2. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
2
POLITICO ECONOMIC RESULTS IN APRIL 2014
S.Zhavoronkov
Further escala on of the crisis in Ukraine, the likely
commencement of sweeping combat opera ons and
subsequent imposi on of interna onal sanc ons
against Russia made the headlines in April 2014. On
April 5–6, opponents to the Kiev government seized
the regional administra on buildings in Dontesk and
Lugansk, a similar a empt failed in Kharkov. The po-
lice and secret service in Dontesk and Lugansk ceased
to perform their du es, and the insurgents also began
to seize other buildings and build barricades around
them, namely city halls, police sta ons and security
service buildings, TV centers, etc. They are heavily
armed, and all the a empts to wrest ground from
them within the month failed, although this is not to
say that they are controlling the en re regions. They
have proclaimed so called “people’s republics” which
are supposed to be legalized through referendums
scheduled on May 11, a week before the upcom-
ing presiden al elec on in Ukraine. In fact, there are
not many of them, just about 100 or 200 persons in
each of the major ci es, however, most of them are
combat-capable and highly mo vated. The situa on in
the Crimea, where the idea of holding a referendum
and being accessed to Russia was supported by the
overwhelming majority of the local council members
and representa ves of elite groups, differs from that in
Dontesk and Lugansk where totally unknown persons
have been put in charge of “people’s republics”, name-
ly the Head of Dontesk People’s Republic, D. Pushilin,
who made no secret of that he worked as team leader
in a Ponzi scheme called MMM as early as the middle
of March. The local elites represented by council mem-
The situa on in Ukraine ratcheted up sharply in April 2014 in the Dontesk and Lugansk Regions, where armed
insurgents seized the regional administra on buildings. Nego a ons in Geneva between officials from Russia,
Ukraine, the United States, and the European Union came to an agreement on April 17 on disarmament of the
insurgents subject to their amnesty. However, not only did the insurgents defy the agreement, they also began to
take hostages, OSCE diplomats. Russia keeps demanding to desist from the use of force against the insurgents,
however it remains unclear what should be done under the circumstances. Again, Russia and Ukraine have found
themselves on the verge of war, with Russia facing the threat of tougher individual and economic sanc ons by
OECD member states. In Russia, a law regarding the collec on of signatures for elec ons at all levels (save for
par es that have passed the 3% threshold at the federal elec on) was adopted on the second, most important,
reading, as well as a law on the abolishment of direct vo ng for mayors and city council members passed the first
reading – the law, however, is going to be amended so that it retains the possibility of direct vo ng for mayors
with the consent of a regional legisla ve body. Substan al adjustments were made to the adopted in the first
reading federal law On the Russian Ci zenship whereby the eligibility for the Russian ci zenship was toughened
for dozens of millions of Central Asian na onals.
bers, businessmen, mayors have taken a two-faced po-
si on. On the one hand, they claim that Ukraine must
be united, on the other hand, they speak up for the
need to undertake reforms, delegate more powers to
the regions, finalize the Russian language status1
, etc.
Quadripar te nego a ons on de-escala on of the
situa on in Ukraine were held on April 17 in Geneva
between officials from the United States, the Europe-
an Union, Ukraine and Russia. The par es to the agree-
ment formulated a fairly reasonable document focus-
ing on the disarmament of all illegal armed groups and
simultaneous adop on of an amnesty law, freeing the
seized buildings, and commencement of a dialogue on
undertaking a cons tu onal reform delega ng more
powers to the regions. An OSCE mission was assigned
to supervise the agreement. However, it turned out in-
stantly that the insurgents recognized no agreements,
i.e. they regarded themselves legi mate, whereas
the Kiev government was illegi mate for them. Rus-
sian diplomats began to ac vely support their stance,
speaking about the need to disarm Right Sector and
other armed groups. Furthermore, OSCE representa-
ves were taken hostage in Slavyansk by the most ag-
gressive group of insurgents. Russia, on the one hand,
speaks against using force against the insurgents, on
the other hand, it either has no control over them or
no inten on to give them any instruc ons whatsoever.
1 The Russian language is presently considered a regional lan-
guage in 12 Ukrainian regions, which means it may be used at state
government bodies, in legal proceedings, for record-keeping. How-
ever, this status is established by an ordinary law and vulnerable to
a simple majority decision in the parliament.
3. POLITICO-ECONOMIC RESULTS IN APRIL 2014
3
There is no secret about the possibility of sending Rus-
sian troops to Ukraine. Under the circumstances, the
United States has called for other states, above all,
European countries, Japan, Canada, Australia, etc. to
impose more sweeping sanc ons against Russia if the
situa on remains the same.
Should Russian troops appear in the con nental
Ukraine, such sanc ons are likely to be imposed, and
it will be painful enough for the country with 3% of
the global GDP facing sanc ons from the countries ac-
coun ng for about 60% of the global GDP. What kind
of sanc ons could be imposed? The simplest way is to
extend the list of individual and visa sanc ons. How-
ever, it should be noted that the EU member states
have so far imposed limited sanc ons covering the
persons who are holding no legal assets in the Europe-
an Union. Sanc ons against certain companies, banks
and enterprises (similar to Y. Kovalchuk’s Russia bank)
controlled by President Pu n’s friends will be even
more uncomfortable: such sanc ons will hit the en re
Russian economy, not just a small number of persons.
Third, restric ons are likely to be imposed on lending
to Russian companies whose debt, mostly short-term,
totals $650–700bn, according to different es ma ons.
As a ma er of fact, the recently downgraded Russia’s
ranking by the key ranking agencies already means ap-
precia on of credit resources. Finally, for all the impor-
tance of Russia’s supplies of natural gas and crude oil
to Europe, a part of them can be subs tuted: through
curtailment on demand, replacement with renewable
energy sources and coal, further li ing the sanc ons
against Iran, li ing the ban on export of U.S. crude oil,
further construc on of regasifica on terminals, etc.
Sanc ons similar to those against Iran may be based
on imposing limits through mathema cal calcula on
of the quan ty of resources which can hardly be sub-
s tuted (Japan and South Korea were en tled to buy
a certain amount of Iranian crude oil even during the
crackdown period).
Russian officials’ assessments of sanc ons differ
ver cally: for example, unlike President Vladimir Pu n
and Prime Minister Dmitry Medvedev who sprightly
say that Russia may well benefit from sanc ons, for ex-
ample, Director of Finance Ministry’s Long-Term Stra-
tegic Planning Department Maxim Oreshkin es mates
Rb 1 trillion of poten al losses for the federal budget
in 2014, including revenues from priva za on, internal
and external loans, profit tax, etc., while the Ministry
of Economic Development of Russia has downgraded
by four mes, from 2.5% to 0.6%, its economic growth
projec on.
Furthermore, it’s not quite clear what for Russia
should sustain such losses. The groups of insurgents
in eastern Ukraine are regarded as assaulters, not de-
fenders who need projec on, besides they defy ne-
go a ons. Unlike the Crimea, the local government
authori es (mayors, regional and municipal councils)
don’t support them, and they are not legi mate. The
idea of proclaiming “buffer” republics (this is what
the insurgents have demanded so far, not accession
to Russia) doesn’t look promising at all for the local
popula on: since most of the products of steel works
and coal mines are exported to the European Union,
the respec ve revenues would be lost. And speaking
of Russia’s subsidies, they have to be much bigger than
in the Crimea: the Dontesk and Lugansk Regions alone
have about 7 million popula on (against 2 million in
the Crimea). Therefore, mee ng the Geneva agree-
ments would be the best op on indeed. However, the
situa on has been developing the other way round.
Amendments to the Federal Law On the Russian
Ci zenship ini ated by the Russian Government early
in March were finally made in April. As a reminder,
the law originally provided for making any successor,
a “Russian na ve speaker”, of those who lived not only
in the U.S.S.R. but also the Russian Empire (!) eligible
for the Russian ci zenship – the “na veness” itself
was supposed to be simply iden fied during an inter-
view rather than through a formal examina on. An
essen al amendment narrowing the coverage of the
law to the current borders of the Russian Federa on
(i.e. including the Crimea) was made to the law prior
to the key second reading, whereby the main threat
was eliminated indeed – the eligibility for the Russian
ci zenship was ghtened for dozens of millions of na-
onals from the Central Asia.
Amendments to the Federal Law On Regional Elec-
ons weren’t good enough too. As a reminder, a law
was adopted in March in the first reading which re-
quires the collec on of signatures from at least 0.5%
of voters to be able to run for elec ons based on party
lists and at least 3% of signatures to run for elec ons
at single-mandate cons tuencies for all poli cal par-
es but those who passed the 3% threshold during
the federal elec ons (i.e. the four parliamentary par-
es and Yabloko) or have a fac on in at least a single
cons tuent en ty of the Russian Federa on (now,
seven more par es). Previously, par es were en tled
to nominate their candidates without having to collect
signatures. Dras c adverse amendments were made
to the law on the second reading – first, par es col-
lected more than 3% of votes retained the right to run
for elec on across Russia, while par es represented in
the legisla ve body of the cons tuent en es of Rus-
sia may nominate candidates, without having to col-
lect signatures, only in the cons tuent en ty they are
represented, second, municipal elec ons are subject
to the same regula ons – considering that many re-
4. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
4
gions including Moscow or St. Petersburg never held
local elec ons based on party lists, it appears that all
but the four parliamentary par es plus Yabloko will
have to collect signatures.
Furthermore, an explicitly repressive Federal Law
On the Abolishment of Mayoral Elec ons and Direct
Elec ons of Municipal Council Members submi ed
by a group of State Duma members, most of which
are members of the poli cal party United Russia, was
adopted in the first reading. Under the law, direct elec-
ons must be abolished anywhere except rural set-
tlements and replaced with an unprecedented in the
modern world framework of indirect elec on of council
members: regional duma (council) members are first to
be elected, then they are to elect among themselves
municipal council members who in turn select a mayor
among themselves. Furthermore, the law establishes
the unified number of candidates from each district ir-
respec ve of its popula on size, thereby a huge district
with an electorate comprising hundreds of thousands
persons may turn out to have a representa on similar
to that of a small suburb area with 2,000 to 3,000 elec-
torate. Addi onally, it is worth recalling that Vladimir
Pu n promised in his February 2012 pre-elec on ar -
cle to introduce na onwide direct mayoral elec ons, if
he wins. Considering the opposi on’s recent success at
the mayoral elec ons in Novosibirsk and Yekaterinburg,
the third and fourth largest ci es in Russia, the law can
be regarded as pure mockery, especially in terms of
the requirements for a “federaliza on” in neighboring
Ukraine. This me the law has been strongly opposed
not only by minor poli cal par es, but also the Com-
munist Party of Russia (KPRF) and Just Russia, because
the law seriously undermines the concept of the ex-
istence of their regional branches which could a ract
resources from candidates at local elec ons. Head of
Internal Policy Department of the Presiden al Execu-
ve Office Morozov O. stated in his report at a forum
of the All-Russia People’s Front (ARPF) that it would be
reasonable to retain the possibility of direct elec ons.
However, first, this is le to the discre on of the regions
themselves (governors have li le interest in direct elec-
ons), second, a mandatory system of appoin ng city
managers is to be introduced, under which city manag-
ers will exercise basic powers, not the elected mayor, if
the mayoral elec on system remains intact. Moreover,
a city manager is appointed by a governor: the governor
delegates a half, not one third, of the contest commit-
tee. In terms of electoral consequences, the law may
play a nasty trick with its ini ators at federal rather than
local elec ons, as was the case with the countrywide
replacement of elected governors in 2008–2011 with
unpopular appointees which had an adverse effect on
the United Russia’s results.
5. INFLATION AND MONETARY POLICY IN MARCH 2014
5
INFLATION AND MONETARY POLICY IN MARCH 2014
A.Bozhechkova
In March, the infla on rate in the Russian Federa-
on visibly accelerated: the Consumer Price Index, as
seen by the month end’s results, rose to 1% (vs. 0.7%
in February 2014), thus climbing 0.7 pp. above its year-
earlier level. As a result, the infla on rate in per-annum
terms went up to 6.9% (Fig. 1). The core infla on rate1
in March 2014 was 0.8%, which represented a 0.4 p.p.
rise on March 2013.
