Russian markets ride oil price wave

Russia's exchanges threatened to hit their highest level since August 2008, giving a boost to companies coming back to Russia's IPO market after two high-profile deferrals.

Moscow's MICEX closed at 1480.17 on Friday, riding on a wave of risk appetite following better than expected employment data in the US and oil touching $85 a barrel.

Venezuelan Oil Minister Rafael Ramirez said Friday during Prime Minister Vladimir Putin's visit that oil had established a floor of $75 a barrel, and prolonged high energy prices will provide a further boost to Russian equities and the economy.

"Oil futures closed near $85 p/bbl on Nymex and ICE and now appears to have established a new trading range in the $80's p/bbl rather than the $70's [a barrel]," Chris Weafer, chief strategist at Uralsib, wrote in a note to investors.

The winning streak will also be a boost to pharmaceutical producer Protek, which last week announced it was seeking to raise $400 million in an IPO in May or at the beginning of June.
Protek's listing, which will be held jointly on Russia's MICEX and RTS indexes, will also please the country's Federal Financial Markets Service (FFMS), which has come under fire from bankers for restricting access to foreign capital.

At the beginning of the year the FFMS slashed the limit which Russian companies could list abroad by 10 per cent, down to 25 per cent, in an effort to force firms to stay at home and boost Moscow's claim as a financial centre.

Bankers, however, say the new listing laws could do the opposite and send companies abroad in search of fresh international capital to inject into their debt-laden companies.
"Either companies will be reluctant to list, or they will have listings in Russia that will not encourage the value of the company to be returned to shareholders," said Tom Mundy, a strategist at Renaissance Capital. "Or they will find ways of creating structures abroad to allow them to list."

While the bankers say they can understand the government's desire to turn Moscow into an international financial hot-spot, the infrastructure and legislation aren't in place to
attract sufficient foreign capital to Russia.

Kyiv authorities to draft city budget for 2010

Prime Minister Mykola Azarov has instructed the Finance Ministry, the Economy Ministry, Vice Prime Minister Serhii Tihipko, and the Kyiv city state administration to take measure to draft the budget of Kyiv for 2010.

Ukrainian News learned this from a statement by the press service of the Cabinet of Ministers.

Speaking at a meeting with the leadership of the Kyiv city state administration, the prime minister of Ukraine also instructed the said ministries, the vice premier for economic issues, and the city administration to consider the process of preparations of Kyiv to hold the Euro 2012 European football championship finals and the functions of Kyiv as the capital city of the country.

"Jointly with the leadership of Kyiv, the Finance Ministry and the Economy Ministry and you, Serhii Leonidovych Tihipko, join them and consider the complex of priority-driven questions. Three questions we must consider in the process of work on the city budget for 2010: EURO 2012, the functions of the capital city, and the budget of Kyiv," the press service quoted Prime Minister Azarov as saying.

The prime minister gave the ministries and the city administration three months to settle the questions. He said there are all required capacities for this.

As Ukrainian News earlier reported, Prime Minister Mykola Azarov has given the Kyiv city state administration time until July 2010 to correct the situation in the city.

The prime minister reprimanded the Kyiv city state administration for bad work.

Ukrainian Government Fears A New Winter Gas Crisis

WASHINGTON, DC -- In December Ukrainian officials descended on Washington with one overriding mission –to convince the Obama administration that without the financial help of the IMF, Ukraine might be unable to supply the EU with Russian gas this winter.
This badly disguised attempt at blackmail on the part of both Petro Poroshenko, the confectionary oligarch and a member of President Viktor Yushchenko’s inner circle, and recently appointed foreign minister and Hryhoriy Nemyria, Prime Minister Yulia Tymoshenko’s right-hand man, was so transparent and brazen that few in Washington were inclined to believe them.In a further sign of disenchantment and frustration with the current Ukrainian leadership, EU leaders speaking at the 13th EU-Ukraine summit in Kyiv on December 4, blasted the lack of promised constitutional reforms in the country, its erratic gas policies and placed part of the blame for past breakdowns in supplying Russian gas to Europe on Ukraine.Jose Barroso, the head of the European Commission was blunt in his criticism of Yushchenko: “Mr. President, I will speak honestly with you. We are often led to believe that Ukrainian promises about reforms are only partially fulfilled and that words are not followed by deeds”.Yushchenko hastily rejected these charges and placed the blame for the lack of reform on the government of Yulia Tymoshenko and the parliament. He also defended Ukraine’s record as a reliable transit country for Russian gas and assured the summit that there would be no disruptions in gas supplies this winter.Despite Yushchenko’s calming words, Poroshenko sang a different tune during his later visit to Washington: “Ukraine is confident Europe will not see another winter of gas supply disruptions, but there will be a “higher risk” if the IMF does not resume lending to its distressed economy,” Poroshenko stated. His use of the words “higher risk” in describing the situation was deceptively close to blackmail.The same can be said of Ukrainian Deputy Prime Minister Hryhoriy Nemyrya’s statement reported in the Financial Times on December 11. “The next three months are crucial,” he claimed. One day after returning from a mission to the IMF’s headquarters in Washington Nemyria asserted: “Wait and see is not an option. The cost of inaction is greater than the cost of action and may aggravate the situation in the wider region.” Apparently the IMF had a number of good reasons to stop lending money to Ukraine.According to an article by analyst Tammy Lynch in the Jamestown Foundation blog on Eurasia on December 10, in the wake of the freezing of IMF and World Bank funding, and following repeated statements by Yushchenko calling for the renegotiation of a Russia-Ukraine gas deal supported by the EU, there was little to discuss.It seems EU leaders believe Ukraine has not lived up to its side of the negotiated bargain. This is true –but the EU has not been in a collaborative mood itself.The EU’s refusal to even mention the far distant possibility of EU membership for Ukraine has consistently irked the country’s leadership, who several years ago needed some hope on which to develop its reforms.More recently, the EU and Ukraine signed a joint declaration at the EU-Ukraine International Investment Conference on the Modernization of Ukraine’s Gas Transit System. Among other things, the declaration commits Ukraine to ensure transparent operation of its gas network, and set tariffs at a rate that will “reflect actual costs incurred”.In return, the European Commission, Ukraine, and “creditors” commit to “cooperate in seeking to establish a technical coordinating (sic) council unit within Naftohaz of Ukraine.” This council would create an EU-approved “full modernization business plan” for the Ukrainian gas transportation system, and would help arrange the funding to undertake the system’s modernization.But the main problems with the IMF were linked to Yulia Tymoshenko reneging on a promise to raise gas prices for domestic consumers. After having promised to increase prices by 25 percent in September, she had a sudden change of heart.Yushchenko was not blameless in these pre-election machinations and pushed for an increase in the minimum wage and pension payments, which the IMF was set against, fearing that its money would be squandered for Yushchenko’s election campaign promises.According to the November issue of the Warsaw-based publication East Week: “The Ukrainian state-owned oil and gas monopoly, Naftohaz, has only twice been able to raise the funds to pay punctually for the monthly gas supplies on its own. In the remaining months, it benefited from support provided by the government and the National Bank of Ukraine (NBU).”Yet, the means it has employed so far to raise funds for gas settlements are becoming more and more desperate. State-owned banks would have to violate the guidelines regulating their activities in order to grant Naftohaz further loans.The state budget is not only experiencing problems financing its own spending, but has also already used almost all the legal options available to support Naftohaz; in September, it reimbursed the company’s VAT for all current, past and future (until the end of this year) settlements, and in August it issued 18.3 billion hryvnias worth of bonds to raise the company’s statutory capital.The government had hoped to obtain loan support from European financial institutions ($1.7 billion negotiated in July with the support of the European Commission, to be spent on modernizing the network and partially financing gas purchases), but Ukraine failed to meet the basic requirements for that loan and the deal fell through.

