Today’s Vedomosti.ru reports that the doubling of foreign postal shipments to Russia surprised even the western postal services. Russians seem to have fully embraced international Internet-shopping: 70 percent of incoming parcels handled by Russian Postal Service originate from foreign online stores. Russian Postal Service expected that the volume of incoming parcels would increase by no more than 40-60 percent during the holiday season.
Delivery delays indicate that some foreign online stores and postal services weren’t prepared for the surge in orders from Russia. For example, the British postal service was not able to increase its assigned volume for shipments to Russia with air carriers and had to redirect some of the shipments to Kiev, from where they get delivered to Moscow by road, delaying the delivery by an average of two weeks. The Chinese postal service is also unable to handle the increased volumes of shipments to Russia, and it took as much as three weeks for some of the parcels to reach the Russian Postal Service.
Russian Postal Service reports that the volume of foreign shipments reached 21.6 million parcels in 2012, of which approximately 70 percent, or 15 million, originate with foreign online stores. The most popular foreign online stores in Russia are eBay, Shipito, Zappos, Yoox, Asos and TaoBao. The reason these stores are so popular with the Russians is straightforward – their prices for ordered products are significantly lower than in Russia. Russian online retailers still have an edge thanks to the services and options unavailable for purchases made abroad, such as product return and live communication. In 2012, they shipped as much as 108 million parcels.
With an estimated annual turnover of USD 10.3 billion, the Russian online retail market is still lagging behind Europe and the United States and is comparable to Brazil and India. As a comparison, Amazon.com alone makes USD 48.1 billion in annual sales, and the total online retail markets in the United States and Europe are estimated at USD 194 billion and USD 260 billion, respectively.
Business daily Vedomosti.ru quotes yesterday’s comments by the Russian Minister of Agriculture Nikolai Fedorov on the effects of Russia’s WTO accession. According to Fedorov, veal, pork, milk and cream imports increased between 10-33.5 percent in the period between September and November on a year-on-year basis. The Institute for Agricultural Market Studies (http://www.ikar.ru/eng/) provides a more detailed analysis, stating that the imports of milk powder increased by 216 percent (to 7,800 tons), imports of whey increased by 89 percent (to 6,766 tons), cheese imports increased by 116 percent (to 89,104 tons) and butter imports rose by 136 percent (to 27,155 tons) in the same period.
Experts sounded the alarm immediately after the final WTO accession requirements became public a year ago. Russia reduced tariffs for pork imported within a determined quota from 15 to 0 percent (tariffs for pork imported above the quota were reduced from 75 to 65 percent), while the tariffs for live pig imports were cut from 40 to five percent. Import tariffs for dairy products were lowered from 25 to 15 percent. One of the experts was quoted saying that Russian system of state subsidies is insufficient to enable the local producers to compete with dairy product exporters such as Belorussia, Finland and the Baltic countries. Furthermore, it is expected that the Russian Government will reduce state subsidies to the dairy industry.
The National Meat Association reports that the pork prices in Central Russia, accounting for half of the country’s output of pork meat, dropped from 94 rubles (USD 3.1) per kilo in August to 65 rubles (USD 2.1) per kilo, which is below the cost of production. However, the Government still has certain instruments for the protection of domestic producers at its disposal. For instance, it already extended the application of the zero income tax rate for agricultural producers and VAT tax breaks applicable to imports of livestock for breeding purposes until 2020. The Government is expected to amend the Law on Agriculture Development and remove limitations on additional state support to the domestic agriculture.
Business daily Vedomosti.ru reports on the analysis performed by the Russian Central Bank, indicating that the risk levels for consumer lending are underestimated. The Central Bank selected a group of 32 Russian banks that provide unsecured consumer loans and analyzed their performance and risk exposure.
The analysis revealed that the retail lending portfolio of the selected banks grew by 46.5 percent year-on-year, faster than the overall average annual growth of 41.7 percent for all banks. Industry experts are concerned that the report might motivate more banks to expand their consumer loans portfolio, as the profitability of the respective market segment is two times higher than the average, primarily due to high interest rates. However, the percentage of bad debts is also quite high, ranging between 10.1 and 19.1 percent. The Central Bank took notice of this and stated that the provisions for consumer loans are lower than the average, which might indicate inadequate risk assessment. Within the 32 analyzed banks, non-performing loans represented 8.6 percent of the consumer loan portfolio, while the respective provisions amounted to 6.4 percent. However, it is difficult to estimate the real magnitude of the potential problem, as the banks often sell their outstanding debts to debt collectors, thus removing them from their balance sheets. On October 1, 2012, the capital adequacy ratio for the selected banks was at 13.1 percent, somewhat lower than the overall average of 14 percent.
