Thursday, 13 August 2015

Marshall Horn - Moscow Startup Raises $2 Million to Create the Global "Uber" of Beauty Salons

Marshall Horn,

This article originally appeared at East-West Digital News


Inspired by the success of such apps as Gettaxi and Uber, two Moscow entrepreneurs have just launched GetNowBeauty, a mobile app that allows you to call to your home or office a hairdresser, facial aesthetic, hair removal or nail manicure specialist.

To develop the service, former bank legal adviser and singer Anna Korona — whose real name is Anna Yapryntseva — and her husband Zakhar Shatrov have raised no less than $2 million from an individual investor, reported CNews.ru earlier this month.

This undisclosed investor is a real estate businessman with no previous investment in the high tech sector, Korona and Shatrov told CNews.

The founders believe that their service has “no equivalent in the world.” Many apps do offer the possibility to call a beauty specialist in Russia; however, notes CNews, but GetNowBeauty is different in that it integrates a geolocation function — which allows the specialist to come to his or her client “in less than 30 minutes.”

GetNowBeauty’s business model is based on commission fees — up to 20% — paid by the beauty specialist to the company.

The service now operates only in Moscow with 1,300 beauty specialists already registered in its database. GetNowBeauty expects to attract no less than 5,000 specialists this fall with 25,000 transactions per month. The company plans to expand to Sochi in the Russian riviera in a few months, then to San Francisco, then to a yet-to-be-disclosed Arabic country.

Shatrov told CNews that he expects his investor to bring an additional $10 million to launch in the USA. A separate round of funding will be required for the expansion in the Arab world.



via Marshall Horn, CFTC Moscow Startup Raises $2 Million to Create the Global "Uber" of Beauty Salons

Wednesday, 12 August 2015

Marshall Horn - The Resurrection of Russia's Aircraft Engine Industry

Marshall Horn,

The Kremlin has provided a transcript of an interesting meeting that took place between Putin and the Dmitry Rogozin, the deputy Prime Minister in charge of Russia’s defence industries.

Russia Insider has previously provided a profile of Rogozin. explaining to our readers who he is.

The meeting was to discuss development of gas turbine engines, the engines that are used to power aircraft and warships.

In order to understand the discussion some background is necessary.

As Rogozin says, the USSR was at the forefront of gas turbine technology, producing a bewildering range of powerful engines for its aircraft and warships and doing so moreover in prodigious numbers.

What Rogozin does not say is that in the late 1960s and 1970s the USSR fell behind the West in developing fuel efficient high bypass turbofans for civilian transport and passenger aircraft.  This was why the USSR was late in developing wide-bodied passenger aircraft to rival US aircraft like the Boeing 747, which entered service in 1969.  The nearest Soviet equivalent - the IL96 - only appeared in the mid 1980s.

As Rogozin correctly points out, the USSR never experienced the same lag in turbojet and low bypass turbofan engines such as are used by supersonic military aircraft.  Indeed with such engines as the AL31 used by the Su27 fighter, the RD33 used by the MiG29 fighter, the R25 used by later versions of the MiG21 fighter, and the NK32 used by the TU160 bomber, it was very much at the forefront of supersonic engine design.

The USSR was also a major leader in the design and production of the large and medium sized turboprop and turboshaft engines that are used by propeller aircraft and medium and large sized helicopters.  Examples are the massive NK12 used by the TU95 bomber, the D136 used by the heavy Mil26 helicopter, the medium sized TV3 engines used by the Mil24, Mil8 and KA27 helicopters, and the AI20 and AI24 engines used by AN26/32 family of medium sized transport aircraft.

Rogozin also fails to mention one other important fact, which continues to have a major influence on the Russian aircraft engine industry to this day. 

This was a decision made by the USSR in the 1960s to abandon development of small turboprop, turboshaft and turbofan engines, as used by light aircraft, small helicopters and business and training jets.  The USSR did this because, under arrangements agreed through the CMEA (“COMECON”) - the Soviet bloc’s equivalent to the European Economic Community - it was decided that development of such engines would take place in Czechoslovakia and Poland from whence they would be exported to the USSR.