EU, Ukraine Trade Accusations At Summit

KIEV, Ukraine -- A top EU official accused Ukraine of dragging its feet on reforms at a summit in Kiev on Friday, while the ex-Soviet republic's leader complained about a delay in a promised EU-Ukraine accord.
It seems to us quite often that the promises of reforms are only partially respected," European Commission President Jose Manuel Barroso told Ukrainian President Viktor Yushchenko, in comments translated into Ukrainian.Barroso urged the divided Ukrainian leadership to "ensure the country's political and economic stability" in the run-up to presidential elections scheduled to be held in January 2010."The EU wishes to support Ukraine and we're doing a lot in concrete terms," Barroso said at a press conference held after the talks.But he added: "In the end, the responsibility for the reform in Ukraine is not for the EU, but for the Ukrainians themselves."Barroso and other EU officials also advised Ukraine's leaders to make every effort to gain access to aid from the International Monetary Fund (IMF) by carrying out economic reforms.Kiev received a 16.4 billion-dollar loan from the IMF in November 2008, but the fund has refused to hand over the third instalment because of Ukraine's failure to maintain fiscal discipline.The European Union then froze a 600 million-euro (904 million-dollar) loan to Ukraine."The IMF programme must get back on track," Swedish Prime Minister Fredrik Reinfeldt, whose country holds the current EU presidency, said at the press conference.Meanwhile Yushchenko revealed his bitterness at the postponement of the signing of an association agreement designed to develop links between Ukraine and the EU, placing some of the blame on Brussels."The EU must understand that we all have the responsibility of making the association agreement into an example for all the countries in the region on their way towards European integration," Yushchenko said.He placed blame for Ukraine's failure to meet its obligations to the EU on the country's government, which is led by his archrival, Prime Minister Yulia Timoshenko, who is running against him in the January 17 presidential vote.The association agreement, which was to have been concluded this year, had been intended to showed Europe's willingness to boost ties with the ex-Soviet republic, though it stopped short of promising eventual EU membership.Yushchenko was the darling of the West five years ago after he swept into power after the pro-Western "Orange Revolution," but since then his reputation has suffered amid endless political infighting and gas disputes with Russia.Barroso warned that European consumers should not suffer a repeat of last winter's Russian-Ukrainian gas conflict, which caused a long interruption of Russian gas supplies to more than a dozen countries in January."We should not be affected by any problem that we had at the beginning of the year," Barroso said.A quarter of the EU's gas comes from Russia, 80 percent of which is transported via Ukraine.So far this winter, a new gas crisis has been averted as Ukraine has managed to pay its gas bills to Moscow, despite being short of cash due to the world economic crisis.Ukraine's state gas firm Naftogaz said on Friday that it had paid for all the Russian gas delivered in November, a statement that was confirmed by Russian state-controlled energy giant Gazprom.

