EBRD takes stake in merged Russian bourse

The European Bank for Reconstruction and Development and the Russian Direct Investment Fund have taken stakes in Moscow’s main exchange, in a bid to make Moscow more attractive for both local companies and foreign investors.

The EBRD will acquire 6.3 per cent of Micex-RTS, while RDIF, a $10bn fund launched by the Kremlin last year, will take 1.3 per cent. Kirill Dmitriev, head of RDIF, said a few leading private equity funds were in talks to join as co-investors.

Both Mr Dmitriev and a representative for the EBRD emphasised that the investments were being made with an eye on returns – and not as a favour to the Kremlin.

The daily turnover of Russian equities has risen from about $100m in 2000 to about $6bn today, with a third of the turnover on Micex-RTS.

Roland Nash, chief strategist at Verno Capital, the Russian investment fund, estimated that Russia could grow from a $1,000bn equity market to a $2,000bn equity market in just a few years time.

To generate that type of growth, Russia will need to woo both foreign investors as well its own companies, who are floating in London, Hong Kong and New York, and in many cases foregoing a domestic listing altogether.

The markets regulator has tried to attract foreign investors with plans to create a national central securities depositary, which will open the Russian market up to big-name US pension and mutual funds and is due to be completed early this year.

The EBRD and RDIF’s investment follows closely on the formal merger of indices Micex and RTS in December. The groups bought their stake at a discount to the $340m it would have been valued at at the time of the merger, and will likely retain their holdings through Micex-RTS’s initial public offering, which is scheduled for 2013.

Mr Dmitriev said the two funds would steer Micex-RTS in rolling out new services, such as exchange-traded funds and products aimed at mutual and pension funds.

The deal will mark the first time that the EBRD has invested in a stock exchange, after an earlier plan to take a 10 per cent stake in RTS was unexpectedly thwarted by Russia’s market regulator.

It comes as funds across the world are taking a fresh look at exchanges – especially in emerging markets. Goldman Sachs, Morgan Stanley and Citigroup have all invested in India’s NSE index, while General Atlantic, the private equity firm, took a stake in Brazil’s BM&F in 2007 prior to its merger with Bovespa.

“If you look at valuations of emerging markets they are growing quite significantly,” Mr Dmitriev said. The capitalisation of the Russian stock market represents just 65 per cent of Russia’s gross domestic product, while the capitalisation of New York’s NYSE and Nasdaq is 124 per cent of US GDP.

Russia offers to lease land in the Far East to APEC countries

Russia is willing to discuss leasing farm land in the Far East to Asia-Pacific Economic Cooperation member countries. The Ministry for Economic Development has stated that a group of 20 projects is intended to bring in tens of billions of dollars in investments.

Andrei Slepnev, the deputy minister for economic development, remarked last week that Russia will offer roughly 20 investment projects to several APEC member countries – Vietnam, Singapore, Thailand and Japan – for developing agriculture in the Far East. “We have given a number of ready-made investment projects that the regions developed and brought to the table. We are offering to organise the processing of agricultural products and their export to fellow APEC member countries, doing it all in Russia,” Slepnev explained.

Russia’s Asian partners are being offered the vast spaces of land in the country’s far east to develop projects, with some of these projects requiring up to 150–200 thousand hectares. Slepnev estimates that the investment volume for these projects will number into the billions of dollars. “Taking into account the amount of money projected for investment, this should be for the long term. We aren’t talking five years here,” Slepnev said. He added that the law allows for long-term leases in Russia.

The Primorsky, Khabarovsk and Amur Regions are among the possible regions that are being discussed at the moment. These places have the right conditions for producing soy, rice and other types of grain.

Slepnev said, “We have the freed-up land and available opportunities that are not being used at the moment, because the areas being talked about have small populations. These are resources that in terms of their value are comparable with several hydrocarbon deposits. They need to be exploited so that we can make money off of them for creating a platform for other projects.”

Yevgeny Kanayaev, a leading researcher at the Centre for Asia-Pacific Research at the Institute of World Economy and International Relations says that up to 50 per cent of arable land in the Far East and Eastern Siberia are not being used, while experts believe that climate change will bolster harvests for chief crops by 11 to 14 per cent in the coming 30 to 50 years.

