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October 17, 2014
This is bne's Russia’s daily newsletter, a list of the top stories from the country. You
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RBL TOP STORY
1. Forbes' top four reasons why Yevtushenkov is under arrest
2. Kremlin tries to plug tax loopholes
3. Russian companies and oligarchs sue EU over sanctions
4. Yandex and Mail.ru fall below IPO price
RBL NEWS
5. Market comment: Russia falls below Lehman low of September 2009
6. Britain to block Fridman's $6.5bn bid for European energy company
7. PWC: RussiaвАЩs inflation to absorb much of salary increase in 2014
8. There is cause for optimism over Russia’s crisis
RBL On the site today
9. Breaking the Bank Asya in Turkey
10. COMMENT: Is the ruble decline overshooting?
11. COMMENT: Life in Russia with $80 oil
BEARWATCH
12. Most Russians Think Western Sanctions Will Boost Nation's Economy
13. Putin reiterates Russia’s principled stance on Kosovo issue
RBL OTHER NEWS
14. Brazil lowers pork prices for Russia amid sanction war with West
15. Crimean Head Guarantees Investment Security, Welcomes Chinese Investors
16. Latvia's Norvik Banka buys Russia's Vyatka Bank
17. Novatek: Yamal LNG might get USD 3.7bn funding from the National Welfare
Fund
18. Oettinger says South Stream is acceptable for EU
19. Putin Threatens EU Gas Squeeze Raising Stakes for Ukraine
20. Russia exposes large-scale channel of illegal pork supplies from Europe
21. Russian Central Bank Shift Boundaries of Ruble by 30 Kopeks
RBL COMPANY SNAPSHOTS
22. CTC Media: Regulatory risks overshadow fundamentals but are already priced in
RBL SECTOR SNAPSHOTS
23. Russia's Gazprom Expects Oil Price to Plummet by Another 10-15%
RBL MACRO RESULTS
24. Clouds over EU trade driven by Russia and Switzerland
25. PPI decelerates to 3.5% YoY in September due to the drop in oil prices
RBL COMPANY RESULTS, UPGRADES
26. E.ON Russia: 9M14 operating update: electricity generation declines
27. Evraz 3Q14 trading update
28. Lenta: Growth decelerating but still strong in 3Q14
29. NLMK 3Q14 trading update
30. Polymetal International 3Q14 trading update
BELARUS
31. Belarus' export of agricultural products to Russia up 10% in September
RBL TOP STORY
1. Forbes' top four reasons why Yevtushenkov is under arrest
bne
October 17, 2014
According to Forbes, the first reason for Russia's feared investigative committee's
probe into Vladimir Evtushenkov - owner and founder of Russia's largest mobile
operator MTS, via holding concern Sistema - was an agreement between Sistema
and structures owned by Ural Rakhimov signed in 2008. Only months after the 2008
agreement, in 2009, Ural Rakhimov sold formerly state-owned oil production and
refining assets to Sistema that he had privatised from the state in 2000-2001, while
his father Murtaza Rakhimov was president of the Russian constituent republic of
Bahkortostan, where the oil fields and refineries are located.
According to the agreement signed in November 2008, a Sistema subsidiary,
Sistema Invest, received power of attorney to act as general director of the
Bashkortostan oil firms. According to investigators, Sistema used this power to
prevent any other contenders from buying the assets, according to Forbes.
The second charge levelled against Evtushenkov by investigators is that Sistema
failed to pay an extra $0.5bn for the assets that was scheduled for later payment,
according to the purchase agreement. Thus Sistema effectively received the assets
at a cut price. According to the investigators, there was no reason for Sistema not to
have paid the full price, and the resulting discount points to the dubious origins of
the assets. Evtushenkov's defence argues that such a staggered payment is common
practice in M&A deals.
The third reason, according to Forbes, is that the price $2bn-$2.5bn was anyway
below the market value of the assets, which according to the investigative committee
totaled. However, the defence disputes this as well, with reference to stock market
analysts' appraisals of the value of the deal at the time.
The fourth reason for the investigative committee to have placed Evtushenko under
arrest is that Sistema's purchase of Bashneft shares on March 30, 2009, took place
on the very same day that the shares were unfrozen after they had been frozen in
connection with tax avoidance charges. According to investigators, this proves that
Evtushenkov had exerted pressure on the tax authorities to unfreeze the shares,
according to Forbes' sources.
2. Kremlin tries to plug tax loopholes
bne
October 17, 2014
Russian authorities are moving ahead with a campaign to plug external and internal
tax loopholes, with the government preparing a new law on 'de-offshorisation' and
the central bank closing down banks complicit in grey capital outflows.
The de-offshorisation campaign is intended to repatriate Russian business from
offshore zones. The finance ministry is drawing up a draft bill on foreign-controlled
companies, which enjoys the support of Russian president Vladimir Putin, according
to sources quoted by business daily Vedomosti.
The law envisages companies and citizens paying taxes to the Russian budget on
non-distributed income received by foreign-controlled companies, i.e. offshores. Tax
rates in Russia are 20% for companies (profit tax) and 13% flat tax for individuals.
The law only applies to companies where passive incomes – interest, royalties, rent,
dividend payments -significantly exceed active income.
According to Vedomosti, neither domestically-listed companies nor foreign listed
companies will be excluded from the bill, despite Russia's business lobby, the
Russian Union of Entrepreneurs and Industrialists (RUEI), having requested this.
