bne:Chairman's Monthly List — February 2015

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

Contents: Top Story Moscow mourns Nemtsov's death

INVISIBLE HAND: Sowing the seeds of an oil-price rise bne:Chart – S&P downgrades Russia to junk, but figures tell different story Russia investment climate halved Politics – the good Russian Newspaper Novaya Gazeta nominated for Nobel peace prize Duma to toughen penalty for tax scams Criminal charges against Uralkali CEO Baumgertner dropped Russia's lower house mulls bill to remove NGOs from Foreign Agent List Bill on seizure of corrupt officials' relatives assets to Duma MPs may have to take Russian loyalty oath FSB forced to downsize due to economic woes

Russia to establish a commissioner for women's rights Russian police solve 90% of murder cases Russia to launch an anticorruption social network Yukos International UK BV wins multimillion dollar case against Rosneft Russia's upper house approves Administrative Proceedings Code Politics – the bad Soldiers' Mothers committee head hit with new charges Russia's Duma proposes a draft bill to tighten controls on media registrations Russian incursions into European airspace triple in the last year Amnesty International slams Russia on human rights record Politics – the ugly Navalny jailed for 15 days State construction contracts inflated by up to 40%

Rosneft publishes executive pay, hides Sechin's salary

CBR tries options in case of SWIFT system exclusion

Polls, mood, sociology A quarter of Russians fear for their jobs Two thirds of Russians believe war with the West is a real possibility Seven out of 10 Russian believe on change on Ukraine policy needed Inflation tops list of Russia's concerns

BRICS development bank takes one step closer to reality Sberbank reported to be selling Slovak and Hungarian units Sberbank boosts Turkey unit’s capital as assets top $37bn RBI set to exit Poland and Slovenia, reduce exposure in Russia Russia's Rosbank to cut 10-15% of staff in 2015

Eight out of ten Russian say their lives have been adversely affected by sanctions Number of smokers down 17% since 2013 Anti-American sentiment reaches a 25 year high

Economics Russian government a bit more upbeat on economic prospects for 2015, but confusion still reigns bne:Chart – Energy sector dominates analysis of Russian tax revenue

Banks and Finance CBR releases January's bank sector data

Russia's January PMI data shows steepest decline in private output since 2009

Tough year ahead for Russian banks

Russia says so long, inflation targeting, CBR cuts rates 2%

December's rate hike feeds through to deposits and loans Russian government approves mortgages subsidies

Russian government to spend only 1% of anti-crisis package in 1Q15

Banking NPLs may top 20% in 2015 Russian government approves mortgages subsidies

Russian Economics Ministry lists systemically important companies Russian economy lacks growth drivers

Russian food retailer freezes prices on soaring inflation Most of 2014 capital flight was debt payments, Sberbank says Unemployment starting to creep up Germany's trade with Eastern Europe plummets

Massive military expenditures put budget spend well ahead of schedule, January deficit Government to cut spending 10% in 2015 Despite cuts, deficit to reach 3.2% of GDP in 2015 Russia to use $50bn from Reserve Fund to plug deficit

MACROWRAP CBR's macroeconomic forecast for 2015

Gazprom woes hit budget revenues Infrastructure

Russian inflation hits 16-year high in January Food prices to peak at 24% in July Russian retail slump in January more modest than feared Russia's real disposable incomes drop sharply year-on-year in December Capital investments contract in January Industrial production and services still growing in Jan Russian exports continued to decline in December on back of oil price fall BUDGETWRAP Russia shows strong budget revenues and spending in January

Aeroflot – A Turbulent Year Ahead Aeroflot turnover up 10.7% in January versus market decline of 8.3% Aeroflot launches budget airline with RUB99 tickets Mexican carrier to buy ten more Sukhoi Superjet-100 Russia to invest $200 million into Cuban airports Turkish Stream pipeline to bypass Ukraine with gas deliveries Russian shipbuilder says postSoviet record by building for nuclear submarine simultaneously Container turnover in Russia down 25.8% in January

ECM Portfolio investment returning to EMs, Russia outperforms

Russian corporate bond issues pick up Sectors

Gazprom to list shares on Hong Kong exchange

Russia's media sector hard hit by economic crisis

Magnit Private placement of minor stake oversubscribed

Car sales to fall by more than third in 2015

Globaltrans Founding shareholders selling again

Russian mobile shopping rivals that in western Europe says PayPal

DCM Moody's downgrades Russia to junk rating Russia dumps $22bn in US bonds China’s Dagong rating agency Russian debt safer than US Russia to offer longer debt on back of recovering oil price

Russia to remain world’s largest energy exporter to 2035 Russian residential construction to fall by 15% in 2015 Turkey becomes Russia's secondbiggest gas import customer after Germany

Top Story Moscow mourns Nemtsov's death

to a funeral procession in honour of Nemtsov.

Tens of thousands of Muscovites turned out to mourn the death of Boris Nemtsov, the flamboyant opposition leader who was gunned down outside the walls of the Kremlin late on Friday night February 27.

"Size of today's Moscow march suggests Nemtsov murder galvanized rather than intimidated.

An encouraging sign," tweeted NYC professor Mark Galleotti.

The mood was grim as somewhere between 50,000 and 100,000 demonstrators marched in almost total silence along the embankment of the river Moskva and then onto the bridge passed the spot where Nemtsov was shot in the back.

Originally the opposition movement were planning to hold a protest march on March 1 however in the event was cancelled and changed

The marchers carried thousands and thousands of Russian flags all topped with a long black piece of cloth to mark the death of one of Russia's most outspoken and long serving public figures.

"Nemtsov's death is a wake-up call for Russia. People don't want to live in a country like this," former Prime Minister Mikhail Kasyanov told bne, who will take over the mantle as the most senior opposition figure following Nemtsov's death.

However, Kasyanov stopped short of accusing the Kremlin of ordering Nemtsov's death, but hopes that it will act to politicise the bulk of Russia's society, which has remained largely apathetic apart from a few demonstrations in recent years.

The authorities were quick to acknowledge the importance of the giving. The original protest march had been given permission, but only on the outskirts of the city.

However within hours of the opposition leaders calling for a funerary much in the centre of the city authorities responded by giving the go ahead.

Russian President Vladimir Putin was it's extremely quick to react to the news of Nemtsov's death, calling it a "provocation" and has said that he will personally oversee the investigation.

A criminal investigation has already been launched with the authority saying they are pursuing possible links to Islamic extremism following Nemtsov's condemnation of the Charlie Hebdo shootings, but have not linked to his death to his political activities, causing much ridicule in the press. Likewise while the international press were out in force at the match very little if anything appeared on state-run TV. The death of a senior Russian politician who was once nominated

by Boris Yeltsin as a possible presidential successor has been extremely embarrassing for Putin.

The State media apparatus are mre likely to continue the job of obfuscation in order to ensure no blame is attached to the Kremlin.

While the western press has been fast to link the Kremlin to the killing, on the basis of no evidence, the Russian authorities have been

just as fast to link the killing to pretty much everything else that is remotely plausible.

Talking on the Rossia state television channel. Russian MP and former State Duma speaker Gennady Seleznyov described the killing as "a serious and I am sure prevocational operation carried out by western intelligence services to create instability in Russia again, so there are more radicals on the streets, and more radical statements and actions."

Well it remains unlikely that the Kremlin itself ordered Nemtsov's death, the most likely possibility floated so far is some fraction within the Kremlin or the security services took matters into their own hands.

What happens next remains unclear. The size of this March 1 march is the biggest since the rebirth of Russian politics with the

protests on Bolotnaya square in December 2011 following a fixed Duma election -- first significant popular protests since Putin took power in 2000.

However this protest like the previous ones remains confined to Moscow and the effective smothering of the news by the state media means that the high emotions in Moscow are unlikely to spread far into the regions. Indeed while St Petersburg held a similar March other marches in other regional capitals were refused.

[Read our longer piece on Nemtsov's death and the failure of the liberal opposition to make any inroads into Russian domestic politics: http://www.bne.eu/content/story/o bituary-nemtsovs-death-andoppositions-failure-change-regime1]

INVISIBLE HAND: Sowing the seeds of an oil-price rise

Is the oil price crash over? In midFebruary, Brent crude traded at $63 a barrel, up from a $45 low a month earlier. Does that sharp rise mean oil will now climb steadily back above $100?

Triple-digit oil prices, after all, have become the normal in recent years.

The black stuff spiralled to almost $150 in late 2008, ahead of the global financial crisis – before falling back, as the world economy endured it worst peacetime shock

for 80 years and asset markets collapsed.

As global growth returned, though, and traders remembered that the populous emerging markets were still becoming more populous, their energy demands ever rising, oil quickly recovered. During the three and a half years from early 2011 to mid-2014, oil was above $100 pretty consistently. Prices then started falling last June, by some 60% to their mid-January low. But

Brent crude is now up 36% during the four weeks to the time of writing. So has the oil market now turned?

Temporary dip Forecasting the oil price is a mug’s game. But crude is so important to modern life, and the path of the global economy, that for all the prediction pitfalls, any decent economist needs to take a view.

With energy importers like the US and EU benefitting from cheaper oil and exporters suffering, price predictions can often appear partisan – driven more by emotion than rational analysis.

During these recent months of East-West conflict, I’ve heard numerous Western analysts express pleasure at the impact of cheaper crude on the Russian economy, for instance, while happily predicting further falls – perhaps without thinking about the painful impact on their own energy producers (in the UK’s North Sea, for instance, or US shale fields).

My (entirely data-driven) opinion is that the price dip is temporary and, even after the recent increase oil remains heavily over-sold. But prices aren’t always driven by data, of course. So we could easily see oil temporarily drop further, in another speculative short-selling frenzy.

Eventually, though, supply-anddemand realities apply. In my view, the fundamentals – high drilling costs and pitiful discovery rates on the supply-side, coupled with ever-rising global demand –

point to oil between $80 and $120. I’d also say that – beyond the hype, and the fact that traders must react in the short term to hype if everyone else is reacting, even if they don’t accept it – such fundamentals are widely understood. As such, unless we see another 2008-style systemic meltdown on global markets, I’d venture $100 will be back in sight towards the end of 2015.

To understand why oil prices are likely to recover, we must understand why they fell. One major reason is Janet Yellen. Last autumn, the Federal Reserve chairman announced that the US is to rein-in quantitative easing.

Since then, on the strength of less virtual money-printing, the dollar has surged. The passing of the QE baton back to Japan, with the Eurozone about to follow, has helped drive the greenback to a near seven-year high against the yen and the euro to an 18-month dollar low. Given that oil is priced in dollars and all major Opec producers peg their currencies to the dollar, when the US currency rises, the quoted oil price axiomatically falls – which is what we’ve seen since Yellen made her move.

I believe that, for all the huffingand-puffing between Athens and its creditors, a deal will soon be cut to keep Greece in the Eurozone.

Germany has blinked during every previous euro crisis and Berlin has too much political capital invested in monetary union to allow “Grexit”, which could then see other “Club Med” countries leave, threatening not just the euro but

the entire “European project”. After a Greek settlement, and once euro-QE kicks in, the single currency will strengthen. That will push the dollar down over the coming months, raising headline oil prices.

Another reason oil prices fell from last autumn, of course, aside from the dollar, was the wave of new crude extracted from “tight” oil formations in America. Since 2009, US shale oil production has grown from almost nothing to 4% of global output. That’s driven the US' total crude production up from 7.5mn to around 10mn barrels daily – approaching peak US production of 11.3mn barrels back in the 1970s.

A supply increase of this magnitude clearly didn’t go unnoticed by the Opec exporters’ cartel. At a time of souring relations between the US and Saudi Arabia – not least due to American overtures to Iran in the battle against Islamic State and support for Qatar, a key backer of the anti-Saudi Muslim Brotherhood – Opec decided not to cut their export quota. Riyadh convinced other cartel members to suppress prices, instead, protecting Opec’s market share by squeezing upstart US shale producers – which have high production costs and often heavy debts – so as to knock them out of the market.

When oil is below $80, many shale producers, particularly the relatively small outfits that have driven US' recent production increase, simply don’t make money. So production stops, as

does investment in future wells.

American energy companies, large and small, are now rapidly laying off field workers in response to cheaper oil. In January, the US “rig count” was down 10% on the month before, amounting to a drop of no less than a third since October. The number of active domestic US wells has, over just four months, plunged to a threeyear low.

Discovery drought The oil price rise since mid-January admittedly reflects other supplyside developments, not least concerns over fighting in the Middle East. Violence in Libya has lately shut all major ports, reducing oil exports to just a trickle. Iraq's semi-autonomous Kurdistan Regional Government has also threatened to withhold crude exports as part of a broader dispute with Baghdad. Having said that, many traders have been struck by the extent to which highcost US shale outfits are now suffering due to cheaper oil. While some such producers have hedged their price exposure, many are unhedged as well as heavily indebted, which puts them in a very weak position. Depleting far more quickly than conventional wells, ongoing shale production when prices are low and below cost requires ever more debt capital, which is currently scarce. No wonder, given increasing market chatter about the non-performing loans of US shale producers potentially sparking another “Lehman moment”.

