Russia - WikiLeaks



Russia 091229

Basic Political Developments

• Reuters: PRESS DIGEST - Russia - Dec 29

• PressTV.ir: Russia denies involvement in Iran's internal affairs

• Kremlin: The President signed a law imposing the penalty of restriction of freedom

• The Moscow Times: Medvedev Beats Putin In the Press - President Dmitry Medvedev has topped a list of the most-mentioned personalities in the Russian media in 2009 with 122,871 references, Interfax reported Monday.

• Reuters: UDPATE 1-Russia to boost efforts curbing speculative capital - Putin says regulations need moderate adjustment; Economy not ready for a free float; Free float dependent on progress in diversifying economy

• Interfax: Russia will develop offensive strike systems to keep strategic balance with U.S. – Putin

• AP: Putin Urges US to Share Missile Defense Data

• Russia Today:  Russia to develop offensive arms to balance out American AMD – Putin

• RIA: Putin unveils car production plant in Russia's Far East

• Itar-Tass: Putin attends Sollers auto plant launch ceremony in Vladivostok

• Itar-Tass: Interior Ministry can be transferred to fed funding in 2012

• RIA: Putin hopes Ukraine will meet its oil transit obligations

• Reuters: Russia agrees oil deal with Ukraine, eases EU fears

• The Mainichi Daily News: Okada, Russian foreign minister divided over Northern Territories dispute

• Trend.az: Russian Orthodox Church representative arrives in Georgia

• Interfax: Georgian Church to send its priest to Russia in response to Archpriest Roman’s arrival

• The Georgian Times: Moscow-Tbilisi flights cancelled - The representatives of the Georgian Airlines say that the sides failed to organize the schedule due to the lack of time; therefore, the flights were delayed for Orthodox Christmas.

Bloomberg: Russia, Georgia to Resume Air Links Severed During 2008 War - “The direct charter flights will start on Jan. 7,” Nino Giorgobiani, a spokeswoman for Airzena Georgian Airways, said by phone today from Tbilisi. “We only got the approval from Russia later yesterday.”

• IDEX: Armenia Negotiating With Russia to Open Diamond Exchange

• RIA: Talks on post-Kyoto climate deal to resume after holidays

• PTI: India, Russia setting up USD 600 million aircraft JV - While Bangalore based state-owned Hindustan Aeronautics Limited (HAL) will fork out USD 300 million, Russia's United Aircraft Cooperation (UAC) will invest a similar amount for the joint venture which will start rolling out the aircraft by 2017.

Reuters: Russia: Engines to blame for Superjet delay

• The Moscow Times: Superjet 100 Indefinitely Delayed

• : Russia launches US telecom satellite

• RIA: Russia launches Proton rocket with U.S. telecoms satellite

• Emportal: Mrkonjic receives medal for good cooperation with Russia - Russian Ambassador to Serbia Aleksandar Konuzin gave a medal to Minister for Infrastructure Milutin Mrkonjic, as an award for the active cooperation of Russia and Serbia in the field of infrastructure.

• Itar-Tass: Russians aboard British tanker captured by pirates

• RIA: Russian Coast Guard detains Cambodian ship poaching crab

• RIA: One dead in helicopter crash in Russian Far East

• Interfax: Muslim representatives see no sense in forcing unification of Islamic communities in Russia

• RFERL: Russian Imam Arrested For Organizing Imam's Murder

• RIA: Police officer injured in Dagestan explosion

• The Moscow Times: 2 Women Beaten to Death - Two Asian-looking women were beaten to death early Monday in southeastern Moscow, investigators said.

• : Lawyer's death in Moscow criticized - In a damning report, the Moscow Public Oversight Commission, created last year by Dmitry Medvedev, president, to oversee human rights in jails, criticised prosecutors, the interior ministry and prison officials for failing to prevent Magnitsky's inhumane treatment. It also accused authorities of denying him urgent medical care to coerce him to commit perjury and of deliberately working to impede the investigation into his death.

National Economic Trends

• RBC: Gov't to move to floating ruble rate

• RBC: Inflation to be around 9% in 2009, PM says

• Itar-Tass: Russia plans to borrow about $ 17 billion abroad in 2010 – Kudrin

• : Russia to export grains from the intervention fund

• Online.: Russia Sheds Debt Burden of Soviet Era

• The Moscow Times: Bankers and Bureaucrats Predict a Tough 2010

• Businessneweurope: RUSSIA 2010: Slow build over first half to boom in 2011 - bne's annual survey of investment bank outlooks suggests that growth will return to at least 4% and possibly go as high as 6% by the end of 2010. Inflation will remain low at about 5% while overnight rates at the Central Bank of Russia (CBR) will become real for the first time, finally giving the central bank a second tool to manage the economy and so be able to tackle Russia's twin perennial headaches of inflation and ruble appreciation more effectively.

Business, Energy or Environmental regulations or discussions

• Reuters: RPT-Russian markets -- Factors to Watch on Dec 29

• The Moscow Times: $700M Shipyards Planned for Far East

• Bloomberg: Gazprom, Norilsk, Transneft, Rosneft: Russian Equity Preview

• Online.: Decade's Top-Performing Funds Focused on Russia

• RBC: Russian Railways subsidiaries to place shares

• Online.: Rusal IPO Draws Initial Investors - The four are Malaysian-Chinese tycoon Robert Kuok, a member of the Kuok Group whose principle business is Hong Kong-listed Kerry Properties Ltd.; blue-blood hedge fund manager Nathaniel Rothschild through NR Investments; Paulson & Co., the hedge fund run by John Paulson; and Russian state development bank Vneshekonombank, or VEB.

• RIA: China intends to invest $300 mln in RusAl

• China Knowledge: CIC may invest in RUSAL's HK IPO: report

• Bloomberg: Rusal May Be Worth $26.7 Billion, Post 2009 Profit, Banks Say

• Bloomberg: Billionaire Kuok, Rothschild Are Said to Buy Into Rusal IPO

• RTT: FFMS Authorizes Addl. Number Of Polymetal's Shares To Be Traded Outside Of Russian Federation - Quick Facts

• Interfax: Chelyabinsk Zinc posts profit in 9M

• Bloomberg: Russian Blitz on Bootlegged Vodka May Be Boon for Synergy Sales

• Bloomberg: Sollers Opens Auto-Assembly Plant in Russian Far East (Update1)

• The Moscow Times: Moscow Hikes Rent for McDonald’s

Activity in the Oil and Gas sector (including regulatory)

• Interfax: Crude oil is bigger earner for Russia than petroleum – Putin

• Bloomberg: Russia Vows Steady Crude Exports Amid Ukraine Talks (Update2)

• Reuters: Russia Jan domestic oil prices fall 14 pct m/m-trade

• The Moscow Times: VTB Credit for TNK-BP

• RBC: Lukoil's VP boosts stake in company

Gazprom

• Focus: Gazprom is working for EU’s energy security

• BerentsObserver: Zubkov: Shtokman will be postponed

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Full Text Articles

Basic Political Developments

Reuters: PRESS DIGEST - Russia - Dec 29



Tue Dec 29, 2009 1:53pm IST

MOSCOW, Dec 29 (Reuters) - The following are some of the leading stories in Russia's newspapers on Tuesday. Reuters has not verified these stories and does not vouch for their accuracy.

VEDOMOSTI

vedomosti.ru

- Russian Prime Minister Vladimir Putin said the strategy to develop the Far East region up to 2025 has been prepared. It will cost hundreds of billions of roubles, the paper says, quoting experts.

RBK DAILY

rbcdaily.ru

- Russian gas monopoly Gazprom (GAZP.MM: Quote, Profile, Research) is set to buy 4.25 billion cubic metres of Turkmen gas, the daily writes.

- 53 million square meters in new apartment accommodation will be built in Russia in 2010, instead of the previously planned 80 million, the paper reports.

NEZAVISISMAYA GAZETA

ng.ru

- The paper publishes a list of Russia's 100 most powerful politicians, with Prime Minister Vladimir Putin ahead of President Dmitry Medvedev.

PressTV.ir: Russia denies involvement in Iran's internal affairs



Tue, 29 Dec 2009 03:18:05 GMT

The Russian Foreign Ministry has voiced concern over the recent anti-government protests in Iran and said Russia is not meddling in Iran's internal affairs.

The Russian Foreign Ministry issued a statement on Monday, after protests in Iran on Sunday during the Shia Muslim ceremonies for Ashura, which is the anniversary of the martyrdom of the grandson of Prophet Muhammad (PBUH), Imam Hussein (PBUH).

At least eight people were killed in clashes between security forces and demonstrators that broke out during the protests, according to the Tehran police headquarters.

The police also said that the police forces neither used violence nor fired a single bullet on Sunday.

“We believe the most important thing in such a situation is to show restraint, and seek a compromise on the basis of the law, and also to take political efforts to prevent a further escalation of the confrontation,” the Russian Foreign Ministry statement added.

The Russians rejected allegations claiming Moscow was involved “in the internal political processes in Iran.”

Commenting on the allegations, the statement said, “We are convinced that this is the work of those opposed to Russian-Iranian cooperation.”

/GOOGLE TRANSLATION/

Kremlin: The President signed a law imposing the penalty of restriction of freedom



December 29, 2009, 11:00

The President signed the Federal Law "On Amendments to Certain Legislative Acts of Russia in connection with the implementation of the provisions of the Penal Code and the Penal Code took on the punishment of imprisonment."

Federal law passed by the State Duma on December 16, 2009 and the Federation Council approved on Dec. 25, 2009.

Help Public Law Department of the Federal Law:

Federal law from 10 January 2010 entered into effect the provisions of the Penal Code and the Penal Code of Russia on the application of the penalty of restriction of freedom. At the same time in the CCRF, Criminal Executive Code and Criminal Procedure Code of RF amended, which provides that the limitation of freedom is to establish a court convicted restrictions on change of residence or stay and place of work or study, to leave the the territory of the municipality to find out the place of residence within a certain time of day, on visiting certain places, including places of public events, as well as the imposition by the court to convict certain responsibilities.

The penalty of imprisonment shall be appointed for a term of two months and four years as a principal form of punishment for crimes of small and medium-gravity, as well as a term of six months to two years - as an additional punishment for certain serious and very serious offenses against human life, public safety, fundamentals of constitutional order and state security.

Supervision of serving her sentence of imprisonment imposed on the criminal executive inspection at the place of residence of convicted persons.

The Moscow Times: Medvedev Beats Putin In the Press



29 December 2009

The Moscow Times

President Dmitry Medvedev has topped a list of the most-mentioned personalities in the Russian media in 2009 with 122,871 references, Interfax reported Monday.

This result was up from last year’s figure of 100,264, according to a news analysis system created by Interfax.

Medvedev outranked Prime Minister Vladimir Putin, who was mentioned in Moscow and regional media a total of 93,182 times, compared with 94,906 in 2008.

Both politicians also topped the list of most-mentioned personalities for the week ending Dec. 27, with 3,752 references to Medvedev and 2,324 to Putin.

Ukrainian President Viktor Yushchenko was the most-mentioned foreign politician with 47,217 references, far ahead of No. 2 U.S. President Barack Obama with 39,628.

Obama was only mentioned in the Russian media 6,972 times in 2008.

Interfax scanned about 1,600 media outlets in Moscow and other regions, including newswires, television, radio, newspapers and Internet resources, for the report.

Reuters: UDPATE 1-Russia to boost efforts curbing speculative capital



|2009-12-29 08:59:16 GMT (Reuters) |

* Putin says regulations need moderate adjustment

* Economy not ready for a free float

* Free float dependent on progress in diversifying economy

(Adds details, background, quotes)

By Gleb Bryanski

VLADIVOSTOK, Russia, Dec 29 (Reuters) -- Russia will moderately step up efforts to curb speculative capital, while gradually moving its economy to a free float rouble exchange regime, Prime Minister Vladimir Putin said on Tuesday.

"We need to correct the rules so it is less interesting for speculative capital to come running into Russia," Putin told reporters. "There will be no revolutions."

The prime minister also said Russia's commodity-dependent economy was not ready for a fully floating rouble exchange rate.

"As the economy diversifies, we will be transitioning to a free float, and this ought to be one of the measures that would remove supportive conditions for speculative capital," he said.

Speaking to reporters on a visit to the port city of Vladivostok in Russia's far east, Putin added the departure from a controlled exchange rate regime would be "mild".

Officials have previously said they are considering "soft" measures to limit speculative inflows, with the Kremlin reiterating recently that there is no need for tougher moves like a Brazilian-style tax on capital inflows. [ID:nLDE5BD1J4]

In September, Putin pledged to keep a "liberal regime" on capital flows, saying it was a key factor in spurring investment in Russia.

Russia lifted restrictions on capital flows in 2006, which resulted in massive inflows of "hot money" that inflated corporate debt to $450 billion in 2008, pushed the rouble sharply up and spiked inflation rates.

The economic crisis that hit Russia last year lead to capital flight of $130 billion in 2008 and the rouble shedding nearly a third of its value.

"We have existing problems, which are related to the fact that we have created good conditions for speculative capital inflows," Putin said. "It flows in quite well, works here, but creates problems, because if crisis hits, it leaves quickly."

An improving global economic outlook in recent months, combined with relatively strong oil prices have renewed interest among investors in the Russian rouble and other emerging markets currencies that are riskier but offer higher returns.

As a result, in the autumn the rouble regained nearly half of its value lost in last year's crisis. The currency has moderated somewhat in recent weeks, but the autumnal rally prompted talk of re-introducing some form of capital controls.

After Brazil imposed its tax in October, Russia was considered the most vulnerable of the BRIC countries when it comes to foreign capital.

Putin said the task of the government is to attract funds, but not the ones that would run away with the "first rain".

"We have to create supportive conditions for inflows of long-term foreign direct investment," Putin said.

FDI into Russia was down 48 percent in the first nine months of the year, totalling only $10 billion, according to data from the Federal Statistics Service. (Reporting by Gleb Bryanski; Writing by Lidia Kelly, editing by Mike Peacock)

Interfax: Russia will develop offensive strike systems to keep strategic balance with U.S. – Putin



VLADIVOSTOK. Dec 29 (Interfax) - Without developing the missile defense system, Russia is going to put focus on offensive strike systems, said Russian Prime Vladimir Putin.

"We need to develop offensive strike systems to preserve the balance without developing the missile defense system, unlike the United States," Putin told journalists in Vladivostok on Tuesday.

"If we want to preserve the balance, we must establish exchange of information: our U.S. partners will provide us all the information on missile defense, and we will give them some information on offensive weapons," he said.

December 29, 2009

AP: Putin Urges US to Share Missile Defense Data



By THE ASSOCIATED PRESS

Filed at 4:06 a.m. ET

MOSCOW (AP) -- Prime Minister Vladimir Putin on Tuesday urged Washington to provide Moscow with data about U.S. missile defense developments as part of an information exchange under a new arms treaty.

Putin's remarks carried by Russian news agencies signaled difficulties in talks between the two nations on a successor to the 1991 Strategic Arms Reduction Treaty that expired on Dec. 5. Moscow and Washington had hoped to strike a deal before the end of the year but problems persist.

Putin's comments also showed that the former Russian president is continuing to shape Russian foreign policy, which under the constitution should be set by his successor, Dmitry Medvedev.

Putin said that Russia is ready to provide the U.S. with some data about its new missiles, but wants the U.S. to share information about its missile defense plans in return.

He said that the arms control talks were proceeding in a positive way and added that Medvedev and President Barack Obama will eventually decide whether to strike an arms deal.

But Putin warned that a missile defense system would give the U.S. an edge and could erode the deterrent value of Russia's nuclear forces.

''The problem is that our American partners are developing missile defenses, and we are not,'' he said.

''But the problems of missile defense and offensive weapons are closely linked. ... There could be a danger that our partners would feel totally safe after creating such an umbrella and would do what they want. After the balance is broken, they will become more aggressive.''

Obama removed a major irritant in relations earlier this year by scrapping the previous administration's plans to place interceptor missiles in Poland and a radar in the Czech Republic -- deployments Russia treated as a threat.

The Kremlin has praised Obama for the decision, but Russian officials have also said they want to know details about what system the U.S. will put in place instead.

''They should give us information about the missile defense, and we will be ready to provide information about offensive weapons,'' Putin said.

Russia had been pushing for an explicit link in the new treaty between offensive weapons and missile defense. A joint statement in July by Medvedev and Obama linked the two, but the U.S. will be unlikely to accept any missile defense restrictions.

Russia Today:  Russia to develop offensive arms to balance out American AMD – Putin



29 December, 2009, 09:55

Russia will develop its non-nuclear offensive combat systems in order to keep balance with American plans for and anti-missile shield.

The statement was made by Prime Minister Vladimir Putin on a working visit to the country’s Far East.

“To maintain the power balance while not developing AMD, like the US, we’ll have to develop offensive arms,” – said Putin. “The issues of anti-missile defense and offensive combat systems are interconnected. Even during the cold war the peace was maintained thanks to this balance of power, which includes the correlation of forces between AMD, air defense and offensive arms.”

“If we are not developing AMD, then there’s a threat that when our partners create an umbrella over themselves to protect them against our offensive system, they might feel completely safe. And that might mean that our partners will feel they can do anything they want – the level of aggression in politics and economics will rise right away. The balance will be lost,” he explained.

At the same time, as part of work on the new START, Russia is ready to provide the United States with information on its offensive combat systems in exchange for information on their anti-missile plans.

Putin also noted that the process of negotiations on the Strategic Arms Reduction Treaty are going well.

According to Russian PM the rules of arms reduction should be transparent and clear to both sides.

RIA: Putin unveils car production plant in Russia's Far East



10:3629/12/2009

Prime Minister Vladimir Putin unveiled on Tuesday a plant in Russia's Far Eastern city of Vladivostok to assemble Korean cars.

The project was launched a year after the federal government raised import duties on used cars, angering drivers and businesses in the Far East who relied almost exclusively on imported Asian cars.

Putin took a tour of the plant's assembly room and drove a metallic gold Patriot Limited model with a Russian-Italian engine, which was made for Italian Prime Minister Silvio Berlusconi, who wished to buy the model during a meeting in St. Petersburg in October.

"You promised him a discount," Putin reminded Vadim Shvetsov, the auto holding's director.

"Yes, we will honor a 10% discount," Shvetsov confirmed.

The assembly project's first stage would relocate Naberezhniye Chelny production lines, making 25,000 SsangYong SUVs per year. The plant will start making Isuzu trucks by the middle of next year and switch production to complete knocked down mode, which includes welding and painting, in 2012, media earlier reported.

The local assembly can lower prices on the models, which are now imported from Korea's SsangYong and Japan's Isuzu, by 5%, Shvetsov earlier said.

Speaking to plant workers on Tuesday, Putin said Russia will continue reviving the domestic car industry, which was hard hit by the global financial and economic crisis.

He again spoke in favor of the rise in duties on imported cars: "There was only one option - to develop domestic [car] production. Your plant is only the first robin and I hope not the last one."

Investment in the Sollers plant was reported to have reached 5 billion rubles ($169 million).

VLADIVOSTOK, December 29 (RIA Novosti)

Itar-Tass: Putin attends Sollers auto plant launch ceremony in Vladivostok



29.12.2009, 10.25

VLADIVOSTOK, December 29 (Itar-Tass) - Russian Prime Minister Vladimir Putin on Tuesday took part in a launch ceremony of the automobile plant Sollers and drove one of the first cars rolled off the plant’s production line.

Vladimir Putin examined the assembly shop of the Sollers - Far East enterprise. The RF head of government was demonstrated several models that will be assembled at this automobile plant – the Ssang Yong crossovers and UAZ Patriot vehicles. The prime minister took to the wheel of an UAZ all-terrain vehicle and drove round the shop, after which had a conversation with the plant’s workers.

The plan specialists also demonstrated to Putin the whole line of trucks and passenger automobiles that will be assembled at the Sollers plant in Vladivostok. According to Sollers director Vadim Shvetsov, the company does not intend to limit itself to just assembling – it has plans to create welding fabrication as well. “As a site for this we have already chosen the Dalzavod facility and a nearby military complex,” he said. Shvetsov also believes that small businesses can also be attracted to this work. “We can really engage here small businesses, to combine, there are people here wishing to work,” he said.

Putin was also shown trucks that will be produced at the plant – both dump trucks, concrete mixer trucks and tractor trucks. “Isuzu has the 6x6 truck, it had earlier been ordered by the (Japanese) army, but now they have refused from it saying ‘take our truck and produce it under your brand, our brand, whatever,” Shvetsov said. “Now, maybe Vladivostok will be the centre for the development of the new 6x6 vehicle,” he believes.

