bne:Chairman's Monthly List — October 2014

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 The Putinisation of Europe CBR makes bold rate hike – is it bold enough?

Russia places 62nd in World Bank Doing Business rating Anti-G7 emerges There is cause for optimism over Russia’s crisis Ukraine/Russia - measuring the costs of the crisis Why is the ruble weakening?

Putin signs law on ratification of Eurasian Economic Union treaty Politics – the good Fines for 'foreign agent' law violations are reduced Bill regulating number of state officials in Russia reaches State Duma Navalny Wins Court Case Against Federal Media Watchdog Navalny’s makes faux pas with Crimea comments

Putin's 'de-offshorization' campaign causes splits in Kremlin Bankers of failed banks banned for life from working in banks Effectiveness of Russia's smoking ban wins kudos from WTO Blacklisted Russians Take EU to Court Over Sanctions Terror acts in Russia down by half Russian Ministry says wants to soften line on foreign media in Russia restrictions, but doesn’t know how to Russia, EEU ready to sign a free trade deal with the EU Penalty for selling alcohol to minors to be hiked 10-fold Russia releases opposition activist charged with violence against police Mikhail Prokhorov to return to politics?

Communist lawmaker loses immunity over embezzlement charges

Politics – the bad Russia overtakes in US in nuclear warhead deployment

Conservative Russian politicians proposes banning Apple CEO Tim Cook from Russia because he's gay

Court orders Sistema to return Bashneft to state

Moscow court hits Bolotnoye suspect with 3 years in prison

Russia reinstates authority of investigating officials to file criminal charges for tax violations independently

Soldiers' Mothers activist arrested for press cases of Russian soldiers in killed in Ukraine

President Putin signs law limiting foreign ownership in Russian mass media to 20% Russian state-owned Rossiya Segodnya media behemoth to launch string foreign bureaus, launches UK channel President Putin signs law limiting foreign ownership in Russian mass media to 20% Russian state-owned Rossiya Segodnya media behemoth to launch string foreign bureaus, launches UK channel Nationalists granted permission to march on unity day in Moscow Bill on private military companies submitted to Russian parliament

Two American Journalism Professors Detained in St. Petersburg at Workshop Russia's pension tsar implicated in $8m fraud Moscow motor rally to protest new parking rules broken up by traffic police McDonalds fine for selling improperly marked toys Polls, mood, sociology Over half of Russians say their country needs "special type" of democracy 83% of Russians ready to vote for Putin in presidential election Most Russians consider US major enemy of Russia

Politics – the ugly Putin Pardons Former FSB Officer Convicted of Murder

Almost half of population do not want McDonald's in Russia Russian hostility to EU also soars

Suicide bombing kills five in Chechnya at Kadyrov's birthday party Russia Failing to Fight Corruption in Global Trade, Report Says

Russia rises by 30 positions in new World Bank's Doing Business rating

70% of Ukrainians but only 26% of Russians say there is a war between their countries Half Russian think sanctions could cause a financial crisis‌

Banks and Finance Banking sector overview for September Two out of nine Russian banks are loss-making

70% of Ukrainians but only 26% of Russians say there is a war between their countries

Banks facing a slump in lending business in 3Q14

Half Russian think sanctions could cause a financial crisis‌

The lack of funding options at heart of bank's problems

‌ but most Russians think sanctions will boost nation's economy

Russia may soften capital adequacy norm for sanctions-hit banks

Russian consumer confidence falling

EU court may hear Russian bank's claims vs sanctions in 2 years

Defence minister Shoigu, Foreign minister Lavrov top publicity, approval rating of government members

Punters moving money from bank accounts to bank safety deposit boxes

Half of Russians believe a return to Stalin-era repression possible

Russians pull $5bn out of banks as ruble plummets

Vast majority of Russians think foreign media criticize Putin to weaken Russia

One in three Russians have savings, proportion rising

Opinion poll finds Russia needs to celebrate National Unity Day Majority of Russians endorse internet censorship Moscow State University makes it into The Times' top-200 university list for first time

Russian banking system has no systemic problems with meeting external debt refinancing obligations this year Bank consolidation continues Credit card use tanks, NPLs up Volume of POS lending falls for the first time Putin signs law delaying deadline for Visa, MasterCard security deposits

Late payments on mortgage loans up 6% YTD

Russia ratings affirmed by S&P with negative outlook

Russian Standard Bank to sell is Ukrainian subsidiary to international investors

Moody’s cuts Russia’s foreign currency long-term debt rating

China opened his fourth bank in Russia Promsvyazbank and Gazprombank plan to obtain a banking license in Hong Kong Local funding reduces risks for foreign banks in Russia BNP Paribas stops credits for Russian commodities deals Government to inject another RUB5bn in Russian Agricultural Bank in 2014 SWIFT system has no intention to disconnect Russia Russia's Deposit Insurance Agency pays $553m to Crimean residents Qiwi sees Russian money remittance market doubling in 2015 from 2013

Russia's agriculture sector soars, import substitution working?

Russia's annual inflation remains at 8.3% Retail trade accelerates to 1.7% y/y in September Russian capital investment fall 0.4% in September Government approves program for project financing with subsidized rates Russia's C/A surplus improved in 3Q14 due to falling imports Russia's industrial output grows 2.2% in September Real salaries in Russia fell 0.3% as of the end of Q3 2014 year on year.

Fewer Russian bureaucrats but salaries increased 30% over five years

Economics Russian economic growth decelerates for third consecutive quarter CBR surprises with sharp interest rate hike Ruble under triple pressure Russia’s economy will reach longterm potential only in 2017

Russians are 17% poorer than in 2007 due to collapsing ruble Russian spending on luxury goods plummets with ruble Persistent ruble weakness soaks speculation of accelerated switch to free float, hard currency reserves to fall

Ruble expected to recover very slowly in 2015 Population still ignoring devaluation, but tide is turning

Infrastructure Aeroflot's 2nd attempt at budget airline to be called 'Victory'

Capital flight for this year high, but slowing fast

Russia, China Move Ahead on $25bn High-Speed Railroad Project

Russia buys most gold for reserves since financial crisis of ’98

China to start construction of the Power of Siberia gas pipeline in 2015

Ruble devaluation supports the budget

Gazprom, Oettinger says South Stream is acceptable for EU but not a priority

Oil prices and break even for the budget Russia to miss already low 2015 privatization revenue goals

LUKoil Seeks European Cash for Project Undercutting Gazprom's South Stream

Russian defence budget to hit record $81bn in 2015

Western Route gas pipeline contract with China not expected to be signed until 2015

Russia depletes its rainy day National Welfare Fund

Gazprom may ditch Vladivostok LNG for Altai project

No capital controls, no borrowing in 2015

Invest in Customs Union rail operator seen at $2.5bn by 2021

Russian bill on flight capital amnesty submitted to the State Duma

Four Russian firms file bids to build power bridge to Crimea

Russians burdened by less debt compared with US

Russia's cargo turnover grows in September ECM

German Exports to Russia Slump 26% in August Over Sanctions Just 3% of Russian SMEs make it through first three years, unless have state support

RTS index falls below Lehman low of September 2009 Sistema stocks were manipulated during arrest newsflow RDIF may be entitled to invest in projects without foreigners.

Russia's TMK to raise $500m through US division's IPO

Russian Grids-Chinese JV to borrow $1bn from China annually

Russia's Acron to sell 30% stake in unit to Indian firms

Russia's Polymetal to refinance $500m debt in 2015

Russia's Detsky Mir not to hold IPO in 2014

Russian industry fund to extend RUB16bn of cheap loans by 2015

Sechin Says Rosneft Shares at Stake Sale Would Be Worth $8.12

Foreign banks in Russia turn to ruble bonds

Russian companies dash to pay 2014 dividends ahead of tax change

Sberbank files six new suits against Mechel companies Sectors

Did Sistema get Bashneft on the cheap?

Mangrove Capital Partners freezes Russia investments RDIF seeks Arab investors to finance Central Ring Road construction

Russia to spend RUB38bn in '1517 on import substitution Russian car sales slump 20.1% in September Russia's AvtoVAZ sales slump 19% year-on-year, losses soar four-fold

DCM Russian firms, banks able to service foreign borrowing despite sanctions Russian external debt down but future payments high Rosneft Denies Media Reports about Liquidity Crunch, a Credit Positive Gazprom mulls offering Eurobonds denominated in Asian currencies Russian Highways board approves offering RUB21.7bn bonds

Russian GAZ Group's management switches to 4-day week until 2015 Russian car imports fall 17% to 485,000 units Jan-Aug Russia on course to a bumper 110m tones grain harvest Russian Internet retail market to rise 28% in 2014 Russia's Real Estate market showing signs of life Increasing number of empty stores in retail real estate Demand for Warehouse Space in Moscow Nosedives

Non-western countries queue up to sell Russia food Russia needs to expand oil drilling to maintain current production levels Russia 1st for global gas exports, 2nd for gas output in 2013 China to increase gas consumption more than threefold by 2030 Gazprom has 19% year-on-year decline in non-FSU gas exports in September

Western sanctions to push Russian steel demand down for 2-4 years Russian advertisement market to rise 1.2% to RUB332bn in 2014 JTI says Russian tobacco market's fall to slow down to 5% in 2015 Chinese firm may invest 45bn rbl in Russia's solar power Detsky Mir toy chain posts strong 9M14 results

Top Story

The Putinisation of Europe David O’Byrne, Kester Eddy and Nicholas Watson When Hungary’s Napoleonesque prime minister, Viktor Orban, declared in a grandiose speech in July that Vladimir Putin’s Russia is a more attractive political model than the liberal democracies of the West, it confirmed the worst fears of those who worry about the dark night of fascism once again descending on Europe.

Those countries, Orban explained, “capable of making us competitive are not Western, not liberal, not liberal democracies, maybe not even democracies.”

Instead, he picked Russia, China, Turkey and Singapore.

Such a bald statement about something that hitherto had only been discussed on the fringes of the political discourse was a gift to neoliberal Atlanticists, who have been warning of a growing trend in Europe that bne identified in a piece about former Ukrainian President Viktor Yanukovych’s swing towards a Russian style of

management in 2010: “The Putinisation of Ukraine”.

In Ukraine, what that entailed was a creeping authoritarianism, nepotism and cronyism, rampaging corruption by connected elites, and a growing disregard for civil rights and press freedom. However, Yanukovych’s Ukraine lacked specifically what had made Putin’s model so attractive in the first place: economic stability. In the decade after he came to power at the turn of the millennium, Putin delivered on 10-fold increases in many economic measures, such as incomes, size of the economy, stock market capitalisation and international reserves.

But after failing to build up domestic support, Yanukovych’s regime swiftly collapsed in the teeth of protests against his corrupt rule, the slumping economy and a turn away from Europe, forcing him to flee to Russia where he still apparently resides (though bne sources reported seeing him in Beijing this summer).

A purer form of “Putinisation”, where the emphasis is on establishing economic stability as cover for the less liberal aspects such as majoritarianism, appears

to be taking root elsewhere in Europe. Orban identified Turkey, but others are seeing signs of it to greater or lesser degrees in Romania and Bulgaria (both EU countries) and EU wannabes Serbia, Macedonia and Montenegro. While there are huge differences among the leaders of these countries, there are also some striking similarities.

What connects the leaders in these countries is an idea that has taken root – and articulated by the current editor of The Economist no less in his book The Fourth Revolution: The Global Race to Reinvent the State” – that the “21st century has been a rotten one for the western model.” As Indian author and political essayist Pankaj Mishra explains in an article entitled “The western model is broken”, rather than every society being “destined to evolve just as the West did, where aspiring middle classes created by industrial capitalism will bring about accountable, representative and stable governments… one event after another in recent months has cruelly exposed such facile narratives."

Thus the 21st century, rather than being “the end of history” as political scientist Francis Fukuyama declared in 1989, is actually proving to be a period of great economic and political upheaval characterised by mass carnage. In such uncertain times, people cry out for stability – a desperate yearning that these European leaders are successfully tapping into. And with many predicting for Europe a decades-long period of

Japanese-style stagnation, it’s likely this will prove fertile ground for breeding more such leaders.

What particularly appeals to these strongmen of Europe has been the success of Putin's methods of maintaining control in the face of opposition and thus clinging onto power. December 2011 saw 100,000-strong crowds march in central Moscow for the first time in nearly a decade, but just two years on and Putin’s popularity is near an all-time high even as living standards begin to fall for the first time; as of the last week of October, Putin enjoyed an 86% approval rating, and even in Moscow where opposition against him is concentrated, more than 60% want him re-elected in 2018.

The side effect of the battle in Ukraine is that it has crushed Russia's nascent opposition movement.

“The attacks against Putin are attacks against Russia,” an influential speaker said at this year's annual Valdai Club meeting in Sochi, where the press is forbidden from naming speakers.

"The Russian people understand that if there is no Putin, there is no Russia."

Sanctions are justified by their Western sponsors as undermining Putinism, but Andrew Kuchins of the Center for Strategic and International Studies in Washington said at the Valdai Club: "It's only encouraging Putinism."

Read more here

CBR makes bold rate hike – is it bold enough?

Faced with an unenviable task, the CBR’s decision On October 31 constitutes a bold move to calm the FX market down and address concerns over rising inflation expectations. Looking ahead, the CBR is likely to remain on hold until the middle of next year unless pressure on the currency intensifies again.

150bp rate hike on inflation grounds... From the inflationtargeting standpoint, the decision to hike rates might be viewed as well-grounded in light of the recent pick-up in headline CPI and its inevitable acceleration towards double-digits through 1Q15.

We do not tend to share this view, though, as there is very little the CBR could do to prevent an inflation spike in the short term, while in the medium term both of the shocks (food and FX) are disinflationary given their impact on income. Inflation expectations getting out of control is a risk, but the persistent slide in nominal wages growth suggests this concern is overrated. …or RUB/financial stability. We believe a milder hike could address concerns over rising inflation expectations, while the genuine reason behind today’s action were financial stability considerations. It is surprising that the CBR did not reference financial stability in its press release, thus leaving room for a different interpretation and making it more difficult for the

market to understand the regulator’s reaction function.

Is the rate hike enough? We think it would be very helpful if the CBR gave some form of a verbal intervention with regards to FX at this point, as the recent bout of capital outflow might not necessarily be highly sensitive to rates, and pressures on the currency might not be fully behind us. We think the next policy action could involve changes to the intervention policy as well as the expansion and the fine-tuning of USD refinancing vehicles.

Rates to stay on-hold before mid2015. As for the rates outlook, we believe today’s hike should mark the end of the tightening cycle, while easing is unlikely to start before the middle of next year.

Market implications: • Marginally negative for RUB, as the market expected bolder action from the CBR – changes to the FX regime and US dollar funding/liquidity. At the same time, the carry in RUB has now improved even more than compared to EM peers.

• Negative for OFZs. We estimate the OFZ market has been pricing up to the 50bp rate hike recently.

Hence, the spread of mid- and longer-dated OFZs to the repo rate is just near 50bp – rather tight by historical means.

• Neutral for NDF market. The NDF market has priced up to the 200bp rate hike, so the decision will likely

be neutral. We do not rule out that front-end NDF rates might actually tighten slightly.

Russia places 62nd in World Bank Doing Business rating

The World Bank has ranked Russia 62nd out of 189 countries in its latest international Doing Business (DB) rating. The ranking methodology has changed, so Russia’s 2014 rating cannot be compared with last year's 92nd placement. Under the new methodology, Russia advanced two places from 64th, which does not indicate any noticeable

improvement in the business climate.

Looking at the underlying indicators, Russia in 2014 moved up the list significantly in terms of Starting a Business (58 to 34) and Registering Property (17 to 12), which highlights a reduction in bureaucratic barriers to companies’ administrative activities; however,

this area is currently of secondary importance to business.

The areas significant to companies’ operations and investment activities, on the other hand, remain a challenge. First, Russia moved down two places to 143 in terms of Getting Electricity, reflecting higher barriers to connecting new SMEs to distribution networks.

(corresponding to the spike in housing construction growth this year), Russia still ranks 156, which signifies persisting constraints in developing the construction sector.

Therefore, we find the new DB rank to be neutral for Russia’s growth story, while current foreign policy tensions concerning Russia will lower the significance of the headline DB rating for market sentiment.

Second, despite jumping 16 places in terms of Dealing with Construction Permits

Anti-G7 emerges

The IMF released data in October that shows the seven largest emerging markets now have a combined GDP that is bigger than the combined GDPs of the G7 industrialised nations, when measured at purchasing power parity (PPP).

Focus is shifting away from the trendy BRICS (Brazil, Russia, India, China, South Africa) and associated MINT (Mexico, Indonesia, Nigeria and Turkey) to the simple realisation that all the emerging markets are growing fast and the world's centre of economic gravity has already moved eastwards.

A hypothetical new Anti-G7, comprising the BRICS and three of the four MINT economies (Nigeria is missing) has a combined GDP of $37.8 trillion (at PPP) compared to $34.5 trillion for the old G7

Canada, France, Germany, Italy, Japan, the UK and the US. At the same time China in PPP terms, is now the world's largest economy, overtaking the US. At market exchange rates, the US economy is worth $17.4 trillion and the Chinese stands at $10.4 trillion. With an adjustment for relative prices, China’s economy moves up to first place, with a GDP of $17.6 trillion.

Russia does less well and is the sixth among the new top 10, ahead of France and the UK. Some political analyst have pointed out that despite Russia's current aggression the most sensible strategy would be simply to wait things out as Russia's relative power in this new world order will wane as its relative size shrinks in comparison to its Anti-G7 peers.

There is cause for optimism over Russia’s crisis

Since the start of this year the Russian ruble has collapsed by 20% against a basket of dollars and euros, by far the worst performing of the major emerging market currencies except for the Argentine peso. But Argentina defaulted on debt obligations, while Russia has less than 11% sovereign debt to GDP and is running a triple budget, trade and current account surplus. It is therefore tempting to link the ruble’s demise with the country’s actions in Ukraine and the resulting sanctions imposed by western countries.

A prevalent theme in many western political commentaries is that the ruble slide, in tandem with the steep oil price fall, will lead to a collapse in the economy which, in turn, will undermine public support for President Vladimir Putin and force the Kremlin into a more accommodating geo-political stance. Both of those assumptions are very wide of the mark. The reasons for the decline in the ruble are more serious than just sanctions and, at the same time, the central bank’s response and the oil price slide offer cause for some optimism that some positives may yet emerge from this crisis.

Of course there can be no doubt that sanctions are hurting, especially those imposed in early September which added Sberbank to the list of state banks excluded from western debt markets and the

cut in the accessible debt limit to 30 days from 90. That action severely squeezed liquidity in the Moscow FX interbank market, sending the cost of borrowing higher and adding further to ruble pressures. The higher cost of debt servicing, which is expected to rise by another 100 to 150 basis points this month as the central bank (CBR) targets inflation and tries to provide ruble support without eating too far into financial reserves, is also one of the major reasons for the slowdown in the economy. Households are spending an increasing amount of income on servicing existing debt and businesses can’t justify investment projects with the cost of capital in excess of 20%, especially for small to medium sized enterprises. That is one of the legacies which will remain long after sanctions are eased and which will hamper the pace of recovery.

But sanctions are nowhere near the full story. The ruble lost 10.5% against a basket of dollars and euros in 2013 and another 8% in January and February of this year.

That was before sanctions were mooted and while oil traded close to $110 a barrel. The major cause of ruble weakness in that period was the sharp slowdown in the economy, which saw growth of only 1.3% in 2013 compared an expectation of 3.5% growth and against 4.3% growth recorded two years earlier. Some policy mistakes by the government contributed to

that decline but the main reason was result of an over reliance on oil and gas revenues, which had fuelled for far too long the consumer and real-estate boom of the previous decade, and delays to any meaningful reform progress.

That is the major concern for investors and businesses in Russia: an easing of sanctions would only bring the economy back to the problems which were evident in 2013 but are now made a whole lot worse because of the legacy of the Ukraine crisis and because of lower oil tax revenues. That’s the glass half empty interpretation.

The glass half full interpretation is that Russia only ever learns from past mistakes and is more likely to change tack and address its problems as a result of a crisis or when there is no other, easier, path to take. That’s one of the reasons why it has always been extremely profitable to invest in Russian assets in the midst of crisis when all of the arguments scream otherwise.

One reason for optimism is the way the CBR has managed the ruble’s decline. It has let the currency fall and remains fully committed to bringing in a free floating ruble sometime next year. This is a major contrast to 2008/09 when the CBR spent one-third of national reserves, or approximately $200bn, in a futile effort to defend the ruble. It learned an expensive lesson back then. The CBR has intervened over the past 10 days, once the ruble crossed the threshold of 44.40 against the dollar-euro basket, but its actions

are much lighter and cheaper than previously. The key reason for that change is to protect ruble budget revenues, the ruble spending power of the accumulated sovereign wealth funds and as an indirect stimulus to local manufacturers.

Last year the federal budget needed an average oil price of $108 a barrel to balance. Over the first nine months of this year the budget ran a surplus equal to 2% of GDP, or over $32bn, despite a 6% rise in spending. In September, and despite the sharply falling oil price, the budget ran a surplus of $3.6bn specifically because the weaker ruble compensated for the lower dollar denominated oil revenues. In its recent draft budget proposal for 2015, the finance ministry assumes an average oil price of $100 a barrel which, using an average ruble-dollar exchange rate of 37.70, would result in a deficit equal to 0.6% of GDP. At the current exchange rate of 41, the same result will be achieved with oil averaging $93 per barrel. That places Russia in a much better position to live with a falling oil price than is the case with the major OPEC producers whose currencies are pegged to the rising dollar and, especially in the case of the Arab producers, have all pushed up their budget reliance on oil very significantly since the Arab Spring.

Balancing the budget with a weaker ruble is only buying time and surviving. Despite the boost to the competitiveness of domestic producers and import substitution,

it cannot lead to a recovery in growth. Continuing capital flight, negligible FDI flows, high inflation and an excessively high cost of capital are more likely to lead to prolonged stagnation. Russia needs reforms and an improved investment climate in order to attract the much-needed boost to inward investment, which Putin clearly identified in his state of the nation address last December as an essential condition for long term growth.

In early 2009, when oil traded below $40 a barrel and the economy was in recession, we saw a greater emphasis on reforms and

efficiency initiatives within government and the big state enterprises than ever seen previously. Regrettably the price of oil rallied too quickly in the 2nd half of 2009 and most of the reform plans were placed back in the pending tray. Different this time? It’s like the series finale of one of those gripping TV series: a number of possible scenarios are possible. Frustrating as it is, the one advantage that Russia still has is that investors will still tune in to the next series. Gripping soapoperas are like that.

Ukraine/Russia - measuring the costs of the crisis

Russia’s foreign minister, Sergey Lavrov this week estimated that the crisis in Ukraine would likely cost the German economy EUR40bn this year, and a further EUR50bn in 2015 – presumably through lost exports, and a broader disruption to the German economy and weaker resulting real GDP growth. It is unclear how Lavrov derived his figures, but these are not insignificant numbers being bandied about, i.e. around 0.7% of GDP on an annual basis.

With this in mind it is worthwhile perhaps to try and estimate the losses of the crisis also to both Ukraine and Russia.

In Ukraine’s case, it is perhaps important to distinguish between losses resulting from the conflict and those relating to the underlying economic crisis which is resulting from the unsustainable policies run by the former Yanukovych regime – twin deficits, were always going to end in a major macro-economic adjustment, with a large exchange rate adjustment required, and likely a corresponding recession as domestic demand “shrunk to fit”.

In a scenario where no conflict occurred real GDP might have contracted by 2-3% YOY, and the exchange rate likely dropping from UAH8.2:$1 to more like UAH9.5:$1+. This would likely have cut dollar GDP from $178bn

in 2013 to more like $157bn in 2014. It might reasonably be argued that the recession/devaluation might have been moderated by access to Russia’s $15bn bail-bond facility, and the provision of cheap Russian gas/energy – albeit as has proven the case in neighbouring Belarus, such Russian support tends to stall much needed longer term reform, and ensures that economic losses are sustained over a longer period of time.

As is, as a result of the on-set of conflict, we estimate a real GDP contraction this year of 9-10%, we assume nominal UAHGDP flat-lining due to an acceleration in the GDP deflator from exchange rate pass through to inflation, and with the exchange rate depreciating to average around UAH11.5:$1 for the year, which takes $GDP down to around $127bn, implying a loss of $30bn on the no-conflict scenario as noted above or the equivalent to around 17% of GDP for 2013. We would note that this is likely the result of the loss of Crimea, parts of Donbas, the actual conflict, plus also disruption to trade and energy ties to Russia.

We would also note that the UAH has been relatively unmoved by the recent, broader $rally, as the NBU imposes administrative tools to try and hold the UAH around current levels of UAH12.9:$1 – arguably the currency should be much weaker if left to its own devises, and indeed, the black market rate for the currency is currently nearer to UAH15:$1 which would imply even large dollar GDP losses as above.

