Russia’s Family Neglect Nods
Russian shares were largely unmoved by a child adoption ban imposed against the US in response to asset and visa sanctions for official abuse contained in the so-called Magnitsky bill as they rose 10 percent in 2012 in MSCI dollar terms, as falling world oil prices and breakneck domestic credit growth otherwise stoked tensions. The diplomatic tiff followed stiffer requirements for foreign parent eligibility even as hundreds of thousands of children remain in orphanages with health and behavior problems rendering them undesirable to local families, amid reports of matches abroad going sour including an incident where a youngster was sent back unaccompanied on an airplane to Moscow. With both Presidents Putin and Obama re-elected relations had briefly seemed to warm after the earlier dashed “reset,” as cooperation turned to Syria in particular as the Kremlin distanced itself from the Assad regime and began to evacuate citizens from Damascus. On Iran the parties were increasingly working on a nuclear enrichment compromise while staying within the broad outline of the UN-agreed commercial boycott. In Europe bilateral ties had improved slightly as consultations took place over a rescue package for Cyprus with hefty Russian offshore banking deposits, following recriminations over an EU investigation into possible Gazprom anti-trust violations.
At home officials have been preoccupied with slowing GDP growth to around 3.5 percent as the PMI dropped to 50 in December on inflation above the 5 percent target due to drought. A marginal fiscal deficit is expected in 2013 with a declining current account surplus at 3 percent of GDP. Foreign reserves are over $525 billion but annual capital flight is again in the $75 billion range. A recent government report from Ernst and Young challenged the definition and asserted the outflow was actually half with the balance accounted for by normal investment and low-tax fund shifts.
State giant Sberbank has been active on the acquisition trail abroad with the purchase of Austrian and Turkish units as ratings agencies warn about “spectacular” uncollateralized retail loan expansion. Central bank figures show the 45 percent annual jump in the segment quadruple the pace of deposit increase and now greater than corporate activity outstanding. It includes personal, credit card, auto, and mortgage borrowing and banks have pared their average capital adequacy ratio 5 percent to support the business. Deposit insurance has been hiked and addition liquidity facilities are on offer to maintain confidence. Financial institutions and companies raised some $50 billion in Eurobonds last year and now anticipate a local windfall with full opening of the ruble market following a regulatory agreement with Euroclear. Foreign holdings of OFZs alone could double from the current 7 percent share, as quasi-sovereigns unveil innovative structures such as with VTB Capital’s gold-linked instrument. Multinationals like Caterpillar have also tapped the deeper internal base as progress accelerates from the former crawl.
