30 08 2011 Aton Oil or Nothing

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30 August 2011

EQUITY RESEARCH

For professional investors only. This document has not been prepared in accordance with legal requirements

designed to promote the independence of investment research. Please refer to important disclosures and

analyst certification at the end of this documentPETER WESTIN +7 (495) 213 03 41

[email protected]

ANDREW RISK +7 (495) 777 6677 (ext. 2641)

[email protected]

SERGEY KOLOKOLOV +7 (495) 777 6677 (ext. 2671)

[email protected]

STRATEGY AND ECONOMICS

Russias economy in barrels of oil. While official data may suggest that Russias oil

sector accounts for a rather small share of the economy, unless measured using tax

revenue, most macroeconomic indicators exhibit a very strong correlation with the

oil price. In light of Russias dependence on the latter we have evaluated certain

aspects ofthe countrys economy in terms of barrels of oil equivalent. We conclude

by outlining our revised economic forecast. On the back of a worsening global

economic outlook we now expect the Russian economy to grow 3.6% this year and

4.0% in 2012. Beyond 2012 we do not see expansion above Russias potential growth

rate (around 4%) with a growing budget deficit our main concern.

A barrel equivalent reading provides insight into the value of production growth.

While we acknowledge the limited value gained from assessing economic variables

such as GDP, fixed investment, retail sales and wages in terms of barrels of oil

equivalent, we nevertheless observed a telling trend: a healthy pace of growth across

each variable in barrels of oil equivalent in 2000-04 vs the years both before and

after that period. In 2000-04, the world oil price rose 100%, but more importantly

Russia expanded crude production by 50%. While the oil price has continued to rise,

output growth has almost totally stalled, hence giving some cause for concern.

Budget deficit the most worrying feature. Our barrel of oil equivalent approach

reveals an even more pronounced impact when we examine the budget. Looking

forward, using our oil analysts average price forecast of $102/bbl in 2011 and$89/bbl from 2012 implies a widening in the deficit in the coming years. Expressed as

a percentage of GDP, we estimate the deficit may expand from 0.7% in 2011 to 4.1%

in 2015. Alternatively, expressed in terms of barrels of oil, under these assumptions

the deficit rises from 128.6mn barrels in 2011 to 1.3bn barrels in 2015.

Downbeat forecast for oil production growth emphasises economic vulnerability.

One solution would be to produce and export more oil (which we acknowledge

would require growth in global oil demand in order to be oil-price supportive).

However, according to our oil teams assessment, Russias crude oil production

growth prospects for the forecast period are not encouraging. We estimate that

under our production growth forecast for 2011-13, around 3% of the deficit

(expressed in barrels of oil) would be covered, while for 2014-15 our projectionimplies that crude oil output growth would cover just 1.5% of the deficit.

A different approach is to set the expected deficit in barrels of oil equivalent against

expected aggregate oil production. Using the same oil price and output assumptions

outlined above, we calculate that this year the deficit in barrels of oil would be equal

to 3.5% of total oil production. For next year the deficit would jump to 11% and then

to over 20% in 2013 and more than 30% of total barrels of oil produced by 2015. Our

estimates suggest that Russia remains extraordinarily vulnerable to the oil price and

the lack of growth in oil output is aggravating the situation.

Oil or NothingMACROECONOMICSMacroeconomic variables and their

correlation* with the oil price

Oil price correlation with:Correlation

coefficient

Exports 0.97

Imports 0.91

Budget revenues 0.93

International reserves 0.91

Average wage 0.90

Average income 0.90Retail sales 0.89

*Correlation based on monthly data for Jan 2001

July 2011 (June 2011 for exports and imports)Source: Rosstat, Ministry of Finance, CBR

Budget deficit in bbls of oil as a

percentage of the total number of

barrels of crude oil produced

Source: Ministry of Finance, Bloomberg, Aton

estimates

Fiscal deficit coverage provided by

growth in oil production (%)

Source: Ministry of Finance, Bloomberg, Aton

estimates
mailto:andrew.risk%40aton.rumailto:sergey.kolokolov%40aton.rumailto:sergey.kolokolov%40aton.rumailto:andrew.risk%40aton.ru


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Oil or Nothing

With Russias economy so heavily dependent on oil, global crude prices remain the

most important variable for forecasting. In simple terms, if you get the oil price right,

you are likely to come pretty close to getting your economic forecast right, too.