The above represents a flow loss of GDP, but there is also a loss of assets (stock GDP in effect) – in terms of destruction to the stock of wealth/assets, including infrastructure. Therein official sources are suggesting that the costs of repairing roads, bridges, housing and infrastructure might total as much as $2bn.

In addition, the crisis has resulted in a deterioration in public finances, a wider budget deficit (now over 10% of GDP) and increased borrowing costs. The original IMF programme agreed in March 2014 assumed the stock of public sector debts of $73bn as of the end of 2013, rising to $82bn by the end of 2014. This was revised up again during the first review under the SBA in July 2014, and after the first on-set of hostilities to $92bn, which might still prove to be an under-estimate. However, this suggests an additional $10bn in increased public sector borrowings as a result of the conflict – it might be argued that the IMF also simply underestimated the economic adjustments required as a result of the policy failures of the Yanukovych regime.

All told the above might suggest an “all-in” cost to Ukraine of the current conflict of around $42bn, including a $30bn loss in $GDP as a result of the conflict, $2bn infrastructure losses, and perhaps an additional $10bn in terms of increased public sector indebtedness. Clearly for a poor country, these losses are huge and impose a systemic burden with the

hope being that Western financial support can partly fill this gap.

Applying some similar analysis to Russia I estimate that real GDP losses are in the 0.5-0.75% range – pre-Ukraine crisis, the market consensus was for real GDP growth of around 0.75%-1% for 2014 for Russia. At present, the consensus is for real GDP growth of zero to 0.2-3% for 2014. Sanctions and concern generally has also weighed on the ruble – albeit lower oil prices and a general trend to a weaker ruble on longstanding concerns over Russia’s real GDP trajectory are also weighing there.

We assume an average ruble rate for 2014 of RUB37:$1, from RUB31.8:$1 in 2013. We assume around one-third of the exchange rate weakening from 2013 to 2014 is Ukraine-conflict related, i.e. we assume that the ruble would have weakened anyway to an average rate of around RUB35.26:$1 – due to weak underlying growth, dollar strength, and lower oil prices. We hike the GDP deflator for Russia for 2014 by 2 percentage points to account for the impact of the food import ban and some exchange rate pass to inflation. We assume 0.25% real GDP growth in 2014, as opposed to 0.75% in no conflict scenario. Overall our results suggest that without the conflict Russia’s $GDP in 2014 would have dropped from $2,099bn in 2013, to $2,022bn. However, assuming a larger nominal exchange rate correction and weaker real GDP growth this takes $GDP down to $1,953bn, implying a loss of around $69bn, or just under 3.3% of GDP again. Note that the IMF using similar GDP/deflator

assumption forecast $GDP for Russia dropping to $2,057bn in 2014, albeit they arguably use an optimistic exchange rate assumption now of RUB35.3:$1 – already exceeded this year.

In Russia’s case it might also be appropriate to add in losses in FX reserves defending the ruble. Thus far in 2014, YTD, FX reserves have dropped $56.9bn, and on the current rate of depletion total reserve loss for the year might total $65bn. This compares with reserve loss of $25.8bn for the full year in 2013. Again it is reasonable to take out intervention which might have been driven by underlying ruble weakness related to oil prices, and weak growth drivers. However, it does not appear unreasonable to assume that one half of reserve loss – maybe $30bn or so might be specifically related to attempts to counter capital flight specifically related to the crisis in Ukraine and the imposition of Western sanctions on Russia which has hurt overall sentiment.

All told the above suggests an overall loss to Russia of perhaps as much as $100bn, or just under 5% of GDP, which is very large. This makes no assumptions in terms of military losses incurred, and higher fiscal costs associated with required investments/fiscal drag from Crimea which could also reach into the tens ofbns of dollar – particularly in terms of the construction of a new bridge to connect Russia with Crimea (preliminary estimates put the cost at RUB300bn, or $8bn). Also there appears to be on-going costs for

Russia’s support for separatists in the Donbas – currently 2.5% of Ukrainian territory occupied by pro-Russian forces. Arguably many of these costs have yet to be assumed. As a very rough estimate, supporting Crimea and regions of Donbas controlled by separatists could easily drain $5bn (0.3% of Russian GDP) annual disbursement from the Russian budget – given the economies of these two regions have all but collapsed, and Russia will not be responsible for provision of social support for their populations, supply of energy, and rebuilding costs.

Note that in terms of the dollar GDP losses as noted above, that these are the losses only incurred for 2014, but the crisis in Ukraine and sanctions are likely to impose a longer term drag on both economies – i.e. recurring and cumulatively growing losses. These may well be diminishing but none the less very significant.

Now clearly on the above we could have a discussion as to whether it is useful to include real depreciation/appreciation in measuring losses, and whether $GDP is the best means to do this, rather than simply real GDP losses.

That said, countries often use $GDP, and $per capita GDP, when it is rising as a measure of wealth/well-being, and indeed $GDP is used as a key measure of key ratios, such as current account/GDP, gross external debt/GDP, etc, and on a relative basis. It is important therefore to the overall story.

Russia - Risk scenarios if oil prices change We forecast Russian 2015E GDP growth at 1.7%, with Brent crude oil at $105/bl. In this report we estimate the impact of a fall or moderate increase in oil prices on the country’s economic performance.

In our base case, we expect Russian GDP growth to accelerate from 0.8% in FY14E to 1.7% in FY15E (Russian GDP growth revision: Goodbye to romance). We are also looking for better economic performance in Kazakhstan, with GDP growth increasing from 4.5% in FY14E to 5.6% in FY15E (Kazakhstan: When softer growth still looks good).

However, both countries rely heavily on energy exports. In our forecasts we assume an oil price of $105/bl for both years. In this note we estimate the impact of a fall or moderate increase in oil prices on countries’ economic performance.

On the stronger side, we assume $115/bl as the best case; on the weaker side we go further, to $50/bl (Figures 1-2). However, we consider oil prices below $80/bl as a very unlikely hypothetical case.

Russian economic picture varies significantly in oil scenarios If oil prices go to $110/bl or $115/bl, GDP growth in Russia might be even stronger next year, at over 2%. We estimate growth is likely to remain positive only with oil prices above $92-93/bl.

Otherwise, we see growth turning negative and the ruble hitting new lows. However, a weaker ruble is

likely to stabilise the current account (we do not foresee FY deficits in any scenario) and also alleviate the effects of a drop in oil prices on the budget.

The risks to our Russian growth forecast are clearly slanted to the downside. First, our current base case is a frozen conflict in Ukraine and the expiry of Western sanctions on Russia in late 2015.

In a recent note we considered various risk scenarios for Russia in the event of intensified sanctions (Risk scenarios for Russia - If sanctions widen to energy exports). Risks to our baseline scenario for Kazakhstan are fairly balanced, in our view. We do not see significant direct impact on Kazakhstan’s prospects stemming from tensions over Ukraine. The indirect effects of a softer Russian performance would be nonnegligible, but not so great as to require quantifying separately from a broad range of traditional risk factors.

However, recent dynamics in global commodity markets prompt us to focus on additional sources of risk for Russian and Kazakh GDP growth. In our forecasts we assume a Brent oil price of $105/bl for 2014E and 2015E. We keep this projection as our base-case scenario, but examine the impact of a fall or moderate increase in oil prices on Russian and Kazakh economic prospects. We assume that a change in oil prices would lead to the same change in prices for refined products.

The Russian picture varies significantly under different oilprice scenarios If oil prices go to $110/bl or $115/bl, Russian GDP growth could be even stronger next year, at over 2%. However, we still do not see 3% growth as possible in either of these scenarios, which in the recent past might have been considered very unimpressive (in this century, Russian GDP growth exceeded 3% every year before 2013, apart from in 2009). Russia’s current significant cyclical headwinds result from very tight credit conditions, softened business confidence and other spillovers from intensified geopolitical tension. In addition, challenging demographic trends, with the labour force stagnating since 2008, weighs down on Russian potential growth.

With higher oil prices, we would also clearly expect to see a range of improvements in other areas.

The ruble would be likely to be stronger (at an annual average of RUB36.9/$ for $110/bl oil and RUB36.4/$ for $115/bl oil); inflation would likely be lower; and the current account would likely be in better shape (with surpluses of $46bn and $52bn, respectively) than in our base case ($39bn).

Nevertheless, we do not see a sizeable improvement in the current account surplus, as a stronger currency and, probably, better domestic demand would result in higher import growth, in our view. We would also expect some improvement on the budget front, with the federal budget becoming balanced or turning into

surplus (0.6% of GDP) at oil prices of $110/bl and $115/bl, respectively.

However, the lower-oil-price scenario currently merits more attention, in our view. With oil prices at $100/bl, we see growth declining to 1%, and see growth staying slightly positive even at the $95/bl level. This seems to us to be an out-of-consensus view in the current challenging environment.

According to a recent Bloomberg special survey, consensus suggests that Urals crude (i.e. not Brent, as in our case, although the price difference is now negligible) needs to trade at $100/bl or higher for Russia’s economy to stay afloat.

Why we are more optimistic? First, we are probably assuming a more benign geopolitical environment in 2015 (highlighted above) than some of the survey respondents.

Second, we keep in mind Russia’s low unemployment (which would likely prevent a major drop in consumer demand), lower destocking and gains from a weaker currency.

We see Russia going into a fullyear recession only if oil prices drop closer to $90/bl (we would expect -0.4% growth at $90/bl), given our assumptions on geopolitics highlighted above. With oil at $90/bl, we also estimate an average annual exchange rate close to RUB41/$, a current account surplus half that in 2014 (we expect $59.7bn in FY14E) and inflation averaging 7.9% during the year.

Looking at the more severe scenarios, we see growth turning

negative (with growth of -5.8% at $50/bl oil) and the ruble hitting new lows (losing around 20% vs the dollar at $50/bl). However, the weaker ruble would be likely to stabilise the current account (we do not foresee FY deficits in any scenario) and alleviating the effects of a drop in oil prices on the budget (with a deficit below 4% of GDP in the worst case). As of the beginning of 4Q14, Russia had $454bn of reserves (equivalent to 23% of GDP or 16 months of import cover), with the government’s sovereign funds amounting to $173bn (8.6% of GDP).

Within the sovereign funds, the Reserve Fund (intended to help deal with a fall in oil prices) amounts to $90bn (4.5% of GDP).

Therefore, in general even our hypothetical worst-case scenario looks manageable for the budget.

On the inflation front, we see price growth hitting highs at $80/bl (with annual average consumer price inflation [CPI] of 8.7%) but coming in lower in the more severe scenarios, with a widening output gap taking its toll on inflation trends. This was the case in 2009, when average inflation amounted to 11.7%, after a 22% fall in the average annual exchange rate.

This compare with 14.7% average inflation in 2008 – so, ultimately, inflation slowed. During a negative external shock, Russia therefore saw some disinflation after years of strong inflationary pressure.

Last but not least, we would like to highlight an important difference between oil-shock scenarios and

our export embargo scenarios. All things being equal, a decline in oil prices would bring fewer pains for the Russian economy than a ban on Russian oil exports. The reason is that a ‘price shock’ would be less painful than a ‘volume shock’ – in the first case, production would remain roughly the same, while in the second case production would likely be reduced at some point.

This would result in significant spillover effects on other parts of the economy (for instance, stemming from cuts in

employment). The fall in dollar amounts of exports might be the same, but the consequences would be different. For example, we see Russian exports declining by $60bn in the event of a 50% cut in Russian crude oil exports to the EU and by $67bn in the event oil prices fall to $80/bl. However, in the first scenario we estimate Russian GDP growth would contract by 2.8%, while in the second we see a contraction of only 1.7%.

Why is the ruble weakening?

The Russian ruble saw the worst loss at 2.1% against the euro since the start of this week (13.5% loss YTD). Against the US dollar the Russian currency’s heaviest loss was 1.3% since 6 October 2014 (22.5% YTD). We have seen that both macro fundamentals and sentiment have been sharply turning against the ruble since summer 2014 despite the central bank’s hawkish monetary policy .

As the $has strengthened significantly against the major and EM currencies since summer 2014, the oil price has continuously fallen, diving under $100/bbl for Brent early September 2014.

Through 2012-2014 our view on the ruble and the oil price has been the following: correlation disappears as Brent price which is moving close to Urals stays between $100-120/bbl. At those levels other factors had a bigger

impact on RUB than just the oil price: dollar liquidity abundance, risk sentiment, geopolitics and seasonality. However, the new old correlation has come back (see Figure 1) .

Despite the rapid decline in the oil price since early summer 2014 (20.4%) under $91/bbl, Brent’s average price is around $105/bbl YTD, which allows the Russian budget to run a comfortable surplus and the current account surplus to grow further in 2014 as%age of GDP on weakening ruble and falling imports (see Figure 2). Yet, we see Russian fiscal stability at a serious risk if the average oil price stays at $90/bbl or goes lower over the next 12 months .

Weak macro weighs over geopolitics Geopolitical risks are still present for the ruble and the

Russian economy. This means that new sanctions against Russia and Russia’s counter-sanctions can arise anytime. Such an environment keeps the largest consumers of FX in Russia nervous as those cannot be sure FX is easily and cheaply available on new possible financial sanctions.

We have seen that local banks and corporations have been actively squirreling foreign currency. We have estimated that total external debt maturing by the end of 2015 exceeds $150bn. Yet, by the end of 2014 just sanctioned entities are due to pay $15bn of FX debt, but the amount is rising considerably in 2015. Till now the increased demand for FX has been driven through FX swaps pushing ruble swap rates quickly down. To cover the need, Russia’s central bank has introduced an FX swap mechanism promising more FX though FX repo (seven and 28-day) in the near future .

Another reason for the rapidly weakening ruble are RUB’s active shorters as fundamentals of Russian economy are not supporting the currency. The economic environment has been deteriorating as fixed investments have fallen 2.5% y/y in JanuaryAugust 2014 and private consumption growth is slowing down on accelerated inflation after the food imports ban was introduced. The Russian economy grew just 0.8% y/y in August 2014 and we expect GDP to shrink 0.3% y/y already in 2014, posting -1.8% in 2015 as accelerated capital

outflows and tight monetary policy continue to weigh on both supply and demand side .

To mitigate the ruble’s fast devaluation Russia’s central bank has actively sold FX this week (mostly $we believe), shifting the trading band for the dual currency basket further up (see Figure 4).

The latest shift reported was executed on 8 October, moving the band to 35.85-44.85. The amount of FX sold in the last three days climbed to $1.8bn.

We believe that the central bank is not against a steadily weakening ruble as the ruble’s real effective exchange rate remains strong, but what scares the central bank is the speed at which devaluation is happening. Thus, further FX interventions will weigh on the country’s gold and FX reserves. At the same time, the major rating agencies do not see any bright future for Russian economic growth in the near future. We continue to reiterate that further rating downgrades are possible in the current environment of Western sanctions.

Overall, we remain bearish on the outlook for the Russian ruble and we expect it to remain under some pressure going forward. We continue to expect the ruble to weaken faster against the $than against the EUR. We continue to recommend keeping elevated short-run hedge levels, especially for the $RUB.

Putin signs law on ratification of Eurasian Economic Union treaty

Russian President Vladimir Putin signed the law on ratification of the treaty creating the Eurasian Economic Union in October.

The Eurasian Economic Union, which envisages free movement of goods, services, capital and workforce and is based on the Customs Union of Russia, Belarus

and Kazakhstan, will become operational from January 1, 2015.

The treaty to create the union was signed by presidents of Russia, Kazakhstan and Belarus Vladimir Putin, Nursultan Nazarbayev and Alexander Lukashenko in Astana on May 29.

The agreement is the basic document defining the accords between Russia, Belarus and Kazakhstan for creating the EEU for free movement of goods, services, capital and workforce and conducting coordinated, agreed or common policies in key sectors of the economy, such as energy, industry, agriculture and transport.

It stipulates transition of Russia, Belarus and Kazakhstan to the next stage of integration after the Customs Union and the common economic space.

The Treaty on the Eurasian Economic Union stipulates customs and technical regulation, foreign trade policies and measures to protect the internal market. The agreement envisages transition to common customs tariffs.

The agreement also stipulates principles of coordinated macroeconomic and foreign exchange policies, financial market regulation, interaction in the energy and transport sectors, development of a common gas, oil, petroleum product, medicines and medical equipment market.

The treaty’s provisions also cover such areas as intellectual property and state purchases, industry, agriculture and labor migration.

The document also regulates informational interaction within the union.

The document defines the Russian language as the union’s working language. The treaty also stipulates that the Eurasian Commission will be headquartered

in Moscow, the Eurasian Economic Union Court in Minsk and the financial regulator in Almaty.

The document says that the union is open for accession by any state sharing the union’s goals and principles on the terms agreed by the member countries. The document stipulates a 10-year period for the union’s member states to fully harmonize their national legislatures.

Politics – the good Fines for 'foreign agent' law violations are reduced The Russian government's legislative commission has approved a bill to lower the minimum fines for NGOs that have not registered as foreign agents with the Justice Ministry.

The bill proposes lowering the minimum penalty from 100,000 rubles (about $2,500) to 50,000 rubles (about $1,200) for officials and from 300,000 rubles ($7,550) to 100,000 rubles ($2,520) for legal entities.

The Justice Ministry drafted the bill after receiving complaints from the Human Rights Commissioner, the Kostroma Public Initiatives Support Foundation and the public.

According to a 2012 federal law, NGOs engaged in political activity and receiving foreign funding are required to register as “foreign agents” with the Ministry of Justice.

In June 2013, the law was amended to authorize the Justice Ministry to add even unregistered NGOs to the foreign agents list at its own discretion. The ministry subsequently added five organizations to the register.

Bill regulating number of state officials in Russia reaches State Duma

Lawmaker from the ruling United Russia party Igor Barinov has submitted a bill to the State Duma, Russia's lower parliament house, authorising the government to set limits on the number of state officials across the country, RIA Novosti reported on October 31.

The growing number of state officials is a painful issue for Russians, according to the explanatory note attached to the bill.

According to the Russian Federal State Statistics Service (Rosstat), the number of officials in the country has increased by about 36% in 2000-2012, according to the explanatory note.

The situation varies from one region to another, the lawmaker says.

He pointed out that under Russia’s Budget Code the regions where subsidies make up a substantial part of the budget must comply with the standards set by the federal government for the calculation of the officials’ wage fund and allocations for the maintenance of authorities.

Putin’s Colossus Will Crumble, says Navalny Opposition leader Alexey Navalny is under house arrest and told the Russian press that, “The regime will devour itself, destroy itself, we

just have to make that moment come sooner. Any authoritarian regime is a colossus on feet of clay.”

“Putin is systematically stifling democratic freedoms, controlling the Internet, intensifying criminal persecution of opposition leaders,” Navalny said. “In this sense he is building a totalitarian system out of an authoritarian one.”

However, Navalny's message is not striking the same chord as it did two years ago. The president’s popularity rose to 88% in October, according to the Moscow-based Levada Centre, matching the previous high set in September 2008.

Navalny and his brother Oleg are on trial for allegedly defrauding the Russian branch of French cosmetics company Yves Rocher, one of several criminal cases against him and his supporters. Navalny leaves home once a week to attend hearings and his followers have begun a petition asking Yves Rocher to request the case be dropped. The company has not commented.

Navalny’s website attracts 1.4m readers a month, compared with 2m for his blog, which was banned for extremism in March and used to be the most popular in Russia.

He also has 792,000 followers on twitter.

Navalny Wins Court Case Against Federal Media Watchdog Navalny announced his victory Tuesday in a lawsuit challenging the Russian federal media watchdog's refusal to register his news outlet as an official media outlet.

Navalny filed an application with the agency on June 2 to set up the "Alexei Navalny Information Agency," a news outlet that would focus on corruption in collaboration with his Foundation to Fight Corruption, according to his blog.

But the agency failed to register Navalny, instead demanding that he provide documentation to prove he could set up a news agency — a requirement that Navalny said is not stipulated in Russia's law on mass media institutions.

With the help of lawyer Vadim Kobzev, Navalny filed a suit with Moscow's Lyublinsky District Court challenging the media watchdog's decision in late September, and the court ruled in his favor.

"We just won the lawsuit against Roskomnadzor regarding the refusal to register my mass media outlet. … The court ordered Roskomnadzor to re-examine my application for registration," Navalny wrote on his blog Tuesday.

Earlier, Navalny disregarded the media watchdog's refusal to register his agency as baseless.

Navalny’s makes faux pas with Crimea comments Navalny antagonized some of his loyal supporters by ruling out the return of the Crimean peninsula to Ukraine.

Asked by the editor of the Ekho Moskvy radio station, Aleksei Venediktov, if he agreed with the popular nationalist slogan, “Crimea Is Ours!” Mr. Navalny hedged.

“Crimea belongs to the people who live in Crimea,” he said, alluding to the Russian nationals that make up a large part of the local population.

“I think that despite the fact that the Crimea was seized with outrageous violations of all international norms, nevertheless, the realities are such that Crimea is now part of the Russian Federation,” Navalny added. “So let’s not kid ourselves. And I advise the Ukrainians not to kid themselves, either. It will remain part of Russia and will never become part of Ukraine in the foreseeable future."

Putin's 'de-offshorization' campaign causes splits in Kremlin President Vladimir Putin's campaign to end offshore banking and property ownership by Russian senior government officials has caused a split in the top players of the Kremlin.

Russia’s Economic Development Ministry has become increasingly vocal in his criticism of some of Britain's policies including the large amount of money he wants to

spend on upgrading the military and most recently the mandatory 'deoffshorization' that bans deputies and managers of stateowned companies from holding international bank accounts or houses abroad. This campaign is moving into a new phase where Russian business registered overseas will have to move their business back home. The rules entail considerable risks for the companies and the slowing economy of the country, the ministry said in pubic.

In December 2013, President Vladimir Putin in his annual address to the Federal Assembly called for a crackdown on Russian companies that dodge taxes by registering in offshore jurisdictions.

The bill was submitted to the lower house of parliament, the State Duma, in October. The bill excludes from double taxation treaties individuals who establish offshore companies to flee to offshore jurisdictions to keep their assets there, Mikhail Yemelyanov from A Just Russia party said. Such individuals would have to pay taxes in Russia, according to Yemelyanov. Requirements set in the bill could be toughened when it reaches the second reading, the lawmaker said.

The bill introduces the concept of a “controlled foreign company" (CFC) and a “controlling person”.

CFC is a foreign company or structure (trust, foundation, partnership) controlled by Russian tax resident, according to the bill.

A person is deemed to control a

foreign company if his interest in the foreign entity jointly with a spouse and minor children is more than 50%. Legal entity is deemed to control a foreign company if it posses a 25% stake.

in Europe, but the effectiveness of the ban drew praise form the World Health Organization Framework Convention on Tobacco Control (WHO FCTC) in October for making a real difference to smoking habits.

Bankers of failed banks banned for life from working in banks

It is now illegal to smoke cigarettes in cafes and restaurants as well as the more obvious pubic spaces.

Moreover, the law prohibits smoking in hotels, marketplaces, train stations as well as on long distance trains and ships.

Russia's lower house of parliament passed in a final third reading a bill obliging banks to disclose professional records and qualifications of their management in October. Bankers who run their banks into the ground will now be banned from holding banking jobs again in the future.

The bill amends the “On banks and banking� federal law. The bill stems from proclaimed low responsibility in the high tiers of banking management for quality and stability of the financial entities, validity of information concerning the banks’ wellbeing, and reliance on state support in critical situations.

The disclosed records must contain info on professional experience in five years period, with a description of positions held, education records (major and minor), academic degrees, honours and present position at the bank.

Effectiveness of Russia's smoking ban wins kudos from WTO Russia place a draconian ban on smoking in public places on June 1, which to everyone's surprise has been strictly enforced and adhered to. Russians are heaviest smokers

Blacklisted Russians Take EU to Court Over Sanctions State-owned Russian oil company Rosneft, Arkady Rotenberg, judo partner of Russian President Vladimir Putin, and the stateowned banking giant Sberbank have all launched legal challenges against sanctions imposed by the EU's European Council over Russia's actions in Ukraine.

Rosneft filed a case in the European Court of Justice's General Court on October 9 against restrictions that bar Russia's energy companies and state banks from raising capital in European capital markets, the report said.

The appeal against the sanctions, filed by Rosneft on behalf of the company and other unidentified parties, also affects state-owned companies such as Sberbank, VTB Bank, VEB, Gazprombank, Rosselkhozbank, Gazprom Neft and Transneft.

The legal basis of the claim against sanctions is that they break the principle of "innocent until proven

guilty." None of the companies or people sanctioned have been convicted of anything a court of law and so the punitive action by the EU and US has no basis in law, is the argument, rather the sanctions are simply a case of geopolitical bullying.

The European courts have accepted the cases and will hear them… in two years time.

Terror acts in Russia down by half The number of terrorist acts committed in Russia are down by half year-on-year and a total of 69 terrorism-related crimes have been committed this year, according to the head of the Federal Security Service of Russia.