Then Putin familiarised himself with the Fiat Ducato vehicles that are already being assembled at the Sollers plant in Tatarstan. Then Shvetsov demonstrated a modification of the UAZ off-road vehicles. “They have made a run from St. Petersburg to Vladivostok covering 12 thousand kilometres without a single breakdown,” the company head said with pride.

Vladimir Shvetsov also showed to Putin the first automobile UAZ Patriot Limited that was assembled at the Primorye plant. He opened the vehicle’s bonnet and told the prime minister about the engine’s characteristics. Shvetsov noted that the engine is Russian-Italian joint production.

The Sollers director recalled that Italian Prime Minister Silvio Berlusconi wanted to buy the first such vehicle and it was produced specially for him in the gold metallic colour.

“You promised him a discount,” Putin said.

“Yes, we will give him a 10-percent discount,” Shvetsov confirmed.

After examining the vehicle the Sollers director and RF prime minister got inside. Putin started the engine, warmed it up for about a minute and then drove several metres over the shop and pulled up near workers who were waiting for him. Putin had a brief conversation with the workers of the enterprise.

Sollers will produce no less than 10,000 vehicles in 2010, and the plant will reach its full capacity of 40,000 vehicles per annum in 2012. The plant will assemble South Korea’s Ssang Yong crossovers, Japanese Isuzu trucks, specialized vehicles on the Fiat Ducato platform and UAZ modifications. Vnesheconombank is providing a loan worth 5 billion roubles as investments in the project.

Itar-Tass: Interior Ministry can be transferred to fed funding in 2012



29.12.2009, 09.44

VLADIVOSTOK, December 29 (Itar-Tass) -- The Russian Interior Ministry can be transferred fully to the federal funding starting from 2012, Russian Prime Minister Vladimir Putin told reporters upon the results of his working visit in Russia’s Far East here on Tuesday.

“Certainly, we cannot do it in 2010 and 2011, but the preliminary estimates showed that we will do it with a quite high degree of probability at the beginning of 2012,” he said.

“We will create conditions by 2012 to bring the full funding of this system to the federal level,” Putin pledged.

RIA: Putin hopes Ukraine will meet its oil transit obligations



11:3029/12/2009

Prime Minister Vladimir Putin said on Tuesday he hopes Ukraine will meet its obligation to transit Russian oil to Europe despite a dispute on transit fees.

"We hope they [obligations] will be fulfilled," Putin told reporters, commenting on ongoing talks on Ukraine's demand to increase shipment tariffs.

Slovakia's government said on Monday that Russia had warned the EU of a possible cutoff of supplies to Slovakia, the Czech Republic and Hungary due to transit fee disagreements with Ukraine.

The warning echoed the two-week cutoff of Russian natural gas supplies to the European Union in early January this year amid a price and debt dispute between the two ex-Soviet neighbors.

Ukraine later in the day moved to calm fears, saying the dispute will not affect supplies to Eastern Europe. And Russia's Energy Ministry said the deal for 2010 will be reached in the next two days.

The ministry said Russia had warned the EU of a possible disruption in line with its obligations of "early warning" about potential energy risks.

Putin said rows with transit nations have undermined Russia's image as an energy supplier, prompting Moscow to seek alternative pipeline routes. He accused transit nations of blackmailing Russia and illegally re-exporting its energy resources.

Russia had several disputes with Ukraine in winter 2006 and 2009 which affected consumers in Europe. Another ex-Soviet transit nation, Belarus, cut Russian oil supplies to the EU in January 2007 also amid a price row.

Ukraine transits about 80% of Russian gas shipments to the European Union, and itself relies on Russian supplies. Ukraine, like Belarus, is a major transit route for oil pumped to Eastern Europe via the Druzhba pipeline.

VLADIVOSTOK, December 29 (RIA Novosti)

Reuters: Russia agrees oil deal with Ukraine, eases EU fears



Tue Dec 29, 2009 8:33am IST

By Gleb Bryanski and Martin Santa

MOSCOW (Reuters) - Russia said on Monday it had agreed terms for a new oil deal with Ukraine a few hours after spooking Europe with a warning the continent could face oil supply cuts because of a dispute between Moscow and Kiev.

"Within the framework of intensive negotiations, the terms of a transit deal have been agreed," a spokeswoman for Russia's energy ministry said, adding that the deal would be signed in the coming days and no interruption in supplies was expected.

The statement came hours after Slovak Prime Minister Robert Fico said he saw an increased risk of a halt in Russian oil supplies to Hungary, Slovakia and the Czech Republic via Druzhba, a major oil pipeline crossing Ukraine, from Jan. 1.

Europe, which receives much of its oil and gas from Russia, has closely tracked disputes between Russia and its neighbours after EU gas supplies were cut in the dead of winter in 2006 and 2009 due to rows between Russia and Ukraine.

A fifth of the EU's gas comes from Russia, the world's largest oil and gas producer, via pipelines across Ukraine. Ukraine itself is reliant on gas from Russia and has disagreed with Moscow in the past over price.

A Russian oil pipeline monopoly executive said on Monday the tension had arisen because Ukrainian politicians were setting "unacceptable" terms for transit of Russian oil via Ukraine's Black Sea port Yuzhny.

Ukraine moved to calm any fears of another stand-off over energy between the two former Soviet republics on New Year's Day like the one at the start of this year, when gas supplies were cut and millions of Europeans were left in the cold.

"Within Ukraine there are no threats, no risks," said Bohdan Sokolovsky, the energy envoy of Ukraine's President Viktor Yushchenko, adding that Moscow's warning to the EU about a possible oil supply halt was aimed at discrediting Kiev.

The earlier cuts occurred amid strained political relations between Moscow and its neighbours. Ukraine will hold a presidential election in January and analysts have said that if a relatively pro-Russian leader is elected, Moscow is likely to take a more accommodating stance in future energy negotiations.

On Monday, the head of Russian gas giant Gazprom, Alexei Miller, said he saw no repeat of gas rows with Ukraine, backtracking from remarks made last week.

DRUZHBA PIPELINE IN FOCUS

U.S. crude oil rose to above $79 a barrel on Monday, the highest in more than a month, largely because of colder weather across the major energy market the United States. The tensions involving Russia provided additional support. [O/R]

Sokolovsky said Ukraine wanted Russia to pay higher transit fees, switch to euros from dollars and guarantee minimal supply volumes, adding that demands had been sent to Moscow in November.

Russia's energy ministry did not say how new demands were solved by the two sides late on Friday.

The demand comes as the International Monetary Fund has rejected Kiev's request for a $2 billion loan to help the recession-strapped country meet obligations by year's end.

A European Union source said oil stocks in Hungary, Slovakia and the Czech Republic were adequate to withstand possible cuts.

Russia sent its warning to the European Union suggesting a possible repeat of the January 2007 oil dispute with Belarus.

Belarus cut Russian oil flows to Europe via the same Druzhba oil pipeline in January 2007, also due to a pricing row, which further undermined the image of Russia as a reliable supplier.

"From the EU point of view, the early warning systems have worked," said a EU source, referring to a recent deal under which Russia has to warn the continent about supply problems.

The Druzhba pipeline supplies Slovakia, Hungary and the Czech Republic via Ukraine with more than 300,000 barrels per day of crude while another spur goes via Belarus to Germany and Poland shipping some 800,000 bpd.

Germany and Poland so far have no guarantees of supplies in the new year as Moscow and Minsk are struggling to agree on volumes of duty-free Russian oil for Belarus.

Russia's top energy official Igor Sechin said on Monday he hoped the deal with Belarus would be signed on Dec. 30-31.

"If no deal is reached then we will have to apply full fees from Jan. 1," he told reporters.

(Additional reporting by Luke Baker in Brussels, Pavel Polityuk and Sabina Zawadzki in Kiev and Tanya Mosolova, Anton Doroshev and Vladimir Soldatkin in Moscow; Writing by Dmitry Zhdannikov; Editing by Christian Wiessner)

The Mainichi Daily News: Okada, Russian foreign minister divided over Northern Territories dispute



(Mainichi Japan) December 29, 2009

MOSCOW -- Foreign Minister Katsuya Okada and his Russian counterpart Sergey Lavrov remained at odds over the disputed Northern Territories in a meeting here on Monday.

The Northern Territories dispute revolves around a series of islands east of Hokkaido seized from Japan by the Soviet Union at the close of World War II, and now claimed by both countries.

"Our lack of visible progress over the question of (which country) the territories belong to is a problem," Okada stated, to which Lavrov replied that it was not Russia's intention "to artificially put off a resolution, but any such resolution should be based on international law and postwar realities."

The discussion was a first between the two foreign ministers, coming after two meetings between President Dmitry Medvedev and Prime Minister Yukio Hatoyama in which the leaders agreed to aim for concrete progress on the Northern Territories dispute.

"If we let the chance to get President Medvedev, Prime Minister (Vladimir) Putin and Prime Minister Hatoyama together slip away, then we can't make any progress," Okada said, emphasizing the need for concrete advancement on the issue.

"There was some sparring," said a diplomatic source about the meeting, "but (the ministers) both understood" that the countries would work towards a solution to the Northern Territories issue.

At a meeting with then-Prime Minister Taro Aso last year, Medvedev advocated a "creative approach" to solving the dispute, while at a press conference following the talks with Okada, Lavrov said Russia was "open" on the issue.

On other issues, the two foreign ministers agreed to open discussions regarding both nation's support for civilian reconstruction projects in Afghanistan, while also agreeing to hold strategic vice-ministerial level talks early in the New Year. Okada and Lavrov did not, however, agree on a schedule for the next leaders' summit, or for the next ministerial-level meetings.

There is speculation that Hatoyama may be aiming to buoy his administration, now in the midst of rocky discussions with United Stated over the relocation of Air Station Futenma, with progress on the Northern Territories problem. By building up discussions between the two countries, the Japanese government appears to be aiming to bring the "four islands to Japan" solution closer to fruition.

With Okada's visit to Moscow as an opening round, Hatoyama hopes to make at least some progress on the Northern Territories issue at a leaders' summit, which he wants to hold in the first half of 2010. Russia, however, has set priority on economic cooperation between the two countries, and barriers to progress on the Northern Territories appear high.

Trend.az: Russian Orthodox Church representative arrives in Georgia



29.12.2009 12:53

Georgia, Tbilisi, Dec.29 / Trend News, N.Kirtskhalia /

Archimandrite Roman has arrived in Georgia. His visit was arranged by the Russian Orthodox Church Holy Synod. The Georgian Patriarchate said Archimandrite is visiting Georgia with the permission of Catholicos-Patriarch of All-Georgia Ilia II.

According to the patriarchate, Georgia residents requested that a Russian-speaking parishioner be sent from the Russian patriarchy to work at the Saint John the Divine Church.

Meanwhile, the Georgian patriarchy will send Archimandrite Liparteliani Vakhtang to Russia to hold service in Georgian at a local Georgian Orthodox church.

Interfax: Georgian Church to send its priest to Russia in response to Archpriest Roman’s arrival



Tbilisi, December 29, Interfax - The Georgian Patriarchate will send its priest to Russia to perform a service at a Georgian Church.

The Georgian Patriarchate made the move after the Russian Orthodox Church sent Archpriest Roman (Lukin) to Georgia at the permission from the Catholicos-Patriarch of all Georgia Ilia II.

"The Russian Patriarchate is sending the priest, who will be one of the ordinary priests at St. John's Cathedral, is being sent at the request of Russian-speaking parishioners who live in Georgia," the statement said.

The Georgian Church will send archpriest Vakhtang Liparteliani to Russia to perform service in Georgian at a Georgian church.

The Russian Church's Holy Synod decided at its session last Friday to send archpriest Roman to Georgia for the pastoral care of Russian-speaking believers.

The Georgian Times: Moscow-Tbilisi flights cancelled



Flights between Georgia and Russia scheduled for December 29-30 have been cancelled because of the delayed note to the Georgian Airlines received from Russia.

The representatives of the Georgian Airlines say that the sides failed to organize the schedule due to the lack of time; therefore, the flights were delayed for Orthodox Christmas.

Russia`s Ministry of Transport released a report that the flights were appointed for December 29-30; however, the next note was the cancellation of flights.

Rustavi2 2009.12.29 13:23

Bloomberg: Russia, Georgia to Resume Air Links Severed During 2008 War



By Helena Bedwell

Dec. 29 (Bloomberg) -- Russia and Georgia will resume direct flights between their capitals in January, 17 months after the two neighbors went to war over disputed territory.

“The direct charter flights will start on Jan. 7,” Nino Giorgobiani, a spokeswoman for Airzena Georgian Airways, said by phone today from Tbilisi. “We only got the approval from Russia later yesterday.”

Russian President Dmitry Medvedev said Dec. 9 he saw “no particular impediments” to restoring air links with Georgia, and supported the eventual cancellation of economic sanctions against the former Soviet state.

Russia cut transport and postal links with Georgia and blocked money transfers in October 2006 in a dispute over Georgia’s arrest of Russian servicemen it accused of espionage. Georgia has suffered a loss of as much as 2 percent of gross domestic product as a result of the embargo, Finance Minister Kakha Baindurashvili said by telephone.

Flights resumed in March 2008 before being halted again by the war over the separatist Georgian region of South Ossetia, after which diplomatic relations were severed. Russia had previously banned imports of Georgian wine and mineral water.

Georgia’s government expects the economy to contract at least 4 percent this year, and forecasts growth of 2 percent next year.

To contact the reporter on this story: Helena Bedwell in Tbilisi at hbedwell@

Last Updated: December 29, 2009 02:15 EST

IDEX: Armenia Negotiating With Russia to Open Diamond Exchange



[pic]

(December 29, '09, 4:00 Edon Ophir)

[pic]

|The Armenian government is in negations with Russia to receive a $100 million loan to be used exclusively for the development of a |

|jewelry business within Armenia, the US-based Ashbarez newspaper reported Monday. |

|  |

|Armenian Prime Minister Tigran Sargsyan said the loan will fund the opening of a diamond exchange that will be used to supply Russian |

|diamonds to jewelry factories in Armenia. |

|“If the negotiations are successful and we manage to come to an agreement with Russia-based Alrosa company, then the attracted loan |

|will be used to develop the diamond cutting sector and to establish a modern diamond-exchange in order to provide Armenian companies |

|with Russian raw material,” the prime minister said. |

RIA: Talks on post-Kyoto climate deal to resume after holidays



Talks on an international climate deal to replace the Kyoto Protocol, which failed in December, will resume after New Year holidays, Russia's WWF chief said on Monday.

"The diplomatic process on a new climate agreement will begin right after the New Year holidays," Igor Chestin said.

The negotiations in Copenhagen ended with no legally binding treaty to reduce greenhouse gas emissions, due to differences on emission targets and finance between industrialized and developing nations.

But the talks yielded an accord that essentially allows countries to set their own emission reduction goals until 2020. And negotiators agreed to set up an emission verification system and reduce deforestation.

The Kyoto Protocol, a legally binding agreement restricting carbon emissions, expires in 2012. A new deal is needed to continue efforts beyond 2012.

MOSCOW, December 28 (RIA Novosti) 

PTI: India, Russia setting up USD 600 million aircraft JV



STAFF WRITER 13:12 HRS IST

Vinay Shukla

Moscow, Dec 29 (PTI) India and Russia are to invest USD 600 million to set up a joint venture (JV) to produce a medium lift transport aircraft for their armed forces.

While Bangalore based state-owned Hindustan Aeronautics Limited (HAL) will fork out USD 300 million, Russia's United Aircraft Cooperation (UAC) will invest a similar amount for the joint venture which will start rolling out the aircraft by 2017.

Voice of Russia radio said the joint venture coming up with fifty-fifty equity would develop the aircraft at Aviastar-SP plant based in Ulyanovsk city on Volga.

The Indian Air Force is expected to order at least 35 and Russian Air Force as many as 100 medium lift transport aircraft.

In its basic configuration the new transport aircraft will have a payload capacity of 18.

Reuters: Russia: Engines to blame for Superjet delay



Published on Tue, Dec 29, 2009 at 10:00   |  Updated at Tue, Dec 29, 2009 at 14:01  |  Source : Reuters

Russia has indefinitely delayed deliveries of the Superjet 100 -- its first new civilian aircraft since the fall of the Soviet Union -- due to the engines not being ready, the head of their builder said.

Sukhoi -- best know for making fighter jets -- is developing Superjet 100 in partnership with shareholder Italian aerospace and defence group Finmeccanica SpA. The engines are being produced by Russia's Saturn with France's Safran, while Thales is involved in avionics.

"Sukhoi is in talks with the buyers about new timeframes for delivery of these planes. The engine makers have shifted the timetable of certification. Well, it turned out they were not ready," Alexei Fyodorov, head of Sukhoi owner United Aviation Corporation (UAC), told reporters on Monday.

"I think the problems were indeed technical -- a new engine is being developed. I do not know for what reason. Perhaps there were financial problems too."

Around 100 of the planes have been ordered, and Russian flag carrier Aeroflot is the first in the waiting line.

Last week, Industries and Trade Minister Viktor Khristenko said deliveries will start in the first half of 2010, marking a further delay on the original end-2008 deadline.

Russia is seeking to boost its manufacturing and technology sectors as part of a drive to reduce the economy's dependence on natural resources which made it especially vulnerable to the latest financial crisis.

The Superjet aircraft has been pitched by officials as the new hope for Russia's languishing aircraft manufacturers, whose production has been squeezed out by foreign plane makers such as Boeign and Airbus.

Superjet is a regional jet that can carry between 75 and 95 passengers. It made its maiden flight -- initially planned for 2007 -- in May 2008 and is still undergoing tests.

Separately, UAC's Fyodorov said his company expected revenues of 115-120 billion roubles for 2009, rising to over 150 billion roubles in 2010, and needs to restructure some 70 billion roubles (USD2.4 billion) worth of debt.

Following an additional share issue in October, the Russian state owns over 80 percent of UAC, state bank VEB has a further 11 percent and the rest is held by private shareholders.

The Moscow Times: Superjet 100 Indefinitely Delayed



29 December 2009

Combined Reports

The United Aircraft Corporation head Alexei Fyodorov said Monday that deliveries of the Superjet 100 have indefinitely been delayed because the engines are not ready.

Fyodorov also told reporters that UAC, the state-controlled holding that brings together most of Russia’s biggest design bureaus and production plants, delivered 90 aircraft this year, including 17 passenger models, and that it may soon resume production of the world’s largest mass-produced cargo plane, the An-124.

Sukhoi — best know for making fighter jets — is developing Superjet in partnership with shareholder Italian aerospace and defense group Finmeccanica. The engines are being produced by Russia’s Saturn with France’s Safran, while Thales is involved in avionics.

“Sukhoi is in talks with the buyers about new time frames for delivery of these planes. The engine makers have shifted the timetable of certification. Well, it turned out they were not ready,” Fyodorov said. “I think the problems were indeed technical — a new engine is being developed.”

Saturn spokeswoman Lyubov Kalinina confirmed that the engines were going through the process of receiving necessary documentation and testing.

“The engine is being certified. We are aiming to get the engines certified according to European, U.S. and, of course, Russian standards, by May-June,” she said, adding that the engine would be delivered to the client after certification.

About 100 of the planes have been ordered, and Aeroflot is the first in line.

Last week, Industry and Trade Minister Viktor Khristenko said deliveries would start in the first half of 2010, marking a further delay on the original late 2008 deadline.

Separately, Fyodorov said UAC expected revenues of 115 billion to 120 billion rubles for 2009, rising to more than 150 billion rubles in 2010, under Russian accounting standards. It needs to restructure some 70 billion rubles worth of debt, he said.

Russian aircraft manufacturers controlled by UAC delivered 31 MiG-29 and two Su-34 fighter jets for the Air Force, Fyodorov said. “This year for the first time we have a high volume of deliveries for the state procurement order,” he said.

President Dmitry Medvedev ordered the inclusion of 20 An-124 jets in the military’s purchase plan, according to a list of orders from Dec. 10 faxed by the Kremlin last week. Medvedev also ordered the government to help UAC promote the aircraft at home and abroad.

“We’re primarily talking about the Defense Ministry because without such an initial order it’s very risky to launch this project,” Fyodorov said. “No doubt there is demand for commercial shipments by this jet but we have to understand it is a very expensive aircraft.”

UAC will need about 17 billion rubles to upgrade the airplane and overhaul the production facility. The modernized An-124 will be able to lift 150 tons of cargo and will retail for about $200 million, Fyodorov said.

