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Monday, May 30, 2005

Russia's Economy Slows Down Despite Record Oil Prices

Image from www.imagebank.com30.05.2005 15:54 MSK MosNews - Russia's economy is slowing despite record high oil prices as weakening business confidence, fuelled by the breakup of oil firm Yukos, saps growth, an Economy Ministry official said on Monday, May 30. "The economy's growth rate has slowed appreciably. What is this linked to? The value of work is falling significantly in the oil and gas industry, which is the motor of our economy," said Andrei Klepach, head of the Economy Ministry's macroeconomic forecasting department, quoted by the Reuters agency. A government-orchestrated breakup of Yukos, formerly the country's largest privately-owned oil company, which was pushed to the brink by huge back tax claims, has sent shock waves through the business community. Klepach told a news conference that falling investment reflected a weakening in business confidence in the aftermath of the Yukos affair. "We are not in a position fully to exploit our potential. We observe a fall in investments and oil production despite enjoying a windfall from high oil prices," he added. He also said there was a "problem of excessive tax demands on oil companies". As MosNews reported, Russia's President Vladimir Putin has called on the tax authorities to stop "terrorizing" business, but his demand has not been heeded so far and reforms, which would clip the wings of Russia's feared tax inspectors, have yet to see the light of day.

Thursday, May 26, 2005

Russia's Investment Climate Is Improving, But Not Fast Enough

Russia’s Investment Climate Is Improving, But Not Fast Enough05-26-2005 FC Info News - Since the beginning of this year, Russian companies have attracted over $6 bln into the country, including $1.9 bln in direct investment or nearly one-third more than in 2004, reports the State Statistics Committee. Investment is mostly channelled into Russia's raw materials sector, and only a minor part of funds goes to the processing sector (above all the food industry) and machine building (primarily automobile manufacturing). Moscow is far ahead of the other regions in investment attractiveness, absorbing the bulk of foreign and Russian capital. Neverteless Russia is losing the global competition for investment to its main rivals among the emerging economies - China, India and Brazil. It holds only the 11th place in the international rating of investment attractiveness.

Monday, May 23, 2005

EBRD Forecasts Economic Growth Slowdown and Investor Flight From Russia

Photo by MosNews.com23.05.2005 16:07 MSK MosNews - Experts of the European Bank for Reconstruction and Development (EBRD) published a forecast according to which economic growth in Russia in 2005 won't exceed 5.2 percent. Russian government officials still hope for 6.5 percent growth. EBRD experts also point out a lack of investor confidence and forecast investor flight from Russia. The economic growth forecast given by the bank's experts is the lowest of all the forecasts made by foreign experts. Analysts of the International Monetary Fund believe Russia's economic growth this year may amount to 5.5 percent, while World Bank specialists cited an even higher figure of 6.2 percent. EBRD experts believe that the factors which were responsible for Russian economic growth over the last four years - the fast growth of competitiveness which happened after the devaluation of the ruble in 1998 and the putting into operation of production facilities that had been idle since the perestroika years - have begun to grow weaker since 2004. In such conditions, the bankers say "the medium-term forecast depends on whether [the Russian authorities] are able to keep the investor confidence and continue reforms". The European Bank for Reconstruction and Development has called on Russian authorities for more government transparency and budgetary discipline. "It is necessary to toughen macroeconomic policies after such strong growth in order to cope with budgetary disbalance and decrease inflation," the bank's statement said. Meanwhile, the Russian government is doing completely the opposite. All the international observers agree that the budgetary discipline has been slacking. Preserving investor confidence also seems highly unlikely considering that the taxmen have a free rein, presenting back tax claims left and right. EBRD experts believe that Russia will soon see massive investor flight, as investors begin taking money out of the economy for fear of stricter state control. According to the data provided by the Russian Economy Ministry, in the first quarter of 2005 alone Russian companies and banks took $19 billion out of the country. This is the highest amount in the history of the new Russian economy. In all of last year about $40 billion left the country. Despite these dismal figures, the Russian government continues to hope for investment inflows and counts on them to fuel the economic growth of 6.5 percent. As the deputy Economy Minister Andrei Sharonov told the Internet daily Gazeta.Ru, the ministry so far has no plans to change the economic growth forecast. Meanwhile, economic data shows that in the first quarter of 2005 GDP growth in Russia amounted to 4.9 percent as compared to 7.3 percent in the same period last year. Independent Russian experts view government figures with skepticism and say that the end result is more likely to resemble the forecasts made by the European bankers.

