a price to earnings ratio of x3.5

(where the stock is trading now) to x5 earnings, which would produce a 43% increase in the share price by itself, not counting bigger dividend payments, which may go up 26-fold, says the bank. That rerating would move the London price of the stock from around $6 to some $18 in just a few years.

However, viewing the coin from the other side and the political risks seem significant. Europe seems determined to wean itself off Russian gas eventually, even if will take years to do, which puts a question mark over the company's long-term prospects.

competition," European Competition Commissioner Margrethe Vestager said in a statement.

More immediately Gazprom's business arrangements in Europe are already under attack by Brussels. The European Union (EU) Gazprom with violating competition laws, accusing it on April 22 of using its market dominance to overcharge clients in Central and Eastern Europe.

Moscow is also getting into a potentially even more costly legal battle with Kyiv, which said last week it intends to sue Russia for $16bn in damages as the 10-year gas supply contract signed in 2009 by then Former Ukrainian Prime Minister Yulia Tymoshenko was "unfair." Gazprom has lodged a counter suit for $24bn for nonpayment of gas delivered under the terms of the same contract.

Both cases are due to be heard in a Swedish arbitration court.

"We find that [Gazprom] may have built artificial barriers preventing gas from flowing from certain Central Eastern European countries to others, hindering cross-border

Vestager is out for blood and says EU studies found at least five EU states were being charged monopolistic rents. Under EU competition rules Gazprom could face a fine of up to 10% of its revenues if found guilty, or some $3.8bn, according to VTB Capital in Moscow. Gazprom has protested strenuously, saying the deals with EU states were "in compliance with the law at the time of signing."

060515_Russia_stocks_Gazprom_capex_time

Politics – the good

Navalny brothers get totalitarian fighters NGO award A European human rights organization has awarded its prize for fighting “against totalitarianism� to Russian opposition activist Alexei Navalny and his imprisoned brother Oleg.

The Prize of the Platform of European Memory and Conscience 2015 will be officially conferred at a ceremony Wednesday in the Hungarian capital of Budapest, the organization said on its website.

The Platform of European Memory and Conscience is an umbrella NGO bringing together 48 public and private institutions from 18 countries to raise awareness of totalitarianism.

Some 2,220 prisoners freed in Victory Day amnesty The Russian government freed more than 2,200 prisoners in an amnesty proclaimed in the honour of the 70th Victory Day anniversary on May 9. A total of 60,000 prisoners could be freed under the programme in the next six months.

Another 400,000 people, including those with suspended sentences or currently standing trial could also see charges dropped in the scheme.

The amnesty only applies to individuals accused of committing minor or moderately severe crimes. Convicts sentenced to prison on murder, terrorism, largescale fraud and embezzlement charges, among others, are ineligible for release under the amnesty.

Celebrity convicts like opposition leader Alexei Navalny are not eligible.

Russian Federation Council passes bill to cap ministers' expenses The Federation Council, Russia's upper house of parliament, approved a bill forcing members of the government to report their personal heavy expenses when they exceed the accumulated income of their family members over three years, according to the law signed by President Vladimir Putin in December 2012.

Deputy chairman of management board of Trust Bank arrested in Russia Deputy chairman of management board of Trust Bank, Oleg Dikusar, was arrested on suspicion of embezzlement. The 32nd largest lender by assets in Russia, the bank is best know for using actor

Bruce Willis in its advertising campaign.

The bank is also one of the biggest victims of the current financial crisis wave. It reported losses in 2014 amounting to RUB18.8bn ($377.6mn). As of December 1, 2014, its assets were estimated at over RUB290bn ($5.8bn).

The Central Bank decided that Trust Bank should be bailed out with the assistance of the Deposit Insurance Agency.

Otkritie Financial Corporation Bank, which is the parent company of Otkritie Financial Corporation Banking Group, was chosen as an investor for the financial rehabilitation of the troubled bank.

Russian government backs bill on amnesty for tax evaders Russia's government has approved an amnesty bill for tax evaders in an effort to bring assets from abroad back to the country. the bill was originally proposed by President Vladimir Putin last December and those bringing back assets would face no taxes or questions from law enforcement agencies.

The document would create a legal framework for the voluntary declaration of property or liquid assets held at banks outside Russia, including those registered to nominal holders, in 2015. This provision concerns real estate, securities, stock and equity stakes, as well as foreign-controlled companies.

Russian bill to strip legislators for withholding income reports A bill has been introduced to the Duma by two deputies that would strip lawmakers and members of the Federation Council if they cheat when filing declarations on their income, expenses, property and property obligations as well as similar declarations for their spouses and minor children each April 1.

Perviously there was no liability for failing to submit the reports in a timely manner or for complying with the law at all.

Duma approves amendments to “Law on Retail” in first reading The State Duma has approved amendments to the Retail Law proposed by a group of deputies under the leadership of Irina Yarovaya. The proposed law would crack down on retailers’ relationships with suppliers, and would introduce a number of restrictions, the most important of which would be banning suppliers from paying chains fees for marketing, promotion or otherwise acting as agents of the suppliers; shortening of the term for payment (by 510 days, depending on how long a given product is stored) and, finally, cutting the maximum retro bonus payment linked to performance from 10% of the producers’ price to 3%. There may be some amendments introduced to the draft before the second reading, but that seems unlikely given that yesterday’s

amendments were approved by 100% of the deputies.

Russia in top 60 countries to be mother Conditions suitable to motherhood are good in Russia, which was ranked as the 56th best place in the world to be a mother out of 179 surveyed by Save the Children, which is based on indicators of maternal health, child well-being and the educational, economic and political statuses of women around the world. Russia ranked 62nd out of 178 states last year.

Russia finished ahead of Kazakhstan, China and Turkey but remains behind the United States, Cuba and Libya. The bestperforming former Soviet republic is Belarus, ranking 25th.

Russian women are more likely to die from pregnancy-related causes than the average industrialized country, the ranking showed.

Women in Russia face a one in 2,600 lifetime risk of maternal death, a figure higher than the average of a one in 9,750 risk found in industrialized countries.

The death rate of Russian children under five years old is more than 10 per 1,000 live births, which is also greater than the average of four deaths in industrialized countries.

Fallen skyscraper builder Polonsky extradited from Camobodia to Russia Former Russian real estate magnate Sergei Polonsky is

being extradited from Cambodia to Russia to face fraud charges. The step signals an end to the [prolonged efforts of authorities to bring, Polonsky, once valued at $1.2bn, to account for more than $100mn lost by swindled investors.

Polonsky founded the Mirax real estate group that started construction of what is billed to be on completion Europe's tallest building, the Federation Tower in Moscow. Mirax ran into financial difficulties as a result of the global credit crunch in 20089. The Federation Tower is currently still under construction by real estate developers Potok, the successor company to Mirax.

Russian prosecutors in 2013 charged 42-year-old Polonsky with embezzling RUB5.7bn ($115mn at the current exchange rate) of advance payments made by buyers of luxury apartments in one of the Mirax developments in Moscow.

Polonsky claims the charges are aimed at seizing his business.

Cambodia initially failed to extradite Polonsky at Russia's request on the grounds that there was no bilateral extradition agreement. However, a Cambodian foreign affairs representative said Polonsky was being returned to Russia after violating immigration laws, according to newswires.

The tycoon, who lives on his own island off the Cambodian mainland, previously fell foul of authorities there in 2012, when he was arrested for locking up a

group of Cambodian sailors in the hold of his luxury yacht. After spending three months in a Cambodian jail, Polonsky reached a financial settlement with the sailors and was released.

Bills to implement reform of arbitration reach Russian parliament Two bills to implement a reform of arbitration in Russia aimed at reducing the caseload of courts have been submitted to the lower house of parliament, the State Duma, proposed by the Ministry of Justice upon instructions from the President and designed to improve arbitration proceedings.

The first bill is to resolve two main groups of issues. First, the regulation of arbitral proceedings, requirements for arbitrators, issuance, enforcement and the nullification of arbitral court rulings. Second, the bill oversees the establishment of permanent arbitration courts, their activity, and the minimal requirements for internal documentation and internal organization.

The second bill will amend the following: the Arbitration Procedure Code, the Civil Procedure Code, the Criminal Procedure Code, the Law on International Commercial Courts of Arbitration and a number of other regulations.

Four defendants in Russian arms export agency get 3.5 years in jail and more The Moscow Presnensky Court has given four defendants in the

Oboronservice case jail sentences ranging from to 3.5 to four years and three months, Interfax report.

Specifically, Larisa Yegorova received four years and three months in a general regime penal colony, Irina Yegorova received four years in a general regime penal colony, Yury Grekhnev received four years in a general regime penal colony, and Maxim Zakutailov received 3.5 years in a in a general regime penal colony.

According to earlier reports, Yevgenia Vasilyeva, the key suspect in the Oboronservice case, was sentenced to five years in a general regime penal colony.

In November 2013 the Russian investigation committee launched the first and real investigation into the notoriously corrupt state agency that is responsible for some $15bn of exports a year.

Former Russian mayor arrested on suspicion of corruption Former mayor of Blagoveshchensk in the Amur Region in Russia's Far East Alexander Migulya was arrested in May. Migulya has been on Russia's wanted list on suspicion of corruption since 2011.

He is accused of issuing an illegal order to buy a motorway bridge across the Chigiri River for over RUB46mn (around $1mn) in public funds, according to the Investigative Committee.

In 2008, Migulya sold a land plot at 10% of its actual value causing damages of RUB20mn ($403,800) to the city. The Investigative Committee claims that between November 2009 and April 2010, he was a top manager at and did other favors to a local company, contrary to a bill prohibiting government officials from holding positions in business.

Putin cracks the whip over graft busters with dismissals Russian President Vladimir Putin unexpectedly dismissed a raft of senior officials connected to the less than impressive cardes in charge of fighting corruption in Russia.

Amongst the top-ranking officials to lose their jobs were: officers of the Russian Interior Ministry, Emergencies Ministry, the Investigations Committee and the Federal Service for Drug Control, who were fired on May 8.

Among those dismissed are Major General of justice, first deputy head of the chief organizational and inspection directorate of the Investigations Committee Alexei Istomin, Major General of justice, head of the Moscow interregional transport investigation directorate of the Investigations Committee Alexei Ustinov, and a number of other top-ranking officers.

