Economic Bulletin No DEB-2012.07-13

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012

Economic News

 Russia's gross domestic product (GDP) grew by an estimated 4.0 percent in the second quarter, in annual terms, Russian news agencies cited Economy Minister Andrei Belousov as saying. In the first quarter, the economy expanded by 4.9 percent in GDP terms. / Thomson Reuters  Russia's top food retailer X5 Retail Group reported on Friday a 10 percent rise in net retail sales for the second quarter, an improvement after a slowdown to 4.4 percent in the previous quarter. Like-for-like sales fell 1.1 percent, year-on-year, against a 3.9 percent drop in the January through March period, X5 said in a statement. / Thomson Reuters  Russia's consumer prices rose 0.3 percent in the week to July 9 after rising 0.5 percent in the previous period, the Federal Statistics Service said on Wednesday. This brings inflation since the start of the year to 4.0 percent compared to 5.1 percent in the same period of 2011. In June, Russia's consumer price index rose 0.9 percent month-on-month, above analysts' expectations of 0.6 percent rise, with sharp increase in food prices driving the rate higher. The central bank aims to keep full-year growth in consumer prices within a target of 5-6 percent after inflation hit a post-Soviet record low of 6.1 percent in 2011. / Thomson Reuters  Russia's telecoms regulator Roskomnadzor has awarded licences for next-generation mobile services as expected to state-controlled Rostelecom and dominant mobile phone groups MTS , Vimpelcom and MegaFon. The licences - awarded for free - allow the operators to provide wireless internet services using the extra fast LTE (Long Term Evolution) technology, expected by analysts to become the industry standard worldwide. "The tender opens a new stage in the development of the Russian telecoms sector. Deployment of 4G networks will provide the population with high-speed mobile broadband and give a boost to the innovative development of the economy," said Andrei Dubovskov, the CEO of Russia's biggest mobile operator MTS. Developing the technology sector has been a priority of the Russian government as it seeks to diversify the economy away from its dependence on energy. The government has been particularly vocal about reducing so-called "digital inequality" by helping poorer people in Russia's regions get online. LTE promises download speeds of more than double that of the previous 3G standard and is designed for data, rather than voice - a staple of increasingly popular smartphones. Owning an LTE licence is seen as a driver for long-term revenue growth for mobile phone operators that have exhausted the market for new subscribers and are now trying to persuade existing customers to spend more on mobile packages. The 'Big Three' mobile groups and Rostelecom beat out Nordic telecoms operator Tele2 , TTK - a telecoms unit of Russian Railways - and Summa Telecom, part of Summa Group. RUNNING A RACE  All winners must start providing services no later than June 1, 2013, but Megafon is seen leading the race and may benefit from an early move. MegaFon, controlled by Russia's richest man Alisher Usmanov, started to provide LTE services in Moscow in May, using the infrastructure of state-backed 4G operator Scartel. Its offering is already available to 10 percent of Russia's 140 million population, MegaFon said on Thursday, and it pledged to expand the footprint to 27 percent by the end of 2012. MegaFon is also seen benefiting from a planned combination of Usmanov's stake in the company with 100 percent of Scartel, a