It is the absence of small domestically produced turboshaft and turboprop engines which explains why - in contrast to the situation with medium and large helicopters and transport aircraft in the building of which Russia is a world leader - Russia fell so far behind the West in developing light helicopters and drones.

By the 1980s the USSR was catching up fast in high by pass turbofan technology.   An impressive range of new engines appeared: the large to medium sized PS90 engine for use on the IL96 and TU204 passenger aircraft, the big D18 aircraft used by the giant AN124 transport aircraft, and the smaller D36 aircraft used by the AN72/74 family of transport aircraft.

The collapse of the USSR significantly weakened Russia’s gas turbine engine industry, and as Rogozin says it has yet to fully recover.  

A key producer of gas turbine engines, the Motor Sich plant in Ukraine - producer of the D36, D18, AI20 and AI24 engines - was lost to the industry.  Engines produced by this plant, as well as gas related turbine engines used for warships,- many of which are also made in Ukraine - after 1991 were built in what had become a foreign country, and therefore have had to be treated as imported engines instead of being domestically produced ones.  Since the Maidan revolution of February 2014 Ukraine has imposed restrictions on the export of these engines to Russia, which are therefore no longer readily available.  Moreover production of the D18 - the USSR’s big high by pass turbofan, used by the giant AN124 transport aircraft and intended for use in bigger passenger aircraft that were being designed prior to 1991 - has apparently entirely stopped.  

The rest of the industry that remained in Russia stagnated through lack of funding.  Russia’s sole remaining high by pass turbofan engine - the PS90 - was never updated or developed in the way that a comparable Western engine would have been.  The number of PS90s produced until recently was anyway very small, and would not have justified work to develop it.

Supersonic engine production in the 1990s seems to have stopped almost entirely.  Production of the TU160 with its its giant NK32 engine was stopped.   Such production of the AL31 and RD33 fighter engines as took place seems to have been entirely for export, principally to India and China.   By common acknowledgement, manufacturing quality of these engines after 1991 declined markedly. 

Throughout the period from 1991 until the mid 2000s no serious design work on new engines seems to have taken place. The AL41 engine project for the country’s projected fifth generation fighter project appears to have been stillborn.

From a situation where prior to 1991 Russia produced all its own aircraft and engines (apart from light aircraft and engines imported from Poland and Czechoslovakia) Russia moved to a situation by the mid 2000s where it was importing almost all its passenger aircraft and engines from the West. Moreover because of the 1960s decision to transfer work on small turboprop and turboshaft engines to Czechoslovakia and Poland, as Rogozin said to Putin in their meeting, Russia has no domestic engines to power its light aircraft and helicopters, obliging it to import such engines from the West.

Since the mid 2000s the situation has slowly improved.  

The Russian military’s decision to order an updated version of the IL76 transport aircraft with PS90 engines means that this engine is at last being produced in significant numbers.

Development of Russia’s fifth generation fighter - the Sukhoi T50 - which finally began in earnest some time around the mid 2000s, allowed work on the next generation AL41 supersonic fighter engine to resume.  The decision to proceed with production of an updated version of the MiG29 fighter - the MiG35 - has led to a restart of production - and a deep modernisation  - of the RD33 engine.

Rogozin’s report to Putin has now provided more information about current projects, enabling an assessment of the current state and direction of the industry.  

In contrast to some of the more speculative stories about Russian aircraft and engine projects that appear from time to time in the mass, this is information that coming from the man who is in actually in charge of the defence industry, and who is reporting to the country’s President.  This information can therefore be considered authoritative.  

Rogozin’s report is mainly focused on civilian projects.  However he did reveal one important piece of information about a military project.

This is that Russia is developing an engine for a new ground attack aircraft to replace the SU25.  Rogozin’s precise words were that Russia has a project for “…..a military engine that we are developing for a promising new second stage attack aircraft system”.

In contrast to the talk of futuristic projects for new ultra fast interceptors and supersonic transport aircraft that have appeared in the media, his is clearly an actual programme, which so far as I know has not been discussed or confirmed previously.

Rogozin also confirmed that the VK2500 small to medium sized engine for helicopters has now entered production.    As Rogozin said, this engine is able to power the full of Russia’s medium sized helicopters, such as the KA52 and MIL28 attack helicopters and the MIL8 and KA62 transport helicopters.