“The number of terrorism-related crimes has declined more than two-fold this year. A total of 69 [terrorism-related] crimes have been committed, 45 of them in the Republic of Dagestan [North Caucasus], which killed 41 and injured 125 law enforcement officers,” the head of the Federal Security Service of Russia (FSB) Alexander Bortnikov said.

According to the FSB and Russia's National Anti-Terrorism Committee, 779 terrorism-related crimes were committed in the country in 2010, 365 crimes in 2011, 261 in 2012, and 218 in 2013.

Russian Ministry says wants to soften line on foreign media in Russia restrictions, but doesn’t know how to The press service of the Ministry of Communications and Mass Media stated that it is interested in foreign-owned mass media operating in Russia, according to Vedomosti, part owned by the FT and Wall St Journal so one of the main victims of a new 20% restriction on foreign ownership introduced on September 26 and effective from January 1, 2016.

This came following a meeting of ministry head Nikolay Nikiforov and his deputy Alexei Volin with mass media outlets. A special working group will soon be created that will be responsible for creating comfortable operating terms and developing foreign media within the framework of the recent reforms in Russian legislation concerning foreign ownership.

However, the only solution that was revealed from the meeting is for governments to sign intergovernmental agreements with Russia as the law implies exceptions for mass media that are registered in countries that have such agreements with Russia.

However, the mass media companies themselves would have to lobby for such agreements with their respective governments.

Representatives of mass media companies doubt that the US or EU will sign such an agreement with Russia. Also, exceptions will not be provided for entertainment channels.

Russia, EEU ready to sign a free trade deal with the EU Moscow is ready to discuss a freetrade zone with the European Union and the Eurasian Economic Union (EEU) that will come into existence on January 1, 2015, Russian Foreign Minister Sergei Lavrov said in October.

“We remain open to cooperation with other states, other regional groups, ready to discuss free trade zone with the European Union and are ready to build the integration model step-by-step,” Lavrov said.

While the terms of the current Customs Union (Russia, Belarus and Kazakhstan) preclude a free trade deal between the EU and the Customs Union, there is no reason why the EEU cannot sign a trade deal with the EU, a point that has also been floated by German Chancellor Angela Merkel.

Penalty for selling alcohol to minors to be hiked 10-fold As part of a general public health exercise the government has introduced amendments to a law that will increase the fines for selling booze to minors ten-fold to RUB50,000 ($1,200).

In 2013 Russian alcohol consumption averaged 13.5 liters per adult each month, down from a catastrophic 18 liters in 2010, largely due to a successful campaign to promote a healthy lifestyle. In April 2014 the Russian government approved objectives to further reduce consumption levels to 10 liters by 2020, thus reducing

the toll the substance has taken on Russia’s demographic, economic and social wellbeing over many years.

Russia releases opposition activist charged with violence against police Russia has released from custody opposition activist Sergei Mokhnatkin, who gained prominence among fellow activists for what he said was an attempt to protect a woman from police brutality at a protest rally, and who has been charged with violence against police.

Mokhnatkin's attempt to protect the woman had already earned him a term in prison, but he was jailed again last New Year's Eve on a similar charge but in connection with a different incident. A court ordered Mokhnatkin to undergo psychiatric evaluation, but in October he was released pending trial after his defence appealed to the European Court of Human Rights, lawyers said.

Mikhail Prokhorov to return to politics?

Russian billionaire tycoon Mikhail Prokhorov may re-emerge as leader of the Civic Platform party, which claims to represent the entrepreneurial middle class.

Prokhorov’s return will be discussed in 2016, after the party decides on its strategy in the 2016 election to the State Duma, the lower house of the Russian parliament.

“We are now sizing up how to do this, and that is why are experimenting with different forms,” he said. “But in order to lead the party into the parliamentary election, Mikhail Prokorov must sort out the issue of his western assets. In line with the law, participation in political activity is impossible with foreign assets."

Prokhorov has been flirting with politics for several years but has failed to make much of an impact.

He is also thought to be close to the Kremlin.

Communist lawmaker loses immunity over embezzlement charges

parliamentary immunity following corruption allegations.

The defence team argued that Parshin’s immunity was stripped in violation of established procedure.

The State Duma representative responded that the immunity removal was conducted according to the Prosecutor General’s Office guidelines, and was voted for by a majority.

According to the Prosecutor General’s Office the lawmaker, while serving in the Volgograd regional parliament, used his authority to conduct several lucrative deals during the sale of a local school building. The alleged damage is estimated at RUB25m ($630,000).

The Supreme Court on Thursday ruled to strip a lawmaker from the Communist Party of Russian Federation, Nikolay Parshin of his

Politics – the bad Russia overtakes in US in nuclear warhead deployment With 1,643 nuclear warheads deployed, Moscow has reversed 14 years of superiority, and now has one more warhead in the field than the Pentagon, according to a State Department report.

Though both former Cold War adversaries have massively cut their nuclear arsenals since 1991, the data shows that over the past

six months — a period that has seen Russia-West relations dive bomb over the crisis in Ukraine — both nations have boosted their nuclear forces.

The report, which is released annually to monitor arms control efforts, has two key metrics — the number of individual nuclear warheads deployed, and the number of launchers and vehicles to deliver those warheads, such as intercontinental ballistic missile

[ICBM] systems, submarines and bomber planes.

Since March, when Russia annexed Crimea from Ukraine, Moscow has upped the ante in both regards, increasing the number of launchers from 906 to 911 and its arsenal of warheads deployed from 1,512 to 1,643.

This has allowed Russia to achieve parity with the U.S., which has showed less zeal in deploying new weaponry, growing its deployment

of its nuclear warheads from 1,585 to 1,642 since March. Washington has reduced the number of its launchers from 952 to 912.

Although both nations increased their deployments this year, over the past three years they have moved in different directions: In 2011, Russia had 1537 warheads deployed — 106 less than now. The three years ago had 1,800 warheads deployed, meaning it has decommissioned 158.

Court orders Sistema to return Bashneft to state Sistema, the Russian telecoms and oil holding, must return oil company Bashneft to state ownership, Moscow's commercial court ruled on October 30 in a hearing that lasted just 90 minutes.

The speed with which the court returned a decision in such a complex case - Bashneft has had a convoluted ownership history spanning two decades - will strengthen perceptions that the proceedings were politically motivated, and that the verdict represents a de facto nationalisation of the assets.

It is widely believed that stateowned oil major Rosneft has its eye on Bashneft as an easy way to replenish its dwindling oil reserves.

Putin-confident and leading Siloviki Igor Sechin, who favours a statist approach where the main economic assets in the country are under the state's direct control, runs Rosneft.

The local press report that Rosneft has already done a valuation of Bashneft, but has not made a formal bid for the country. If the rumours prove to be true and Rosneft does buy Bashneft then this would be a step backwards for the free market model in Russia and further entrench power in the hands of Putin's inner circle.

Russia reinstates authority of investigating officials to file criminal charges for tax violations independently The changes president Putin signed into law on October 22 were effective immediately and abolish the 2011 reform introduced during the Medvedev administration.

Under the 2011 reform, criminal charges for tax violations could only be laid by tax authorities. The amended law allows investigators (e.g. police) to press charges after requesting a statement from tax officials. Charges can be pressed even if the tax authority finds no evidence of tax code violations.

The 2011 reform was part of a general liberalisation of the Criminal Code aimed at reducing the powers of officials to exert pressure on firms. Other reforms included limits on the time the accused can be held during a criminal investigation and easing criminal penalties.

The business community saw the 2011 reforms as extremely important in reducing opportunities for authorities to harass companies. The number of criminal charges filed against companies for tax violations was reduced significantly. According to officials, however, the reform made it more difficult to investigate tax crimes.

Putin submitted his proposal on stiffening the law to the Duma last autumn, raising a long-running controversy thereafter. Not only have representatives of the business community declared their opposition to the move; prime

minister Medvedev and several ministries also came out against it.

Opponents say the change will again worsen the operating environment for firms. Indeed, companies have perceived deterioration in their operating environment in many ways over the past couple of years.

President Putin signs law limiting foreign ownership in Russian mass media to 20% Russian President Vladimir Putin signed off on a new law that limits foreign ownership in media to 20% in October. The law will devastate the sector as at least half of the leading publications in Russia are owned by foreign companies. The law comes into effect in 2016, but comes into full force in 2017.

Rules limiting foreign ownership of TV and radio were already in place and are common even in democracies. But the new laws extend the limit to print media and are not common. Specifically the Kremlin seem to be targeting the leading newspaper Vedomosti, which is jointly owned by the Financial Times, The Wall St Journal and a Finnish publisher.

Vedomosti is highly regarded and rarely pulls its punches in criticising the government.

TV company RT (formerly Russia Today, but which remains independent from Rossiya Segodnya) launched a UK news channel at the end of October.

The plan is to expand the Kremlin's global media presence amid what senior Russian officials call an "information war" with the West.

Ironically the initiative, design to counter what the Kremlin sees as one-sided and biased reporting, has been pretty successful. RT has become the most watched nondomestic news channel in the UK, beating out the likes of Al Jazeera and CNN, so opening a dedicated UK channel makes a lot of sense.

Rossiya Segodnya was established by a Kremlin decree last December. The media holding company integrates the state news agency RIA Novosti and state radio station Voice of Russia into a single media monolith helmed by controversial pro-Kremlin news anchor Dmitry Kiselyov.

Russia has increased spending on its foreign media operations, earmarking 15.38bn rubles ($362.2m) for RT in 2015, an increase of nearly 30% from last year. Next year's budget for Rossiya Segodnya has been almost tripled to 6.48bn rubles ($152.6m).

Russian state-owned Rossiya Segodnya media behemoth to launch string foreign bureaus, launches UK channel

Nationalists granted permission to march on unity day in Moscow

The state-owned media conglomerate Rossiya Segodnya is opening local bureaus in 29 world capitals and its sister company the

The nationalist organization spearheading Moscow's annual "Russian March" on National Unity Day has received the city's blessing

to hold the event, after initially denying nationalists permission.

The march is used by nationalists and neo-fascists as an annual display where some march in paramilitary uniform bearing symbols that resemble Nazi insignia. To its credit even the Kremlin is a bit uncomfortable with this blatant display of radical right wing politics, but if push comes to shove the market goes ahead.

Earlier this month, Dmitry Dyomushkin, leader of a nationalist organization known simply as "Russians," said the organizers of the November 4 event had submitted numerous request to Moscow City Hall, offering up some 10 potential routes for the march. City authorities had declined their requests, citing organizers' inability to choose a single route as the reason behind their refusal.

Although city authorities granted the organization the right to hold the march with a maximum of 10,000 participants, they have forbidden the organizers from staging a concert or protest at the end of the march, as had been the case in last year's iteration, Interfax reported.

National Unity Day, which has been a public holiday since 2005, commemorates Russia's defeat of Polish invaders in 1612.

Bill on private military companies submitted to Russian parliament A Just Russia member Gennady Nosovko has submitted a bill on private military and security companies to the State Duma that would allow Russia to set up a Russian version of Blackrock.

The bill stipulates that Russian private military companies would provide military services to clients, including foreign clients. They could assist with mine clearing, piracy protection or “alternative settlement of armed conflicts.�

They could also train security forces, protect buildings, vehicles, officials, state institutions and other facilities. Nosovko believes private military companies should be supervised by the Federal Security Service.

Private military companies would carry out political, social and economic tasks for the state – for example, the resolution of sensitive military and political issues in other countries without the direct involvement of the state or the recruitment of former law enforcement agents, and they would be paying taxes on these activities.

Politics – the ugly

Putin Pardons Former FSB Officer Convicted of Murder

citing an unidentified source close to the case.

President Vladimir Putin has pardoned Dmitry Maximov, a former Federal Security Service officer, who was sentenced to 11 years in prison on a murder conviction in 2012 and expunged his criminal record.

At least five bodies could be seen at the site of the explosion in pictures posted on social networks by people at the scene.

Maximov was convicted of killing a man in a street fight. He maintained a plea of innocence, telling the court that he had been robbed and beaten, and only regained consciousness once in police custody. Both he and the victim were drunk at the time of the incident.

In 2010 a court in Moscow acquitted Maximov by decision of a jury, but a Vladimir region military court later reversed the ruling.

Suicide bombing kills five in Chechnya at Kadyrov's birthday party A suicide bombing in the Chechen capital of Grozny killed at least four police officers and one bystander during a public festival to celebrate the birthday of local strong man leader Ramzan Kadyrov.

The bomber was identified as 19year-old Opti Mudarov, reports said

Sunday was meant to host festivities as Grozny celebrated its annual city-appreciation day, Teachers Day and . Chechnya's leader Ramzan Kadyrov's birthday.

A large concert was set to take place in the evening.

Police officers noted a suspicious young man in front of metal detectors that visitors had to pass through in order to enter the concert hall. The bomber detonated his device when challenged by police.

Russia Failing to Fight Corruption in Global Trade, Report Says Russia is among several big exporting nations to have broken a pledge to fight corruption in global trade, according to a report by Transparency International (TI) release in October.

The Berlin-based anti-corruption watchdog named Russia, Japan, the Netherlands, Greece and Brazil among the worst offenders to have

signed an anti-bribery convention and failed to implement it.

To tackle this problem, the Parisbased Organization for Economic Cooperation and Development (OECD) adopted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in 1997.

The treaty requires the 41 signatory countries to make foreign bribery a crime for which individuals and enterprises can be made responsible. These countries are responsible for around twothirds of global exports and almost 90% of total foreign direct investment outflows.

However, 22 signatories have done little or nothing to enforce the treaty, said TI's annual report on the issue.

"As a result, the convention's fundamental goal of creating a corruption-free level playing field for global trade is still far from being achieved," the report said.

Conservative Russian politicians proposes banning Apple CEO Tim Cook from Russia because he's gay Conservative Russian nationalist Vitaly Milonov wants to ban Tim Cook, the CEO of Apple, from entering Russia.

Milonov, a deputy of the St. Petersburg legislature, opposes gay rights in general.

In a statement published in Business Week, Cook announced

on October 30 that while he valued his privacy, he wanted to acknowledge his sexuality. He declared he was proud to be gay.

Soon "Tim Cook" was a trending term on Russian-language Twitter.

Milinov said: "What can he bring here? The Ebola virus, AIDS, gonorrhea? They all have indecent relations over there. We should ban his entry permanently. He's increasing sales this way. Apple became a popular brand. He is like an artist who at first builds himself up as an artist and then announces that he is a pederast. Now everyone knows that Apple is made by pederast and everyone begins to change their consciousness -but he's talented...It's a subtle political move."

Milonov himself has been shown using an Apple tablet so a picture of him with the Apple logo coloured in the gay pride rainbow colours is making the rounds of social media.

Moscow court hits Bolotnoye suspect with 3 years in prison A Moscow court sentenced one of the defendants in the highprofile Bolotnoye protest march case on October 10 to three years and two months in jail for his part in anti-Putin demonstrations that rocked the capital in 2012.

Dmitry Ishevsky, 31, was found guilty of participating in mass riots and using force against police officers, charges to which he confessed in order to speed up his

trial, the Interfax news agency reported.

Investigators reportedly had video evidence of Ishevsky's actions, and they had earlier expressed concerns about the suspect putting pressure on witnesses or fleeing to avoid trial.

A total of 29 people were later charged for allegedly orchestrating mass riots that day, 11 of whom were pardoned under a presidential amnesty last winter.

Protestors claim the police used provocateurs to start the violence in an attempt to justify a harsher crack down on civil society.

Soldiers' Mothers activist arrested for press cases of Russian soldiers in killed in Ukraine Ludmila Bogatenkova, a member of the Soldiers' Mothers that campaigns for the rights of soldiers (usually their sons), from Stavropol Territory, was briefly arrested by court order but released shortly afterwards.

The case was widely seen as government pressure on the group which was highlighting the death and secret burial of Russian soldiers killed in action while on unofficial duty fighting in Ukraine's eastern territories.

The government continues to officially deny it has any troops on the ground, however, media discovered a string of secret burials of soldiers apparently killed in Ukraine. Bogatenkova took up the

issue and widely published the fact much to the Kremlin's embarrassment.

In August, Bogatenkova reported on the cases of 9 soldiers of the 18th Motorized Brigade from army unit 27777 based in Chechnya who were reportedly killed in Ukraine.

On 25 August, Sergei Krivenko and Ella Polyakova, members of the Presidential Council on Human Rights, presented the list to the Russian Investigative Committee.

At the time they said they had compiled a list of some 400 soldiers killed or wounded in Ukraine.

Two American Journalism Professors Detained in St. Petersburg at Workshop Two American journalism professors were detained in St. Petersburg Russia briefly in August although they were in Russia at the invitation of the US State Department.

The New England Centre for Investigative Reporting said that its co-founder, Joe Bergantino, and University of South Carolina professor Randy Covington, were detained for several hours by immigration authorities as they began teaching in workshop as part of a two day trip to Russia.

The Federal Migration Service in St. Petersburg, Russia's secondlargest city, said in a statement the men were taken to court and found guilty of "violating the visa regime" because their activities in Russia "did not correspond to the stated purpose of their visit."

The two were told they could not teach classes with a tourist visa although the State Department had recommended they obtain this type of visa.

Russia's pension tsar implicated in $8m fraud The head of Russia's flagging state-owned Pension Fund owns property he cannot legally afford on his salary, anti-corruption activist Alexei Navalny said Thursday.

Ownership documents published

by Navalny show that Anton Drozdov's family owns a swanky seven-room apartment in central Moscow worth $8m at the time of purchase in 2009.

Drozdov and his wife earned a combined 47m rubles ($1.1m) between 2009 and 2013, according to publicly available income declarations. Drozdov, a state employee since 1986, was in no position to earn $8m by 2009, Navalny said on his website.

His wife's sources of revenue are less clear, but there are no businesses registered in her name, and her sole listed workplace is adviser to the director of the Azimut Hotels chain, the report said.

The Drozdovs had not commented on the story as of this article's publication.

Moscow motor rally to protest new parking rules broken up by traffic police A motor rally held by opposition activists in Moscow in October was broken up by police and several people were reportedly detained.

The rally was meant to protest the Moscow government's new policies on parking for city residents, many of whom are now obligated to pay fees.

Russian motorists have been amongst the more passionate demonstrators against the government. A few years ago motors started to tap blue plastic buckets to the roofs of their cars to protest against the widespread abuse of flashing blue police lights which many business buy to avoid following traffic rules. Ordinary people, fed of being flashed out of the way by other civilians simply stopped getting out the way for anyone except official police cars.

McDonalds fine for selling improperly marked toys The Moscow Commercial Court has fined a McDonald’s restaurant in Moscow 100,000 rubles (about $2,500) for selling unmarked toys.

The suit was brought by Russia’s consumer rights agency Rospotrebnadzor, saying the toys were sold without the date of manufacture, an administrative offence. Over 100 outlets have been inspected in August.

Polls, mood, sociology

Over half of Russians say their country needs "special type" of democracy Russians believe the Western democratic model is not viable in Russia but are interested in how life works in Western countries, according to the independent Levada Centre: 55% of the respondents said Russia needed a "special type of democracy," if any, to fit the country's national traditions and its distinctive lifestyle. Their number has grown from 34% in August 2013.

Another 16% of the respondents argued that Soviet-style democracy would have fitted Russia, 13% prefer using the experience of developed European and American nations (down by half from 26% in August 2013), 5% said democracy would fail to meet Russia's needs, and 11% were undecided.

Speaking of the Western democratic model, a relative majority (45%) said it would be inappropriate or even harmful for Russia. Over a third (39%) said that model had some potential but sizable transformations would be required to support it. Only 5% argued that the experience of Western states was necessary for Russia's development, and 11% could not give an answer.

Almost two-thirds (64%) of Russians are confident that relations with the West will always be based on mistrust. A quarter (26%) offered the opposite opinion, and 10% failed to answer the sociologists' question.

43% of the respondents said they were not interested in the life and work in the West. 49% claimed the opposite: 20% said they might think about moving abroad for a better life, and 19% wanted to give a future to their children.

A quarter (26%) said that buying property abroad, opening accounts with foreign banks, sending children to Western schools and spending vacations outside Russia were normal things to do. 50% did not care about those trends, and 21% felt annoyed by them. 3% were undecided.

83% of Russians ready to vote for Putin in presidential election 83% of Russian citizens interviewed by the Levada Centre in September said they were ready to vote for incumbent President Vladimir Putin if the presidential elections were to be held this coming Sunday, as compared with 66% at the beginning of the year.

This means that the polls show more Russians believe in Vladimir

Putin than believe in God, according to Vedomosti commentator Maksim Trudolyubov: 86% of Russians who say they believe in Putin is higher than the 78% who say they believe in God, he pointed out in a recent column.

7% of respondents said they would support Communist Party chairman Gennady Zyuganov, 4% Liberal Democratic Party leader Vladimir Zhirinovsky, 2% A Just Russia Party leader Sergei Mironov, 2% Prime Minister Dmitry Medvedev, and 1% opposition activist Alexei Navalny.

63% of those polled said they were ready to vote for the United Russia party if Russia's next parliamentary elections were to be held this coming Sunday. 15% named the Communist Party, 7% the Liberal Democratic Party, 5% A Just Russia, 2% the Yabloko liberal party, and 1% Alexei Navalny's Progress Party.

Most Russians consider US major enemy of Russia A majority of Russians consider China, Belarus and Kazakhstan key partners and friends of Russia, while they believe the US is Russia’s main rival, the stateowned pollster VTsIOM found in October.

According to the survey 51% of the respondents named China among Russia’s friends, while 32% and 20% voted for Belarus and Kazakhstan respectively.

Meanwhile, less than 1% named the United States a partnercountry, while 73% agreed that America was Russia’s number one enemy. Besides the US, Ukraine (32%), the EU and Germany (10%) are believed to be among Russia’s rivals. Moreover, Italy, France and Japan were considered Russia’s partners by only 1% of the surveyed.

Almost half of population do not want McDonald's in Russia Almost half of the population in Russia have approved an idea to close all the McDonald's fast food restaurants in Russia, according to a public opinion poll conducted by the All-Russia Center for Studies of Public Opinion (VTsIOM).

Russian hostility to EU also soars Russia's foreign minister, Sergei Lavrov, said in October that relations between Russia and the US are at a post-Soviet "rock bottom." But more worrying,

relations with the EU have also sunk to a record low: a poll out October 21 shows that Russians have never held a more negative view of the EU than they do today.

The independent pollster Levada Center found that the number of Russians that see the EU in a negative light has risen to 66% by far the highest level since the survey was launched over a decade ago.

16% of Russians think Russia should apply for EU membership it was 56% in 2010.

Russia rises by 30 positions in new World Bank's Doing Business rating Russia rose by 30 positions in a new Doing Business ranking of the World Bank (WB), taking the 62nd place. The WB rating assesses the comfort of doing business in 189 countries around the world.

Greece is 61st, ahead of Russia and Moldova in the 63rd position is below. In last year’s Doing Business ranking, Russia was 92nd between Barbados and Serbia.

The government has launched a series of National Business Initiative Roadmaps which it says are responsible for the rapid rise in the rank. A change of methodology also benefited Russia.

Putin set the government the task of raising Russia's rating from 120th in 2012 to 20th by 2018.

This year Russia scored well on the measures facilitating the registration of business and property and getting building permit. In addition, the preparation of tax reports has become less consuming.

Russia occupies 156th place in terms of the time and ease of obtaining construction permits. It is on the 143rd place by connection to the electrical networks. In terms of the loans’ availability, Russia is on the 61st place. Regarding the bankruptcy proceedings mechanisms, Russia is 65th.

However, it is relatively easy to start a business in Russia — the country is on the 34rd place by this criterion, it is even easier to

register the ownership right in Russia (12th place). It is also easy to enforce contractual obligations of business partners (14th place in the ranking). Russia is on the 49th place in the Doing Business ranking

70% of Ukrainians but only 26% of Russians say there is a war between their countries 70% of Ukrainians say that there is a war going on between Russia and Ukraine, while only 26% of Russians agree with that, according to the Levada Centre.

The two polls show that Ukrainians and Russians are divided on other aspects of the current situation as well: 74% of Ukrainians but only 50% of Russians agree with the statement that “Russia is supporting pro-Russian forces in the east of Ukraine."

The two nations also divide on who is to blame: 63% of Ukrainians say Russia is to blame, while only 27% of Russians agree with that.

Instead, in Russia, three out of

in terms of accessibility and clarity of the tax payment mechanism.

The country still has problems with the protection of minority shareholders (100th place).

every four respondents say Russia was not to blame, and only 17% of Russians say their country is responsible.

Half Russian think sanctions could cause a financial crisis‌ Over half of Russian citizens express increased concern about the effect of western sanctions on the country's financial system, but their consumer behaviour remains mostly unchanged.

Over a half of Russians (52%) believe that the sanctions imposed

by Western countries are negative and could provoke a financial crisis in Russia, according to the National Agency for Financial Research in October.

Fears of a financial crisis are especially common for the residents of Moscow (69%) and the

people of the Siberian and Northwestern Federal Districts (61 and 45% respectively.)

A similar poll conducted in May showed that only 31% of the population was doubtful about Russia's economic and financial stability.

