This is bne's Russia chairman’s newsletter, a selection of forward looking stories on development in eastern Europe and the region. Feel free to request topics or ask questions: editor@bne.eu

Contents: Top Story

Sanctions and Ukraine instability hurt the Russian economy Europe will be Russia's hostage over gas supplies for at least another decade Which countries hardest hit by Russian food ban?

Politics – the good

Russian drunk drivers to lose licenses for up to 20 years - report Top managers of bankrupt banks face lifetime ban in Russia Court Softens House Arrest for Opposition Leader Navalny

Politics – the bad

Russian Crackdown on Political Parties Sees Numbers Cut in Half Soldiers' Mothers of St Petersburg NGO listed as "foreign agent" Russian Regulator Seeks Leverage Over Moody's, Fitch and S&P

Politics – the ugly Russian Laundromat washes billions of dollars in Russia, Latvia, Moldova State Officials Buy Up Luxury Moscow Real Estate as Foreigners

Former president of Mezhprombank charged with embezzling over $771m Ex-Bank of Moscow chiefs arrested in absentia Russia's MOESK top exec accused of RUB1bn embezzlement Seized assets of Russia’s anti-corruption official, his deputy estimated at $8m Opposition Leader Navalny's Wife Questioned Suspects placed under house arrest for Ukrainian flag on Moscow skyscraper Four Bolotnaya protestors sentenced to up to four years in jail

Polls, mood, sociology

Putin's electoral rating reaches record 71% Most Russian Students Want to Find Jobs Abroad One in 3 Russians Afraid to Show Criticism in Opinion Polls Russians say Abkhazia and S.Ossetia are independent states and should remain as such Fewer Russians Worry About Inflation Despite Predictions of Higher Food Prices UN losing its authority in Russians' eyes - poll Russians back Putin on Ukraine policy

Russia is the only country here where people don’t get happier as they age.

Banks and Finance

Fitch Russian Banks Datawatch for 7M14 Russian banks may be isolated from SWIFT Risks in the mortgage lending business are rising slowly Russia's Finance Ministry ready to extend deadline for VISA, MasterCard to find local partner Russian government forced to boost the capital of two of its biggest banks as the sector suffers from the economic slowdown LightBank moving fast to bring in Chinese credit market Consumer NPLs up by a third in first seven months of this year Consumer loan servicing volume to overtake new loan volume for first time Russian deposits with foreign banks rising faster than at domestic ones Retail banks are on the brink of busting their prudential limits Profit of Russia's 30 largest banks falls 7% to RUB368.5bn in 6M14 Individual deposits in Russian banks fall, but overall level of deposits unchanged in 1H14 Three banks to merge to make one of Russia's top 15 banks

Economics

Flirting with recession, Russia puts in negative GDP growth for the second consecutive month Ruble hits new low as Ukraine crisis deepens Russian government to toughen control over state companies' investments

European companies may find it hard to return to the Russian market after the Kremlin imposed sanctions on food products Russian economy September: sanctions are manageable, but non-negligible Russia central bank may transfer 75% of profit to budget Russia's industrial growth remains stable Russia August manufacturing PMI 51 vs 51 in July Russian inflation accelerates to 7.6% year-on-year Putin wants new inflation targeting mechanism developed One in three Russian companies are making a loss Russian ministry raises 2014 capital outflow outlook to $100bn Russia's M&A deals down by almost two thirds in 1H14, or is it? Russia ranks sixth in world in volume of gold reserves Russian imports down in first half Russian producer confidence in resource extraction and manufacturing segments unchanged Russian capital investment growth back in positive territory in June Russian retail trade growth slumps in June Russian real disposable income contracts due to sharp drop in entrepreneurial income CBR increases RUB flexibility, one step away from float Russia's budget expenditures may rise due to sanctions and Russia’s response to them

Infrastructure

Russia launches the Power of Siberia gas pipeline to China

Building begins on Moscow's vast new ring road Russian power firms may invest over $19bn in 2014 Russia's Sukhoi, Indian firms to jointly develop cargo plane

ECM Russia to transfer $10bn RDIF fund out of sanctions' reach Russia's Gazprom wants to cancel offer to minorities Russian telecom, media firms' market cap falls 26% in 2014 Russia's leading PE fund Baring Vostok to invest $75m into app GetTaxi Mobius buys stake in NCSP, O'Key, raises Yandex, Mail.Ru Grp ones Oppenheimer funds more than double Russian investments April-June Russia's Sistema may sell 10% in Detsky Mir if no IPO on offer this autumn Global Hedge Fund Equinox Partners is buying Russian stocks Russian withdrawing money from domestic mutual finds and investing in offshore funds Norwegian pension fund is hanging onto its Russian assets Bashneft delayed SPO

DCM

EU mulls a ban on buying Russian sovereign bonds Sanctions hit Russia's ability to borrow abroad VTB bonds rally big time despite sanctions Russia's domestic debt rises 1.2% in Jan-Jul Sanctions-Hit Rosneft Could Get Less State Help Than it Wanted

Moscow Stock Exchange to launch Russian Eurobonds trading this autumn Russian Fin Ministry keeps plans to borrow $7bn abroad in 2015

Sectors

Putin Praises Exxon Alliance as Arctic Drilling Starts Russia May Ban Car Imports If West Imposes New Sanctions, Sources Say AvtoVAZ Cuts Production of Ladas as Russia's Car Market Flops Great Wall Motor starts building $520m car plant in Russia Russian government to underwrite truck maker KamAZ's $1bn debt amid auto market collapse Russian 2014 grain export potential rises to 23m tonnes Medvedev pledges continue support to farm sector, including grain purchase interventions Carlsberg may close 2 breweries in Russia - CEO Russia's pay TV subscriber base rises 10% to 36.4m in H1 Russia has highest growth in mobile subscribers after China Unsanctioned suppliers raise meat prices after Russian food embargo Checks are being carried out at McDonalds' restaurants in several Russian regions Iconic Detsky Mir toy store reopens in Moscow Chinese Haima plans to return to Russian auto market Moody's: Russian oil and gas producers poised to benefit from China energy deals

Top Story Sanctions and Ukraine instability hurt the Russian economy Russia's Economic Development Ministry ramped up its inflation forecasts and halved its 2015 economic growth forecast, adding to signs that tit-for-tat sanctions over Ukraine are seriously harming its economy. The ministry now sees inflation standing at 7-7.5% at the end of 2014, up from its previous forecast of 6% and way ahead of Russia's core inflation of between 4% and 5%. The ministry cited the impact of a ban on Western food imports that Russia introduced in retaliation for Western sanctions for driving up inflation, especially on food, which was keeping inflation high even before the sanctions. Deputy Economic Development Minister Alexei Vedev said that the import ban was expected to add around 1% to the inflation rate this year, and 0.5% next year. That contradicted earlier assertions by some officials that the ban would not lead to much higher prices. He added that a new tax on sales to be introduced next year would also add around 1% to the inflation rate. For 2015, the ministry forecast inflation at 6-7% by the end of the year, up from its previous forecast of 5%. High inflation is starting to hurt consumption, which is one of the

few economic drivers Russia has at the moment. It is also squeezing company profits which are also being squeezed by wage inflation. However, companies are starting to react and have been cutting real wages, even if nominal wages are still rising. This in turn is also depressing consumption. The ministry left its 2014 gross domestic product growth forecast unchanged at 0.5% despite ministry officials having said several times in recent months that they may raise it. But it halved its economic growth forecast for 2015 to 1% from 2%. This follows gloomy economic growth data published in August, which showed that the economy contracted in both June and July, fueling economists' fears that Russia is heading for recession. Vedev said the ministry was cutting growth forecasts for 2015-2017 because of "a strengthening of geopolitical tensions," a reference to the Ukraine crisis which has sunk East-West relations to their lowest ebb since the Cold War. Economists polled by Reuters at the end of last month, before Russia's food import ban, forecast economic growth of 0.3% in 2014, and inflation at 6.5%. Other government bodies do not always see eye-to-eye with the Economic Development Ministry. Deputy Finance Minister Alexei

Moiseyev said Tuesday that his ministry was more optimistic than the Economic Development Ministry about inflation next year but more worried about the oil price, which is crucial for economic growth and the budget. "It seems to us that oil prices are somewhat inflated," he said, predicting that geopolitical

concerns that are presently supporting prices may diminish in future. "Therefore, of course, we're afraid that oil prices could be significantly below the $100 [a barrel] that is forecast by the Economic Development Ministry."

Europe will be Russia's hostage over gas supplies for at least another decade Fitch caused a kerfuffle in August by releasing a report that points out that despite the rhetoric, western Europe will be dependent on Russian gas supplies for at least another decade. Policymakers will have no choice but to continue buying gas from Russia until at least the mid-2020s and "potentially much longer", according to Fitch An estimated 50% of Russian gas supplied to Europe passes through Europe will remain heavily reliant on Russian gas for at least another decade, according to the rating agency. Fitch said a lack of alternative sources meant policymakers would have no choice but to continue buying gas from Russia until at least the mid-2020s and "potentially much longer". Europe already buys a quarter of its gas from Russia, and analysts expect consumption to increase by

a third by 2030 as economies recover from the debt crisis and gas-fired electricity generation replaces old coal and nuclear power. Analysts said it would be difficult for countries to secure alternative sources of supply in the medium term, leaving them at risk of being "held hostage by dominant suppliers", including Russia. "Any attempt to improve energy security by reducing European reliance on Russia would require either a significant reduction in overall gas demand or a big increase in alternative sources of supply, but neither of these appears likely," Fitch said in the report. "Even if coal-fired and nuclear energy were favoured over gas, the impact on energy security would be limited because Russia also supplies 26% of the EU's hard coal and is the sole supplier of fuel rods to nuclear power plants in several countries," it said.

Finland, the Czech Republic and much of eastern Europe rely heavily on Russia for gas, while Germany imports a substantial amount from Russia. Fitch said overhauling Europe's current infrastructure and making the network more resilient to shocks would cost around €200bn (£160bn). Although around half of this can be funded by capital markets, there is a risk that consumers may also be forced to pay for the upgrade through higher energy bills. Fitch said the Trans-Anatolian gas pipeline, which stretches from the Shah Deniz gas field in Azerbaijan to Europe via Turkey, could transport considerable amounts of gas to Europe, although it would not be enough to cover the increased gas demand expected in Europe. Fitch said Azerbaijan's Trans Anatolian gas pipeline could provide an alternative source of energy for Europe once construction is completed in 2018, providing 31bn cubic metres (bcm) of Europe's expected overall demand of around 565 bcm of gas a year by 2026. But analysts

added: "That is not enough to cover the incremental increase in gas demand we expect over the period, let alone replace any supplies from Russia." The International Energy Agency (IEA) estimates that Europe has 13 trillion cubic meters of natural gas in shale reserves. However, concerns about fracking, has led to many countries banning the development of reservoirs in Europe (Source: Fitch, IEA, KPMG) The rating agency also cast doubt over an American-style shale gas revolution in Europe. "We do not expect meaningful shale production for at least a decade by which time it could at best offset the decline of conventional gas production," it said. "We believe Russia and Gazprom would react with lower natural gas prices should they perceive their market share in Europe was at risk," Fitch added. "Europe, despite efforts from Russia to diversify its customer base, would remain a key market and source of revenue and especially profits."

Which countries hardest hit by Russian food ban? Which countries are hardest hit by Russia's food ban? German pork producers are heavily dependent on Russia but as pork has been banned since the start of the year on health grounds, they have managed to find other markets in Europe. However, other countries – notably Finland – are in a much weaker position. Two graphs sum up the situation.

Politics – the good Russian drunk drivers to lose licenses for up to 20 years - report The Duma's lawmakers have proposed toughening penalties for drunk driving under the influence causing grievous bodily harm and death. Driving while impaired by alcohol or a drug causing grievous bodily harm will result in a driver’s license suspension for up to 5 years. In case of death, driver’s license will be suspended for up to 10 years. If more than one person is dead, the convicted driver will face a 20-years suspension of his license, according to the bill. Famous for its heavy drinking and lawlessness, Russia actually has some of the toughest drink driving laws in Europe. The government reduced the minimum alcohol limit to zero – the only country to completely ban all alcohol – but later relaxed the rule to 0.3mg/litre, as too many people were being convicted of drunk driving after taking cough medicine, but otherwise abstaining from any drinks. The Russian government has aggressively been attacking a raft of problems surrounding driving. It has successful launched a campaign to curb the ubiquitious bribing of traffic cops so that it is no longer possible to bribe your

way out of a misdemeanour – or at least it much more expensive as there are real risks on all sides. Also a seat belt ban has been largely observed by drivers as has a new rule to have your headlights on during the day. The data provided by the non-governmental organization Road Safety Russia shows that in 2013 there were 204,000 road traffic accidents in Russia resulting in death or grievous bodily harm. Some 27,000 people died and over 258,000 were injured. Top managers of bankrupt banks face lifetime ban in Russia Russian senators have proposed to prohibit top managers of banks, which go bust from ever holding senior positions in other banks ever again. The Federation Council’s Budget and Financial Markets Committee is advocating the bill which will be submitted for consideration soon. Court Softens House Arrest for Opposition Leader Navalny A Moscow court relaxed the conditions of opposition leader Alexei Navalny's house arrest in August, who has been under house arrest since February in connection with an embezzlement case pending against him.