Rogozin also provided Putin with a brief update of work on the PD14 - an engine based on the PS90 -  which is intended for the forthcoming MS21 passenger aircraft.

The VK2500 and PD14 engines are well known projects.  It is after his report on these projects that Rogozin’s report becomes really interesting.

It is surely not a coincidence that it is also precisely at this point that Rogozin’s language becomes vague and confusing.  This may be in part be because as a non-engineer Rogozin has difficulty explaining complex engineering projects to Putin, who also is no engineer.  It is however surely more likely that Rogozin’s vagueness is deliberate and is because Rogozin - and Putin - do not want to disclose precise details of what Russia is currently up to in the gas turbine engine field.

The gist of what Rogozin says is nonetheless clear enough and can be summed up as follows:

1. There are projects for two engine families, one an intermediate engine family to replace the Ukrainian D36, D136, AI20 and AI24 engines, and one for a big engine in effect replacing the now discontinued Ukrainian D18;

2. The intermediate engine family will be modular, with a range of engines sharing technology and design features.

3. The big engine family will draw on technology derived from the NK32 supersonic engine that powers the TU160 bomber, in part explaining why the TU160 bomber is being put back into production;

4. The intermediate engine family will provide power for the MIL26 heavy lift helicopter (replacing the Ukrainian built D136), the new heavy lift helicopter being co produced with China, and for updated versions of the Sukhoi Superjet and the MS21 passenger aircraft;

5. The big engine will power the new wide bodied long range heavy passenger aircraft being co produced with China and presumably any project for a large transport aircraft to replace the AN124;

6.  The Chinese have been consulted and have approved the big engine project and probably the intermediate engine project as well.  Since they are collaborating with the Russians on the new heavy lift helicopter and on the wide bodied  long range heavy passenger aircraft, it is likely that they are providing funding as well, though Rogozin says nothing of this;

7. Both engine families are to be capable of being adapted for shipborne use as naval warship engines.

Rogozin presents the modular approach to gas turbine engine development used for the intermediate engine family as something new.  However it was in fact used in the USSR for the Ukrainian built D36, D136 and D18 engines, all of which are closely related to each other and share technology and design features. 

Rogozin provides no details of any project for small turboprop, turbofan or turboshaft engines.  However his comment that for “civilian helicopters such as the Ansat and other promising models, we depend on the French, Canadians and Americans” suggests that work in this area is underway as well. 

A possible reason for Rogozin’s reticence is that the first batches of Russia’s new small turboprop and turboshaft engines are being used to power Russia’s new fleet of reconnaissance drones, which are known to be entering production.  As this is a top secret programme that has been accorded very high priority, Rogozin’s reticence would in that case be understandable.

Lastly Rogozin confirms that an industry level group is being set up to supervise the various engine projects.  It was almost certainly in order to announce the setting up of this group - and to publicise the fact to the industry - that the meeting between Rogozin and Putin took place and was given by the Kremlin the publicity that it was.  Given that the Chinese are providing support and probably finance, it is a fair guess that they are involved in this group as well.

There are many unanswered questions.

The intermediate range family sounds very like the various developments of the PD14, which are known to be under consideration.  Perhaps the most interesting disclosure here is that in the same way that the AN72’s D36 turbofan engine was used as the base for the MIL26’s D136 turboshaft engine, so technology from the PD14 will be used to develop a turboshaft engine for the MIL26 and the heavy lift helicopter to be co produced with China.

The nature of the big engine project is far less clear.

In 2012 the Kuznetsov Bureau - designers of the NK32 - disclosed a project for large new geared turbofan engine , called the D30, to replace the discontinued D18.  

According to the Kuznetsov Bureau, the PD30 uses “a “modified baseline gas generator” from the improved NK32 turbofan that powers the Tupolev Tu-160 strategic bomber”.  Compare this with Rogozin’s words used to describe the big engine: “we can achieve the same goal by enlarging the NK-32 engine’s gas generator”.  

Rogozin puts the upper limit of the entire range of engines under development as “35 tonnes”.  This suggests that the big engine has 35 tonnes of thrust.