But the pollsters said that seven out of ten respondents had not revised their consumer habits yet.

However, 9% of those surveyed had cut their spending. In addition, an insignificant portion of 3% had abandoned a large purchase or a trip abroad. ‌ but most Russians think sanctions will boost nation's economy The majority of Russians (60%) believe that Western sanctions and Russia's retaliatory ban on food imports will actually help the country's economy, according to the poll by the independent Levada Centre.

Only 25% of respondents expect sanctions to damage the Russian economy, and only 26% expect they or their families will personally face problem due to sanctions.

41% of respondents in the latest survey thought sanctions were directed “against broad segments of the population,� up from 27% in May. Meanwhile, the number who thought the sanctions were aimed at a small group fell from 42 to 30%.

Sberbank's "Ivanov Consumer index" show confidence falling

Russia's middle class' confidence is falling according to Sberbank's quarterly "Ivanov index," which fell to -7% in the third quarter.

All components of the index decreased excluding "conditions for major purchases". Although, authors of the survey think that it could be explained by the desire of the respondents to conclude reserved major purchases because of the ruble depreciation and price rise but they cannot find confirmation to their hypothesis: State Statistics Service reports a deceleration of the rates of nonfood goods retail sales growth.

Thus, the Ivanovs save less as they used to before. In June only 37% failed to save money, while in September 42% of respondents refused from saving and average income that is being allocated for savings among those who was able to save money, shrank from 9.2% to 8.9% respectively. Reduction of the people's desire to save money could be explained by the food price surge (11.5% according to the Ivanov). 52% of respondents have experienced ban for food import from developed countries, including deficit; however, only 38% of respondents introduced changes into their primary food basket.

Russian consumer confidence falling Rosstat published consumer confidence data for 3Q14, which showed consumer confidence contracted 1 ppt to a negative 7% in 3Q14 after unexpectedly growing 5 ppt in 2Q14.

The index of changes that have taken place in the economic situation contracted 1 ppt to negative 7% in 3Q14: the share of respondents that negatively assessed the changes that have taken place in the economy increased to 31% in 3Q14 from 30% in 2Q14.

The index of expected changes in the economic situation in the near future dropped 4 ppt to a negative 4%: the share of respondents expecting the economic situation to worsen in the next 12 months grew to 29% in 3Q14 from 22% in 2Q14.

The index of expected changes in the personal material situation dropped 2ppt QoQ to a negative 4%: the share of respondents expecting their material situation to worsen in the next 12 months grew to 17% in 3Q14 from 16% in 2Q14.

Defence minister Shoigu, Foreign minister Lavrov top publicity, approval rating of government members Russian Defence Minister Sergei Shoigu and Foreign Minister Sergei Lavrov top the publicity and approval rating of government workers, the state owend VTsIOM found in a poll in October.

Well over half of the respondents correctly identified the positions of Shoigu and Lavrov (77% and 63% respectively).

The other members of the top five rated public figures were Sports Minister Vitaly Mutko (34%), Interior Minister Vladimir Kolokoltsev (26%) and Education and Science Minister Dmitry Livanov (23%).

A fifth of the respondents correctly identified the positions of Culture Minister Vladimir Medinsky (21%) and Health Minister Veronika Skvortsova (21%). The position of Deputy Prime Minister Dmitry Rogozin was known to 16% of respondents, and 15% knew that Vladimir Puchkov was the Emergency Situations Ministry.

The least known are Deputy Prime Minister Sergei Prikhodko, Minister of Crimean Affairs Oleg Savelyev and Deputy Prime Minister Alexander Khloponin (2%) and Deputy Prime Minister Arkady Dvorkovich (1%).

Half of Russians believe a return to Stalin-era repression possible Nearly half of all Russians (48%) believe that a return to Stalin-era repression is possible within their lifetime, a poll by the state-run Public Opinion Foundation found in October.

The poll, titled "Mass Repression in the Soviet Union," found another 14% describing the likelihood of a return to repressions as high, while 34% said that though possible, repression is unlikely. A quarter of respondents said they did not expect to see political repressions in their lifetime, and another 22% expressed difficulty answering the question.

The number of those who view Soviet-era political repression as having been justifiable jumped from 12% in October 2012 to 17% at present.

The poll further revealed that fewer people blame Soviet dictator Josef Stalin exclusively for the height of political repression in the 1930s, with 40% saying he holds all responsibility, compared with 43% in 2012.

Vast majority of Russians think foreign media criticize Putin to weaken Russia The overwhelming majority of Russians view negative foreign media coverage of President Vladimir Putin and of Russia

in general as an attempt to destabilize the country, pollster VTsIOM found in a poll.

independent Levada Centre.

Another 31% were against it, and 16% were undecided.

Some 87% of respondents see such ulterior motives in critical remarks released by foreign media outlets. A mere 4% of respondents said such criticism was intended to improve the country's situation.

A similar poll in 2012 found that 63% of respondents supported restrictions of online freedoms.

Similarly, 87% of respondents said they considered such criticism of Putin to be baseless, while the same number said such comments were a result of the Russian president following policies independently of the rest of the international community.

The number of Russian Internet users has stopped growing, remaining at last year’s 66% level, found an opinion poll by the stateowned VTsIOM at the start of October.

Opinion poll finds Russia needs to celebrate National Unity Day The number of Russians approving of the National Unity Day celebrated on November 4 has risen 20% in the past 10 years to 63% as nationalist sentiment swells after the annexation of Crimea in March, according to the Public Opinion Fund (FOM).

Introduced in 2005, the National Unity Day, which marks Russia’s liberation from Polish invaders in 1612, replaces the November 7 communist holiday celebrating the 1917 Bolshevik Revolution. In 2004, 46% of respondents said the holiday is necessary, while 38% disagreed with them.

Majority of Russians endorse internet censorship The majority of Russians (54%) supports a curb on Internet freedoms in theory, according to

Internet's steady rise in Russia halts

Most active users are welleducated young people aged between 18 and 24 enjoying good financial standing, the poll found.

Most Russian nationals using the Internet - 82% - searched web sources to reach latest news from home and abroad.

About 77% of survey participants said they used e-mail and 74% used social networking sites to communicate with friends. 70% said they used the Internet periodically for work and studies and 54% to play Internet games.

As many as 43% did Internet shopping and 20% admitted visiting erotic sites. Frequent use ratings said 46% of those questioned used the Internet every day.

Moscow State University makes it into The Times' top-200 university list for first time Moscow State University (MGU) was ranked 196th in the latest World University Ratings 2014/15, published by the Times Higher Education magazine, making it into the top 200 for the first time sine the list debuted in the 2010/2011 academic year.

The only other Russian college to make the cut was Novosibirsk State University, which ranked in the 301-350 bracket of the ranking.

Moscow State University also ranked 61th on the Time's list of best universities for engineering and technology, which was topped by the U.S-based Massachusetts Institute of Technology (MIT).

Putin generation emerges

Centre of Strategic Communications director Dmitry Abzalov said in a report chronicling “Fifteen Years of Putin, Beginning of a New Era”.

“A whole generation has formed with various attitudes toward the authorities, but formed against the background of the presence of the authorities. We call it ‘Putin Generation’,” Abzalov said.

"The generation is not marked only by a positive or negative attitude to authorities. It is a social group, a social cluster realised in the past 15 years, “ Abzalov said, adding that it comprised all social and political groups formed over that period.

This cluster is politically, publicly and economically active, spanning up to 50% of the middle class and identifying itself as the Putin Generation, the speaker added.

A social group that can be called Putin Generation has emerged in Russia over the last 15 years,

Banks and Finance

Banking sector overview for September The banking sector remains under pressure and muddling through as in last month. Given the backdrop of massive ruble depreciation, the lack of significant retail deposit

outflow so far is a positive. The public is still predominantly in some sort of “wait and see” mode, as even throughout this eventful year the share of FX retail deposits has been quite stable at around 20% (latest data as of August).

However, we do not think the extent to which deposit rates have moved this year (maximum ruble deposit rate of the top 10 banks has increased only 1.1 pp YTD) is appealing enough for depositors given all the risks. Interestingly, Vedomosti has reported today that VTB will raise its ruble retail deposit rates by 1 pp on average, having made an increase of 0.8 pp on average for forex deposits earlier in October.

• Profits: Profitability of secondtier banks not spectacular in 3Q14.

Sberbank has earned the highest quarterly RAS net income so far this year in 3Q14, with ROAE close to 20% despite local highs in COR, thus continuing to demonstrate the advantages of its privileged model.

Among second-tier banks, only Bank St Petersburg posted a decent ROAE of 15% according to the CBR’s unadjusted figures; however, it appears to be primarily

driven by a one-off gain in net interest income, which rose 72% QoQ. • Assets: Assets climbed 2.6% mo-m, implying growth of 18% yearon-year and 12% YTD. • Loans: Corporate loans increased 2.3% m-o-m, helped significantly by the revaluation of FXdenominated loans following 7% ruble depreciation in September (adjusted for that, growth would have been only around 0.6%).

Corporate loans were up 14.7% YTD and 17.4% year-on-year.

Retail loans added 1.3% m-o-m for the second straight month, with year-on-year growth settling at 18% and YTD at 11.5%. Sberbank was in line with the rest of the sector in corporate lending and slightly outperformed others in retail (1.5% versus 1.2%).

• Deposits: Retail deposits edged up 0.2% m-o-m, but adjusted for ruble depreciation (20% of deposits are in hard currency) there would have been around 1% outflow. In year-on-year terms, retail deposits are running at 9%, and the YTD tally is just 2.1% YTD.

Corporate funds grew 4.2% m-o-m (circa 1.8% adjusted for FX effects) and 175 year-on-year.

Loans from the CBR rose 3.5% month-on-month and also remain a significant source of funding. Banks are trying to redistribute funding to retail deposits, as a number of banks have recently raised both

ruble and forex rates; the maximum deposit rate continues to rise steadily, reaching 9.6% in mid-October, about 130 bps above early-2014 lows.

Sberbank underperformed the rest of the sector in retail deposits

(0.4% outflow versus 0.7% inflow, respectively). • Earnings: Total sector EBT was R685bn in 9m14, down 9% yearon-year.

• NPL: The overdue loan ratio (which incorporates only the overdue portion of a loan) increased from 5.6% to 5.7% in

the retail segment and decreased from 4.5% to 4.3% for corporate loans.

Two out of nine Russian banks are loss-making Bank losses rose six-fold in the third quarter of this year and now 191 of 859 operating banks took a combined loss of RUB64.6bn ($1.5bn) for three quarters of 2014, according to the figures made public by the Bank of Russia.

In 2013, 120 of 942 operating banks ended the same period with a total loss of RUB10.3bn.

"The increase in the number of loss-making banks is driven by a number of factors: the deteriorating situation in retail lending, a higher cost of funding for banks and the decline in the economy. The revaluation of securities and foreign currency takes its toll, too," says Alexander Danilov, Senior Director for Financial Institutions at Fitch.

The biggest losses were reported by banks currently under

reorganization: Baltiyskiy Bank, Mosoblbank and B&N Bank Credit Cards. They account for 15% of total losses.

In 2013, the leaders by loss as of the end of three quarters were MDM Bank with a loss of RUB2.6bn, Petrocommerz Bank with a loss of RUB1.2bn and Renaissance Credit with a loss of RUB744m.

Banks facing a slump in lending business in 3Q14 Russian banks faced with a slump in lending in Q3 2014: with the number of loans granted between July and September down by 12.94% to 3.68m loans worth RUB518.7bn ($12bn), compared to the same period in 2013, according to the data from National Bureau of Credit Histories (NBKI).

This is a reversal from the first two quarters of this year, when the number of borrowers was

decreasing little by little, but the amount of loans were increasing.

The number of approved loans decreased 7.83% in Q1 2014 year on year, but the amount of all consumer loans granted was 9.64% higher than in 2013. In Q2 2014, the number of loans decreased 8.82%, but the amount of loans was 2.28% higher year on year.

"In the first six months, banks granted loans aggressively under "secondary" lending programs, i.e. to borrowers with a good credit history, and, guided by the experience of working with the customer, offered them a higher limit than to new borrowers," explains Ilya Filatov, Deputy Chairman at Uralsib Bank.

The lack of funding options at heart of bank's problems The negative outlook for the sector reflects the on going geo-political tensions and economic sanctions have exacerbated a downward trend in Russia’s GDP growth, which has had a detrimental affect on asset quality and profitability.

Compounding banks’ challenges are increasingly difficult funding conditions, due to the lack of cross-border market access, and increased cost of funding domestically. The state has stepped in and is providing plenty of liquidity to keep the sector going, but this set up doesn’t inspire confidence.

The investment climate remains poor, as evidenced by large capital

outflows, which will suppress growth prospects and borrower creditworthiness. In addition, the restrictions imposed by the US and European authorities will further limit new foreign business opportunities. Consequently, we expect lending growth to slow to 5%-10% in nominal terms over the outlook horizon from 17% in 2013, in line with stagnating trends in the economy.

In the face of the tighter credit conditions, we expect problem loans to rise to 9.5% of total loans over the next 12-18 months from 7% at end-20133. This trend was already evidenced by leading banks reporting sharp increases in provisioning expenses in the first half of 2014. The Russian banking system’s chronic problem of high single-borrower and related-party exposures exacerbate asset-quality risks.

Since the onset of the geo-political crisis with Ukraine, the banking system’s access to international wholesale markets has remained virtually frozen, with the exception of brief reversal in May/June 2014.

If continued, this will weaken the banking system overall, drain foreign-currency resources and increase funding risk of individual entities.

The loss of access to European and US capital markets will lead to a concentration and increased dependency on domestic financing sources. As a result of this, and combined with the tightening in policy rates by the central bank, the cost of funding will increase further. In the near term, however,

refinancing risk is mitigated by the system’s fairly low reliance on international funding and the

manageable maturity profile of existing foreign-currency borrowings.

The funding profile of the system continues to principally rely on domestic customer deposits (about 55% of total liabilities) and other domestic sources. Among these domestic sources, the role played by the Central Bank of Russia (CBR) and its ability to replace diminishing international funding and minimise currency volatility will remain crucial for the stability of funding. Thus far, the CBR supported an increasingly large portion of the system’s liabilities, at 10% as of August 2014. Given the unfavourable external funding environment, the banking system’s dependence on its institutional capability and reserves will increase. Although the CBR reserves remain ample at $419bn as at August 2014, they also came under downward pressure and declined by almost 11% since the beginning of 2014.

With the total regulatory capital adequacy ratio at 12.8% as at June 2014, capital buffers in the Russian banking system remain comparable to other emerging-market peers.

Russia may soften capital adequacy norm for sanctionshit banks Russia's Finance Ministry has suggested softening capital adequacy requirements for stateowned banks that were hit by western sanctions when issuing guarantees for them.

The draft will help increase stability of the customs guarantees' market and widen the use of banking guarantees by banks, that are directly or indirectly controlled by the central bank, the ministry said.

Under a Finance Ministry order, a bank can receive the highest

volume of state guarantees if its own capital adequacy stands over 11% in the three latest months.

In July, the E.U. imposed sanctions on Russian state-owned banks, including VTB, Russian Agricultural Bank, Sberbank, Gazprombank and Vnesheconombank, barring them from taking long- and mid-term loans within Europe. Later, the imposed similar restrictions.

EU court may hear Russian bank's claims vs sanctions in 2 years Several Russian banks have decided to challenge the EU's decision to hit them with sanctions in court, but it seems they will have to wait to have their day in court.

The EU General Court has registered claims of Russian banks Gazprombank, VTB and Sberbank – all state-owned - against the union's sanctions imposed on them, but their consideration may take no less than two years at best.

Claims are usually considered by the court within 30 months, but in case with claims against the EU sanctions the procedure may take about two years. The Luxembourgbased court is the court of first instance of the EU. In September, the union toughened the sanctions, prohibiting E.U. lenders to give loans to the banks for over 30 days and buying the banks' share issues and bonds with over 20 days of maturity.

Punters moving money from bank accounts to bank safety deposit boxes With fears of a crisis in the back ground and fears of a sharp devaluation in the foreground, Russians have been taking their money out of accounts and putting it in safety deposit boxes. The point of the boxes is if there is a crisis and withdrawal restrictions are imposed, these won't affect cash in a box that can be taken out at any time. The cost to rent a safety deposit box is about $8 a month.

"We not make it in time to buy safes, the greatest demand is for safes. I understand when clients want to put dollars into a safe but now we see a new tendency - to take the ruble and put it into a safe," she stated. "People think that deposits could be withdrawn, frozen, monetary movement will be complicated, transfer of funds will be under some conditions. First of all, people are trying to save money," Bella Zlatkis, Deputy Chairman of the Board of Directors at Sberbank said.

Russians pull $5bn out of banks as ruble plummets Russians pulled RUB52.6bn rubles ($1.3bn) out of ruble deposits in September as Moscow battled to keep its currency afloat amid plummeting oil prices, high capital outflows and Western sanctions over the Ukraine crisis, business daily Vedomosti reported, citing data from the Central Bank.

Consumer confidence in Russia's financial system is falling, with half of Russians saying they don't trust banks and are using such services less, in a troubling signal for a system under pressure from Western sanctions and more sensitive than ever to outflows of depositors, a recent study showed.

In the first half of this year, more than 47% of Russians agreed with the following statement: "I do not trust banks, they never tell the whole story." This number has shot up from about 43% in the second half of last year and 41% in the six months before that, the survey by researcher Synovate Comcon showed.

While hard currency deposits grew 2.4% in September in ruble terms, this was thanks to the rise of the dollar and euro relative to the ruble rather than an increase in deposits.

Calculating for the ruble devaluation, Russia's banking system lost a total of 200bn rubles ($4.9bn) in personal deposits in September, ratings agency Fitch told Vedomosti.

Analysts have blamed the 0.4% dip in ruble deposits, the first decrease since March's drop of 2.2%, on the falling ruble, which has lost some 20% of its value since the start of the year.

Rubles withdrawn from bank accounts are converted into hard currencies or used to buy imported goods and real estate, or placed in safety deposit boxes.

Households currently hold a total of about RUB1.6 trillion rubles ($40bn) in bank accounts, according to Sergei Pukhov, an economist at the Higher School of Economics.

One in three Russians have savings, proportion rising

refinancing obligations this year

A survey conducted by the Russian Public Opinion Research Centre (VTsIOM) revealed that only 35% of the Russian people have money saved for a rainy day. The rest live paycheck to paycheck. However, the number of residents saving money is increasing in the country.

The Russian banking system is not facing any systemic problems with external debt refinancing, as the 30 largest Russian banks possess a foreign currency hedge of $32bn, according to the Central Bank of Russia’s Financial Stability Review.

Nearly a half of respondents save money for a rainy day and just to be safe. 25% of respondents save to buy an apartment. The following priorities are medical treatment, buying a car or land, and spending on holiday and other leisure activities.

Early in 2014 some 16% of respondents saved money for entertainment. The number of such residents has halved by now.

Russian banking system has no systemic problems with meeting external debt

The regulator reports that a survey of the country’s 30 largest credit organizations was held in September determined that that the largest banks’ liquid assets exceeded liabilities that are due in the fourth quarter of 2014 and in 2015. This foreign currency hedge amounts to $32bn.

“Certain banks may have to deal with a lack of foreign currency liquidity due to incongruity between the amount of assets and liabilities to be repaid, but the banking sector as a whole is not facing any systemic problems with external debt refinancing,” the Central Bank of Russia concludes.

Bank consolidation continues The Central Bank of Russia has continued closing smaller banks without respite through out the crisis. The number of banks has fallen from over 4000 in the "wild cat" banking says in the 1990s to 804 as of September this year.

When taking the office of the Bank of Russia Governor in June 2013,

Elvira Nabiullina promised to toughen control of the banking sector. She fulfilled her promise: 10% of Russian credit institutions have been liquidated over the period she was in office.

Licenses of 100 credit institutions were revoked over this year.

Experts say the purge of the banking sector would have been even more aggressive being one of

the main economic topics in the country but for the geopolitical situation aggravated by the crisis in Ukraine, the shock devaluation

of the ruble and falling prices for oil.

Credit card use tanks, NPLs up Late payments on credit cards have increased by record 47% since January 1, 2014, their contribution to total arrears of unsecured loans up to 35%, according to a survey conducted by Sequoia Credit Consolidation. Late payments on credit cards made a total of RUB219.9bn ($5.2bn) as of October 1, 2014 Credit card growth was booming until this year but has hit a wall now. Growth of the credit card market in Russia slowed down to 13.9% for nine months of 2014 to a total of RUB1.134 trillion. That

compares with the fast growth of previous years: 38.4% for the frist nine months of 2013, 62.4% in 2012, and 45.4% in 2011.

The amount of a card loan keeps rising: from RUB39.7 thousand as of beginning of 2013 to RUB56.3 thousand as of September 2014, according to the survey. However, a final amount varies from region to region. For example, the average credit limit is RUB74.5 thousand in Moscow and RUB27.9 thousand in the Vologda region.

Credit cards account for over 10% of all loans granted by banks to individuals (RUB11.071 trillion).

Volume of POS lending falls for the first time POS loan debt has decreased for the first time, down by 2.5% over the year from October 1, 2013 to October 1, 2014, according to Sequoia Credit Consolidation analysts calculated based on the Bank of Russia's figures and banks' financial statements.

POS lending is shrinking while other segments of unsecured retail lending are growing. Over the same period, indebtedness under credit cards has added 21% and under cash loans by 19%, according to Sequoia Credit Consolidation

Putin signs law delaying deadline for Visa, MasterCard security deposits Russian President Vladimir Putin signed a law in October delaying the deadline for security deposit payments by Visa, MasterCard and other international card systems.

The law extends the deadline for calculating and paying security deposits to the first and second quarters of 2015.

The delay in security deposit payments was needed for a transitional period to transfer international payment card processing to the operational centre and the payment clearing centre based on Russia’s national payment card system.

The POS loan market totals RUB18.5bn (for comparison, the

credit card market is estimated at RUB1.13 trillion). This is 2.5% of the overall unsecured lending market. The figure was 4% in 2010 and decreased to 3.5% in 2011 and to 3% in 2012 and 2013. The POS loan market increased 14% in 2013, 18% in 2012, 24% in 2011 and 43% in 2010.

Late payments on mortgage loans up 6% YTD Late payments on mortgages were up year to date 5.9%, according to the data collected by Sequoia Credit Consolidation, a Russian collection agency.

A rising trend of bad debts started in August and arrears as of October 1, 2014 reached RUB42bn ($1bn).

Arrears of mortgage loans had been decreasing before 2014: overdue loans had reduced 10% since January 1, 2012.

Late payments on mortgage loans increased following the boom of mortgage lending started this spring. Amid multiple revocations of bank licenses, individuals started to place their savings with banks to a lesser degree and take more mortgage loans. Besides, the demand for residential real estate increased after the started devaluation of the ruble.

The data provided by the Agency for Housing Mortgage Lending (AHML) shows that Russian banks granted nearly 200,000 mortgage loans to the amount of RUB334.7bn in Q1 2014. This is 1.39 times the number and 1.47 times the amount of mortgage

loans granted in Q1 2013. During nine months of 2014, banks granted mortgage loans to the amount of RUB1.207 trillion versus RUB906bn for the same period in 2013.

Today, the mortgage loan portfolio of Russian banks exceeds RUB3.2 trillion.

The situation around arrears of mortgage loans may further deteriorate until the year-end.

Russian Standard Bank to sell is Ukrainian subsidiary to international investors The leading Russian retail banking Russian Standard Bank (Russky Standart) has decided to service Ukrainian subsidiary to the pool of European and American investors.

Russian Standard bank has been having a hard time recently on the back of falling consumer spending and slowing economy at home in Russia. However obviously the situation in Ukraine is far worse.

Banks across the region are being squeezed by the turmoil and the central banks increased prudential measures in order to curb a growing consumer credit bubble.

The Ukrainian subsidiary was established in 2006. As of July 1, 2014, PAO Russian Standard ranked 52nd by total assets among 173 Ukrainian banks, according to the data from the National Bank of Ukraine. The Ukrainian bank's profit was UAH5.3m for H1 2014, which is nearly half the profit for H1 2013. The bank's core assets are retail loans (UAH2.1bn as of

July 1, 2014). Retail deposits and accounts are UAH1.18bn as of the same date. Russian Standard Bank is the first bank to announce the sale of a subsidiary in Ukraine this year.

The other Russian banks operating in Ukraine include: Sberbank, Vnesheconombank, VTB, Bank of Moscow, Alfa-Bank and Trust Bank.

China opened his fourth bank in Russia China has registered its fourth bank in Russia, the China Agricultural Bank, which was accredited by the central bank of Russia on September 25.

The CAB was established with authorized capital is RUB1.4bn. No license has been granted to the bank so far because the authorized capital has not been paid up yet.

However, the period provided in the law for the purpose hasn't come to an end yet, the bank says on its page on the Bank of Russia's website.