Oil market bears point out, rightly, that after four years of rising US

shale production, and an on-going ban on almost all energy exports, US crude stocks are now high at almost 420mn barrels. That puts downward pressure on prices.

Having said that, with the US still importing a net 9mn barrels of oil daily, a long way from “energy independence”, this stockpile could quickly deplete. The threat that cheap crude poses to domestic production will also eat into inventories.

While judging between falling US rig counts and high stockpiles, traders have also lately absorbed news that in 2014 global oil discoveries fell for the fourth year in a row – the longest run of annual declines since the 1950s, despite the incentive of $100-plus crude during much of that period.

The 16,000 barrels of oilequivalent found last year was less than half of total 2014 consumption and the lowest for six decades.

While “conventional” crude costs up to $60 per barrel to produce, unconventional oil – shale, deepwater and tar-sands – generally absorbs $80-$100. Over the last decade, more than two-thirds of the 12mn-barrel rise in daily global oil production that has prevented prices spiralling in the face of fastgrowing demand has come from “unconventional” sources. Lower prices make much of that production uneconomic while deterring investment in future capacity – sowing the seeds of an upcoming price rise.

The fundamental supply-side trends, then, point to more

expensive energy. Then there’s the demand side, where the fastgrowing emerging markets now account for over half of total global consumption. In each of the last three years, world production has lagged actual usage by upwards of 3mn barrels daily, mainly due to rising emerging market demand.

While this reality has lately been overshadowed by the US “shale revolution” and the drama of Riyadh defying Washington, the insatiable energy appetite of the East, in the face of ever-rising oil production costs, remains one of the defining economic trends of our time. It will soon reassert its grip on the global market for crude.

Liam Halligan is Editor-at-Large at bne IntelliNews

bne:Chart – S&P downgrades Russia to junk, but figures tell different story

Standard & Poor’s downgrade of Russia to junk status on January 27 was met by the Kremlin with accusations of US-influenced politicking. Russian news agency RIA Novosti quoted Deputy Foreign Minister Vasily Nebenzya as saying that he has “no doubt that this was done not even on the prompting but on direct orders from Washington”.

While there is little argument that 2014 proved to be a damaging year for the Russian economy, a closer look at some basic macroeconomic figures would offer some credence to the Kremlin’s cries of foul play – especially when compared to other economies still ranked investment grade.

S&P’s main justification for downgrading Russia to ‘BB+’ – its highest non-investment grade – was the country’s newfound lack of access to international capital markets. The implicit message there is that, in the not-too-distant future, Russia simply will not be able to service its debt obligations.

The widely used metric of public debt as a%age of GDP is seen as a broadly reliable indicator of a country’s level of indebtedness. A glance at the bne:Chart below reveals not only how healthy Russia is in this respect, at 9.2% of GDP, but also the comparative fragility of other nations – including those whose sanctions led to the S&P downgrade.

Without access to capital markets, Japan would have to use more than two years’ total GDP to service just a single year of public debt. Russia, on the other hand, could pay its own off with little more than a month of output.

Even this measure fails to take into account that governments do not have their countries’ entire GDP as a liquid fund for servicing debt, but only the product that comes back to it in the form of tax revenues.

Taking the hypothetical scenario to the extreme where the Russian economy ground to a halt, its only buffer would be its reserves. With no other source of capital, it would have no option but to dip into its coffers to bankroll the material needs of the nation and service its debt obligations with its own cash.

Even in this extreme case, Russia is set up to withstand a worst-of-

Looking then at tax revenue as a%age of total public debt, the picture is even bleaker for the highly-indebted developed countries (HIDCs), as the second bne:Chart shows. It would take the US over three years of real income to service a year of public debt and Japan over seven years. Russia’s tax revenue, however, would cover its obligations twice over in a single year.

the-worst scenario for a surprisingly long time.

As the third bne:Chart shows, the Central Bank of Russia (CBR) could cover just shy of two years’ worth of debt obligations with its reserves. The US Federal Reserve, on the other hand, could cover just three days’ worth of debt and would run out of funds shortly after lunchtime on day four.

Curiously, a look back at the CBR’s historical reserve levels shows that, in terms of import cover, Russia is actuallyhealthier now

than it was when ratings agency Fitch upgraded it to investment grade in 2004.

While these scenarios go some way to illustrating the robustness of the Russian economy, they do not factor in the high, and growing, levels of inflation that Russia is suffering – 11% at the time of writing. This alone would shorten Russia’s lifeline considerably.

Conversely, though, the scenarios also work off of the assumption that Russia’s access to capital markets has dried up completely as a result of sanctions, which is not the case.

See the web version of this piece http://www.bne.eu/content/story/bnechartsp-downgrades-russia-junk-figures-tell-different-story

Russia investment climate halved

A survey into Russia's investment climate by Detail communication found that investment confidence has halved since the crisis hit, however, a third of respondents are expected the Russian stock market to bounce off the bottom this year and put in double-digit returns.

"Russia is arguably facing its most challenging times in modern history. For the country, 2014 was marked by tensions in Ukraine, sanctions, plummeting oil prices, change in ownership of Crimea,

currency devaluation and economic recession. Needless to say, this did not go well with investors. By the end of the year, the market capitalization of the entire Russian stock market was less than that of one single corporation – Apple," said Timofey Pletz, head of communications at Detail, which interviewed top business leaders in Russia and Europe. "Almost a third of the respondents showed great optimism and expect to see double-digit growth from the Russian stock market in 2015.

That’s despite the fact that none of

them forecast economic growth in 2015."

complaint the decision was politically motivated.

But despite the expectation of a big 'dead cat bounce' this year, simpler to the tripling of asset prices in the spring of 2009, confidence remains close to historical lows. On a scale of 1 to 10 Russia had an average score of 5.6 for its investment climate before the crisis, which has since more than halved and is now equal to 2.5, the survey found.

Around 70% of the investors gave Russia two of the lowest possible scores.

Investors are also pretty pessimistic about the prospects for near-term economic recovery: none of the respondents expect the Russian economy to rebound in 2015. The majority (44%) believe it will happen in 2017. Almost 20% say it will happen only in five years’ time.

Investors are concerned with a smorgasbord of problems, but political risk and geopolitical tension are top of the list.

That said one of the worries investors don’t have is the fear that Russia will default on its debt: 92% of the investors are either completely not worried or have slight concerns about Russia defaulting on its debt.

"A Russia default is also out of the question, with only 8% [of respondents] saying they are very worried about it," says Pletz. Its an issue that bne IntelliNews raise in a recent chart, http://www.bne.eu/content/story/b nechart-sp-downgrades-russiajunk-figures-tell-different-story asking if rating agency Standard & Poor's recent decision to downgrade Russia to junk status was justified; a look at the macroeconomic fundamentals raises a big question mark over the decision and bolster's the Kremlin's

As for attractive investment opportunities, the oil and gas remains the stand out sector of choice for investors: "Despite underlining the concern about how dependent Russia remains on oil prices, which plummeted massively in 2014, almost half of the investors (38%) named the oil and gas sector as the most attractive industry," says Pletz.

These companies are the big winners from devaluation as their costs are in rubles, but most of their revenue is in foreign currency and they’re least likely to default.

Metals and mining industry, also big winners from devaluation, along with agriculture tied for second place.

So now it is over to the government to follow through, but interestingly the survey concluded domestic issues are top of the pile when it comes to making Russia a more attractive investment proposition: aalmost 50% of investors say reform and diversification of the economy is the top priority to make Russia more attractive to investors. Peace in Ukraine and sanctions lift are in

third and sixth place, respectively, the survey found.

Politics – the good Russian Newspaper Novaya Gazeta nominated for Nobel peace prize Independent investigative Russian newspaper and bastion of the opposition movement Novaya Gazeta has been nominated for the 2015 Nobel Peace Prize.

The Norwegian Nobel Institute does not publish names of nominees, but Norwegian experts compile lists.

The $1.2mn award will be announced in October.

Duma to toughen penalty for tax scams A bill has been submitted to the Russian Duma and that would significantly increase the penalties for employers that cheat on their taxes and specifically try and lower employee earnings reporting.

Paying people using brown envelopes to avoid tax payments is endemic in Russia. According to the draft the penalty for dodging employee taxes will be 40% of the nonpaid tax or a minimum of RUB150,000 ($2275).

In addition employers who fail to report salaries for employees that are employed under employment or service contracts will face even stiffer fines: they will have to pay a penalty of 50% of the nonpaid tax

but not less than a minimum of RUB200,000 ($3034).

Criminal charges against Uralkali CEO Baumgertner dropped The end to an ugly saga, criminal charges against former fertiliser giant Uralkali's CEO Vladislav Baumgertner were dropped on

February 20.

Baumgertner found himself in the

centre of the storm and a political wrangling between Russia and Belarus in 2013 when he went to visit the Belarusian prime minister only to be arrested on his way back to the airport.

At stake was a joint-venture between Uralkali and the Belarusian Potash producer that is the government billions of dollars in revenue. Uralkali had just declared that it would stop selling its product through the Belarusian Potash Company (BKK), a trading cartel that dealt primarily with state-run Belaruskali. Tempers flare them both sides accuse each other for cheating on the agreements and selling potash of book for their own corporate profit.

Baumgertner arrest shocked the political elite in Russia who have assumed that senior executives of Russian companies are off-limits

for this kind of political harassment. Baumgertner was even shown on the Belarussian evening news being made to do a "perp walk" to a small and uncomfortable jail cell.

Held on abuse of office charges, the negotiations to get him back home to Russia have been long and protracted. The Uralkali board dismissed Baumgertner as the company’s CEO at the end of 2013 and he also quit the company's Board of Directors in the following year. Clearly enough time has passed now so that the affair can finally be put to bed. Baumgertner was extradited to Moscow on November 22 and then placed under house arrest in December.

In September 2014, he was released on a RUB15mn ruble ($241,400 at the current exchange rate) bail.

Russia's lower house mulls bill to remove NGOs from Foreign Agent List Russia's Duma adopted in the first reading on February 20 a bill on removing non-governmental organizations (NGOs) from the controversial Foreign Agent List.

The bill was submitted by President Vladimir Putin and is aimed at fixing legal loopholes, Olga Kazakova, Deputy Chair of the State Duma Committee on Public Associations and Religious Organizations said.

The bill proposes excluding NGOs from the list upon requests of the NGOs after occasional compliance inspections. To qualify the Justice

Ministry will conduct an unscheduled audit and make a decision within three months of receiving the application. The Federal Law on Non-Governmental Organizations will include possible reasons for these audits.

Bill on seizure of corrupt officials' relatives assets to Duma A bill that would empower courts to seize the assets belonging to relatives of corrupt officials has been submitted to the Duma by the Just Russia party lawmaker Oleg Nilov.

The bill is designed to couner the common dodge by corrupt officials of transferring the ownership of their ill gotten gains to family members.

This is the second time Nilov has submitted the bill; previously in 2013 the Duma rejected it.

The bill would allow for inspections that if they reveals money, valuables, other property or income of which the legitimacy cannot be confirmed, the property must be confiscated.

MPs may have to take Russian loyalty oath A bill submitted to the Duma would require deputies from both the upper and lower house to take a loyalty oath to the national interests of Russia if passed.

The bill was introduced by A Just Russia party at the end of February

by Mikhail Yemelyanov, first deputy head of the Just Russia party.

Russian police solve 90% of murder cases

FSB forced to downsize due to economic woes

Russian police so 90% of all murder cases in 2004, according to the Russian investigative committee head Alexander Bastrykin.

Russian Secret Service (FSB) is reportedly cutting staff by 10% to save money due to the economic slowdown. Likewise the police force will also see up to 10% of staff cuts.

Nearly all regional branchs of the FSB has received orders from the agency's chief Alexander Bortnikov to reduce staff, reports St. Petersburg news site Fontanka.ru.

The first cuts will be made to the FSB's regional financial planning and economic divisions, and the jobs of retiring staff members will not be filled this year, the report said.

Similarly, the federal police force is reducing staff by "at least 10%," according to an order by the Interior Ministry's head, Vladimir Kolokoltsev.

Russia to establish a commissioner for women's rights Russia is to establish a commissioner for women's rights.

The idea was put forward by the Public Chamber members, which includes presidential advisor Sergei Markov and spin-doctor-in-chief, who criticised a recent proposal from the Labour ministry that would cut women's pension payments to 20% less than those of men.

Bastrykin said that the investigative committee together with the Federal Security services (FSB) had solved 89.3% of all murder cases in 2014 (88% point in 2013) and 94.8% of all rapes (93%).

Last year the investigative committee dealt with more than 225,000 criminal cases and closed over 120,000 of them which is 5000 more than it managed to complete in 2013.

Russian President Vladimir Putin set up the investigative committee as a parallel law enforcement service that is answerable only to him which has been prominent in investigating politically motivated cases. The committee is very much old school and its numbers should be taken with a pinch of salt.

Russia to launch an anticorruption social network In March the Russian government hopes to launch and all Russia anticorruption social network called Vzyatke-NET (so no to bribes), which is designed to improve the connection between the public and the authorities as part of the government's anti-graft campaign.

