Russia 110329 Basic Political Developments

Brazil’s Surplus

Mirae has cut its holdings of dollar- and euro-denominated bonds on concern the U.S. will consider ending its $600 billion second round of quantitative easing and policy makers will start raising interest rates in Europe, Heo said. The company also raised the proportion of its assets held in cash to above 10 percent, from a maximum 8 percent in 2010, he said.

“We are not at a comfortable situation that we can aggressively invest,” Heo said. “We need to build a position that can benefit from a likely flattening of the curve in advanced countries. Europe is bracing for rate hikes which could pressure the U.S. to end its monetary easing.”

To contact the reporter on this story: Kyoungwha Kim in Singapore at kkim19@bloomberg.net; David Yong in Singapore at dyong@bloomberg.net.

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net; Sandy Hendry at shendry@bloomberg.net.

CBR forex policy: Rouble appreciation trend less pronounced

http://www.bne.eu/dispatch_text14583

Renaissance Capital

CBR Deputy Chairman Sergey Shvetsov made several comments on the forex market that in our view provide no support to expectations of further rouble appreciation.

Floating band widening does not necessarily imply rouble appreciation. According to Shvetsov, the regulator widened the floating band at both ends in March, with the area of no interventions remaining untouched. CBR daily interventions are fixed - on our estimates (we doubt the ends of the floating band were moved in March), the regulator purchases $150mn when the rouble is at 33.70-34.45 vs the dual-currency basket, $300mn at 32.95-33.70, and $400- 450mn at 32.45-32.95. We think the CBR increased its currency purchases within the current limits of the floating band compared with those before band widening. Thus, the potential for rouble appreciation seems less pronounced to us and is likely to be limited by our target level of 33.25.

Planned interventions as an instrument for injecting liquidity into the banking system. Inside the floating band, there is still a distinction between planned interventions (implying no shift in the ends of the band) and accumulated interventions. Planned interventions are nonlinear and depend on the current account, forecast export revenue sales, and the monthly budget execution. Thus, the CBR uses planned interventions to moderate the rouble's dependence on the oil price. Nevertheless, using budget estimates as one of the inputs reflects another CBR priority - the regulator is prepared to buffer changes in banking system liquidity that are caused by the federal budget. Therefore, the CBR fosters a favourable environment for domestic sovereign borrowing by increasing planned interventions when there is wide-scale sterilisation of banking-system liquidity by the budget.

Reserve Fund accumulation will lead to an increase in targeted interventions, which is negative for the rouble.

The CBR again showed its concern over a potential major squeeze in banking-system liquidity, which is the likely consequence of MinFin's stated intention to accumulate an extra RUB700bn in the Reserve Fund. This may technically take place after the Budget Code is amended this summer (after the 2011 budget parameters become clearer). If this occurs, the CBR will do its best to soften the impact of liquidity outflows to the Reserve Fund. One of its measures will likely be an increase in planned forex interventions, which is unlikely to provide support to the rouble at the end of 2011.

February data remain enigmatic. According to Shvetsov, the CBR purchased about $4.6bn in March, with no shift in the floating band, we think. In February, the CBR purchased $4.6bn, with planned interventions accounting for $3.7bn of this (the floating band was shifted once). Given recent comments, these data remain a riddle.

Anton Nikitin

http://www.bne.eu/dispatch_text14583

Renaissance Capital

CBR Deputy Chairman Sergey Shvetsov yesterday (28 March) made a few comments on inflation and potential interest rate changes.

Inflation expectations will depend on non-monetary drivers. According to the CBR, crops remain a key driver of inflation expectations. If this year crops remain at an average level, then inflation may be at 6-7%. This implies that the CPI is primarily driven by non-monetary factors and not policy decisions taken by the CBR. Therefore, the February increase in rates should be considered as a signal that the regulator pays attention to the CPI, but the influence of its anti- inflationary tools is limited due to the non-monetary nature of inflation.

Fixed REPO rate is likely to stay unchanged if the CBR decides to raise rates. CBR decisions are discretionary in nature, hence there is no way of estimating at which level rates will be at in a few months. Shvetsov stated that the regulator keeps on searching for an optimal gap of changes in interest rates. We think it is unlikely that the gap will be widened, and so Shvetsov's statement is a signal that it may be cut by means of raising deposit rates. The CBR considers a fixed REPO rate as an effective ceiling for interbank rates - this implies that the gap may be reduced by a simultaneous hike in all interest rates except the fixed REPO rate. Despite the fact that interbank rates are defined by the deposit rate, the tighter monetary policy signal will be noticed by non-residents as well, as they see the refinancing rate as being a benchmark for CBR interest rate policy.

Abundant liquidity will depend on measures from MinFin. Shvetsov confirmed that there are no threats to abundant liquidity on a horizon of the next few months. The CBR deliberately makes use of deposit operations instead of the OBR (which does not offer solid premiums) as a sterilisation tool. As soon as MinFin starts to build the Reserve Fund, the liquidity surplus will vanish, and the current structure of sterilisation tools will help to avoid major liquidity changes that may take place if OBRs are widely used.

Anton Nikitin

http://russiaprofile.org/business/34137.html

Russian Prime Minister Vladimir Putin on Friday put his weight behind a move to amend the country's tough Strategic Sectors Law, which restricts the level of foreign investment in 42 sectors of the Russian economy. After almost four years of resisting such a move, the prime minister finally endorsed a groundbreaking proposal that would allow foreigners to buy up to 25 percent of strategic companies without obtaining mandatory approval from the government.