Slepnev said that the Ministry for Economic Development and Ministry of Agriculture, along with the regions, started developing the investment projects in mid-2011 for the APEC Summit. He also pointed out that Vietnam, Singapore, Thailand and Japan have so far expressed only theoretical interest, with Singapore, which “would like to take part in this,” having requested further information.

An inside source says that leasing agricultural land in the Far East has been going on as part of smaller investment projects headed up by Chinese agricultural and industrial companies, including vegetable production by Chinese farmers in the Jewish Autonomous Region.

The population is growing in countries in the Asia-Pacific Region, but the opportunities to increase land for agricultural use and the water resources needed to support them are limited: the amount of arable land is falling, while over the past decade, the wheat harvest has grown by just 1 per cent, and the corn harvest by just 2 per cent. Thanks to increasing incomes, people have begun to consume more meat and more fodder has become in demand for livestock production. Meanwhile, the growth in the car industry requires more agricultural products for producing biofuels, especially with oil prices being high, Kanayev explained.

Food safety will be one of the priority topics at the APEC Summit in September in Vladivostok. Slepnev has said that Russia, as the host of the event, plans on discussing the regulation of food markets, measures for cutting down on speculation, and providing mutual humanitarian aid. “Russia will bring initiatives to the table on the opportunity for giving foreign investors access to agricultural production. In turn, we will be willing to provide the opportunities for investor countries in the region to invest in Russia’s agricultural and industrial complex in the Far East and Pacific Regions,” Slepnev noted. He also said that unlike some countries, Russia’s farm land is not considered to be strategic entities and does not put restrictions on investing in its agricultural and industrial complex.

Russia to extend influence with free trade agreement

A free trade agreement between Russia and New Zealand will signal Russia’s intentions to further push its influence in the Asia Pacific region, Russian Foreign Minster Sergei Lavrov says.

However, Mr Lavrov said such moves were not part of any “vote-buying” measures to get support for recognising breakaway Georgian territories.

Foreign Affairs and Trade Minister Murray McCully met Mr Lavrov yesterday – the first time a Russian foreign minister had visited New Zealand.

The pair signed a plan of consultations which they said would lead the two countries towards the official signing of a free trade agreement in Vladivostok during this year’s Apec summit.

“This comes at a moment in time when we have reached something of a high point in the relationship between our two countries,” Mr McCully said.

Investment heavyweight Goldman Sachs has forecast that Russia would be the largest economy in Europe by 2050. The trade deal would be the first time Russia has signed such an agreement with a Pacific country.

Mr McCully said the relationship had been “gathering momentum”. The agreement was likely to immediately lift tariffs on items such as dairy products, lamb and manufactured goods.

The talks include Belarus and Kazakhstan, which are part of a customs union with Russia. Tariffs on other “sensitive products” would be phased out over 10 years.

“I believe it’s going to be a symbolic event and it may lay the foundation for similar agreements with other countries of the region in the future,” Mr Lavrov said.

Russia wanted to increase its share of exports to New Zealand and the Russian business community had shown interest in investing here.

However, accusations by Georgian Prime Minister Nikoloz Gilauri that Russia was simply “buying support” to recognise the breakaway states of South Ossetia and Abkhazia were unfounded, he said.

The Russian-backed territories declared independence in 2008, resulting in a war between Russia and Georgia.

Russia’s UTV Sues U.S. Firm Over Lady Gaga Concert

Russian media holding UTV, which owns Muz-TV channel, has filed a $1.8 million lawsuit with a Miami court, claiming losses from U.S.-based New Wave Entertainment over a canceled Moscow concert by popular singer Lady Gaga.

UTV claims it attempted to book the popular American singer through Miami-based New Wave Entertainment to perform at the Muz-TV awards ceremony in June 2012.