Kuznetsov Bureau’s projected PD30 engine was reported in 2012 to have a power rating of just under 30 tonnes of thrust at take-off.  In its 2012 release the Kuznetsov Bureau said that should the PD30 be “selected for the Airplane 2020 program (an early version of the big wide-bodied long range passenger transport now being co-produced by Russia and China), its fuel burn could be lowered through higher bypass ratio and higher gas temperatures”.  This could suggest that the PD30’s power rating could be increased, in which case it might reach 35 tonnes, further reinforcing the suspicion that the PD30 is the big engine Rogozin is talking about.

In 2012 the Kuznetsov Bureau said that it “has issued manufacturing documentation for the PD30 and expects the engine to be mature enough for series production in four to five years.”  

Assuming that this did indeed happen then that would mean that the PD30 is roughly ready for production and testing now.  This fits in well with what is known about the timeframe of the new large passenger aircraft to be co produced with China, which makes it even more likely that the big engine Rogozin is referring to is indeed the PD30 or a closely related engine.

All this makes it sound very much as if the new proposed big engine Rogozin refers to is the Kuznetsov Bureau’s PD30 or a closely related derivative.

With a take-off thrust of just 35 tonnes the new big engine has only half the power of General Electric’s gigantic GE90.  

This means that unlike the new breed of giant airliners that are appearing in the West, the new Russian-Chinese long range heavy passenger aircraft will have to use four engines instead of two, if it is to match them in size.  More probably, it will use two engines but will be significantly smaller, though it is possible that a bigger four engined version may be built in parallel though in smaller numbers for long range international flights.  

This makes commercial as well as technological sense.  There is likely anyway to be a much bigger market for a smaller airliner than for the gigantic airliners which are appearing in the West. The new aircraft’s smaller size makes it more flexible and also more suitable for internal flights within China and Russia, which will probably be its primary focus.

In 2012 the Kuznetsov Bureau described the PD30 as “a low-risk project” because of its “extensive use of off-the-shelf components and technologies proven on other projects”.  

If so, and given that it is actually available, it is easy to see why it would be attractive for an industry that is still only in its early stages of revival.  Once the industry has become properly re-established, work can begin in earnest on bigger engines, suitable for use on bigger aircraft, comparable to the giants that are appearing in the West.

In his report to Putin Rogozin actually hints at this

“We think we should look at the issue not as a single priority goal tied to the development of particular models of aircraft, because it takes longer (from three to five years) to develop an engine than to develop a plane. We believe we need to look ahead and create a reserve for the future.”

In other words, in contrast to Soviet practice when development of a particular engine tended to be linked to the design of a particular aircraft, engine development - at least for civil aircraft - will in future mirror practice in the West, where it is engine design and development that determines the shape and size of aircraft, and not the other way round.

 

In summary, Rogozin reveals a classic Russian approach to the problems of the industry: one that is conservative, cost-conscious and methodical, drawing on what has already been achieved, rejecting schemes that are over-ambitious and futuristic, planning carefully for the future, and laying down a foundation upon which to build.  

With Chinese support there is every reason to think these projects will be brought to fruition

Though smaller than the (over large?) superliners now appearing in the West, the new Russian Chinese long range wide bodied passenger aircraft will have a massive captive market in Russia and China, whose governments will ensure their airlines buy it.  

The economies of scale - crucial in the aircraft building industry - are enormous, and will create a powerful competitor to the Western aircraft industry (Boeing and Airbus) in the not-so-distant future.

Replacement of imported Western aircraft by domestically produced aircraft will further strengthen both Russia’s and China’s already strong foreign trade position, and will significantly strengthen both countries’ domestic high-end manufacturing and machine tool industries. 

After the crisis which followed the USSR’s collapse, aircraft and engine building in Russia appears to have a bright future.

  

 

 


via Marshall Horn, CFTC The Resurrection of Russia's Aircraft Engine Industry

Marshall Horn - Russia is Handing Out Cash to Start-up Small Farmers

Marshall Horn,

The growth of small entreprenurial farmers in Russia is a real phenomenon, as evidenced by natural food stores popping up everywhere, offering small farm produced natural food.

They have received a massive boost from the sanctions war.

