Russia’s Churlish Host Habits
Russian shares despite p/e ratios around 5 remained off through July with the expected glow from hosting the G-20 central bank-finance minister meeting overshadowed by the criminal verdict against online activist Navalny, and surprise launch of a special “QE-lite” special on-lending facility to stoke 2 percent GDP growth. The protestor sentencing came exactly a decade after oil baron Khodorkhovsky was jailed as well on specious business allegations, and Navalny’s 5-year penalty will be appealed as he was released on bail after street anger. The new 1-year pool is designed to inject liquidity as rate cuts are resisted which may hurt the ruble. Big listings Sberbank and VTB have reported earnings drops on the sluggish economy and NPL provisioning in both consumer and corporate accounts, as the state reduced ownership in the latter to 60 percent after strategic investor placements. The monetary authority has received wide-ranging oversight power over non-banks and is investigating widespread suspected cross-border laundering rings though Belarus, Cyprus, Latvia and elsewhere. Outgoing head Ignatiev claimed that half of 2012’s $50 billion capital outflow was channeled through these networks. On the inflow side officials hail the past year’s government bond tie-up with Euroclear which has boosted secondary trading to records as non-residents hold an estimated half of long-term instruments. Corporate and municipal bonds will soon be added and Clearstream too will provide international processing and settlement. Inflation may revert to the 5-6 percent target as food costs subside and infrastructure bottlenecks are overcome in the medium-term under an ambitious public-private scheme President Putin presented at the annual Saint Petersburg executive forum to lukewarm response. A high-tech venture in that mold has already been stymied by conflicting objectives and corruption charges which forced a former Kremlin adviser to relocate to Paris. Trade policy under WTO membership has also been mired in controversy as the EU and US plan to file complaints against auto-import recycling fees viewed as discriminatory since they do not apply to domestic manufacturers.
Russian hydrocarbon exports continue to flourish amid general commodity hurdles and Ukraine’s Naftogaz is again in talks over shipments and financing as it tries to extend a $ 2 billion Gazprombank line. Ratings agencies have singled out the country’s vulnerability to emerging market fears with reserves down one-fifth to $25 billion through mid-year as large IMF repayments loom with little chance of immediate program renewal. Fitch switched the “B” sovereign outlook to negative on the 8 percent of GDP current account deficit and lack of exchange rate flexibility, and external debt may worsen as foreign banks withdraw local unit support. The stock market is off over 10 percent on the MSCI index with 0.5 percent economic growth and the fiscal gap at 5 percent of output with continued reluctance to curb energy subsidies. Bad credit is one-third the total and sparring between the ruling party and opposition precludes financial system reform and EU partnership entry as Brussels bridles at anti-democratic behavior.
