BNE Credit - October 20, 2014 (Eastern EU Data)

October 20, 2014
This is bne's Eastern Europe credit weekly newsletter, a list of the top credit stories
in the region last week. You can receive the list as a plain text or html email or as a
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CREDIT TOP STORY
1. Russia’s credit rating cut to Baa2 by Moody’s on sluggish growth
2. Where is the ruble heading?
3. Eurozone inflation drops to five-year low
4. Kazakhstan’s Currency Battered by Twin Assaults
5. Polish central bankers sow confusion
6. Recession fears rise as Germany slashes growth outlook
7. Return of Hungarian deflation puts pressure back on central bank
8. Russia - Life in the time of sanctions
9. Russia - Risk scenarios if oil prices change
10. Russian economy to stagnate on large capital outflows, domestic policy
tightening, cheaper oil
11. Russians external debt payments drive capital outflow
12. Ukraine, Belarus and Kazakhstan on Diverging Paths
CREDIT NEWS
13. COMMENT: Is the ruble decline overshooting?
14. COMMENT: Life in Russia with $80 oil
15. Clouds over EU trade driven by Russia and Switzerland
16. EMEA high-yield issuance slowing into Q4 2014
17. Fears of a Russian credit crunch greatly exaggerated, say analysts
18. Gazprom mulls yuan bond issue
19. Kudrin Slams Fixed Exchange Rate as Russia's Ruble Hits New Lows
20. Ruble continues on down together with oil price
21. There is cause for optimism over Russia's crisis
CREDIT OTHER NEWS
22. Eurozone industrial production suffers largest monthly fall for two years
CREDIT EA
23. Azerbaijan soveriegn bond assessment
CREDIT EE
24. Russian Grids-Chinese JV to borrow $1bn from China annually
25. Russian Highways board approves offering RUB21.7bn bonds
CREDIT CE MACRO NEWS
26. Bumper Czech harvest threatens further pressure on inflation
27. Falling exports drag Czech current account to deeper deficit
28. Hungarians losing hope
29. Latvia Trade Deficit Narrows
30. Lithuania Trade Deficit Decreases In August
31. Lithuanians growing more pessimistic on economy
32. Polish data trade data joins the CEE August drop
33. Slovak Cabinet Backs 2015 Budget With Gap Below EU Limit

34. Slovakia Aug Industrial Production Rises At Slower Rate
35. Slovakia Sep Consumer Prices Fall At Slower Rate
CREDIT EA MACRO NEWS
36. Armenia's construction in eight months grows by 0.4% to AMD198.3bn
37. Armenian German trade in first half surges by 28.8% to $294.4m
38. Azerbaijan predicts non-oil export increase in 2015
39. Azerbaijan specifies macroeconomic forecasts for 2014
40. German investments in Armenia reach $840m
41. Kazakhstan Hit by Russia's Economic Slowdown
42. Kazakhstan sees GDP growth at 4 percent
43. Kazakhstan to revise forecasts for GDP growth
44. Major sectors of Kazakh economy grow by 2.6% in January-September
45. Mongolia's Industrial production index in figures
46. Mongolia's Macroeconomic indicators as of September
47. Mongolia's external turnover reaches over USD 8,000 million
48. More than 7 billion somoni worth of industrial goods produced in Tajikistan in
Jan-Sept 2014
49. Non-oil sector share in Azerbaijan's GDP to exceed 65% in 2015
50. Tajikistan's poverty rate will decrease to 30 percent in 2015, says president
51. Tajikistans external trade turnover estimated at more than 4.3 billion USD in
Jan-Sept 2014
52. Trade turnover between South Korea, Uzbekistan exceeds $1 billion in H1 2014
CREDIT RUSSIA MACRO NEWS
53. Access to foreign funding for Russian banks and corporations dried up
54. Belarusian industrial output growth accelerates in September
55. Central bank plays it cool as dollar falls to historic low on back of oil price slump
56. Decline in Ukraine organized retail trade slows down in September
57. Economy to stagnate on large capital outflows, domestic policy tightening,
cheaper oil
58. Industrial output grows 2.8% YoY in September
59. PPI decelerates to 3.5% YoY in September due to the drop in oil prices
60. PWC: Russia's inflation to absorb much of salary increase in 2014
61. Putin Says Budget Cuts an Option If Energy Prices Continue to Drop
62. Putin: no doubt Russia-China trade will reach $100 billion in 2015
63. Ruble facing depreciation pressures
64. Russia Output & Demand- September; temporary relief amid deteriorating
fundamentals
65. Russia's foreign debt falls 7% to $678.4bn in January-September
66. Russia: Gauging capital flight
67. Russian CBR reports Russian corporate foreign debt at $614bn as at end-Sept
68. Russian Industry Grows More Than Forecast on Food
69. Russian Positive 3Q14 BoP Ignored On Cheaper Oil
70. Russian Spending on Luxury Goods Plummets with Ruble
71. Russian budget in good shape
72. Russian budget surplus expands to 2.1% of GDP in 9M14
73. Russian industrial output recovers in September
74. Salaries in Moscow Rise to $1,200 Per Month as Wage Growth Slows
75. Ukrainian economy overshadowed by war
76. Weekly CPI: inflation creeps up and approached 8.2% YoY as of 13 October
78. Falling imports support Russia’s current account surplus
CREDIT UKRAINE MACRO NEWS
79. Ukraine goods trade reaches USD 308 mln surplus in August

80. Ukraine monetary base rises 2.9% m/m in September
CREDIT TURKISH MACRO NEWS
81. Turkey - August BOP in focus
CREDIT EE - FROM THE DAILIES
82. Belarus' export of agricultural products to Russia up 10% in September
84. Individual demand for foreign cash in Ukraine rises in September
85. Mechel accounts suggest company still unable to service debt
86. Moody's affirms Kyiv's Caa3 rating; outlook negative
87. Ruble/Yuan trading looms, Moscow Exchange signs cooperation agreement with
bank of china
88. Russia may introduce special economic regime with Ukraine - report
89. Russia's Central Bank Shifts Boundaries of Floating Ruble Corridor by 10 Kopeks
90. Russian Central Bank Shift Boundaries of Ruble by 30 Kopeks
91. Turkish investments in Belarus up by 400 times in last five years
92. Ukraine's Finance Minister Sees No Need for More IMF Funds
CREDIT CE - FROM THE DAILIES
93. Poland's Szczurek named Finance Minister of the Year CEE
94. Polish deflation continues in September
CREDIT SE - FROM THE DAILIES
95. Romania: Daily Snapshot - Long term debt yields set new records
96. S&P Raises Albania Outlook to Positive from Stable
97. S&P Ratings On Serbia Placed On CreditWatch Negative Pending Medium-Term
Fiscal Plans
CREDIT EA - FROM THE DAILIES
98. Armenia to get 1.13% of customs duties from imports of goods to Eurasian
Economic Union
99. Chinese Eximbank to extend $300 million loand for construction of chemical
complex in Uzbekistan
100. Falling ruble, oil price reignite rumours of devaluation of Kazakh currency
101. Kazakhstan sees rise in tax revenues
102. Kazakhstans financial institutions banned from using Bitcoin
103. Kyrgyzstan collects nearly KGS30bn in taxes and payments this year so far
104. Launch of Eurasian Economic Union may trigger growth of salaries in
Kazakhstan
105. Mongolia's central bank economic indicators for first nine months of 2014
106. Mongolia's national consumer price index increases in September
107. Personal tax collection rises in Kazakhstan
108. Turkmenistan facing devaluation risk
109. Ulaanbaatar's house prices up 10.2% in first nine months of 2014
CREDIT TOP STORY
1. Russia’s credit rating cut to Baa2 by Moody’s on sluggish growth
bne
October 18, 2014
Ratings agency Moody's cut Russia’s credit rating one level to Baa2, the second-
lowest investment grade, from Baa1, with a negative outlook, citing sluggish growth
prospects.
Moody's also pointed to the fall in Russia’s hard currency reserves after the central
bank spent more than $50bn this year defending the currency. Reserves are also

under pressure due to on going capital flight which is expected to top $100bn this
year.
Falling oil prices, down 20% this year, and borrowers’ lack of access to international
capital markets were also contributing factors.
The economy will expand 0.3% in 2014, the worst performance since output shrank
in 2009, according to analysts surveyed by Bloomberg.
“The military confrontation in Ukraine and escalating sanctions against Russia are
likely to have an increasingly negative macroeconomic impact on Russia’s investment
climate and consequently on its medium-term growth prospects,” Moody’s said in a
report.
Tim Ash of Standard bank said in a note:
Pretty much expected, given that Moody's original Baa1 rating was generous
compared to Fitch at BBB and S&P at BBB-. Obviously Russia's credit profile is
deteriorating as a result of weak growth, sanctions, lower oil prices, and heightened
geopolitical concerns.
I guess a bigger threat will be if S&P moves to remove the IG rating, which still
seems unlikely at this stage, and after they already moved back in April.
Russia does still benefit from modest debt ratios, and a weight of FX reserves.
Tim Ash, Standard Bank
October 15, 2014
We have been seeing some pretty substantive moves on the ruble in recent months -
reflecting $strength, weak oil/commodity prices, Ukraine/sanctions risk, weak growth
drivers, et al. On a basket basis, YTD we are off 15% YTD on a basket basis, record
lows there and against the $and Euro. That said, I attach a REER chart going back to
1994, which still does not suggest the ruble is that cheap. In REER terms (the chart
is 1995=100) we are around 173 at present, down 12 points on the year, and about
par to the level in 2009 after Lehman fall-out, and about par for the 10Y average.
That said, the 10Y real GDP growth average was 3.2%, versus expectations of flat
growth this year, and not much hope of an uplift next year. The 10Y average oil price
is $80 a barrel, versus just over $90 a present.
I tend to think that we have not seen the end of weakness yet, indeed, it is
interesting how the CBR is not panicking either in terms of the scale of its
intervention (verbal or direct), or rate hikes. They appear comfortable with ruble
weakness - seeing this as an escape valve for market concerns and also a likely
kicker for growth. It also helps unwind so-called Dutch disease, which saw the REER
more or less double since Putin came to office and oil prices increased four fold.
Indeed, maybe we could see 50 on a basket basis, or 45 against the $before we see
more substantive CBR action - they appear comfortable both with the extent and
pace of ruble weakening at present. Note 50 on a basket basis would take the REER
rate back to 2006 levels when oil prices averaged $66 per barrel. Maybe the other
"trigger" for the CBR to move will be exchange rate pass thru - the CBR seems

comfortable with single digit inflation, albeit that might change if we see double
digits approaching.
3. Eurozone inflation drops to five-year low
Eurostat
October 16, 2014
Euro area annual inflation was 0.3% in September 2014, down from 0.4% in August.
This is the lowest rate recorded since October 2009. In September 2013 the rate was
1.1%. Monthly inflation was 0.4% in September 2014.
European Union annual inflation was 0.4% in September 2014, down from 0.5% in
August. This is the lowest rate recorded since September 2009 In September 2013
the rate was 1.3%. Monthly inflation was 0.3% in September 2014.
These figures come from Eurostat, the statistical office of the European Union.
In September 2014, negative annual rates were observed in Bulgaria (-1.4%),
Greece (-1.1%), Hungary (-0.5%), Spain (-0.3%), Poland (-0.2%), Italy, Slovenia
and Slovakia (all -0.1%). The highest annual rates were recorded in Romania
(1.8%), Finland (1.5%) and Austria (1.4%). Compared with August 2014, annual
inflation fell in seventeen Member States, remained stable in two and rose in nine.

The largest upward impacts to euro area annual inflation came from restaurants &
cafés (+0.09 percentage points), rents (+0.07pp) and maintenance of vehicles
(+0.05pp), while fuels for transport (-0.21pp), telecommunications (-0.12pp) and
gas (-0.08pp) had the biggest downward impacts.
4. Kazakhstan’s Currency Battered by Twin Assaults
EurasiaNet
October 16, 2014
As the price of oil falls, and as Russia’s Central Bank struggles to keep the ruble from
hitting a new record low each day, Kazakhstan’s currency is facing pressure on two
fronts. The major oil producer, whose economy is tightly linked to Russia’s, already
sharply devalued the tenge once this year. But facing these new challenges, can the
Kazakh National Bank hold its currency stable? And can Kazakhstan keep its books
balanced?
Higher output and weaker global demand have pushed the price for benchmark Brent
crude to $83 per barrel, its lowest in four years, down 27 percent since June. Oil,
Kazakhstan’s chief export, is still above the government’s fiscal breakeven point of
$65.5 per barrel, as calculated by the IMF. But it is below $90.6, where Kazakhstan
faces a balance of payments deficit that puts further downward pressure on the
currency. Moreover, trade with Russia is down 22 percent this year.
Kazakhstan’s “tenge weakened in forward markets last week, responding to a drop in
the price of oil and sliding ruble,” Halyk Finance, an Almaty-based investment bank,
said in an October 13 note. “The weakening of the Russian ruble and falling oil prices
are the main fundamental reasons of the tenge weakening in forward markets."
Read more here:
http://www.eurasianet.org/node/70476?utm_source=dlvr.it&utm_medium=twitter

5. Polish central bankers sow confusion
bne
October 17, 2014
Less than a week after finally agreeing to cut interest rates, Poland's central bankers
are back to bickering and sowing confusion over further steps to support the
stuttering economy.
With the recovery going strongly early this year, the National Bank of Poland's
traditionally turbulent Monetary Policy Council (MPC) briefly reached unanimity,
opening the way for Governor Marek Belka to announce it would offer forward
guidance. With the economy now stumbling, such consensus has gone out of the
window. Conflicting signals mounted on October 13 following the previous week's
surprise of a 50-basis-point cut to push the key interest rate down to 2%.
Following the October 8 cut, Belka suggested more easing could be on the way due
to the effects of economic weakness in the Eurozone and the Ukraine crisis on GDP
growth and inflation. He reiterated that view in an interview published by Gazeta
Wyborcza on October 13, but warned investors not to assume the move would mark
the start of an aggressive easing cycle.