Politics – the bad

Russian officials cancel registration of opposition leader Navalny's Progress Party Russian officials have cancelled the registration of the political party led by Alexei Navalny, the anticorruption activist who is one of President Vladimir Putin's most adamant critics.

It was unclear if the ministry decision would affect Progress' intention to field candidates in regional elections this year. The party recently announced it was establishing a coalition with the opposition RPR-PARNAS party.

That party's leaders included Boris Nemtsov, who was shot dead in February.

The Justice Ministry said Tuesday that the Progress Party had not fulfilled a requirement to register operations in at least half of Russia's regions.

Another RPR-PARNAS leader, Mikhail Kasyanov, said the coalition was created "in consideration of any possible actions by the authorities and we will use all

means to overcome difficulties," according the Tass news agency.

Over $1.8bn worth of corruption uncovered in Russia's Space Agency audit Russian investigators uncovered RUB92bn rubles ($1.8bn) worth of corruption in an audit of the federal space agency Roscosmos last year, the head of Russia's Audit Chamber, Tatyana Golikova, said in May. A government spending watchdog that has never really done anything, the Audit Chamber released its annual report in May detailing the investigations into misspending by Russian government agencies and ministries at the troubled space port.

The construction of the space centre is to free Russia from its rent on the Kazakh-based space centre in Baikonur, the home of Soviet space travel.

However, work on the new space port has been plagued by blatant stealing. in an effort to shake things up the Duma abolished the federal space agency Roscosmos and replaced it with a new state corporation, also to be called Roscosmo that will take on the building and designing space equipment functions, uniting all elements of the space process under one house.

Dozen of protesters arrested in Bolotnaya anniversary rally

Russian police arrested at least 65 demonstrators who gathered on central Moscow's Bolotnaya Square over the river from the Kremlin in an unsanctioned rally to honour participants of large anti-Kremlin protests that took place on the square three years ago and ended in a riot with multiple arrests.

All those taken into custody this month were released but several of the protestors at the original rally have received lengthy jail sentences.

A bill to bans foreign NGOs deemed to be a threat passed in second reading Russia's Duma passed in the second of three readings a bill that bans foreign NGOs activities in Russia if they are deemed to be a "threat to national security." The bill faces one more reading and further restricts the options of Russian civil society.

Only three of the 445 lawmakers who voted on the bill cast their ballot against it, RBC reported.

The bill sailed through its first reading in January and emerged against the backdrop of lingering tensions between Russia and the West over the Ukraine crisis.

The bill targets Russian political and rights activists, which are widely smeared as foreign "agents" and have been under sustained attack in the state controlled media.

The bill contains administrative fines for Russian NGOs that violate

the law against cooperating with "undesirable organizations," as well as criminal charges if there are persistent violations. Two administrative charges of involvement with an "undesirable" foreign NGO within a one-year period could lead activists to face up to RUB500,000 ($10,000) in fines or up to six years in jail.

17 LGBT Protesters Detained in Moscow As Police Observe St. Petersburg Rally LGBT activists in St. Petersburg hosted a peaceful rally onMay 17 while in Moscow, 17 gay rights campaigners were arrested at a similar event.

Gay rights supporters in both cities gathered to mark the 25th anniversary of the day the World Health Organization removed homosexuality from its disease classification, which took place on May 17, 1990. The day is now recognized by LGBT communities worldwide as the International Day Against Homophobia, Transphobia and Biphobia.

LGBT rights activists gathered in St. Petersburg with rainbowcolored flags and balloons, and banners calling for "love without borders," in a rally that proceeded without police interference.

Politics – the ugly

Russian $60mn military fraud case ends, anti-graft drive hits new targets Russia’s anti-corruption drive launched by President Vladimir Putin in 2012 steamrolled back into the headlines in this spring with several new high-ranking targets and a slew of old cases entering the final stages.

On May 6, a Moscow court found former defence ministry official Yevgenia Vasilyeva guilty of embezzling RUB3bn ($60mn). The court only announced the introductory part of the

verdict, with the rest of the content and accompanying sentences for the defendants expected after several days, news wires reported.

Other cases moving forward include the alleged embezzlement of $54mn by the former head of the federal prison service, and millions more found to have been diverted from the space programme.

In Moscow, prosecutors had asked for an eight-year suspended sentence for Vasilyeva and for her to sustain lawsuits worth

RUB800mn ($16mn) from her personal assets. The prosecution also asked for suspended four-to-six year sentences for another four suspects in the case around the defence ministry-affiliated company Oboronservis.

Vasiliyeva, who has been under house arrest for more than two years, was accused on 12 counts, including major fraud, abuse of power and selling of Oboronservis’s assets at understated prices, before legalising the proceeds via firms she controlled.

The court also found that Vasilyeva had "betrayed the confidence" of her former boss, ex-defence minister Anatoly Serdyukov. The court sustained the prosecution's claim that Serdyukov knew nothing about the embezzlement in Oboronservis, despite Vasilyeva's claims that all of the transactions went through Serdyukov first. The former minister participated in Oboronservis case as a witness.

Despite, or perhaps because of, such high-profile cases, President Vladimir Putin said in March that the level of corruption in Russia was decreasing.

“Statistics prove that thanks to the measures taken [to curb corruption] there is a tendency towards a lower corruption level,” Putin said, addressing a panel of Interior Ministry officials. “But there are facts showing the problem is not solved yet, including the Internal Affairs Ministry itself.”

In less than a month Putin's words were proven accurate by another high-profile arrest. On March 31, the former director of the Russian Federal Penitentiary Service (FSIN), Alexander Reimer, was arrested on suspicion of embezzling over RUB2.7bn ($54mn) allocated for the purchase of electronic tagging bracelets According to the investigators, in 2010-2012 Reimer together with his deputy Nikolai Krivpalov acquired the bracelet at hugely inflated prices. Stationery and mobile bracelets which cost RUB19,000 were purchased for RUB108,000 and RUB128,000 respectively. “So the bracelets… cost the state budget more than gold jewellery [would],” Kommersant daily quoted committee representative Vladimir Markin as saying.

Reimer’s case was followed by a fraud scandal on Russia’s Vostochny cosmodrome construction site. The situation at the space centre drew the authorities’ attention after construction workers went on hunger strike over pay delays on April 4. The investigation found multimillion embezzlement of funds received to pay workers but spent “on activities not connected with construction of cosmodrome”. As a result, the government had to compensate RUB54.9mn stolen during the construction.

On May 6, four construction companies working on the Vostochny received funds to pay out salaries debts that have been accumulating since January.

According to Russia’s Prosecutor General Yury Chaika, the Investigative Committee opened 20 criminal cases against 228 officials responsible for construction at Vostochny.

The construction of the space centre is to free Russia from its rent on the Kazakh-based space centre in Baikonur, the home of Soviet space travel.

On April 24 the investigators from Amur region department opened the criminal case on RUB300mn ($6mn) embezzlement during the construction works on the Vostochny cosmodrome. Further investigation into unpaid salaries revealed RUB55mn debt.

However, work on the new spaceport has been plagued by blatant stealing. Armies of students have been shipped into complete the work. Russia was planning trips to both the moon and Mars before the most recent slowdown made funds short.

At the end of 2014, the National Anti-Corruption Committee reported that one in three Russian officials still accepts bribes. In 2013, Transparency International has ranked Russia 127th in its Corruption Perceptions Index. In 2012, Russia moved up 10 positions to 133rd from 143rd in 2011.

Embezzlement investigation started at "Kremlin bank" subsidiary

Over $1.8bn worth of corruption uncovered in Russia's Space Agency audit Russian investigators uncovered RUB92bn rubles ($1.8bn) worth of corruption in an audit of the federal space agency Roscosmos last year, the head of Russia's Audit Chamber, Tatyana Golikova, said in May. A government spending watchdog that has never really done anything, the Audit Chamber released its annual report in May detailing the investigations into misspending by Russian government agencies and ministries at the troubled space port.

The Interior Ministry investigators opened a criminal investigation into alleged embezzlement of over RUB70bn ($1.4bn) from Mosoblbank, a subsidiary of SMPBank, which has been dubbed the Kremlin bank due to ties to senior Russian officials and was included in the US/EU sanctions list.

Regular thefts of large sums of money belonging to Mosoblbank customers by unidentified individuals is being investigated.

The Interior Ministry found that the thefts occurred between January 1, 2012 and May 19, 2014 when bank management decided to reorganize.

The unidentified suspects used “commercial organizations established for this particular purpose and reporting strictly to them.” The organizations were part of the Republican Financial Corporation (RFC) and carried out false transactions with the bank’s

customer accounts that were masked as business operations.

Deutsche Bank accused of money laundering in Russia Deutsche Bank launched an investigation into its Russian investment arm after German media reports accused it of laundering money.

A handful of workers were suspended in what appears to be a isolated case. German monthly magazine Manager Magazin claimed that Deutsche Bank personnel in Russia were laundering money for Russian clients through complex transactions on the derivatives market.

Deutsche Bank's Russian unit is the country's 77th-largest lender by assets, according to industry website banki.ru.

Night Wolves received millions in state funds to produce antiwestern children's shows Russia's nationalistic biker group the Night Wolves has receivedmns of in government grants over the past year and a half, with some of

the money allocated for staging anti-Western shows for children, a report by opposition activist Alexei Navalny claimed.

The Night Wolves and their associated groups, all affiliated with biker leader Alexander Zaldostanov, nicknamed "Khirurg" (Surgeon), received RUB56mn ($1.1mn) of taxpayer money over the past year and a half, the report published Tuesday on the Navalny.com website said.

Zaldostanovis friends with Russian President Vladimir Putin and has repeatedly appeared in public with the Russian leader, but little has been disclosed previously about the funding behind the biker group's grand-scale nationalistic performances.

The shows include holiday concerts for children casting the West as a bogeyman bent on destroying Russia.

The bikers received RUB12.5mn from the National Charitable Fund for their New Year's shows over the past two years, according to Navalny's report.

Polls, mood, sociology Russians fear of US attach up to 60% 59 percent of Russians believe that America poses a threat to their country, by 12 percent since the same question was presented to respondents in 2007 by the Levada Center. Nearly one-third (31 percent) fear US military intervention and occupation up 10 percent over the same period, while 24 percent feared the United States would assert control over Russia's political course.

