8/17/2012

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ECONOMIC BULLETIN № DEB-2012.08-03

Economic News

Russia's GDP rose by 4% in the second quarter, year-on-year, compared to a 3.4% rise a year ago,

preliminary data from the FSS showed on Friday (10 Aug). In the first quarter of 2012, the economy

expanded by 4.9% in GDP terms. / Thomson Reuters

Russia's foreign trade surplus fell to $14 bln in June from $17.4 bln in the preceding month, CBR

data showed on Friday (10 Aug). / Thomson Reuters

Russia's CPI were flat in the week to 13 August after rising 0.1% in each of the two preceding weeks,

the FSS said on Wednesday (15 Aug). Since the start of the year consumer inflation has reached 4.6%

compared to 4.9% in the same period of 2011. The CBR aims to keep full-year growth in consumer prices

within its target of 5-6% after inflation hit a post-Soviet record low of 6.1% in 2011. The Reuters monthly

poll showed in late July that full-year rise in the CPI index is seen at 6.6%. / Thomson Reuters

Russia's PPI fell 1.1% month-on-month in July after declining 0.9% in June, the FSS said on Thursday

(16 Aug). Analysts had forecast a month-on-month rise of 0.8%. Year-on-year, the PPI index rose 4.1% in

July, the same pace as in the preceding month. / Thomson Reuters

Russia's industrial output was surprisingly robust in July, data showed on Wednesday (15 Aug), but

analysts said it tends to be volatile and it was too soon to suggest the economy is accelerating. Russia's

economy has been slowing although growth, at 4% in the second quarter year-on-year, is much stronger

than in many other economies and is supported by the high price of oil, the country's chief export. Industrial

output rose 3.4% in July from a year earlier, the FSS said, easily beating economists' forecasts for 2.5%

growth and much stronger than a 1.9% increase in June. "Industrial production will continue to be volatile

but looking at today's release - it signals more positive developments for the coming months," said Vladimir

Pantyushin, chief economist in Moscow. Manufacturing output, which rose 5.7% in July, was the main driver

of growth in industrial production with a breakdown showing that domestic-oriented sectors, such as

construction materials fared particularly well. That points to relatively strong domestic demand. "I would,

however, put more focus on investment - and that is still the weakest link in the whole growth paradigm for

Russia," said Pantyushin. He said he was still considering cutting his 2012 economic growth forecast from

4.3%, despite Wednesday's data. In June, capital investment by companies rose by 4.7% year-on-year,

significantly below analysts' forecasts for a 7% rise. July's investment data, along with data on

unemployment and retail sales, is due within days. Dmitry Polevoy said those releases would give a better

indication of how the economy fared at the start of the third quarter. "We still stick to our view that

domestic demand will moderate in the second half of 2012, thus reducing support for the industrial sector,"

Polevoy wrote. Morgan Stanley last week to slash its forecast for full-year growth to 4.2% from 5%, after

economic growth slowed in the second quarter from 4.9% in the first quarter. The EconMin forecasts 3.5%

GDP growth this year, but officials have mentioned the possibility of raising it to 3.8-4%.

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ECONOMIC BULLETIN № DEB-2012.08-03

AMMUNITION FOR RATE CUT? If data due this week follows industrial output and surprises on the

upside, that would probably strengthen expectations for an interest rate rise in September to control unruly

inflation. Last week, the CBR kept its key interest rates on hold, but sent the strongest signal this year that

policy tightening may lie ahead if inflation risks from food prices increase. "(The data) may boost talk of a

rate hike, given the CBR was mainly unworried about industrial performance and more hawkish on the

inflation outlook during its last meeting," Polevoy said. CPI rose 5.7% year-on-year in the first week of

August, making the CBR aim of keeping full-year inflation down to a targeted 5-6% more difficult. Pantyushin

said industrial output data would only be one of several factors affecting a rate decision. "The data is not

really placing restrictions on the central bank's decision, as it is always one of many listed factors," he said,

adding that the CBR is likely to focus more on the banking sector and retail banking in particular, while

making its decision. The service provided the following headline data and sector breakdown:

Headline industry output July' 12 June'12 July'11 mth/mth pct change +1.9 -0.6 +0.4 yr/yr pct change +3.4 +1.9 +5.2 Extraction of raw materials mth/mth pct change +3.8 -2.2 +3.1 yr/yr pct change +0.9 +0.2 +1.8 Manufacturing mth/mth pct change +1.2 +1.0 -1.9 yr/yr pct change +5.7 +3.4 +5.5 Production and distribution of electricity, gas, water mth/mth pct change +1.1 -11.2 +2.4 yr/yr pct change +0.8 +2.1 +1.9