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012 deal expected to be announced soon. "Obviously it is MegaFon who won and namely Mr Usmanov who competently consolidated the assets. It is a farsighted defence of his investments," said Eldar Murtazin at Mobile Research Group. Usmanov raised his stake in MegaFon to 50 percent plus one share in April when billionaire Mikhail Fridman sold his stake, resolving a long-running dispute over strategy and governance at MegaFon and positioning it for a highly-anticiapted initial public offering that could raise $4 billion. MTS said it plans to build 4G networks ahead of schedule, while preparing to launch LTE in Moscow in August- September on previously acquired frequencies. Vimpelcom pledged to provide LTE services in six Russian regions by the end of 2013, but at this stage looks to be lagging its three rivals. "We have already commenced modernising our network and making it LTE-compatible," said Anton Kudryashov, head of Vimpelcom's Russian business. The results of the auction will also help to boost the position of state- controlled Rostelecom, the former fixed-line monopoly, in a sector previously dominated by private players. Rostelecom, which was transformed last year into a multi-service provider by merging with seven regional operators, wants to boost its share of mobile as well as broadband and pay-TV markets to offset a fall in its core fixed-line business. The company said on Thursday it plans to update its mobile strategy to take into account the LTE licence as well as the planned consolidation of Russia's No.8 wireless carrier Sky Link, which has 2G and 3G licences in more than 70 Russian regions. "Rostelecom plans to create modern multistandard mobile networks, combining advantages of 2G, 3G and 4G and allowing us to provide voice and data services with high level of quality," said spokeswoman Kira Kiryukhina. Kiryukhina added Rostelecom was ready to team up with other operators to build shared infrastructure in order to speed up the network rollout and reduce costs. Rostelecom also plans to start providing LTE services on Scartel network in September as per a similar MVNO (Mobile Virtual Network Operator) agreement to the one MegaFon has with Scartel. Rostelecom earlier said it was targeting 22 percent of the wireless broadband market in subscriber terms by 2015, up from the current 9 percent. / Thomson Reuters  Russian President Vladimir Putin said state energy holding company Rosneftegaz should not be the only contender in planned sales of government-controlled energy assets, and said Russia would stay the course on planned privatisations. "Of course you can't call it privatisation in the direct sense if Rosneftegaz participates in the acquisition of state company shares," Putin told a meeting of a newly formed energy advisory council, adding that the state had an obligation to help some heavily regulated companies boost their value. "That does not mean we should limit ourselves to participation by Rosneftegaz," he added. He said any sell-off of state energy assets should bring "systemic" benefits, and said there was no point in selling companies such as Russian state hydropower company RusHydro at low valuations now. / Thomson Reuters  Russia's state-controlled telecoms operator Rostelecom said on Friday that its net profit in the first quarter grew by 38 percent year-on-year, supported by strong performance in the company's broadband and interactive TV segments. Net income rose to 14.6 billion roubles ($446.13 million), with revenues growing 17 percent in annual terms to 84.4 billion roubles. Revenue from broadband services increased by 9 percent and from pay television products by 58 percent. "Rostelecom's financial results grew significantly in the first quarter of 2012, despite the fact that our local tariffs remained unchanged for virtually the entire quarter, at rates set at the beginning of 2011," Anton Khozyainov, Rostelecom's deputy vice-president, said

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012 in a statement. The company's operating income before depreciation and amortisation was up 29 percent to 34.8 billion roubles in the first three months of the year. / Thomson Reuters

Global Economy

 Former Italian Prime Minister Silvio Berlusconi will return to frontline politics as the centre-right candidate in next year's general election, a senior official in his PDL party was quoted as saying on Thursday. "Yes, Berlusconi is the candidate for premier," Fabrizio Cicchito, PDL parliamentary leader told Italian news agencies after a meeting of the party leadership at Berlusconi's Rome residence. He said the return of Berlusconi, the undisputed master of a party built up entirely around himself, meant there would be no primaries to find a candidate, as had been originally expected. The confirmation follows growing speculation about a likely return by the former premier, who has kept a low profile since he resigned last year in the middle of financial turmoil that risked tipping Italy into a Greek-style debt crisis. On Wednesday, PDL party secretary Angelino Alfano said he was among those pushing the 75-year-old media billionaire to lead the centre right into elections expected early in 2013. Berlusconi himself has given several recent hints that he was planning a return to politics, complaining about his successor Mario Monti's austerity policies and musing openly about the possibility of Italy leaving the euro. The dominant figure in Italian politics for almost 20 years, he has divided opinion like few others, retaining a sure feel for the mood of mainstream Italy while fighting a constant series of corruption and sex scandals. Financial markets have been on edge at the prospect of political stalement that would block more economic reforms after Monti's departure next year and Italy's borrowing costs have got back close to the levels they hit when Berlusconi stepped down. He has made no public comment about the growing speculation but may do so at a political rally on Friday.