Putting Oil in Context: The Contribution to GDP

Estimating the energy sectors proportion of GDP with accuracy is a tricky process.

Based on official data, mineral extraction, which is part of industrial production and

includes oil extraction, amounted to a mere 10% of GDP in 2010. However, this is

measured in terms of value added in domestic prices, which are lower than world

market prices. For example, crude oil is a very low value-added product.

Furthermore, looking solely at extraction does not capture the value created by the

refining of crude oil.

Moreover, the figure of 10% does not reveal the full extent of the oil and gas

contribution to GDP given that services to the energy industry comprise a significant

proportion of several other economic sectors (notably transportation and trading), a

fact that is not reflected in extraction figures. Estimates by the World Bank and the

OECD in studies aimed at including all areas linked to oil and gas put energy as a

share of GDP closer to 25%. Measured in terms of federal budget revenue collection,

the oil and gas sector accounts for about 45% of revenue.

We can derive a simple approximation of the oil sectors contribution to GDP by first

multiplying the annual number of barrels produced in Russia with the average oil

price to arrive at a theoretical value of the oil produced and sold. Why theoretical?

First, we do not capture the value added but rather the final price, while a share of

crude oil produced is sold for refining. Furthermore, oil is sold at a discount to the

world market price domestically, and the same is true for exports to the CIS.

Currently about one-quarter of crude oil produced is consumed domestically and just

over 10% of total crude oil exports go to the nations of the former Soviet Union.

Nevertheless, this likely underestimated value still amounts to around 20% of GDP.

Figure 1: Value of Russian oil production at world market price as share of GDP

Source: Info TEK, Rosstat, Bloomberg, Aton estimates

Still, although according to official data the oil sector seems to account for a rather

small share of the economy (unless measured using tax revenue), most

macroeconomic indicators show a very strong correlation with the oil price.

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Figure 2: Macroeconomic variables and their correlation* to the oil price

Oil price correlation to: Correlation coefficient

Exports 0.97

Imports 0.91

Budget revenues 0.93

International reserves 0.91

Average wage 0.90

Average income 0.90

Retail sales 0.89

*Correlation is based on monthly data for Jan 2001 July 2011 (June 2011 for exports and imports)

Source: Rosstat, Ministry of Finance, CBR

While it may not be surprising that exports are strongly correlated to the oil price,

given that oil and oil products account for 50% of exports (or 65% if we include

exports of natural gas), we see that imports are also highly correlated with the oil

price. We believe this is related to the strong correlation between the oil price and

domestic demand-related indicators, such as wages, income and retail sales. In other

words, this correlation is a product of oil revenues reaching the country and then

trickling down into the economy, and in turn supporting domestic consumption andhence demand for imports. The strong correlation between budget revenues and the

oil price is also not surprising given the high tax burden placed on the oil industry.

Russias Economy in Barrels of Oil

In light of Russias dependence on the oil price we have evaluated certain aspects of

its economy in terms of barrels of oil equivalent. Admittedly, this exercise is of

limited usefulness, especially when measuring indicators such as GDP and fixed

investment in terms of barrels of oil equivalent. Additionally, it does not solve the

biggest issue in forecasting economic development that is, it does not provide a

tool for predicting the oil price.

At the same time, we believe this approach offers an insight into the Russian budget,

in particular highlighting the need for creating incentives for the oil industry to invest

in generating production growth.

For the most part, therefore, we view this method as simply a different way of

looking at things and hope our clients find it enlightening, something which is

perhaps rare in the current market environment.

Measuring the economy in terms of number of barrels of oil (here we used the

average oil price expressed in roubles) shows that based on our 2011 nominal GDP

estimate of RUB52.7trn and our 2011 average oil price forecast of $102/bbl, Russias

economy is worth 17.8bn barrels of oil. This is well below the peak of 22.5bn barrelsin 1998. While GDP at that time stood at RUB2.6trn, the average oil price was a mere

$12/bbl.


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Real GDP is calculated by adjusting nominal GDP by inflation, or the GDP deflator,

which in simple terms is a combination of growth in consumer and producer prices.

When we divide nominal GDP with the average oil price we get real GDP adjusted for

the change in the oil price, i.e. an alternative measure of real GDP, or what we callthe barrel equivalent of real GDP.