/ Thomson Reuters

Fitch Ratings has affirmed Russia's Long-term foreign and local currency Issuer Default Ratings (IDR)

at 'BBB' with Stable Outlooks. The Short-term foreign currency rating and the Country Ceiling have also

been affirmed, at 'F3' and 'BBB+', respectively. The affirmation balances Russia's strong sovereign balance

sheet, net external creditor position and increasing exchange rate flexibility against its hesitant steps

towards greater fiscal consolidation and structural reforms in the face of volatile oil prices and an uncertain

global economic backdrop. Russia retains a strong sovereign balance sheet relative to the 'BBB' category.

General government debt is low - 11% of GDP in 2011 - while the government holds USD 112 bln (7% of

GDP) in sovereign wealth funds, which provide fiscal financing flexibility and a buffer against a sharp drop in

oil prices. Externally, sovereign net foreign assets totalled USD 467 bln at end-2011 (25% of GDP), the

highest in absolute terms in the 'BBB' category, bolstered by the fifth largest international reserves in the

world. Banks, a significant source of external stress in 2008-09, have also become net external creditors.

Real GDP growth projections of 3.8% in 2012 and 3.5% in 2013 encapsulate Fitch's view that Russia is

materially less exposed to external shocks than it was in 2008-09, helped by a more flexible exchange rate

that has moderated the budgetary impact of volatile oil prices while reducing net capital outflows.

Nonetheless, Russia has not been immune to the eurozone debt crisis, which is playing itself out through

volatile oil prices, falling asset prices, a weaker exchange rate and deteriorating investment sentiment.

Commodity dependence and the attendant exposure to fluctuations in oil prices remain Russia's key rating

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ECONOMIC BULLETIN № DEB-2012.08-03 weakness and one that shows no sign of diminishing. Headline budget and current account surpluses mask

structural non-oil deficits of 10%-12% of GDP in 2011, highlighting Russia's vulnerability to commodity price

shocks best exemplified by a high fiscal break-even oil price of around USD 118 bbl. While acknowledging

that recent steps to reinstate a 'fiscal rule' represent a first step towards loosening the link between oil

prices and expenditure, Fitch argues that these imply only a gradual reduction in the non-oil deficit to 8.5%

of GDP by 2015, compared to a pre-crisis medium-term target of 4.5% (which the IMF estimates to be in line

with intergenerational equity). The agency also notes that it remains unclear how President Putin's election

pledges, independently estimated at a cumulative 6% of GDP over six years, will be accommodated within

overall budget targets. Compared to its BRIC counterparts, Fitch believes that Russia has fared relatively well

throughout the current eurozone-led crisis. However, the prospect of Russia revisiting pre-crisis growth

rates of 7% appear remote in the absence of major structural reforms, notwithstanding the country's

imminent accession to the WTO. Russia compares poorly with rating peers on the World Bank's governance

indicators including political stability, rule of law, control of corruption and government effectiveness. These

factors manifest themselves in a poor business climate, heightened event risk and persistent net capital

outflows. In the absence of greater fiscal consolidation, Fitch says that a severe and sustained drop in oil

prices would weaken public finances and the economy and could lead to a downgrade. Conversely, further

steps toward entrenching a 'fiscal rule' that delivered a more ambitious reduction in the non-oil deficit,

coupled with a sustained reduction in inflation, could lead to an upgrade. Major reforms that improved the

business climate, further strengthened the financial sector and made convincing inroads to poor

governance, would also be rating positive. / Thomson Reuters

Global Economy

Investors who have long played safe by using shares in Western multinationals to tap into the

emerging market boom are looking afresh at buying emerging equities instead, seeing prices as cheap

after two dire years for the asset class. Blue-chip companies such as Procter & Gamble and Unilever have

long been regarded as a win-win bet, allowing shareholders to participate in the developing world boom

while avoiding currency, political and corporate governance risks. The trade paid off handsomely, especially

in the volatile post-Lehman years. Data from Goldman Sachs shows a model basket of 50 Western

companies with high emerging markets exposure would have outperformed a group of pure emerging

markets plays by 20% since mid-2010. But the result is that shares in these blue chips are now looking

pricey. The multinationals' basket trades on average at a price premium of over 20% to emerging markets,

based on the ratio of share prices to estimated future earnings. That price gap, Goldman says, is the widest

since 2007. A discount of that magnitude has historically been a "launchpad" for EM outperformance,

according to fund managers at Blackrock who now prefer emerging equities to multinationals with exposure

to the developing world. "Sometimes valuations ... and relative price performance give you a signal as to

where you should be tilting your portfolio. The recent price action in emerging markets gives investors a

strategic and tactical reason to emphasise direct EM investment," said James Bristow, a portfolio manager

with Blackrock's global equity team. That is especially the case for U.S.-based multinationals such as Colgate-