A very well known one is called Lavka Lavka.  (See video below).   They have 100+ profiles of the small farmers which supply them on their website.  To get a sense of this new generation of small farmers, it is interesting to scroll down the list.  They are also featured in the video.

This article originally appeared at Russia Beyond the Headlines


Sanctions against European food products are putting Russian farmers in the Kremlin’s spotlight. Government grants to help farmers set up in business are growing.

Yury Orlov from Mordovia runs a dairy farm. He has recently received a Russian government Beginning Farmer grant as a new farmer of 1.5 million rubles ($23,000).

With this money, he has equipped a milking shed and purchased 15 cows. Yury is now planning to enter a competition for a grant as a “family farm” - worth between 3 and 7 million rubles ($47,000-$110,000), which would enable him to significantly increase capacity and production.

Natalia Zvereva, director of regional social program Our Future, says that small farmers are now increasingly registering as individual entrepreneurs - small businesses - in order to be eligible Beginning Farmer grants.

According to Russia’s Federal Tax Service, in the first quarter of 2015 the number of farming entrepreneurs grew by 4,670 compared with 3,000 for all of 2014.

Olga Bashmachnikova, chairwoman of the Agrarian Party of Russia and deputy director of the Association of Farms, adds that the Beginning Farmer program was set up in 2012, but interest in it has increased this year.

Individual grants average 1.5 million rubles. Sixty percent of those who apply for the grant are cattle farmers, while 40 percent run arable farms (25 percent of which are grain farms).

Business boost

Farmers interviewed by RBTH say a grant of 1.5 million rubles represents a major boost in setting up a small farm.

Yelena Shcherbakova, who has a poultry farm in the Altai region, registered as an individual entrepreneur on July 15.

“My main goal is to apply for the Ministry of Agriculture’s Beginning Farmer grant,” Shcherbakova said.

“For us it is a chance to get funds from the government to help purchase items we cannot afford – expensive incubators, including industrial ones, which can cost as much as 540,000 rubles.”

Farming has become a potentially profitable business thanks to the current embargo on foreign foodstuffs and demand from Russian consumers had increased.

“The food embargo made room for Russian entrepreneurs on the shelves of major supermarkets,” says Mikhail Nikolayev, managing partner of the company Nikolayev and Sons and the winery Lefkadia.

“Demand for Russian products has grown dramatically since the introduction of sanctions in the summer of last year,” he says, adding that Russian demand for Russian cheese has doubled to 40% percent of the market this year.

Growing fund

Experts say Russia has as much as 40 million hectares of land suitable for agriculture lying idle. In 2014, more than half of all Russian farms were individual homesteads - 51.4 percent, according to the Association of Farms.

Farmers admit that this figure can be increased, but this requires more funding and the preservation of the food embargo.

The Agrarian Party’s Bashmachnikova says the volume of state subsidies is not yet sufficient to support all who want to start a farm business. This is despite the fact that this year’s funding for the grant program has been increased from 1.9 billion to 3.2 billion rubles ($29.7 million to $50.1 million).

Over next five years, the Ministry of Agriculture has pledged to allocate about 2 trillion rubles ($31 billion) to support the agricultural industry.



via Marshall Horn, CFTC Russia is Handing Out Cash to Start-up Small Farmers

Tuesday, 11 August 2015

Marshall Horn - Russia's Banks Return to Profit, Card Payment System Ready for Launch

Marshall Horn,

Putin’s website is providing details of an interesting meeting between Putin and Central Bank Governor Nabiullina.

Nabiullina’s remarks to Putin provide an insight into the state of the economy and on the steps the Russians are taking to strengthen their financial system.

Obviously Putin’s website only publishes details of meetings the Kremlin wants made public. 

It would be naive to think that everything Putin and Nabiullina ever say to each other is made public, and no-one thinks it. 

Meetings such as the one between Putin and Nabiullina of which we have just been given details are carefully staged and prepared in advance, precisely so that the information exchanged at them can be made public by the Kremlin in this way.

That does not make what Nabiullina told Putin any less important or interesting, and in this case two important facts came out of the meeting.

The first is that after a torrid period caused by last year’s ruble crash, Nabiullina has confirmed that Russia’s banking sector has turned the corner by returning to profit in the second quarter.  It was probably in order to announce this that the meeting was held.

