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№ DEB-2011.10-02

Economic News

Fitch Ratings has affirmed Turkey-based Denizbank A.S.'s and its Russian subsidiary CJSC Dexia Bank's (DR) Long-term foreign currency Issuer Default Ratings (IDRs) at 'BBB-'. A full list of rating actions is at the end of this release. Denizbank is a 100%-owned subsidiary of Belgian-based Dexia ('A+'/Stable). On 12 October’11, Denizbank announced that Dexia has started exploring potential strategic steps regarding its shares in Denizbank. Fitch's base case scenario is that Dexia will ultimately sell Denizbank. This view is based on the apparently now non-core nature of the Turkish operations to the Dexia group, Dexia's ongoing restructuring and the announcement by Denizbank. At the same time, Fitch believes that Dexia would likely continue to provide support to Denizbank as long as the latter remains a part of the group. Denizbank's 'BBB-' foreign currency IDR continues to reflect the bank's stand-alone strength, which Fitch does not expect to be materially impacted by developments at the parent bank level. Denizbank's Long-term IDRs could be impacted by the bank's sale and/or any actions on the Turkish sovereign ratings ('BB+'/Positive). If the bank is sold to a highly-rated new owner, and the Turkish sovereign, and hence Country Ceiling ('BBB-'), are upgraded, then Denizbank's Long-term foreign currency IDR could be upgraded to 'BBB' from 'BBB-', and its Long-term local currency IDR to 'BBB+' from 'BBB', reflecting the increased potential for external support. However, if the bank is sold to a lowly-rated owner, the bank's Long-term IDRs would likely be equalised with its Viability Rating, at 'BBB-'. These potential rating movements are reflected in the Positive Outlook on the Long-term foreign currency IDR and the Rating Watch Evolving (RWE) on the Long-term local currency IDR. Fitch's base case expectation is that Denizbank will be sold to a highly-rated new owner, resulting in an affirmation of its Support Rating of '2'. However, the rating has been placed on Rating Watch Negative (RWN) to reflect the material possibility that the bank will be sold to a lowly-rated new owner, resulting in a reduced likelihood of external support. DEXIA Russia's ratings continue to reflect potential support from Denizbank. The full list of the rating actions are as follows:

Denizbank A.S.: Long-term foreign currency IDR: affirmed at 'BBB-' Outlook Positive Short-term foreign currency IDR: affirmed at 'F3' Long-term local currency IDR: 'BBB', placed on RWE Short-term local currency IDR: affirmed at 'F3' Support Rating: '2', placed on RWN National Rating: affirmed at 'AAA(tur)', Outlook Stable Viability Rating: 'bbb-' not affected Individual Rating: 'C' not affected

DEXIA Russia: Long-term foreign and local currency IDRs: affirmed at 'BBB-', Outlook Stable Short-term foreign and local currency IDRs: affirmed at 'F3' National Rating: affirmed at 'AA+(rus)', Outlook Stable Support Rating: affirmed at '2' / CBONDS

Russian CPI were flat in the week to 10 October as in three preceding weeks, raising

the government's chances to meet the full-year target, the FSS data showed on Wednesday (12 Oct). Since the start of the year CPI have increased by 4.7% compared to 6.5% for the same period in 2010. Prices for food staples, potatoes, wheat and sugar, continued to fall, offsetting a rise in prices for eggs, beef and dairy products. In the coming months inflation will accelerate slightly but is still poised to come below 7%, first deputy chairman of the CBR said last week. / Thomson Reuters

Russia's budget surplus jumped in September as government spending dropped sharply and high oil prices continued to boost revenues, FinMin figures showed on

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Thursday (13 Oct). In September alone, the fiscal surplus was 5.9% of GDP, bringing the total for the year-to-date to 2.8% of GDP. The robust fiscal position has enabled the government to halt auctions of government bonds during the last four weeks, as the euro-zone debt crisis buffeted financial markets, and lend ready cash to banks to ease funding strains. But analysts warned that spending will pick up going into the end of the year in a seasonal pattern, as bureaucrats rush to spend entitlements or risk losing funding in later years. The federal government ran a surplus of RUB 1.09 trln from January to September, or 2.8% of GDP, up from 2.3% in the first eight months of 2011. "The key surprise was on the spending part. September expenditures have fallen RUB 260 bln to just RUB 692 bln and I think this is unlikely to be sustained," economists said. "In the fourth quarter we will see expenditures picking up again."

STAYING IN THE BLACK. Oil prices turned to be higher but on the expenditures side, the government acted in a more or less in a prudent manner. We don't exclude that the full-year number (for the budget balance) will be slightly positive. However, the picture looked less healthy once oil revenues were stripped out. The key issue is that you will end up with very heavy non-oil deficits. The FinMin revised its mid-term budget assumptions at mid-year to factor in an average oil price of $105 for 2011, but prices have generally held above that level, boosting energy revenues that account for around half of the federal tax take. Former FM Alexei Kudrin, who was ousted last month in a clash on spending with President Dmitry Medvedev, had warned that the budget would only balance next year if oil prices rise to $116 per barrel. The departure of Kudrin was unlikely to affect the 2011 budget. So far we have not seen any changes and we do not expect to see the changes in this year's budget. But questions remain about whether the new FinMin team would stick to Kudrin's hawkish line as Russia faces parliamentary elections and a presidential vote next March expected to return PM Vladimir Putin to the Kremlin. Investors were concerned about Kudrin's departure. It seemed to be the case that Kudrin was the only guy who had the courage to say no to higher spending. / Thomson Reuters