Palmolive which trade at around 20 times forward earnings, more than double the emerging markets'

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ECONOMIC BULLETIN № DEB-2012.08-03 average. "Mostly for relative valuation reasons, the best way to get into emerging markets and growth

markets right now is go there directly rather than using proxy trades," Jim O'Neill, chairman of Goldman

Sachs Asset Management and the coiner of the BRIC investment concept, told Reuters.

MULTINATIONALS STLL HAVE FANS. This is not to say that multinationals have lost their entire fan

base. First, not all funds have the stomach to invest in emerging markets, where volatile currency and

political swings can wipe out bumper gains in a matter of days. Second, emerging bourses usually are loaded

with commodity and industrial stocks. Pure consumer plays such as retailers, which are sought after by

foreign investors, are rarer and often trade at a premium. And, according to Dale Winner, who runs a global

equity fund at Wells Fargo, it is possible to buy EM-exposed shares that are reasonably priced, particularly in

battered European markets. "I agree there's valuation pressure in U.S. companies - look at the premiums

they are trading on - but it's the opposite in Europe, because of a macro discount," says Winner who holds

Swiss watchmaker Swatch and luxury goods maker Richement. Based on a price-earnings or PE ratio, both

trade 8-10% below their past average, Winner says, in contrast to U.S.-based brands such as Avon or

Colgate that are trading at a premium to their history. All these companies get at least half their revenues

from emerging markets.

WESTERN MARKETS EXPOSURE A DRAG. Emerging equities' lacklustre performance in the past 18

months is partly to do with a slowdown in developing countries' high-octane growth, a weakening that

appears to be confirmed by data showing falling exports and retail sales almost everywhere. The slowdown

is hitting once-booming sales of goods, from mobile telephones to cars, and threatens revenues at emerging

market companies. It is also a worry for multinationals and the investors who have piled into them. But

Blackrock's Bristow argues that valuation - how much of the bad news are the shares pricing in - is key. "We

know global growth is slowing pretty much across the board but ... valuations in emerging markets price in

more of an earnings slowdown than in developed markets. That means your margin of safety is already

higher," he said. And multinationals, for all their much-hyped emerging markets exposure, typically still get

over half their revenues from Western markets, where debt-laden consumers and governments are in

saving rather than spending mode. Take beverage giant Coca-Cola. In the second 2012 quarter its sales

jumped 12% in Africa and Asia, grew 1% in America and dropped 4% in Europe. But the two latter markets

account for over half its business. Similarly, Procter & Gamble, which makes detergent and Olay face cream,

has struggled this year due to big falls in the developed markets, which make up 60% of sales. "You can own

a multinational and get exposure to emerging markets but it's going to be diluted exposure," said Nick Price,

who runs an emerging equities portfolio at Fidelity Worldwide Investments. "You have to accept that 60% of

business is in places where volume growth is close to zero." / Thomson Reuters

BRICs is by no means an obsolete tag. The acronym coined by Goldman Sachs economist Jim O'Neill

in 2001 continues to operate as both a useful shortcut and a fertile provocation to compare and contrast

the world's four biggest developing economies: Brazil, Russia, India and China. But like all neat

catchphrases, there is a danger that one day it will veer into cliché. It's already easy to over-associate the

term with all emerging markets. Ruchir Sharma is anxious to prevent jargon freezing into unassailable truths.

Individual countries are distinct and diverse, even at comparable stages in their economic evolution. This

very simple idea informs Sharma's approach in his new book "Breakout Nations: In Pursuit of the Next

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ECONOMIC BULLETIN № DEB-2012.08-03 Economic Miracles," in which he identifies which developing countries have the potential for stable growth

worthy of investor attention. Sharma's wealth of knowledge as Morgan Stanley Investment Management's

head of emerging market equities and ample experience on the ground are strong foundations for his

exploration of what makes economies break out, or break down. And his analysis offers the reader a set of

original and actionable revelations about which countries may offer compelling investment prospects.

Among them, he argues that Poland is underrated, Nigeria is on the up and Thailand is at a turning point. He

is less enthusiastic about the directions Brazil, Vietnam and a few other investor darlings are headed.