Navalny now enjoys the privilege of being able to communicate with his co-defendants in criminal cases pending against him, according to the report after his internet was turned back on. Previously, Navalny had only been allowed to communicate with members of his family, certain law enforcement officers and members of his legal team.

Navalny stands accused alongside his brother Oleg of having embezzled more than 26m rubles ($716,000) from a Russian subsidiary of French cosmetics company Yves Rocher. Navalny has claimed that this and a series of other criminal cases launched against him are simply part of an effort to prevent him from engaging in politics.

Politics – the bad Russian Crackdown on Political Parties Sees Numbers Cut in Half The number of political parties in Russia has fallen from 150 in 2013 to 76 today, as the Justice Ministry suspended the registration of six more parties in August. The ministry suspended the registration of the parties "Democratic Choice," "Nonpartisan Russia," "Great Cossack Brotherhood," "Revival of Agrarian Russia," "Fresh View of Russia," and "Morning," according to reports. Vladimir Milov, chairman of "Democratic Choice," said in comments to Moskovsky Komsomolets that his party had met all the requirements for registration. "We have branches in 52 regions of Russia (by law, there should be no fewer than 43), and each of them submits the required reports," Milov was cited Thursday as saying.

"Of course, questions come up periodically with the required documents. In such cases, the activities of the branch are suspended, we receive a recommendation and fix the mistake, and then work goes on. But the Justice Ministry cannot stop the activities of the entire party because of a mistake by one branch," he added. The Justice Ministry's press service confirmed that the registration of five parties had been suspended after they failed to submit the required documents, but no mention was made of "Democratic Choice," Moskovsky Komsomolets reported. Sixty-three parties of 76 registered parties are set to take part in the upcoming municipal elections on Sept. 14. For comparison, in 2013, there were 150 registered parties, according to the report.

Soldiers' Mothers of St Petersburg NGO listed as "foreign agent" The Russian Justice Ministry has registered another two non-governmental organizations (NGO) - Soldiers' Mothers of St. Petersburg and the Institute for Information Freedom Development - as "foreign agents." This is blow for democracy as the Soldier's Mothers organization was set up in the Chechen wars to protest against the government's decision to send green conscripts into battle in the breakwaway region, many of whom were killed. It is one of the few genuine grassroots political organizations in Russia and has been very effective, not to mention embarrassing for the government. Labeling it a "foreign agent" is an effort by the state to undermine its creditability. Putin refers to "Novorossiya" suggesting he could annex more Ukrainian territory

Russian President Vladimir Putin mentioned the word "Novorossiya" in two speeches at the end of August that has sent the willies up the Ukrainian leadership's back. The term is a Tsarist-era term that includes the territory in Ukraine's Donbass region – the most productive part of Ukraine and currently the focus of the fighting. The word literally means "new Russia" and was used when it was part of the Russian Empire, but has since been adopted by Russia ultra-nationalists who want to re-conquer the area. Putin has used the word twice during the crisis. First, he used it in April, about a month after Russia had invaded and annexed the Ukrainian region of Crimea, subtly suggesting that the annexation was justified because Crimea was in Novorossiya and thus inherently part of Russia. He used it again at the end of August just after a peace summit in Minsk where he met with Ukrainian president Petro

Poroshenko. The use of the word is probably designed to turn the screws on Poroshenko and warn him that one of Russia's options is to simple annex part of Ukraine. And if Russia annexed the Donbass, the rump Ukraine would probably not be economic viable.

Russian Regulator Seeks Leverage Over Moody's, Fitch and S&P As part of Russia's counter-sanctions measures that are interfering with some large foreign businesses working in Russia, the Central Bank of Russia said in August that international ratings agencies may soon have to create Russian subsidiaries governed by the Central Bank to continue operating in the country.

The Russian government has already introduced laws that will force credit card companies VISA and MasterCard to set up local subsidiaries and find local partners if they want to keep operating in Russia. The move against the rating agencies is also part of a wider effort to break away from the US-dominated international financial system and create a financial infrastructure that operates outside of the dollar that is not vulnerable to attack or sanctions.

The Central Bank has released draft legislation that would, for the first time, require foreign ratings agencies to receive accreditation

in Russia and register their ratings methods with the regulator.

Politics – the ugly Russian Laundromat washes billions of dollars in Russia, Latvia, Moldova Over the last four years criminals and corrupt politicians laundered some $20bn through a scheme involving Russian, Latvian and Moldovan banksa report from the reportingproject.net said in August. (https://reportingproject.net/the-russian-laundromat/russian-laundromat.php) "Between 2010 and early 2014, organized criminals and corrupt politicians in Russia moved $20bn in dirty funds through this Laundromat's complex cleanse-and-spin cycle made up of dozens of offshore companies, banks, fake loans, and proxy agents. The process was then certified as clean by judges in the tiny Republic of Moldova. The newly cleaned funds were then spread across Europe," the report said. The use of dodgy bank transfers came to light following the financial crisis in Cyprus. The problem is that banks making a transfer are supposed to report the identity of the beneficial owner to the receiving bank, but transfers made from Moldova – widely seen as

fronting for Russians – rare give full information. However, once the money is in a Cypriot bank it is inside the EU system and has effectively been 'washed.' "The key to the system was the involvement of Moldova, a country caught between its aspirations to join the European Union and its history of close ties to Russia. The scheme used Moldova to both provide legal protection against regulators through the country’s judicial system and a means to inject the illegal money into the European Union's financial systems," the report said. That may change as tolerance for money laundering schemes is fading fast. An investigation into the scheme has begun in Moldova. The report lays out the details of how the scam works: A typical transaction began with two companies, often based in the United Kingdom and with their true ownership obscured in the offshore mists of a tax haven. The companies sign a bogus contract in which one agrees to lend the other large sums, although no money ever actually changes hands. It is likely that both companies are

owned by the same owner but that ownership is hidden behind “proxy” figures. The tax haven of choice in this operation was Belize, and the sums involved in each transaction were huge, ranging from US$ 100-800m. The contracts in each case stipulated that the debt was guaranteed by companies in the Russian Federation, almost always run by a Moldovan citizen. This Moldovan gave the operation access to the courts in Moldova, which would ultimately permit the movement of the dirty money into the legitimate banking system. The next step was for the “borrowing” company to refuse to repay the debt to the “loaning” company, thereby shifting the debt to the Russian companies who had guaranteed the loan. The “loaning” company then would take the matter to court in Moldova where a judge would issue an order “certifying” the debt as real and

ordering the Russian company to pay. Then the Russian company would transfer dirty money into an account set up by the “loaning” company. For every case, the money was sent to an intermediary bank called Moldindconbank—an institution connected to one of the country’s most powerful businessmen. Finally the money was wired to the “loaning” company’s account, which was always at the Latvian-based Trasta Komercbanka. And once it is in Latvia, voila! It is in the European Union, backed by a court order and clean and ready to use. The OCCRP investigation found that 19 Russian banks, some already being investigated for money laundering, used The Laundromat.

State Officials Buy Up Luxury Moscow Real Estate as Foreigners A third of all elite housing in Moscow was owned by government officials at the end of first half of 2014, a 6% increase since the start of the year, according to a report published Tuesday by real estate consultancy Kalinka Group. The number of elite real estate deals clinched by state officials in Moscow grew by 250% in the

first six months of 2014 compared with the same period last year, the report said. At the same time, the number of foreigners buying elite property in Moscow fell 500% — just 2% of all posh Moscow apartments sold in the first half of 2014 went to expats. Analysts at Kalinka said the demand for Moscow elite real estate among Russian officials grew due to the difficulties they now face when trying to buy

oversees property, which they are not allowed to own any more under new patriotism/antigraft laws introduced by the Kremlin. Out of the nearly 500 government officials who declared oversees property in 2013, only a handful have sold their foreign premises since the ban came into effect, while 30 officials have since been added to the list. Former president of Mezhprombank charged with embezzling over $771m 1/2 Alexander Didenko, former president of the International Industrial Bank (Mezhprombank), has been charged with embezzling over RUB28bn ($771m), official Investigative Committee spokesman Vladimir Markin said in August. Mezhprombank (International Industrial Bank) was an old school style bank that survived through to the naughties and its owner, Sergei Pugachev, was close to several high ups in the Kremlin, including Putin. However, it ran foul of the 2008 crisis and was not bailed out by the state. The bank’s operating license was revoked in October 2010 by the Central Bank over failure to comply with the regulator’s requirements or to satisfy creditors’ claims, effectively killing the last 1990s oligarch bank, leaving only those that have transformed into real commercially based banks. In November that year Mezhprombank was declared

bankrupt. At that time, the bank owed RUB31.8bn to the Central Bank while the creditors’ claims totalled RUB85bn ($2.3bn). Pugachev was arrested in absentia by a Moscow court and put on the international wanted list in December 2013. Dmitry Amunts, deputy head of the Federal Agency for Tourism, stands accused of aiding and abetting Didenko. According to investigators, Didenko and Amunts were members of a criminal group that embezzled the funds from Mezhprombank in 2008-2009. Ex-Bank of Moscow chiefs arrested in absentia Another 1990s-era banker was convicted in absentia in August also on embezzling charges. Moscow's Tverskoy District Court issued arrest warrants for fugitive former chairman and vice chairman of Bank of Moscow, Andrei Borodin and Dmitry Akulinin, both who are thought to be in London. Bank of Moscow was operating for the Moscow City government and widely believed to be a front for then-Moscow mayor Yuri Luzhkov and his billionaire businesswoman wife Yelena Barturina. The bank went bust following the 2008 crisis and was taken over by state-owned VTB Bank. However, it emerged that Borodin had embezzledbns of dollars from the bank and the Central Bank was forced to issue more credits to

rescue the bank in 2010 than it was forced to spend to rescue the entire banking sector in the worst of the 2008 crisis. Borodin and Akulinin, along with several other former executives of the bank have been charged with large-scale embezzlement and misappropriation of over RUB1bn (about $30m). Russia's MOESK top exec accused of RUB1bn embezzlement The director of logistics and purchases department at Russia's Moscow United Electric Grid Company (MOESK), Kharris Ravilov, and employees at a number of companies have been accused of embezzling over RUB1.1bn from MOESK, the Investigative Committee said in August. Ravilov is on the run from investigators and has been put on an international wanted list. The accusation comes as part of a larger campaign against companies in the power sector which Putin called the "most corrupt sector in Russia" in the winter of 2012. The state is attempting to clear out corruption in the sectors where the state intends to invest the most money in the coming years.

Seized assets of Russia’s anti-corruption official, his deputy estimated at $8m

The seized property owned by Denis Sugrobov, who headed the Economic Security and Anti-Corruption Department at the Interior Ministry, and his deputy Boris Kolesnikov, has been estimated at over RUB300m ($8.3m), according to reports in August. The court's press secretary said the assets included 11 items of real property owned by Sugrobov on the list including apartments and parking lots. Amongst the property is a downtown 1,500-square-meter loft apartment worth about RUB214m ($6m), that were registered to aides in an effort to avoid the law on disclosure of property by state officials imposed by prime minister Dmitry Medvedev. Sugrobov reportedly tendered his resignation after the Russian Investigative Committee and the Federal Security Service (FSB) searched offices of four of his subordinates. Bribe extortion and power abuse cases were launched

against them. On May 15, Sugrobov was charged with organizing a criminal gang, power abuse and bribery. Kolesnikov was arrested in February. No charges had been filed against him when he jumped out of a window during questioning at the Investigative Committee in June. Later the Basmanny District Court said no evidence was found of assisted suicide. Opposition Leader Navalny's Wife Questioned Yulia Navalnaya, the wife of opposition leader Alexei Navalny, was questioned by federal investigators Monday in a move the couple referred to as an act of "intimidation." The Investigative Committee called Navalnaya, 38, in for questioning in connection with a piece of street art that investigators believe was stolen by affiliates of her husband, she said. The work in question — a diptych by artist Sergei Sotov titled "Good/Bad Man" — depicts two people embracing various vices and virtues. The work had been displayed on a city street in central Russian city of Vladimir. Sotov is known for creating satirical works and then placing them in public spaces. Navalny has said the artwork was given to him as a gift by a friend, Georgy Alburov, who had found it in the street.

Suspects placed under house arrest for Ukrainian flag on Moscow skyscraper A Moscow-based Ukrainian "roofer" (someone that likes to film himself in acts of daring-do climbing on the roofs of Moscow climbed to the top of one of the seven Stalin-era skyscrapers and painted the star on top in the colours of the Ukraine flag on flag day at the of August. Predictably he was arrested and charged with "hooliganism."

Moscow’s Tagansky District Court has placed four young people who allegedly placed Ukrainian flag on the spire of the city's skyscraper under house arrest. The Ukrainian flag was placed on the spire of the skyscraper on Kotelnicheskaya Embankment in central Moscow. The Soviet star on the spire was painted in the national colours of Ukraine. The authorities painted the star yellow again the same day. The roofers now face seven years in prison if convicted. All suspects pleaded not guilty to the charges brought against them.

Four Bolotnaya protestors sentenced to up to four years in jail Moscow's Zamoskvoretsky District Court on Monday found four opposition activists guilty of participating in Moscow's May 2012 riots, using violence against law enforcement officers and sentenced them to terms ranging from 39 to 42 months. The opposition claim that the police provoked the violence to use as a pretext to crack down on the protectors and that the convicted protestors are prisoners of conscience. The court sentenced opposition activists Alexei Gaskarov and Alexander Margolin to 3.5 years in prison each. Ilya Guschin was sentenced to 2.5 years in prison.