Asked about the nature of the threat posed by the United States to Russia, 48 percent of respondents voiced concern that the United States could hinder Russia's efforts on the path toward further development, 40 percent feared the United States taking control of the Russian economy and 36 percent were wary of the unnecessary imposition of U.S. values and ideals.

More Russians see China as friendly nation Russians increasingly see China as a friendly nation: of the 1,500 respondents in Russia's 43 regions, 77% said China is a friendly country to Russia, up from 48% in 2006 according to the VTsIOM pollster.

Another 56% of the respondents said the Russia-China relationship has been on the rise.

70% believed that China's growth pace is faster than that of Russia, while over half of the respondents said China's rise poses no threat to Russia and 27% held the opposite opinion.

However, one third of the respondents considered that relations with China and other Asian countries are more important to Russia than relations with the West. Moreover, 32% of those polled complained that there is not adequate information about China in Russian media.

The Russia-China ties have been "in the best period in history," with all-around cooperation and exchanges strengthened at all levels and in various formats, according to the poll.

Russia well ahead of BRIC peers in human capital rankings A month after Russia took the helm of the BRICS grouping of developing nations, it scored a strong 26th place in a global ranking of countries that maximally foster “human capital�, or population potential, coming surprisingly close behind UK (19th spot) and Germany (22nd).

Largely due to its highly educated populace (a legacy from the Soviet era), Russia nudged ahead of many EU members, including Italy and

Spain, in the Human Capital Report by the World Economic Forum, a Geneva-based non-profit foundation.

“Talent, not capital, will be the key factor linking innovation, competitiveness and growth in the 21st century,” said the study of 124 economies published on May 13. “More than a third of employers globally reported facing difficulties in finding talent last year and nearly half expected talent shortages to have a negative impact on their business results."

Russia ranked far ahead of its fellow members of BRICS, which is increasingly viewed as an emerging counterweight to dominant Western financial institutions, especially amid the current tensions over Ukraine. China came in 64th place, Brazil in 78th, and South Africa and India trailing behind at 92nd and 100th place, respectively. Together the five countries account for almost a half of the world’s population and around 30% of its global gross domestic product.

While the former-Soviet republics face intense economic and political challenges today, the strong underlying educational base still bodes well for the future of those in Europe. Ukraine, currently wracked by crisis and military

conflict, still scored an encouraging 31st ranking, while the three Baltic republics all came in the top 23 rankings. Belarus, now on a roll of economic cooperation with China and enjoying the same educational traditions as Russia and Ukraine, still remains a wild card in many respects, with no data having been available for the study. Georgia too was not ranked due to lack of data.

Over 80% of Russians favour state censorship More than eight out of ten (82%) of Russians approve on state censorship of artistic output deemed to be vulgar, immoral or harmful to society, according to VTsIOM. Respondents in favour state censorship as it is needed to prevent the injurious works of art containing violent, vulgar or immoral episodes having an effect on society.

Another 14% of Russians do not support state censorship the survey also showed. However, the survey found that 56% of the Russian population think bans on theater productions, films and other artistic creations are unacceptable.

Banks and Finance

Banking sector April data: still tough times The good news was strong retail deposit growth in April for the sector, which tallies with Sberbank results . But lending growth remains in negative territory for the year, which is hardly a surprise given where interest rates have been and the weak economic outlook.

The banking sector’s continued struggles are highlighted by both poor overdue loan dynamics, especially in corporate, and the third month out of four this year in which the banking sector has lost money. Against this backdrop, it is hardly surprising that the CBR is considering prolonging banking support measures, as we wrote about yesterday.

Earnings. The high provisions could be one of the reasons for the sector returning to a net loss, of RUB23bn or $435mn in April, after a net profit in March. Excluding Sberbank, the sector lost RUB72bn ($1.2bn) before taxes in 4M15, raising concerns over asset quality trends.

While not a huge hit for the sector which has assets of RUB74 trillion rubles ($1.5 trillion) at the beginning of April the losses are a sign that this year will be tough on Russia's banks.

The banking sector narrowly avoided net losses in the first quarter thanks to a profit of RUB42bn ($840mn) in March, which brought the quarter's profits to RUB6bn rubles ($120mn), according to the Central Bank.

Loans. Adjusted for revaluation, corporate lending growth slowed to 6.4% year-on-year in April from 7.6% in March and retail lending decelerated to 3.2% from 5.8% in March. Loans were almost flat month-on-month in the corporate sector and down 0.8% in the retail sector.

The number of loans issued in Russia in the first quarter fell by 58% compared to the same period in 2014, the United Credit Bureau said in May.

Deposits. Adjusted for ruble appreciation, retail deposits continued to expand, growing 2.9% month-on-month in April, the strongest this year, and 5.1% year-on-year compared to 3.3% in March. FX retail deposits added 4.3% in dollar terms.

Corporate deposits fell 1.3% in adjusted terms and grew 6.1% year-on-year, almost the same as in March.

Sberbank outperformed the sector in retail loans, probably due to the mortgage subsidy program and credit cards, and in retail deposits,

which could be attributed to a flight

to quality.

Overdue loans. NLPs were up sharply in April.

The corporate NPL ratio surged 50 bps month-on-month to 5.4%, the highest level since 2010 (or 60 bps

month-on-month to 5.6% excluding loans to government bodies). Retail NPLs rose the customary 20 bps month-on-month to 7.1%.

Capital adequacy ratio: CAR improved in April and the state of affairs does not look as dramatic as it did in December-January. The strengthening of the ruble and the CBR’s rate cuts have been two key relievers of pressure on banks’ capital. Moreover, even some of the more notorious non-performing loans have shown improvement.

Overall, it seems that the situation will normalise, in a fashion similar to that seen in 2009. However, some banks will struggle with funding that is beyond their means, particularly those that offered longer-term deposits during the winter months at the rate peak.

Only one in five Russians save money

few as 41% of adults (vs. 56% globally) made savings; we expect the low preference for savings to stay.

Only 41% of Russian adults save vs. the world average of 56%. The low preference for savings is a strong reason to expect demandpull inflation.

A recent World Bank study showed that only 67% adults in Russia have a bank account (vs. 79% in China and almost 100% in US and Germany), and only 20% use their account for savings. In 2014, as

Preference for savings remains low partly as are real rates on deposits have not been significantly positive for many years now, except for a short period in 1H12 when inflation was artificially low due to a change in the seasonality of regulated price increases.

Even now, the real rate on the 1Y deposit rate in rubles has slumped to almost -5.3%.

We do not expect materially positive real deposit rates: while inflation will fall from the current spike, in our view, so will the nominal deposit rate due to the

CBR’s easing. In fact, they have already started to: from almost 13% in December to 11% in February. Thus, we expect a return to the 2012-13 situation when real rates were nearly zero and the preference for savings remained low.

Russian banks depend on state, loan quality decaying

CBR only accounted for about 3% of liabilities.

Russian banks remain heavily dependent on the state for funding.

CBR funding accounted for 11% of liabilities in March 2015. Even in the worst of the 2008 crisis the

"We believe that banks have been attempting to substitute state funding with deposits, as they are more supportive of NIM. However, although the CBR is reluctant to provide additional liquidity to the

sector, substantial state funding appears likely to be a fixture for the foreseeable future," Alfa Bank said in a report.

Some analysts have drawn a parallel with 2008-9 when the sector saw a rapid deterioration in the loan portfolio quality as Russians and companies struggled to repay their debts. And a sharp rise in non-performing loans (NPLs) is the main danger to the sector this time round too.

"The most important difference this time is the Western sanctions on the largest state banks, which prevent them from borrowing in

"By March 2015, overall sector NPLs had increased 50% from March 2014 in nominal terms, as

foreign currency and supplying it to the economy," says Karapetyan.

Corporate NPLs were running at a manageable have been rising steadily in the last two years but were hovering at around 20% in November 2014, before taking off in the wake of the ruble's collapse in December.

Consumer loans were already in trouble having risen steadily over the last two years from around 40% to just over 50%, but the devaluation had relatively little impact on the already bad situation.

corporate and retail NPLs rose 48% and 52% year-on-year, respectively," wrote Karapetyan.

Deteriorating loan quality will be expensive for Russian banks as estimates that each 100bp added to the NPL/loan book ratio will cost the banking sector an additional RUB500bn in provisions. Alfa has taken as a base case an increase in NLPs to 7%, which means RUB1 trillion of additional provisions.

Bankers hate provisions as it is dead money to them and it eats into the profits that are the simplest and most attractive way of recapitalising themselves.

The state has stepped into the breach to help banks through the

trough with various recapitalisation programmes. Currently, there are two capital support lines available.

The first is recapitalization via RUB1 trillion of treasury bills (OFZ) that is being distributed by the Deposit Insurance Agency (DIA).

RUB830bn of this money has already been disbursed.

The second avenue open to troubled banks is the conversion of subordinated debt given to the banks during the 2008-09 crisis in a program worth RUB900bn and of which RUB214bn has already been converted into Tier 1 capital – all by the VTB Group in September.

Russian lending plummets in first quarter Russia's banks slashed lending in the first quarter of 2015 as the economy was hit by ruble devaluation, lower oil prices, Western sanctions and an interest rate hike to 17%. However, there were signs of recovery in March as the key rate was cut to 14%.

Banks made 58% fewer loans on the year, according to statistics released by the United Credit Bureau (UCB). In January, the figure was 63%, February 59%, and March 54% down on the year.

In the first quarter, banks disbursed a total of 2.753mn loans compared to 6.616mn on year before, according to the UCB. The volume of lending fell from around RUB1 trillion in the first quarter of 2014 to only RUB384bn over the same period this year.

Car loans were worst hit, with their number down 80% in the first quarter on the year, while the number of mortgage loans was down 43% on the year, and the number of cash loans by 48%.

Lending showed signs of recovery in March, as the central bank started cutting interest rates, according to the UCB. At the end of April, the Russian Central Bank (RCB) again cut interest rates to 12.5%.

The mortgage lending crash comes after the RCB recorded a spike in mortgages in 2014, up 22.8% from 2013. The reasons for last year's surge range from panic buying of

apartments in the face of the currency meltdown, to the introduction of a new government mortgage-subsidy scheme.