Russia's foreign trade surplus declined to $14.67 bln in August from $15.16 bln the

previous month, the CBR said on Tuesday (11 Oct). / Thomson Reuters

A sharp fall in the rouble forced banks to set aside RUB 55 bln against bad loans last month, but the system's overall capital adequacy remains sufficient, a CBR said on Wednesday (12 Oct). "Provisions rose by almost RUB 55 bln last month. That reflects an almost 40% overall increase in provisions since the start of the year," CBR board member Mikhail Sukhov told a banking conference. Russian banks have allocated RUB 116 bln in provisions against potential loan losses since the start of 2011, with some like Sberbank starting to write back charges as the economy recovered from the 2008-09 slump. Sukhov said the main reason for the increase in provisions was the revaluation of forex positions in their loan books. The rouble weakened 10.5% vs the dollar last month. "When the quality of loan books is improving, the only reason to explain such a process is a change in the exchange rate," he said. Russian banks, among which Sberbank, VTB and Gazprombank account for the first three positions in terms of assets, earned RUB 620 bln in the first nine months of 2011, of which RUB 48.3 bln roubles was posted in September. "Dramatic events are not expected on the forex market, so profits must be enough (to set aside provisions and keep capital ratios under control)," Sukhov said. The overall capital adequacy ratio for Russian banks under RAS stood at 15.7% as of 1 September, slightly down from 16.1% in August but still well above the 10% minimum needed to keep a banking licence. The Russian authorities, including the CBR, have said the local banking system is in much better shape now than during the 2008-09 crisis but they are ready to provide additional support if needed. In particular, they note that Russian banks have a positive net foreign asset position whereas before the crisis they had net foreign liabilities, meaning they have reduced their vulnerability to a rouble devaluation. / Thomson Reuters

Russia's tight-knit group of dedicated foreign investors put on a brave face at a

conference despite a rouble drop to 27-month lows, stocks at May’10 levels and capital flight for the year at nearly $50 bln. At the annual 'Russia Calling' conference on Thursday (13 Oct) hosted by VTB, a two-day event aimed at attracting foreign investors, they were keen to emphasise

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the positives amid carnage in the markets. "If you look objectively, compared to Europe and the US, Russia looks good. There is a freely-floating rouble and no state debt. You have to be optimistic about the macro-economic environment" said Jacob Grapengiesser of East Capital, a Russia-focused fund manager that handles more than EUR 5 bln in assets. He added that while the recent sacking of FinMin Alexei Kudrin left him disappointed, it was not the same as if one of Kudrin's peers in western nations had been ousted in similar style. "If they come up with a new one soon, I won't be too worried," he said. Nadya Wells, a vice-president at fund management behemoth Capital International, which manages EUR 95 bln, agreed that Russia should be allowed to distance itself from the problems in the euro-zone. "Economic necessities created by problems in the West may open up developing markets (such as Russia). Expectations of Russia are extremely low, it has a 40% discount to emerging markets. That's a lot of room for a positive upside," she told the conference's packed opening session.

PUTIN COMES LATE. But eyebrows were raised around the conference hall when PM Vladimir Putin, eyeing a return to the Kremlin, arrived two hours late for his speech and question-and-answer session, his first since announcing he would run in March's presidential election. "This shows how much he really cares about attracting foreign investment," said one foreign Russia veteran, as he joined the queue for lunch at 4.30 pm, the delay caused by Putin's late arrival. Others were more sympathetic to the man seen as the most powerful in Russia, who exuded confidence as he took a variety questions. "I go to a lot of countries and you don't always get a political leader do that. If you go to China, you don't get (leader) Hu Jintao taking questions from investors," said London-based Ewan Thompson of Neptune Investment Management, which has a dedicated Russia fund. Criticisms of Russia at the conference stuck to the familiar, with Nadya Wells listing corruption, the legal system and capital flight among the concerns putting off investors. "If your elite are not investing in your country, why should we?" she asked. Others said there was value to be had on the back of the downturn, such as the falling value of the rouble. "I see value in the oil and gas sector. There has been a correction in the currency of almost 20%. That means costs for oil companies are 20% lower, and the oil price is not," said Steffen Gruschka, who runs the SG Alpha fund. / Thomson Reuters

Talks between bitter rivals Georgia and Russia over Moscow's bid to join the WTO

ended without agreement on Saturday (8 Oct), and Georgia said it would block Russian accession unless Moscow's position changes. The failure to resolve a dispute rooted in a 2008 war between the ex-Soviet neighbours undermines Russia's chances of joining the WTO this year, a target set by Moscow and the United States, and could worsen Russia's relations with the West. "The negotiations are over and we can say that they collapsed, ended with no result at all," Georgian Deputy Foreign Minister Sergi Kapanadze, the head of his country's delegation to the talks in Switzerland, told Reuters by telephone. Since the WTO, a 153-nation trade rules body, makes decisions by consensus, Georgia, a pro-Western NATO aspirant, has an effective veto over membership for the much larger Russia. Kapanadze said the sticking point was Russia's refusal to let Georgia have access to information about trade in the breakaway Georgian regions of South Ossetia and Abkhazia, which Moscow recognised as independent nations after the five-day war. "Georgia cannot give its consent to Russia's entry to the WTO until Russia changes its position on trade within the occupied territories," Kapanadze said, referring to the two regions, where Russia maintains sizable military forces. Kapanadze said the talks were the last agreed round of negotiations "and we do not see any sense in continuing talks just for the sake of talks". But a Russian source close to negotiations said there was an agreement to resume on 17 October. Russia is by far the largest economy outside the WTO and has been seeking entry for 18 years. Georgia halted WTO talks with Russia in April’08 after the Kremlin ordered the lifting of economic sanctions against Abkhazia and South Ossetia in the run-up to the war that August. Russian forces repelled a Georgian attempt to regain control of South Ossetia, which has long been outside the sway of the central government in Tbilisi, and penetrated deep into Georgia before an EU-brokered ceasefire was reached. Almost all remaining trade issues between Russia and WTO members including the United States and European Union have been resolved since U.S. President Barack Obama made support for Russia's bid a part of efforts to improve ties with Moscow. Before it can

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join the WTO, Russia also needs to conclude multilateral talks with a "working party" which is seeking assurance that Russia's laws are in compliance and guarantees that it treat trade issues appropriately after it joins. "We are really close and just fine tuning and finding the appropriate language," an EU official told Reuters on Friday. Senior negotiators have said it would be possible to admit Russia formally at a ministerial meeting in December if accession talks remain on track and the dispute with Georgia is settled. Russia's chief negotiator suggested Moscow would not give in to Georgia's demands. "What Georgia is asking of us is not within the sphere of responsibility of the WTO," Maxim Medvedkov told Reuters by telephone. In pointed remarks this week, Russian Prime Minister Vladimir Putin urged the United States and the European Union to help overcome Georgia's objections. Failure to bring Russia into the WTO soon could damage relations between Russia and the West as Putin prepares to return to the presidency in an election next March. / Thomson Reuters

