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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

Politics – the bad

Tackling Russia’s Grey Economy

Kremlin struggling to contain graft, Putin frustrated

Politics – the good

Putin Creates New Anti-Corruption Department

Putin’s line softening to opposition Putin Speaks Out Against Intolerance of Sexual Minorities

Kudrin formally rejoins government, but warns making the economy competitive will take 7-15 years Kudrin could establish party of his own State Duma committee supports bill that would allow convicts to run for office Fourteen more convicts released under economic crime amnesty in Russia Russia to Form New Copyright Watchdog Amid Anti-Piracy Push Russia's Ministry of Finance is finalizing "anti-offshore" amendments Russia creates separate ministry for construction, housing and public utilities

Economic Development Ministry proposes reintroducing permissions for foreigners to buy real estate. Defense Minister Anatoly Serdyukov finally charged with corruption Detection rate of major corruption crime too low in Russia says Prosecutor General’s Office Russian Lawyers Protest Putin’s Court Reform Navalny's Party founded, court refuses to register it Russian Official Accused of Stealing Timber Worth $1M Politics – the ugly Russia's TI corruption ranking improves Putin says harsher criminal code needed to fight economic crime


Checks into state employee income declaration result in 200 firings Corrupt policemen may lose their service pensions

Sberbank CEO calls on Russian cbank to cut stake in bank to 25%

Sberbank cuts cash advance

Sberbank has new five year strategy; balanced growth, quality over quantity

Russian bank top manager detained in Moscow for extortion

Fitch on Russian banks: Situation stable, demand for funding on rise

Police to Take Lie Detector Test in Russia's Graft Battle

Loans to buy new houses could be 40% of all mortgage loans in 2014

City Mayor Arrested on Bribery Charges in Russia

Finance Ministry wants to stop recapitalizing Russian Agricultural Bank

Kremlin Chief Says Graft Has Cost Russia $312M This Year

Russian Bank Debt to Reach 10 Trillion Rubles in 2013

Polls, mood, sociology Putin's approval lowest since 2000

Russian Banking Sector Rising Concern Over NPLs

Almost half of Russians approve of national development course - poll

Most Russian banks meet Basel III requirements

Poll Sees Support for Putin's Actions at Lowest in 12 Years

Sovcombank took over GE Money Bank

Over 90% of Russians against regional succession

Gazprombank still hopes to enter British banking market

Russian Patriotism Has Declined Under Putin

Economics

Nearly Half of Russians Say Parliament’s Lower House Is Unneeded Banks and Finance CBR shutters major retail bank for money laundering, sparks crisis fear CBR drafts law to regulate credit interest rates

CBR's Inflation Targeting goal put to a Test Russia best BRIC for Doing Business, Progress Fails to Boost GDP Growth Russia’s monetary policy became more coherent under the new team Deutsche Bank sees Russia’s GDP growth to speed up to 3.3% in 2014


Russian Federal budget posted deficit in October

Russian Railways - 12 routes for liberalisation of locomotive traction

Russian real disposable income drops, depress retail

ECM

Russian Federal budget posted deficit in October

Russia to levy 30% tax on dividends of unknown beneficiaries

Russian real disposable income drops, depress retail

Rosneft Sale of TNK-BP Stake Raises Concerns of Squeeze Out Plan

Russian capital investment continues to contract in September

Russia, France to invest $400 mln in joint fund

Russia raises corporate property tax

Russia equity market falls as November worst month for EM fund flows since the August selloff

CEE/CIS region makes biggest reforms to paying taxes in 2012 Concerns over ruble stability rising Russian export growth trails peers, current account surplus shrinking steadily Russia’s 2013 capital outflow not to exceed $60bn Russia’s retail trade growth accelerated to 3.5% y/y in October but investments continued to fall Russian FDI by a half in 9M13 on capital repatriation from Cyprus

German retailer Metro mulls float of 25% of its Russia unit in Russia Russia’s IGSS may hold IPO in London in 2014 RDIF and KIC launch RussianKorean Investment Platform 78% of Russians choose nongovernment funds for pension savings US' invest funds acquire 45% of Russia's ALROSA IPO shares DCM

Russia’s foreign debt rises 0.2% to $55.bn in October Russia's poverty rate down to 12.1% -- lower than USA Infrastructure Russia Puts Out $612 M Tender to Upgrade 2018 World Cup Football Venue

Mechel stock plummets as forced to restructure $1bn of debt Share of non-resident investors in Russian state bonds market totaled 25%


Sectors Government approves LNG export liberalization

Russia’s car output falls 2% to 1.6m units in January–October

Russia Among 7 Best Countries for Expatriates to work in

OPEC says $160-a-barrel oil by 2035

AvtoVAZ started manufacturing engines and gears under a license agreement with Renault-Nissan

Moscow, St. Petersburg and Kiev will be top-5 retail growth centres in Europe

Italy, Russia seal 28 deals

Gazprom valued at Russia's most valuable brand at $37bn

Volkswagen to €1.2bn in Russia till 2019

Russia overtakes Europe in shopping mall construction

Share of smartphone sales exceeds 50% late Oct

Russian takes in a good harvest

Russia’s grain harvest up 25.4% to 90.3 mln tn by Nov

Aeroflot launch new regional airline Aurora Airline

E-Commerce Market Gets High Ranking

Russia’s Gunvor mulls buying $3.3bn assets in America

Mobile Phone Penetration Hits 168%

Russia Surpasses Europe in Shopping Mall Construction

Auchan to open 10–14 stores in Russia in 2014

Internet industry to contribute 1.5% to Russia’s 2013 GDP


Top Story Tackling Russia’s Grey Economy A number of government policies have been launched recently all with the goal of normalising Russia by reducing the size of the shadow economy. The first real drive to stamp on all the grey and black schemes that have been part of day-to-day life for most of the two decades is driven by the dramatic and unexpected slow down and the goal is to bring in more revenue to the state, leaving its reserves in the form of the various funds untouched. The main actions in November have been: • Two significant retail bank were closed for money laundering. • The CBR revised its lending instruments • the Anti corruption drive went up a notch as Putin sought to expand investigator’s powers to bring charges and the former Minister of Defence was finally charged with corruption. • a clampdown on the use of offshore zones by major companies to optimize taxes. • an effort to improve collection of tax on property sales; • new restrictions on the use of cash for large payments.

Russia has a sizeable informal economy. The Finance Minister Siluanov says the Russian budget loses over 4% of GDP in taxes as businesses conceal up to 20% of GDP. According to Deputy Prime Minister Golodets, 38 million, or nearly half the workforce, are employed in the informal sector. Policies are being developed to tackle these problems. The government is on the hunt for revenues. Weak growth this year (1.4%Y) has translated into weak budget revenues, up just 2.3% year-to-date, which means down over 4% in real terms, given inflation averaging 6.8%Y. Given growing expenditure commitments, the fiscal rule capping the deficit at 1% of GDP, and the commitment not to raise tax rates significantly, the MinFin has been constrained in its search for revenues. Now, after the oil tax manoeuvre and the unfunding of pensions, we see an emerging focus on improved tax compliance, including:


Politics – the good Putin’s line softening to opposition It seems that even if Putin is not happy with the opposition he has decided to actively counter them by engaging them a bit more. The Kremlin’s line has noticeably softened to the opposition as it tacitly concedes they are not going away. But rather confront them, the Kremlin seems to be adopting a policy of address some of their (legitimate) concerns and leaving them alone to fight with each other.

Putin Speaks Out Against Intolerance of Sexual Minorities Putin tried to step backwards from the nasty wave of xenophobia he has unleashed with tough laws on gays that have lead to brutal beatings and murders. Putin on November 21 spoke out against intolerance of sexual minorities, and reiterated that a recently adopted law to prevent the promotion of homosexuality was designed to protect children.

A good example came in November when Putin met with leaders of major non-parliamentary parties for the first time in his 13 years in power.

“Xenophobia should not be fostered in society, no matter on what criterion it is based, including sexual orientation,” Putin told a meeting of opposition parties.

Even more notable was Putin said the reason for the meeting was part of his preparations for his state of the nation speech due in December. Clearly he intends to directly address some of the issues the opposition are bring up and make them his own.

He said he had received “a lot of criticism” for the law, which bans promoting homosexuality to minors, but he emphasized that it was instated to shelter children from adult issues.

Participants in the meeting, who included billionaire Mikhail Prokhorov of Civil Platform, Vladimir Ryzhkov of RPR-Parnas and Sergei Mitrokhin of Yabloko, raised concerns about what they called politically motivated prosecutions of opposition supporters and capital outflow, among other topics. Opposition blogger Alexei Navalny was not invited to the meeting.

Kudrin formally rejoins government, but warns making the economy competitive will take 7-15 years Alexei Kudrin former finance minister, dubbed “Mr Prudence” has rejoinded the government as a member of Putin’s economic council to advise him on economic policy. This is good news and could be seen as a possible


Building a Competitive Economy Will Take 7-15 Years, Says Kudrin 02 December 2013 | Issue 5267 The Moscow Times The Russian economy's conversion to a more competitive model will take from 7 to 15 years to achieve, former Finance Minister Alexei Kudrin said. The peak of the economic crisis is past, but systemic imbalances have still not been removed, Kudrin said, speaking at the RussianGerman Chamber of Commerce, Vedomosti reported Friday. While Europe is still stuck in a serious risk zone, he said, and stabilization of state debt will begin only after 2016, Russia has it own problems, 60 percent of which are tied up with internal political issues. Russia was unable to make use of high oil prices to push through necessary reforms, Kudrin said. "We got bogged down in the transition period." According to the European Bank for Reconstruction and Development, post-Soviet reforms stalled in the mid-2000s and are still no further on now. Kudrin could establish party of his own The all-Russia civil forum Agenda for Russia, organized by the Committee of Civil Initiatives, could become a basis for establishing a new liberal party, headed by Kudrin Russia’s local press reports. The Center of Political Technologies has begun researching the topic of party building and possible

leadership of Alexei Kudrin. "We can not talk about results so far, the research has not been completed yet," Head of the Center of Political Technologies Igor Bunin was quoted as saying. Kudrin could be Putin’s secret weapon in turning around sentiment towards Russia. The poll ratings of prime minister Dmitry Medvedev have recently decoupled from Putin’s and are currently plummeting which has lead to speculation that he may be sacked soon. Kudrin as PM would be very warmly received by international investors. State Duma committee supports bill that would allow convicts to run for office The State Duma Committee for Constitutional Legislation and Nation Building supported a bill proposing the imposition of a ban against felony offenders' running for public office within 10 years following the expunction of their records. The bill allows opposition blogger Alexei Navalny to run for office, but will not be in force in time for him to run in the next elections. This bill avoids the "Tymoshenko problem" and protects Russia from criticism of 'selective justice' while still banning Navalny from running. The bill also proposes permitting people who have committed grave crimes to run for public office 15 years after the expunction of record.