Companies registered in the white list of Russia's tax service will not be affected by
the law, but as a rule of thumb, profit tax in the jurisdiction where a company is
registered should not be less than 75% of the Russian profit tax rate (currently 20%,
meaning the country of registration should not have a profit tax of less than 15%).
Other variants of the law provide for milder conditions.
Russian authorities are also trying to close down the second major channel of tax
revenue leakage: Russian companies' use of 'black cash' schemes, sometimes
referred to as the 'internal offshore', where companies wire funds to sham firms
under bogus contracts. Funds are either returned to the originating company as offthe-books cash or shifted into foreign bank accounts. Most of Russia's more than
1,000 banks, many of them tiny, are thought to be involved in administering such
schemes, in cahoots with organised crime and corrupt law enforcement officials.
A recent investigation by the Organised Crime and Corruption Reporting Project said
that $20bn of such grey and black funds had been moved out of Russia via bogus
contracts and mini-banks. In 2012, the outgoing head of Russia's central bank,
Sergei Ignatev, said a total of $50bn was being shifted out of the country each year
in this manner.
Since taking over at the helm of the central bank in June 2013, Elvira Nabiullina has
launched a crackdown on banks operating such schemes, withdrawing dozens of
licences. On October 16 the central bank 'celebrated' its 100th withdrawal of a credit
institution licence over the last year, including 12 banks notorious for providing
'black cash' services.
The campaign seems to have avoided impacting on the inter-bank market, say
experts, in contrast to Russia's last attempt at such a crackdown in 2004: when the
mass withdrawal of licences of money laundering banks led to a mini-banking crisis
and then the assassination of the deputy head of the central bank, Andrei Kozlov, in
2006.
How the campaign will impact on Russia's finances and capital flight remains unclear.
In the second quarter of 2014 for the first time in years Russia's capital accounts
recorded a $2.4bn inflow of funds under categories recording dubious operations and
“errors and omissions.” But third quarter had a return to a negative balance with an
outflow of grey funds totalling $7.7bn.
“There was still a visible improvement (…) that we might link to the CBR's crusade
against misbehaving banks,” wrote VTB analysts. “Simultaneously, we warn against
drawing any overly upbeat conclusions as ‘grey’ capital outflow probably only
changed its clothes - for example, transformed into something that the BoP
methodology might classify as FDI,” they add.
3. Russian companies and oligarchs sue EU over sanctions
bne
October 17, 2014
Russian companies and oligarchs are suing the EU over sanctions the EU imposed on
them in response to Russian aggression in Ukraine. Rosneft, the largest Russian
state-owned oil company, and Arkady Rotenberg, an oligarch close to Russian
president Vladimir Putin, have filed suits against the sanctions, according to the
Financial Times.
Rosneft filed a case at the European Court of Justice against the European Council on
October 9, requesting annulment of the July 31 EU sanctions blocking access to
European capital markets. Rotenberg filed a similar claim on October 10 at the same
court. Rosneft's suit is filed on behalf of Rosneft and other unidentified parties, and
will have relevance for other companies hit by the same sanctions, such as stateowned banks Sberbank, VTB, VEB, Gazprombank and Rosselkhozbank, and energy
companies Gazpromneft and Transneft.
The sanctions on Rosneft and other oil companies have frozen the companies' access
to Western capital markets and blocked access to new technologies needed to
develop new offshore, Arctic and shale fields.
The EU has also frozen assets belonging to Arkady Rotenberg and banned him from
receiving an EU visa. The EU sanctions provisions specified that Rotenberg had
“developed his fortune during President Putin’s tenure” and “been favoured by
Russian decision makers in the award of important contracts by the Russian state or
state-owned enterprises”.
The EU said the European Council would mount a defence of the sanctions in court.
“The Council takes great care to ensure legal robustness when adopting restrictive
measures and takes due account of relevant case law of the court,” an EU
spokesperson said, as quoted by FT. “The fact that court proceedings are brought
does not mean that the restrictive measures will be suspended during those
proceedings.”
The European Council lost similar cases relating to measures imposed on Iran and
Syria, with the European Council's case weakened by excessive reliance on
confidential sources, according to the FT.
4. Yandex and Mail.ru fall below IPO price
bne
October 17, 2014
Share prices of Russia's two largest internet stocks have again fallen beyond their
IPO prices, indicating that Russia's slowing economy and disturbing political trends
are impacting even on its most dynamic sector.
The share price of Russia's largest internet company, search engine Yandex, on the
Nasdaq has fallen to $24.48 on October 17, below the price of its landmark IPO in
May 2011, the first such IPO of a Russian internet company, when the company's
shares were floated at a price of $25 per share.
The global depositary receipts (GDR) of Mail.ru, Russia's largest social network
company, listed on the London stock exchange were trading at GBP24.12 on October
17, less than their IPO price in November 2010 when they were placed at GBP27.70.
Russia's internet stocks have plummeted faster than the market, as investors fled
the hopeful part of the Russian economy faster than they drop its core oil and gas
stocks, as anti-Westernism and authoritarianism in Russia grow. The capitalisation of
Yandex has now collapsed by 43% since the start of the year, and of mail.ru group
by 41%, twice as much as the drop in the index of the wider RTS Index. Other major
Russian tech stocks have also collapsed far ahead of the market, including
telecommunication stocks: Vimpelcom is down 55% since the start of the year, MTS
down 39%, Qiwi down 51% and STS Media down 64%.
Besides political developments, investors have been scared off by new regulatory
measures applied to the internet, obliging Russian firms to retain user data for six
months, restricting internet payments and equating bloggers with media, for
example.