Plotting the change in real GDP as well as GDP adjusted for oil price inflation since

1995 (based at 100) shows that since that time, real GDP (using the GDP deflator) has

advanced 80% (2011 estimate). Real GDP, adjusted for the oil price, is actually down

4% compared to the 1995 level. While at first this may seem a product of the rise in

oil prices since 1999, a closer examination reveals that the sharp drop in the oil price

in 1998, followed by a sharp rise in 1999 and 2000, largely explains the

underperformance of the barrel equivalent real GDP. In fact, rebasing both real GDP

and GDP adjusted for the oil price to 1999 shows a very similar path for both

variables (Figure 7).

Figure 6: Growth in GDP: real vs real bbl equivalent, 1995-

2011E (1995=100)

Figure 7: Growth in GDP: real vs real bbl equivalent, 1999-2011E

(1995=100)

Source: Rosstat, Bloomberg, Aton estimates

We also recalculated fixed investment, retail sales, personal income and wages in

terms of barrels of oil. In Figures 8 to 11, we set growth in real terms for these

indicators against growth in the barrel equivalent. While one could question the

value of this exercise, the charts reveal very healthy growth rates in all variables (as

well as GDP, as shown above) in barrels of oil equivalent in 2000-04 compared to the

years before and after that period. In 2000-04, Russia expanded crude production by

50% and the world market oil price rose 100%. While the oil price has continued to

rise, output growth has almost totally stalled, which raises concerns. The impact iseven more pronounced when examining the budget in terms of barrels of oil, which

is discussed in more detail in the following pages.

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Figure 3: GDP, 1995-2012E (in bn bbls) Figure 4: GDP, 1995-2012E (RUBbn) Figure 5: Oil price ($/bbl, Urals Med)

Source: Bloomberg, Rosstat, Aton estimates

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Figure 8: Growth in fixed investment: real vs bbl equivalent,

1995-2011E (1995=100)

Figure 9: Growth in retail sales: real vs bbl equivalent, 1995-2011E

(1995=100)


Figure 10: Growth in per capita income: real vs bbl equivalent,

1995-2011E (1995=100)

Figure 11: Growth in real wage: real vs bbl equivalent, 1995-

2011E (1995=100)


When it comes to the budget, translating values into barrels of oil becomes more

interesting in our view. In Figure 12 we plotted federal fiscal revenues and

expenditures in barrels of oil, while Figure 13 shows the resulting balance expressed

in barrels of oil. We have included our budget forecast to 2015 using a flat oil price

forecast of $89/bbl from 2012 onwards, as provided by Atons oil team.

Figure 12: Budget revenue and expenditures in bbls of oil Figure 13: Federal budget balance in bbls of oil (mn barrels)

Source: Ministry of Finance, Bloomberg, Aton estimates

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Thus, using our oil analysts forecast of an average oil price of $102/bbl in 2011 and

$89/bbl from 2012 implies a widening of the deficit in the coming years. Expressed as

a percentage of GDP, the deficit could expand from 0.7% in 2011 to 4.1% in 2015.

Alternatively, expressed in terms of barrels of oil, under these assumptions the

deficit could rise from 128.6mn barrels in 2011 to 1.3bn barrels in 2015.

In theory, the deficit could be reduced by producing and exporting more oil (which

we acknowledge would also require growth in global oil demand in order to be oil-

price supportive). However, according to our oil teams assessment, Russias crude oil

production growth prospects for our forecast period are not encouraging.

We estimate that the production growth in our forecast for 2011-13 would cover

around 3% of the deficit expressed in barrels of oil, while for 2014-15 our projection

implies that growth in crude oil output would cover just 1.5% of the deficit.

A different approach is to set the expected deficit in barrels of oil equivalent against

expected aggregate oil production. Using the same oil price and output assumptions

outlined above, we calculate that this year the deficit in barrels of oil would be equal

to 3.5% of total oil production. For next year the deficit would jump to 11% and then

to over 20% in 2013 and more than 30% of total barrels of oil produced by 2015.