Yelena Kokhtareva received a 39-month suspended sentence. Over 400 people were arrested and scores injured in the Bolotnaya Square protest that turned violent in May 2012. Dozens were later charged with inciting mass riots and using violence against law enforcement officers. These convictions follow on from February 24, Moscow’s Zamoskvoretsky District Court sentenced eight activists to prison terms of three to four years in prison for participation in the riots. Ten suspects were pardoned pursuant to a broad amnesty spearheaded by Russian President Vladimir Putin in commemoration of the 20th anniversary of the Russian constitution at the end of 2013 and the beginning of 2014.

Polls, mood, sociology Putin's electoral rating reaches record 71% The electoral rating of Russian President Vladimir Putin has reached a record 71%, VTsIOM (Public Opinion Foundation) pollster said at the end of August. Some 71% of Russians said they would vote for Putin if presidential elections were to be held on the nearest weekend, the pollster. This

up from 68% of the respondents who said the same in July.

Only 6% of the respondents said they would vote for Liberal Democratic Party leader Vladimir Zhirinovsky and 4% said they would support Communist Party leader Gennady Zyuganov. Some 82% of Russians said they were satisfied with Putin's work, the pollster said, down from 87% in June – the first fall in a year – according to the Levada Centre. In addition, 64% of Russians believe "things in the country are going in the right direction," down from 66% at the start of the month. Most Russian Students Want to Find Jobs Abroad Three of every four Russian university students would prefer to work abroad rather than in Russia, according to a survey conducted by Career.ru. The survey revealed that 77% of Russian students found the prospect of overseas employment more appealing than working at home. Those most hopeful for overseas jobs were students completing their degrees in marketing and the humanities, the survey showed, while those studying medical and pedagogical degrees were more inclined to stay in Russia. Half of the survey's respondents attributed their desire to find employment overseas to a higher standard of living there, and 36% were prepared to relocate for the long term.

46% of respondents cited Europe as their ideal destination, while 10% said they were aiming to move to the US. One in 3 Russians Afraid to Show Criticism in Opinion Polls About a third (28%) of all Russians worry they would "probably" or "certainly" face punishment by the state if they disclosed critical views in polls, according to independent pollster Levada Center. However, another 61% said that such persecution would be "unlikely" or "impossible," the report said. 11% gave no answer. Also, about a third respondents appeared to be generally hesitant or reluctant to exercise their freedom of speech where views about government policies are concerned. A total of 6% said they were unable to speak freely about government policies, and another 28% said they could speak "with some restrictions" and "not everywhere," the poll showed. Russians say Abkhazia and S.Ossetia are independent states and should remain as such Abkhazia and South Ossetia have been referred to independent states by 58% and 55% of Russian citizens, respectively, Levada Center said. 52% of respondents believe that Abkhazia should remain an independent state, 22% of those

polled called Abkhazia a part of Russia, 25% said that Abkhazia should join Russia, 9% referred to the republic as a part of Georgia, and 8% said that it should enter Georgia. As far as South Ossetia is concerned, 51% of respondents said that it should remain an independent state, 22% referred to South Ossetia as a part of Russia, 24% of those polled said that South Ossetia should join Russia, 11% described as Georgia's territory, and 8% said that it should join Georgia. South Ossetia declared its independence from Georgia immediately after Tbilisi's armed aggression in early August 2008. Russia and several other foreign countries have recognized South Ossetia and Abkhazia as independent states. Fewer Russians Worry About Inflation Despite Predictions of Higher Food Prices Fewer Russians are concerned about inflation than they were a month ago, a new poll published in August showed, even thought inflation is now inevitable following Russia's decision to ban certain European food products. The state-run VTsIOM (Russian Public Opinion Research Center) found that between June and July, the number of Russians citing inflation as one of the most pressing problems faced by the country dropped by 10%, from 59% to 49%.

The poll was conducted in late July, before Russia banned an extensive list of Western food products. Respondents were asked to select up to seven answers from a list of issues. Inflation remained the problem cited by the most Russians, followed by the state of housing services and utilities, cited by 46% of respondents, and corruption and bureaucracy at 42%). During the past year, Russians' anxiety about the inflation rate reached its peak in March, when 62% of the population identified rising prices as one of the country's biggest problems. At the time, inflation stood at 6.2%.

Increase in prices (%) [19-25 August, 1-25 August, since the start of the year]

UN losing its authority in Russians' eyes - poll The popularity rating of the United Nations Organization in Russia has practically halved in the last year in Russia. 55% of the respondents polled in 2000 had a positive opinion about the UN role in the contemporary world, but their number is down to 24% at present, according to VTsIOM (Public Opinion Foundation). The number of Russians who think the UN has a significant influence on global affairs is down, from 54% to 34%. Russians back Putin on Ukraine policy Nearly two thirds (63%) of Russians support President Vladimir Putin’s actions on Ukraine, an opinion poll suggests and said Putin's actions in Ukraine will contribute to a peaceful settlement in the neighbouring nation. 47% believed Putin’s main aim was to achieve peace in Ukraine, including in its war-torn Donbass region, VTsIOM found in August.

Russia is the only country here where people don’t get happier as they age.

Banks and Finance Fitch Russian Banks Datawatch for 7M14 A Fitch Ratings banking reports showe that Russia's banking sector continues to rely on the state for funding and that growth is anemic, however, the state has enough resources to prop the sector up for the meantime.

• Corporate lending increased by a high 2% month-on-month (or by RUB536bn) compared with an already strong 1.4% monthly average for January-June. However, more than half of July's growth was due to revaluation of foreign currency loans, as the ruble lost about 5% against the dollar. The underlying growth net of the revaluation effect was a moderate 0.8% (about RUB230bn).

• Retail lending grew at a moderate pace of 1.7% month-on-month (8.9% in January-July) or RUB189bn. The retail growth rate had only a minimal impact from FX revaluation due to the negligible share of foreign currency retail

loans. Over 70% of the increase was accounted for by state banks. Of specialized retail banks only Sovcombank, OTP and Tinkoff grew in line with the market, while others moderately contracted their loan books.

• Customer funding (excluding funds of government entities) increased by RUB332bn in July, of which corporate accounted for RUB111bn and retail RUB221bn. However, net of the foreign

currency revaluation effect there was a net outflow of about RUB145bn, which was a combination of a RUB70bn inflow of retail deposits and RUB215bn outflow of corporate funds.

• Given the underlying outflow of customer funding all of July's real lending growth was covered by funds attracted from the Central

Bank of Russia (up by RUB223bn to RUB5.6 trillion rubles), regional and federal budgets (up by RUB87bn to RUB624bn) and The

Ministry of Finance (up by RUB36bn to RUB656bn). As a result, total government funding

reached a new record of RUB7.11 trillion or 13.7% of total sector liabilities.

• Profitability was poor with the sector reporting only RUB37bn of net income (annualised ROE of only about 7%), dampened by FX losses in many cases. The bulk of income was earned by Sberbank (RUB36bn) and Alfa (RUB9bn), while 42 of the sample 100 banks showed losses, including VTB Group (RUB7.8bn loss), Promsvyazbank (RUB2.9bn loss) and Credit Bank of Moscow (RUB1.5bn loss). Among major specialized retail banks only OTP had a notable positive RUB1bn net result, Tinkoff and Svyaznoy were marginally above break-even and Russian Standard, Sovcombank, Home Credit, Orient Express and Rencredit were loss-making.

• Capitalization remains moderate. As of 1 August, 13 banks from the sample had a total capital ratio (N1, 10% required minimum) below 11%, including four below 10.5%. These were Rencredit (10.2%, a monthly drop of 0.1% due to losses), Moscow Industrial Bank (10.2%, roughly stable), Fondservicebank (10.1%, a drop of 1.1%) and Bank Trust (10.3%, roughly stable).

Russian banks may be isolated from SWIFT Following the clear evidence of Russian regular army operating in the territory of Ukraine at the end of August Britain scaled up his threats of financial sanctions by threatening to block Russian banks from using the SWIFT International messaging service. This remains a threat at this point however it is indicated on the increasing tensions over the Ukraine affair. Should the UK carry out this threat it would not prevent smashing thanks for making international transfers but it would be serious impediment to their business. It would also almost certainly engender the retaliatory actions by the Kremlin against international banks working in Russia. It could even lead to Russian banks moving their financial centres of operation from London to another financial capital. This obviously would be painful to London and so it makes the action unlikely, say analysts. The USA and Europe have already impose limited financial sanctions on Russia that limit their ability to borrow in international capital markets. Russian banks may not borrow money from more than 90 days and the sanctions imposed in July. This measure represented a serious getting up in sanctions. However there has been serious resistance of the idea amongst you politicians. "The problem is that while it would probably work well in the short-term, as in the case of Iran, in the long-term it would

trigger the creation of an alternative system to SWIFT and the setting up of two alternative world transaction systems and nobody wants that," an EU diplomat told news agencies. SWIFT is headquartered in Belgium and works under Belgium law and follows EU regulation. According to the company's website, SWIFT is only a messaging service provider and has no involvement in or control over the underlying financial transactions that are mentioned by its financial institutional customers in their messages. According to SWIFT, Russia was the 15th largest SWIFT member with 73.7m traffic and 1.5% share in the global traffic of all users but had the highest 42.7% year-on-year growth in 2013 amid top-25 countries with share in global SWIFT starting from 0.7% to 17.2% (US) and 19.2% (UK share). There were 602 Russian institutions connected to the SWIFT including 108 Russian-based SWIFT shareholders compared to 10,565 connected institutions throughout the Globe and 2,389 members. S Russian banks expelling from the SWIFT is technically possible. SWIFT disconnected some Iranian banks in March 2012 after an EU resolution was passed in 2012, that prevented banks dealing with the sanctioned Iran.

Russian banks refocus on SMEs and private entrepreneurs After the Central Bank of Russia (CBR) curbed retail lending to consumers at the start of this year to head off and expanding bubble, Russian commercial banks have refocused their attentions on self employed individuals and entrepreneurs in the hunt for profitable business. The entrepreneur is a proxy for retail customers. At the same time income from corporate lending has been falling as has the volume of loans that can be extended to retail customers in the last month. Banks have introduced new products such as the online service "My Business Internet Accounting" from Alfa Bank that is now a top product for the bank. State-owned Sberbank accounts for nearly a half (RUB306.6bn) of all loans granted to self-employed individuals (RUB654.6bn). However, it is also evident from the ranking that private banks started to step up their portfolios rapidly. The leading lenders to self-employed individuals among private banks as of July 1 were Petrocommerz Bank, Tatfondbank, ZAO Raiffeisenbank, Rost Bank, and Bank of Khanty-Mansiysk. These banks have increased loans to self-employed individuals by 50% and more over the past year and by several times over the past four years.

Self-employed individuals prefer to keep their money with state banks, but they start to place funds with private banks step by step as well. Such customers keep up to 50% of cash (RUB92.6bn) with the largest state banks. Sberbank alone holds 37% of all funds of self-employed individuals, which is equivalent to RUB66.7bn. The leading private banks by deposits of self-employed individuals are Uralsib Bank (RUB5.7bn as of July 1, 2014), Alfa-Bank (RUB4.6bn), Promsvyazbank (RUB3.3bn), Rosbank (RUB2.8bn), ZAO Raiffeisenbank (RUB2.5bn), and Avangard Bank (RUB2.2bn). Funds on accounts of self-employed individuals have increased more than 30% over the past 12 months at Alfa-Bank (41.3%) and ZAO Raiffeisenbank (38.6%). Risks in the mortgage lending business are rising slowly Mortgage loan arrears increased 16.6% in the first half of the year as mortgage lending as a whole also accelerated: total housing mortgage loans increased to RUB769.5bn in H1 2014, up by 41.8% from RUB542.5bn in the same period of 2013, according to the figures made public by the Bank of Russia Loans with a down payment under 30% account for nearly a half of the mortgage loan portfolio of Russian banks and loans with a down payment under 20% for a third of the portfolio.

Russia's Agency for Housing Mortgage Agency (AHML, AZhIK) is concerned, saying the decreasing size of the down payments could become a source of risk for the sector as Russia faces the possibility of a housing bubble, driven by credit. All leading mortgage lenders softened their requirements to borrowers in first half of this year the agency said. The number of loans with a down payment of 10-20% tended to rise in 2013, but banks started to cut such schemes in the last 3-4 months of the year in response to growing risks amid the economic difficulties, the agency says. It hasn't affected the quality of the mortgage loan portfolio so far: the%age of loans overdue by more than 90 days is about 2% (7.3% in the retail loan portfolio in general). However, such stability "is supported in many respects by a high growth rate of the mortgage portfolio", the AHML analysts think. If mortgage lending slows down sharply, the quality of portfolios may deteriorate "as it is seen in the segment of unsecured lending."

Russia's Finance Ministry ready to extend deadline for VISA, MasterCard to find local partner The Russian government introduced new laws that would force the two leading US credit card companies VISA and MasterCard to find local partners following a decision by America and Europe to slap financial sanctions on Russia. While Russia is rushing to set up its own national payment system, in the sense has begun to prevail and it has eased back on forcing Visa and MasterCard out of the market. Russia's Finance Ministry is ready to extend the deadlines for Visa and MasterCard to transfer their card processing to the country from October 31, Deputy Minister Alexei Moiseyev. In May, President Vladimir Putin signed a law ordering to establish a national payment system after Visa and MasterCard stopped servicing cards of some Russian banks. Under the law, the systems must pay security deposits equaling 25% of their average daily turnover to the central bank by October 31 in order to continue operating in Russia, but the deposits can be reduced to zero if the systems find a partner among nationally important card operators.