Common Economic Misconceptions and the Politics of Trade

05-23-2005 Pavel Erochkine - Russia Profile - The latest opinion polls show that a new fear is emerging among the Russian population that, more than 15 years after the fall of the Iron Curtain, a new wall is appearing between Russia and Europe.
Policymakers in the European Union accept that EU-Russia relations are close to a post-Soviet low. A package of four common spaces – economy; external security; freedom, security and justice; and education, research and culture – was designed to develop the relationship, which is based on the Partnership and Cooperation Agreement of 1997, and set an ambitious agenda for partnership for the next several years. Both sides hope that the package will be adopted at the EU-Russia summit on May 10.
At a recent conference in Luxembourg on EU-Russia relations, which was organized by the Luxembourg Institute for European and International Studies and by the New Eurasia Foundation, almost all experts and policymakers agreed that most of the current problems result from lack of strategic vision and mutual understanding.
There are significant misconceptions about, for example, the proposed Common Economic Space, and one of the surprises at the EU-Russia summit will likely be the realization that this economic space is not about economics at all.
The EU is Russia’s single largest trading partner, and its share in Russia’s trade turnover has become dominant. It has increased from 37 percent in the mid-1990s to more than 50 percent today. Although much less significant, Russia’s share in EU trade will soon double from 4 percent to 8 percent. The economic links between Russia and the EU have been strengthening. Yet this increased economic integration has been driven by the expansion of the EU, economic growth and higher commodity prices, and not by reductions in trade barriers. Political ups and downs in EU-Russia relations have had very little effect on trade and financial flows.
Russian policymakers see the main benefit of the Common Economic Space in facilitating trade and investment, which are dominated by energy and are dangerously dependent on world oil prices. They are interested in diversifying Russia’s trade with the EU by getting the best deals for Russian companies in, for example, agriculture. They are fighting wholeheartedly over health and sanitation standards that could hurt Russian producers. Russia’s World Trade Organization accession negotiations have been driven by a similar pragmatism.
In contrast, for the EU, the Common Economic Space is a political issue. An official EU paper on the Common Economic Space states that the EU’s main interests are to foster political and economic stability in Russia, to contribute to the strengthening of the rule of law through the development of institutions and of legislative and judicial systems. The EU also hopes to support measures for a better investment climate in Russia, and to cooperate in combating “soft security threats.” These are the EU’s official objectives, and the paper does not mention anything related to the topics important to Russia, such as trade or economic integration.
The historical truth is that common economic spaces are rarely driven by economics. One of the first such spaces was COMECON, which from 1949 to 1991 linked the Soviet Union to Bulgaria, Czechoslovakia, Hungary, Poland, Romania and East Germany. Although more than 70 percent of an average member’s trade was within COMECON, it was an ideological system, and not a market system based on the comparative advantages of different members. Russia kept the system going by supplying other members with subsidized energy, and the system rapidly collapsed when this stopped. Russia and the East European members of the former COMECON have switched most trade from the CIS to the EU. Russia’s interest in COMECON was political and ideological, not economic. Today’s EU-Russia relations are the reverse.
The EU wants to have a market-oriented, democratic and well-governed neighbor, and not a bigger trading partner. The road maps and plans for legislative harmonization are designed accordingly. The Common Economic Space is not really intended to foster further economic integration, which is occurring anyway, but to make Russia accept certain rules and to force it into a certain framework. Many in the EU genuinely believe that they are creating this new framework for the benefit of both Russia and the EU.
Russia has huge mineral wealth, well-educated people and unexploited industrial potential. What it lacks is good governance, and it is rightly argued that introduction of European norms could help Russia turn the corner in this crucial area.
When one side talks about the rules of behavior and the other thinks they are taking about trade, it is inevitable that misunderstandings and clashes will occur. There are very similar problems in other areas.
Mutual understanding is the most powerful driver in international relations, and it is absent in the relations between Russia and the EU. The EU should make clear what it wants from Russia and what it thinks the benefits for Russia and the EU will be. Russia should do the same. They have to agree on common interests and have to form a common vision about their partnership, and only then can they create common spaces to accommodate them.