On October 10, the Russian Constitutional Court ruled that the provision banning individuals convicted of grave or aggravated crimes from running for public office for their lives is unconstitutional. Fourteen more convicts released under economic crime amnesty in Russia Fourteen convicts have been released in Russia in the week ended November 27 in accordance with an economic crime amnesty passed in Russia about five months ago, according to the website of the Federal Penitentiary Service. In late October, business rights ombudsman Boris Titov said that 1,284 people have already been released. On July 2, a bill proposing an economic crime amnesty was approved by the State Duma, and will be carried out over the next six months. A total of 13,000 people have been identified as wrongly imprisoned. Russia to Form New Copyright Watchdog Amid Anti-Piracy Push The Russian government plans to form an agency in charge of copyright observance amid a series of moves aimed at cracking down on piracy. The economic development ministry has submitted to the government a project for an agency for copyright control, which

is to be formed on the basis of the existing patent agency but will have much broader authority and would be reporting directly to the government. The move comes at a time when the Russian government is apparently stepping up its activities aimed at fighting piracy. Earlier this year, a stricter anti-piracy law was enacted, but its effectiveness is yet to be seen, while rights holders have repeatedly stated that the government is to make more effort in that area. Russia's Ministry of Finance is finalizing "anti-offshore" amendments According to the plan of the government's legislative drafting activities approved a year ago, till the end of 2013, the Ministry of Finance was to define the term of "a tax resident organization" and develop a procedure for taxation of retained earnings of foreign controlled companies. At the moment, the term of "a tax resident of the Russian Federation" applies only to individuals, but the terms of "a Russian organization" and "a foreign organization" are used in respect of companies. The purpose of a more detailed definition is to make companies which are formally registered abroad, but have core assets and management in Russia liable to pay a profits tax under the Russian laws.


Russia creates separate ministry for construction, housing and public utilities On November 1 president Vladimir Putin announced that the federal agency handling services for construction, housing and utilities, Gosstroi, will now be elevated to ministry status. Gosstroi, established last year, failed in its tasks of moving ahead on stuck reforms in the municipal service sector and eliminating bureaucracy related to construction. The problems facing the new ministry remain huge. The quality of housing and level of municipal services in Russia is extremely low. Much of Russia’s housing stock is old and in poor shape. Twothirds of apartment buildings need basic repairs and the situation worsens every year. Money set aside by the state for basic repairs is insufficient and residents lack the funds to

finance necessary major repairs themselves. About a quarter of all districtheating networks and about 40% of water and wastewater networks are in need of complete overhauls. Consumer rates for heat, water and gas have risen rapidly in recent years as part of the government’s efforts to bring rates up to a level where they cover production costs. Rising rates, however, have not translated into improved quality of service and have become a source of general dissatisfaction among the populace. Part of the problem is that housing and utilities are among the most corrupt sectors in Russia. The government says one solution to improving municipal services would be to attract more private investment into the sector.

Politics – the bad Kremlin struggling to contain graft, Putin frustrated Russian President Vladimir Putin is frustrated with the slow progress in his anti-corruption drive and struggling to take charge of the situation. Putin's answer has been to tighten the screws, though in ways that are upsetting the business community. Russia can no longer afford to ignore to waste so much money. Despite the $100-plus oil price, the

federal budget is only just in profit and actually fell into deficit in October, according to the finance ministry. The anti-corruption programme launched by then-president Dmitry Medvedev in 2008, and taken over by Putin since, is supposed to increase the tax take and reduce the government’s investment costs. But it is not producing the desired results.


In November Putin submitted a bill that would expand the powers to start criminal prosecutions by any investigator, reversing reforms made prime minister Dmitry Medvedev in 2011 that said only tax authorities have this power. Putin argued that the number of cases being brought has fallen dramatically. The business lobby countered that the reason the number of cases has fallen is less spurious cases designed purely to extract bribes are being brought. Interestingly Putin’s bill brought almost universal condemnation from both the private sector and several powerful government organs. Perhaps even more interestingly Putin eventually climbed down under the weight of this opposition and watered the bill down. Putin Creates New AntiCorruption Department The Kremlin announced December 2 that Putin had founded a new department in the presidential administration specifically devoted to fighting corruption, the latest government initiative to combat one of the country's most stubborn problems. The new department will oversee the work of verifying officials' income and expense declarations; uncovering and eliminating any potential conflicts of interest for government officials; and alerting law enforcement authorities about possible corruption schemes in state organs, among other duties.

The department will be headed by little-known Putin aide Oleg Plokhoi, whose surname, which is the same as the Russian word for "bad," prompted snickers from observers. Putin speaks frequently about the government's need to fight corruption, calling it one of the country's main obstacles to development. International groups and opposition leaders give similar assessments, although the opposition often says Putin is only paying lip service to the problem. Economic Development Ministry proposes reintroducing permissions for foreigners to buy real estate. The Russian Economic Development Ministry proposed on November 18 to re-introduce permits for foreigners who want to own Russian property, which would be a significant step backwards for improving Russia's business climate if adopted. However, the idea is in line with the new increasingly tough line the government is taking on maleficence. "The absence of norms in Russian Federation legislation... allows foreigners, stateless people and Russian companies where foreigners or stateless people hold 50% or larger stakes to acquire ownership and administration rights for real estate whose turnover is not restricted and located on the territory of the Russian federation without control, including land plots, flats, other


premises, buildings, factories and complex properties, which may also create danger for Russian security," the ministry said, reports Prime.

there were no reports of military personnel subsequently vacationing at the luxury resort, Kommersant daily reported in March.

In other words, people are buying property and the state has no idea who they are, where their money is coming from and where it is going.

Detection rate of major corruption crime too low in Russia says Prosecutor General’s Office

Defense Minister Anatoly Serdyukov finally charged with corruption

The Russian law enforcement and security forces detect too few major corruption crimes, according to Deputy Prosecutor General Alexander Buksman.

Investigators have launched a criminal case against former Defense Minister Anatoly Serdyukov; the estimated damage is 56m rubles ($1.7m), the Investigative Committee's official spokesman Vladimir Markin said. Previously the Investigation committee that is spearheading the drive has balked at charging a figure as senior as a minister. The decision to charge Serdyukov is clearly connected to Putin’s obviously growing frustration with the slow progress in the anticorruption drive. Investigators believe that Serdyukov personally supervised construction work at the Zhitnoye resort in the Volga River delta, which was carried out by military personnel from a nearby air defense test site. This place was owned by Valery Puzikov, who is married to Serdyukov's sister. Serdyukov told investigators earlier that the Zhitnoye resort's owners had promised to remunerate the servicemen who worked there with discounted vacations. However,

This statement is in line with the other big corruption stories of the month and indicate the Kremlin wants to take the whole programme up a gear. There is currently a “downward trend in exposing these kinds of crimes,” he said. The number of organized corruption crimes revealed over the first six months of the year has halved compared to the previous year. Russian Lawyers Protest Putin’s Court Reform Russian lawyers criticized the Kremlin on November 20 in a rare display of public discontent, speaking against a court reform that would abolish what they called the most progressive branch of Russia’s judiciary. Russian President Vladimir Putin proposed in July to merge the Supreme Arbitration Court, which oversees business disputes, into the Supreme Court, which handles criminal cases and civil lawsuits.


The reform would solve the problem of conflicting jurisdictions between the courts, Kremlin representatives said earlier this year. Navalny's Party founded, court refuses to register it Opposition politician Alexei Navalny formally joined the People's Alliance party and was elected its leader when it held its founding congress in the middle of November. The congress, which was attended by 111 delegates from 48 regions, marked the party's third attempt to be registered. The People's Alliance held previous founding congresses in December 2012 and June 2013 but the Justice Ministry rejected its applications for registration. This time around, the event was held at a luxury hotel with decor exploiting the theme of the 1812 Borodino Battle between Russia and France. The congress attracted a diverse group of people ranging from young hipsters sporting ripped jeans to elderly people in classic suits. A Moscow court ruled that the Justice Ministry's refusal to register opposition leader Alexei

Navalny's People's Alliance Party was legitimate, Dmitry Krainev, a lawyer for the party, said on November 19. He said the party expected to appeal the ruling by the Zamoskvoretsky District Court and eventually bring it to the European Court of Human Rights. The party held its first founding congress in December 2012, and in May the ministry rejected its application to be registered. As a result, the party had to hold a founding congress for the second time in June, but in July its request for registration was rejected again. Russian Official Accused of Stealing Timber Worth $1M Authorities in Russia's Siberian region of Tomsk said Wednesday that they are investigating the misappropriation of almost $1 million worth of timber by a local district official. The Investigative Committee said that Pervomaysk district head Mikhail Pristavka used his position in 2011 and 2012 to request that the regional forestry department cut down 9,700 cubic meters of timber, which he said would be used for municipal purposes.


Politics – the ugly Russia's TI corruption ranking improves Russia rose six places from its 133rd-place ranking in last year's index, a ranking of public sector corruption as perceived by business people and country experts, but its score remained constant at 28 out of 100 possible points. The score put it in a nineway tie with countries including Pakistan, Azerbaijan and the Gambia. New Zealand and Denmark were ranked the most transparent in the ranking, with scores of 91, followed by Finland, Sweden, Norway, Singapore, Switzerland, the Netherlands, Australia and Canada. Afghanistan, North Korea and Somalia were seen as having the most corrupt governments, each receiving a score of 8. Transparency International creates its ranking using a combination of surveys and assessments conducted by 13 separate institutions based on government and business climate data collected in the last two years. Ukraine overtook Russia to become the most corrupt country in eastern Europe at 144 place.