CHANGED LANDSCAPE Unpredictability has always been among his trademarks and until he makes a public declaration himself an element of doubt is likely to hang over his intentions. "I want to understand this candidacy of Berlusconi if it's a definite fact or just something provisional," the PDL mayor of Rome Gianni Alemanno told La7 television. Berlusconi, still on trial over accusations of paying for sex with a teenager, will in any case find the political landscape very different from the one he left in November. Monti himself has ruled out running and opinion polls suggest a centre-left bloc around the Democratic Party would win an election, with the PDL fighting the maverick 5 Star movement led by former comedian Beppe Grillo for second place. Hostility to the mainstream parties is running high and Berlusconi's former coalition allies in the Northern League are in disarray after the regional party's founder Umberto Bossi was driven from office by a graft scandal. His own party has been in upheaval since losing power, with hardline Berlusconi loyalists at odds with more mainstream conservatives. / Thomson Reuters

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012

 Moody's surprised markets on Friday by downgrading Italy's government bond rating by two notches to Baa2 and warned it could cut it further, piling on pressure just hours before the euro zone third- largest economy launches its latest bond sale. The ratings agency blamed increased liquidity risks for the country amid persistent euro zone woes and an expected deterioration of Italy's already weak economic condition as the main reasons behind its decision. The downgrade of Italy to just two notches above junk status could raise already-painful borrowing costs for the country and risks undermining Prime Minister Mario Monti's efforts to turn market sentiment through tough fiscal and structural reforms. The stark warning from Moody's, which comes as investors are already fretting about Spain's ability to mend its banking sector, knocked the euro down about a quarter of a cent and sunk BTP futures 60 ticks down. "Italy's government debt rating could be downgraded further in the event there is additional material deterioration in the country's economic prospects or difficulties in implementing reform," the agency warned. "Should Italy's access to public debt markets become more constrained and the country were to require external assistance, then Italy's sovereign rating could transition to substantially lower rating levels." Moody's took its ratings for Italy below those from agencies Standard & Poor's Ratings Services and Fitch Ratings, a move that risks triggering further investment outflows from Italy. In an interview published on Friday, Peter Bofinger, an economic adviser to German Chancellor Angela Merkel, praised Monti's reform efforts and said Italy's borrowing costs of 6.0-6.5 percent were 'unreasonably high' in view of its structural balance and low deficit. "It takes time to lower the debt. The key thing now is the deficit," Bofinger said.

BAD TIMING The timing could not be worse for Italy as it seeks to sell 5.25 billion euros ($6.40 billion) in medium-term bonds later on Friday, including a new three-year issue. There had been hopes borrowing costs would fall at the auction after signs of progress on a Spanish bank bailout and a sharp improvement in Italy's borrowing costs at a one-year bond auction on Thursday. "Italian bonds were already giving up ground and the Moody's news is going to chew them a bit further," said a bond trader. Moody's said the downgrade was driven by Italy's increased susceptibility to political event risk, such as a Greek exit from the euro zone or Spain requiring further aid. The agency said the country faced growing funding problems given its 2 trillion euro public debt and significant annual borrowing needs of 415 billion euros in 2012-2013, as well as its diminished overseas investor base. On the other hand, a successful implementation of economic reform and fiscal measures that effectively strengthen the growth prospects of the Italian economy and the government's balance sheet would be credit positive and could lead to a stable outlook, Moody's said Analysts estimate that foreigners hold about one third of Italy's public debt, down from around 40 percent a year ago. Data from Italy's banking association ABI on Thursday also showed that foreign deposits at Italian banks were down 20 percent year on year, confirming a trend of shrinking cross-border financing in the euro zone. High sovereign borrowing costs are 'unsustainable' for Italian banks as they put massive strain on the cost of bank funding, Federico Ghizzoni, who heads Italy's largest bank by assets UniCredit said on Thursday. Italian politicians and executives have criticised past rating action by the three top international agencies, saying the downgrades hit the country by forcing up borrowing costs. Italian