Figure 14: Level of coverage of fiscal deficit provided by growth

in oil production (%)

Figure 15: Budget deficit in bbls of oil as a percentage of the total

number of barrels of crude oil produced


Both the budget and the current account have become more dependent on oil inrecent years. For example the oil price at which the budget balances in 2011 is

$110/bbl, on our numbers, and $107/bbl for 2012. Also, as shown in Figure 16, the

non-oil fiscal deficit, derived by excluding federal revenues related to crude oil and

oil products, could amount to 11% of GDP this year. Although we estimate it may fall

slightly in 2012 (based on our forecast of $89/bbl) it is still far greater than the non-

oil deficit seen prior to 2009. The same is true for the current account. While we

expect a surplus of 5.6% of GDP this year, excluding exports of oil and oil products

pushes the current account into a deficit of 9.3%/GDP, reaching 10%/GDP by 2013.

3.1% 3.2%3.4%

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2011E 2012E 2013E 2014E 2015E

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Figure 16: Fiscal balance: general and non-oil (%/GDP) Figure 17: Current account balance: general and non-oil (%/GDP)


Atons strategy and oil teams have written extensively on the problems facing the

Russian oil industry (for example, see Russian Oils: Strangled by Taxes, 26 May 2011,

and Russian Equity Strategy: Underweight the Heavyweights, 16 June 2010). Figures18 and 19 demonstrate the problems facing the oil industry. After a period of sharp

contraction in oil production in the 1990s, related to underinvestment, capital flight

and a general destruction of value, growth resumed after the 1998 crisis. As the oil

price rose, capital that had left the country started to return and investment surged.

However, this was short-lived, as the government imposed high taxes on the oil

sector in 2002-04, destroying the incentive to invest. Little has been done to tackle

this problem and the outlook for the next five years, according to Atons oil team, is

for a further slowdown in crude output growth.

Figure 18: Growth in Russian crude oil output Figure 19: Periods of Russian crude output growth

Source: InfoTEK, Aton estimates

Regarding the equity market, it is no secret that the oil price has a great influence

on Russian equities given that oil and gas stocks comprise 49% and 52% of the RTS

and MICEX indices, respectively.

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Balance Non-oil balance

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Figure 20: MICEX and the oil price: A close relationship

Source: Bloomberg

However, by transforming the index market cap of MICEX into barrels of oil

equivalent and setting it against the index market cap in dollar terms, we reveal an

interesting pattern. Since 2006, market caps expressed in dollars and barrels of oil

have diverged sharply on four occasions, with barrels of oil equivalent seemingly the

leading indicator and the index in dollar terms lagging by around two-to-six months.

We believe this can be interpreted in the following way: as the market cap in barrels

of oil equivalent rises ahead of the index, this suggests that the equivalent number of

barrels of oil which could be purchased with the index market cap has become

relatively cheaper, i.e. more barrels for your buck. As the index catches up, it reaches

a point where the number of barrels of oil that can be purchased with the index

market cap (i.e. the relationship between the stock price and oil price) is no longer as

attractive, leading the index market cap to follow the barrel equivalent lower.

Figure 21: MICEX and barrel of oil equivalent index market cap

Source: Bloomberg, Aton estimates

Economic Outlook Revised Downwards amid Global Deterioration

We last revised our economic forecast in Sep 2010 when we had a rosy outlook for

2011-12, especially given that 2010 was a disappointing year economically as the

base effect from the 7.8% GDP drop in 2009 did not materialise. We looked for a shift

in the base effect to occur in 2011.

The reality is that over the past six months global conditions have taken a turn for

the worse. Domestically an oil price above $100/bbl has created reform paralysiswhile apparent political concerns ahead of the Dec 2011 elections have sparked

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massive capital outflows. The latter has occurred despite an advance in the oil price,

which should in theory lead to greater demand for roubles.

Figure 22: Russian net private capital outflow ($bn)

Source: CBR

A worsening global picture

We do not expect to see markets fully stabilise in the next few months. One of the

key reasons is the substantial debt repayments facing EU countries this year as

shown in Figure 23: and Figure 24:. France and Italy have to make the greatest

repayments with the toughest months being September and October. Our fixed

income team expects a further jump in CDS spreads around this time, which in our

view is likely to be accompanied by volatility on equity markets.

Figure 23: Breakdown of scheduled 2011 debt repayments for

major EU members by month (

bn)

Figure 24: Breakdown of remaining 2011 debt repayments for

major EU members by country (

bn)

Source: Bloomberg, Aton estimates

In addition to sovereign stress in Europe, there are increasing concerns about a

global recession. Recent economic data out of the US and Europe in particular has

been disappointing. This has led economists to start downgrading the global outlook,

led by downgrades of developed economies.