Putin says harsher criminal code needed to fight economic crime Putin said that the 2011 relaxation of the criminal code has failed to achieve its intended results. He noted that public officials convicted of bribery under current law usually get off with fines, which is not efficient as most of those fines are never paid. The law was changed during Dmitri Medvedev's presidency. Many economic crime classifications were eliminated and the possibility of holding suspects in jail during a crime investigation was limited. Penalties for economic crimes were also reduced. The changes were part of reforms to improve the business environment in Russia. They are often cited as one of the major accomplishments of the Medvedev presidency. The goal of the reform was to reduce coercive practices used on firms. It is not unusual in Russia for competitor firms or corrupt officials to haul companies into court on trumped-up charges in order to push the victim firm out of a certain market, take it over or strip it of its assets. Even the mere threat of a lawsuit is often sufficient to obtain a bribe. Especially charges for tax avoidance have been used for this purpose.


Checks into state employee income declaration result in 200 firings Some 200 officials, including eight unidentified senior officials, have been fired for “loss of confidence” over information in their income declarations for 2012, Kremlin chief of staff Sergei Ivanov told a meeting of President Vladimir Putin’s anti-corruption council on October 31. In addition, the official number of corruption crimes decreased this year compared to last year, Putin told the council, although he expressed little optimism that measures against bribes were proving effective. The long-standing problem of official corruption in Russia is a major political issue for Putin and his government, with public discontent over it remaining high. Corrupt policemen may lose their service pensions Another step in the anti-corruption campaign and another scaling up of measures. A draft law stripping lawenforcement employees of their service pensions if they are found guilty of crimes against the authorities and the interests of civil service has been sent to the State Duma. Alexei Chepa, deputy head of the Just Russia party in parliament, said that according to polls on the police, people are most concerned about police extortion, bribery and

corruption (47% of respondents) and police arbitrariness (30%). The MP cited international practice where stripping officials sentenced for crimes of corruption of their service pension, which is larger than ordinary retirement pay, has proved to be an effective way to combat corruption in many countries. Chepa said the law stipulates this punishment for the military and servicemen of the Interior Ministry agencies, the State Fire Service, agencies which control drug and mood-changing substances, and penal services and institutions. Sberbank cuts cash advance Another anti-corruption measure – this one is designed to make it harder to get hold of large amounts of cash. Effective November 15, Sberbank reduced cash advance limits for debit cards by 1.5-3 times depending on a card type. Banks in Russia may follow Sberbank's example and impose stricter restrictions on ATM cash advance, says financial ombudsman Pavel Medvedev, cited by Vedomosti. A daily limit set by Sberbank for Visa Electron and Maestro cards is decreased three times to RUB50,000. A daily limit for Visa Classic and MasterCard Standard is decreased from RUB150,000 to RUB80,000. Pavel Medvedev thinks that the decision will not provoke a "revolution" on the market of both


cash and non-cash payments and have little effect on the life of ordinary Russians, but it will help tame fraudsters' appetite. Russian bank top manager detained in Moscow for extortion A top manager at a Russian bank and another individual were detained in Moscow for the alleged extortion of 8.2 million rubles ($250.000), the Interior Ministry reported November 29. The arrest comes as the authorities are increasingly cracking down on dodgy banks and follows the closer of mid-sized bank Master Bank in November. Although the name of the bank was not officially disclosed, a police source told RIA Novosti that the bank in question was the RosDorBank. The suspects were allegedly targeting a real estate deal in Moscow worth 219 million rubles ($6.6 million). An entrepreneur who acted as an intermediary in the deal was expected to receive 24 million rubles ($727.000) as payment. The sum transferred from the buyer was placed in an account in a subsidiary of the bank, but instead of receiving his cut, the intermediary was told that he would not receive the money, as the bank would not approve the transfer, and the leasing entity would be declared bankrupt. Rosneft’s Sechin's $50M Makes him Top Earner at State Companies

Igor Sechin, former deputy prime minister and head of state-run oil company Rosneft, became the highest-paid executive in Russia by earning $50 million last year, according to a Forbes Russia list. Second and third place on the list of the 25 highest-earning executives in the country, are held by the chiefs of two other statecontrolled companies — VTB head Andrei Kostin, who earned $35 million, and Gazprom CEO Alexei Miller, with $25 million of income in 2012. Top managers' pay checks at Russia's state-run companies significantly increased in 2012, while the pay at private companies remained virtually unchanged or decreased, Forbes reported. Police to Take Lie Detector Test in Russia's Graft Battle Police officers in Russia will have to start taking lie-detector tests as part of a corruption-fighting drive initiated by the Interior Ministry. Interior Minister Vladimir Kolokoltsev has ordered that all police officers, drug police and employees of the Federal Penitentiary Service will now need to take polygraphs before getting hired or promoted, Izvestia reported. Exams to test candidates' inclination toward drug use will also be introduced, the newspaper said.


City Mayor Arrested on Bribery Charges in Russia A court in Russia's Yaroslavl Region approved the arrest of a local mayor accused of bribery in the second such case in the province this year on October 28. A lawyer for Yury Lastochkin, the mayor of Rybinsk - a city of 200,000 located 270 kilometers north of Moscow - denied all allegations and said the defense will file an appeal on Monday. Kremlin Chief Says Graft Has Cost Russia $312M This Year Corruption in Russia has cost the country damages worth more than an estimated RUB10bn ($312 million) this year, the Kremlin administration chief said October 31.

Speaking after a session of Russia’s Anti-Corruption Council, Sergei Ivanov said the figure includes losses of 370 million rubles that have been documented and proven in court since the beginning of 2013. This year, 2,500 officials reported attempts to bribe them, Ivanov said. A total of 835 criminal cases have been launched into these reports and 311 people have already been prosecuted. According to data provided by Russia’s Supreme Court, 3,500 people have been brought to justice for corruption-related crimes in the past five years. “In the past five years, 242,000corruption-related crimes have been uncovered. The damage is immense,” Ivanov said.

Polls, mood, sociology Putin's approval lowest since 2000 Rising prices and an economic slowdown helped drive Putin's public approval rating to its lowest level in more than 13 years last month, a Russian polling agency said on December 3. A survey by the independent Levada agency found 61 percent of respondents voiced approval for Putin's performance in November, down from 64 percent in October and the previous low this year of 62 percent, recorded in January.

It was the lowest for Putin in Levada's monthly survey since June 2000, the month after he started his first of three presidential terms. Putin's approval rating exceeded 70 percent for most of his first two terms in 2000-2008, which coincided with an oil-fuelled economic boom, and sometimes rose above 80 percent.


Almost half of Russians approve of national development course - poll Almost half of Russians (46%) approve of the course of national development taken by Vladimir Putin after his return to the presidency, Levada Center told Interfax. This course is mostly supported by women (50% vs. 41% of men), young citizens aged from 18 to 24 (55%), people with secondary education (52%) and residents of cities with a population exceeding 500,000 (52%). The sociologists polled 1,603 respondents in 45 regions in late October. Some 41% of the respondents said they were unhappy with the course, mostly, men (47%), respondents aged from 40 to 54 (46%), people with higher and primary education (43% and 44%), people with a lower economic status (43%), Muscovites (45%) and villagers (51%). A relative majority of the respondents (44%) said Putin had a clear idea of the development course. Thirty-six percent disagreed, and 20% could not answer the question. Poll Sees Support for Putin's Actions at Lowest in 12 Years Another poll showed that one-third of Russians do not support Vladimir Putin’s actions as president, marking his lowest approval rating in 12 years.

Steadily improving economic conditions and political stability have ensured Putin broad favor among Russians over the almost 14 years he has served alternately as president and prime minister. According to the survey conducted by the respected Levada Center polling agency in mid-November, 31 percent of respondents had a negative opinion of Putin’s actions. The proportion of those questioned that back Putin’s policies stood at 47 percent, the lowest since 2001. Sixteen percent said they did not have enough information to express an opinion. Over 90% of Russians against regional succession Talk has revived of some of the more prosperous regions splitting off from the rest of the country. This first came up under Yeltsin when Vladivostok and some of the oil-rich regions in Siberia (especially Tatarstan) were inching towards leaving Russia. Tatarstan even started issuing its own passport and opening embassies. Putin quickly squashed these ideas and pulled all the regions back under central control. Fewer than a tenth of Russians would favor breaking up the sprawling nation by allowing the secession of one of its regions, according to a poll by the independent Levada Center posted Thursday.


Just eight percent of respondents to the survey, held over November 15-18, said they felt positively about the region where they lived breaking off from Russia, while nine percent said they would favor any of the country’s regions declaring independence. Russian Patriotism Has Declined Under Putin The proportion of Russians who consider themselves patriots has dropped by eight percent since President Vladimir Putin first took office 13 years ago, according to a new survey released by the independent Levada Center pollster in November. Sixty-nine percent of respondents professed to be patriots in the poll held at the end of October, down from 77 percent in 2000.

has changed somewhat since the turn of the century. Nearly Half of Russians Say Parliament’s Lower House Is Unneeded Nearly half of Russians think that their federal parliament’s lower house, the State Duma, plays too little a role in the country’s political process to be needed, a survey showed November 26. Only 39 percent of respondents (down 8 percentage points since 2011) said the country could not function normally without the Duma, while 43 percent said the legislature was largely redundant, compared with 32 percent in 2011. Only 16 percent of respondents said they had positive feelings about the Duma’s work, down 4 percentage points since 2011.

The survey also found that Russians’ definition of patriotism

Banks and Finance CBR shutters major retail bank for money laundering, sparks crisis fear

enforce anti-money laundering rules more rigorously;

Russia’s central bank (CBR) pulled the operating license of Master Bank on November 20, sparking fears of a fresh wave of the financial crisis.

improve the transparency of capital flows to improve tax collection and reduce the size of the grey economy;

force a consolidation on the banking sector and reduce the number of banks operating;

The decision was due to a new tougher policy at the CBR that is designed to do a number of things:


•

Improve the stability of the bank sector which is under pressure from the economic slowdown.