Global Economy

The United States will keep pressing Europe vigorously to come to grips with its debt

crisis before it derails an already fragile global recovery, a top U.S. Treasury Department official said on Wednesday (12 Oct). Speaking ahead of a Group of 20 FM meeting in Paris this Friday and Saturday, Under Secretary for International Affairs Lael Brainard said the meeting was likely to be "tightly focused" on how to strengthen growth. "Against a backdrop of elevated risks to the recovery, The United States will intensify our call for resolute action," Brainard said, adding that Europe "presents the most serious risk to the global recovery today." / Thomson Reuters

Russian PM Vladimir Putin said on Tuesday (11 Oct) that the crisis-hit euro zone had

enough resources to resolve its own troubles without support from Russia and fellow BRICs countries. As concern rise over weak growth and plunging stock markets, officials from the so-called BRICs emerging economies, including heavyweights China, Brazil and India, have floated plans to support Europe by using their currency reserves to buy bonds and help solve the euro area debt crisis. But Putin's comments were a reminder of scepticism over the plan in Russia, holder of the world's third largest gold and foreign exchange reserves, which has over two-fifths of its $517 bln in foreign reserves invested in euro-zone sovereign debt. "The big European economies have enough resources to resolve their own problems," Putin said, while welcoming a plan by Germany and France to recapitalise Europe's troubled banks as a "positive signal." "I do not think that the BRICs countries can play any particular kind of role," Putin said in an interview with Chinese state media during a visit to Beijing. Putin, who has announced plans to return to the presidency in 2012, also hinted that U.S. Federal Reserves' purchases of treasuries were "bad" for the country's fiscal discipline, saying the United States was profiting from the dollar's "monopoly" as the main reserve currency. "The Federal Reserve is buying treasuries, that is simply printing money. I do not want to make any judgements, maybe our American colleagues know better, but in the past that is not how they advised us to behave," Putin said. Asked to clarify his statement this summer describing the United States as a "parasite" on the global economy, Putin said: "I did not say that America is being parasitic on the world economy. America is being parasitic with the dollar's monopoly position," Putin said. / Thomson Reuters

All four BRIC currencies, the Brazilian real, Russian rouble, Indian rupee and Chinese yuan, will recoup at least some of their recent heavy losses over the next 12 months, a Reuters poll showed on Wednesday (12 Oct). The latest Reuters BRIC FX survey showed the real, rouble and rupee recovering slowly after diving more than 10% against the dollar over the last three months, as low borrowing rates in sluggish developed economies force investors to seek yield in dynamic emerging markets. The rouble and rupee, will take the lead, expected to gain more than 5% and 6%, respectively, according to the median estimate of around 70 analysts, economists and strategists polled by Reuters. The yuan is expected to rise more than 4% and real only about 2% over the next year. The outlook for the rouble and real has taken an about turn since the last poll in

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July, when strategists predicted falls for the currencies over a 12 month horizon. For the current consensus to come true, however, Europe will have to solve the crisis, said Win Thin, global currency analyst with Brown Brothers Harriman, the largest privately owned U.S. bank, in New York. That looks far from certain right now. "The BRICs are vulnerable to a big blow-up if Greece defaults and Europe melts down, but the emerging markets always come back and right now they just offer more promise than developed markets," he said. "Once the dust settles it seems like the natural flow will be to the BRICs and other emerging markets," said Thin, whose bank expects emerging markets to strengthen over the next year. For all the currencies but the yuan, the threat of a Greek default and resulting withdrawal of funds from higher-risk emerging markets to lower-risk dollar investments has led to sharp losses in recent months. The rouble also weakened after S&P downgraded the U.S. sovereign debt rating in early August. However, with Brent crude oil still above $100 per barrel, the Russian central bank has sold more than $10 bln of dollar reserves since early September, helping the rouble to bounce back vs the greenback from 32.9, its weakest level since August’09. Oil and petroleum products are Russia's main export. The rouble recovery may begin soon, with the currency expected to rise about 2.2% to 31.43 to the dollar by year-end, according to the poll. "On the one hand, there's the factor of capital outflow which is unlikely to vanish in the fourth quarter. But on the other hand, there is still a strong capital account surplus," said Julia Tsepliaeva, chief economist for Russia and CIS at BNP Paribas in Moscow. "The external background will favour appreciation in the rouble ... but until the capital outflow trend changes there will be no solid result, and volatility will be high." Gains may be limited by Russia's need to make $38 bln of foreign debt payments in the fourth quarter, payments that will reduce the net capital inflow and add to pressure for the rouble to weaken.

RUPEE TO ROAR BACK. The partially convertible Indian rupee is set to reverse its losing streak and gain more than six percent over the next twelve months as investors develop an appetite for risk. It has lost close to 12% to the U.S. dollar since the start of this year and hit a 28-month low of 49.885 on 23 September, a month when it depreciated seven percent as it hit a wave of sellers intent on dumping risky assets and returning to safe haven investments. "The rupee remains vulnerable vs the majority of the rest of Asia due to its ongoing current account funding requirement," said Paul Mackel, head of asian foreign exchange research, in a note to clients. "While the rupee will continue being one of the most vulnerable to current hostile market conditions ... the rupee could be one of the largest beneficiaries, if the global risk environment stabilizes and improves."