The first time that Yandex and mail.ru stock fell below IPO price was in April
following statements by Russian President Vladimir Putin complaining about 'Western
influence' in Yandex. The stock price then recovered before again in October dipping
below the IPO price in connection with slowing growth in the domestic economy.
Both companies' earnings show that they are developing not that badly, according to
Uralsib analyst Konstantin Belov. Almost all Yandex earnings come from advertising
sales, mostly context advertising. In the second quarter, Yandex's context ad sales
increased by 39% and banner ads dropped by 6%, while the company retained its
earnings forecast of 25-30% growth for 2014, according to Uralsib. Mail.ru makes
money on both banner advertising, context advertising and receives payments from
users. The company cut its earning growth forecast for 2014 from 22-24% to 1418% following its second-quarter results.
Experts expect the rate of internet advertising growth to slow, but to stay relatively
high. They see the drop in share price of Yandex and Mail.ru ahead of the market as
also reflecting the drop in the value of the ruble – both companies earn the bulk of
their revenue in the domestic currency.
Russia's advertising market is already feeling the squeeze from falling growth rates.
The Russia communication agencies association's (AKAR) forecast for 2014 is for
growth of only 1.2% compared with 10.1% growth in 2013. In the first half of the
year, the internet ad market grew by 20% to RUB28bn, AKAR said.
RBL NEWS
5. Market comment: Russia falls below Lehman low of September 2009
UralSib
October 17, 2014
RTS index closes at a new multi-year low. The RTS index lost another 2% yesterday
to close at 1,045, a five-year low. Remarkably, the closing level was also lower than
the level following the collapse of Lehman Brothers in the US in September 2008,
which marked the beginning of a crisis of trust among global financial institutions
and a liquidity crunch. The world is in much better shape now, and central banks are
ready to flood markets with massive liquidity. Hence, it does feel safer, yet there is
no conviction among investors that stocks in Russia are clear buys given the
negative momentum in the economy and tighter domestic liquidity conditions.
Exporters in Russia fared slightly better yesterday as the ruble set another low
against the US dollar. Metals & mining and oil & gas names closed down 1.5% and
1.9%, while industrials and financials were among the weakest performers, down
3.7% and 2.5%.
Brent futures rise after yesterday’s expiration. US markets closed flat yesterday,
while emerging markets took losses, resulting in the MSCI EM index losing 1.2%.
Asian markets are mixed this morning, while US equity futures, up 0.2%, are
diverging from European futures, which have fallen 0.4%. Brent oil futures have
rebounded strongly after yesterday’s expiration as they are being traded close to
$86.4/bbl. We see the RTS index opening up 0.7%.
Slava Smolyaninov
6. Britain to block Fridman's $6.5bn bid for European energy company
bne
October 17, 2014
Britain will block a bid by Russia's Mikhail Fridman to buy the oil and gas assets of
German utility firm RWE, which has assets in British coastal waters, as testament to
the growing anti-Russian sentiment in western Europe.
Fridman's Luxembourg-registered holding company LetterOne has bid $6.5bn for the
German asset, but Fridman is not on the US or EU sanctions lists nor are any of his
companies.
However, without specifying a concrete reason the UK's Energy Minister Ed Davey
said he was "not minded" to give official approval to the sale, the Financial Times
reported on Wednesday citing unnamed sources.
LetterOne was set up last year to invest proceeds from the sale by Russian tycoons
of their stake in private Russian oil firm TNK-BP to state owned Rosneft last year and
has been specifically targeting energy.
Read more here: http://www.themoscowtimes.com/article/509527.html
7. PWC: RussiaвАЩs inflation to absorb much of salary increase in 2014
bne
October 17, 2014
Growth of salaries in Russia slowed down, PricewaterhouseCoopers says in a regular
survey: companies increased salaries 7.6% on average in 2014 versus 11% in 2013.
Plans for the next year are even more modest - employers plan to increase salaries
by no more than 7%. The survey covered 71 companies from 12 sectors of Russia's
economy, mainly manufacturing and energy ones.
Salaries of company heads have increased at the slowest pace in 2014, by 6.5% on
average, but bonuses paid to top-managers are not included in PwC's figures.
Specialists can boast of the biggest increase - their salaries added 8.2%. However,
the share of employees whose salaries were increased decreased to 39% in 2014
from 68% in 2013. Total remuneration in money increased 6.4% in 2014, PwC
notes. PwC experts explain such behavior of employers by the current economic
situation in the country.
The findings of the survey show that inflation will absorb much of the salary increase
in 2014. Inflation reached 8% at the end of September year on year. However, the
Center for Macroeconomic Analysis and Short-Term Forecasting (CMASF) estimates
that the growth rate of real (inflation-adjusted) salaries in Russia will still be positive
in 2014 - about 2.5-3%.
The trend towards convergence of basic salaries in the capital city and in regions has
broken off, PwC notes. The ratio of salaries in St. Petersburg and Moscow was 85%
in 2014 versus 87% in 2013. However, companies try to encourage employees even
during the hard times. The most popular bonus is a payment of RUB25,000 on
average on the occasion of significant events.
8. There is cause for optimism over Russia’s crisis
Chris Weafer of Macro-Advisory, FT
October 17, 2014
Since the start of this year the Russian ruble has collapsed by 20% against a basket
of dollars and euros, by far the worst performing of the major emerging market
currencies except for the Argentine peso. But Argentina defaulted on debt
obligations, while Russia has less than 11% sovereign debt to GDP and is running a
triple budget, trade and current account surplus. It is therefore tempting to link the
ruble’s demise with the country’s actions in Ukraine and the resulting sanctions
imposed by western countries. A prevalent theme in many western political
commentaries is that the ruble slide, in tandem with the steep oil price fall, will lead
to a collapse in the economy which, in turn, will undermine public support for
President Vladimir Putin and force the Kremlin into a more accommodating geopolitical stance. Both of those assumptions are very wide of the mark. The reasons
for the decline in the ruble are more serious than just sanctions and, at the same
time, the central bank’s response and the oil price slide offer cause for some
optimism that some positives may yet emerge from this crisis.
