Russia What will 2013 bring? Vladimir Miklashevsky Economist Danske Bank Markets, Research + 358 10 546 7522 [email protected] 17 December 2012 Important certifications and disclosures are contained from page 17.

Economy on a slower growth path than in 2012 • Russian economic growth continued to slow down in Q3 12 posting 2.9% y/y versus 4.0% a quarter earlier and 4.9% y/y in Q1 12. In October, GDP grew 2.3% y/y only. Expansion slowed to 3.7% y/y between January-October on rising inflation and slowing private consumption growth. Private consumption expanded 5.1% y/y in Q3 12 versus 6.9% a quarter earlier. We downgrade our 2012 GDP forecast by 20bp to 3.8% y/y. • 2013 looks to be a period of a slower economic growth in Russia as the global environment remains challenging and uncertain. It is unlikely that the Russian economy will get a significant boost from fixed investment expansion. Thus, steady private consumption together with a low unemployment rate are likely to continue to power the economy. • As we do not expect any significant fall in oil prices next year, our 2013 GDP forecast stays at 3.5% y/y.

Source: Reuters EcoWin, Danske Bank Markets

Russia's industrial production and GDP 20.0 17.5

20.0 % y/y

% y/y 17.5



>

% y/y

> 12.5

12.5

10.0

10.0

7.5

7.5

5.0

5.0

2.5

2.5

0.0

0.0

-2.5

-2.5

-5.0

-5.0

-7.5

-7.5 2010

Source: Reuters EcoWin, Danske Bank Markets

15.0

2011

2012

2013

5

Residential construction to remain volatile 20

Dwellings commenced

% y/y

• From January to October 2012, residential construction expanded 3.8% y/y to 40.1m m2. After a September contraction of 7.2% y/y, 11% y/y growth was posted in October. • Mortgage stock is traditionally low in Russia: only 13.2% of all loans issued in 2011 were mortgages as high rates impose limits. The average rate for RUB mortgages was 12.3% in October. In September, mortgage loan issuance grew only 30% y/y vs 49% in August as income growth is slowing down. We expect mortgage loan issuance to slow down in 2013 as banks are tightening conditions and real income is set to grow only moderately. • FX loans are just a tiny part of the stock: 2.7% of all loans issued in 2011. • Last year, the average payback of RUB mortgages was 179 months compared with 196 months in 2010. As high rates prevail, Russian consumers seek to pay back their loans as quickly as possible. The share of mortgages paid in advance was 30.2%.

Source: Bank Rossii, Danske Bank Markets, Reuters EcoWin

15 10

millions, m2, 12M MA

>

5

5.1

0

5.0

-5

4.9

-10

4.8

-15

4.7 2010

2011

2012

Mortgage loan and rate development in Russia 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

20 % 15 % 10 % 5% 0% -5 %

6

High oil price to keep budget balanced • The Russian budget saw a 1.4% of GDP surplus from January to November. The surplus has expanded from one month to another due to high energy prices and increased tax collection. • We expect the budget to end balanced this year and post a 0.8% deficit in 2013, as the oil price might ease a bit. The budget deficit will be financed mostly through borrowing and privatisation. • In early December, Russian president, Vladimir Putin, signed into law a draft budget for 2013 and the planned period of 2014–15. The budget for 2013 suggests that GDP will total RUB66.5trn and inflation will not exceed 5.5%. • According to the draft, in 2014 and 2015, GDP is set to amount to RUB74trn and RUB83trn and inflation will not exceed 5%. The oil price is expected to stay at USD97/bbl, USD101/bbl, and USD104/bbl in 2013-15.

Source: Reuters EcoWin, Danske Bank Markets

Russian budget balance and oil price 10

% of GDP

USD/bl

Brent-oil price >>

5

130

120

0 110 -5 100 -10 90 -15 80

-20

>

1.25

2500

1.00

2000

Trend for budget revenues

75

75

50

50

25

25

0

2008

2009

2010

2011

2012

0 9

Russian stocks are following global risk sentiment • The Micex stock exchange index has recovered 15.2% since May, as global risk-on sentiment returned to the markets, and the oil price rose. The recovery in Russian stocks has been faster than in many emerging or developed markets. Yet, since this year’s high, Russian stocks have lost 11.6%.

Russian Micex stock and P/E indices 1600

5.7

1550

5.6 5.5

1500

• According to P/E numbers, Russian stocks are cheap at the moment compared with the beginning of 2012.

1450

• Downside risks for Russian stock indices this year include a possible return of strong global risk-off sentiment on euro zone woes and declining prices for Russia’s main exports (energy and metals) as Chinese economic growth slows further.

1350

Source: Reuters EcoWin, Danske Bank Markets

5.8

>

5.2 5.1 5.0

1400

4.9 4.8 4.7 1300

4.6 1

2

3

4

5

6 7 2012

8

9

10

11

10

Scandinavian stocks with Russian exposure Company

Carlsberg Rockwool Scania Nokian Renkaat Oriola-KD YIT Stockmann Tikkurila TeliaSonera Oriflame Tele2 Aspo Fortum Modern Times

Source: Bloomberg, Danske Bank Markets

Sector

Consumer Construction Auto Auto Pharma Construction Retail Construction Telecoms Consumer Telecoms Industrial Utility Media

Performance, YTD %, as 17 Dec '12 37.9 33.5 32.8 28.2 27.3 17.8 15.4 8.5 -0.4 -6.1 -11.4 -11.9 -12.8 -31.5