Importantly, "Breakout Nations" helps readers recalibrate their assessment of the BRICs and other well-

covered markets. For example, Sharma writes, investors have staked out extreme positions on China: either

extremely negative or excessively boosterish, when perhaps they should just be moderately bearish. China

will grow, but those banking on 9% forever will be disappointed. The book was published a few weeks

before China reported that official GDP for the quarter ending June 2012 had dipped to 7.6%. As with any

rushed trip around the world in 14 chapters, there's still plenty of scope to revisit certain areas. In many

cases, while Sharma's enthusiasm for a particular market is fully explained there is no time to tackle some of

the questions his narrative raises. For instance, while the book highlights the bright side of Indonesia's

"efficient corruption" and low costs, the downside - cronyism and a vast wealth gap - casts a silent shadow

over the argument. For all Sharma's emphasis on acknowledging the developing world's diversity, he could

also do more to fully explore the diversity within important individual markets. Although a large chunk of

the book is dedicated to China, the author appears to have focused his exploration on the industrialized east

coast. Despite a detailed discussion of what lies ahead for the Chinese consumer, he could have delved

further into China's vast, fast-growing interior. Sharma's biggest shortcoming may simply be in the

marketing of his investigation: he lacks a snappy acronym to trump BRICs. Without a catchphrase, Sharma's

investment ideas may prove less memorable than O'Neill's in the long run. But his examinations of how

some countries manage to grow and make both their people - and investors - prosperous will be worth

remembering. / Thomson Reuters

Bioenergy companies and protein producers will be the main losers among EMEA corporates from

record soft commodity prices, Fitch Ratings says. The impact on the food and beverage sector will be more

muted because raw materials represent a smaller fraction of their costs, although subdued consumer

demand and resistance from retailers to price inflation will compound the problem for this sector. The price

rally has been driven by the US drought, primarily affecting production yields for corn and soybeans in North

America. We believe the overall threat to corporates is mild, as weather-driven price shocks are often

temporary - and prices could unwind on improved weather conditions. Tight supply of major grains and

oilseeds associated with the drought is exacerbated by the high demand for food and protein from emerging

economies, leading to tight stock-to-use ratios. Among the affected sectors, the downgrade of Abengoa to

'B+' from 'BB' last month was largely due to poor performance in its bioenergy business in Q1’12. We believe

this segment will not see a meaningful recovery until mid-2013, as profitability depends on crush margins

(the difference between the ethanol sales price and the input cost of corn). Bioenergy also has substitutes

such as gas/oil that are not correlated to higher soft commodities; thus sustained high input costs for

bioenergy make it less attractive relative to oil-based fuels. Protein producers will see the next biggest

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ECONOMIC BULLETIN № DEB-2012.08-03 impact, as food retailers will be reluctant to accept substantially higher than CPI price inflation. CIS protein

producers, such as MHP or Miratorg LLC, generally benefit from growing their own Tgrain for fodder.

Avangardco could see some pressure as it does not grow its own grain, and feed costs account for as much

as 70% of the cost of producing eggs. However, it benefits from sourcing cheap grain from local farmers and

adequate pricing power. While prices of substitutes often move in tandem, soybeans cannot be easily

replaced as a key fodder component, due to the high protein relative to sunflower. Therefore, for animal

feed producers such as Sodrugestvo, rising soybean prices could result in higher working-capital financing;

this is mitigated by its equity private placement in early July 2012. For the food and beverage sectors, the

impact is muted. Raw materials account for around 30% of the cost of goods sold for a food producer, and

some input costs remain subdued, unlike in 2008 when all commodities were rising. Weak oil and metals

prices will reduce the pressure on packaging costs. We do not expect higher food inflation for the rest of

2012, and do not foresee any extra pressure on profitability for EMEA-based packaged food producers in

2013. Small food manufacturers, or those focused on bakery and pasta with little bargaining power with

retailers or product differentiation (eg Premier Foods, manufacturer of Hovis bread), will suffer more than

global and diversified food companies such as Danone or Nestle. We published a report in May’11 examining

the potential impact of rising agricultural commodity prices, including a scenario in which a supply-driven

price shock - such as drought - was combined with weak consumer spending power (see Related Research).