Russia’s law on foreign investments, which took effect in May 2008, classifies 42 sectors of the economy as strategic. In addition to defense, energy, aircraft and aerospace and critical infrastructure – which have long been deemed strategic – the new law added certain natural resource deposits, radio, television, and fishing to the list of strategic sectors. Under the law, foreign investors seeking to acquire over 10 percent stakes in companies working in those sectors had to receive permission from the government as well as the Federal Antimonopoly Service (FAS). However, as part of ongoing efforts to improve the investment climate, the government commission on regulating foreign investment, which Putin heads, decided at a meeting on Friday to lower the bar for foreign investors by raising the threshold from 10 percent to 25 percent.

The measures approved by the commission on Friday were prepared by FAS as part of the second set of the long-awaited revisions to tough laws on foreign investment in strategic mineral fields. "When you buy a 25 percent stake in a company engaged in mineral resources, you will not need the permission of FAS and our commission,” Putin said at the meeting. “At present, this threshold is fixed at 10 percent." FAS Chief Igor Artemyev said a 25-percent stake is enough to enable investors to “exercise significant influence over the management of any company” – a concession long sought for by foreign investors. He explained that foreign investors that come with their own technologies generally do not require the approval of the governmental commission for limited access to strategic natural resource deposits.

Putin said he hopes the gesture will stimulate foreign investors’ appetite for Russia, amid the “growing worldwide competition for investment.” He said the commission must raise the level of foreign direct investment (FDI) to the pre-crisis level of between $60 billion and $70 billion per year. The prime minister's optimism echoes last year's forecast by his Finance Minister, Alexei Kudrin. In February 2010, Kudrin predicted that Russia could see pre-economic crisis levels of FDI by 2013. He said FDI stood at $70 billion before the global economic recession swept the country in 2008 and reduced the figure to $30 billion.

The government has intensified efforts to attract foreign capital as it struggles to reverse a systematic fall in foreign investment sparked by the 2008-09 financial crisis. Preliminary statistics indicate that FDI in Russia fell by 50 percent to between $12 billion and $14 billion in 2010, Finance Minister Alexei Kudrin told a February 18 economic forum in the Siberian city of Krasnoyarsk. "It is not enough. In better times it could have reached $27 billion," Kudrin said. Foreign direct investment in Russia was about $8 billion in the first nine months of 2010, compared with $16 billion in 2009, according to Bank of America Merrill Lynch Global Research.

As part of a two-pronged approach - a combination of sweeping liberalization measures and pro-FDI institutional reforms - Putin on Friday ordered the simplification of the procedure of reviewing applications from foreign investors. Investors, he said, should be able to resolve outstanding issues with FAS, bypassing the government’s Commission on Foreign Investment. He also directed the commission to “get rid of ineffective or clearly excessive procedures” in a bid to create a comfortable environment for companies seeking to invest their money [and] knowledge in the Russian economy. FAS is currently reviewing 198 investors’ applications related to transactions in strategic sectors, ITAR-Tass reported.

The core strategy for the government, however, is creating strategic relationships with foreign companies to speed up improvements in the country’s industry through transfer of modern technology and know-how. One of the 12 cases considered by the commission on Friday were investment plans by French engineering giant Alstom, builder of most of the world's high-speed trains. Alstom, which has already partnered with train-maker TransMashHolding (TMH), is seeking to modernize facilities at Tver Carriage and Bryansk Engineering Works that will produce trains, passenger cars and new rolling stock for the Russian market. Putin praised the French company, saying that rail-cars produced by it will be used for transportation on the Moscow-Sochi route during the Olympic Games in 2014. "In addition, there are future plans to build railcars for the [country’s] subway," Putin said before directing the commission to approve a deal between Alstom and Transmashholding to implement development programs and technological re-equipment of Tver Carriage and Bryansk Engineering Works.

In the past, top government officials including the prime minister have been reluctant to open up the country’s vast natural resources to foreign investors, arguing that such sectors are crucial to national security. In 2007, when the Strategic Investment Law was being prepared, the commission readily brushed off suggestions from industry leaders - including from Industry and Trade Minister Viktor Khristenko – to set the threshold at 25 percent for foreign investors and 50 percent for Russian companies, Kommersant reported on Saturday. However, the global economic downturn coupled with the depletion of reserves in Russia's traditional oil stronghold, is forcing the government to diversify the resource-based economy in part by relaxing tough laws on foreign investment.

Faced with the prospect of a rapidly dwindling foreign investment, Putin vowed last year to reverse the negative trend. "This year we want to break this tendency, and to do this we are acting in several directions at once," Putin told the EurAsEC intergovernmental council meeting in May, RIA Novosti reported. "The issue is about improving the investment climate, abolishing abundant bureaucratic limitations, revising the legal framework that regulates foreign investment in strategic branches of the Russian economy," the agency quoted Putin as saying. The prime minister said he did not exclude the possibility that customs duties on imports would also gradually come down, and that other protectionist measures implemented in the wake of the economic downturn would be eliminated.

Since then, the government has swung into action, initiating a series of measures to reduce administrative barriers to investment. Last month, the government submitted a raft of amendments to the Strategic Investment Law to the State Duma. Measures envisaged in the package, which passed its first reading in the lower house of parliament last week, include liberalization of control over foreign investments in food and medical industries, the banking sector and extraction industries, FAS chief Artemyev said. “The amendments will also reduce administrative barriers by improving the procedures for filing and processing petitions,” he said.