UAC will be able to deliver the first An-124s, also known as Ruslans, in 2014 if Medvedev’s order is implemented soon, Fyodorov said.

Also, more than 30 Su-30 jets were exported to India, Malaysia and Algeria this year, he said. The country also delivered six MiG-29s to India this year and agreed to supply 20 MiG-29s to Myanmar, he said, without elaborating.

(Reuters, Bloomberg)

: Russia launches US telecom satellite



Last Updated:Dec 29, 2009

BAIKONUR (BNS): A Proton-M rocket, carrying US telecommunications satellite DirecTV-12, blasted off from the Baikonur space centre early on Tuesday, Russian space agency Roscosmos said.

The rocket was launched at 0322 hours Moscow time and is scheduled to be orbited after 9 hours and 10 minutes at 1232 Moscow time, the space agency said.

This was the last launch from the Baikonur cosmodrome for 2009, it said.

The DirecTV-12 satellite, made by US firm Boeing, will join the direct TV satellite grouping to provide high-definition television, Internet and communications services to subscribers in America.

For Russian-built Proton-M carrier rocket, Tuesday’s launch was the tenth launch for this year.

Roscosmos targets 8 Proton launched in 2010 the first of which is slated to take flight on January 12.

RIA: Russia launches Proton rocket with U.S. telecoms satellite



07:5529/12/2009

MOSCOW, December 29 (RIA Novosti) - Russia has made this year's last launch from the Baikonur Space Center in Kazakhstan, launching a Proton-M carrier rocket with the U.S. telecommunications satellite DirecTV-12, the Russian Space Agency Roscosmos said Tuesday.

"The launch was carried out without incidents, the spacecraft is expected to be orbited at 12:32 Moscow time [09:32 GMT]," a Roscosmos spokesman said.

The DirecTV satellite operator had a contract with Russian-U.S. joint venture International Launch Services (ILS) to launch the DirecTV-12 on board a Proton-M carrier rocket to expand its existing satellite grouping.

The Boeing-made DirecTV-12 satellite, weighing around 6 metric tons, will become part of DirecTV satellite grouping and provide high-definition TV, Internet and communications services to subscribers in the United States.

All Proton rockets are made by Russia's Khrunichev Space and Research Center.

Emportal: Mrkonjic receives medal for good cooperation with Russia



29. December 2009. | 09:21

Source: Tanjug

Russian Ambassador to Serbia Aleksandar Konuzin gave a medal to Minister for Infrastructure Milutin Mrkonjic, as an award for the active cooperation of Russia and Serbia in the field of infrastructure.

Russian Ambassador to Serbia Aleksandar Konuzin gave a medal to Minister for Infrastructure Milutin Mrkonjic, as an award for the active cooperation of Russia and Serbia in the field of infrastructure.

On the behalf of the Russian minister of transport, Konuzin handed the medal which honors the 200 years of water and overland traffic management to Mrkonjic in the MPs club.

The ambassador said that this award is assigned only to representatives of foreign countries and added that this year Russia has realized a good cooperation in the field of infrastructure with Mrkonjic.

Konuzin assessed that there is good cooperation between RF & Serbia in the fields of energy and infrastructure, and underlined that the countries' joint interests in this field would yield benefits.

Itar-Tass: Russians aboard British tanker captured by pirates



29.12.2009, 11.13

NAIROBI, December 29 (Itar-Tass) -- Russian citizens are staying aboard the British tanker St. James Park captured by Somali pirates on Tuesday, chief officer of the East African Seafarers Assistance Program Andrew Mwangura told Itar-Tass.

The crew of the chemical carrier is mixed and consists of 26 sailors from Russia, Ukraine, Georgia, Bulgaria, Romania, the Philippines, Poland, India and Turkey, he said.

RIA: Russian Coast Guard detains Cambodian ship poaching crab



09:2329/12/2009

Russian Coast Guard authorities have detained a Cambodian-flagged vessel with 4.5 metric tons of live crab on board in the Tatar Strait dividing the island of Sakhalin from mainland Russia, the regional Coast Guard said on Tuesday.

"The schooner, from the home port of Phnom Penh, was detained near Cape Zhukovsky. The crew consists of 13 people, including three Indonesians," a statement said.

The Hujer's crew reportedly failed to provide coast guards with permits for catching crab.

Russia's Coast Guard is actively involved in tackling poachers in its territorial waters. Last year at least 20 ships, including many foreign vessels, were detained.

VLADIVOSTOK, December 29 (RIA Novosti)

RIA: One dead in helicopter crash in Russian Far East



06:5329/12/2009

One person died and two were seriously injured when a Mi-8 helicopter crashed in Kamchatka in Russia's Far East, the Russian air transportation agency Rosaviatsiya said.

"A Mi-8 helicopter crashed 350 kilometers north of Petropavlovsk-Kamchatsky at 3:03 a.m. Moscow time [00:03 GMT]," a spokesman for the agency said.

There were three crewmembers on board. The helicopter, owned by Koryak Airlines, also was also 2 metric tons of cargo.

The crew reported problems 15 minutes after takeoff, the spokesman said.

"The helicopter was found destroyed. One crewmember died, two were seriously injured and were evacuated by a search and rescue helicopter to a nearby village," he said.

A special commission will be set up to investigate the accident.

MOSCOW, December 29 (RIA Novosti)

Interfax: Muslim representatives see no sense in forcing unification of Islamic communities in Russia



Moscow, December 29, Interfax - The idea of combining Russia's Islamic groups into one big organization is not one of the main priorities for an average Muslim in Russia, said Shafig Pshikhachev, North Caucasus Muslims Coordination Center's envoy to Moscow.

"Certainly, every Muslims must seek unification. There certainly must be unity in Russia's Muslim ummah [community], but that does not mean that the creation of a single structure must become the ultimate goal," Pshikhachev told a press conference at the Interfax head office.

"This [the unification of the Islamic organizations] is probably not the main thing" for today's Muslims, there are other problems that need to be addressed such as the creation of an institute of military clergy and teaching religion at schools, Pshikhachev said.

At the same time, today "no one stops the three regional organizations, which represent virtually the entire Russian Muslim ummah, setting up some working body and working on these [unification] issues." However, this is quite a lengthy process which could take "five to ten years," he said.

The unification of Russian Muslims "is a dream of the multi-million ummah," said Albir Krganov, first deputy chairman of the Russian Muslims Central Spiritual Board.

However, "while there is no quarrel among ordinary Muslims and mutual respect remains among them, there may be certain misunderstanding among their leaders," he said.

"Thank God spiritual unity does exist and remains among our Muslims," Krganov said.

RFERL: Russian Imam Arrested For Organizing Imam's Murder



December 29, 2009

KISLOVODSK, Russia -- An imam at a Kislovodsk mosque has been arrested on charges of organizing the murder of Imam Ismail Bostanov in Karachayevo-Cherkessia, RFE/RL's Russian Service reports.

Ismail Haji Berdiev, the mufti of Karachayevo-Cherkessia and Stavropol Krai, said the unnamed 38-year-old imam was arrested by police at the Mineralnye Vody airport on December 27.

According to a preliminary investigation, the imam organized the murder of Bostanov, which was allegedly committed by three residents of Karachayevo-Cherkessia who were arrested on December 18.

Bostanov, the rector of the Islamic Institute and deputy chairman of the Spiritual Directorate of Muslims in Karachayevo-Cherkessia and Stavropol Krai, was shot dead in his car on September 20 in the city of Cherkessk.

He was known to be moderate and was loyal to the government, something that angered more fundamentalist Islamic adherents. 

RIA: Police officer injured in Dagestan explosion



04:3929/12/2009

A police officer has been wounded in an explosion in the capital of the Russian North Caucasus republic of Dagestan, police said.

"At about midnight, an explosive device detonated on the way of a police vehicle in Makhachkala. One police officer was wounded," a police spokesman said.

An investigation is underway.

Shootouts and attacks on troops, police and other officials have been reported daily in the mainly Muslim Caucasus republics of Dagestan, Ingushetia, and Chechnya.

MAKHACHKALA, December 29 (RIA Novosti)

The Moscow Times: 2 Women Beaten to Death



29 December 2009

Two Asian-looking women were beaten to death early Monday in southeastern Moscow, investigators said.

The unidentified women, aged about 30 and 35, were found lying at 46 Okskaya Ulitsa at about 2:30 a.m. with numerous injuries to their heads and bodies, the Investigative Committee said in a statement.

One of them was found dead, while the other was rushed to the hospital in a coma and died several hours later.

The women’s faces were severely maimed, making it difficult to confirm their identities, Interfax reported.

(MT)

: Lawyer's death in Moscow criticized



By Isabel Gorst in Moscow

Published: December 29 2009 02:00 | Last updated: December 29 2009 02:00

Moscow's prisons watchdog yesterday accused authorities of subjecting anticorruption lawyer Sergei Magnitsky to "torturous conditions" during an 11-month detention that culminated in his death in November.

In a damning report, the Moscow Public Oversight Commission, created last year by Dmitry Medvedev, president, to oversee human rights in jails, criticised prosecutors, the interior ministry and prison officials for failing to prevent Magnitsky's inhumane treatment. It also accused authorities of denying him urgent medical care to coerce him to commit perjury and of deliberately working to impede the investigation into his death.

"It was clear that they lied to us. They lied a lot," Valery Borshev, the report's lead author, said.

Medical staff at detention centres were unavailable for interviews and detainees were apparently afraid to speak, the authors said.

The head of Butyrka prison also refused to name the guard who escorted Magnitsky in an ambulance to Butyrka, saying: "I don't want him to be killed."

The report said: "We have come to the conclusion that the circumstances that led to the death of detainee S. Magnitsky cannot be viewed separately from the course of the investigation of the criminal case."

Magnitsky was arrested in November 2008 on tax evasion charges in a case that also indicted William Browder, the US founder of Hermitage Capital, formerly Russia's biggest investment fund. Mr Browder, who fought against corruption, has been barred from entering Russia since 2005. Days before his arrest Magnitsky named Russian interior ministry officials he claimed had participated in an alleged fraud uncovered by Hermitage Capital.

The report is expected to add to pressure for reforms of the judicial system in the wake of the Magnitsky case.

Magnitsky, who was in good health before his arrest, developed a stomach complaint in detention, but was denied medical treatment in a move the report said "raised questions about the violation of his right to life". In repeated breaches of prison regulations, he was shunted between detention centres and cells and often held in unlawfully cramped and unsanitary conditions. He was also denied visits by his family.

The report highlights the responsibility of a judge at a Moscow court who prolonged Magnitsky's detention four days before his death after refusing to accept written evidence of his deteriorating medical condition. The most harrowing episodes of the report cover the last hours of Magnitsky's life when he was transferred to the Matrosskaya Tishina prison from the notorious Butyrka jail, supposedly for urgent medical treatment.

After telling prison staff that someone was trying to murder him, provoking a decision that he was suffering from a "psychotic episode", he was given an injection and placed in an isolation ward where he died just over an hour later.

Tamara Flyorova, an expert at the Council for the Observation of Human Rights in the Russian Federation, said: "It is shameful to feel you are a citizen of a country in which this could happen."

National Economic Trends

RBC: Gov't to move to floating ruble rate



      RBC, 29.12.2009, Vladivostok 10:47:39.The Russian government - in its attempts to counter the inflow of speculative capital - plans to implement a number of measures, including a gradual transition to the national currency's floating rate, Russian Prime Minister Vladimir Putin told a news briefing today. "We will not do anything that would cause a market shakedown," he stated.

      Putin maintains that Russia is currently facing a problem of speculative foreign capital inflow. "We must bring down the interest of short-term foreign speculative players." At the same time, the official indicated that speculative capital was not a crime, but it definitely created problems with liquidity when pulled abruptly away from the market.

RBC: Inflation to be around 9% in 2009, PM says



      RBC, 29.12.2009, Vladivostok 10:39:58.Russia's inflation will amount to about 9 percent in 2009, Russian Prime Minister Vladimir Putin told a press conference today. He pointed out that this was "record low for Russia." With this in mind, the official stressed that Russian enterprises must act accordingly, noting that it was inadmissible for companies to speculate on inflation and boost tariffs, including those in the housing and utilities sector.

      The PM indicated that the housing and utilities sector had always been problematic. "This is a monopolistic market dominated by various officials, and it is quite clear what needs to be done," he stated. The modernization of the sector, however, does not necessarily mean an increase in tariffs, according to Putin.

Itar-Tass: Russia plans to borrow about $ 17 billion abroad in 2010 – Kudrin



28.12.2009, 23.53

MOSCOW, December 28 (Itar-Tass) -- Russia plans to borrow about 17 billion U.S. dollars abroad to support the level of the state expenditures in 2010, Russian Deputy Prime Minister and Finance Minister Alexei Kudrin said in an interview to Vesti TV channel on Monday.

“We have to increase borrowings next year in order to support the targeted level of the state expenditures, even if we plan to spend all reserves,” he said, adding, “We plan to borrow about 17 billion U.S. dollars in 2010.”

Touching upon the country’s past debts, Kudrin said that their absence helps us “to be on firm ground.”

“We repaid our foreign debts. And everyone had realized now that this measure made it possible not to spend our funds for debt servicing in the crisis. We feel confident about the future,” the finance minister stressed.

“Our business have confidence in the future, too. Business can start its new growth, making ‘proper’ debts for modernisation,” Kudrin said, stressing, “We don’t feel the burdens of the past.”

: Russia to export grains from the intervention fund



12/29/2009 10:04

The Russian Federation will start exporting grains from the intervention fund in the nearest future, declared Viktor Zubkov, the First Vice-Premier of the Russian Federation on December 25.

According to him, the government has already determined own supply volumes to several countries, and deliveries will begin in the nearest future.

According to V.Zubkov, during the current agricultural year, Russia plans to purchase additional volumes of 1.5 mln tonnes of grains to the intervention fund. The government will provide 5 bln RUR for the purchases. The intervention fund will also sell feed grains on the domestic market.

DECEMBER 29, 2009

Online.: Russia Sheds Debt Burden of Soviet Era



By RIVA FROYMOVICH

Russia has rid itself of Soviet-era debt, paving the way for it to re-enter international capital markets after a decade.

Russia exchanged $405.8 million of cash and sovereign Eurobonds maturing in 2010 and 2030 last week to the remaining outstanding bondholders of Soviet debt. "Completion of the last exchange represents the settlement of one of the most complex and comparatively large categories of the external state Soviet-era debt," Russia's Finance Ministry said.

The government had said it intended to finish the exchange before issuing new bonds. The size of Russia's Eurobond issue, seen early next year, could be up to $17.8 billion, according to Finance Minister Alexei Kudrin, depending on the price of oil, the country's major export.

The nation's re-entry comes as fresh emerging-market sovereign debt is expected to reach critical mass. Brazil, Venezuela, Mexico and Argentina are also forecast to sell new bonds in 2010, among others.

But demand isn't expected to be a problem for any of these issuers, many of which came to market en masse in 2009 to feed funding requirements by taking advantage of heightened investor demand.

Russia's Finance Ministry has said it will lean more heavily on overseas debt markets through 2012 to finance annual deficits, as Russia's oil wealth funds run down. Standard & Poor's said Monday that Russia's net government borrowing requirement could come in at 6% of gross domestic product in 2010.

Last week, the ratings firm raised the sovereign outlook on Russia to stable from negative and affirmed its rating at triple-B, noting that budget and balance-sheet performance will gradually improve. Mr. Kudrin said the move created a "good environment" for the anticipated Eurobond offering.

"I think there will be high demand" for Russia's Eurobond, said John Chambers, chairman of Standard & Poor's sovereign-rating committee. "It's a solid investment-grade credit."

Russia holds an investment grade rating from all three international ratings firms, due partially to its $440 billion gold and currency reserves, the world's third largest next to China and Japan. Mr. Chambers added that Russia will be afforded more flexibility in financing by tapping international markets.

"Governments often come to market early to nail down their external borrowing needs. I think there will be plenty of demand at all levels," Mr. Chambers said.

This year, investors sought to tap the higher yields of riskier credits while the developed world kept interest rates near record lows. The rate differential is poised to continue for many months.

"If [Russia] prices with some concession to the secondary market, a deal could go well," said Claudia Calich, head of emerging markets and a senior money manager at Invesco in New York.

Lately, issuers such as Brazil haven't even had to concede much due to high demand.

Write to Riva Froymovich at riva.froymovich@

The Moscow Times: Bankers and Bureaucrats Predict a Tough 2010



29 December 2009

By Alex Anishyuk

As bankers and government officials were clearing out for the New Year’s holiday this week, there was little cause for cheer. Their full-year targets and forecasts were shattered by a global banking collapse, and no one was in the mood to bet on the coming 12 months.

There was a consensus: It’s going to be bad.

But as the Russian economy has begun to stabilize, the country’s prognosticators are returning to the table, and with them comes the task of manufacturing — and managing — expectations.

The government has stayed cautious with its full-year gross domestic product forecasts, trying to find figures that can’t fall short but that will also be of some use for budget planning. Banks are more optimistic on the economy’s prospects, but they also warn that the return to growth could start pushing prices back up.

“If the government’s forecast is below the real figures, then that’s OK, but when the official forecast looks too optimistic by the end of the year, the government faces political consequences,” said Vladimir Tikhomirov, chief economist at UralSib.

The Economic Development Ministry last week updated the three scenarios for its 2010 economic forecast, with pessimistic growth of 1.3 percent, a baseline scenario of 3.1 percent and possible growth of 3.5 percent if oil prices continue to stay above the $58 per barrel forecast used to calculate the 2010 budget.

The ministry’s pessimistic scenario sees an average Urals crude price of $58 to $60 per barrel and combined GDP growth of about 5.3 percent for 2010-2012. The base scenario puts crude at $65 per barrel in 2010, increasing to $70 to $71 in the next two years for three-year GDP growth of 11.1 percent.

The optimistic scenario predicts that crude will average $69 next year, $74 in 2011 and $81 in 2012 — bringing GDP past the precrisis 2008 level by 2.7 percent.

“We forecast that the economic results in Russia in 2010 will be much better than official government forecasts,” UralSib analysts wrote in a research paper. They said GDP would fall 6.9 percent in 2009, year on year, better than the ministry’s expected drop of 8.5 percent.

The economy will return to growth of 5.5 percent in 2010 and 5.9 percent the following year, they said.

Alexander Osin, chief economist at Finam, had a more cautious forecast, although it was still at the high end of the Economic Development Ministry’s guidelines. GDP will grow 3.5 percent in 2010, with a major upturn of 1.4 percent quarter-on-quarter growth coming in the third quarter before slowing back to a quarterly rise of 0.6 in the last three months of 2010, he said.

“GDP growth will be driven by increases in budget expenses and a net export surplus, and therefore we assume the peak of these activities will be in the second and third quarter,” Osin said.

Increased social spending added 2.9 trillion rubles ($97 billion) to the 2010 deficit, according to federal budget documents published earlier this month.

Another major point of contention was inflation, which is now widely expected to register at about 9 percent for 2009.

The government forecasts inflation of 8.8 percent to 9 percent for 2009, according to last week’s revised Economic Development Ministry numbers. Next year, prices may rise 6.5 percent to 7.5 percent, it said.

“The positive momentum of lower inflation is expected to continue into the first half of 2010, as the lower rate in the second half of 2009 came partly from seasonal factors (cheaper food) and partly because of the change in the Central Bank’s monetary policy,” the report said. “Expect a higher global inflation trend from mid-2010, and that will have some contagion for Russia. The expected general economic improvement in Russia by midyear will also add inflationary pressures.”

Anton Pletenev, an analyst at Raiffeisenbank, said he expected average inflation of 8.5 percent to 9 percent next year, while Finam’s Osin said the figure would be 9 percent to 11 percent, depending on what the state does.

And while the Economic Development Ministry may have submitted its best guesses, that hasn’t stopped senior policy makers from offering their macro forecasts for 2010. A number of top officials, most recently President Dmitry Medvedev, have said the economy could grow 5 percent next year — although virtually all have attributed the figure to “experts.”

Alexei Ulyukayev, a Central Bank first deputy chairman, and the Komsomolskaya Pravda newspaper in October made a bet — setting the consumer basket of goods used to calculate the effects of inflation on households as their wager — that full year inflation for 2009 would be less than 11 percent.

The newspaper on Monday conceded defeat and said it would pay him a “consumer basket of the future,” including caviar, crab meat and pineapple instead of the standard items like flour, eggs and sugar.