During March, the prices of foodstuffs rose by
1.8% (Fig.2). By comparison with February 2014, the
growth rates of prices for cereals and legumes, meat
and poultry, milk and dairy products, fruit and vege-
table products, alcoholic beverages, fresh eggs, and
granulated sugar increased from 0.0% to 0.9%, from
0.1% to 0.4%, from 1.6% to 2.6%, from 5.1% to 5.3%,
from 2.0% to 2.3%, from -7.4% to 2.9%, and from
1.7% to 7.8% respec vely. The growth rates of prices
for bu er dropped from 2.2% in February to 1.8% in
March.
The prices and tariffs established for commercial
services rendered to the popula on increased by
0.4% in March a er rising by 0.4% in February. The
growth rate of tariffs for housing and u li es services
in November amounted to 0.2%, which represented a
0.1 p.p. rise on February. By comparison with Febru-
ary, the growth rates of prices for outbound tourist
services, services provided in the field of physical cul-
ture and sport, services rendered by cultural establish-
ments, and recrea onal services increased from 2.4%
to 2.7%, from 0.4% to 0.8%, from 0.7% to 1.2%, and
from 0.1% to 0.6% respec vely. The growth rates of
prices for medical services and preschool educa on
services con nued to decline. By comparison with
February, they dropped from 1.1% to 0.5%, and from
2.1% to 0.7% respec vely.
1 The core consumer price index reflects the level of infla on on
the consumer market a er adjustment for the seasonal (prices of
vegetable and fruit products) and administra ve (regulated tariffs
for certain types of services, etc.) factors. This index is also calcu-
lated by the RF Sta s cs Service (Rosstat).
In March 2014, the Consumer Price Index (CPI) amounted to 1% (vs. 0.3% in March 2013), which represents a
0.3 p.p. rise on February 2014. As a result, the infla on rate in per annum terms, as seen by the results of the
past 12 months, rose to about 6.9%. Over the period from 1 April through 21 April, the CPI climbed to 0.3%. On
3 March 2014, the Bank of Russia temporarily increased the key rate from 5.5% to 7% per annum. On 25 April
2014, Russia’s financial regulator again increased the key rate, to 7.5% per annum, thus con nuing the toughe-
ning of monetary policy.
Over the course of March, the growth rate of prices
for non-food commodi es amounted to 0.7%, which
represented a 0.3 pp. rise on February. In this commo-
dity group, the steepest accelera on was recorded by
the growth rates of prices for tobacco products (+3.5%
in March vs. +1.7% in February), motor gasoline (+1.5%
inMarchvs.+0.4%inFebruary),pharmaceu cals(+1.1%
in March vs. +0.7% in February), construc on materi-
als (+0.5% in March vs. +0.2% in February, tex le and
tex le products (+0.6% in March vs. +0.3% in February),
and footwear (+0.5% in March vs. +0.2% in February).
During April, the rate of infla on con nued its up-
ward movement, mainly due to the seasonal rise in
prices for fruit and vegetable products and the unfa-
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
01.01.2011
01.04.2011
01.07.2011
01.10.2011
01.01.2012
01.04.2012
01.07.2012
01.10.2012
01.01.2013
01.04.2013
01.07.2013
01.10.2013
01.01.2014
Source: Rosstat.
Fig. 1. Growth Rates of the Food Price Index
in 2011–2014 (% Year-on-Year)
0,0
5,0
10,0
15,0
20,0
Jan08
May08
Sep08
Jan09
May09
Sep09
Jan10
May10
Sep10
Jan11
May11
Sep11
Jan12
May12
Sep12
Jan13
May13
Sep13
Jan14
food products non-food products paid services
Fig. 2. Infla on Factors, 2008–2014 (as a Percentage
of the Previous Year’s Corresponding Month)
6. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
6
vorable situa on on the dairy products market, pork
market and gasoline market. Bearing in mind that im-
ports make up a considerable share of total consump-
on in Russia, it should be noted that Russian infla on
might be pushed up, to some extent, by the weaker
ruble. The Consumer Price Index for the first 21 days
of April amounted to 0.6% (vs. 0.4% for to the same
period of 2013). At present, the main factors that are
keeping infla on at bay are the lack of significant de-
mand pressure on prices and the current drop in glo-
bal prices for agricultural prices.
Over the course of March 2014, the broad mone-
tary base increased by 1.2% to Rb 9,344.7bn (Fig. 3).
Its increased components included the monies kept on
commercial banks’ correspondent accounts with the
RF Central Bank (growth by 16.1% to Rb 1,162.6bn),
banks’ deposits (growth by 11.0% to Rb 118.7bn), and
required reserves (growth by 6.5% to Rb 442.7bn).
The volume of cash in circula on, including the cash
balances of credit ins tu ons, dropped by 1.1%, to
Rb 7,620.7bn.
The narrow monetary base (currency issued by the
Bank of Russia plus required reserves) over March
shrank by 0.7%, to Rb 8,062.4bn as of 1 April (Fig. 4).
During March 2014, the surplus reserves held
by commercial banks1
dwindled by 15.6%, to
Rb 1,281.3bn, while the amount of banks’ repo debt
increased by 29.9%, to Rb 3.05 trillion. As of 25 April,
banks’ repo debt amounted to Rb 3.2 trillion. The inter-
est rate in the interbank market2
in March was on the
average at the level of 7.9% (against 6.0% in February
2014). Over the period from 1 April through 25 April,
the average interbank interest rate was 7.7% (Fig. 5).
The sharp rise in the interbank interest rate was
caused by the Bank of Russia’s decision, of 3 March
2014, that the key interest rate should be tempora-
rily increased by 1.5 pp., from 5.5% to 7% per annum,
and that the interest rates on liquidity provision and
absorp on instruments should also go up because of
the rapidly worsening situa on on financial markets,
brought about by the turmoil in Ukraine.
At the three-month REPO auc on for loans secured
by non-marketable assets, held by the Bank of Russia
on 6 March 2014, the cut-off rate was set at 7.41%,
while total amount allo ed was Rb 200bn. In the
course of another such auc on held on 14 April 2014,
a total of Rb 700bn was allo ed, the cut-off rate being
set at 7.26% per annum. It should be noted that, al-
1 The surplus reserves held by commercial banks at the RF CB
are understood as the aggregate balance of their correspondent
accounts, deposits with the RF CB, and the bonds issued by the
RF CB and held by commercial banks.
2 The interbank interest rate is the average monthly interest
rate on overnight ruble-denominated interbank loans (Moscow
Interbank Actual Credit Rate – MIACR).
though the terms of lending at such auc ons are very
so (the Bank of Russia provides loans under floa ng
interest rates), only big banks are capable of par cipat-
ing in these REPO auc ons, because they alone pos-
sess the assets to be pledged as collateral thereat.
As of 1 April 2014, the Bank of Russia’s interna-
onal reserves volume amounted to $ 486.1bn, hav-
ing shrunk since the year’s beginning by 4.6% (Fig. 4).
At the same me, over the course of November, the
reserves backed by monetary gold declined by $ 1.2bn
due to a downward adjustment of asset value. In the
main, the dwindling of the Bank of Russia’s interna-
onal reserves in the period January–March 2014 was
caused by the financial regulator’s foreign exchange
interven ons designed to support the ruble in a situ-
a on characterized by the weakening of developing-
country currencies and the geopoli cal consequences
of the Ukrainian unrest.
As seen by the March 2014 end results, the Bank
of Russia’s foreign exchange interven ons in the form
of foreign exchange sales comprised $ 22.3bn and
EUR 2.3bn (Fig. 6). In March, the financial regulator
purchased $290m for the purpose of replenishing or
spending the monies held by the Federal Treasury as
part of sovereign funds denominated in foreign cur-
0
1000
2000
3000
4000
5000
01.01.2008
01.05.2008
01.09.2008
01.01.2009
01.05.2009
01.09.2009
01.01.2010
01.05.2010
01.09.2010
01.01.2011
01.05.2011
01.09.2011
01.01.2012
01.05.2012
01.09.2012
01.01.2013
01.05.2013
01.09.2013
01.01.2014
Blnrubles
Overnight loans' debt Other loans' debt Lombard loans' debt
REPO debt Unsecured loans
Fig. 3. The Movement of Commercial Banks’
Debt to the Bank of Russia in 2008–2014
370
420
470
520
570
3600
4400
5200
6000
6800
7600
8400
29.12.07-4.01.08
3-9.05.08
6-12.09.08
10-16.01.09
16-22.05.09
19-25.09.09
22-28.01.10
28.05-3.06.10
1-7.10.10
7-13.02.11
14-20.06.11
18-24.10.11
21-27.02.12
26.06-2.07.12
30.10-5.11.12
5-11.03.13
15-20.07.13
18-25.11.13
28.03-04.04.2014
blndoll.
blnrub.
Monetary base (billion rubles)
Gold and Foreign Currency Reserves (billion dollars)
Fig. 4. Behavior of Russia’s Narrow Monetary Base and
Gold & Foreign Currency (Interna onal) Reserves in 2007–2014
7. INFLATION AND MONETARY POLICY IN MARCH 2014
7
rencies. It should be noted that the March 2014 inter-
ven ons exceeded threefold the previous three-year
high ($8.6bn in January 2014). Over the course of
March, the financial regulator eight mes revised the
boundaries of the bi-currency basket’s floa ng corri-
dor by 5 to 10 kopecks, thus pushing them up to the
level of Rb 36.25 – 43.35. In the period from 1 April
through 24 April, the financial regulator twice revised
the boundaries of the bi-currency basket’s floa ng
corridor by 5 kopecks. As of 24 April, the boundaries of
the bi-currency basket’s floa ng corridor were set at
Rb 36.35–43.35. Over the period from 1 April through
24 April, the volume of foreign exchange sales by the
Bank of Russia amounted to $ 2.4bn, while the scope
of foreign exchange interven ons undertaken by the
financial regulator in order to replenish the monies
held by the Federal Treasury as part of sovereign funds
was $ 878bn. In April, the situa on on Russia’s foreign
exchange market became rela vely stable, but in the
short term-term perspec ve the behavior of the ruble
will s ll be determined by geopoli cal factors.
According to the Bank of Russia’s preliminary es-
mates, net capital ou low from Russia in Q1 2014
climbed to $ 50.6bn, which represented a 1.8-fold in-
crease on the same period of 2013. It should be noted
that over the whole year 2013, net capital ou low
from Russia amounted to $ 59.7bn. Over the course
of Q1 2014, net capital ou low from the banking sec-
tor rose to $ 18.9bn, and that from all the other sec-
tors – to $ 31.7bn. The main factor behind this huge
capital ou low in Q1 2014 was the tense geopoli cal
situa on.
During March, the ruble’s real effec ve exchange
rate against the two major foreign currencies dwindled
by 1.75% (vs. -3.9% in February 2014). On the whole,
over the course of Q1 2014, the ruble’s real effec ve
exchange rate against the USD and the EUR dropped
by 4.6% on Q4 2013 and by 8.5% on Q1 2013 (Fig. 7).
During March, the exchange rate of the US dollar
against the ruble dropped by 0.5% to Rb 33.0; the eu-
ro’s exchange rate against the ruble dropped by 1.6%
to Rb 38.4. The exchange rate of the Euro against the
ruble shrank by 1.2% to Rb 49.1. In March, the aver-
age exchange rate of the Euro against the USD was
1.38 USD per Euro. During that month, the value of
the bi-currency basket declined by 1.4% to Rb 41.7.