Yukos International UK BV wins multimillion dollar case against Rosneft The Amsterdam District Court ruled on February 10 in favour of Yukos International UK BV, a company affiliated with former shareholders of now-defunct company Yukos, in the case brought against Russian state-owned oil producer Rosneft and its affiliate Promneftstroy.

The final award will now be calculated by the court, and it will take time, Barbara RumoraScheltema, partner of NautaDutilh

law firm, who acted for Yukos International UK BV. Russia's upper house approves Administrative Proceedings Code Russia's Federation Council has approved an Administrative Proceedings Code to regulate court procedures during the hearing of administrative offenses by general jurisdiction courts and the Supreme Court that is a step towards cleaning up the judicial system and improve enforcement.

Politics – the bad Soldiers' Mothers committee head hit with new charges A leader of the Russian civil rights groups Soldiers' Mothers has been hit with a fraud investigation after publicly defined the Kremlin.

Lyudmila Bogatenkova, 74 years old, who chairs the rights group's North Caucasus branch in Budyonnovsk, was detained on suspicion of fraud in mid-October after speaking out against the Russian army's decision to secretly send soldiers to fight in east Ukraine.

Now Russian investigators have hit Bogatenkov with a second count of fraud on top of charges issued against her in October, her lawyer said in February.

Investigators claim Bogatenkova promised a man to have his son freed from police custody for the payment of RUB800,000 ($12,000).

Bogatenkova claims the case is politically motivated and an attempt to smear her name.

In late August, Ella Polyakova, a member of the Kremlin's human rights council, cited Bogatenkova as the source of claims that Russian soldiers in Dagestan had been offered RUB250,000 each to go to Ukraine.

Russia's Duma proposes a draft bill to tighten controls on media registrations The Russian Duma has introduced a draft bill that would tighten the process of registration mass media outlets and provides new grounds for denying licenses to foreign mass media. New powers were also awarded to the Communication and Mass Media Ministry, which is in charge of evaluating applications.

The grounds for denying licenses are pretty vague. A license can be denied if it is deemed that a foreign media outlet has reported "unreliable information." They can also be refused if the license has been issued to another media organisation previously bearing the same name.

There are already laws on the books that preclude media outlets from or restrict media outlets from reporting on extremism. In the 1990s TV stations found that they were unable to our interview with terrorists as it is illegal under Russian law, however some international broadcasters ran foul of this law because obviously they did run these interviews including the voice track, which is specifically precluded in Russia. If these laws are stringently applied it would effectively muffle any open criticism of the government.

Russian incursions into European airspace triple in the last year Russia is reverting to its Cold War habits and incursions into European airspace, especially by

military aircraft, have tripled in the last year, according to NATO. In 2014 the Alliance aircraft intercepted Russian planes more than 400 times, three times as many as in 2013. General is one that this is dangerous as it is only a matter of time before somebody gets shot down accidentally and leads to a major incident.

On 28 January UK Eurofighter Typhoons and French Dassault Mirage jets were forced to intercept Russian aircraft over the English Channel. The latter composed of the nuclear-capable Tupolev Tu95MS bombers accompanied by Ilyushin Il-78 'Midas' tankers and Mikoyan MiG-31 'Foxhound' interceptors.

Although not entering UK or French-controlled airspace, the flight path of the Russian aircraft disrupted European civilian air traffic as the Russian flights were undertaken without a filled flight plan, with transponders switched off, and with no communication with civilian air traffic control (ATC).

Amnesty International slams Russia on human rights record The international human rights watchdog Amnesty International has slammed Russia's human rights record in its latest report.

The organisation blasted Russia on a wide range of policy issues from its heavy-handed use of its UN veto power through to controversial legislation that stifles civil society.

The report also focused on the situation in Ukraine where since April more than 5600 people have been killed, the report said, although according to more recent numbers over 6000 are believed dead, and over 1 million civilians that have been displaced by the fighting.

Amongst other aspects that Amnesty highlighted were restrictions on the fundamental freedoms of expression, assembly and association, state pressure on civil society and political activism, and torture allegations that have been levelled against the administration in the North Caucasus.

Politics – the ugly Navalny jailed for 15 days Prominent Russian opposition leader Alexei Navalny was jailed for 15 days for breaching demonstration restriction laws and barred him from a planned rally on March 1. He is already serving a 3.5yr suspended sentence for embezzlement, which he claims is politically motivated.

The March rally is to protest against the government's mismanagement of the crisis.

"To ease the economic and political crisis we have to pressure the authorities. Let's go to the anticrisis rally," Navalny said on Twitter account.

The court ordered Navalny jailed for 15 days for handing out leaflets in the Moscow metro last week to promote the so-called "Spring" protest rally on March 1.

Rosneft publishes executive pay, hides Sechin's salary The publicly traded Russian state oil giant Rosneft published the pay of its top executives, but obscured the income of CEO and Russian President Vladimir Putin confident Igor Sechin.

State-owned companies are supposed to reveal the pay of their top managers but Rosneft has managed to use its status as a semi-state-owned entity to refuse to release the details of individual pay packets.

Sechin has already successfully sued the Russian edition of Forbes two years ago for claiming his paycheck was $50mn.

Rosneft said in a press release in February that the company's 13strong executive body last year earned a total of RUB2.8bn ($45mn), but did not provide any breakdown. If the pay pot were

divided equally, each manager would have earned 215mn rubles ($3.4mn) last year. The company said that 60% of the earnings were issued as bonuses.

State construction contracts inflated by up to 40% Russia's accounting watchdog, the audit chamber, reported that the states construction contracts are inflated by as much as 40% customer stay up to $6 billion a year from the total spend of RUB1 trillion ($15.2bn).

Price hikes are caused as some state agencies exist and ignore the existing budgeting procedures or do not hold tenders. Another favourite scare is to outsource to a private company which is not under public scrutiny.

Large construction projects in Russia, including building work on prestige projects such as Olympic venues in Sochi and construction ahead of the AsiaPacific Economic Cooperation forum in Vladivostok in 2012, have been dogged by allegations of corruption and opaque pricing.

Polls, mood, sociology A quarter of Russians fear for their jobs A quarter of Russians fear they might be sacked in the next three months and just over a third (35%) expect to have their salary cut, as Russian companies react to the steep economic contraction, according to the state and poster VTsIOM. Unemployment has already started to tick up slowly as conditions on relate the market get worse.

Employment has been at historic lows below 5% for most of the last year.

"Unemployment among economically active individuals increased to 5.3% in December

from 5.2% in November.

Seasonally adjusted, unemployment came in at 5.2% for the third straight quarter in the fourth quarter of 2014," UralSib said in a note.

The number of vacancies was down to 1.4mn by the end of December.

There were 57 applicants per 100 vacancies during the month.

Uralsib predicts unemployment may rise to 6.5-7.0% in 2015 due to the recession.

And families are expected to take it on the chin: 37% of respondents in the survey said they expected salary payments or those of their family members to be delayed or cut. Another third (30%) expect their hours at work to be cut or

they will be given compulsory holidays.

Fears of being sacked are rising with a quarter (26%) saying they thought the jobs were in danger and even more (38%) expected their workmates to be fired. Just under two out of every five Russians (39%) believe that finding a similar job to the one they have now would be difficult or impossible. And a quarter of respondents said they already know someone or have a family member who has already been sacked.

Two thirds of Russians believe war with the West is a real possibility Two thirds (68%)of Russians believe that the threat of a military clash with the West is now more real than at any time in the last 15 years, according to an opinion poll from the state owns agency VTsIOM

Another third of respondents (28%) were unsure that Russia was facing a threat, which is 1.5times less than the proportion of unsure people only a year ago (48%).

But if it does come to a clash Russians are more confident that they stand a fighting chance. After nearly 3 years of heavy investment by the Russian state the Russians perception of the Army's condition has improved greatly. One in two Russians now believe the army is "was good condition", double the number a year ago.

And the population is also backing Russian President Vladimir Putin drive to increase spending on the army: two out of every five Russians think it's necessary to increase spending on the army and boost is military strength, up from only 30% thought the same year earlier.

Seven out of 10 Russian believe on change on Ukraine policy needed Although the showdown with the west is now hurting the average Russian in the pocket seven out of ten Russians (69%) are still supporting Russian President Vladimir Putin and his policies on Ukraine, according to a survey by the independent Levada Centre.

Half of respondents (54%) said the cost of goods their family buys has grown at a rate of between 15% and 50%, the poll found. Another 23% said the price of goods bought by their family has increased by up to 100%, while 9% reported a perceived price increase of less than 15%, the poll indicated.

Number of smokers down 17% since 2013

This is despite the fact that eight out of 10 of respondents (79%) said sanctions have had a noticeable affected their lives.

Another third (34%) said they experienced "serious problems," due ot sanctions.

The number of smokers has fallen by 17% over the last two years after the government launched its national health drive, banned smoking in public places and dramatically increased taxes on tobacco products.

Only one in five (21%) think that Moscow should make concessions in its policies toward Ukraine.

Russian used to be the heaviest smokers in Europe but as of February 2014 39% said they were regular smokers. The Russian government announced in 2013 that it hoped to reduce the share of smokers to 25% of the adult population by 2020.

Inflation tops list of Russia's concerns Soaring inflation tops of the list of things Russian worry about most, easily beating concerns over the clash with the west or sanctions imposed on Russia., according to the Levada Centre.

Economic concerns topped the list of Russians' worries, with price increases named as the main trouble by 41% of respondents, followed by a decline of living standards, named by 16%, and the "devaluation of money" and the fall of the ruble, named as the main problem by 15%, according to the survey.

The legislation has been in force since June 2013, but some of its provisions — including a ban on smoking in restaurants, hotels and trains — came into effect last summer.

The level of compliance with the [smoking] bans remains high, exceeding 90%, according to the Health Ministry spokesman Oleg Salagai.

Eight out of ten Russian say their lives have been adversely affected by sanctions

according to the poll which was conducted between January 23 and 26.

Eight out of ten (79%) Russians say their lives have been affected by sanctions, including 34% who said they experienced "serious problems," but seven out ten (69%) believe that the Kremlin policy in Ukraine is the right one, according to a survey by the independent Levada Centre pollster. Only one in five (21%) think that Moscow should make concessions to Ukraine. A separate poll found that inflation is currently Russian's top concern.

Russians attitude towards the west has been falling slowly starting in mid 2011 but the negative sentiments exonerated starting in March 2014 at the time of the annexation of Crimea.

Anti-American sentiment reaches a 25 year high Russia's today are more antiAmerican than at any time since the end of the Soviet Union, according to a poll from the Levada Centre. More than 80% of Russians have a negative opinion of the United States which is only slightly ahead of the 70% negative impression Russians have of the European Union,

The flip side of the coin is that Putin's personal popularity has soared and currently the rating hovers above 85%.

Attitudes towards Ukraine have also deteriorated, although the long history and cultural ties have buoyed the ratings somewhat. Today 65% of Russian still have a positive attitude towards Ukraine although that is down from 75% in July 2013, according to the poster.

China has also been a big wing weather from the showdown with the west with its approval rating Sorin more than 20%age points since November 2013 to 81% of current responders who say they see China in a positive light now.

Banks and Finance CBR releases January's bank sector data The CBR published headline banking sector data for January.

The first month of the year is seasonally slow given the long holidays and was obviously also a challenging one in the wake of

December’s sharp rise in interest rates and further massive ruble weakness.

The sector deleveraged in January amid high funding costs/weak credit demand and the higher rates have meant that banks significantly reduced their exposure to CBR

funding. But it remains to be seen how a 2% rate cut by the CBR in the key rate in late January will affecting the situation in February.

The first month of this year was a transition month where the dramatic changes in the environment will start future and have their effects.

• Assets: Assets rose 4% monthon-month; however, adjusting for the impact of ruble depreciation, assets contracted 2.6% month-onmonth, according to the CBR. Relatively expensive CBR funding fell from 12% to 9.6% of liabilities, while Finance Ministry funds (similarly priced) increased from 0.7% to 1.2%.

• Loans: Corporate lending has continued despite the higher cost of borrowing however the rate hike push through by the central bank in December has almost entirely killed retail lending. Total loans rose almost 5% month-on-month but declined 0.7% when FXadjusted.

Corporate loans increased 7.0% month-on-month but fell 0.5% when FX-adjusted.

Retail loans were down 0.7% in nominal terms and 1.3% on an FXadjusted basis. Only two years ago the annual growth in retail loans was running at some 40% a year.

In nominal terms, Sberbank was in line with the sector in corporate lending (6.8% growth in January)

and showed a smaller decline in retail lending (down fractionally).

• Deposits: Retail deposits increased 4.2% month-on-month but fell 1.6% if adjusted for ruble depreciation. This comes on top of December’s fall of around 0.7%.

Given the long January holidays, one should not read too much into this and wait to see if outflows continue in February. Corporate funds rose 12% month-on-month, which implies about 2.8% on an FX-adjusted basis. Sberbank slightly underperformed the rest of the sector in retail deposit growth (FX-adjusted outflows of around 2%).

• Earnings: Total sector EBT was negative RUB24bn in January, as loan loss reserves increased RUB284bn month-on-month.

• Overdue loans: The overdue loan ratio, which incorporates only the overdue portion of a loan, rose quite sharply in January in both retail and corporate, up from 5.9% to 6.3% in the former and from 4.2% to 4.5% in the latter.