This is the strongest indicator yet of an improving economy.  The 4.6% contraction in GDP in the second quarter has inevitably produced some lurid headlines, but was in reality an entirely natural  - and inevitable - one-off consequence of the sharp interest rate rise and of the inflation hike caused by last year’s ruble crash.  

With interest rates and inflation coming down, and with the banks recapitalised, the stresses in the banking system that existed at the start of the year have apparently been overcome.  

This should pave the way for the anticipated recovery in the rest of the economy - which ultimately depends on increased bank lending - that has been forecast for the last quarter.  

There are in fact early indications that the recession hit bottom in June and that a recovery may have started in July.  However it would be best to suspend judgement on this until the full data are in.

The second thing Nabiullina is reported to have told Putin is that Russia’s new bank payment card (which she disclosed is to be called Mir) will be up and running next year, as will the new credit ratings agency that Russia is busy setting up. 

Though Nabiullina did not mention it, earlier reports said that Russia’s new interbank payment system, which is being created to parallel SWIFT, is currently under test and should also be in operation next year.

Taken together with the rapid - if forced - repayment of Western loans that is currently underway, what that means is that Russia’s financial system is rapidly becoming independent of the US financial system and its institutions.  

What that means in turn is that US financial leverage over Russia is rapidly diminishing and may lose effectiveness entirely within a few years.   

 

 


via Marshall Horn, CFTC Russia's Banks Return to Profit, Card Payment System Ready for Launch

Monday, 10 August 2015

Marshall Horn - A Year Under Sanctions - Here is How Russian Banks are Faring

Marshall Horn,
MOSCOW, July 31. /TASS/. On July 30 Washington extended sanctions for another 11 individuals and 15 legal entities, mostly from Russia. Vnesheconombank subsidiaries are included in the list. The bank is subject to the sanction of the European Union and the US for over a year.

Exactly a year ago the European Union introduced the first package of sectoral sanctions that finally closed the western capital markets for Sberbank, VTB, Gazprombank, Russian Agricultural Bank, and VEB. Over the year the banks learned how to find money at the domestic market and started to look for a place on the Asian market, but they are still not ready for a prolonged isolation, experts say.

Central office of Russia's Sberbank

The introduction of the European sanctions on July 31 last year was not a surprise for banks - at that time similar restrictions from the US were already in force. Nevertheless, for the last 10 years Europe was the traditional market for raising capital for the Russian emitters that were actively registering special purpose entities (SPV) and became familiar with the London stock exchange. In the Western markets Russian banks had recognizable brands, and even started to become familiar with the european retail (Sberbank Europe AG, Sberbank subsidiary and VTB Deutschland, VTB Group subsidiary). Restrictions from the main financial partner for local bankers became more of a moral challenge than commercial. It was necessary to change the whole business paradigm, to look for alternative capital sources.

The sanctions issue continues to be extremely painful for banks - Sberbank, VTB, Gazprombank, Russian Agricultural Bank and VEB declined to comment on the annual results of its work to alleviate the impact of sanctions.

No serious consequences

According to the Cbonds’s data, the largest banks, subjects to sanctions, were even able to reduce the amount of debt load in that year. Redeemable Sberbank debt declined as of July 30, in annual terms by 19% to $13.5 bln, Gazprombank’s - by 28% to $12.31 bln, VEB - by 15% to $17.23 bln. Total debt of VTB and Russian Agricultural Bank fell to $10.51 bln and $15.072 bln, respectively. In ruble terms the amount of debt to maturity showed an increase due to a devaluation of the ruble by 40%.

This year the banks do not have to repay not a large volume of the foreign currency debt. Sberbank has to pay 410 mln Swiss francs in the autumn, VTB - 300 bln Swiss francs and 2 bln yuan, Gazprombank - 500 mln Swiss francs and $1 bln, the Russian Agricultural Bank - 450 mln Swiss francs, VEB does not have payments on foreign currency debt in the near future. Russian banks did not have any problems with the repayment of the debt this year.