CBR extends anti-crisis measures, exchange rate pegs The Central Bank of Russia (CBR) will extend some anti-crisis measures adopted in December 2014 to support the country's floundering banking sector, the regulator said on May 15.

Among the measures, the CBR prolonged the use of Q3 weighted foreign currency exchange rates to value riskweighted assets and to create provisions on bad loans, which was introduced amid extreme ruble volatility in the end of 2014.

This had been due to expire on July 1, but the revised exchange rates will now be kept in place until October 1, the CBR said. While the new rates are higher than the previous ones pegged to Q3/14, they are still below market rates (RUB45 to US dollar, RUB52 to euro, etc).

On May 14, the deputy head of the CBR Mikhail Sukhoi told media the banking sector posted a loss of RUB20bn ($400mn) in April, according to preliminary data. In January-April overall banks posted RUB14bn loss, according to Sukhoi.

Earlier this month, Deputy Prime Minister Igor Shuvalov said the banking sector, which has around RUB74 trillion of assets ($1.5 trillion), is not expected to see any profit in "foreseeable

future", but excluded worse scenarios of loss-making.

The government has previously announced about RUB2.5 trillion worth of support measures for banks.

Moral hazard in current deposit insurance scheme, risky banks to pay more Deputy finance minister Alexei Moiseev is categorically opposed to both shifting a portion of the deposit risk from the state insurance system to the depositor (10% of the deposit, for instance), and any form of failing to fully insure accrued interest income.

Either way, Moiseev argues, the deposit insurance system would be undermined as depositors would run on a troubled bank to try and prevent even partial losses.

Bankers’ moral hazard, clearly present in the current form of the system, will be solved by introducing higher insurance fees for weaker and riskier banks. The first step is to differentiate the insurance fees based on the retail deposit rates offered by banks (this will be introduced on 1 July), but additional differentiating criteria will be developed at a later stage.

Mortgage lending up by third in 2014 due to state support Mortgage borrowing surged by a third in the first quarter of this year, partly thanks to a state support program to subside the costs and encourage homeownership. Demand for mortgages was up in March after the government released a

RUB20bn ($390mn) package of subsidies aimed at lowering interest rates.

Still, mortgage lending in 2015 is expected to be half the level of 2014 due to Russia's economic owes. More than one million mortgages were issued in Russia in 2014, according to the CBR, up 22.8% year-on-year. The total value of the mortgages issued was RUB1.7 trillion ($33bn).

Societe Generale posts loss in Russia in Q1, announces layoffs Heralding planned cuts of 1,000 jobs, Societe Generale on April 6 reported a loss for its Russian division that includes RosBank, Delta Credit, and RusFinans credit institutions (ranked 12th, 46th, and 65th in terms of assets by Interfax).

SG Russia posted a loss of €91mn, or €108mn adjusted for higher cost of risk. Meanwhile, SocGen had overall profit surge 5-fold y/y in Q1 to €868mn compared with €169mn for the same period of last year and beating the €770mn expectations of Bloomberg';s survey.

In Russia, SocGen saw revenues decline by 39% y/y to €114mn and the share of the Russian division in total group's revenues declined to 5% from previously being the group's largest market outside France. Costs in Russia grew by 10% to €145mn, attributed to high inflation. The group's deposits in Russia inched up by 1.5% ytd, while the volume of issued loans

dropped by 10% ytd as of the end of Q1.

"We are seeing a progressive normalisation in Russia as compared to the end of 2014," CEO of SocGen Frederic Oudea told Bloomberg. On the background of ruble stabilisation and lower key interest rates, the bank's CEO expects slower activity in the retail segment but sees stable corporate business due to solid existing client base.

Probably due to the negative outlook on the retail segment, the company is planning to shed around 1,000 workers in Q2-Q3, SocGen's regional coordinator in Russia Didier Ogel was quoted by Interfax as saying during a phone conference. SocGen had earlier reported plans to lay off about 1,000 people in Q1. In 2014, SocGen's Russian subsidiaries posted a total loss of â‚Ź497mn vs. net profit of â‚Ź165mn.

SocGen is not the first major financial institution scaling back its presence in Russia. On March 25, the CEO of Raiffeisenbank International (RBI) Karl Sevelda said the bank is withdrawing from the Russian car lending market and will by November close its offices in 15 Russian cities because of unprofitability.

Domestic retail lenders are also feeling a strong squeeze of their margins in the banking sector. Of all major Russian banks specialising on consumer lending, in 2014 only Tinkoff Bank posted net IFRS profit of RUB3.4bn, the Vedomosti daily reported on

May 5. All others posted losses: Russian Standard Bank reported a loss of RUB15.9bn, Renaissance Credit RUB15.6bn, Vostochny Express RUB10.7bn, HKF Bank RUB4.5bn, and OTP Bank losses of RUB2.4bn.

Bank of Moscow merger with VTB Bank postponed to 2018 The merger of the Bank of Moscow (BoM) with Russia's second-largest VTB Bank is will now be oostponed to 2018, instead of planned 2015, Kommersant daily reported on May 26, citing unnamed sources in the VTB group.

Reportedly, the merger of the banks was blocked by the Central Bank of Russia (CBR) due to inability of VTB to secure reserves required for post-merger assets, as well as risks of breaching Basel norms of capital adequacy.

The BoM will continue operating independently, while VTB will only get part of its business. In order to be able to fully incorporate the BoM, VTB needs to have additional reserves of RUB83.3bn ($1.65bn) for the next three years.

Andrei Klapko of Gazprombank told the newspaper that given a loss forecast for 2015, the ability of VTB to generate such reserves without substantial pressure on the capital is limited.

Sergei Voronenko of Standard & Poor's believes that VTB could postpone the merger with Bank of Moscow until it gets substantial recapitalisation, like RUB300bn from the Deposit

Insurance Agency (DIA) as part of the OFZ bonds recapitalisation programme.

In 2011, VTB got a RUB295bn 10year subordinated loan at 0.51% annual interest from DIA to restructure the BoM. This allowed the troubled bank to fully cover bad loans of RUB366bn with reserves.

At the end of 2014, the loan as prolonged by five years to 2026, which allowed the VTB group to generate profit of RUB99bn.

In 2011, in order to receive the austerity package for the BoM from the CBR and FinMin, VTB had to consolidate its state in the bank to about 95%. The Finance Ministry in the end of 2011 held an audit in BoM, sharply criticizing the former management of the bank and accusing them of submitting false financial statements that failed to recognise at least RUB150bn worth of bad loans. Â

Economics

Crisis may not be as bad as expected‌ Russia's GDP contracted 1.9% y_o_y in 1Q15 according to the State Statistics Service, which exceeds initial estimates from the Economics Ministry of a 2.2% yearon-year decline -- much less worse than economists expected.

The improving outlook has caused several economists to improve their forecasts for this year: while pessimists, like Uralsib, are still predicting a 6.8% contraction, the optimists believe the number will be on the order of the EBRD's prediction of 3.5%-4.2% for the full year. Previous doomsayers like Anders Aslund of the Peterson Institute, who was predicting a 10% decline, are now simply looking foolish. Sberbank on the other hand is predicting a mere 1% contraction this year.

The slump of the ruble has import substitution affects in things like meat, dairy and fertilizer production that has taken the sting out of the recession. However, heavier industries like cars and engineering are still feeling the brunt of the slowdown.

Russia’s economy continued to slide in March as most key sectors continued to contract. Industrial production moderately improved, but remained in negative territory

due to continuing weak output in manufacturing, which dropped 1.9% year-on-year.

But in a surprise for the market, after the deep slump at the start of the year, capital investment moderately improved contracting only 5.3% year-on-year after dropping 6.4% Year-on-year in first two months of 2015.

Despite the improvement in capital investment, the slump in construction intensified as the sector contracted 6.7% year-onyear in March after falling 3.1% Year-on-year the previous month.

Consumer demand continued to deteriorate as retail trade shrank 8.7% year-on-year due to the continued decline in real wages, which fell 9.3% year-on-year in March. Despite more than 10% pension indexation in February, real pensions declined 4.3% yearon-year in March, which added to the consumer weakness.

Unemployment continued to rise, hitting 5.9% in March. Russia’s economy contracted 3.5% Year-onyear in March, says Uralsib, which is almost in line the Economy Ministry estimate of a contraction of 3.4% year-on-year.

‌ but industrial production suddenly slumps 4.5% in April due to ruble recovery

Industrial output suddenly dropped 4.5% year-on-year in April and 1.5% year-on-year in 4m15.

The pace of contraction accelerated suddenly last month and caught analysts surprise, as the decline had stood at just 0.4% over the first quarter of 2015.

The weak ruble helped the manufacturing sector overcome the negative impact of high interest

rates in the first quarter of 2015, but in April ruble appreciation reversed those trends.

Raw materials extraction shrank 0.8% year-on-year in April (up 0.4% in 4m15), while the supply and redistribution of electricity, gas and water was up 1.8% (up 0.5% in 4m15) and manufacturing output declined 7.2% (down 3% in 4m15).

Production dynamics seriously worsened in the chemicals industry, the construction materials segment, the metals sector, and in investments goods and furniture.

Russia's services PMI in positive territory for first time in seven months PMI data for services and the composite output (manufacturing and services) in April showed a stabilisation of the Russian private sector, with output growing for the first time since September 2014, a report compiled by Markit for HSBC shows.

The HSBC Russia Composite Output Index gained to 50.8 in April from 46.8 in March, entering positive territory above the nochange mark of 50.0 for the first time in seven months. The HSBC Russia Services Business Activity Index also showed return to growth at 50.7 compared with 46.1 seen in March.

An index above 50.0 represents a marginal growth in output, which is a notable turnaround from the contraction of the business of service providers seen in early 2015. April's PMI for manufacturing published earlier in May also showed slight growth in output for the second time in the past three months.

Services providers linked the growth in business to new orders, ending a seven-month sequence of contraction. Backlogs and stock continued to fall, both for services and manufacturing, but the rates of depletion eased, resulting in the slowest reduction of outstanding business since May 2014.

Employment continued to decline, however, for manufacturing and services. Notably, both input costs and output inflation that peaked to all-time-highs in the beginning of 2015 moderated in April to the weakest in six months.

