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Bank Rossii Eases Further As Russia's Economy Contracts At A Record Rate

The ECB's Balance Sheet At A Glance.

Wednesday, August 27, 2008

Russian Stocks Fall For Fourth Day, Turkish Companies Hit

Russia's Micex Index fell for a fourth day on Wednesday, on concern that the government's decision to recognize Georgia's breakaway regions will deepen a rift with the West and shake investor confidence. OAO Sberbank, Russia's biggest bank, reached its lowest level in almost two years amid speculation losses in the value of its government ruble-denominated bonds will erode its capital.

The ruble-denominated Micex Index lost 1.1 percent to 1,278.72 at 2:22 p.m. in Moscow, after earlier climbing as much as 2.4 percent on a rally in oil prices. The dollar-denominated RTS Index dropped 0.7 percent to 1,567.53, extending its third- quarter decline to 32 percent.

UBS AG today cut its price estimates for 74 Russian stocks, citing Medvedev's decision to recognise the two Georgian regions which are in rebellion.

Moves in the RTS Index are growing more disconnected from oil as the equity benchmark suffers its worst monthly decline in eight years. Before August, the RTS posted an 11-fold gain this decade while crude climbed almost fivefold.

``We could be in for a volatile period until there is a resolution to what's going on in Georgia,'' said Vlad Milev, an analyst at Metzler Payden, which oversees $1 billion in East European stocks. ``We are not trading on economic fundamentals or company earnings. We are trading on headline news, and the headlines have been largely negative since the events in Georgia started.''

The RTS has lost 15 percent since Russia invaded Georgia on Aug. 8, leaving it 37 percent below its record high of 2,487.92 in May. Sberbank fell for a third day, sinking 1.91 rubles, or 3.4 percent, to 54.10 rubles, the lowest level since September 2006.

The bank holds an estimated $10 billion in ruble-denominated Russian government bonds. The yield on Russia's benchmark 30- year 6.9 percent ruble bond has jumped 106 basis points to 8.81 percent since Aug. 7.

CDS's ON Gazprom UP 36 BPs In August

OAO Gazprom led a jump in the cost of protecting Russian companies from default to the highest in almost five months on investor concern the military incursion in Georgia will trigger a rise in borrowing costs. Credit-default swaps on Gazprom increased 36 basis points to 260 this month, and Moscow-based oil-pipeline operator OAO Transneft rose 33.5 to 265, according to at CMA Datavision prices at 3:15 p.m. in London this afternoon. Contracts on Russia's government debt climbed 32 to 134, the highest since April 2.

The credit crisis has already prompted a jump in Russian corporate funding costs, with Russia's largest lender, OAO Sberbank, increasing rates on outstanding loans by an average of 2 percentage points last month. Access to capital for Russian corporations, which had already been severely damaged by the global credit crunch, seems to have further deteriorated on the back of increased political risks.

Ruble Slides

The ruble has now slumped almost 4 percent against the dollar since the five-day war started on Aug. 7, extending its declines further yesterday after Russia recognized the independence of two breakaway regions of neighboring Georgia. Before the conflict, banks such as Merrill Lynch & Co. had predicted above-target inflation would force Russia to let the its currency strengthen by as much as 5 percent to the basket in the next 12 months.

The ruble fell to an almost seven-month low against the U.S. currency yesterday after President Dmitry Medvedev signed decrees recognizing the independence of South Ossetia and Abkhazia.

The ruble, which had gained more than 1 percent against the basket through by Aug. 7, is now at 29.8504, 0.7 percent weaker than its average basket price over the past 12 months. It rose 0.2 percent to 24.6102 per dollar by 5:45 p.m. in Moscow, and lost 0.3 percent to 36.2560 per euro, after sliding 0.2 percent yesterday.