Analysts believe that the volume of bad consumer debts in Russia will increase in 2013, as the growth of lending continues to outpace the growth of real income. High deposit interest rates represent another risk factor, as smaller banks usually offer higher than average rates, thus attracting clients who are likely to leave the bank as soon as other, more attractive options become available. Experts do not expect to see any signs of “overheating” yet, as the ratio of retail lending to private deposits was at 56 percent in November – meaning that the citizens still remain a net borrower in the banking system. This year, Sberbank and VTB24 already announced their intention to enter the unsecured consumer loans market.
Today’s business daily Vedomosti.ru reports that the Russian Government is expected to discuss the tax reform announced by the Prime Minister Dmitry Medvedev at the beginning of December. In his statement, Medvedev emphasized his intention to discuss the possibility of introducing the turnover tax to replace the VAT. The Government will hear expert opinions at its today’s session, including that of Mr. Sergei Sinelnikov-Murylev, President of the Russian Foreign Trade Academy and the Head of the Science Council with the Gaidar Institute for Economic Policy.
According to Vedomosti.ru, Murlyev will advise against the substitution of VAT for turnover tax, as it will lower the central budget revenues and require the Government to increase other taxes. A compromise solution – reducing the VAT rate while introducing a marginal turnover tax – can hardly be efficient, as increased administrative costs will eat up any increased tax collections. According to the analysis performed by the Russian Foreign Trade Academy, at the end of 2011 as many as 156 countries, including almost all developed countries, relied on the VAT, and their number is steadily increasing. On the other hand, only 29 countries still use turnover tax, among them the United States. However, the total collected turnover tax in the USA amounts to only 2.57 percent of the GDP. Only seven countries use both the VAT and the turnover tax, including Canada, China and India. VAT in Russia brings as much as 6 percent of the GDP to the central government budget. Should the Government decide to replace the VAT with the turnover tax, the rate of the latter should be no less than 22.5 percent in order to fully substitute for the loss of VAT revenues. Introduction of the turnover tax would also remove the existing VAT tax refunds and increase the tax burden for small businesses.
Introduction of the turnover tax would not lead to redistribution of tax revenues to local administrations, which was one of the main motivations for considering its introduction. 10 regions account for more than 50 percent of the retail turnover in the country; in 2002, when the turnover tax was still in effect, only three regions accounted for more than half of its collections. Experts from the Gaidar Institute argue that instead of substituting one tax for another, the Government should consider redistribution of the existing VAT revenues to the local authorities. They propose two suggestions: either to leave between 4-6 percentage points of the 18 percent VAT to the local authorities where the VAT is generated, or to simply redistribute approximately 30 percent of total VAT collections to local authorities on a per capita basis. The first option would help mineral extracting regions with a small population, while the second would increase the revenues of densely populated regions with weaker economies. Before it considers any of the proposed suggestions, the Government will have to come up with a solution to compensate the reduction of revenues for the central budget.
Gazeta.ru reports on the capital outflow from Russia that continues for the 11th consecutive week. According to the Emerging Portfolio Fund Research (www.epfr.com), during the week that ended on December 19, foreign investment funds targeting Russia were reduced by USD 60 million. This marks the continuation of a negative trend lasting for 11 weeks – since the beginning of October, foreign investment funds reduced their Russian assets by USD 636 million. Most of the outflow during the past two weeks is attributable to long-term investors, which indicates that the loss of confidence might not be confined only to the immediate future.
Foreign funds invested approximately USD 462 million in Russia since the beginning of the year, which is less than the amount of financial investment China attracted during the previous week (USD 670 million). During the last week, foreign funds pulled money out of Brazil (USD 130 million) and Taiwan (USD 105 million), while Turkey managed to attract USD 52 million of capital. Developing countries as a whole registered a capital inflow of USD 4.5 billion in the last week. Foreign investors continue to favor Asian markets, primarily South Korea and China.
Analyists state that the Russian market lacks impetus and that the growth rates in China make Russia pale in comparison. This could cause a negative trend in the Russian stock market in the near term, which is expected to be reversed only in the second half of 2013 should the Russian economy show encouraging signs.