Activity and new orders have recovered following sharp

contraction in the beginning of the year, coupled with improved business sentiments. Companies and workers need demand to keep improving, as evidence remains that spare capacity in the private sector is leading to job cuts, Markit analysts said.

Russia's import substitution program will cost at least $50bn Russia's import substitution program will cost at least RUB2.5 trillion ($50bn), says the Russian Industry and Trade Minister Denis Manturov.

Some of the money will come from private investors. The government has allotted RUB2.2bn ($44mn) so far for projects in six regions out of 800 applications asking for more than RUB280bn ($5.6bn).

Manturov added that the government would prioritize projects in pharmaceutical manufacturing for cancer, HIV, and tuberculosis treatment drugs, domestic diesel engine production, and tank production for chemical and petrochemical liquids.

Russian cheese production rose a startling 30% in the first four months Russian cheese production rose a startling 30% in the first four months of the year as domestic producers leapt to fill the gap left

by Russia's ban on cheese imports from the West. Cheese production between January and April jumped to 180,000 tons, a 29.5% rise from the same period in 2014, according to data from state statistics service Rosstat. food processing in general is soaring with the help of sanctions on food imports from Europe.

CBR cuts key interest rate to 12.5% The Central Bank of Russia (CBR) cut the key interest rate from 14% to 12.5% in May, reflecting the national leadership's stance that inflation is under control and growth is now the priority after months of economic recession.

This was the third decrease in 2015 since the rate was hiked to 17% in December as an emergency measure amid extreme ruble volatility.

In a first statement, the CBR cited diminishing inflationary risks, while those resulting from "substantial cooling of the economy" remain.

Monthly consumer price growth was now in check due to ruble strengthening since February, it said, while consumer demand was much lower and there were good signs of stabilisation of annual inflation.

The 150bp rate cut was in line with expectations of 100bp-200bp decrease seen in RIA Novosti and Bloomberg surveys. Like the central bank, analysts saw favourable conditions for further monetary policy easing as Russia pulls through the worst of the economic turmoil by a 50% drop in oil prices in the past year, and a similar slump in the ruble's value because of Western sanctions imposed over the Ukraine crisis.

But while monthly and weekly inflation consistently declined since March (slowing to 0.1% week-onweek as of April 27),

yearly inflation hovered around 17% at the start of the month, and is only expected to fall to 12%-13% in the second half of 2015.

The central bank under governor Elvira Nabiullina believes inflation can still be reined in sooner, to

CBR announces Fx purchases, says not targeting specific ruble rate The Central Bank of Russia (CBR) began from May 13 to "regularly purchase foreign currency on the market" to make transfers to its foreign reserves, it said. The decision was taken in view of the recent "normalisation on the domestic currency market", with the regulator stressing that it

reach an annual 8% by April 2016, and a 4% target in 2017. If inflationary pressure weakens as hoped there will be further cuts to the rate, said the bank's board of directors, which will meet again on June 15.

was not targeting a specific exchange rate.

Daily purchases of $100mn$200mn will be spread equally over a given trading day and might be revised in the case of "sufficient change of the situation on the currency market", a statement said.

Despite attempts to underscore the harmlessness of the operations, the ruble reacted negatively to the

news, which calls into question its free-floating status. Trading in the national currency on May 14 opened in Moscow at RUB50.64 to the US dollar, compared with RUB49.27 at the previous day's close.

Gazprombank analysts commented on the Prime news website that the up-to $200mn the CBR says it will purchase each day amounts to only 5% of the daily currency turnover on MICEX ($3.5bn-$4bn). This is not expected to seriously pressure the ruble, they added.

However, Vladimir Evstifeev of Zenith Bank said the CBR's move shows its unwillingness to see the ruble appreciate beyond the RUB50 per dollar mark. This will also create difficulties for carry trade operations, the analyst predicted.

Supporting this view, CBR and government officials recently and repeatedly referred to the RUB50RUB55 per dollar bracket as an "equilibrium" exchange rate.

Analyst Sergei Kochergin of EXNESS argues that the central bank cannot afford to directly support any set exchange rate of the free-floated ruble, even though limited appreciation would benefit exports and the budget.

The decision is likely to have only a short-term negative effect as ruble growth continues to be backed by high oil prices and relative geopolitical calm around Ukraine and in relations with the West.

Maxim Korovin of VTB Capital noted that the new tax payment period due to start on May 15 will provide further support.

Russia's hard currency reserves ($bn)

Ruble rallies but running out of steam now Russia’s ruble devaluation bottomed out in January 30 and currency traders that were buying are now selling.

Deputy Finance Minister Alexey Moiseev said on Tuesday the ruble

is “very strong” and the ministry started buying foreign currencies again in May. The Bank of Russia and the Finance Ministry decision was helped by the speculation and designed to weaken the ruble again that was starting to cause problems for the budget as a strong ruble will

reduce oil revenues denominated in rubles and lead to a higher budget deficit.

The ruble’s 40% surge from a low at the end of January when the ruble was trading at RUB80/$ hit resistance at about 49 rubles against the greenback as verbal interventions by policy makers in April gave way to the central bank buying dollars.

Moiseev said Russia would buy as much as RUB500bn by the end of the month using cash from its Reserve Fund. Assuming it acquired the full amount in dollars, those rubles are now worth $10.1bn, or $2.2bn more than they were back then.

By lending the rubles it bought to banks, the ministry earned 14 billion rubles ($282 million) in the period, according to an e-mailed statement from its press service.

Russia's death rate is surging and it's not clear why Rosstat released the demographic figures for the January-March period about a week ago, but when the data was first posted it initially (and mistakenly) included the results from January-February. I was thus wrong in my initial conclusion that the birth rate had continued along its recent swoon.

After a strong March, the birth rate in Q1 2015 was less than 1% smaller than in Q1 2014. That’s

obviously not great news, but it’s hardly exceptional.

However while there is little meaningful change in the birth rate, the newest data do show that Russia’s mortality rate has surged noticeably over the past few months. From January-March 2015 there were 23,800 more deaths than in the equivalent period of 2014. That translates to a 5.2% increase in the death rate per 1,000.Keep in mind that 5% increase isn’t over a single month (where we can expect a sizable degree of random variation) but over an entire quarter. If it were just statistical “noise,” you’d expect it to have evened out by now.

The increases were primarily from those types of illness (especially heart disease) which the Russian medical system has never been very adept at treating. Deaths from diseases of the circulatory system (which account for the majority of deaths from all causes) increased by 4.8%, while deaths from diseases of the digestive and respiratory systems increased by 9.9% and 22.1% respectively. It’s unclear why circulatory system diseases, which have been very slowly declining for most of the past decade, would suddenly shoot up by around 12,000, but understanding that is the key to understanding the current mortality surge.

FDI to Russia slumps but Chinese investors step in as others pull back Overseas investment by Russian companies fell to $56bn last year, a 40% decline from 2013, even as China led a wider boom in foreign direct investment from emerging economies, according to a report by the United Nations Conference on Trade and Development (UNCTAD).

The figure means that Russia last year was the world's sixth-largest foreign direct investor, equal with France, according to UNCTAD. In 2013, Russia placed fourth, with its companies investing $95 billion overseas.

The number of greenfield FDI projects into Russia declined 39% to just 134 in 2014, according to fDi Markets, a Financial Times data

service. Russia now stands as the eighth most popular investment destination in Europe, trailing neighbouring Poland (ranked number five) and just ahead of Romania. Russia received only a third of the number of projects that second-ranked Germany did, and a seventh of the number registered by top European destination the UK, the FT reports.

But those investors continuing to invest in Russia are doing so in large volumes: Russia was the second ranked country in Europe last year for capital expenditure in inbound greenfield projects, with an estimated total of $12bn, capturing 10% of European FDI. A nd these committed investors seem mostly to be coming from China. The top five biggest investors in Russia were all Chinese companies, which together

announced more than $5bn of FDI projects in Russia in 2014. Russia was the second most popular destination country for Chinese outbound investment after the US, based on greenfield capital expenditure.

Chinese automakers have made several large-scale investments in Russia in recent years as they seek to establish their brands in the market. Among recent investors, Hawtai Motor Group said it planned to invest $1.1bn in the construction of a car production plant in Russia.

Chongqing Lifan Industry, an automotive company, plans to establish a new engine factory in Russia after 2021. The new facility represents part of the company’s strategy for localisation of manufacturing in Russia.

Russian firms drop place in global business ranking Nearly all Russian firms listed in a ranking of the world's top 2,000 companies dropped places in this year Forbes magazine ranking.

Gas giant Gazprom, which led Russian firms in 2013, dropped from 21st place to the 27th and Russia's top oil firm, Rosneft fell from 34th to 59th place.

Banking giant Sberbank and and oil firm Lukoil lost their positions in the first hundred of the largest companies in the world, dropping from 58th to 124th place and from 83th to 109th place respectively.

Only the Novolipetsk Steel company gained in the rankings, rising from 1,248th place to 1016th place, Kommersant reported.

Still, the overall number of Russian firms in the Forbes ranking was practically the same as last year, standing at 27 to last year's 26: three fell off the list, but were replaced by two new ones.

CBR starts buying FX again In the middle of May the CBR began to buy hard currency again, selling rubles to the market, despite some predictions that it would run out of money this year.

The central bank's inflation rate targeting model has been abandoned to a so-called "dirty float" of the currency and the bank took the opportunity of a rapidly strengthening ruble to restock its depleted levels of gross international reserves in May. The ruble currently appears too strong, as Sberbank speculated earlier this year, the consequences of which could be harsh to the economy.

Firstly, the Russian manufacturing sector is struggling to compete with imported goods, which slows economic recovery.

Secondly, an excessively strong ruble increases exporter costs in FX, decreases their profitability and hurts investment activity.

Thirdly, budget revenues and financial stability are negatively affected.

Therefore, the CBR’s decision to resume buying FX to keep the national currency from appreciating

is a logical one. Acquiring FX will inject cheap ruble liquidity into the money market and may reduce the need to refinance the banking system against non-market collateral. At the same time, however, the bank itself contributed to the ruble’s appreciation by expanding financing via FX repo (i.e. it increased the supply of FX on the market).

If the CBR begins acquiring FX, it should stop refinancing in FX to avoid initiating a vicious cycle, one where increased FX refinancing drives ruble appreciation and, in turn, forces the bank to acquire more FX. FX repo should be used to refinance foreign debt.