“ZAO TV Service (Muz-TV) and the American NWE Talent Agency & Management Company reached agreement that the U.S. side would organize the arrival and concert by Lady Gaga in Moscow at the Muz-TV awards ceremony in June 2012. The Russian side paid the necessary reservation deposit but the Americans could not guarantee the concert on the date for the channel,” Muz-TV said in a statement.

New Wave Entertainment claimed it had connections to Lada Gaga to organize the tour but failed to secure the singer’s performance in Moscow, despite receiving a $1.5 million advance and $300,000 in agency fees.

“As a result, ZAO TV Service has applied to a court in Florida, U.S.A., with a lawsuit against the agent company to return the insurance deposit and compensate for losses suffered by the TV channel,”  Muz-TV said.

New Wave Entertainment has so far refused to return the funds.

Obama meets Georgia leader amid Russia dispute

The White House says President Barack Obama will reaffirm U.S. support for the country of Georgia in a territorial dispute with Russia when the two presidents meet later Monday.

White House press secretary Jay Carney says the United States supports Georgia’s “territorial integrity” within internationally recognized borders. That’s a reference to the dispute over a breakaway region of Georgia that prompted a brief war between Russia and the former Soviet republic in 2008.

The dispute sent U.S. relations with Russia plummeting, and was a main reason that Obama tried to “re-set” the overall U.S. relationship with Russia.

Carney says the Oval Office sit-down will also cover trade and security issues, and Georgia’s upcoming election.

Georgia is looking to Obama for a road map to NATO membership, something Russia opposes.

Russian Central Bank Fails to Promote Growth, Deripaska Says

United Co. Rusal Chief Executive Officer Oleg Deripaska said he is “very concerned” with the Russian central bank’s policy, according to an interview on state television Rossiya 24, posted on Rusal’s Facebook page.

The central bank has largely suspended money supply and frozen the development of the financial system in Russia’s regions as 75 percent of loans are provided by the five largest banks, Deripaska said in the interview.

Central bank policy makers have failed to promote employment and economic growth and they don’t take any examples from either developed countries or from China and India, Deripaska told Rossiya 24. As a result, interest rates in Russia are higher than those in the countries it competes with, he said.

Russian Prime Minister Vladimir Putin May Face Communist in Presidential Run-Off, Polls Show

Russian Prime Minister Vladimir Putin may face a presidential run-off in March against Communist leader Gennady Zyuganov as his support fell for the first time since last month, according to two opinion polls.

Russian Prime Minister Vladimir Putin, who needs more than half the vote on March 4 to avoid a second round, will get 49 percent, according to the Jan. 21-22 survey of 1,600 people by the state-run All-Russian Center for the Study of Public Opinion, known as VTsIOM. He will receive 44 percent, according to a Jan. 21-22 poll of 3,000 people by the Public Opinion Foundation, known by its Russian acronym, FOM.

The Russian leader, 59, who suffered a slide in popularity in recent years, is facing the biggest challenge to his rule since he came to power 12 years ago after mass protests sparked by allegations of fraud in Dec. 4 legislative polls. The opposition plan their next major rally in Moscow on Feb. 4.

“The Kremlin will do everything to ensure Putin wins in the first round,” Stanislav Belkovsky, director of the Moscow- based Institute for National Strategy, said by telephone today. “But the situation is getting out of the Kremlin’s control.”

Nationalist Support

Putin’s voter support is as low as 37 percent, according to an opinion poll by the independent Levada Center, which surveyed 1,600 people on Jan. 20-23 and had a margin of error of 3.4 percentage points. Zyuganov would get 8 percent according to Levada and 11 percent according to VTsIOM and FOM.

The prime minister, whose election campaign has focused on shoring up nationalist support by promising to crack down on illegal immigration and using anti-U.S. rhetoric, won’t succeed in broadening his electoral base, said Belkovsky.

“The people who are swayed by this rhetoric are already Russian Prime Minister Vladimir Putin supporters,” said the analyst, a former Kremlin adviser. “The rest of the electorate is tired of his rule.”

A Jan. 14-15 opinion poll by VTsIOM released a week ago showed Putin’s voter backing rising four percentage points to 52 percent, with a margin of error of 3.4 percentage points. His support climbed one percentage point to 45 percent in a Jan. 14-15 survey by FOM, which gave no margin of error.

