Dmitry Savchenko May 2015

Russia Economy and RUB will look for equilibrium

RUB price of oil is relatively comfortable

Key figures

Russia 2011 2012 2013 2014 2015 2016

(annual % change) forecast forecast

GDP growth (real) 4,3 3,4 1,3 0,6 -3,9 0,2

Export growth (vol) 30,3 2,7 2,5 -5 -15 5

Import growth (vol) 33,2 11,5 4,5 -9 -20 2

Household consumption 5 4,8 3,4 2,5 -4 0,5

Government consumption -1,2 0,2 0,2 0,4 0 0,1

Private fixed investment 6,2 6,7 -0,3 -5 -9 0,5

Unemployment (annual 6,6 5,5 5,6 5,3 6,9 6,3

Real wage growth 6,3 6 5,3 -2 -5 0

Inflation 6,1 6,6 6,5 11,5 12,5 9

GDP components – where is the weakest link?

• Household consumption accounts for

more than 50% of GDP

• Government investments are stable but

may increase (point at issue in the

government)

• Net export may add slightly into GDP

due to sharply contracted import

• Investment activity and household

consumption are in focus

GDP breakup

Government consumptionHousehold expendituresNet exportInvestments

• 2014 GDP growth was 0.6%, in 2015 we expect

economy will contract by 3.9%

• Household consumption is not a strong driving force

any longer

• Consumption is expected to decline in 2015 along with

capital investment given spillover effect of weak

commodity prices

• Weak RUB increases inflation risk, worsened by import

ban sanctions.

• On the positive side

• Devalued RUB creates favorable environment for

export-oriented companies which partially offset

negative

• CPI growth has peaked out in April 2015 and

started to decrease

• CBR has started to ease in order to support

economy, In January, March and April the CBR

reduced the key rate from 17% (hike of Dec

2014) to current 12.5%

• Government started to spend reserves, MinFin

has announced RUB1.4 tn. anti-crisis plan,

government expenditures increased in Q1 2015

by 24% y/y

Macro trends

Government tries to invest more

• In February and March economy contracted by 1.2% y-o-y and 3.4% which is

better than expectations due to much higher government spending

Currency • Oil prices, the Central Bank policy and geopolitics are major

factors for the RUB

• 50% depreciation of the rouble in 2014 can be attributed to:

• 20%-points coming from geopolitics (including

sanctions and corresponding difficulties in getting FX to

refinance external debt)

• 30%-points coming from the oil market slump

• CBR abandoned target corridor in 2014

• RUB has rebounded by ~40% from the bottom reached in

Jan., supported by higher oil prices and ample FX liquidity,

provided by the CBR

• In May CBR decided to buy USD and EUR to replenish

reserves worth $100-$200 million per day

• Debt redemptions calendar will be rather light, thus

supporting the rouble

• No FX liquidity shortage is expected

• CBR will continue to provide cheap FX liquidity

• The expectations of further easing from the CBR including

the possibility of other steps could weaken RUB slightly

• Currently USDRUB equilibrium level is seen in the range 55-

60 given expectation of oil market within the range USD60-

70 /bbl. Brent

Currency market scenario

• Baseline scenario:

• We do not expect a quick rebounding in the oil prices,

nor an improvement on the geopolitical side during the

coming 6 months

• On the negative side CBR will continue intervene and to

ease, cutting the key rate and increasing FX REPO rate

• On the positive side, we are rather optimistic regarding

CBR’s efforts to continue offering FX liquidity to the

market

• The external debt redemption calendar will be relatively

light, thus helping RUB to stabilize

• Capital outflow will be moderate in comparison with

2014 year

• Our oil market forecast is also rather supportive for the

RUB

• Our 6-month USD/RUB forecast is 57

Money market

• In December CBR raised the key rate to 17% from 10.5% in

order to stop speculative pressure on the rouble

• Simultaneously the pressure on the Central Bank has been

mounting as business couldn’t tolerate high interest rates

• CBR has started to ease in order to support economy, In

January, March and April the CBR reduced the key rate from

17% (hike of Dec 2014) to current 12.5%

• Inflation risks decreased, CPI growth has reached maximum

at 16.9% in March and started to decline in April as

devaluation effect is washing out quickly

• Weak economic activity may force CBR to cut the key rate

further during 2015

• However we do not expect that CBR will quickly return to

pre-crisis rates

• Money market rates may continue to decrease gradually

Public finances • 2014 budget faced a 0.5% deficit, in 2015 budget deficit

may reach 3%-4%

• New budget will be based on oil price at USD50 for

barrel Urals and on USDRUB at 61.5

• 2015 budget revenues may be revised down by 16.8%,

spending – by 2%

• Deficit will be financed from reserves and partially from

market borrowings

• Public debt/GDP ratio is low at ~10% and won’t exceed

15% in the coming year given current borrowing plan

• Government will start to spend reserves: RUB1.33 tn.

anti-crisis plan has been announced, including money

reserved for banking system capitalization, support to

system-enterprises, government guarantees, social

stability, import substitution program etc.

• Russia30/Treasuries10 spread has come back to pre-

crisis normal levels

Coming changes in public finances

• Government has announced RUB1.4 tn. anti-crisis plan, which will be financed from reserves

According to preliminary data:

• 250 bn. will go on further banking system capitalization plan (1 tn. has been already

offered)

• 300 bn. will go to support system-enterprises

• 200 bn. will be reserved for government guarantees

• 240 bn. will be allocated to support certain sectors (farm, automotive production,

housing and utility services etc.)

• 350 bn. will be spend to support social stability (unemployment benefits, maternity

capital etc.).

• 20 bn. will be spent on import substitution program

The plan can be revised depending on situation in economy and external factors.

Factors of banking sector stability Government will support Russian banks:

• Up to 10% of the money in the National Wealth Fund (NWF) can be invested in subordinated

deposits and subordinated bonds of large Russian banks.

• Cash injection of RUB 1tln (EUR 13.6bn) into 27 banks through the State Depositary Insurance

Agency (DIA) using federal loan bonds (OFZ). The intention is to lift capitalization of Russian

banks (subordinated debt and preferred shares) to enable them to increase lending to the real

sectors of the economy and to maintain stability of the financial system.

• A number of important regulatory indulgencies have been implemented aimed mainly at capital

liberation (such as the opportunity to recalculate FX balance and P&L items using not the current

but the average FX rate for the last quarter)

Recent government support for banks:

• Sberbank: Borrowed RUB 200bn from the Central Bank in 2014 with a 50 year maturity.

• VTB: Converted over RUB 200bn debt into preferred shares in 2014. Received RUB 100bn in

new capital in 2014 from the NWF (in the form of 30-year subordinated deposit) and is seeking

another RUB 150bn by the end of Q1 2015.

• Gazprombank: in 2014 converted RUB 40bn debt into preferred shares and is seeking a total

capital injection to reach RUB 70bn in 2015 from the National Wealth Fund.

• Rosselkhozbank: Converted RUB 25bn debt into preferred shares in 2014 and completed a

share issue of RUB 5bn. in January 2015.

• Furthermore three midsized banks (Trust Bank, MosOblBank and Baltiyski Bank) have been

directly bailed out through a combined RUB 289bn. capital injection in 2014.

Dmitry Savchenko, CFA

Chief economist, Nordea Markets

Dmitry.savchenko@nordea.ru

+74957773477 ext. 4194