The ruble’s appreciation should be a sign to the CBR that there is sufficient FX liquidity and that FX repo can be stopped.

Banking woes lead to redollarization of Russian economy The lack of funds, high ruble interest rates and pressure on the banking sector have lead to a redollarization of Russian economy.

Russians have come to trust the ruble in the last decade and a half so when the 2008 financial crisis swept unlike many of its neighbours few in Russia has debts denominated in any currency other than their own. Likewise, when oil prices tumbled taking the ruble down with it in December the impact on the average Russian was muted as their rubles could still

buy many staples at the same price even if foreign holidays suddenly became unaffordable.

However, in the face of sustained ruble instability and the extremely high cost of borrowing, many company have started to accumulate dollars again, a phenomena associated with the economic chaos of the 1990s.

"The main negative we see from the first four months of 2015 statistics is the increased level of dollarization in the economy," Alfa Bank's chief economist Natalia Orlova said in a note. "Retail deposits with 24% in FX are less of a concern than the corporate side, where the share of FX deposits is now as high as 44%, which is a sign of a paucity of financial resources flowing into the real sector."

The re-dollarization is being partly driven by the Central Bank of Russia (CBR) decision to keep the ruble weak to bolster budget funds and for the benefits it has on Russia export sector.

"The CBR’s outspoken preference for a weak ruble – which is confirmed by reinstating direct FX purchases on the market and limiting FX repo – is likely to keep dollarization high," says Orlova.

"Banks’ unwillingness to reduce exposure to CBR facilities is an indirect confirmation of this pattern being built up. This is a negative for Russia’s growth story."

MACROWRAP EU puts Russia's GDP contraction at 3.5% in 2015 The European Commission expects Russia's GDP to contract by 3.5% in 2015 due to the effects of declining oil prices and economic sanctions compounding pre-existing structural weaknesses, it said in the latest Spring Economic outlook published on May 5. In 2016, some stabilisation is expected to follow with 0.2% economic growth, on the back of base effects and slight recovery in oil prices, according to the report.

The official forecast of Russia's Ministry of Economic Development for 2015 is 3% GDP contraction, which could be revised to 2.8% decline on the wave of recent optimism backed by stable ruble, oil prices, and relative calm in Ukraine.

The report notes that economic growth has been in decline for some time as diversification away from the energy sector did not progress and investment stalled. While the end of 2014 has seen severe market turbulence, record ruble depreciation, and sharp deterioration of economic confidence, the start of 2015 also had several key indicators falling, such as retail sales and industrial production.

Nevertheless, market pressures have subsided somewhat since the start of 2015 on the background of stabilising oil prices, lighter payment schedule of foreign debt, ruble recovering part of the losses and renewed investor interest in Russian assets.

However, the fall in investment is expected to deepen sharply because of continued sanctioned access to Western capital markets, increased borrowing costs, persistent capital outflow (despite current slight slowing) political and economic uncertainty and the deteriorating business environment.

Private consumption is seen falling in autumn 2015 for the first time since 1999 and 2009, due to a slump in real wages, and to limitations of the room for public wages and pensions increases caused by fiscal consolidation.

Moderate consumption recovery is expected in 2016 on a gradual return to growth and slowing inflation.

Despite a contraction of employment expected in 2015 and 2016 due to recession and decline in the working age population, employment losses will remain contained by the tight Russian labour market that tends to mainly adjust through wages, the EC believes.

The outlook agrees to the consensus on inflation having peaked at 16.9% y/y in March, and expects consumer price growth to moderate in the coming months resulting in average annual inflation of 12.5%. Base effects and weak economic environment will curb inflation further to 8% in 2016, according to the report.

Fiscal balance will sharply deteriorate in 2015, the EC warns. The Russian government's recently adopted anti-crisis plan and capital injections into major state-affiliated banks and corporations will all weigh in on public finances, although this will be partly offset by tapping into existing fiscal buffers.

IMF buffs up economic forecast for Russia as growth beckons In the latest prognosis of Russia's economic prospects by the big-league financial institutions, the International Monetary Fund (IMF) has presented a revised and more optimistic scenario than some of its peers.

GDP will fall by 3.4% in 2015 and return to growth in 2016, with an 0.2% increase expected, the head of the IMF's mission to Russia Ernesto Ramirez Rigo said on May 21, as he laid out the Fund's new report on Russia.

The forecast had been overhauled in Russia's favour in view of improved economic data and a strengthening ruble, Rigo said. The economy contracted by only 1.9% in the first quarter of 2015, less than expected, according to the federal statistics service, while the ruble strengthened from RUB80 to the dollar in December 2015 to RUB50 to the dollar.

The official also heaped unexpected praise on Russian regulators for their response to a sharp drop in oil prices and Western sanctions imposed over the Ukraine crisis in the second half of 2014.

In the final analysis, the 'technocratic analyses' of international financial institutions and Russia's central bank and government have proved to have been closer to the mark than more hawkish Western political analysts. While prominent economist Anders Aslund foresaw a 10% GDP collapse for Russia in 2015, the government is calling 4.5%, the European Bank for Reconstruction and Development (EBRD) 4.8%, and the World Bank only 2.9%.

Russian investment banks are even more bullish on GDP development in 2015-2016. Our prognosis is even better than the IMF's - we expect a GDP contraction of only 1.5% in 2015," Sergei Konygin, analyst at Sberbank CIB, told bne IntelliNews. "Industrial production will be under pressure but the support will come from consumer demand," he added.

Russia's inflation expectedly slows to 16.4% y/y in April

Russia's consumer price growth slowed down to 16.4% y/y in April, posting the first slowdown of the y/y headline rate in eight months after peaking at 16.9% y/y in March, the RosStat statistics service said on May 6. The moderation was largely in line with consensus expectations of inflation peaking at the end of the first quarter and moderating to 10%-12% by the end of 2015.

Economists surveyed by Bloomberg expected y/y inflation in April to amount to 16.7% y/y and Reuters survey expected 16.8% y/y and 1.2% m/m price growth. Price growth moderation outperformed the expectations at 0.5% m/m.

The slowdown in inflation justifies the policy easing of the Central Bank of Russia (CBR), which cut the key interest rate by 150bp to 12.5% on April 30, citing lower inflationary expectations and higher risks stemming from the economic slowdown.

The CBR has been under fire for cutting the interest rate for the first time in 2015 from the emergency 17% to 15% in early February, when inflation was on the rise to 15% y/y in January. However, the regulator appears correct in its stance that the peak in consumer prices was a temporary effect of extreme ruble volatility in the end of 2014 and will now moderate.

The central bank said in a statement on April 30 that if inflationary pressure weakens as expected there will be further cuts. The next meeting of the CBR's board of directors is scheduled for June 15.

Russian government freezes public wages to contain inflation, but kills demand In April the government took a key decision to freeze public wages freeze, which was signed into law with the amendments to the budget.

This public wages freeze is crucial to contain possible public sector-led wage inflation, which could have triggered matching wage indexation in the private sector, resulting in a significantly increased probability of inflation spiralling out of control.

In March, the contraction in real wages reached -9.3% year-on-year and even taking into account the preliminary nature of the wage statistics, they provide important evidence that there is no measurable risk of second round inflationary effects.

However, the effective real reduction in public sector wages coupled with the collapse in consumer credit means that demand has also collapsed and with it any hope of growth this year.

BUDGETWRAP Federal budget deficit more than doubles month-on-month in April Russia's budget deficit more than doubled in April to reach 4.4% of GDP, the Finance Ministry reports, or RUB996bn ($19.9bn) in 4M15.

The first quarter of 2015 figures were revised upwards to a deficit of RUB692bn, or 4.2% of GDP, from RUB812.3bn, or 4.9% of GDP (there was a

surplus of 0.3% of GDP in 4M14). The budget deficit rose to RUB304bn in April from RUB133.7bn in March.

Defence expenditure is what is driving the deficit. Federal budget revenues reached RUB4.55 tln, or 36.3% of the plan for the year, while budget expenditure was RUB5.54 tln, or 36.4% of the plan for the year.

Revenues dropped 4.1% month-on-month to RUB1.1 tln, as oil & gas revenues declined 5.3% month-on-month to RUB 472.9bn and their share of total revenues dropped to 42.6% in April from 43.1% in March. Non-oil & gas revenues contracted 3.3% month-on-month to RUB637bn.

Expenditure grew 9.5% month-on-month to RUB1.41 tln in April. National defence expenditure reached RUB1.7 tln, or 55% of the plan for the year in 4M15.

Total revenues declined 4.3% Year-on-year in 4M15, oil & gas revenues dropped 19.8% year-on-year, while expenditure grew 18.3% year-on-year due to the sharp 40.8% year-on-year increase in national defence expenditure.

The Finance Ministry is continuing its attempts to reduce the growing budget deficit to save Reserve Fund resources. Recently, it proposed amending the budget rule to use ruble oil prices to calculate the cap on budget expenditure. If this proposal goes through, the budget expenditure could drop to RUB13.6 tln in 2016.

Nonoil and gas revenues strong in April The federal budget collected revenues of RUB1,110bn ($22.2bn) in April, down 10.0% year-on-year.

Oil and gas revenues fell 31.5% to RUB472.9bn, and this is the lowest monthly level year-to-date. The weak result was due to ruble appreciation at end March and in April.

However, Non-oil and gas revenues soared 17.3% to R637bn thanks largely to inflation (which was at 16.9% year-on-year). The relatively strong result can be cautiously treated as a sign that the economy is not performing so poorly.

Russian government freezes public wages to contain inflation, but kills demand In April the government took a key decision to freeze public wages freeze, which was signed into law with the amendments to the budget.

This public wages freeze is crucial to contain possible public sector-led wage inflation, which could have triggered matching wage indexation in the private sector, resulting in a significantly increased probability of inflation spiralling out of control.

In March, the contraction in real wages reached -9.3% year-on-year and even taking into account the preliminary nature of the wage statistics, they provide important evidence that there is no measurable risk of second round inflationary effects.

However, the effective real reduction in public sector wages coupled with the collapse in consumer credit means that demand has also collapsed and with it any hope of growth this year.

Culture ministry to slash spending by 30% Culture Minister Vladimir Medinsky said that his ministry will cut internal expenditures by 30 percent as Russia's economic crisis hits government budgets.

