Russia: Other Points of View

RUSSIAN FEDERATION WEEKLY SITREP

by Patrick Armstrong

Election fraud. Two opinion polls, both by Levada, give us data on how people say they voted in the elections last month. A poll of Muscovites (JRL/201/4) gives 46.1% for United Russia (official numbers 66.25%), 27.1% for the communists (13.3%), 11.8% for LDPR (6.13%), 7.9% for Just Russia (5.33%) and 3.7% for Yabloko (4.71%). A nation-wide poll asking the same question gives United Russia 47%, communists 13%, Just Russia 8%, LDPR 7% and Yabloko 2%. When the Yabloko leader said his vote hadn’t been counted at all, a recount was ordered and, lo! it was found that some Yabloko votes had “accidently” been miscounted. But these numbers do not give us a clear picture. Levada tells us that Muscovites voted communist at twice the rate of the nation; this seems improbable. Levada also tells us that fewer people voted for Yabloko than the official numbers give; this too seems improbable if the scenario were to inflate United Russia’s numbers and deflate the others. So, as always, an examination of the data we have deepens the mystery. The Yabloko leader has described what his people told him and it appears that fake voters was the preferred method. Medvedev met with the head of the CEC and said “All types of claims must be investigated thoroughly”. Well, we’ll see. These numbers make a prima facie cause for fraud favouring the pedestal party but leave us in the dark as to what degree of fraud there was.

RUSSIA'S REFORMIST GOVERNOR

REPRINTS

The Dissident Who Came In From the Cold Nikita Belykh is radically remaking Russia's vast Kirov region. The country's democratic future may depend on his success.

By Owen Matthews and Anna Nemtsova

Newsweek, November 2, 2009 

Dozens of villagers are lined up at the gates of the decrepit local boatyard on a breezy Saturday morning to witness an unheard-of event. They gaze in wonder as the visitor arrives: never in living memory has a regional governor paid a call to the backwater town of Arkul, on the Vyatka River, roughly 500 miles northeast of Moscow. Climbing out of his battered Land Cruiser in scuffed jeans and a New York Yankees cap, Nikita Belykh makes a startling contrast to Russia's standard-issue provincial bureaucrats.

Looks are the least of the differences: Belykh made his name opposing those entrenched post-Soviet apparatchiks as one of the most determined pro-democracy activists in the country. Old friends were shocked and angry when he abruptly abandoned their street protests and took a Kremlin appointment as governor of Kirov oblast, deep in Russia's neglected heartland. But Belykh is tackling his new job with all the energy he used to radiate as an opposition leader. He immediately begins peppering the boatyard's director with questions, especially about what needs fixing. "Tell me what you do!" Belykh says briskly. "Tell me everything!" 

RUSSIA'S DEVELOPMENT PATH

FINANCIAL ANALYSIS

By Chris Weafer 

Main Principles Have Been Identified, But Progress Is Slow 

Drifting or planning? One of the criticisms levied at Russia is that it remains far too dependent on and, therefore, vulnerable to earnings from commodities. Critics say the government has either been far too complacent about the need to reform the economy or has been regularly distracted from efforts to do so. This view has and continues to affect how both portfolio and strategic investors view Russia’s risk and opportunity, and it is one of the main reasons why foreign investment flows have remained at a low level.

Following the experiences of other countries. But the evidence is that, even from the early days of Vladimir Putin’s presidency, there existed at least a broad outline of a long-term development plan (see below for description) to transform the economy from its dependency on natural resources to one with a better range of drivers, where the risk of the sort of boom-to-bust cycle experienced recently is substantially reduced. In critical areas, the development plan for Russia differs very little from those of other nations, which have successfully transformed their economies. Examples such as Chile and Malaysia come to mind. In each case, it also took about twenty to twenty-five years to end up with a restructured economy. 

  

To read the full note, please click here Download Russia's_Development_Path

MEDVEDEV TACKLES CORRUPTION

Sberbank Staff Embezzle $180 Million (USD) 

By Anatoly Medetsky

The St. Petersburg Times

MOSCOW - A group of Sberbank employees has defrauded the company of more than $180 million, which was issued in fraudulent loans from a Moscow branch, the Interior Ministry said Tuesday.

In another high-profile bust, the ministry announced that it had uncovered corruption in the Moscow city government's construction committee - a success attributed to a special unit created on the orders of President Dmitry Medvedev.

Both announcements were made at a news conference held by the ministry's economic crimes department, which later released a summary of these and other crimes it said were uncovered amid the recent economic turmoil.

It was not immediately clear why the ministry chose to release the details all at once.

Sberbank said it had uncovered and reported the theft in March, and a City Hall spokesman said no officials had been arrested for crimes described by the ministry, describing the report as "slander."

RUSSIA WEEK: A PANGLOSSIAN PARADIGM

FINANCIAL ANALYSIS 

by Chris Weafer

• Moscow's bourses should open better on Monday, following another positive session in the US on Friday, a $2 p/bbl rise in the price of oil and strong gains (+4.2%) in Brazilian commodity names in New York. The weekly fund flow report from EPFR showed that investors are finally looking again at Russia as an acceptable risk in the “commodity/recovery” theme.
  
• Following a less catastrophic 1^st Qtr for earnings in the US, and Russia, than had been feared the market gains of the last few months look more secure. We retain our mid year target for the RTS in the range of 1,000. Progress from here, after a near 70% rally from late January, will be tougher but the combination of cheap valuations and light investor exposure might provide a sufficient catalyst to add the extra 20% upside.
  
