Still Too Many Banks in Russia, Fitch Agency Says

Russian news agency Rosbalt quotes the Director of the Financial Institutions Analyst Department with Fitch Dmitry Vasilyev who stated that the number of banks in Russia remains too high even after the Central Bank’s recent cleanup. The number of banks was reduced from over 1,000 to approximately 600 within the last couple of years, Vasilyev said. He stated that the number of banks per million inhabitants in countries comparable to Russia in terms of GDP is lower than the Russian average. Consolidation of the Russian banking sector continues, but it hasn’t affected the smallest banks yet.

Earlier last week, Fitch blew the lid off the troubled financial condition of Bank Peresvet, a bank that has the Russian Orthodox Church as the single largest shareholder, and reduced its credit rating to “D”, designating a bank with weaknesses.

Personal Income in Russia Drops by 5.7% in Real Terms

Relying on the Russian Statistical Bureau’s data, Russian daily Gazeta.ru reports that personal income in Russia dropped by 5.7% in the year to May 2016. Average monthly salary in May was 36 570 rubles (USD 570), or 6.2% higher than a year ago.

Moscow Mayor Sergey Sobyanin recently stated that real income in Moscow discontinued its downward trend. At the same time, former Finance Minister Alexei Kudrin noted that the drop of personal income in Russia is more serious than in the nineties.

Russia increases its military spending, but the reasons are internal

In an essay for Slon.ru, former State Duma Representative Aleksei Mikhailov writes about sharply rising military spending foreseen by the Russian 2015 budget. According to the proposed budget for the next year, Russia’s defense spending should reach 4.2 percent of the GDP, a sharp increase from 3.4 percent of the GDP in 2014 and only 1.5 percent of the GDP in 2010. If the proposed budget passes, military spending will take up 21.2 percent of the total central government expenditures for 2015.

Consequently, Mikhailov writes, other budgetary expenditures will have to be cut. Budgets for education, healthcare and sport will be noticeably reduced, with healthcare suffering the most. According to Mikhailov, the World Bank ranked Russia as 9th on the list of countries with highest military spending in relation to GDP, higher than any other nuclear power, including the United States with defense spending of 3.9 percent of GDP. If it passes the 2015 budget as planned, Russia will enter the top 5 countries in the world in terms of defense spending as a percentage of the total central budget. The author notes that Russia’s increased military spending is unlikely to surpass the respective budgets of the two top defense spenders, the United States and China, in absolute terms. As a matter of fact, even if Russia decided to spend its entire central budget on defense, it would still fall short of the U.S. military spending. In order to match the Chinese military budget, Russia would have to spend as much as 8 percent of the GDP on defense. At the same time, Russia’s defense budget dwarfs that of its neighbors – it spends 36 times as much on defense as Ukraine does. Consequently, Mikhailov concludes, the sharp increase in Russia’s military spending is most probably motivated by internal factors.

Mikhailov claims that the recent herding of the Russian defense industry into state-owned monopolies damaged its competitiveness, which led the former Defense Minister Serdyukov to consider foreign suppliers. When Serdyukov was removed in 2012 under allegations of embezzlement, some speculated that it was a consequence of his unwillingness to continue equipping the Russian army with local production regardless of its quality. At the same time, the Russian Government sees the defense industry as one of the few remaining possible generators of economic growth and wants to ensure that the respective budget is spent locally. However, Mikhailov writes, such a strategy is likely to play into the hands of the chosen few, as the secretive military contracts in a competition-free environment represent an ideal opportunity for the suppliers to inflate prices. He concludes by noting that the USSR’s military budget in 1990 amounted to 19 percent of the country’s GDP, and it still didn’t help the economy from running into the ground.