Analyst said it is not worth reading too much into the January numbers, particularly given the long holidays and the fact that the CBR key rate cut at the end of the month has reduced pressure in the system and pushed down funding costs. That said, it was unquestionably a tough month for the sector.

Tough year ahead for Russian banks Russian banks are facing severe pressure on both sides of the balance sheet and are facing a very tough year. The bond market decline, sharp spike in the policy rate and expectations of NPLs render the situation similar to 2008, with more risks lying ahead.

Losses on securities portfolios may reach RUB1tr in 2015, which is as much as the sector used to earn in profits in the boom years.

The decline in bond prices since December has reached 30% and caused a sharp drop in the RUB8tr bond portfolio held by the Russian banking system. The S&P downgrade to below investment grade in January will prevent these

losses from recovering, and Russian bond spreads are likely to stay elevated at ~200-300bp, not returning to the previous 100bp levels. Even if the CBR allowed banks not to show it officially, it would still damage their liquidity position.

Repricing in liabilities will cost at least RUB600bn in 2015 given 11% of assets funded from the Central Bank of Russia (CBR) (although that fell to about 9.6% in January thanks to the CBR's rate hike). As opposed to 2008, when banks were running only RUB200bn, or 1%, in assets exposure to the CBR, banks this time were running RUB8.2tr, or 11%, in assets exposure as of the end of December, rendering them considerably more vulnerable to policy hike shock.

With the recent increase in the policy rate (now at 15%), analysts expect additional costs to the CBR’s overnight funding, which is ~RUB300bn in losses in annual terms. Retail current accounts must also be repriced. As analysts expect the policy rate to stay above 13% through end-2015, minimal losses will represent ~RUB600bn this year.

Poor 2-5% loan growth in 2015 will also be a drag on margins. The environment of higher interest rates will force the population and companies to reduce exposure to banks in the first half of 2015.

Corporate and retail loan growth

for the full year will be a minuscule 5% and 2%, respectively.

The poor growth rate means that the more expensive liabilities will be a direct hit on the net interest margin that analysts see contracting 20-25%, which is also a difference vs. 2009, when margins recovered after the crisis.

There is some good news though.

Exporters benefit from weak ruble, and in particular the construction sector is in surprisingly good is shape having enjoyed a spike in demand at the end of 2014. In previous crises the population chose to buy washing machines in

cars but this time round they've bought apartments. It is also worth noting that the situation of borrowers is not too dramatic. As in the previous crisis, exporters have benefitted from the weak ruble. On the retail lending side, only 3% of retail loans are now denominated in FX vs. 13% in 2009.

The news is this good for nonperforming loans (NPLs). The initial

All in all bank net losses in 2015 may reach RUB2tr or 25% of equity capital. That being said, losses on bond books, liabilities repricing and an increase in NPLs all indicate that banks will lose

level of NPLs is 5% vs. 2.5% in 2008: However, while the banking sector entered the 2009 crisis with a very modest 2.5% in bad loans on the total loan book, banks are now running at ~5% in bad loans.

Given the anticipated GDP contraction of 5% for 2015, this puts the sector in a more difficult situation, and Alfa Bank expects ~RUB1tr to be additional provisions for the year.

~RUB1tr (at best) in 2014; and their losses may possibly go to RUB2tr, or 25% of sector equity capital.

An additional capital injection from the government or the Central Bank of Russia (CBR) Will be required, and the decline in the number of banks that began in mid-2013 should continue.

December's rate hike feeds through to deposits and loans The 1% m/m decline in ruble retail deposits in January should be taken as a good sign: At first glance, retail funding remained an issue in Jan, with ruble retail deposits declining 1% m/m and the share of FX deposits increasing to 30% vs. 26% reported as at December 2014; however, analysts take this result as rather positive.

Analysts see this development as a risk that may accelerate net capital outflow and prevent the ruble from benefitting from the improvement in the current account in 2015.

First, the typical pre-crisis ruble deposit decline owing to the January factor was ~2% m/m, thus last month’s 1% outflow should be seen more as an achievement.

Second, the increase in the share of FX funding reflects the ruble’s drop to RUB70/$ vs. RUB56/$ at end-Dec, while the actual volume of FX deposits in the banking

system kept declining from $86bn in Dec 2014 to $84bn in Jan 2015 – the volume similar to start-2013.

The conclusion is that ruble deposits became more sensitive to interest rates, but fears of capital controls still harm FX funding.

Corporate deposits remained highly dollarized: The increase in the share of FX deposits is sharper in the corporate funding segment (it has hit 50% of corporate funding), representing a significant increase in nominal terms from $170-180bn as at end-2013 to $190-200bn in the last six months. However, ruble funding was not hurt, as, contrary to the retail segment, ruble corporate deposits posted a 13% y/y increase in Dec 2014 and a 15% y/y increase in Jan 2015 thanks to the year-end inflow of budget spending.

High rates help CBR reduce exposure to banks: After increasing support to the banking system in Dec 2014 to RUB8.2tr in rubles (RUB9.3tr when combined with FX funding), the CBR managed to reduce exposure to banks in Jan by ~RUB1.6tr by withdrawing ruble liquidity support. Analysts consider this to be the positive result of the rate hike, and we expect banks will likely continue to reduce exposure to expensive state funding. As of Jan, the CBR’s ruble funding was 8.1% of total bank assets, and, together with Finance Ministry deposits, it funded 10% of assets.

Retail loan growth ceased, corporate segment keeps growing: The 1% m/m decline in retail loans in Jan is a clear sign that the environment of high interest rates

will keep the market stagnant for some time. Analysts reiterate the expectation of 2% y/y growth, expecting the credit card segment to deliver a faster growth rate of 5%. At the same time, it is not clear to what extent corporate loan growth has reacted to the rate hike – full statistics will appear only within the next couple of months.

Given January’s monthly jump in NPLs (from 5.9% to 6.3% in retail and from 4.2% to 4.5% in corporate), analysts believe that some deceleration should be expected, but not to the same extent as in the retail segment.

Decline in CBR funding is function of the policy rate: analysts are sceptical about a strong depositmarket reaction to the policy rate hike this year, expecting an increase of only 7% in both retail deposits and corporate accounts in 2015. That said, monetary transmission should rather work through the slowdown in lending, thus offering banks the opportunity to cut exposure to the CBR. If our assumption proves correct, we expect that the CBR will be able to withdraw its FX funding of banks by end-2015. However, the prospects of ruble funding from CBR remain uncertain. In order to cut exposure to banks, the CBR should keep the policy rate high until inflation decelerates, which means maintaining it at 15% until end-summer. However, political pressure should also be taken into account. We consider it highly probable that there will be another key rate cut in April-May, but analysts believe that the chances are low that such a decision will be

taken at the next meeting scheduled for March 13.

Banking NPLs may top 20% in 2015 Russia's banking system is under increasing pressures and may see its bad loan rates (non-performing loans, NPLs) rise to between 17% and 23% of the total loan portfolio in 2015, according to international ratings agency Standard & Poor's, up from 8% in 2014.

The state has already been forced to inject around RUB1 trillion capital into several banks including Vnesheconombank, VTB Bank and Trust bank. The central bank says that it will probably have to inject another RUB1 trillion into the next 25 largest banks in the country.

S&P said according to its base scenario, Russian banks may be forced to set aside around RUB2.5 trillion ($41bn) to cover potential bad loans. Under its negative scenario, bad loans may reach 35%-40%, S&P said.

Russian government approves mortgages subsidies The government has decided to allocate RUB20bn in 2015 to support housing construction markets through mortgage rate subsidies. The subsidy mechanism is not yet clear, but the government hopes this money will be enough for the banks to offer mortgage rates of 13% for apartments purchased on the primary market, in both completed and under construction projects.

The government hopes RUB20bn will be enough to subsidize interest rates for a year for roughly 300,000 new mortgage loans worth a total of RUB400bn-RUB500bn (25-35% of 2014 volumes).

The volumes offered by the government will not completely substitute last year’s mortgage volumes, neither will they account for a significant part of primary housing (RUB20bn will be enough to subsidize roughly 10-15% of new housing volumes) but will still offer support to homebuilders.

CBR tries options in case of SWIFT system exclusion Russia's Central Bank is exploring various options for alternative channels of interbank communications in case of SWIFT system exclusion, the banks first deputy head, Ksenia Yudaeva, said on February 10.

The move still remains unlikely with the Germans identifying it as the "nuclear economic" option recently.

"We are looking at various opportunities for using the resources we have and the funds that banks lend to each other.

There are different options, we are exploring them all," Yudaeva said, the state-run TASS news agency reported..

SWIFT system exclusion, which is still unlikely according to Yudaeva, will make payment confirmations less easy to organize. "But nevertheless, the system could be

replaced by other communication channels," she said.

because of worsening market conditions.

In September 2014, the European Parliament urged EU member states to consider excluding Russia from the SWIFT system, which provides the infrastructure for $6bn in interbank operations daily.

SWIFT spoke against such a measure, arguing that governments cannot constrain business in this manner.

In December, a source close to Sberbank told Reuters that it was looking to sell the two units but had no buyers. The statecontrolled Russian bank does not plan to sell its operations in Czech Republic, Lidove Noviny reports, quoting unnamed sources.

BRICS development bank takes one step closer to reality Both the governments of Russia and India have now given the goahead to establish a new $100 billion dollar development bank for the BRICS countries -- Brazil, Russia, India, China and South Africa.

India followed Russia's lead by ratifying agreement to establish the bank at the end of February.

The agreement to set the new development bank (NDP) was signed on July 15, 2014 by the heads of the five countries during a BRICS summit. The bank will be headquartered in Shanghai.

The banks initial capital will be $50 billion which will be increased $100 billion later.

Sberbank reported to be selling Slovak and Hungarian units Russia's Sberbank is preparing to sell its Slovak and Hungarian units, Czech media reported on February 23, quoting unnamed sources.

Russian largest bank had suggested in December that its strategy was set to change

"A deal is already being prepared in Hungary and Slovakia," one source told the newspaper.

Alongside the Czech unit, the Hungarian and Slovak units make up the three largest businesses in the Sberbank Europe network.

Sberbank boosts Turkey unit’s capital as assets top $37bn Sberbank is planning to boost the capital of its Turkish daughter bank DenizBank AS by TRY1.1bn ($442mn) in capital to maintain the banks fast rate of growth.

The bank has ambitious plans for its loan growth rate in 2015, which is one of its few markets that is not depressed by the global economic gloom.

DenizBank is 99.85% owned by Sberbank , Russia’s biggest bank, and has $1.2bn dollars of Tier 2 capital dating from the Moscowbased lender’s acquisition in an October 2012 deal.

RBI set to exit Poland and Slovenia, reduce exposure in Russia Raiffeisenbank Bank International (RBI), which made both this name

and its money in emerging Europe, will sell its banking operations in Poland and Slovenia, scale back its exposure to Russia and Ukraine, and optimize its business in Hungary, in order to boost capital buffers, the bank said in a statement on February 9.

The move follows pressure on the shares and bonds of the second largest lender in Central and Eastern Europe (CEE), sparked by the collapse of the ruble and the Swiss central bank's decision to end the franc's peg to the euro.

RBI is heavily exposed to Russia and Ukraine and has thousands of clients in CEE who have taken out Swiss franc mortgages.

In Russia RBI will cut its riskweighted assets (RWA) by approximately 20% by the end of 2017. At the end of last year it had RWA of â‚Ź8.4bn in the country. In Ukraine, where RWA at the end of last year were â‚Ź3.0bn, the cut will

be 30%. The bank had previously sought to exit the country, but the ongoing conflict has scuppered that effort.

Russia's Rosbank to cut 1015% of staff in 2015 Russia's Rosbank, part of France's Societe Generale Group and a top ten Russian retail bank, says it will cut staff by 10-15% this year, due to the economic slow down.

The bank cut about 8.5% of its staff in 2014 and says it will continue to cut back in the next few years to deal with the economic slowdown.

The bank will also continue to sell part of its problematic loans to reduce its loan-loss provisioning, reduce its branch network and through a reorganization of its business structure, Chief Executive Dmitry Olyunin told journalists.

Economics Russian government a bit more upbeat on economic prospects for 2015, but confusion still reigns The Russian government has become a little more upbeat about the prospects for recovery in 2015, but the outlook is still really bad.

Economy Minister Alexey Ulyukayev said in the middle of February that his ministry now

expects the Russian economy to contract by 3% this year instead of the previous official forecast of 0.8%. Chief economist at Sberbank Evgeny Gavrilenkov is even more optimistic and believes the contraction could be as little as 1%, or even possibly Russia could see some growth. These statements should be set against the consensus forecast of between 4% and 5% contraction this year,

with outliers predicting a dramatic 10% contraction.

The Economy Minister new forecast is based on an average oil price of $50/bbl. According to Ulyukayev, capital investment will shrink 13.7% this year, real incomes will contract 6.3% and retail trade will drop 8.2%. Inflation will decelerate after peaking in 1H15, but will still reach 12.2%. Industry will be in better shape than the overall economy and will decline just 1.6%.