We found the impact on retailers to be neutral as long as they are able to strengthen their private-label

products, which would become more popular as consumers switch to cheaper alternatives. We expect this

situation to remain through to 2013. Grain producers and exporters such as Mriya or Kernel in the CIS could

be among the few beneficiaries of high demand and prices. However, we do not expect an immediate

impact, as the harvest campaign is only finished for early crops. Ukraine and Russia are not expecting grain

production yields as strong as 2011, as summer conditions are also hot and dry. Both countries may consider

introducing export restrictions. Therefore, higher international prices could be partially offset by weaker

domestic prices and export volumes. / Thomson Reuters

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ECONOMIC BULLETIN № DEB-2012.08-03 Markets: FX / MONEY MARKET

FX MARKET

On this week

the rouble loosed

0.3% to 31.90 vs the

dollar and eased 0.6%

to 39.40 against the

euro. Against the

basket, the rouble

has depreciated

around 0.45% to

35.26, hovering near

a strong trend line

formed by its 200-day

moving average.

"Trading activity

remains low... The

rouble has support

from high oil prices

and support should

also emerge from tax

payments," analysts

said. Month-end tax

payments are

expected to bolster

the rouble as

exporters step up

conversion of foreign

currencies to meet

local liabilities. "Taxes

will play on the

rouble's side for a

while but then its

dynamics could

change," analysts said

in a note.

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ECONOMIC BULLETIN № DEB-2012.08-03

Russia's gold and foreign exchange reserves rose to $510.0 bln in the week to 10 August from $507.4

bln a week earlier, CBR data showed on Thursday (16 Aug). The reserves include monetary gold, special

drawing rights, reserve position at the IMF and foreign exchange. / Thomson Reuters

MONEY MARKET

Due to

beginner of tax

payment period on

this week money

market rates have

increased around

100 bps and

stabilised at 5.0-

6.0%.

CBR sent

the strongest

signal this year on Friday (10 Aug) that policy tightening may lie ahead if inflation risks from food prices

increase, while keeping its main interest rates unchanged for now at a monthly meeting. Russia's

economic growth slowed to 4% in the second quarter compared with a year earlier, the FSS confirmed on

Friday, but is still much stronger than many other economies, helped by a strong oil price, the country's chief

export. The CBR, which has kept monetary policy unchanged since cutting some lending rates in December,

said it did not see an increased risk of slowing economic growth at the moment as domestic demand

remains robust. It sounded more concerned about inflation, which is nearing 6%, the top of the CBR target

range. "The worsening situation in the global and Russian food markets, as well as estimates of harvests of

main agricultural crops in the current year is an important source of inflationary risks, particularly given the

influence of these factors on inflation expectations," the CBR said in a statement after the meeting. For the

first time this year it refrained from commenting on whether it deemed current rates to be at an

appropriate level in the near term - which analysts read as a clear indication that monetary tightening is in

the pipeline. "The CBR is definitely more committed now than before to start the path of policy tightening,"

said Alexander Morozov, chief economist for Russia. The CBR kept as expected the fixed one-day REPO rate,

the de-facto ceiling for the money market, at 6.25%. It held the overnight deposit rate, a floor for interbank

rates, at 4%. The more symbolic refinancing rate, the cost of borrowing overnight from the central bank,

stayed at 8%. That was broadly as expected although analysts had seen some risk the CBR could make a

surprise move on policy given growing supply-led pressure on prices. Latest polling last month predicted a

rise in rates before the end of the third quarter. The IMF, which forecasts Russia's economy will grow by

around 4% this year and next year, this month urged Russia to tighten monetary policy to guard against the

risk of overheating and bear down on inflation. Prices of goods for consumers in Russia rose 5.7% year-on-

year as of 6 August, making the CBR aim of keeping full-year inflation down to a targeted 5-6% more

difficult. "When making (future) decisions the CBR will focus on the medium-term targets for inflation and

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ECONOMIC BULLETIN № DEB-2012.08-03 the assessment of economic growth prospects as well as the dynamics of inflation expectations," the CBR

said in its statement. The slowdown in economic growth in the second quarter to 4%, announced by the

EconMin last month and confirmed by the statistics service on Friday, marked a slowdown from 4.9% annual

growth in the first quarter. "One gets the feeling that there is no final decision yet whether to raise rates or

not," Dmitry Polevoi, an economist in Moscow, said. "That is, (the CBR) is clearly preparing the stage, but

there is no clear signal as uncertainty remains: how bad will the harvest be, by how much food prices will

rise and how it will affect inflation expectations and the core inflation."

CREDIBILITY ISSUE. Morozov reckoned the CBR made a mistake by holding rates: inflation is likely to

exceed 6% next month. And although the recent spike in inflation comes from higher food prices, which are

beyond the CBR control, rather than rising money supply, which the CBR can mitigate, raising rates

marginally could lower inflation expectations, he said. This, in turn, could tame real price rises. "(The

decision) puts the CBR in a certain extent behind the curve rather than ahead of the curve," Morozov said.