Ukraine's Deep C02 Cut Masks A Dirty Reality

DNIPRODZERZHYNSK, Ukraine -- Ukraine has made some of the world's deepest cuts in carbon emissions over the past two decades, but the ring of steel and chemical factories polluting her hometown make Natalya Maksymenko sceptical.
"This is not air -- this is a horror," said the 25-year-old mother, screwing up her nose at the smoke belching out of factory chimneys in Dniprodzerzhynsk, an industrial city of 250,000 people and birthplace of Soviet leader Leonid Brezhnev."We can even hear ourselves breathing in and out. You can see what is swimming in this air -- carbon certainly and factory pollution. Everything is dirty," she complained.Dirt-encrusted shop fronts stretch out a couple of kilometres along Lenin Avenue then end in an haze at a gigantic steel complex surrounded by swirling fumes.It is hard to tell where the clouds end and the smoke begins in Dniprodzerzhynsk, a city which expanded rapidly under Soviet dictator Josef Stalin's forced industrialisation programme.Yet as leaders from around the world attempt to seal a deal on climate change in Copenhagen next week, on paper Ukraine looks like a model pupil on CO2 emissions reduction.It has halved CO2 output from 1990 levels to 345 million tonnes a year, according to U.N. statistics, allowing it to sell carbon emission rights it received under the Kyoto Protocol that are potentially worth billions of dollars.But the reality is that Ukraine's plunging emissions have simply mirrored the collapse of its Soviet-era industry -- the economy is still only three-quarters the size it was in 1990.CONTROL OVER MONEYThe global economic crisis accelerated that drop and the concern now is that this is killing the motivation to make greener power stations, factories and mines built 100 years ago.Earlier this year, Ukraine sold 30 million carbon emission rights to Japan for $375 million and hopes to earn $2 billion or more from the sale of the right to pollute carbon credits that it does not use.Viktor Khazan, a local environmentalist in Dniprodzerzhynsk, says the 3 billion euros ($4.5 billion) Ukraine could make from its sale of C02 rights is being wasted rather than spent on green projects, as intended by the Kyoto rules."There were projects where the funds were partially used and the rest went to altogether other uses," he said. "As long as there is no control over organisations, political parties, we can't say the money will be used only (on ecological projects)."Mykola Sasiuk, the deputy head of Ukraine's environmental investment agency that sells C02 rights, denies this. He says 150 projects have been outlined, with 30 approved."These projects are already working and have produced real reductions (in emissions)," he said.Ukraine's largest coalmine, Zasyadko, for example, had cut emissions by 4 million tonnes, he said.But for some in Dniprodzerzhynsk, the projects have come far too late."I was poisoned by coking coal fumes and after that I could not go to work at the factory because it affected my health badly," said unemployed former steelworker Viktor, 37."We don't have the power to change anything," he said with a shrug as he fished from a bridge over the Dnipro river that gives the town its name.

Moscow bullish on bonds

Russia's return to the debt market for the first time in a decade got a positive reaction from investors who appear ready to forgive and forget the 1998 default that sent stocks crashing.
A high profile delegation led by Finance Minister Alexei Kudrin arrived in London last week seeking to persuade the City that their cash was safe in the government's hands.
We think that currently the assessment of risk in Russia is elevated so this ... conversation ... is important," Reuters reported a source in the delegation as saying.
Investors have warmed to the idea after prudent measures allowed the country to build up a stockpile of foreign currency and two reserve funds, decreasing the risk of default.
"Russia has a considerable amount of foreign reserves, around $400 million, so just on that basis it is very unlikely Russia will be unable to pay their creditors," said Tom Mundy, equities analyst at Renaissance Capital.
The main danger to sovereign debt remains the oil price, with a large proportion of the government's budget inflows coming from crude. However, a conservative estimate of $58 per barrel for 2010 from the government is well below Friday's close of $77.4.
"Our forecast is $85 [a barrel] next year, gradually rising to $110 by 2012 so given this trajectory, Russia's debt doesn't really look risky given the reserves," said Alexandra Yevtifyeva, chief economist at VTB Capital.
Many investors wrote off Russia as a safe bet following the 1998 default, saying they would never invest here again, but opinion turned around thanks to the ballooning oil price.
"Russia has moved beyond the stage of being a pariah on the international debt market, we're a long way past 1998," said Mundy.
Investment bank Troika Dialog said in a note two weeks ago that the bonds were only likely to raise $5 billion to $7 billion rather than the $18 billion the government was planning to place, but other analysts see no reason the placing won't be popular.
"From talking to investors, there is appetite for Russian sovereign risk," said Yevtifyeva.
A successful bond issue would ease the strain on the budget deficit, which President Dmitry Medvedev said would hit 7.5 per cent this year, while also injecting money into the ailing Russian economy.
In addition to the newly created demand the bonds could also provide a boost to Russian firms.
"If the placement goes well, it sets a benchmark for Russia on an international level, so for any Russian corporate looking to borrow on the international debt market they can work from the benchmark," said Mundy.

Getting tough on inflation

Russia's inflation could fall to just over 8 per cent, Prime Minister Vladimir Putin said Sunday, smashing earlier official forecasts of 12 per cent and boosting recovery prospects.
"This year inflation might be 8 per cent and a little more, then it'll move towards 6 [per cent] and then towards 5 [per cent]," Vladimir Putin said at a Russia-Finland forestry summit in St. Petersburg, RIA Novosti reported.
Inflation has already hit 8.1 per cent for the year to date but has slowed down to almost zero in the last three months and analysts see this as positive for Russian markets.
"Prime Minister Putin's bullish view of the inflation trend ... will provide support for the rouble and domestic investor sentiment generally, but the main driver will again be where the US markets and oil trade through the week," Chris Weafer, chief strategist at UralSib, wrote in a note to investors.
Putin's comments assume inflation will remain flat until the end of the year, but this is unlikely as cash is often doled out from the budget in the fourth quarter.
"We also think other factors, such as producer prices, budget spending and monetary emission, are still not adding enough pressure to [the] CPI, hence, these conditions remain favourable for loosening monetary policy as early as October," Renaissance Capital analyst Anton Nikitin wrote in a research note.
Latest estimates from the Central Bank put price rises at a maximum of 10.3 per cent for the year.
The positive economic news capped a good week for the markets, which saw the bourses consolidate gains from earlier in the month while investment came flooding in.
Russian stock funds took in $450 million last week, their highest weekly inflows since US-based research company EPFR started taking records in 2002.
The oil price fluctuated around the $80 a barrel level for most of the week, lending support to the markets, which mostly traded in line with crude. OPEC president Jose Botelho de Vasconcelos said Monday that they will try to balance oil prices at around $75 to $80 a barrel as anything higher would harm prospects of an economic recovery.
"You know that, if necessary, some countries are open to injecting more oil into the market and that will be done," Botelho de Vasconcelos said Sunday, Reuters reported.
The oil price was already trading lower on Monday morning on speculation of an OPEC output hike at the organisation's next meeting in December.
"The price of oil will likely slide this week ...because there is an increasing focus on the very high inventory levels of crude and products and on the comment by the OPEC Secretary General," Weafer wrote.