Friday, May 20, 2005

Foreign investment in Russia on the rise

05-20-2005 RBC News - Accumulated foreign capital in Russia amounted to $85.1 billion as of March 31, 49.1 percent up on the year, the federal state statistics service reported. This includes foreign investment reflecting redemptions, reassessments and other changes of assets and obligations in Russia's economy. Direct investment made up 44.5 percent, up from last year's 43 percent, and portfolio investment made up 1.9 percent, against 2.5 percent twelve months before. The largest investors in the Russian economy in the first quarter this year were Cyprus, Luxembourg, the Netherlands, the UK, the US, France, together accounting for 81.4 percent of total accumulated foreign investment. Foreign investment in Russia in Jan.-March 2005 amounted to $6 billion, 2.4 percent less than in the same period last year. Russia's investment accumulated abroad made $7.566 billion at the end of March 2005. In the first quarter of this year, Russia invested $6.4 billion abroad, which is 53.4 percent more compared with Jan.-March 2004. Most of Russian investment went to South Africa ($1.25 billion, or 16.5 percent of total investment), the Netherlands ($625 million, 8.3 percent), Cyprus ($561 million, 7.4 percent), the British Virgin Islands ($545 million, 7.2 percent), Ukraine ($479 million, 6.3 percent), Bahama Islands ($437 million, 5.8 percent), Iran ($407 million, 5.4 percent), the UK ($373 million, 4.9 percent), the United States ($352 million, 4.7 percent), and Lithuania ($282 million, 3.7 percent). Foreign investment in natural resources production totaled $1.183 billion in the first quarter of 2005, of which $954 million was invested in the production of fuel and energy resources. The largest investor in this sector was the Netherlands. Foreign investment in Russia's metal industry amounted to $705 million, including $39 million in direct investment and $2 million in portfolio investment.

Thursday, May 19, 2005

EBRD Issues Ruble-Denominated Bonds

EBRD logo / Image from MosNews.com archive19.05.2005 15:47 MSK MosNews - The European Bank for Reconstruction and Development said on Wednesday, May 18, that it has placed its first issue of ruble-denominated bonds amounting to 5 billion rubles ($178.6 million) and maturing in 2010. The information was reported by the Russian Time of News (Vremya Novostei) newspaper. The EBRD placed its bonds at par value by closed subscription among 12 Russian and foreign underwriter banks. The bond issue was arranged by the Russian structures of Raiffeisen Bank and Citigroup. The bonds carry a floating coupon rate pegged to the MosPrime Rate index (the average of interest rates, at which the group of banks participating in the index is ready to provide loans for a term of one to three months to top financial institutions). The index was specially developed for the EBRD by the National Monetary Association. The first coupon rate is based on a 4.04 percent index of annual interest. T his is an extraordinary event for the Russian market because a top-class borrower with the AAA/Aaa rating is joining it. The EBRD expects its papers to be traded soon on the Moscow Interbank Currency Exchange (MICEX) and will be included in the Bank of Russia pawn list. The EBRD clearly expects that the market will welcome the new bonds. However, investors have until now been skeptical about top papers of western issuers. Recently, Germany's EssenHyp Bank offered AAA/Aaa mortgage bonds to Russian market players. Rosbank Head of Debt Market Analysis Pyotr Grishin said that the EBRD bonds will be of interest for foreign investors. "Foreigners still hold the view that the ruble has potential for appreciation. Net foreign exchange investment is not quite a good thing, while foreign exchange risks in Russia are actually neutralized by risk-free ruble bonds." But Aton Capital analyst Alexei Yu thinks domestic banks will show as much interest as their foreign counterparts. "Russian banks will clearly not show strong demand," Yu said, noting it is more advantageous for them to be refinanced with the use of the Finance Ministry's bonds, which offer both higher rates and liquidity.