Of course there can be no doubt that sanctions are hurting, especially those imposed
in early September which added Sberbank to the list of state banks excluded from
western debt markets and the cut in the accessible debt limit to 30 days from 90.
That action severely squeezed liquidity in the Moscow FX interbank market, sending
the cost of borrowing higher and adding further to ruble pressures. The higher cost
of debt servicing, which is expected to rise by another 100 to 150 basis points this
month as the central bank (CBR) targets inflation and tries to provide ruble support
without eating too far into financial reserves, is also one of the major reasons for the
slowdown in the economy. Households are spending an increasing amount of income
on servicing existing debt and businesses can’t justify investment projects with the
cost of capital in excess of 20%, especially for small to medium sized enterprises.
That is one of the legacies which will remain long after sanctions are eased and
which will hamper the pace of recovery.
Read more here: http://blogs.ft.com/beyond-brics/2014/10/16/guest-post-there-iscause-for-optimism-over-russias-crisis/
RBL On the site today
9. Breaking the Bank Asya in Turkey
David O'Byrne in Istanbul
October 17, 2014
A little over a year ago, Turkey's largest Islamic finance house, Asya Katilim Banka,
boasted Sharia-compliant assets of $12.1bn – enough to place it in the top 30 of th
Islamic financial institutions. Today, however, the future of Bank Asya, as it’s
commonly called, is in doubt following a roller coaster few months that saw its
shares repeatedly suspended over mounting criticism of the bank's operations and
suspected government pressure over its ownership.
Much of that criticism has come from pro-government quarters, culminating in the
claim by Turkish President (formerly prime minister) Tayyip Erdogan in midSeptember that Bank Asya was effectively bankrupt and that the country’s banking
regulator, the BDDK, should step in and take it over.
Read more here: http://www.bne.eu/content/story/breaking-bank-asya-turkey
10. COMMENT: Is the ruble decline overshooting?
Peter Szopo of Erste Asset Management
October 17, 2014
Russia’s economy is under pressure, the most salient sign of this being the decline of
the ruble.
The Russian currency lost nearly 26% of its value against the dollar over the past 12
months (to mid-October). To some degree, the ruble’s devaluation reflects the
general strength of the US currency, which gained almost 7% over the same period
on the back of the US Federal Reserve’s switch to a tightening bias and the robust
economic data flow (which only suffered temporarily from seasonal effects in the first
quarter). In fact, the Russian currency was already weakening at the beginning of
2013, but last year it still moved mostly in line with other emerging market (EM)
currencies against the dollar. Since the beginning of 2014, however, the ruble also
has decoupled from its EM peers, losing 17% relative to a GDP-weighted currency
index covering 23 emerging markets.
Read more here: http://www.bne.eu/content/story/comment-ruble-declineovershooting
11. COMMENT: Life in Russia with $80 oil
Chris Weafer of Macro-Advisory
October 17, 2014
From late 2010 until the middle of August this year, the price of Brent crude has
traded within a relatively narrow range and averaged close to $110 per barrel. Over
the past two months the price has collapsed from a high of $115 per barrel to just
over $80. For commentators with more of a political than energy bias, the
explanation for the sudden price collapse is because of collusion between the US and
Saudi Arabia to damage their respective enemies, Russia and Iran. It has also led a
spate of headlines suggesting that weaker oil will collapse the Russian economy and
bring about the demise of Putin’s rule. Both are very wide of the mark.
The weaker oil price certainly suits the US administration’s geopolitical position and,
as the US is still the world’s biggest importer of oil, it also acts as a further stimulus
to the economy. But the idea that the White House is leaning on the government in
Riyadh to keep supply high in order to kill the price is ridiculous.
Read more here: http://www.bne.eu/content/story/comment-life-russia-80-oil
BEARWATCH
12. Most Russians Think Western Sanctions Will Boost Nation's Economy
The Moscow Times
October 17, 2014
Despite an economic slump and rising inflation, the majority of Russians believe that
Western sanctions and Russia's retaliatory ban on food imports will actually help the
country's economy, a poll published Thursday showed.
Only 25 percent of respondents expect sanctions to damage the Russian economy,
and only 26 percent expect they or their families will personally face problem due to
sanctions, according to the poll by the independent Lavada Center.
Read more here: http://www.themoscowtimes.com/business/article/most-russiansthink-western-sanctions-will-boost-nation-s-economy/509537.html
13. Putin reiterates Russia’s principled stance on Kosovo issue
TASS
October 17, 2014
Russian President Vladimir Putin at a meeting with Serbian President Tomislav Nikolic
on Thursday reiterated Russia’s principled stance on the Kosovo issue.
“You mentioned the Russian stance on the Kosovo issue. Russia has a principled
stance, which is based not only on our friendship and proximity, but also on
international law and justice,” Putin said.
Read more here: http://en.itar-tass.com/russia/754764
RBL OTHER NEWS
14. Brazil lowers pork prices for Russia amid sanction war with West
TASS
October 17, 2014
Brazil has scaled down the prices of pork intended for exports to Russia from October
2014, the vice president of the Brazilian Association of Animal Protein (ABRA), Rui
Eduardo Saldanha Vargas, said on Thursday.