Russian business daily Vedomosti.ru reports that the competent ministries within the Russian government agreed on the main provisions of the future law regulating taxation of the shelf oil and gas fields. Deputy Minister of Finance Mr. Sergei Shatalov stated that the Ministry of Finance, Ministry of Energy and Ministry of Economic Development came to terms on the principal issues of the new law. All that remains to be done is to put the law on paper, Shatalov said, which the Ministry of Finance should do by the end of the year.
The Russian Government instructed the Ministry of Finance to develop a draft of the respective law in April and outlined the main principles of future tax breaks for oil and gas projects within the shelf. The projects will be broken down in four categories according to their complexity: from „basic“ to „Arctic“. The mineral extraction tax for basic projects will be set at 30 percent of the value of extracted minerals, while the most complex projects will enjoy a reduced mineral extraction tax rate of five percent. The law will guarantee that the tax rates, once set, will remain unchanged for a period lasting between five and 15 years. In addition, oil and gas concessionaires within the shelf will enjoy a zero oil export tariff and will not be required to pay customs and VAT on imported high-tech equipment used in their projects. Tax breaks will be applied to projects where the extraction will begin no earlier than in 2016. The Russian Ministry of Natural Resources proposed to introduce an increased profit tax rate for oil and gas extraction projects within the shelf, but the proposal was rejected.
Experts stated that the tax breaks are unprecedented, but justified, as it is necessary to make the oil and gas extraction projects within the Arctic shelf attractive. By giving up the oil export tariffs and reducing the mineral extraction tax, the Government reduced the tax burden for the shelf concessionaires by 2.5-3 times. Some analysts believe that this was a forced move, as there are less and less traditional oil fields and it is necessary to speed up the development of the shelf projects.
Currently, only Rosneft and Gazprom are licensed to develop oil and gas fields within the shelf, while other companies can become minority partners. Neither Rosneft nor Gazprom were available to comment on the proposed tax breaks.
Today’s edition of Gazeta.ru reports on VTB bank’s financial results for the third quarter of 2012, which was one of the most successful quarters in the bank’s history. While VTB’s income from corporate loans declined, approximately half of the bank’s total net profit of 26.6 billion rubles (USD 865 million) in the third quarter came from non-core activities, such as leasing, insurance and development. VTB’s third quarter net profit exceeded analysts’ expectations by 25 percent and was 40 percent higher compared to the same period in 2011.
VTB’s President Mr. Andrey Kostin stated that the VTB group’s net profits for the third quarter of 2012 represent the second best financial result in its history. According to Kostin, such results are attributable to efficient expansion of retail banking and adequate risk management policies. Analysts remarked that the contribution of VTB’s non-core activities to the group’s overall financial result were extraordinary. However, the VTB group’s net profit for the first nine months of 2012 was 17 percent lower than in the same period in 2011 – 60.2 billion rubles (USD 1.96 billion) against 72.6 billion rubles (USD 2.36 billion), respectively. The bank justified this by higher personnel costs as a consequence of the integration of the Bank of Moscow, acquired in February 2011. Analysts agree that the acquisition and related integration costs were not accompanied by corresponding organic growth – group’s assets increased by a mere 4.1 percent in the first nine months of 2012, to 4.8 trillion rubles (USD 156 billion). In addition, the bank had to increase its provisions by 80 percent compared to the same period last year, to 25.3 billion rubles (USD 822 million). Non-performing loans represented 5.6 percent of the bank’s total loan portfolio.
VTB’s management stated that the bank’s retail business increased significantly during the first nine months of 2012 – loans to citizens amounted to 1.03 trillion rubles (USD 33.5 billion), increasing by 24.6 percent from the beginning of the year and contributing 35.6 billion roubles (USD 1.15 billion) to the bank’s total net profit in the respective period. Corporate lending brought disappointing results, adding 18.7 billion rubles (USD 607 million) to the bank’s net profits. VTB suffered a loss from its investment banking activities and reduced its securities portfolio by 25.9 percent to 201.3 billion rubles (USD 6.54 billion) from the beginning of the year. The bank’s capital adequacy ratio on September 30, 2012, was 12.9 percent.
VTB is the second largest Russian bank in terms of assets and the largest bank in the country according to its equity. The Government is the largest shareholder with a 75.6 percent stake. After the acquisition of the Bank of Moscow in 2011 for 251 billion rubles (USD 8.15 billion), some VTB officials complained about the deal, referring to a „hole“ of 366 billion rubles (USD 11.89 billion) in the Bank of Moscow’s balance sheet.