EBRD logoMOSCOW, May 18 (RIA Novosti) - The EBRD -- European Bank for Reconstruction and Development -- has for a first-ever time issued ruble bonds to circulate in the Russian market, Steven Kaempfer, bank vice-president for finance, announced to the media today. The EBRD is coming as the world's first international financial institution to issue ruble bonds in Russia, he stressed. The total batch will amount to five billion rubles (R27.99/$1 is the Central Bank rate for today), with a five-year payment term. Each bond will have a variable coupon. Intended for Russian capital investors, the loan fully complies with the acting Russian legislation, Kaempfer emphasized. The variable coupon rate is tied in with the MosPrime Rate, a new monetary market indicator, as elaborated under Russia's National Currency Association aegis. Eight major Russian-based banks guarantee indicator quotation. The MosPrime Rate is established for every day to reflect the rates on which creditor banks agree to offer loans to top-notch financial institutions for a month to three, explained the EBRD chief. The annual rate for EBRD bonds first coupon has been established at 4.04 per cent to change once every three months in conformity with the acting MosPrime offer rate for the period. Russia's Federal Service on Financial Markets will receive a project summary tomorrow. As soon as necessary papers are registered, the EBRD will apply to MICEX -- Moscow Interbank Currency Exchange -- to enter the bonds on its list, and to the Central Bank of Russia to include them in the pawning list. Raiffeisenbank Austria and Citigroup lead bond issue organizers, and ten banks -- Russian-based and transnational alike -- are among the underwriters, Kaempfer went on. The EBRD is coming out in the Russian market as a major capital investor -- it has invested, for today, close on six billion euros to fund roughly two hundred projects, he added. The projects the bank was funding, or intended to fund, needed ruble financing. The EBRD has grown to realize that point ever clearer. Besides, it is within its mandate, and in conformity with resolutions of its stockholders -- Russia among them, to promote the progress of domestic capital markets. Whatever revenues the bonds bring will be used entirely within the Russian market, Kaempfer pointed out. As for prospects for more ruble bond issues, the EBRD cannot be sure for now about exact dates. Anyway, the bank is envisaging a project financing line to exceed by far the present bond issue, he said.

Monday, May 16, 2005


MOSCOW, May 14 (RIA Novosti) - Morgan Stanley investment bank announced changes in its stock indexes yesterday, causing the weight of the Russian index in the regional index MSCI Emerging Market grew by 15%. It was the biggest increase in the weight of Russian companies in the MSCI index in the past few years, Kommersant reported. Because of this, the MSCI Russia index includes new papers - MTS, VimpelCom, AFK Sistema, the steel group Mechel, Wimm-Bill-Dann, VolgaTelecom and Transneft. The weight of shares that had been included in the index before, like those of LUKoil, Surgutneftegaz and Norilsk Nickel, decreased. Mosenergo shares were removed from the index. Experts describe the increase, which many big investors use as a guideline for forming their portfolio, as a clearly positive factor for Russia as a whole. In the past, the MSCI index included only the shares that were actively marketed in the RTS and MICEX. But now it also includes Russian companies whose papers are marketed on Western exchanges like the London Stock Exchange and the New York Stock Exchange. This will give additional support to the Russian shares, said Alex Kantarovich, chief strategist at Aton. Funds with equities worth $100 billion take into account MSCI Emerging Market indexes when deciding how to invest. Fund manager's attention will be drawn above all to the new companies included in the index, Kantarovich said. This will have the biggest effect on the least liquid of companies included in the index - VolgaTelecom and Transneft, said Ovanes Oganesyan, an analyst with Renaissance Capital. A big fund that invests 2% of its portfolio in Transneft shares will greatly increase the quotations of the liquid company, he said. Changes in the indexes are effective since May 31, but investors are expected to form their portfolios in advance.