Russian government forced to boost the capital of two of its biggest banks as the sector suffers from the economic slowdown The Russian finance ministry said it would invest RUB239bn ($6.6bn) into two of the countries leading states and banks VTB Bank and Agricultural Bank, as international sanctions cups the banks access to capital. The money will come from the States rainy day fund, the National Wellbeing Fund, which will convert a RUB200bn subordinated loan repaid by VTB into preferred shares, according to a government order. The fund will invest the rest in Russian Agricultural Bank, which with other lenders, received similar loans after the 2008 global financial crisis.

VTB’s Tier 1 capital, a measure of financial strength, may rise to more than 11% from 9.4% at the end of June, which is less than the mandatory minimum of 10%, according to the ministry. VTB’s net income tumbled by 85% in the first half to RUB4.3bn from 27.9bn rubles for the same period a year ago, the bank said August 21, as an economic slowdown in Russia and turmoil in Ukraine hurt its business. The Russian government holds 60.9% of VTB, the bank’s website shows, and 100% of Russian Agricultural Bank. LightBank moving fast to bring in Chinese credit market Russia’s LaitBank (aka LightBank) is moving fast to bring in Chinese credit card after the two market leaders America's Visa and MasterCard ran foul of the Kremlin

following the US decision to slap financial sanctions on Russia. LaitBank says it could issue approximately 10,000 China UnionPay cards in the coming weeks, online newspaper Gazeta.ru reported last week, citing an anonymous source at the bank. A small private bank, Laitbank entered talks with UnionPay in 2012 and finally obtained the shipment of plastic cards from China in August. The bank’s representative also said they are to receive another 50,000 cards over the next two months. Top Russian banks, including Alfa Bank, Gazprombank and Bank of Moscow, are looking for alternative credit card payment solutions after the American companies ran into truble. The Duma has introduced a new law that would require the two companies to hold a dollar of reserves for every dollar the lend that would run into severalbn dollars. The Russian government has softened the terms more recently saying if the companies can find a local partner they can continue their current operations, however, neither card company has managed to find a partner yet. However, Russia's biggest bank Sberbank and the leading issuer of

credit cards, says it plans to develop its own “Pro100” payment system, rather than use an alternative company. A Russian subsidiary of China Construction Bank is also planning to issue 600,000 UnionPay cards in September. UnionPay is one of the world’s leading bank card associations, dominating markets in the United Arab Emirates, Thailand and Turkey. In July, Fen Zhiguang, a China UnionPay representative in Russia said the company plans to increase the number of UnionPay debit and credit cards to twom over the next three years. The representative also mentioned that the company has acquired around 30 new partner banks in Russia. Consumer NPLs up by a third in first seven months of this year Loan arrears of Russian residents increased by 33% to RUB586.7bn between January and July 2014, the CBR reports, or a headline figure of 5.4% of total retail loan portfolio now non-performing. With the growth of income slowing down amid the stagnating economy, the Russian people take up loans to refinance their existing debt.

Retail lending growth has been shrinking since the start of this year: from 28.7% to 19.7% in July. The outstanding debt increased from RUB9.96 trillion in January to RUB10.82 trillion as of August 1, 2014. Loan arrears rose to RUB587.6bn during seven months of 2014 and reached 5.4% of the loan portfolio. Loans provided by banks to individuals made a total of about RUB10.82 trillion as of August 1, 2014, which is equivalent to about 17% of GDP. Thus, loan arrears account for 5.4% of all loans granted. This is not much, according to experts. What is more important is the speed at which loan arrears grow. The rise in retail loans is not a disaster as lending in Russia remains low: retail loans account for about 17% of Russia's GDP versus 80% in the USA and about 90% in France. Btu the structure of the loans is very different.

Loan Debt of the Russian People Region Debt Per

Resident RUB'000s

)

Debt/Average Salary

Ratio

Tyumen region

132.5 2.4

Magadan region

117.2 1.8

Sakhalin region

100.1 1.9

Moscow 99.2 1.7 Krasnoyarsk Territory

97.1 2.7

Moscow region

96.8 2.5

St. Petersburg

90.8 2.3

Buryatia 90.4 3.3 Khabarovsk Territory

89.4 2.5

Amur region

86.9 2.7

Novosibirsk region

86.4 3.2

Tomsk region

80.7 2.5

Ivanovo region

47.5 2.4

Mordovia 46.6 2.4 Source: Russian National People'Front"

In Russia, about 70% of all loans are the most trubled short-term consumer loans, whereas in the west the borrowing is in the safer long-term loans, which only account for 30% of total consumer borrowing in Russia.

Another worrying trend is the share of household income that goes towards financing borrowing: in early 2014, Russian families spent 21% of their income to repay loans on average versus 12% in France, 9.9% in the USA and about 3% in Germany. The CBR estimates that some 41% of Russians now have unsustainable levels of personal debt, or 27m persons.

Consumer loan servicing volume to overtake new loan volume for first time Russians will spend more on servicing old loans than they take out as new loans for the first time this year, the Gaidar Institute said in a report. At the start of this year the Central Bank of Russia introduced new prudential rules designed to slow consumer borrowing growth that has been running at about 40% in recent years and pop an obvious credit bubble that has been building. Banks have been pushing consumer lending hard as one of the very few very profitable products they have to offer at the moment, but consumer lending has fallen sharply this year as a result and was at about 21% by the middle of this year. "Mortgage loans which are granted for longer periods and at low interest rates account for much of the debt in the USA and Europe. In Russia, about a half of borrowers take up consumer loans which are characterized by a shorter period of repayment (up to 12 months as a rule) and higher interest rates which may come to tens of% per annum," the report says. Russian deposits with foreign banks rising faster than at domestic ones Total deposits with Russian banks were up 1.4% in July 2014, a bit less than new deposits made at

foreign banks with branches in Russia. The highest growth was reported by Citibank (+4.5%), Nordea Bank (+8.8%), and OTP Bank (+3.4%). None of these banks increased interest rates on deposits in July. And the weekly inflow into fixed-term deposits in June and July 2014 was twice higher than in the same months of 2013. Analysts believe the increase was due to the sanctions imposed on several leading Russian banks by the EU and US and the threat of more sanctions being imposed on other state-owned banks. In particular individuals' deposits increased by only 0.5% at Sberbank, 1.7% at VTB24, and 1.7% at the Bank of Moscow (now owned by VTB). Inflow of Individuals' Funds into Russian Subsidiaries of Foreign Banks as of

August 1, 2014, RUB bn

UniCredit Bank 79.5 Raiffeisenbank 260.2 Citibank 79.06 Home Credit Bank 202.02 Nordea Bank 9.9 Rosbank 142.3 OTP Bank 55.2 Credit Europe Bank 10.1 Source: the Bank of Russia

Retail banks are on the brink of busting their prudential limits Having rapidly extended consumer credits to the population for the last few years some retail banks are running up against their prudential limits. For example, Leto Bank (part of the VTB Bank Group), decreased its core capital adequacy ratio from 6.44% to 5.78% in July, which is just above the 5% mandatory minimum set by the Central Bank of Russia. The key banking ratio - N1.0, or capital adequacy ratio, which is must be at least 10% - is 10.11% at Leto Bank. Another retail-oriented bank - Renaissance Credit - is in a similar situation (5.67% and 10.17% respectively). Home Credit Finance Bank (second biggest retail lender) is doing best with ratios are higher than required (9.39% and 14.08%). and Russian Standard Bank (biggest consumer lender) does not release its financial information, but reported a fall in profits in the first half. Another big retail lender, Trust Bank, has already had to turn to its shareholders last year: they contributed RUB1.5bn to the bank in June 2013, which helped the bank pull out of the red (profit was RUB1.2bn) and meet the ratio requirements. In April, the bank had to carry out another issue of shares to the amount of RUB3bn, but its capital decreased again.

Profit of Russia's 30 largest banks falls 7% to RUB368.5bn in 6M14 The top-30 Russian banks received a profit of RUB394.7bn for the first six months of 2013, down by 6.6% year-on-year. Assets of the top-30 banks increased to RUB47.1 trillion as of July 1 from RUB47 trillion as of June 1, 2014. In its hay-day pre-crisis the Russian banking sector was making over RUB1 trillion of profits a year and the top 30 banks account for 80% of that. These results represent a fall in profits from the boom years of about a third. Russia's top-30 banks are as follows: Ak Bars, Alfa-Bank, Bank of Moscow, Bank Rossiya, Bank St. Petersburg, Bank of Khanty-Mansiysk, B&N Bank, Citibank, Credit Bank of Moscow, Gazprombank, Home Credit Bank, MDM Bank, Moscow Industrial Bank, NB Trust, Nordea Bank, Orient Express Bank, Otkritie FC Bank, Petrocommerz, Promsvyazbank, Raiffeisenbank, Rosbank, Russian Agricultural Bank, Russian Standard Bank, Sberbank, Sviaz-Bank, Uralsib, UniCredit Bank, Vozrozhdenie, VTB Bank, VTB24. Individual deposits in Russian banks fall, but overall level of deposits unchanged in 1H14 On August 14, the Deposit Insurance Agency released a report on the development of private deposits. In H1 2014, individuals'

funds held with banks decreased by RUB74.3bn versus growth by RUB1.3 trillion in the same period of 2013. Individuals are more concerned over possible depreciation and/or devaluation of their savings.

"A large number of cash savings was reinvested in hard assets. It was evident in the first six months of 2014 that individuals spent their money to buy real estate and cars to protect their wealth against devaluation and high inflation," said Irina Grigorieva, Senior Vice President of Loko-Bank.

The share of large deposits (over RUB1m) in total funds placed by individuals with banks fell 2.5% in H1 2014, the total amount of large deposits unchanged in H1 2014. The share of large deposits to the total amount fell 0.4% points to

39.6%, according to the statistics of the Deposit Insurance Agency. At the same time, deposits to the amount of RUB400,000 to RUB700,000 and RUB700,000 to RUB1m increased. The former rose 12.5% in terms of amount and 11.3% by the number of accounts.

The latter increased 2.8% and 2.9% respectively. Small deposits to the amount under RUB100,000 (down by 8.1% in terms of amount and 0.9% by the number of accounts) showed a weaker growth than the largest deposits over RUB1m. Total funds placed on deposits ranging from RUB100,000 to RUB400,000 decreased 1.5%. Three banks to merge to make one of Russia's top 15 banks Otkritie Bank and Novosibirsky Municipal Bank have will merge with Khanty-Mansiysk Bank to become one of Russia's top 15 banks by assets, Otkritie said in a statement in August. The merger is part of establishing private financial group Otrkitie. The

joint bank will be named Khanty-Mansiysky Bank Otkritie. Chairman of Khanty-Mansiysk Bank Dmitry Mizgulin will be the group's president and the chairman of the board of directors. Current Otkritie's Chairman Yevgeny Dankevich will be appointed as Khanty-Mansiysky Bank Otkritie's chairman. The joint bank will work under two brands: as Khanty-Mansiysk Bank on the territory of West Siberia and as Otkritie Bank in the rest of Russia. Otkritie is one of the country's largest financial groups with assets amounting to two trillion rubles, with the banking business accounting for RUB1.8 trillion of the assets.

Economics Flirting with recession, Russia puts in negative GDP growth for the second consecutive month The economy contracted 0.2% year-on-year in July after 0.1% year-on-year drop in June. Two consecutive contractions are technical recession. Moreover, the figures for June were revised downwards: GDP dropped 0.1% year-on-year in

June versus the 0.6% year-on-year growth reported earlier. The economy grew 0.7% year-on-year in 7M14. The July trade balance data was also weak, as the trade balance surplus contracted 15.7% year-on-year to $11.3bn in July. Exports declined 8.2% year-on-year to $40.1bn in July and imports fell 5% year-on-year to $28.8bn.

Russia's Economic Development Ministry expects gross domestic product (GDP) to grow 0.1-0.2% on the year in July-December, Oleg Zasov, director of the ministry's macroeconomic forecasts department says. The ministry also kept its forecast for Russia's GDP growth in 2014 unchanged at 0.5%, Zasov said.

The outlook for GDP growth in 2015 was reduced to 1% from 2%. For 2016, it was cut to 2.3% from 2.5%, and for 2017 it was cut to 3.0% from 3.3%. Economists saying there are no growth drivers for the economy visible in the near future.

Economic growth was weak in July due to the contraction in the trade balance surplus and deceleration in investments (to a contraction of 2% year-on-year in July after 0.5%

year-on-year growth in June) and construction (minus 4.6% year-on-year in July after 1.2% year-on-year growth in June).

Besides sanctions, which affected economic and entrepreneurial activity in Russia, the key rates were also raised. The Central Bank has increased key rate 250 bps to 8% this year which has resulted in higher rates on loans issued by banks.

Moreover, consumer demand, which had been the key growth driver, has weakened: due to the weak economic growth it has become more difficult for consumers to service debt and to increase it.

Ruble hits new low as Ukraine crisis deepens The ruble hit a record low against the dollar on September 1 falling below $1/RUB37 for the first time as fighting in Ukraine escalated and the speculation turned to talk of war in Europe.

The ruble has been falling all year on the back of the political instability and slowing Russian economy and is down about 20% from January.