Bankers and consumers are all too painfully aware of the 2004 minibank crisis that nearly lead to a systemic meltdown that started exactly the same way: the CBR pulled the license of the aptly named Sodbiznessbank for money laundering and stealing its depositors money. A survey conducted by Izvestia after Master Bank was closed shows that all major banks, including Sberbank, VTB24, Gazprombank, Alfa-Bank, Bank of Moscow and Promsvyazbank, expect a significant inflow of

deposits as of the end of November. Alfa-Bank was open during the past weekend so that everybody who wanted to could open accounts and transfer money from competing banks. In that case panic swept through the banking sector as banks shut down interbank payments to smaller banks and rumors of a CBR black list circulated that only exacerbated the problem. Similar problem are apparent today. The leading banks complained loudly saying that the CBR decision to pull Master Bank’s license was already being felt on the interbank market. As the smaller banks (about 800 from a total of 900) are effectively


treasuries for their corporate owners they rely very heavily on the interbank market for funds. Freezing the interbank market could lead to a systematic meltdown. According to bne reports VTB, Russia’s second biggest bank, had already reduced its lines to UralSib, another major private bank, on the back of a return of the ‘black list’fears that dogged banks in the 2004 mini-crisis. This time round bankers took the news of a major retail bank’s demise with a bit more sagacity. Flash reports circulated and tweets flew, but by lunchtime most people seem to accept that the bank had been caught doing wrong and that was the end of it. By the next day state-owned giants Sberbank and VTB had taken over settling the bank’s payments. The deposit insurance fund also confirmed it would bail out all savings accounts up to a maximum of RUB700,000 ($22,000). Master Bank, the 41st largest bank in Russia by deposits according to a RIA Novosti rating, was guilty of conducting “large scale suspicious operations” and had violated laws against money laundering and the financing of terrorism, the central bank said in a statement explaining its decision. The CBR says that the bank owes almost $1bn to its depositors. Russia’s Deposit Insurance Agency said Wednesday that initial estimates put payments owed to depositors at Master Bank at about 30 billion rubles ($914 million),

which the insurance fund will have to reimburse. The closure of Master Bank was particularly scandalous as Russian President Vladimir Putin cousin Igor Putin has been a board member of the bank since 2010. The new CBR chairman Elvira Nabiullina has launched a campaign to tidy up the sector and get rid of the little banks. Master Bank is the 23rd bank to lose its license this year, according to the central bank. The following week Nabiullina called in all the heads of the major banks to explain the new strategy and to reassure them there were no black lists of little banks to be closed. CBR drafts law to regulate credit interest rates The Finance Ministry and Central Bank have submitted a set of amendments to the consumer credit law that will be discussed by Duma deputies, which seek to fix the extent of the regulator's powers in controlling consumer loan interest rates in the last days of November. The CBR is worried the rapid expansion of consumer lending – one of the few really profitable bits of business in the sector at the moment – will turn into a bubble. This is the second attempt to bring to fruition the idea of interest rate regulation — although this one offers more flexibility to lenders. The first version of such


amendments which disappeared from the agenda a week before they were to be discussed by deputies last month, allowed the Central Bank to determine the maximum allowed cost of credit within a 30 percent range of the average market price. The current version of the amendments narrows the regulator's freedom in managing the interest rates, by limiting it to a set level which is related to the market. Each quarter the Central Bank will have to calculate and publish the average market cost of credit, including interest rates and account fees. Banks will then have to set their credit rates at no more than the published rate. However, there will be exceptions which allow banks the right to set the rates outside the prescribed 30% level. Sberbank CEO calls on Russian cbank to cut stake in bank to 25% The shares of the Russian central bank in the country’s largest lender Sberbank should be gradually decreased to 25%, Sberbank CEO German Gref said November 14. “In my opinion, it should not happen quickly. But it would have been better for Sberbank, and for the central bank, and for the entire sector, if 25% of our shares were gradually sold on the market and the central bank had kept the remaining 25%,� Gref said.

The regulator now holds 50% plus one share in Sberbank, the minimal stake allowed by law. Sberbank has new five year strategy; balanced growth, quality over quantity Sberbank announced its new 5 year strategy for 2014-18. The bank targets more balanced development, with the story moving to quality from growth. Still, the goals are ambitious: ROE at 18-20% and CIR at 40-43%. We expect more details during the Strategy Day, scheduled for 14 November in London. The new targets match the adjusted expectations, and are consistent with the more muted macro outlook for Russia. The greater dependency on operating efficiency makes the investment case more geared to the quality of the execution. The current share price, already advanced 17% from the 30 August low, fairly reflects the outlined objectives; we reiterate our Hold recommendation. Key targets. Sberbank sees assets and earnings doubling by 2018 from 2013 levels, keeping or increasing presence on most of the markets. To recap, for FY13, management expects NI to reach RUB 370bn and therefore in 2018 Sberbank aims to post earnings of RUB 740bn, which is well above the current Bloomberg consensus estimate for FY16 of RUB 460bn. Management targets ROE at 1820% (in line with our expectations for 2013-15) supported by a further increase in operating efficiency (CIR is to decline to 4043% from 47% in 1H13). Major


pressure on the bottom line is set to come from narrower NIM (down up to 100-130bp) and high CoR (120-140bp vs. 110bp guided for FY13). T1 CAR is targeted at more than 10%. Growth of operations. Sberbank sees higher growth in retail lending (17-18% YoY) vs. corporate (15% YoY). In Russia, within the retail portfolio, the bank targets rapid expansion of credit cards and other higher marginal products, which should help it to shield NIM. In corporate, the key focus will be on SME clients. The number of products per client is set to increase 40-70% to 2.7% in retail, 5.1-5.4% in SME and 6.0% for large corporate clients. The bank aims to up the share of current accounts, likely positive for NIM. It also targets further expansion in F&C income and non-banking products. International business. The share of international operations in earnings is set to increase to 910% from the current 7%, with no M&A activity eyed in the next few years. Assets and earnings growth is targeted at 2.5-3.0x within the next five years. ROE of international operations is seen at 14-16% and CIR at 45-48%. In 2015, Sberbank might revise its country strategy in Turkey should that be needed. IT and personnel. Sberbank has set new targets for modernisation, with competition from new retail banks growing. The further development of remote access channels might allow the network of branches to be remodelled and

the staff count to be optimised. According to CEO German Gref, the bank plans to cut personnel 12% in 5Y. Centralising the IT processes would also likely support the further optimisation of operations. The bank also aims to optimise IT costs. Dividends. Sberbank has left its dividend payout ratio at 20%, claiming that it might increase it in the future. As the government aims to increase the dividend payout ratio for state owned companies to 35%, we see more pressure on Sberbank. In our view, relatively high profitability and more balanced growth would likely stimulate a further gradual increase in the payout ratio in the medium term. Fitch on Russian banks: Situation stable, demand for funding on rise On October 24, Fitch Ratings published a review of the Russian banking system for three quarters of 2013, describing the situation in the sector as stable. However, what is noteworthy is that amid higher demand of companies for loans and a slower inflow of customer money to banks, the dependence of the banking sector on public funding reached the record high. According to the agency, banks borrowed about RUB800bn from the Bank of Russia in 3Q 2013 and thereby raised the amount of public funding to the absolute high of RUB4.4tn (11% of all their liabilities). This is more than the amount raised at the peak of the


crisis in 2009 - RUB3.6tn (12% of liabilities), Fitch analysts say in the review. With a traditional jump of lending at the year-end in mind, Fitch expects lending to increase by about 20% in 2013 (versus 1518% expected earlier). While lending was growing, the demand of banks for funding was driven by a slower inflow of money both from corporate and from retail customers. Corporate deposit accounts increased 1% in 3Q and 9% in 1H 2013. Retail deposits added 2% versus 8.7% for the first half-year. "Thus, in 3Q 2013, banks were spurred to borrow more from the Bank of Russia by two factors - a slower inflow of customer money and a jump of demand for corporate loans," says Alexander Danilov, Senior Director of the Bank Analytical Group, Fitch Ratings. "Besides, the Bank of Russia took a number of steps to facilitate banks' access to funding." On the one hand, the growing dependence of banks on funding from the Bank of Russia has been observed for long, but unlike the crisis period, it is not indicative of urgent demand for liquidity, he says. Loans to buy new houses could be 40% of all mortgage loans in 2014 This will boost housing construction, but makes the mortgage portfolio more sensitive to risks of the construction sector The Russian mortgage market has been slowing down for the third

consecutive year: mortgage loans granted as of the end of the first six months of 2013 increased 26% versus 57% in 2012. Cooling off on the market resulted from a firm rise in interest rates on mortgage loans started at the end of the last year. The trend reversed only in the second quarter of 2013. Sberbank was the first to announce a decrease in rates, followed by VTB24 and AHML. Over the period March-May 2013, the largest mortgage lenders decreased rates on the most popular loan programs by 1 percent on average. Being no longer able to compete in prices, many lenders started easing requirements to borrowers and terms of granting mortgage loans, including the requirement in respect of a down payment in the first place. Furthermore, a number of banks eased requirements in respect of a debt load on a borrower's family budget. The largest state banks continue strengthening their positions on the mortgage market. The top-3 leaders - Sberbank of Russia, VTB24 and Gazprombank increased their share from 65% to 68% of all loans provided in the first six months of 2013. The share of the largest state banks (Sberbank, VTB24, Gazprombank, Sviaz-Bank, and Bank of Moscow) together with refinanced loans of AHML is over 74% of the market. VTB24 made the biggest contribution to the strengthening of state banks' position: its share


rose from 14% in 2012 to 18%, lending growing 2.5 times faster than the market. Sberbank's share in total loans has been falling for the second consecutive year: it was 43% as of the end of 1H 2013 versus 45% in the same period of 2012. The growth of state banks' share is also driven by the return of Bank of Moscow to the market: in 1H 2013, the bank provided by 15 times more mortgage loans than over the same period in 2012, its share on the market up from 0.1% to 0.9%. Finance Ministry wants to stop recapitalizing Russian Agricultural Bank The government should stop recapitalization of Russian Agricultural Bank, Finance Minister Anton Siluanov said. “We have said that we must stick to responsible credit policies. Russian Agricultural Bank is a commercial bank and not an organization giving unrecoverable loans. We see that such a recapitalization must take place for the last time,� Siluanov said, died by Prime. In 2013, the government will add RUB30bn to the capital of the bank after RUB40bn in 2012. Russian Bank Debt to Reach 10 Trillion Rubles in 2013 The total amount of money Russians owe to banks will rise to 10 trillion rubles ($300 billion) by the end of this year, the CBR said.