Promsvyazbank and Gazprombank plan to obtain a banking license in Hong Kong Commercial bank Promsvyazbank and state-owned Gazprombank filed documents for obtaining a banking license in Hong Kong in order to make bank transactions of all kinds on this market.

Russian banks are turning to Asia to find new sources of funding.

Many already have accounts with Asian banks are ramping up those

relations. Others are setting up offices in Asia.

Promsvyazbank already has representative offices in New Delhi and Beijing because the bank is engaged in trade financing and factoring business with China on a large scale.

In April 2014, Gazprombank registered a subsidiary in Hong Kong under the name of GPB Financial Services Hong Kong Limited. The bank planned to fine documents for obtaining a few licenses to deal on the securities market.

Moody's downgrades seven Russian financial institutions Moody's Investors Service took rating actions on seven Russian financial institutions -- namely Sberbank, Bank VTB JSC, Gazprombank, Russian Agricultural Bank, Agency for Housing Mortgage Lending OJSC, Vnesheconombank and Alfa-Bank.

These actions follow the weakening of Russia's credit profile, as reflected by Moody's downgrade of Russia's government debt rating to Baa2 from Baa1 on 17th of October, 2014.

Specifically, Moody's downgraded the supported senior unsecured, subordinated debt and deposit and issuer ratings of the governmentowned Russian financial institutions. The outlook on the long-term ratings of these institutions is negative. The outlook on privately-owned Alfa-Bank's Ba1 supported senior debt and deposit

ratings and its guaranteed special purpose vehicles were changed to negative from stable.

Local funding reduces risks for foreign banks in Russia Major foreign banks in Russia are mostly locally funded, which reduces risks for their parents, nevertheless slower economic growth and ruble weakness are likely to put pressure on earnings given the large in-country exposures some international banks have, particularly European ones, international rating agency Fitch said in a statement Wednesday.

Recent issuance in the Russian bond market is not a new trend for the major foreign banks as they have mainly funded themselves locally for some time. Raiffeisen Bank International (RBI), Unicredit, Societe Generale and Citigroup want to reduce their Russian risks given the weakness in the ruble and the geopolitical tensions. The banks are likely to continue to optimize costs and reduce risks in their Russian operations, so the local subsidiaries may take market opportunities for further domestic bond issuances.

The foreign bank subsidiaries' loans are almost entirely funded by local deposits. Raiffeisenbank had a loan-to-deposit ratio of 104% and UniCredit Bank had a ratio of 107% at the end of the first half of the year. Societe Generale's main Russian subsidiary - Rosbank - had a consolidated ratio of 108% (including two specialized

mortgage and consumer finance subsidiaries).

Citibank runs with a much lower ratio, at around 50%, since it has a small loan book given that retail and corporate banking is only roughly half of its business mix, with investment banking making up the remainder. The bank has good access to residual current account balances and cheap shortterm deposits.

BNP Paribas stops credits for Russian commodities deals French banking giant BNP Paribas SA has stopped offering letters of credit to finance commodities trades involving five sanctioned Russian banks, according to people familiar with the matter—the latest fallout from tightening economic restrictions imposed by the West against Moscow.

While sanctions ban Western banks from raising finances for, or lending to, the five banks, they do not forbid letters of credit— essentially a guarantee of payment for a future delivery. The instruments are key in facilitating commodities trading.

A spokeswoman for BNP Paribas declined to comment. The French bank was hit with a fine of almost $9bn earlier this year after pleading guilty to violating sanctions against Sudan, Iran and other countries.

Government to inject another RUB5bn in Russian Agricultural Bank in 2014 The Russian government will inject 5bn rubles more into the capital of Russian Agricultural Bank in 2014, Finance Minister Anton Siluanov told reporters Tuesday.

“Yes, we will additionally increase Russian Agricultural Bank's capital by 5bn rubles this year," Siluanov said.

He said the funds will be allocated from the budget.

The Economic Development Ministry's 2015-2017 social and economic development forecast envisages the bank receiving up to 10bn rubles of injections into its capital from the budget annually.

SWIFT system has no intention to disconnect Russia The international inter-bank settlement system SWIFT has no intention to unilaterally disconnect Russia, SWIFT said in a statement on October 6.

“SWIFT and its stakeholders have received calls to disconnect institutions and entire countries from its network — most recently Israel and Russia,” the statement said.

“SWIFT regrets the pressure, as well as the surrounding media speculation, both of which risk undermining the systemic character of the services that SWIFT provides to its customers

around the world,” the statement said.

“Any decision to impose sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators. Being EU-based, SWIFT complies fully with all applicable European law,” the document said. “SWIFT will not respond to individual calls and pressure to disconnect financial institutions from its network,” it added.

Russia's Deposit Insurance Agency pays $553m to Crimean residents Russia's Deposit Insurance Agency has paid RUB22bn ($553m) to over 200,000 residents of the Republic of Crimea who had accounts at Ukrainian banks, according to the deputy general director of the agency Andrei Melnikov.

“We started accepting the first applications on April 23 and have received around 300,000 applications since then. Over 200,000 people have received compensations, a total of 22bn rubles,” the agency quoted Melnikov as having said.

The Deposit Insurance Agency Director said that the agency involved several banks, the Russian National Commercial Bank, the Black Sea Bank of Reconstruction and Development and Genbank, in restoring trustworthiness of the banks that will further establish their presence in Crimea.

Compensation will be paid to the depositors of 40 Ukrainian banks.

The major ones include Privatbank and Oschadbank.

Qiwi sees Russian money remittance market doubling in 2015 from 2013 Anna Stoklitskaya, Qiwi managing director, yesterday estimated the volume of Russian money remittance in 2014 to grow 19% year-on-year to RUB 2,500bn ($65.7bn).

2,900bn ($76bn), up 38% year-onyear.

Qiwi has strengthened its focus on money remittance since 2H13, and managed to double the share of money remittance in its total payment commission structure to 11% in 2Q14, from 6% a year before, while the money remittance volumes made via Qiwi soared 94% year-on-year, reaching RUB 15.3 bn ($0.5 bn) in 1H14. During 1H14, money remittance average effective yield increased to 1.49% from 1.21% in 1H13.

Stoklitskaya expects further money transfer market acceleration in 2015, estimating money remittance volumes at RUB

Economics

Russian economic growth decelerates for third consecutive quarter GDP growth accelerates to 1.1% year-on-year in September. The Economy Ministry reported that GDP growth accelerated to 1.1% year-on-year in September from zero year-on-year growth in August, reports Sberbank.

Seasonally adjusted, the economy grew 0.4% month-on-month in September after contracting 0.4% month-on-month in August.

Economic growth decelerated to 0.7% year-on-year in 3Q14 from

0.8% year-on-year in 2Q14, according to MERT. Thus, growth slowed for the third consecutive quarter. Economic growth remained flat QoQ in 3Q14. The ministry sees negative growth rates in 4Q14 as highly possible.

Further monetary tightening will slow economic growth. The ministry’s GDP growth estimate of 1.1% year-on-year in September appears quite high to us, as we do not see many growth drivers.

We estimate that cheaper oil, geopolitics and tighter monetary policy will lead Russia’s economy into a medium-term recession. We

believe that the Central Bank will increase the key rate by 50 bps to 8.5% on Friday, in order to constrain inflation and ruble weakness. We believe that higher rates will further negatively affect investments, industry and consumer demand. We forecast capital investment to fall 3% this year and 2.5% next year. We see GDP growth at 0.6% this year and 0.7% next year.

CBR surprises with sharp interest rate hike Russia's Central Bank raised its main lending rate by 1.5% at a board meeting on October 31, citing concerns about above-target inflation, weak oil prices and a toughening of Western sanctions.

The move brings the bank's main lending rate, the one-week minimum auction repo rate, to 9.5%, and brings the cumulative increase this year to 4%.

monetary policy," the Central Bank said in a statement.

The bank said it is concerned about inflation, which is rising as a result of the weaker ruble and a ban on most Western food imports introduced in retaliation for sanctions.

The bank said that inflation reached 8.4% as of Oct. 27 and would remain above 8% until the end of the first quarter of 2015.

The bank also said it expected economic growth to be close to zero in the fourth quarter of this year and in the first quarter of next year.

The ruble briefly firmed after the bank's decision, trimming losses from earlier in the session, before falling back into negative territory.

Ruble under triple pressure

The Central Bank has been under pressure to raise rates to defend the sliding ruble, which has shed around 20% against the dollar since mid-year as a result of falling oil prices and Western sanctions imposed over Russia's actions in Ukraine.

The increase was above analysts' expectations, according to a Reuters poll this week which predicted a half-point increase.

"If external conditions improve, and a persistent trend for lowering inflation and inflation expectations emerges, the Bank of Russia will be ready to start to ease its

Russia has spent $68bn this year to defend the ruble and $21bn just in October. Russia's hard currency reserves had fallen to $443.8bn as of October 17 as the ruble set all time low records against the dollar, euro and pound on almost a daily basis. Where will the ruble go from here?

Russian policy makers sold $200bn in seven months to prop up the ruble after the collapse of Lehman Brothers Holdings Inc. six years ago, slashing reserves by almost 40% in the process. They don’t want to “repeat the experience” and may move faster to a free float

and inflation targeting, Credit Suisse Group AG said in an October 15 research note.

When you are an EM and you have $450bn in reserves, and your currency is weakening, that's because you want your currency weaker, or know adopting a hard core defence of it is futile. The best thing you can do is to try and manage/moderate the rate of depreciation, and that is what they are trying to do, while trying to retain the mirage that they are still looking to cling to the inflation targeting/float concept, says Tim Ash of Standard Bank.

The CBR is using a combination of measures to try and prevent the ruble's decline becoming a rout, including FX interventions, some rate hikes, verbal intervention, but

We consider the recent drop in the ruble to RUB40.45/$ to be an overreaction, with the market having disregarded 3Q14’s strong current account surplus and lower-

all have their failings when set against strong fundamental reasons for the ruble to be weaker, including weak growth, weakening lower oil prices, negative perceptions (now bordering on panic in terms of some of the policy responses seen) around sanctions, capital flight associated with concern over the business environment.

The CBR likely would want to raise policy rates further but with growth so feeble, its political masters would likely be unappreciative and especially after earlier rate hikes failed to have much impact. Note that FX interventions are fine, but they have to work, or else the market just sees FX reserve loss as a growing vulnerability, as was the case in 2008/09.

than-expected foreign debt redemption of $16bn, Alfa Bank reports.

There are several reasons for ruble depreciation since mid-year.

• First is oil price weakness: the ruble traded ~RUB34/$ in July under $110/bbl, and the drop to $90/bbl justifies depreciation to RUB38/$.

• Second, the shortage of FX liquidity after the tightening of foreign sanctions in Aug, which restricted corporate access to foreign funding, explains depreciation by another RUB1.01.5/$.

• Third and most recent blow was the capital control rumor that reemerged in October, and which has remained an investor concern despite official denials that such a measure was being considered. As a result, market expectations on the YE14 RUB/$ rate have collapsed from RUB33-38/$ at midyear to the current RUB36-42/$.

Should oil return to $100/bbl, we still see RUB37/$ as plausible for YE14; however, each $10/bbl deviation leads to a RUB1.5-2.0/$ adjustment. As our current account surplus expectations of $90bn for 2015 are double consensus’ figure, we remain optimistic on the ruble, envisaging RUB38/$ for YE15.

The market is underestimating the size of the Current account surplus… Macro fundamentals behind the ruble exchange rate are not as negative as perceived. The 3Q14 current account surplus was an above-consensus $11bn, with imports down 9% y/y. Ruble depreciation combined with foreign trade restrictions suggest that imports may drop by 10-15% y/y in the next four quarters. Under the $100/bbl assumption, we see the current account surplus at $17bn in 4Q14E and $90bn in 2015, the latter being twofold higher than consensus.

…overestimating pressure of foreign debt redemption… In 3Q14, Russian corporate foreign debt contracted by $44bn; however, $28bn of this decline was due to the revaluation effect, as around 20% of the debt is denominated in rubles and 10% in euros. Russian banks and companies in 3Q14 have actually redeemed only $16bn vs. $37bn guided by the CBR and managed to rollover the rest. The $47bn redemption guided by the CBR for 4Q14 also appears highly overestimated. …and underestimating banks’ ability to attract FX deposits locally: While FX deposit rates offered by Russian banks were rather stable until Aug, anecdotal evidence suggests that they are up from ~2% to ~4%. We believe that this may attract some FX from “under the mattress”, and thus

within a month may help banks overcome the shortage in FX liquidity.

Russia’s economy will reach long-term potential only in 2017 Sanctions and policy tightening will hurt Russian economy. Although the immediate impact of Western sanctions is likely to be limited, the indirect effects could turn out to be quite substantial in light of the acceleration in capital outflows and the decrease in investment activity.

The tighter monetary policy, the decision to freeze the self funded component of pensions and the creeping tax increase could end up having a larger effect on the Russian economy than the sanctions themselves. In our view,

Russia should refocus on domestic economic policy and avoid further distancing itself from its global economic partners.

Given the negative impact of recent geopolitical events and the government’s tightening of economic policy, we believe that Russia may not be able to achieve its long-term economic growth potential until 2017. Our base-case medium-term outlook for the Russian economy continues to envisage stagnation. In this environment, industry should continue to grow at a sluggish pace thanks to partial import substitution. Weak growth will likely remain in the retail, real estate, transport and telecom sectors.

EU chose to focus on oil and financial companies with its latest sanctions. The West’s latest round of sectorial sanctions against Russia, introduced in September, targeted key segments of the Russian economy. The sanctions from the EU banned European investors and companies from buying shares and bonds with tenor of more than 30 days from some of Russia’s largest oil companies, including Rosneft, Transneft and Gazprom Neft.

Additionally, the oil companies, along with some of Russia’s largest banks (Sberbank, VTB, Gazprombank, Russian Agricultural Bank and VEB), can no longer receive loans with tenor of more than 30 days. A new embargo on technology used for deep-sea drilling, offshore Arctic exploration and shale projects will also make things more difficult for Russian oil

companies. We doubt the EU will impose sanctions on Russian gas companies anytime in the foreseeable future due to its reliance on Russian natural gas.

While US sanctions focused mainly on the energy sector. In the latest round of sanctions from the US, several of Russia’s largest energy companies were added to the list, including Gazprom, Novatek, Rosneft, Lukoil, Surgutneftegas and Gazprom Neft. The US will no longer allow American companies to supply these Russian energy companies with certain types of technology and equipment used in deep-sea, shale and offshore Arctic projects. A number of companies, including Gazprom Neft and Transneft, were also added to the list of companies that can no longer receive loans or place debt instruments with tenor of more than 90 days in the American market. The list previously included just Rosneft and Novatek.

Sanctions should have mild shortterm impact on targeted companies. While we do not believe the new sanctions will have a major short-term impact on the targeted companies, as they still have the ability to transact in dollars, the medium-term refinancing risks for these companies have risen considerably.

The sanctions will inevitably lead to a shortage of dollar liquidity in the Russian market and sour sentiment among clients, investors and partners of the targeted companies.

High-tech oil projects are at risk.

The embargo on oil technology and

equipment will put a number of oil projects in the Arctic and at shale deposits on hold, while the embargo on defence exports should stymie Russia’s efforts to modernize its armed forces. For Russia, replacing these imports with Russian production would most likely prove to be expensive and lead to a noticeable increase in budgetary expenditures. However, the negative impact of these sanctions will only begin to be felt in the medium term, which provides some hope that if the situation in Ukraine deescalates quickly, the sanctions will be lifted before the real pain begins to set in. However, if tensions do not begin to ease, the sanctions could cause substantial problems in the financial sector and hamper Russia’s medium-term growth prospects.

Indirect effects of sanctions likely to be more significant than direct impact. Although the direct effect of the sanctions should be virtually unnoticeable in 2014 and will likely amount to less than 0.3-0.5% of GDP in 2015-16, the indirect consequences could turn out to be far more impactful, given the recent acceleration of capital outflows and decline in investment activity. According to data from the CBR, Russia experienced a $74.6bn net outflow of capital in 1H14.

Taking the new sanctions into account, as well as how difficult it has become for Russian companies to refinance their external debt in the international capital markets, we expect to see a net outflow of $90bn in 2H14. In the event that things cool down in Ukraine over the next several months, we

estimate that capital flight will slow to $75-85bn in 2015 and $55-60bn in 2016, but even in this case, the amount of money leaving Russia would have a significant negative effect on the economy. Our calculations show that each additional $10bn in outflows leads to a 0.2 ppt drop in GDP growth and a 0.5 ppt drop in capital investment growth.

On the other hand, with the EU preparing to further loosen monetary policy, we expect the economic recovery in the eurozone to continue, which would be mildly supportive for the Russian economy.

Tighter fiscal policy will hamper economic growth. Shortly after the government got to work on its 2015-17 budget plan, it was starting to look like the new plan would include measures that would increase the tax burden on both Russian consumers and businesses. In June, the Finance Ministry suggested raising VAT tax and personal income tax as well as introducing a sales tax.

Even though it appears the government is no longer considering such sweeping reforms to its tax policy, the chances of taxes being raised over the next 23 years remain high, creating risks for medium-term economic growth.

According to our estimates, a 2 ppt hike of the VAT tax could lead to a 0.2-0.3 ppt slowdown in GDP growth, while a 2 ppt rise in the income tax rate could lower real GDP growth by 0.2-0.3 ppt.

Introducing a five-percent sales tax could shave another 0.1-0.2 ppt off

of annual GDP growth. Aside from that, raising taxes would inevitably lead to a rise in inflation resulting from producers passing the higher costs of doing business on to consumers. We believe that raising the VAT tax could speed up inflation by around 1.5 ppt within a matter of months. The effect of a sales tax would most likely be less pronounced, but we believe it could add another 1.0-1.5 ppt to CPI growth. Although the federal government formally announced that it does not plan on raising taxes this fall, it will allow Russia’s regional governments to impose duties on certain types of businesses, including hotels, restaurants, taxi companies and travel agents. This would effectively produce the same effect as introducing a sales tax in these segments.

Freeze on self-funded pensions will deprive Russia of an important source of investments. The government’s recent decision to extend the freeze on the selffunded component of pensions through 2015 came as a surprise not only to ordinary Russians, but also to the expert community, the financial markets and even members of the Russian cabinet.

With the growing uncertainty regarding Russia’s economic prospects and the resulting lack of certainty regarding budgetary revenues, the government’s decision to freeze pension contributions allowed it to cut back on transfers from the federal budget and ensure that its social obligations will be fulfilled over the medium term. However, it is

important to consider that the decision will result in the loss of RUB500-600bn worth of investments in financial markets, which should bring about a further rise in the interest rates and make borrowing more difficult for Russia’s budgetary authorities as well as key state companies, many of which are already virtually blocked off from the external debt markets due to Western sanctions.

In our view, the decision will have a negative effect on medium-term economic growth. The situation could grow even worse, as the government is reportedly discussing the possibility of getting rid of the self-funded component of pensions altogether.

Economic recovery in Europe could provide support, even if the sanctions remain in place. We maintain our long-term growth forecast of 2.5-3.0% per year, but considering the negative impact that the recent geopolitical events and the tighter economic policy will have over the medium term, we do not believe Russia will be able to achieve its longterm growth potential any earlier than 2017. We expect GDP growth to slow from 1.3% in 2013 to just 0.6% this year, but the gradual economic improvement in Europe should provide support for the Russian economy in 2015-16 in spite of the sanctions. Even though the European economy has slowed somewhat as of late, we believe the lower oil prices, the further easing of monetary policy and the consequent weakening of the euro should help the European economy get back on track.

Russia ratings affirmed by S&P with negative outlook Despite some speculation that S&P could downgrade Russia to "junk" status again – it was upgraded to investment status in 2003 – ratings agency S&P maintained Russia's rating in October at BBB-/A-3, one notch above junk.

The agency cited the large currency reserves and low

sovereign debt as underpinning the rating, but expressed concern at the economic slump, high inflation and on going capital flight.

• We expect Russia will maintain a strong net external asset position and moderate net general government debt in 2014-2017.

• We are affirming our 'BBB-/A-3' long- and short-term foreign currency ratings and our 'BBB/A-2'

long- and short-term local currency ratings on Russia.

domestic producers a chance to expand – is working.

• The outlook remains negative, reflecting our view that we could downgrade Russia over the next 18 months if its external and fiscal buffers deteriorate at a faster pace than we currently expect--for example due to any further tightening of sanctions as a result of the conflict in Ukraine.

The agriculture sector posted extremely strong growth of 16.6% year-on-year in September and 7.7% in 9m14. Combined with strong industrial output growth last month (2.8%), driven by import substitution, this should lead to improvements in basic sector output.

• If we see Russia's monetary policy or exchange rate flexibility weakening, we could also lower the ratings.

Russia's dependence on imports will fall to 39% from 51% by 2020, Industry and Trade Minister Denis Manturov said at a Russian Union of Industrialists and Entrepreneurs (RUIE) meeting in October.

Moody’s cuts Russia’s foreign currency long-term debt rating Moody’s cut Russia’s foreign currency long-term debt rating on Friday, 17 October 2014 from ‘Baa1’ to ‘Baa2’ while keeping the country’s outlook on negative, stating that Russia’s economic prospects are weak and sanctions are weighing on the country’s FX reserves.

‘Baa2’ is the second lowest investment grade level.

As Russia’s capital outflows accelerated in Q1 14 and the central bank initiated overly tight monetary policy in order to support the ruble’s exchange rate.

Russia's agriculture sector soars, import substitution working?

It seems Putin's import substitution policy – cutting off EU imports of agricultural products to clear the market of competition and give

Sberbank's Evgeny Gavrilenkov says that the economy is adjusting to the new environment. Economic growth has slowed, but it is not stagnating or contracting.

Russia's food industry came under even more pressure after Russia's acceded to the WTO in August 2012. Pork producers in particular immediately felt the squeeze after import duties on European's higher quality, lower cost imports were phased out as part of the deal.

Russia's annual inflation remains at 8.3% The ban on the import of EU food continues to be the main driver of inflation, which remains high at 8.3% in October and is now expected to end the year at, or over, 9%. Inflation is expected to remain persistently high in 2015 as well.

The CBR faces a nasty dilemma: to hike rates or not. On balance the CBR has indicated that given the inflationary pressure is coming from non-monetary factors (ie food) over which it has no control the bank is avoiding hiking rates, which would also further depress already poor growth. But which way the bank will go in the few meetings it has left this year remains up in the air.

Retail trade accelerates to 1.7% y/y in September Retail trade growth kept accelerating from a very low 1.2% y/y in July to 1.4% y/y in Aug and 1.7% y/y in September.

September’s acceleration was driven by the non-food segment, which posted 3.5% y/y growth after 2.6% y/y in the previous two months; the food segment has been shrinking since May, and was down 0.5% y/y in Sept. The latter

Inflation reached 0.2% w-o-w in the week to October 27, leaving the year-on-year figure flat at 8.3%. Inflation accelerated in October, as the annual figure was 8.0% at end September. The CPI rose 0.8% over October 1-27, surpassing the m-o-m inflation figure for October 2013 (0.6%).

reflects deterioration in income fundamentals, with real salaries declining 1.0% y/y in Sept, and Aug growth downgraded to a 1.2% decline, indicating an adjustment to the faster inflation.

The spike in consumption likely a one-off, trend worsening ahead, reports Sberbank. Even though the unemployment rate remained low at 4.9% in September, we believe that the decline in real salaries is not compatible with the acceleration in consumption growth

in the long term. We thus see the spike in retail trade growth as a one-off, reflecting household concerns on the safety of savings.

The Russian banking sector lost ~RUB50bn in ruble-denominated

Russian capital investment fall 0.4% in September Russia's fixed capital investment cleared of seasonality fell 0.4% on the month in September, the Economic Development Ministry said. The lack of investment is killing growth, but the state has been unable to kick start

retail deposits in Sept, which were probably withdrawn in order to fund spending. Similar to elevated retail trade growth of 3.6% y/y in 1Q14, as soon as financial panic calms down, it should result in a deceleration in retail trade.

confidence or cut the cost of money to engender more investment.

The Federal State Statistics Service said on October 17 that the investments fell 2.8% on the year in September, while in JanuarySeptember, capital investments decreased 2.5% on the year.

The Economic Development Ministry expects capital investments to fall by 2.4% in 2014.

Inflation was highest in the vegetable segment (tomato prices climbed 39.9% in October 1-27, while cucumbers were up 41.9% and potatoes jumped 10%), as the import weighting in this segment is significant and exchange rate sensitivity is strong.

It was also notable for goods partly falling under the food import ban (cheese prices were up 2.3% over the period, while sausages rose 1.5-1.6%, chicken prices were up 1.2% and frozen fish climbed 1.3%). Inflation triggered by the food ban appears to be slowing, and the supply shock effect was lower in October than in September. YTD inflation reached 7.1% and the annual figure will most likely exceed 8%.

Government approves program for project financing with subsidized rates

and a construction permit is obtained, if necessary. All the rest is as a bank deems fit.

