Russia 090505 Basic Political Developments

PMI Rises 4th Month This Year

http://www.themoscowtimes.com/article/600/42/376819.htm
05 May 2009
By Anatoly Medetsky / The Moscow Times
The rate of decline in Russia's manufacturing sector slowed for a fourth straight month in April, as the number of new orders fell less steeply, VTB Capital said Monday.

The bank's Purchasing Managers' Index, derived from a monthly survey of 300 executives in Russian manufacturing companies, rose to 43.4, the highest level in six months, from 42 in March. A reading below 50 indicates contraction.

"The results are no doubt positive," said Dmitry Fedotkin, an economist at the investment bank, adding that they did not necessarily mean that the economy was on the road to recovery.

The results were in line with the predictions of 16 analysts polled by Reuters last week. They said the worst of the slowdown had passed but expected a larger median contraction of 4.7 percent of gross domestic product this year.

Deputy Economic Development Minister Andrei Klepach said last month that the economy could shrink as much as 6 percent in 2009. His boss, Minister Elvira Nabiullina, said later last month that a recent increase in electricity consumption and rail cargo shipments were encouraging signs that the economy could be rebounding.

The survey's latest findings provided further evidence that the manufacturing sector was going through a longer and larger contraction than the one caused by the financial crisis in 1998, the bank said. The current downturn extended to nine months in April, compared with seven months in the previous decline.

In addition to a weaker fall in new orders, the rate of contraction in new business has moderated since hitting a record in December, VTB Capital said. New export business, however, declined more quickly than in March. Output declined at a rate that was little changed from the previous month.

Employment among manufacturers continued to weaken, although the drop eased for the third month running, the bank said. Unemployment reached 10 percent of the work force, or 7.5 million people, in March.

Ruble Hits 3-Month High on $50 Oil

http://www.themoscowtimes.com/article/1009/42/376818.htm
05 May 2009 Bloomberg
The ruble climbed to a three-month high against the dollar as the price of oil traded above $50 a barrel and metals gained, attracting investors back to the energy-exporting economy.

The currency gained as much as 0.4 percent to 32.93 per dollar on Monday, the strongest since Jan. 26. It added 0.3 percent to 37.82 versus the dollar/euro currency basket used to manage fluctuations that hurt exporters, stronger than the level that traders say the Central Bank had previously been defending.

Crude in New York rose 0.8 percent to $53.60 a barrel Monday, 4.9 percent higher than on April 30, before markets closed for the May 1 holiday.

"Everyone is looking at the oil price above $50, as that's a good figure for the Russian economy," said Nikolai Kashcheev, head of economic research at Moscow's MDM-Bank. "Given where the price is, the Central Bank has let it go a little bit stronger today."

The Central Bank has been buying foreign currency since the end of January after the ruble started to strengthen amid a rebound in oil prices and policymakers limited bets against the local currency. After halting the ruble's advance at 37.90 last week, the Central Bank is now exchanging dollars and euros for rubles at 37.85 versus the basket Monday, said Kashcheyev, citing MDM currency traders.

The ruble added 0.2 percent to 33 per dollar on Monday, from 33.06 on May 1. It closed at 33.10 on April 30, the last day of official ruble trading in April. The currency gained to 43.73 per euro Monday, from 43.88 in unofficial trading on May 1, and 43.79 on April 30.

Economics: Government draft bill: tax increase planned for 2011

http://www.businessneweurope.eu/dispatch_text8531

UralSib, Russia

May 5, 2009

Social taxes could rise from 26% to 34%. Yesterday, the government submitted a draft bill to the Duma in which it proposed a major increase in one of the key taxes, the unified social tax (UST). According to the draft bill, starting from 1 January 2010, UST should be replaced by three separate taxes, but the overall tax load will remain unchanged. However, on 1 January 2011, two of these new taxes will be increased to bring the overall tax load to fund social programs from the current 26% to 34%. While the news is negative for business, it is positive for overall economic and social stability as the new tax system will significantly decrease pressure on the budget and will help improve Russia's social security, medical and pension systems. implemented in two stages. In the first stage (from 1 January 2010) the current UST will be split into three separate taxes: pension tax (20% of the payroll), social security tax (2.9%) and medicare tax (3.1%). Combined, the rate of the three new taxes will be equal to the current UST rate (26%).

... with tax increase planned for 2011. In the second stage (from 1 January 2011), the government bill suggests raising the pension tax from 20% to 26% and medicare tax from 3.1% to 5.1%. Social security tax will remain unchanged.

Overall, it is planned that the three new taxes in 2011 will total 34%, which is a considerable increase on the current UST tax rate.

SMEs will pay higher taxes too. The new bill also includes a number of proposals aimed at improving standards of social security in Russia, like plans for new increases in state pensions, higher social payouts for disabled and pregnant citizens, etc. In addition, the government plans to increase social taxes for SMEs that currently pay taxes under a simplified scheme. The combined social tax load for these businesses will increase from the current rate of 14% to 16% in 2011 and then will gradually increase to 21% by year 2014.

News from the Fields: Minimal Signs of Recovery

http://www.businessneweurope.eu/dispatch_text8531

Troika, Russia

Tuesday, May 5, 2009

We have visited a number of small companies in the Volga and Urals federal districts to get a better picture of developments in the real economy. While official statistics indicate a slight rebound over the last two to three months, morale in the regions remains poor and we still lack clear signs of recovery.

_ Demand is still very weak. Although statistics show a slight m o m rebound in industrial output, anecdotal evidence holds that only a few companies have seen an improvement in demand, while the vast majority have not. Defense, electrical equipment, heavy machinery and auto part manufacturers say that they are still experiencing a decline in demand and capacity utilization. Consumer discretionary goods are also suffering. For example, a furniture maker told us that demand has evaporated for all but the cheapest items it produces.

_ Exporters are doing better. The few companies that have reported an improvement are large exporters due to the positive impact of devaluation. For example, a fertilizer producer in Saratov Region saw capacity utilization rise from 50% in December to 100% in March. Media outlets recently reported that Arkhangelsk Pulp has seen a similar trend. Consumer staples and food producers are also doing relatively well.

_ Credit is available but very expensive. The companies we spoke with said that banks have started to offer loans to borrowers, but at unbearably high interest rates. Common rates well exceed 20% and average 25%. Companies avoid taking credits at these rates, which far outpace their gross margins in the current environment, and businessmen are very uncertain about future sales. However, matters have improved from a couple of months ago. At that time, credit was unavailable at all, even at rates above 25%. We see this as a first step in the right direction, and maintain that credit activity may revive in 2H09 as interest rates fall.

_ Unemployment is likely to rise. The vast majority of the employed work for domestic focused companies that are operating in this harsh environment. The state and local authorities were always reluctant to allow companies to conduct massive layoffs, which has been a limiting factor for unemployment. However, as many companies continue to suffer losses, additional layoffs are unavoidable. We were told by a local government official that another wave of staff cuts is expected in early autumn, when troubled companies reach the end of their financial means.

_ The government is apparently one of the main sources of payment arrears.

The revision of the 2009 budget took several months, and the new budget was signed only in late April. Having no budget, regional and federal authorities not only suspended planned spending, but also stopped paying for some contracts that had already been signed. A number of companies ended up with significant receivables from the government. The hope is that this money will be paid in 2H09, and the companies will receive cash and transfer it to their suppliers.