The Economy Ministry expects the capital outflow to increase to $115bn this year from the $90bn expected earlier. However, it still expects capital flight to slow this year after the record outflow of $151.5bn last year, as Russia needs to pay a smaller amount (about $100bn) of foreign debt this year compared to $133bn in the second half of 2014.

Alfa Bank believes that the ministry’s new macro outlook is still too optimistic as it underestimates the negative effect of Western sanctions on the Russian economy, which have effectively blocked access of Russian companies to international capital markets. Payments on

foreign debt in second half of 2014 are even larger than similar payments in 4Q08-1Q09 ($94.5bn).

Taking into account the sharp drop in oil prices in second half of 2014 and in second half of 2008, Alfa says the current situation closely resembles the previous crisis, when the economy contracted 7.8% in 2009.

In addition, the sharp monetary tightening in December 2014 will further affect the economy due to the dramatic slowdown in both corporate and retail lending. The government does not have as many resources for social support this time as it had in 2009, when real incomes grew 3% despite the crisis.

Real incomes are also expected to drop 8.2% this year and retail trade will contract 8.7%, which is not too far from the new government estimates. Alfa believes that the slump in consumer demand will strongly affect the economy as consumers have always been one of the key growth drivers. We expect the economy to contract 6.8% this year.

Alfa bank's pessimism is in stark contrast to Sberbank's optimism.

The chief economist at Sberbank says there will be no deep recession in 2015 and is predicting that the economy will shrink by only 1% this year – or maybe even less.

"We do not expect a deep recession in 2015. Although household consumption and investment appear set to inevitably contract in 2015, this will be partly compensated by strong growth in net exports. We expect GDP to contract 1% in 2015, but we would not exclude a better result," said

Evgeny Gavrilenkov in a note in the middle of February.

The basis of Gavrilenkov argument is that household consumption, currently the main economic driver, is inversely proportional to export revenues. While the price of oil has fallen hard, Russia remains the world biggest oil exporter and is currently selling a record 10.6mn barrels a day, which offsets the fall of oil prices to an extent.

This means that while the overall trade surplus is expected to fall from around $200bn in 2014, due to the higher prices of oil last year,

to around $100bn this year, after the fall in prices, this is still a large surplus that will support household consumption and so provide some economic stimulus.

Indeed, the falling ruble has depressed imports which have also collapsed further than the fall in oil export revenues and so the current account surplus is expected to actually increase this year from $56bn in 2014 to about $75bn in 2015 according to some estimates, and this is the money the government actually has to spend.

Russian President Vladimir Putin has already promised that social spending on wages and pensions will not be touched despite 10% across the board budget cuts and this will feed through into consumption.

However, it remains early days where the average price for oil comes in over the year remains the deciding factor and that will not be clear until the next OPEC meeting in the summer.

bne:Chart – Energy sector dominates analysis of Russian tax revenue With oil, fuel and gas accounting for 70% of Russia’s $450bn exports in 2014, it is no surprise that three of the five largest nominal tax contributions came from regions whose economies are heavily energy-focused.

The bne:Chart shows, the KhantyMansi region contributed just under RUB1.2tn and accounted for 49.5% of all federal mineral extraction tax (MET) receipts between January and October 2014 – the most recent available data from Russia’s finance ministry.

Moscow’s VAT and corporate profit tax receipts were the second and fourth largest federal contributions, respectively. The city’s profit tax alone accounted for more than half of all federal profit tax receipts.

The concentration of services industries and large population density in the Moscow area are likely the main drivers behind its dominance in these fields.

However, disentangling energyrelated tax revenue from nonenergy revenue is difficult, as the fiscal footprint of the energy sector is so pervasive in Russia, contributing to MET, profit tax, VAT and excise duties.

Despite coming top of the pile for nominal VAT and profit tax contributions, on a per-capita basis both Moscow’s profit tax and VAT

receipts ranked third in the country.

The Yamalo-Nenets region and Sakhalin Oblast generated the highest per-capita VAT and profit tax revenues, respectively, with Yamalo-Nenets – where Gazprom’s main production fields are based – at RUB199,302 and Sakhalin Oblast at RUB54,428.

The Leningrad Oblast and Westfacing port city of St Petersburg recorded the highest nominal and per-capita tax revenues for excise duties – likely a result of the port city being one of the largest outward trade gateways in Russia.

Certain types of tax revenues are received only by individual regions and are not recorded by the Ministry of Finance as contributing to federal receipts. These are: corporate property tax; individual property tax; land tax; vehicle tax; and personal income tax (PIT).

Use the bne:Chart below to explore regional contributions to federal tax revenues.

Click on the map to see a breakdown of a region’s tax revenue and hover over one of the bubbles to see how it compares to the rest of the country.

Use the menu on the map to isolate a specific region, then click on it to see its individual tax components. Select “All” on the map menu to go back to a nationwide view.

Russia's January PMI data shows steepest decline in private output since 2009 Russia's private sector output continued to decline in January, with total business activity (manufacturing and services) shrinking at the fastest rate since May 2009, according to the HSBC PMI data compiled by Markit.

In addition to the renewed decline in manufacturing output, the first in the past eight months (from manufacturing PMI data published earlier this week), the incoming new business for service providers declined further in January. New

contracts in services have been falling continuously since September. Declining new business was linked to the weakening economy, currency crisis, and higher interest rates.

Weak business conditions resulted in stock depletion in both services and manufacturing, and a further sharp fall in employment. Both input and output price inflation is consistently around all-time-highs.

Persistent negative business expectations are linked to the weak economy, high interest rates, credit problems, and oil price uncertainty.

In January, the services PMI index declined to 43.9 from 44.8 in December, remaining below the 50.0 points no-change benchmark and thus indicating contraction in the sector. Manufacturing PMI went down to 47.6 in January from 48.9 in December. The composite private sector output index (services and manufacturing) declined from 47.2 in December to 45.6 in January. This made for the sharpest decline of the index since May 2009 and kept the composite index in negative territory for the fourth month running.

HSBC's chief economist for Russia, CIS and the Baltics Alexander Morozov commented that output contraction became broader-based and gained stronger momentum in January. Judging from the past correlations between GDP and PMI, the economy is forecast to contract by 1.5% q/q in Q1 if the headline PMI stays at the same level throughout the quarter.

However, the PMI deterioration is proving to be more gradual than that seen in 2008-2009. Other indicators also suggest a slide into a recession rather than a sharp fall in activity, the HSBC economist believes. The outlook for GDP decline in 2015 remains at 3.5% vs a 7.8% drop in 2009, though this is dependent on the dynamics of oil prices.

At the same time HSBC notes that inflationary pressures rose to an all-time high amid the output decline, the opposite of what was observed in 2008-2009 when price growth eased. Thus the monetary easing appears premature, the

report concludes, referring to the recent key interest cut from 17% to 15%. The central bank explained the cut by pointing to the short-term nature of inflationary pressures, due to the end-of-2014 currency shocks, together with the decline in output.

Russia says so long, inflation targeting, CBR cuts rates 2% CBR unexpectedly cut its key rate by 2% in January to 15% at its first BoD meeting since the appointment of Dmitry Tulin as first deputy chairman in charge of monetary policy.

The move was a surprise catching both market and commentators out; everybody had expected the rates were left unchanged and probably unchanged until at least after the spring.

(Two hours prior to the announcement of the rate cut, the ruble mysteriously began to fall even though oil prices were rising.)

Immediately after the announcement, the ruble plummeted to RUB71.5/$, before later recovering some of its losses - properly due to CBR interventions.

In the press release published following the BoD meeting, the CBR noted that inflation had accelerated to 13.1% year-on-year as of 26 January and will continue to rise in the near future. However, the CBR decided to cut the key rate anyway due to concerns over the deceleration of M2 growth (to 5% year-on-year, as of 1 December,

2014), weak credit growth and the shrinking economy; the CBR expects GDP to contract at an annualized rate of 3.2% in the first half 2015.

Analysts were severely unimpressed by the whole show.

The outtake was that the rate cut will not have any beneficial macroeconomic effects and if anything will drive up inflation even more in the short-term.

However it clearly has undermined the already faltering confidence in the CBR's policy.

US investment bank Goldman Sachs expects Russia’s Central Bank’s to lower key interest rate to 11% from the current 15%, Bloomberg reports Goldman Sachs’ experts forecast the Central Bank’s key interest rate will decline by 100 base points every quarter, to reach 7% in 2016.

Russian government to spend only 1% of anti-crisis package in 1Q15 The Russian government will spend only RUB22bn in the first quarter, or 1% of its total 'anti-crisis' plan, Vedomosti reports, citing its source in the finance ministry. The full estimate of the anti-crisis measures is RUB2.3tr.

According to the source, the finance ministry was against spending any money at all in Q1 because the budget has enough money for subsidies. The Economic Development Ministry insisted on spending RUB100bn. The ministries agreed on RUB22bn, of which the agriculture sector will receive

RUB10bn, the vehicle utilisation programme will get RUB5bn, another RUB5bn will be spent on subsidised loans for companies, and the rest will go to regions and for additional capitalisation of state-owned Roseximbank.

Analysts consider the composition of the Q1 package conservative and lacking pro-growth elements.

“While we understand that this represents a means to support import substitution in the real sector, we believe that there are questions as to the efficiency of this allocation,” Alfa bank analysts said in a note. “The government’s preference for modest spending on anti-crisis initiatives implies that the intention to preserve budget stability is a more important focus of economic policy vs stimulating real sector recovery… The current plan presentation is unlikely materially to support the growth trend,” they conclude.

On February 3, president Vladimir Putin said that it was crucial to provide support for the industrial and agricultural sectors of the Russian economy, as well as to the national banking system, labor market and small and mediumsized businesses. He also said that additional resources may be required to fully implement Russia’s anti-crisis plan.

“Undoubtedly, we should expect that additional resources may be needed, I mean that we are going through difficult times,” Putin said, cited by Sputnik news agency.

Russian Economics Ministry lists systemically important companies Russia's Economics Ministry listed 199 companies considered to be "systemically important" and so eligible for government bailout money on February 5.

This the company goes together with the state economic support program, which was approved at the beginning of February. The aims of the programme include stabilising Russia’s economic conditions, supporting import substitution as well as improving diversification of the structure of Russian exports. Special emphasis is made on securing the activities of core branches and companies, supporting the banking sector and protecting social entitlements. The programme includes financial support and measures aiming to reduce bureaucracy and regulatory burdens. Many Russian economic experts have, however, criticised the programme for failing to address properly Russia’s fundamental need for structural economic reforms and measures for restoring growth.

Total programme costs this year are estimated to exceed RUB1.3 trillion (€17bn), of which just over RUB200bn are designated as government guarantees. Half of the actual support funding should come out of the federal budget and half out of the National Welfare Fund. Up to RUB550bn will come from the National Welfare Fund, or about 10% of the fund’s present value. The money will be used to recapitalise banks and provide

more funding for the VEB development bank to boost lending. Banks receiving capital infusions, in turn, must forward the funds for the financing of major infrastructure projects.

The companies on the list, many of them state-owned, were chosen using several quantitative criteria, including number of employees (no fewer than 4,000), annual revenue in 2013 (no less than RUB10bn) and tax payments over the last three years (no less than RUB5bn), reports Uralsib. Most of the privately owned companies on the list are major raw material producers that also earn Russia hard currency revenues from exports.

Amongst the list are: ALROSA (diamonds), the steel mills MMK, NLMK, Evraz, Severstal and Mechel; the mining companies Metalloinvest and Siberian Coal & Energy Company and SDS Coal; the pipemakers TMK, OMK and Chelyabinsk Pipe; the base metal producers Norilsk Nickel, UC RUSAL, Russian Copper Company and Urals Mining & Metallurgical Company; the gold mines Polymetal, Polyus Gold and Petropavlovsk; and the fertilizer companies Uralkali, PhosAgro, Acron, EuroChem and UralChem.

The list is a repeat of a policy rolled out during the 2008 crisis when 300 companies were named as systemically important.

Russian economy lacks growth drivers With consumption in retreat Russia now has no effective growth drivers for 2015. The economy is already doing poorly and grew 0.6% in 2014 compared to 1.3% growth in 2013, slightly above the Economy Ministry's official forecast of 0.5% GDP growth in 2014.

Nominal GDP reached RUB70.98 tln in 2014.

Financial sector, household production and manufacturing were the key growth drivers last year.

Rosstat gave a detailed sector breakdown, according to which the

Russian food retailer freezes prices on soaring inflation A dozen top Russian food retailers says they will freeze prices on 20 "socially important" goods for two months, according to the Association of Retail Stores (AKORT). The list includes: Magnit, Auchan, Dixy, Lenta, O'Key, Billa,

financial sector grew 9.6% in 2014 (versus 12.3% growth in 2013), household production grew 2.7% (versus 12.2% growth in 2013) and manufacturing (almost 13% of total GDP) grew 2.5% (versus 3.9% growth in 2013). The weakest growth rate was posted by the construction sector, which shrank 5.2% in 2014 after shrinking 2.9% in 2013, which is not surprising given the drop in investment activity (capital investments fell 2.5% last year).

Retail and wholesale trade, the largest segment in Rosstat's GDP breakdown (nearly 17% of GDP), posted 0.5% growth in 2014 versus 0.4% growth in 2013.