"It may be just one more cut," he said. "If it only depended on me, I would strongly
concentrate in time all changes of rates, and then observe (their impact)." The NBP
governor suggested that with the European Central Bank and other regulators in
ultra-dovish mood, Poland cannot allow the zloty to gain. Belka has previously
insisted that he wants to see all necessary monetary easing completed swiftly.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/polish-
central-bankers-sow-confusion
6. Recession fears rise as Germany slashes growth outlook
bne
October 17, 2014
Diving Eurozone industrial production and plummeting confidence provoked Germany
to slash its growth forecasts on October 14. The move raises concern over the
faltering economic recovery in Central Europe.
Heavily reliant on export demand out of the single currency area, and especially
Germany, the Czech Republic and Hungary saw their own industrial output sink
alarmingly in August (http://www.bne.eu/content/story/central-europe-shudders-
germany-sneezes). Analysts suggest that the data was impacted by holidays, and
that they expect a sharp revival in September, but buffeted by the Eurozone
slowdown, as well as additional pressure from the sanctions war with Russia, Central
Europe's economies will be wary of the announcement from Berlin.
The German government cut its growth forecast for this year to just 1.2%, a huge
drop from the 1.8% it predicted in April. For 2015 it trimmed 0.7 percentage points
to leave its outlook at 1.3%. Economy minister Sigmar Gabriel blamed the
geopolitical crisis and moderate global growth for holding back a German economy
itself heavily reliant on exports.
The role of the Central European economies in the supply chain threatens to see it
hit also. Berlin chopped its expectations for export growth this year by 0.7 pp to 4%.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/recession-
fears-rise-germany-slashes-growth-outlook
7. Return of Hungarian deflation puts pressure back on central bank
bne
October 17, 2014
Hungarian consumer prices fell by 0.5% on an annual basis in September - the
lowest inflation rate since the fall of communism - the country's statistical agency
KSH reported on October 10. The return of deflation raises the possibility that the
central bank could consider a return to monetary easing.
September's drop in prices was the first deflation since the 0.3% retreat in June, a
figure analysts expected to be matched. Month-on-month, prices declined 0.2%,
matching August. Economists had forecast a flat reading for the monthly change.
The Hungarian Central Statistical Office suggested that the government-mandated
price cuts for utilities did most to push prices down, with household energy prices

dropping 12%. Portfolio.hu also noted that the introduction of the financial
transaction tax has now dropped out of the 12-month index.
Accompanied by a sharp decline in industrial production growth in August, the return
of deflation moves the focus back towards the Magyar Nemzeti Bank, which at its
monthly meeting on September 23 kept rates steady for the second consecutive
month.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/return-
hungarian-deflation-puts-pressure-back-central-bank
8. Russia - Life in the time of sanctions
RBS
October 15, 2014
Although the Ukraine-Russia conflict has de-escalated in the recent weeks, fighting
continues around Donetsk in eastern Ukraine, and progress towards implementation
of the Minsk ceasefire accords remains slow.
Despite the growing risk of recession in Germany and Euro zone as a whole,
Germany does not appear prepared to discuss relaxation of the sanctions regime
against Russia. We expect Germany and a few other EU countries to oppose any
softening of the sanctions regime in late October, when the EU is scheduled to
review it.
The next dates to watch are 16-17 October, when President Putin will attend the
ASEM summit in Milan where he may meet with Chancellor Merkel, President
Hollande and President Poroshenko.
The 3Q balance-of-payments estimate released by the CBR reveals that the
fundamentals still remained relatively strong, and capital flight abated compared to
1H 2014.
However, the falling oil price and the shortage of FX liquidity in the local market are
exerting strong downward pressure on RUB. Although the drawdown of FX reserves
has been modest by historic standards, the market should watch out for the signs of
re-dollarisation of household bank deposits, which would exacerbate the pressure on
RUB.
The recent downtrend in the oil price raises questions about the ability of the
government to stick to its prudent fiscal rule in 2015. With Brent trading below
$90/bbl, (currently $88/blb)the assumptions of the draft 2015 budget no longer
looks conservative enough.
As a result of Western sanctions, the government has come under increased
pressure to allow allocation of sovereign funds for anti-crisis support. In particular,
the Welfare Fund is seen as a source of funding for fixed investment projects of the
sanctioned companies.
On a positive note, the much more flexible RUB FX rate should partially absorb the
impact of a drop in the oil price on budget revenues. We estimate that under the
RUB float, a drop in the hydrocarbon revenue caused by cheaper oil could be more
than 70% less than under a pegged RUB FX rate.

We estimate that the RUB weakening since mid-August could add 1.5%age points to
headline inflation in the coming months. The rise in the inflationary risks will likely
prompt the CBR to hike its policy rate by 50bps at the next policy meeting (on 31
October), or earlier in case of a run on the RUB.
Given the RUB's role as a "shock absorber" for the government's finances, we think
that for now the CBR will refrain from changing the parameters of its FX
interventions. Even if it hikes in October, this should not be sufficient to break the
trend of RUB depreciation in the short term, because banks and companies would
still need to buy FX for external debt repayments. .
Still, we abstain from putting out a "short" trade recommendation on RUB given the
risk of CBR opting for a more sizeable hike, which could cause high volatility in the
RUB market.
We think the CBR's determination to switch to a RUB float in 2015 will be further
tested if the oil price drops to $80/bbl or below. We think that a combination of rate
hikes and a temporary increase in FX interventions would be the most likely policy
response.
The negative oil price trend reinforces our "underweight" recommendation on
Russian hard currency debt. We think that the time for "bottom-fishing" in the
Eurobond market has not come yet.
9. Russia - Risk scenarios if oil prices change
VTB
October 16, 2014
We forecast Russian 2015E GDP growth at 1.7%, with Brent crude oil at $105/bl. In
this report we estimate the impact of a fall or moderate increase in oil prices on the
country’s economic performance.
In our base case, we expect Russian GDP growth to accelerate from 0.8% in FY14E
to 1.7% in FY15E (Russian GDP growth revision: Goodbye to romance). We are also
looking for better economic performance in Kazakhstan, with GDP growth increasing
from 4.5% in FY14E to 5.6% in FY15E (Kazakhstan: When softer growth still looks
good). However, both countries rely heavily on energy exports. In our forecasts we
assume an oil price of $105/bl for both years. In this note we estimate the impact of
a fall or moderate increase in oil prices on countries’ economic performance. On the
stronger side, we assume $115/bl as the best case; on the weaker side we go
further, to $50/bl (Figures 1-2). However, we consider oil prices below $80/bl as a
very unlikely hypothetical case.
Russian economic picture varies significantly in oil scenarios
If oil prices go to $110/bl or $115/bl, GDP growth in Russia might be even stronger
next year, at over 2%. We estimate growth is likely to remain positive only with oil
prices above $92-93/bl. Otherwise, we see growth turning negative and the rouble
hitting new lows. However, a weaker rouble is likely to stabilise the current account
(we do not foresee FY deficits in any scenario) and also alleviate the effects of a drop
in oil prices on the budget.

The risks to our Russian growth forecast are clearly slanted to the downside. First,
our current base case is a frozen conflict in Ukraine and the expiry of Western
sanctions on Russia in late 2015. In a recent note we considered various risk
scenarios for Russia in the event of intensified sanctions (Risk scenarios for Russia -
If sanctions widen to energy exports). Risks to our baseline scenario for Kazakhstan
are fairly balanced, in our view. We do not see significant direct impact on
Kazakhstan’s prospects stemming from tensions over Ukraine. The indirect effects of
a softer Russian performance would be non-negligible, but not so great as to require
quantifying separately from a broad range of traditional risk factors.
However, recent dynamics in global commodity markets prompt us to focus on
additional sources of risk for Russian and Kazakh GDP growth. In our forecasts we
assume a Brent oil price of $105/bl for 2014E and 2015E. We keep this projection as
our base-case scenario, but examine the impact of a fall or moderate increase in oil
prices on Russian and Kazakh economic prospects. We assume that a change in oil
prices would lead to the same change in prices for refined products.
The Russian picture varies significantly under different oil-price scenarios
If oil prices go to $110/bl or $115/bl, Russian GDP growth could be even stronger
next year, at over 2%. However, we still do not see 3% growth as possible in either
of these scenarios, which in the recent past might have been considered very
unimpressive (in this century, Russian GDP growth exceeded 3% every year before
2013, apart from in 2009). Russia’s current significant cyclical headwinds result from
very tight credit conditions, softened business confidence and other spillovers from
intensified geopolitical tension. In addition, challenging demographic trends, with the
labour force stagnating since 2008, weighs down on Russian potential growth.
With higher oil prices, we would also clearly expect to see a range of improvements
in other areas. The rouble would be likely to be stronger (at an annual average of
RUB36.9/$ for $110/bl oil and RUB36.4/$ for $115/bl oil); inflation would likely be
lower; and the current account would likely be in better shape (with surpluses of
$46bn and $52bn, respectively) than in our base case ($39bn). Nevertheless, we do
not see a sizeable improvement in the current account surplus, as a stronger
currency and, probably, better domestic demand would result in higher import
growth, in our view. We would also expect some improvement on the budget front,
with the federal budget becoming balanced or turning into surplus (0.6% of GDP) at
oil prices of $110/bl and $115/bl, respectively.
However, the lower-oil-price scenario currently merits more attention, in our view.
With oil prices at $100/bl, we see growth declining to 1%, and see growth staying
slightly positive even at the $95/bl level. This seems to us to be an out-of-consensus
view in the current challenging environment. According to a recent Bloomberg
special survey, consensus suggests that Urals crude (i.e. not Brent, as in our case,
although the price difference is now negligible) needs to trade at $100/bl or higher
for Russia’s economy to stay afloat. Why we are more optimistic? First, we are
probably assuming a more benign geopolitical environment in 2015 (highlighted
above) than some of the survey respondents. Second, we keep in mind Russia’s low
unemployment (which would likely prevent a major drop in consumer demand),
lower de-stocking and gains from a weaker currency.
We see Russia going into a full-year recession only if oil prices drop closer to $90/bl
(we would expect -0.4% growth at $90/bl), given our assumptions on geopolitics

highlighted above. With oil at $90/bl, we also estimate an average annual exchange
rate close to RUB41/$, a current account surplus half that in 2014 (we expect
$59.7bn in FY14E) and inflation averaging 7.9% during the year.
Looking at the more severe scenarios, we see growth turning negative (with growth
of -5.8% at $50/bl oil) and the rouble hitting new lows (losing around 20% vs the
dollar at $50/bl). However, the weaker rouble would be likely to stabilise the current
account (we do not foresee FY deficits in any scenario) and alleviating the effects of
a drop in oil prices on the budget (with a deficit below 4% of GDP in the worst case).
As of the beginning of 4Q14, Russia had $454bn of reserves (equivalent to 23% of
GDP or 16 months of import cover), with the government’s sovereign funds
amounting to $173bn (8.6% of GDP).
Within the sovereign funds, the Reserve Fund (intended to help deal with a fall in oil
prices) amounts to $90bn (4.5% of GDP). Therefore, in general even our
hypothetical worst-case scenario looks manageable for the budget.
On the inflation front, we see price growth hitting highs at $80/bl (with annual
average consumer price inflation [CPI] of 8.7%) but coming in lower in the more
severe scenarios, with a widening output gap taking its toll on inflation trends. This
was the case in 2009, when average inflation amounted to 11.7%, after a 22% fall in
the average annual exchange rate. This compare with 14.7% average inflation in
2008 – so, ultimately, inflation slowed. During a negative external shock, Russia
therefore saw some disinflation after years of strong inflationary pressure.
Last but not least, we would like to highlight an important difference between oil-
shock scenarios and our export embargo scenarios. All things being equal, a decline
in oil prices would bring fewer pains for the Russian economy than a ban on Russian
oil exports. The reason is that a ‘price shock’ would be less painful than a ‘volume
shock’ – in the first case, production would remain roughly the same, while in the
second case production would likely be reduced at some point. This would result in
significant spillover effects on other parts of the economy (for instance, stemming
from cuts in employment). The fall in dollar amounts of exports might be the same,
but the consequences would be different. For example, we see Russian exports
declining by $60bn in the event of a 50% cut in Russian crude oil exports to the EU
and by $67bn in the event oil prices fall to $80/bl. However, in the first scenario we
estimate Russian GDP growth would contract by 2.8%, while in the second we see a
contraction of only 1.7%.

