RUSSIA MARCH 2012 ECONOMIC MONTHLY

By Evgeny Gavrilenkov, Troika Dialogue

Domestic demand remains main economic growth driver. Retail sales expanded 6.8% y-o-y in January, while investment increased 15.6% y-o-y, a rapid acceleration from the 6.2% rise seen in 2011. This acceleration appears to be more statistical in nature than based on economics. We believe the official figures understated investment activity in 1H11, so the double-digit y-o-y growth in January can be regarded as merely a result of the understated base.

Russia’s Prime Minister Vladimir Putin charged Monday that the United States pursues its interests to the detriment of world security and served notice Russia would continue to oppose this if he returns to the Kremlin.

At the same time, however, Putin stated that close and trusting relations between Moscow and Washington were of signal importance for the world in turbulent times and made clear Russia wanted such ties if based on mutual respect.

In an lengthy article published in the daily Moskovskiye Novosti a week ahead of presidential elections he is widely expected to win, Putin outlined a broad vision of how he sees Russia’s place in the world and how he would aim to fortify it.

London’s commercial court system, at least 60% of which is rented out to rich Russians and East Europeans, according to the Financial Times. White & Case partner John Reynolds says that he “cannot think of a single [peer group] firm which does not have some Russian-related litigation at the moment.”

The Maslenitsa Russian festival London event takes place from 1pm, today, Sunday 26th February 2012. The event takes place at Trafalgar Square. Admission is free. The traditional festival welcomes the approaching spring and gives the Russian community and friends a chance to fill up on blinis before Lent. London families and music fans can party in true Russian style at the free event.

Glavkino, a new Russian studio complex situated several miles outside Moscow, lifted its curtain last Thursday with a special screening of patriotic movie "August 8th" for the country's president, Dmitry Medvedev. The 108,000 square foot studios will boast Eastern Europe's biggest sound stage. At 9,800 square foot, it is three times the size of the largest sound stage at Mosfilm, Russia's busiest studios. Medvedev commented, "Now we have our own Hollywood -- it is Glavkino."

Ukraine is going to repay more than $12 bln of Sovereign debt in 2012 (domestic and external, including interest) and plans to raise a relatively similar sum from various sources. The country's borrowing program looks very ambitious and can hardly be executed without additional steps being taken by the authorities. We do not rule out the possibility that some decisions may even be made in 2Q12.

We posit that Norilsk Nickel is now entering a new development phase focused on modernizing and refurbishing its Tier 1 but underinvested asset base, which will imply structurally higher capital outlays. The company aims to spend $37 bln through 2025 and its free cash flow - a previously incontestable forte - will now come under a double whammy of lower earnings due to softer commodity prices and ratcheted-up capex. We argue that the company's reduced free cash flow capacity could cap its multiples.

Insufficient terms on investment loans provided for the development of Russia's dairy industry are holding back milk production growth in the country, Deputy Agriculture Minister Shamil Bakhitov has stated. "Dairy cattle farming requires long money with recoupment periods of 10-15 years, but investment loan subsidies are provided for 8 years," he said at the Agrofarm 2012 Exhibition in Moscow.

The Russian government’s decision that Russia’s second largest bank VTB should hold a share buy-back to compensate losses to shareholders in the bank's "people’s IPO" was taken to protect the bank’s reputation in the eyes of society and investors,  in the words of Prime Minister Vladimir Putin. Putin instructed state-controlled VTB last week to devise a buyback plan for the people's IPO, which targeted members of the general public.

Almost 120,000 retail investors in Russia bought shares in May 2007, part of a larger offering in which VTB floated 22.5 % of its stock, raising some $8 bn. Mikhail Zadornov, head of the bank’s retail arm, VTB-24, said that VTB, intended to buy back shares sold in a  "people's IPO" in 2007 at the original offer price of 13.60 kopeks per share, or almost double the current market price. "If you believe that for some reasons it is better for you to get rid of these assets, I can instruct the bank’s management to think about a share buyback scheme from minority shareholders so that you do not sustain any losses,” Putin told participants in the Russia 2012 Investment Forum, addressing VTB minority shareholders.

VTB CEO Andrei Kostin said last week that the plan to buy back shares from some 115,000 minority shareholders would cost 15-18 bn roubles ($480-580m). (RIA Novosti)

It remains the world’s worst nuclear accident and according to one report may have already claimed the lives of nearly one million people but, despite happening over twenty-five years ago, its toxic and deadly legacy still remains.

The Chernobyl disaster in April 1986 occurred when a series of explosions at the nuclear power plant in Ukraine released large amounts of radioactive material into the atmosphere, affecting many areas in Europe and former Soviet republics.