Moreover, he added, the wait-and-see approach the CBR adopted on Friday somewhat discredits the CBR

goal to shift its main monetary policy focus to inflation targeting from controlling the rouble rate. The CBR

widened the rouble's trading band by one rouble last month, aiming to increase currency flexibility which

will allow it to cut down on forex interventions as it moves away from targeting the exchange rate and

towards inflation targeting. "From the credibility perspective it would have been more advisable to raise

rates now rather than in September." Not all agree. "We believe raising policy rates in the current

environment is premature, as local lending remains quite expensive, thus limiting investments and growth,"

analyst at Barclays wrote in a note prior to Friday's meeting. Below in the table you could find all key

effective rates of CBR:

KEY RATES CURRENT LEVEL PVS LEVEL refinancing (refi) rate 8.00 pct 8.25 pct min one-day repo rate 5.25 pct 5.25 pct 1-day overnight deposit rate 4.00 pct 3.75 pct 7-day deposit rate 4.00 pct 3.75 pct 30-day deposit rate 5.50 pct 5.50 pct 90-day deposit rate 6.50 pct 6.50 pct fixed rate 1-day repo 6.25 pct 6.50 pct fixed 1-day lombard rate 6.25 pct 6.50 pct fixed 7-day lombard rate 6.25 pct 6.50 pct fixed 30-day lombard rate 6.25 pct 6.50 pct swap (rouble) 6.50 pct 8.00 pct overnight credit rate 8.00 pct 8.25 pct 90-day gold-backed loans 6.75 pct 6.75 pct market assets and guarantees 7.00 pct 7.00 pct market assets and guarantees 7.50 pct 7.50 pct market assets and guarantees 8.00 pct 8.25 pct min 7-day repo rate 5.25 pct 5.25 pct min 3-month repo rate 6.75 pct 6.75 pct min 6-month repo rate 7.25 pct 7.25 pct min 12-month repo rate 7.75 pct 7.75 pct min 3-month lombard rate 6.75 pct 6.75 pct min 6-month lombard rate 7.25 pct 7.25 pct

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ECONOMIC BULLETIN № DEB-2012.08-03 min 12-month lombard rate 7.75 pct 7.75 pct BANKS' MINIMUM RESERVE REQUIREMENTS for liabilities to non-resident corporates 5.50 pct 5.50 pct for liabilities to private individuals 4.00 pct 4.00 pct for liabilities to other liabilities 4.00 pct 4.00 pct

/ Thomson Reuters

Markets: FIXED INCOME

Russia attracted bids for less than half the five-year OFZ treasury bonds it offered at an auction on

Wednesday (15 Aug), as local liquidity strains, a weaker rouble and globally increased risk aversion

dragged on demand. The FinMin sold RUB 6.5 bln of OFZs due 19 April’17, having offered to sell up to RUB

15 bln of the bonds. The FinMin met all bids, setting the average yield at 7.62%, the top end of a guideline

yield range of 7.57-7.62% announced overnight. "We believe that today's weak auction results are linked to

the banking sector's liquidity shortage," analysts said in a note. Russian interbank overnight lending rates

rose to 5.5% on Wednesday, the deadline for banks and companies to meet monthly social security

payments, from levels of around 4.2% last week. A tick lower in the rouble on Wednesday also eroded the

appeal of buying into rouble-denominated bonds for holders of foreign currencies, while a sell-off in stock

markets underlined widespread wariness about taking risky positions. "Demand from foreigners was also

weak due to unclear global dynamics and the lack of progress on liberalising access for foreign depositaries

to the Russian market," analysts wrote. "Moderate rouble weakening failed to boost interest in rouble

bonds either." The Russian bond market had been expected to adopt international settlement system

Euroclear's trading rules in July, effectively opening its doors to global investors, but implementation has yet

to be completed. / Thomson Reuters

Sberbank has added $300 mln to its outstanding Eurobond issue maturing in 2017, a trader who has

seen details of the deal told Reuters on Friday (10 Aug). He said the deal was priced at the initial yield

guidance of 3.95%. Sberbank was not immediately available for comment. Russian borrowers have raised

almost $30 bln since the start of the year, more than in the whole of 2011.