• Note: at the end of this note is a table showing the % that the most liquid GDR/ADRs are currently sown from last year’s high. 26 stocks are down by more than the market average and 20 of these are off by 75%, or greater, from last year’s high. Still plenty of scope for recovery gains.  

RUSSIA TODAY: CLINGING TO LIFE

FINANCIAL ANALYSIS

by Chris Weafer

• The global markets rally looked close to expiring on Monday but yesterday the US Treasury Secretary breathed life back into it to live a little longer. The strong gain in the US markets (S&P rose 2.1% to 850.1), plus the rise in the price of oil, will help the Russian markets to regain yesterday’s loss at the opening this morning. The banks, especially Sberbank, should lead the recovery after US banks led the way higher in their market. Oil company shares should also be modestly better with the better finish for crude on Nymex and the price gain in Asia this morning. 
• Asian equities are trading around 0.5% higher this morning, led by shares in banks and the technology sector. The former as a conta gion from the US banks move higher and the latter after a good report from a chip producer. Japan’s March exports fell 45.6% according to a government report. That is at least better than the 49.4% slump in February. A flimsy reason for optimism but a marginal positive nevertheless. 

PIECES OF EIGHT

FINANCIAL ANALYSIS 

By Chris Weafer 

• Global markets look set to extend the current bull run this week. But the prevailing view is that this is only a rally in the long bear market. Progress from here will be more of a struggle, albeit the momentum may stay positive because this is a short week in western markets and activity will slow down either side of the Easter break.
  
• This morning, the Asian markets are extending last week’s gains. The MSCI Asia Pacific Index is up 1.0%. The S&P Futures are currently showing an opening gain of 1.0%. The dollar is again weaker against the euro and is trading at $1.3559. That is helping the price of oil again; Brent is trading at $54.0 p/bbl and WTI is at $53.6 p/bbl, up $1.1 p/bbl.
  
• Gold is now trading well down, i.e. as the demand for haven assets has evaporated. It is currently at $881.7 per ounce.
  
• The next big test for the US, and other markets, will be the 1^st Qtr corporate results season. That kicks off on Tuesday with Alcoa’s results and with the heavyweight names reporting from mid month. Any major negative surprises will call the end to this bear market rally.
  
• The Russian markets should follow that trend and make further gains before reversing later this month, again with corporate resukts. In this note are listed eighth reasons that have justified the 50% rally in the RTS Index since late January, plus eight reasons to now shift to a more cautious stance through the 2^nd Qtr. 

RUSSIA WEEK: BUCKLE UP

FINANCIAL ANALYSIS

by Chris Weafer

➢    Global markets are set for a very turbulent week. Investor hopes that the G20 meeting might produce some instant financial market and economic relief, are being rapidly downplayed by political leaders while economic indicators continue to show deterioration in most global economies.

➢    Despite last Friday’s sell-off, there may still be some gains, or minimal selloff, as part of the usual end quarter “window-dressing” with the real test for market sentiment coming as the new quarter starts on Wednesday.

➢    There are several major economic reports due out in the US this week with Friday’s nonfarm payroll and unemployment reports likely to have the biggest impact. If these disappoint then markets, and commodities, will start the new quarter heading south regardless of what the G20 agrees.

➢    The RTS had risen 50% during this rally before losing 4.2% on Friday. That reduced the month to date gain to 32.4%. After such a strong run, the tendency will be towards caution, especially with March indicators expected to show a continuing sharp decline in the economy and the prospect of a big hike in bank bad debts looming large. The bank sector looks particularly vulnerable to a short-term decline.

WINTER OF DISCONTENT - REDUX

Rally in the bank sector looks to have ended                                                FINANCIAL ANALYSIS

by Chris Weafer

In recent weeks, Muscovites had become used to the signs of approaching spring and the mood was improving. This morning, they have had a reminder that winter is far from over as the City is again covered in a blanket of snow. There is a clear analogy with the stock market. The RTS had grown by almost 50% from late January until Monday’s close as optimism grew with stronger oil, metals, a more stable currency and the global market trend. The size of that rally matches the rally seen in early November last and while conditions today are certainly a lot more hopeful than at that time, there are again worrying signs emerging. The investigation into the financial dealings surrounding Norilsk Nickel and the ongoing Altimo-Telenor dispute serve to remind investors of Russia investment risk. The earnings report from Novolipetsk and the Interfax report of Sberbank’s earnings are a reminder of just how bad are trading conditions in Russia. Finance Minister Kudrin’s warning about an expected rise in bad debts and the still deteriorating economic conditions should also serve as a warning that we are only in the eye of the storm rather than clear of it. There is an army of street sweepers currently clearing the snow from Moscow’s streets. Such an efficient clear up will not be possible in the stock market or the economy.

VERNAL OPTIMISM

FINANCIAL ANALYSIS

By Chris Weafer

• The MSCI Asia-Pacific Index is down almost 1.0% this morning as investors take profits in financial stocks. That extends the trend seen in the US and over the closing hours of trade in Europe yesterday.
• The Russian banks have spiked with the news of the government’s capital injection and prospects of equity issuance at a “premium” to the recent price. There is now a lot of speculation in the price of both stocks. Yesterday’s economic update in Russia confirms the still rapid slowing of the economy and raises the prospects of, e.g. much higher non performing loans and bad debts in the banking system. Dangerous to chase these prices much higher from here.