The opposition accused Putin’s United Russia ruling party of inflating its score from 30 percent to about 50 percent in the Dec. 4 parliamentary elections. The prime minister, who was president from 2000 to 2008 and is seeking a new six-year term after four years of his protege, President Dmitry Medvedev, insists the legislative polls were fair.

Russian Stocks Fall for Second Day as Oil Drops on Europe Summit

Russian stocks fell for a second day as investors bet emerging-market equity gains are overdone amid concern Europe’s debt crisis will derail the global recovery.

The Micex Index of 30 stocks retreated 0.8 percent to 1,496.30 by the close in Moscow, adding to a 0.4 percent drop on Jan. 27. United Co. Rusal, the world’s largest aluminum producer, and OAO Rosneft, Russia’s biggest oil producer, slid 2 percent and 1.3 percent, respectively. The dollar-denominated RTS Index slipped 1.2 percent to 1,546.59, heading for its biggest drop since Jan. 5.

Developing-nation stocks pared their strongest monthly advance since October on speculation European Union leaders meeting today may fail to resolve the region’s debt crisis. Oil, Russia’s main export revenue earner, fell as much as 0.8 percent to $98.79 a barrel in New York.

The “risk-on hiatus owes as much to month-end as it does anything else,” Julian Rimmer, a trader of Russian shares at CF Global Trading in London, said in an e-mail. “Volatility always cranks up towards month-end, a propensity particularly pronounced when the performance of the four weeks previous has been strongly positive.”

Shares of OAO Novolipetsk Steel and OAO Raspadskaya, a coal producer, dropped more than 3 percent, while OAO GMK Norilsk Nickel, the country’s biggest miner, lost 1.9 percent to 5,701 rubles. Prices of metals including copper, nickel and aluminum retreated as China signalled caution on monetary loosening.

The Micex has gained 6.7 percent this year and trades at 5.7 times analysts’ earnings estimates for member companies.

Opposition Rallies

That compares with an 9.8 percent gain so far in 2012 for Brazil’s Bovespa index, which is at 9.9 times estimated earnings, according to data compiled by Bloomberg. The Shanghai Composite Index trades at 9.4 times estimated earnings, and the BSE India Sensitive Index has a ratio of 14.8.

OAO KamAZ, Russia’s biggest truckmaker, rose 12 percent to 43.61 rubles, the highest level in almost three months after Sergei Chemezov, the head of its state-owned shareholder, said Daimler AG is seeking to gain a controlling stake.

Investors’ appetite for Russian stocks may wane ahead of political demonstrations scheduled for the weekend, Rimmer said.

Russian opposition groups, who accuse Prime Minister Vladimir Putin’s party of inflating its vote in December’s parliamentary elections, plan their next major protest on Feb. 4, a month before the presidential vote.

“Nervousness surrounding the opposition rally this Saturday may temporarily stay the hand of Russian punters this week,” Rimmer wrote.

Vladimir Putin Vows to Sell Assets, Cut State Presence in ‘New’ Economy

Russian Prime Minister Vladimir Putin, who’s running for president in March, pledged to reduce the government’s presence in the economy by selling state assets and scaling back regulations.

“We need a new economy,” Vladimir Putin wrote in an article published today in the Vedomosti newspaper. The premier said the government will divest stakes in major non-commodity companies and lower its holdings in some commodity producers by 2016, excluding utilities and defense enterprises.

Russian Economy Probably Slowed Last Year as Industry Lost Steam

Russian economic growth probably slowed last year as the euro region’s debt crisis weighed on industrial production and capital flowed out of the world’s biggest energy exporter even as oil prices jumped.

Gross domestic product rose 4.1 percent after a revised 4.3 percent increase in 2010, according to the median forecast of 17 economists in a Bloomberg survey. Prime Minister Vladimir Putin estimated growth at 4.2 percent on Jan. 12. The Federal Statistics Service in Moscow will publish an initial estimate today or tomorrow.