A boom in consumer lending in Russia this year has sparked concern that the market may be overheating, with officials warning of possible financial volatility if the trend is not checked. Almost half of the 10 trillion rubles owed to banks is unsecured consumer borrowing, the head of the financial regulator's bank regulation department Vasily Pozdyshev told Vedomosti business daily. Russian Banking Sector Rising Concern Over NPLs Despite slow economic growth in 3Q13 and in October, loan growth is in line with initial expectations and shows no signs of weakness. The funding side surprised on the downside, but very low corporate deposit inflows were offset by CBR and Finance Ministry injections. Market concerns over Mechel (see below) and growth in nominal corporate NPLs suggest the risks of deteriorating corporate loan quality have started to materialize. The poor economic growth of previous months did not affect loan growth. Corporate loans grew 13% y/y in October, while retail loans were up 30% y/y, meaning banks have been playing a role in mitigating the economic deceleration. The funding side was less clear. Retail deposit growth remained at 22% y/y and showed no increased preference for forex deposits. However, corporate deposit inflows in October were RUB300bn less than expected, with growth


decelerating to 13% y/y, apparently reflecting tight budget policy and possibly poor industrial output growth. The entire YTD growth in corporate funding is foreign-currency-denominated and equivalent to $26bn. As in previous months, the state compensated for the lack of ruble funding. Total CBR and Finance Ministry exposure to banks grew by RUB300bn in October and RUB1.5tr YTD, with the state now funding 9% of banking assets.

The recent concern over corporate NPLs appears to be materializing sooner than expected. In October, nominal corporate NPLs increased significantly, though they are still only 4.4% of the corporate book. Recent market jitters over Mechel are the first sign that credit quality is becoming more of a problem, as slower-than-expected GDP growth rate is inevitably affecting companies’ financial position. The recent revocation of licenses, as in the case of Master Bank, is also negatively affecting the real sector, as a number of companies have to withdraw their corporate and salary accounts from the troubled banks.


Most Russian banks meet Basel III requirements Nearly all Russian banks meet the new Basel III capital requirements, Mikhail Sukhov, Deputy Chairman of the Bank of Russia, said on October 25. The expert opinion that bank assets may reduce might result from the situation in the countries where the capital adequacy ratio is close to the standard indicator 8%, he said.

"As for Russia, we have a certain buffer in terms of the ratio of total assets to capital which enables banks to easily meet the Basel III standards at an initial stage," he said. Banks will need more capital at "later stages", but "this is over a long term", added Mikhail Sukhov.


Sovcombank took over GE Money Bank

approvals are received from the FAS and the Bank of Russia.

On October 28, Kostroma-based Sovcombank announced the takeover of GE Money Bank controlled by General Electric Corp. (GE).

Experts think that the retail bank with such a network may be interesting to buyers, the more so as GE might sell the bank at the price not higher than its capital.

GE Money Bank says that with its help, Sovcombank will change from a multi-regional into a fully federal bank, acquire a lot of new customers and gain access to banking technologies used worldwide.

Gazprombank still hopes to enter British banking market

The Russian bank says that both banks will be united under the brand of Sovcombank shortly after closing of the transaction. No changes in the strategy are planned, the united bank to continue servicing its target audience. The transaction will be closed as soon as all necessary

Having dropped its plan to conduct investment banking activities in Great Britain, Gazprombank is considering other business options in this country, Gazprombank says in its annual report. According to Bloomberg, last year, the bank withdrew its application for a license from Britain's Financial Services Authority when the latter demanded more information about Gazprombank.

Economics CBR's Inflation Targeting goal put to a Test Russia’s CBR kept rates unchanged in November despite poor 1.3% y/y GDP growth. The CBR is not doing well in its fight against inflation which ticked up in 19-25 November to 6.3%. The problem was a rapid rise in food prices, especially milk.

The central bank’s First Deputy Chairwoman Ksenia Yudayeva admitted in November that the 6% inflation target for 2013 is almost certain to be missed. The weekly CPI structure reveals that disinflation in eggs and deflation in gasoline helped inflation to abate. However, this positive development was


completely offset by the WoW tickup in a range of items. The new CBR head Elvira Nabiullina, the former Minister of Economy, was perceived as caring more about GDP growth than monetary stability since she took over. However, she is looking a lot more hawkish now and the central bank has passed its first test, convincing the market of its independence. The Cabinet has been unable to contain inflation, which is 6.4% y/y as of now, above the CBR’s 6% target. Though next year’s tariff freeze will help keep price growth in check, low competition on the domestic market will continue to put upward pressure, and the CBR will have to keep rates unchanged

in anticipation of a pick-up in CPI in 2015, or otherwise provoke an overheat. Russia best BRIC for Doing Business, Progress Fails to Boost GDP Growth Russia overtook China to become the BRIC where it is easiest to do business. This year, Russia ranked 92nd in the World Bank’s Doing Business report, advancing by 19 places in one year and 31 in three years – the most impressive progress in its peer group. This progress, however, is driven by secondary indicators that do not support Russia’s economic trend. As the core business climate indicators show little improvement.


The Facts Russia’s rating in Doing Business improved to 92nd place from 111th: As a result, Russia is now ranked higher than China (96th) Brazil (116th) and India (134th). Although it still has some catching up to do with Mexico, South Africa and Turkey, over the last three years Russia has made the most progress among its peer group, jumping 31 places. Bureaucratic barriers lowered: Russia’s biggest success was in the ease of connecting new business to electricity distribution networks, where it rose from 188th place last year to 117th this year. The other drivers of Russia’s progress in the rating this year included easing the process of starting a business and registering property. In addition, Russia continued to improve the ease of tax administration, which improved from 105th two years ago to 56th this year. Russia’s advance in Doing Business driven by secondary indicators: Of the index’s 10 key indicators, Russia’s position is notably better in five areas related to ease of administrative activities. The progress in these areas most likely reflects officials’ quick response to Putin’s recent call to advance Russia’s ranking from 120th to 20th place by 2018. Though the increased internal political importance of Doing Business appears to have helped,

the success has been achieved in areas that are not of the biggest concern for the business community. But barriers to core business operations remain high. Progress was less evident in the key areas of operating and investment activities (the first five indicators in the table below). Russia remains at the bottom of the ranking in terms of ease of obtaining construction permits and ease of conducting international trade, limiting investment and export growth; there was also no progress in investor protection, adding pressure on Russia’s capital account. The challenges in the core business climate areas explain why Russia, despite showing the strongest headline improvement in the ranking in its peer group, is one of the weakest in terms of current versus pre-crisis GDP growth rates. The sharp deceleration in GDP growth from 3-4% y/y in 2011-12 to just 1.3% y/y in 9M13 further highlights how Russia’s seemingly strong progress in the overall ranking failed to translate into better GDP growth. We thus reiterate our recently downgraded and below-consensus 1.5% y/y GDP growth for 2013E and expect further deceleration to 1.3% y/y in 2014E.


Russia’s monetary policy became more coherent under the new team But as part of the wider fight to get the economy back on its feet the CBR has been fine tuning its tools to better implement its inflation targeting policy. It simplified the interest rate corridor to eliminate any uncertainty over the policy rate, which is currently the auction repo rate of 5.5%. The intervention band on the forex market was remastered to allow more ruble flexibility. Finally, starting February 2014, the CBR will shift to providing short-term liquidity rather than funding for banks. Deutsche Bank sees Russia’s GDP growth to speed up to 3.3% in 2014 Russia’s growth is still lacklustre. GDP rose 1.3% in January– September, the Federal State Statistics Service said at the end of November, citing preliminary data. In October, the Economic Development Ministry reduced its forecast for GDP growth in January–September to 1.3% from 1.5%.

Russia’s GDP will rise 3.3% in 2014 as compared with a 2.0% growth projected for this year, Yaroslav Lisovolik, chief economist of Deutsche Bank said. The bank expects the Russian economy to rise thanks to a favorable situation in the global economy, which is expected to grow 2.7% in 2013 and 3.7% in 2014. In general most analyst agree with Lisovolik and believe Russia will grow by 3%-3.5% in 2014. However, the EBRD is more pessimistic. Russia’s economy may grow 2.5% in 2014 from 1.3% expected in 2013, the EBRD said in November in its annual survey on developing countries. Russian Federal budget posted deficit in October According to the Finance Ministry, the federal budget posted a small deficit in October due to a pick-up in spending growth, and the cumulative surplus shrank to 1.1% of GDP in 10M13 from 1.2% in 9M12. In nominal terms, this is still a RUB600bn surplus, but expenditures are expected to increase in November-December,


accounting for almost 25% of annual projected spending; as a result, by year-end, the budget would only be balanced if oil averages $110/bbl this year. Russian real disposable income drops, depress retail Real disposable income contracted 1.3% year-on-year in September following 2.1% year-on-year growth in August (3.6% year-onyear for 9M13) The decrease in real incomes comes due to a steep drop in entrepreneurial incomes Real wages rose 8.2% year-onyear in September following 6.8% year-on-year growth in August (5.9% year-on-year for 9M13) Real wage growth should dip to 5-6% year-on-year in the next few months We expect real disposable

income to grow 3.9% in 2013 We have raised our 2013 real income growth forecast Retail trade was up 3% YoY in September after being up 4% YoY in August (3.8% YoY for 9M13) Real incomes contracted 1.3% YoY in September after growing 2.1% YoY in August Retail lending growth remains strong (31% YoY in September, 33.8% YoY in August) The share of food items in retail trade increased to 46.3% in September 2013 from 45.9% in September 2012 We expect 3.6% retail trade growth for 2013 We lowered our 2013 retail trade forecast due to deceleration in real income growth from May to September We expect retail lending growth to slow to 25% YoY by year-end