He said prices were revised in September at the request of the Russian authorities
and importers, going down, in some cases even by half. Earlier, Russian pork
importers said Brazilian suppliers raised release prices of pork for Russia after it had
imposed a food embargo on some Western countries following Western sanctions on
Russia over Ukraine.
Read more here: http://en.tass.ru/economy/754742
15. Crimean Head Guarantees Investment Security, Welcomes Chinese
Investors
RIA Novosti
October 17, 2014
Crimea guarantees investment security and calls on foreign investors, especially
from China, to invest in the region, Sergei Aksyonov, the Head of the Republic of
Crimea said at a press conference Thursday.
"An investment banking forum has been recently held in Yalta. I have personally
guaranteed all the investors the security of investing in the republic," Aksyonov
stated.
Read more here: http://en.ria.ru/russia/20141016/194149241/Crimean-HeadGuarantees-Investment-Security-Welcomes-Chinese.html
16. Latvia's Norvik Banka buys Russia's Vyatka Bank
Xinhua
October 17, 2014
Latvian bank Norvik Banka has acquired a 97.75 percent stake in Russia's Vyatka
Bank, the Latvian bank's spokesman said Thursday.
"This is a planned step in the bank's strategy which will allow us to continue its
purposeful development both in Latvia and the bank's other target markets," said
Norvik Bank CEO Oliver Bramwell.
In October, Norvik Banka's shareholders injected 69.64 million euros (89.17 million
U.S. dollars) into the bank's paid-up share capital, increasing it to 123.1 million
euros. In late June 2014, Norvik Banka was the eighth biggest bank in Latvia in
terms of assets, according to data from the Association of Latvian Commercial
Banks.
To read the full
storyhttp://www.shanghaidaily.com/article/article_xinhua.aspx?id=247170
17. Novatek: Yamal LNG might get USD 3.7bn funding from the National
Welfare Fund
VTB Capital
October 17, 2014
News: The Ministry of Economic Development has agreed to consider granting
Novatek’s Yamal LNG project strategic status. The company hopes to receive
financial support from the National Welfare Fund in the amount of RUB 150bn (USD
3.7bn). The final decision is to be made when project analysis has been performed
by the ministry.
Our View: Various media sources have already reported that Novatek has requested
some RUB 100bn (USD 2.6bn) from the National Wealth Fund in order to continue
implementing the project. Further, Prime Minister Dmitry Medvedev previously said
the company’s Yamal LNG project might be supported by the government. No
particular terms for financial support, nor a final decision to provide funds to
Novatek’s Yamal LNG project, have been made clear yet.
In July, the company considered increasing project financing, from both its partners
and Novatek itself, and was confident that it would be able to adhere to its operating
and financing schedule, even if there were a lack of debt resources. We have said on
numerous occasions that the project faces some difficulties with the raising required
financing; nevertheless, given the project is considered as strategically important by
the state, it will be supported by the NWF, we believe. Overall, we continue to view
the Yamal LNG project as risky, as it is complicated technically, which might result in
capex overruns and delays in commissioning even without existing financing issues.
It would be supportive for Novatek if it could get support from the state, so we view
the news as sentiment-wise positive for the name.
18. Oettinger says South Stream is acceptable for EU
VTB Capital
October 17, 2014
News: EU energy commissioner, Gunther Oettinger, has said that the South Stream
gas project is not currently a priority for the EU, Interfax reports. South Stream
would not solve the EU’s short-term energy problems, he said.
In separate news, Gazprom might decrease gas supplies to Europe if Ukraine starts
consume transit gas for its own purposes, President Putin has said, according to
Kommersant.
Our View: Earlier this week, Gazprom’s management said that South Stream
discussions are ongoing, and that they expected more cautious behaviour from
international banks. However, the company does not expect major delays in the
project: in 2016, the 1st line (16bcm) is guided to be launched. Recently, the South
Stream project’s total capex increased to EUR 40bn (USD 50.8bn). The capital
expenditures for the offshore part of the pipeline increased from EUR 10bn (USD
12.7bn) to EUR 14bn (USD 17.8bn) and for the onshore part from EUR 6bn (USD
7.6bn) to EUR 9.5bn (USD 12bn).
In October, Naftogaz filed a lawsuit against Gazprom in the Stockholm Arbitration
Court to reconsider the terms of the gas transit contract. The Ukrainian company
claims compensation in the amount of USD 5bn from Gazprom for low gas transit
(below 110bcma) in 2009-14.
Recently, the requirement for Ukraine to pay back USD 2bn by the end of October
has been reduced to USD 1.45bn. This amount corresponds to the country’s debt for
gas purchased in 2013. At the same time, Ukraine has lowered its requirement for
Russian gas for the upcoming winter season to 4bcm, from 5bcm discussed
previously. Both sides have sent proposals to the European Commission.
We see the newsflow as generally unsupportive for the name and expect some
uncertainty to be eliminated after the 21 October trilateral meeting in Brussels.
Dmitry Loukashov, CFA
Ekaterina Rodina
Alexander Donskoy
Kirill Sharikhin
19. Putin Threatens EU Gas Squeeze Raising Stakes for Ukraine
Bloomberg
October 17, 2014
Russian President Vladimir Putin flew into Milan last night for peace talks with
European Union leaders after threatening to cut the supply of natural gas through
Ukraine if the government in Kiev diverts fuel for domestic use.