It should be noted that in March the value of the bi-
currency basket hit its all- me high of Rb 43.1. As seen
by the results of the first 25 days of April, the exchange
rate of the USD against the ruble went up by 0.2% to
35.7 rubles per USD, while the exchange rate of the
Euro increased by 0.7% to 49.3 rubles per Euro. As
a result, the value of the bi-currency basket grew by
0.5% to Rb 41.8. In April, the average exchange rate
of the Euro against the USD was 1.38 USD per Euro. It
should be noted that the strengthening of the Euro is
caused by both the Euro zone’s economy exi ng reces-
sion and by the conserva ve monetary policy pursued
by the European Central Bank. The weakening of the
ruble against the USD in the period January–March
2014 was caused in the main by the considerable in-
tensifica on of capital flight from Russia resul ng
from the unstable geopoli cal situa on in Ukraine,
op mis c forecasts for US and EU economic growth,
and the ongoing slowdown in the growth rates of the
2
4
6
8
10
10.01.2012
09.02.2012
14.03.2012
13.04.2012
17.05.2012
19.06.2012
19.07.2012
20.08.2012
19.09.2012
19.10.2012
21.11.2012
21.12.2012
30.01.2013
01.03.2013
03.04.2013
08.05.2013
11.06.2013
12.07.2013
13.08.2013
12.09.2013
14.10.2013
14.11.2013
16.12.2013
23.01.2014
24.02.2014
27.03.2014
MIACR rate on ruble loans for 1 day in the interbank market
Minimum REPO rate at Auction for One Day and for One Week
Deposit Rate for One Day
The Fixed Rate on Operatons to Provide Liquidity
Overnight Rate
Maximum rate at deposit auction for 1 week
Fig. 5. The Bank of Russia’s Interest Rate Corridor and the
Interbank Market’s Behavior in 2012–2014 (% per Annum)
-20000
-15000
-10000
-5000
0
5000
10000
Mar10
Jun10
Sep10
Dec10
Mar11
Jun11
Sep11
Dec11
Mar12
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
0
10
20
30
40
50
mlndoll.
doll.
Currency interventions ("+" - net purchase, "-" - net sales)
Official currecy basket / Rub (end of period)
Fig. 6. The Bank of Russia’s Currency Interven ons
and the Ruble Exchange Rate against the
Bi-currency Basket in March 2010 – March 2014
0
50
100
150
200
20
30
40
50
60
jan05
jun05
nov05
apr06
sep06
feb07
jul07
dec07
may08
oct08
mar09
aug09
jan10
jun10
nov10
apr11
sep11
feb12
jul12
dec12
may13
oct13
mar14
Official USD/RUR exchange rate (end of period)
Official EUR/RUR exchange rate (end of period)
Value of the two-currency basket
Real effective exchange rate index (right scale)
Fig. 7. Behavior of the Ruble’s Exchange Rate
Indicators in January 2005 – February 2014
8. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
8
Russian economy. The rela ve strengthening of the ru-
ble in late March was caused by the fact that no s ff
economic sanc ons had been imposed against Russia
over the Crimea.
On 25 April 2014, the Bank of Russia’s Board of Di-
rectors announced its decision that the key rate should
be increased to 7.5% per annum. This measure was
aimed at reducing the risk of a considerable rise in
infla on and at maintaining financial sustainability in
the current situa on characterized by the weakening
of the ruble and growing poli cal tensions.
On the same day, the Bank of Russia announced
that the key rate would not be decreased in the next
few months. The financial regulator explained that
raising its key rate would slow annual infla on to no
more than 6% by the end of the year. We believe that,
bearing in mind the current panic in financial markets,
the temporary increase in the key rate was the right
decision. However, if the increased rate is kept for a
long period of me, it will adversely affect Russia’s
shrinking economic ac vity.
9. FINANCIAL MARKETS IN MARCH 2014
9
FINANCIAL MARKETS IN MARCH 2014
N.Andrievsky, E.Khudko
The Movement of the Russian
Stock Market’s Main Structural Indices
The movement of the MICEX Index in April reflected
the Russian stock market’s recovery a er its sharp fall in
March. Over the period from 1 April through 23 April,
the MICEX Index stood at an average of 1,350.17 points.
It should be remembered that on 14 March the MICEX
Index had plummeted to 1237.43 points.
shares traded on the Moscow Exchanged are con-
cerned, the only shares that were losing in value in the
second half of April were those issued by Sberbank –
over the period from 27 March through 23 April, that
company’s ordinary shares dropped 9.19%. It should
be noted that the drop in Sberbank stock quotes was
taking place in the absence of any nega ve reports on
that company’s ac vity. At the same me, April saw a
con nua on of the upward trend in the price of shares
in Norilsk Nickel, which rose by 9.41% over the afore-
said period. An upward trend was also demonstrated
by shares in VTB, which gained 5.07% over the period
from 27 March through 23 April.
As of 23 April, the annual yield on ordinary shares
in Sberbank was nega ve, with the losses incurred by
its investors since 23 April 2013 amoun ng to 21.7%.
The annual yield on privileged shares in Sberbank
and VTB was also nega ve, amoun ng to -15.1% and
-15.6% respec vely. The leader in growth was shares
in Norilsk Nickel, which gained more than 30% over the
course of 12 months. One of the possible reasons for
that price rise was the 35% climb in global nickel prices
which took place during the aforesaid period. Over
the course of 12 months, shares in Gazprom and Ros-
ne climbed by 8.6% and 6% respec vely. The price of
shares in LUKOIL remained prac cally unchanged.
In early April sectoral indices grew at moderate
rates. The only excep on was the MICEX Index-Ma-
chine Building, which displayed a sharp rise deter-
Having experienced a sharp drop in March, Russia’s stock market was steadily recovering throughout April. Over
the period from 1 April through 23 April, the MICEX Index stood at an average of 1,350.17 points. The growth
leader among highly liquid shares were Norilsk Nickel securi es – over the period from 27 March through 23 April
they rose 9.41%, while the annual yield on that company’s shares rose to more than 30%. As of 23 April, the stock
market’s capitaliza on amounted to Rb 21.6 trillion (or 33.3% of GDP), which represented a Rb 89bn fall (-0.4%)
compared with 27 March. The situa on on the Russian domes c market of corporate bonds con nued to worsen
due to the exacerba on of nega ve trends in the Russian economy. As a consequence, the key market indices –
the Corporate Bond Market Index, the market’s size, the weighted average yield and the ac vity of issuers and
investors – showed nega ve dynamics.
90
95
100
105
110
115
120
1200
1250
1300
1350
1400
1450
1500
1550
02.04.2013
14.04.2013
26.04.2013
08.05.2013
20.05.2013
01.06.2013
13.06.2013
25.06.2013
07.07.2013
19.07.2013
31.07.2013
12.08.2013
24.08.2013
05.09.2013
17.09.2013
29.09.2013
11.10.2013
23.10.2013
04.11.2013
16.11.2013
28.11.2013
10.12.2013
22.12.2013
03.01.2014
15.01.2014
27.01.2014
08.02.2014
20.02.2014
04.03.2014
16.03.2014
28.03.2014
09.04.2014
21.04.2014
MICEX Index Brent crude prices (right-hand side scale)
Source: Quote.rbc.ru.
Fig.1. The Movement of the MICEX Index
and Brent Crude Oil Futures Prices in the Period
from 4 February 2013 through 23 April 2014
Source: Quote Rbc.ru, the author’s calcula ons.
Fig. 2. Growth Rate of the Quota ons of Highly
Liquid Stocks on the Moscow Exchange
(Over the Period from 27 March through 23 April)
-10,0
-5,0
0,0
5,0
10,0
27.03.14
28.03.14
31.03.14
01.04.14
02.04.14
03.04.14
04.04.14
07.04.14
08.04.14
09.04.14
10.04.14
11.04.14
14.04.14
15.04.14
16.04.14
17.04.14
18.04.14
21.04.14
22.04.14
23.04.14
Sberbank LUKOIL Rosneft VTB
Sberbank prev Gazprom Norilsk Nickel
-21,7
-15,1
8,6
-0,9
6,0
30,2
-15,6
-30
-20
-10
0
10
20
30
40
Sberbank
Sberbankprev
Gazprom
LUKOIL
Rosneft
NorilskNickel
VTB
23/04/2013–23/04/2014
Source: Quote rbc.ru, the author’s calcula ons.
Fig. 3. Growth Rates of the Prices of Highly Liquid Shares
Traded on Moscow Exchange
Over the Period from 26 March through 26 March 2014
10. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
10
mined by the climb in shares issued by the Sollers com-
pany manufacturing a number of foreign car brands in
Russia. The leader in growth was the MICEX Consum-
er Goods and Services Index – over the period from
27 March through 23 it gained 8.88%, mainly due to a
significant growth in the stock quotes of Farmstandard
and M.Video.
In April, the average daily trading turnover of the
Moscow Exchange amounted to Rb 39.7bn, which
represented a 38.4% drop on March. Shares in Sber-
bank accounted for 35.8% of the average daily trad-
ing in common and privileged shares on the Moscow
Exchange. In April, the second-best performer on the
MICEX was shares in Gazprom, which accounted for
21% of the average daily trading turnover of the Mos-
cow Exchange. Thus, these two biggest companies ac-
counted for more than 57% of the Moscow Exchange’s
trading turnover. Trailing behind them were five com-
panies whose combined volume of trade in shares on
the MICEX accounted, on the average, for 23.5% of
the daily trading turnover of the Moscow Exchange.
It should be noted that those five companies included
Magnet, Russia’s biggest retailer. Eight best-perform-
ers on the MICEX accounted, on the average, for 80.7%
of the daily trading turnover of the Moscow Exchange.
According to Emerging Por olio Fund Research (EP-
FR), over the period from 27 March through 19 April,
funds oriented to the Russian market experienced net
inflows in the amount of $ 122m. As of 23 April, MICEX’s
total capitaliza on amounted to Rb 21.6 trillion (or 33%
of GDP), having fallen since 27 March by more than
Rb 89bn (-0.4%). As far as the stock market’s capitaliza-
on structure by type of economic ac vity is concerned,
in April the capitaliza on share of the companies be-
longing to processing industries rose by 0.7 p.p., to
13.5%. The capitaliza on share of companies belonging
to the financial sector shrank by 0.5 p.p.
The Corporate Bond Market
In April 2014, the volume of Russia’s domes c cor-
porate bond market (by the nominal value of ruble-
denominated securi es in circula on, including those
issued by RF non-residents) con nued to shrink. By
21 April, this index had shrunk to around Rb 5,237.6bn,
which represented an almost 0.5% drop in the domes-
c corporate bond market’s volume by comparison
with 25 March1
. As before, 16 U.S dollar-denominated
bond issues (with an aggregate face value of above
$ 2.2bn) and one yen-denominated bond issue placed
by Russian emi ers remained in circula on. The drop
in the volume of the market was caused by a nota-
ble reduc on in the number of issued bond loans
(1,034 ruble-denominated corporate bond issues vs.
1 According to data released by the Rusbonds informa on agency.
1,044 issues as of the end of the previous month). At
the same me, the number of emi ers represented in
the debt segment remained almost unchanged (359 in
April vs. 360 as of the end of March).
In April, investment ac vity on the secondary cor-
porate bond market remained at a sufficiently high
level. Thus, in the period from 25 March through
21 April, the combined volume of exchange transac-
ons carried out on the Moscow Exchange amounted
to Rb 109.7bn (for reference: over the period from
24 February through 24 March the trade turnover was
-4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
27.03.2014
28.03.2014
31.03.2014
01.04.2014
02.04.2014
03.04.2014
04.04.2014
07.04.2014
08.04.2014
09.04.2014
10.04.2014
11.04.2014
14.04.2014
15.04.2014
Financial and banking
Machine building
companies
Oil and gas companies
Companies of electrical
engineering industry
Metal and mining
companies
Companies of consumer &
retail sector
MICEX Innovation
Source: Quote rbc.com, the author’s calcula ons.
Fig. 4. Growth rates of Different Sectoral Indices
on the Moscow Exchange
(Over the Period from 27 March through 23 April 2014)
0,0
10,0
20,0
30,0
40,0
50,0
60,0
27.03.2014
28.03.2014
31.03.2014
01.04.2014
02.04.2014
03.04.2014
04.04.2014
07.04.2014
08.04.2014
09.04.2014
10.04.2014
11.04.2014
14.04.2014
15.04.2014
16.04.2014
17.04.2014
18.04.2014
21.04.2014
22.04.2014
23.04.2014
SBER GAZP LKOH ROSN
GMKN VTBR MGNT Total turnover
Source: Quote rbc.com, the author’s calcula ons.
