Negligent clients a source of considerable revenue for the Russian banks

Business daily Vedomosti.ru quotes one of the banking industry analysts, stating that the Russian banks earned approximately 57.8 billion rubles (USD 1.92 billion) in penalty fees in 2012. While for some banks the growth of penalty fees corresponds to their asset growth, others record a disproportionate growth in respective revenues that can be explained by the growth of unsecured consumer loans and non-performing loans. Some industry experts even presume that there are banks that deliberately focus on a group of less disciplined customers in order to generate higher fee income.

At the same time, the banks that focus on corporate lending register a decline in respective fees, having done their best to get rid of bad loans. This group contains some the largest banks in the market, including the largest: Sberbank, VTB, Alfa-bank. In addition, there are some specific cases: Bank Moskvy was forced to book additional penalties after the audit found a large volume of bad loans provided to entities related to the bank’s former President Andrey Borodin (it is doubtful that the bank will ever collect them, though); Rosselhozbank (Russian agricultural bank) also generated a large amount of penalty fees due to its unusually high percentage of non-performing loans – 10.7 percent, almost three times the industry average.

Russia considers making market access for generic drugs more difficult

Yesterday’s business daily Vedomosti.ru reported that the Russian Ministry of Health considers amending the existing law on pharmaceuticals in a way that will make it much more difficult for generic drugs to access the market. The Ministry of Health defined the criteria for substitution of the original drugs with their generic counterparts, requiring the latter to have a “full therapeutic equivalent” with the originals – something that can only be established by performing a full range of clinical tests lasting approximately one year and involving a minimum of 150 patients. Clinical tests for oncological drugs can take up to five years. The current law requires the generic drugs to be accompanied only with a proof of bio-equivalence and toxicological data, which can be provided within three months, with the participation of a minimum of 18 patients. Testing required to prove full therapeutic equivalence is approximately ten times more expensive than the testing for bio-equivalence.

One of the industry experts provided the example of the eptacog alfa enzyme (a blood coagulation factor), for which the Russian Ministry of Health spent 763 million rubles (USD 25.3 million) in 2008; a year later, a supplier of a generic competitor participated in the tender and the cost went down to 438 million rubles (USD 14.55 million). Hence, experts argue, it is obvious that the drug expenditures will go up should the Government introduce stricter market access requirements for generic drugs, which is contrary to the Government’s plan outlined in its “Pharma-2020” strategy.

Industrial output shortfall disturbs Russia’s bright economic future

Today’s Novaya Gazeta reports on the recently published data by the Russian Statistical Bureau, indicating that the industrial output grew by a mere 2.6 percent in 2012, which is less than the Ministry of Economy’s humble projection of 3.2 percent. What is more interesting is that the Russian Central Bank, known for its resistance towards loosening of the monetary policy, changed its views and does not exclude the possibility of changing its interest rates.

Industrial output grew by 1.4 percent year-on-year in December 2012, down from 1.9 percent in November and 2.5 percent in December 2011. Independent analysts confirm the negative tendency, stating that some sectors of industry still did not catch up to the pre-crisis levels – for example, manufacture of machinery and equipment in 2012 was 13.1 percent lower than before the 2008 crisis. On the other hand, oil and gas extraction, as well as production and supply of electricity and gas, surpassed their pre-crisis levels by 5.7 and 6.6 percent, respectively, thus lifting the overall industrial output to 2 percent above its pre-crisis level. However, such developments only increase Russia’s dependence on its oil and gas sectors. Industrial optimism index, developed and published by the Gaidar Institute for Economic Policy, fell to its three-year minimum in January 2013, indicating that it would be unrealistic to expect an increase in fixed capital investments in the immediate future.

Considering the recently published data on the Russian industrial output, it might be more than a coincidence that the Russian Central Bank changed its rigid attitude towards changes in monetary policy. Alexey Ulyukaev, Deputy President of the Central Bank, stated that the Central Bank allows the possibility of changing interest rates depending on the complex developments in the international environment. Only a week ago, Ulyukaev was quoted saying that the reduction of interest rates would be counterproductive and lead to increased risks in various sectors of the economy. At the same time, the Central Bank decided to keep its base refinancing rate at 8.25 percent (the history of Central Bank’s monetary measures can be found here. The Central Bank remained indifferent even to President Putin’s statement on the necessity to provide cheap long-term funds for the development of the economy. His request might have been contradictory in a sense that it called for a low inflation as well, which currently seems to be the main concern of the Central Bank. Ulyukaev stated that the year-on-year inflation at the beginning of 2013 could increase to 7 percent, higher than the desired target of around 6 percent. Analysts don’t expect the Central Bank to change its monetary policy anytime soon, as the risk of higher inflation currently outweighs the risk of an economic slowdown. With all this taken into account, Russian analysts expect that the industrial output will grow by about 1 percent in 2013.