At some point, of course, the central bank will step in and try to firm up support for the ruble, and of course there are no shortage of foreign exchange reserves in Russia at this point. By buying and selling rubles regularly, Bank Rossii contains the currency within a trading band against the basket, which is made up of about 55 percent dollars and 45 percent euros. It manages the ruble in order to limit the impact of its fluctuations on the competitiveness of Russian exporters.

The drop in the oil price, if it continues (and this conflict more or less settles the issue for me, since global economic output is bound to be hit negatively, even if at this stage we don't know by how much), is certain to erode Russia's $37 billion current- account surplus in the process cutting support for the currency and breaking the long-term trend of ruble appreciation.

Turkey Protests Customs Delays

Turkey protested to Russia over trade restrictions after trucks were held up at customs posts, hurting exports to Turkey's biggest trading partner. Russian customs inspections, which previously took a few hours, are delaying the entry of Turkish trucks for as long as 20 days, according to an official at Turkey's Trade Ministry. The ministry estimates Turkey could lose as much as $3 billion in exports if the curbs continue, and has sought an explanation from the Russian government.

Russia last year was the largest market outside the European Union for Turkish goods, with $4.9 billion of exports, according to the Turkish Assembly of Exporters. Turkey sells textiles and food to Russia, and relies on imports of Russian natural gas for heating and electricity. The restrictions are especially damaging for Turkish textile exporters who are currently selling their winter collections, Trade Minister Kursad Tuzmen said yesterday. Textile and clothing exports were Turkey's biggest foreign currency earner last year, bringing in $22.6 billion to help cap a trade deficit that's widening as energy costs rise.

Turkish Builder Enka Hit Hard

Enka Insaat & Sanayi AS, Turkey's biggest builder, and brewer Anadolu Efes Biracilik & Malt Sanayii fell the most in more than a year in Istanbul trading today on concern that they may lose business in Russia as a result of tensions in the Caucasus.

Enka shares declined 80 kurus, or 7 percent, to 10.60 liras at the close of trading in Istanbul today, bringing the company's market value down to 12.7 billion liras ($10.7 billion). Anadolu Efes shares plunged 1.40 liras, or 11 percent, to 11.50 liras, the biggest drop since June 2006.

Investors are concerned that Enka, which has won contracts to build airports and power stations in Russia and modernize Russia's parliament buildings, may lose out as the military conflict in Georgia hurts Russia's relations with the North Atlantic Treaty Organization or NATO, in which Turkey is a member. Anadolu Efes beer sales in Russia have surged as the company acquired local brewers.

Almost half of Enka's backlog of orders are in Russia, and more than half its assets are in Russia and other CIS countries, Hackett said. Enka owns the Ramstore chain of supermarkets in Russia.

Contagion Watch

From an economic point of view this whole situation is now very serious, and needs careful following by the day. The first signs of contagion seem to be emerging in Turkey. The German economy, which is now slowing rapidly, is evidently the OECD economy which is most at risk by what is happening. The whole of the EU 10 is also very vulnerable to contagion (which seems to have started already in Turkey), plus Ukraine, of course, with Sebastopol an evident focus of attention now, as Bernard Kouchner is pointing out.

But Romania could easily get sucked in to any conflict which developed in Moldova, and the following declaration from Valeri Kuzmin Russia's ambassador to Moldova is not exactly likely to calm things down.

Russia's ambassador to Moldova, meanwhile, said the country's leaders should be wary of what happened in Georgia and avoid a "bloody and catastrophic trend of events" in the separatist, pro-Russia region of Trans-Dniester. The ambassador, Valeri Kuzmin, said Russia recognized the independence of South Ossetia and Abkhazia because of "Georgia's aggression against South Ossetia." Trans-Dniester broke away from the former Soviet republic of Moldova in 1990. A war broke out between Moldovan forces and separatists in 1992 leaving 1,500 dead. Trans-Dniester is supported by Russia but is not recognized internationally. Russia has 1,500 troops stationed there to guard weapons facilities.

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