Opposition: Kiev Is Deep In Debt

KIEV, Ukraine -- One of the opposition leaders in the city council Dmytro Andriyevsky warned on Oct. 28 that municipal debts are growing with a catastrophic speed.
“The income part of the budget is short of nearly Hr 6 billion, and the situation is worsening by the day,” said Andriyevsky.He said Kiev has so far failed to collect Hr 1.244 billion in income taxes, Hr 1.07 in planned proceeds from the sale of land and other assets, and what the budget refers to as “other incomes” worth Hr 2.1 billion.“The fantastic budget projects and promises of Mayor Leonid Chernovetsky, as we had warned, turned out to be soap bubbles,” Andriyevsky said. “By today, the city finances are short of every third hryvnia planed for spending.”He said none of the mayor’s novelty ideas for filling the budget, including expensive dinners with city officials businessmen are supposed to pay, the sale of city-owned cars, increases in parking fees and introduction of new fees for various municipal services have brought no income to the budget.As a result, the city’s development projects are under-financed by Hr 875 million, while social expenditures are Hr 677 million short of target, and city medicine is Hr 204 million short. Moreover, the city owes Hr 2 billion to the state.“Budget predictions for the fourth quarter are unfavorable. Kiev, with Chernovetsky’s effort, is flying into a debt pit,” Andriyevsky told Ukrayinska Pravda.

Managing Russia After the Crisis

The international crisis dealt a severe blow to the Russian economy. The lower oil prices and reversal of international capital flows to emerging markets hit the country hard because the shocks struck just as the economy was on a steep upturn and Russia’s dependence on oil made it particularly vulnerable.
As a result, economic activity fell precipitously. Faced with this challenging turn of events, the government mounted an economic policy response that was swift and unprecedented in its scale and contents. The banking pressures were addressed through large-scale liquidity injections and a rescue of problem banks, while fiscal policy became expansionary. At first, the Central Bank allowed gradual exchange-rate depreciation into early 2009, drawing on its foreign reserves to moderate the pace. This allowed banks and corporations to bolster their foreign exchange positions and brought the ruble in line with the new fundamentals implied by lower oil prices.
Looking forward, the global economy suggests a slow recovery as it will be facing deleveraging, corporate restructuring and slow job growth. Similarly, Russia cannot expect a rapid return of high oil prices or large capital inflows. We should therefore foresee a fairly modest recovery in Russia combined with a weaker balance of payments than in recent years.
This sobering outlook has important implications for the country’s economic strategy. Clearly, the government’s response over the last year has helped preserve stability, which is a prerequisite for the resumption of growth. In fact, since mid-2009, there have been signs of economic stabilization. But large challenges remain. The central goal will be to turn the tentative signs of a rebound into lasting economic growth, while preserving the stabilization gains. In this regard, Russia faces delicate trade-offs, as well as room for improving the boost to economic growth, both in the short and longer term.
Consider first the short-term policy priorities. Ensuring a healthy banking system will be critical for the resumption of credit supply. This underscores the need for a proactive and comprehensive strategy so that banks have the capacity to lend once the economy recovers. Key elements of this strategy should include mandatory stress tests of major banks to obtain better assessments of their viability. These tests should, above all, reveal whether banks have adequate capital or have the ability to raise more capital if needed, either from private sources or from the envisaged bank recapitalization by public funds.
Turning to budget policy, the cautious fiscal policy of the past has left Russia with a low public debt level and sizable buffers, creating “fiscal space” for relaxation. But the size of the relaxation should not be so large as to undermine the quality of public spending. Moreover, the use of the Reserve Fund for budgetary financing is effectively the same as printing money for this purpose, and this could easily threaten the stability of the ruble. The good news is that with a better composition of the fiscal stimulus, Russia could achieve the same boost to domestic demand with lower fiscal deficits. To this end, the fiscal stimulus should enhance social safety nets and infrastructure projects. Also, the government should keep in mind longer-term fiscal policy objectives. Emphasizing self-reversing spending categories now would allow more flexibility in budget policies later. The more convincing the medium-term fiscal plans are, the stronger the fiscal boost will be today.
On the monetary policy side, the Central Bank is facing a balancing act. Inflation is coming down and may undershoot the target this year. But at the same time, the ruble remains vulnerable to swings in oil prices, banks are still liquid, and the fiscal expansion may renew pressures. On balance, however, the gradual relaxation of monetary policy envisaged by the Central Bank would seem appropriate. But there is clearly a need for careful implementation to avoid instability while keeping an eye on capital flows, the exchange rate and depositor confidence.
Looking beyond the crisis, there is broad consensus on the need for Russia to achieve economic diversification. This would help Russia realize its economic potential and also make the country less vulnerable to the vagaries of financial and commodity markets. Diversifying would not necessarily mean an increase in hi-tech industries but could equally well involve such sectors as light industry and tourism. To achieve real diversification, however, Russia will need significant investment.
The reform agenda is well-known. The most important priorities are a rollback of state control, easing of entry for new firms, reforms of the public sector, strengthening anti-corruption efforts and gaining accession to the World Trade Organization. While the commentary on Russia’s medium-term policies tend to focus on these structural reforms, we should not lose sight of the macroeconomic foundations for balanced economic growth.
Both medium-term government budget policy and monetary policy will play critical roles in how Russia recovers. As for medium-term budget policies, the central issue is how the country over time would best benefit from its natural resource wealth. One option would be to conservatively aim for a public spending level consistent with the income that the government will derive from petroleum over the long haul. Taking the 2009 budget as the starting point, this would require considerable restraint in government spending once the economy recovers, while at the same time underlining moving forward with deep and comprehensive public sector reforms. Other options toward fiscal viability entail large fiscal adjustments. Whichever option is pursued, conservative fiscal policies will preserve Russia’s competitiveness and limit “Dutch disease” by avoiding excessive reliance on natural resources.
The second important condition for achieving sustained growth is to anchor inflation at a low and stable level. This can be achieved through higher domestic saving and investment. To this end, formal inflation targeting must become a goal of the government. The Central Bank has been making progress on the technical preparations for formal inflation targeting. Encouraging recent examples include increased exchange-rate flexibility and more public statements explaining interest rate decisions.
Russia must now concentrate its efforts on how to foster sustained growth. For the near term, the government’s strategy on the banking and budget sides should aim to facilitate an early recovery and protect stability. Russia has vast economic potential, and unleashing it will require a deliberate and broad economic strategy that encompasses sound macroeconomic policies and structural reforms.
Odd Per Brekk is senior resident representative at the International Monetary Fund in Moscow.