After missing an earlier meeting time because he stayed on at a military parade in
Serbia, Putin met German Chancellor Angela Merkel shortly before midnight as they
prepared for formal talks on Ukraine scheduled for 8 a.m. today. Ukrainian President
Petro Poroshenko also met Merkel as well as Italian Prime Minister Matteo Renzi and
EU President Herman van Rompuy.
Read more here: http://www.bloomberg.com/news/2014-10-16/poroshenko-seeksmerkel-s-support-as-russia-bristles.html
20. Russia exposes large-scale channel of illegal pork supplies from Europe
TASS
October 17, 2014
Russia’s agricultural watchdog Rosselkhoznadzor exposed a chain of illegal pork
supplies from Europe that up to date channeled 7,500 metric tons of pork production
after Moscow introduced food sanctions in regard to the West over two months ago,
watchdog's chief Sergey Dankvert said on Thursday.
“This channel has been exposed on Wednesday and as of today it was used to bring
to one of the Customs Union’s member states 7,500 metric tons of pork products
since the introduction of sanctions,” he said. Besides Russia, members of the
Customs Union are Belarus and Kazakhstan.
Read more here: http://en.tass.ru/economy/754704
21. Russian Central Bank Shift Boundaries of Ruble by 30 Kopeks
The Moscow Times
October 17, 2014
Russia's Central Bank said Friday it had shifted the boundaries of its floating ruble
corridor by 30 kopeks, following market interventions to curb the pace of the
currency's decline.
Read more here: http://www.themoscowtimes.com/business/article/russian-centralbank-shift-boundaries-of-ruble-by-30-kopeks/509591.html
RBL COMPANY SNAPSHOTS
22. CTC Media: Regulatory risks overshadow fundamentals but are already
priced in
UralSib
October 17, 2014
Regulatory, economic risks have driven share prices too low. Market sentiment
towards CTC Media (CTCM US – Buy) has been overwhelmed by the recently
introduced legislation limiting foreign ownership in Russian media companies. The
weaker macro outlook is another major factor. CTC shares have fallen 43% since the
amendments to Russia’s media law were passed by the State Duma at the first
reading. We believe the steep drop is unjustified, as the company remains
fundamentally strong despite the risks. Although pressure on the top line is
inevitable, the company’s flexible costs and limited capex needs should enable it to
continue generating positive cash flow, leading us to believe that the company’s
intrinsic fundamental value is well above the level implied by the current market
prices. The limits on foreign ownership do impose significant risks and could
potentially require CTC Media to delist or substantially reduce its free float,
potentially by forcing foreign shareholders to sell their stock. However, there is a
reasonable chance that the company will find a way to comply with the new
regulations while protecting the economic rights of minorities, depending on how
strict the restrictions on foreign ownership will be in practice.
Rating upgraded to Buy, target price lowered. We have adjusted our model for CTC
Media based on our latest macro forecasts, which are more conservative and
envisage lower GDP growth and a weaker ruble. Thus, we have reduced our
forecasts for 2015 revenues and OIBDA by 12% and 18% in dollar terms. With the
weaker financials and the higher equity risk premium, we have also reduced our 12month target price for CTC Media by 20% to $8/share. Since the new price target
implies 65% upside from the current levels, we have upgraded CTC Media to a Buy.
Any signs that the company will be able to find a solution to its foreign ownership
problem could lead to a recovery in the share price.
Konstantin Chernyshev, PhD
Konstantin Belov
RBL SECTOR SNAPSHOTS
23. Russia's Gazprom Expects Oil Price to Plummet by Another 10-15%
The Moscow Times
October 17, 2014
The global oil market slump looks likely to continue, with prices possibly nearing $70
a barrel in the short term, an official of Russian gas producer Gazprom said.
Crude fell more than $1 a barrel on Thursday to a four-year low below $83 a barrel
as growing concerns over the global economy stretched a four-month rout.
"It could be at $70-75 in a question of months," Gustavo Delgado, head of Gazprom
in Venezuela, told Reuters on the sidelines of an oil conference on Margarita Island.
He did not specify whether he was speaking of Brent prices or U.S. crude.
Read more here: http://www.themoscowtimes.com/business/article/russia-sgazprom-expects-oil-price-to-plummet-by-another-10-15/509572.html
RBL MACRO RESULTS
24. Clouds over EU trade driven by Russia and Switzerland
Borderlex.eu
October 17, 2014
Amidst very worrying economic data coming out of Europe, one set of figures has
largely been overlooked today: the European Union’s goods export performance so
far this year.
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16102014-BP/EN/616102014-BP-EN.PDFData</a> published by Eurostat today indicate that Europe is
still a machinery and car export champion, boasting a џ150bn trade surplus in July.
Yet Europe’s statistics body’s figures show that both the pace of export and of
import growth (notably of energy ) is slowing down, reflecting the current global
economic slowdown and Europe’s outright slump. In August alone, compared with
July, seasonally adjusted exports by the EU’s 28 member states fell by 2.1 percent
and imports by 4 percent.
Between January and July this year, EU exports to China have grown 11 percent,
while imports from China have grown 5 percent. The European trade deficit with
China has slightly narrowed. In the same period, EU exports to South Korea have
risen 10 percent, while imports have risen 12 percent.
Whereas goods trade data with East Asia look good, in India, and much closer to
home, EU businesses have much to worry about. The Ukrainian crisis is looming
large. Eurostat writes:
“The most notable decreases were recorded for exports to Switzerland (-22%),
Russia (-12%) and India (-10%), and for imports from Russia and Norway (both 7%) and Brazil (-5%)”.
