Russia 090313 Basic Political Developments

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Trade Surplus Up To $9.4Bln
13 March 2009


Russia's trade surplus rose in January from the previous month as the weaker ruble eroded companies' demand for imported goods, the Central Bank said in a statement Thursday.

The surplus rose to $9.4 billion from $4.6 billion in December. Exports fell to $19.7 billion from $28.5 billion in December. Imports, which have become more expensive since the ruble lost 17 percent against the euro in December and a further 7 percent in January, tumbled to $10.3 billion from $23.9 billion, the bank said. The European Union is Russia's biggest trading partner.

The price of the Urals blend of crude averaged $43.88 a barrel in January, which was 9 percent more than the average price in December. Energy, including crude oil and natural gas, accounted for 69 percent of exports to the Baltics and countries outside the former Soviet Union, the Federal Customs Service, which uses a different methodology than the Central Bank, said in a statement on March 5. Machinery and other manufactured equipment comprised 44.3 percent of imports.

Russia's trade surplus in 2008 was 37 percent higher than the previous year at $179.8 billion. The average price of Urals last year was also 37 percent higher than in 2007 at $95.11 per barrel, according to Bloomberg data. The Central Bank expects a trade surplus this year of "several" tens of billions of dollars, first deputy Central Bank Chairman Alexei Ulyukayev said this month.

Remittances Fall 26%

Remittances from Russia to former Soviet republics fell 26 percent in the fourth quarter as wages and employment shrank during the country's worst economic crisis in a decade, the Central Bank said on its web site late Wednesday.

Funds sent to the Commonwealth of Independent States amounted to $3.17 billion, a decrease of $1.1 billion compared with the third quarter, the Central Bank said. Remittances to the CIS accounted for 92 percent of the total sent abroad from Russia last year. (Bloomberg)
PPI increases for the first time in five months

VTB Capital

March 13, 2009

Producer prices increased 2.9% MoM in February, the first rise since August last year when they increased 0.4% MoM. In YoY terms, the PPI continues to decline (minus 5.7% YoY). However the pace of producer price deflation moderated from January, when the PPI was down 1.8% MoM and 9.2% YoY.

The data reveal two major trends. First, prices remain high in the food and machinery & equipment industries. This is likely the combined effect of rouble depreciation, resilient demand for food and government support for the automotive sector.

The second trend is a substantial monthly increase in mining, refined products and coking coal and metals. We attribute this to exporters preferring to supply their products to the international markets rather than locally, partly due to the weaker rouble. This particularly applies to the steel sector, which is trying to benefit from the fact that it is temporarily more competitive (before foreign producers revise input prices in April).

Overall, the increase in the PPI might suggest a MoM rebound in industrial production in February. This is in line with the Manufacturing PMI survey and railways cargo turnover data published earlier this month. However, it is too early to say that we are on a strong recovery trend.

Russia update

Timothy Ash of Royal Bank of Scotland

March 13, 2009

Quite a few interesting developments today in Russia worthy of comment:

(-) The MOF posted budget data for January thru February. These showed a surplus of RUB116.3bn, or 0.2% of GDP, which compares with the full year target still to run a surplus of RUB1.9 trillion (3.7% of GDP). February's data was notable in that it showed a marked deterioration compared to January. One-off factors (perhaps disbursals from the fiscal reserve) had appeared to buoy revenues in January (+11.6% YOY) while spending growth was limited to 5.4% YOY. In February the marked deterioration evident in Q4 resumed with revenues down 29% and spending up by 47.7% YOY. Clearly if February's trend continued over the year, the deficit would extend towards the RUB3 trillion level or 7.5% of GDP warned at by the government. PM Putin today confirmed that various anti-crisis measures would amount to around RUB3 trillion, with funds drawn from the fiscal reserve to cover these sums.

(+/-) The CBR reported merchandise trade data for January (revisions to data previously reported). This showed a slight improvement from December, driven by a collapse in imports, as the domestic economy slowed and presumably as the rouble devaluation made imports less competitive. On a monthly basis the surplus thus increased to US$9.4bn, double the December outturn, but less than half the year earlier level. Exports by dollar value dropped 43% YOY, with imports contracting by 34.1% YOY. Assuming this trend sustains to year end would suggest a cut in the merchandise trade surplus to around US$90bn, i.e. lower by around US$110bn YOY, and likely still pushing the current account into deficit.

(+/-) The governor of the CBR, Sergei Ignatiev, has been on the wires "re-assuring" that the Russian authorities are in control of the exchange rate, following the early year maxi-devaluation of the rouble. Ignatiev indicated that the CBR is having little problem defending the current regime, and even hinted that the CBR would do nothing to stop the currency from appreciating. Ignatiev drew attention to the fact that the CBR had stemmed the loss in FX reserves (see below), and thought that estimates of capital flight (US$90bn annually for 2009) could well be revised down. Ignatiev also talked tough on interest rates, suggesting that given that inflation remained at around 13-14% it was difficult to see scope to trim official rates; the CBR's refinancing rate is currently 13%; this view was further support today by comments from PM Putin.

Encouragingly, Ignatiev argued against using capital controls to defend the exchange rate but tellingly indicated that he only hoped his colleagues in the CBR/government shared his view. A remarkable statement for a governor of a central bank and implying almost that he is not in control of the institution which he heads. Indeed, this latter defence was not very convincing, and there does now appear to be a concerted view emerging within government, and United Russia in parliament, that the use of capital controls would be one means to stem the loss in FX reserves. Perhaps Ignatiev's comments were in fact a plea to head off pressure for the imposition of such controls, which would obviously be very negative, and take Russia back years.

On the exchange rate front, the CBR is currently trying to hold the line, and appears to have stemmed capital flight. Our big concern now is the growth outlook. If the economy pushes deep into recession in 2009, with little prospect of a recovery in 2010 we think that elements within the government will begin to look for accessible levers to pull to kick-start the economy. An obvious one would be the exchange rate, and hence we still think there is a high probability of the basket being further devalued to year end, probably to around 50.

Thinking thru the capital controls story, the danger is that Russia follows Kazakhstan in forcing exporters to sell FX. In the short term this would likely bring an appreciation of the rouble against the basket, as FX availability increases. However, over the longer term it would likely just restrict the free flow of capital/FX, further undermining economic activity and sentiment, and actually accentuating capital flight. It might then just accentuate the eventual FX correction when it eventually comes; we would share with Ignatiev's less than enthusiastic stance on the benefits of capital controls at this point in time.

(+/-) Certainly, FX reserve loss has moderated since the CBR devalued the basket. Indeed, reserves fell only US$3.9bn in the week to March 6, and flat-lined in the month of February, after a loss of US$30bn a month over the previous 7 months.

(-) In a separate development note that President Putin has suggested that Russia will not hold Ukraine to the agreement reached in January to purchase contracted volumes of gas in 2009. This signifies a major warming in relations between the Putin and Tymoshenko camps. The Russian MOF has recently reconfirmed that it is in negotiations to provide a US$5bn loan to Ukraine to allow it to buy gas in H2 2009 for consumption in 2010. Presumably Moscow assumes that in exchange for providing such financing facilities and cutting Ukraine slack over the volumes of gas purchased, it can secure access to interesting strategic assets in Ukraine (e.g. VEB's recent purchase of Prominvestbank in Ukraine).

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