PRESSURE ON YUAN TO RISE. The yuan, still heavily controlled by the Chinese government, will continue its steady and slow appreciation under the prevalent system of regular intervention to prevent large swings in the currency, Thin said. Strategists now forecast the yuan to appreciate to 6.3 in three months, 6.24 in six months and 6.11 in a year compared to 6.4, 6.3 and 6.2 in the July Reuters poll. The gains may ease but are unlikely to end complaints by the U.S., Brazil and other countries that the yuan remains unfairly undervalued against the dollar, giving it an unfair trade advantage. "The Chinese are willing to have some appreciation but not too much and in times of uncertainty will stop it altogether," Thin said. "It is not a free-floating currency by any means and will only really appreciate when the government wants it to." Since revaluing its currency in 2005, the yuan has gained 30% against the dollar. But those gains were halted by the central bank during the 2008-2009 financial crisis and world recession. The U.S. Senate on Tuesday approved a controversial bill to punish China over its currency in an effort to save American jobs, sending it to the House of Representatives where its fate is uncertain. Additional pressure may even come from within China. A stronger yuan could help ease consumer price pressures by making imports of raw materials, and technology cheaper, especially if China does not suffer any kind of economic hard landing. Brazil's real is expected to gain the least of the BRIC currencies after a roughly 16% slide since July, fuelled by the euro zone crisis, currency controls and a cutting of interest rates in August. Analysts said that if China keeps growing, helping maintain high prices for iron-ore, soybeans, chickens and other commodity exports, and Europe avoids a meltdown, the real should start strengthening again. "Our feeling is that by the end of the year Europe will put its house in order and there will be less risk aversion and the real will appreciate," said Luciano Rostagno, head economist at CM Capital Markets in Sao Paulo. / Thomson Reuters

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G20 FM will press Europe this week to find an urgent solution to its debt crisis, with a

row between Washington and Beijing over the yuan threatening efforts to address broader global imbalances. An economic slowdown and market slump has been met with discord within the Group of 20 rich and developing economies that makes up 85% of global output, a stark contrast to 2009 when the group launched a coordinated stimulus to pull the world economy back from the brink. From Brasilia to Tokyo, impatience has grown at Europe's failure to turn the page on a debt drama that has roiled markets and threatens to shatter confidence in a fragile world recovery. Disagreement within the euro zone over how to recapitalise banks and stabilise Greece make any breakthrough unlikely at the two-day G20 ministerial meeting starting in Paris on Friday (14 Oct), with policymakers targeting an EU summit on 23 October as the key forum. Anger has resurfaced in Washington over the level of the yuan, prompting warnings from Beijing that a bill approved by the U.S. Senate on Tuesday to press China to lift its value could prompt a trade war and derail efforts to promote global growth. Washington has also urged countries that are in sufficiently robust shape, such as Germany, to soft-pedal on austerity measures or even inject fresh stimulus. Berlin has not proved to be receptive and a defeat for President Barack Obama's $447 bln jobs stimulus bill in the Senate on Tuesday leaves the United States in a weaker position to prod others. The G20 FM are expected to make progress in some areas, including support for an increase in the IMF's firepower to cope with the growing threat of crises in large, developed economies. It should also give the green light to regulators for new rules on banks deemed 'too big to fail', including capital surcharges, due to be officially approved by G20 leaders at a summit in Cannes on 3-4 November that wraps up France's presidency. "I'm not expecting any big announcements this week. Ministers are not going to pre-empt their leaders," said one G20 delegate. "The final communique will affirm that the Cannes summit will announce short- and medium-term steps to stabilise the global economy." French President Nicolas Sarkozy and German Chancellor Angela Merkel have pledged to find a permanent solution before the Cannes summit to get the euro zone debt crisis under control, but a decision to delay by a week an EU leaders summit to approve a deal suggests a consensus remains elusive. While Germany is leaning towards a second round of losses for Greek bondholders, Paris is reticent. Doubts remain on how to leverage the EUR 440 bln European Financial Stability Facility rescue fund, something Washington has pushed for, and the role it should play in providing perhaps EUR 100 bln in fresh capital for the region's banks. Complicating matters, Slovakia's parliament on Tuesday rejected a prior euro zone plan to ramp up the EFSF's firepower. "It's really early days. They can't be precise at the G20 level until the Europeans have decided," said Gilles Moec, senior European economist at Deutsche Bank. "The November G20 summit is a realistic target to have a framework. Of course, the implementation will take much longer." Brazilian FM Guido Mantega said on Monday he expected G20 nations to discuss extending further support to the IMF to help manage the European debt crisis. "A deal on expanding the resources is something which could be deliverable by Cannes," said the G20 source. "The French support this."

DERAILED. The deepening of the euro zone crisis has derailed Sarkozy's stated aim of using France's year-long presidency to launch a fundamental rethink of the global financial system and its reliance on the U.S. dollar. After November's summit, France passes the G20 baton to Mexico, which has elections next year. In Paris, ministers will discuss the measures needed to tackle economic imbalances blamed for helping to trigger the 2007-09 financial crisis, such as the persistent U.S. trade gap and the correspondingly large surplus in China. A G20 meeting in April placed seven large economies under review, the debt-burdened United States, export-rich China, France, Britain, Germany, Japan and India. Officials have said privately the aim was to get Beijing to discuss the yuan, and China's cooperation is essential to the success of the process. China, which has let the yuan revalue 30% against the dollar since 2005 and says it is committed to gradual reform, called on Obama to veto the Senate bill which would allow Washington to slap tariffs on imports from nations found to be undervaluing their currencies. "There'll be strong pressure on China to agree to revalue the yuan but it's uncertain how this will play out in terms of the communique. China can argue now is not the time to do it and that European-U.S. fiscal problems are more important," said another G20 official. France has dangled the prospect of

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China's yuan entering the basket of currencies making up the IMF Special Drawing Right (SDR) in a bid to divert the debate away from its value and onto the criteria of free "usability" required for this. A French official said an agreement on the necessary steps was expected by November's summit, but China was dragging its heels on specifying a timetable. A drive for a G20 "code of conduct" on short-term measures allowing members to impose curbs on capital flows also appeared to be losing momentum in the face of emerging economies' resistance, another official said. "This G20 meeting will be quite interesting in the sense that reaching an agreement won't be easy in many areas," said one G20 official. With governments at odds, there is some evidence of central banks trying to fill the void. The Bank of England authorised a new round of quantitative easing last week and in the emerging world, Brazil and Indonesia have cut interest rates. Ministers may discuss a replacement for future ECB president Mario Draghi at the head of the Financial Stability Board global banking watchdog, but a decision will not be taken until Cannes when Draghi will also make recommendations on reinforcing the institution, which has just 20 staff. / Thomson Reuters