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012 magistrates are currently investigating the downgrade action by the three rating agencies, which deny vigorously any wrongdoing. / Thomson Reuters

 China's growth rate slowed for a sixth successive quarter to its slackest pace in more than three years, highlighting the need for more policy vigilance from Beijing even as signs emerge that action taken so far is beginning to stabilise the economy. Year-on-year growth of 7.6 percent in the second quarter was a whisker above the government's official 7.5 percent full year target and dragged the first half average down to 7.8 percent - below the 8 percent level that in previous downturns has triggered a robust response from policymakers. The GDP number, released in a flurry of Chinese data on Friday, was roughly in line with investor expectations. The trajectory of the economy is crucial for money managers facing a slowdown not only in China, the world's second-largest economy, but anaemic growth across the BRIC grouping of major emerging economies - Brazil, Russia, India and China - which combine as the biggest marginal generators of global growth. "I would say probably the worst is over and we are going to see some stabilisation and even improvement in growth in the next quarter," Sun Junwei, China economist at HSBC in Beijing said, citing improvement in quarter-on-quarter growth and broad stability in June data for fixed asset investment, industrial production and retail sales. "It pretty much depends on what will be the strength of further easing, but I think the chance is good that (policymakers) are willing to respond to this growth slowdown." Beijing's response to the slowdown so far, sticking rigidly to a mantra of fine-tuning and a series of tweaks to monetary and fiscal policy over the last eight months, has left the economy on track for its slowest full year of growth since 1999, raising the risk for some investors that the government is behind the policy curve. "At this moment, my focus is not how deep the fall was for the economy in the second quarter, but how long it's going to stay in a hole," Dong Tao, China economist at Credit Suisse in Hong Kong, said. "My view is that the Chinese economy will be in an L-shape (trajectory) for a while." Two cuts to benchmark interest rates in the space of a month - the latest just last week - and liberalisation moves that permit discounts to borrowing costs of up to 30 percent more, are signs to others that policymakers will do all they can to underwrite growth. Sheng Laiyun, spokesman at China's statistics bureau, said the data signalled that the economy was stabilising in Q2 and that growth in the first half was in line with expectations. The Q2 forecast in the benchmark Reuters poll was 7.6 percent. Financial markets took the data in their stride, with Hong Kong shares gaining slightly on relief that it wasn't any worse, a sentiment echoed among oil traders who nudged Brent crude oil down a touch, while the China-sensitive Australian dollar edged up from session lows. / Thomson Reuters

Markets: FX / MONEY MARKET

FX MARKET The rouble was poised to close the week on Friday with rare gains, while stocks traded slightly higher, with the market expecting no changes in Russian interest rates at a central bank meeting and steady crude prices providing support. At 0605 GMT, the rouble traded at 32.62 against the dollar, 21 kopecks firmer from last Friday and 0.5 percent stronger on the day, after falling as low as 32.98 on Monday.

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012

Versus the euro, the rouble firmed 0.3 percent from the previous session to 39.81 and it was up 0.4 percent at 35.86 against the dollar-euro basket used by the central bank to guide the rouble's nominal exchange rate. The central bank was holding its monthly rate policy meeting, and was broadly expected to leave rates unchanged as it balances the risks of rising inflation and a slowing recovery.

"Despite inflation accelerating, we do not expect any bold actions from the central bank at this stage and think that the regulator has some room to continue with its wait and see approach in order to analyse the growth outlook," an analyst said.