10. Russian economy to stagnate on large capital outflows, domestic policy
UralSib
October 15, 2014
Russia’s economy stops growing. In August, industrial growth decelerated to zero
after 1.5% year-on-year growth in July, due to manufacturing, which contracted
0.6% year-on-year in August after growing 2.4% year-on-year in July. In addition,
transportation turnover dropped 1.3% year-on-year due to the weak industrial
growth, and construction fell 3.6% year-on-year as a result of the 2.7% year-on-
year contraction in capital investment. However, retail trade accelerated to 1.4%
year-on-year growth from 1.2% in July due to the short-term rebound in real
incomes (up 3.9% year-on-year in August). Nevertheless, consumer demand
remains under pressure due to the ongoing deceleration in retail credit growth and
growing inflation, which accelerated to 8% year-on-year in September as a result of
the ban on European food imports. We estimate that the economy contracted 0.2%
year-on-year in August, while the Economy Ministry more optimistically sees flat
year-on-year growth in August.
Base case medium-term stagnation. We have recently lowered our medium-term
economic outlook for Russia due to the large capital outflows, domestic policy
tightening, and cheaper oil. We now expect Russia’s economy to stagnate in 2014-15
and resume its long-term growth potential by 2017. The key growth factors – growth
in Europe and the cap on regulated tariff growth – will continue to support Russia’s
economy in the medium term. However, if Russian companies remain cutoff from
global capital markets for longer than several months, the average ruble rate could
sink to RUB48-50 against the bi-currency basket next year, which would put the
Russian financial system under pressure, drag the economy into a recession, and
inevitably unleash an inflationary spiral. We believe that given the threats, the CBR
will step in and provide the required liquidity. In this case, we expect an average
ruble rate of RUB43.7/basket and real GDP growth of 0.7% in 2015.

11. Russians external debt payments drive capital outflow
Sberbank CIB
October 15, 2014
The Central Bank has revised the current account surplus figure for 1H14, lowering it
from $44.2bn to $40.9bn. The surplus declined to $11.4 in 3Q14bn due to
seasonality. The 9m14 tally was still strong at $52.3bn, compared with $26.1bn in
9m13. Due to the revision in 1H14 statistics, we downgrade our full-year forecast
from $67bn to $70bn.
The contraction in the current account surplus in 3Q14 was accompanied by a
decrease in net capital outflow to $14bn (versus $72.3bn in 1H14). Curiously,
despite increased geopolitical risks in 3Q14, capital outflow was milder than in the
relatively calm 2Q14 ($23.7bn). Also rather interesting was the change in external
debt, which slid $52.8bn in 3Q14 to $678.4bn. Russian corporates and banks were
scheduled to redeem $37.5bn last quarter. The rest of the reduction was likely
related to a revaluation of ruble and euro-denominated external debt against the
backdrop of the Russian currency’s depreciation and the dollar’s strength against the
euro. We can draw two conclusions from these numbers. First, difficulties with
refinancing external debt were rather significant in 3Q14. Second, a sizable chunk of
capital outflow was related to external debt payments.
Over 9m14, exports totaled $383.8bn, in line with the 9m13 figure, while imports
shrank 6.3% y-o-y to $232.7bn. The latter combined with slowing retail sales growth
illustrates the effect of import substitution. As a result, the trade surplus widened to
from $135.1bn to $151.2bn over this period. This was the main cause of the current
account surplus.
Evgeny-Gavrilenkov
12. Ukraine, Belarus and Kazakhstan on Diverging Paths
Sberbank CIB
October 16, 2014
? Belarus. The expansion of domestic consumption is moderating (growth moved into
single digits), while investment activity is contracting. This development seems
logical on the heels of a period of overheating. The growth in exports supports
industrial output and GDP dynamics. Inflation will stay around 18% this year.
Belarus is seemingly one of the few clear beneficiaries of the Ukrainian crisis, as it
has been able to increase production and exports to Russia almost overnight due to
its geographical proximity and free trade arrangements via the Customs Union.
? Kazakhstan. The country remains the least affected by the conflict in Ukraine, while
the general macroeconomic trends that emerged after the depreciation of the tenge
early in the year are relatively unchanged. Industrial growth has fluctuated at around
0% y-o-y, while GDP growth has decelerated and inflation remained relatively high.
? Ukraine. Industrial output contracted 21.4% y-o-y in August, which brought the
8m14 tally to negative 7.8% y-o-y versus the more moderate negative 5.8% in
7m14. Construction in Ukraine contracted 15.6% y-o-y in 8m14, while the
agriculture sector delivered growth of 6.3% thanks to a good harvest. It looks
increasingly likely that 3Q14 GDP growth will be more negative on a y-o-y basis than
it was in 2Q14 (negative 4.6%), although it remains unclear how severe the drop will

be, as September industrial output may contract further, and the construction
dynamic remains unknown due to competing downward pressure from the continuing
macro deterioration and upward pressure from the need to rebuild infrastructure
damaged by the war.
CREDIT NEWS
13. COMMENT: Is the ruble decline overshooting?
Peter Szopo of Erste Asset Management
October 17, 2014
Russia's economy is under pressure, the most salient sign of this being the decline of
the ruble.
The Russian currency lost nearly 26% of its value against the dollar over the past 12
months (to mid-October). To some degree, the ruble's devaluation reflects the
general strength of the US currency, which gained almost 7% over the same period
on the back of the US Federal Reserve's switch to a tightening bias and the robust
economic data flow (which only suffered temporarily from seasonal effects in the first
quarter).
Read more here: http://www.bne.eu/page/bnerussia-daily-list/comment-ruble-
decline-overshooting
14. COMMENT: Life in Russia with $80 oil
Chris Weafer of Macro-Advisory
October 17, 2014
From late 2010 until the middle of August this year, the price of Brent crude has
traded within a relatively narrow range and averaged close to $110 per barrel. Over

the past two months the price has collapsed from a high of $115 per barrel to just
over $80. For commentators with more of a political than energy bias, the
explanation for the sudden price collapse is because of collusion between the US and
Saudi Arabia to damage their respective enemies, Russia and Iran. It has also led a
spate of headlines suggesting that weaker oil will collapse the Russian economy and
bring about the demise of Putin's rule. Both are very wide of the mark.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/comment-life-russia-
80-oil
15. Clouds over EU trade driven by Russia and Switzerland
Borderlex.eu
October 17, 2014
Amidst very worrying economic data coming out of Europe, one set of figures has
largely been overlooked today: the European Union’s goods export performance so
far this year.
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16102014-BP/EN/6-
16102014-BP-EN.PDFData</a> published by Eurostat today indicate that Europe is
still a machinery and car export champion, boasting a €150bn trade surplus in July.
Yet Europe’s statistics body’s figures show that both the pace of export and of
import growth (notably of energy ) is slowing down, reflecting the current global
economic slowdown and Europe’s outright slump. In August alone, compared with
July, seasonally adjusted exports by the EU’s 28 member states fell by 2.1 percent
and imports by 4 percent.
Between January and July this year, EU exports to China have grown 11 percent,
while imports from China have grown 5 percent. The European trade deficit with
China has slightly narrowed. In the same period, EU exports to South Korea have
risen 10 percent, while imports have risen 12 percent.
Whereas goods trade data with East Asia look good, in India, and much closer to
home, EU businesses have much to worry about. The Ukrainian crisis is looming
large. Eurostat writes:
“The most notable decreases were recorded for exports to Switzerland (-22%),
Russia (-12%) and India (-10%), and for imports from Russia and Norway (both -
7%) and Brazil (-5%)”.
Are EU trade data a proxy for Germany’s while the rest of Europe struggles
with trade deficits? Almost, but countries like Italy are not in a bad situation.
Eurostat writes:
“Concerning the total trade of Member States, the largest surplus was observed in
Germany (+€124.5 bn in January-July 2014), followed by the Netherlands (+€34.6
bn), Italy (+€24.3 bn), Ireland (+€20.1 bn) and the Czech Republic (+€10.0 bn).
The United Kingdom (-€76.2 bn) registered the largest deficit, followed by France (-
€43.2 bn), Spain (-€13.6 bn) and Greece (-€12.4 bn).”
Read more here: http://www.borderlex.eu/blog-eu-exports-china-grow-rapidly-
imports-new-trade-nuggets-2014/

16. EMEA high-yield issuance slowing into Q4 2014
Moody's
October 16, 2014
While clearly negatively affected by the August
summer break, the market environment in September and towards year-end
remains different compared with the first half, with a lower likelihood
of frantic activity into the fourth quarter, says Moody's Investors
Service in the October edition of its "High Yield Interest -- European
Edition" publication.
"With high-yield markets remaining more fragile into Q4, we expect that
some issuers, especially those opportunistically seeking to reprice, will
opt to wait on the sidelines to see how the market environment develops."
says Peter Firth, Associate Managing Director in Moody's European
leveraged finance team. "However, if yields continue their September
trend this may prove to be the wrong choice for some issuers."
The October edition also discusses the returning awareness of the need to
perform credit analysis and the question of how much leverage matters,
very much brought to the forefront by Phones4U's demise. The events
surrounding the retailer going into administration bring to the fore
questions regarding credit analysis, selection and monitoring, as well as
the merits of recapitalisations, especially those funded by payment in
kind (PIK) note issuance.
Moody's also examines recent cases of investor pushback regarding
covenants, particularly where investors demanded the exclusion of
portability clauses. While this may continue, portability has
nonetheless become an almost standard feature in European sponsor-led
transactions and private equity sponsors are unlikely to willingly part
with this feature.
Moody's also examines next year's refinancing supply in the report.
Subscribers can access the report via this link:
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_176391
17. Fears of a Russian credit crunch greatly exaggerated, say analysts
bne
October 16, 2014
On paper, Russian companies have huge foreign debts, and no way of refinancing
them because sanctions effectively close Western capital markets to Russian
borrowers. But with much of Russian corporate foreign debt in fact hidden equity
investments from offshore zones, the figures seem much worse than they are.
International headlines are predicting a looming liquidity meltdown in Russia.
Russian companies must pay down $134bn in external debt through the end of 2015,
with a major spike of $32bn coming up in December 2014 alone, according to
Russia's central bank.

Read more here: http://www.bne.eu/page/bnerussia-daily-list/fears-russian-credit-
crunch-greatly-exaggerated-say-analysts
TASS
October 15, 2014
Gazprom held talks with Industrial and Commercial Bank of China (ICBS) to discuss
the possibility of issuing yuan-denominated bonds and organizing a system of-yuan
settlements, the Russian gas giant said on Tuesday.
Gazprom’s statement comes after a meeting between Gazprom CEO Alexey Miller
and ICBS head Jiang Jianqing. Gazprom and ICBS also discussed the prospects of
organizing trade and corporate financing, the statement said.
Gazprom Deputy CEO and head of the gas monopoly’s financial and economic
department Andrey Kruglov said in 2011 that Gazprom was interested in borrowings
in the Chinese currency.
In June 2014, Kruglov said that Gazprom was in talks on the company’s listing on
the Hong Kong Stock Exchange and considered floating bonds denominated in the
yuan or Singapore dollars. “We have started working on it,” Kruglov said at the time,
adding such an agreement could be signed beginning from autumn.
Gazprom’s external borrowings for 2014 are planned at RUB90bn ($2.2bn at the
current exchange rate). In February, Gazprom floated seven-year series 35
Eurobonds worth €750m with a yield of 3.6% per annum. Gazprom’s euronote
program was launched in 2003. Gazprom has increased the program’s volume from
$30bn to $40bn.
Read more here: http://en.itar-tass.com/economy/754297
19. Kudrin Slams Fixed Exchange Rate as Russia's Ruble Hits New Lows
The Moscow Times
October 17, 2014
The ruble weakened Friday to a fresh historic low as the Central Bank said its market
interventions to slow the currency's fall this month had climbed above $10 billion
and former Finance Minister Alexei Kudrin warned against fixing the exchange rate
to defuse the crisis.
Shortly after 11:00 a.m. the Russian currency devalued to the record level of 46.29
rubles against the euro-dollar basket, the benchmark used by the Central Bank.
During morning trading in Moscow the ruble also passed the 41 ruble to the U.S.
dollar mark for the third time this week, and touched a record low of 52.59 against
the euro.
The Central Bank said Friday it spent 72.43 rubles ($1.8 billion) defending the ruble
on Oct. 15, slightly less than the $2.3 billion it burned through the day before.
Russia has now spent more than $50 billion this year to curb the ruble's decline,
and over $10 billion just this month.