Facing the prospect of a deeper crisis in Europe, the IMF is weighing whether it could

expand its rescue lending capacity through debt issuance or bilateral borrowing. The options are being considered as part of a review of the IMF's crisis-fighting resources mandated by the lender's managing director, Christine Lagarde. The idea is to prepare for the worst. Should a country the size of Italy or Spain need rescue, the IMF's funds could be severely strained. Experts say IMF bonds could easily attract some of the liquidity now sloshing into safe-haven U.S. Treasury debt. But the IMF's dominant shareholders, including the United States, Japan, Germany and China, would likely be wary of a new independent funding source that could dilute their influence. An easier and more straightforward path, especially if the IMF needs to raise rescue funds in a hurry, may be to borrow bilaterally from these wealthy IMF member countries. "It is an intriguing idea for the IMF to issue debt to shore up its financial base," said Eswar Prasad, a former IMF official who is now a professor of international trade policy at Cornell University, in Ithaca, New York. "Emerging markets are likely to welcome this move as it would provide an alternative safe asset for them and reduce their reliance on increasingly risky sovereign debt of the reserve currency economies," Prasad said. However, the United States, which would see increased competition for Treasuries in international capital markets, has shown little enthusiasm. A U.S. Treasury official declined comment on the prospects for IMF debt issuance, saying only that Washington believes the IMF's current lending capacity of $400 bln "is more than adequate to meet currently anticipated needs."

INFLUENCE AND INDEPENDENCE. A new market-based source of funding could boost a sense of independence at the IMF, which gets its money from its member countries. "The key members clearly aim to exercise political clout over the Fund's decisions," said Domenico Lombardi, a former IMF executive board member who is now a senior fellow at the Brookings Institution in Washington. "They fear that if IMF turned to the markets, the IMF would somehow lose that tie to the membership." Debt issuance also could take some time because of internal policy approvals and the need for the IMF to acquire a credit rating and comply with securities disclosure laws. But the IMF's sister institution, the World Bank, has been issuing debt since 1947 and has had a triple-A credit rating for more than 50 years. It has issued around $30 bln in debt this year to investors ranging from central banks to insurance companies, pension funds and asset managers. Some worry that the IMF could become more conservative in its lending programs because it would have to protect its own credit rating if it were selling bonds.

THINKING OUTSIDE THE BOX. Lagarde and the IMF staff have said the IMF existing resources could prove woefully inadequate if Europe's crisis gets worse. A staff study obtained by Reuters suggested that the IMF may face demands for $840 bln in a "worst-case" scenario. IMF officials are clearly thinking outside the box on how to deal with the crisis. IMF Europe chief Antonio Borges on Wednesday floated the idea of setting up a special-purpose vehicle to buy Spanish or Italian bonds alongside a euro-zone bailout fund, but he quickly backed away from the suggestion. Such a move would require a change in the fund's legal structure, and alternative funding sources, and nothing has been discussed with members, Borges said. Still, the IMF has used special purpose vehicles in the past. IMF officials have yet to focus on a specific target for expanded

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resources, but some simple math indicates that it would probably be well north of $1 trln. Full approval of previously agreed increases in quotas, the contributions that determine IMF voting rights, would boost the IMF's lending capacity to around $755 bln. If the IMF were to permanently activate a separate $581 bln crisis lending fund, the New Arrangements to Borrow, this could boost resources to around $1.3 trln. But fewer than 20 of the IMF's 187 members have approved the quota increase. "The quickest option is to activate bilateral lines of credit," Lombardi said. "That is the most immediate and fiscally feasible way for the IMF to increase its war chest."

BRAZIL, BRICs AND A BLUNT 'NYET'. Brazil, eager to increase the influence of emerging markets in the IMF, last month proposed that the BRICs group of countries offer new funds to the IMF to battle the European crisis. But at a news conference just before the IMF's annual meeting late last month, however, fellow BRICs partners China and India gave a lukewarm response to the idea. With $3.2 trln in reserves, China is the most obvious source of ready financing. But any new funds would likely come with strings attached and would be widely viewed as a prelude to a demand for increased voting rights. Beijing may need to be able to trumpet more clout within the IMF to overcome domestic opposition to aiding wealthy democracies in fiscal trouble. "The question is, 'What sort of bargain would have to be struck that would allow China to get enough of a benefit from providing funds to the IMF?'" Prasad said. Russia's deputy FM called BRICs' joint aid for Europe "impossible." There are still some other options available under the IMF's structure that could be considered, but these are similar to issuing debt and borrowing from members, and have never been tried. The IMF could borrow from private-sector lenders and it could issue notes to the central banks or other official arms of sovereign members. / Thomson Reuters

Stock exchanges from six of the world's largest emerging markets will join forces to

cross-list equity indexes derivatives, to target investor demand for fast-growing economies. Exchanges from Brazil, Russia, India, Hong Kong and South Africa, representing the BRICS grouping of big emerging markets, said on Wednesday (12 Oct) they plan to list contracts based on their flagship equity indexes by June’12. The tie-up comes as exchanges around the globe increasingly hunt for potential acquisitions or look for product partners to fend off bigger rivals. The cross-listed instruments would be available in local currencies, meaning an investor in Hong Kong could bet on the performance of the Brazilian index without taking on any currency risk. The local currency settlement would also pass muster with regulators in countries with stringent exchange controls, such as South Africa and India, said Russell Loubser, the chief executive of the Johannesburg bourse operator JSE Ltd. Loubser introduced the alliance together with officals from Brazil's BM&FBovespa, the Hong Kong Exchanges & Clearing Ltd, Russia's MICEX and RTS exchanges and India's National Stock Exchange of India and BSE Ltd, all of whom are in Johannesburg for an annual meeting of exchanges this week. The emerging exchanges together represent about $9 trln in market value and nearly 20% of the volume of exchanged-listed derivatives traded worldwide. Although the BRICS are Brazil, Russia, India, China and South Africa, Hong Kong is taking the place of mainland China, where both local bourses are still cash equity. The exchanges said they plan to develop and cross list more products end evetually cooperate on different asset classes. / Thomson Reuters

