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Russia
The end of the electoral season signals the comeback of a more pacified political environment. The protest movement that
flared up in the wake of the parliamentary elections in December came dissipated in the wake of the election of Vladimir
Putin in early March and progress made in political liberalisation. The interest in Russian assets from portfolio investors is
back while the Russian government’s bond issues have been a success. The inflows of liquidity and vigorous activity are
likely to stoke inflationary pressures, encouraging the central bank to undertake sterilising operations. At the same time,
the government’s pre-electoral tendency to spend up large is likely to abate, so we expect the comeback of a more
conservative policy mix.
The comeback
More pacified political environment…
After a period of uncertainty over the ability of the Russian authorities to maintain
social stability in late 2011-early 2012, the tensions decelerate. While the middleclass
got massively behind the opposition political forces, protesting against the
results of the December parliamentary elections, the movement dissipated with
the victory of Vladimir Putin in the first round of presidential elections on March 4
(with an official count of 63.6% of the votes). Despite lingering doubts over the
transparency of the vote-counting procedures, Putin remains the most popular
political leader in Russia. So he will make an official return to the Kremlin on 7
May for a period of six years (with the possibility of being re-elected for another
six-year mandate in 2018).
In response to the protest movements between December 2011 and February
2012, the Russian authorities have agreed to a certain political liberalisation. In
March 2012 the State Duma unanimously adopted a law slashing the number of
members needed to officially form a political party from 40 000 to 500, thereby
making the registration process easier for small opposition movements. A bill
allowing for the direct election of regional governors, after nomination by a
political party represented in the regional parliament, was introduced in the
Duma by President Medvedev in mid-January 2012. If it is adopted, it will be
another significant step in terms of political liberalisation. Victory for opposition
candidates at the mayoral elections in the cities of Tolyatti and Yaroslavl in
March and April 2012 also shows a wider opening-up and demonstrates the
aspirations for change expressed by the middle classes. Lastly, arrests and
resignations of senior civil servants in the police forces for corruption and human
rights violations (Kazan, Ryazan) aim to appease the discontent of the
population in the face of the abuses of the law enforcement authorities.
Despite these signs of liberalisation, the omnipresence of corruption continues to
anger public opinion, calling for fresh reforms. The question is whether these
steps will be maintained leading to a lasting political stabilisation.
…encouraged a comeback of portfolio investments
The markets welcomed the end of the electoral period in Russia. The rouble
appreciated 5.6% against the euro/dollar basket in the first quarter. In March, the
Russian currency remained upbeat while other emerging currencies tended to
weaken, which is a good reflection of end to the political uncertainty. Inflows of
portfolio investments in Russia have gathered pace: according to weekly data
from EPFR, while other emerging markets recorded capital outflows, net inflows
to Russian investment funds at the beginning of April had increased over 10
consecutive weeks, reaching a cumulative total of USD1.28bn in the first quarter
of 2012. The private-sector bond market also posted a quarterly record, with
issuance exceeding the highs prior to the 2009 crisis: private-sector domestic
bond issuance volumes reached RUB317bn (USD10.5bn) in Q1-2011.
Inflationary pressures are back…
Balance of payments data for Q1-2012 still point to a financial account deficit of
USD32bn, although this capital flight is still outweighed by the current account
surplus (USD42bn in Q1-2012). With uncertainty over elections now over, net
capital outflows are likely to decline over the coming quarters – and could even
become positive once again. As the current account surplus will continue to be
fuelled by high oil prices, the sequential increase in liquidity could stoke
inflationary pressures. The Bank of Russia would then have to adopt a more
restrictive policy by sterilising this excess liquidity.
In the meantime, inflation, which hit a record low in February and March (3.7%
y/y), is likely to accelerate already in the second quarter, especially given
encouraging pace of activity. The basic sectors’ output index expanded by 5.3%
y/y in January and by 7.1% y/y in February 2012. We expect GDP growth to
attain 3.9% in 2012, with average inflation of nearly 6%.