Current Central Bank policy mandates that interventions take place when the ruble
passes the limits of a prescribed trading corridor, the upper boundary of which it
raises by 5 kopeks every time it spends more than $350 million attempting to prop
up the ruble's value on the markets.
The corridor was shifted by 30 kopeks Thursday, the Central Bank said Friday,
indicating the regulator spent about $2 billion that day. The Central Bank releases
data on the exact amount of foreign reserves spent on market intervention with
a two day time lag.
The ruble has weakened by almost 20 percent this year against the euro-dollar
basket in the face of Western sanctions against Moscow over the crisis in Ukraine
and a sliding global oil price.
Falls have intensified in recent days as the price of Brent crude dropped to four-year
lows, although oil pared recent declines Thursday.
Read more here: http://www.themoscowtimes.com/article/509644.html
20. Ruble continues on down together with oil price
bne
October 16, 2014
The ruble continues to track the price of oil, falling to new historical lows on October
15 atÊ41 rubles to theÊdollar andÊ51.87 against theÊeuro, as the price of oil plunged
to its lowest mark since 2010. The price of a barrel of Brent crude dropped 3% on
October 14 to $86, putting it now $20, or nearly 25%, lower than in June 2014.
The ruble's drop has forced the central bank to spend more than $6bn over the past
week, as each successive widening of the currency trading corridor by 5 kopeks
comes only after the central bank spends $350m to support the ruble. Russia's
central bank has already spent $54.9bn out of its foreign currency reserves since
theÊstart ofÊ2014, bringing its reserves toÊa four-year low $454.7bn, but only
around $220bn of that is in hard currency cash.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/ruble-continues-
down-together-oil-price
21. There is cause for optimism over Russia's crisis
Chris Weafer of Macro-Advisory, FT
October 17, 2014
Since the start of this year the Russian ruble has collapsed by 20% against a basket
of dollars and euros, by far the worst performing of the major emerging market
currencies except for the Argentine peso. But Argentina defaulted on debt
obligations, while Russia has less than 11% sovereign debt to GDP and is running a
triple budget, trade and current account surplus. It is therefore tempting to link the
ruble's demise with the country's actions in Ukraine and the resulting sanctions
imposed by western countries.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/there-cause-
optimism-over-russias-crisis

CREDIT OTHER NEWS
22. Eurozone industrial production suffers largest monthly fall for two years
Markit
October 17, 2014
Eurozone industrial production fell more than expected in August, adding to fears
that the region is facing a slide back into recession.
Official data from Eurostat showed industrial production down 1.8% in August, more
than reversing a 0.9% increase in July. The fall was the steepest seen for almost two
years and left output 1.9% lower than a year ago.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/eurozone-
industrial-production-suffers-largest-monthly-fall-two
CREDIT EA
23. Azerbaijan soveriegn bond assessment
Moody's
October 15, 2014
Azerbaijan’s Baa3 foreign and local-currency government bond ratings are supported
by low government debt, sustained albeit falling fiscal surpluses and a strong net
creditor position. These credit positive elements are due to the sizable foreign assets
that Azerbaijan has accumulated with the sovereign wealth fund, State Oil Fund of
the Republic of Azerbaijan (SOFAZ) and the Central Bank of Azerbaijan (CBA), the
central bank. We believe that Azerbaijan’s high level of foreign assets worth around
$50.9 billion (or 69.2% of GDP) as of end-2013 will help to shield the economy from
internal and/or external shocks. Meanwhile, real GDP growth accelerated to 5.8% in
2013 thanks to buoyant growth of non-oil GDP.
However, the ratings also capture Azerbaijan’s over-reliance on the hydrocarbon (oil
and gas) sector, very low institutional strength, and the low credibility and
effectiveness of policies. Azerbaijan’s high reliance on hydrocarbons remains a key
credit weakness because it exposes the economy to a plunge in global oil & gas
prices and/or to disruptions in domestic oil & gas production. In 2013, hydrocarbon-
related GDP accounted for around 41% of nominal GDP. At the same time,
hydrocarbon revenue accounted for 70% of consolidated central government
revenue and 93% of total exports of goods, respectively. The government's capital
investment program could facilitate the emergence of revenue-generating non-oil
sectors. However, Azerbaijan will most likely continue to rely heavily on hydrocarbon
revenue to have the financial means to further develop its non-oil sectors. Moreover,
the ratings capture Azerbaijan’s sustained geopolitical tensions with neighbouring
Armenia, and risks from recent rapid credit growth in the context of a generally weak
banking system.
Upward pressure could be exerted on Azerbaijan's ratings following significant
improvement in the country's institutional strength, as indicated by improvements in
the World Bank’s World Governance Indicators, and/or continued and sustained
economic diversification. Downward pressure could develop in the event of significant
deterioration in the domestic or regional political environment that could result in
severe disruptions to oil production or foreign investments in the economy. A

prolonged period of fiscal deterioration leading to significantly worsening debt
metrics could also result in downward pressure on the ratings.
This Credit Analysis elaborates on Azerbaijan’s credit profile in terms of Economic
Strength, Institutional Strength, Fiscal Strength and Susceptibility to Event Risk,
which are the four main analytic factors in Moody’s Sovereign Bond Rating
Methodology.
CREDIT EE
24. Russian Grids-Chinese JV to borrow $1bn from China annually
bne
October 13, 2014
A planned equipment production joint venture between Russian Grids and the State
Grid Corporation of China will borrow up $1bn annually from China, CEO Oleg
Budargin said, Prime reported.
Russian Grids will have a 51% stake in the joint venture, while the Chinese firm will
hold the remaining 49%. The sides are signing a complete ‚Äúroad map" of the joint
venture on Monday, Budargin said.
25. Russian Highways board approves offering RUB21.7bn bonds
bne
October 15, 2014
Russian Highways' board of directors has approved placing a 27-year RUB21.7bn
bond of the second series, the company said in a statement seen by Prime.
In December 2011, Russian Highways placed its debut, 5-year RUB3bn bond backed
by state guarantees.
The government plans to invest around RUB150bn from the National Wealth Fund in
bonds of Russian Highways, according to earlier reports. The yield may stand at a
level of inflation plus1 percentage point at least.
CREDIT CE MACRO NEWS
26. Bumper Czech harvest threatens further pressure on inflation
Dow Jones
October 17, 2014
The Czech Republic looks set to reap its third-biggest grain harvest ever, with a 16%
rise in production forecast by the Czech Statistics Office (CSU).
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/bumper-
czech-harvest-threatens-further-pressure-inflation
27. Falling exports drag Czech current account to deeper deficit
KB
October 17, 2014

August's current account recorded a deficit of CZK 15.5bn, which is a worse result
than market analysts had expected. The goods and services balance in particular
came as a disappointment when it reported a surplus of only CZK 9.6bn.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/falling-
exports-drag-czech-current-account-deeper-deficit
28. Hungarians losing hope
Portfolio.hu
October 17, 2014
The ratio of Hungarians looking into the future optimistically has declined
significantly between January and July 2014, local think tank Tárki has said on
Wednesday. The change in how people assess their future prospects exerts a great
impact on their willingness to vote, it also found.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/hungarians-
losing-hope
29. Latvia Trade Deficit Narrows
RTT
October 17, 2014
Latvia's merchandise trade deficit in August narrowed from a year ago, as exports
declined less than imports, figures from the Central Bureau of Statistics showed
Friday.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/latvia-trade-
deficit-narrows
30. Lithuania Trade Deficit Decreases In August
RTT
October 17, 2014
Lithuania's trade deficit narrowed in August, figures from the statistical office showed
Friday.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/lithuania-
trade-deficit-decreases-august
31. Lithuanians growing more pessimistic on economy
Lithuania Tribune
October 17, 2014
According to opinion polls, the Lithuanian public is growing increasingly pessimistic
about the country's economic outlook. This, says economist _ygimantas Mauricas,
has a lot to do with the economic stand-off between the European Union and Russia
as well as fears about the euro adoption.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/lithuanians-
growing-more-pessimistic-economy

32. Polish data trade data joins the CEE August drop
Commerzbank
October 17, 2014
Trade and current-account data for Aug showed the same monthly drop that we
witnessed across the CEE: export growth turned negative (c.3%YoY), while import
growth also decelerated to just 1%; the trade and current-account balances for the
month registered wider deficits.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/polish-data-
trade-data-joins-cee-august-drop
33. Slovak Cabinet Backs 2015 Budget With Gap Below EU Limit
Bloomberg
October 17, 2014
The Slovak government approved its 2015 budget draft with a smaller deficit than
required by European Union rules, leaving room to boost spending.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/slovak-
cabinet-backs-2015-budget-gap-below-eu-limit
34. Slovakia Aug Industrial Production Rises At Slower Rate
RTT
October 17, 2014
Slovakia's industrial production growth slowed in August, figures from the Statistical
Office of the Slovak Republic showed Friday.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/slovakia-aug-
industrial-production-rises-slower-rate
35. Slovakia Sep Consumer Prices Fall At Slower Rate
RTT
October 17, 2014
Slovakia's consumer prices dropped at a slower rate in September, figures from the
Statistical Office of the Slovak Republic showed Monday.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/slovakia-sep-
consumer-prices-fall-slower-rate
CREDIT EA MACRO NEWS
36. Armenia's construction in eight months grows by 0.4% to AMD198.3bn
ARKA
October 17, 2014
In the first eight months of 2014 Armenias construction sector saw a 0.4 percent
growth from the year earlier to 198.3 billion drams, according to the latest numbers,
released today by the National Statistical Service (NSS).

Read more here: http://www.bne.eu/page/bneeurasia-daily-list/armenias-
construction-eight-months-grows-04-amd1983bn
37. Armenian German trade in first half surges by 28.8% to $294.4m
ARKA
October 17, 2014
The Armenian-German trade turnover in the first half of 2014 surged by 28.8% to
$294.4 million, Vahagn Lalayan, head of an Armenian economy ministrys department
in charge of investment policy, said today when speaking at the Armenian-German
business forum in Yerevan.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/armenian-german-
trade-first-half-surges-288-2944m
38. Azerbaijan predicts non-oil export increase in 2015
Trend
October 17, 2014
Azerbaijan plans to export products worth $26.8 billion in 2015, the presentation of
Azerbaijans state and consolidated budget projects for next year, released by the
Ministry of Finance, says.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/azerbaijan-predicts-
non-oil-export-increase-2015
39. Azerbaijan specifies macroeconomic forecasts for 2014
Trend
October 17, 2014
GDP growth will be 3.6 percent and reach 59 billion AZN in 2014, the specified
forecasts of the Azerbaijani government say.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/azerbaijan-specifies-
macroeconomic-forecasts-2014
40. German investments in Armenia reach $840m
ARKA
October 17, 2014
The overall German investments into Armenian economy have reached a total of
$840 million, Vahagn Lalayan, head of an Armenian economy ministrys department
in charge of investment policy said today when speaking at the Armenian-German
business forum in Yerevan.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/german-
investments-armenia-reach-840m
41. Kazakhstan Hit by Russia's Economic Slowdown
Reuters
October 15, 2014

Kazakhstan's economy grew 4% in January-September, slowing from a year ago as
it was hit by the economic slowdown in major export market Russia and by a drop
in oil and metals production, preliminary data showed Tuesday.
Gross domestic product in the oil-rich Central Asian nation had expanded 5.7% year-
on-year in the first nine months of last year.
"There is a certain slowdown in the growth tempo," Alikhan Smailov, head of the
National Economy Ministry's statistics committee, told a news conference.
"To some extent it is linked to a downward trend in industrial output caused by crisis
phenomena in the Russian Federation due to the sanctions, which in turn led
to falling demand for Kazakhstan's exports."
Russia, a close ally which has agreed with Kazakhstan and Belarus to launch
the Eurasian Economic Union on Jan. 1, has seen its economy slow as it has faced
several rounds of and EU economic sanctions over its involvement in the Ukraine
crisis.
The World bank said this month that it expects Kazakhstan's economy to grow
by 4.3% this year, down from 6% in 2013.
42. Kazakhstan sees GDP growth at 4 percent
Azernews
October 16, 2014
Kazakhstan's Gross Domestic Product grew by 4 percent in January-September
2014, Head of the Statistics Committee under Economy Ministry Alikhan Smailov
said.
The forecast is based on the short-term economic indicators, namely, on the six
main industries and according to forecast estimates in other sectors of the economy.
Read more here:
http://www.azernews.az/region/71993.html?utm_medium=twitter&utm_source=twit
terfeed
43. Kazakhstan to revise forecasts for GDP growth
Aznews
October 17, 2014
The Kazakh government plans to revise the forecasts for GDP growth in 2014, said
Kazakhstan's National Economy Minister Erbolat Dossayev on October 9.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/kazakhstan-revise-
forecasts-gdp-growth
44. Major sectors of Kazakh economy grow by 2.6% in January-September
bne
October 17, 2014

The short-term economic indicator based on real growth in six sectors of the
economy - agriculture, industry, construction, trade, transport and
telecommunications - was up by 2.6% year on year in January-September, according
to the Kazakh Statistics Committee.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/major-sectors-
kazakh-economy-grow-26-january-september
45. Mongolia's Industrial production index in figures
Montsame.mn
October 17, 2014
In the first nine month of this year, the industrial production index (IPI) (2010=100
seasonally adjusted and experimental estimation) increased by 4.0% from the end of
the last year, and by 5.7% over the previous month.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/mongolias-
industrial-production-index-figures
46. Mongolia's Macroeconomic indicators as of September
M.A.D. Newswire
October 17, 2014
In September 2014, the national consumer price index rose 0.7 percent from the
previous month, totaling a 13 percent increase from 2013. This percentage increase
is largely due to higher prices for a households purchased goods and services, such
as water, electricity and fuel, and other miscellaneous products.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/mongolias-
macroeconomic-indicators-september
47. Mongolia's external turnover reaches over USD 8,000 million
Montsame.mn
October 17, 2014
In the first nine months of this year, Mongolia traded with 129 countries, and the
total external trade turnover reached USD 8,068.1 million, of which 4,021.8 million
was made up by exports and USD 4,046.2 million by imports.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/mongolias-external-
turnover-reaches-over-usd-8000-million
48. More than 7 billion somoni worth of industrial goods produced in
Tajikistan in Jan-Sept 2014
Asia Plus
October 17, 2014
In January-September 2014, Tajikistan has produced a total of more than 7 billion
somoni (equivalent to some 1.4 billion U.S. dollars) worth of industrial goods,
according to the Agency for Statistics under the President of Tajikistan.