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012

While cutting rates could aid economic growth, it would make the rouble less attractive for carry trade operations, among others. But the threat from rising inflation makes such a cut unlikely. Monthly inflation spiked to 0.9 percent in June and might reach 1.2-1.4 percent in July as a result of the tariffs hike at the start of the month, the Economy Ministry said on Thursday. The rouble got some support in early trading from oil prices, with Brent crude holding steady above $100 a barrel as supply disruptions in the North Sea and Iran offset concern over lower demand in China.

MONEY MARKET The overnight lending rates on the money market stayed stable during the whole week at 4.75-5.75 %.

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Markets: FIXED INCOME  VTB , Russia's second-biggest lender, plans to tap the market for a three-year Eurobond issue denominated in Singapore dollars, IFR, a Thomson Reuters news and market analysis service, said on Thursday. Books for the deal opened on Thursday morning, while the initial yield guidance was set at around 4 percent. The state-controlled lender first tapped Singapore dollar market in 2010, selling a two- year long bond of 400 million Singapore dollars ($316.7 million) with a 4.2 percent yield. Last year, VTB sold another Eurobond worth 300 million Singapore dollars, pricing a three-year deal at 3.4 percent. The bank also has debt in Chinese yuan, Swiss franc, U.S. dollars, euro and roubles.  Russia's Gazprom has placed $1 billion worth of 10-year Eurobonds at a yield of 4.95 percent and a five-year tranche worth 750 million euros at mid-swaps plus 270 basis points, IFR, a Thomson Reuters news and market analysis service, reported on Wednesday. The yields on Gazprom's bonds were lower than their initial guidance. Earlier on Wednesday, sources have told Reuters that Gazprom had cut its dollar Eurobonds yield guidance to 5.125 percent from initial 5.5 percent .

Markets: STOCKS

At 0605 GMT Russia's stocks climbed, tracking trends on other emerging markets, with the broad emerging market MSCIEF index up 0.7 percent. The benchmark-dollar denominated RTS index was up 1.1 percent at 1,354.51 points, while its ruble-traded peer MICEX was up 0.5 percent at 1,401.87 points. Emerging markets were broadly trading higher, after China's second-quarter gross domestic product data landed in line with forecasts, offsetting worries that a slowdown in China could undermine fragile global growth.

Macroeconomic indicators of Russia 8

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012

ECONOMIC INDICATORS PERIOD LATEST PREV YR AGO Nominal GDP (bln RUB) Q1 13.491 15.462 11.680 GDP Y/Y Q1 +4.9 +4.8 +4.0 CPI M/M Jun +0.9 +0.5 +0.3 CPI Y/Y May +3.8 +3.6 +9.4 PPI M/M May -2.4 +0.6 +1.1 PPI Y/Y May +3.1 +6.7 +19.0 Ind output M/M May 3.2 -5.4 0.8 Ind output Y/Y May 3.7 1.3 4.1 Retail sales Y/Y May +6.8 +6.5 +5.8 Unemployment (mln) May 4.09 4.37 4.86 Real disposable income Y/Y May +3.6 +2.1 -4.5 Real average wage Y/Y May +11.1 +11.1 +3.5 Nominal average wage (rbls) May 26.058 25.800 22.779 Capital investment (bln RUB) May 866.3 682.8 n/a Capital investment Y/Y May +7.7 +7.8 +7.4 Trade surplus ($bln) Apr 19.13 19.43 18.76 Exports ($bln) Apr 45.99 47.95 45.88 Imports ($bln) Apr 26.86 28.52 27.12 Budget balance (bln rbls) Jan-May +120.1 -60.3 +385.3 CBR reserves ($bln) 29-Jun 512.9 513.1 498.6 Monetary base (bln rbls) 1-Jun 7.728 7.729 7.269 M2 (blnR) 1-May 24.247 24.041 20.049 REER rouble Feb/Jan +3.5 +0.7 +1.8 Oil output (mln bpd) Apr 10.33 10.36 10.27 Oil output (mln T) Apr 42.3 43.8 43.1 Gazprom gas output (bcm) Mar 62.2 60.2 61.5 URALS oil, $/bbl 13-Jul 102.58 100.25 118.22 BRENT oil, $/bbl 13-Jul 102.58 101.89 118.88