Although formally only the Western currency markets are closed for the five largest Russian banks, due to the global integration of the investment flows the Russian companies can easily find partners in other countries. It will take some time before Sberbank or VTB become brands in Singapore or Hong Kong. However, at the request of the Sberbank Head German Gref, due to sanctions the largest Russian credit organization cannot attract “a penny” adroad.

Having lost the ability to raise capital in foreign markets, banks had to settle for the only alternative - to work in Russia, expanding both domestic borrowing program and the share of Russian Central Bank funding. For Sberbank and VTB24, for example, the traditional funding base is deposits of the population.

The activity of the banks in the domestic bond market also increased in January, Sberbank announced plans for placement of exchange bonds for 50 bln rubles ($827.86 mln), VTB approved a new program in June, keeping ithe detail a secret. Late last year Gazprombank approved the placement of bonds for 70 bln rubles ($1.16 bln). It is important to understand that the possibilities of the domestic bond market are very limited. The share of the Russian Central Bank in the liabilities of state banks for the year increased by 2.2% for Sberbank, VTB - by 8.3%, the Russian Agricultural Bank - by 5.4% (according to Fitch). Thus, although the reliance on the Central Bank’s funds tends to increase, the critical resources mass cannot be yet estimated.

The banks suffered the most from the sanctions indirectly - external constraints hit on the solvency of clients, which led to an increase in the cost of risk and the formation of unprecedented reserves. For example, the cost of VTB’s risk at the end of last year reached 4.6%, having almost more than doubled in a year. However, the bank tightened its credit policy and risk management, which made it possible to reduce the cost of risk to 2.2% by the end of the Q1 of this year. In the Q1 Sberbank increased provision charges 1.5-fold to 115 bln rubles ($1.9 bln). However, the quarterly rate of growth of Sberbank reserves somewhat reduced in quarterly terms.

Asian issue

Asian capital markets could become an outlet for Russian banks, but in the long run. The fact is that Asian investment bankers are afraid to work with banks subjects to sanctions because it may mean sanctions for them as well. For example, the US Treasury has done the same thing with the Iranian banks’ counterparties. This year Russian bankers have visited Asia several times, hoping to attract capital: German Gref visited Singapore, Gazprombank held a series of road-shows in the capitals of the Asia-Pacific region. However, there were placements no placements.

VTB and Gazprombank have progressed further in the development of Asia that any other bank. VTB is traditionally present in the eastern capital markets; Gazprombank in spring approved the documentation for the bank’s exchange bonds in yuan. “The specific plans for banks on placing these bonds have not been yet determined,” Gazprombank said.

Analysts doubt the possibility of the forced subjugation of Asian markets. “It is unclear whether the biggest banks will be able to place their bonds in the Asian capital markets. There are such capabilities and intentions, but is it really possible? The situation is ambiguous. There is a possibility, but it is small,” a source in banking circles said.

Analysts fear that the sanctions could be extended indefinitely. The banks could withstand one or two years in the mode of severe restrictions, but a 10-year break in relations would lead to serious consequences. “A further extension of the sectoral sanctions will lead to the isolation of the banks. We will slowly come to a planned economy. It will no longer be a market,” TASS’s source from one of the top-30 banks said. According to the source, dependence of banks on the Central Bank and the state will grow as the sanctions are extended.

 



via Marshall Horn, CFTC A Year Under Sanctions - Here is How Russian Banks are Faring

Marshall Horn - Recent Declines in Ruble Will not Derail Russia's Recovery

Marshall Horn,

The ruble’s fall over recent weeks - apart from the odd scaremongering piece - has so far produced less of the overheated commentary that its similar fall did a year ago.

This is probably because the widely anticipated collapse of the Russian economy following last year’s fall failed to materialise, making Western commentators more careful about their predictions this time round.

The ruble has fallen this year for the same reason it fell last year - because of the fall in oil prices.  This is connected to the fact that energy (oil and gas) is Russia’s biggest export.  

According to the Central Bank Russian corporates have already assembled $135 billion in liquid assets.  The Central Bank estimates total debt repayments in the period September to December 2015 at just $35 billion, which is around half the debt payments that fell due in the same period last year.  

This year’s fall in the ruble should not therefore result in any significant debt payment difficulties for Russian corporates.

Unlike last year’s fall, this year’s ruble fall is unlikely to have a dramatic impact on inflation.  