Read more here: http://www.bne.eu/page/bneeurasia-daily-list/more-7-billion-
somoni-worth-industrial-goods-produced-tajikistan-jan-sept
49. Non-oil sector share in Azerbaijan's GDP to exceed 65% in 2015
Trend
October 17, 2014
The share of non-oil sector in Azerbaijan's GDP in 2015 is predicted at 65.1 percent,
which is 5.5 percent higher than the forecasts for 2014 and 8.5 percent higher than
in 2013, said the presentation of projects of state and consolidated budget of
Azerbaijan for 2015, released by the Ministry of Finance of Azerbaijan.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/non-oil-sector-
share-azerbaijans-gdp-exceed-65-2015
50. Tajikistan's poverty rate will decrease to 30 percent in 2015, says
president
The Times of Central Asia
October 17, 2014
Tajikistan's poverty rate will decrease to 30 percent in 2015, Tajik President Emomali
Rahmon noted at a meeting with entrepreneurs and investors that took place in
Dushanbe on October 14.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/tajikistans-poverty-
rate-will-decrease-30-percent-2015-says-president
51. Tajikistans external trade turnover estimated at more than 4.3 billion
USD in Jan-Sept 2014
Asia Plus
October 17, 2014
Over the first nine months of this year, the external trade turnover of Tajikistan,
including electrical power and natural gas, has amounted to more than 4.3 billion
U.S. dollars, which was 112.8 percent of the January-September 2013 level or 489.1
million USD more, according the Agency for Statistics under the President of
Tajikistan.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/tajikistans-external-
trade-turnover-estimated-more-43-billion-usd-jan
52. Trade turnover between South Korea, Uzbekistan exceeds $1 billion in
H1 2014
AKIpress
October 17, 2014
UZ-SOUTHKOREA Trade turnover between South Korea and Uzbekistan reached
$1.14 billion in the first half of 2014, said Korean Ambassador to Uzbekistan Lee
Wook-heon.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/trade-turnover-
between-south-korea-uzbekistan-exceeds-1-billion-h1-2014

CREDIT RUSSIA MACRO NEWS
53. Access to foreign funding for Russian banks and corporations dried up
BOFIT
October 17, 2014
Preliminary CBR balance-of-payments figures indicate Russia’s net private sector
capital outflow fell in the third quarter. Banks repatriated a record high amount of
their assets from abroad in order to balance their forex positions as Russian firms
and households reduced their domestic forex deposit accounts with Russian banks.
In addition, observers note that Russia’s large state banks repatriated assets from
abroad also in case there was an asset freeze. Net borrowing of banks from abroad
was strongly, and to an unusual degree, negative.
The net capital outflow from Russia’s enterprise sector (non-bank corporations)
increased substantially in the third quarter (up to more than 6 % of GDP of the four
previous quarters). While corporate asset outflows remained largely unchanged, e.g.
with respect to direct investments, corporate liability flows turned negative – a very
exceptional situation. FDI in the corporate sector ground nearly to a standstill and
firms paid down existing foreign debt in considerably larger amounts than what they
received in new loans.
Trade and current account surpluses, and net inflow of private sector capital to
Russia, % of 4Q average GDP
54. Belarusian industrial output growth accelerates in September
Sberbank CIB
October 17, 2014
Belarus’ industrial output was solid in September, jumping 8.4% y-o-y after a strong
August (6.6%). This was helped by base effects, the steady upward trend in August-
September taking place against a backdrop of weak growth in 3Q13 (industrial
output down 4.2% y-o-y). Nevertheless, a breakdown of industrial output by sector
looks strong: raw material extraction expanded 77.6% y-o-y in September (up
43.2% y-o-y in 9m14), while manufacturing grew 6.4% (down 0.2% in 9m14), and
production and redistribution of energy climbed 3.8% (up 0.6% in 9m14).
Importantly, the country’s major industrial products posted respectable y-o-y output
growth in September. Namely, potash fertilizer production nearly tripled, cheese

production grew 52%, milk production surged 11.5%, and cement output increased
9.1%.
These numbers suggest that Belarus has been a clear beneficiary of the Ukrainian
crisis, as it has increased production and exports to Russia. Industrial production
grew 1.2% in 9m14, up from a much slower pace in 8m14 (0.3%), and we expect
this to accelerate to at least 2.0% for the full year.
Evgeny-Gavrilenko
55. Central bank plays it cool as dollar falls to historic low on back of oil
price slump
bne
October 17, 2014
The ruble dropped to another historic low on October 15, passing the RUB41 per
dollar mark in morning trading, but analysts said Russia's central bank is not
panicking because ruble weakness is bolstering manufacturing growth and budget
revenues.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/central-bank-plays-it-
cool-dollar-falls-historic-low-back-oil-price-slump
56. Decline in Ukraine organized retail trade slows down in September
Concorde Capital
October 17, 2014
Ukraine's organized retail trade declined 10.9% yoy in September after falling 17.1%
yoy in the prior month, according to a State Statistics Service (Ukrstat) report
released on Oct. 16. For 9M14, organized retail trade contracted 6.5% yoy after
growing 6.2% yoy in the same year-ago period.
Read more here: http://www.bne.eu/page/bneukraine-daily-list/decline-ukraine-
organized-retail-trade-slows-down-september
57. Economy to stagnate on large capital outflows, domestic policy
UralSib
October 16, 2014
Russia's economy stops growing. In August, industrial growth decelerated to zero
after 1.5% YoY growth in July, due to manufacturing, which contracted 0.6% YoY in
August after growing 2.4% YoY in July. In addition, transportation turnover dropped
1.3% YoY due to the weak industrial growth, and construction fell 3.6% YoY as a
result of the 2.7% YoY contraction in capital investment.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/economy-stagnate-
large-capital-outflows-domestic-policy-tightening-cheaper
58. Industrial output grows 2.8% YoY in September
UralSib
October 17, 2014

Industrial growth well above expectations. Yesterday Rosstat released September
industrial output figures, which showed 2.7% MoM growth after a contraction of
0.2% MoM in August. Growth accelerated to 2.8% YoY in September from zero YoY
growth in August. The figures for September were much stronger than expected, as
both we and the Interfax consensus forecast zero YoY growth.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/industrial-output-
grows-28-yoy-september
59. PPI decelerates to 3.5% YoY in September due to the drop in oil prices
UralSib
October 17, 2014
PPI posts deepest MoM drop this year É Yesterday, Rosstat reported that producer
prices dropped 0.8% MoM in September after zero MoM growth in August. Growth
decelerated to only 3.5% YoY in September from 5.7% YoY in August. The figure was
a surprise as the Interfax consensus expected a contraction of 0.1% MoM. PPI rose
6.2% YoY in 9M14.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/ppi-decelerates-35-
yoy-september-due-drop-oil-prices
60. PWC: Russia's inflation to absorb much of salary increase in 2014
bne
October 17, 2014
Growth of salaries in Russia slowed down, PricewaterhouseCoopers says in a regular
survey: companies increased salaries 7.6% on average in 2014 versus 11% in 2013.
Plans for the next year are even more modest - employers plan to increase salaries
by no more than 7%. The survey covered 71 companies from 12 sectors of Russia's
economy, mainly manufacturing and energy ones.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/pwc-russias-inflation-
absorb-much-salary-increase-2014
61. Putin Says Budget Cuts an Option If Energy Prices Continue to Drop
The Moscow Times
October 16, 2014
Russian President Vladimir Putin said Tuesday he cannot rule out revisions to the
recently adopted budget to limit spending in light of declining energy prices.
Russia's government gets nearly half of its revenues from tax receipts from oil and
gas exports. The 2015-2017 budget is based on an average oil price of $100 per
barrel.
62. Putin: no doubt Russia-China trade will reach $100 billion in 2015
TASS
October 16, 2014

Russian President Vladimir Putin said on Tuesday he has no doubt that Russia-China
trade will reach $100 billion in 2015.
“It is obvious next year we’ll reach $100 that we have agreed on with our friend,
Chinese President Xi Jinping,” Putin said at a meeting with Chinese Prime Minister Li
Keqiang.
Read more here: http://en.tass.ru/economy/754283
63. Ruble facing depreciation pressures
BOFIT
October 16, 2014
The ruble's exchange rate has declined about 4 % over the past two weeks and over
10 % since the end of June. Responding to the ruble's on-going slide, Bank of Russia
(CBR) this week lowered the floor of the ruble's fluctuation range and following its
policy aimed at a flexible exchange rate widened the fluctuation band.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/ruble-facing-
depreciation-pressures
64. Russia Output & Demand- September; temporary relief amid
deteriorating fundamentals
VTB Capital
October 18, 2014
Autumn started with a mixed picture: while monthly data implies the Russian
economy might have avoided technical recession in 3Q14, fundamentals got worse,
with real wages sliding into the red. Looking through to the year-end, the steep
plunge in the rouble and falling oil prices are set to squeeze domestic demand.
Though, if i) the delayed effect from the massive increase in defence orders, ii)
Power of Siberia pipeline construction, and iii) import substitution continue to
progress, FY14 growth might come in higher than zero.
Resilient consumption backed local demand. Local demand benefited from some
relief in household spending, despite persistent investment contraction (in light of
the boom in homebuilding industry dying out). Despite negative growth in real wages
(the latest available statistics showed that public wages were the most hit with
nominal growth printing just near 3% YoY in August) and deteriorating retail lending,
retail sales edged up to 1.7% YoY in real terms on the back of a 4-month high
discretionary spending gain.
This improvement might be explained by: ? the cash-for-clunkers initiative spurred a
recovery on the car market, where a decline in car sales softened from 25.8% in
August to 20.1% YoY in September, according to AEB. This could have added near
0.6pp to the non-food purchases increase last month (+0.9pp to 3.5% YoY).
? RUB weakness might have pushed households to rush for imported goods, similar
to March.

Short-term, we might see further improvement from both factors, but there will be
no way to escape a consumption slowdown after these supportive effects dissipate in
the coming months.
No rhyme or reason to stubbornly low unemployment rate, as the slowing economy
that has just been hit by a multi-year drop in oil prices (in addition to all the other
issues) cannot sustain full employment. In any case, as seen in shrinking wages, the
environment on the labour market is certainly not getting better and, as we have
argued many times, an institutional setup where wages are not rigid results in wages
taking the brunt of the adjustment to the shock.
Net exports weather impact on economy. On a brighter note, owing to the record-
high harvest this year, agriculture jumped 16.6% YoY in September, bringing full-
quarter growth to 11% YoY, which might have added near 0.5pp to GDP growth in
3Q14. That said, after a one-month break, IP strength returned to the spotlight on
the back of i) transportation machinery (not disclosed, we suppose it could be
military-oriented); ii) some recovery in oil output; iii) import substitution in food
industries; iv) blips in oil refining and chemicals; v) construction of Power of Siberia
(not only did pipes output register a multi-month 23% YoY gain, but construction-
related materials also signalled some recovery). All these together suggest net
exports will continue to cushion the impact from slowing local demand.

65. Russia's foreign debt falls 7% to $678.4bn in January-September
bne
October 16, 2014
Russia's foreign debt decreased 7% in January-September to $678.4bn as of October
1, the central bank said in a statement citing preliminary data.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/russias-foreign-debt-
falls-7-6784bn-january-september
66. Russia: Gauging capital flight
Standard Bank
October 16, 2014
We provide a review of measures of capital flight, but all generally show a pick-up in
capital flight in Russia over the past year, the result of a combination of Fed tapering
concerns and then the crisis in Ukraine and the imposition of Western sanctions.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/russia-gauging-
capital-flight

67. Russian CBR reports Russian corporate foreign debt at $614bn as at
end-Sept
Alfa Bank
October 14, 2014
According to the CBR, the foreign debt of Russian banks and companies dropped
from $658bn to $614bn in 3Q14. While the nominal $44bn drop may seem rather
large, we believe that $28bn of the amount is due to the currency revaluation effect,
given that ~20% of the debt is ruble-denominated and another 10% is in euros. The
actual redemption of $16bn of the $37bn that was previously guided by the CBR’s
schedule indicates that Russian corporates managed to rollover ~60%. As financial
markets are closed and do not allow for refinancing any market vehicles, the high
rollover figure suggests that a large part of Russia’s debt is of a non-market nature.
Based on 3Q14 figures, we expect that actual foreign debt redemption in 4Q14 will
be $20-25bn – much less than the $47bn feared by the market. We thus believe that
the FX market is overreacting to the debt problem, and we confirm our take that the
current account surplus in 2015 (projected at $90bn) should be enough to cover
corporate foreign debt redemption (officially assessed at $87bn for 2015), even in
the worst case scenario.
Natalia Orlova,
68. Russian Industry Grows More Than Forecast on Food
bbb
October 19, 2014
Save
Russian industrial output rose in September, as food production climbed after
President Vladimir Putin banned a range of imports from the and its allies.
Output at factories, mines and utilities rose 2.8% from a year earlier after zero
growth in August, the Federal Statistics Service in Moscow said today in an e-mailed
statement. That exceeded the highest forecast in a Bloomberg survey of 21
economists, whose median estimate was for a 0.1% gain.
Russia’s economy is teetering on the brink of recession under the weight of sanctions
from the and its allies over the crisis in Ukraine. The ruble has plunged to a record
low, curbing consumer demand and forcing the central bank to raise interest
rates three times this year. Increased capital outflows have taken a toll on
investment.
“It looks as if the ruble’s weakness and restricted trade with Ukraine have continued
to drive import substitution,” Dmitry Polevoy, chief economist for Russia and
the Commonwealth of Independent States at ING Groep NV, said in a research note.
“The food import ban added extra positive momentum to the food industry, and the
beginning of pipe construction to China might have spurred higher demand for
pipes."
The ruble strengthened 0.6% to 40.6760 per dollar as of 7:08 p.m. in Moscow. It
lost 14% in the third quarter, the worst performance among more than 170
currencies tracked by Bloomberg.
Read more here: http://www.bloomberg.com/news/2014-10-15/russian-industry-
grows-more-than-forecast-on-food.html