Last year, Ulyukayev lost a similar bet with Izvestia. He delivered a case of wine to the newspaper after inflation turned out to be higher than in 2007.

Economic Forecasts for 2010

|Indicator |Average |Median |Min / Max |

|GDP, % |3.3 |3.3 |-1 / 7 |

|Inflation, % |8.3 |8.5 |5.5 / 11 |

|Industrial Production, % |4.1 |4.7 |-3 / 8.2 |

|Fixed capital investment, % |5.3 |4.2 |-4 / 20 |

|Retail goods sales, % |4.2 |4 |0.5 / 10 |

|Nominal wages, & |8.5 |9.3 |1.2 / 16.6 |

|Real household incomes, % |3.4 |3.1 |1 / 8.4 |

|Exports, $Bln |358 |353 |290 / 413 |

|Imports, $Bln |230 |226 |184 / 270 |

|Current account balance, $Bln |56 |61 |16 / 103 |

|Capital inflows / outflows, $Bln |10 |16.5 |-60 / 60 |

|Direct foreign investment, $Bln |39 |45.5 |6 / 70 |

|Central Bank refinancing rate |7.9 |8 |6.5 / 9 |

|Lending rate to nonfinancial sector |12 |12.3 |10 / 13.6 |

|Increase in lending volume to nonfinancial sector, % |11.4 |10 |6 / 18 |

|Increase in consumer lending volume, % |9.5 |7.6 |2 / 18 |

|Average Urals crude price, $ / barrel |72.1 |73.4 |60 / 90 |

|Ruble / dollar rate at the end of 2010 |28.4 |28.5 |26.2 / 33 |

|Unemployment, % |7.7 |7.6 |7 / 9 |

|Participants: Alfa Bank, Bank of Moscow, BDO Unicon, Center for Macroeconomic Analysis and Short-Term Forecasting, Citibank, |

|Higher School of Economics’ Development Center, HSBC, ING, Merrill Lynch, Otkritie, Renaissance Capital, Sberbank Macroeconomic |

|Forecasting Center, Troika Dialog, Trust National Bank, UralSib |

|— Vedomost |

Businessneweurope: RUSSIA 2010: Slow build over first half to boom in 2011



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Ben Aris in Moscow

December 28, 2009

Russia was undoubtedly far more affected by the international crisis that started in September 2008 than anyone had expected – especially the Kremlin. It also stands out as the only one of the BRIC countries (Brazil, Russia, India, China) to show negative growth, leading to calls from the likes of analyst Anders Aslund to remove the "R" from BRIC.

This is rubbish, so Jim O'Neill, the man that coined the term in the first place, told bne at the 2009 International Monetary Fund (IMF) conference. "The only reason that Russia was hurt so badly was unlike the others, it borrowed heavily on the international capital markets and, of course, it is dependent on the price of oil."

The Russian economy contracted by a bit less than 9% in 2009, but as the year came to a close it was already starting to recover – six months later than analysts were predicting at the start of the year. However, despite the pain of the crisis, the prospects for 2010 are looking much better than many had dared hope.

bne's annual survey of investment bank outlooks suggests that growth will return to at least 4% and possibly go as high as 6% by the end of 2010. Inflation will remain low at about 5% while overnight rates at the Central Bank of Russia (CBR) will become real for the first time, finally giving the central bank a second tool to manage the economy and so be able to tackle Russia's twin perennial headaches of inflation and ruble appreciation more effectively.

Fixed investment will recover and could bounce back strongly (depending on what happens to oil prices) while FDI will continue to recover, not to the 2008 levels, but it will remain a constant addition to growth.

The much discussed problems of the reappearance of a budget deficit will be much milder than appears now, coming in at something under 5% of GDP. This means the Kremlin will drastically reduce its international borrowing and has already cut the amount it needs to raise from $18bn to $10bn, but this could fall to $5bn or even nothing at all if oil prices rise to around $80 per barrel, which most of the banks bne surveyed believe will be the average price for 2010. Indeed the state will be able to raise all the money it needs to plug the deficit at home and pave the way for a return of private issuers to the international capital markets.

Finally, the RTS had a spectacular performance, rising over 120% in 2009 from its spring lows to end the year at about 1400. Unlike last year, the investment banks all agree that the index will end 2010 at around 1900-1950 and some say that it will reach and pass its all-time high of 2600 by 2011.

The themes for 2010 include: a turning inwards to growth driven by domestic demand, a push to introduce some real bottom-up economic reforms, a new focus on improving Russia's productivity, increased inter-regional crediting, a shift towards closer ties with China, consolidation within many sectors and most important a gradual reassessment of Russia's risk.

The collapse of the Russian economy in 2009 was dramatic, but emerging market crises are intrinsically less "sticky" than those in the West, largely because of the shallow penetration of debt in all its forms into the economy. As Liam Halligan, chief economist at Prosperity Capital Management, points out Russia's fundamentals remain extremely strong and stand out from the rest of emerging Europe. And despite spending $200bn on rescue packages, the Kremlin still have $400bn in the bank, which was increasing again towards the end of the year, and remains the third richest country in the world after China and Japan, against the US and UK, which are 18th and 19th with a bit more than $80bn each. As the story going forward for the next several years will be all about the credit worthiness of countries, Russia finds itself, along with its newest buddy, China, in an enviable position.

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source: Bofa ML (as of November 2, 2009)

The momentum of sentiment

Sitting on over $600bn in hard currency reserves at the start of the meltdown in 2008, the government assumed that it could simply buy its way out of any problems. But by February an element of panic could be heard from the state as it became increasingly clear that even its huge honey pot of cash was not nearly enough to rescue everyone.

The speed of the collapse also wrong footed all the Russia watchers. As 2008 came to a close, most investment banks in Moscow were predicting zero growth for 2009 when the actual number was closer to a 9% contraction. Even the normally erudite state economic advisor Akardy Dvorkovich predicted that the economy would be showing selected recovery in some sectors by May when it actually only started to show signs of life in about November.

There is a momentum to sentiment and clearly it took time for both real fear and pessimism to gather speed. Over the first six months from September 2008, banks and international financial organisations were re-rating their predictions of economic collapse down on an almost monthly basis.

What no one understood properly was that while most firms in the rest of the world made cuts and slashed orders, Russia's companies and banks simply came to an overnight standstill – from over 7% growth, goods and money just stopped flowing. It was a massive overreaction to the crisis, but that is what you get from people that have been through at least four major economic crises in the last 17 years.

However, after the nadir was passed sometime in the spring, the momentum of sentiment has been working in reverse. Now that the economy is picking up, it is picking up faster than anyone expected; or better to say the pessimism had gained a lot of momentum and like a ship it is hard to turn it around and make it sail in the other direction.

As 2009 came to an end, the same bankers and IFIs were revising their predictions on a monthly basis, but this time revising them up, as they struggled to keep up with the reality of a rapidly brightening picture. On top of this, those closest to the action were running ahead of those outside: economists in Moscow are still running several months behind the reality whereas those sitting outside Russia are maybe six months behind where the economy actually is.

The momentum that pessimism built up over the summer suggests that 2010 will actually be better than any of the predictions for 2010 suggest on principle. But what is the logic behind this generalisation?

The argument is a simple one: companies panicked and stopped dead in their tracks, choosing to sell off inventory to meet orders rather than produce anything. The bounce back has been so swift as once the shelves were bare companies had to got back to producing so the whole economy when back to work sometime in the summer at more or less the same time. Russia has seen no major bankruptcies, no major defaults and an economic system that looks more or less the same as before the crisis. In other words much of the crisis was psychological, driven by fear and if (or when) confidence returns, Russia can go back to rapid growth – albeit slowed by the absence of international credits, worth about $250bn of financing.

Of course a lot of real damage has been done. Deputy Prime Minister and Finance Minister Alexei Kudrin estimates the pre-crisis economic levels will not be regained until the end of 2012, but this is almost certainly a very conservative estimate and Russia will probably claw back all the lost ground in 2011.

Just how fast this process goes depends firstly on prices on the international commodity market, but its durability and robustness depends more in the long term on how effective the Kremlin is in keeping its recent promises to "modernize" the economy; increasing Russia's miserable productivity – a third of American levels – can produce more and longer lasting growth than doubling the oil price could.

The world has been turned on its head in the last 12 months. The so-called industrialised countries now have structural problems and public finances that were more usual for emerging markets, while the emerging markets are the ones that will increasingly drive global growth and more importantly provide the returns that investors need to make if they are going to raise the money to pay the pensions of their aging populations.

Economic optimism

As the Christmas holidays approached in 2009, there was a notable increase in optimism and even some talk of a "boom" or "equity market bubble" in 2010.

The government officially admitted the increasingly bright prospects for 2010 in the middle of December by significantly revising upwards many of the main indicators shortly after the 2010 budget was approved. The budget numbers have not been revised, which means – like every year – the government has built a healthy comfort margin into the budget that should leave it plenty of cash for discretionary spending.

The latest official expectation for 2010 GDP growth has been raised to 3.1% in response to higher oil prices and a stronger ruble. The average oil price was increased to $65/bbl from $58/bbl (which remains the official budget estimate), and the forecast of a capital outflow was revised to an expectation of a flat capital account. This resulted in a change to the government's ruble exchange-rate forecast for 2010 from RUB33.9/$ to RUB28.3/$.

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And it is not just the economists and bankers that are feeling more confident about the future: the Russian people too have cheered up in the last months of 2009. After worrying that they would once again be the victims of a governmental screw-up, the number of Russians who believed that Russia was doing well economically increased by November with 57% believing that Russia was doing well, or average compared to the rest of the world, while the number of people think it was doing badly fell from 43% in March to 39% in November, according to pollsters VTsIOM.

Liam Halligan with Prosperity Capital Management, one of the biggest portfolio investors into Russia, argues, that Russia stands alone in comparison to the other CIS countries as its macro fundamentals are completely different from other countries in the region.

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The one group that is not optimistic is the government. Kudrin said in December that Russia's economy would grow by 1.6% in 2010 and that it would take until the fourth quarter of 2012 for the economy to win back all the ground lost in the crisis.

Kudrin's estimates are clearly extremely pessimistic and he is erring on the side of caution. He set $58 for a barrel of oil for the 2010 budget -- at least $20 less than practically everyone else in the game (with the notable exception of Capital Economics). And Kudrin has been forced by events to upgrade several of his forecasts as 2009 came to end – not that the budget numbers were changed. Clearly the government forecasts are designed not to give their best guess at what is going to happen, but to build in a very comfortable margin of error so that there can be no nasty surprises in 2010. Likewise the IMF and its ilk are following a similar policy when it comes to forecasts as they also clash dramatically with the forecast private bankers are giving for the economic performance in 2010.

Kudrin was actually quoting the most pessimistic of the three scenarios developed by the Ministry of Economic Development and Trade, all of which are more pessimistic than the independent forecasts. The government's guidelines are:

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2010: bad things that could happen

Almost everyone is assuming "that was it" for crashes and that from here on out there will be steady recovery with the odd wobble thrown in to keep it interesting. Almost all the banks were, "neither factoring in a steep recovery in 2010 nor any serious or prolonged dip."

The OECD issued global-growth forecasts in December, predicting 1.9% growth in Russia in 2010 following a 3.5% contraction in 2009. For 2011, the OECD forecast is for 2.5% growth, which is in line with the other IFIs. But this clashes with the commercial banks and the IFIs have a poor record of predicting post-crisis performance in emerging markets.

Still, there are real risks that could derail the expected return to health. Merrill Lynch points to the following dangers: a double dip recession in the developing world, a US dollar crisis, a blood bath on international bond markets following a round of downgrades, and prospects of hyper- or high-inflation driven by the wall of liquidity floating around the world now.

However, Bill O'Neill, Portfolio Strategist and Chief Investment Officer at Merrill Lynch, goes on to say there is little chance for a double dip recession in the global economy in 2010 as the world economy strengthens and that the significant excess capacity generated by the collapse in demand also, "suggests worries over inflation are unfounded."

All of Russia's risks for 2010 are now external, but the problems going forward are likely to be technical rather than cataclysmic. Left to its own devises the investment banks all agree that the theme for the year will be one of domestic companies raising money as the new period of ownership change and growth ambitions plays out. The state will play an important role in the early part of this process. "Investment will return to Russia in 2010 and will again be driven by a combination of external and domestic factors," says Chris Weafer, chief strategist at Uralsib. "Externally, the most important issues will be the strength of the US recovery, China's continuing appetite for commodities, the G20's exit strategy for stimulus measures put in place earlier this year, inflation, interest rates, and the trend in the value of the dollar. These factors will have a direct impact on Russia's economy, and will largely shape investors' risk appetite towards emerging market assets."

Uralsib identifies the main tenants of the government programme:

• Support higher levels of spending on infrastructure.

• Encourage and assist consolidation in strategic industries.

• Provide financial support to repair the balance sheets of the country's most important companies.

• To improve the country's image with both portfolio and direct investors.

• To increase the volume of foreign direct investment in the country.

Just successful the state is in implementing these goals will set the pace of the recovery. "The role of the state remains crucial. While the role of the state has changed dramatically since the beginning of the crisis – from a creditor of last resort to the main financier of domestic demand – it will remain the most important factor behind the stable recovery of the Russian economy," says Weafer. "The state is likely to play a particularly important role in fixed investment and income growth. We expect the government to continue pursuing a proactive investment policy, both directly (through the budget) and indirectly (through state-owned companies and banks)."

There are various aftershocks from the crisis that need to play out into 2010, the most significant being rising unemployment, the rise in non-performing bank loans (NPLs), the effect of the crisis on retail and consumption and how effective has the government's stimulus programme been.

At the end of 2009 it is not clear how bad any of these factors will be, but taking the NPLs as an indicator at this point non of them will be very sever as NPLs, for one, have come out at the end of 2009 far lower than the worst case scenarios were predicting at the start of the year.

ECONOMICS

Inventory and capacity utilisation and investment

Most of fast growth in the 1990s was driven simply by putting bums on empty seats driving up capacity utilisation close to 100% after which investment took over as the new driver of growth in the middle of the decade.

The speed of the fall of the economy in the first part of 2009 was caused by the fact that factories simply stopped working. Economists estimate that up to 80% of the collapse in economic growth was caused by the switch from production to selling off inventories. Of course if factories are not working they don't need inputs and don't pay suppliers or subcontractors so the slow down spread rapidly throughout the whole economy. "Russia's significant GDP underperformance vs other BRIC countries reflects very extensive destocking after an unprecedented inventory build-up in 1H08. Experience suggests destocking rarely lasts more than three quarters, in turn suggesting much of the damage done to Russia's growth is recoverable over 2010," says Renaissance Capital.

However, as inventories were run down by the middle of the year factories slowly went back to work after the sky failed to fall on their collective heads. Rencap estimates the capacity utilisation rate in the steel sector, one of the worst hit sectors, rose from about 50% in 1998 to 90% by 2008. But during 2009 this dropped back to under 50% again. However, according to Deutsche Bank all the spare capacity was in use again by the end of 2009, thanks to recovering commodity prices, largely driven by Chinese demand. "The pick up in Russia will be faster than expected, regardless of what happens to oil prices in 2010 simply because of the process of restocking," says an emerging markets fund manger at Blackstone.

The collapse of demand and the falling capacity utilisation rates killed investment demand dead eradicating one of Russia's growth drivers in the process. Sectors like oil put all their capex plans on hold, which will lead through to shortage of supply when demand recovers over the next year or two, which should further drive a faster than expected bounce back. Still, Russia has been and remains under invested.

Deputy Economic Development Minister Andrei Klepach said in December that the seasonally adjusted capital expenditures in Russia fell 18.4% on the year in January–November and 0.4% on the month in November. All in all the fixed investment was expected to fall by 17.6% in 2009, down from original prediction of a 20% growth. "In order for economic growth to become sustainable, Russia has to increase its investment-to-GDP ratio. While it is competitive with other post-Soviet transition countries, Russia, at 25% lags China's 40% investment-to-GDP ratio. Russia clearly needs to spend more to make economic recovery sustainable," says Rencap

Increasing investment is easier said than done. Russia's growth will be slower and capacity utilisation is not under pressure now so investment will be slow to recover. Still economists are expecting a pick up in capex in 2010 as the recovery continues to gather pace.

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Russian consumer demand outlook

Consumer demand was also killed off by the crisis, but it is only on pause until some predictability returns in 2010. Like China, Russia will turn inward to its own people to provide the engine for growth in the next few years. Citigroup said that consumption – the key Russian growth driver – was already stabilising as 2009 came to an end, and expects it to pick up again in 2010: retail sales fell heavily over the first half of 2009 but are expected to recover to 5.3% growth over 2010.

Polls showed in November that the average Russian was becoming more optimistic about Russia's economic future. The number of people that believed the economy was doing well or in the middle of global performances was up to 57%, while the number of those that thought it was doing badly was down to 39% from 43% in March, according to pollster VTsIOM. A quarter of Russians believed the country is moving in the right direction in November, up from 19% in March, and the number that said things had gotten better in the last months of the year was up to half.

In general the percentage of Russians who disapprove of the overall situation in the country has almost halved throughout the year, with the 58% of those believing it was bad or even terrible in March and only 32% of such respondents in November, VTsIOM said.

Clearly, the majority of Russians are not happy but the improving sentiment is key to the recovery of the economy as like the companies the average Russian has stopped shopping and maybe more importantly stopped borrowing. Banks have been accused of cutting loans and the government has introduced several schemes to support borrowing, however, this ignores the fact that many Russians, worried about their future, have stopped asking for these loans. Many banks that have funds say that they can't lend money even if they want to as most people have gone back to living on the money in their pocket rather than borrow against their future earnings to buy the big ticket items. Nowhere is this clearer than in the car market where the volume of sales halved between 2008 and 2009 and will remain at under half of the 2008 levels in 2010 say industry experts.

However, this crisis has been a corporate one and unlike the previous crises like in 1998, the man in the street has been much less affected. While unemployment rose to about 9% in 2009, it was falling again in the later part of the year. Most people have kept their jobs and are still getting paid albeit at lower rates: the average salaries have fallen marginally from over $700 a month to about $670 by the end of 2009.

However, as Russia's spending is a lot more concentrated in the middle class – who have been less affected by the crisis – the higher levels of unemployment will have a lesser impact on retail sales than they do in the West. And unemployment should start falling again in the second half of 2010.

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Moreover, the Kremlin is planning to hike pensions by about 40% in 2010, which will feed directly through to the retail of Russian-made goods. Putin said in September: "What do pensioners spend their money on? Not luxury goods imported from other countries, but simple things; things made in Russia."

Pensioners are an important class of consumer and already account for 10% of retail spending, according to Morgan Stanley. The increase in pensions should increase their share of the overall spending to about 15% in 2010, estimates the US bank.

The collapse of the retail business and consumer lending is a largely psychological phenomena as punters become more cautious. Even devaluation, the one bit of the crisis to really hit average Russians in the pocket, was much milder this time round than in 1998: then the currency fell overnight to a quarter of its value, however, the devaluation of about 30% at the start of 2009 was painful, but manageable. Moreover the ruble was appreciating again by the autumn, which puts money back in the pocket of average Russians and contributes to the "feel good" actor.

If these trends continue into the New Year and are coupled with a reduction in the banking sector problems, then as confidence returns the pick up in retail could be rapid. And once the virtuous circle of spending, investment, profits, and wage rises starts function again the stronger the pick the stronger the pick up will be reinforced.

Budget and deficits

Another big change in Russia's economy is that the state will run deficit budgets for the next few years after enjoying nearly a decade of surpluses.

The government reduced its estimate for the budget deficit in 2010 to 6.8% in December, but most banks believe that the deficit will be even lower in 2010, on the order of 3.9%-5.4%, which assumes oil prices of between $80 and $70 per barrel.

The standstill of the economy plus the collapse of commodity prices reduced tax revenues by about a fifth while the government boosted spending by about a third above the planned spending to prop up the economy and rescue flailing banks and companies.

Russia's Federal tax service reported tax income for the first nine months of 2009, 21.5% less than the same period a year earlier.

The service collected a total of RUB6.889 trillion for the consolidated budget and government non-budget funds in January-October, which includes federal, regional, and local budgets.

The details of tax returns mirror how the current crisis has hurt the economy. Income from raw materials was amongst the worst hit of the tax revenues, down 45.4% over the same period to RUB831.1 billion. Of this oil royalties decreased by 47.8% RUB735.2 billion following the collapse of oil prices at the start of the year.