11

Bank Rossii to tread more carefully Money supply is not a CPI driver anymore

• Bank Rossii left its refi rate unchanged on 10 December at 8.25% as expected by Consensus (DBM: 8.25%) but increased the overnight deposit rate by 25bp to 4.50% (Consensus 4.25%, DBM: 4.50%). At the same time, Bank Rossii cut rouble swap rates by 25bp ‘to limit money market volatility’. The overnight repo rate is unchanged at 5.50%. • Bank Rossii commented on the decision, stating that ‘rates are acceptable for the time being’ as there is a ‘broad stabilisation of consumer prices’. A day later, the central bank added that ‘Russia is past its inflation peak’. • Slowing economic growth seems to have become a concern for Bank Rossii, and we expect it to take it into account in future decisions whether consumer prices continue to grow moderately. As Q1-Q2 13 inflation decelerates, we cannot exclude the possibility of it ending its tightening cycle in H1 13. • Thus, we believe Bank Rossii will remain on hold at its next meeting in early January 2013. • Bank Rossii has reduced its intervention and is letting the RUB fluctuate more freely. Source: Reuters EcoWin, Danske Bank Markets

40

12

35 % y/y

% y/y 11

30

>

-5

3

-10

2

-15

1 2010

108

2011

2012

2013

2014

REER* and RUB rates**

107

43.0

EUR/RUB >>

106

40.5

105 38.0

104 >

* Effective exchange rate is also called a weighted exchange rate. It is used to measure the overall value of a currency in the foreign exchange market. It is a relation of one currency to a group of other currencies that are given weights reflecting the importance of these currencies in international trade

** RUB rates forecast curve is based on 1, 3, 6 and 12M forecasts seen as on 12 December 2012. Thus, no continuous pattern of volatility is reflected in the forecast curve.

33.0

101 100

30.5

99 28.0

98 9 11 1 2011

3

5 7 9 11 1 2012

3

5 7 9 11 2013

12

RUB’s FX rate becomes more flexible than ever 42

• Bank Rossii widened the FX basket’s trading band by 100 kopecks to 7 RUB in an attempt to boost the RUB’s flexibility (±1%) in order to improve liquidity and the efficiency of monetary policy. The lower boundary now stands at 31.65 and the upper boundary at 38.65 (32.15-38.15 previously). The RUB’s volatility remains high, allowing the Russian currency to depreciate more than previously on oil price falls and to strengthen more on oil price rises. We expect Bank Rossii to widen the band further by 100 kopecks in Q1 13 and again in H2 13. • The oil price and the RUB have traditionally moved together as energy is Russia’s main export good. The high oil price pushes the RUB up through the trade balance surplus, which has been more than USD17bn on average over the past 12 months. • As an emerging currency, the Russian RUB rate is very sensitive to global risk sentiment.

Rouble's trading band vs. dual currency basket 40 38 36 34 32 30

lower border upper border RUBBASK Curncy

Russia's central bank's reserves and money supply 7.5

USD, bn 600

RUB, trn >

525

6.0

500

5.5

475

5.0

450

4.5

• We expect a stronger RUB in Q1 13 on a larger current account surplus and a weaker RUB in mid-Q3 13.

425

4.0

400

3.5

375 2007 2008

2009

2010

2011

2012 Source: Danske Markets, Reuters Ecowin

Source: Reuters EcoWin, Bank Rossii, Danske Bank Markets

13

Local bond market liberalisation to support RUB in 2013 • In January 2013, non-residents will gain direct access to the local rouble bond market and Russian government bonds, OFZs, as Euroclear and Clearstream will be allowed on the Russian market.

Russian bonds in the markets, approx. USD bn

100 135

OFZs Non-gov. RUB bonds

• As returns in developed markets are not very attractive right now, OFZs are offering high nominal rates reaching up to 8%.

Sovereign Eurobonds Non-gov. Eurobonds 42

125

• Despite the fact that foreign investors would be allowed to trade only on the OTC market, we expect inflows to reach up to RUB800bn during the first 12-18 months. This would give additional support to the RUB but at the same time volatility may increase in both the currency and local market. • Some legislation and tax regulations are under discussion right now. We expect more transformation to come over the next 12 months. Source: Minfin, Cbonds, Sberbank

14

Capital outflows slow down • The private sector’s net capital exports continue to weigh on the RUB. Despite the high oil price, outflows are slowing down. In Q2-Q3 12, banks even provided positive net capital flows, for the first time in nearly two years. • We expect at least USD70bn of outflows in 2012, as the figure last year climbed to nearly USD81bn. In 2013, we expect capital outflows to slow down further to USD60bn, as the next year looks politically calmer than 2012. This would support the RUB over the year.

20

Russian private sector's capital net flows, USD bn

10

0

-10

-20

-30 Other sectors

Banks

-40

Source: Bank Rossii, Danske Bank Markets

15

Russia: macro and FX forecasts 2011 2012 2013 2014 GDP (% y/y)

4.3

3.8

3.5

3.8

Inflation (% y/y)

6.1

6.5

6.9

5.9

Unemployment (%)

6.6

5.4

5.9

5.6

Current Account (% of GDP)

4.7

3.9

3.1

2.8

Budget (% of GDP)

0.8

0.0

-0.8

-0.2

RUB

EUR Danske Forward 12-Dec 39.96 +3M 38.50 41.03 +6M 38.20 41.65 +12M 39.20 42.86

Source: Danske Bank Markets

USD Danske Forward 31.70 28.73 31.15 28.30 31.59 29.7 32.44

Basket Danske Forward 35.60 34.00 N/A 33.41 N/A 34.18 N/A

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Disclosure This research report has been prepared by Danske Bank Markets, Research, a division of Danske Bank A/S ('Danske Bank'). The author of this research report is Vladimir Miklashevsky, Economist. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Date of first publication See the front page of this research report for the date of first publication.

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