Globus, Metro Cash & Carry and the X5 Retail group, which owns the Perekryostok and Pyatyorochka brands.

Russia's third-largest food retailer Dixy group has already imposed a one-month price freeze on February 9 as prices soar due to

rising inflation in a stunt to keep its stores full.

Most of 2014 capital flight was debt payments, Sberbank says

However the expansion of the price freeze to the 12 leading outlets at the start of March suggest heavily that the government has been leaning on the companies in order to artificially curb inflation, which is reminiscent of administrative to Used in 2008 to bring about the same effect.

Capital outflow was around $150bn last year and largely consisted of foreign debt repayments. Total foreign debt fell by around $130bn (including revaluation effects, such as the weaker euro and ruble, which reduced the ruble and euro elements of the debt).

Rosstat reported that January's inflation rose to 15% year-on-year – well ahead of the 11% reported for the full year in 2014. Dixy said it was holding the price of staples such as buckwheat, rice, pasta, sunflower oil, flour, frozen fish and pelmeni (Russian ravioli) unchanged for the next month in a statement.

Since Russia imposed a ban on the import of European agricultural goods last year food prices have soared well ahead of headline inflation as Russia imports nearly half of its processed food.

Buckwheat (which the EU doesn’t produce but Russians love) has seen prices rise by half in the second half of last year and most other foodstuffs have increased in price well head of the headline inflation rate.

On top of that, around $34bn consisted of the domestic preservation of savings by individuals: rubles converted into foreign cash. This is internal capital outflow, as the cash remained in Russia.

Unemployment starting to creep up Unemployment among economically active individuals increased to 5.3% in December from 5.2% in November.

Seasonally adjusted, unemployment came in at 5.2% for the third straight quarter in the fourth quarter of 2014. Conditions in the labor market worsened in December:. The number of vacancies was down to 1.4mn by the end of December. There were 57 applicants per 100 vacancies during the month. We believe unemployment may rise to 6.57.0% in 2015 due to a deep economic recession.

Germany's trade with Eastern Europe plummets The Weltmeister of exports, Germany, saw its trade turnover with Russia plummet by 12.09% in 2014 but its trade with Ukrainian Fell even faster, dropping by 25.01% , the committee for the east German economy reported at the end of February.

According to the statement, in 2014, German exports to Russia

fell by 18% and to Ukraine by 33%.In monetary terms German exports to Russia reduced to €29.3bn from €35.8bn, German exports to Ukraine were down to €3.6bn from €5.4bn in 2013.

In 2014, Germany also reduced its exports to Kazakhstan and Belarus by 20% and 21% respectively.

MACROWRAP CBR's macroeconomic forecast for 2015 The Central Bank of Russia (CBR) released a set of revise macroeconomic predictions for 2015 that significantly downgrade the estimate for the price of oil also predict a 4.5 duty-paid decline and suggested inflation comprises by 16% in 2015. * Oil prices are now expected to halve from the prior forecast, from USD100 a barrel, to USD50 a barrel for 2014, and just under USD100 a barrel for 2014. *The ruble value is expected to drop from an average of 37.7 in the prior forecast to 61.5 per dollar for 2015. * Real GDP growth for 2015 had been expected at 1.2%, but is now expected to post a drop of 3%.

Real GDP grew 0.6% in 2014, according to preliminary estimates. In nominal terms, GDP was RUB70,976bn, or $ 1,876bn. Given that nominal GDP was $2,095bn in 2013, dollar-denominated GDP shrank 10.5%. In real terms, however, growth continued, albeit at a slower pace. The annual figure implies GDP growth of 0.2% y-o-y and 4.2% Q-o-Q in the fourth quarter of 2014.

The latter is much better than the 2.7% Q-o-Q contraction we saw in 4Q08. * Nominal USD GDP is expected to decline from USD1868bn in 2014, to just USD1189bn in 2015 and down from the prior estimate for 2015 dollar GDP of USD2051bn. A remarkable drop - Russia just got a lot poorer, USD862bn poorer. * Inflation is expected to double in 2015 from prior estimates of 5% to 12.2%. * The budget assumes a huge loss in oil revenues in dollar terms, I.e. from the prior assumption of USD205bn to just USD91.6bn. Exports of gas are also expected to fall from 190 bcm to 178.1 bcm, and gas prices dropping from USD289 per tcm to USD208 per tcm, implying a loss of gas revenues of around USD18bn. *The budget for 2015 had assumed a moderate deficit of 0.5% of GDP, but it is now assumed to run a deficit of 3.8% of GDP. * The government now assumes a large draw down in funds in the various fiscal reserves, and reflective of deficit financing and the costs of the anti crisis programme. This "loss" is reported to be around USD143.3bn, with the funds in the fiscal reserve dropping from 13.2% of GDP in 2014 to 8.7% of GDP in the new forecast.

* Capital flight is expected to moderate from USD152bn in 2014 to USD115bn in 2015, but up from the prior estimate for 2015 of just USD50bn. * The current account surplus is though expected to remain at around the same level as in 2014, or USD56bn, presumably helped by the weaker rouble and the deflation of domestic demand.

Russian inflation hits 16-year high in January Russia's monthly inflation hit a 16-year high in January to an annualised 13.7%, according to the latest figures from Rosstat.

Consumer prices surged 3.9% month-on-month in January from 2.6% month-on-month growth in December. Such high inflation was last seen in February 1999 (up 4.1% month-on-month).

PPI growth accelerates to 7.1% year-on-year in January ‌ According to Rosstat data producer prices rose 1.3% month-on-month in January after 0.8% month-on-month growth in December. Thus, the index accelerated from 5.9% year-on-year in December.

Manufacturing prices were the key PPI growth driver, rising 2.7% month-onmonth in January after 0.3% month-on-month growth in December and accelerating to 12.2% year-on-year in January from 8.5% year-on-year in December. In the manufacturing segment, prices accelerated most of all in food production (up 20.9% year-on-year in January from 15.2% in December) and metallurgical production (up 24.2% year-on-year in January from 14.5%year-on-year in December).

More worryingly core inflation is also increasing and grew 3.5% month-onmonth in January compared to 2.6% month-on-month growth in December and growth accelerated to 14.7% year-on-year in January from 11.2% yearon-year in December.

Analysts predict that inflation will keep accelerating for the next 2-3 months and reach a peak of 16.5-17% year-on-year growth in March-April, according to UralSib, which is expecting to see inflation decelerate over the rest of the year and end 2015 at 9.4% year-on-year by the year end.

Food prices to peak at 24% in July Food prices will continue rising in the first half of this year, peaking at 23.8% in July before falling again in the second half of the year, according to the Economic Development Ministry predictions, before falling back to a full year rate of 12%.

This latest forecast is now the base case scenario for a revised 2015 budget.

Food inflation has spiralled following the collapse of the ruble in 2014 and a food import ban imposed by the Kremlin in response to Western sanctions on Moscow.

Inflation in Russia in 2014 was 11.4%, the highest since 2008, and prices rose 15% in January compared with the same month a year previously.

Russian retail slump in January more modest than feared Analysts had expected retail trade to drop 8.0% year-on-year in January after a one-off consumption spike in December, the actual decline was a more modest 4.4% year-on-year.

As unemployment increased slightly to 5.5% the consumption trend is likely to remain more sensitive to inflation, which continues to exceed forecasts and favours a higher preference for spending.

The expected decline of 10% year-on-year in 2015 of retail trade is now looking to be too pessimistic. However, the January figure is definitely bad news for the market, which had anticipated a dip of only 1.9% year-on-year in January and now may have to revise downward this year’s consumption forecast.

Russian consumption to recede this year With December 2014 retail trade surging 5.3% year-on-year on the FX crisis and industrial production posting 3.9% y/y growth, 2014 growth came at 0.6% year-on-year. This, however, reinforces our take that 2015 will be a pause, especially on the consumption side and especially if the government decides to minimize social indexation. Despite the CBR’s attempts to ease monetary policy, we reiterate our contrarian view that the 5% GDP drop in 2015 will be caused by a 10% year-on-year drop in consumption.

Russia's real disposable incomes drop sharply year-on-year in December Real disposable incomes dropped 7.3% year-on-year in December after dropping 3.9% year-on-year in November; real incomes shrank 1% year-onyear in 2014: Real wages fell 4.7% year-on-year in December after falling

1.2% year-on-year the month before. Real incomes are under huge pressure due to the weakening economy and surging inflation. Uralsib expects a steep 8.2% contraction in real incomes in 2015 due to a deep recession, massive capital outflows and high inflation. The government does not have as many resources to allocate to social programs as it did in 2009, when real incomes grew 3% in spite of the severe economic crisis

Capital investments contract in January Capital Investment activity contracted in January, down 6.3%. Capital investment contracted 2.4% year-on-year in December after contracting 4.8% year-on-year in November. Capital investment declined 2.5% in 2014 but seasonally adjusted, capital investment grew 0.6% month-on-month in December.

Remarkably in light of the lack of investment output in the manufacturing sector edged down just 0.1%, while imports fell significantly (according to customs statistics, imports from non-CIS countries sank nearly 40%).

Sberbank's chief economist is convinced that this import substitution effect will be significant and continue to support the economy.

"The import substitution process will be the main supporter of economic development this year. GDP will probably (but not necessarily) decline this year, but the contraction will not be as deep as that in domestic demand (we

expect 5%) or investments (we expect 8%)," says Evgeny Gavrilenkov, chief economist with Sberbank.

Uralsib expect a dramatic 28.2% contraction in capital investment this year.

"Capital investment will be hit by massive capital outflows, ruble weakness, the high level of uncertainty surrounding the Russian economy and CBR policy tightening," the bank said in a note and remains the most pessimistic about Russia's economy.

Industrial production and services still growing in January Industry and services growth remains in place. Industrial production growth decelerated to 0.9% year-on-year in January due to the 0.1% year-on-year contraction in manufacturing.

Raw materials extraction grew 1.5%, the supply and distribution of electricity, gas and water was up 1.2% year-on-year, while the manufacturing sector contracted 0.1%. The dynamic in the latter varied among segments.

Growth was observed in food, pulp and paper, metals and chemicals, whereas investments and output of goods and machinery (including passenger cars) contracted.

Because of the deceleration in industry, cargo turnover shrank 4.1% yearon-year in January after contracting 3% year-on-year in December.

Construction activity was also weak, shrinking 3.5% year-on-year in January, due to the drop in investment activity.

Agricultural growth decelerated to 2.8% year-on-year growth in January from 4.2% year-on-year in December.

Real disposable incomes contracted just 0.8% year-on-year in January after declining 6.2% year-on-year in December. As expected, after an uptick in December, driven by inflation fears, retail trade contracted 4.4% year-onyear in January.

Services grew 0.9% year-on-year, which is puzzling given the weak services PMI readings. The unemployment rate rose for the fifth consecutive month, to 5.5% in January from 5.3% in December.

Russian exports continued to decline in December on back of oil price fall Exports decreased to $34.5bn in December from $36.7bn in November. The price of Brent dropped 20.6% month-on-month and 42.9% year-on-year to $63.3/bbl in December.

Gas prices grew 2.9% month-on-month but fell 4.9% year-on-year to $376/1,000cum in December. Metal prices showed mixed dynamics in December: the price of aluminum was down 6.8% month-on-month but rose 10% year-on-year; the price of nickel grew 1.4% month-on-month and 14.4% year-on-year; and the price of copper decreased 4.2% month-onmonth and 10.8% year-on-year.

Fuel and energy commodities (73.3% of exports to non-CIS countries and 43.9% of exports to CIS countries) and metals (7.9% of exports to non-CIS countries and 10.3% of exports to CIS countries) accounted for the bulk of Russia’s exports in 2014. Uralsib expect exports to amount to $338.9bn in 2015 and an average Brent price of $60/bbl this year.

Imports grew to $24.7bn in December from $23.3bn in November. The ruble depreciated 15.8% month-on-month against the dollar in real terms in December. In 2014 machinery and equipment (50.5% of imports from nonCIS countries and 25.3% of imports from CIS countries and chemicals (16.8% of imports from non-CIS countries and 11.8% of imports from CIS countries) made up the bulk of imports to Russia Uralisb expects imports to total $209bn in 2015 and imports to drop sharply this year due to the weak ruble.

Russia recorded a trade surplus of $9.9bn in December 2014, 42.2% smaller

than the $17.1bn surplus recorded in December 2013; exports fell 30.1% year-on-year and imports declined 23.8% year-on-year in December

BUDGETWRAP Russia shows strong budget revenues and spending in January Budget revenues totalled RUB1,316bn in January, down just 0.8% year-onyear despite the oil price contracting almost 50%. This was compensated by ruble depreciation on a similar scale; revenues in ruble terms remained almost unchanged. Expenditures reached RUB1,594bn, up 110% year-onyear.

The share of oil and gas revenues in total revenues decreased to just 39.6% from 46% in December. Oil and gas revenues dropped 15.3% year-on-year and 27.2% month-on-month in January.

This huge jump was driven by the government’s decision to support the economy. The government spent 10.3% of its annual expenditures and ran a deficit of RUB278bn in January (which is very unusual for the month, as spending usually runs well below the average monthly target at the beginning of the year).