Corporate taxes were also hit hard with corporate profit by more than half, or 53.4% over the same period to RUB1.072 trillion. Corporate profit tax collection for the federal budget fell by a huge three quarters, or 76.9% to RUB158.9 billion in the period highlighting the fact that this is a corporate crisis.

However, the corporate nature of Russia's crisis was highlighted by the fact that income taxes were down a mere 1.4% to RUB1.306 trillion and VAT was actually up on the period by 4.8% to RUB1.003 trillion (and unlike income tax, all of VAT goes directly to the federal budget).

Stepping back from these numbers the picture they paint is the raw material extractors were hit by the fall in international commodity prices, the corporate sector was bludgeoned into semi-consciousness by the brick wall business ran into, but retail and personal incomes remains relatively unaffected so if Russians aren't buying anything it is because they are choosing not to buy anything not because they can't afford it.

In terms of a bounce back, mineral taxes have already recovered on the back of rising commodity prices; income and VAT taxes were not affected (other than they stopped growing); but the corporate taxes will be the hard one as for this to recovery depends on a general pick up in the economy. Still, the other two streams of revenue are at least as large as corporate taxes and so the gap the government needs to plug will be manageable. "The Federal Customs Service received around RUB1trn less over January-September than it did in the corresponding period of 2008. Over the same period, the Federal Tax Service missed out on around one-third of the previous year's collections, for two reasons: first, mineral extraction tax slumped on the back of deteriorating external commodity markets; second, in order to stimulate activity in the real sector, the Russian government cut corporate income tax from 24% to 20% in late 2008, and the federal budget's share was reduced to 2%," Rencap said.

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On the other side of the fence, the government has significantly increased its spending. Prime Minister Vladimir Putin signed off on an extra RUB1.548 trillion ($50bn) of spending from the Reserve Fund to cover the federal budget deficit from June–December 2009, and as of December 1, the Finance Ministry had already spent RUB2.264 trillion from the Reserve Fund to cover the budget deficit in 2009, with RUB2.238 trillion left in the fund as of December 1, the Finance Ministry said.

At this rate the government is expected to use all of the money built up in the Reserve Fund during the boom years from oil taxes by the middle of 2010 – which is not a bad thing as the purpose of the fund was to support the budget during crises. However, this level of spending (which has caught some flak from the likes of the IMF) assumes that economic growth will resume in the second half of 2010 and that oil prices will remain around the $70 mark – neither of which seems unreasonable as of the end of 2009.

Indeed the Finance Ministry lowered its forecast for the 2009 deficit to 6.9% of the country's gross domestic product (GDP) from 8.3% forecasted earlier as of the end of 2009 as the pressure on public finances was visibility lifting as 2009 came to an end. "We assume that the budget will be much better than the official 6.8% deficit forecast due to higher oil-tax revenues and more-conservative spending by the government," Uralsib said.

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• financing the deficit

Going forward the question is how the government is going to finance the deficit. In the autumn of 2009 the finance ministry said it would return to the international debt markets with an average of $20bn off issues over the next three years. Some have questioned Russia's ability to raise such large amounts, as it will have to compete with the likes of Poland and Turkey, which also intend to borrow heavily. However, analysts point that Russia has some of the best fundamentals of any country in the world (very little debt, large reserves, falling inflation and interest rates) and should be at the front of the queue when it comes to collecting money from the international markets.

Indeed as the economic outlook improved in the last months of 2009, the finance ministry announced that it was going to cut the amount it planned to raise in 2010 from $18bn to $10bn. In fact the state may issue even less than this debt as the budget assumptions are already looking very conservative and if the pessimism momentum continues to catch up with reality the 2010 deficit could well come in at about 4.5% of GDP for 2010.

• deficit scenarios for 2010

Just how much the budget will be under in 2010 of course will depend a great deal on what is happening in the rest of the world – and especially what is happening to oil and commodity prices.

Rencap are assuming a base case of budget revenues at RUB7.4trn, corresponding with a deficit of RUB2.3trn, or 5.4% of GDP (lower than the official forecast of 6.8%). Other analysts are even more optimistic on the deficit with Citi group estimating that it will reach -4.2%, due to rising oil prices and stronger than expected economic growth.

Oil prices will make a big difference. Rencap estimates revenues of RUB6.3 trillion if oil prices are $40 per barrel rising to RUB10 trillion with oil at $100 at which point the budget will be balanced.

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• financing the deficit scenarios

The changing price of oil will drastically change how the government finances the budget. For example, if prices fall back to $50 as Capital Economics predicts then the state will have to tap all available sources including domestic market, foreign market, reserve fund and the national welfare fund.

But if oil stays about $60 the state won't have to borrow abroad at all, being able to raise enough from the funds and the domestic market to make good the short fall. The state will try and avoid borrowing abroad if it can as this stimulates both inflation and ruble appreciation. Indeed, Citigroup analyst Elina Ribakova expects the government to actually issue something between $5bn and $10bn of Eurobonds if at all.

Once the price gets to $70 the state won't need to borrow at home either, but it will still run the reserve fund down to nothing over the year. But if oil prices are above $80 then there will still be money in the reserve fund at the end of 2010. Finally, if prices return to $100 or more, then the budget breaks even and Russia can go back to accumulating cash in the funds as well as re-launch the massive $1 trillion-plus infrastructure investment programme that was supposed to start in 2008.

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CAPITAL MARKETS

Equities

Russia's equity markets were murdered in the meltdown in September 2008, with the RTS index falling from over 2100 to a low of 500 in May, before recovering to finish 2009 at about 1400, making Russia the second best performing market in the world. In 2010, Russia's investment banks are almost universal in predicting the RTS index will end 2010 at about 1900-1950, for no other reasons than the return to growth thanks to restocking will send earnings up driving equity valuations before them.

• not rocket science

Stepping back a little, the choice facing portfolio investors into Russian equities is very simple. Russia's market was one of the worst performing in the world in 2008 as valuations lost almost three quarters of their value in the space of a few months. However, Russia's market was the second best performing in the world in 2009, as the market bounced back.

This is nothing unusual for Russia as it has always either one of the best or worst performing in the world since 1996. In bne's Russian Outlook 2009 we quoted Renaissance Capital's head of research Roland Nash saying: "Over the last 12 years Russia has either been amongst the best performing equity markets in the world or in the worst. So you have to ask yourself a simple question: which one of the two do you think it will be in for 2009?"

Those that chose "invest" in January 2009 were handsomely rewarded, more than doubling their money. So what about 2010? At this point it looks like a no-brainer: the market looks certain to rise (barring some large unforeseen external shock). Of course, the returns will not be as big, but bankers are still predicting a 40%-plus upside for the year and possibly more if there is any re-rating of the traditional Russian discount. The rest (below) are just details.

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• oversold and bounce back in 2009

The market was clearly oversold in 2009. What drove the index so low was the fact that so many companies had used their equity as collateral when raising debt. As the index sank it triggered margin calls on these loans where the companies had to come up with cash to cover the difference in value between their sinking stock prices after it fell below the strike price in their loan covenants. As the only places to raise money was on the stock market, prices went into a "death spiral." The index low of 500 was well below fair values, even in a depressed economy and the RTS won't go there again.

By the spring all the leverage and margin calls had been squeezed out of the equity market which began to recover with the RTS rising to end 2009 at about 1400 – the same level it was at the start of 2006.

Russia's investment banks, unlike last year, are fairly unanimous in predicting that Russia's equity valuations will continue to rise through out 2010 to end the year at about 1900-1950. Some, like UralSib, say they will continue to rise in 2011 to pass the all time high of 2487.92 set in May 2008.

As of the end of 2009 Russian stocks had recovered to the level where valuations were at a 30% discount to their other emerging market peers – which is the traditional Russia discount level. Going forward the main driver of equity price growth will be rising earnings on the back of economic recovery. However, analysts say there is a chance that Russia will also enjoy a re-rating that reduces the size of the traditional Russia discount as all the emerging markets, and especially the BRIC countries, have been promoted as a result of the crisis.

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"It is quite possible that CIS equities will yet again surprise to become one of the best-performing asset classes over the early part of the next decade," says Renaissance's Nash. "Even while the macro-backdrop looks excellent for emerging market risk assets, the market still, on average, distrusts to the point of loathing Russian equities, and still largely ignores those of Kazakhstan and Ukraine. The switch from investor-spittoon to grudging respect has, on at least three occasions in the past decade, proven the driving force behind a major re-rating for CIS equities."

• Strong earnings growth and momentum

The easiest bit of the equity story to predict is the return to earnings in 2010 that will necessarily drive share prices up. In the midst of the crisis in 2009 Citi group neatly explained the recovery of share prices after May while the economy was still contracting with their idea of the "twilight zone" (see the bne archive online).

The idea is that in the initial phase of a big sell prices tumble because of the raw panic. However, at some point the prices begin to recover even though earnings are still falling, as some investors anticipate the return of income based on a company's fundamentals – this is the "twilight zone" bit. During this stage stocks can outperform if investors underestimate the depth to which an economy has fallen, but at some point prices have to reconnect with actual earnings, which seems to have happened in about October when the RTS reached 1400 and stayed about this level for the rest of the year.

Going into 2010 the economy is expected to grow by anything between 4% and 6% depending on who you listen to, which will lift share prices, which are no back in a "normal" relation with earnings. While the rising tide of economic growth will lift share prices, there is still a lot of uncertainty over how this last stage will play out. "It is unsurprising that Russia's consensus forward-looking earnings forecasts are far more volatile than those for the EM average. However, it is also clear that forward-looking indicators have some considerable momentum behind them. Twelve-month forward-looking EPS consensus has now increased for four consecutive months [to December] as the market prices in recovery," says Renaissance Capital.

However, several analysts are much more optimistic on the prospects for earnings growth in 2010. Credit Suisse for one is expecting Russia to outperform its emerging market peers on this front and says over the last six months of the year Russian companies built up considerable earning growth momentum.

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"Looking further ahead to 2010 and 2011, Russian equities are now forecast to experience the strongest, most enduring earnings growth in the emerging markets universe," says Credit Suisse.

On top of this, Credit Suisse itself points out that Russia watchers have an extremely poor record at predicting earnings growth and usually underestimate them. "Over the last 10 years, Russia's actual EPS results have surprised on the upside by an average annual rate of 23%. This is particularly interesting when one considers that analysts have tended to be overly optimistic for other large EMs over the same time period," says Credit Suisse.

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Uralsib agrees and says that the stronger earnings in 2010 will reduce the P/E and make the stocks more attractive. "For 2010, Russia is at a discount to the emerging-market average, but only because of the very high weighting of the oil & gas sector, which trades at a lower rating than other sectors. Stripping out the oil & gas stocks, the rating of Russian stocks in 2010 is more in line with the emerging-market average. Stronger earnings recovery in Russia in 2011 again opens up the rating gap with emerging markets, and it is this stronger growth trend that is expected to ensure that Russian stocks outperform their emerging-market rivals in 2010 – again, favoring the domestic theme rather than the hydrocarbon sectors," says Uralsib.

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• Stock picking themes

So if an investor buys into the bullish outlook, what stock should they buy? Here there is more divergence of opinion than normal as there are so many factors in play.

Uralsib expect a catch-up theme driven by economic growth to produce the best results: "Because of expected improvements in the economy, we expect both indices to reclaim their record highs in 2Q11, three years after they were set. While Russian equities are trading close to their emerging-market peers (when oil & gas stocks are excluded), stronger earnings growth in 2011E will again open the discount gap. Russia (excluding oil & gas) is trading at a 2011E P/E of 9.9, while the forecast GEM average is 12.8. This will help Russian stocks, especially the domestic themes, to outperform the emerging-market average in 2010," says Uralsib

Credit Suisse highlights four big themes to back: oil prices will recover and their equities will rise on the back of rising prices; investors should seek out companies with the potential quickly increase earnings such as the leaders in retail and telecoms; many companies, particularly outside the blue chips, are still oversold and have larger upsides; and as the central bank is expected to continue cutting interest rates, some stocks will benefit more than others.

Renaissance Capital laid out five rules for choosing stocks:

1. we think a recovery in the domestic economy will support stocks with exposure to disposable income and industrial production growth.

2. as well as domestic recovery, we expect Russia to benefit from a recovery in the global backdrop. We look for stocks that are plugged into a pick-up in global demand.

3. we think the government is more committed than ever to improving the economy's efficiency. We favour stocks that are positioned to benefit the most from reform and restructuring.

4. we expect lending conditions to start to normalize, and we expect a pick-up in loan growth and a plateau in NPLs to support earnings in the banking sector.

5. we look for those stocks, selectively, that we think have an operational edge within their sector. Low debt ratios, growing production, or superior management are factors that stand out here.

"Going into 2010, we continue to see upside in [banks and real estate], but prefer steels, some of the better risk-return retail stocks, those companies in a strong position to benefit from restructuring or reform, and, potentially, fertilisers, which have yet to gain much traction," says Renaissance Capital.

Troika Dialog is also pushing the "return to health" strategy, but in addition it has highlighted Russia obvious growing ties with China as a theme. "Russian and China have the best synergy on the planet," says Kingsmill Bond, Troika's head of strategy. He recommends looking for stocks that:

1. catalysed by the crisis, which means that Chinese money is increasingly flowing into Russia looking for a non-US home, and here the bank and natural resource sectors stand out.

2. companies with assets close to the Chinese boarder as they produce things with a ready made and large market nearby.

3. companies building the new infrastructure that can support this cross border trade. New oil and gas pipelines are already appearing and the Sino-Siberian power grid idea that was promoted by Prime Minister Viktor Chernomyrdin will probably reappear soon based on Sibeira's copious and under-developed hydropower resources. Only 5% of Russia's hydrocarbons went east in 2008 and this is expected to rise to 25% by 2015 and then to 40% by 2030.

4. macroeconomic play as China is already providing loans and investment to Russian companies and regions. In Russia Chinese investment has already reached 2% of GDP and in Kazakhstan 10%, and this is before the Chinese have liberalised the ability of their firms to invest abroad.

• correction vs bubble

The world has been turned upside down by the crisis and many of the conditions that drove the eight-year long boom in emerging markets are back. The emerging market stocks soared as international interest rates were at historically low levels engendering a credit boom as western banks sought out some decent returns for their money. The bubble in eastern Europe was burst when America's interest rates rose to over 5.25% at the end of 2008, but since then they have fallen back to under 1%.

Of course, everyone is going to be a lot more reluctant to lend this time round, but the logic remains the same: funds in the west need decent returns if they are going to fund their growing pension payments for an aging population and once the ball starts rolling with money going east driving up market valuations more money is pulled in starting a positive feedback loop.

This time round the arguments for sending investment money east are stronger than ever, pulled by the fact that the "emerging" markets are increasing being reclassified and promoted to "transition" countries (ie they are not as terrifyingly risky as they once were) and pushed by the fact that clearly returns in the west will be very soggy for years to come.

All this adds up to a recipe for another bubble, fuelled by the massive amount of excess liquidity that central banks around the world have pumped into their financial systems in an effort to reboot their economies. This bubble will take a little while to build, but some analysts are expecting it to be manifest by the end of 2010 or into 2011.

"With most of the world's biggest structural imbalances now focused in the developed world, global interest rates over the longer-term will remain too low for EM. This will lead to outperformance of EM asset classes well into bubble territory, which will likely prove the source of the next financial crisis," says Nash.

However, no one seems to think the bursting of the bubble will come before 2012.

In the meantime there could still be many nasty surprises in store as even if the Russian economy is continue to recovery steadily the rest of the world won't; how many more "Dubai's" of "Greece's" are in store? Still, some analysts says these will be temporary set backs that will increase the volatility but not undermine the story.

"Do not confuse a correction with the end of the bull market …it may offer opportunities especially in areas with robust growth and in cheap, quality sectors," says Merrill Lynch.

• Risk perception/DISCOUNT

The really exciting prospect for 2010 is that Russia's traditional discount to its other emerging market, and BRIC, peers might finally be reduced somewhat, adding out-performance to its already positive performance.

"Russia has traditionally traded at around a 30% discount to the EM average. At the trough of the crisis, Russia's discount to the EM average widened to 71%. Following the 110% YtD rally, the discount is now back in line with its historic average," says Nash.

The argument is that the world looks a lot different today than it did 18 months ago, but the models used to predict the future as still based on the old assumptions. Russia's economy in particular looks especially stable (it remains one of the very few emerging markets that didn't bother to do a deal with the IMF) and it is still sitting on a huge, albeit slightly smaller, cash pile.

The re-rating will come in stages. First companies putting in strong earnings growth will do well. Then interest traditionally turns to the second and third tier companies, which should be big winners in 2010. Finally the risk discounts will start coming down as the strong growth and rising investment improves the investment climate.

Renaissance says there is a good chance that 2010 will see Russia's traditional discount being revised downwards over the course of 2010. Indeed, many investment firms like Blackstone, have already marked Russia up to overwight by December 2009.

Credit Suisse says: "Where do we go from here? We retain our overweight rating on Russia. And while we recognize that the magnitude of the market's explosive recovery of +90% since we upgraded in early April 2009 is unlikely to be repeated in 2010, we believe the Russian market still offers one of the more compelling investment cases in the emerging market universe… We believe Russia's high beta characteristic still qualifies it as one of the better vehicles for a cyclically leveraged play on the global recovery. "

•Fund flow

Russia was back in vogue by the end of 2009, reflected by the very strong inflows into Russia dedicated funds in the last part of the year.

However, Russia-dedicated funds still have some way to go before they return to pre-crisis levels. Although assets under management at Russia-dedicated funds have increased more than 300% in 2009, they remain some 40% below pre-crisis levels.

"Russia's rally in 2009 has largely been driven by international fund flows as risk appetite has increased. As domestic liquidity conditions return to normal in 2010, we expect domestic fund managers to return to the market and underpin this performance. A growing Russian pension fund will add considerable weight to this, we think," says Uralsib.

Part of this inflow was driven not so much by improving sentiment for Russian stocks, but simply there was so much global money looking for a home. Merrill Lynch calculated the global flows which show clearly there is a lot of cash about. The problem with growing share prices driven by this cash is that once western central banks start hiking interest rates – which is inevitable – this money could disappear as fast as it arrived.

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Source : Factset.

* Emerging market liquidity calculated using deviation of current real Federal Reserve funds rate from historical mean. +10 indicates current real Fed Funds rate is greater than two standard deviations below historic mean. -10 indicates current real Fed Funds rate is greater than two standard deviations above historic mean.

• PE ratios

Despite Russia's strong run of 120% in 2009, the Russian market is not trading at excessive valuation levels. The reason for this is that the market's strong recovery this year has also been accompanied by strong underlying earnings growth, which has limited the expansion of forward P/E multiples.

Russia's forward P/E levels normalized in December from their historically depressed levels earlier in the year, currently trading at their historical average of 8.6. Compared to other EM peers, Russian forward P/E valuation levels were still the lowest in the EM universe in December 2009. Moreover, the market's discount today relative to the MSCI EM of –35% was even higher than its long-term average of –25%.

Add to this the strong earnings growth forecast for 2011 of +30% (vs. only +18% for the MSCI EM) implies a market return upside of 30% from December 2009 levels.

• IPOs

IPOs disappeared from the radar in 2009 but as the year came to an end they were back on the agenda and one company, Human Steam Cell Institute, even managed to raise RUB143.5m with the first IPO in over a year, listing on the MICEX exchange.

The pipeline was filling quickly by the end of 2009 and Uralsib estimates that Russian companies could raise about $55bn in the next two years from IPOs at home and abroad. Indeed, a search for "Russia IPO" in bne's archive for the last quarter of 2009 produces 128 hits of plans from all sectors.

The first significant IPO of 2010 will probably be Oleg Deripaska's float of RusAl in Hong Kong that should raise several billion dollars in January, but as markets thaw more will follow.

UralSib estimates that Russian companies will need to raise $100bn from investors in 2010 to pay down debt, of which about $55bn will be raised from selling equity over the next two years. Russia's nonfinancial companies had a combined debt of $723bn, of which $293bn is owed to foreign banks, a bit less than half of which is due in 2010.

Most of the IPOs are expected to arrive in the second half of the year when market sentiment should have improved.

Debt and fixed income

The main transmission route for the international crisis into Russia's economy was the accumulated debt by companies and banks. The reason why Russia is in a good position to bounce back is because the state didn't borrow, but conversely used the windfall oil money to pay down external public debt from 75% of GDP in 1998 to 5% as of 2008. Moreover, Russia's total external debt is covered a bit more than dollar for dollar by its $400bn-plus of reserves.

