Russia’s Unorthodox Offshore Capital Credo
Russian shares struggling for traction despite single-digit P/E ratios the cheapest in major markets were further hammered on Cyprus’ imposition of capital controls and a large deposit 40 percent levy to secure a $10 billion IMF-EU emergency line. Top officials denounced the “confiscatory” move and refused to expand a $2.5 billion bilateral loan already in place even if tied to future Mediterranean energy rights. The Russian share dominates $20 billion in non-resident deposits and an equal sum has been recycled through the island annually to qualify for 10 percent tax treatment. The freeze came as a new central bank head close to President Putin took the helm after her predecessor put 2012 illegal fund outflow at $50 billion. The government has moved against the practice by formally prohibiting officeholders from holding accounts abroad, as it again found tax lawyer Magnitsky guilty of evasion in the Yukos affair with Cyprus dealings. Retaliation against EU banks may be explored although action will wait until the end of Orthodox Easter and the president’s former chief economic adviser Nabiullina will weigh in in her new monetary authority capacity as the local government bond market was just liberalized and WTO admission permits wider foreign bank entry. GDP growth has already slowed from last year’s 3.5 percent on lackluster retail and industrial figures as inflation climbs above 7 percent on food and tax pressures. Unemployment is above 5 percent, and consumer lending has slackened from it brisk double-digit pace on more borrower caution. Foreign flows into OFZs have picked up with the Euroclear connection but are far from the 30 percent ownership surge predicted as investors await possible interest rate easing. Russian companies have shifted from hard currency to ruble issuance with the interest as activity tripled on Q1 to over $5 billion according to Dealogic. In a switch coinciding with the annual BRIC gathering, companies have also turned to the yuan-denominated dim sum market in Hong Kong for $500 million equivalent in placement from VTB and other banks.
Ukrainian individuals and firms joined the Cypriot wave in less conspicuous fashion as stock performance has bounced to top frontier ranks on renewed IMF program discussions unlikely to result in an immediate breakthrough with continued opposition to gas and fiscal adjustments that sank the original post-crisis accord. The current negotiating team has added exchange rate flexibility to demands as the overvalued UAH has contributed to a whopping 8.2 percent of GDP current account hole and depleted reserves below the critical 3-months imports level. Recession deepened in the last quarter of 2012 to minus-3 percent, and the outlook may improve this year on better agricultural output and FDI such as with Shell’s recent deal, but the consensus forecast is for only 1 percent advance. European banks are still slashing subsidiary support in a conventional strategy doubting Kiev’s conversion.