There two important conclusions from the January budget figures. First, revenues remain strong in nominal terms. Should this continue, annual revenues could come in close to the 2014 figure. Second, if the annual spending target stays at around RUB15.5 trillion (which is possible), monthly expenditures will fall and the budget balance will improve. So based on the current trends, the annual deficit does not seem unbearable and could be below RUB2 trillion.

Massive military expenditures put budget spend well ahead of schedule, January deficit The federal budget ran a RUB277.9bn (5.7% of GDP) deficit in January; last year the budget ran a large surplus in January.

The revenue side, surprisingly, did not cause the deficit. January revenues amounted to RUB1.32 tln, or 8.7% of the full-year plan, while expenditures

totaled RUB1.59 tln, or 10.3% of the full-year plan; expenditures are thus well ahead of schedule this year and were the main reason behind the budget deficit in January.

In fact, very sharp acceleration in spending growth (atypical for the beginning of any given year) caused the unexpected deficit: the spending of RUB1.6tr in Jan 2015 substantially exceeds the normal RUB1.0-1.1tr for this month as well as the low base of RUB760bn in 2014.

Massive military spending of RUB710bn (over 20% of the annual defence spending plan) caused the spike.

The Finance Ministry reiterated its intention to cut this year’s total spending plan by 10%, which implies zero nominal spending growth for the full year, indicating that January's spending splurge may be a one-off event.

The Finance Ministry now expects a budget deficit of 3.2% of GDP in 2015.

The Economy Ministry earlier estimated that the federal budget may run a deficit of 3.8% of GDP this year with an average Brent price of $50/bbl.

Government to cut spending 10% in 2015 The Finance Ministry reiterated its intention to cut this year’s total spending plan by 10%, which implies zero nominal spending growth for the full year.

Government plans to cut state investment projects and freeze wages of state employees.

The Finance Ministry does not plan to reduce expenditures on national defence, the area of spending that will see the largest year-on-year increase this year.

Most of the budget cuts will instead come from state capital investment projects. The Ministry also plans to save money on the compensation of state employees by freezing salaries in 2015.

It additionally intends to use RUB2.7 tln from the Reserve Fund to cover the budget deficit this year, even though the current budget law only allows it to spend RUB500bn to cover a deficit. As of 1 February, the Reserve Fund stood at RUB5.8 tln.

Despite cuts, deficit to reach 3.2% of GDP in 2015 Despite the planned spending cuts Russia's budget deficit will likely hit 3.2% of GDP this year according to the Finance Ministry estimates.

The 2014 deficit came in at 0.5% of GDP, and the original federal budget for this year, adopted in November, forecast it would rise to just 0.6% in 2015.

But this estimate has been revised down to reflect the worsening economic climate.

Ministers have already said that the new budget will assume an average oil price of $50 per barrel this year compared with the $100 per barrel that was initially envisaged — meaning major adjustments were inevitable.

Russia to use $50bn from Reserve Fund to plug deficit Russia plans to spend RUB3.2 trillion ($52.36bn) from its Reserve Fund to plug an expected deficit in the federal budget in 2015, including RUB500bn already pencilled into the 2015 budget.

The increase means that Russia could spend well over half of its rainy day fund, currently worth $85bn, in a single year. The increase is part of a rebalancing of the budget which previously assumed an average price of $100 per barrel but now assumes $50.

First Deputy Finance Minister Tatiana Nesterenko said in the worst-case scenario, the Reserve Fund could fall to as low as RUB1 trillion by the end of the year, implying over 80% of the fund could be spent.

Gazprom woes hit budget revenues Gazprom usually contributes almost one-fifth of federal budget revenue, but a mild winter, better energy efficiency and a reluctance in Europe to take gas from Russia have meant some of the gas company's main customers have halved their supplies.

And if prices stay low as they track oil, which has fallen almost 50% since mid-last year, Gazprom, and Russia, may lose billions of dollars.

Sberbank CIB analyst Alex Fak said the budget may lose around $6bn a year if gas prices for Europe decline by 35% as expected, with possible sales falling by one-third.

Infrastructure Aeroflot – A Turbulent Year Ahead In this environment, a large drop in Russian international traffic of 20-25% y-o-y is expected as vacations abroad have become much more expensive. VTB also expects domestic traffic to increase 10%.

Aeroflot should outperform the market, as the company is not planning a significant capacity cut, unlike many competitors.

• Russian aviation market to suffer in 2015. We expect the Russian aviation market to contract 2025% in terms of international traffic in 2015 due to the increased cost of vacationing abroad caused by the weak ruble. This will stimulate domestic tourism, and we forecast a 10% increase in traffic on domestic routes, implying a 5-8% reduction in overall traffic for the industry.

• Aeroflot to outperform on both markets. Unlike many competitors, Aeroflot does not plan to cut its capacity significantly. Meanwhile, the recent crisis among travel agencies in Russia that saw several go bankrupt has led to a switch from package holidays, which generally use charter flights, to self-planned vacations, which most often use regular airlines. Aeroflot will also become more competitive on routes connecting Europe and Asia and could increase its market

share in this segment, while the further development of low-cost carrier Pobeda will strengthen its position domestically.

• Increase in ticket prices inevitable. The weaker ruble and high inflation will boost costs substantially, but this will be partly offset by lower jet fuel prices.

Overall we forecast 19% growth in ruble costs per available seat kilometer (ASK), which mean higher ticket prices for domestic flights are inevitable. On international flights, where prices are denominated in euros, we project an 8% decline. This will lead to a 20% increase in average yields in ruble terms.

Aeroflot turnover up 10.7% in January versus market decline of 8.3% The Federal Aviation Agency issued Russian airline industry statistics for January that show Aeroflot's passenger turnover rose 10.7% year-on-year, outperforming the market, which contracted 8.3%.

Also, the group’s number of passengers carried jumped 18.0%, while the broader market was flat.

Passenger turnover was unexpectedly strong for Aeroflot standalone (up 14.0%) and its regional subsidiaries. We credit the winter holidays here and note that they were largely booked before the sharp ruble depreciation in the fourth quarter of 2014. The only

downside was Orenair posting a 44% year-on-year dip in turnover, but traffic was slightly up, which bodes well for their shift from international charter to regular domestic transportation (with the average distance declining 45%).

Industry-wide, domestic turnover rose 15.5% at the expense of international (down 18.7%) for an overall decline of 8.3%. We associate this deterioration with the significant ruble depreciation and overall sluggish economic performance, which prompted Russians to travel domestically instead of internationally, and in turn forced the industry to cut capacity (ASK) by 4.6% (including

Aeroflot launches budget airline with RUB99 tickets Aeroflot's budget airline Pobeda (Victory) launched cheap ticket flights to seven Russian cities with a nominal introductory charge RUB99 ($1.49).

a 13.4% cut on international flights).

Despite this, Aeroflot Group added 10.4% to its capacity. International flights to and from CIS countries are slightly up in comparison to previous months, which further confirms the assumption that the fall in non-CIS flights was driven by travel budget constraints.

Finally, most charter carriers saw flights drop significantly, even as much as 80% for the smallest carriers. This was likely provoked by the crisis in the tour operator industry, which we have highlighted previously. We expect it this to continue, leading to further capacity cuts.

The sale applies to flights between Moscow's Vnukovo airport and the cities of Arkhangelsk, Belgorod, Nizhnyevartovsk, Perm, Tyumen, Ufa and Volgograd.

The tariff does not represent the final ticket price, which includes taxes and duties and

varies from RUB1,051 ($16) and RUB5,000 ($75).

Mexican carrier to buy ten more Sukhoi Superjet-100 Mexican carrier Interjet decided to order ten more the Russiadesigned Sukhoi Superjet-100 planes, according to Russia's ambassador to Mexico Eduard Malayan.

Mexico was one of the first to buy the Russia-designed SSJ-100 planes and has been actively using them for air-traffic operations.

The plane is also used by Laotian and Indonesian airlines.

At the end of February Russia's Sukhoi Civil Aircraft company and Nepalese airline Bishwo Airways signed a letter of intent for the supply of five more Sukhoi SuperJet-100 planes (SSJ-100) to Nepal.

Russia could begin assembling the Sukhoi Superjet regional jet in India to take advantage of lower production costs, the president of the plane's maker United Aircraft Co (UAC) said in February. UAC executives had visited several Indian aircraft assembly facilities and were impressed with their capabilities, Yury Slyusar, UAC's new president, said at a press conference in the Aero India air show in Bangalore in February.

Russia to invest $200 million into Cuban airports Russia says that it will invest up to $200 million into airports in Cuba

together with investors from the United Arab Emirates, according to local reports in Abu Dhabi.

If the project goes ahead then the Cuban government will build a rail link from the airport to the new by seaport of Mariel, which is also a special economic zone.

Once again Russia is vying with the US which recently ended years of diplomatic isolation and Russia is hoping to continue to drive a wedge between America and its own allies in the Latin American countries.

Turkish Stream pipeline to bypass Ukraine with gas deliveries The Kremlin threatened to bypass Ukraine completely by switching to a mooted gas pipeline running through Turkey.

Russia is attempted to open a new front in the gas wars after the European Commission effectively blocked South Stream construction on grounds of non-compliance with EU energy law. The pipeline would have run through Bulgaria, Serbia and Hungary leading to a gas node in Austria.

The EU energy commissioner Maros Sefcovicwho said he was "very surprised" by the announcement on January 14, which was the most explicit threat Russia has made yet on ending gas deliveries to Ukraine.

Russian President Vladimir Putin announced the new plan to replace South Stream with a pipeline via Turkey during a visit in December.

The advantage of the Turkish route is it lies outside of the EU. A gas node will be built on Turkey's border with Greece and hooked into the European pipeline network.

However, the threat remains that, as the Turkish pipeline deal is not a done deal. Wary of handing Russia such a powerful political tool as control over Turkey's energy supplies Ankara said in December it is will press on with plans to construct a 20bn cubic metre a year pipeline to import Iraqi gas, just a week after agreeing to discuss Putin plan for a new Russia-Turkey gas pipeline.

Gazprom CEO Alexei Miller said: “The Turkish Stream is the only route along which 63 billion cubic metres of Russian gas can be supplied, which at present transit Ukraine. There are no other options”, AFP reports.

Miller was especially aggressive in a meeting with Sefcovic this week, calling for the EU to start building “the necessary gas transport infrastructure from the Greek and Turkish border” immediately otherwise the 63 billion cubic meters of gas it will carry, "could end up in other markets."

Sefcovic was not amused: “We don’t work like this … the trading system and trading habits - how we do it today - are different,” he said after the meeting.

Russian shipbuilder says postSoviet record by building for nuclear submarine simultaneously Leading Russian military shipbuilder Sevmash in Severodvinsk set a post-Soviet record for building the most submarines at one time, completing for atomic nuclear submarines in its yards at the start of this year. The two boats are key to Russia's modernisation drive and indicative of the concentration on the submarine fleet.

The shipyard completed two new Borei- and Yasen-class submarines both of which are Russia's Next Generation submarines packed with nuclear tipped intercontinental ballistic missiles that can remain in the ocean depths for a considerable amount of time and moved into position to attack landbased strategic nuclear targets.

Container turnover in Russia down 25.8% in January Throughput at Russian ports dropped 25.8% y/y to 298,000 TEU in January, According to the Association of Trade Sea Ports (ASOP), Global Ports' container turnover was down 26.8% y/y to 143,000 TEU. Container turnover at Russian marine terminals fell 6.3% y/y to 419,000 TEU in December and 1.3% y/y to 5.2mn TEU last year.

“Container turnover in Russia was on the rise in January-July, but the positive trend was broken in August, and turnover has been

declining for six consecutive months, with the decline accelerating in January,” noted UralSib analysts.

Ruble depreciation is shifting local demand towards local products.

This is expected to cement the negative trend over the next few months, with 31% y/y

contraction this year. Turnover at Global Ports, which controls nearly half of the market, will follow the trend. “However, we believe that the sharp contraction in the container market is already priced in and see the current price level as an opportunity to pick up Global Ports GDRs,” UralSib added.

ECM Portfolio investment returning to EMs, Russia outperforms It seems portfolio investors are a lot more impressed with the recent ceasefire deal signed in Minsk between the West, Ukraine and Russia than the politicians are.

Funds have been returning to emerging market equities in the last two weeks but Russia has outperformed or other markets in the period.

"All funds covering EM saw a second straight week of mild inflow in the period to February 18, with 0.09% of AUM ($748.9mn) coming in, according to EPFR Global data.

Over one year, outflow is now 1.1% of AUM ($8.0bn)," Cole Akeson, an equity analyst with Sberbank CIB said in a note on February 20.

While nobody is expecting the economy to do well this year – in fact it is almost universally accepted that the Russian economy will contract by about 3%-5% –

the attitude to stocks is not quite the same. The point is that on the back of the recent brouhaha equity prices have been used to ridiculously cheap prices. Any sign of a lasting peace in Ukraine means the entire market should enjoy a fairly significant "dead cat bounce."

A recent survey by Moscow-based Detail Communications found that while investment confidence into Russia had halved in the last year some third of the respondents – a mix of portfolio managers and analysts from some of the most prominent investment funds and banks – expect the Russian stock market to put in double-digit returns this year.