Russian capital investment continues to contract in September Capital investment contracted1.6% YoY in September after a 3.9% YoY contraction in August (1.4% YoY for 9M13) Investment activity is pressured by large capital outflows and turbulence in the global markets We expect a 0.2% decrease in capital investment for 2013 We decreased our 2013 capital investment forecast due to weak 9M13 investment dynamics and continuing capital outflows We predict the tariff growth cap will boost investment activity in 2H14


Russia raises corporate property tax Under tax code amendments approved at the beginning of November, the method for determining the property tax paid on commercial space based on book value can be replaced with the valuation indicated in the property register that more closely reflects the actual market value of the property. Officials say the current tax paid on commercial properties is too low relative to the huge profits they generate. The Duma took up and passed the amendments to the tax code with exceptional speed. They enter into force next January. According to the amendments, the new method can be applied to commercial and office space only. The tax on other types of space (e.g. industrial facilities) will still be determined according to book value. To be eligible for the new method, at least 20 % of a property’s floorspace must be dedicated to commercial purposes. Property tax is collected by regional governments, which can decide the details of the tax within a framework set forth under the federal law. Only a few regions will introduce the new tax practice immediately next year. This is because the majority of regions are unlikely to be able to make the requisite legislative amendments to their own tax codes before the end of this year. The City of Moscow has been the biggest proponent of the reform. Moscow saw a substantial drop in

tax revenues last year after changes were made in laws governing transfer pricing and conglomerate taxation. Taxes collected from conglomerates such as large energy companies are now shared among all regions where the business group has operations. Earlier, the lion’s share of taxes went to the region where company headquarters were located. The City of Moscow this week decided to introduce the new tax arrangement from the start of next year. The new method applies to buildings with floorspace of at least 5,000 m2. In practice, this means large commercial centres such as shopping malls and office buildings are affected. In response to an initiative from business lobbies, the tax rate next year will be cut to 0.9 %, which is below the minimum set by federal law for Moscow. Under the change, Moscow’s tax revenues will increase next year by about 17 billion rubles (€390 million), or about 1 % of Moscow’s budget revenues. CEE/CIS region makes biggest reforms to paying taxes in 2012 Central and Eastern Europe and the Commonwealth of Independent States (CEE/CIS) made the most progress in reforming their tax systems last year, according to a PriceWaterhouseCoopers (PwC) survey released on November 20. "The economies in the [CEE/CIS] region showed the largest fall in both the time to comply [with tax payment rules] (220 hours) and the number of payments (25.1 payments), and apart from the


Middle East have the largest fall in the Total Tax Rate (15.7%)," said the report "Paying Taxes in 2014", which is based on the World Bank’s "Doing Business" survey. Concerns over ruble stability rising However, there are rising concern over ruble exchange rate stability are rising amongst both companies and individuals, which suspect the CBR will allow the ruble to devalue as a non-interest way of stimulating the economy in 2014. The Russian ruble dropped to a record low exchange rate against the bi-currency basket comprising $0.55 and €0.45 at the start of December. The CBR blamed the fall on ‘external conditions’—ie the Fed’s policy is dictating the ruble rate. Having said that the ruble is not as vulnerable to the Fed’s tapering as Russia is one of the few emerging markets that doesn’t suffer from a current account deficit. Still, since mid-2008, corporate foreign debt has increased from just below $500bn to $640bn. Only 20% of the growth came from

ruble-denominated loans and thus the repatriation of Russian capital previously moved abroad was rather modest and the corporate sector must be ready to service the debt. Consequently companies want to build up forex cushions. Of the total corporate foreign debt, some $120bn is subject for redemption or refinancing within the next 12 months, so currency risks are an important argument for companies to accumulate forex deposits. This makes Russia’s capital account rather vulnerable, and further deterioration can be triggered by a negative external factor, such as a decision by the Fed to taper its QE program. In addition to fundamental concern over current account stability, the CBR’s move toward inflationtargeting means it will provide less support to the ruble exchange rate. This lends weight to the perception that ruble depreciation could be used to boost economic growth. As a result, many companies and private individuals expect the ruble to come under more pressure in 2014. In particular, the consensus on the market is that the CBR support for the ruble is likely to decline after the Sochi Olympics.


Russian export growth trails peers, current account surplus shrinking steadily Russia’s export growth is weak, the current account surplus is declining and the country faces $120bn in short-term foreign debt payments. The CBR this year had to sell $22bn to support the ruble, bringing its reserves to close to $500bn, down from pre-crisis peak of over $600bn, and its ability allow free floating of ruble is under question.

The ministry’s 2013 capital flight forecast amounts to $70bn. In October, Deputy Economy Minister Andrei Klepach said that the 2013 outflow will be below expectations at $60bn. The central bank has reduced its forecast by $7bn to $55bn. Russia’s retail trade growth accelerated to 3.5% y/y in October but investments continued to fall In October, retail trade picked up from a low 3.0% y/y in September to 3.5% y/y, slightly exceeding market consensus. But, the all important fixed investment numbers continue to fall, declining 1.9% y/y. It is clear now that with 10M13 investments down 1.2% y/y, even a pessimistic zero investment growth forecast for the full year may turn out to be too positive. Russian FDI by a half in 9M13 on capital repatriation from Cyprus

Russia’s 2013 capital outflow not to exceed $60bn

According to Rosstat, FDI inflow to Russia totaled $6.5bn in 3Q13, with growth decelerating to 38% y/y from 60% y/y in 1H13.

Capital outflow from Russia will not exceed $60bn in 2013, Economic Development Minister Alexei Ulyukayev said.

The resulting $18.6bn FDI inflow for 9M13, up 52% y/y, is still impressive compared with the 20% y/y average annual growth seen in 2011-12.

“The outflow is no more than $60bn for the year. We are not changing the outlook, it’s an estimate,” Ulyukayev said, cited by Prime.

But this year’s statistics are heavily affected by the Cyprus crisis, which forced the repatriation of Russian capital. The strongest effect is seen


in the trade sector, which previously did not see any material inflows from Cyprus but in 9M13 received $4.1bn, including $1.5bn in 3Q13. Net of those one-off items, the 9M13 FDI inflow growth would have been only 19% y/y, in line with previous years, and only 7% y/y in 3Q13, suggesting no fundamental improvement in the role of foreign direct investment in the Russian growth story. Russia’s foreign debt rises 0.2% to $55.bn in October Russia’s foreign debt increased by 0.2% to $55.891 billion as of November 1, the Finance Ministry said late on Tuesday. This was as gross international reserves fell to $500bn as of the same date. Below is a breakdown of the government’s foreign debt, as provided by the ministry: Debt as of November 1 Eurobonds Debt to international financial institutions Debt to countries outside the Paris Club Debt to former members of the Council for Mutual Economic Assistance Debt to Paris Club members Commercial debt inherited from the Soviet Union Debt on foreign currencydenominated OVVZ bonds Foreign currencydenominated guarantees

$bn 40.67 1.62 1.061 0.947

0.174 0.022 0.006 11.395

Russia's poverty rate down to 12.1% -- lower than USA During the first six months of 2013, the number of the poor in Russia increased by 0.7 million persons to 18.4 million. The subsistence level increased to RUR 7.372 per person per month in the second quarter of 2013 from RUR 6.385 a year earlier. The subsistence level is RUR 7.941 for an able-bodied individual, RUR 5.043 for a retired person, and RUR 7,104 for a child. The minimum wage in Russia is RUR 5,205. On November 22, the State Duma approved a law on increasing the minimum wage to RUR 5,554 with effect from January 2014. Russia's poverty rate is now 12.1%, less than the USA rate of over 15%.


Infrastructure Russia Puts Out $612 M Tender to Upgrade 2018 World Cup Football Venue

Russian Railways - 12 routes for liberalisation of locomotive traction

The Russian government put out a RUB20bn ($612 million) tender to reconstruct Moscow's iconic Luzhniki Stadium, the venue for the 2018 World Cup football final on November 20.

This marks the start of next phase of rail reform and privatisation.

Work has already begun to rip out the seats at the hulking arena, which will be hollowed out and furnished with new stands. Only the outer shell is to be kept intact. The winning contractor, to be announced on December 12, will have 3 1/2 years to complete all necessary work. The World Cup organizers had initially put the costs of the refurbishment at $800 million, though that was before they announced a more frugal approach to building for the tournament. The tender is posted on the government's procurement website zakupki.gov.ru.

After a request from Arkady Dvorkovich on the liberalisation of locomotive traction in the summer, Russian Railways has sent a proposal to liberalise 12 routes; however, private companies are largely unhappy with the choice of routes due to the low volumes transported on them (some 20,000t/month). Sergey Malcev in his letter points out that only five of the routes comply with liberalisation criteria.


ECM Russia to levy 30% tax on dividends of unknown beneficiaries

minority investors in the traded unit, which holds most of TNK-BP’s assets.

Russia will levy a 30% tax on dividends if companies fail to disclose their beneficiary owners, according to a law signed by President Vladimir Putin on November 3, Prime reported.

President Vladimir Putin urged Rosneft this month to pay RN Holding shareholders market price. His government is seeking to counter accusations of poor corporate governance at state companies and attract investment into the economy, which has slumped to its weakest pace since 2009. Prosperity and Templeton Emerging Markets Group have said Rosneft’s offer is too low.