69. Russian Positive 3Q14 BoP Ignored On Cheaper Oil
Alfa Bank
October 15, 2014
We consider the recent drop in the ruble to RUB40.45/$ to be an overreaction, with
the market having disregarded 3Q14’s strong current account surplus and lower-
than-expected foreign debt redemption of $16bn. Should oil return to $100/bbl, we
still see RUB37/$ as plausible for YE14; however, each $10/bbl deviation leads to a
RUB1.5-2.0/$ adjustment. As our current account surplus expectations of $90bn for
2015 are double consensus’ figure, we remain optimistic on the ruble, envisaging
RUB38/$ for YE15.
The Facts CBR spent $6bn in FX interventions in Oct: The ruble entered the CBR’s
intervention area at start-October for the first time since mid-May. Depreciation
initially took place on modest volumes that reflected a lack of FX supply rather than
strong demand; however, last Friday’s oil-price drop to below $90/bbl (Brent) came
as a shock, pressuring the ruble to RUB40.45/$ on high volumes. As a result, the
CBR, which has been selling $0.5-1.5bn daily since Oct 3, was forced to sell around
$2bn last Friday, putting the Oct volume at $6bn.
Ruble under triple pressure, market mood gloomy: There are several reasons for
ruble depreciation since mid-year. First is oil price weakness: the ruble traded
~RUB34/$ in July under $110/bbl, and the drop to $90/bbl justifies depreciation to
RUB38/$. Second, the shortage of FX liquidity after the tightening of foreign
sanctions in Aug, which restricted corporate access to foreign funding, explains
depreciation by another RUB1.0-1.5/$. The most recent blow was the capital control
rumor that re-emerged in Oct, and which has remained an investor concern despite
official denials that such a measure was being considered. As a result, market
expectations on the YE14 RUB/$ rate have collapsed from RUB33-38/$ at mid-year
to the current RUB36-42/$.
Our Take Market disregarding positive 3Q14 current account… Macro fundamentals
behind the ruble exchange rate are not as negative as perceived. The 3Q14 current
account surplus was an above-consensus $11bn, with imports down 9% y/y. Ruble
depreciation combined with foreign trade restrictions suggest that imports may drop
by 10-15% y/y in the next four quarters. Under the $100/bbl assumption, we see
the current account surplus at $17bn in 4Q14E and $90bn in 2015, the latter being
twofold higher than consensus.
…overestimating pressure of foreign debt redemption… In 3Q14, Russian corporate
foreign debt contracted by $44bn; however, $28bn of this decline was due to the
revaluation effect, as around 20% of the debt is denominated in rubles and 10% in
euros. Russian banks and companies in 3Q14 have actually redeemed only $16bn vs.
$37bn guided by the CBR and managed to rollover the rest. The $47bn redemption
guided by the CBR for 4Q14 also appears highly overestimated.
…and underestimating banks’ ability to attract FX deposits locally: While FX deposit
rates offered by Russian banks were rather stable until Aug, anecdotal evidence
suggests that they are up from ~2% to ~4%. We believe that this may attract some
FX from “under the mattress”, and thus within a month may help banks overcome
the shortage in FX liquidity.

Oil price remains key risk for our RUB37/$ YE14 forecast: Given the aforesaid
considerations, we believe that the market is currently overly pessimistic. We expect
the ruble to return to RUB37/$ by YE14 if oil recovers to $100/bbl; however, each
$10/bbl deviation in the oil price causes a RUB1.5-2.0/$ adjustment in the FX rate.
We also consider a 50bp interest rate hike as a prerequisite for curbing rumors of
capital control. As far as 2015 is concerned, as foreign debt payments are likely to
stay below official guidance of $87bn, and we expect the current account surplus to
be as high as $90bn, we see the ruble fluctuating in the RUB35-40/$ range and
ending the year at RUB38/$, which puts us on the optimistic side of consensus.
70. Russian Spending on Luxury Goods Plummets with Ruble
Reuters
October 15, 2014
A weak ruble and low consumer confidence have taken their toll on Russian luxury
spending, with goods sales down 7% at constant exchange rates and down 18%
at current exchange rates, consultancy Bain & Co said in a report published
on Tuesday.

Bain added that economic sanctions against Russia also put pressure on the
country's banking system and limited access to credit for many wholesalers.
The personal luxury goods industry has been through a slowdown since 2011 in part
due to flagging demand in China where the government has cracked down on gift-
giving, and economic weakness in Europe.
71. Russian budget in good shape
Sberbank CIB
October 15, 2014
Budget revenues reached R1,258bn ($33.2bn) in September, while expenditures
totaled R1,120bn ($29.6bn) for a surplus of R138bn ($3.6bn) over the month.
Over 9m14, the surplus reached R1,110bn ($32.2bn). The strong surplus was
achieved despite a 7.7% y-o-y rise in spending over 9m14, as revenues climbed
11.4% y-o-y. The weakening ruble supported ruble-denominated oil and gas
revenues, which rose 15.1% y-o-y despite a 1% fall in the oil price. Non-oil and gas
revenues expanded 7.7% y-o-y, driven mostly by inflation. We estimate the
breakeven oil price for this year’s budget at around $100/bbl Urals. Should Urals
average $90/bbl in 4Q14, the annual average would be $102.4/bbl and the budget
would run a small surplus for the full year (while noting that the seasonal jump in
spending will mean a deficit for 4Q14).
Evgeny-Gavrilenkov
72. Russian budget surplus expands to 2.1% of GDP in 9M14
Alfa Bank
October 14, 2014
The Finance Ministry yesterday released preliminary data that suggests the budget
surplus increased by RUB140bn in Sept to RUB1.1tr in 9M14, which is in line with
expectations. Seasonality of the budget execution requires a material increase in
spending in 4Q14 (33% of the annual plan vs. a quarterly average of 22% in the first
three quarters of 2014); therefore, we expect this surplus to shrink by year-end.
However, we remain confident that the Russian budget will be executed at around
RUB300bn, or 0.5% of GDP surplus that corresponds to a ~$100/bbl breakeven oil
price, which is an improvement vs. $114/bbl seen last year. That being said, we note
that this improvement is entirely due to the depreciation of the ruble exchange rate
from an average of RUB32/$ in 2013 to an average of RUB36/$ in 2014, which has
boosted budget revenues by RUB1tr this year. Without the same degree of ruble
depreciation next year, and with expenditure growth planned to accelerate from 5%
to 11% this year, we forecast that the breakeven level will return to $115/bbl. This
means that under an oil-price scenario of $90-100/bbl, next year's budget will be in
deficit of 1.0-1.5% of GDP.
Dmitry Dolgin
73. Russian industrial output recovers in September
Sberbank CIB

October 16, 2014
Industrial output expanded 2.8% year-on-year in September and 1.5% in 9m14.
Although there were 22 working days last month versus 21 in September 2013, the
figure adjusted for seasonality and the calendar grew by a very robust 1.6% m-o-m
– the biggest rise since February 2012.
In September, raw materials output grew 2.4% year-on-year (up 1% year-on-year
over 9m14) and manufacturing output climbed 3.6% (up 2.3% in 9m14), while the
supply and redistribution of electricity, gas and water fell 0.8% (down 1.8% in
9m14).
The upturn appears to have been driven by import substitution on the back of ruble
depreciation, Russia’s food import ban against the US and EU and falling trade with
Ukraine.
As a result, growth was seen for food items (meat, oil, cheese, non-alcoholic drinks),
apparel (jackets, shirts, suits, trousers), pulp (paper, boxes), chemicals (dye,
fertilizers, plastic), ferrous metals (including tubes), automatic control devices, and
furniture.
Output of construction materials continued to rise (cement production was up 4.5%
y- o-y over 9m14, cement blocks and bricks were up 8.3% and tiles were up 2.1%).
This should indicate growing local demand, as Russia does not export construction
materials on a large scale. However, construction dynamics remain negative. It could
be that the official statistics do not fully reflect the situation in the sector and the
actual picture is somewhat better. Interestingly, more expensive bricks appear to be
being substituted by cheaper cement blocks.
High lending rates are pressuring demand for durable goods such as cars. Passenger
car production fell 18.1% year-on-year in September and 6.2% year-on-year in
9m14.
We regard our industrial output growth forecast of 1.6% for 2014 to be reasonable.
74. Salaries in Moscow Rise to $1,200 Per Month as Wage Growth Slows
The Moscow Times
October 15, 2014
The average Muscovite is pulling in slightly more than 50,000 ($1,200) a month this
year, as wages in all sectors increase but fall behind the double-digit pay rises
of recent years, a Moscow city official said Tuesday.
Workers in municipal services, construction, social services and small business will
earn 50,000 rubles or more on average in 2014, news agency TASS quoted Maxim
Reshetnikov, head of Moscow's economic policy department, as saying.
Wage growth in all sectors of the city's economy will exceed inflation, he added.
Inflation has spiked this year due to the devaluation of the ruble and Russia's ban
on an array of Western food imports. Officials now say it is likely to strike 7.5 to 8
percent for the year.
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75. Ukrainian economy overshadowed by war
OSW
October 17, 2014
Ukraine's financial results over the past few months prove that the economic crisis
which has been ongoing since mid 2012 has exacerbated. According to data from the
Ukrainian Ministry of Economy, Gross Domestic Product for the first six months of
2014 shrank by 3%. In the second quarter, it fell by 4.6%[1] and may further be
reduced by as much as 8-10% over the year as a whole. After the first six months of
this year, the balance of payments deficit reached US$4.3 billion.
Read more here: http://www.bne.eu/page/bneukraine-daily-list/ukrainian-economy-
overshadowed-war
76. Weekly CPI: inflation creeps up and approached 8.2% YoY as of 13
October
VTB Capital
October 17, 2014
News: Rosstat reports that CPI added 0.39% over 1-13 October, with the average
daily inflation ticking up a bit to 0.030% during 7-13 October (from 0.029% in the
previous week). Component-wise, the increases in the prices of cucumbers (+10.9%
WoW), tomatoes (5.7%), gasoline (0.4%), potatoes (2.1%) and cheese (0.5%) were
the key inflation drivers last week.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/weekly-cpi-inflation-
creeps-and-approached-82-yoy-13-october
October 17, 2014
We have been seeing some pretty substantive moves on the ruble in recent months -
reflecting $strength, weak oil/commodity prices, Ukraine/sanctions risk, weak growth
drivers, et al. On a basket basis, YTD we are off 15% YTD on a basket basis, record
lows there and against the $and Euro. That said, I attach a REER chart going back to
1994, which still does not suggest the ruble is that cheap.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/where-ruble-heading
78. Falling imports support Russia’s current account surplus
October 17, 2014
BOFIT
October 17, 2014
Preliminary Central Bank of Russia balance-of-payments figures show a third-quarter
current account surplus again rivalling the quarterly surpluses of the previous two
years. For the past four quarters, the current account surplus rose to nearly 3 % of
GDP and the goods trade surplus continued to hold at nearly 10 % of GDP.

Russia’s earnings from exports of goods and services fell slightly y-o-y in both the
third quarter and the first three quarters of this year. Growth in export earnings has
remained virtually flat for the past two-and-a-half years.
Russia’s recent notable trade and current account surpluses reflect a contraction in
Russian imports. The value of imports of goods and services (including spending of
Russian travellers abroad) was down 6–7 % y-o-y in both the third quarter and the
first nine months of the year. The corresponding drop in goods imports only was
about 8 %. Regarding services imports, both traveller spending abroad and imports
of other services contracted just a couple of percentage points and only during the
past six months.
CREDIT UKRAINE MACRO NEWS
79. Ukraine goods trade reaches USD 308 mln surplus in August
Concorde Capital
October 17, 2014
Ukraine's goods trade balance was reported at a USD 308 mln surplus, compared to
a USD 1.7 bln deficit a year ago, according to state statistics released on Oct. 15. For
8M14, the trade balance was a USD 1.2 bln surplus compared to a USD 7.3 bln
deficit a year ago.
Read more here: http://www.bne.eu/page/bneukraine-daily-list/ukraine-goods-
trade-reaches-usd-308-mln-surplus-august
80. Ukraine monetary base rises 2.9% m/m in September
Concorde Capital
October 14, 2014
Ukraine’s monetary base rose 2.9% m/m (by UAH10bn) in September (14.4% YTD)
compared to a 2.1% m/m drop in the prior month, the National Bank of Ukraine
(NBU) reported on Oct. 10. Money supply contracted 2.2% m/m in September
(+9.1% YTD) compared to 2.9% m/m growth in August. The NBU purchased
UAH29.7bn in state bonds in September, compared to UAH44.6bn in the prior
month.
Alexander Paraschiy: Active state bonds purchases were the prime factor behind the
monetary base jump in September. In particular, the last two months added
UAH77.4bn to the NBU’s state bonds portfolio, which is 58.8% of the UAH126.6bn in
bonds purchased by the central bank year-to-date. We anticipate the monetary base
growth to slow in the next few months given that the last two months of hryvnia
printing was done primarily to refund state monopoly Naftogaz. No doubt, the budget
will experience difficulties but without IMF approval of a wide deficit, we do not
expect the NBU to be engaged in printing more money for the coffers. Against this
backdrop, we are keeping our monetary base growth forecast at 19.8% YTD for
2014.
CREDIT TURKISH MACRO NEWS
81. Turkey - August BOP in focus
October 15, 2014