Statistics: Ukraine sees 0.8 percent inflation in September

Consumer prices in Ukraine in September 2009 renewed growth after a two-month seasonal halt: inflation last month was 0.8%.
As the State Statistics Committee reported on Tuesday, consumer prices have grown by 9.1% since the beginning of the year.
However, inflation in September 2009 from September 2008 slowed down to 15% from 15.3% in August 2009 from August 2008 and 15.5% in July 2009 from July 2008.

Putin Says Privatizations Will Be at Market Price

MOSCOW — Russia must sell stakes in state-run companies at market price when it launches a new round of privatizations to help pull the economy out of its first recession in a decade, Prime Minister Vladimir Putin said.
Putin, chairing a meeting on Russia's privatization strategy on Tuesday, said potential investors should not be offered any discounts to the market value of companies put on the block.
"Privatizations must neither be free nor privileged. If federal property must be sold, it should be sold at the real market price, without any discount," Putin said at the opening of the meeting.
Putin has promised to launch a new Russian privatization drive. Officials have said minority stakes in shipping firm Sovkomflot, agricultural equipment leasing firm Rosagroleasing and some sea ports and airports could be first up for sale.
Finance Minister Alexei Kudrin said on Monday that Russia should reduce state and regional authorities' ownership of business to 30 percent or less from about 50 percent currently.
Putin said the state had widened its presence in the economy during the financial crisis, which has pushed Russia into recession following a decade of oil-fuelled economic boom.
"It was the natural reaction of the state to the private sector's inability, at times, to cope alone with their growing problems in conditions of financial crisis, and a result of the private sector's urgent appeals to the government for help.
"We are looking at privatization as one of the key tools of structural reform in the real economy," he added.
"In each case, we must thoroughly examine how realistic the need to attract additional investment is, whether positive changes can occur within a company and whether interests of national security are catered for — especially if dealing with strategic enterprises."

Foreign Media Fret Over Big Rent Hike

Many of Moscow’s foreign media are worrying about rising costs after the Foreign Ministry’s property department notified them that rental rates would go up sharply next year.
The notices, sent by e-mail last week, declared that the hike would be by 50 percent to 100 percent, foreign media representatives said Monday.
“We were told to pay 70 percent more, and there was absolutely no reason given. It was just shocking,” the bureau chief of a major European news organization told The Moscow Times, requesting anonymity because he was not authorized to speak publicly about the matter.
He said the notice had not been totally unexpected since other tenants had been hit by such hikes before. Yet he said now was “the worst possible time — in the middle of a crisis where we see that rent is going down everywhere.”
The property department, more commonly known by its Russian acronym UPDK, rents out apartments in more than 20 addresses in Moscow and manages about 1 million square meters of office and apartment space, according to its web site, Updk.ru.
Many of its tenants are foreign diplomats and foreign media, which under Soviet restrictions had little choice but to rent UPDK premises.
After the Soviet breakup, UPDK remained popular because its rents often were below market rates, and some organizations said they paid about $240 per square meter per year.
“We are getting a bargain here and hope to continue that,” said another Western bureau chief, speaking on condition of anonymity as to not jeopardize his bargaining position.
Most tenants said Monday that they suspected that the property department was under pressure to increase income after state revenues had been dented by the crisis.
While foreign media representatives interviewed for this article said they did not suspect that any political motives were behind the rent hikes, political pressure has been reported before. A German correspondent said he was gently asked to write more favorably about Russia during rent negotiations in 2006 and 2007. After this, his rent was effectively increased by 100 percent over the course of more than 12 months, the correspondent said Monday, requesting anonymity because he feared being targeted by another rent hike.
A woman who answered the phone at the property department said nobody was available for comment immediately. She added that the department was planning a hearing with foreign media representatives, organized in the Foreign Correspondents’ Association.
The association’s president, Adib Al-Sayed, said he hoped a solution would be found, citing many years of “constructive cooperation” with the property department. “We have negotiated with UPDK successfully in the past and hope to reach an agreement that pleases both sides this time, especially with regard to the fact that many media organizations had to shorten budgets because of the financial crisis,” Al-Sayed said.

