Putin’s desire to limit annual energy tariff growth likely to hurt Russian energy stocks

Today’s edition of Slon.ru published a chart indicating a poor stock performance of energy utility companies that came as a consequence of President Putin’s attempts to limit the growth of energy tariffs. His recent requirement is to keep the tariff growth within 6 percent per year, which is currently below the official annual inflation in the country. Authors expect that this will drive investors away from the Russian energy sector, as demonstrated by the performance of the MICEX Power Index of the Moscow Stock Exchange.

At the beginning of 2011, the Government decided to limit the annual growth of energy tariffs to 15 percent, which didn’t prevent energy prices in several regions of the Russian Federation to increase by as much as 40-50 percent within a month. This made President Putin – at that time looking to return to the office for his third term – quite unhappy, and he decided it was time to put a stop to the uncontrolled growth of energy prices for households. While his intentions were decent, portfolio investors reacted by pulling out from the sector and sending the market capitalization of respective companies into a nosedive. This is visibly displayed by a chart below, which shows the value of the Moscow’s Stock Exchange composite energy index plummet at the beginning of 2011, and then again at the beginning of 2012, when the Parliament considered limiting the energy tariff growth to the annual inflation rate. After focusing primarily on the electricity utility companies, the Government is expected to attempt to control the tariffs of the heating companies.


Gaidar Institute survey says Russian bankers are fairly optimistic

Business daily Vedomosti.ru quotes the results of the survey performed by the Gaidar Institute, indicating a moderate optimism among the largest Russian banks regarding the growth of lending in 2013. The survey included 52 top managers from the group of 100 largest Russian banks, including Sberbank and VTB. Although the corporate lending growth rate fell from 26 percent in 2011 to 12.7 percent in 2012, leading Russian bankers do not expect a reduction of demand for corporate loans in 2013.

Most of the respondents (55 percent) believe that the demand for corporate loans will grow, but only slightly, while 27 percent of the surveyed bankers believe that the corporate lending growth rate will remain the same. Only 9 percent of the respondents believe that the demand for corporate lending will decrease in 2013. Reduced forecasts are a consequence of lower GDP growth estimates for 2013 (approximately 3.5 percent).

Surveyed bankers stated that 60 percent of the borrowers use the loans to finance their current assets, and only 12 percent resort to borrowing in order to service and maintain their existing production facilities. One quarter of the borrowers use new loans to refinance the existing ones, while only 3 percent of the total corporate lending is used for investments into new production capacities.

Consumer lending increased by 39.4 percent in 2012, but only 17 percent of the surveyed top bankers believe that the growth will continue at a similar pace, while 62 percent believe that the growth will be moderate. However, none of the bankers expect a significant decrease in consumer lending. Respondents are similarly optimistic regarding lending to small and medium businesses – almost 2/3 of them believe that lending to SMEs will increase, albeit slowly, and another 18 percent believe that lending to SMEs will increase significantly.

As far as the credit portfolio quality is concerned, only 3 percent of the respondents stated that they expect significant worsening of their borrowers’ performance, while most of the bankers (38 percent) expect the quality of their portfolios to remain the same. When combined with 35 percent of the surveyed who believe that the loan portfolio quality will slightly improve, they form a majority with moderate expectations.

Communal infrastructure in Russia leaves a lot to be desired

Last week, business daily Vedomosti.ru reported on a study performed by the Russian Engineers’ Association on the state of Russian public services infrastructure, which found that as much as 11 percent of all households in urban areas do not have running water, while almost 20 percent of them don’t have hot water. Even more worrying than this disturbing snapshot is the Association’s estimation on the condition of the existing infrastructure – almost 70 percent of the communal water, gas and electricity networks are worn out. The study analyzed the condition of the communal infrastructure in 164 cities in the Russian Federation and found that the cities in the immediate vicinity of Moscow are better off than the rest of the country, including Moscow itself and St. Petersburg.

The Russian Engineers’ Association claims that cities like Lubertsy, Pushkino, Krasnogorsk, Podolsk, Odincov, Balashika and others offer the best combination of infrastructure quality and penetration. For example, the city of Lubertsy boasts 14 kilometers of heating infrastructure, 16 kilometers of water supply and sewage infrastructure and 12 kilometers of gas supply infrastructure per each square kilometer of city’s surface. The leading cities are also much better off than the average in terms of infrastructure condition: only 34 percent of heating infrastructure and 25 percent of water supply infrastructure is considered to be worn out, while the average for the Moscow region is around 50 percent.

While it is not surprising that the youngest cities with relatively recent construction projects have the best quality of communal infrastructure, those that have not been to Moscow or St. Petersburg might be surprised that the two capitals are not among the top ten cities according to infrastructure quality. For the sake of comparison, the length of gas supply infrastructure in Moscow is 7 kilometers per square kilometer of city surface, while the length of heating and water supply infrastructure is 8 and 3.5 kilometers, respectively. The average infrastructure deterioration in Moscow is quite low, though, with 19 percent, while the respective estimate for St. Petersburg is around 30 percent.