Fig. 5. Structure of the Trading Turnover of the Moscow
Exchange (Over the Period 27 March through 26 April 2014)
Mining industry;
48,9
Processing
industries; 13,5
Production and
distribution of
electric energy,
gas and water;
4,3
Wholesale and
retail trade;
repair services;
9,0
Transport &
communications;
9,8
Financial sector;
13,5
Other types of
economic
activity; 1,0
Source: the MICEX’s official website; the authors’ calcula ons.
Fig. 6. Structure of Capitaliza on of the MICEX
Stock Market, by Type of Economic Ac vity
11. FINANCIAL MARKETS IN MARCH 2014
11
Rb 108.7bn), while the number of transac ons carried
out over the period under considera on rose to 28.4
thousand (vs. 26.0 thousand in the previous period)1
.
Such a behavior of the trade indices indicated that the
said securi es con nued to be a rac ve to small in-
vestors.
Having predictably fallen in March, the IFX-Cbonds
index of the Russian corporate bond market made an
a empt to rally back. By the end of April 2013, it had
gone up 3.2 points (or 0.9%) from the end of the pre-
vious month. The weighted average effec ve yield on
corporate bonds dwindled from 9.35% at the end of
March to 9.22% as of the end of April (Fig. 7)2
. How-
ever, as the current level of this index s ll remains too
high, it is too early to say that the market has finally
become stabilized. As of the end of April, the corporate
bond por olio dura on index amounted to 580 days,
which represented a 25-day drop on the end of the
previous month. Taking into account the dwindling
of the weighted average effec ve yield on corporate
bonds, it can be confidently said that this behavior of
the dura on index was caused by a decrease in the du-
ra on of bond circula on.
Unlike in the previous period, yields on the most
liquid bond issues all behaved differently and did not
display a single trend. The financial sector was the
most vola le. Some mes, several bond issues of one
and the same emi er (e.g. Vneshekonombank, Ros-
selkhozbank and Credit Europe Bank) all behaved dif-
ferently. A considerable drop in yields (by more than
1 p.p.) was experienced by securi es issued by the
manufacturing and hi-tech companies OJSC JSOC Bash-
ne , LLC EvrazHolding Finance, AFK OJSC Sistema and
LLC SUEK Finance. It should be said that JSOC Bash-
ne was one of the few Russian emi ers affirmed by
Fitch Ra ngs at ‘BB’ with a Posi ve Outlook. The ra ng
upgrade for Bashne followed the recent acquisi on,
by that company, of a Siberian oil producing asset. As
a consequence, the number of transac ons in Bash-
ne ’s securi es significantly went up. On the whole,
the highest drop in bond yield (by around 0.5 p.p.) was
displayed by the manufacturing sector.
Due to the unfavorable situa on on the market,
the ac vity of Russian emi ers whilst registering
their new securi es issues considerably declined in
April. Thus, over the period from 25 March through
21 April, 8 emi ers registered 19 bond issues with a
total face value of Rb 58.6bn (for reference: over the
period from 22 February through 24 March, a total of
35 bond issues were registered, with a total face value
of Rb 140,5bn). More than half of the registered bond
issues were exchange-traded bonds.
1 According to data released by the Finam company.
2 According to data released by the Cbonds company.
The ac vity on the primary market also dwindled,
with the number of primary placements dropping to
its lowest since mid-2012. Thus, over the period from
25 March through 21 April, just three emi ers placed
7 bond loans with a total nominal value of Rb 24.6bn
(for reference: over the period from 22 February
through 24 March, a total of 11 bond loans with a to-
tal nominal value of Rb 35.7bn were placed) (Fig. 8).
Nevertheless, despite the plumme ng placement in-
dices and the nega ve outlook on the Russian market,
two mortgage agents managed to a ract finance in
the form of 32-year loans.
As the Bank of Russia did not place any securi es at
the MICEX in April, no bond issues were de-listed (for
reference: In March, two bond issues were declared
null and void and consequently de-listed)3
.
In the period from 25 March through 21 April,
17 emi ers should have redeemed the face value
of their bond loans with a total nominal value of
Rb 40.9bn. However, one emi er declared a technical
default (in the previous period, all emi ers observed
3 According to data released by the Bank of Russia.
Source: According to data released by the Cbonds company.
Fig. 7. Behavior of the IFX-Cbonds Index
of the Russian Corporate Bond Market
and the Dynamics of Its Weighted Average Effec ve Yield
Source: According to data released by the Rusbonds informa-
on agency.
Fig. 8. Dynamics of the Primary Placements
of Issues of Ruble-Denominated Corporate Bonds
12. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
12
their liabili es in due me). It is expected that, in May
2014, 13 corporate bond issues with a total face value
of Rb 41.9bn will be redeemed1
.
It should be noted that the period from 25 March
through 21 April saw no real defaults on the payment
1 According to data released by the Rusbonds informa on agency.
of the coupons, on the buyback offers to the current
holders of securi es before their maturity, and on the
redemp on on a whole bond loan2
. In this respect, the
situa on remained unchanged from the previous few
months.
2 According to data released by the Rusbonds informa on agency.
13. THE REAL SECTOR OF THE ECONOMY IN THE 1ST QUARTER OF 2014
13
THE REAL SECTOR OF THE ECONOMY IN THE 1ST
QUARTER OF 2014
O.Izryadnova
According to the preliminary es mates of the Mi-
nistry of Economic Development of the Russian Fe-
dera on, in the 1st
quarter of 2014 GDP growth rates
amounted to 0.8%. In the 1st
quarter of 2014, the na-
ture of economic growth was determined by simulta-
neous weakening of both external and domes c de-
mand. The prevailing trend of reduc on of investment
demand which trend was formed as early as the sec-
ond half of 2012 and jus fied by the impact of struc-
tural and ins tu onal limita ons had a rather adverse
effect in that period on the economic dynamics. In ad-
di on to the above, in 2014 the situa on in the invest-
ment sector was made even worse due to higher risks
related to geopoli cal factors.
According to the data of the Central Bank of Rus-
sia, in the 1st
quarter of 2014 the ou low of capital
amounted to $50.6bn with the capital ou low index
for the en re 2013 being equal to of $59.7bn. In Janu-
ary–March 2014, the withdrawal of capital by the non-
banking sector amounted to $31.7bn and exceeded by
200% the index of the respec ve period of the previ-
ous year. With reduc on of par cipa on of the private
sector and modest financing of investments at the ex-
pense of budget funds which is typical of the begin-
ning of the year, on the basis of the results of Janu-
ary–March 2014 investments in capital assets and the
volume of jobs in building amounted to 95.2% and
96.9% of the respec ve indices of the same period of
the previous year, respec vely. Infrastructure limita-
ons in the investment area can be overcome with a
simultaneous effec ve u liza on of budget funds of
development ins tutes affiliated with the state and
private investors.
Early in 2014, slowdown of growth rates of con-
sumer demand which began in the second half of 2012
con nued. In the 1st
quarter of 2014, growth rates of
the retail trade turnover amounted to 3.5% (7.0% in
2012 and 4.0% in 2013) on the respec ve period of the
previous year. Prevalence of a high rate of infla on and
a drop in the growth rates of households’ real income
In the 1st
quarter of 2014, economic dynamics was determined by growth in consumer demand and a drop in
investment demand. On the basis of the results of the 1st
quarter of 2014, investments in capital assets fell by
4.8% on the respec ve period of the previous year with simultaneous reduc on of volumes of jobs in building and
produc on of capital goods. In the 1st
quarter of 2014, growth rates of retail trade turnover amounted to 103.5%,
which is 0.5 p.p. lower than the respec ve index of 2013. In January–March 2014, recovery of industrial growth
thanks to a 2.4% increase in the output of manufacturing industries as compared to January–March 2013 had a
posi ve effect on the economic situa on. As of the end of March 2014, offices of the state employment service
registered 941,000 persons as unemployed which is 13.2% lower as compared to March 2013.
Table 1
GROWTH RATES OF THE MAIN ECONOMIC INDICES IN THE 1ST
QUARTER OF 2010 2014, AS % OF THE RESPECTIVE
PERIOD OF THE PREVIOUS YEAR
2010 2011 2012 2013 2014
GDP 103.5 103.5 104.8 100.8 100.8*
Industry 108.4 105.0 104.5 98.8 101.1
Produc on of primary products 104.9 101.4 102.0 99.7 100.8
Manufacturing 111.5 109.7 106.7 98.6 102.4
Investments in capital assets 95.2 99.2 116.5 100.1 95.2
Retail trade turnover 102.2 105.0 107.9 104.0 103.5
Households’ real disposable cash income 108.1 100.0 101.6 105.6 97.6
Real wages and salaries 103.1 101.6 110.3 104.5 104.2
Export 161.1 122.8 116.3 95.4 98.1**
Import 118.8 142.4 112.1 103.7 92.9**
The total number of the unemployed 96.3 85.7 85.3 96.2 95.2
* the ini al data of the Ministry of Economic Development.
** the ini al data of the Central Bank of Russia.
Source: The Rosstat.
14. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
14
affected the consumer behavior. In March 2014, as
compared to the same period of the previous year the
consumer price index amounted to 106.9% (107.0%
a year before). The 2013 trend of higher diversifica-
on of households’ income, greater poverty and slow-
down of growth rates of social payments and house-
holds’ income from property and business ac vi es
had a serious impact on the dynamics of households’
real income. In the pa ern of households’ income, the
unit weight of wages and salaries has grown. In March
2014, the indices of households’ real income and real
wages and salaries amounted to 93.2% and 103.1%
year on year, respec vely (in March 2013 they were
equal to 109.1% and 105.1%, respec vely).
Households’ higher infla on expecta ons have re-
sulted in a reduc on of the volume and share of sav-
ings in households’ income and ac ve conversion of
households’ accumulated savings into a foreign cur-
rency. In such a situa on, all other factors being equal
the volume of poten al investment resources at the
expense of households’ funds is decreasing and a pos-
sibility to speed up the growth rates of consumer de-
mand is ge ng smaller.
Throughout the second half of 2012 and the en re
2013, the Russian economy demonstrated a slowdown
of growth rates of business ac vi es virtually by all the
types of economic ac vi es. In February-March 2014,
industrial growth recovered as compared to the 2013
index. On the basis of the results of the 1st
quarter of
2014, industrial output came to the level of the re-
spec ve period of 2012. In March 2014, recovery of
growth rates year on year was registered by all the
major types of ac vi es in industry: produc on of pri-
mary products – 100.8% and manufacturing – 103.5%.
Higher volumes of oil refining at domes c plants – it
made up for a 5.0% reduc on of the export of Rus-
sian hydrocarbons as compared to the 1st
quarter of
2013 – had a considerable effect on the dynamics of
the primary sector.
A decrease in produc on of capital goods was de-
termined by the downward trend of investment ac-
vi es. In March 2014, as compared to the same pe-
riod of the previous year the index of produc on of
machines and equipment amounted to 84.6%, while
that of produc on of power and electronic and op cal
equipment, to 93.4%. It is par cularly alarming taking
into account the fact that output gap in the above sec-
tors was observed throughout the en re 2013.
In the 3rd
quarter, as compared to the previous year
recovery of growth rates of produc on of means of
transporta on and equipment was observed. In March
2014, the index of produc on of means of transporta-
on amounted to 114.2% and 111.0% on that of March
2013 and January–March 2013, respec vely. It is to be
noted that shipbuilding, aircra and spacecra build-
ing and rolling-stock building accounted for the main
por on of growth in that sector (126.8% on the index
of the 1st
quarter of 2013) with output gap in the auto-
mo ve industry (92.4%). The dynamics of the automo-
ve market is affected both by a drop in demand and a
decrease in produc on of cars in an industrial assembly
mode due to higher costs of import parts and u li es.