The new mechanism of paying the income tax and the profit tax will also be applied to the income received from securities issued by Russian firms but registered on a custody account of a foreign nominal holder, a foreign authorized holder or on a custody account of depositary programs. Rosneft Sale of TNK-BP Stake Raises Concerns of Squeeze Out Plan Rosneft sold almost 10 percent of RN Holding to unrelated parties, after acquiring the oil unit as part of its $55 billion acquisition of TNKBP this year, sparking concerns that it may squeeze out minority shareholders. Rosneft sold the stake in the third quarter for 97 billion rubles ($3 billion), according to a financial report yesterday. Analysts from RN Holding shareholder Prosperity Capital Management, VTB Capital and JPMorgan Chase & Co. asked Rosneft executives on a public call to explain the deal. The stake was sold at a lower average price than Rosneft paid for Russia’s thirdlargest oil producer or offered to

Rosneft Chief Executive Officer Igor Sechin said last year and has reiterated since that the company has no obligation to buy out minority shareholders, who held about 5.3 percent of RN Holding, given the structure of the deal. Russia, France to invest $400 mln in joint fund Russia's state-backed private equity investment fund said on November 29 it would team up with state-backed French bank Caisse des Depots (CDC) to invest 300 million euros ($407.23 million) in an existing joint investment platform. The creation of the Russia-France investment fund worth a total 1 billion euros was backed by the two countries' presidents, Vladimir Putin and Francois Hollande, earlier this year in a bid to boost bilateral direct investment.


The Russian Direct Investment Fund (RDIF) was set up two years ago with capital of $10 billion with a brief to win over strategic investors who have steered clear of Russia due to concerns over rampant graft and the rule of law. Russia equity market falls as November worst month for EM fund flows since the August selloff The outflow dynamics of all EM funds for November continued to remain negative for the fourth week running, similar to what was seen in August but at a slower pace. The total outflows stand at $6,017m as reported by All EM Funds. The net outflows were not a surprise, given the further drop in risk sentiment. From November 20-27, for instance, the MSCI EM Index dropped 0.7% and the RTS Index shed 2.8%. Outflows from EM funds were largely driven by Brazil ($270m), followed by Russia ($192m), India ($165m) and South Africa ($52m). China reported inflows to the tune of $450m. Overall, BRICS reported $230m in outflows versus $32.02m in inflows the previous week. German retailer Metro mulls float of 25% of its Russia unit in Russia Europe's fourth-biggest retailer, Metro, is considering floating a 25% stake in its Cash & Carry

Russia unit in the spring, according to reports. The initial public offering could value the unit at no less than €4bn. It will be competing for investors' attention with local rival Lenta, which is also planning to float in London early next year. Lenta is controlled by state bank VTB and private equity fund TPG. Russia’s IGSS may hold IPO in London in 2014 IGSS, Russia’s seismic exploration operator, will hold an IPO on the London Stock Exchange in 2014 the company said. Shareholders Nikolai Levitsky and Sergei Generalov have begun to consolidate their stakes with Generalov buying a 13% stake from Gennady Timchenko and Levitsky announcing plans to raise his interest in IGSS to 40-50% from the current 26.8% before December, in order to float about 20-30% of shares at the IPO in London next year, a source said. After the deal Levitsky will make a buyout offer to other shareholders and the expected purchase price will stand at $15 per common share or $30 per global depositary receipt, sources said. The owners may issue additional shares to jointly retain a controlling stake, a source said.


RDIF and KIC launch RussianKorean Investment Platform The Russian Direct Investment Fund (RDIF) and the Korea Investment Corporation (KIC) have signed a memorandum to form the Russian-Korean Investment Platform. The signing ceremony took place in the presence of Russian President, Vladimir Putin, and Korean President, Park Geunhye, in Seoul. The investment platform will focus on cross-border investments which fulfill Russian-Korean strategic interests. The parties intend to invest in companies and projects that facilitate trade and encourage investment cooperation between the two countries. 78% of Russians choose nongovernment funds for pension savings Russia’s pension fund business is growing. Following the reform in 2002 Russians had the option to put some of their money with nonstate pension funds and increasingly people are doing just that. The bulk of of Russia’s economically active population, or 77.49% of people who receive salaries officially, have decided to put their pension savings on accounts with non-government

funds in January–September, Vedomosti business daily reported Tuesday, citing the state-run Pension Fund’s statement. In accordance with the pension reform, the 2014 pension savings of working citizens will be distributed among retired people. The 2015 and 2016 pension plan says that an individual can choose between saving 6% of the payroll tax on their wage with a private fund or Vnesheconombank (VEB), or to let it be spent on current state needs for a theoretically higher compensation in future. VEB provides the lowest interest rate on the pension funds market. US' invest funds acquire 45% of Russia's ALROSA IPO shares U.S.-based investment funds have acquired 45% of the shares placed by Russia's uncut diamond miner ALROSA in IPO in October. Other investors were from Europe and the U.K. and all investors are long-term. She also said that hedge-funds accounted for 7% of the company's shares placed in the IPO. ALROSA placed 1.181bn shares, or16%, in the IPO in October at RUB35 each.


DCM Mechel stock plummets as forced to restructure $1bn of debt Mechel came to an agreement with most of its creditors not to test the terms of the company's loans in 2014 and spread over payments under a $1bn syndicated loan for a year Mechel is the most debt-burdened Russian steel-making company: its net debt was USD 9.55 billion as of June 1, 2013 (no updates available). Mechel breached covenants in respect of loans in 2012 and notified thereof in its annual report. Mechel's net debt to EBITDA ratio was 7.2 instead of 5.5 required. The ratio of EBITDA to net interest payments was 1.85 instead of at least 2.65. The maximum overall debt Mechel could afford under the terms of credit agreements is USD 11 billion. As of December 31, 2012, the debt was USD 9.6 billion - this covenant was met. Mechel managed to renegotiate the other covenants. The net debt to EBITDA ratio was agreed at 7.5 as of June 30 and December 31. The ratio of EBITDA to interest payments was to be at least 1.5. However, the company had to negotiate a revision of these new terms as well because of the unfavorable situation on the steel market. It became known in October that Mechel's ore mining

subsidiary Mechel-Mining asked the members of the USD 1 billion syndicated loan not to test the covenants until 2015 and to adjourn repayments from 2014 to the years 2015-2017. The rumors that negotiations about covenant holidays failed were one of the reasons for the steepest fall in Mechel's shares on November 13 first on the Moscow Exchange where the company's worth slumped to the record low of USD 862 million (ordinary shared dropped by 41.35), and then on the NYSE where the company fell in price by 24%. State-controlled bank VTB has agreed to join other creditors in restructuring mining group Mechel's $9.6 billion debt, a source close to VTB said November 18. Share of non-resident investors in Russian state bonds market totaled 25% In early October 2013 non-resident investors' presence in the market for Russian state bonds totaled 25%, according to CBR. Non-resident investors have considerably increased their presence in the market for Russian state bonds since January 2012 (3.7%) having reached all-time high in May 2013 (28.1%). After that non-residents were leaving from the market for Russian state bonds and their number stabilized in August - October 2013.


The Bank of Russia explained that non-residents increased their presence due to liberalization of OFZ market and authorization to

buy bonds directly excluding Russian agents.

Sectors Government approves LNG export liberalization

updates on coordination of gas supplies.

The Russian government approved LNG export liberalization. The relevant amendments to the current legislation should pass the State Duma and come into force in the coming weeks.

Russia Among 7 Best Countries for Expatriates to work in

The ruling breaks Gazprom’s long standing monopoly on exports and is designed as a competitive goad and a warning for all Russia’s giant resource producers. According to Energy Minister Alexander Novak, the right to export LNG will be granted to companies with a +50% state stake and those whose exploration license as of January 2013 includes plans to build LNG plants. Though there is still no clarity on how the government will coordinate gas supplies in order to avoid competition between pipeline gas and LNG, Novak said there will now be competition on the markets for Gazprom pipeline gas and LNG. Novatek plans to supply LNG to both Europe and Asia. We currently see the news as NEUTRAL for the main beneficiary of liberalization, Novatek, as it was widely expected and priced in. We await further

Russia was named seventh best country for expatriates in an annual survey involving more than 7,000 expats worldwide and described as one of the largest of its kind. HSBC Expat Explorer analyzes three major criteria for various countries - quality of life as a foreigner, the opportunity to make money and conditions for raising kids. China topped the list, followed by Germany, Singapore, Cayman Islands, Australia, Canada and Russia. AvtoVAZ started manufacturing engines and gears under a license agreement with Renault-Nissan AvtoVAZ reported that it launched the manufacturing of engines and gears under a Renault-Nissan license agreement in November. The agreement began with the production of1.6 liter105 horsepower engines and several modifications of the J-family gears


supplied for the production of the Lada Largus and various Renault vehicles. AvtoVAZ engine production capacity is 300,000 units per year, while the level of localization will reach 80% once the company begins the moulding and machining of engine components. Russia’s toy store Detsky Mir to triple store chain to 610 by 2018 Russian retailer of children's goods Detsky Mir will almost triple its chain to 610 units by 2018, CEO Vladimir Chirakhov said in November. “The long-term strategic goal of Detsky Mir is to raise the business value ninefold by 2018. We also plan to raise the number of stores to 610 from 211 through organic business growth,” he said, cited by Prime. Chirakhov did not rule out the possibility of mergers and acquisitions which will lead to a growth of about 2.5-5.0%. Chirakhov said that the net profit of Detsky Mir will soar to RUB5bn by 2015 from about 456 million rubles in 2012. In 2013, the store chain is likely to have a RUB1bn net profit, he said. Italy, Russia seal 28 deals During a trip to Italy Putin signed a total of 28 agreements in the finance, energy and industry sectors at the Italian-Russian summit held in the northeastern

Italian city of Trieste on November 26. The agreements included deals between Italian energy companies Eni and Enel and the leader of Russia's petroleum industry Rosneft as well as between Italian insurance and financial group Sace and Russia's bank Vnesheconombank. Other deals were signed between Italian bank Ubi Banca and Russian Transcapital bank as well as between Italian cable maker Prysmian and Russia's largest electricity transmission and distribution grid company JSC Rosseti. Volkswagen to €1.2bn in Russia till 2019 Germany's Volkswagen will invest 1.2 billion euros to develop its business in Russia, which it considers Europe's strategic market, till the end of 2018, the company said in a statement in November. Volkswagen expects its sales in Russia to decrease within 5% in 2013, the company said in September. Russian facilities of Volkswagen are located in the Kaluga Region, and in the Nizhny Novgorod Region, where the company use some facilities of GAZ Group. Share of smartphone sales exceeds 50% late Oct The share of smartphone sales has passed a 50% milestone of


Russia’s total sales of mobile handsets and reached 51% in the week starting on October 28 and ending on November 3, major cell phone retailer Euroset said on November 25. In the same period of last year, smartphone sales accounted for just 33% of sales, the retailer said. In the two following weeks, smartphone sales respectively accounted for 52% and 54% against 35% and 33% a year earlier, Euroset said. In monetary terms, smartphone sales brought 83% of cell phone retailers’ combined revenue in October 28–November 3 against 69% a year earlier. In the two following weeks, smartphone sales respectively generated 84% and 85% of the total revenue compared with 72% and 70% in the same periods of 2012. Russia’s grain harvest up 25.4% to 90.3 mln tn by Nov Russian farmers increased grain harvest by 25.4% on the year to 90.3 million tonnes in bunker weight as of November 1, the Federal State Statistics Service said on November 19. This is a good harvest and will help bring down inflation in 2014. On the whole, grain was milled from 87.6% of sown area as of the reported date.