Russian economist Sergei Guriev: I just want to avoid risking loss of freedom

In his recent interview to radio-station Echo Moskvy, renowned Russian economist Sergei Guriev, known as the Rector of the Moscow’s New Economic School (www.nes.ru), explained his reasons for leaving the country after the Russian Investigative Committee launched an investigation that might lead to a third indictment of a Russian businessman Mikhail Khodorkovsky. Guriev was a member of an independent expert group tasked by the former President Dmitry Medvedev to examine the last case against Mikhail Khodorkovsky, who was convicted for embezzlement and money laundering that took place while he served as the CEO of a Russian oil giant Yukos. Since the independent group of experts found in 2011 that the indictment and the sentence in the second trial of Mikhail Khodorkovsky were groundless, Russian authorities searched the premises of three out of six Russian members of the group (Guriev became the fourth one). After the Russian Investigative Committee questioned Guriev in February and April, the court issued a search warrant and seized his personal e-mail correspondence on suspicion that the members of the expert group received financing from Yukos’ ex-officials and were thus motivated to issue an opinion supporting Khodorkovsky’s innocence.

In his interview with Echo Moskvy, Guriev simply stated that he wants to avoid any risk of losing freedom and being separated from the family (his family lives in France). He added that he has no issues with the current Russian President Vladimir Putin or the former President and current Prime Minister Medvedev, but that he prefers to live in a country where his personal safety is not threatened. While he is bound by the order of non-disclosure, Guriev explained that he felt disturbed by the attitude of the Russian Investigative Committee, which seemed to indicate that Gurivev might become a suspect. Guriev said that one of the investigators mockingly remarked that he fared much better than Andrei Sakharov – the “father” of the Russian hydrogen bomb and a Nobel peace prize laureate who was exiled from Moscow in 1980 for his dissident views and advocacy for human rights. In addition, during his last departure from Russia, Guriev realized that his movements were under special scrutiny. As the investigators increased the pressure, Guriev decided it would be safer for him to stay out of the country. Asked about his plans to eventually return to Russia, Guriev stated that he doesn’t see how his personal freedom could be guaranteed under current conditions. He finds it difficult to believe that the case against Khodorkovsky will be dismissed (Guriev didn’t specify whether he was referring to the possibility of reversal and remand of the second indictment or the discontinuation of current investigation, apparently undertaken in preparation for a third case against Khodorkovsky) and that he would be released, which would eliminate the risk of possible charges against Guriev. Although Guriev asked not to be included in the list of candidates for the Supervisory Board of Sberbank, where he served since 2009, he was re-elected to the position immediately after his departure from the country, having gathered the largest number of votes among all other candidates; interestingly enough, the Russian Central Bank, Sberbank’s largest shareholder, voted for Guriev to be included in Sberbank’s Supervisory Board.

While some other members of the expert committee that issued a dissenting opinion regarding the Yukos case were exposed to more pressure than Guriev, he sees no reason for panic, as this is a peculiar case and other economists usually don’t experience such inconveniences. One of the reasons he quit his position at the New Economic School is that he doesn’t want to expose the school or his former colleagues to any risks stemming from the investigation.

JP Morgan joins Goldman Sachs in teaching Russia how to be a fair lady

Today’s edition of business daily Vedomosti.ru reports that investment bank JP Morgan is about to take on the role of adviser to the Russian Ministry of Finance on how to improve the country’s credit rating. Russia’s current credit ratings are Baa1 according to Moody’s, and BBB according to Fitch and S&P. The Ministry’s financial management program forecasts that the ratings will increase to A3 and A, respectively, by 2016. JP Morgan will adapt the Ministry’s documents to suit the rating agencies’ requirements, clarify any contentious points, and maintain regular contact with the agencies. The details of the deal have not been made public and seem to be vague at this point, as this is the first contract of the kind for the Russian Ministry of Finance. Sources from the Ministry claim that JP Morgan will not receive any compensation for its consulting services, as “many banks help the Ministry of Finance on a voluntary basis in order to increase their reputation”. One might argue that the benefit for the banks is obvious – the ability to present the macroeconomic situation in the country to their clients in detail, as well as to gain access to other inside information presents an undeniable advantage.

At the same time, investment bank Goldman Sachs is already working on enhancing Russia’s investment image. However, Goldman Sachs is not doing it on a pro bono basis – it will collect USD 500,000 for the work that includes responsibilities that could lead to a more tangible immediate outcome: organizing meetings and establishing contacts with the investors.