While the dropping ruble is indicative of the deteriorating relationships between you and Russia at the same time it also shows that the central bank of Russia has more-or-less made available free-floating currency. The CBR has been moving steadily towards expanding the exchange rate card in as it shifts its emphasis from just defending the currency exchange rate towards inflation targeting. The central bank had plans to completely free the ruble by the beginning of next year. However with the recent expansions in the corridor this point has already almost been achieved.

The politics may be awful however allowing the ruble to move freely is good news for the economy. And appreciating room to act to let off some of the steam produced by all the hot air that is floating around and allow the Russian economy to absorb external shocks – Be they due to political hits or economic problems. Russian government to toughen control over state companies' investments The cash-strapped Russian government is not only looking for new revenues but it is also imposing more controls on its state-owned entities in an effort to make its fewer rubles go further. This is most obvious in the ongoing

crackdown on corruption, but now it is extending into the normal business of managing investments efficiently. The Russian government has developed a road map for the technological and pricing audit of natural monopolies and state firms' investment projects, making almost all of them pass an obligatory audit under the orders of Prime Minister Dmitry Medvedev, who increasingly is playing the role of manager in is ZAO Kremlin, the "closed stock company" of state-owned assets directly under the government's control. Since the beginning of the year all state companies' investment projects exceeding RUB8bn rubles have to pass an obligatory audit, but the government wants to have even stricter control over state firms by making the audit obligatory for all projects with state participation, irrespective of size. The Economic Development Ministry has prepared a draft obliging the companies to hire an independent auditor for almost all their investment projects to be approved by the government, Vedomosti reported. Investment projects exceeding RUB3bn rubles by the strategic companies in which the government has more than a 50% stake and their affiliates also must to pass the audit.

European companies may find it hard to return to the Russian market after the Kremlin imposed sanctions on food products European businessmen are disappointed with the decisions of their countries’ politicians made against Russia, as it will be hard for them to come back to the Russian market, Russian President Vladimir Putin said at the end of August. “The danger for our traditional suppliers is that when one company or another is fixed on a market, in particular, we are talking about the Russian market, it is very hard, almost impossible to budge them. And I think that the European companies, not political circles, as we say in such cases, but namely the businessmen understand this. They are disappointed with the politics of their countries," Putin said. Russia has already threatens to give China what were the European Union's pork import quotas, but Putin admits that Russia’s manufacturers cannot entirely replace the goods that used to be imported from the West. “That is why we are working with other foreign manufacturers from Latin America: Brazil, Argentina, Chile, with our eastern partners and Chinese producers. It was strange to hear that European colleagues ask them not to deliver products to Russia, to Russian market, because it is simply ridiculous, because it is hard to imagine that businessmen will not

use this opportunity to come to our market,” the Russian leader added. Russian economy September: sanctions are manageable, but non-negligible The sanctions battle between Russia and the European Union is affecting the Russian economy on several different levels.

• Access to capital: Russian banks and its leading corporations have been more or less cut-off from access to the international capital markets. In the meantime this is not a problem as the Russian level of indebtedness is rather low and the outstanding debt, including corporate debt, is of a longer maturity.

According to the CBR, aggregate external debt defined as liabilities to non-residents of the Russian private sector (both banks and non-financials) stood at around $650bn as of end 2Q14, while upcoming debt redemptions until the end of 2015 was $160bn. However, these two numbers should be taken with a pinch of salt due to intercompany accounting schemes that in push the headline number up. Alternatively, public data on Eurobonds and syndicated loans suggests the aggregate external debt of the private sector was around $350bn as of end July and

about $82bn (~$59bn from sanctioned entities) are due for redemptions before the end of 2015. Private companies, which are not subject to US/EU restrictions, appear to have retained access to foreign capital markets, even if they are borrowing at higher interest rates. The external debt redemptions of these entities account for about $23bn before the end of 2015. Not all of the countries joined in with the US/EU and, hence, alternative funding markets might have remained open for Russian

borrowers. It is worth noting in this regards that more than half ($41bn) of all upcoming redemptions fall on Rosneft and

Gazprom which accumulated a significant FX liquidity buffer and, moreover, might still have access to pre-arranged funding from Asia.

Secondly, the Russian private sector has accumulated a significant FX liquidity buffer over the past few years. On an aggregate level, this could be seen in the widening gap between FX deposits and loans, which ballooned to over $120bn by the end of July. Also an estimate of the banking sector’s aggregate FX liquidity

position, banks had approximately $87bn in short-term FX deposits ($63bn) and unpledged securities ($23bn) as of 1 August. All of this together suggests that the Russian governments and companies are not going to run out of dollars in time soon.

• Food sanctions: the food sanctions that Putin imposed on European agricultural produce will almost certainly add 1% if not 2.5% inflation this year. That's bad

news for the consumer who is already seeing their real wages is shrink. Economists are predicting an end of year inflation rate of between 7% and 8%.

• No rate cuts: high inflation will also mean that the central bank of Russia will keep interest rates for hire and for longer. The economy could really do with a growth-boosting interest rate cut but that's not on the cards for the rest of this year and possibly longer. Russia central bank may transfer 75% of profit to budget The increasingly cash-strapped Kremlin has been casting around for ways to grow a potential hole in

the budget. Its latest wheeze is to nick the profits of the Central Bank of Russia (CBR). Russian Prime Minister Dmitry Medvedev has ordered the Duma to prepare a bill that will raising the share of the central bank's profit that is allocated to the federal budget to 75% from 50%.

Russia's industrial growth remains stable Industrial output was up 1.5% year-on-year in July and 7m14, according to the State Statistic Service (industry grew by the same 1.5% year-on-year in 1H14). Industrial output, adjusted seasonally and for the number of days in the month, was up 0.6% m-o-m in July. Growth was uneven across products, some posting contraction, while others saw double-digit growth year-on-year. The weaker currency helped domestic industry deliver better results this year than in 2013 (industry grew by a mere 0.5%) as in 7m14 the real ruble weakened year-on-year against the dollar, the euro as well as the trade-weighted basket, by 5.9%, 8.9% and 5.5%, respectively.

Import substitution was clearly seen in some segments of the food industry as well as in the production of durable goods, such as furniture. Increased demand from the government boosted production of railroad cars and trams. Car production was up 3.3% in July, which brought the 7m14 tally to a minor contraction of just 0.7% year-on-year. Chemical and metallurgical industries as well as production of some construction materials saw strong year-on-year growth as well. These data may point to the fact that investment activity is recovering and that investment may turn more positive than we had expected by year end, which could encourage us to upgrade our growth outlook for 2014 in the forthcoming Russia Economic Monthly.

Russia August manufacturing PMI 51 vs 51 in July HSBC and Markit Economics released their purchasing managers’ index for Russia manufacturing in August. The index was unchanged at 51 from 51 in July, but this is up from a year ago of 49.4.

This was the second consecutive month of expansion. New orders rose to 52 vs 51 in July, which is the higest reading since October 2013. Higher frequency Russian economic indicators continue to show some resilience. That said, while not collapsing, a reading just in

positive territory is hardly showing real sign of life - the Russian economy rather continues to flat-line with real GDP growth this year more likely to be in the zero - 1% level. This is well below par, but reflects deep seated structural weaknesses and the lack of new growth drivers. Why are sanctions not hurting that much? Essentially because of the way they are designed - the EU/US would argue that they are not aimed at crashing the economy, but in signalling potential long term pain/drag to recovery and growth/investment unless Russia changes its course. Russian inflation accelerates to 7.6% year-on-year The CPI rose 0.1% in the week ending August 25, while it was flat during this period last year. Thus, year-on-year inflation accelerated from 7.5% to 7.6%. Over the first 25 days of August, inflation was 0.2%, versus 0.1% a year earlier. Although w-o-w inflation of 0.1% on average is normal for Russia, it is abnormally high for August, when deflation in fruits and vegetables slows CPI growth. High inflation was observed in chicken (1.4% w-o-w and 3.8% compared with August 1), pork (0.9% and 1.7%, respectively) and frozen fish (0.5% and 1.0%). We partly agree with the common view that Russia’s ban on food imports from select countries (mostly EU) contributed to inflation last week, but Russian sanctions did not trigger inflation in these segments.

Prices for the above-mentioned products already inflated rapidly in June and July. For example, m-o-m inflation for chicken was 5.6% in June and 4.3% in July, while for frozen fish it was 2.2% and 1.5%, respectively. Thus, the inflationary trends observed in Russia since the beginning of summer continued into August. YTD inflation was at 5.5%, versus 4.5% a year earlier. The annual figure will obviously exceed 7%, but we expect it to remain below 8%. Putin wants new inflation targeting mechanism developed President Vladimir Putin has ordered the Russia's Economic Development Ministry to team up with the Central Bank of Russia and the Finance Ministry to work out an inflation targeting mechanism that will keep inflation at about 4%. The officials agreed that an inflation targeting mechanism and was a good idea however complained that 4% wasn't overly ambitious target. The current central bank's monetary policy sets the 2014 inflation target at 5%, 4.5% in 2015 and 4% in 2016, and the bank allows a maximum deviation from the target of 1.5%. However it is already completely clear that the central bank will miss its target this year – and miss it by at least 2% if not 3%.

One in three Russian companies are making a loss One in three Russian companies are lost money in the first half of this year. The number of loss-making companies increased 0.1% to 32.4% in the first six months of 2014 year on year, Rosstat reports. The number of loss-making companies in extractive industries was 42.8% in the first six months of 2014 versus 41.3% a year earlier. And those producing fossil fuels was 39.9% versus 38.2% in 2013. Besides, 51.8% of companies involved in the production and distribution of electric power, gas and water were in the red. 31.9% of manufacturing companies were in the red in the reporting period versus 31% in H1 2013. The number of loss-making companies in wholesale and retail trade, repairs of motor vehicles, motorcycles, home and personal appliances rose from 20.9% to 21.4%. Russian ministry raises 2014 capital outflow outlook to $100bn Russia's net private capital outflow will reach $100bn in 2014 instead of $90bn expected earlier, Oleg Zasov, director of the macroeconomic forecasts department at the Economic Development Ministry, told reporters Tuesday. “We (earlier) estimated net private capital outflow at $90bn for this

year. But now we increased it to $100bn," Zasov said. The ministry also revised its forecast for net private capital outflow in 2015 to $40bn and in 2017 to $10bn, Zasov said. Russia's M&A deals down by almost two thirds in 1H14, or is it? The volume of M&A deals in Russia tanked by almost two thirds (60%) in the first half of this year, compared to the same period a year earlier to total RUB1.15 trillion ($32.5bn), on the back of the general malaise caused by the Ukrainian crisis. The fall was not all bad news, or at least the data was distorted by the massive Rosneft deal to buy TNK-BP: Rosneft's purchase of TNK accounted for $56.8bn of the total amount of $80.6bn of M&A transactions in 2013, AK&M reports. Counting out the Rosneft deal then the total of M&A deals last year came to $23.8bn, so the $32.5bn of deals done in only the first half of this year is actually a big improvement. Still, the growing geopolitical risks related with the situation around Ukraine have already hurt deal making, and the deal size is getting smaller. Experts say the base amount of the M&A market, excluding the largest transactions (over $1bn), decreased in June, for the first time over the past five months. This indicator reflects M&A transactions in respect of small and mid-cap companies. The base amount was $3.38bn in April and $2.8bn in June 2014. The number

of those who want to cut deals is not changing, but the process of negotiations has become more complicated. Russia has been through this before. Owners used to seeing their companies grow in double digits are not willing to lower prices, while those buying argue that the market is pricing assets at lower rates. The owners, who are usually veterans of several crises, typically choose to sit on their companies confident that the fast growth is not over, only paused, and wait for the market to recover. The upshot is the deal volume goes down and prices for assets shrink less than they ought to. And ironically the number of transactions made by foreign investors with Russian assets increased over the first half of this year, underscoring the disconnect between European politicians and their business leaders when it comes to how they see Russia. Foreign transactions made a total of $7.63bn, up by 1.4 times compared to the full last year ($5.35bn). One explaination for this boom in foreign-Russian deals is that Russian companies are selling their foreign assets to foreigners to bank profits in case sanctions cut them off from their companies. Russia ranks sixth in world in volume of gold reserves Russia ranked 6th in the world in terms of gold in reserves. In late June volume of gold reached 1094.7 tons having increased for the reporting period by 54 tons.

It was the greatest quarterly increase since late 2009, and the second-largest since the record began. As a result Russia stole leadership from China, where gold reserves remained unchanged - 1054.1 tons, World Gold Council (WGC) announced. Russian imports down in first half The value of goods imports in the first half fell to $153bn, a drop of about 5% year-on-year. Imports contracted in nearly all product groups on sluggish demand, ruble weakness and tighter credit markets. About half of Russia’s imports consisted of machinery, equipment and transport vehicles, with the volume of imports from non-CIS countries contracting by 10% year-on-year and even more sharply from the CIS countries mainly due to the Ukraine conflict. Metal imports also plummeted. The value of Russia’s food imports in January-June was unchanged from 1H2013. Considerably less pork meat was imported than a year ago from both CIS and non-CIS countries. Imports of milk and dairy products rose substantially. The value of Russian good exports increased just over 1% year-on-year to $256bn. The bulk of export growth came from major increases in exports of petroleum products such as gasoline. Crude oil exports declined from a year earlier. The EU accounted for

half of Russian goods trade, APEC countries about a quarter and the CIS countries 13%. The biggest drop in Russian trade volume was registered with the CIS countries. The Russian government informed on

Wednesday (Aug. 20) on products taken off the banned import list. Following to proposals brought up last week, e.g. non-lactose dairy products and seed potatoes were removed from the list.

