Page 22 - IFR Opportunities in Russian capital markets

CHAPTER 01
ifrintelligence reports/Opportunities in: Russian Capital Markets
The rate of growth of hard currency deposits was essentially zero in 2006, according to UBS, while domestic deposits grew at 60% year-on-year and the share of foreign currency deposits declined from 30% to 23% of total bank deposits in the first nine months of 2006. Furthermore, according to the balance of payments figures, US$10.6bn of cash dollars left Russia in 2006, compared to US$1bn in 2005.
The net demand for foreign currency in 2006 ranged from zero to US$1bn a month, while in 2005 the demand for foreign currency was US$2–3bn a month. The euro accounts for a quarter of foreign currency purchases and 15% of sales. The remainder is almost completely in dollars.
Money supply and dollars
2006 saw a record net inflow into Russia of US$41.6bn in capital – repatriated funds by domestic investors and burgeoning amounts of foreign investment – compared to the net inflow of US$1.1bn in 2005. The pace is likely to slow considerably this year, but is still a lot better than in the past; the Finance Ministry is predicting inflows of US$15bn in 2007.
Russia's money supply is intimately linked to the flows of foreign currency, as the CBR still uses the FX markets as its main tool of monetary policy. The money supply increased sharply in 2006; however, economists were surprised that this did not fuel higher inflation, which actually decreased.
While the CBR stepped up its attempts at sterilisation (through its deposit window, the issuance of its own paper – the OBRs – and an increase in the reserve requirement for foreign currency borrowing in October) reserve money grew by 41% y-o-y in 2006, funding about US$45bn of the reserve build-up, compared to a growth rate of 22% y-o-y in 2005.
UBS said in January: "Somehow surprisingly, this rapid expansion has not led to an increase in inflation. In fact, inflation has continued to decline and the CBR managed to achieve its end-year inflation target of 9% y-o-y. It has been helped by relatively slow growth in administrative prices but the rising demand for the ruble is the main reason for the falling rate of price increases in our view."
The de-dollarisation is also contributing to keeping inflation down, despite the continued rapid rise in the money supply.
"The fact that the demand for money must have grown substantially is also borne out by the fact that nominal interest rates have hardly changed," says UBS.
The federal budget
The government ended 2006 with whopping budget surplus of 7.3% of GDP, or slightly less than RUB2trn. Federal budget revenues came to RUB6.3trn, while expenditures were RUB4.3trn.
In 2005, the federal budget surplus was at RUB1.5trn, or 7.2% of GDP, while federal budget revenues amounted to RUB5trn and spending was at RUB3.6trn. Budget data can be seen in Table 1.3.
The Federal Tax Service collected RUB3trn in taxes for the budget in 2006, the Federal Customs Services collected RUB2.9trn and the Federal Property Management Agency collected RUB69.8bn. Other federal government agencies collected RUB343bn for the budget in 2006.
Among the fastest rising tax revenues was corporate profit tax, which was up 40% in 2006 to RUB1.7trn. One of the slowest risers was VAT, which was up only 4.1% last year to RUB924bn – but as VAT contributes a third of budget revenues by itself, this slow rise is more a function of the fact that reforms to the tax collection system have concentrated on the efficiency of VAT collection above all else. Federal budget revenues and expenditures as a percentage of GDP are shown in Figure 1.10.
The situation is improving in the regions, too. Of Russia's 88 regions (two were merged in 2006) 16 are now running at a profit and net contributors to the budget – almost all oil producing regions – and a dozen regions rely on federal funds for their budget needs. The rest are muddling through on local taxes and federally-sponsored programmes. Financial aid from the federal government to the regions between January and October 2006 was nearly RUB440bn, with average transfers equalling 14.6% of regional budget revenues.
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