ANNUAL DATA 2011 2010 2009 2008 2007 Nominal GDP (bln USD) 1692.4 1479.2 1292.1 1403,8 1349,3 GDP (pct) +4.3 +4.3 -7.8 +5.2 +8.5 CPI Y/Y (pct) +6.1 +8.8 +8.8 +13.3 +11.9 M2 (bln R) 24,543 20,012 15,698 13,490 13,27 Oil/gas cond.(mln T) 511 505 494 488 491 Natural gas (bcm) 671 650 582 665 653 Coal (mln T) n/a 323 298 326 315 Grain (mln T) n/a 61 97 108 82 Beet Sugar (mln T) n/a 2.7 3.3 3.6 3.2 Gold (T) n/a 201 205 184 163

GOVT FORECASTS 2012 2013 2014 Nominal GDP (bln USD) 1 913.3 n/a n/a GDP Y/Y (pct) 3.7-4.0 (+3.4) +3.8 (+3.9) +4.4 (+4.6) Industry output (pct) +3.1 (+3.6) +3.4 (+3.8) +4.1 (+4.2) CPI Y/Y (pct) 5.0-6.0 (5.0-6.0) 4.5-5.5 (4.5-5.5) 4.0-5.0 (4.5-5.5) 9

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012

Cap. Investment pct +4.0-5.0 (+6.6) +7.1 (+7.1) +7.0 (7.2) Retail Sales pct +5.5 (+5.5) 5.3 (5.3) 5.5 (5.5) Exports $ bln 513.4 (533.1) 515.0 (535.9) 543.4 (565.3) Imports $ bln 368.6 (397.4) 412.7 (444.6) 454.0 (486.1) Trade Balance $ bln 144.8 (135.7) 102.3 (91.3) 89.4 (79.2) Urals oil, ave., $/bbl 115 (100) 97 (97) 101 (101) Rouble rate/$1 29.20 (31.1) 31.3 (29.4) 31.80 (30.50) Rouble REER +0.2 (+3.5) +2.0 (0.0) 1.2 Reserve fund, trln RUB as of yearend 1,568 1,619 1,624 Revenue, trln RUB 12.588 (11.779) 12.729 (11.674) 14.116 (12.646) Expenditure, trln RUB 12.656 (12.185) 13.766 (13.418) 14.631 (14.294) Budget deficit, trln RUB -0.068 (-0.877) -1.037 (-1.744) -0.514 (-1.648) Budget deficit, % of GDP -0.1 (-0.3) -1.6 (-2,7) -0.7 (-2.3) Real incomes, % 4,2 (4.8) 4,8 (4,8) 5.3 (5.3)

BALANCE OF PAYMENTS ($bln) 2011 2010 2009 Current account 98.8 71.1 48.6 Cap/fin account -76.2 -26.0 -43.5 Net errors/omissions -10.0 -8.3 -1.7 Reserve assets -12.6 -36.8 -3.4

LONG-TERM FOREIGN CURRENCY RATINGS Moody's (December 12, 2008) Baa1 (outlook stable) S&P (June 27, 2012) BBB (outlook stable) Fitch (January 16, 2012) BBB (outlook stable)

ECONOMIC BULLETIN № DEB-2012.07-01 7/13/2012

CJSC Denizbank Moscow Treasury Ksenia Mayorova [email protected] Alexander Shetler [email protected] +7 (495) 789-97-20, +7 (495) 783-31-41 Corporate Banking Savas Citak [email protected] Oguz Yalcin [email protected] Koray Akefe [email protected] Mine Arpadji [email protected] Elena Kislova [email protected] Roman Otavin [email protected] Marina Kalashnik [email protected] Oksana Korzhuk [email protected] +7 (495) 783-31-40, +7 (495) 725-10-20

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