Debt rose fast in the boom years especially amongst the private sector, but despite the large absolute values, it remains at manageable levels in relative terms. According to the Russian central bank private sector external debt rose from $48bn in 2002 (of which banks: $14bn) to $451bn (banks: $165bn) in 2008, including $131bn in debt of state-owned enterprises. Post crisis a massive de-leveraging process has begun that ran through 2009 and will continue into 2010, before it starts to become possible to roll over debt again sometime from 2011.

In 2008, private companies in Russia paid a total of $244 billion in principal and interest payments to foreign creditors, and most of these payments were funded by Russia's Sovereign funds. According to CBR data, total debt payments stand at just below $180 billion for 2009 and $124 billion for 2010. This means that problems related to servicing, refinancing, and restructuring foreign debt in Russia's private sector will continue to be of importance to investors.

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FX: ruble vs dollar, appreciation

The unexpected recovery of oil from $43 a barrel to trade well over $60 for the second half of 2009 means that while the market was pricing in ruble depreciation going into 2009 it is pricing in ruble appreciation again going into 2010.

Citigroup expect that the appreciation pressure will be "significant" in 2010 and indeed where the ruble will be at the end of 2010 is one of the few places where Russia's investment banks disagree widely, ranging from Citi's RUB34/$ to Rencap's RUB27.41/$

Part of the problem is that the CBR has changed its policy to managing the currency and will govern the foreign exchange markets with a lot lighter touch.

"The CBR will retain its policy of a semifree float for the ruble in 2010, which could help Russia's currency gain strength if commodity prices go north. However, any correction in the markets are likely to lead to a decline in the ruble rate – and, most likely, this decline will be much steeper than previous declines. The CBR changed its monetary policy in early August 2009, deciding on a semi-free float for the ruble, and since September, we have seen a significant rebound in the ruble, which over the past three months has made it the best performing currency in the world," says Merrill Lynch.

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Inflation and Interest rates

The crisis had cut Russia's inflation rate to zero by the end of 2009 and while inflation will rise again in 2010 it is not expected to return to double digit levels. Indeed the rate of inflation is expected to remain below that of the CBR's overnight interest rates, making interest rates in Russia real for the first time.

This a huge change in Russia's macroeconomic makeup. For the last 18 years the CBR's overriding goal was to bring inflation down to normal levels. At the start of 2008 inflation finally fell to single digit numbers (9%) for the first time in modern history.

As part of the campaign to reduce inflation the state was holding back domestic tariff increases for things like power and gas, which need to be brought in line with international levels, starving Russia's utilities of investment capital and preventing much needed investment (a problem that was partially solved by the break up and privatisation of the sector in the last two years). At the same time the state was reluctant to use its windfall oil and gas receipts to invest into equally badly needed infrastructure renewal which was starting to hamper economic growth.

Once inflation reached 9% the Kremlin promptly announced an enormous $1 trillion investment campaign that would renew Russia's infrastructure and power sector only to see the programme derailed by the summer as the crisis struck. Since then much of the money earmarked for this work has been diverted into social spending and supporting struggling regions, but the conditions to restart this growth-bolstering investment programme remain in place; the problem now is how to finance it (and China is already stepping into the breach).

"The main drivers of declining inflation have been lower consumer demand, constrained access to consumer loans and, more generally, a very tight monetary policy, reflected in a decline in money supply aggregates over the year (these have started to recover only very recently) – all against the backdrop of very rapid growth in the money supply in other countries," says Renaissance Capital.

As the economy recovers and consumers start spending again and if oil prices continue to rise inflation will come back in 2010, although predictions range from between 5% and 8% -- still modest levels.

However, Russia (relatively speaking) low inflation gives the state a lot more wiggle room than its western peers. The near zero inflation rates in the last four months of 2009 allowed the CBR to cut interest rates nine times in an effort to pump more liquidity into the sagging economy. Significant excess capacity suggests worries over inflation are unfounded, say Merrill Lynch.

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While central banks in the developed world will be forced to start increasing interest rates sometime in 2010 to head off rising inflation caused by the "wall of liquidity" Russia's central bank has a lot more wiggle room to keep growth-supporting low interest rates low throughout the year.

Credit Suisse says there is plenty of room to cut rates more: "Earlier in [2009], the CBR had to intervene heavily in the currency markets to limit the rapid fall of the currency. Not only did it use up over USD 200 bn of the country's foreign exchange reserves, but it also needed to raise its interest rates in February (while other EM peers were cutting theirs). But since March, the ruble has appreciated by nearly 30% from its lows which has also helped bring inflation rates down to single-digit levels, and has also allowed the CBR cut rates… Russia's still large interest rate advantage over most other countries should allow it more scope to cut rates relative to peers… Looking ahead, we believe the stabilizing currency, the restocking of reserves, continuing disinflation, and the still weak domestic demand are factors likely give the CBR further room to ease monetary policy in 2010 to stimulate economic growth."

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Source: BofA Merrill Lynch (BofAML) Research

Data as at 30 November 2009

INVESTMENT

FDI

Despite the crisis, foreign direct investment (FDI) into Russia has held up remarkable well during 2009 and should regain momentum in 2010.

FDI has fallen from high of $27bn in 2008 to about $17bn in 2009, this is still well above the 2007 level. The appeal of the 142m-strong population is continuing to pull in in investors.

The crisis means that prices and barriers to entry have been reduced (and should reduce further if the Kremlin's new focus on attracting more investors is to be believed) and the Germans in particular have made their move. The exit from Russia of Carrefour, the French supermarket people, got headline coverage in most news media in October, but the fact that its rival Auchan announced it was opening 6 more stores at about the same time (and has since announced more) didn't get a mention. At the same time Germany's OBI DIY stores have moved in and a glace through in bne's weekly bneInvestor newsletter shows the steady flow of foreign companies building new factories in Russia through out the year.

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These investors are now being pushed into Russia as much as pulled by the large consumer market. Russia briefly became the largest consumer market in the summer of 2008 on a PPP basis, according to Troika Dialog, and over took (briefly) Germany as the largest car market selling 1.65m units against Germany's 1.6m units. The car market has since collapsed and Russia expects to sell 1.4m cars in all of 2009, but these sales remain extremely profitable.

Still, FDI still remains far too low for a country of Russia's size. Renaissance Capital points out that the ease of doing business in Russia remains low while the cost of doing business remains high, while the country continues to score badly on the World Bank's "ease of doing business" ranking and Transparency International's corruption index.

"On some estimates, it costs some 34% more to build a distribution centre in Moscow than it does in London and to obtain a construction permit takes 6x longer in Russia than it does in Sweden," says Renaissance Capital.

But against these problems investors continue to come as increasingly they cant ignore Russia and if they can make their business work the margins remain very high, more than compensating for the pain the neck bureaucracy and legal uncertainty. Consider, the prices of most foodstuffs in the supermarkets of Moscow cost the same or slightly more than those in Berlin, yet the average incomes are less than half.

"With the recovery in domestic demand still nascent, Russia will need to turn to FDI to plug the gap in economic growth. Russia has plenty of room for improvement here, with FDI per capita still very depressed, and among the lowest in any post-communist transition country. This is an extraordinary statistic given Russia's wealth of natural resources, and commodity-deficient countries' unabashed desire to add to their resource bases. It is highly encouraging, for example, that the government is now considering easing restrictive mining laws to attract foreign investors," says Renaissance Capital's Nash.

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Reform and privatisation

Hopefully – and it remains only a hope – the crisis will put some steel in the Kremlin's rhetoric on the need to continue market orientated reforms.

Russia-based analysts have high expectations that 2010 will be the year that the Kremlin launches a real attempt to address the reforms that have been long ignored or were slipping down the agenda as soaring oil prices took the pressure off their necessity. However, those outside Russia are a lot more sceptical.

"At this juncture, there is still little evidence that the Russian authorities are willing and able to address Russia's business climate and/or other structural growth constraints effectively, despite recent statements by top-level officials that changes are necessary. Russia's long-term growth outlook, therefore, mainly seems to depend on commodity prices," says Jürgen Conrad, an analyst at Deutsche Bank.

To be honest, even the upbeat "modernisation" state of the nation speech by Russian president Dmitry Medvedev in October remains more of a promise than an plan, as the Kremlin has never been good at implementing real reforms.

On the flip side there is more pushing the Kremlin at taking the reform task in hand than ever before. Following the 1998 crisis the Kremlin's elite had a "never again" moment and their answer to ensuring they were never put through the humiliation of the collapse and default again was to build up massive currency reserves; this was the only reason that Kudrin was able to ring fence the hundreds of billions of reserve money against the would-be profligate Duma.

Following the 2009 crisis the Kremlin is going to have another "never again" moment as it very nearly was "again". Happily while the cash pile didn't save the economy from a beating it did stave off the kind of collapse that destroyed so many empires a decade earlier.

The point of this "never again" moment is that it is now blindingly clear to everyone – including the Siloviki fraction that has been hindering liberalisation – that simply having oil or being rich is never going to be enough; you have to make the reforms – there is no alternative.

Like everywhere else Russian state has increased its share in the economy as it semi-nationalised struggling banks and companies. However, unlike nearly everywhere else the Kremlin has already put a renewed privatisation plan on the table and intends to sell off hundreds of assets – some of them major – in 2010.

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Privatisation was iced in the mid-1990s and is back now. In order to fund its official forecast of a 6.8% budget deficit. The Russian state is looking to generate some $2.4bn in 2010 by selling all or part of its stakes in some 450 enterprises – a ten-fold increase in previous privatization targets. And beyond 2010, the government has considerable room to sell down stakes in VTB, Rosneft, Sberbank and Russian Railways.

The scale of the sell off is still relatively small but the rhetoric surrounding it is that private ownership is better than state and the state needs to get out of business.

M&A and consolidation

One of the assumptions of the crisis is that it will be followed by a wave of M&A as those companies that still have cash snap up bargains. But those that thought this have been disappointed. Consultants and investors in other countries tell bne that the price of Russian companies are still high and despite the economic woes, owners of the best companies are unwilling to sell.

"Good companies remain expensive," says Marcus Svedberg, economist with East Capital. "The good companies have accumulated cash and are sitting the down turn out as they are still looking at their long-term prospects. The cheap companies are in real trouble, but often they are in so much trouble that you don't want to buy them – at any price."

The number of completed M&A deals in Russia grew in 2009, however, more and more of these did not involve foreign participants, says Renaissance Capital. In 2007, 77% of completed M&A deals involved either a Russian target or a Russian acquirer. In 2009, that number had grown to 93% as foreign participants were effectively shut out of the market. Renaissance Capital are predicting that foreign buyers will return to the market in 2010 and significantly drive the prices up as the owners of good companies are still demanding a premium.

Can China take up the slack?

One of the most interesting questions facing investors into Russia is what role the burgeoning relationship with China will play in 2010. And on balance it looks like Russia will disproportionately benefit from China's obvious rise. The improved relationship between the two emerging market stars was epitomised by the agreement to build a new gas pipeline in October that is the geo-political equivalent of marriage (see bne's cover story in November).

Just how this relationship plays out is unclear but what is clear is that China is now a major source of international finance. It is also the biggest market on the planet. It is also the biggest consumer of exactly those things that Russia produces – raw materials. And politically the two countries, while traditionally uncomfortable in each other's company, are being driven together by the pragmatic desire to build a multi-polar world as America goes into an obvious and protracted period of decline. Weather all these factors become significant in 2010 remains up in the air, but these themes will clearly play out in the coming years.

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"The global driver of economic growth has shifted from West to East. China rather than the US will likely prove the main driver of the growth needed to ignite CIS economies and equity markets. Less accepted, but possibly equally as important, the sources of financing are also shifting, from London and New York to Singapore and Hong Kong. The loss of soft power in the West implied by these changes could well have a profound impact on the behaviour of governments and corporates across the CIS," says Renaissance Capital.

Like Russia, China is going through a radical change shifting its growth model from export orientated to domestic consumption. It is outside out our competence to judge what affect this will have on Eastern Europe, but the IMF and other IFIs have suggested that the countries with the biggest populations can usefully replace global demand with domestic demand as the driver for economic growth (and Poland's good performance in 2009 testifies to the validity of this idea).

This means that China will continue to grow strongly but it also suggests the Russian economy could also do well if it can reignite consumer demand as it remains the most populous country in the region. If consumer demand is set on fire then this is one of the factors that could lead Russia to surprise on the upside. And both China and Russia have the money to make this happen.

SECTORS

Oil and commodities

Clearly the most important variable in determining how 2010 plays out is what happens to oil prices and as 2009 there was a lot of speculation on where the prices will settle.

Oil prices fell to a low of $43 in 2009 before recovering to about $75 at the end of the year. The official government forecast for the price, used in the budget calculations, was $58 average over 2010, but some analysts were expecting oil to fall again, with Capital Economics predicting prices to fall to $50 over the year.

Others have been much more optimistic. Most of the Russian investment banks are predicting an average oil prices of between $75 and $80 for 2010 and a few (notably VTB Capital) say that $100 a barrel days are already visible on the horizon.

The first thing to say is that oil, while very important, is not as important to Russia's economy as it is widely assumed – Russia is not a petro-economy.

Oil actually only accounts for about a fifth of Russia's gross domestic production, whereas services are far more important and now make up more than half of GDP.

Put another way, GDP per capita in 2008 was about $15,800, according to the CIA, where as oil production accounted for only $3,912 of this total – and that is assuming oil was at the peak price of $150 for all of last year.

Where oil and gas does dominate is in both tax and export revenues where they account for about two thirds of all the dollars Russia earns abroad. But the high taxes earned from oil are high because the state uses them to subsidise the rest of the economy. The state taxes away about 90c on every dollar an oil company earns from oil exports over a price of $27, but at the same time Russia has some of the lowest income tax, corporate profit tax and VAT in Europe. In this light the high contribution to tax is a good thing, although it makes public finances vulnerable to swings in the oil prices.

The high share of oil in export revenues is more of a problem. Russia already suffers from the so-called Dutch disease where excess oil revenues have driven up the value of the currency to the point where manufactures in non-oil sectors can compete on international markets. the cost of labour in Russia is lower than that in western Europe, but it is not as low as the Chinese costs and so as Russia can't compete on the basis of quality it can't compete with the Chinese at all so it is left exporting the one thing it can – raw materials.

This is the point of Medvedev's call to "modernise" Russia and Putin's personal backing of the whole nanotech programme as the only hope Russia has of diversifying its exports away from raw materials is to complete with the likes of the Chinese on the basis of value added products. The Kremlin's push on these two fronts is more than welcome, but the problem is the whole programme is going too slowly and there big holes in the plan, such as the lack of investment into education (a mistake the Chinese are not making).

In the meantime, with energy sector making up nearly 70% of the Russian equity market, it is clear that the oil price is a strong driver for the Russian equity market as well as for the broader fundamental economy.

"Looking ahead, we expect prices to remain strong and even increase from current levels to USD 85–90/barrel in 2010 on account of rapidly rising oil consumption and demand, particularly from China and other fast-growing emerging markets," says Credit Suisse.

There are strong arguments to support this. The crisis has not brought the inexorable rise in oil prices to an end, it has only paused it. Oil production has passed peak and the rise of big markets like China and India will keep the upward pressure on prices – especially if these countries turn to boosting domestic consumption to maintain growth going forward as they now must.

Another factor driving prices up over the medium term is the crisis caused all the oil companies to can their investment programmes which means once there is return to normalcy there will be a lack of new production capacity coming on line. The International Energy Agency (IEA) has already predicted a supply crunch arriving in the next two years and raised its demand forecast for 2010 in September to 85.7 million barrels a day. Likewise, oil futures were pricing oil at over $100 in November in anticipation of rising demand.

"The commodity super cycle is not over, it is just pausing. For the world economy to resume growth of 5%, commodity supplies must expand by a similar rate," says Merrill Lynch.

For its part OPEC's president has made it clear that the organization views an $80/bbl price average in 2010 as optimal for the global economy and producers. During the last 18 months, the organization has shown itself to be very adept at managing the oil supply to achieve targets, and this is expected to continue next year. T

Against this many countries have taken advantage of the low prices at the start of 2009 to build up inventories so there is a lot less leeway in the market; should economic growth slow in somewhere like America oil prices could fall faster than normal.

• gas

There is more uncertainly over where gas prices are going. Gazprom seems to have over stepped itself. By driving up prices in the last years, coupled with fears caused by the annual gas row with Ukraine, have resulted in European countries actively sources gas from other places, eating into Gazprom's market share.

Supply will exceed demand in the gas market for the next five years, the commercial director of Germany's E.On told press in December, echoing the general sentiment. The IEA has also predicted an oversupply of gas.

However, Russia's analysts are sanguine as they believe that any short fall in Europe will be more than compensated by rising demand in China, so the new Sino-Russian gas pipeline seems to have been a very timely project. Most Russian analysts believe the old relationship between oil and gas prices remains intact.

"The price of export gas will continue to rise in 2010 due to the six-nine month lag in the recovery of the oil price in 2009. Gas companies will benefit more than the oil majors due to a milder tax regime. The price of gas on the domestic market is rising, as per the agreed schedule to reach netback parity by 2013. Having suffered a 6% decline in domestic gas consumption in 2009, the forecast is for a modest gain of 3% in 2010," says Uralsib.

• steel

Steel prices are expected to rise 20-25% in 2010 as the main driver of steel prices in Russia is the combination of export demand, led by growth in China, and domestic demand, as the economy recovers and the government directs investment into improving infrastructure.

• fertilisers

Chinese contracts in the process of negotiation at the end of 2009 will set the pace in this sector, but once the financial crisis ends the world will go back to the agricultural crisis that was brewing in the summer of 2008 and so will support the growth of the fertiliser sector. Uralsib says the potash market to deliver better sales trends than other fertilizer segments, as the signing of a new potash contract with China should relieve existing price uncertainty and enhance potash exports.

Bank sector

Russia's banks took the brunt of the blow that hit Russia. However, they have faired a lot better than was expected and should begin to grow again in 2010.

Most of the attention has centred on the rise of non-performing loans (NPLs). By the end of winter the CBR was predicting 15%-20% NPLs for the end of the year and admitted that it could go as high as 30-35% -- the level of a full-blown, home-grown emerging market crisis.

However, by the end of 2009 the sector average for NPLs looks closer to 10-12%. Moreover, the capital adequacy levels have been maintained which gives banks the wiggle room to deal with bad debts.

Standard & Poor's has been the most aggressive in bad mouthing bad debt, effectively accusing both the banks and the CBR of lying about the level of bad debt. The agency has come up with a more general "generally distressed debt" and puts the "true" level of Russia's bad debt closer to 30-40%. However, this "trouble debt" is not well defined. It includes debt that is being serviced but at reduced rates and lumps this together with debt that has been defaulted without bothering to offer any qualifications. The big number is what catches the headlines as it implies Russia's bank sector is teetering on the edge of collapse, which is clearly not the case.

Banks have been working hard to restructure debt, which is a new experience for them. Alfa Bank is a good example of a bank that has both been aggressive in restructuring and successful in containing the problem. In May officials fingered the bank after it reported NPLs were already over 10% against a sector average of about 3%. Indeed the bank's own president said its NPLs could top 30-40% by the end of the year. However, by the end of December 2009 the bank's NPLs were still at 10%, which means a huge amount of debt has been successfully restructured.

Most of the top 50 banks have a similar story to tell. The banks that have been really hurt are the smaller ones were bad debt is over half of all loans. Still the Central Bank and the Deposit Insurance Agency (which has turned into a trouble bank ambulance agency) has only had to take over 18 banks in the year and the CBR predicts it will have to pull the licenses of about 30 banks in 2010 from a total of over 1000. All of these banks are insignificantly small in comparison to the sector as a whole and their disappearance will not registered.

Alfa is also typical in that it will make no profit in 2009 as it reinvests every penny to create provisions for bad debt. Experts says it could take several years for banks to get rid of the bad debt on their books that will sap their profits and constrain their willingness to lend. However, a general economic recovery in 2010 and 2011 will accelerate this process. Typically about half the bad debt can eventually be recovered and some say that if the recovery goes faster than expected then like the real economy, the bank sector could also bounce back faster than expected. The terror that gripped bankers during the midst of the collapse has lead them to build up very significant provisions against the estimated 30%-plus NPLs. However, if bad levels remain well below this level (as now appears likely) some of these provisions will be converted to capital that will fuel a much faster return to health than currently appears likely.

Where the problems of the bank sector become significant is their reluctance to credit the real economy. Russia's equity market collapsed so viciously as companies had leveraged themselves so aggressively using their soaring equity as collateral. As the RTS plunged by three quarters all this leverage was squeezed out of the market in the matter of a few weeks.