Russia is recovering from an economic contraction of 7.8 percent in 2009, when commodity prices sank after the collapse of Lehman Brothers Inc. While retail-sales growth accelerated last year amid wage increases and a post-Soviet low in inflation, industrial-production growth slowed to 4.7 percent from 8.2 percent in 2010 as uncertainty over the euro crimped demand for exports of manufactured goods.

“Industrial production is in large part tied to trends on export markets and demand for the goods Russia exports,” Vladimir Osakovskiy, chief economist at Bank of America Merill Lynch in Moscow, said yesterday by phone. “The slowing world economy, including Europe, certainly has a negative effect on industrial output.”

The Micex stock index fell 17 percent in 2011 as net capital outflows more than doubled to $84.2 billion, according to a preliminary estimate by the central bank. The ruble weakened 4.9 percent against the dollar to 32.1475.

Oil Boost

Urals crude, Russia’s main export blend, averaged $109 a barrel in 2011, 40 percent more than the previous year’s $78 average. That helped the budget return to a surplus of 0.8 percent of GDP from initial forecasts of a shortfall.

Exports of raw materials such as energy and metals account for more than a quarter of Russian GDP, Putin wrote in an article published yesterday in the Vedomosti newspaper.

Higher energy prices benefited some of Russia’s largest oil producers, including OAO Lukoil, TNK-BP, and OAO Gazprom Neft, all of which are projected to have record profit last year, according to forecasts compiled by Bloomberg. OAO Gazprom, Russia’s gas export monopoly and largest company, is also forecast to record its biggest-ever profit in 2011.

Putin, who is seeking to return the Kremlin through a March 4 presidential vote, says Russia needs to grow at least 6 percent a year to become one of the world’s five largest economies and should be less reliant on energy exports.

Retail Surge

Retail sales jumped 7.2 percent in 2011, faster than the previous year’s 6.3 percent increase, as consumer prices rose at the slowest pace since the collapse of the Soviet Union two decades ago. Inflation totaled 6.1 percent last year, according to the central bank, which is seeking to trim that to 6 percent in 2012.

OAO Magnit, the country’s largest food retailer by market value, was among the companies that benefited from the surge, posting a 20 percent gain in net income last year.

“Domestic demand rose thanks to lending growth, the pre New Year’s mood and higher incomes toward the end of the year,” Ksenia Yudaeva, chief economist at OAO Sberbank in Moscow, said yesterday in an e-mailed response to questions.

The International Monetary Fund on Jan. 24 cut its forecast for Russian growth to 3.3 percent in 2012, saying the global economy poses risks. GDP will expand 3.5 percent this year and 3.7 percent in 2013, according to the median estimates of 17 economists in a Bloomberg survey.

Putin Guards Russia’s Mideast Influence in UN Snub of Assad Ouster Demand

Russia won’t back the U.S. and its Arab allies in a United Nations resolution to oust Syrian leader Bashar al-Assad as it seeks to defend its most important lever in the Middle East, said researchers from Moscow to London.

U.S. Secretary of State Hillary Clinton will lead a diplomatic push in the UN Security Council today to sanction Syria, which hosts Russia’s only military base outside the former Soviet Union and is an export target for the eastern European country’s weapons. Russia won’t back a resolution that calls on Assad to cede powers to his deputy, Deputy Foreign Minister Gennady Gatilov said yesterday, Interfax reported.

More than 5,000 people have been killed in the Syrian uprising. Russian Prime Minister Vladimir Putin wants to return to the presidency in March elections and last week accused the U.S. of needing “vassals” rather than allies. He opposed President Dmitry Medvedev’s decision to refrain from vetoing the UN resolution that paved the way for military action in Libya.

“The Russians aren’t likely to back down, even if it’s going to get very uncomfortable for them to continue backing Syria,” said Thomas Gomart, director of the Russian Center at the French Institute of Foreign Relation in Paris. “If they surrender on this issue, their whole parade in the Middle East would crumble.”

Failure to secure UN approval for the departure of Assad may bolster his regime, prolonging a standoff as the U.S. and Europe step up sanctions to pressure Syrian ally Iran to give up its suspected nuclear weapons program.