Russian producer confidence in resource extraction and manufacturing segments unchanged In July, producer confidence was unchanged in the resource extraction and manufacturing segments, but improved in the utilities segment Confidence in manufacturing and resource extraction remained at negative 3% and 0%, respectively Confidence in utilities improved to negative 4% from negative 8%

Among those polled in a July survey, the%age of respondents who expected output to grow in the next three months was higher than the%age who expected output to contract – 24% higher in manufacturing and 21% higher in resource extraction compared to 25% and 17% in the June survey Even though we expect to see moderate improvement in the economy, we expect producer confidence to moderately decrease in 2H14 due to geopolitics

Russian capital investment growth back in positive territory in June Capital investment grew 0.5% year-on-year in June after contracting 2.6% year-on-year in May (down 2.8% year-on-year in 1H14)

Seasonally adjusted, capital investment grew 0.8% month-on-month in June after growing 1.1% month-on-month in May. We expect a 6.7% contraction in capital investment this year but it should rebound next year thanks to a moderation in capital outflows, the regulated tariff caps and deferred demand.

Russian retail trade growth slumps in June Retail trade grew just 0.7% year-on-year in June after growing 2.1% year-on-year in May (up 2.7% year-on-year in 1H14) Real incomes contracted 2.9% year-on-year in June after growing 6.5%

year-on-year in May Retail lending growth slowed to 20.9% year-on-year in June The share of food items in retail trade increased to 47.5% in June 2014 from 47.2% in June 2013 We expect retail trade to grow 3.1% this year We expect retail lending growth to slow to 18% year-on-year by year-end

Russian real disposable income contracts due to sharp drop in entrepreneurial income Real disposable income dropped 2.9% year-on-year in June after growing 6.5% year-on-year in May (down 0.2% year-on-year in 1H14) Real income contracted due to a sharp drop in entrepreneurial income Real wage growth decelerated to 1.7% year-on-year in June from 2.1% year-on-year in

May The real wage statistics for May were revised downwards substantially We expect real disposable income growth to decelerate to 0.6% in 2014 Real income growth has been constrained by large capital outflows (we expect $120-130bn in outflows this year) and slow economic growth (we expect GDP growth to decelerate to 0.5% in 2014)

The medium-term risks are rising. The sharp deceleration in retail trade can be at least partly explained by the drop in consumer activity following the uptick in April-May, when Russians converted their savings into goods in response to the rise in inflation. So the Russian economy will moderately improve over the next several months, as suggested by July manufacturing PMI readings

which were well above expectations. At the same time, the medium-term risks have risen due to the recently imposed sanctions and Russia’s embargo on food imports. While the sanctions will likely have a fairly minimal impact this year, the effects may become more evident in the medium term.

CBR increases RUB flexibility, one step away from float Effective from August 20 the Central Bank of Russia (CBR) amended broadened the ruble corridor yet again. It is now so wide that the ruble exchange is all but a freely floating currency.

The floating operational band was symmetrically widened from RUB7 to RUB9; Interventions in sub bands were effectively eliminated, and thus the nonintervention zone has widened from RUB5.1 (37.35-42.45) to RUB9 (35.40- 44.40). The volume of interventions that trigger a 5-kopeck band shift was lowered from $1.0bn to $350mn – its lowest pre-March level.

Russia's budget expenditures may rise due to sanctions and Russia’s response to them Despite all its problems Russia is still running a budget surplus, which reached 1.7% of GDP in 7M14. The federal budget surplus contracted to RUB675.5bn, or 1.7% of GDP, in 7M14 from

RUB718.8bn or 2.1% of GDP in 1H14. The 1H14 figures were revised upward from the previously reported RUB649.3bn surplus. The federal budget surplus reached RUB236.6bn, or 0.6% of GDP, in 7M13. In July, the federal budget ran a deficit of RUB43.3bn after running a surplus for two consecutive months.

But there was a budget deficit of RUB43.3bn in July. In 7M14, budget revenues reached RUB8.25 tln, or 58% of full year target, placing them on track to meet the forecast for 2014. Budget expenditures were recorded at RUB7.6 tln, or 54.3% of the full year target, placing it 4% short of the forecast for 2014. In July, the budget ran a deficit of RUB43.3bn as revenues dropped 8.4% month-on-month to RUB1.13 tln due to the 23.3% month-on-month decline in non-oil and gas revenues to RUB523.5bn. Oil & gas revenues grew 10% month-on-month to RUB610.4bn, despite the 3.4% month-on-month drop in oil prices. Oil & gas revenues grew month-on-month due to ruble depreciation and the extra day in July. The share of oil &

gas revenues in total revenues in July increased to 53.8% from 52% in June. Expenditures rose 10.6% month-on-month to RUB1.17 tln in July. National defense (64% of the year’s plan), education (59.3% of the year’s plan), and media (63.7% of the year’s plan) expenditures, as well as inter-budget transfers (58.2% of the year’s plan), were the highest in 7M14. Support for agricultural may increase. The federal budget is in good shape thanks to the cheaper ruble: revenues are on target. The budget could be balanced this year and there is an upside risks to the generally pessimistic forecasts of a deficit of 0.3% of GDP.

Infrastructure Russia launches the Power of Siberia gas pipeline to China With each worsening step in the relations between Russia and the West there is another step in the improvement of relations between Russia and China. The two countries are increasingly tying themselves together with major infrastructure. The latest addition to the family is the Power of Siberia, a gas pipeline that will cost $20bn that was launched in August. The Power of Siberia gas pipeline from Russia to China will cost approximately RUB770bn ($20.6bn) to build, according to a memo for Russian President Vladimir Putin’s forthcoming visit to Yakutsk. This includes RUB 283bn of investment in the construction of the pipeline in the Republic of Sakha (Yakutia). The pipeline is part of Gazprom’s Eastern Gas Programme, which will tap gas reserves in Eastern Siberia for transport to China. Gazprom and China National Petroleum Corp. signed a deal in May for delivery of 38bn cubic metres per year to Chinese consumers. Power of Siberia will have a capacity of 61 bcm/y.

Building begins on Moscow's vast new ring road Construction of a vast new 530km ring road – the fourth of concentric circles around the city -- encircling Moscow began in August. Aimed at stimulating development in the areas around the capital and tackling Moscow's notorious traffic congestion, the Central Ring Road is being built in sections through public-private partnerships. The result will be a toll road that Mayor Sergei Sobyanin says will allow 120,000 fewer cars every day to use the Moscow Ring Road — an overloaded Soviet-era highway that currently skirts the city. State road agency Avtodor picked infrastructure builder Stroigazconsulting to build the 49.5km first section of the road. Transportation Minister Maxim Sokolov last week oversaw the internment of a memorial capsule near the site of the ground breaking ceremony in Beliye Stolby, south of Moscow. Stroigazconsulting will build the section for RUB49bn rubles ($1.3m), which is RUB3.5bn less than the starting price of the government's tender. The company will contribute RUB6.8bn of its own funds, with the remaining RUB42.1bn for the state.

The Central Ring Road is slated for completion in 2018. About RUB75bn each is expected to come from state budgets and private companies. The project will also receive RUB150bn from Russia's National Welfare Fund, an oil-revenue-funded piggybank that is being increasingly uncorked to stimulate the stagnant economy. Russian power firms may invest over $19bn in 2014 Russia's largest power generating and grid companies may invest a total of around RUB690bn, or over $19bn, in 2014, the Energy Ministry's press office said. The size of investments will decrease over the next years, as companies will complete construction of power units under capacity supply agreements concluded in 2010, Kravchenko said. By 2020, the combined investments of Russia's largest power firms may amount to around RUB3.445 trillion. The Energy Ministry also estimated necessary investments in development and modernization of the centralized heat supply system at over RUB2.5 trillion by 2025. Russia's Sukhoi, Indian firms to jointly develop cargo plane Russia's Sukhoi Civil Aircraft and Indian aircraft makers have begun to jointly develop a multitask cargo plane, CEO of United Aircraft Corporation Mikhail Pogosyan told reporters August 16.

Pogosyan separately said that by the end of 2014 the company may sign several contracts to supply Sukhoi Superjet-100 planes to countries of Latin America. “We have positive changes in the market situation for Superjet. Firstly, because our planes have demonstrated great performance in Mexico: high flying hours and positive feedback not only by pilots, but by passengers and personnel," Pogosyan said. Mexican airline Interject earlier concluded a contract for purchase of 20 Superjet-100 aircraft with an option for 10 planes more. Russian Civil Aircraft Engine Program to Get Government-Backed Financing The Russian government will back a RUB3.3bn ($92m) bond issue by state aerospace conglomerate Oboronprom to finance the development of new civilian aircraft engines to power domestically designed airliners. The move is part of a drive by Moscow to curtail Russia's dependence on global markets, particularly in the defence and aerospace industries, prompted by the sanctions tit-for-tat unfolding between Russia and the West over the crisis in Ukraine. The government order, published on Monday, aims to help Oboronprom raise funding by guaranteeing the company's bonds. The money will "finance the development of advanced PD-14 and PD-10 engines for next-

generation passenger aircraft," namely the Irkut MC-21, the statement said.

ECM Russia to transfer $10bn RDIF fund out of sanctions' reach Fearing an escalation in the in use of financial sanctions, Russia has decided to transfer the ownership of its $10bn sovereign wealth fund, the Russia Direct Investment Fund (RDIF), out of Russia's jurisdiction in order to protect it from sanctions, according to reports. Russian Direct Investment Fund’s co-investors, which include sovereign funds in Europe and Asia, are concerned that sanctions may affect their investments in Russia if the state lender controls the assets, according to one of the people, Bloomberg reported. The fund, created in 2011 to stimulate investments in privately held businesses and wean the state off its dependence on commodities, has secured the backing of funds including France’s Caisse des Depots et Consignations and Japan Bank for International Cooperation and last year hired Goldman Sachs as an adviser. Penalties over Ukraine have led Russia to invest in state-owned lenders VTB group and the Russian Agricultural Bank, whose access to international funds, has been

curbed, and the measures may also impede co-investors from dealing with RDIF. RDIF said a decision on the transfer to the central bank has “not been made,” according to an e-mailed statement. A discussion about “possible separation” started two years ago, the fund also said. Russia's Gazprom wants to cancel offer to minorities Russian gas giant Gazprom is trying to find a way of avoiding a mandatory buy out offer to minorities worth RUB8bn worth of shares in gas distributing companies it bought from Rosneftegaz in 2013. Gazprom CEO Alexei Miller has written a letter to Economic Development Minister Alexei Ulyukayev, suggesting freeing a state company from offering shares to minorities if a purchase was made on government's or president's orders, sources told Kommersant. Currently the law says that a company purchasing more than 30% in a venture must send an offer to the venture's minorities. But Miller said that the company

cannot reject a deal if it is ordered by president or the government, and said that there exists the risk of driving the offer price up artificially as the law says that the price cannot be below a six-month average market price or the highest price of the purchase. Miller suggests implementing the amendments retroactively, from 2006, when the current law was signed. Several state companies have already bought 30% or more stakes in other companies since. Russian telecom, media firms' market cap falls 26% in 2014 The market capitalization of Russian telecommunications and media companies – probably some of the most modern and dynamic sectors of the Russia economy - plunged 26% since the beginning of 2014 to $83.5bn due to a weaker ruble, worsened macroeconomic expectations and higher political risks. Deloitte estimated capitalization of Russian telecommunications and media companies at $113.47bn as of the end of 2013 as compared to $3.05bn in 1999. The number of traded companies remained unchanged at nine, but the players are different. In 1999, they were state-controlled telecom giant Rostelecom, mobile operator VimpelCom and seven inter-regional firms. Now, they are Rostelecom, which has acquired the seven inter-regional firms, as well as mobile operators MTS and MegaFon, multi-industry holdingAFK Sistema, media

holdings CTC Media and RBC, and Internet companies Mail.Ru Group and Yandex. In 1999, Rostelecom accounted for 43% of capitalization of the companies, while in 2013, MTS accounted for 20%, Vimpelcom Ltd., the sole owner of Russia's VimpelCom, for 20% and MegaFon for 18%. Russia's leading PE fund Baring Vostok to invest $75m into app GetTaxi Russia's most successful private equity fund Baring Vostok has signed a memorandum of understanding to invest up to $75m in taxi hailing app company GetTaxi. GetTaxi is battling it out with the market leader Yandex Taxi to provide online taxi ordering service that specifically targets smartphone users. Earlier in August, Swedish investment fund Vostok Nafta contributed $25m to GetTaxi, which was also co-invested by Russian businessman Anton Inshutin. The deal took place as part of a round of investments into the $150m project. The investment by Baring Vostok, if it is provided, thus comprises half of the latest financing round and will be made in the form of loans, some of which may be converted to equity at a non-fixed company value starting at $400m. Since being founded in 2010 and prior to the current financing

round, GetTaxi had raised $57m from investors including the Kreos Capital loan fund and Leonard Blavatnik's Access Industries, which is expected to participate in the latest financing round. GetTaxi operates in 24 cities worldwide including New York, London, St. Petersburg and throughout Israel. The company's CEO and founder Shahar Waiser recently disclosed that GetTaxi expects revenue of $100m this year rising to $500m in 2015. Mobius buys stake in NCSP, O'Key, raises Yandex, Mail.Ru Grp ones Many funds were selling their Russian holdings in the early part of this year, but it seems that prices have fallen so far that many are now buying again. Investment legend Mark Mobius remains bullish on Russia despite the historically cheap stock markets and general brouhaha surrounding the Kremlin. At these prices he was in the market in August buying shares again. Templeton Russia and East European Fund, controlled by Mark Mobius, has purchased shares of Novorossiysk Commercial Sea Port (NCSP) and retailer O'Key in the second quarter and more than doubled stakes in internet companies Yandex and Mail.Ru Group. The fund purchased NCSP's shares worth $750,000, O'Key's shares worth $460,000 and increased the stakes in Yandex and Mail.Ru