The government approved a program for project financing of investment projects (available at government.ru). The purpose is to reduce the cost of borrowing for companies willing to invest in new projects. The interest rate must exceed the Bank of Russia's key rate by no more than 1 percentage point, i.e. the interest rate would be 9% at the moment.

After being considered by a bank, projects will be submitted to an interdepartmental commission, which will check whether the application meets the priorities defined in the Core Areas of the Government's Activities.

Project financing development is part of the government's plan for improving labour efficiency and stimulating the economy.

The plan was prepared at the instruction of Russian President Vladimir Putin.

Companies will be able to apply for credits to banks to be selected by the government. The core criteria are as follows: capital at the level not lower than RUB100bn, financing of at least 10 investment projects worth at least RUB3bn each over the past three years, and having a special division capable of controlling the targeted use of resources.

Each project will have to pass six stages of approval. Projects will be selected by banks, not by the government or authorities: a bank will study a project at the initial stage and make a decision whether to approve a loan or not. Projects will have to meet the minimum set of requirements: the value is from RUB1bn to RUB20bn, at least 20% of financing is out of own funds,

Banks that qualify for the program are mostly state-owned: Sberbank , Bank VTB, Russian Agricultural Bank, Bank of Moscow, VTB24, Alfa-Bank and UniCredit Bank.

Russia's C/A surplus improved in 3Q14 due to falling imports Russia makes it into the top 10 countries with the largest currentaccount surpluses in the world, according to a chart released on October 8 by Renaissance Capital's chief economist Charlie Robinson.

The silver lining to the devaluation of the ruble is that imports tanked in the third quarter dramatically boosting Russia current account surplus and off setting about half of the current capital flight which is expected to top $100bn this year.

The C/A surplus was surprisingly strong in 3Q14, amounting to $11.4bn, according to preliminary CBR estimates; higher than Rencap's forecast ($8.8bn) and Bloomberg consensus ($8.75bn).

It compares with a deficit of $0.7bn in 3Q13 and a surplus of $14.1bn in 2Q14, but analysts attribute some of the decline in compared with 2Q14 to

unfavourable seasonality. On a 12M rolling basis, the surplus increased further to 3.0% of GDP ($52.3bn), from 2.4% of GDP in 2Q14.

And some analysts are expecting the surplus to be even higher next year with the consensus of around $50bn-$60bn and the most optimistic (Alfa Bank) guess as much as $90bn driven by the switch to a completely free floating ruble.

The improvement in the C/A surplus was mainly the result of declining imports. Russia’s trade surplus widened by 11.2% yearon-year to $48.6bn in 3Q14, driven

by subdued imports growth. Goods imports contracted by 8.7% yearon-year, after a 5.0% year-on-year drop in 2Q14, due to the weaker ruble and subdued domestic demand.

The bad news was goods exports also fell and were down 2.0% yearon-year, hit by cuts in energy exports. In particular, gas exports dropped by nearly 40% due to a cut in gas supplies to Ukraine.

Further decline in investment income paid abroad also played a role. The deficit on investment income eased by $5.8bn compared with a year ago ($12bn, vs $17.8bn in 3Q13).

Russia's industrial output grows 2.2% in September Russia's industrial output grew 2.2% on the year in September, the Federal State Statistics Service said.

In January-September, the output rose 0.5% on the year, while in July-September the indicator increased 0.7% in annual terms.

For comparison, Russia's production decreased 0.5% on the year in August and rose 0.3% in July.

The growth is calculated on the basis of data on changes in agricultural production, mining, manufacturing, the production and distribution of electricity, gas and water, construction, transport, retail and wholesale trade.

Real salaries in Russia fell 0.3% as of the end of Q3 2014 year on year.

In their first decline for five years, real wages in Russia fell 1.2% in August. Real wages, or wages adjusted for inflation, last fell in November 2009, the year when the global financial crisis wiped 9% off Russia's gross domestic product. Rosstat blamed the August fall on the one-two punch of slowing nominal wage growth and rapidly rising inflation.

The nominal growth of salaries slowed to 6.3% in August and 6.9% in September year on year versus 9-10% in the preceding months, according to Rosstat. At the same time, inflation jumped to

8% in September to October. The Higher School of Economics estimates a possible fall in salary in real terms at 1.9% in 2015 with no prospects for improvement seen.

Growth of salaries in Russia slowed down, PricewaterhouseCoopers (PwC) says in a regular survey: companies increased private sector salaries 7.6% on average in 2014 versus 11% in 2013. Plans for the next year are even more modest employers plan to increase salaries by no more than 7%. Salaries of company heads have increased at the slowest pace in 2014, by 6.5% on average, but bonuses paid to top-managers are not included in PwC's figures.

Specialists can boast of the biggest increase - their salaries added 8.2%. However, the share of employees whose salaries were increased decreased to 39% in 2014 from 68% in 2013, says PwC. Much of the fall is driven by a sharp slowdown in the rise of the salaries of the state employees, who have been enjoying pay hikes significantly ahead of those in the private sector in the last few years.

Salary in the state-run sector will be adjusted by 5.5% in 2015, which is less than both current and expected inflation rate for this year.

The data for August collected by the Higher School of Economics show that growth rates of salary

and wages in real terms were nearzero or negative in the majority of manufacturing industries. The decline in wages in real terms reached 3-4% year on year in the sectors, which have been in a recession for long, for example, engineering. A favorable trend in August was seen in wholesale and retail trade and in the financial sector, "but these sectors are most sensitive to the influence of sanctions, counter-sanctions and the fall in oil prices," the HSE said.

The Higher School of Economics experts think that a negative salary trend will result in a decline in real disposable income of individuals, a fall in consumer demand and deterioration of the consumption structure in the near-term.

Fewer Russian bureaucrats but salaries increased 30% over five years

Russians are 17% poorer than in 2007 due to collapsing ruble

The number of Russian officials has decreased slightly from 2009, but their collective earnings have grown 31% to 682bn rubles ($16bn), a new study showed Wednesday.

The rapid plunge in the value of the ruble over the past 18 months has sent the spending power of Russian households tumbling, according to a report by investment bank Credit Suisse.

Russia had 1.45m officials as of 2013, compared to 1.5m five years ago, the study conducted by the RBC news website said.

Russian household wealth multiplied eightfold between 2000 and 2007 as commodity prices boomed, but stalled when the financial crisis swept through the global economy the next year, the bank's 2014 Global Wealth Report said.

This still amounted to 102 officials per 10,000 citizens — a figure comparable to many developed countries, including the U.S., Germany, Japan and Israel, but less than in the Soviet Union, which had only 81 officials per 10,000 in 1988.

The average salary of a Russian bureaucrat was RUB39,000 ($950) in 2013, up from RUB28,000 ($580) in 2009, the survey showed. The salary hike was especially pronounced in the Kremlin administration, where salaries grew 2.4 times over the five-year period.

The figure puts Russian officials' monthly income at 31% above the average salary nationwide, the study said, based on publicly available sources.

Meanwhile, top officials are making 14 to 15 times more than the average citizen with a higher education, while the discrepancy is only three to four times in developed countries.

Now Russian households have 15% more rubles than in 2007, but while in that year one dollar cost 25 rubles, the same dollar now costs 34 rubles, the bank said in its report. The result: Russian household wealth has fallen 17% since 2007 and is now at $19,590 per adult, the report said.

The situation may in fact be even worse. Credit Suisse's calculations rest on a 34 ruble exchange rate for this year. This was true in July, but an economic slowdown, tightening Western sanctions over Ukraine and sharp falls in the price of oil since then have driven down the value of the ruble far further.

At the end of October the ruble hit the 41-to-the-dollar mark — 20% weaker than Credit Suisse's chosen rate.

The report also found that the richest 10% of Russians own 85% of the country's wealth — far

above the US, where the top decile owns 75% of wealth, and China, where the richest 10% take 64% of the pie. The bank puts average household wealth in the US this year at $347,845.

Russian spending on luxury goods plummets with ruble A weak ruble and low consumer confidence have taken their toll on Russian luxury spending, with goods sales down 7% at constant exchange rates and down 18% at current exchange rates, consultancy Bain & Co said in a report published in October.

The personal luxury goods industry has been through a slowdown since 2011 in part due to flagging demand in China where the government has cracked down on gift-giving, and economic weakness in Europe.

Industry concerns have been compounded by conflicts in the Middle East, the Ukraine crisis hitting demand in Russia — the No.2 luxury goods buyer after the China — and pro-democracy protests in Hong Kong, where many luxury brands made more than 10% of their annual sales.

Bain predicted total revenue from the personal luxury goods industry — which includes watches, jewelry, clothes, shoes and leather goods — to reach €223bn ($282.70bn) in 2014 against 218bn in 2013, when sales rose 7% at constant exchange rates.

Persistent ruble weakness soaks speculation of accelerated switch to free float, hard currency reserves to fall The rapid fall of the ruble, especially against the dollar that has also been appreciating strongly, has lead to speculation that the CBR will accelerate the switch to a fully floating ruble, slated to happen at the start of next year.

The CBR is required to expand the ruble corridor by 5 kopeks after each $350m intervention by its own rules, but as interventions have been so large recently – the CBR has spent about $50bn on defending the ruble this year, with most of it spent in recent months – the corridor expansions have been coming in 40 kopek chunks in October.

The ruble has more-or-less been freed already; the CBR is now in effect managing a controlled devaluation to prevent panic but trying to preserve its currency reserves at the same time.

Hard currency reserves dropped below $450bn in October, a four year low, and down from their post-crisis peak of about $500bn.

Some economists have speculated that reserves will fall to $400bn next year. S&P forecasted usable foreign currency reserves to decline to about four months of imports by 2017, from eight months in 2014, as a result of the central bank providing foreign currency liquidity support to the economy.

Ruble expected to recover very slowly in 2015 The Russian ruble will rebound very slowly, while 2015 will be the year of a strong dollar,

Chairwoman of the Centre for Macroeconomic Research at Sberbank Yulia Tseplyayeva said in October.

"News flow is negative, and the situation causes great concern among us," she said, pointing out the falling oil prices, which can decrease further in 2015. However, the Russian ruble is seriously underpriced, and its fair price is 38 rubles against the dollar, Tseplyayeva said.

Rencap. This compares with a spike of $10.3bn in 1Q14.

Comparing the current situation with 1998, she said the situations are radically different, as in 1998 the oil price fell to a critical low of $9 per barrel, while Russia's budget deficit was colossal. Now the budget is balanced, Russia's debt is low and the central bank has many instruments for helping the banking system.

Another data source, the CBR’s statistics on retail operations with FX cash, suggests a somewhat higher figure, which also indicates some slowdown in the growth of FX cash in circulation.

Population still ignoring devaluation, but tide is turning Following the rush to buy dollars in the spring when the ruble first started to devalue amounting to over $10bn of FX purchase and mounting "internal capital flight" it seems that the population is calmer in the autumn.

Net purchases of FX cash stayed very low, at $1.5bn for the whole of 3Q14, according to the balance of payments statistics, reports

An increase in demand for FX cash could damage the ruble’s prospects even further, so we were pleased to see that our view of no panic on the street (at least for now) was backed up by the macro numbers.

At the same time the spike in the purchases of apartments in the spring has slowed. Support for housing construction has evaporated recently: this signals the end of flight from banking deposits to real estate, given the recent sharp spike in interest rates on FX deposits. But against this some people are increasingly taking cash out of their accounts and putting it in bank safety deposits boxes in banks to protect themselves from bank collapse (see story in banking section).

However, there was no sizable shift in the structure of households’ deposits adjusted for FX revaluations in July-August (the latest available data).

Capital flight for this year high, but slowing fast Net capital outflows by banks and businesses, calculated by the CBR, eased further to $5.7bn in 3Q14, from $10.2bn in 2Q14 and $61.7bn in 1Q14. In 9M14 net outflows amounted to $77.6bn, and banks are now forecasting outflows of below $100bn for the whole year, less than the pessimistic estimates of over $100bn-$120bn by some commentators a few months ago.

Although net capital outflows have decreased substantially after peaking in first-quarter 2014,

private-sector net capital outflows should be substantially higher for 2014 compared with previous years.

Outflows averaged $57bn annually in the five years to 2013, and $85bn already in the year-toSeptember 2014 (or $78bn including foreign currency transactions between Russian banks and the central bank).

However, S&P expect Russia's current account surplus to be maintained over our 2014-2017 forecast horizon as ruble weakness weighs on imports.

Bankers say there are three factors driving the slow down: • First is the seasonal compression of the C/A. Less money coming to Russia from trade operations means less money slipping away.

• Second is that banks have swung from taking capital abroad to bringing capital to Russia. The banks did this by cutting their assets (by $32.1bn – a record-high

quarterly figure for Russia), as funding in Russia is increasingly hard to come by. Also access to international markets closed Russian entities was forced to cut their external debt.

• Third is a shortage of dollar funding domestically.

Russia buys most gold for reserves since financial crisis of ’98 Russia boosted gold reserves by the most since defaulting on local debt in 1998, driving its bullion holdings to the largest in at least two decades.

The country expanded its stockpile, the world's fifth- biggest, by 37.2 metric tons in September to 1,149.8 tons, according to data on the International Monetary Fund's website. The increase, valued at

about $1.5bn, was the biggest since November 1998. Russian reserves, which overtook those of Switzerland and China this year, almost tripled since the end of 2005 and are at the highest since at least 1993, the data show.

Ruble devaluation supports the budget The falling price of oil is not a problem for the government finances if the ruble falls at the same time. As oil is priced in dollars in the budget, but the

money it generates for the state to spend is converted into rubles, devaluation increases the number of rubles it has available. S&P expects the central government to post a small surplus of 0.4% of GDP in 2014 as a result of the devaluation effects.

Given that spending is priced in nominal terms and doesn’t change regardless of what happens to the exchange rate, this means that with $80 oil but USDRUB rate of 42 the government has more ruble cash to spend than at $100 oil and USDRUB rates of 30. And indeed, the government was running a 2% of GDP surplus in September.

The finance ministry sees consolidated government spending rising over 11 % in nominal terms next year, slightly faster than its previous estimate this summer and ahead of the 5% increases of recent years. The ministry also expects a slight rise in revenue growth to over 7%. The deficit forecast remains at over 2% of GDP in 2015.

Budget revenues reached RUB1,258bn ($33.2bn) in September, while expenditures

totaled RUB1,120bn ($29.6bn) for a surplus of RUB138bn ($3.6bn) over the month.

Over 9m14, the surplus reached RUB1,110bn ($32.2bn). The strong surplus was achieved despite a 7.7% year-on-year rise in spending over 9m14, as revenues climbed 11.4% year-on-year.

The weakening ruble supported ruble-denominated oil and gas revenues, which rose 15.1% yearon-year despite a 1% fall in the oil price. Non-oil and gas revenues expanded 7.7% year-on-year, driven mostly by inflation. We estimate the breakeven oil price for this year’s budget at around $100/bbl Urals. Should Urals average $90/bbl in 4Q14, the annual average would be $102.4/bbl and the budget would run a small surplus for the full year (while noting that the seasonal jump in spending will mean a deficit for 4Q14).

However, local and regional government balances are deteriorating as they bear the brunt of the government's increased spending on publicsector wages.

Oil prices and break even for the budget Oil has plunged to a 27-month low are inflicting damage on a Russian economy already contending with escalating sanctions from the US and European Union over its role in Ukraine.

A Bloomberg chart shows how an average oil price of $90 a barrel, close to where prices are now, would give Russia a budget deficit of 1.2% of gross domestic product next year, according to Sberbank CIB, the investment bank of Russia’s biggest lender.

The right axis shows the budget balance as a percentage of GDP

under different oil-price scenarios.

The left axis measures spending and revenues in trillions of rubles.

Russia will require an oil price of about $104 to balance its budget in 2015, Sberbank estimates. Brent a benchmark for more than half the world’s oil including Urals, Russia’s main export blend, declined more than $20 since its 2014 peak in June and traded at about $92 a barrel today. It closed at $92.31 on Oct. 3, the lowest since June 2012.

The futures curve for Brent crude shows prices ranging from $93 to $96 a barrel next year, having averaged $107 so far in 2014.

Russia to miss already low 2015 privatization revenue goals Russia is unlikely to see large privatization deals in the near future and it will not meet the targets set for the 2015 federal budget revenue from privatization, Audit Chamber Director Tatyana Golikova told Rossiya 24 channel on October 10. “I think that RUB158bn rubles of planned privatization budget revenue in 2015 is a quite optimistic forecast. This is a forecast that can be fulfilled as a result of large companies' privatization, but obviously, any case of a large company's privatization depends on the economic situation in general. I do not think that we will go to the length of making large privatization deals now," she said. "the government must focus on privatization of small assets."

Privatization plans have been constantly scaled back since the program was launched in 2008 by then president Dmitry Medvedev with a target of over RUB1 trillion a year.

Russian defence budget to hit record $81bn in 2015 Russia's national defence budget for 2015 will reach a record RUB3.3 trillion ($81bn), or 4.2% of its national GDP, the head of the State Duma's defence committee, Admiral Vladimir Komoyedov said in October.

Defence spending, of which virtually all comes from the federal budget, will rise next year to even higher levels than planned earlier.

In nominal terms, spending will rise 33 % from this year, will constitute 11 % of overall government spending.

The 2015 budget represents an RUB812bn ($20bn) increase over 2014, and portends a larger defence budget over the next several years. The Duma plans to spend RUB3.1 trillion ($76bn) on defence, or 3.7% of GDP, in 2016 and RUB3.23 trillion ($79bn), or 3.6% of GDP, in 2017.

With the exception of the United States, which spent 3.8% of its GDP on defence in 2013, most of the world's countries spend less than 3% of their GDP on their militaries, according to World Bank data.

However, World Bank data paints an even more drastic picture of Russia's recent defence spending than Komoyedov did.

In 2013 the World Bank said Russia's defence budget was already 4.2% of its GDP. The finance ministry also expects spending on pensions and other social entitlements to increase faster in coming years than foreseen in the summer plan.

Spending should rise fairly sharply next year (16%). On the other hand, much of the increase is due to pension savings included in the social spending figures. A return to this pension savings scheme policy begins next year. Running social costs will grow at a more modest

rate (next year about 10%). Social spending will rise to about 35 % of government spending and to over 13 % of GDP.

The government has yet to decide where it will invest Fund assets besides in Rosatom projects and the State Direct Investment Fund.

It is clear, however, that Welfare Fund assets are insufficient to cover all funding requests.

No capital controls, no borrowing in 2015

Russia depletes its rainy day National Welfare Fund Russia’s weak economy, foreign trade sanctions and budget imbalances have placed tremendous pressure on the government to use assets of the National Welfare Fund to cover budget shortfalls that was set up to subside pension payments in the future.

At the end of August, the National Welfare Fund held assets of $85bn (RUB3.15 trillion), an amount equal to 4.4% of GDP. Under the Fund’s new rules, 40% of assets can be invested in domestic infrastructure projects or deposits with domestic financial institutions, 10% with the State Direct Investment Fund for financing domestic projects and 10% in Rosatom projects. The government has already given the green light for e.g. Rosatom Oversea’s 1,200 MW Hanhikivi 1 nuclear power plant in Finland.

Following a Bloomberg report citing CBR insiders saying Russia was considering introducing capital controls the ruble tanked. It turned out the story was spurious and the CBR was on the wires within an hour denying the story, but investors were shaken.

Russia's central bank has reaffirmed it will not introduce capital and currency controls even under its worst-case scenario where oil falls to $60 per barrel, Governor Elvira Nabiullina said on at the start of October.

Russian Finance Minister Anton Siluanov does not expect to tap the budget's Reserve Fund next year to cover a budget deficit, but the option remains in the budget.

The 2015-2017 budget, approved last week, allows for spending of up to RUB500bn ($12.7bn) from the Reserve Fund, which as of Sept. 1 stood at $91.7bn.

Russian bill on flight capital amnesty submitted to the State Duma Senators Konstantin Dobrynin and Yury Biryukov have submitted a bill to the State Duma, Russia's lower parliament house, on a flight

capital amnesty, to be effective from January 1 to August 31, 2015. The bill would set a 2.5% tax on repatriated capital.

An explanatory note to the bill says that “the amnesty will be announced to encourage fight capital to return home and to be invested in the national money market.” The bill’s authors, who analyzed foreign experience, propose setting a 2.5% tax on the returned capital. They believe that the amnesty and the low tax on returned capital would bring considerable revenue to the state budget.

They write that in the first three months of 2014 legal capital was estimated at $200bn at the least, and that the yearend figure, including flight capital, could reach as much as $1 trillion. “As a result of the amnesty, at least 10% of flight capital or approximately $100bn would return to Russia.

The 2.5% tax on this sum would bring over $2bn to the state budget,” they said.

Russians burdened by less debt compared with US Despite concerns of a consumer lending bubble in Russia, relatively few Russians have any debt at all compared with residents of the US and Europe, according to a survey from research centre Demoscope released in October.

Russia's consumer lending market grew at 40% in 2012 and again in 2013, sparking fears of a consumer credit bubble. The CBR acted decisively and has killed the

momentum in 2014. Growth in banks' consumer lending portfolios have halved in the first half of this year, falling from 13.7% in the first half of 2013 to 6.8% this year.

But loans remain unpopular. Only 32% of Russian households had a loan hanging over their heads in 2013, compared with nearly 75% of households in the US and 44% in the euro zone in 2010, Demoscope found.

The generally low level of borrowing reflects the fact that Russians are less likely to use banking services of any kind than and euro zone citizens, the study showed. Only 55% of households interviewed had bank accounts, compared with 92% in the US and 96% in the euro zone.

However, debts make up a higher share of income in Russia than in the west. Among Russian borrowers, total debt amounted to about 15% of yearly income in 2013. In the U.S., with its hyperactive consumer lending market, total debts averaged about 12% of yearly income in 2010.

Plus those least abe to repay loans have the biggest ones. Households with unpaid loans in the poorest 20% of the population faced loan payments amounting to over 37% of their monthly income, the study found, compared with 19% among the richest 20%. In the poorest segment about 22% were in arrears by two months or more, compared with 16% in the wealthiest group.

German Exports to Russia Slump 26% in August Over Sanctions German exports to Russia fell by more than 26% on the year in August, the sharpest fall since the financial crisis in 2009, according to data released in October that underlines the impact of Russia sanctions on Europe's biggest economy.

Exports to Russia in August were worth â‚Ź2.3bn ($2.9bn), a 26.3% drop against the same month a year earlier, the Statistics Office said. For the January-August period, exports fell 16.6% to â‚Ź20.3bn.

German shipments to Russia had already shrunk 5.2% in 2013, having seen high growth rates from 2010-2012.

Just 3% of Russian SMEs make it through first three years, unless have state support

A study by Russia's Public Chamber has found that just 3.4% of small and midsized businesses launched in Russia survive for more than three years, news website Garant.ru reported.

But while survival rates were dismally low overall, almost 90% of businesses who received state support made it past the threeyear threshold, according to Russia's Economic Development Ministry.

This indicates that state support is effective, but difficult to access, he said. Only 3% of small and midsized businesses received state support last year, and almost 80% of entrepreneurs have never taken part in state programs.

The problem is also one of information: 34% of entrepreneurs do not even know that state support for small business exists the survey found.

Infrastructure Aeroflot's 2nd attempt at budget airline to be called 'Victory' Russia's national carrier Aeroflot is going to have a second try and launching a budget airline, which is to be called Pobeda, or Victory.

Aeroflot's previous attempt at a low-cost airline, Dobrolyot (Good Flight), suspended operations in August, just two months after its maiden flight. Its lease agreement for Boeing aircraft was cancelled under European Union sanctions because it flies to Crimea, which Russia annexed from Ukraine in March.

Aeroflot plans to launch Pobeda ticket sales on November 1 and begin flights mid-month.

The carrier will fly from Moscow to eight Russian cities but not to Crimea.

Russia, China Move Ahead on $25bn High-Speed Railroad Project China signed off on a memorandum that paves the way toward long-anticipated construction of Russia's first highspeed railway, which will stretch from Moscow 800 kilometers east to Kazan.

State-run railway monopoly Russian Railways told news agency RIA Novosti the grand aim of the agreement is to develop plans for a Eurasian high-speed transport corridor from Moscow to Beijing that would include the segment between Moscow and Kazan.

The total cost of the Moscow-Kazan railway is estimated at more than a trillion rubles ($25bn). Chinese companies are prepared to invest about 400bn rubles ($10bn) in the project, a representative from High-Speed Rail Lines, a Russian Railways subsidiary, told RIA. China to start construction of the Power of Siberia gas pipeline in 2015 The Chinese government has approved China National Petroleum Corporation's (CNPC) plan to construct part of the Power of Siberia pipeline that will deliver gas

from Russia to China, Neft Rossii analytical portal reports.

The construction of the Chinese part of the pipeline will start in 2015. The route will pass through six Chinese provinces – Heilongjiang, Jilin, Liaoning, Hebei, Shandong and Jiangsu, as well as the Inner Mongolia Autonomous Region and Tianjin and Shanghai.

The pipeline will consist of northern, southern and central parts.