The United States will press major oil-producing nations to ensure they are pumping

enough oil to meet demand, regardless of price, while also encouraging a recovery of oil output from Libya and Iraq, a senior energy department official said on Wednesday (12 Oct). "We don't assess the supply and demand equation as a function of price per se," U.S. Deputy Secretary of Energy Daniel Poneman told Reuters in an interview. "We look at satisfying consumer demand." "The focus still must be on making sure that the existing producers produce adequate quantities to meet current demand." While U.S. oil prices have fallen back under $90 a barrel, President Barack Obama's administration has played an active diplomatic role to keep a lid on prices so they do not threaten the economic recovery. "When it comes to international diplomacy, we have very strong partnerships with oil producers and consumers around the world," Poneman said. He said oil diplomacy, however, should be integrated into the country's overall strategy of reducing its dependence on imported oil by 30% by 2020, a strategy outlined by by Obama in

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March. Such a goal has eluded his predecessors. "We intend to do that through the responsible, environmentally sound development of our own natural gas and oil resources, which we are very energetically pursuing," Poneman said. The United States consumed almost 20 mln barrels of oil a day in 2010, of which roughly half was imported. Poneman said the United States was hopeful that the global shock to oil supplies from the Libyan turmoil would soon be reversed. "We are still recovering from the loss of in the order of 1.5 mln barrels per day from Libya," he said. "We are hoping that is going to come back sooner rather than later, thankfully now that the new government is taking the reins." He said that the United States was talking with all major oil-producing nations, both inside and outside OPEC, to ensure markets were well supplied. "We are in continuing, robust diplomatic engagement with consumers and producers alike, with a consistent message to make sure that we are satisfying global demand and that producers are making the quantities available to do that," he said.

IRAQI OUTPUT. Poneman said that the United States was encouraging Iraq to adopt a much-delayed law on hydrocarbons that investors see as key to stability. The new law has been in the making for years but has faced opposition over who controls the world's fourth-largest oil reserves, some in areas disputed by ethnic Arabs and Kurds and and some in Iraq's semi-autonomous north. "We've been very encouraging of Iraqi efforts to increase their oil production, with tenders that have been offered and taken up by a number of companies, including U.S.-based oil producing companies," Poneman said. "They're up to a point of 2.6 mln barrels per day of production, over 2 mln barrels of which they're exporting. That's moving in the right direction. "The next things we need to do are to continue to make sure that the pipeline infrastructure that's needed to get that oil to market is enhanced," he said.

'MEGATONS TO MEGAWATTS'. Poneman was in Kazakhstan attending a conference on nuclear nonproliferation. The Central Asian country voluntarily surrendered the nuclear arsenal that it inherited after the break-up of the Soviet Union. Poneman said that he expected "existing players" in the uranium enrichment market to make up a shortfall in global supply when a 20-year nuclear fuel pact between the United States and Russia expires in 2013. The so-called 'Megatons to Megawatts' program, on which Poneman has worked under several U.S. administrations, is recycling the equivalent of 20,000 Soviet-era nuclear warheads to create enough uranium to power the United States for two years. "It shows how you can harness the power of the commercial marketplace to drive a national security imperative," Poneman said. "One in every ten American light bulbs is fueled by material that used to be targeted on American cities on the top of missiles." Russian supplies from old warheads are key in the global uranium market, accounting for 13% of world supply and helping to fill a gap from mined output. The Kremlin, however, has shown little appetite for renewing the deal. "The end of that deal will create headroom in the marketplace," Poneman said. "The question will be how that shortfall is made up by other sources of production... I believe that the existing players in the enrichment market will likely step up and try to satisfy that demand." He added: "When that is done, we are going to continue to have a robust engagement with Russia." / Thomson Reuters

Markets: FX / MONEY MARKET

FX MARKET:

The rouble rallied to four-week highs on this week, boosted by expectations of imminent support from month-end tax payments and rising oil prices. The rouble firmed 4.2% from 32.34 to 30.99, its strongest level since 19 September, extending the distance from 32.72 hit earlier this month, its weakest level since August’09. Against the euro, the rouble had added 0.75% to 42.72 and gained 2.75% to 36.28 vs the basket. The market is jumping the gun when selling foreign currencies... on expectations that banks' clients will be selling dollars before tax payments. Export-focused companies usually step up conversion of dollars and euros in the second half of every month. Insurance premium payments, due by 18 Octjber, and payments of value-added tax no later than by 20 October will withdraw around RUB 550 bln, according market’s analysts. Tax payments will also affect already strained liquidity and could push overnight interbank lending rates above 5%. Tight rouble supply locally helps - it may make more sense for some FX cash rich companies to

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convert dollars into roubles rather than borrow roubles expensively. The market will be closely watching euro zone inflation data and U.S. data on producer prices and retail sales for clues of the health of the world's leading economies. Analysts said in a note that "bears urgently need new arguments to sell" and the market is poised to rise, although the external background remains "contradictory".

Russia's gold

and foreign exchange reserves fell to $510.4 bln in the week to 7 October from $516.8 bln a week earlier, CBR data showed on Thursday (13 Oct). The reserves include monetary gold, special drawing rights, reserve position at the IMF and foreign exchange. / Thomson Reuters

The head of

CBR said on Monday (10 Oct) that the rouble did not face exchange rate risks and was more likely to appreciate than decline as long as oil prices remain around current levels. Sergei Ignatyev, chairman of the CBR, also said the situation on financial markets had steadied of late and that the CBR had been able to reduce its forex sales in support of the Russian currency. "The situation has more or less stabilised over the last two weeks," Ignatyev said in remarks to a meeting of finance officials chaired by President

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Dmitry Medvedev. Ignatyev said the rouble's exchange rate had stabilised at around 32 to the dollar, despite continuing market volatility. "The price of Russia's exports remains quite high, and therefore I do not see particular risks for the exchange rate of the rouble, rather the contrary," he said. "I would suggest that the likelihood that the rouble appreciates is greater than of it depreciating, assuming that oil prices remain around current levels." Ignatyev added that the CBR continued to conduct sales of foreign currencies from its reserves, but the volume of its market interventions had fallen somewhat.