Sberbank is gauging international lenders' demand for a three-year syndicated loan, in a move that

could boost this year's muted Russian deal flow, bankers close to the company said. "Sberbank is gauging

market appetite, and only after they have an understanding of what they could collect will they define the

volume," one European banker said. Russian borrowers have raised $11 bln in loans this year, marking a 59%

drop on the same period in 2011, Thomson Reuters LPC data shows. Of this, Russian banks have raised $750

mln. Russian banks' liquidity has meant that many Russian borrowers have tapped domestic lenders rather

than international banks. The yield on the loan will need to be above 300 bps all-in (or combining margin

and fees) to attract lenders, many of which are grappling with tightened liquidity amid the eurozone debt

crisis, the banker added. Other bankers said Sberbank's prominent standing in Russia and its position as a

frequent borrower means the bank has historically managed to snap up large amounts at highly competitive

rates. Pricing on Sberbank's last internationally syndicated loan of $1.2 bln in November was competitive,

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ECONOMIC BULLETIN № DEB-2012.08-03 with a margin of 150 bps, bankers said. Sberbank declined to comment. A second Russian bank,

Gazprombank, is also in talks with lenders over a $600 mln, one-year deal with all-in pricing of 275 bps, one

banker said. Sberbank posted a seven-month net profit of RUB 212.4 bln on 7 August, up 6% on the same

period last year, helped by strong growth in net fee commissions and net interest income. / Thomson

Reuters

Markets: STOCKS

Russian shares

rose on this week,

outperforming other

emerging markets on

a spike in oil prices he

dollar-based RTS

index climbed 0.55%

to 1435 bps and the

rouble-denominated

MICEX was up around

1% at 1456 bps, just

below strong resistance at its 200-day moving average. Trading activity was low at what is the peak of the

August holiday season. "The whole process of trading now is just attempts to find a local low and then to

lock in profit after a short-lived rise," said a dealer at a Western bank in Moscow. A rise in Brent crude price

to above $116 for the first time since early May supported Russian assets, but they remain vulnerable to

changes in global risk sentiment. Analysts said the main driver of Russia's shares "for some time has been

the trend in global emerging markets and investors' assessment of risk". "Still, the rising (oil) price is a

positive for the budget and gives the government more spending firepower to sustain economic growth

around the 4% level we forecast," they wrote. The European benchmark for oil has risen by more than a

third in less than two months on worries that a conflict over Iran's disputed nuclear programme could

escalate, disrupting supply, and as investors lock in positions on hopes of more stimulus measures from

central banks.

The CEO of Sberbank, German Gref, hopes the bank's delayed 7.6% stake sale will take place this

year, if the markets allow. "We are ready. If the market situation is better than today, I hope that it will be

possible before the end of this year," Gref told journalists late on Saturday (12 Aug) in London. Gref said

September "will be a good time" for the stake sale, which is worth worth nearly $5 bln, but repeated that it

would depend on how favourable the markets are. Sberbank, Europe's second-largest lender by market

value after HSBC, initially planned to sell its 7.6% stake in via secondary public offering last year but

postponed the deal due to fragile markets. Sberbank's stake sale was a part of the CBR total holdings of

57.6% and a wider state privatisation drive aimed at raising funds and improving corporate governance. So

8/17/2012

12

ECONOMIC BULLETIN № DEB-2012.08-03 far, the state managed to sell 10% in VTB last year, while other deals stalled due poor conditions in the

markets, which have been hit by the European debt crisis. / Thomson Reuters

Macroeconomic indicators of Russia

ECONOMIC INDICATORS PERIOD LATEST PREV YR AGO Nominal GDP (bln RUB) Q1 13.491 15.462 11.680 GDP Y/Y Q2 +4.0 +4.9 +3.4 CPI M/M Jul +1.2 +0.9 +0.0 CPI Y/Y Jul +5.6 +4.3 +9.0 PPI M/M Jul -1.1 -0.9 -1.8 PPI Y/Y Jul +4.1 +4.1 +15.1 Ind output M/M Jul +1.9 -0.6 +0.4 Ind output Y/Y Jul +3.4 +1.9 +5.2 Retail sales Y/Y Jun +6.9 +6.8 +5.8 Unemployment (mln) Jun 4.14 4.09 4.61 Real disposable income Y/Y Jun +3.0 +4.1 +2.4 Real average wage Y/Y Jun +12.9 +12.4 +2.4 Nominal average wage (rbls) Jun 28.232 26.385 24.137 Capital investment (bln RUB) Jun 1015.6 866.3 n/a Capital investment Y/Y Jun +4.7 +7.7 +4.9 Trade surplus ($bln) Jun 14.0 17.4 16.4 Exports ($bln) Jun 40.8 45.2 44.2 Imports ($bln) Jun 26.8 27.8 27.8 Budget balance (bln rbls) Jan-Jun +247.4 +120.1 +703.5 CBR reserves ($bln) 3-Aug 507.4 505.5 n/a Monetary base (bln rbls) 1-Aug 8.06 8.129 7.147 M2 (blnR) 1-Jul 24.764 24.45 20.745 REER rouble Feb/Jan +3.5 +0.7 +1.8 Oil output (mln bpd) Jul 10.34 10.32 n/a Oil output (mln T) Jul 43.7 43.8 n/a Gazprom gas output (bcm) Jul 45.0 n/a n/a URALS oil, $/bbl 17-Aug 114.82 113.93 111.12 BRENT oil, $/bbl 17-Aug 114.94 113.88 112.17