According to the Russian Statistical Bureau, at the beginning of 2012 as many as 29.2 million inhabitants lived in households with no running water, while 47.1 million people had no hot water supply. The lowest percentage of households fully supplied with infrastructure was registered in the Republic of Altai – 13.2 percent.


The revolution is over: Internet-commerce volumes declined at the end of 2012

Yesterday’s daily Slon.ru referred to a study performed by the National Research Institute of the Higher School of Economics that analyzed the situation in the Russian retail sector. Focusing on the capital city in particular, the study found that more than 25 percent of all retail businesses in the Moscow region reported a decrease in turnover during the 4th quarter of 2012. The study also found that the percentage of online retail trade in the overall retail turnover across the country fell from 9 percent to 7 percent, thus depriving the retail sector of the desired support. However, the share of online retail trade in Moscow increased from 8 to 11 percent, which was probably caused by a decision of several large retailers in the capital to expand into the online arena. (Translator’s remark: this could also be a result of disappointing experiences with delivery outside of large metropolitan areas)

Consumer lending helped the retail market noticeably, increasing its share in the overall retail turnover in Russia from 13 percent in 2011 to 18 percent in 2012. Within the Moscow region, the share of consumer lending in total retail spending increased from 10 to 20 percent.

The study found that the domestic producers lost the battle with foreign suppliers, which was especially noticeable in Moscow, where the share of foreign products in the overall retail turnover in 2012 reached 51 percent, three percent more than in 2011. The respective percentage across the country in 2012 was 35 percent.

Retailers continue to struggle with profitabiliy, and most of them tried to increase their margins during the second half of 2012. According to the study, the average retail margin in Moscow during the fourth quarter of 2012 was at 34 percent, while the average retail margin for the entire country stood at 27 percent. For certain categories of subsidized products, the margins can be as low as 7 percent. Retailers themselves claim that the average margin in Moscow should be no less than 41 percent. If this is truly the case, the authors expect to see signs of consolidation in the market.

Average share of online retail and consumer lending in total retail turnover (in percentages)

2011 2012
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Share of online retail in total retail turnover
Moscow 8 9 9 8 12 13 11 11
Moscow region 11 12 11 11 8 8 8 8
Russian Federation 7 8 7 9 7 7 7 7
Percentage of   consumer lending in total retail turnover
Moscow 9 13 13 11 20 20 20 18
Moscow region 10 10 10 10 20 18 20 20
Russian Federation 13 11 12 12 12 12 14 14

Average share of foreign products in total retail turnover (in percentages)

2011 2012
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
Moscow 42 41 46 48 47 49 49 51
Moscow region 44 41 40 39 38 39 39 38
Russian Federation 31 32 33 34 32 31 33 33



Average retail margin

Current retail   margin Desired retail   margin
Moscow Russia Moscow Russia
2011 1Q 26 25 38 38
2Q 26 24 38 39
3Q 26 28 38 39
4Q 27 27 37 39
2012 1Q 27 26 35 38
2Q 26 27 36 38
3Q 27 26 35 38
4Q 27 26 35 38


Russian Central Bank leaves the base rate unchanged, levels mandatory reserve requirements

Today’s business daily Vedomosti reports that the Russian Central Bank decided to leave the base refinancing rate unchanged at 8.25 percent and moved to introduce a single mandatory reserve rate of 4.25 percent for all categories of lending. Before the Central Bank’s decision, provisioning requirements for ruble-denominated loans to citizens differed from those for corporate lending – the former being at 4 percent, while the latter was set at 5.5 percent.

The new measure will become effective in the period between March 1 and April 1, 2013. The Central Bank claims that the measure will be neutral to the banking sector and that it does not represent any change in direction of its monetary policy. Due to increased flexibility in exchange rate formation, as well as considering internal and external macroeconomic tendencies, the mandatory reserve requirement mechanism lost a great deal of its importance, the Central Bank says.

As far as the refinancing rate is concerned, the Central Bank stated that it considered inflationary risks and perspectives for economic growth before deciding to leave the rate unchanged. Raiffeisenbank’s analysts believe that the Russian Central Bank will not reduce the rate before March. Experts did not expect the Central Bank to change the refinancing rate at its today’s Board meeting, as the inflation registered in February on a year-on-year basis exceeds the Central Bank’s target figure by 1 percent – instead of desired 5-6 percent, the annual inflation in Russia is currently at 7 percent. The Central Bank acknowledges that the inflation exceeded its target rate and quoted food and transportation prices as the main culprits. However, last week the Vice President of the Central Bank Aleksei Ulyukaev expressed a degree of optimism regarding inflation, stating that it will reach its peak in February and return to the targeted range by the 2nd quarter of 2013. He backed up his expectations with figures indicating a slow growth of money supply as a consequence of lower credit demand.