Discussions on the export of Russian natural gas to China via the western route, which is part of the Power of Siberia pipeline, have been brought on by a contract signed between Russia's gas giant Gazprom and CNPC in May. In the $400bn contract both sides agreed on the annual export of 38bn cubic meters of Russian gas to China for a 30-year period starting in 2018.

The gas will be delivered by branches of the Power of Siberia pipeline.

The construction of the 3,000kilometer (1,860-mile) Power of Siberia pipeline was launched in Yakutia on September 1. According to Russian President Vladimir Putin, the new gas pipeline will significantly strengthen Russia's economic cooperation with the governments of the Asia-Pacific region, particularly with China.

Gazprom, Oettinger says South Stream is acceptable for EU but not a priority EU energy commissioner, Gunther Oettinger, has said that the South Stream gas project is not currently

a priority for the EU and will not solve the EU’s short-term energy problems.

At the same time Gazprom is struggling to find money to build the pipeline. Gazprom has postponed any attempt to raise project financing for the Black Sea stretch of the proposed South Stream pipeline until 1Q15, a source in the company told Interfax. In addition, the company’s deputy CFO said the estimated cost of the offshore stretch of the pipeline will be EUR14bn and the European stretch will cost EUR9.5bn.

The cost of all three stretches of the pipeline (including the RUB739bn Russian part) has now risen by 40% from the initially reported estimates of which 85% was supposed to be financed by third parties. But the capital markets are now closed to Russian companies. Gazprom’s total financing of the project could double from the currently assumed $23bn until end of 2018, depending on how much its partners can (or rather cannot) muster.

Serbia plans to start the construction of the South Stream pipeline in late 2014, the country's Ambassador to Russia Slaven Terzich told reporters at the start of October.

Gazprom’s management said that South Stream discussions are ongoing, and that they expected more cautious behaviour from international banks. However, the company does not expect major

delays in the project: in 2016, the 1st line (16bcm) is guided to be launched. Recently, the South Stream project’s total capex increased to EUR 40bn ($50.8bn).

The capital expenditures for the offshore part of the pipeline increased from EUR 10bn ($12.7bn) to EUR 14bn ($17.8bn) and for the onshore part from EUR 6bn ($7.6bn) to EUR 9.5bn ($12bn).

LUKoil Seeks European Cash for Project Undercutting Gazprom's South Stream While the future of the gigantic South Stream natural gas pipeline from Russia to Europe remains mired in uncertainty, an alternative project is gaining momentum.

LUKoil Overseas, the international subsidiary of Russia's largest private oil company, has asked the European Bank for Reconstruction and Development (EBRD) for a $1bn loan to further develop the Shah Deniz gas field in Azerbaijan.

Shah Deniz — Azerbaijan's largest gas field — aims to deliver gas from the Caspian Sea to Turkey and Europe. When fully utilized, output is expected to rise from the current 9bn cubic meters per year to 25bn cubic meters. Tenbn of this is to be sent to Greece, Italy and Bulgaria via the Trans Adriatic Pipeline, work on which is expected to start next year.

The $28bn Shah Deniz project unites a consortium of European

energy companies, led by BP. LUKoil owns a 10% share.

Gazprom may ditch Vladivostok LNG for Altai project

The EBRD played a crucial role in the field's initial development, providing LUKoil in 2005 with loans of $180m, and SOCAR — Azerbaijan's state oil company — with another $170m. In February, the bank granted a further $200m to develop Caspian gas reserves.

Gazprom may abandon plans to construct the Vladivostok LNG project in favor of a 30 bcm Western pipeline route (the socalled Altai route) to China, according to CEO Alexei Miller following a visit to China in October.

However, the EBRD has currently frozen its Russian operations on the back of the political crisis between Europe and Russia.

Vladivostok LNG is a $25bn project that, without cost overruns, would break even only close to a $13/MMBtu ($470/mcm) LNG price in Asia. Analysts see Asian-Pacific LNG prices coming down to perhaps as low as $10.5/MMBtu by 2016 as fresh US and Australian LNG volumes compete for market share in the basin.

Western Route gas pipeline contract with China not expected to be signed until 2015 According to Prime Minister Dmitry Medvedev, the negotiations between Russia and China over the "Western Route" gas pipeline, which will run from Western Siberia to Northwestern China, are unlikely result in a contract being signed before 2015.

Gazprom CEO Alexei Miller previously suggested that Gazprom may be willing abandon its Vladivostok LNG plant in favour of a new pipeline to China that could transport up to 15 bcm of gas, mostly from Sakhalin. However, Russia and China did sign an intergovernmental agreement which will allow the May 2014 "Eastern Route" gas contract to take effect.

The Altai route, on the other hand, would run 2,800 km from the existing fields in the Nadym-PurTaz region and squeeze its way through the western border with China. It would cost an estimated $15bn, and the project would break even at the border price to China of about $320/mcm, even with the full 30% export duty paid to the government (again, assuming no cost overruns). It would require no significant upstream investments, as Gazprom already has plenty of spare production capacity to fill the link.

The Chinese side might also welcome these volumes as long as Gazprom ring-fences particular production acreage to supply the pipeline. However, China will not need the additional 30 bcm of gas from Russia (on top of 25-38 bcm to be supplied via the Power of

Siberia route) until closer to 2030, we estimate. To make room for the extra Russian gas, it would have to reduce the proposed volumes of LNG imports.

It would cost the Chinese importers about $120/mcm to ship the Russian pipeline gas from the west of the country to the consuming eastern seaboard, which means that the Altai route can only break even and still compete with LNG if the liquefied gas is priced at $440/mcm ($12.2/MMBtu) or more. But as we expect LNG to come down in price, possibly to below these levels, Gazprom would have to offer discounts, which would in turn cause the Altai route to generate well below the 10% return, even without cost overruns.

Invest in Customs Union rail operator seen at $2.5bn by 2021 Investments in yet-to-be-created Integrated Transport and Logistics Company (ITLC) comprising container assets of Russia, Belarus and Kazakhstan will amount to RUB93bn ($2.5bn) by 2021 and RUB166bn by the end of 2025.

The largest investments will be made in the period when the company will handle the largest amount of transit, for instance, in 2020, investments will stand at about RUB20bn.

The net profit of the operator will amount to RUB6bn in 2015 and then gradually rise to RUB44bn in 2025. Revenue of the company will stand at RUB120bn in 2021 and

over RUB170bn rubles in 2025 – at least that's the plan.

National railways companies of Russia, Belarus and Kazakhstan the members of the Customs Union - signed an agreement to set up the transport and logistics company in June 2013.

Four Russian firms file bids to build power bridge to Crimea Four Russian companies have filed bids to take part in a tender to build a power bridge to Crimea, which became part of Russia in March. Construction of the cable should be completed in October 2016 and should solve Crimea's dependence on power supplies from Ukraine.

The bids were filed by GlobalElektroServis, part of businessman Ziyavudin Magomedov's Summa Group, Gidroelektromontazh, Technopromexport, and Stroytransgaz, controlled by businessman Gennady Timchenko.

The Federal Grid Company of Unified Energy Systems (FGC UES) announced the tender to build a 220-kilovolt underwater cable through the Kerch Strait to Crimea in early October with the maximum value of the contract of RUB13.838bn ($328m).

Russia's cargo turnover grows in September Turnover at Russian seaports grew 6.2% year-on-year in 9M14.

According to the Association of Trade Sea Ports (ASOP),

throughput at Russian ports grew 6.2% year-on-year to 466m tons in 9M14: coal throughput rose 14.6% year-on-year to 87m tons, oil products’ turnover grew 14.7% year-on-year to 97m tons, fertilizers added 16.8% year-onyear to 11m tons, containers increased 6.3% year-on-year to 35m tons, ferrous metals grew 4.6% year-on-year to 18m tons and grain turnover almost doubled to 22m tons. However, oil turnover (the largest type of cargo by tonnage) dropped 7.6% year-onyear to 143m tons.

Turnover kept growing in September although at a slower pace of 5.1% year-on-year, driven mainly by the solid growth of coal, oil products and grain (up from last year’s low base). The transloading of fertilizers, as many producers are operating close to full capacity, also supported growth. However, the transloading of crude oil at Russian seaports kept declining on flat oil production and higher output of oil products.

ECM RTS index falls below Lehman low of September 2009

September compared with 5.91 pct in July.

RTS index closes at a new multiyear low at the end of October. The RTS index closed at 1,045, a fiveyear low.

However there's little doubt that for brave investors Russian assets look cheap: The valuation gap between Russian and emerging equities, based on forward earnings and book value, is the widest on record. Fund flows have seesawed suggesting some investors have taken short-term risks.

The closing level was also lower than the level following the collapse of Lehman Brothers in the US in September 2008, which marked the beginning of a crisis of trust among global financial institutions and a liquidity crunch.

The RTS has fallen out of its 1,2001,400 band where it has been stuck for most of last three years and fell below 1,100 points in October, marking its worst performance since March, when the index dived nearly 30% as Moscow moved to annex Crimea from Ukraine.

Outflow from Russia picked upto reach 0.31% of AUM ($139m) in the week to October 22, according to EPFR Global data, versus the previous week’s 0.14% ($62.0m) and marking the third week in a row of outflow. In the meantime, the RTS fell 2.6% and the MSCI Russia 2.1%. Russia’s redemptions over one year thus reached 4.4% of AUM ($2.7bn), YTD $1.3bn.

EPFR fund allocation data showed emerging equity funds cut their average exposure to Russian shares to 4.65% by early

Both Templeton Franklin and JPMorgan Asset Management are getting back into the market.

Dividend yields on Russian equities have overtaken price to forward earnings ratio for the first time since 2008. Whenever this has happened in an emerging market, it has been followed by an average 74% return over the coming year, unless one expects an Argentinestyle default, JPMAM says.

Overall, dynamics continued to show a shift out of EM with no new trends emerging. EPFR fund allocation data showed emerging equity funds cut their average exposure to Russian shares to 4.65% by early September compared with 5.91 pct in July.

Global funds reduced their exposure to 0.66% in September from 0.74% in July — almost in line with Russia's 0.5% weighting in MSCI's All Country World Index.

Sistema stocks were manipulated during arrest newsflow

and has sent the information to the Central Bank. The signs are obvious," Afanasiev said.

The Moscow Stock Exchange has notified Russia's Central Bank on signs that stocks manipulation has occurred with AFK Sistema conglomerate trading, the exchange's head, Alexander Afanasiev, said on October 2, capitalising on the news flow surrounding the arrest of Sistema boss Vladimir Yevtushkov.

On September 19, the Moscow Stock Exchange announced it was investigating Sistema's stock trading after the company's key shareholder Yevtushenkov was released from house arrest. The news triggered an immediate rise in the shares of Sistema and Bashneft on the stock exchange by 13.2 and 5.2%, respectively.

"The Exchange has found signs [of AFK Sistema stocks manipulation]

The same day, the Russian billionaire denied media reports of

his release in a phone call with RIA Novosti.

Yevtushenkov was arrested on September 16 over his suspected involvement in money-laundering.

Prosecutors are investigating Sistema's acquisition of shares in Russia's Bashkortostan Republic's oil company.

RDIF may be entitled to invest in projects without foreigners.

Russian Prime Minister Dmitry Medvedev ordered that the Ministry for Economic Development and the Ministry of Finance review the operations of the Russian Direct Investment Fund (RDIF), Russia's sovereign wealth fund, to see if its charter should be allowed to invest one its own, or co-invest with Russian investors. Under the RDIF's charter it may only invest together with foreign investors, and even then as a minority investor.

With a total assets under management of $10bn the fund has been struggling to find both suitable investments of big enough size as well as foreign co-investors.

Last month UK-based fund Blackrock pulled out of a partnership with RDIF mainly because it couldn’t find any suitable investments.

Russia is in desperate need of investment the change of clearly the government wants to press RDIF into service on the investment front, whereas originally it was set up to kick start foreign investment.

The RDIF has not been a complete failure and in the 11 investments it has made so far it managed to raise one ruble to three foreign ruble invested instead of one to one, according to Kirill Dmitriev, General Director of RDIF. However, this is still a long way from the 10to-1 ration the fund was hoping for when it talked to bne shortly after being set up.

At the same time the cash increasingly strapped RDIF's resources are going to be decreased drastically: currently RDIF has invested $1.3bn and holds another $2.7bn on accounts, but the government is suggesting it wont continue paying in $2bn a year as was the original plan.

Ministry of Finance has decided that the rest of the money would be provided to RDIF only as and when necessary.

Russia's TMK to raise $500m through US division's IPO Russian oil and gas pipe maker TMK plans to raise over $500m through an initial public offering (IPO) of its North American division IPSCO, the company said in October.

TMK Chairman and owner Dmitry Pumpyansky told Bloomberg TV in an interview the company is considering IPSCO's IPO as the division has a limited access to the debt market due to the sanctions imposed by the West against Russia.

TMK has invested $5bn in its business since 2008. The company planned to integrate the division

with the Russian business but has discontinued the process, Pumpyansky said.

Russia's Acron to sell 30% stake in unit to Indian firms Russian fertilizer producer Acron is in negotiations with Indian companies to sell them a 30% stake in affiliate Verkhnekamsk Potash Company, Chairman Alexander Popov said in October. “We are only in negotiations now, we are still far from a deal.

Negotiations about the real value of this stake were scheduled for next year," Popov said.

Earlier, media reported that the company was in talks with five Indian firms to sell a 30% stake in Acron.

India's Business Standard newspaper reported that India made a consortium comprising NMDC, Rashtriya Chemical Fertiliser, Krishak Bharti Cooperative, Fertiliser and Chemicals Travancore and National Fertiliser. India and Russia will soon sign an intergovernmental protocol of intent and the Indian consortium will start due diligence, the newspaper reported citing its sources.

Russia's Detsky Mir not to hold IPO in 2014 Russian children goods retailer Detsky Mir will not IPO in 2014 after all, CEO Vladimir Chirakhov said in an interview in October.

"I fear that in the current circumstances, it has no sense to plan an IPO. We will be able to plan this when there is more clarity," Chirakhov said. The IPO "is not an issue to be solved this year," he said.

Detsky Mir planned to sell 25% in the IPO in 2013, but postponed the offering due to losses. The company was again expected to hold the IPO in March, but delayed it for a year at least due to the macroeconomic situation in Russia and the crisis in Ukraine.

The company wants to sell a 10% stake to a strategic investor. The Russia-China Investment Fund (RCIF) was willing to buy the stake but postponed the step earlier in October because of the arrest of Vladimir Evtushenkov, a major shareholder of Detsky Mir's parent company AFK Sistema.

Sechin Says Rosneft Shares at Stake Sale Would Be Worth $8.12 Russia's Rosneft Chief Executive Igor Sechin said he sees Rosneft's share price at no less than $8.12 per share at possible SPO by the state, initially planned for this year, but in doubt now given the environment.

Rosneft shares traded at 224.3 rubles ($5.4 dollars) on Thursday.

The Russian government owns 69.5% in Rosneft and had planned to cut its stake by 19.5%.

Russian companies dash to pay 2014 dividends ahead of tax change Russian companies are in a hurry to pay dividends in 2014, before taxes on dividends are increased.

Several changes to the rules and increases in taxes on shareholders will appear in 2015. First of all, the dividend tax will increase from 9% to 13%. The date of actual receipt of income is deemed to be the date of payment.

Secondly, many "deoffshorization" initiatives will be put in place, that will force Russian companies domiciled abroad to come home.

In particular, a law "On Controlled Foreign Companies" (CFC) has already been introduced to the State Duma prepared by the Ministry of Finance and will become effective next year. Under the law, Russian taxpayers will have to pay a Russian tax on retained earnings of their foreign companies.

Legal entities will pay the tax at the rate of 20%, individuals at the rate of 13%. At the moment, Russian owners withdraw profits from Russia by way of dividends and interest to foreign subsidiaries and often pay no taxes at all on these transfers. If the money is sent via Cyprus the withholding tax rate in Russia will be 5% instead of 15% due to tax agreements, but in Cyprus dividends are tax-exempt.

Some of the companies currently paying dividends include:

Norilsk Nickel may pay $2.78bn in interim dividends for nine months 2014. In 2013, interim dividends paid by the company were about $1bn.

Vladimir Lisin-owned NLMK will pay $133.9m for the first six months of 2014, which makes 40% of net profit; for the last time, NLMK paid interim dividends in 2011, but their amount was twice as much ($263.7m).

Severstal owned by Alexei Mordashov may pay $1.14bn for first nine months 2014; a special dividend from the sale of two USbased assets accounts for much ($1bn) of the amount. The company paid $301.5m for nine months of 2013, according to the information on its website.

Severstal has been paying interim dividends properly every three months since 2003, except for 2008 and 2009.

MMK will pay RUB6.5bn in dividends for nine months of 2014.

This is twice the amount paid for the full year 2012 when the company paid interim dividends for the last time. MMK pays interim dividends irregularly.

M.Video will pay one-off special dividends at the rate of RUB25 per share over a period from midDecember 2014 to mid-January 2015, says Denis Davydov, Investor Relations Director at M.Video.

RusAgro owned by senator Vadim Moshkovich has already paid RUB2bn for the first six months of 2014. This will be the second

dividends paid by the company: the first ones, for the last year, were paid in June 2014.

Did Sistema get Bashneft on the cheap?

In the last days of October the Russian state seized the shares of Bashneft and rumours are swirling that it will be sold to state-owned oil major Rosneft, in what some have called a repeat of the Yukos affair.

One of the key arguments of Russia's investigative committee looking into Sistema, is that in 2009 it acquired the Bashkortostan oil sector assets later consolidated into Bashneft at a significant discount to the market, knowing that they were of illegal origin, thus knowingly acted as a fence for stolen goods.

Last month a Russian court seized Sistema’s Bashneft shares, while Sistema's controlling shareholder Vladimir Evtushenkov remains under house arrest on money laundering charges.

According to a presentation Sistema published on October 9, this argument is wrong, since Sistema acquired the disputed assets at a premium to the market.

According to the presentation, Sistema acquired the assets in three stages - acquiring a minority holding of 19.9% in August 2005 for $502.9m, adding share packets in October 2005 of 2-9% totalling $96.8m in value, and then in April 2009 paying $2bn to take a controlling stake.

This last transaction in April 2009 exceeded the average market evaluation of the shares on the market over the preceding 6 months by 80%, with a 8.5 price to earnings ratio compared to peer companies' ratio at around 5.1, according to Sistema.

According to Aton brokerage, carrying out a historical analysis of Sistema's dealings with Bashneft, Sistema indeed paid a market price for the Bashneft assets.

Nonetheless questions remain over why Sistema failed to make an additional and final $500m payment it contracted to that would have taken the total acquisition price to $2.5bn.

Sistema's decision not to make this final payment and Ural Rakhimov's apparent acceptance of the decision appears to be one of the mainstays of investigators' arguments.

In May 2009 Sistema announced that it would forgo the $500m because unspecified pre-agreed conditions were not met.

Investigators argue that the way that Ural Rakhimov, son of Bashkiria's president, agreed to Sistema dropping the $500m payment suggests he was willing to accept a lower price just to be rid of the potentially trublesome assets.

"While we do not know the nature of the unmet conditions, their presence suggests to us that Sistema realised it was taking on quite a challenge when buying the assets, and tried to safeguard itself in case it later encountered any

unexpected operational, financial or regulatory issues," Aton analysts wrote. "Now it appears that this prudent measure and the consequent forgoing of the final $500m payment as a result have returned to haunt them."

Aton agreed with Sistema that the final $2bn payment in itself was at a premium to the market, and put the premium at 59%-80%. But Aton listed one important caveat: "The deal was struck at almost the height of the 2008-09 financial crisis, when the Urals price fell to around $40 per barrel."

"That Sistema acquired the assets at a later stage is purely incidental, and does not make Sistema guilty by association," wrote Aton analysts. "It should not be used to suggest that Sistema, or indeed its controlling shareholder were involved in foul play or benefitted unjustly."

Mangrove Capital Partners freezes Russia investments Mangrove Capital Partners, a Luxembourg-based venture capital firm, suspended operations on the Russian market, said Ratmir Timashev, one of the founders of ABRT Venture Fund. Investors are concerned over the current political situation related with the conflict in Ukraine, therefore the fund doesn't seek new projects in the country for the moment. ABRT used to invest in multiple projects together with Mangrove, for example, in such projects as KupiVIP, Drimmi, HomeMe.

At the moment, Mangrove's portfolio includes about 70 companies. The fund amounts to $750m. In Russia, Mangrove invested in the Internet shop KupiVIP, a search engine Quintura, a computer game developer Drimmi, and the Internet shop HomeMe.ru. The last transaction in Russia was made by Mangrove in March 2013 when the fund participated in the $11m round of investment in Oktogo, a hotel reservation service. Oktogo received most of the funds from VTB Capital, a fund controlled by VTB. RDIF seeks Arab investors to finance Central Ring Road construction The Russian Direct Investment Fund (RDIF) plans to bring in investors from Arab countries to participate in construction of the third and fourth phases of the Central Ring Road project, RDIF head Kirill Dmitriev said at meeting with Russian President Vladimir Putin.

"Our Arab partners have confirmed their desire to invest in the third and fourth phases of the Central Ring Road and we are working intensively with the Transportation Ministry and Rosavtodor to raise that investment. Another coinvestor will be one of the leading non-state pension funds. That will make it possible to mobilize pension money," Dmitriev said.

DCM

Russian firms, banks able to service foreign borrowing despite sanctions The Central Bank of Russia reports that non-bank corporations and banks have sufficient assets to service their debts at least to the end of 2015, even if shut off altogether from international financial markets.

A just-released CBR Financial Stability Survey finds that, as of end-September, non-bank firms and banks (including statemajority-held) owed $614bn (30 % of GDP) to foreign creditors: $422bn by corporations and $192bn by banks. By the end of this year, corporations must pay down $39bn in foreign debt (including interest) and banks $414bn. Corporations next year must make payments on principal and interest of $77bn and banks $42bn.

The foreign loans of non-bank enterprises broke down into 22 % Eurobonds, 29 % syndicated loans and 49 % bilateral loans.

Oil and gas companies accounted for the bulk non-bank enterprise sector loans (64 % of all loans).

Some 35 % of foreign loans taken by these companies mature before 2016, while the loan due dates of firms in other branches is divided

more evenly. Large export earnings denominated in dollars should help ease the burden in the oil and gas sector. The CBR pointed out that the sector nevertheless could be forced to reduce or postpone investment to service debt.

Moody’s estimates that a significant part of large corporations will be able to service their debts e.g. out of substantial cash reserves at least this year and next. Many companies have anticipated coming foreign payments, e.g. by actively purchasing forex during the first half of this year (which boosted recorded capital exports). Debt servicing, however, has become challenging for some firms due to the lack of new financing from abroad. Moving ahead, firms must borrow from domestic sources with higher costs to service their debts.

The foreign debt of banks consisted of 62 % state-bank debt, 24 % private bank debt and 14 % foreign-owned bank debt. Most bank debt is long term, and will mature more than three years from now. A survey carried out by the CBR in September on Russia’s 30 largest banks found banks generally capable of servicing their foreign debt at least through the end of 2015, even if certain banks could run into trouble from maturity mismatches with forex revenues and expenditures.

Russian external debt down but future payments high With restricted access to international financial markets, Russian external debt decreased by $52.7bn compared with 2Q14, to $678.4bn.

bonds; down by $5.3bn) and Russian eurobonds (down by $3.3bn). Private sector debt declined by $43.6bn. Banking sector debt was down by $16.9bn to $192.0bn, while corporates paid off $26.7bn (with their debt not standing at $422.4bn).

Government debt decreased by $8.8bn, which was mainly driven by foreign residents’ decreased exposure to OFZs (government

This was Russia’s second-largest quarterly external deleveraging since 1Q09, when external debt was cut by $60bn.

However, looking at the headline numbers, we also note that a significant portion of these moves (around 55%) could be owing to exchange-rate movements. As of 1 April 2014 (the latest available statistics), 23% of Russian external debt was denominated in rubles and 11% in euros.

According to the latest available data, Russian banks and corporates will have to repay or refinance $53.0bn of external debt in 4Q14 and $118.8bn in 2015 (data as of 1 July 2014).

However, the accuracy of external debt statistics is a source of concern to analysts. The main challenge is that the headline debt roll-over figure is overstated, as it includes low-risk transactions

within multinationals or between parent companies and subsidiaries, or Russian financing done through offshore vehicles.

Rencap estimates, around 40-45% of total Russian external debt could be attributed to these types of transactions. Conversely, official statistics fail to capture some grey/unreported borrowings. We have no access to data on the latter, but believe that the scale of these borrowings is significantly lower than intercompany lending and Russian financing via offshores vehicles.

Taking all this into account and Rencap estimates the amount of private external debt that needs to be paid amounts to roughly $32bn in 4Q14 and $65-70bn in FY15.

Rosneft Denies Media Reports about Liquidity Crunch, a Credit Positive

sufficient for repayment of upcoming debt maturities, a credit positive.