… and call for the comeback of fiscal conservatism
Fiscal policy was accommodating in the first quarter, which is not surprising
given the rounds of elections. The Russian federal budget posted a deficit of
RUB245bn (3% of GDP) over the first two months of 2012, which is very unusual
for a start of the year. While the federal budget’s revenues increased by 24%
(compared with the first two months of 2011), spending surged by 48%. In two
months, the federal government spent 17% of the total budget for the year,
whereas this figure was only 13% in 2011. March had a more typical profile, with
a fiscal surplus of RUB 125 billion, which enabled the Russian federal
government to record a deficit of only RUB 120 billion (0.8% of GDP) for the first
quarter.
With the elections now over, the spending spree is likely to ease. If oil prices
remain at their current level, the fiscal deficit should decrease in the next few
months and the government could post a surplus for the 2012 fiscal year.
Given the low level of the public debt (8% of GDP for the federal debt and 12%
of GDP for consolidated debt) and the savings in the oil funds (USD152bn, or
8% of GDP), the financial situation of the Russian government remains very
comfortable. This has attracted investors, which welcomed the new US$7bn
issue of Eurobonds (with maturities of 5, 10 and 30 years). The issue attracted
demand of USD 23 billion, which allowed Russia to obtain historically low interest
rates (5.625% for the 30-year bonds and only 3.25% for the 5-year maturity).
The OFZ issue (domestic bonds denominated in rouble) with a maturity of 15
years, carried out for the first time since the 2009 crisis, was oversubscribed by
five times.
Nevertheless, the authorities appear concerned about the dependence of budget
revenues on the oil price and the continued increase in social spending: the
debate over the tax system has gone beyond the ministerial meetings behind the
closed doors, reflecting the authorities’ increased openness to public discussion
of this topic. In fact, the breakeven oil price – i.e. the price that allows a balanced
budget – is currently at USD 120 per barrel, which ultimately leaves the
government little room for manoeuvre. The Finance Ministry has proposed
gradually reducing this breakeven used in budget planning exercises towards
USD 90 per barrel in 2016. This should justify the determination to spend less
and save more in reserve funds, although toning down expenditure will be fairly
difficult to implement: it will require pension reform, which remains unpopular, in
addition to major savings on state procurement.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Russia
The end of the electoral season signals the comeback of a more pacified political environment. The protest movement that
flared up in the wake of the parliamentary elections in December came dissipated in the wake of the election of Vladimir
Putin in early March and progress made in political liberalisation. The interest in Russian assets from portfolio investors is
back while the Russian government’s bond issues have been a success. The inflows of liquidity and vigorous activity are
likely to stoke inflationary pressures, encouraging the central bank to undertake sterilising operations. At the same time,
the government’s pre-electoral tendency to spend up large is likely to abate, so we expect the comeback of a more
conservative policy mix.
The comeback
More pacified political environment…
After a period of uncertainty over the ability of the Russian authorities to maintain
social stability in late 2011-early 2012, the tensions decelerate. While the middleclass
got massively behind the opposition political forces, protesting against the
results of the December parliamentary elections, the movement dissipated with
the victory of Vladimir Putin in the first round of presidential elections on March 4
(with an official count of 63.6% of the votes). Despite lingering doubts over the
transparency of the vote-counting procedures, Putin remains the most popular
political leader in Russia. So he will make an official return to the Kremlin on 7
May for a period of six years (with the possibility of being re-elected for another
six-year mandate in 2018).
In response to the protest movements between December 2011 and February
2012, the Russian authorities have agreed to a certain political liberalisation. In
March 2012 the State Duma unanimously adopted a law slashing the number of
members needed to officially form a political party from 40 000 to 500, thereby
making the registration process easier for small opposition movements. A bill
allowing for the direct election of regional governors, after nomination by a
political party represented in the regional parliament, was introduced in the
Duma by President Medvedev in mid-January 2012. If it is adopted, it will be
another significant step in terms of political liberalisation. Victory for opposition
candidates at the mayoral elections in the cities of Tolyatti and Yaroslavl in
March and April 2012 also shows a wider opening-up and demonstrates the
aspirations for change expressed by the middle classes. Lastly, arrests and
resignations of senior civil servants in the police forces for corruption and human
rights violations (Kazan, Ryazan) aim to appease the discontent of the
population in the face of the abuses of the law enforcement authorities.