Grain stock at producing and processing enterprises increased 10.3% on the year to 36.3 million tonnes as of November 1. Grain reserves with harvesting enterprises rose 27.8% on the year to 24.7 million tonnes, while grain reserves with processing enterprises shrank 14.6% on the year to 11.6 million tonnes. Farmers milled 7.6 million tonnes of sunflower seeds, produced 28.9 million tonnes of sugar beetroot and 29.6 million tonnes of potatoes. E-Commerce Market Gets High Ranking Russia was ranked thirteenth out of 30 developed and developing countries for its E-commerce market, but will have to resolve basic infrastructure issues to maximize its potential, according to a study released November 20. The Global Retail E-Commerce Index by management consulting firm A.T. Kearney ranked the countries in terms of the level of short term investment returns that companies can expect. Russia's advantages include the largest population of Internet users in Europe — 70 million users, 33 million of whom already purchase goods online — and an open market in which no single player holds a share higher than 4 percent, which spurs both multichannel and online retailers to focus on Internet sales.


The market has already reached $10 billion in yearly sales with a projected yearly growth of 18 percent up to 2018. Mobile Phone Penetration Hits 168% Mobile phone subscriptions in Russia stood at 239.5 million by the end of September, equal to 168 percent of the population, up from 234 million three months earlier, data from market research group AC&M showed on 19 November. The total number of valid SIM cards was up 5.4 million from the same period a year ago. The number is higher than 100 percent because many people own several SIM cards. Russia's population reached 143 million in 2012, according to the Federal Statistics Service. AC&M provided the following data from millions of subscribers,including those in Armenia, Belarus, Georgia, Kazakhstan, Russia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan. Auchan to open 10–14 stores in Russia in 2014 French retailer Auchan will open 10 to 14 stores in Russia in 2014, Jean-Pierre Germain, CEO for the country. The company has already signed agreements to build three classic Auchan hypermarkets and three Auchan City hypermarkets, Germain said. The company will

also build four Nasha Raduga stores within a radius of 500–600 kilometers from Moscow, he said. The company also plans to launch an Auchan Drive store brand in 2014 to provide customers with online sales, Germain said. Auchan has also completed a €16m rebranding of the hypermarket network Real, comprised of 16 stores in Russia. The company bought the chain operating in Eastern and Central Europe in April from Germany’s Metro Group. Russia’s car output falls 2% to 1.6m units in January–October Russia’s car production fell 2.3% on the year to 1.6m units in January–October, according to a statement of the Federal State Statistics Service. In October, the output fell by 0.7% on the year. The country’s truck output fell 2.8% on the year to 168,000 units. Bus production also decreased 6% on the year to 43,200 units, while the manufacturing of trolleybuses rose 17.5% to 403 vehicles. OPEC says $160-a-barrel oil by 2035 The Organization of the Petroleum Exporting Countries raised its forecasts for its crude-oil basket price and long-term world oil demand growth, according to the latest annual World Oil Outlook report.


The report from OPEC, which provides a view on the world oil market from 2010 to 2035, said oil prices CLZ3 are forecast to "remain stable in the long run," though its estimates are a bit higher than last year`s report. OPEC said it expects its nominal OPEC Reference Basket price (ORB) to average $110 a barrel over the period to 2020 and then rise to $160 by 2035. In its 2012 report, OPEC had said it assumed that the ORB nominal price would average $100 a barrel over the medium term before rising with inflation to reach $120 by 2025 and $155 by 2035. The ORB is made up of a dozen different types of crude oils. Moscow, St. Petersburg and Kiev will be top-5 retail growth centres in Europe Within five years the largest cities in Russia and Ukraine – Moscow, St. Petersburg and Kiev – will be leaders in terms of retail sales growth dynamics in Europe, according to Jones Lang LaSalle. With an annual growth of 4.2% to 4.8% the cities will take third, fourth and fifth place respectively in the ranking of the most actively growing retail markets in Europe. According to Jones Lang LaSalle, Moscow, St. Petersburg and Kiev are among the 20 largest European markets by population, while the purchasing power of the residents of these cities is significantly lower. Moscow, for example, takes first place by population but by purchasing power it takes only 46th with purchasing power per

capita of 11,000 euros. St. Petersburg is at 14th place by number of inhabitants but at 54th place by purchasing power (6,300 euros). Kiev is at 17th place by population, but according to purchasing power it takes 57th place, the lowest of all the countries surveyed (3,600 euros). According to the research, the leaders by purchasing power are the citizens of such small cities like Zurich (38,600 euros), Oslo (25,300 euros) and Luxembourg (27,200 euros). Moscow is the largest consumer market in Russia and accounts for 17% of all retail sales in the country. Gazprom valued at Russia's most valuable brand at $37bn State-owned gas giant Gazprom topped a new annual rating of Russia's top brands, accounting for about half of the combined value of 40 brands in the study. Gazprom's brand was valued at 1.2 trillion rubles ($37.4 billion) by New York-based brand consultancy Interbrand, in part due to the company's assets in industries other than energy resources. The runners-up in the survey, released Tuesday, were telecom giants MTS and Beeline, priced at 192 billion rubles ($6 billion) and 155 billion rubles ($4.8 billion) respectively. The top 10 also comprised another telecom operator MegaFon; miner Norilsk Nickel; state-owned bank


Sberbank; oil companies TNK and LUKoil; Baltika brewery; and Tatneft oil company.

oil companies, 11 percent, and metals companies, 7 percent.

Telecoms accounted for 19 percent of entries on the list, followed by Rank 1 2 3 4 5 6 7 8 9 10

Brand

Industry

Gazprom MTS Beeline (company VimpelCom) MegaFon Norilsk Nickel Sberbank TNK-BP Lukoil Baltika Tatneft

Oil and gas Telecommunications Telecommunications

Brand value RUBm 1262.0 192.1 155.5

Telecommunications Metals and Mining Banking Oil and gas Oil and gas Brewery Oil and gas

114.2 111.5 106.7 98.8 75.2 56.2 53.8

Russia overtakes Europe in shopping mall construction Russia is ranked number one in Europe in terms of building retail space but still has a lower ratio of shopping malls to people, according to research by Cushman & Wakefield. With over 456,200 square meters of retail space built in just the first half of 2013, Russia topped the rankings for shopping center construction, with Turkey coming second, having built 422,500 square meters of retail space over the same period, the report said.

Russian takes in a good harvest Russian farmers increased the grain harvest by 26% on the year to 92.6 million tonnes in bunker weight as of Monday, according to a statement of the Agriculture Ministry. Grain was milled from an area measuring 41.2 million hectares, or 93.5% of the sown area. The yield amounted to 2.25 tonnes per hectare as of Monday, compared to 1.89 tonnes per hectare as of the same date last year.


Aeroflot launch new regional airline Aurora Airline Aeroflot announced the launch of Aurora Airline on November 6, which will be based on its Far East subsidiaries Vladavia and SAT Airlines. The BoD approved the lending of up to RUB430m ($13m) to the new airline. Reportedly, Aeroflot Group will have a 51% stake in the new carrier, while the rest will be owned by regional authorities. Vladavia and SAT Airlines account for 4% of turnover. The carriers were acquired by the Aeroflot Group from Rostec in 2011. In 9M13 Vladavia and SAT Airlines accounted for 3.4% and 0.3% of Aeroflot Group’s passenger turnover, respectively. Both companies have been loss-making. Last year, Vladavia recorded a net loss of $107m and SAT Airlines $4m. In 1H13, Vladavia recorded a net loss of $1m and SAT Airlines $2m. Aeroflot Group currently owns a 52% stake in Vladavia and 100% in SAT Airlines. Russia’s Gunvor mulls buying $3.3bn assets in America Commodity merchant Gunvor, long known in the industry as one of the key traders of Russian oil, is studying growing opportunities in North America resulting from the shale oil boom and is looking at select trading assets including parts of JPMorgan Chase & Co.'s business, Reuters reported late on Tuesday.

Gunvor chief executive and cofounder Torbjorn Tornqvist said the firm saw opportunities in North America and had been in contact with the Wall Street bank, which put its physical trading business up for sale this summer for around U.S. $3.3bn. JPMorgan's assets include oil storage tanks in Canada and its Henry Bath global network of metal warehouses. The bank sent out its prospectus to several potential buyers last month as it decided to sell the unit due to tighter regulations and political scrutiny on banks active in commodities. Russia Surpasses Europe in Shopping Mall Construction Russia is ranked number one in Europe in terms of building retail space but still has a lower ratio of shopping malls to people, according to research by Cushman & Wakefield. With over 456,200 square meters of retail space built in just the first half of 2013, Russia topped the rankings for shopping center construction, with Turkey coming second, having built 422,500 square meters of retail space over the same period, the report said. Internet industry to contribute 1.5% to Russia’s 2013 GDP Russia’s Internet industry will account for 1.5% of the country’s gross domestic product (GDP) in 2013, Mikhail Seslavinsky, head of the Federal Agency on Press and Mass Communications said.


“We expect 1.5% of the GDP to be formed by the Internet industry, including payments,� Seslavinsky said, cited by Prime. He also said that the number of Internet users in Russia is constantly growing. According to the agency, 40% of Russian citizens surf the Internet for more than an hour and a half every day.

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