Are EU trade data a proxy for Germany’s while the rest of Europe struggles
with trade deficits? Almost, but countries like Italy are not in a bad situation.
Eurostat writes:
“Concerning the total trade of Member States, the largest surplus was observed in
Germany (+џ124.5 bn in January-July 2014), followed by the Netherlands (+џ34.6
bn), Italy (+џ24.3 bn), Ireland (+џ20.1 bn) and the Czech Republic (+џ10.0 bn).
The United Kingdom (-џ76.2 bn) registered the largest deficit, followed by France (џ43.2 bn), Spain (-џ13.6 bn) and Greece (-џ12.4 bn).”
Read more here: http://www.borderlex.eu/blog-eu-exports-china-grow-rapidlyimports-new-trade-nuggets-2014/
25. PPI decelerates to 3.5% YoY in September due to the drop in oil prices
UralSib
October 17, 2014
PPI posts deepest MoM drop this year … Yesterday, Rosstat reported that producer
prices dropped 0.8% MoM in September after zero MoM growth in August. Growth
decelerated to only 3.5% YoY in September from 5.7% YoY in August. The figure was
a surprise as the Interfax consensus expected a contraction of 0.1% MoM. PPI rose
6.2% YoY in 9M14.
… as prices in the extraction sector drop 5.8% MoM. Prices in the extraction sector
contracted 5.8% MoM in September after declining 2% MoM in August and shrank
4.6% YoY in September after growing 5.2% YoY in August. Crude oil prices fell
another 6.2% MoM in September and services for oil & gas extraction cheapened
13.7% MoM. Prices in the extraction sector rose 9% YoY in 9M14. Prices in the
manufacturing sector grew 0.6% MoM for the second consecutive month but slowed
to 6.4% YoY growth in September from 6.6% YoY growth in August. Prices in the
manufacturing sector increased 5% YoY in 9M14. In the utilities sector, prices grew
0.6% MoM in September after 0.4% MoM growth in August and accelerated to 2.6%
YoY growth in September from 2.3% YoY growth in August. Prices in the utilities
sector grew 7.5% YoY in 9M14.
PPI to accelerate moderately in the near future. PPI is following the oil price, which
has already fallen 20% since its local high in June; this has helped YoY producer
price growth to slow to 3.5% in September. We believe that in the next couple of
months, producer prices will grow moderately, as overall inflationary pressure, due
to ruble weakness and the ban on certain food imports, remains high. In addition, we
expect some recovery in the oil price, which will support producer price growth. We
forecast PPI to grow 6.6% this year.
Alexei Devyatov, PhD
Olga Sterina
RBL COMPANY RESULTS, UPGRADES
26. E.ON Russia: 9M14 operating update: electricity generation declines
UralSib
October 17, 2014
Generation down 6.3% YoY ... E.ON Russia (EONR RX – Hold) published an operating
update for 9M14 yesterday. The company reported that electricity generation fell
6.3% YoY to 42.7 mln MWh in 9M14.
… due to planned maintenance. The decline was due largely to planned maintenance
on the company’s generation units and the construction of a transmission line to the
new capacity of E.ON’s power plant in Siberia.
Still one of the best dividend stories in the sector. The decline in electricity
generation was expected, so it should not set the company back in its goal of earning
RUB15 bln ($411 mln) in net profit this year, which could imply a rather attractive
dividend yield of 4-6%.
Matvey Taits
27. Evraz 3Q14 trading update
VTB Capital
October 17, 2014
News: Yesterday, Evraz reported its 3Q14 trading update, posting crude steel
production of 3.86mnt, down 2% QoQ, and guiding for higher output in 4Q14.
Our View: Evraz has reported a weak 3Q14 trading update, posting a 4% drop in
total steel products output on the back of maintenance and repair works in Russia,
and showing a deterioration in the product mix due to a contraction in demand for
infrastructure-related products in Russia, i.e. rails and beams.
The total output of steel products was down 4.2% QoQ and 6.7% YoY to 3.4mnt in
3Q14 on the back of unscheduled maintenance works at ZSMK, resulting in lower pig
iron output and a deterioration in the product mix during the quarter. On a
consolidated basis, construction products output was down 3% QoQ in 3Q14, which
is a negative surprise, given seasonal demand strength and slight price increases
(within 1%), driven by maintenance at one of NTMK's reheating furnaces and the
shutdown of Mill 450 at ZSMK. Railway products output was down 24% QoQ on the
back of a sharp drop in demand from Russian Railways, and while the company
guides an increase in steel production in 4Q14, profitability will still be under
pressure from lower domestic prices (as the catch-up with netback will take some
time) and higher semis exports due to the seasonal demand slowdown. On a positive
note, steel margins are to be supported by lower iron ore and coking coal prices.
Indeed, sinter ore and pellets prices were down 25% QoQ and 22% QoQ in 3Q14,
respectively, but the decline will only be partially offset by rouble depreciation and
thus lower cash costs in mining.
The company has guided for higher output in 4Q14; however, the earnings outlook is
unimpressive given seasonal softening in domestic demand, and domestic prices due
to rouble depreciation, which are unlikely to be fully offset by its positive cost
impact.
As a result, we see a modest downside risk to current market EBITDA estimate of
USD 2.0bn (Bloomberg consensus).