Alfa, Telenor Agree to $23Bln Merger

Alfa Group and Norway’s Telenor on Monday agreed to end a long-running feud by combining their telecom assets in Russia and Ukraine in a deal that requires Telenor to cede control of Ukraine’s leading mobile operator.
Under the agreement, Alfa Group’s telecom unit, Altimo, and Telenor will have until the middle of next year to create a new venture — a Bermuda-registered Vimpelcom Ltd. — that will incorporate their stakes in VimpelCom and Kyivstar.
“We managed to overcome the main problem, that of mutual mistrust,” Alexei Reznikovich, chief executive of Altimo, said at a news conference. “Trust is often key in business.”
The partners announced the deal, which will establish a company worth more than $23 billion, after Prime Minister Vladimir Putin last week met with Telenor chief executive Jon Fredrik Baksaas and invited more foreign investment in Russia at a conference in Moscow.
Altimo and Telenor went on the warpath after Telenor voted down VimpelCom’s expansion in Ukraine in 2005. The dispute — seen as a test for investor rights in Russia — came up during talks between Putin and Norwegian Prime Minister Jens Stoltenberg in March.
Altimo and Telenor will hold almost equal amounts of equity in Vimpelcom Ltd. — 38.84 percent and 38.46 percent, respectively, they said in a joint statement.
Altimo will own a 43.89 percent voting stake, more than Telenor’s 35.42 percent. Even so, each company will be able to nominate three directors to represent them on the nine-member board. The remaining three seats will go to independent directors. Neither Telenor nor Altimo will have veto power.
The partners appeared unsettled about one key detail that has marred their relations in the past months: the lawsuit against Telenor filed by Farimex, a tiny VimpelCom investor.
On orders from a regional Siberian court that ruled in favor of Farimex, bailiffs have seized Telenor’s stake in VimpelCom and are preparing to sell it to compensate VimpelCom to the tune of $1.7 billion for having lost a chance to capture the Ukrainian market.
Farimex claimed that Telenor-appointed board members hindered VimpelCom’s expansion into the Ukrainian market in 2005 by blocking its purchase of Ukrainian Radio Systems, an asset that VimpelCom later acquired anyway. Ukrainian Radio Systems, or URS, has been loss-making for VimpelCom through 2008.
Alfa has denied any connection to Farimex, but the case is widely seen as a tool to put pressure on Telenor to either unite its assets with those of Altimo, or fully divorce them.
Reznikovich said the Farimex case was not part of the deal. Telenor chief executive Jon Fredrik Baksaas reiterated Monday that Farimex must cancel its complaint before the deal with Altimo could be concluded.
The next hearing of Telenor’s appeal in the case is scheduled for March. Lawyers have said the Siberian court ruling in favor of Farimex defies the law in that shareholders cannot be held legally responsible for decisions made by board members.
An upsetting aspect of the deal for Telenor is that it will surrender its 56.5 percent stake in Kyivstar and also likely its strong operational influence on the leading Ukrainian mobile operator, said Martin Hoff, a telecoms analyst at Arctic Securities, an investment bank in Oslo, Norway. This means that Telenor will no longer consolidate Kyivstar earnings into its accounts, starting next year, he said. Even so, Kyivstar may derive additional profits from a potential merger with URS, Hoff said.
Reznikovich said there were no current plans to combine the two firms.
If Kyivstar and URS merge, it will mean less competition on the Ukrainian market and allow for cost savings, Hoff said. In addition, Telenor, which has been good at supporting growing operations, will not be able to apply this advantage in Ukraine, one of the countries worst hit by the recession, Hoff said.
The deal also valued the unlisted Kyivstar at $5.2 billion, which is a good number for Telenor, Hoff said. VimpelCom’s latest market valuation was $18.2 billion, he said. “My conclusion is that the pressure Altimo and Farimex have put on Telenor has not resulted in Telenor having to accept poor terms on the deal,” Hoff said.
Konstantin Belov, a telecoms analyst at UralSib, agreed that the deal was fair. “It’s a good result for everybody. The terms are quite reasonable,” he said. “Evidently, both sides initially counted on a more favorable outcome for themselves.”
Telenor’s Oslo-traded shares surged ahead 14.6 percent on the news to close at 72.45 krones. VimpelCom’s New York-traded American Depository Receipts reacted in kind, closing up 9.14 percent at $19.58.
The deal will put the heavily indebted VimpelCom on a stronger financial footing because Kyivstar has virtually no debt, Alexander Torbakhov, VimpelCom’s general director, said at the news conference.
The partners chose to settle any disputes in London under New York law, they said in a statement.
Vimpelcom Ltd., headquartered in Amsterdam, will be listed on the New York Stock Exchange. Partners will select a chief executive for the new company by the end of December, Reznikovich said. Vimpelcom Ltd. will consider expansion in Asia and Africa, he said.
Telenor currently holds 30 percent in VimpelCom, while Alfa has 44 percent of the voting stock. Alfa is a minority shareholder in Kyivstar.