ANNUAL DATA 2011 2010 2009 2008 2007 Nominal GDP (bln USD) 1692.4 1479.2 1292.1 1403,8 1349,3 GDP (pct) +4.3 +4.3 -7.8 +5.2 +8.5 CPI Y/Y (pct) +6.1 +8.8 +8.8 +13.3 +11.9 M2 (bln R) 24,543 20,012 15,698 13,490 13,27 Oil/gas cond.(mln T) 511 505 494 488 491 Natural gas (bcm) 671 650 582 665 653 Coal (mln T) n/a 323 298 326 315 Grain (mln T) n/a 61 97 108 82 Beet Sugar (mln T) n/a 2.7 3.3 3.6 3.2 Gold (T) n/a 201 205 184 163

8/17/2012

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ECONOMIC BULLETIN № DEB-2012.08-03

GOVT FORECASTS 2012 2013 2014 Nominal GDP (bln USD) 1 913.3 n/a n/a GDP Y/Y (pct) 3.5 (3.8-4.0) +3.8 (+3.9) +4.4 (+4.6) Industry output (pct) +3.1 (+3.6) +3.4 (+3.8) +4.1 (+4.2) CPI Y/Y (pct) 5.0-6.0 (5.0-6.0) 4.5-5.5 (4.5-5.5) 4.0-5.0 (4.5-5.5) Cap. Investment pct +4.0-5.0 (+6.6) +7.1 (+7.1) +7.0 (7.2) Retail Sales pct +5.5 (+5.5) 5.3 (5.3) 5.5 (5.5) Exports $ bln 513.4 (533.1) 515.0 (535.9) 543.4 (565.3) Imports $ bln 368.6 (397.4) 412.7 (444.6) 454.0 (486.1) Trade Balance $ bln 144.8 (135.7) 102.3 (91.3) 89.4 (79.2) Urals oil, ave., $/bbl 106-108 (115) 97 (97) 101 (101) Rouble rate/$1 29.20 (31.1) 31.3 (29.4) 31.80 (30.50) Rouble REER +0.2 (+3.5) +2.0 (0.0) 1.2 Reserve fund, trln RUB as of yearend 1,568 1,619 1,624 Revenue, trln RUB 12.588 (11.779) 12.729 (11.674) 14.116 (12.646) Expenditure, trln RUB 12.656 (12.185) 13.766 (13.418) 14.631 (14.294) Budget deficit, trln RUB -0.068 (-0.877) -1.037 (-1.744) -0.514 (-1.648) Budget deficit, % of GDP -0.1 (-0.3) -1.6 (-2,7) -0.7 (-2.3) Real incomes, % 4,2 (4.8) 4,8 (4,8) 5.3 (5.3) Capital outflow, bln USD -50.0 (-25.0) n/a n/a

BALANCE OF PAYMENTS ($bln) 2011 2010 2009 Current account 98.8 71.1 48.6 Cap/fin account -76.2 -26.0 -43.5 Net errors/omissions -10.0 -8.3 -1.7 Reserve assets -12.6 -36.8 -3.4

LONG-TERM FOREIGN CURRENCY RATINGS Moody's (December 12, 2008) Baa1 (outlook stable) S&P (June 27, 2012) BBB (outlook stable) Fitch (August 16, 2012) BBB (outlook stable)

CJSC Denizbank Moscow Treasury Ksenia Mayorova ksenia.mayorova@denizbank.com Alexander Shetler alexander.shetler@denizbank.com +7 (495) 789-97-20, +7 (495) 783-31-41 Corporate Banking Savas Citak savas.citak@denizbank.com Oguz Yalcin oguz.yalcin@denizbank.com Koray Akefe koray.akefe@denizbank.com Mine Arpadji mine.arpadji@denizbank.com Elena Kislova Elena.kislova@denizbank.com Roman Otavin roman.otavin@denizbank.com Marina Kalashnik marina.kalashnik@denizbank.com Oksana Korzhuk oksana.korzhuk@denizbank.com +7 (495) 783-31-40, +7 (495) 725-10-20

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