The dynamics of the consumer complex of the in-
dustry demonstrates output growth which situa on is
probably related to some revitaliza on of import sub-
s tu on processes as a result of deprecia on of the
ruble exchange rate and a drop in import efficiency. In
March 2014, the index of tex le and sewing produc-
on, that of produc on of leather, leather ar cles and
footwear and that of produc on of food amounted
to 103.6%, 103.7% and 101.8%, respec vely, as com-
pared to March 2013.
Source: The Rosstat.
Fig. 1. Indices of produc on by the main types of manufacturing industries
in the 1st quarter of 2012–2014, as % of the respec ve period of the previous year
15. THE REAL SECTOR OF THE ECONOMY IN THE 1ST QUARTER OF 2014
15
In March 2014, as a year before in the intermediate
goods segment growth in output year on year con nued.
In March, on the labor market of the Russian Fede-
ra on growth in demand on workforce was registered.
As compared to March 2013, the number of gain-
fully employed popula on increased by 92,000 per-
sons, while the number of the unemployed fell by
228,000 persons. According to the preliminary results
of the Rosstat’s employment survey, in March 2014
the total number of the unemployed was es mated at
the level of 4.0m people or 5.4% of the gainfully oc-
cupied popula on (in accordance with the methods of
the Interna onal Labor Organiza on). As of the end of
March 2014, offices of the state employment service
registered 941,000 persons as unemployed which is
13.2% lower as compared to March 2013.
16. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
16
THE RUSSIAN INDUSTRY IN MARCH 2014
S.Tsukhlo
Industrial op mism index1
The first data of March showed a somewhat im-
provement of the Russian industry’s mood thanks
to which the index amounted only to the zero level
(Fig. 1). The above factor fairly reflects the situa on
which was formed at enterprises long ago.
Demand on industrial produce
By enterprises’ es mates, in March the demand on
industrial produce kept recovering a er a tradi onal
drop in January. The ini al balance of a change in the
index (an analog of growth rates in tradi onal under-
standing) gained another 4 points and entered the
posi ve area. A year before, the balance of that index
became posi ve as early as February. As a result, clear-
ing of a seasonal factor showed con nued reduc on
of demand at nearly the same (as in February) rate of
intensity (Fig. 2).
However, such dynamics of demand did not disap-
point enterprises at all – for the first me from 2013
the share of “normal” es mates exceeded (though to
the minimum extent) the share of “below the norm”
es mates. The industry demonstrated again high ad-
apta on to a complicated exis ng situa on and in-
creased uncertainty of the forthcoming months due to
the Ukrainian crisis.
The above factor affected the forecasts of the Rus-
sian industry’s sales even in a situa on of deprecia on
of the ruble exchange rate and import subs tu on ex-
pected by experts and the authori es. A er the mo-
dest February maximum, in March the balance of fore-
casted changes in demand (that is its growth rates in
tradi onal understanding) fell to +12 points, while in
the previous post-crisis years it amounted to +18...+23
points. With the seasonal factor cleared, the balance
1 Surveys of managers of industrial enterprises are carried out
by the Gaidar Ins tute in accordance with the European harmo-
nized methods on a monthly basis from September 1992 and cover
the en re territory of the Russian Federa on. The size of the panel
includes about 1,100 enterprises with workforce exceeding 15% of
workers employed in industry. The panel is shi ed towards large
enterprises by each sub-industry. The return of queries amounts
to 65–70%.
fell to nega ve values. Generally, in the 1st
quarter of
2014 dynamics of forecasts is worse than the values of
the index for the respec ve period of the previous year.
Stocks of finished products
In March, the balance of es mates of stocks of
finished products (Fig. 3) decreased by 6 points and
According to the data of business surveys carried out by the Gaidar Ins tute1
, the first es mates of March did not
iden fy any principal changes in the dynamics of demand, output, employment and investments of the Russian
industry. However, enterprises’ prices have, probably, started to yield to the infla onary pressure, while reserves,
to growing uncertainty of forthcoming months.
Fig. 1
Fig. 2
17. THE RUSSIAN INDUSTRY IN MARCH 2014
17
amounted to the 18-month minimum. In other words,
such modest surpluses of stocks of finished goods have
not been registered by surveys since September 2012.
Output
According to the ini al data, in March the rate of
intensity of output growth gained another 12 points
and as a result amounted to the value which is typi-
cal of that month. A er clearing of the seasonal factor,
the output growth rates (Fig. 4) returned to the zero
level which situa on points to preserva on of hardly
discernable rates of a change in output of the Russian
industry and permit to gain the aggregate result with
any sign as a result of applica on of methods of exclu-
sion of seasonal and calendar factors which differ a lit-
tle from each other.
A similar situa on takes place in respect of the in-
dustry’s output plans. A er clearing of the seasonal
factor, that index returned to the limits within which
it stayed from January 2013. So, hopes for moderate
output growth s ll prevail in the Russian industry.
Prices of enterprises
In March, the Russian industry con nued to main-
tain high intensity of growth in prices (Fig. 5) which
was only two points below the January rate of a change
in the index. During the past two years, by the end of
the 1st
quarter the balance would lose momentum and
head for the zero level. In 2014, in a situa on of a high-
er pressure on the ruble exchange rate and stronger
infla onary processes enterprises have to change their
pricing policy even to the detriment of sales.
Also, enterprises’ pricing forecasts behave untypi-
cally. Firstly, the pre-new year surge in the index was
limited to one month (December), though in previous
years enterprises smoothly increased their forecasts
and/or kept them at the maximum level for a few
months. At present, sales problems made enterprises
behave differently. Secondly, a January reduc on in
forecasts was not maintained, while in March the in-
dex rose by several points. Enterprises started to take
into account changes in the infla onary situa on in
the economy.
The actual dynamics and layoff plans
Exit of workers from the Russian industry con nues
(Fig. 6). A er a typical surge of layoffs in January, in
March the balance of changes in the number of per-
sonnel rose only to -10 and -8 points and came as a re-
sult to the level of reduc on of the number of workers
(the rate of intensity) which was typical of the second
half of 2013. Forecasts of a change lost the January
op mism. A er a 22 point surge to +7 points in the
beginning of the year, as early as February the balance
Fig. 3
Fig. 4
Fig. 5
18. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
18
became zero and retained that value in March. The
industry realized again that efforts related to employ-
ment of personnel lacked prospects. However, so far
it does not create problems related to provision with
personnel of industrial growth expected by enterprises.
In the 1st
quarter of 2014, the balance of es mates of
the current number of workers became zero, that is,
the share of the more than sufficient answers became
equal to that of the less than sufficient answers with
absolute dominance of the sufficient answers (72%).
Enterprises’ investment plans
The industry keeps maintain an investment pause
(Fig. 7). The balance of investment intensions remains
in the nega ve area (that is, the number of answers
about the expected decrease in investments was high-
er than that about possible growth in investments) for
ten months running. A nominal improvement of the
index from -15 points in November-December 2013 to
-8 points in March 2013 can be regarded as a scrap of
hope in that gloomy investment situa on.
Fig. 6 Fig. 7
19. THE FOREIGN TRADE IN FEBRUARY 2014
19
THE FOREIGN TRADE IN FEBRUARY 2014
N.Volovik
In the 2014 World Economic Outlook (WEO)1
re-
leased by the IMF in April 2014, it is stated that the busi-
ness ac vity is growing in the world. The IMF forecasts
growth in the world economy from 3% in 2013 to 3.6%
and 3.9% in 2014 and 2015, respec vely. In the 2014–
2015 period, in developed countries economic growth
rates will amount to about 2.25% which is almost 1 p.p.
higher than in 2013. The highest economic growth
rates – at the level of about 2.75% – are expected in
the US. In the euro area, growth is forecasted as well,
while in countries with emerging markets and develop-
ing countries a gradual increase in GDP growth rates is
expected from 4.7% in 2013 to about 5% and 5.25% in
2014 and 2015, respec vely. Growing external demand
on the part of developed economies will contribute to
growth, while toughening of financial condi ons limits
expansion of the domes c demand. In China, growth
will remain at the level of about 7.5% in 2014 as the au-
thori es will seek to restrain growth in domes c lending
and carry out reforms aimed at a gradual switchover to
more balanced and sustained growth.
It is stated in the WEO that despite be er prospects
global growth is not stable so far and with prevailing
old risks of economic slowdown new geopoli cal risks
1 h p://www.imf.org/external/pubs/ /weo/2014/01/pdf/text.pdf
In February 2014, the main indices of the Russian foreign trade dropped considerably. The European Union sub-
mi ed to the Secretariat of the World Trade Organiza on a query as regards consulta ons with the Russian Fe-
dera on as regards measures affec ng the import of live pigs, pork and pork products from the EU. The Eurasian
Economic Commission started an an dumping inves ga on into deliveries of oil and gas steel pipes from China
to markets of member-states of the Customs Union.
have emerged. So, the 2014 forecast as regards Russia
was adjusted to 1.3% though as early as last autumn
the IMF es mated Russia’s GDP growth rates at the
level of 3%. The factor behind downward revision of
the forecast was geopoli cal tensions in rela ons with
Ukraine.
In February 2014, the Russian foreign trade turn-
over calculated on the basis of the methods of the
balance of payments amounted to $60.6bn which is
11.3% lower than the 2013 index. Such a drama c
drop in Russia’s foreign trade turnover was not ob-
served from October 2009. It is to be noted that there
was a substan al drop in the monetary volume of both
export (by 12.7% as compared to the respec ve index
of 2013) and import ( 9.4%). In February 2014, as a re-
sult of advanced decrease in export the trade balance
surplus amounted to $12.4bn which is 18.9% lower
than the respec ve index of the previous year.
In February 2014, prices on virtually all the com-
modi es of the Russian export decreased on global
markets as compared to February 2013.
In February 2014, prices on Brent oil fell by 6.6%
to $108.8 a barrel as compared to February 2013. On
February 3, the price fell to the month’s minimum le-
vel of $106.55 a barrel due to China’s weak industrial
indices in January 2014. China’s output growth slowed
0
10
20
30
40
50
60
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Balance Export Import
Source: The Central Bank of the Russian Federa on.
Fig. 1. The main indices of the Russian foreign trade (billion USD)
20. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
20
down to the minimum growth rates for six months due
to weakening of both foreign and domes c demand.
On February 19, prices on Brent oil appreciated to the
maximum level of $ 110.37 a barrel due to geopoli cal
risks related to hos li es in Libya and South Sudan, as
well as protest rallies in Venezuela.
Late in February and early in March, another spot
of tensions – Ukraine – emerged. A er the President
of the Russian Federa on received on March 3, 2014 a
permit from the Council of Federa on to use troops in
Ukraine, prices on Brent oil rose to the level of $111.26
a barrel which was the maximum one in the 1st
quarter
of 2014. However, on March 4 Brent oil prices depreci-
ated to $109.26 a barrel. Oil prices kept falling due to
a release of the weak economic data on China and a
seasonal drop in oil consump on.
Early in April 2014, rebels who controlled for eight
months oil seaports in the east of Libya agreed to li
a blockade of terminals. That news resulted in a drop
in Brent oil prices to a five-month minimum ($103.37
a barrel) on April 2. Probably, in the near future Brent
oil will be traded in a broad range of $103 a barrel to
$113 a barrel under the impact of geopoli cal risks on
the one side and expecta ons of growth in oil deliver-
ies from Libya, Iran and Iraq, on the other side.
In February 2014, prices on Urals oil fell by 6.1% as
compared to February 2013 and amounted to $107.4
a barrel. Within the first two months of 2014, prices on
Urals oil fell by 5.5% to $106.9 a barrel as compared to
the respec ve period of 2013.
According to the oil price monitoring, in the period
of from March 15, 2014 ll April 14, 2014 the average
Urals oil price amounted to $770.5 a ton. According
to the informa on of April 16, 2014 of the Ministry
of Economic Development of the Russian Federa-
on on Possible Customs Du es on Oil and Individual
Categories of Goods Produced out of Oil in the Pe-
riod of from May 1 ll May 31, 2014, in May the rate
of duty on crude oil will be reduced to $376.1 a ton
against $387 a ton which was in effect a month ear-
lier. A privileged rate is being reduced from $190.8
a ton to $182.4 a ton. The rate on superviscous oil
will amount to $37.6 (against $38.7 in April). The rate
on light and medium dis llates will be reduced from
$255.4 a ton to $248.2 a ton. In May, the duty on the
export of petrol will amount to $338.4 a ton ($348.3
a ton in April).