The CBRT released monthly BOP data for August, and for the first eight months of
the year, which always makes interesting reading given focus on the current account
deficit and external financing requirement as a large vulnerability for the Turkish
economy.
The current account deficit has been on an improving trend since late-2013 in
response to policy tightening from the CBRT and also the impact of a weaker lira.
This has produced a "rebalancing" theme which helped underpin Turkish assets
through the middle part of the year – now running out of steam with dollar strength
and concern over security concerns across Turkey’s borders. This saw the annualised
current account deficit moderate from USD65.1bn as of December 2013, to a low of
USD48.5bn by July this year. There was here a question mark as to whether
"rebalancing" would continue to year end, or whether political strains in Turkey and
security problems across its borders with Iraq and Syria, and into the Middle East
would see a slowing in the improving current account position. Counter to this there
has been hope that lower oil prices will reduce Turkey’s energy imports, which total
around USD55bn a year, i.e. more than equal to the current account deficit. Note
that a generally accepted rule of thumb is that each USD10 per barrel cut in the oil
price reduces energy import costs by USD4bn for Turkey – so the USD20 a barrel
recent drop in the oil price should save Turkey in theory, USD8bn. This might have
been expected to bring another leg lower in the current account deficit, perhaps
down to USD40bn on an annualised basis.
Reviewing the August BOP release, the above trends are not that obvious in the data
series.
* First, the improvement in the headline current account position stalled in August,
with the monthly deficit actually rising YOY to USD2.8bn, from USD2.4bn one year
earlier.
* Similarly, the deficit on merchandise trade also rose, to reach USD6.3bn, from
USD5.3bn one year earlier.
* The growth in merchandise exports remained relatively robust, posting a 5.4% YOY
increase in August, as compared to the 6.1% growth for the period January through
August. Earlier, weaker exports to the Middle East seemed to be being compensated
for by increased exports to the EU. Exports thus appeared durable in the face of the
challenging regional environment, both in the Middle East, but also north to Russia
and Ukraine. Perhaps this showed the dynamism of Turkey’s export sector and the
benefits of a weaker currency on competitiveness.
* Of particular note, and the key driver for the deterioration in both the current and
trade accounts, imports picked up pace quite remarkably in August, rising 10% YOY,
after just 0.6% YOY growth therein for the period January through August. It is
difficult to explain this big uptick in imports, unless by a residual Ramadan effect, or
perhaps related to a large single import item distorting the data, albeit to the
implausible tune of several billion dollars.
* There was no noticeable impact in August from trends in gold trade which
remained broadly in line with the year earlier levels – actually the deficit from this
trade was much reduced from the year earlier level, from USD497m in August 2013,
to USD145m in August this year, i.e. overall supportive of the headline CA position.

* Services – significantly tourism performed well in August, posting a USD4.3bn
monthly surplus, higher by 13.6% YOY. The surplus herein was USD16.5bn YTD, also
up 11.5% YOY. Regional security concerns are clearly not having that much impact
on Turkey’s tourism sector which is still thought to offer a quality, competitive
offering – and the Med coast/Istanbul are perhaps still seen as far distant from the
borders with Syria and Iraq.
* The income deficit was slightly higher YOY, at USD609m for August, versus
USD506m one year earlier – with a deficit of USD5.8bn for the first 8 months of the
year.
* Transfers flat-lined in August YOY, with a USD90m surplus, and a USD500m
surplus YTD.
On the capital and financial account, equally interesting trends:
* FDI posted a net outflow of USD1bn in August, on a big overseas "purchase" which
showed in the USD2bn investment abroad. YTD net FDI totalled just USDUSD4.6bn,
or 15% of the CAD, which is again disappointing, and the annual total might struggle
to get close to the USD9.7bn total for 2013, let alone the peak annual average of
USD18.5bn secured in the period 2006-2008.
* Portfolio flows showed a USD1.7bn net outflow in August – mostly bonds, which
perhaps reflecting foreign investor concern over the outcome of the presidential
election held in August, the concentration of power around PM Erdogan and the
future of his economy team, in particular Deputy PM Ali Babacan who has been key
to the market's appreciation of the AKP government over the past 12 years. Babacan
subsequently affiremed his continued stay in the Davutoglu government, which
provided some re-assurance. And, note that the power of the EM carry trade
enduring was still evident from the fact that YTD net portfolio inflows still totalled
USD12.1bn, of which USD10.8bn was bond purchases. Portfolio, or "hot" money
inflows thus covered 41% of the CAD – that said, these flows have thus far proven
relatively sticky, while Turkish nominal rates remain relatively high compared to its
EM peers.
* "Other" investments still posted a huge net inflow of USD6.6bn in August (4x
higher YOY, and the YTD was only USD7.2bn), which seems to have been
significantly driven by a USD3.9bn inflow on the "asset" side in the deposits line
account – essentially this appears to be a drawdown of FX deposits/assets, as locals
presumably saw value in a weak lira.
* Net errors and omissions posted a USD817m net inflow in August, and a huge net
inflow of USD9.1bn YTD as of August – 3.5 times the year earlier level. This is
already the largest annual total from E&O on record – indeed the last record net
inflow on this account was in 2011 when the full year totalled USD9.1bn. For 2013
net E&O amounted to USD2.9bn. This is a very large number – which might reflect
cross border trade into Iraq/Syria or perhaps even regional money being deposited in
Turkey given the competitive level of the lira and "carry". Suffice to say this is a very
large "unexplained" item in the BOP, equivalent to over 1% of GDP.
* The CBRT still managed to accumulate USD1.9bn in FX reserves in August, and
USD3.4bn for the period YTD.

Overall reviewing the above, the August data is disappointing on the current account
side, but the financial/capital accounts still show resilience albeit still with a
dependency on "hot" money flows. Much is made of locally of continued TRY
weakness, but this has to be set against broader EMFX weakness against a
recovering dollar – Turkey is posting a par performance against its EM peers, and
actually outperforming the likes of the rouble, despite its own security/political
concerns.
We tend to think that the uptick in imports in August will prove to be a one-off and
will fade – helped by lower energy import costs, and also by a weakening in domestic
demand driven by regional security concerns. This should extend the rebalancing
theme a bit to year end, and should still be somewhat supportive for the TRY, albeit
still dependent on broader global trends and in particular their market concern/fears
over Fed tightening into 2015.
CREDIT EE - FROM THE DAILIES
82. Belarus' export of agricultural products to Russia up 10% in September
Belta
October 17, 2014
In September 2014 Belarus' export of agricultural products to Russia went up 10% in
comparison the same month of the year 2013, head of the main foreign economic
department of the Agriculture and Food Ministry Alexei Bogdanov told reporters on
14 October, BelTA has learned.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/belarus-export-
agricultural-products-russia-10-september
TASS
October 16, 2014
Gazprom held talks with Industrial and Commercial Bank of China (ICBS) to discuss
the possibility of issuing yuan-denominated bonds and organizing a system of ruble-
yuan settlements, the Russian gas giant said on Tuesday.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/gazprom-mulls-yuan-
bond-issue
84. Individual demand for foreign cash in Ukraine rises in September
Concorde Capital
October 16, 2014
Net individual demand for foreign cash in Ukraine increased to USD 265 mln in
September compared to USD 201 mln in the prior month, the National Bank of
Ukraine (NBU) reported on Oct. 14. For 9M14, net individual demand for foreign cash
was USD 2.0 bln, which is 2.1x more than a year ago (USD 941 mln).
Alexander Paraschiy: Individual demand was somewhat lower in September than we
anticipated. We assumed that the reported USD 735 mln in net interventions of the
NBU on the ForEx were primarily intended for individual demand. The currency panic

also seemed to promise higher cash purchases by Ukrainians, to be reflected in
statistics. However, it looks like state restrictions on cash foreign currency purchases
(one cannot buy more than USD 200 in one transaction) and a foreign cash deficit at
the exchange offices dampened the figures.
Read more here: http://www.bne.eu/page/bneukraine-daily-list/individual-demand-
foreign-cash-ukraine-rises-september
85. Mechel accounts suggest company still unable to service debt
bne
October 16, 2014
Mechel's belatedly published accounts for the second quarter suggest the financially
troubled Russian metals and mining giant is still unable to service its billion dollar
debts, let alone pay them down. The company remains lossmaking and analysts
warn that only political support can save it.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/mechel-accounts-
suggest-company-still-unable-service-debt
86. Moody's affirms Kyiv's Caa3 rating; outlook negative
Moody’s
October 16, 2014
London, 10 October 2014 - Moody's Investors Service has affirmed its foreign and
local currency issuer ratings and foreign-currency senior unsecured rating on the City
of Kyiv at Caa3, following the city's repayment of its UAH1.125 billion (around $85
million) senior unsecured bonds, which matured on 6 October 2014. The outlook for
the ratings is negative.
Read more here: http://www.bne.eu/page/bneukraine-daily-list/serinus-energy-
boosts-hydrocarbon-production-15-qoq-3q14
87. Ruble/Yuan trading looms, Moscow Exchange signs cooperation
agreement with bank of china
Bank of China Limited
October 16, 2014
Moscow Exchange and Bank of China have signed a cooperation agreement aimed at
expanding collaboration between the Russian and Chinese financial markets.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/rubleyuan-trading-
looms-moscow-exchange-signs-cooperation-agreement-bank
88. Russia may introduce special economic regime with Ukraine - report
TASS
October 17, 2014
A lawmaker of the Liberal Democratic Party of Russia (LDPR) has submitted a
proposal to the government on introducing a special economic regime with Ukraine
to revise the current contracts with Kiev and ban further deals, the Izvestia
newspaper reported on Thursday.

Read more here: http://www.bne.eu/page/bneukraine-daily-list/russia-may-
introduce-special-economic-regime-ukraine-n-report
89. Russia's Central Bank Shifts Boundaries of Floating Ruble Corridor by 10
Kopeks
The Moscow Times
October 16, 2014
The Central Bank said Tuesday that it had shifted the boundaries of its floating ruble
corridor by 10 kopeks, following market interventions to curb the pace of the
currency's decline.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/russias-central-bank-
shifts-boundaries-floating-ruble-corridor-10-kopeks
90. Russian Central Bank Shift Boundaries of Ruble by 30 Kopeks
The Moscow Times
October 17, 2014
Russia's Central Bank said Friday it had shifted the boundaries of its floating ruble
corridor by 30 kopeks, following market interventions to curb the pace of the
currency's decline.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/russian-central-bank-
shift-boundaries-ruble-30-kopeks
91. Turkish investments in Belarus up by 400 times in last five years
Belta
October 17, 2014
The volume of Turkish investments in Belarus has skyrocketed by 400 times over the
last five years, BelTA learned from Ambassador Extraordinary and Plenipotentiary of
Belarus to Turkey Andrei Savinykh on 14 October as the Ambassador commented on
the ongoing visit of the Belarus parliament delegation to Turkey.
Read more here: http://www.bne.eu/page/bnerussia-daily-list/turkish-investments-
belarus-400-times-last-five-years
92. Ukraine's Finance Minister Sees No Need for More IMF Funds
The Moscow Times
October 16, 2014
Ukraine will not need a new International Monetary Fund financing program unless
its conflict with pro-Russian separatists worsens significantly, Finance Minister
Oleksandr Shlapak has said.
Read more here: http://www.bne.eu/page/bneukraine-daily-list/ukraines-finance-
minister-sees-no-need-more-imf-funds
CREDIT CE - FROM THE DAILIES
93. Poland's Szczurek named Finance Minister of the Year CEE

Polskie Radio
October 17, 2014
Mateusz Szczurek has been recognized as Finance Minister of the Year Central &
Eastern Europe (CEE) 2014 at an award ceremony in New York.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/polands-
szczurek-named-finance-minister-year-cee
94. Polish deflation continues in September
Erste
October 17, 2014
Deflation in Poland continues and September is the third consecutive month with
negative growth of the price level (-0.3% y/y). The dropping price level was mostly
influenced by the lower level of food, transport and clothing prices. In 4.05 monthly
terms, the price level remained the same, as the negative impact 4.25 of fuel prices
was balanced by the increase in clothing, dwelling and food prices.
Read more here: http://www.bne.eu/page/bnecentral-europe-daily-list/polish-
deflation-continues-september
CREDIT SE - FROM THE DAILIES
95. Romania: Daily Snapshot - Long term debt yields set new records
ING
October 13, 2014
The RON continued to tick firmer, in line with most bond markets and against the
equity trend. It closed yesterday at 4.4035/EUR, c.35 pips firmer on the day and is
now virtually unchanged.
Against our call, the one week repo operation was rolled over and 4 participants took
c.RON1bn from the Bank at 3.00%. In spite of this, cash continues trading at 3.20%
and longer rates continue drifting higher. The 1M-3M segment trades 2.80-2.55% vs
2.45-2.40% seen two days ago and when we released our previous note. The moves
in the FX swap market have not contaminated the debt curve which continued
repositioning lower. Possibly aided by three positive recommendations which focused
on the long end of the curve (with the boldest looking for a 80bp compression from
the 7Y paper), the popular 9Y set a new record low after a very strong tender. This
paper traded a touch below 3.95% yesterday but repositioned a bit higher today. In
light of these recommendations and the compression trade in the euro area, we look
for new lows in domestic debt yields, with the middle of the curve likely to receive
support from the cash end, starting late this month.
Vlad Muscalu
96. S&P Raises Albania Outlook to Positive from Stable
WSJ
October 13, 2014