Russian tendency to rely on the Government undermines economic potential

Last week, Russian business daily Vedomosti.ru reported on the poll performed by the Sberbank’s Center for Macroeconomic Research and the analytical center “Levada” to determine how certain psychological factors influence financial decisions of Russian citizens. Some of the considered factors were interpersonal trust, perceived control over and responsibility for own living conditions, as well as those of the society as a whole, and characteristics of social interactions. According to the authors, interpersonal trust is an economic resource as it plays a crucial role in shaping rational consumer behavior, pushes the family budget planning horizon further into the future and encourages growth of personal savings.

Authors of the study polled 6,000 citizens from all eight regions of the federation, of which 30 percent live in cities with a population over a million, 13.6 percent reside in cities of between 500,000 and one million, 31.4 live in cities with a population between 100,000 and 500,000, and 25 percent in cities with between 20,000 and 100,000 inhabitants. The poll was performed in the second half of 2012 and revealed some unpleasant surprises. For instance, it found that the already low level of interpersonal trust among Russians is declining even further: while the share of respondents who expressed lack of trust in others in 2008 was 74 percent, the respective figure in 2012 increased to 81 percent. In 2012, only five percent of respondents felt completely comfortable with placing trust in others and another 27 percent considered themselves “inclined” towards trusting their fellow citizens. Surprises continued as the researchers found that the level of trust doesn’t correlate with social or demographic characteristics (including personal income and education), nor with the subjective feeling of control over and responsibility for one’s life and the level of social integration. Furthermore, although the percentage of surveyed who felt that they have control over their destiny was quite high at 75 percent, it turned out that the feeling of control ends outside of the immediate social circle. Approximately half of the surveyed feel that they have some say in their working environment, while only 27 percent felt that they can influence the situation in their own homes. Nine out of ten respondents felt that they have no influence whatsoever over the developments in their cities.

Although the sense of responsibility rises with income, it is accompanied by an increased perception of vulnerability. As much as 75 percent of the surveyed feel that the society they live in is unjust, which correlates almost perfectly with the percentage of those who feel it is possible to achieve success without breaking the rules – a mere 29 percent.

Authors of the study concluded that the roots of distrust are institutional and that its prevalence eliminates the hope that the strengthening of the middle class will lead to changes. They argue that meaningful changes are possible only on the level of social institutions and not in small, isolated islands. (Translator’s note: the belief that progress is attainable only through radical changes is somewhat typical for “closed” societies in which the tradition of citizen participation and compromise is absent; Western democracies are characterized by gradual, sometimes incremental progress, but are blissfully spared of violent revolutions in return).

The study also found that the increase in interpersonal trust doesn’t lead to changes in behavior, or as Mrs. Nadezhda Ivanova of the Sberbank’s Center for Macroeconomic Research puts it: “Trust without control and responsibility is an empty phrase”. According to the authors, it will take a different approach – one that involves stimulation of citizen participation – to enhance the social and cultural climate on a community level and, consequently, in the entire society.

Russia’s top banks enjoy hefty net income growth

Today’s business daily Vedomosti reports on the financial results of the 30 largest Russian banks for the past year. According to the figures provided by the Russian Central Bank, combined net profit of the 30 largest Russian banks in 2012 increased by 20.4 percent compared to 2011, to 795.3 billion rubles (USD 25,3 billion). The combined net profit of all Russian banks in 2012 amounted to 1.12 trillion rubles (USD 37.3 billion), exceeding the Central Bank’s projection of one billion rubles. Within the group of the 30 largest banks, more than a third of combined net profit, approximately 440 million rubles (USD 14.6 billion), is attributable to Sberbank, the largest Russian bank.

However, Sberbank lagged behind the rest of the group in terms of net income growth with a 7 percent increase, while Bank Moskvy increased its net income in 2012 by as much as 45.3 percent, to 8.2 billion rubles (USD 273 million). Profit growth recorded by VTB24 (+27.91 percent, to 36,9 billion rubles, USD 1.23 billion) and Transkreditbank (+27.9 percent, to 15.4 billion rubles, USD 513 million) pales in comparison with a new addition to the group of the largest Russian banks – Hantiy-Mansiyskiy bank and its 1,400 percent net income growth (to 7.5 billion rubles, USD 250 million). Alfa-bank recorded the highest net income growth within a narrower group of the top five banks, almost doubling its income to 21.6 billion roubles (USD 720 million).

One of the analysts stated that the banks’ net profit growth in 2012 was mainly driven by a substantial increase in assets. Analysts expect that the combined net profit of the Russian banking sector will grow by no more than 5 percent in 2013 due to the continued high cost of funds and a reduced ability to generate profit by lowering provisions.