Russian oil company Rosneft Vice President of Economics and Finance Svyatoslav Slavinsky denied recent media reports that the state-owned company cannot meet its short-term liquidity needs on October 31. Slavinsky confirmed that the company's cash flows and cash reserves will be

The reassurance comes on top of reports that the company has asked the government for just under RUB2 trillion ($50bn) in help to meet refinancing costs due before the end of the year. The comments came two days after the company redeemed $12bn of loans taken out to buy the oil company

TNK-BP and reported zero profits for the first three quarters of this year.

Rosneft is Russia's most heavily indebted oil company, according to Moody's, with approximately $20bn due in the next two quarters amid constrained market liquidity as a result of US and European Union sectoral sanctions tied to developments in the Ukraine. The sanctions have undermined its ability to raise financing in the West and develop certain projects, such as Arctic offshore, together with Western partners.

The government has suggested that it will help Rosneft, but wont give as much as RUB2 trillion.

Rosneft's request for funds relates to discretionary future development projects as opposed to liquidity needs, says Moody's.

"The company can meet its liquidity needs with currently available resources and much lower scale bridge financing from Russian banks," Moody's said.

It will be able to cope with the first-quarter 2015 when another approximately $12bn in operating cash flows will be available and a cash balances of more than $20.6bn as of end-September, and $6.6bn of confirmed backup facilities from Russian banks that it has now.

The company has reviewed its investment programme and rephased some of its second-half 2014 investments to accommodate large debt payments without new financing. Rosneft paid dividends in

the amount of $3.8bn in JulyAugust and remains the largest corporate taxpayer and contributor to government finances. Including dividends, Rosneft contributed RUB2.7 trillion (almost approximately $83bn) to the government in 2013, or approximately 20% of budgeted taxes.

Rosneft's retained cash flow (after dividends) of approximately $22$23bn a year at $95/barrel (bbl) covers close to 90% of its normal annual capex programme. A decrease in oil prices to $80-$85/ (bbl) from the earlier estimate of $95/bbl will cut US dollardenominated revenue, but depreciation of the local cost currency (ruble) by around 20% versus the US dollar since the beginning of 2014 will benefit profitability and cash flow generation, mitigating the negative effect of lower oil prices. In addition, Russian export duties are linked to oil prices: a decrease in average Urals price to $98/bbl in August-September entailed more than a 6% reduction in export duty.

Gazprom mulls offering Eurobonds denominated in Asian currencies Russian gas giant Gazprom is considering an offer of Eurobonds denominated in Asian currencies, the company said in a statement following a board of directors' meeting on October 20.

"At the moment Gazprom is considering possibilities of diversification of its funding

sources with the help of Asian capital markets. The company is cooperating with Asian financial institutions on a range of issues, including the possibility of offering Eurobonds in Asian currencies," the company said.

Gazprom is also considering a listing on the Hong Kong Stock Exchange and to increase the listing level on the Singapore Stock Exchange.

Gazprom’s external borrowings for 2014 are planned at 90bn rubles ($2.2bn at the current exchange rate). In February, Gazprom floated seven-year series 35 Eurobonds worth €750m with a yield of 3.6% per annum.

Gazprom’s euronote program was launched in 2003. Gazprom has increased the program’s volume from $30bn to $40bn.

Russian Highways board approves offering RUB21.7bn bonds Russian Highways' board of directors has approved placing a 27-year RUB21.727bn ($435m) bond of the second series, the company said in a statement in October.

In December 2011, Russian Highways placed its debut, 5-year RUB3bn bond backed by state guarantees.

The government plans to invest around RUB150bn from the National Wealth Fund in bonds of Russian Highways, according to earlier reports. The yield may

stand at a level of inflation plus 1% point at least.

Russian Grids-Chinese JV to borrow $1bn from China annually A planned equipment production joint venture between Russian Grids and the State Grid Corporation of China will borrow up to $1bn annually from China, CEO Oleg Budargin told reporters in October.

Russian Grids will have a 51% stake in the joint venture, while the Chinese firm will hold the remaining 49%. The sides are signing a complete “road map" of the joint venture on Monday, Budargin said.

The joint venture will raise funds to modernize and build power grids in Russia, with the first projects planned in the Baikal Lake area, Budargin said.

Russia's Polymetal to refinance $500m debt in 2015 Russian precious metals producer Polymetal International plans to refinance about $500m of debt in 2015, CEO Vitaly Nesis said on the sidelines of the Minex forum Wednesday.

"We will need to refinance about $170-$180m of debt next year, as well as the bridge loan, which was taken out for the acquisition of assets in Kazakhstan," Nesis said.

Polymetal raised $318.5m for the acquisition of the Kyzyl project.

He said that Polymetal paid out $52m of debt in August and it was the last from the company's debt repayment schedule for 2014.

The net debt of Polymetal amounted to $1.038bn as of June 30.

Russian industry fund to extend RUB16bn of cheap loans by 2015 Russia's RUB18.5bn Industry Development Fund will grant loans at a rate below inflation and may allocate RUB16bn ($320m) to this end in 2014, Trade Minister Denis Manturov told local press in October.

Economy Minister Alexei Ulyukayev does not rule out that inflation may exceed 7.5% in 2014, while President Vladimir Putin estimated the CPI at 7.8-8%.

Initially the fund's rate was expected not to exceed 5%, but it faced a wave of criticism from market analysts.

Foreign banks in Russia turn to ruble bonds The two biggest foreign banks in Russia have been heavily tapping the ruble bond market to replace funding from their parent companies in Europe as they rush to reduce their exposure to the country.

Austria’s Raiffeisen Bank International and France’s Societe Generale, which operate the two biggest foreign-owned bank branch networks in Russia, have both

issued large amounts of ruble bonds for their Moscow-based operations in recent weeks.

The moves come amid concerns over the impact of the west’s sanctions against Russia after its annexation of part of Ukraine and the continued political stand-off between the former Soviet republic and Moscow.

Foreign banks with large operations in Russia are pushing their offshoots in the country to finance themselves on a standalone basis, rather than relying on credit lines from their western parents.

SocGen has issued about Rbs30bn ($750m) of bonds in the past two weeks, helping to repay some of the €1.9bn in funding from the French parent group.

Sberbank files six new suits against Mechel companies State-run OAO Sberbank has filed six new suits against Mechel companies with the Moscow Commercial Court, according to court records, to recover unpaid debts.

One of these lawsuits has been filed against OAO Mechel, a parent company. The rest of the lawsuits list its subsidiaries and associates, including Korshunov Mining Plant, Bratsk Ferroalloy Plant, Chelyabinsk Metallurgical Plant, Southern Kuzbass Coal Company, OAO Yakutugol, OAO Mechel Mining, OOO Mecheltrans, OOO Mechel Service, and OOO Mechel Trans Auto.

Sberbank filed its first lawsuit against Mechel and four of its affiliated companies with the Moscow Commercial Court earlier this week. Another lawsuit was lodged with an Irkutsk Region commercial court.

Sberbank CEO German Gref said earlier that he supported VTB Bank, which had filed a lawsuit to collect nearly RUB3bn (about $76m) in debt from Mechel. Gref said that Sberbank would sue Mechel to demand that it repay its overdue debts.

Sectors Russia to spend RUB38bn in '15-17 on import substitution

subsiding interest rates and export guarantees."

The Russian government has allocated RUB38bn ($927m) to support import substitution in 2015-2017, Finance Minister Anton Siluanov told the State Duma, the parliament's lower house, in October.

Siluanov also said the government had to optimize or delay about RUB1.5 trillion of spending previously scheduled for 20152017. “In the state arms program alone we had to transfer RUB500bn from 2017," he said.

“In the current conditions import substitution and support of exports are one of the key (issues). We've envisaged additional funding of 38bn rubles in the next three years, plus the funds from the (state) programs' redistribution," Siluanov said, adding that it will allow to create Russia's own base to replace key product supplies for the defence and other industry sectors.

Russian car sales slump 20.1% in September

The government also plans to allocate RUB44bn rubles in the three years to support non-raw materials exports, Siluanov said.

“The funds are envisaged for

New passenger car and LCV sales fell 20.1% year-on-year in September to 197,233 units, according to the Association of European Businesses (AEB).

This is somewhat better than the 25.8% drop recorded in August, and it implies a 13.0% year-onyear contraction in 9m14 to 1.8m vehicles.

Sollers’ domestic car sales sank 21% last month, as UAZ sales slid just 6% on the back of discounts for the Patriot SUV ahead of the

model’s 2015 launch in October, as well as corporate purchases, while SsangYong models remained too expensive after price hikes in 2Q14 (sales down 40% in September).

Ford brands (Ford/Sollers JV) saw sales sink 35%: expectedly poor Ford Focus sales (down by 2,600 units) were magnified by weakness in other models (down 200 units) despite SUVs (Explorer and Kuga) being in the model range. AEB expects government support measures to have a positive effect on the market in 4Q14 and reiterated its full- year forecast of 2.45m units (down 12% year-onyear).

Ahead of official launch of the state’s “cash for clunkers” program, major producers initiated their own programs in anticipation of being compensated once the paperwork had been signed.

According to the Industry and Trade Ministry, this led to 36,000 vehicles being sold in September, the vast majority being passenger cars and LCVs, including 15,168 sold by AvtoVAZ, which is traditionally the main beneficiary given its high level of localization and affordable pricing.

As program-dedicated sales gained momentum toward end September, the target of 170,000 vehicles over SeptemberDecember looks achievable.

Russia's AvtoVAZ sales slump 19% year-on-year, losses soar four-fold Sales of Russian auto maker AvtoVAZ slumped 19% on the year to 38.400 cars in September, the company said in a statement Thursday. AvtoVAZ' sales on the domestic market fell 17.35% to 283.8 units on the year in JanuaryAugust.

Sales of the Lada model amounted to 36.513 cars in September, a 9% fall on the year and a 38% increase on the month. Ladas'

exports decreased almost 25% on the year to 1.878 vehicles.

The strongest demand is registered for Lada Kalina and Lada Granta models, their sales grew by 33% and 42.7%, respectively.

Kazakhstan accounts for 80% of Lada cars' exports, AvtoVAZ said.

Avtovaz had net losses of RUB5.1bn to Russian Accounting Standards (RAS) in JanuarySeptember to RUB5.1bn, the carmaker said in a statement. This was 4.5 times higher than the

RUB1.117bn loss the company posted for the same period of last year.

The company plans to launch three new models of the Cross model line, including Lada Kalina Cross, Lada 4x4 Urban and Lada Largus Cross. AvtoVAZ launched sales of Lada Granta sedans in September, according to the statement.

Russian GAZ Group's management switches to 4-day week until 2015 Russian automaker GAZ Group has switched its management to a four-day working week from October to 2015, the company said.

"From October 2014, management of the managing company is switching to a four-day week under a cost-cutting program implemented by the GAZ Group due to the shrinking Russian market for commercial transport," the company said.

Gorkovsky Automobile Plant will also be partially switched to a shorter working week mode, but the working staff and assembly lines will not be covered by the measure.

Russian car imports fall 17% to 485,000 units Jan-Aug Russian car imports fell 17% to 485,000 units in January-August and were worth $9.45bn, a 17.4% decrease, the Federal Customs Service said in October.

Car imports from countries outside the CIS fell 16.6% to 460,000 units worth $9.3bn, and imports from CIS countries dropped 44.0% to 25,000 units worth $187.4m.

Car exports increased 7% to 87,500 units and were worth $993.3m, a 15% increase.

Truck imports fell 19% to 46,400 units in the period and fell 16% to $1.5bn in monetary terms. Truck exports fell 17% to 13,300 units and amounted to $299.4m, a 22% drop.

Russia on course to a bumper 110m tones grain harvest Russia's grain harvest may reach 110m tonnes in gross weight in 2014, Agriculture Minister Nikolai Fyodorov told newswires in October. “Taking into account a usual midyear loss allowance, the net weight may stand at least at 104m tonnes," Fyodorov said. The export potential in this case will amount to up to 30m tonnes, he said.

In mid-September, the minister said that the country's grain harvest may amount to at least 100m tonnes in net weight.

As of September 25, Russian farmers gathered over 93m tonnes of grain, the ministry said earlier.

Russian Internet retail market to rise 28% in 2014 The Russian Internet retail market will expand 28% in 2014 to over RUB700bn ($14bn), according to a

research by the Internet Commerce Companies Association (AKIT), said in October.

Sales of online retailers will rise to over RUB1 trillion by 2015 from RUB544bn in 2013, the AKIT said.

Russia is the leading country in Europe by the number of Internet users, counting 70.7m people. Half of them are involved in ecommerce, as compared to 60% in the E.U., over 70% in the and over 80% in the U.K. Citizens of central Russia make most of purchases.

Web sites of online stores are visited by 60% of all Internet buyers, with the dominating place taken by service Yandex.Market.

Cash payment accounts for 69% of all purchases made with an average bill of $75.

The Russian-speaking segment of the Internet, known as Runet, had 40,000 online stores in JanuaryJune.

Russia's Real Estate market showing signs of life Despite a tightening of Western sanctions and a stuttering economy, investment in Russian real estate grew in the third quarter of the year, and the share of foreign capital channelled into development projects increased.

Real estate investment volumes reached $1.4bn in the third quarter — more than was invested in the

sector over the whole first half of the year, according to a report published by Jones Lang LaSalle in October.

"However, tensions between Russia and the West, the slowdown in the Russian economy as well as continued exchange rate volatility still reflect considerable risks for investors, especially foreign ones," Tom Mundy, head of research at JLL Russia and CIS, said in a statement.

Part of the recovery may be connected to the falling prices.

The Moscow real estate market experienced a boom earlier in the year as buyers wary of the steadily devaluating ruble decided to safeguard their earnings in real estate. Over the course of September, dollar prices on apartments in Moscow lost 2.5%, falling from $4,988 to $4,863 per square meter, while ruble prices made a similar drop, according to data from analytics firm IRN.ru. On the primarily rubledenominated secondary market, prices have risen by about 0.5%, said Dmitry Taganov, head of analytical centre Inkom.

The greatest demand is for properties in the relatively cheap price bracket of between 6m and 7m rubles ($150,000 to $175,000).

It is unlikely that a positive third quarter will blossom into a full recovery of a once booming market, say analysts. Full-year investment volumes are expected at $3.4bn, down from $8.1bn last year, Mundy said.

Russia, Europe's largest property market, saw a surge in real estate investment over the last decade.

After a brief wobble caused by the 2008-09 financial crisis, volumes rebounded to record levels of more than $8bn annually.

According to data from international real estate consultancy CBRE, two-thirds of all investment in the third quarter of this year — or more than $1bn — was channeled into office construction. The remaining $400m financed residential construction, shopping malls and sports facilities.

While local investors still dominate the real estate market, accounting for 70% of all deals, foreign investors have actually become more active.

Since the beginning of the year, the share of foreign investors has grown to 35%, up from 27% last year, CBRE said.

The largest investors were the Qatar Investment Authority, Goldman Sachs and Eastern Property Holdings, a Russiaoriented real estate investment firm registered in the British Virgin Islands. Together, these accounted for a majority of cross border investments.

Increasing number of empty stores in retail real estate According to JLL estimates, the Moscow shopping centres vacancy rate has increased significantly from 3.5% in Q2 to 6% in Q3 2014 due to the high volume of new supply added to the market from

the beginning of the year and an active rotation of tenants.

The volume of new retail supply for 9M 2014 reached 285,000 sq m, which is almost 1.5x the FY2013 level, according to JLL estimates.

In Q3 two shopping centres were delivered to the market – Vodny SEC (32,000 sq m GLA) and Alfavit SEC (11,000 sq m GLA). This figure is 20% higher than last year, when only 35,000 sq m was completed.

Due to the volatility of the exchange rate, the period of tenants’ decision-making has been lengthened. JLL analysts forecast, that the vacancy rate will continue to growth in 2015 due to the significant volume of new completions, as well as the revision of retailers’ development plans resulting from the weakening purchasing power of Russians, and as consequence, the slowdown in retail sales growth.

Rents in shopping centres generally remain unchanged, though tenants are increasingly insisting on a reduction in rental levels. For the moment developers, in turn, are ready to consider alternative commercial terms. For example, they are able to offer turnover rent for the short-term period (3-12 months) in newly constructed shopping centres. The prime rent in shopping centres in Moscow is $3,000-4,500/sq m/year, the average rent is ranging between $500 and 1,800/sq m/year.

Demand for Warehouse Space in Moscow Nosedives

specialists in China, the agency reported.

Demand for warehouse space plummeted in Moscow with space rented and bought down nearly 39% in the first nine months of this year compared with 2013, according to consultancy Jones Lang LaSalle, or JLL.

Rosselkhoznadzor also exposed a chain of illegal pork supplies from Europe via Customs Union member Belarus, that up to date channelled 7,500 metric tons of pork production into Russia, defying the ban on EU food imports.

Foreign investors are particularly hesitant to buy or rent, consultancy S.A. Ricci found.

Transactions with foreign participants have fallen to just 15% this year after making up at least a quarter of deals over the past five years.

Brazil also said it will become one of the main suppliers of meat to the Russian market, the Brazilian Association of Animal Protein (ABPA) told RIA Novosti in October.

According to ABPA, Russia now buys some 39.6% of Brazilian meat exports, an increase from 35.8% over the past few months.

At the same time, a spate of new warehouses have cropped up in the north and south of the city. About onem square meters of highquality warehouses space have gone on line so far this year, according to S.A. Ricci. The volume of new supply in 2014 could reach 1.6m square meters, which is one of the highest number in the last few years, but there is an oversupply now. The vacancy rate rose to 5% in the third quarter and could rise to 6 or 7% by the end of this year, according to JLL. Non-western countries queue up to sell Russia food Russia’s veterinary standards agency Rosselkhoznadzor gave a green light to imports of pork from China in October that were suspended in 2004 on health grounds. On October 11, 32 containers with 800 tons of pork were shipped to Russia under control of Rosselkhoznadzor

Russia needs to expand oil drilling to maintain current production levels Russian production drilling volumes need to grow by 5-7% per year to sustain the current output, Energy Minister Alexander Novak said at a meeting in October between government officials and oil companies.

VTB calculates that drilling needs to grow by circa 7% per year just to manage the brownfield decline against the slowing growth in greenfield output and meet the oil companies’ internal targets. To keep brownfield production flat, notional drilling volumes may indeed need to grow by almost 50% to 30m meters per year, which is Lukoil’s estimate.

The expansion in horizontal drilling volumes may of course allow for a slowdown in the nominal drilling

footage to achieve the same targets. The point is that for oil producers there is still no way around the basic, bread-and-butter drilling in order to sustain output or manage a more gradual brownfield decline. Meanwhile, drilling on the brownfields remains profitable.

Russia 1st for global gas exports, 2nd for gas output in 2013 Russia was ranked first among gas exporters, pumping 206.53bn cubic meters of gas abroad in 2013, and second for gas output standing at 657.66bn cubic meters which represents 19.2% of the global gas production, Italian energy company Eni said in a report published Monday.

Iran was ranked second for its gas exports standing at 128.08bn cubic meters, and Norway was the third with gas exports amounting to 103.77bn cubic meters.

The US was the first among gas producers with its 2013 gas output standing at 673.51bn cubic meters.

ranked eighth with 4.8% of the world’s reserves, while Venezuela was the first with 18.0%, Saudi Arabia the second with 16.2%, and Canada the third with 10.4%.

China to increase gas consumption more than threefold by 2030 China will increase its gas consumption by 2030 from the current 167bn cubic meters to 550bn cubic metres, China's financial and economic newspaper Shanghai Zhenquan Bao writes on Thursday.

In 2013, gas consumption in China went up by 13.9% to reach 167.5bn cubic meters. Russia’s gas producer Gazprom and China's CNPC agreed in May that Russia will supply China with 38bn cubic meters of gas starting from 20182019.

Gazprom has 19% year-onyear decline in non-FSU gas exports in September

Russia was also ranked first for gas reserves amounting to 49.541 trillion cubic meters, or 24.4% of the world’s reserves. Iran and Qatar were ranked second and third with 33.948 trillion cubic meters and 24.936 trillion cubic meters respectively.

Gas exports by Gazprom were almost flat un January to August, rising 0.08% to 124.1bn cubic meters in January-August, and revenue from the exports fell 4.5% to $40.879bn, according to the Federal Customs Service's. however, the decline in Gazprom's gas exports accelerated in September.

Russia was ranked second among oil producers, with output standing at 10.877m barrels daily, while Saudi Arabia was the first with output at 11.566m barrels daily. As regards to oil reserves, Russia was

Based on preliminary data for 1-28 September from CDU TEK, we estimate Gazprom supplied about 11 bcm of natural gas via pipeline to countries outside of the former Soviet Union (FSU, except Baltic

Countries and Georgia) last month, down 18.6% year-on-year. This follows 14% year-on-year export declines in July and August.

Total exports, including all pipelines and LNG, fell 24% yearon-year to about 13.8 bcm in September, reflecting both the weak non-FSU flows and zero exports to Ukraine, a faster yearon-year decline than the 7% in July and 12% in August.

These export declines are in contrast to 1Q and 2Q14, which saw 1-2% year-on-year growth in non-FSU exports, while total exports were flat in 1Q14 and 1% up in 2Q14.

Western sanctions to push Russian steel demand down for 2-4 years Western sanctions may push the Russian steel demand down two to four years, steelmaker Severstal CEO Alexei Mordashov told reporters in October.

“I think, that the short-term impact of the sanctions is relatively small, but it is largely represented in people's emotions and moods rather than in economic problems…in general, the sanctions bear the risk of worsening the investment climate in the long run.

People will buy less houses, cars…It will hurt the demand for steel, there is such a risk," Mordashov said.

Previously, Severtal forecasted steel consumption in Russia to grow by 3% in 2014 due to growing construction and the oil

and gas industries, including the increasing purchases of large diameter pipes for new projects.

Russian advertisement market to rise 1.2% to RUB332bn in 2014 Russian advertisement market will increase 1.2% to 331.7bn rubles in 2014, President of the Russian Association of Communication Agencies Alexei Kovylov said Thursday.

In January-June, the advertisement market rose 6% on the year to 165bn rubles.

Ads in printed press were the only ones to show negative dynamics, the printed ads market went down 10% to 16.9bn rubles in the period. Online media advertisement market soared 20% to 38bn rubles. Advertisements on TV cost 78.9bn rubles, up 4%, radio advertisement market rose 6% to 7.8bn rubles and outdoor advertisements kept flat at 21bn rubles.

JTI says Russian tobacco market's fall to slow down to 5% in 2015 Japan Tobacco International (JTI) expects decrease of Russia's tobacco market to slow down to 5% in 2015 from 10% forecasted for 2014, Sergei Kiselyov, vice president for corporate relations and communications.

Russia's tobacco market will amount to about 300bn cigarettes in 2015 “if amendments to the Tax Code are adopted," Kisilyov said.

In 2014, the market will stand at about 316bn units.

Under the amendments, excises on cigarettes in 2015 may rise to 960 rubles per 1,000 units plus 9.5% of the value calculated on the base of a maximum retail price, but not less than 1,330 rubles per 1,000 units from the current 800 rubles plus 8.5% on the value, but not less than 1,040 rubles. In 2017, excises on cigarettes may increase to 1,350 rubles per 1,000 units plus 10.5% of the value, but not less than 1,930 rubles per 1,000 units.

Chinese firm may invest RUB45bn in Russia's solar power Solar Systems, a 100% subsidiary of China's Amur Sirius, may invest a total of around 45bn rubles in solar power industry in Russia, business daily Vedomosti reported citing Olga Bykova, the company's director for investments and finances.

In July, the company took part in Russia's tenders for renewable energy projects that get market support and received a right to build 175 megawatts of solar power capacities in three Russian regions in 2016-2018. At such tenders the power regulator chooses projects with the lowest costs, and winners receive capacity supply agreements guaranteeing return of investments in 15 years with an annual margin of 14%.

Investments in this construction are planned at around 19bn rubles, but the company also plans to

continue participating in renewable energy tenders and also plans to build a plant for production of solar panels in the republic of Tatarstan.

Detsky Mir toy chain posts strong 9M14 results Detsky Mir, the retail unit of AFK Sistema, released strong 9M14 results yesterday. Revenues increased 24% YoY to RUB29.8 bln ($840 mln) and OIBDA increased 140% YoY to RUB945 mln ($27 mln) in 9M14, implying an OIBDA margin of 7.6%, a 3.7 ppt YoY improvement. Net income reached RUB613 mln ($17 mln), representing a 16-fold YoY increase.

Total floor space grew 21% YoY to 363,000 sqm, while the number of stores increased 18% YoY to 297 stores (256 Detsky Mir stores and 41 ELC stores). LfL sales were up 14% YoY in 9M14, while the gross margin contracted by 0.5 ppt YoY to 36.7%. The improvement in the company’s OIBDA margin reflected the fact that SG&A rose slower than sales. SG&A grew only 8% YoY to RUB8.7 bln ($244 mln) in 9M14, accounting for just 29.1% of sales during the period, 4.2 ppt lower than in 9M13.