Russia’s Flagging Energy Edicts

Russian stocks were down 10 percent at the rear of the MSCI main Emerging Europe pack as partial energy privatizations were sidetracked by a move to first consolidate interests in a holding company to be run by close Putin chum Sechin. Technocrats reclaimed third term cabinet posts but the power balance remains intact with so-called Medvedev modernizers on the back foot despite majority opinion polls demanding fundamental political and economic shifts. The repeat administration has also refused to flinch at Western criticism of its support for Syria’s Assad and rule of law defects in high-profile cases involving oligarchs and investors. In the latest controversy the TNK-BP joint venture has again dissolved into recriminations with the Kremlin, Alfa Group head Friedman and multinational company executives presenting opposite views. GDP growth was 5 percent in Q1 and inflation has come down to the same level but capital flight was $35 billion for the period and oil prices have since tumbled to under $100/barrel. The central bank has been on hold as the ruble fell to 38/dollar, which may accelerate the timetable for placing local OFZ paper in the Euroclear system for simpler access. In inaugural speeches President Putin outlined specific commercial and structural aims but audiences noted a resemblance to previously unmet pledges. During this tenure he wants to raise investment and the high-tech portion of GDP to 30 percent and advance 100 spots in the World Bank’s “Doing Business” list. His remarks turned to epithets for street protesters denounced as illegitimate and he accused the US and Europe of fomenting Cold war sentiments with exclusion threats as he stayed away himself from the G-8 Camp David summit in May.

Russian state banks on the other hand are pursuing continental engagement as Eurozone counterparts shed prize assets. Sberbank has already acquired the Austrian Volksbanken network and is near a $4 billion deal to buy Dexia’s former stake in Turkey’s Denizbank. Citigroup is also divesting its share in blue-chip Akbank, which hit the Istanbul exchange still in positive mode. Prime Minister Erdogan has welcomed back the World Economic Forum after walking out in a huff several years ago, and also announced the resumption of EU accession talks and an initiative to establish a Turkish ratings agency after S&P lowered the sovereign outlook to stable. The current account deficit has narrowed slightly but inflation remains in double-digits as the central bank has tightened its rate channels for price and exchange rate stability. The lira is again up marginally against the dollar, and credit growth has slowed to 15 percent. The primary budget surplus rose to 2 percent of GDP enabling tax removal for mutual funds and greater leeway for private pension launch to inject new energy.