Group to $5m from $2.4m and to $2.4m from $1m. The funds also owns $8.6m of Sberbank's shares, $4.3m of oil company Lukoil shares and $3.7m of gas giant Gazprom's shares. Oppenheimer funds more than double Russian investments April-June Oppenheimer Global Strategic Income Fund and Oppenheimer International Bond Fund, which invest in fixed income bonds, more than doubled their investments in Russian assets in April-June the company reports. Global Strategic Income Fund increased the volume of Vnesheconombank's (VEB) bonds it holds to $94.44m as of June 30, while International Bond Fund raised the amount of its investment in Russian bonds to $203m from $79m. Oppenheimer Global Fund bought $49.1m gas giant Gazprom's shares on the back of Ukrainian conflict as of June 30, while as of March 30 the fund had no Gazprom shares. The fund also increased its investments in the Moscow Exchange to $66.8m from $55.6m and in diamond giant Alrosa to $36.6m from $30m. Russia's Sistema may sell 10% in Detsky Mir if no IPO on offer this autumn Russian multi-industry holding AFK Sistema says it may sell up to 10% in its children goods retail legend Detsky Mir to private investors to

monetize some of its investments if the markets do not reopen and allow for an IPO sometime in September-November, Sistema President Mikhail Shamolin said Thursday. Sistema says it is ready for the IPO, but it just waiting for better market conditions. Sistema has received bids from private funds interested in buying a minority stake of up to 30% in Detsky Mir and is now holding talks with some of them, Shamolin said. In case of the sale to investors, the retailer could be estimated at $1bn at least, he said. Initially, Detsky Mir planned to sell 25% in the IPO in 2013, but postponed the offering due to losses. The company was again expected to hold the IPO in March, but delayed it for a year at least due to the macroeconomic situation in Russia and the crisis in Ukraine. Global Hedge Fund Equinox Partners is buying Russian stocks The President of US-based Equinox Partners Sean Fielermet with leading Russian public companies - Yandex, Magnit, Sberbank, Saint-Petersburg Bank, Moscow Exchange, CTC Media, and decided to increase their exposure to Russian stocks. Now Russian market is facing a serious crisis once again, Sean Fieler took an interest in cheap Russian shares and decided to visit Russia in order to understand how

our companies work, his friend says: Sean Fieler "was enormously impressed by their performance". Equinox Partners is not the biggest investor: in November 2012 (the most recent official figures), assets of the fund amounted to $1.14bn, Equinox International - $472m. The funds did not have Russian securities in the portfolios until recently; the fund is investing on emerging markets (shares, bonds, derivatives) as well as in gold and silver mining companies. In 2012 most of all Equinox International invested in India, Brazil and Canada. Since the start of the year the RTS and the MICEX Indices lost 11.6% and 2.8% respectively. Russian withdrawing money from domestic mutual finds and investing in offshore funds Russians have been pulling their money out of domestic mutual funds, but have been ploughing their spare cash into funds that specialise in investing in foreign companies, according to investfunds.ru. Russians withdrew RUB15.4bn ($440m) from domestic funds in the first half of this year, but invested RUB2.4bn ($69m) in Russian funds that invest in foreign assets. Some Russian mutual funds have given up and are shuttering their businesses after almost six years straight of redemptions. Trinfico

Investment Group said in August that it was closing its fund due to withdrawals. Other managers surveyed by Vedomosti don't plan to close funds focused on Russian securities, but are stepping up foreign assets in their mutual funds. For example, seven of 17 funds managed by leading second tier investment bank Otkritie Asset Management are focused on global investments. Norwegian pension fund is hanging onto its Russian assets The Norwegian Government Pension Fund Global (GPFG), one of the biggest funds in the world, says that it has no plans to sell its $8.3bn of Russian investments as a result of the show down between Russia and the West over the fate of Ukraine. Indeed, the fund has been taking advantage of the unusually low prices caused by the crisis to increase it holdings: in the second quarter of this year the Russian securities in GPFG's portfolio grew from 0.6% to 0.7% having returned to the level of late 2013, the fund reports. Observers point out that the fund's last reports were made before the downing of the Malaysian commercial airliner that killed almost 300 civilians that is seen by many as a game changer and before the EU and the USA imposed limited financial sanctions on Russia. However, Yngve Slyngstad, Head of GPFG, said on August 20 that the fund did not sell

Russian assets but just kept them unchanged. It is not clear if the fund will make more investments as in late July the Ministry of Finance of Norway gave to understand that sovereign fund would be following sanctions against Russian companies (Norway joined EU sectorial sanctions). The fund has not commented on the government's decisions, but under the terms of the ban European sanctions are not imposed against existing securities of Russian banks so the fund will not be forced to sell the assets. The value of investments in Russia by the fund for the first half of 2014 has grown by 7% from NOK47.3bn to NOK50.7bn ($8.2bn), largely due to the appreciation of the ruble bonds in fund's portfolio by more than 15% from NOK24.3bn to NOK28bn ($4.5bn). At the same time market value of investments in Russian stocks decreased for six months by 1.3%, while the widely tracked MSCI Russia index was down by 6% over the same period. In early 2014 GPFG had shares of 65 Russian companies including Sberbank ($370m) and VTB ($887m) that were sanctioned in late July. Investments in VTB (4.6%) are the fund's largest asset among Russian companies. In April Yngve Slyngstad said that the fund had made considerable investments in Russia but if to take into account volume of the fund it was not much. According to GPFG's presentation, in mid 2014 about 0.7% of the fund's total

investments in the shares, 1.4% of investments in bonds and 1% of all investments were due to Russia. In Q2 total return of the Norwegian fund amounted to 3.3% or NOK 192bn ($31bn) in absolute terms. Despite geopolitical instability (military operations in Ukraine and Iraq), the fund managed to earn money on global markets growth. Return from investments into shares amounted to 4% (in bonds only 2%).

Bashneft delayed SPO Russian regional oil producer Bashneft has delayed again its $1bn SPO because of poor market conditions that was supposed to be offered in September. The company is having a lot of other problems. In July shares of Bashneft that belong to AFK Sistema (63.2% of charter capital) and its structures, were arrested as part of a case investigating the sale of the fuel and energy complex of Bashkortostan's assets to AFK, also makes the situation more complicated.

DCM EU mulls a ban on buying Russian sovereign bonds Europeans could be barred from buying new Russian government bonds under a package of extra sanctions over Moscow's military role in Ukraine that European Union ambassadors were to start discussing on Monday, Reuters reports. This threat comes on top of financial sanctions already imposed on Russians that limit their ability to borrow on the international capital markets to instruments with the maturity of not more than 90 days. Last week the British threatened to cut Russia off from the SWIFT international messaging

system, so making trouble for Europeans who wanted by Russian bonds is an even more drastic scaling up of financial sanctions that could be imposed on Russia. However this measure would be around back on Europe. Since Russia plug it in its financial markets into the international clearing and settlement systems of Euroclear and Clearstream at the start of last year fine investments into Russia's sovereign bonds has skyrocketed; foreign investors now account for roughly 25% of all of Russia's outstanding bonds and have become a major source of cheap financing. On the flipside Russian bonds are among the few in the world that are at the same

time relatively safe and still pay interest rates in double digits. Sanctions hit Russia's ability to borrow abroad The most obvious implication of the new sanction reality is the increased risk of forced reduction in foreign debt that is especially pronounced in the state-owned entities segment. Russia’s total corporate foreign debt stopped increasing at the start of this year, but so far has not shown a noticeable decline. It is currently $650bn, which includes $200bn owed by banks and the remaining $450bn owed by companies. State-owned entities’ exposure to foreign debt is $140bn for banks and around $170bn for companies. All in all, the exposure of state-owned banks and companies to global markets is around $310bn, or some 50% of the total corporate foreign debt. By mid-2015, Russian corporates are scheduled to redeem around $120bn of foreign debt principal, and, according to our estimates, around $60bn out of that sum is owed by state-owned entities.

The implications for the local markets will depend on the gravity of the contagion effect from the sanctions. However, the likely scenario says Alfa Bank is that the CBR will have to increase substantially liquidity support to the banking sector through the refinancing system. "In our estimates, the combined effect of the SSI and SDN sanctions will boost appetite for CBR funding by around RUB1tr in the next 12 months. We reiterate our view that the CBR will soon have to consider new instruments of refinancing support and that uncollateralized loans seem to be a very plausible way to resolve the issue," says Natalia Orlova, chief economist with Alfa Bank. The sanctions are also a reason to expect interest rates to increase higher than expected. Previously economists considered the 7.5% key rate level as appropriate, given the inflation trend, even with the recent unexpected rate hike to 8.0%, we consider another 50bpt rate increase as possible before the end of this year. Trade restrictions will play a crucial role here. Any limits on import flows will be inflationary and will be another reason for a rate increase.

VTB bonds rally big time despite sanctions Bond investors who lost faith in VTB Group when it was saddled with sanctions by both the and European Union missed out on Russia’s best corporate bond rally. VTB’s dollar-denominated notes due in October 2020 returned 3.5% in August, helped by government plans to bolster its capital as the crisis over Ukraine stalls economic growth and stokes a jump in Russian non-performing loans. That’s the best performance among 98 Russian securities in the Bloomberg Emerging Market Corporate Bond Index, which gained 1.1% over the same period. The government has stepped up support for banks after penalties curtailed their access to dollar and euro funding to punish President Vladimir Putin for his alleged support of Ukrainian separatists. The 200bn-ruble ($5.4bn) capital injection for VTB was announced just days before the and EU threatened new sanctions after NATO said Russian troops moved into Ukraine to help a rebel offensive last week. And the CBR support for the sector as a whole has topped a record breaking RUB7 trillion this year. The state still has plenty of cash in reserves and is committed to keeping the bank sector going while the political games play out.

Russia's domestic debt rises 1.2% in Jan-Jul Russia's domestic debt increased 1.2% or 69.02bn rubles to 5.791 trillion rubles in January-June, the Economic Development Ministry said in a report late Thursday. In July, the debt grew 0.6% or 34.06bn rubles. The debt in rubles-denominated securities grew 0.8% or in July and 2.2% in January-July to 4.531 trillion rubles, while the amount of state guarantees fell 0.1% in July to 1.260 trillion rubles as of August 1. Sanctions-Hit Rosneft Could Get Less State Help Than it Wanted Russia may provide some state support for sanctions-hit oil producer Rosneft, but significantly less than it has asked for, Economic Development Minister Alexei Ulyukayev said Tuesday. Rosneft head Igor Sechin has asked for 1.5 trillion rubles ($41.5bn) from the National Wealth Fund to help the company weather Western sanctions against Moscow in the Ukraine crisis, Vedomosti newspaper reported earlier this month. "There are some options for the support, but the sums' order of magnitude is less than that," Ulyukayev told reporters.

Moscow Stock Exchange to launch Russian Eurobonds trading this autumn The Moscow Exchange will launch domestic trading of Russian Eurobonds this autumn, the exchange said in Augsut. According to Cbonds, in July 2014 Russian Eurobond market amounted to $229.32bn (corporate Eurobonds - $179.5bn). More than 95% of transactions are carried out on over-the-counter market - through Bloomberg and Reuters. At the moment only qualified investors are able to conclude transactions with Eurobonds; however, they will be available for private customers, if they sign a notice of risk with the exchange. Eurobond yield of some Russian banks bonds are much higher than the currency deposit rates in the same banks. For example, bonds issued by Sberbank and VTB Group pay 6%-7% and 1.8%-2.25% annual respectively, which the bonds of the smaller private banks

are typically in the range of 14%-17%. Russian Fin Ministry keeps plans to borrow $7bn abroad in 2015 The Russian Finance Ministry is maintained plans to offer $7bn Eurobonds in 2015 despite Western sanctions, Deputy Finance Minister Sergei Storchak said Wednesday. Russia issues about $7bn of bonds every year, as much as a benchmarking process to help Russia's corporate issuers have a yardstick to measure their own rates again as any other reason. The bulk of the government's debt issue is carried out on the domestic market in rubles. Although the Finance Ministry has already cancelled 13 auctions for ruble-denominated OFZ-PD fixed-rate bonds scheduled for 2014, it will not stop trying to offer bonds in 2014. “The price offered for the securities contains way too high a political margin," Storchak said.