CORRIDOR. Officials said in early October that the CBR had sold around $10 bln since the start of September to shore up the rouble. On Monday, First Deputy Chairman Alexei Ulyukayev said interventions this month were $2-$3 bln. Ulyukayev also told reporters that the exchange-rate corridor the CBR uses to guide interventions was at 32.7-37.7 roubles to the the dollar-euro currency basket that it targets. Under its managed float, the CBR steps up interventions as the rouble's exchange rate nears the corridor's boundary. When it has exhausted an intervention allotment of $600 mln, it shifts the band by 5 kopecks. Over the past month the CBR has lowered the rouble's target range against the band by 40 kopecks. The rouble was trading at 36.7075/37.7225 to the basket on Monday after posting strong gains against the dollar on hopes that a joint package of measures planned by France and Germany will stem the euro-zone's debt crisis. The CBR $517 bln in reserves are the world's third largest. Russia is the world's top oil producer and rouble assets are correlated to the oil price, which at $107 per barrel is sufficient to keep the budget in surplus.

DIFFICULT SITUATION. Ignatyev said the situation on global markets remained "difficult" as European leaders continued to seek a resolution to the sovereign debt problems facing the euro zone in general and Greece in particular. "European governments have still not persuaded financial markets that the problems will be resolved quickly and effectively," he said. "Unfortunately, uncertainty persists over the debts of Greece and other countries, and this is unsettling participants on financial markets." He said that the CBR foreign exchange sales and rouble purchases had led to a deficit of rouble liquidity in the Russian banking system. The CBR was "actively" providing liquidity to Russian banks, with daily volumes at one-day REPO auctions now at around RUB 200 bln, a level that he said could be increased if necessary. "If there is a need to provide more (liquidity), we will provide more, we are ready to make available RUB 1 trln, and if more is needed, we will provide even more." / Thomson Reuters

MONEY MARKET:

On this week money market rates fluctuated around 4.25-5.75%.

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Markets: FIXED INCOME

The Russian FinMin cancelled a regular auction of OFZ treasury bonds on Wednesday (12 Oct), for the fourth time in as many weeks, anticipating little interest due to market uncertainty and unwilling to pay a premium. Higher than anticipated oil prices have also resulted in greater revenues, enabling the FinMin to cut this year's budget deficit forecast, meaning the auctions are not essential for government finances. "The decision to cancel the auction was based on analysis of the current market context," the FinMin said in a statement explaining its decision not to sell the 10-year bonds it had planned to offer. The FinMin cancelled a planned auction of six-year bonds last week for similar reasons. "Market demand for rouble bonds is still not high enough to absorb the proposed volume of long-term bonds," analysts at VTB Capital said in a note. The FinMin, which has raised RUB 1.02 trln by selling bonds this year, promised in September that it would fulfill its reduced RUB 1.4 trln borrowing target. The FinMin had planned to raise RUB 90 bln from OFZ auctions in the fourth quarter but has yet to get an issue away, which may encourage it to offer shorter-dated paper even as high oil prices keep the budget in surplus. / Thomson Reuters

Russia is ready in principle to buy Spanish government debt once the euro zone's

member states have put in place a strategy to overcome the currency bloc's debt crisis, Arkady Dvorkovich, economic adviser to President Dmitry Medvedev, said on Monday (10 Oct). Russia is the world's third-largest reserves holder and has over two-fifths of its $517 bln in foreign reserves invested in euro-zone sovereign debt. "When the European countries announce a concrete and clear strategy to exit the crisis, and if in the framework of this strategy support from Russia and other BRIC countries is necessary, then we would provide such support," Dvorkovich said in response to a question. Dvorkovich, attending a conference in Moscow with Spanish EM Elena Salgado, said Salgado had met Russia's former FM Alexei Kudrin and Foreign Minister Sergei Lavrov. Salgado left the event without taking questions from reporters. The BRIC nations, Brazil, Russia, India and China, are a loose coalition of large emerging economies that together hold the bulk of the world's foreign exchange reserves. Of Russia's total reserves, $109 bln are held in two sovereign wealth funds whose asset allocation is set by the FinMin. The CBR decides how the remainder is invested. Moscow has generally taken a sceptical approach towards offering bilateral financial support to euro-zone countries, saying it would prefer to invest in bonds issued by a common bailout fund, the European Financial Stability Facility (EFSF). Officials have also said that they would prefer to support any debt initiative that is put together under the auspices of the Group of 20 nations, which is due to hold a summit in Cannes, France, next month. / Thomson Reuters

The world's largest aluminium producer, UC RUSAL, which just completed the

refinancing of its entire $11.4 bln debt, expects its net debt to fall by another $500 mln over the next 12 months, its head of capital markets said on Friday (7 Oct). Oleg Mukhamedshin told reporters at an investment conference in Moscow that the company would spend cash flow to make the payments. / Thomson Reuters

Russia's top oil producer Rosneft is considering raising up to $1.5 bln via a loan at a

rate of LIBOR plus 1.85%, three banking sources told Reuters on Wednesday (12 Oct). Two of them said that Rosneft is looking to arrange a five-year loan but the decision whether to proceed with the deal will depend on market conditions, which are not optimal now given the ongoing European debt crisis. Sources did not state the purpose of the loan, whose net debt stood at $12.45 bln as of the second quarter. Rosneft declined to comment. Rosneft is joining Sberbank, who are also looking to raise up to a combined $3.5 bln in separate loans. Sberbank was looking to price the new deal of up to $2 bln at a margin similar to VTB's record $3.13 bln deal signed in July. That carried a margin of 130 bps, at parity with Vnesheconombank's (VEB) three-year, $2.45 bln deal in April. But sources said on Wednesday that Sberbank is unlikely to get such a price given weak

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markets, especially when European lenders are trying to avoid deals as they need cash themselves to prepare for worst-case scenarios related to Eurozone debt problems. / Thomson Reuters

Russian metals giant Norilsk Nickel's five-year, pre-export financing of up to $1.5 bln pays a margin of 225 bps over LIBOR, bankers close to the deal said. The all-in cost stands at 280-290 bps, depending on how early banks commit to the deal, one banker added. The loan marks Norilsk's first syndicated loan since 2008. The deal, which is for general corporate purposes, has launched to senior syndication and banks are being invited to join as mandated lead arrangers. There will then follow a general phase, a senior loans banker said. On 30 September, bankers said Norilsk was looking to raise around $3.5 bln to buy back shares. The board approved on 13 September a buyback of 7.7% of its stock at $306, a total of $4.5 bln. Norilsk could use the new deal to go towards that buyback, but either way the firm is still looking to raise $3.5 bln for its funding requirements, the senior loans banker added. In 2008, Norilsk signed a $1.5 bln, three-year syndicated loan. The deal was split between a $750 mln of secured pre-export financing, a secured $550 mln of revolving credit and an unsecured $200 mln of revolving credit. The secured tranches paid a margin of 85 bps over LIBOR, while the unsecured tranche paid 100 bps. Norilsk Nickel declined to comment. / Thomson Reuters Markets: STOCKS

On this week the

rouble-traded MICEX index was up 5.3% and the dollar-based RTS was adding 9.5%, heading away from 2011 lows hit in early October.