Likewise the boom in consumer credit was fuelling a nationwide shopping binge that was driving a virtuous circle of consumption, profit, investment and wage rises.

Both these forms of lending have come to an abrupt halt but by November modest lending was restarting. As much of the consumer lending was driven by wholesale financing and this source of capital has disappeared for the moment clearly lending will take time to recover, but the pace of this aspect of the recovery is very sensitive to what happens in the rest of the world.

"While we do not expect pre-crisis levels of growth (around 40%), we expect assets to increase by 14-20% in the next three years, and loans to follow suit with 18-25% growth. We see sufficient drivers for low inflation to boost credit activity strongly in 2010, such as lower credit risks, liquid assets (loans currently amount to 61% of total assets, and 69% at the peak in 2008) to be allocated to loans, a low base affect, and the relatively low banking penetration (44% of total loans to GDP) with which the banking sector entered the crisis in 4Q08," says Uralsib.

Other sectors

• telecoms

The reorganization of Rusia's fixed line giant Svyazinvest will dominate the news in this sector in 2010 and end with the conversion of regional fixed line holdings into Rostelecom to take place at fair value, as minorities in each regional have to approve the respective deals.

The mobile sector will also see a lot of action and as Russia's most modern sector had already seen operating margins recover to pre-crisis levels by the end of 2009. Longer-term growth will come from rolling out more valuable services to that customer base.

Of the sub-sectors, there has been an explosion in of broadband services, in particular, is a high growth area with current market penetration of only 19%, which will rise to 23% in 2010.

• power

Deregulation of the electricity prices will be 70% completed in 2010 and fully deregulated by 2011. Electricity distribution companies are to switch to a new tariff-regulation system (RAB), which will boost the cash flow for the most efficient operators. The new tariff system creates an incentive for cost efficiency, as companies currently operate under the cost plus tariff system. In addition, the RAB system will give companies a long-term budgeting model, and access to long-term financing.

• advertising

The advertising market is a simple play on economic recovery and also has a few prospective IPOs in the pipeline such as ProfMedia. The sector expected to increase 48% in dollar terms in 2010, following a 20% drop in 2009E.

• coal

The outlook for coal producers in 2010 is good with volume and price going on up on the back of demand from China. Production of coking coal had already reached pre-crisis levels in the fourth quarter of 2009, and, if the high capacity-utilization ratio is sustained through 2010, will rise another 18%.

Business, Energy or Environmental regulations or discussions

Reuters: RPT-Russian markets -- Factors to Watch on Dec 29



MOSCOW, Dec 29 (Reuters) - Here are events and news stories that could move Russian markets on Tuesday.

You can reach us on: +7 495 775 1242

STOCKS CALL (Contributions to moscow.newsroom@):

OTP Bank: "Today we expect the market to open in the neutral zone...After the open, a move lower is probable. It is most likely that in the final days before the holidays investors will try to reduce existing long positions."

Olma: "Traders on commodity markets are more in the mood for a rise, so there is still a possibility of a pick up in the Russian (stock) market. However the low activity of non-residents...can remain until the end of the year."

EVENTS (All times GMT):

VLADIVOSTOK, Russia- Prime Minister Vladimir Putin visits

ST PETERSBURG, Russia- A press conference on the results of the transport industry development. Russia's Pulkovo airport head to participate

MOSCOW- Russia's Finance Ministry to place up to 37.9 billion roubles of temporarily free budget funds in four-week deposits at commercial banks at a minimum bid rate of 9.25 percent

IN THE PAPERS:

Renaissance Capital has revealed its shareholder structure, in line with new central bank regulation. Chief executive Stephen Jennings has 32.18 percent, while Renaissance Equity Trust controls 46 percent, Vedomosti reports.

Hedge funds Paulson & Co and Atticus Capital, as well as Asian investment company Kerry Trading could be among the participants of RUSAL IPO, Vedomosti writes, citing sources.

TOP STORIES IN RUSSIA AND THE CIS: TOP NEWS: Russia agrees oil deal with Ukraine, calms EU COMPANIES/MARKETS: Metalloinvest still eyeing IPO-source ECONOMY/POLITICS: Russia says engines to blame for Superjet delay ENERGY: Gazprom to by 15.5 bcm of Uzbek gas in 2010 COMMODITIES: Russian grain prices show no clear trend

MARKETS CLOSE/LATEST:

RTS 1,455.32 +0.26 pct

MSCI Russia 804.83 -0.09 pct

MSCI Emerging Markets 978.27 -0.29 pct

Russia 30-year Eurobond yield: 5.403/5.292 pct

EMBI+ Russia 188 basis points over

Rouble/dollar 29.6925

Rouble/euro 42.8100

The Moscow Times: $700M Shipyards Planned for Far East



29 December 2009

By Rachel Nielsen

Prime Minister Vladimir Putin on Monday announced plans for the state-run United Shipbuilding Corporation to build two major infrastructure projects with foreign partners, with investments of a combined $700 million.

He also said the government had created a $5 billion plan for the purchase of civilian ships and related technology in the Far East through 2020, a move that he said was crucial to ensuring the new ventures’ success.

“Above all, we’re talking about orders from our largest companies — Gazprom, Rosneft and Sovkomflot — as well as deliveries of fishing and other specialized ships,” Putin told a meeting of government and industry officials in Vladivostok, according to a transcript posted on the government web site.

He also oversaw the signing of six shipbuilding contracts, the government said in a separate statement.

The first infrastructure project, with Singapore’s Yantai Raffles Shipyard, will create a new shipyard to build drilling platforms in Chazhma Bay. The second is with South Korea’s Daewoo to construct a dry dock at the existing Zvezda factory in the nearby town of Bolshoi Kamen to make tankers, including for liquefied natural gas.

Both projects are in the Primorye region.

Vneshekonombank, the state development bank, said in a statement on its web site that it had opened a one-year credit line of up to 1 billion rubles ($33.7 million) to help finance initial work to build the shipyard.

Putin said 75 percent of the $700 million in financing would come from Russian sources, without giving a breakdown for the two projects.

Separately, Gazprom deputy chief Alexander Ananenkov said the company planned to spend $2 billion on four tankers from the shipyard project with Daewoo. The vessels would be for Gazprom’s Shtokman deposit in the Arctic, Ananenkov said, with a planned delivery date of 2015 or 2016.

Gazprom is also planning to order two supply ships for a combined 2 billion rubles, he said.

On Friday, First Deputy Prime Minister Viktor Zubkov, who is also Gazprom chairman, said the company might push back the launch of the Shtokman development, without giving a time frame. It is currently scheduled to go on line in 2013.

Vladimir Savov, head of research at Otkritie, commended the investments in the region, saying the Far East had been somewhat neglected. With the rapid economic growth in Asia, “Russia needs more presence there,” he said.

Vladivostok is the site of Russia’s second-largest infrastructure development project, after the 2014 Sochi Olympics. The city is preparing to host the Asia-Pacific Economic Cooperation forum in 2012.

Bloomberg: Gazprom, Norilsk, Transneft, Rosneft: Russian Equity Preview



By Denis Maternovsky

Dec. 29 (Bloomberg) -- The following companies may have unusual price changes in Russian trading. Stock symbols are in parentheses and share prices are from the previous close.

The 30-stock Micex Index added 0.3 percent to 1,361.58. The dollar-denominated RTS Index gained 0.1 percent to 1,451.60.

OAO Gazprom (GAZP RX): Russia’s natural gas export monopoly signed a contract to buy 4.25 billion cubic meters of Uzbek natural gas in 2010 at prices based on European market levels, raising the agreed volume of imports from the Central Asian country to 15.5 billion cubic meters. The shares fell 0.5 percent to 181.45 rubles.

OAO GMK Norilsk Nickel (GMKN RX): Copper rose to its highest level since September 2008 in New York, touching $3.3395 a pound, after China said its copper inventories tallied by the Shanghai Futures Exchange fell 7.7 percent and labor disputes threatened to disrupt supplies from South America. Russia’s largest producer of nickel and copper gained 1 percent to 4,205.33 rubles, its strongest closing level in three days.

OAO Transneft (TRNFP RX): Mol Nyrt., Hungary’s largest oil refiner, said Russia’s state oil pipeline operator may halt oil supplies to the Czech Republic, Hungary and Slovakia as of Jan. 1 because of conflict over transit fees with Ukraine. Russia and Ukraine are expecting to sign a long-term transit accord by the end of 2009, Russian Energy Ministry spokeswoman Irina Yesipova said. Preferred shares of Transneft rose 0.5 percent to 24,212.11 rubles in Moscow, a weekly high. OAO Rosneft (ROSN RX), the country’s biggest oil company, added 1.1 percent to 253.87 rubles.

To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@

Last Updated: December 28, 2009 22:00 EST

DECEMBER 29, 2009

Online.: Decade's Top-Performing Funds Focused on Russia



By IRA IOSEBASHVILI

MOSCOW -- The top-performing fund of the last decade, bringing investors returns of more than 15-fold in U.S. dollar terms, invested primarily in Russian equities, as did more than a third of the top-performing funds, according to data from fund tracker Morningstar.

A $10,000 investment in the Stockholm-based, $1.5 billion East Capital Ryssland fund at the start of the decade would be worth $155,553 on Dec. 21, according to the data.

Other Russia-focused funds provided similarly impressive results: The same $10,000 invested in Uralsib's Fund First would be worth $113,400 today, while HQ Rysslandsfond, also from East Capital, would be worth $97,390.

In all, seven of the last decade's top 20 funds in terms of performance invested in Russian equities. Of these, six outperformed Russia's RTS index, which jumped 829% over the decade.

Most of the funds aren't domiciled in Russia, so they are open to non-Russian investors.

To get those returns, however, investors had to stomach an unusually bumpy ride. In the third quarter of 2009, Russia emerged from its first recession in a decade, during which RTS plummetted 80% from its high as oil prices tumbled and bank lending ground to a halt. Although this year's oil-fueled recovery has been lopsided, with key sectors like manufacturing and construction slow to revive, equities have soared, pushing the RTS up 277% from its February low. For all of 2009, the index is up 130%.

"Russia's stock market has been in the top five or the bottom five performers every year since 2000," said Roland Nash, chief strategist at Renaissance Capital. "As long as Russia's economy remains oil dependent, we can expect to see this kind of boom and bust cycle."

Next year promises to be somewhat more cheerful on the economic front. The economy is expected to grow by as much as 5% after an 8.5% contraction in 2009. A resurgent ruble is making a strong case for the country's economy to foreign investors, even as it hurts domestic exporters.

Investors and analysts hope to see the government make good on promises of refocusing spending on spending and other initiatives to drive reforms and economic diversification. Last week, Finance Minister Alexei Kudrin gave those hopes a lift when he said that Russia should look abroad for brains and technology if it hopes to ever have a well-rounded economy.

"At the moment, Russia is still under-owned and undervalued in relation with its peers," said Chris Weafer, chief strategist with Uralsib. "Investors panic-sold in the fourth quarter of 2008 and are only now slowly returning."

Write to Ira Iosebashvili at i ra.losebashvili@

RBC: Russian Railways subsidiaries to place shares



      RBC, 29.12.2009, Moscow 12:32:50.Russian Railways' chief Vladimir Yakunin announced today that up to 25 percent of Transcontainer's shares were likely to be offered during an IPO and up to 25 percent of Freight One shares to be sold as part of a private placement. Yakunin explained that Russian Railways' subsidiary Freight One was quite a new company on the market, and, therefore, only 25 percent of its shares would be placed, adding that potential investors had expressed interest in the stake.

      According to preliminary assessments, Freight One was worth less than $5bn at the time of its creation in August 2007.

DECEMBER 29, 2009, 3:18 A.M. ET

Online.: Rusal IPO Draws Initial Investors



By NISHA GOPALAN

HONG KONG—Four cornerstone investors agreed to buy into Russian aluminum giant UC Rusal's US$2 billion Hong Kong initial public offering, two people familiar with the deal said Tuesday.

The four are Malaysian-Chinese tycoon Robert Kuok, a member of the Kuok Group whose principle business is Hong Kong-listed Kerry Properties Ltd.; blue-blood hedge fund manager Nathaniel Rothschild through NR Investments; Paulson & Co., the hedge fund run by John Paulson; and Russian state development bank Vneshekonombank, or VEB.

VEB provided Rusal with a $4.5 billion bailout loan in 2008 and has said it plans to buy up to 3% of the IPO.

Rusal plans to raise about US$2 billion from selling around a 10% stake through the IPO, with the company set for a primary listing in Hong Kong and a secondary listing in Paris on Jan. 29.

Pre-marketing of the deal will begin Jan. 4, and the road show, which will begin in Hong Kong before proceeding to Singapore, the U.K., continental Europe and the U.S., will start on Jan. 12, one person said.

Bank of China International, BNP Paribas SA, Bank of America Merrill Lynch and Credit Suisse Group are bookrunners on the deal.

Write to Nisha Gopalan at nisha.gopalan@

RIA: China intends to invest $300 mln in RusAl



11:3929/12/2009

China Investment Corporation is considering the purchase of shares in Russia's aluminum giant RusAl worth $300 million, the Zhongguo Wang news service said on Tuesday.

Hong Kong Securities and Futures Commission allowed in December RusAl's $2.5 billion initial public offering to be held on the Asian trading floor on condition that the world's largest aluminum producer would not sell its shares to individual investors. Earlier, RusAl's IPO was allowed by the Hong Kong Stock Exchange.

RusAl, which accounts for 11% of global aluminum and 13% of alumina production, earlier announced plans to sell about 10% of its shares on the Hong Kong and Paris-based Euronext stock exchanges at the end of 2009.

Bloomberg said on Tuesday Nathaniel Rothschild's private investment company might also buy shares in Rusal's Hong Kong IPO.

BEIJING, December 29 (RIA Novosti)

China Knowledge: CIC may invest in RUSAL's HK IPO: report



Dec. 29, 2009 (China Knowledge) - China Investment Corp, the country's US$300-billion sovereign wealth fund, is likely to invest in United Company RUSAL, the world's largest aluminum producer, when the Russian firm launches an initial public offering on the Hong Kong Stock Exchange, said industry sources, local newspaper Vedomosti Daily reported.

The report said that U.S.-based fund BlackRock also plans to take part in RUSAL's Hong Kong IPO.

RUSAL has set a price range for the IPO of between US$13.7 and US$18.9 billion, according to the newspaper.

The Russian aluminium giant plans to start pre-marketing its IPO on Jan. 5 and a road show on Jan. 11, said the sources, adding that the issue price will be finalized around Jan. 21.

In mid-December, RUSAL received approval from the Securities and Futures Commission of Hong Kong to launch the IPO, but is not allowed to sell shares to individual investors.

Bloomberg: Rusal May Be Worth $26.7 Billion, Post 2009 Profit, Banks Say



By Bei Hu

Dec. 29 (Bloomberg) -- United Co. Rusal, aiming to become the first Russian company to go public in Hong Kong, may be worth as much as $26.7 billion and will swing to an annual profit in 2009, according to banks arranging the share sale.

Bank of China International Holdings Ltd., one of the arrangers of the $2 billion initial public offering, values the world’s largest aluminum producer at $21.1 billion to $26.7 billion. Liberum Capital Ltd., another bank involved in the sale, estimated the Moscow-based company controlled by billionaire Oleg Deripaska to be worth $20 billion to $26 billion.

Rusal is selling shares in Hong Kong to help repay $17 billion of debt. The IPO, now scheduled to begin marketing in January, has been delayed as regulators in Hong Kong sought more information on its debt restructuring. Rusal, which booked $5.95 billion of losses in 2008, may post a full-year profit of $505 million this year, BOCI said in its report.

“We anticipate UC Rusal’s earnings will turn around in 2009” following a recovery in global aluminum prices, higher cost efficiencies and successful debt restructuring, said BOCI analysts Belle Chan and Le Yukun in the report. They estimate Rusal’s profit to double to $1.04 billion in 2010. The company last had a profit in 2007.

BOCI’s valuation for the company is based on one times Rusal’s net asset value.

Liberum’s valuation prices Rusal at 14.1 times to 18.3 times 2010 estimated earnings per share, said its report.

‘Competitive Advantage’

Rusal deserves a valuation between those commanded by Aluminum Corp. of China Ltd., the nation’s largest maker of the metal, which is trading at 25 times next year’s estimated earnings, and Western peers, Liberum said.

Macquarie Group Ltd. gave Rusal a value of $21.3 billion to $25.9 billion. Renaissance Capital Ltd. in London values the Russian company at $20.4 billion to $24.4 billion, or 20 times to 24 times its estimated earnings in 2010.

Hong Kong Exchanges & Clearing Ltd., operator of Asia’s third-largest stock market, has been wooing international companies to list amid competition with peers and as the flow of mainland Chinese state-owned industry leaders and private-sector firms is thinning.

“UC Rusal’s low cost gives it a competitive advantage in overseas market expansion,” BOCI said in its report. “The company has increased its negligible 2008 sales in China to 5 percent of the company’s revenue in 2009.”

BNP Paribas SA, Bank of America Merrill Lynch, Credit Suisse Group AG and Russia’s VTB Bank OJSC are among banks arranging the share sale.

To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@

Last Updated: December 28, 2009 21:34 EST

Bloomberg: Billionaire Kuok, Rothschild Are Said to Buy Into Rusal IPO



By Simon Casey, Bei Hu and Maria Kolesnikova

Dec. 29 (Bloomberg) -- Companies controlled by Malaysian billionaire Robert Kuok, and Nathaniel Rothschild may buy shares in United Co. Rusal’s $2 billion Hong Kong initial public offering, said three people familiar with the plan.

Paulson & Co., the New York hedge fund run by billionaire John Paulson, and the Russian state-owned development bank Vnesheconombank also may be among so-called “cornerstone” investors guaranteed stocks in an IPO in exchange for a pledge not to sell them for a number of months, said the people. They declined to be identified because the information is private.

Kuok and companies in the Kuok Group he founded may invest in Rusal as cornerstones, the people said. Agnes Au, a spokeswoman in Hong Kong for Kerry Properties Ltd., the listed real estate unit of the Kuok Group, said she had no information on the proposed investment, and the group doesn’t have a media spokesperson.

“It certainly helps when investors of that sort of caliber express interest,” said Kenny Tang, an analyst at Redford Securities Co. in Hong Kong. “It’ll be great for Rusal’s IPO if these investors can convince other investors that they’re in it for the long run and not just looking for a quick profit.”

Billionaire Oleg Deripaska is trying to secure investors for the IPO, which will make Rusal, the world’s largest aluminum producer, the first Russian company to list in Hong Kong. Vnesheconombank may buy as much as a 3 percent stake, while other state-run lenders also may buy Rusal shares.

BlackRock Inc., the world’s largest asset manager, has expressed interest in buying shares in the offering, though it wouldn’t invest as a cornerstone, one of the people said.

Hong Kong Exchanges & Clearing Ltd. and the city’s Securities and Futures Commission said Rusal will be excluded from offering stock to retail investors when it approved the company’s IPO application earlier this month.

Valuation

Rusal’s board approved a price that valued the company at $16 billion to $22 billion, the people said, declining to give a per-share price.

The company is worth $21.1 billion to $26.7 billion, Bank of China International Holdings Ltd., one of the IPO’s arrangers, said in a report. Rusal, which booked $5.95 billion of losses in 2008, may post a full-year profit of $505 million this year, BOCI said.

The Hong Kong exchange’s listing committee withheld approval for Rusal’s IPO application twice as it sought more information, including details of a debt restructuring. Earlier this month, Rusal signed a $17 billion accord with creditors in Russia’s largest corporate debt restructuring.

“On the other hand, it could be that they’re only attracted to the IPO because of the potentially lower price after all the negative publicity recently,” said Tang.

Deripaska’s Friend

Rusal plans to start gauging demand for the sale on Jan. 4 and begin an investor roadshow on Jan. 12, one of the people said. The company declined to comment on possible investor interest in the IPO in an e-mail.

Rothschild may invest in the Rusal IPO through his private investment company, the people said.

Rothschild, 38, a Rothschild banking family member and co- chairman of New York hedge fund firm Atticus Capital LP, is a friend and an adviser to Deripaska.

Rothschild and Deripaska became front-page news in the U.K. last year when Rothschild wrote in a letter to the London-based Times newspaper that George Osborne, finance spokesman for Britain’s Conservative opposition, sought a donation for his party from Deripaska. Osborne subsequently gave up fund-raising for the party.