BEIJING, May 14. (RIA Novosti) - Favorable terms proposed by St. Petersburg will allow it to attract up to $1.5 bln of Chinese investment within eight years to carry out a social infrastructure project. On May 14, St. Petersburg administration intends to sign an investment contract with Shanghai Industrial Investment on the terms of constructing a multifunction complex in St. Petersburg, the city's governor Valentina Matviyenko announced in the Chinese capital on Friday. At Friday talks in Beijing the Chinese party emphasized the importance of the project, she said. "This is China's largest investment project abroad," she explained, adding that this pilot project was also expected to demonstrate the country's abilities. Matviyenko described the project, Baltiyskaya Zhemchuzhina, as "a very necessary and socially important project for the city." After its implementation St. Petersburg will receive 1 mln sq m of housing, a social infrastructure, including hospitals, schools, clinics, kindergartens, sports facilities, hotels and business centers, and an improved embankment and beach, she said. The project will provide housing for 35,000 citizens of St. Petersburg, Ms. Matviyenko emphasized. The city and Chinese investors are both interested in the success of the project, she added. "Importantly, Chinese investors are coming to an empty place, where there is neither engineering infrastructure nor heat sources," she said. The Chinese company will have to invest $200 mln only to prepare the territory and create engineering infrastructure, she added. On May 14 Shanghai will host the opening of an economic forum titled "St. Petersburg - Shanghai: Developing Cooperation in Trade and Investment". Ms. Matviyenko is expected to speak at the opening. The agreement on the procedure of fulfilling the strategic project was signed on December 20, 2004. The construction will be launched in June 2005 and is scheduled to finish in 2010-2013. Earlier the St. Petersburg administration's press service reported that the investors intended to invest $1.5 bln in the construction.

Thursday, May 12, 2005

IMF Predicts Russian Economic Growth at 6% in 2005

Image from MosNews archive12.05.2005 12:08 MSK - MosNews - Paul M. Thomsen, the IMF's senior resident representative in Moscow, said on Thursday, May 12, that the rate of economic growth in Russia will amount to six percent this year. Thomsen was speaking at the third annual banking conference "Stake on Russia" organized in London by The Banker magazine. "We expect this year's increase roughly at six percent. Though it is much less than last year, the capital inflow will start reviving," Thomsen was quoted by RIA Novosti. The IMF expert added that in his opinion Russia has no need for a rate of economic growth higher than five or six percent, because otherwise it will suffer from additional inflationary pressures. Thomsen also said that the Russian government has to make a choice between 5-6 percent economic growth, with inflation under control, and quicker progress with galloping inflation. The IMF representative also admitted that the long-awaited reforms in the housing and public utilities sector, as well as in the natural resources sector and the administrative reform would create certain socio-political problems, but stressed that reforms had to be tackled while the government can make use of high world oil prices. High oil prices promote the overall growth of the Russian economy and also fuel public consumption as well as an increase of the population's real incomes and labor efficiency. Economic growth will continue even if oil prices fall, he noted. Not all IMF experts are so optimistic about Russia's prospects, however. Michael Deppler, the director of the IMF's European Department which oversees Russia, told the Russian daily Time of News (Vremya Novostei) that inflation in Russia will exceed 10.5-11 percent this year. "According to our forecast the current policy [of the Russian government] will lead to 10.5-11 percent inflation in 2005, but we are afraid that even this considerable deviation from the earlier government forecast may be exceeded," Deppler said. As MosNews reported earlier, the original inflation forecast for 2005 amounted to 8.5 percent, but in April the Russian government was forced to increase it to 10 percent. Deppler said that in his opinion the major reason for the growing inflation in Russia is a failure of the budgetary policies of the government. The government is unable to counteract the growing consumer demand fueled by profits from high world oil prices. "In order to decrease inflation, a tougher budgetary policy is needed," he said. Another problem is the Russian Central Bank which tries to prevent the domestic currency, the ruble, from appreciating too much and as a result pours large amounts of rubles into the economy. The IMF official said that a more flexible currency exchange policy would allow a decrease in inflation.

Wednesday, May 11, 2005

China to Invest $12Bln in Russian Economy by 2020

Photo from www.georgeandpaula.com05-11-2005 - MosNews - By 2020 China plans to increase the sum of its capital investments in Russian economy to $12 billion. The news was reported by a Kremlin source, quoted by RIA Novosti, on Monday, May 9, following a meeting of Russia's President Vladimir Putin and China's President Hu Jintao.
According to the agency's source, trade and economic cooperation between the two countries is developing successfully. The source noted that in 2004, trade turnover between Russia and China was the highest in the history of bilateral relations. According to the data provided by Russian statistics, the volume of trade turnover amounted to almost $15 billion, while Chinese statistics show a figure of $21.2 billion.
Based on the results of last year, Russia became China's ninth largest trade partner. The source also recalled that the Russian and Chinese governments have agreed to increase the volume of bilateral trade to $60 billion by 2010.