 

 

World Economic Forum in Davos: Prime Minister Medvedev will try to brighten up dark scenarios of Russia’s future

Today’s business daily Vedomosti.ru talks of the Russian Prime Minister’s difficult task to present his country’s economic future in a brighter light at the current World Economic Forum in Davos. In his attempt to do so, he will rely on large infrastructure projects, including the development of the Russian Far East, construction of the infrastructure for the winter Olympic Games in Sochi in 2014 and construction projects in cities expected to host the 2018 FIFA World Championship. According to the Deputy Prime Minister Arkadiy Dvorkovich, this year Russia sent the largest delegation ever to Davos.

A report on Russia’s economic future prepared by more than 350 managers, government officials and analysts before the Forum already casts a shadow of doubt over the presenter’s customary optimism. According to Vedomosti.ru, the report sees Russia as a passive player in the world economy: it will merely respond to changes or put up a line of feeble defense. The report proposes three alternative development models for Russia’s future, depending on the developments on the international energy markets, Russia’s institutional reforms and related social conditions in the country.   

The first scenario sees the central government comfortably enjoying the consequences of the international economic growth and corresponding growth of oil prices, postponing any meaningful institutional reforms. This will create problems for some local authorities in Russia, as they will remain dependent on the subsidies from the central budget. Some regions will manage to develop their own brand and attract investors by emphasizing their development potential based on human capital, but others will fail to do so, thus deepening economic disparity in the country.

The second scenario foresees a darker future should the oil prices drop; in attempting to preserve the current distribution of economic and political power in the country, the Russian Government could introduce a progressive income tax or other mechanisms for distribution of wealth in order to support the same level of social expenditures. The Government will intervene in the economy to prevent bankruptcies and loss of jobs, eventually creating a super-monopoly with a complete control over the country’s energy resources. Inefficiency will follow, causing the extraction to stagnate and the infrastructure to deteriorate.

The third scenario is not too bright, either: it sees Russia’s energy sector flourishing as a result of tax breaks and special treatment of foreign investors in the sector, while the rest of the society grows increasingly frustrated. Social inequalities will continue to rise and the citizens will continue to suffer from corruption, low quality of government services and lack of perspective. Even a part of the political and business elite will become dissatisfied with the continued domination of the oil and gas lobby. There will be increased pressure on the Government to implement institutional reforms.

All three scenarios are grim in their own way, but shouldn’t be taken too seriously. Russian municipalities and regions have already recognized the need to focus on developing their own resources rather than rely on Government subsidies, and many of them have already undertaken concrete steps to attract investors and create a more comfortable living environment. In addition, an expert from the Moscow’s Higher School of Economics reminds the readers that market forces should be taken into account – stakeholders will not watch any of the three scenarios develop with folded arms.

Does the Yukos case precedent jeopardize freedom of businesses to form prices?

Today’s business daily Vedomosti.ru comments on the dictum accompanying the Moscow municipal court’s December dismissal of the petition by Mikhail Khodorokovsky and Platon Lebedev to overturn the first-instance ruling on the second “Yukos” case. Mikhail Khodorkovsky (former Chairman of the Yukos oil company) and Platon Lebedev (former CEO of the Menatep Group, a holding company that had a controlling interest in Yukos) were charged of defrauding Yukos’ daughter companies involved in oil extraction. Russian State Attorney claimed that the price at which Yukos purchased oil from its daughter companies was below the prevailing market price. The defendants argued that the daughter companies were not defrauded, as the price at which Yukos purchased their oil was higher than the cost of extraction. In 2010, the Khamovniki municipal court in Moscow found Khodorkovsky and Lebedev guilty of stealing 200 million tons of oil and money laundering and sentenced them to 14 years in prison.

Commentators are concerned with the Moscow municipal court’s interpretation of the term “defrauding” (to be more precise, the term in question is “acquiring without compensation”), as it found that any transaction that doesn’t involve “adequate” compensation (market price) should be considered as theft. The article goes on to quote an excerpt from the dictum: “The analysis of the mechanism developed by the defendants to determine prices for oil extracted by Samaraneftegaz Inc., Yuganskneftegaz Inc., Tomskneft-VNK Inc. (Yukos’ daughter companies)… demonstrates that, as a rule, the prices were lower than the real market prices… and that the sums paid (by Yukos)… barely compensated the costs of extraction.”

Legal experts stated that the Supreme Court of the Soviet Union considered unequal exchange whereby the value of one exchanged item is lower than the other as theft; however, such interpretation in a free market environment could threaten any and all commercial activity in the country. Some experts see this as a new tendency, as the recent case against the state-owned defense company “Oboronservis” is based on the presumption that the management sold company’s assets below the market price. Former defense attorney for Platon Lebedev criticized the Moscow municipal court for disregarding the Russian Constitutional Court’s interpretation, stating that the price in commercial transactions is determined by consenting parties alone. One party could be accused of defrauding another only if it employed deliberate deceit or misrepresentation of essential facts. One of the commentators is concerned that the current interpretation of the Moscow municipal court could introduce the term “adequate price” as a measure for compensation and allow the law enforcement institutions to decide what it should be.