In February 2014, prices on aluminum, copper and
nickel fell by 17.5%, 11.3% and 19.7%, respec vely, as
compared to February 2013.
Under the impact of weather factors and higher
demand, in February 2014 the FAO food price index
showed the sharpest swing ever since the mid-2012:
its average value amounted to 208.1 points which is
5.5 points higher than in the previous month. Such
growth in index was jus fied by growth in prices of all
the groups of primary commodi es on which basis the
Index is formed; the excep on is meat which prices fell
somewhat. From the day of publica on of the index
for the previous month, the highest growth in prices
was on sugar (+6.2%), oils (+4.9%), grain (+3.6%) and
dairy products (+2.9%).
In February 2014, a reduc on of the Russian export
as compared to February 2013 took place over the
main posi ons of the expanded commodity nomencla-
ture. There was a decrease in export of fuel and energy
complex (14.5%), the chemical industry (10%), metals
and metal products (16.7%) and machines, equipment
and transporta on vehicles (28.4%). There was growth
in export of food (35.6%), wood and pulp and paper
products (15.2%), tex le and tex le products (39.8%)
and precious stones and metals (43.7%).
There was a decrease in import purchases by all
the posi ons of the expanded commodity nomencla-
ture, except for food products and agricultural primary
products whose import rose by 0.3%.
Table 1
MONTHLY AVERAGE GLOBAL PRICES IN FEBRUARY OF THE RESPECTIVE YEAR
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Oil (Brent),
USD/barrel
30.9 44.8 59.7 58.26 92.66 43.87 73.8 104.1 119.7 116.5 108.81
Natural gas*,
USD/1m BTU
3.89 5.49 7.95 8.56 10.84 11.04 8.8 9.36 11.12 11.77 11.3
Copper,
USD/ton
2759.0 3254 4982 5671.1 7887.7 3314.7 6899 9867.6 8441.5 8060.9 7149.2
Aluminum,
USD/ton
1685.6 1883 2455 2759.14 2776.9 1330.2 2061 2508.2 2207.9 2053.6 1695.2
Nickel,
USD/ton
15178.3 15350 14979 41154.5 27955.5 10409 19141 28252 20393.7 17690 14203.6
* The market of Europe, average contractual price, Franco-border.
Source: calculated on the basis of the data of the London Metal Exchange (London, the UK) and the Intercon nental Oil Exchange
(London).
21. THE FOREIGN TRADE IN FEBRUARY 2014
21
On April 8, 2014, the European Union submi ed
to the Secretariat of the World Trade Organiza on a
query as regards consulta ons with the Russian Fe-
dera on on measures affec ng the import of live pigs,
pork and pork products from the EU.
It is to be reminded that the ban on import to the
territory of the Russian Federa on of hog farming
products from all the EU countries was introduced on
January 30, 2014 due to the outbreak of African pig
plague (APP) in the territory of the EU. From April 7,
2014, the ban on all the types of ready-made meat
products from Poland and Lithuania became effec ve.
Such a ban has produced a serious impact the finan-
cial posi on of the European hog farming. According
to the data of the European Commission, in 2013 the
volume of the export of live pigs and pork from the Eu-
ropean Union to Russia amounted to euro 1.4bn. The
Russian ban has resulted in a drama c surplus produc-
on in Europe with oversupply on the market and de-
precia on of prices on pork. The EU believes that the
complete ban on the export of pork from the EU to
Russia is in conflict with the WTO’s rules and a dispro-
por onate one.
According to the WTO’s rules, par cipants in the
dispute have 60 days for consulta ons on amicable
se lement of the issue. If they fail to reach a consen-
sus, the plain ff is given the right to ask for forma on
of a special expert group on se lement of the dispute
within the frameworks of the WTO.
At present, the WTO has received the EU’s claim to
Russia as regards payment of the u liza on charge.
On March 31, 2014, the Eurasian Economic Com-
mission (EEC) published the No fica on on the Start
of An dumping Inves ga on into Supply of Oil and
Gas Steel Pipes from China to the Territory of Member-
States of the Customs Union (CU)1
. The peak of import
of Chinese oil and gas pipes to member-states of the
CU fell on January-September 2013 when deliveries
from China increased by 156% as compared to the re-
spec ve period of 2012, while the share of the Chinese
produce in the import virtually doubled and amounted
to 55.4% against 28.2% in 2010. The main Chinese im-
porters of oil and gas pipes to the CU member-states
are TPCO company and Hengyang Valin company
which – by calcula ons of the EEC – supplied products
at the dumping margin of 20% and 22%, respec vely.
In 2013, the above companies sold pipes to the EU
member-states at prices which were 24.5% lower than
the 2012 level which situa on, according to claimants,
“resulted in aggrava on of price compe on”. Russian
manufacturers’ cost-effec veness of sales of oil and
gas pipes virtually decreased by threefold, while their
profit, by 62.8%.
The evidence provided by the claimants cons tuted
grounds for passing of a decision on the start of an an-
dumping inves ga on into supply of Chinese-made
seamless steel pipes (used in drilling and opera on of
oil and gas wells) which are imported into the territory
of the Customs Union.
1 h p://www.eurasiancommission.org/ru/act/trade/podm/no-
ce/Lists/List/A achments/50/no ce_ini a on_octg.pdf
22. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
22
THE STATE BUDGET IN JANUARY MARCH 2014
T.Tischenko
The Analysis of the Main Parameters of Execu on
of the Federal Budget in the 1st
Quarter of 2014
In the 1st
quarter of 2014, federal budget revenues
amounted to Rb 3,520.8bn or 21.6% of GDP which is
0.8 p.p. of GDP higher than the level of the respec ve
period of the previous year (Table 1). The oil and gas
revenues rose by 1.1 p.p. of GDP as compared to three
months of 2013. In January–March 2014, budget ex-
penditures amounted to Rb 3,410.8bn (20.9% of GDP),
which is 0.4 p.p. of GDP lower than the level of expen-
ditures for the same period of the previous year.
Onthebasisofthreemonthsof2014,thefederalbudg-
et surplus amounted to Rb 110.1bn (0.7% of GDP) which
is 1.1 p.p. of GDP higher than the level of deficit of the
1st
quarter of the previous year when the federal budget
was executed with a deficit of 0.4% of GDP. On the basis of
the results of January–March 2014, the oil and gas deficit
didnotchangeascomparedtothesameperiodofthepre-
vious year and amounted to 10.5% of GDP.
According to the data of the Federal Treasury, in January–March 2014 the federal budget revenues increased by
0.8 p.p. of GDP as compared to the same period of the previous year on account of growth of 1.1 p.p. of GDP in
oil and gas revenues due to deprecia on of the ruble exchange rate against the US dollar. In the 1st
quarter of
2014, federal budget expenditures fell by 0.4 p.p. of GDP as compared to the 1st
quarter of 2013 and on the basis
of the results of January-March 2014 the federal budget was executed with a surplus of 0.7% of GDP. However,
the effect of unfavorable foreign poli cal and economic factors is ge ng stronger which situa on creates addi-
onal risks for stability of the budget system of the Russian Federa on and may require adjustment of the main
parameters of the federal budget in the second half of 2014.
In the 1st
quarter of 2014, profit tax revenues to
the revenues side of the federal budget remained at
the level of January-March 2013, that is, 0.5% of GDP
(Table 2). As regards other items of tax and non-tax re-
venues, in the 1st
quarter of 2014 growth in revenues
in frac ons of GDP against three months of the previ-
ous year was registered from domes c VAT (0.2 p.p.
of GDP), domes c excises and import excises (0.1 p.p.
of GDP and 0.01 p.p. of GDP, respec vely), severance
tax (0.2 p.p. of GDP) and foreign economic ac vi es
(0.6 p.p. of GDP). In January–March 2014, federal
budget revenues from import VAT fell by 0.2 p.p. of
GDP as compared to the same period of the previous
year.
Itistobenotedthatinthe1st
quarterof2014ascom-
pared to January–March 2013 a decrease in expendi-
tures in frac ons of GDP was observed over 5 sec ons
out of 14 sec ons (Table 3), including: Housing and
U li es (a decrease of 0.14 p.p. of GDP), Educa on
Table 1
THE MAIN PARAMETERS OF THE FEDERAL BUDGET OF THE RUSSIAN FEDERATION IN JANUARY MARCH
2013 2014
January–March 2014 January–March 2013 Devia ons,
p.p. of GDPBillion Rb % GDP Billion Rb % GDP
Revenues,
including:
3520.8 21.6 3105.6 20.8 0.8
Oil and gas revenues 1826.7 11.2 1508.2 10.1 1.1
Expenditures,
including:
3410.8 20.9 3167.8 21.3 -0.4
interest expenditures 132.9 0.8 120.4 0.8 0.0
non-interest expenditures 3277.9 20.1 3047.4 20.5 0.4
Surplus (Deficit) of the federal budget 110.1 0.7 -62.2 -0.4 1.1
Non oil and gas deficit -1716.6 10.5 -1570.4 10.5 0.0
GDP es mate 16284 14 889
Source: The Ministry of Finance of the Russian Federa on, the Federal Treasury of the Russian Federa on and calcula ons of the
Gaidar Ins tute.
23. THE STATE BUDGET IN JANUARY–MARCH 2014
23
(0.4 p.p. of GDP), Healthcare (0.2 p.p. of GDP), Social
Policy (1.8 p.p. of GDP) and Physical Training and Sport
(0.04 p.p. of GDP).
In the 1st
quarter of 2014 as compared to the same
period of the previous year, in the Social Policy sec-
on the largest reduc on of federal budget expendi-
tures took place in the Pension Security item (1.4 p.p.
of GDP) and the Social Security item (0.4 p.p. of GDP).
On the basis of the results of the 1st
quarter of 2014,
growth in federal budget revenues in frac ons of GDP
against January–March 2013 took place in four sec-
ons: Federal Issues (growth of 0.3 p.p. of GDP), Na-
onal Defense (1.6 p.p. of GDP), Na onal Security and
Law Enforcement (0.1 p.p. of GDP) and Culture and
Cinema (0.02 p.p. of GDP). As regards the Na onal De-
fense sec on, in the 1st
quarter of 2014 expenditures
on the item – the Armed Forces of the Russian Federa-
on – increased considerably (1.4 p.p. of GDP) against
January–March 2013.
In the 1st
quarter of 2014, as regards other sec ons
federal budget expenditures remained at the level of
January–March 2013. It is to be noted that despite the
fact that expenditures related to servicing of the public
debt in frac ons of GDP remained on the basis of the
results of three months of 2014 at the level of Janu-
ary–March 2013 in the volume of 0.8% of GDP, growth
rates of cash execu on in respect of that item at the
level of 31.1% exceeded somewhat the rates of deve-
lopment of the expenditure side of the federal budget,
that is, 24.4% of the approved volumes of expenditures
Table 2
MAIN TAX REVENUES TO THE FEDERAL BUDGET IN JANUARY MARCH 2013 2014
January–March 2014 January–March 2013 Devia on,
p.p. of GDPBillion Rb % GDP Billion Rb % GDP
1. Tax revenues, including:
Corporate profit tax 81.7 0.5 73.7 0.5 0.0
VAT on goods sold in the territory
of the Russian Federa on
565.5 3.5 495.1 3.3 0.2
VAT on goods imported to the Russian Federa on 376.9 2.3 369.3 2.5 -0.2
Excises on goods manufactured
in the Russian Federa on
125.4 0.8 100.8 0.7 0.1
Excises on goods imported to the Russian Federa on 14.8 0.09 11.9 0.08 0.01
Severance tax 713.2 4.4 623.4 4.2 0.2
2. Revenues from foreign economic ac vi es 1309.0 8.0 1108.5 7.4 0.6
Source: The Ministry of Finance of the Russian Federa on, the Rosstat and calcula ons of the Gaidar Ins tute.