Several large-scale regional cultural projects will be scrapped. Cultural building projects that will be canceled in 2015 include a puppet theater in the northern city of Arkhangelsk, a cultural center in Kaluga, a library in the republic of Buryatia and a series of projects linked to the 100-year anniversary of the founding of Murmansk, according to Medinsky.

Funding for state institutions including museums and libraries, will be preserved at previous levels, Medinsky said, Kommersant reported.

Infrastructure Russian port operator FESCO reports threefold net income growth under RAS in 1Q Russia’s Far East Shipping Company (FESCO), the head company of FESCO Group, posted a net income of RUB361.06mn ($7.2mn) under Russian Accounting Standards (RAS) in the first quarter of 2015, which is 3.4 times more y/y, the company reported on May 5. Revenues grew twice y/y to RUB1.48bn. In 2014, FESCO’s net losses under RAS surged 16 times y/y to RUB7.58bn.

The company’s value was estimated at RUB1.04tn, and its debt grew from RUB498.42mn at the beginning of 2014 to RUB680.45mn as of March 31.

FESCO is a privately-owned transportation and logistics company with operations in ports, rail, integrated logistics and the shipping business. The company controls the Commercial Port of Vladivostok which has throughput capacity of 3.9mn tonnes of general cargo and oil products, 150,000 vehicles and over 600,000 TEU of containers.

On December 4, 2014, Russian President Vladimir Putin proposed granting Vladivostok the status of a free seaport. This means establishing special custom regulations similar to those provided for the Crimean ports. As

the largest stevedore at the port of Vladivostok, FESCO is expected to benefit from the change in regulation.

Shrinking Russia Jet Fleet Threatens Airbus-Boeing Order Backlog Russia’s fleet of Airbus Group NV and Boeing Co. jets is shrinking for the first time in 15 years as carriers hand back leased aircraft - raising the specter of a wave of order cancellations if the economy continues to stutter, reports Bloomberg.

The number of Boeing and Airbus planes deployed by Russian airlines declined by a net 11 jets between August and April 1, according to Russian Federal Aviation Authority spokesman Sergey Izvolskiy.

That’s after the combined fleet of foreign models had climbed more than 10-fold in two decades.

Passenger numbers fell 2.3 percent to 17 million in the first quarter, the first decline since 2009, according to the Federal Air Transportation Service.

Fabrice Bregier, chief executive officer of Airbus’s plane-making unit, said in a briefing on April 17 that the Toulouse-based company is already in discussions with carriers seeking to defer taking aircraft they’ve previously ordered.

China plans slew of rail and port deals with Russia A China Railway Construction Corp Ltd (CRCC) unit signed a memorandum of understanding with Russia in May to build rails and ports in Russia, the firm said as part of a raft of deals signed between Chinese President Xi Jinping and Russian President Vladimir Putin during the Victory Day celebrations on May 9.

China Civil Engineering Construction Corporation (CCECC) said it had agreed with Russian firm Tuva Energy Industrial Corporation LLC (TEIC) to help source funds from Chinese institutions for projects including a

410kmtrack across the central southern part of Russia. Another railway line connecting the Tuvan Republic, in the same area of Russia, to western China, and a port project in eastern Russia is planned.

Last week, Russian Transport Minister Maxim Sokolov said the countries would invest RUB1 trillion ($19.7bn) in a rail link between Moscow and the Russian city of Kazan to be completed by 2020.

Putin said the level of Chinese investment would be around RUB300bn.

ECM

Moscow Exchange reports 127% net income growth in 1Q

sufficiently upbeat about the year's performance.

Moscow Exchange (MOEX) reported strong financial results for the first quarter of 2015 under IFRS on May 14. Net income leapt by 127.2% y/y to RUB7.2bn ($143mn), while basic earnings per share increased to RUB3.25 from RUB 1.45.

"We consider the results to be moderately positive, given that the outperformance came largely from interest income, which probably peaked in 1Q15 due to high rates and large client balances that were pushed up by high volatility," VTB Capital said in a note.

Strong earnings growth was driven by fees and commissions generated by Money Market and Depository and Settlement Services, as well as higher net interest income, MOEX said.

Meanwhile, analysts were

Russia’s NLMK to pay biggest dividend since 2007 Russian mining and metal producer NLMK has approved a new dividend policy under which it will pay 50%

of net profit or 50% of free cash flow as dividends if net debt/EBITDA ratio at the end of each quarter does not exceed 1, the company said on April 24. If the ratio is greater, the payout will amount to 30% of net profit and remain within 30% of cash flow.

end of 2015, RMG analyst Andrei Tretelnikov told business daily Vedomosti. The company’s dividend yield in 3Q and 4Q of 2014 and in 1Q 2015 will be 4.7%, and if its financial situation does not change, the yield may reach 7.3% in 2015, Tretelnikov said.

The NLMK board recommended paying out RUB19.2bn as dividends, or RUB1.56 per share, for 2H 2014 and 1Q 2015.

Shareholders will receive RUB9.3bn for July-December 2014. Together with interim dividends the total payout for 2014 will amount to RUB14.6bn, or to 30.7% of the company’s net profit, which is the biggest ruble-denominated dividends in NLMK’s history since 2007. The board recommended paying RUB9.8bn, or RUB1.64 per share, as dividends for 1Q 2015, according to the new dividend policy.

NLMK is one of Russia’s foremost miners and steel producer with a capitalisation of $8bn. Its 2014 revenue under IFRS was $10.4bn, net profit stood at $845mn.

Buying NLMK shares now may result in 9%-10% of profit by the

Frontier markets coming to the fore Emerging Europe has made people fortunes but as we go into the eighth year investors are becoming more interested in Frontier markets. These markets are still in "catch up" mode, whereas returns in the traditional emerging European markets will depend heavily on them pushing through structural reforms.

Leading Russian tech company Navigation Technologies files for bankruptcy Innovative hi-tech company involved in satellite based vehicle tracking Russian Navigation Technologies which develops GPS/GLONASS-based systems for transportation monitoring and management was placed into

administration in May. The company’s creditors have filed claims that total RUB136.3mn ($2.7mn).

The company’s services are based on an in-house hardware and software platform developed under the brand AutoTracker.

Sectors

Russian tourism down 30% in first quarter Tourism from Russia to Europe fell by 30 percent in the first quarter of this year compared with the same period in 2014, as the economic slowdown and devaluation hit the holiday business. according to the European Travel Commission (ETC). Only Montenegro and Romania saw the number of Russian tourists rise in the first quarter of the year, the ETC said.

McDonald’s Russia expansion undaunted by recession, antiWestern sentiment The 500th McDonald’s restaurant opened in the Urals city of Yekaterinburg on May 13 as the US fast food giant shows no signs of slowing its conquest of the Russian market, 25 years after the first outlet was launched in Soviet-era Moscow.

"The opening of McDonald's [restaurants] marked the start of the Soviet Union's international integration," TASS news agency quoted Mayor Evgeny Roizman as saying. The building in which the restaurant opened was affixed with a plaque beating the number 500, the only outlet to be so honoured apart from the debut branch in the capital in 1990.

Khamzat Khazbulatov, president of McDonald’s in Russia and Central Europe, said in January that the company plans to open 50 new restaurants in Russia in 2015, investing about RUB6bn ($117mn) in its development of the national market.

The expansion plans indicated that the corporation had surmounted problems it had with the Russian consumer rights watchdog Rospotrebnadzor in 2014. Snap

checks that exposed food hygiene and other violations were interpreted in some quarters as a backlash from the country's political confrontation with the US and the West over Ukraine. Some outlets, including a number in Moscow, were temporary closed.

In March, the head of the committee on international affairs in the State Duma lower house of parliament, Alexei Pushkov, suggested McDonald's and CocaCola companies should withdraw from Russian market altogether.

"McDonald's and Coca-Cola should support Obama's sanctions against Russia and leave Russia to make the Russian people well-rid of their products.," Pushkov said on his Twitter account. "They will remain true to their principles, while we will be healthier for that."

Ex-finance minister Alexey Kudrin responded that such a full-scale exit from the country would leave thousands of Russians unemployed. "Pushkov obviously does not know that more than 160 Russian companies account for 85% of products supplied to McDonald's. Coca-Cola buys more than 75% of its products in Russia as well," Kudrin said.

McDonald’s global chain comprise over 35,000 restaurants in 118 countries. In Russia, the company serves over 1mn people daily in over 100 cities.

Meanwhile, Riding a current mixed wave of patriotism and antiWestern sentiment, two prolific Russian film directors Andrei

Konchalovsky and Nikita Mikhalkov got a $19mn state credit in April to launch a new national fast-food chain as a counterweight to McDonald’s and other foreign operators.

However, no all-Russian challenger has yet been able to significantly threaten the US chain's market dominance in Russia.

All but one segment of Russian advertisement market declines in the first quarter of 2015 Total advertisement spending in Russia in the first quarter of 2015 contracted 17% Year-on-year to RUB63.7bn ($1.0bn), according to statistics released by AKAR in May. TV advertisement spending (ex TV) dropped 22% year-on-year to RUB30bn ($480mn) and radio advertisement revenues fell 25% year-on-year to RUB2.5bn ($40mn). Print media revenues plummeted 34% year-on-year to RUB4.9bn ($79mn) and the outdoor segment contracted 27% to RUB7.2bn ($115mn).

Only the context online advertisement segment continued to grow, expanding 16% Year-onyear to RUB15.4bn ($246mn).

However, even this growth was largely in line with general consumer inflation, reflecting the slowdown in activity of small and media businesses, which are the key users of text-based advertisement.

Display online advertising sales decreased largely in line with the general advertising market, falling

18% Year-on-year to RUB2.8bn ($45mn) in the first quarter of 2015; thus, the total online advertisement market rose just 9% Year-on-year to RUB18 bn

($291mn), of which 85% represented context-based advertisement and 15% display advertisement.

Car sales remain weak, slump 41.5% year-on-year in April

the discounts it receives via the “cash for clunkers” program are among the largest (in relative terms). The opposite is true for SsangYong, which had to significantly increase pricing due to a low localization rate of 5%.