Sectors Putin Praises Exxon Alliance as Arctic Drilling Starts President Vladimir Putin lauded Russia’s “old and reliable partner” Exxon Mobil Corporate as he gave the command for the energy company and Russian state-owned

ally Rosneft to begin drilling a $700m Arctic Ocean oil well. The fate of the joint venture has been in doubt since the USA cracked down on Russia and imposed sanctions on the country, but despite these problems

corporate interests have prevailed over political. Putin, Rosneft Chief Executive officer Igor Sechin and Exxon’s Russia head Glenn Waller, undeterred by the crisis in US-Russian relations, together welcomed the start of the country’s northernmost well. It’s the first step in a quest for new energy resources to help maintain oil production near a post-Soviet high of more than 10m barrels a day. The partners plan to drill the Universitetskaya prospect after more than two years of planning. Exxon, which reported a drop in output to a five-year low in the second quarter, isn’t the only western company involved. BP Plc (BP/), the UK oil company, has an interest through its 20% stake in Rosneft, whose CEO Sechin is subject to sanctions. Russia May Ban Car Imports If West Imposes New Sanctions, Sources Say Russia may tighten retaliatory sanctions against Western nations to include a ban on imports of cars, among other things, if the and the EU impose additional sanctions on Moscow, the Kremlin threatened in August. As Russia is already the second biggest consumer market in Europe and despite the economic slowdown sales volumes in most product groups continue to grow in double digits. It is an irresistible combination for most producers who have ignored the political

problems to open shops in the Russian capital. Imported vehicles accounted for 27% of sales of passenger cars in the first half of 2014, for trucks imports accounted for 46%, and 13% for buses, according to Vedomosti. The new ban would not apply to foreign automakers' production inside Russia, the paper said. Ford, Volkswagen, Ford Renault, Toyota and Hyundai Motor Co all have production facilities inside Russia. No definite decision has been made yet on imposing the ban. AvtoVAZ Cuts Production of Ladas as Russia's Car Market Flops Russia's top car maker AvtoVAZ plans to cut production of its Lada cars in the next three months due to a falling Russian market. The company, controlled by the Renault-Nissan alliance, said total cuts would amount to 25,000 cars. In July it produced 47,100 Ladas as well as 12,100 Renault and Nissan vehicles. "Because of the decrease in sales of all cars in the Russian market, and in order to better manage inventory levels, AvtoVAZ made a decision to reduce production of Lada cars in September, October and November for a total amount of 25,000," the company said in a statement. AvtoVAZ added its workers would continue to receive their full salary in the next three months.

However, the company also fired 10,500 employees since the start of the year, decreasing the workforce by 16% on the year to 42,350 people ahead of schedule, business daily Vedomosti reported Wednesday quoting the company's labor union Chairman Sergei Zaitsev. Previously, AvtoVAZ said it planned to cut the workforce to 42,350 people by the end of the year on the back of falling sales and a poor 2014 market forecast. General Motors also said last week it would reduce production at its plant near St. Petersburg and was reviewing its expansion plans in the country. Car sales have faltered in Russia this year as economic growth has

slowed, causing people to put off large purchases. Consumer sentiment has come under further pressure because of Western sanctions over the crisis in Ukraine. The downturn in Russia's car market gathered pace in July, with sales sliding 23% year-on-year after a 17% fall in the previous month, according to the Association of European Businesses, or AEB. Sales of Lada cars tumbled 25% to 28,014 in July, AEB data showed. In 2013, AvtoVAZ produced 438,400 Ladas and 20,800 Renault and Nissan cars, while in the first seven months of 2014 production stood at 213,700 and 51,800 respectively, according to ASM-Holding.

Great Wall Motor starts building $520m car plant in Russia China’s Great Wall Motor Company Limited has started the construction of a $520m plant in Russia’s Tula Region, a spokesperson for the regional government said. The company will be the first firm to be located on the territory of the Uzlovaya industrial technological park. The plant will be launched in 2017 and reach its design capacity of up to 150,000 cars of the Haval brand in 2020.

Russian government to underwrite truck maker KamAZ's $1bn debt amid auto market collapse Russia will guarantee $1bn of truck maker KamAZ's future debt, as part of a broader government initiative to support vehicle manufacturers struggling with falling sales. Russia's car output decreased 0.7% on the year to 1.074m units in January-July, the Federal State Statistics Service said in a statement Tuesday. Truck output decreased 20.1% on the year to 87,000 units in the period, and bus output fell 24.3% to 21,800 units.

Russian iconic carmaker Avtovaz had to fire 10,000 works as a result of falling orders. The government plans to reintroduce its "cash-for-clunkers" scheme of subsidized sales this autumn. Russia's Industry and Trade Ministry will implement a RUB10bn program of recycling old cars from September 1 through December 31 and provide citizens with discounts for new cars in exchange for recycling their old ones, Minister Denis Manturov told reporters in August. Over 170,000 cars of various models are planned to be sold under the program, which will be executed by auto dealers directly, Manturov said. The discount for purchases of new cars produced in Russia in exchange for recycling old ones will amount to up to 40,000 rubles, while for freight motor vehicles it will stand at up to 150,000 rubles. The discount for trade-in deals, when people can exchange their old cars for new ones with an additional payment, will amount to 40,000-300,000 rubles. Shares in KamAZ, in which Germany's Daimler owns 15%, jumped more than 9% on the government's announcement. The government said it had approved state guarantees for up to RUB35bn ($968m) of debt issuance by KamAZ for up to 15 years. The move is intended to help the truck maker's investment program, including launching new

models and upgrading all production lines. KamAZ, which had net debt of RUB12bn at the end of 2013, approved the issuance of RUB35bn worth of bonds late last year and a further RUB27bn in May 2014. It had said it would like the government to back both programs. Russian 2014 grain export potential rises to 23m tonnes Russia is on track for a good harvest and should bring in about 100m tones of grain that will allow it to up exports. Russia's grain export potential in calendar year 2014 will rise to 23m tonnes, up from 19m tonnes in 2013, the government said Prime Minister Dmitry Medvedev, and carry over 56m tonnes of grain stocks into 2015, the press release says. Russia exported 9.038m tonnes of grain in the first half of 2014, 240% more than in the same period last year, Rosstat reported previously. The total included wheat and meslin (a wheat-rye blend) 5.743m tonnes (370% more), 751,000 tonnes of barley (100% more) and 2.371m tonnes of corn (160% more). Medvedev pledges continue support to farm sector, including grain purchase interventions Russia has allocated nearly RUB14.5bn to support domestic crop raising, Prime Minister Dmitry Medvedev said.

"In order to guarantee the effective operation of the farm sector, agricultural producers were allocated serious funds from the federal budget. Almost RUB14.rubles in discretionary support was allocated to crop raising, RUB8bn to subsidize interest on short-term loans, and over RUB9bn on investment loans," Medvedev said at a meeting on development of agriculture. Carlsberg may close 2 breweries in Russia - CEO Danish brewer Carlsberg is preparing to close one or two breweries in Russia, CEO Jorgen Buhl Rasmussen told daily Berlingske. “We are under the influence of some macroeconomic factors about which we can do nothing," Rasmussen said. “We use 50-60% of current capacities. Until now we thought that the growth will restart and the capacities will be needed. Now the situation has changed… Closing one or maybe two beer plants is the next stage. We are planning it." Carlsberg bought a stake in Russia's Baltika for $10.4bn in 2008, becoming the only company's owner. Since then “Russia has raised beer excises, imposed a ban on selling beer in kiosks, and now there is some sort of a trade war going on between Russia and the West," Rasmussen added. Carlsberg owns 10 breweries in Russia, the largest of which is located in St. Petersburg.

Russia's pay TV subscriber base rises 10% to 36.4m in H1 The number of Russia's pay television subscribers increased 10% on the year to 36.4m households in January-June, analytical agency iKS-Consulting said Monday quoting preliminary data. The number of clients of satellite TV operator National Satellite Company, working under the Tricolor TV brand, rose 11% on the year to 10.6m households. The number of clients of telecom giant Rostelecom increased 12% on the year to 7.7m households. Russia has highest growth in mobile subscribers after China Russia and India became the world's second largest countries by the mobile subscriber growth in April-June, whose number increased by 5m, after China, where the number of new subscribers swelled by 12m people, according to Swedish telecom giant Ericsson. On a quarterly basis, the number of users of Russian mobile Internet rose by 1-2m, Konstantin Ankilov, managing partner at analytical firm TMT Consulting, told the daily. He said the bulk of new users already have a SIM-card for voice calls. iKS-Consulting analyst Maxim Savvatin said that the high growth is explained by a rising number of Internet users and a high degree of

shifting of the subscriber base in Russia. Globally, the number of mobile users grew by 80m to 4.6bn. There were 6.8bn active SIM-cards as of the end of June. According to Ericsson, the number ofwireless broadband data transfer users increased 35% on the year to 2.4m in April-June. The traffic volume soared 60% on the year to 2,500 petabyte. Unsanctioned suppliers raise meat prices after Russian food embargo Countries whose meat products were not affected by Russia's food embargo are raising their meat prices for Russia, Executive Director of the National Meat Association Sergei Yushin told Interfax. From the moment the embargo was announced, export prices for pork and poultry have grown significantly in Brazil, which is the only serious alternative supplier that can meet Russian demand and the hole left in the market after the Kremlin banned the import of European alternatives. Prices for chicken legs increased to $2-$2.2 per kilogram from $1.35-$1.45 and pork prices increased by an average of 20% or more. Checks are being carried out at McDonalds' restaurants in several Russian regions About half a dozen McDonalds restaurants have been temporarily

closed on health grounds as part of the ongoing sanctions war with the US and EU, including the iconic branch that first opened in Soviet Russia in 1990 on Pushkin's square in central Moscow. bne sources say that the onslaught has been made worse by Moscow's entrepreneurs who are egging the authorities on in the hope of being able to take over some of the McD's prime locations for their own eateries. However, sources also say that the closures really are temporary and expect most of the restaurants to reopen shortly after tempers cool. Iconic Detsky Mir toy store reopens in Moscow When Russian children dream they go to Destsky Mir (Children's World) the iconic Soviet-era toy store in the heart of Moscow where parents used to queue for days to buy their kids something special during the holidays. The giant flagship store is the biggest in Russia and one of the biggest in Europe. It was closed after running into financial trouble in the 2008 crisis and has been under major renovation since. The store was opened at the end of August with an explosion of golden confetti, as beloved Soviet, Russian and Disney characters mingled with their young admirers in vast marble halls just minutes away from the Kremlin and across the road from the former KGB headquarters (and still occupied by the FSB).

Despite all of Russia's other problems the one thing Russian don’t scrimp on is their children; last year Russia overtook Germany to become the largest toy market in Europe, worth an estimated RUB662bn ($21.3bn) at the end of 2012 and the sector is expected to grow by 11% this year. Only 17% of toys on the market are made in Russia, compared with about 60% of cribs and other such furniture and 90% of baby food according to the industry association. The Russian children's goods market is forecast to grow by 15-17% on average in the period of 2011-2015, according Detsky Mir, which has already developed a franchise business that stretches across Russia. The company forecasts the growth to speed up gradually, starting from 13% in 2011 and ending at 17% in 2015. In 2015 the market is forecast to be worth RUB 701.3bn ($22.4bn). Detsky Mir has continued with ambitious plans to add more than 50 stores to its network over the course of the year, topping 300 stores nationwide and seizing 10% of the market by New Year's. About 25% of Detsky Mir's product assortment will come from abroad in 2014, the company says — a dependence that would seem to place the company at risk as Russia and the West exchange blows over the crisis in Ukraine.

Chinese Haima plans to return to Russian auto market Chinese automotive company Haima plans to enter the Russian market, following another Chinese automobile manufacturer Lifan, newspaper Kommersant reports. “Chinese manufacturers, apparently, hope for special preferences or plan to fill niches, which can emerge after potential sanctions in the automotive sector,” said Oleg Dazkiv, head of the internet portal auto-dealer.ru. In his opinion, the moment for starting production is not quite right, as Russian automotive industry is currently experiencing a slowdown in sales. According to Kommersant, Haima is going to invest $100m in the new project, which is expected to produce 10-30 thousand cars in a year. The project implementation is planned to take place in four steps – starting with SKD followed by gradual extension of localization levels. Moody's: Russian oil and gas producers poised to benefit from China energy deals Major oil and gas deals signed over the past 15 months between Russia and China will be credit positive for the Russian companies involved, as the deals will provide them with opportunities for growth and access to new sources of funding, with the potential to expand these relationships in the future, says Moody's Investors Service in a report published today. They will also reduce

Russia's heavy reliance on European energy markets where the country is exposed to sanctions and competitive risks. The deals were signed by Russia's OJSC Oil Company Rosneft (Baa1 negative), OJSC Gazprom (Baa1 negative) and OAO Novatek (Baa3 stable) with the China National Petroleum Corporation (CNPC, Aa3 stable). "Russia's efforts to diversify its energy exports, are aligned with China's desire to secure new oil and gas supplies to meet its large and fast-growing energy needs," says Julia Pribytkova, a Moody's Vice President -- Senior Analyst and author of the report. "Gazprom's deal, which is valued at $400 billion, will also provide a launch pad for the company's full-scale diversification into the Asia-Pacific region at a time when it is facing sales pressure in Europe," continues Ms. Pribytkova. China is helping to finance the development of Russia's oil and gas industry. Long-term supply contracts with guaranteed offtake volumes, equity deals and access to funding from Chinese financial institutions will facilitate the development of new production and transportation infrastructure required to supply the Chinese market. This alternative source of financing is particularly important for Rosneft in light of the US sanctions as the company faces the greatest maturities by end-2015 in the sector, which it expects to cover in part with oil prepayments from its contract with CNPC.