Table 3
FEDERAL BUDGET EXPENDITURES IN JANUARY MARCH 2013 2014
January–March 2014 January–March 2013 Devia on,
p.p. of GDPBillion Rb % of GDP Billion Rb % of GDP
Total expenditures 3410.8 20.9 3167.8 21.3 -0.4
including
Federal issues 223.2 1.4 161.2 1.1 0.3
Na onal defense 1019.3 6.2 689.3 4.6 1.6
Na onal security and law-enforcement 438.1 2.7 383.5 2.6 0.1
Na onal economy 355.9 2.2 334.7 2.2 0.0
Housing and u li es 30.5 0.2 8.9 0.06 -0.14
Protec on of environment 5.0 0.03 5.0 0.03 0.0
Educa on 135.5 0.8 178.8 1.2 -0.4
Culture and cinema 18.1 0.1 11.6 0.08 0.02
Healthcare 112.5 0.7 142.1 0.9 -0.2
Social policy 729.3 4.5 936.7 6.3 -1.8
Physical training and sport 6.6 0.04 11.9 0.08 -0.04
Mass media 17.4 0.1 15.5 0.1 0.0
Servicing of state and municipal debts 132.9 0.8 120.4 0.8 0.0
Intergovernmental transfers 186.6 1.1 168.1 1.1 0.0
Source: The Ministry of Finance of the Russian Federa on, the Federal Treasury of the Russian Federa on and calcula ons of the
Gaidar Ins tute.
24. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
24
in 2014. Such a situa on jus fied by growth in the ex-
change rate of a bi-currency basket against the ruble
may result in an upwards adjustment of the approved
volume of annual budget alloca ons in respect of the
Servicing of the Public and Municipal Debts sec on.
For three months of 2014, as of April 1, 2014, the ag-
gregate volume of funds of the Reserve Fund and the
Na onal Welfare Fund in the ruble equivalent rose on ac-
count of the exchange rate difference as a result of reval-
ua on by Rb 261.6bn and Rb 221.9bn, respec vely and
amounted to Rb 3,121.3bn and 3,122.5bn, respec vely.
Nega ve trends in the Russian economy which pre-
vailed from the second half of 20121
and the growing
pressure of economic sanc ons made it topical to re-
vise income forecasts, prospects to increase expendi-
tures and the deficit of the federal budget and expedi-
ence of adjustment of the budget rules.
According to the es mate of the Ministry of Fin-
ance of the Russian Federa on2
, on the basis of the re-
sults of 2014 federal budget revenues will be Rb 100bn
short of the planned ones despite the fact that the
volume of addi onal oil and gas revenues from depre-
cia on of the ruble exchange rate are es mated at Rb
900bn. So, in 2014 the federal budget may receive over
Rb 1 trillion less than it is due, including Rb 234bn and
Rb 250 bn on foreign loans and domes c loans, respec-
vely, for financing the deficit of the federal budget and
Rb 180bn from priva za on, as well as dividend income.
As regards expenditures, the Ministry of Economic
Development of the Russian Federa on believes that
the ideology of the budget rule permits to spend ad-
di onal oil and gas revenues on infrastructure projects
to ensure economic growth as they have nothing to
do with market movement. However, according to the
Ministry of Finance of the Russian Federa on the as-
sessment of the Ministry of Economic Development of
the Russian Federa on of the posi ve effect of addi-
onal expenditures of the RF budget on the economic
growth rates is largely overes mated3
and in order to
1 The Ministry of Finance of the Russian Federa on believes
that in the second half of 2014 the economy of the Russian Fed-
era on may enter a technical recession when for two quarters run-
ning GDP cleared of a seasonal factor decreases.
It is to be noted that in the 2nd quarter and the 2rd quarter year
on year growth in GDP of the Russian Federa on slowed down vir-
tually to the zero level and it is not excluded that it may enter the
nega ve area.
2 Here and to the end of the sec on – source: h p://www.min-
fin.ru/ru/press/speech/index.php?id_4=21535
3 The Ministry of Economic Development of the Russian Fed-
era on means growth of 0.5% a year in the deficit with aggregate
growth of 2% of GDP in the volume of expenditures within four
years which situa on permits to increase GDP by 4.4% within the
same period. The Ministry of Finance of the Russian Federa on be-
lieves that the assessment of economic growth is overes mated,
par cularly, in the mid-term and long-term prospects.
ensure stable economic growth rates the deficit is to
be increased every subsequent year by the same val-
ue, that is, 0.5% of GDP.
So, the posi ons of the financial agency and economic
agency as regards a feasibility to increase expenditures
and the deficit of the federal budget are different. De-
spite the fact that in mid-April 2014 V. Pu n, President of
the Russian Federa on called not to hurry with amend-
ment of the budget rule4
and to take into account global
and domes c economic risks, it can be expected that in
the second half of the year, the debates on feasibility of
relaxa on of the budget rule may renew.
Execu on of the Consolidated Budget
of Cons tuent En es of the Russian Federa on
in January–February 2014
According to the data of the Federal Treasury, in
January–February 2014 the revenues of the consoli-
dated budget of cons tuent en es of the Russian
Federa on amounted to Rb 863.1bn or 8.2% of GDP
which is 1.4 p.p. of GDP lower than the value in the
same period of 2013 (Table 4).
Within two months of 2014, expenditures of the
consolidated budget of cons tuent en es of the Rus-
sian Federa on decreased by 0.2 p.p. of GDP as com-
pared to the same period of the previous year and
amounted to 9.6% of GDP or Rb 1,010.4bn. On the
basis of the results of January–February 2014, budgets
of cons tuent en es of the Russian Federa on were
executed with a deficit in the amount of Rb 147.3bn or
1.4 % of GDP which is 1.2 p.p. of GDP lower than the
level of the respec ve period of the previous year.
Within two months of 2014, the main decrease of
1.0 p.p. of GDP in the revenues to consolidated budg-
ets of cons tuent en es of the Russian Federa on
took place in the Return of Balances of Subsidies, Sub-
ven ons and Other Inter-Budgetary Transfers item
against the respec ve period of 2013. In January–Feb-
ruary 2014, tax revenues decreased inconsiderably in-
cluding those from individual income tax (0.1 p.p. of
GDP), domes c excises (0.1 p.p. of GDP) and aggregate
income tax (0.1 p.p. of GDP) as compared to the first
two months of 2013. In January–February 2014, as re-
gards other tax and non-tax revenues of the consoli-
dated budget of the Russian Federa on the volume of
revenues in frac ons of GDP remained at the level of
the respec ve period of the previous year.
On the basis of the results of two months of 2014,
expenditures of the consolidated budget of cons tu-
ent en es of the Russian Federa on (Table 5) de-
creased against the respec ve period of 2013 only
in respect of the following two sec ons – Na onal
Defense (0.001 p.p. of GDP) and Na onal Economy
4 h p://www.rbcdaily.ru/
25. THE STATE BUDGET IN JANUARY–MARCH 2014
25
(0.2 p.p. of GDP) – and increased by 0.02 p.p. of GDP
in respect of the Mass Media sec on. On the basis of
the results of two months of 2014, as regards most
sec ons expenditures of budgets of cons tuent en -
es of the Russian Federa on in frac ons of GDP re-
mained at the level of the respec ve period of 2013.
In March 2014, the volume of the state debt of con-
s tuent en es of the Russian Federa on increased
by Rb 13.4bn and as of April 1, 2014 amounted to
Rb 1,754.0bn or 22.8% of the forecasted annual vo-
lume of the revenues of the consolidated budget of
cons tuent en es of the Russian Federa on.
Table 4
THE MAIN PARAMETERS OF THE CONSOLIDATED BUDGET OF CONSTITUENT ENTITIES
OF THE RUSSIAN FEDERATION IN JANUARY FEBRUARY 2013 2014
January–February 2014 January–February 2013 Devia on
p.p. of GDPBillion Rb % of GDP Billion Rb % of GDP
Revenues,
including:
863.1 8.2 907.4 9.6 -1.4
corporate profit tax 176.2 1.7 161.9 1.7 0.0
individual income tax 335.8 3.2 313.5 3.3 -0.1
domes c excises 75.4 0.7 74.4 0.8 -0.1
aggregate income tax 35.8 0.3 37.9 0.4 -0.1
property tax 64.1 0.6 60.2 0.6 0.0
revenues from u liza on of property which
is in state and municipal ownership
32.7 0.3 31.5 0.3 0.0
non-repayable revenues from other budgets of
the budgetary system of the Russian Federa on
263.8 2.5 240.2 2.5 0.0
repayment of balances of subsidies,
subven ons and other purpose inter-
budgetary transfers of previous years
-188.7 -1.8 -74.4 -0.8 -1.0
Expenditures, including: 1010.4 9.6 923.7 9.8 -0.2
Surplus (deficit) of the consolidated
budget of cons tuent en es
-147.3 -1.4 -16.3 -0.2 -1.2
GDP es mate 10503 9466
Source: The Federal Treasury and calcula ons of the Gaidar Ins tute.
Table 5
EXECUTION OF THE CONSOLIDATED BUDGET OF CONSTITUENT ENTITIES OF THE RUSSIAN FEDERATION
ON THE EXPENDITURE SIDE IN JANUARY FEBRUARY 2013 2014
January–February 2014 January–February 2013 Devia on,
p.p. of GDPBillion Rb % of GDP Billion Rb % of GDP
Total expenditures, 1010.4 9.6 923.7 9.8 -0.2
including
Federal issues 65.4 0.6 58.5 0.6 0.0
Na onal defense 0.2 0.002 0.3 0.003 -0.001
Na onal security and law-enforcement 9.9 0.09 8.2 0.09 0.0
Na onal economy 123.5 1.2 131.4 1.4 -0.2
Housing and u li es 74.1 0.7 63.3 0.7 0.0
Protec on of environment 1.9 0.02 2.0 0.02 0.0
Educa on 312.7 3.0 283.0 3.0 0.0
Culture and cinema 36.9 0.3 33.4 0.3 0.0
Healthcare 163.6 1.6 151.6 1.6 0.0
Social policy 183.8 1.7 163.1 1.7 0.0
Physical training and sport 18.4 0.2 16.1 0.2 0.0
Mass media 5.1 0.05 3.1 0.03 0.02
Servicing of state and municipal debts 14.8 0.1 9.5 0.1 0.0
Intergovernmental transfers 0.06 0.0006 0.2 0.002 -0.0014
Source: The Federal Treasury and calcula ons of the Gaidar Ins tute.
26. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
26
RUSSIAN BANKS IN Q12014
M.Khromov
More banks had their banking license revoked in
March 2014. Forty banking licenses were revoked in
the period of July 2013 thru February 2014, 5 licenses
per month, 6 licenses were revoked in December 2013
and January 2014 each. In March 2014, 11 credit ins -
tu ons lost their license, nine of which saw revoca on
of their retail services license. In March 2014, assets of
a license-revoked bank totaled a bit less than Rb 7bn
while retail accounts and deposits totaled Rb 3,8bn.
As of March 1, 2014, the assets of such banks totaled
Rb 75,5bn or 0.13% of the banking sector’s total assets
while their retail accounts and deposits totaled Rb 34bn
or 0.2% of the total bank retail accounts and deposits.
The State Agency for Deposit Insurance is to compen-
sate Rb 29bn of retail deposits in these banks, i.e. more
than 85% of the retail accounts and deposits held in the
banks whose license was revoked in March 2014 are to
be reimbursed from the deposit insurance fund. A total
of 900 credit ins tu ons including 841 banks remained
in business in Russia as of April 1, 2014.
The banking sector’s total assets increased 0.8%1
in
March 2014 and 1.3% in Q1 2014, annual growth rates
reached 15.5% (14.2% at 2013 year end).
The banking sector’s profit dropped to Rb 64bn in
March 2014, the lowest value in 2014 and much lower
than the monthly average profit in 2013 (Rb 83bn).