Standard & Poor’s Ratings Services on Friday raised its outlook for Albania to positive
from stable, as a new government moves forward with ambitious plans to shrink the
country’s deficit and reform its legal system.
S&P affirmed its junk-status B rating on the Balkan country’s foreign and local
currency sovereign credit.
Read more here: http://online.wsj.com/articles/s-p-raises-albania-outlook-to-
positive-from-stable-1412960119
97. S&P Ratings On Serbia Placed On CreditWatch Negative Pending
Medium-Term Fiscal Plans
Standard & Poor's Ratings Services
October 10, 2014
OVERVIEW
•
Serbia's public finances have continued to deteriorate in 2014.
•
Despite a strong mandate following the April elections, the government has not yet
launched meaningful medium-term fiscal reform. In our view, the 2015 budget will
indicate the credibility of its fiscal consolidation.
•
We have placed our 'BB-' ratings on Serbia on CreditWatch with negative implications
ahead of the government's 2015 budget and pending details of its medium-term
fiscal consolidation plan.
•
We will resolve the CreditWatch in early 2015 once we have assessed whether the
budgetary laws passed by the end of 2014 offer a credible consolidation of public
finances.
RATING ACTION
On Oct. 10, 2014, Standard & Poor's Ratings Services placed its 'BB-' long-term
sovereign credit ratings on the Republic of Serbia on CreditWatch with negative
implications.
RATIONALE
Our CreditWatch placement reflects Serbia's deteriorating general government debt
metrics. Favorable market access is currently masking the potential for refinancing
risks, which are exacerbated by the high share of foreign currency borrowing and a
structural current account deficit that remains elevated, despite narrowing
substantially in recent years.
The ratings are constrained by Serbia's moderate GDP per capita and limited
monetary policy flexibility, owing to the high euroization of the economy. Serbia's
long-term economic growth potential remains supportive of the ratings.
Serbia's political situation is more stable than in most post-Yugoslavia republics. The
Serbian Progressive Party (SNS) not only has a comfortable majority of 63% in
parliament, it also enjoys widespread popular support and has a coalition partner
supporting a broader consensus. This has helped increase public acceptance of
difficult and politically sensitive reforms and austerity measures, which had been on
previous governments' agendas.

Major policy initiatives have been delayed again so far this year, partly due to severe
flooding in May and also the resignation of the finance minister and the government's
hesitation over which austerity measures to implement. That said, we note the
recent passage of laws regarding pensions, the labor market, bankruptcy,
privatization, and the restructuring of state-owned enterprises (SOEs). The sell-off or
dissolution of 502 non-strategic SOEs will free up assets for better economic use by
private-sector actors, and reduce indirect burdens on the state. Together with
expected public administration reforms, this could reduce the distorting use of
resources across the economy and promote competitive businesses that could, in
turn, generate sustainable employment. Serbia's challenges are comparable to other
post-Communist Central and Eastern European states. The difference is that Serbia
now faces a weaker global economy and has a dual legacy as a state and federal
center.
The government's main challenge is fiscal consolidation. We remain doubtful whether
consolidation will occur unless there is an IMF agreement acting as a policy anchor.
In its absence, the government has only announced partial steps toward reducing
the budget deficit. Notably, these have included various cuts to pensions and public
wages for those earning more than Serbian dinar 25,000. These cuts should
generate the approximate savings needed for the total fiscal adjustment: a headline
figure of €1.5 billion over three years has been mentioned in the context of an IMF
agreement. The remaining measures are supposed to be drawn from a mix of
subsidy cuts, public expenditure savings, and revenue enhancements. To date, we
have no details about this portion of the consolidation plan.
The credibility of these saving measures will be key to our overall view of Serbia's
medium-term fiscal framework. If the majority of the fiscal adjustment succeeded,
we calculate it would reduce the general government deficit to 6.0% of GDP in 2015
and 4.5% in 2016, from an estimated 8.1% in 2014.
Failed SOEs have forced the government to service large chunks of its guaranteed
debt portfolio, which we now consider equal to general government debt. As a result,
net general government debt (gross debt minus liquid assets) has soared to above
60% of GDP from just 25% in 2009. Consequently, general government interest
payments as a share of general government revenues have jumped to nearly 9% in
2015 from less than 2% in 2009. We forecast full fiscal consolidation to lead public
debt to gradually stabilize at these high levels by 2016-2017.
By then, some of the structural reforms should have helped revive growth even if
there is a recession. We estimate Serbia's economy will contract by 0.7% in real
terms this year, but grow again by 1.2% in 2015 before accelerating to an average
of 2.7% annually thereafter. In per capita terms, this equates to an average of 2.0%
growth over 2014-2017, though this figure is flattered by the population shrinking at
an estimated 0.5% per year. Given the current strength of the U.S. dollar, this
translates into GDP per capita of roughly $6,000, lower than any EU neighbors and
Montenegro.
Serbia's economic potential could lie in the recent development of new export
facilities. The growth in automotive production shows that foreign investment can be
channeled into transforming industrial assets formerly belonging to the state and
leveraging Serbia's lower cost structures to build competitive industries. As an EU
accession country, Serbia's expected public- and private-investment inflows will be

channeled into exports, in particular. Together with compressed import demand due
to the weak economy, we believe the current account deficit will remain roughly flat,
averaging 5.5% of GDP in 2014-2017.
Our conservative assumption is that FDI inflows should finance at least half of
Serbia's annual current account deficit. This should limit the need to raise large
external debts. Given the already high gross external debt stock (90% of GDP in
2015), however, external financing remains a key vulnerability to Serbia's
creditworthiness. Gross external financing needs should remain roughly equal to
100% of current account receipts (CARs) plus usable reserves. In dollar terms, we
estimate Serbia's 2015 gross external financing need at $11.5 billion (44% of CARs).
We project that 85% ($6.2 billion) of the current portion of external debt will be
refinanced, all short-term external debt ($2.0 billion) will be rolled over, and FDI will
remain at 2013-2014 levels ($1.5 billion). We forecast that the public sector will
raise the remaining requirement ($1.8 billion), half through official borrowing and
half via Eurobond issuance, portfolio flows to the domestic government bond market,
and, if needed, a drawdown of external fiscal assets.
Another external vulnerability is that 77% of the general government debt is
denominated in foreign currency, and about 60% of commercial debt is held by
nonresidents. This makes the fiscal debt-to-GDP ratio sensitive to exchange-rate
fluctuations. Such fluctuations have prompted the National Bank of Serbia to pursue
a more restrictive monetary policy than its inflation targeting would suggest. As a
floating currency, the dinar provides a flexible adjustment mechanism. Recent
inflation at the lower end of the central bank's target range (2.5%-5.5%) should not
detract from Serbia's history of exceeding its inflation targets. Furthermore, political
challenges to central bank independence limit the credibility of monetary policy, in
our opinion.
CREDITWATCH
We will resolve the CreditWatch in early 2015 once we have assessed whether the
budgetary laws passed by the end of 2014 offer a credible consolidation of public
finances.
In the absence of legislated fiscal plans leading to the stabilization of the
government's debt burden, we would lower the ratings to 'B+/B'. We could also
lower the ratings further if external financing becomes more costly, either because
bank rollover rates fall below our expectations or because the public sector's access
to markets weakens, or if the central bank adopts a significantly more interventionist
foreign exchange policy.
Other depository corporations (dc) are financial corporations (other than the central
bank) whose liabilities are included in the national definition of broad money. Gross
external financing needs are defined as current account payments plus short-term
external debt at the end of the prior year plus nonresident deposits at the end of the
prior year plus long-term external debt maturing within the year. Narrow net
external debt is defined as the stock of foreign and local currency public- and
private- sector borrowings from nonresidents minus official reserves minus public-
sector liquid assets held by nonresidents minus financial sector loans to, deposits
with, or investments in nonresident entities. A negative number indicates net
external lending. CARs--Current account receipts.

The data and ratios above result from S&P’s own calculations, drawing on national as
well as international sources, reflecting S&P’s independent view on the timeliness,
coverage, accuracy, credibility, and usability of available information.
CREDIT EA - FROM THE DAILIES
98. Armenia to get 1.13% of customs duties from imports of goods to
Eurasian Economic Union
AKIpress
October 17, 2014
Armenia, when it joins the Eurasian Economic Union (EEU), will get 1.13% of the
customs duties from imports of goods to the EEU territory, according to the treaty on
Armenias accession to the EEU posted on the website of the Eurasian Economic
Commission, an EEU regulatory body.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/armenia-get-113-
customs-duties-imports-goods-eurasian-economic-union
99. Chinese Eximbank to extend $300 million loand for construction of
chemical complex in Uzbekistan
AKIpress
October 17, 2014
uzhimprom Eximbank of China will provide $300 million loan to the Government of
Uzbekistan for construction of chemical complex on production of polyvinyl chloride
(PVC) at the Uzbek enterprise Navoiazot, representative of the Uzbek enterprise told
RIA Novosti.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/chinese-eximbank-
extend-300-million-loand-construction-chemical-complex
100. Falling ruble, oil price reignite rumours of devaluation of Kazakh
currency
Naubet Bisenov in Almaty
October 17, 2014
The stumbling ruble and oil price have reignited rumours about a "second wave" of
devaluation for the tenge in Kazakhstan. Rumours about another devaluation have
been circulating in the country's financial capital, Almaty, since the central bank was
forced to cut the value of the Kazakh currency by 19% in February.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/falling-ruble-oil-
price-reignite-rumours-devaluation-kazakh-currency
101. Kazakhstan sees rise in tax revenues
Azernews
October 17, 2014
Kazakhstan's private owners paid taxes worth 26.6 billion tenges (about $146
million) in January- August 2014, the analytical service Ranking.kz reported.

Read more here: http://www.bne.eu/page/bneeurasia-daily-list/kazakhstan-sees-
rise-tax-revenues
102. Kazakhstans financial institutions banned from using Bitcoin
Tengrinews
October 17, 2014
Kazakhstans financial institutions have been banned from using Bitcoin, Yerlan
Ashykbekov, Head of the Payment Systems Management Department of the countrys
Central Bank, told in an interview for Tengrinews.kz.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/kazakhstans-
financial-institutions-banned-using-bitcoin
103. Kyrgyzstan collects nearly KGS30bn in taxes and payments this year so
far
24.kg
October 17, 2014
In September 2014 Kyrgyzstan collected 3 billion 835.3 million soms taxes and
charges, the chairman of the State Taxation Service Zamirbek Osmonov said today
at a press conference.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/kyrgyzstan-collects-
nearly-kgs30bn-taxes-and-payments-year-so-far
104. Launch of Eurasian Economic Union may trigger growth of salaries in
Kazakhstan
Tengrinews
October 17, 2014
The Eurasian Economic Union of Russia, Kazakhstan and Belarus to be shortly
launched may trigger growth of salaries in Kazakhstan, according to Ms. Tamara
Dyuissenova, the countrys Minister of Healthcare and Social Development.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/launch-eurasian-
economic-union-may-trigger-growth-salaries-kazakhstan
105. Mongolia's central bank economic indicators for first nine months of
2014
Monstsame.mn
October 17, 2014
According to the Bank of Mongolia, money supply (broad money or M2) reached MNT
10.1 trillion at the end of September, decreasing MNT 65.4 billion or 0.6 percent
from the previous month, but increasing 1.6 trillion or 18.7 percent against the same
period of 2013.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/mongolias-central-
bank-economic-indicators-first-nine-months-2014
106. Mongolia's national consumer price index increases in September

Monstsame.mn
October 17, 2014
Mongolia's national consumer price index rose by 0.7 percent in September of 2014
from the previous month, by 8.5 percent against the beginning of the year. It also
increased by 13.0 percent over the same period of the previous year. An increase of
0.7% was mainly due to increases of 4.2% in housing, water, electricity and fuels,
and 1.2% in clothing, footwear and cloth.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/mongolias-national-
consumer-price-index-increases-september
107. Personal tax collection rises in Kazakhstan
Trend
October 17, 2014
Kazakh private owners paid taxes worth 26.6 billion tenges (approx. $146 million)
between January and August 2014, the analytical service Ranking.kz said.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/personal-tax-
collection-rises-kazakhstan
108. Turkmenistan facing devaluation risk
Chronicles of Turkmenistan
October 17, 2014
Starting from 6 October the currency exchange offices in Ashgabat stopped selling
US dollars. Rumours are circulating among the residents that the authorities intend
to increase the US dollar exchange rate to the Turkmen manat.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/turkmenistan-facing-
devaluation-risk
109. Ulaanbaatar's house prices up 10.2% in first nine months of 2014
Montsame.mn
October 17, 2014
In the third quarter of this year, the index of apartment price in the citys six districts
increased by 2.2 times against end of 2010, by 10.2% against the previous year,
and by 2.8% against end of this year, but there was no difference against the
previous quarter.
Read more here: http://www.bne.eu/page/bneeurasia-daily-list/ulaanbaatars-house-
prices-102-first-nine-months-2014

BNE Credit - October 20, 2014 (Eastern EU Data)

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BNE Credit - October 20, 2014 (Eastern EU Data)