Wednesday, May 04, 2005

New Opportunities For Russian-American Partnership

May 4, 2005 Moscow. (Sergei Rogov, for RIA Novosti) - George Bush and Vladimir Putin will have an opportunity to stabilize U.S.-Russian relations when they meet during the 60th anniversary celebrations of VE Day in Moscow. This will only benefit both countries, as they, just like the rest of the world, have to counter common threats, such as international terrorism, the proliferation of weapons of mass destruction, simmering regional conflicts, and emerging global economic and environmental problems. Peace and stability across the planet can only be achieved through joint efforts and this is the foundation of long-term partnership between Russia and the United States. During their February summit in Bratislava, the two presidents adopted important decisions on cooperation in ensuring nuclear security and on preventing terrorists from using nuclear weapons. Nevertheless, bilateral relations are not at their highest ebb, as negative attitudes toward each other have emerged in both countries. The reasons for this are well known. The United States is worried about Russia's "backsliding" on democracy and pursuing a "neo-imperialist policy" on the domestic scene. Russia is concerned about U.S. policy in Ukraine and other CIS nations. Nor is it happy about U.S. attempts to secure "regime change" in those countries that fail to meet its standards of democracy. Democrats in Congress and Republican right-wingers have made renewed calls to deter Russia, thereby trying to revive the spirit of the Cold War in Russian-U.S. relations. Indeed, many people in Russia, to say nothing of America and Europe, say America and the West as a whole are Russia's eternal foes and partnership is impossible. Today, 15 years after the Soviet Union collapsed, Russia may be forced "to pay" for losing the Cold War. In other words, it will be treated as a third-rate country that should toe the winners' line. Russia will never accept this approach. It wants to cooperate with the U.S. on the basis of trust, but will not be dictated to as it was in the 1990s, when it was told what economic policy to pursue and how it should act in the former Soviet republics. In his state of the nation address on April 25, President Putin emphasized that democratic values were an absolute priority for Russia. But will Russia be able to become a mature democracy with a developed market economy if it remains isolated from advanced democracies or is locked in confrontation with them? At an April 28 news conference, President Bush virtually rebuffed the hard-liners' calls to forego partnership with Russia. In his opinion, Russia and the U.S. can and should cooperate despite current disagreements. Recent events in Kyrgyzstan, where both Russia and the U.S. have military bases, create more opportunities for Russian-American cooperation. Through concerted efforts they can help prevent al-Qaida-linked fundamentalists from destabilizing the situation in Central Asia. Considering that the Russian and American troops are deployed close to each other, it would make sense to let them cooperate and conduct joint maneuvers. Moreover, both Russia and the U.S. can cooperate in fighting drug production in Afghanistan and trafficking out of the country. Russia is seriously concerned about the production of drugs since the fall of the Taliban regime, as Afghanistan has now turned into the main transshipment point for sending drugs from Central Asia to Russia and Europe. Russia's decision to join the NATO Status of Forces Agreement creates more opportunities for expanding and stabilizing Russian-American contacts. This agreement covers the legal aspects of personnel and equipment deployment on foreign territory and regulates their transit. This means the U.S. and NATO can supply their troops in Kyrgyzstan and Afghanistan via Russian territory. Cooperation in this sphere will promote mutual trust and demonstrate that Russia and the U.S. are not engaged in some idle competition. Other post-Soviet nations, like Georgia and Ukraine, will see it as an example to follow. At any rate, they will realize that it is pointless to exploit Russian-American contradictions. When the Russian and U.S. presidents issued a joint statement marking the 60th anniversary of Soviet-U.S. meeting on the Elbe, they said the new century had brought more opportunities for building a lasting peace on the foundations of law and common values of freedom and democracy. As Russia and the United States develop a closer partnership, the Elbe meeting serves as reminder of the opportunities they can provide for themselves and the rest of the world when they are united in the face of global challenges and cooperate for the sake of progress. Sergei Rogov is the director of the Institute of the U.S.A. and Canada, and a corresponding member of the Russian Academy of Sciences.

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