Therefore, in March, the return on assets fell to
1.3% p.a., reaching a total 1.6% p.a. (1.9% in 2013) in
Q1 2014. The return on banking sector’s equity stood
at 11.9% p.a. in March and 14.7% p.a. in Q1 2014 rela-
ve to a total of 16.8% in 2013.
Fundraising2
March 2014 saw a decline in retail accounts and
deposits in banks for the first me since the fall of
2008 (exclusive of seasonal setbacks in January). They
fell 1.7% or Rb 279bn during the month. In Q1 2014,
1 Hereina er, growth rates in balance-sheet indicators are pre-
sented with adjustment for revalua on in foreign currency but
with no adjustment for banks with revoked banking license, unless
otherwise indicated.
2 Calculated according to balance-sheet accounts (form
No. 101).
bank retail accounts and deposits lost a total of 4% or
Rb 683bn. Annual growth rates in retail accounts and
deposits denominated in foreign exchange fell to 9.3%,
reaching the bo om line since the fall of 2009.
Ruble-denominated retail accounts contracted 2.2%
during the month, whereas retail accounts denominat-
ed in foreign exchange increased merely 0.4% in dollar
terms. The share of retail accounts and deposits de-
nominated in foreign exchange reached 20.4%, far less
than the value recorded early in 2009 (33.6%). How-
ever, the total amount of retail accounts and deposits
denominated in foreign exchange in Russian hit a new
record of $94,8bn rela ve to just $67,6bn, the highest
in 2009.
Substan al ou low of retail deposits from the banking sector in Q1 2014 forced banks to increase their liability
to the regulators – the Central Bank of Russia and the Ministry of Finance – reaching record values. The quality of
the retail credit por olio keeps deteriora ng while the banking business facing decline in profitability.
50
52
54
56
58
0
10
20
30
40
01.01.2010
01.04.2010
01.07.2010
01.10.2010
01.01.2011
01.04.2011
01.07.2011
01.10.2011
01.01.2012
01.04.2012
01.07.2012
01.10.2012
01.01.2013
01.04.2013
01.07.2013
01.10.2013
01.01.2014
01.04.2014
State-run banks
Private banks
The share of state-run banks in the Russian banking system
Fig. 1. Dynamics of assets in state-run banks
and other banks (trillions of rubles), and the share
of state-run banks in the assets (%, right-hand scale)
49
50
51
52
53
54
55
56
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
01.01.2010
01.04.2010
01.07.2010
01.10.2010
01.01.2011
01.04.2011
01.07.2011
01.10.2011
01.01.2012
01.04.2012
01.07.2012
01.10.2012
01.01.2013
01.04.2013
01.07.2013
01.10.2013
01.01.2014
01.04.2014
State-run banks
Other banks
The share of state-run banks in the Russian banking system
Fig. 2. Dynamics of equity in state-run banks and other
banks1
(trillions of rubles), and the share of state-
run banks in the capital (%, right-hand scale)
27. RUSSIAN BANKS IN Q1 2014
27
All the key groups of banks were affected by retail
cash ou low in March 2014. Small and medium-sized
banks and large private banks were hit most, 3.3%
and 3.5% respec vely. Sberbank saw the slowest re-
tail cash ou low of just 0.5%. Therefore, the share of
state-run banks bounced back to the level recorded
early in the year, accoun ng for 60.7% of the total re-
tail bank deposits.
In March 2014, banks lost 0.4% of corporate ac-
counts and deposits as ruble accounts and deposits
kept being converted into foreign exchange. For exam-
ple, ruble-denominated corporate accounts and de-
posits contracted 2.2%, whereas those denominated
in foreign exchange increased 4.9% in dollar terms,
reaching a historical highest value of $106,6bn.
While the share of fixed-term corporate deposits
remained more than 50%, it declined from 54.9% to
51.3% rela ve to the beginning of the year. This was
caused by an ongoing trend towards conver ng ruble-
denominated fixed-term deposits, which lost 10.7%
(Rb 584bn) since the beginning of the year, into cur-
rent accounts denominated in foreign exchange which
increased 67.8% ($13,3bn) over the first three months
of the year. Fixed-term deposits denominated in for-
eign exchange saw a much more moderate increase of
18.6% ($5,1bn).
In March 2014, banks raised by Rb 820bn their debt
to the monetary authori es including the Ministry of
Finance of Russia (Rb 85bn) and the Bank of Russia
(Rb 735bn). Banks owed more than Rb 5,1 trillion to
the Bank of Russia and the Ministry of Finance, includ-
56,0
57,0
58,0
59,0
60,0
61,0
62,0
0
2
4
6
8
10
12
01.01.2010
01.04.2010
01.07.2010
01.10.2010
01.01.2011
01.04.2011
01.07.2011
01.10.2011
01.01.2012
01.04.2012
01.07.2012
01.10.2012
01.01.2013
01.04.2013
01.07.2013
01.10.2013
01.01.2014
01.04.2014
State-run banks
Private banks
The share of state-run banks in the Russian banking system
Fig. 3. Dynamics of retail deposits in state-run banks
and other banks (trillions of rubles), and the share of state-
run banks in the retail deposit market (%, right-hand scale)
44
46
48
50
52
54
56
58
0
2
4
6
8
10
01.01.2010
01.04.2010
01.07.2010
01.10.2010
01.01.2011
01.04.2011
01.07.2011
01.10.2011
01.01.2012
01.04.2012
01.07.2012
01.10.2012
01.01.2013
01.04.2013
01.07.2013
01.10.2013
01.01.2014
01.04.2014
State-run banks
Other banks
The share of state-run banks in the Russian banking system
Fig. 4. Dynamics of corporate accounts with state-run banks
and other banks (trillions of rubles), and the share of state-run
banks in the corporate account market (%, right-hand scale)
50
60
70
80
90
100
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
01.01.2010
01.04.2010
01.07.2010
01.10.2010
01.01.2011
01.04.2011
01.07.2011
01.10.2011
01.01.2012
01.04.2012
01.07.2012
01.10.2012
01.01.2013
01.04.2013
01.07.2013
01.10.2013
01.01.2014
01.04.2014
State-run banks
Other banks
The share of state-run banks in the Russian banking system
Fig. 5. Dynamics of Bank of Russia’s loans extended to state-
run banks and other banks (trillions of rubles), and the share of
state-run banks in Bank of Russia’s loans. (%, right-hand scale)
Table 1
RUSSIAN BANKING SYSTEM’S STRUCTURE OF LIABILITIES AT MONTH END , AS PERCENTAGE OF TOTAL
12.08 12.09 12.10 12.11 12.12 03.13 06.13 09.13 12.13 01.14 2.14 3.14
Liabili es, billions of rubles 28022 29430 33805 41628 49510 49839 52744 54348 57423 58445 59137 59377
Equity 14,1 19,3 18,7 16,9 16,2 16,7 16,3 16,5 16,0 16,1 16,0 16,0
Loans from the Bank of Russia 12,0 4,8 1,0 2,9 5,4 4,5 4,4 5,8 7,7 7,4 6,7 7,9
Interbank opera ons 4,4 4,8 5,5 5,7 5,6 5,4 5,2 5,1 5,1 5,2 5,0 4,7
Foreign liabili es 16,4 12,1 11,8 11,1 10,8 10,4 10,8 10,1 9,9 10,3 10,7 10,6
Retail accounts and deposits 21,5 25,9 29,6 29,1 28,9 29,6 29,6 29,3 29,4 28,7 28,5 27,8
Corporate accounts
and deposits
23,6 25,9 25,7 26,0 24 23,9 23,5 22,9 23,8 24,1 24.2 23,9
Accounts and deposits of
government agencies and
local government authori es
1,0 1,0 1,5 2,3 1,6 1,4 2,4 2,9 0,9 1,4 1,6 1,8
Outstanding securi es 4,1 4,1 4,0 3,7 4,9 5,2 5,1 4,7 4,5 4,5 4,2 4,2
Source: Central Bank of Russia, Gaidar Ins tute’s es mates.
28. RUSSIAN ECONOMIC DEVELOPMENTS No. 5, 2014
28
ing Rb 4,7 trillion owed to the Bank of Russia. Both in-
dicators hit their historical highest as of 01.04.2014.
Monetary authori es’ funds reached 8.6% in total
liabili es, of which 7.9% is owed to the Bank of Russia.
It is state-run banks that are responsible for a major
part of the debt owed to the Bank of Russia, account-
ing for 70.7% of the total volume of refinancing of the
banking sector.
Loans issued
The debt on retail bank loans increased 1.4%
(Rb 148bn) in March 2014, annual growth rates slowed
down to 25.2%. The quality of the retail credit por o-
lio remained unchanged in March 2014. The share of
overdue debt remained at 4.9% of the total debt, while
the ra o of loan loss provisions to total debt increased
0.1 p. p., reaching 8.0%. Therefore, March 2014 saw a
slowdown in the deteriora on of the quality of retail
loans. The share of overdue debt was the same as in
the mid-2012 while the provisions-to-loans ra o was
similar to that recorded at the end of 2011.
The corporate credit por olio gained 1.4% (Rb 298bn)
in March 2014. Annual growth rates stood at 12.7%. The
quality of corporate loans also remained unchanged. The
share of overdue debt accounted for 4.2% of the total
debt while the ra o of built up loan loss provisions to to-
tal loan debt declined by 0.1 p. p., staying at 6.8%.
47
48
49
50
51
52
53
54
0,0
1,0
2,0
3,0
4,0
5,0
6,0
7,0
01.01.2010
01.04.2010
01.07.2010
01.10.2010
01.01.2011
01.04.2011
01.07.2011
01.10.2011
01.01.2012
01.04.2012
01.07.2012
01.10.2012
01.01.2013
01.04.2013
01.07.2013
01.10.2013
01.01.2014
01.04.2014
State-run banks
Other banks
The share of state-run banks in the Russian banking system
Fig. 6. Dynamics of retail loans issued by state-run banks
and other banks (trillions of rubles), and the share of state-
run banks in the retail loan market (%, right-hand scale)
55,0
56,0
57,0
58,0
59,0
60,0
0
5
10
15
01.01.2010
01.04.2010
01.07.2010
01.10.2010
01.01.2011
01.04.2011
01.07.2011
01.10.2011
01.01.2012
01.04.2012
01.07.2012
01.10.2012
01.01.2013
01.04.2013
01.07.2013
01.10.2013
01.01.2014
01.04.2014
State-run banks
Other banks
The share of state-run banks in the Russian banking system
Fig. 7. Dynamics of corporate loans issued by state-run banks
and other banks (trillions of rubles), and the share of state-
run banks in the corporate loan market (%, right-hand scale)
Table 2
RUSSIAN BANKING SYSTEM’S STRUCTURE OF ASSETS AT MONTH END , AS PERCENTAGE OF TOTAL
12.08 12.09 12.10 12.11 12.12 03.13 06.13 09.13 12.13 01.14 2.14 3.14
Assets, billions of rubles 28022 29430 33805 41628 49510 49839 52744 54348 57423 58445 59137 59377
Cash and precious metals 3,0 2,7 2,7 2,9 3,1 2,5 2,4 2,3 2,8 2,3 2,2 2,8
Deposits with the Bank of Russia 7,5 6,9 7,1 4,2 4,4 3,3 3,3 3,5 3,9 3,0 2,7 3,5
Interbank opera ons 5,2 5,4 6,5 6,4 6,8 6,4 6,0 5,8 5,7 6,1 5,8 5,3
Foreign assets 13,8 14,1 13,4 14,3 13,0 14,5 15,1 13,6 13,3 14,7 15,5 14,4
Retail sector 15,5 13,1 13,0 14,4 16,8 17,4 17,9 18,5 18,5 18,4 18,2 18,4
Corporate sector 44,5 44,5 43,6 44,0 41,3 41,9 40,8 41,2 39,3 40,0 39,8 39,6
State 2,0 4,2 5,1 5,0 3,2 3,2 3,2 2,9 3,1 3,3 3,7 3,0
Property 1,9 2,7 2,6 2,3 2,2 2,2 2,2 2,1 2,0 2,0 1,9 1,9
Source: Central Bank of Russia, Gaidar Ins tute’s es mates.