This uptake seems to have already kicked off. According to Sberbank CIB the Russian market has already significantly outperformed its peers, with invested assets up by nearly a% in the last two weeks (0.94%) or taking in an additional $282.6mn in money terms.

"The Minsk 2 agreement and recent strong gains in Brent (the most active contract was up 5.3% in the period) have spurred hopes of a market recovery, and Russia’s net inflow has now crossed into positive territory (0.07%; $11.4mn) on a one-year basis.

Considering the steep outflows of March-April 2014, the one-year figure should continue rising if the broader market backdrop is sustained," says Cole.

The geographic breakdown reflected the regional news flow, with Russia-dedicated funds gaining 0.89% ($267.8mn) last week when other geographies were in a – 0.01% to 0.05% range.

Passive funds soared 2.38% ($291.3mn), while active gained a more muted 0.30% ($63.5mn).

Gazprom to list shares on Hong Kong exchange

permission to list on the Asian stock exchanges.

Russian state-owned gas giant Gazprom says it's intends to offer its shares for training on the Hong Kong stock exchange.

Magnit Private placement of minor stake oversubscribed

The company has already listed on the Singapore stock exchange, in a first step towards shifting to the east, which contributed to an uninterrupted trade in Gazprom’s shares.

In early February, China’s Dagong Global rating agency gave Gazprom the highest AAA credit rating for both local and foreign currencies, with a long-term stable outlook, helped Gazprom get

The principle shareholder in Russia's best supermarket company Magnit decided to sell off some shares to raise cash for investment projects. Reported price range represents 2-3% discount to the market.

Magnit’s shareholder, Lavreno Ltd, which is affiliated with the company’s principal shareholder Sergey Galitskiy, is placing up to 1mn shares of Magnit or about 1% of the company’s capital, with a RUB9,850-9,950/share ($146.1-

147.5/share) price range, representing a 2.2-3.2% discount to closing price on the Moscow Exchange.

The principal shareholder is gradually reducing stake in the company. The size of the placement could be about RUB10bn ($150mn). Sergey Galitskiy is planning to use the proceeds for his own projects not related to Magnit.

Following the placement, there will be a 90- day lock-up period for the sale of Magnit shares either owned directly by Galitskiy or through Lavreno Ltd. Galitskiy has been gradually reducing his stake in Magnit in recent months (by 1.6 ppt since September) but has confirmed that he will remain a strategic longterm investor in the company.

Some pressure on share prices likely in the short term. The private placement will likely result in minor short-term pressure on Magnit shares. That said, the company should remain an investor favorite among Russian retailers, as it is the market leader and has a good

chance to further increase its market share in the current environment. However, Magnit is not immune from the general macroeconomic challenges, while reduced profitability and increased administrative pressure will be key risks for the company this year, in our view. We have our model for Magnit Under Review at the moment.

Globaltrans Founding shareholders selling again Founding shareholders of the tankcar business Globaltrans were reported to have sold 40% of BTS, one of Globaltrans’s subsidiaries focused on rail tanks, to Vardanyan, Broitman and Partners (VBP).

The terms have not been disclosed and Globaltrans has not commented on the deal. Although Globaltrans still owns 60% in BTS, we interpret the sale of the founding shareholders’ stake as a negative signal. We believe VBP considers it a short-term rather than a medium- term financial investment and will probably sell it to a rail operator.

DCM Moody's downgrades Russia to junk rating Moody's Investors Service on February 20 downgraded Russia's sovereign debt rating from investment-grade Baa3/Prime-3 to speculative Ba1/Not Prime (NP) with a negative outlook. It was the second rating agency downgrading Russia's rating to junk after Standard & Poor's, which will mean that some international funds will not be able to hold Russian debt.

Russian Finance Minister Anton Siluanov called the downgrading “beyond reason” and "guided primarily by political factors”.

Moody's said the move was driven by the continuing crisis in Ukraine, coupled by oil price and exchange shocks undermining Russian economic strength and mediumterm growth prospects. Moody's also saw the government's financial strength diminishing under fiscal pressures and continued erosion of FX reserves in light of ongoing capital outflow and restricted access to international capital markets.

Finally, although still very low, the agency sees rising risks of an international response to the conflict in Ukraine triggering Russian authorities to directly or indirectly undermine timely servicing of external debt.

The negative outlook reflects potentially more severe economic and political shocks, related either to the conflict in Ukraine or a renewed decline in oil prices, further undermining Russia's public and external finances.

Moody's expects a deep recession in 2015 and continued contraction in 2016, with decline in confidence and incomes constraining domestic demand and exacerbating “already chronic” underinvestment. The agency does not believe that policymakers will be able to address the multi-faceted dilemmas of a falling exchange rate, large capital outflows, declining economic activity, and rising inflation.

The agency expects fiscal and foreign exchange buffers to erode further, despite planned fiscal measures currently taken at face value. Consolidated government deficit is expected at RUB1.6 trillion (2.6% of GDP in 2015), while the non-oil deficit is expected to widen, which would be financed by drawing from the Reserve Fund.

If the recession persists into 2016 and the government has to turn to the domestic market to finance at least a share of the deficit, the debt-to-GDP ratio could increase to 20%. Sovereign FX assets of the central bank and the government are expected to more than halve from approximately $330bn as of end-2014 due to continued capital

flight and restricted access to international capital markets.

Russia dumps $22bn in US bonds Russia dumped $22bn of US treasury bills in December bring the total sold in 2014 to $45bn of US treasury bonds.

After the sale Russia held $86bn of US government debt, the lowest level since 2008, according to figures released by the US Treasury Department.

The sale of the bonds had a dual purpose. Firstly the bonds were sold to raise cash to fight a rapidly devaluing ruble, however, more generally Russia is now actively reducing its exposure to the US currency for political reasons and what the Kremlin has called the "dictatorship of the dollar."

Russian officials have said that they will wind down holdings of US securities and reinvest the money in emerging market economies.

China’s Dagong rating agency Russian debt safer than US China’s Dagong rating agency says that Russia debt is more secure than US debt as a battle of the ratings agencies breakout. The head of the agency said the decision of the US Big Three credit rating agencies to cut Russia’s credit rating is politically motivated and disregards the real state of the country’s economy.

"We believe that the downgrades of Russia’s rating by the Big Three

rating agencies [Standard & Poor's (S&P), Fitch and Moody's] … are politically motivated," Guan Jianzhong said.

In January, China’s Dagong Global rating agency assigned to Russia a "A" rating with a "stable outlook," while the US agencies downgraded Russia to speculative grade. "I believe, there are no preconditions for these downgrades," Jianzhong said.

Comparing the current economic situation in Russia and in the Western countries, Jianzhong said that the crisis in the United States and the European Union is mainly due to domestic rather than external reasons.

"In these countries, unlike Russia, the scale of loans has exceeded the potential of national wealth production, resulting in a "bubble."

This crisis has spread across the world due to the policy of quantitative easing and switching on the printing press. All the countries have been forced to pay the price for this," he said.

"The current crisis in Russia has been caused by the Western countries’ sanctions rather than domestic factors," Jianzhong said, characterizing Russia’s economic development as normal.

Russia to offer longer debt on back of recovering oil price Russia plans to offer its longestdated debt since November as rebounding oil prices and a shaky cease-fire agreement in Ukraine drove a month of bond, currency

and equity gains in emerging markets in general and Russia in particular.

Russia’s borrowing costs fell to two-month low following the Minsk II ceasefire deal in February and the ruble, the worst performer in emerging markets in the past year, strengthened 10% versus the dollar in February.

After selling the most debt in a year at a bond auction in February, the Finance Ministry started offering RUB10bn ($160mn) of floating-rate bonds due January 2020 and RUB5bn of fixed-rate debt maturing August 2023 – its longest maturities in months.

The ministry of finance was seizing on improved investor appetite to bolster its financial position. Oil prices increased to the highest level since December 11 at the end of February.

Russian local-currency securities were the best performers in the Bloomberg Emerging Market Local Sovereign Index in February.

The dollar-denominated RTS Index has also climbed the most among 93 stock indexes globally with a 24% gain since January making Russian equities amongst the best performers this year.

Russian corporate bond issues pick up Has the bottom passed in the Russian bond market? Corporate bonds previously trading at distressed levels have seen spreads contract and the number of issues has ticked up over the first two months of this year.

In January $44bn of the nation’s corporate Eurobonds traded at distressed levels, reflecting mounting concern their issuers were at risk of default. That amount has dropped by more than 50% to $21bn as of February 17, reports Bloomberg even after S&P cut the country to junk.

The number of bonds trading at least 1,000 basis points above US Treasuries has fallen to 42 from 68 last month, according to data compiled by Bloomberg.

The Central Bank of Russia (CBR) design to unexpectedly cut rates by 2% to 15% in January has contributed to the bonce. But mainly the recovery is due to fears of a widespread financial collapse receding.

The demand for Russian assets has also been helped by a surged as the price of Brent crude that was up by a third from end of 2014 lows.

Sectors Russia's media sector hard hit by economic crisis

Car sales to fall by more than third in 2015

Russian media employees are among those to be worst affected by the economic crisis.

Russian car sales will fall between 25% and 35 % in 2015, according to PricewaterhouseCoopers (PwC) or to between 1.52mn and 1.75mn units for 2015. According to the Association of European Businesses, the sales of passenger and light commercial vehicles in Russia in 2014 dropped in comparison with the previous year by 10.3%, or down to 2.49mn units .

Journalists will loose their jobs as advertising revenues and state funding continue to shrink, according to government estimates.

Alexei Levchenko, an aide to Deputy Prime Minister Olga Golodets, told Izvestia the "conditions in the media market, where the situation is one of the most alarming," Between 15% and 20% of Russian media employees are expected to lose their jobs as a result of the economic downturn, Izvestia reported, citing Communication Ministry estimates.

The TASS news agency, one of Russia's largest state news agencies, was planning to lay off 25% of its staff in February as funding dwindled, general director Sergei Mikhailov said last month in comments carried by Vedomosti.

Other state news organizations, including pro-Kremlin broadcaster RT and news agency Rossiya Segodnya are looking at slashing their spending by at least 50% as the ruble continues to shed value, news reports have said.

Russian mobile shopping rivals that in western Europe says PayPal Russians use their mobile gizmos to buy online almost as much as punters in western Europe, according to the US online payment system PayPal. "Russian internet users are no different from other consumers in the major e-commerce markets, and they are increasingly using [mobile devices] to purchase goods and make payments — it's faster and more convenient," Vladimir Malyugin, head of PayPal Russia, was quoted as saying in a PayPal press release.

PayPal found that Russians use their mobile phones to place an average 2.6 orders online per month, compared to Western Europe's three. Russians also lagged just slightly behind Western

Europe in terms of purchases made using tablets with 2.38 and 2.4 sales per month, respectively, the report said.

A quarter of Russian smartphone users said they would like to be able to buy things in physical shops with their devices, and 22% would like to be able to place reservations or order food ahead of arriving at restaurants.

The mobile payment market has grown exponentially in Russia, rising from 1% of the country's total e-commerce market in 2010 to 20% in 2014, the report said.

Russia to remain world’s largest energy exporter to 2035 Currently pumping a record 10.6mn barrels a day of oil, making Russia the world's biggest export of oil and second largest producer; the country is likely to hang on to these titles through to 2035, according to British oil company BP's annual energy survey.

"Russia remains the world's largest primary energy exporter and the second largest oil and gas producer, with net exports of 712 Mtoe [million tonnes of oil equivalent] and total oil and gas production of 1236 Mtoe by 2035," the report read.

Natural gas production in Russia is set to be the second largest in the world, after the United States, at 75bn cubic feet per day in 2035.

However, unlike the United States, most of Russia's gas production will

come from conventional reservoirs, BP said.

Russia's primary energy production will grow by 14% between 2013 and 2035, according to the forecast, while its primary energy consumption will be the slowest growing among the BRIC countries, with its global share set to decline from 6 to 5%.

Fossil fuels will account for 87% of primary energy consumption in 2035, a slight decline from 2013, with natural gas dominating the fuel mix.

The consumption of oil, gas, hydro and nuclear fuel is set to grow, with coal being the only fuel expected to decline, according to the forecast.

Russian residential construction to fall by 15% in 2015 The volume of construction of Russian residential real estate is 64-bit by between 10% and 15% this year well mortgage lending will be cut in half, according to the Russian construction, housing and utilities ministry.

Mortgage lending could be full by even further if the state does not follow through on a promise to provide RUB400 billion ($12 billion) in subsidies to builders and banks and the ministry said.

Mortgage lending has already fallen by 15% in January month on month which is down by 35% yearon-year.

Turkey becomes Russia's second-biggest gas import customer after Germany Turkey became the second largest importer of Russian gas after Germany following of boost to imports by 2.3% in 2014 compared to imports of the previous year.

The increase came at the cost of cutting imports of gas from Turkey's other suppliers – Germany and Italy. Gazprom exported 27.3 billion cubic meters of gas to Turkey, while its exports to Germany by 3.7% to 38.7 billion cubic meters and those to Italy dropped by 14.4% in 2014 to 21.6 billion cubic meters of gas.