Although the Bloomberg consensus outlook for Eurozone GDP has actually risen over

the past six months or so, this is largely a function of a positive outlook for Germany.

That said, the recent (Aug 2011) preliminary reading for German 2Q11 GDP growth of

2.8% came in below consensus (3.2%) and may become the turning point for

downgrades of German and subsequently Eurozone GDP growth.

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So far, the consensus view seems to be that the emerging market universe will be

able to maintain the earlier-forecast growth rates. Nevertheless, we believe that GDP

growth downgrades for emerging economies are likely on the horizon, although we

expect that, as was the case in 2008-09, most emerging markets will see healthy

growth rates relative to the developed world.

Figure 25: Bloomberg consensus 2011 GDP growth: downgrades underway (%)

Source: Bloomberg

From a wider perspective, our view is that on some levels the current global

environment is more precarious than in 2007-08:

Banking system: The sub-prime crisis brought most US banks to the verge of

bankruptcy while European banks also suffered huge losses. In addition, the loss of

credibility meant that once a semblance of normality returned, banks could not

borrow as they once did and heightened third-party risk froze financial markets and

severely impacted the global economy.

Currently, in both the US and Europe, banks have recapitalised and are lessdependent on short-term borrowing. That said, in Europe many banks remain

vulnerable due to sizeable exposure to heavily indebted nations, mainly in the south

of Europe. The European Central Bank (ECB) as a lender of last resort remains a key

lifeline.

Policy tools: In 2008, the G7 countries were quick to loosen monetary and fiscal

policy in order to stem the crisis by offering financial support to ailing banks and

supporting national economies through investments and lowering taxes. This was

very much a coordinated response.

Since then sovereign debt in both Europe and the US has ballooned and the space for

additional stimulus measures is likely limited, while in many countries harsh austerity

measures are needed. The level of political coordination is also questionable with

signs of major divisions. In the US this mainly comes down to internal politics, while

in Europe the division is spread across EU member countries.

Central banks: When the sub-prime crisis hit in late 2007 the Fed Funds rate was at

4.75% and the ECB rate stood at 4.0%. As the US and European economies plunged

into recession the US Fed and the ECB lowered policy rates to between 0-1% and

initiated a wave of emergency funding for banks, coupled with purchases of

securities.

Currently, the Fed Funds rate stands at 0.25% (and is set to stay at that level until

mid-2013) and the ECB rate is 1.5%. Over the past couple of years the Feds balance

sheet has increased from approximately $1trn to $2.8trn and the Fed has expressed

scepticism about further security buybacks. Before the ECB began to support Italian

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and Spanish bonds recently, it had already bought 74bn worth of bonds from other

countries, leading to questions about the banks independence. Hence the

availability of monetary policy tools has probably largely been exhausted.

US vs Europe - pulling in different directions: Investors are also battling a conflicting

environment in which the US and Europe, two of the worlds major economic zones,

have contrasting policy needs. In the US, the question revolves around further near-

term stimulus efforts, while in Europe tightening measures are in focus after a period

of moves aimed at revitalising the economy during the 2007-08 crisis.

China: As the global economic cycle slowed in 2008, the Chinese government

responded by increasing investment and offering cheap domestic financing. One

result was a sharp recovery in commodity prices, benefitting not just emerging

markets but also the exporting industries in the developed world. China was also

financing the US deficit by continuing to buy US Treasuries.

China is now dealing with an overheated economy and higher inflation. This may

imply that a new round of stimulus measures is unlikely, at least until inflation is

under control and economic growth has reached a sustainable level.

Russia - economic slowdown amid a deteriorating global backdrop: To recap on a

few points: prior to the 2008 downturn Russias potential GDP growth was

approximately 6% and the non-oil budget deficit (the estimated budget deficit when

excluding revenue from the oil and gas sector) amounted to 4% of GDP, based on our

estimates. Currently, we believe Russias potential growth rate is 4% at best while

the non-oil deficit is currently a massive 12% of GDP, so the Russian economy has

become more sensitive to the oil price.