Libya Abuse

Russia argues that the UN-sanctioned bombing of Libya by the North Atlantic Treaty Organization was abused to bring about regime change and that the U.S. and western European governments are trying to repeat that scenario in Syria.

The West is putting pressure on Syria because the country refuses to break off its alliance with Iran and not for repressing the opposition, Russian Security Council head Nikolai Patrushev said Jan. 12.

“Russia appears concerned about heightened instability in the area at large, the prospect of further empowering Islamists, and the West’s typically cavalier attempts to push its agenda under the guise of noble moral values,” Peter Harling, director for Egypt, Syria and Lebanon at the Brussels-based International Crisis Group, said in e-mailed comments on Jan. 29.

The Syrian leader’s father, Hafez al-Assad, who ruled his country for three decades until his death in 2000, was a close ally of the Soviet Union. Russia maintains a servicing point for naval vessels in the Syrian port of Tartous, where about 600 Defense Ministry staff are stationed, according to Izvestia newspaper, giving it access to the Mediterranean.

Missiles, Aircraft, Ammunition

This month, three Russian warships, including the country’s only aircraft carrier, visited Tartous in what a former head of the Russian navy said was a show of force aimed at preventing NATO military involvement in Syria.

Russia dismissed U.S. criticism after a ship delivered Russian ammunition to Syria this month. It also signed a $550 million deal to sell 26 Yak-130 jet trainer aircraft to the country, according to the Kommersant newspaper.

Russia has contracts with Syria worth at least $3 billion, including Yakhont anti-ship cruise missiles, MiG-29 fighter jets and Pantsir short-range air-defense systems, Ruslan Pukhov, head of the Center for Analysis of Strategies and Technologies in Moscow, said in a phone interview yesterday.

“The Russian behavior has taken all Western countries by surprise,” said Jonathan Eyal, director of international security studies at the Royal United Services Institute in London. “It’s not so much that the Russians have objected to Western policy in Syria but the length to which they have gone to support the Syrian regime, especially deliveries of weapons and the presence of Russian naval ships in Syrian ports.”

Russian Veto?

A Russian veto, repeating its action in October when it teamed up with China to stop a European-drafted resolution that sought to censure Assad, would leave Western and Arab policy toward Syria in a “quandary,” said Eyal.

A spat with the west may also boost Putin’s popularity, said Fyodor Lukyanov, an analyst at the Council on Foreign and Defense Policy in Moscow.

“Russia can’t stop Western intervention in Syria but it will do everything to ensure it is illegitimate under international law,” Lukyanov said in a phone interview yesterday. “For Putin, this is a key moment ahead of the presidential elections.”

The Arab League suspended its observer mission in Syria due to an increase in violence and a “grave deterioration of the situation,” Egypt’s Middle East News Agency reported on Jan. 28, citing a statement from the group’s Secretary-General, Nabil El-Arabi.

The head of the monitoring mission, Mohammed al-Dabi, said the number of casualties had been exaggerated by the media, according to a 30-page report presented last week in Cairo to the Arab League that presents the mission’s findings in a Dec. 28-Jan. 18 visit.

The disbandment of the mission is a blow for Russia, which had repeatedly cited the study as evidence that reports of violence by security forces had been overblown. Russia had insisted on inclusion of the document, translated from Arabic, as part of the Arab League’s Jan. 31 presentation to the Security Council.

Without a UN mandate, Western powers would be reluctant to get involved militarily in Syria, and the Arab League wouldn’t have the stomach to fight with one of its members, said Eyal at the Royal United Services Institute. Qatar this month suggested sending Arab troops to Syria to halt the violence.

Syria’s opposition, which didn’t respond to an invitation from Russia to attend talks in Moscow with Assad representatives, showed frustration at the Russian stance.

“Russia holds the keys to change. If Russia withdrew its support tomorrow, the regime would fall in a matter of weeks,” Bassma Kodmani, a Paris-based spokeswoman for the Syrian National Council, said last week. “It’s the only support it has left besides Iran.”