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Macroeconomic indicators of Russia

ECONOMIC INDICATORS PERIOD LATEST PREV YR AGO GDP Y/Y Q2 +3.4 +4.1 +5.2 CPI M/M Aug -0.2 0.0 +0.6 CPI Y/Y Aug +9.3 +9.0 +6.4 PPI M/M Aug +4.6 -1.0 +3.3 PPI Y/Y Aug +18.5 +16.1 +9.0 Ind output M/M Aug +1.1 +0.4 +0.1 Ind output Y/Y Aug +6.2 +5.2 +7.0 Retail sales Y/Y Aug +7.8 +5.7 +9.0 Unemployment (mln) Aug 4.7 5.0 5.2 Real disposable income Y/Y Aug +1.4 +0.4 +5.2 Real average wage Y/Y Aug +3.9 +2.4 +5.6 Nominal average wage (rbls) Aug 23.126 23.598 20.753 Capital investment (blnR) Aug 920.0 802.0 813.7 Capital investment Y/Y Aug +6.5 +7.9 +8.1 Trade surplus ($bln) Aug 14.7 14.9 8.0 Exports ($bln) Aug 44.6 42.6 31.8 Imports ($bln) Aug 29.9 27.7 23.8 Budget balance (bln rbls) Jan-Sept +1 090.0 +759.0 -645.8 CBR reserves ($bln) 7-Oct 510.4 516.8 481.3 Monetary base (blnR) 12-Sept 6,295 6,242 5,075 M2 (blnR) 1-Aug 20.848 20.743 17.063 REER rouble Aug -3.1 +0.2 +0.1 Oil output (mln bpd) Aug 10.28 10.26 10.06 Oil output (mln T) Aug 43.46 43.38 42.54 Gazprom gas output (bcm) Aug 32.83 35.74 32.86 URALS oil, $/bbl 14-Oct 115.32 105,66 82,35 BRENT oil, $/bbl 14-Oct 116.98 108,86 84,05

ANNUAL DATA 2010 2009 2008 2007 2006 2005 GDP (pct) +4.0 -7.9 +5.2 +8.5 +8.2 +6.4 CPI Y/Y (pct) +8.8 +8.8 +13.3 +11.9 +9.0 +10.9 M2 (bln R) 20,173 15,698 13,493 13,272 8,996 6,046 Oil/gas cond.(mln T) 505 494 488 491 480 470 Natural gas (bcm) 508 582 665 653 656 641 Coal (mln T) 323 298 326 315 309 298 Grain (mln T) 61 97 108 82 79 78 Beet Sugar (mln T) 2.7 3.3 3.6 3.2 3.2 n/a Gold (T) 201 205 184 163 164 168

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GOVT FORECASTS 2011 2012 2013 GDP Y/Y (pct) +4.1 (+4.2) +3.7 (+3.5) +4.0 (+4.2) Industry output (pct) +4.8 (+5.4) +3.4 (+3.6) +3.9 (+4.0) CPI Y/Y (pct) 6.5-7.0 (7.0-7.5) 5.0-6.0 (5.0-6.0) 4.5-5.5 (4.5-5.5) Cap. Investment pct +6.0 (+9.0) +8.8 (+4.0) +7.7 (+7.4) Retail Sales pct +4.5 (+4.1) +4.8 (+4.1) N/A Exports $ bln 527.5 (503.8) 533.1 (494.4) 535.9 (512.3) Imports $ bln 340.0 (308.7) 401.4 (352.4) 449.3 (396.0) Trade Balance $ bln 187.5 (195.1) 131.7 (142.0) 86.6 (116.3) Urals oil, ave., $/bbl 108 (105) 100 (93) 97 (97) Rouble rate/$1 28.6 (28.4) 28.4 (27.9) 30.1 (27.9) Rouble REER +7.7 (+2.6) +3.5 (+1.1) +2.0 (0.0) Reserve fund, trln RUB as of yearend 1.450 (1.408) 1,568 1,619 Revenue, trln RUB 11.008 (10.303) 11.779 (10.615) 12.729 (11.674) Expenditure, trln RUB 11.008 (11.023) 12.670 (12.185) 13.766 (13.418) Budget deficit, trln RUB 0 (-0.720) -0.891 (-1.570) -1.037 (-1.744) Budget deficit, % of GDP 0 (-1,3) -1.5 (-2,7) -1.6 (-2,7)

BALANCE OF PAYMENTS ($bln) Q1’2011 2010 2009 Current account 31.8 71.1 48.6 Cap/fin account -15.9 -26.4 -43.5 Net errors/omissions -5.8 -8.0 -1.7 Reserve assets -10.1 -36.8 -3.4

LONG-TERM FOREIGN CURRENCY RATINGS Moody's (December 12, 2008) Baa1 (outlook stable) S&P (August 31, 2011) BBB (outlook stable) Fitch (September 02, 2011) BBB (outlook positive)

CJSC Dexia Bank, Moscow Treasury Ksenia Mayorova ksenia.mayorova@dexia.com Alexander Shetler alexander.shetler@dexia.com +7 (495) 789-97-20, +7 (495) 783-31-41 Corporate Banking Savas Citak savas.citak@dexia.com Oguz Yalcin oguz.yalcin@dexia.com Koray Akefe koray.akefe@dexia.com Mine Arpadji mine.arpadji@dexia.com Olga Volkova olga.volkova@dexia.com Marina Kalashnik marina.kalashnik@dexia.com Roman Otavin roman.otavin@dexia.com +7 (495) 783-31-40, +7 (495) 725-10-20

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