Distinction between online and offline retail in Russia becomes blurred

Today’s edition of business daily Vedomosti.ru reports that a great number of Russian online retailers started opening their delivery points and stores, thus embarking into the realm of offline retail. Mr. Maxim Faldin, the General Manager of a Russian online-hypermarket Wikimart, stated that the “materialization” of online stores in Russia has become such a frequent occurrence that it can be considered a trend. Wikimart itself opened two delivery points just before the New Year in order to reduce its dependence on postal services and will evaluate the justification of respective costs after February 23 (Defender of the Homeland Day, informal Fathers’ Day) and March 8 (International Women’s Day). Other online magazines already concluded that such delivery points are worth the investment. Sotmarket, an electric appliances online store, opened 200 delivery points in 130 cities across Russia in the last two years alone. It plans to add another 100 points in 2013 and open 45 branded boutique stores. Online retailer Lamoda.ru delivers purchased items to its clients through a courier service and a partner network that operates more than 300 self-service postal booths. So far, the retailer opened only one magazine, in a Moscow shopping mall “Atrium”.

While customers in Moscow and St. Petersburg prefer courier service, delivery points are increasingly popular in regions outside these two metropolitan areas. According to an online retailer Ozon.ru, courier services account for 47 percent of total deliveries in Moscow and 25 percent in St. Petersburg. Outside of these two major cities, as much as 72 percent of deliveries are made through delivery points, while courier services account for only 9 percent of the total deliveries. Ozon.ru delivers its merchandise through 2,000 delivery points in 230 cities in Russia and Kazakhstan. Sotmarket’s representative explains that the customers outside the two largest Russian cities view delivery points as a proof of existence of a particular online retailer and a guarantee for a certain delivery. Delivery points also serve as a channel of communication between the retailer and a customer, thus increasing consumers’ confidence – according to Sotmarket’s representative, after opening of a new delivery point, online orders from the respective area double within months.

It is only natural to expect that the online stores will look to outsource “live” delivery services to other companies, as they are accompanied by costs that are not typical for an online retailer. For instance, PickPoint delivers merchandise from several online retailers (Lamoda.ru, Wildberries.ru, Sapato.ru, MyToys.ru, Rendez-vous, Ecco, Dostavka.ru, re:Store, Avon, Oriflame and others) through 320 of its self-service postal booths. According to PickPoint’s management, the company processes approximately 60,000 orders with an average value of 3,000 rubles (USD 100) per month.

Curiously enough, there is a reverse tendency as well: as the share of online retail trade is expected to rise, retailers are increasingly interested in generating online sales. For instance, the representative of Lamoda.ru expects that approximately 8 percent of the total fashion sales in Russia in 2015 will be generated online. The largest Russian food retailer X5 Retail Group opened its own online shop e5.ru and provides delivery to a vast network of its own magazines. The project started in February 2012 and by November the volume of orders reached 3,500 per day, with an average value of 2.000 rubles (USD 66). The company would like to generate 2 percent of its total revenues through online retail. For comparison, a leading electric appliances dealer M.video generated approximately 10 percent of its total sales in Moscow through its online shop.

Economists say 2013 might be a year of the Bear for Russia

Today’s Vedomosti.ru quotes opinions of several economic experts on the prospects for the Russian economy in 2013. Most of the experts agree that the GDP growth will continue to slow down, accompanied by a relatively high inflation and a continued net capital outflow. According to their expectations, the current account surplus will decrease by another 30 percent (on top of the 20 percent decrease in 2012), the ruble will weaken against major currencies, and consumer spending, although reduced, will remain the principal driving force of the economy. Such developments represent a continuation of the existing trends in absence of a new internal or external impetus.
Economists are also concerned about the risk of recession in Germany, as its banks are actively financing the periphery of the EU, thus steering funds away from the domestic economy. The ongoing possibility of Greece stepping out of the Euro zone, postponement of the solution to the U.S. fiscal cliff and uncertainties regarding growth rates in China are among other factors that could negatively affect the Russian economy. In addition, some analysts expect that the oil supply will exceed the demand; while most of the 14 interviewed analysts expect the oil price to remain within the range of USD 100-110 per barrel, two of them believe that the price will stabilize between USD 93-95 per barrel, and two are willing to bet above the majority estimate, but only by a fraction, quoting USD 110.5 per barrel as the expected average price in 2013.

Experts are not sure what should be done to boost the Russian economy, but currently do not see any signs of an impending change in the current trend. Even if the Government decides to provide new stimulus from the budget or national reserve funds and/or implement a more aggressive institutional reform, these measures would yield results only in the longer run.

Most of the quoted experts expect the Russian GDP to grow by between 3-3.5 percent, while four of them believe that the growth will be below 3 percent. The most pessimistic forecast is equal to the actual annualized GDP growth in the IV quarter of 2012 – a mere 2 percent (interestingly enough, the most pessimistic estimate came from the expert of the Russian investment bank VTB Capital). Lower growth rates could provoke the Government to mandate government-owned companies to increase their investments. However, some analysts are of the opinion that any strengthening of the government sector could actually slow the economy even further. Other analysts are warning of possible “overheating” should the Government attempt to squeeze out more from the economy than it would naturally yield. Analysts see the potential for the increased role of the domestic financial sector, which could become more engaged in financing the local economy should the Central Bank prove that it can control the inflation.