Crisis Still Grips Ukraine Amid IMF Jitters

KIEV, Ukraine -- One year after the economic crisis plunged Ukraine into one of Europe's deepest slowdowns, the country's economy remains fragile amid fears the IMF may suspend billions of dollars in credit.
The International Monetary Fund may not release the next tranche of its pledged 16.4-billion-dollar (11.2-billion-euro) loan to Ukraine due to fears over the government's control of the budget deficit and inflation, analysts and officials say."There is a considerable risk that the release of the new tranche could be delayed until the start of 2010," said Mykyta Mikhailichenko, an economist at Concorde Capital, an investment fund in Kiev.Ukraine, one of world's hardest-hit countries by the crisis, was the first country to get IMF help last year, a shocking setback for an economy that had enjoyed strong growth of around 7.0 percent per year from 2000 to 2007.The economy ministry is now forecasting a contraction in Gross Domestic Product (GDP) of 10-12 percent in 2009 after a dramatic fall of over 20 percent in the first quarter.So far the Washington-based IMF has released three tranches worth a total of 10.6 billion dollars.But the release of the next tranche of 3.8 billion dollars, due in November, is uncertain because the government has been dragging its feet in implementing unpopular measures demanded by the Fund.In particular, the government has been reluctant to raise prices for natural gas and electricity, moves that would be politically risky ahead of presidential elections set for January 2010, Mikhailichenko said.The IMF is also unhappy about a bill under consideration that calls for 1.15 billion dollars to be spent on preparations for the Euro-2012 football tournament."If the authorities conduct the policy that leads to inflation and undermines stability of (the) banking and financial system, we cannot support that," the IMF's top representative in Ukraine, Max Alier, said in an interview with the Kontrakty business weekly."We are prepared to provide assistance to Ukraine and be partners of Ukraine in successfully overcoming the crises, but we are not prepared to support a policy that deepens the economic crisis."Ukraine's government submitted a draft budget for 2010 last Tuesday that was based on a deficit equal to just under 4.0 percent of total economic output, in line with IMF demands.But the opposition Regions Party criticised the document as unrealistic and the Moscow-based investment bank Renaissance Capital said it was based on a "rather optimistic" economic forecast.Officials close to Ukrainian President Viktor Yushchenko have expressed doubt about the IMF's continued support."I believe they won't give anything else," the deputy head of Yushchenko's administration, Olexander Shlapak, said last week.Yushchenko is expected to run in the January 2010 election, as is his bitter political arch-rival, Prime Minister Yulia Tymoshenko.If the IMF halts its support, "Ukraine would find itself in a difficult situation, without money, with a collapsed currency ... and a paralysed economy," the business weekly Investgazeta wrote."The suspension of cooperation with the IMF is a great danger, above all for the financial sector," said Olena Belan, an analyst with the Ukrainian investment fund Dragon Capital.An IMF cutoff could push the government into a "considerable monetary emission" to cover its deficit, Belan said.That would further weaken Ukraine's currency, the hryvnia, after it lost over 40 percent of its value against the dollar in the past year.Others warn that the end of IMF support would tarnish Ukraine's image abroad."This is a very negative signal in the eyes of investors," said Dmytro Boyarchuk, head of CASE Ukraine, an economics research centre in Kiev."Nobody will want to work with a country that the IMF does not want to cooperate with anymore."But indicators have emerged of a gradual improvement in the economy with, activity picking up in the crucial metals sector where production rose 15.3 percent in July from the month earlier."We think that Ukraine has hit the bottom," Renaissance Capital said in its latest report on the Ukrainian economy, saying there was now "macroeconomic evidence of a real economy recovery, at a basic level."With the economy contracting by 18 percent year-on-year in the second quarter compared with a 20.3 percent fall in the first quarter, Ukraine recorded quarter-on-quarter GDP growth in the April-June period.

Putin Calls For More Private-State Partnerships

Prime Minister Vladimir Putin called for more public-private partnerships to pull Russian regions out of the crisis faster and to free one-industry towns from their “economic trap.”
“The economy … is demonstrating clear signs of recovery, so we should pay more attention to questions of development,” Putin said at a government meeting on public-private partnerships in the Tula region town of Novomoskovsk.
State statistics showing seasonally unadjusted quarter-on-quarter economic growth of 7.4 percent in the second quarter have prompted the government to revise next year’s production forecast, while President Dmitry Medvedev has proposed to “start looking at postcrisis development.”
Among the ways to make the partnership model more attractive to business, Putin listed state guarantees, infrastructure bonds, subsidizing interest rates on bank loans, and helping with access to land. The government should make sure money for public-private partnerships is “not sitting as dead weight on bank accounts but working to stimulate production,” Putin said.
The government plans to allocate 75 billion rubles ($2.5 billion) on infrastructure bond guarantees this year, and increase the amount to 100 billion rubles in 2010, Deputy Finance Minister Alexander Novak said at the meeting.
“We should pay special attention to one-industry towns, many of which are in a kind of trap today,” Putin said. “When these towns were created, nobody thought of possible problems.”
Putin’s trip to Novomoskovsk also included visits to factories belonging to fertilizer producer Eurochem and consumer goods conglomerate Procter & Gamble. Eurochem is investing 6 billion rubles into expanding production of carbamide to 2,000 tons a day at its Novomoskovsk Azot facility and to convert output to granulated products that could be exported to Europe, Eurochem director Dmitry Strezhnev told reporters. Production will begin in the fourth quarter of 2010, he said.
The town won praise from Putin for a public-private partnership to develop an industrial cluster with improved transport infrastructure, where Azot and Procter & Gamble are investing a combined 6.2 billion rubles. The project’s total cost is more than 46 billion rubles, and 8.65 billion rubles will come from the Russian Investment Fund, Tula Governor Vyacheslav Dudka said.

Scandinavia to open 25 fish mini-markets in Kyiv region by end of 2009

Kyiv-based Scandinavia company, a large operator on Ukraine's fish market, is to open 25 fish mini-markets under the Rybny Domik brand in Kyiv region and one specialized fish store in the city of Kyiv by end of 2009, President of the Scandinavia company Olena Yakymenko has said.
"We plan to develop our own chain of mini-markets and open a specialized fish store in the city of Kyiv," she told reporters in Kyiv on Tuesday.
She said the mini-markets, the areas of which would be between 30 and 50 square meters, would be opened at railway stations. Investment in one outlet will range between $15,000-20,000.
She said the fish mini-market project is a pilot one in Kyiv, and if it is a success, it will be launched in other regions.
In addition to fish, the mini-markets will offer related products.
Scandinavia has been operating on the Ukrainian market for 12 years. It is among the leaders on the Ukrainian market of sea fish and seafood. The company incorporates importer companies, a logistics center and refrigerated warehouses.