The Ministry of Finance is in contact with the rating agencies only once a year or so, when it decides to float debt on the international markets. JP Morgan will maintain such contacts on a regular basis, which could result in higher credit ratings, as was the case with some other countries that made a similar move. A higher credit rating would be quite helpful to Russia at a time when a shadow of recession looms over its economy. Some experts estimate that the cost of borrowing might drop by between 0.25 and 0.5 percent. Last year, Russia floated 5-year Eurobonds at a rate of 3.3 percent, 10-year Eurobonds at 4.6 percent, and 30-year Eurobonds at 5.8 percent. An enhanced country rating would benefit major Russian companies as well, enabling them to borrow internationally at lower rates and, in some cases, increase their own credit ratings.

Some analysts believe that Russia’s country rating should be higher, as its central budget is balanced and the level of external debt is quite low – approximately 10 percent of the GDP. With a budget deficit of 0.8 percent in 2012 and international reserves of USD 512.4 billion, Russia has a lower rating than some of its peers with a significantly worse macroeconomic situation. However, the rating agencies have already taken the stability of Russia’s central budget into consideration and are more concerned about the structure of the economy. In its report, S&P wrote that oil and gas related revenues account for approximately half of the Government’s revenues, exposing the central budget to risks that outweigh the low level of debt. In order to reconsider Russia’s rating, Fitch requires the level of budget deficit excluding oil and gas revenues to drop from the current 10.6 percent of GDP to 4.7 percent of GDP. However, non-oil and gas deficit is expected to drop to 8.5 percent of the GDP only in 2015.

Credit ratings are not all that matters to investors. For example, Brazil has a similar rating to that of Russia, but its borrowing rate is 0.25 percent lower. An explanation can be found in Fitch’s report, where it is stated that Russia looks unfavorable compared to other countries with a similar rating in terms of the quality and efficiency of the government, the implementation of the rule of law, and corruption. Even the Vice-President of the Government Igor Shuvalov recently concluded that there are currently no grounds for the reassessment of the country’s rating. No investment bank can help the Government implement the kind of reforms that are required in order to enhance the country’s rating and image. A Government official stated that while Goldman Sachs’ weekly reports on investors’ reactions to developments in Russia did not induce the Government to reconsider any of its decisions, they did make the absurdity of the decisions more obvious.

Prime Minister Medvedev: absence of significant developments in the economy irritates everyone

Russian daily Gazeta.ru reported on Prime Minister Medvedev’s press conference in Sochi, where he talked about the Government’s results after a year in office. While certain macroeconomic indicators might be interpreted as a sign of stability – the budget deficit close to zero, low level of Government debt, low unemployment, – the state of the Russian economy is “lukewarm”, as Medvedev put it: there’s nothing good or bad going on.

Dmitry Medvedev considers the economic slowdown to be the main challenge not only to the Government, but to the society as a whole. He stated that while the central government revenues and the salaries in the country are increasing, there are no substantial developments in the economy, which irritates everyone. Medvedev had his honest moments in the past and was up to that standard when he stated that the positive macroeconomic trends in the previous year were not so much a result of the Government’s work, but a consequence of the recent positive economic cycle.  

On the other hand, the Government seems to have done quite a lot in the previous year: it implemented 111 presidential orders (out of 152 to be effected by the end of 2013), issued 3,906 of its own decrees, forwarded 269 bills to the Parliament (of which 113 passed the vote and are already signed by the President) and came up with a plan of activities until 2018, as well as the projection of long-term social and economic development by 2030.

Medvedev continued to quote positive developments, stating that approximately 400 large production facilities in Russia were modernized during the last year, with aggregate investments amounting to 500 billion rubles (USD 15.92 billion). Stimulus measures for the oil and gas sector should bring 45 trillion rubles (USD 1.43 trillion) in additional revenues by 2030. One of the major concerns for the Government, the situation in the mortgage market, still shows no signs of significant improvement: last year, the Russian banks approved 691,000 housing loans with a total value of one trillion rubles (USD 31.84 billion) and an average interest rate of 12.8 percent. In accordance with the presidential decree, the Government should strive to raise the volume of housing loans to 815,000 in 2018 and lower the interest rate to 2.2 percent above the Central Bank’s discount rate (currently at 8.25 percent).