Wiktor Bielski
Vadim Astapovich
Oliver O'Donnell
Boris Sinitsyn
28. Lenta: Growth decelerating but still strong in 3Q14
UralSib
October 17, 2014
Outlook for 2014 confirmed at 34-38%. Lenta (LNTA LI – Not Rated) yesterday
published a reasonably strong 3Q14 trading update. Revenue growth slowed to 33%
YoY to RUB48.5 bln ($1.3 bln) from 39% in 2Q14. Management confirmed its outlook
for the year despite the effect of sanctions and restrictions on the import of certain
products from the EU; revenues are expected to expand 34-38%, while the retail
space is expected to increase 30% YoY, with the planned opening of 24
hypermarkets and 15 supermarkets.
LFL sales up 9% YoY. Like-for-like sales rose 8.9% YoY in 3Q14, reflecting 4.2% YoY
growth in like-for-like traffic and 4.5% YoY growth in the like-for-like ticket. Total
selling space in3Q14 increased 37% to 569,803 sqm, with 103 stores in operation at
the end of September, including 87 hypermarkets and 16 supermarkets. Five
hypermarkets and two supermarkets were opened during 3Q14.
Among market leaders in terms of growth. The update confirms that the company is
able to deliver strong growth, comparable to that of market leaders such as Magnit
(MGNT LI – Under Review) or DIXY (DIXY LI – Under Review), so it can be seen as
an attractive investment alternative in the sector. The fact that management
maintained its outlook for the year is also a positive sign in the current environment.
We have no recommendation on the stock at the moment.
Konstantin Belov
29. NLMK 3Q14 trading update
VTB Capital
October 17, 2014
News: Yesterday, NLMK reported its 3Q14 trading update, posting a 9.5% QoQ
increase in crude steel output to 4.13mnt and a 2.4% QoQ drop in sales to 3.74mnt.
Our View: The steel product mix was weaker, with HRC and dynamo steel down 7%
and 42% QoQ, respectively. Meanwhile, iron ore concentrate production increased
0.9% to 3.7mnt, although sales to third parties were down 34.5% QoQ to 0.7mnt
due to increased internal shipments. Longs sales decreased sharply in the third
quarter to 1.5mnt, down 19% QoQ, partly due to the seasonal slowdown in
construction during September. The decrease in volumes also reflects an increase in
sales through distribution networks, which have a longer revenue recognition period;
this follows strong demand in the second quarter during which NLMK was able to
increase the portion of direct sales to end users. This means that sales have been
deferred to the fourth quarter and, as a result, the company has guided for a 3-5%
QoQ increase in fourth quarter sales. We expect 3Q14 revenues to be negatively
affected by weaker sales, although profitability-wise this is likely to be offset by
marginally lower unit costs due to increased capacity utilisation (from 94% to 96%)
following the relaunch of blast furnace No.3 and lower raw materials input costs.
Wiktor Bielski
Vadim Astapovich
Oliver O'Donnell
Boris Sinitsyn
30. Polymetal International 3Q14 trading update
VTB Capital
October 17, 2014
News: Polymetal International released its 3Q14 trading update yesterday, posting
gold eq. production of 388koz, up 16% QoQ, and reducing TCC and AISC guidance to
USD 625-675/oz and USD 925-975/oz respectively.
Our View: Polymetal's 3Q14 operating figures were in line with our expectations and
support the company's increased FY14 guidance of 1.36mnoz of gold equivalent. The
company continues to benefit from rouble depreciation, and has again decreased its
FY14 cash cost guidance, which creates upside potential to our FY14 earnings
expectations.
Gold equivalent production of 388koz in 3Q14 was up 16% QoQ but down 6% YoY,
as the strong performance at Dukat hub (silver output up 8% YoY to 6.1mnoz),
Omolon (YoY gold production up 42% to 49.9koz on the back of higher grades
processed) and Mayskoye (with sales started during the quarter, total gold
production reached 42.1koz in 3Q14, +18% YoY) was offset by lower production at
Albazino/Amursk (down 37% YoY in 3Q14), Varvara (the flotation circuit was
temporarily suspended in July) and Khakanja (the asset is nearing depletion).
Production at the Albazino/Amursk hub was up 16% QoQ to 61.7koz, with the POX
plant exceeding its 1.6mnt/a nameplate capacity in 3Q14, operating with a 94%
recovery rate. At Varvara, the company has resumed concentrate sales, with an
increase in throughput possible once the existing stockpile is sold. Revenues reached
USD 451mn and USD 1,175mn in 3Q14 and 9mo14, respectively.
While the full-year production guidance was reiterated at 1.36mnoz of gold
equivalent, the cost performance was better than expected (although Polymetal had
earlier pointed to potentially lower costs) due to rouble depreciation. As a result, the
FY14 cash cost guidance was further reduced to USD 625-675/oz (AISCC of USD
925-975/oz) of gold equivalent, implying upside potential to our FY14 earnings
estimates. The 2015/16 production guidance of 1.35mnoz and 1.40mnoz of gold
equivalent, respectively, is 5-10% above our current estimates.
Wiktor Bielski
Vadim Astapovich
Oliver O'Donnell
Boris Sinitsyn
BELARUS
31. Belarus' export of agricultural products to Russia up 10% in September
Belta
October 17, 2014
In September 2014 Belarus' export of agricultural products to Russia went up 10% in
comparison the same month of the year 2013, head of the main foreign economic
department of the Agriculture and Food Ministry Alexei Bogdanov told reporters on
14 October, BelTA has learned.
According to Alexei Bogdanov, the export of agricultural products to the Russian
market increased gradually. In August 2014 the Belarusian export of such goods
went up 7% over August 2013.
Read more here: http://eng.belta.by/all_news/economics/Belarus-export-ofagricultural-products-to-Russia-up-10-in-September_i_76506.html