Ukraine's underlying inflation in August remains at 0.5%

Underlying inflation in Ukraine in August 2009 remained at the level registered in July 2009 – 0.5% compared to 0.9% registered in June 2009 and 0.6% registered in May 2009, said the State Statistics Committee on Tuesday.
Underlying inflation January through August 2009 hit 11.3%, whereas consumer prices in general grew by 8.2% in the eight months, however in July and August they declined – by 0.1% and 0.2% respectively.
Underlying inflation does not cover short-term irregular changes in prices influenced by various factors of an administrative, event-based or seasonal character. For instance, it does not include changes in the price of food and energy.
The State Statistics Committee started calculating underlying inflation from the beginning of 2008.
In 2008, underlying inflation was 21.3%, while consumer prices increased by 22.3%.
In August 2008, underlying inflation was 0.7%, whereas in the eight months of 2008 it was 13.9%

How low will it go?

Vladimir Tikhomirov, Chief economist UralSib
The rouble will not collapse. Russia has an administered currency, which means that any major changes in the rouble exchange rate could be triggered by market movements to the same extent that they could come from policymakers' decisions. This is a major risk factor for investors, and the heritage of last year's devaluation is likely to remain embedded in investors' minds for quite some time. However, we believe that in the coming months the chances of the rouble breaking out of the trading corridor that was set by the Central Bank (RUB26-41 to USD/EUR basket) are close to zero. By the end of the year, we expect the rouble to trade at its current level of RUB31-32/USD and the US at $1.45 /EUR.

Vladimir Osakovsky, Chief economist UniCredit
We think that the rouble is likely to remain under pressure in the remainder of the year, mostly due to continued inflow of fresh rouble liquidity from the federal budget, which is running an increasingly large deficit. Coming on top of relatively low interest rates and lack of support from rising oil prices, this should push the rouble a little bit further down even from its current levels. Overall, our forecast is that by the end of this year the currency will fall by another 1.5 roubles against the bi-currency basket to some RUB39.5. Taking into account our USD1.45/EUR forecast this implies an exchange rate close to RUB32.8/USD.

Ivan Ivanchenko, Head of Investment Strategy VTB
The rouble is now defined by two major factors. The first is external: the price of oil. Risk appetite and generous liquidity have driven oil prices to above $70/bbl recently, but the fundamentals hardly look supportive. In fact, they are rather bearish near term.
The second factor, luckily, is domestic: Central Bank policy. The current policy choice is a stable rouble, despite the harsh economic reality calling for a much easier monetary policy and a weaker currency. But unless the balance of payments turns into a deficit, the Central Bank is unlikely to change its stance. I think that the markets are pricing in a too-aggressive recovery, and any disappointment would lead to heightened risk aversion which means dollar strength. This would also put pressure on the oil price. So my take is the basket will drift higher, perhaps towards around 40, with the dollar-rouble exchange rate around 35 by the year end.

Anton Struchenevsky, Analyst Troika Dialog
It is absolutely impossible to say, because we will see very high volatility, so I can give only a range. But I think the rouble against the dollar will be between 31and 33. This will be affected by the oil price, and the euro-dollar exchange rate is also very important. The third thing is the level of budget expenditures, and in December we will see significant volatility of the rouble against the basket and against the dollar. The more government money that goes into the economy, the higher the volatility we will see.

Aksakov In Reversal On Ruble

The ruble is likely to strengthen in the medium term because of higher commodity prices, Anatoly Aksakov, a bank lobbyist known for sending the euro down earlier this year, said Tuesday.
The comments mark a sharp turnaround for Aksakov, a State Duma deputy who earlier this month proposed a 30 percent to 40 percent devaluation of the ruble, incurring the wrath of top officials of the ruling United Russia party.
“The global environment favors Russia’s economy, oil prices remain high, so now all the conditions are present for the ruble to strengthen,” Aksakov told a news conference.
He said the main issue for the Central Bank now would be how to withstand future ruble appreciation. Aksakov’s calls for a devaluation earlier this month weighed on the currency.
In February, Aksakov’s proposal for Russian debt restructuring prompted a sell-off in the euro, which fell more than 1 percent versus the dollar. He later backtracked on those comments.
The politician, who heads the Association of Regional Banks, one of the two major banking lobby groups in Russia, is now facing expulsion from the National Banking Council, which supervises the Central Bank.
“I have been appealing for a weak ruble during at least the last five years. I do not know why the reaction was so sharp now,” Aksakov said.

Ukraine Gambling Ban Is Implemented

KIEV, Ukraine -- Following the recent backdown over the presidential veto by President Viktor Kuschenko of the Ukraine, the gambling ban has been imposed with immediate effect in the Ukraine, reports Ukra News. And the ban includes online gambling.
The text of the law was published in the Holos Ukrainy (Voice of Ukraine) newspaper, on June 25, enforcing the vote of the Verkhovna Rada despite President Kuschenko's appeals for a more considered approach, and his unsuccessful attempt to exercise his veto to effect this.The law defines gambling as the activity or organisation of gambling games for profit in terrestrial casinos, via slot machines, at bookmaker’s offices, and in virtual casinos.It also covers any game requiring betting, allowing rewards for wins, and which fully or partially depends on the element of chance.Exceptions include: Lotteries, art contests, billiards, and certain other games such as pickup reward machines that depend on player dexterity or those for charitable causes.The law makes provision for punitive measures against offenders and the confiscation of gambling equipment.