A deteriorating global outlook has severely undermined the foundation for growth in

Russia and we forecast economic growth to remain sluggish for the next few years,

despite an increase in our long-term oil price forecast from $79/bbl to $89/bbl. As aresult, we expect GDP to expand 3.6% in 2011 and slightly improve to 4% in 2012.

Figure 26: GDP growth (%) Figure 27: GDP per capita ($)

Source: Rosstat, Aton estimates

Within GDP we see consumption maintaining a leading role with retail sales

expanding 5.8% this year and an estimated 6% in 2012. This segment should gain an

extra boost from a probable hike in pre-election spending. However, we believe fixed

investment growth will remain sluggish at a mere 4.3% in 2011, rising to 5.4% in

2012.

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Figure 28: Growth in industrial production, fixed investment and retail sales


Lower commodity prices and a slowdown in economic activity have led to a certaineasing in headline inflation, though it still stood at 9% YoY in July 2011. At the same

time, core inflation has not budged and lower unemployment and a reduced output

gap are likely to continue to put pressure on inflation at the core, in our view. That

said, we expect to see headline inflation coming down further, reaching 7.4% YoY by

YE11. Lower headline inflation coupled with a slowdown in economic growth, both

domestically and globally, suggests the CBR is unlikely to tighten further. Hence we

see the refinancing rate remaining at 8.25%, with perhaps a 25 bpts hike in 4Q11.

Figure 29: Inflation and the refinancing rate Figure 30: Unemployment rate


We forecast the federal budget to run a minor and manageable deficit of 0.7% of

GDP in 2011. Of greater concern, however, is our projection for the non-oil deficit,

which we see potentially running at 11% of GDP before dropping to 10% in 2012.

These levels suggest that the budget remains highly vulnerable to movements in the

oil price. The same is true for the current account, which we believe will remain in

surplus both this year and next, but turn to a deficit in 2014, under the assumption of

a flat oil price of $89/bbl. Nevertheless, like the budget, the non-oil current account

is in deficit to the tune of 10% of GDP.

-20%

-10%

0%

10%

20%

30%

2006 2007 2008 2009 2010 2011E 2012E

Industrial production Fixed investment Retail sales

4%

6%

8%

10%

12%

14%

16%

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

CPI Refinancing rate4%

5%

6%

7%

8%

9%

10%

Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10 Dec-10 May-11


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Figure 31: Fiscal and current account balance (%/GDP)

Source: Rosstat, Ministry of Finance, CBR, Aton estimates

Recent rouble movements have also posed a conundrum. Historically, a higher oilprice has led to a stronger currency, which has led to increased demand for roubles

domestically and an inflow of capital from abroad. This in turn has provided

significant benefits for the monetisation of the economy and the banking system.

However, over the past 15 months the oil price (Urals Med) has risen more than 60%

while the CBR has reported a net private capital outflow of approximately $40bn

over the same period.

The oil price plays a vital role in determining the exchange rate. Figures 32 and 33

show the strong correlation between the oil price and the exchange rate. At the

same time, Figure 33 highlights a shift in this relationship in late 2008, implying that

currently, a given oil price corresponds to a weaker rouble than seen prior to Dec

2008.

Figure 32: Oil price and the RUB/$ exchange rate Figure 33: Oil price and exchange rate: A shift in relationship

Source: Bloomberg, CBR, Aton estimates

While the current oil price stands at $110/bbl, Atons oil team is expecting it to drop

to around $90/bbl by YE11, which would likely put further pressure on the rouble.

We expect a RUB/$ rate of 29.9 by the end of this year. Given that our oil team

forecasts the oil price to remain at a similar level ($89/bbl) in 2012, we currently

estimate a marginally unchanged exchange rate of RUB29.6/$ by YE12.

Finally, a look at liquidity reveals a rather comfortable position. It is no secret that

excess liquidity resulting from rising commodity prices has been part ofRussiasfundamental story over the past ten years or so. We forecast money supply growth

to remain healthy with M2 expanding by 19.7% in 2011 and 22.9% in 2012.