Medvedev commented on the privatization revenues that the Government generated during the last year, saying that they were lower than expected, but are no longer seen as something “exotic”. The Government collected 217 billion rubles (USD 6.91 billion) from privatization in the last year and plans to generate 427 billion rubles (USD 13.59 billion) for the whole 2013. However, the Ministry of Finance expects that the privatization revenues will not exceed 60 billion rubles (USD 1.91 billion) in this year.

The struggle between the two opposite approaches to managing the central government budget continues as well. The President of the Russian Federation Vladimir Putin tasked the Government with taking all the necessary steps to speed up the annual GDP growth to 5-6 percent, but the Ministry of Finance expects that the Russian GDP will grow by less than half of that figure, approximately 2.4 percent. Such a discrepancy practically demands of the Government to boost investments from the central budget, which is the position shared by the Ministry of Economy. However, the Ministry of Finance is against financing large unprofitable projects in times of economic uncertainty. The decision on which approach to take is currently with the President, who promised to „put an end to this discussion“. The pension reform is another point of disagreement between the Government and the President.  At the beginning of May, President Putin complained that the Government still hasn’t come up with a transparent formula regarding individual capitalized savings. However, during his recent “direct line” with the public, Putin stated that regardless of his discontent with some of the Government’s decisions, it should be allowed more time to demonstrate its capacity.

Other interesting achievements of his Government that Medvedev mentioned were the construction of 70 new hospitals and clinics across the country, the reduction of waiting lists for nursery schools by 20 percent and the reduction of the number of convicts in Russian prisons from 818,000 in 2010 to 695,594 in April this year.  

The matter of trust in Russia

Russian business daily Vedomosti.ru published findings from the „Eurobarometer in Russia“ report prepared by The Russian Presidential Academy of National Economy and Public Administration (http://ranepa.com/), as well as the World Values Survey association (http://www.worldvaluessurvey.org/) study on the level of interpersonal trust in Russia. According to the reports, this indicator is on average 1.5-2 times lower than in Western Europe and the United States. 

The level of general interpersonal trust seems to be the lowest in Russian cities with a population exceeding 1 million. For instance, less than 1 percent of the surveyed in Moscow believe that people in general can be trusted – the lowest percentage in all of Russia. Three quarters of the surveyed across the country feel distrust and wariness towards strangers. In some relatively isolated communities, such as industrial small towns formed during the Soviet era, the level of distrust towards unfamiliar persons reaches a full 100 percent. 

However, the situation is quite different when it comes to interpersonal relationships with familiar people – family and friends. With the level of institutional confidence being notoriously low, Russians rely on their private social circles more than anything else. For instance, 44 percent of the surveyed stated that they would prefer borrowing money from family or friends in case of need rather than from the bank (16 percent stated the opposite). An average Russian citizen is able to raise 75,000 rubles (USD 2,390) from relatives and friends within three days. The percentage of those preferring to borrow from family and friends roughly corresponds to the percentage of those willing to lend money to a fellow in need: 42 percent of the surveyed stated that they regularly lend money to their friends and/or cousins, and they feel confident that they’ll get their money back. 

According to the studies, Russians tend to have a wide network of acquaintances, contacting with as many as 25-30 people on a regular basis. The most sociable 25 percent of the population regularly interact with between 40-60 people. Only 15 percent of the unfortunate ones maintain regular relationships with less than 10 people and are forced to rely on government institutions to a larger extent. It seems that necessity is the primary motivator behind the reliance on government institutions – individuals with a wider social circle tend to trust the institutions less than the less sociable ones. The studies conclude that the level of abstract trust (towards institutions and strangers) in Russia is very low, forcing the people to rely on family and friends both in their private and business relationships.