Rusal has said it plans to sell a 10 percent stake to help repay its debt. The share offering will be led by Zurich-based Credit Suisse Group AG and BNP Paribas SA of Paris, with banks including BOC International Holdings Ltd. and VTB Group helping manage the sale.

Commodity Collapse

Vnesheconombank, also known as VEB, may buy as much as 3 percent of Rusal in the share sale, Russian Finance Minister Alexei Kudrin, who also sits on VEB’s supervisory board, said last month. Russia’s two biggest banks, OAO Sberbank and VTB, both state-controlled, will buy shares in the IPO alongside state-run VEB, RIA Novosti reported this month, citing Russian President Dmitry Medvedev’s chief economic aide Arkady Dvorkovich.

The company’s borrowings almost doubled last year after Rusal bought 25 percent of Moscow-based OAO GMK Norilsk Nickel, Russia’s biggest mining company, for $7 billion in cash and a 14 percent Rusal stake. Commodity prices subsequently collapsed, with aluminum tumbling 36 percent in 2008 on the London Metal Exchange.

Rusal had a net loss of $6 billion last year, Vedomosti reported in October. The company was forced to take a $4.5 billion loan from VEB in October 2008, the biggest state-led bailout of any Russian company. Rusal has cut the debt to $14.9 billion from about $17 billion following a restructuring agreement with billionaire Mikhail Prokhorov’s Onexim Group.

Paulson & Co. spokesman Armel Leslie declined to comment.

To contact the reporters on this story: Maria Kolesnikova in Moscow at mkolesnikova@; Bei Hu in Hong Kong at bhu5@

Last Updated: December 29, 2009 00:20 EST

RTT: FFMS Authorizes Addl. Number Of Polymetal's Shares To Be Traded Outside Of Russian Federation - Quick Facts



12/29/2009 3:16 AM ET

(RTTNews) - JSC Polymetal (PMTL.L: News ) said that the Federal Financial Markets Service of Russia or "FFMS" has authorized 20.09 million company's ordinary registered uncertificated shares to be placed and/or traded outside of the Russian Federation in addition to 79.75 million company's ordinary registered uncertificated shares which placement and/or trade outside of the Russian Federation were already authorized by FFMS in 2007.

Hence, the total numbers of shares authorized to be placed and/or traded outside of the Russian Federation make up 25% of all Polymetal's issued shares.

Click here to receive FREE breaking news email alerts for JSC Polymetal and others in your portfolio

by RTT Staff Writer

Interfax: Chelyabinsk Zinc posts profit in 9M



MOSCOW. Dec 29 (Interfax) - Chelyabinsk Zinc Plant (RTS: CHZN) closed the nine months ended September 30 with net profit of 268 million rubles, compared with losses of 1.1 billion rubles in the same period of last year, Russia's biggest zinc producer said in a statement.

Bloomberg: Russian Blitz on Bootlegged Vodka May Be Boon for Synergy Sales



By Andrew Cleary and Maria Ermakova

Dec. 29 (Bloomberg) -- Russian president Dmitry Medvedev’s crackdown on illegally produced vodka may help the country’s two biggest distillers, OAO Synergy and Russian Alcohol Group, sell more of their most popular brands.

Medvedev is fighting the world’s highest per-capita alcohol consumption by targeting the production and availability of bootlegged vodka and imposing minimum prices on store shelves. The measures will probably nudge more drinkers toward the mid- priced vodkas produced by Synergy and closely held Russian Alcohol Group, according to analysts.

“The whole push is about reducing alcohol consumption, but it could spur a flight to quality brands that will benefit these local distillers,” said Simon Hales, an analyst at Evolution Securities Ltd. in London. “If people suddenly can’t buy the illegal stuff for half the price, they’ll naturally trade up.”

The President has his work cut out for him -- the black market accounts for about half the country’s 2.4 billion liters of annual vodka consumption. His reforms may help the value of Russia’s vodka market rise 13 percent to 549.3 billion rubles ($18.5 billion) in 2010, while sales of illegal brands will probably fall 26 percent to 101.3 billion rubles, investment bank Renaissance Capital estimates.

Price Controls

The government has set a minimum retail price of 89 rubles per half-liter bottle of vodka starting Jan. 1, almost double the average price of illegal brands, which can be readily bought in stores. Russian Alcohol’s Yamskaya costs 100 rubles for the same-sized bottle, while Synergy’s Belenkaya sells for about 135 rubles.

“The minimum price is one of the set of measures that should help get rid of illegal vodka on store shelves,” said Alexander Korovka, spokesman for Russian Alcohol, co-owned by Poland’s Central European Distribution Corp. and Lion Capital LLP. “People won’t want to drink unknown products. The demand for mid-level brands will rise.”

Medvedev is trying to succeed where former Soviet leader Mikhail Gorbachev could not. Gorbachev in May 1985 introduced a partial prohibition of alcohol in the country to curb abuse, raising prices and restricting sales by time and location. While official consumption dropped, the measures backfired as black- market production filled the void left by legitimate channels.

Gorbachev’s Crackdown

“Gorbachev’s anti-alcohol campaign in the 1980s was the last serious crackdown on the industry,” said Victor Dima, an analyst at Otkritie brokerage in Moscow. “Bottles disappeared from store shelves, vineyards were getting destroyed, and as a result, people started making and drinking surrogates.”

More than 23,000 people die annually from alcohol poisoning in Russia, with 75,000 dying from “excessive drinking,” according to the country’s Alcohol Market Regulation Federal Service. While some distillers sell vodka on the black market to avoid paying excise, more unscrupulous producers sell liquor laced with anything from anti-freeze to lighter fuel and cheap perfume.

The government aims to cut pure alcohol consumption to as low as 5 liters per person a year by 2020 from 18 liters now.

Russian prosecutors confiscated about 1 million vodka bottles and are investigating two distillers in the republic of North Osetia-Alania, the Interior Ministry’s Investigative Committee press service said in an e-mailed statement. The two vodka makers have been illegally selling part of the liquor they produce to avoid paying excise taxes, the ministry said.

‘Big Winners’

If Medvedev’s reforms succeed in limiting the reach of the bootleggers, Russian Alcohol’s market-leading Yamskaya brand and Synergy’s Belenkaya, which dominate the mid-priced category, will be the first to benefit, according to analysts. Synergy’s revenue may rise 24 percent next year to 23.5 billion rubles, almost twice the pace of this year’s forecasted growth, estimates Renaissance, which recommends buying the stock.

“Vodkas in this category were already the fastest growing in Russia, and this is likely to further boost growth,” said Trevor Stirling, an analyst at Sanford C. Bernstein in London. The “big winners” will be Synergy and CEDC, which also sells the Parliament vodka brand through its local unit, he added.

CEDC’s market value on Nasdaq has risen 44 percent this year to $1.9 billion. Synergy’s shares more than quadrupled in the period to give it a value of almost 11 billion rubles.

Minimum vodka pricing may also accelerate a switch by Russian consumers to beer from cheap spirits, according to Evolution’s Hales. That would benefit brewers including Carlsberg A/S and Anheuser-Busch InBev NV, whose volumes have plunged in Russia this year and face a tripled excise tax starting Jan. 1.

Beer Benefit

“Widening the price difference between vodka and beer will certainly be a benefit to a beer industry already under pressure,” said Hales. The government’s coffers will also benefit from the switch to beer or legitimate vodka brands as “consumers enter the taxable market,” he added.

“The government’s step is right and we fully support it,” Alexander Mechetin, chief executive officer of Synergy, said in an interview. “Russia’s legal vodka market has fallen 15 percent this year. Next year, with the help of this minimum price and other measures, the market should rise.”

The probable boost to sales at Synergy and its rival may “provide extra funds which they could invest in marketing some of their brands abroad,” said Natalia Smirnova, an analyst at UniCredit SpA in Moscow. Synergy in September began exporting its premium Beluga brand to the U.S. and some countries in the Middle East. The distiller expects Beluga’s U.S. sales to exceed Russian revenue in five years, Mechetin said in 2008.

Overseas Expansion

Selling abroad is more profitable, said Russian Alcohol’s Korovka, adding that Russian Alcohol plans to enter the U.S. next year and aims to sell in Latin America. A bottle of the company’s more expensive Green Mark brand, which sells for 140 rubles in Moscow, retails for the sterling equivalent of 496 rubles in U.K. liquor stores.

According to Synergy’s Mechetin, the announced measures “won’t be enough” to tackle the scale of bootlegged production. Changes to excise tax policy and regulating licenses for vodka transportation, which are under consideration by the government, are also required, he added.

“I’m very skeptical about how effective a campaign this can be when it is against what is almost a national pastime,” said Walter Connor, a post-Soviet politics expert at Boston University. “An awful lot of people will pay whatever the price is or turn to home distilling. Changing a culture without the majority of people on your side is a very long haul.”

To contact the reporter on this story: Andrew Cleary in London at acleary7@. Maria Ermakova in Moscow at mermakova@

Bloomberg: Sollers Opens Auto-Assembly Plant in Russian Far East (Update1)



By Anna Shiryaevskaya

Dec. 29 (Bloomberg) -- OAO Sollers, a Russian automaker, opened a plant in Vladivostok in the nation’s far east that will assemble Ssangyong Motor Co. sport-utility vehicles and Isuzu Motors Ltd. trucks.

The plant, eventually to have estimated investments of 5 billion rubles ($168 million), will produce at least 15,000 vehicles a year starting from 2010, according to the Russian government.

Sollers is moving car assembly from the European part of Russia to the Far East. The new plant will initially produce Ssangyong and UAZ-model SUVs, adding assembly of Isuzu trucks and Fiat SpA Ducato cars next year. Sollers plans to begin full- cycle car production at the facility in 2012, expanding capacity to 40,000 vehicles.

To contact the reporter on this story: Anna Shiryaevskaya in Moscow at ashiryaevska@

Last Updated: December 28, 2009 22:44 EST

The Mosc ow Times: Moscow Hikes Rent for McDonald’s



29 December 2009

Vedomosti

McDonald’s will have to start paying an annual 1,200 rubles ($40) per square meter, instead of 1 ruble, for properties on the Arbat and Bolshoi Nikolopeskovsky Pereulok after a court canceled its long-term contract with the city.

The Moscow Arbitration Court approved a suit brought by the city forcing the restaurant chain to increase its rent, an official in the city property department told Vedomosti.

In July 2009, the department filed two suits against Moskva-Makdonalds seeking to overturn the rental rates for a 1,577-square-meter restaurant on the Arbat and a 859-square-meter training center on Bolshoi Nikolopeskovsky Pereulok. The city approved the rental rates for 49 years in 1992, when it was still the controlling shareholder in the joint venture with McDonald’s.

In 1996, McDonald’s Restaurants of Canada purchased 31 percent of the joint venture, and in 2005, it bought the remaining 20 percent to become its single shareholder. For most of the company’s properties rented from the city, the rates were gradually increased, but the rate of 1 ruble per square meter was kept for these two buildings.

Starting in 2010, McDonald’s will have to pay the new rate, which is the minimum rent for municipal property in Moscow, the City Hall official said. McDonald’s will likely appeal, forcing the city to continue in court, he added.

A spokesperson for McDonald’s in Russia declined comment, saying the company had not seen the decision.

The property department has been in court with the company since 2007. Two lower courts had ruled against the department, which had been seeking to raise the rate to 18,883 rubles annually, before the latest decision increased it to the city minimum.

Activity in the Oil and Gas sector (including regulatory)

Interfax: Crude oil is bigger earner for Russia than petroleum – Putin



VLADIVOSTOK. Dec 29 (Interfax) - Crude oil exports are bringing larger profits than exports of petroleum products, Russian Prime Minister Vladimir Putin told journalists in Vladivostok on Tuesday.

"We need to build and create what is profitable. Oil sales are bringing greater profits today," he said.

Projects aimed at building new refineries should be fine-tuned, Putin added.

Crude oil is now sold at a higher price than petroleum products, the manufacturing of which entails certain costs, the prime minister said.

"These are distorted economic realities," he added.

However, as far as strategies are concerned, there is a need to build new refineries in Russian territory, Putin said.

"But today this strategy runs into conflict with economic logic. We need to analyze and to give preliminary assessments of what we should build, where and whom all this can be sold to," the prime minister said.

This analysis should precede all decisions regarding the construction of new such facilities, including the Primorye refinery on the coast of the Pacific Ocean, he said.

Bloomberg: Russia Vows Steady Crude Exports Amid Ukraine Talks (Update2)



By Anna Shiryaevskaya and Stephen Bierman

Dec. 29 (Bloomberg) -- Russia pledged to maintain oil exports to three European countries as Prime Minister Vladimir Putin said Ukraine was abusing its position as a transit country almost a year after a dispute cut natural gas supplies.

“We have a contract and hope it will be implemented,” Putin said today in Vladivostok, Russia.

Russia will continue oil exports even if no agreement on changes in oil transits accords is reached with Ukraine by Jan. 1, Deputy Prime Minister Igor Sechin said in Vladivostok.

Ukraine wants to increase the transit fees on the Druzhba and Odessa-Brody pipelines 15 percent to 20 percent and move to a “pump or pay” accord, Bohdan Sokolovskyi, an aide to Ukraine President Viktor Yushchenko, said yesterday. Russia notified the European Commission, and countries fed by Druzhba including Slovakia, Hungary and the Czech Republic of the talks under an early warning mechanism, the Energy Ministry said yesterday.

At least 20 European countries suffered disruption of Russian gas imports in January as the world’s largest producer of the fuel cut supplies to Ukraine during a payment dispute. Russian oil exports to Europe were interrupted in January 2007 when Belarus sought to tax transits.

Transit States

“The problem is that transit states abuse their position in an attempt to reach exclusive terms for prices for their domestic consumption,” Putin said.

The EU yesterday called on Russia and Ukraine, a major transit nation for oil and gas bound for Europe, “to ensure uninterrupted oil supply.”

Sechin said Ukraine is also seeking to reduce the notification period for any volume reduction to 30 days. Russia is proposing 60 days, he said. “There won’t be any problem with crude shipments,” Sechin said.

“It is neither in Ukraine or Russia’s interest to have a repeat of last January’s energy dispute,” Chris Weafer, chief strategist at UralSib Financial Corp., said in an e-mail today. Ukraine needs financing from the International Monetary Fund, while Russia is trying to improve its investment credentials, he said.

To contact the reporter on this story: Anna Shiryaevskaya in Vladivostok at ashiryaevska@; Stephen Bierman in Moscow sbierman1@.

Last Updated: December 29, 2009 04:20 EST

Reuters: Russia Jan domestic oil prices fall 14 pct m/m-trade



Mon Dec 28, 2009 3:17pm GMT

MOSCOW, Dec 28 (Reuters) - Russian domestic oil prices for

January delivery fell by more than 1,000 roubles from December

to 6,600-6,900 roubles ($224.3-$234.5) per tonne at West

Siberian metering points, traders said.

Local crude prices went down despite favourable dynamics on

the international market and a lower Russian oil export duty for

January, as oil supply next month will probably outweigh demand

amid lower exports, industry sources said.

Russian oil exports in the first quarter 2010 may fall

compared to October-December 2009, the quarterly export plan

showed.[ID:nLDE5BF1NY]

The export netback for Russia's main export Urals blend in

northwest Europe URL-NWE-E for loading ex-Primorsk during the

trading period was estimated at between 6,800 and 7,800 roubles

per tonne.

For Russian domestic crude prices click

Industry sources said Surgutneftegaz (SNGS.MM: Quote, Profile, Research) will deliver

over 875,000 tonnes of crude locally in January, up by 375,000

tonnes from December.

TNK-BP (TNBPI.RTS: Quote, Profile, Research) will ship 550,000 tonnes of crude

locally, Lukoil (LKOH.MM: Quote, Profile, Research) - 230,000 tonnes, Shell (RDSa.L: Quote, Profile, Research) -

some 150,000 tonnes, traders said.

Russian domestic spot crude prices (roubles per tonne):

Price basis Jan Dec Nov

Komi Region 6,570-6,700 7,600-7,850 7,900-8,100

Almetievsk 6,700-6,900 7,800-8,050 8,100-8,300

Moscow Refinery 7,250-7,500 8,350-8,650 8,500-8,750

UFA Refineries 7,100-7,400 8,200-8,550 8,400-8,600

Western Siberia 6,600-6,900 7,700-8,050 7,900-8,200

The domestic crude oil trading session usually continues for

around a week and final prices may be revealed next week.

The domestic spot market is estimated at around 2.5 million

tonnes of crude, which is sold during the trading sessions every

month by small producers and major firms that lack refining

capacity, and is bought by independent refiners.

(Reporting by Ludmila Zaramenskikh, writing by Gleb

Gorodyankin, editing by Anthony Barker)

The Moscow Times: VTB Credit for TNK-BP



29 December 2009

TNK-BP may borrow as much as 26.8 billion rubles ($903 million) from VTB Group, the lender said Monday in an e-mailed statement.

The bank also said it would provide the oil venture with as much as $200 million for 18 months.

(Bloomberg)

RBC: Lukoil's VP boosts stake in company



      RBC, 29.12.2009, London 11:50:27.Lukoil's Vice President Leonid Fedun purchased 196,384 common shares of the company for a total of RUB 325.212m (approx. USD 10.99m), Russian oil giant announced in a statement today. The purchase took place on December 23, 2009.

      Meanwhile, Fedun and Lukoil's President Vagit Alekperov actively increased their stakes in the companies over the last few years, including during the peak of the global economic crisis.

Gazprom

Focus: Gazprom is working for EU’s energy security



[pic][pic][pic]29 December 2009 | 06:09 | FOCUS News Agency [pic][pic][pic]

Sofia. In an interview with the Trud daily, Gazprom Deputy CEO Alexander Medvedev commented that Gazprom was not only supplying gas for Bulgaria, but helping the state modernize its energy system by investing in gas distribution infrastructure. He expressed the company’s certainty that even though alternative energy sources are gaining popularity, in a long-term perspective oil and especially natural gas will continue meeting Europe’s increasing demands for energy resources. He declared that for more than 40 years the Russian blue fuel has been “the spine” of Europe’s energy security. In his words, during this time, Gazprom had proven itself a reliable partner in spite of complex political and economic conditions. He assured that for as long as Ukraine follows the responsibilities it assumed under long-term contracts and pays its debts there was not reason for the gas crisis from January 2009 to repeat. According to him, Gazprom and its European partners made a huge step forward in their aspiration to reduce transit risk and create new export routes in Europe by developing South Stream and Nord Stream. With its capacity of 55 cub.m. annually, Nord Stream is not a bilateral project between Russia and Germany, but a true trans-European gas pipeline, he commented. Regarding the alleged competition between South Stream and Nabucco, Medvedev explained that as in the future production in the frames of the EU would reduce and import will increase 300 billion cub.m. until 2030, both projects will have an important role.

Medvedev said that as any other energy giant, Gazprom also felt the effect of the global crisis. Even so, the RUB 761,53 billion investment programme approved by Gazprom Group for 2009 was above the average amount for the past three years.

Russia needs energy security as much as Bulgaria and Europe, Medvedev concluded. All preconditions for intensive co-operation with Bulgaria exist, he stated.

BerentsObserver: Zubkov: Shtokman will be postponed



2009-12-28

Start-up of the Shtokman development will be postponed says Russia’s First Deputy Prime Minister and Head of Gazprom’s Board of Directors Viktor Zubkov.

In a press conference last week Mr. Zubkov said that the start-up of the development of the huge Shtokman gas field in the Barents Sea will be postponed, RIA Novosti reports. He did not offer any reason for the delay, but stressed that the project would go ahead regardless:

- Shtokman is a promising project and there is no doubt that it will be realized.

According to Zubkov, the Board of Directors in Gazprom discusses the investment program for the Shtokman project practically every month. Investments in 2009 were cut from the planned 920 billion RUB to 761.5 billion RUB. The investments for 2010 are approved to 802 billion RUB. Zubkov underlines that gas prizes and gas consumption are constantly being analyzed by Gazprom.

The French stockholder in the project, Total, has on several occasions mentioned a possible delay in the project. Earlier this month Total's vice-president for exploration and production in Central Europe and Continental Asia Arnaud Breuillac said that a final investment decision on the Shtokman gas field is impossible before the end of 2010 due to problems with financing, as BarentsObserver reported.

The investment decision was originally planned to be taken during the first quarter of 2010.

Gazprom officials have also indicated the previous deadline could slip. The company's deputy chief executive Alexander Medvedev told reporters in September that Gazprom could delay Shtokman if gas demand in Europe doesn't recover fast enough.

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