Sales of new passenger cars and LCVs sank 41.5% year-on-year in April to 132,456 units, the Association of European Businesses (AEB) reported in May. The maker of Russia's answer to the Jeep as well as trucks UAZ sales were very strong (down just 2.6%), while SsangYong sales tumbled 78%. Bankers attributed the fall to this to affordability: UAZ, thanks to a high localization rate of over 70%, did not see price hikes to reflect ruble depreciation, and

As a result, Sollers’ domestic car sales fell 27.3%. Ford brands (Ford/Sollers JV), which have a localization rate of just around 40%, saw sales decline 48%, which is an improvement from the 66% year-on-year drop in the first quarter of 2015, most likely on the back of price discounts.

The government support measures in April included not only the “cash for clunkers” program, but also subsidies for auto loans (two thirds of the CBR key rate) and leasing, though the latter just started and was gaining momentum during the month. These measures are still

Car production in Russia plummets 20.5% in first four months Russia produced 480,000 cars in January-April 2015, 20.5% less year-on-year, the Federal State Statistics Service (Rosstat) said.

Car production in April was down 21.9% year-on-year and was 8.9% lower than in March 2015.

outweighed by fundamental factors (higher prices, largely stemming from the weaker ruble, prohibitive terms on auto loans and falling retail sales) as well as ruble strengthening – some people are now waiting for prices to be cut based on this.

Russia produced 35,500 trucks in January-April, down 24.6% yearon-year. Production fell 26.7% year-on-year in April but rose 3.8% in April compared with March 2015.

Bus production fell 16.4% year-onyear in January-April to 9,700. In April alone, output fell 16.3% year-

on-year and it fell 10.7% in April compared with March.

Russian oil production stays at post-Soviet high Russia’s production of oil and gas condensate has maintained its record level of 10.7 million barrels a day, the highest since the 1991 collapse of the Soviet Union, the Economy Ministry said.

The country extracted 43.83mn tons in April, according to data released on May 2 by the ministry.

Fortunately for Russia’s increasingly stretched finances, the oil price jumped 21% in April to $66 per barrel, becasue of slowing

drilling rates and rising political tensions in the Middle East, having plummeted from a peak of $115 per barrel in June 2014.

The Russian economy relies on oil and natural gas for about half the federal budget revenues, and was hard hit by the oil price slump and also Western economic sanctions imposed over Russia’s role in the Ukraine crisis. GDP contracted by 3.4 percent in March year on year.

The country’s total oil exports via the Transneft pipeline monopoly rose by 0.7 percent to 4.4 million

barrels per day, or 18.021 million tons in April. The Economics Ministry expects exports to be three million tons higher this year

and the company's lower, oil-linked prices anyway make its gas more appealing to European customers," the bank's analysts wrote.

However, Rosneft, Russia's leading oil producer, cut its oil production by 0.1 percent in April to 3.81 million barrels per day.

Despite a 20% drop in shipments to non-CIS countries in Q1, exports are expected to rise by 3.3% y/y to 153bcm in Q3. At the same time, the company's cash position will be limited by high capex ($33bn-$34bn) in 2016-2017 due to extensive spending on Eastern Gas Program, mainly the Power of Siberia pipeline to China and Chayanda gas field.

Gazprom cuts 2015 output target, analysts see greater exports ahead Russian natural gas producer Gazprom is cutting its output target for the second time and now plans to extract 444bcm of gas in 2015, showing a flat extraction rate year over year, board member Vsevolod Cherepanov told the Vedomosti business daily. In 2013 the company's output stood at 487.4bcm.

The target is adjusted downwards by 15bcm in Q2, after a 16bcm cut in Q1, from an initial output plan of 471bcm.

Cherepanov's colleague on the Gazprom board, Vitaly Markelov, said the company will see its maximum capacity decline to 1.5bcm daily from 1.65bc daily, due to lower output volume at some old fields. In April, volumes fell short of the output plan of 35.6bcm by 2bcm. "We're hoping for a cold winter in Europe," Markelov said.

Meanwhile, Alfa Bank analysts forecast on May 19 that Gazprom will reap the benefits of increased exports to Europe expected to start in Q3. "The continent's gas inventories are near exhausted,

Alfa believes that the recently announced Western Route of supplies to China, once - and if launched, will benefit Gazprom by unlocking the resource base in the far north of Western Siberia, by allowing more flexibility and bargaining power in Europe, and by being cheaper than the already operation Eastern Route via the Sila Sibiri (Power of Siberia) pipeline.

However, with the Western Route only breaking even at a $290/mcm price, the bank sees little immediate scope for returns for Gazprom shareholders from this source.

Russia climbs in tourism ranking Russia climbed 18 positions to rank 45th this year out of 141 economics in the World Economic Forum's Travel and Tourism Competitiveness Index.

The World Economic Forum rating's program in Russia, named tourist-

favorite Saint Petersburg, historyfilled Tatarstan and the southern region of Krasnodar as Russia's top 3 tourist destinations for 2015.

Russia's natural and cultural resources played a key tole in raising Russia's rating, with natural resources ranking 34th best in the world and cultural resources ranking 21st. Price competitiveness ranked 41st, helped in part by the ruble's fall of around one third to the U.S. dollar since the start of last year amid falling oil prices and Western sanctions over the Ukraine crisis.

There are still plenty of things to improve though. Road infrastructure, an often-cited black spot in Russian life, ranked 92nd in the World Rating. The worst area was safety and security (126), followed by business environment (109) and environmental sustainability (106).

Russian beer sales fall 9% Beer sales in Russia fell by 9% in the first three months of this year year-on-year, according to Russia's biggest brewer Baltika, a division of international brewer Carlsberg.

The company attributed the slump to Russia's currently poor macroeconomic conditions.

Baltika's market share in the Russian beer market remained at 38.4%, roughly the same as last year.

Russia's beer market has steadily declined over the last several years as higher duties and stricter laws,

including a ban on alcohol sales after 11 p.m., have come into play.

Last year Russia's beer market declined by 7% compared to the previous year, according to Baltika.

Carlsberg closed two of its Russian breweries at the start of this year due to the declining Russian beer market and difficult macroeconomic conditions in the region.

Apartment sales on the secondary market tumble Sales apartments on Moscow's secondary market tumbled by half year-on-year following a buying spree in December 2014.

About 11,400 title deeds for residential properties were transferred in April, down from about 20,000 in April 2014, according to the Moscow property registry — a fall of 47%. Sales fell by another 30% in the first four months of this year.

An emergence rate hike by the Central Bank of Russia (CBR) to 17% from 6.5% only depressed sales further, as about a third of housing sales are made with mortgage now. Mortgage rates has since reduced to 14.5% following three rate cuts since the start of the year, but are still more than the 12.5% prior to the ruble's devaluation in December 2014.

However, the demand for new apartments remains strong thanks to government subsidies on borrowing that have reduced rates to 12%. Demand for new

apartments was up 15-20% in the first quarter say realtors.

Demand for Moscow leading retail streets up but still weak

Luxury apartment sales in Moscow soared to a record high in April

After collapsing in 2014 the demand for prime locations on Moscow best retail streets has recovered slightly but is still low.

Luxury apartment sales in Moscow soared to a record high in April as buyers rushed to turn their FX saving into fixed assets as the ruble surged, according to real estate consultancy Knight Frank.

The ruble has risen 40% against the US dollar since early February, recovering some of the ground lost when it plummeted in December.

The average rental budget of banks for premises of 100-200sq m on these streets has increased by 34% quarter-on-quarter to RUB800 thousand per month, whereas both catering and electronics segments have upgraded their budgets by 11% in the first quarter.

A total of 165 apartments were sold in the Russian capital in April, 66% more than in the entire first quarter of the year and eight times more than in April of last year, the report said.

But the current rental budgets for street retail are still below the levels of early 2014. At the end of 2014 tenants sought prices significantly below market average, but in almost all cases they did not agree with landlords and some of them lost attractive locations.

The Russian currency is still down by around 30% to the dollar since the beginning of last year.

The surge in luxury property sales was driven by demand for small and inexpensive properties priced in rubles, the report said. More than 80% of luxury sales in April were of apartments worth $2mn or less, with 50% of the total sales volume falling to properties cheaper than $1mn. This boom in demand for low-end luxury apartments brought the average sales price in this segment down to $1.2 million, nearly half of what it was in the first quarter.

At the end of March the majority of companies who still have appetite for street retail premises have revised their rental budgets slightly upwards. At the same time, the companies are trying to reduce the entry costs by choosing the special premises released by equal segment. In addition, they are asking for decrease of indexation, free-rent periods and so on.

According to JLL rating, the position of the most expensive and prestigious street is still held by Stoleshnikov Lane. Maximum rental rate here is at 300,000 RUB/sq m/year for 100 sq m premises. Kuznetsky Most Street has ranked the second where high quality expensive premises located opposite to TSUM have entered the

market. By the end of the first quarter 2015 maximum rental rate for Kuznetsky Most was at 250,000 RUB/sq m/year.

Tverskaya Street maximum rental levels have moved to 100,000 RUB/sq m/year and fell to the 5th place in Top Moscow Prime Street Retail Corridor rating sharing this place with Myasnitskaya Street and Garden Ring.

Tverskaya Street has lost its status as the major touristic street of Moscow. The current tenants have registered the increase of traffic, which supported mainly by people from neighboring offices. As a result, we have observed the increasing demand from catering segment. However not all available premises are suitable for the opening of restaurant or café.”

Petrovka Street has fallen from 2nd to the 3rd place because of current vacant supply quality being underrepresented in comparison with the premises on other top streets. Maximum rental rate here is 120,000 RUB/sq m/year. The extraordinary high demand moved to Patriarshie Prudy District. This interest was mainly supported by the restaurateurs with a unique concept. As a result, the rental rates in Malaya Bronnaya Street and its neighbourhood have become very high, reached the level of 120,000 RUB/sq m/year that allowed Patriarshie Prudy took the 3rd place.

Moreover, a correction of stated prime rental rates was observed on Pyatnitskaya Street – maximum rental rate decreased to the level

of 115,000 RUB/sq m/year.

Previously the significant growth of the price owed to re-development and opening of new pedestrian areas. Today the excitement about this street has shrunk and as a result Pyatnitskaya Street went down from 3rd to 4th position in rating. Nevertheless, a tender among restaurants was organized regarding some individual premises.