-10%

-5%

0%

5%

10%

15%

2006 2007 2008 2009 2010 2011E 2012E

Fiscal balance CA balance

0.025

0.027

0.029

0.031

0.033

0.035

0.037

0.039

0

20

40

60

80

100

120

140

Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11

Oil price ($/bbl), lhs $/RUB, rhs

0

20

40

60

80

100

120

140

160

20 25 30 35 40

Oilprice($/bbl)

RUB/$ exchange rate

Jan 2001

to

Nov 2008

Dec 2008

to

Aug 2011


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4

To ascertain whether domestic liquidity conditions will remain favourable, we use

Marshallian K (developed by the economist Alfred Marshall). Marshallian K shows the

difference between the change in money supply and the change in money demand

(we use GDP as a proxy for money demand), allowing us to estimate a countrys

liquidity position. A reading above zero is representative of money supply growing

faster than money demand.

Since 2000, the Marshallian K calculated for Russia has been in positive territory:

money supply growth has exceeded growth in money demand. This has been

underpinned by capital inflows and a strengthening rouble (both linked to high

commodity prices). However, following the economic downturn of 2008-09 excess

liquidity dried up. Nevertheless, our forecast indicates that excess liquidity will

remain, although at a slightly lower level than in 2010 and weakening further in

2012.

Figure 34: Money supply growth Figure 35: Marshallian K points to excess liquidity

Source: Rosstat, CBR, Aton estimates

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2006 2007 2008 2009 2010 2011E 2012E

M2, Dec/Dec M2, Average

0.0

0.5

1.0

1.5

2.0

2.5

2004 2005 2006 2007 2008 2009 2010 2011E 2012E


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5

Figure 36: Key macroeconomic indicators: historical and forecast

2008 2009 2010 2011E 2012E

Nominal GDP (RUBbn) 41,277 38,786 44,939 52,653 58,950

GDP ($bn) 1,661 1,222 1,480 1,816 1,982

GDP per capita ($) 11,697 8,641 10,504 12,932 14,164

Real GDP growth, (%) 5.2 -7.8 4.0 3.6 4.0Industrial output growth (%) 2.1 -10.8 8.2 5.1 5.1

Fixed investment (%) 9.8 -17.0 6.0 4.3 5.4

Real retail sales (%) 13.5 -5.5 4.4 5.8 6.0

SOCIAL INDICATORS

Real disposable income (%) 1.9 1.9 4.3 2.1 4.0

Real wage (%) 11.5 -2.8 4.2 4.5 5.0

Average wage ($/month) 693.8 592.4 694.6 814.5 897.2

Unemployment (% ILO) 6.4 8.4 7.5 6.4 6.3

PRICES

CPI growth (% Dec/Dec) 13.3 8.8 8.8 7.4 6.8

PPI growth (% Dec/Dec) -7.0 13.9 16.7 7.0 5.0

TRADE

Exports ($bn) 471.6 303.4 400.4 513.7 476.8

Imports ($bn) 291.9 191.8 248.7 308.8 375.6

Trade balance ($bn) 179.7 111.6 151.7 204.9 101.1

Current account ($bn) 102.3 49.4 89.3 102.5 50.6

Current account ratio (%/GDP) 6.2 4.0 6.0 5.6 2.6

Oil price ($/bbl, Urals Med, aop) 95 61 78 102 89

FEDERAL BUDGET

Revenues (%/GDP) 22.5 18.9 18.5 21.0 19.4

Expenditures (%/GDP) 18.3 24.9 22.5 21.7 21.2

Fiscal balance (%/GDP) 4.1 -6.0 -4.0 -0.7 -1.8

MONETARY INDICATORS

Gross international reserves ($bn) 427 439 479 547 597

M0 (RUBbn eop) 3,795 4,038 5,063 5,988 7,651

M0 growth (%) 2.5 6.4 25.4 18.3 27.8

M2 (RUBbn eop) 13,493 15,698 20,012 23,952 29,425

M2 growth (%) 1.7 16.3 27.5 19.7 22.9

M2/GDP (% average) 33.1 34.0 38.4 41.7 46.2

EXCHANGE RATES

RUB/$ (eop) 29.4 30.2 30.5 29.9 29.6

RUB/$ (aop) 24.9 31.7 30.4 29.0 29.8

Real appr.(+) / depr.(-) RUB/$ (%) -8.9 5.7 6.2 6.3 5.8

Real appr.(+) / depr.(-) RUB/, (%) -4.9 3.6 15.2 4.7 4.2

Source:Rosstat, CBR, Ministry of Finance, Bloomberg, Aton estimates


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