Prices rose sharply in the first half of the year largely because last year’s ruble fall drove up import prices. 

Those price increases have now been factored in.  There is no reason why they should increase further because the ruble is once again trading at the levels it reached in the winter.   Even if the ruble falls below those levels it is unlikely it will cause prices to rise much more, if only because import volumes have fallen so much this year. 

Whilst the fall in inflation that was already becoming established may slow, it is unlikely to be reversed entirely.  As of the time of writing the weekly growth in prices has fallen to zero.

Provided the ruble falls in lockstep with the fall in the oil price, the Russian authorities have little cause for concern.  On the contrary, as we have discussed many times, the ruble’s fall acts as a form of protectionism for domestic manufacturing and agriculture - precisely the two sectors whose growth the Russian government wants to encourage.

The ruble has so far fallen in lock-step with the oil price.  Since May the oil price has fallen by 28% and the ruble by 32%.  The slightly greater fall in the ruble is the result of a certain degree of overshooting, and possibly of extra downward pressure on the ruble - shared by other non-Western currencies - caused by rumours of pending increases in US interest rates, which have been causing money to flow out of emerging market economies to the US.

The major uncertainty is how far oil will fall and for how long.  

As I have discussed previously, the claim that last year’s oil price fall was the result of an anti-Russian plot agreed by John Kerry with the Saudis at a semi-secret meeting on 11th September 2014 is almost certainly wrong.  With the Saudis now busy investing $10 billion from their sovereign wealth fund in the Russian economy and some even talking (wrongly in my opinion) of a Russian-Saudi alliance, the theory of the oil price fall as an anti-Russian US-Saudi plot is becoming increasingly untenable.

The key factor in causing last year’s oil price fall was the tightening of the previously excessively loose monetary policy of the US, which caused funds previously invested in oil-based securities to shift back to the dollar.  The fall was then deepened - but not caused - by Saudi determination to maintain production at previous levels in order to shake out US shale producers.  Russia and the ruble were never the Saudis’ target but were caught in the crossfire.

As anyone who has studied the history of oil prices knows, attempts to predict their course is a mug’s game, with scarcely anyone at the start of 2014 predicting that oil would now be trading below $50 a barrel.  

A reasonable guess however is that despite certain heroic attempts to argue the contrary, a shakeout amongst US shale producers cannot be long in coming if oil prices remain at their present levels, and that this will be accompanied by production cutbacks by other weaker producers once the usual period of stepped up production that follows a supply glut has run its course.  At that point oil prices should rebound, more than off-setting the effect of any additional production from Iran, which is anyway likely to increase only gradually.

Even if - contrary to my expectations - oil prices do not recover in the short to medium term, the Russian economy - and the ruble - will adjust to the lower prices, and are in fact already doing so.  

Russia is itself a major consumer - as well as producer - of energy.  A prolonged period of lower oil prices - and the cheaper ruble that would go with them - would benefit some of the more productive sectors of Russia’s economy once the period of adjustment in the country’s financial and budget system had been completed.  These sectors would not only benefit directly from lower energy prices but from the increase in investment - previously focused on the energy sector - and the reduced competition from imports that the cheaper ruble would bring in its wake.  The experience of 2015 shows this adjustment would be neither as difficult nor as protracted as is commonly supposed.

In the meantime Gazprom’s latest report shows how the fall in the ruble has helped Russia offset the effect of the oil price fall.  Gazprom’s ruble-denominated profits rose 71% in the first quarter of 2015 despite the oil price fall.  Since it is in rubles that Gazprom pays the bulk of its costs and the taxes it pays to the Russian state, the ruble’s fall means it has no difficulty doing so, protecting both Gazprom and the Russian budget from the effect of the oil price fall.

In time oil prices will recover.  What is happening in the meantime, with Russian corporates rapidly deleveraging on their foreign debt, a new interbank payment system, card system and ratings agency being created, and with the manufacturing and agricultural sectors of Russia’s economy being given time and space to build themselves up, means that when that recovery comes Russia’s economy will be in a much stronger position to benefit from it than previously. 

 


via Marshall Horn, CFTC Recent Declines in Ruble Will not Derail Russia's Recovery