Despite these signs of liberalisation, the omnipresence of corruption continues to
anger public opinion, calling for fresh reforms. The question is whether these
steps will be maintained leading to a lasting political stabilisation.
…encouraged a comeback of portfolio investments
The markets welcomed the end of the electoral period in Russia. The rouble
appreciated 5.6% against the euro/dollar basket in the first quarter. In March, the
Russian currency remained upbeat while other emerging currencies tended to
weaken, which is a good reflection of end to the political uncertainty. Inflows of
portfolio investments in Russia have gathered pace: according to weekly data
from EPFR, while other emerging markets recorded capital outflows, net inflows
to Russian investment funds at the beginning of April had increased over 10
consecutive weeks, reaching a cumulative total of USD1.28bn in the first quarter
of 2012. The private-sector bond market also posted a quarterly record, with
issuance exceeding the highs prior to the 2009 crisis: private-sector domestic
bond issuance volumes reached RUB317bn (USD10.5bn) in Q1-2011.
Inflationary pressures are back…
Balance of payments data for Q1-2012 still point to a financial account deficit of
USD32bn, although this capital flight is still outweighed by the current account
surplus (USD42bn in Q1-2012). With uncertainty over elections now over, net
capital outflows are likely to decline over the coming quarters – and could even
become positive once again. As the current account surplus will continue to be
fuelled by high oil prices, the sequential increase in liquidity could stoke
inflationary pressures. The Bank of Russia would then have to adopt a more
restrictive policy by sterilising this excess liquidity.
In the meantime, inflation, which hit a record low in February and March (3.7%
y/y), is likely to accelerate already in the second quarter, especially given
encouraging pace of activity. The basic sectors’ output index expanded by 5.3%
y/y in January and by 7.1% y/y in February 2012. We expect GDP growth to
attain 3.9% in 2012, with average inflation of nearly 6%.
… and call for the comeback of fiscal conservatism
Fiscal policy was accommodating in the first quarter, which is not surprising
given the rounds of elections. The Russian federal budget posted a deficit of
RUB245bn (3% of GDP) over the first two months of 2012, which is very unusual
for a start of the year. While the federal budget’s revenues increased by 24%
(compared with the first two months of 2011), spending surged by 48%. In two
months, the federal government spent 17% of the total budget for the year,
whereas this figure was only 13% in 2011. March had a more typical profile, with
a fiscal surplus of RUB 125 billion, which enabled the Russian federal
government to record a deficit of only RUB 120 billion (0.8% of GDP) for the first
quarter.
With the elections now over, the spending spree is likely to ease. If oil prices
remain at their current level, the fiscal deficit should decrease in the next few
months and the government could post a surplus for the 2012 fiscal year.
Given the low level of the public debt (8% of GDP for the federal debt and 12%
of GDP for consolidated debt) and the savings in the oil funds (USD152bn, or
8% of GDP), the financial situation of the Russian government remains very
comfortable. This has attracted investors, which welcomed the new US$7bn
issue of Eurobonds (with maturities of 5, 10 and 30 years). The issue attracted
demand of USD 23 billion, which allowed Russia to obtain historically low interest
rates (5.625% for the 30-year bonds and only 3.25% for the 5-year maturity).
The OFZ issue (domestic bonds denominated in rouble) with a maturity of 15
years, carried out for the first time since the 2009 crisis, was oversubscribed by
five times.
Nevertheless, the authorities appear concerned about the dependence of budget
revenues on the oil price and the continued increase in social spending: the
debate over the tax system has gone beyond the ministerial meetings behind the
closed doors, reflecting the authorities’ increased openness to public discussion
of this topic. In fact, the breakeven oil price – i.e. the price that allows a balanced
budget – is currently at USD 120 per barrel, which ultimately leaves the
government little room for manoeuvre. The Finance Ministry has proposed
gradually reducing this breakeven used in budget planning exercises towards
USD 90 per barrel in 2016. This should justify the determination to spend less
and save more in reserve funds, although toning down expenditure will be fairly
difficult to implement: it will require pension reform, which remains unpopular, in
addition to major savings on state procurement.
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