Updated September 10, 2008

   Recently, Standard & Poor's published the report, where the rating agency assessed Russia's bank system saying that "it became more stable, however, we should make a range of stipulations to state th is

fact". Though, despite its "youth", the Russian bank sector has experienced already three crises, in 1995, 1998 and 2004, and the agency warns that it is too early to speak about the significant changes within the sector.

However, this statement doesn't impede the Russian banks to solve successfully the problems, caused by the world liquidity crisis, due to the support of Russia' s government and the

stockholders.

   Within less than 20 years of the existence of Russia's bank industry, it faced several crises and periods of destabilization, as the analysts of S&P remind. Thus, they mark also that the tendency to the growing lending rating average of the Russian banks from CCC to B+, though this index remains one of the world's lowest, indicates the recovery of Russia's bank system.

   Though it has experienced several crises, Russia's bank system "is still subjected to the risk of the liquidity reduction under the influence of panic moods and the danger of mass withdrawals of the customers' deposits, like in summer, 2004", the analysts of S&P mark. In their opinion, "the major part of the growing Russian banks' business is funded by the external borrowings that have the high risk of refunding, liquidity and the currency risk in the bank system".

   In Standard & Poor's consider that the liquidity slumps, though recoverable, will continue, and the cooldown in the relations with the West, as well as the continuing world loan crisis, will contribute to this.

"However, Russia's banks are dealing successfully with their problems, caused by the world liquidity crisis, due to the changes in the development strategies, creation of the internal liquidity reserves, and the government and stockholders' support as well", as the agency marks.

   The director of the Department of the Scientific Research, the Moscow University of Industry and Finance Sergey Moiseev marks that the fifth part of the Russian banks' liabilities is formed using the foreign facilities, thus, this is mainly the money of the foreign banks' subsidiaries. "If the growth of these banks is suspended because of the unstable foreign receipts, the growth of the overall market will be suspended as well", as Mr. Moiseev considers.

   "The capital outflow in the bank area resulted in the liquidity deficiency that, in its turn, resulted in the growth of the funding cost.

One and a half months ago, there was the liquidity surplus in the industry that prevented the growth of expenses for the funding", as the analyst of Deutsche Bank Bob Comers marks.

"The situation would hardly improve as compared to the present one.

Nevertheless, Deutsche Bank's key scenario predicts that the tension in the political sector keeps at least by the end of this year. The revival of the capital inflow is unlikely in the nearest future within the framework of this scenario". "The level of the external borrowings is high, but not huge", as the analyst of Troika Dialog IC Olga Veselova considers.

"If the borrowings are suspended, it will result in the growth deceleration of the bank sector and in the more expensive money.

This will affect negatively Russia's bank system, but will not be disastrous".

   "The measures to support the liquidity can be assessed as positive.

If earlier the banks were taking loans reluctantly at the auctions of the Ministry of Finance, so, when the banks were provided with the new ways of borrowings, for instance, the facilities placement of the fund for housing and utilities development, they became interested in this kind of money attraction", as Olga Veselova considers.

   "High economy rates predetermine favorable terms for the development of Russia's national bank sector", as the analysts conclude.

"The rise of Russia's credit worthiness minimizes the recurrence of the disastrous scenario". S&P's analysts mark that the country risks are still high, since the weakness of the legal and supervisory systems, low transparency of the banks and companies' incorporated structures, as well as the high-level concentration of the bank loan portfolios and the sources of funding and income influence on them.

   "I think that it goes about the provision of the activity norms and the shortage of laws, for instance, about the bank mortgage, securitization, and syndicated lending", as Sergey Moiseev marks. "Russia' banks, on the contrary, pay much attention to their extra reporting". In the opinion of the president of the Association of Regional Banks of Russia Anatoly Aksakov, everything is relative.

"I don't think that the supervision is low, rather ineffective. The banks' load is too heavy, and its efficiency is low". "Our supervision is effective because we don't have banks that went bankrupt due to the losses", as Sergey Moiseev considers. In Anatoly Aksakov's opinion, the supervisory bodies "should raise the responsibility of owners and the banks' top-management, including criminal one, and on the other hand, provide them with the independence". As for the transparency of the lending organizations, "it is the false information, at least, concerning those banks that are listed in the Agency for Deposit Insurance, and in the Central Bank are aware of all actual owners", as Anatoly Aksakov states.

   Among the mentioned risks of Russia's bank market, S&P emphasizes the Bank of Russia's activity that "has tackled effectively the problems of liquidity caused by the world loan crisis in summer, 2007"; as well as the activities of Russia's government on the support of private banks that "reflects the aims of Russia' political authorities and regulatory bodies to provide the bank sector with stability". "When the crises started, the Central Bank acted as an experienced and professional organization, therefore, Russia's bank system is stable. Russia's government, in its turn, was placing temporary available facilities on deposits", as Anatoly Aksakov marks. However, the Russian bank sector has been requiring a major reform for a long time that would urge the development of banks and would accelerate the increase of their ratings. However, the reform is progressing slowly, and it is explained by "the opposition of the vested interests, whose interests it affects", as S&P summarizes.

   "We don't require such reform as the deep revision of relations between regulation, supervision and money policy", as the president of the Russian Banks' Association Garegin Tosunyan considers.

"This is not the reform for the bank system, it is the revision of the system to manage it. The bank system requires some development". "Despite the aggravation of the situation in the bank industry in the nearest prospect, we are still assessing the investment attraction of Russia's banks as high in the mid-term prospect", as Bob Comers adds.

Updated September 3, 2008<

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   Russia's Prime Minister Vladimir Putin declared that in 2008,

the Russian government wouldn't increase the stake of the capital inflow to the economy, since "it poses the additional problems" with the inflation and

the volume of money supply.

Russia's Central Bank (CB) and the government can afford such strategy for a year or two, but no later than 2011, though, from the end of 2009 the level of the capital inflow will determine both the inflation and the ruble rate.

   "We will not have such capital inflow like in the previous year, but it is not related to the events in Georgia", Russia's PM Vladimir Putin declared in Tashkent on September, 2. "We don't require such high inflow, since it poses the additional problems both with the volume of money supply and the inflation growth". He used the CB' data as a reference and gave the forecast of the net capital inflow of $30-40 billion in 2008. In 2007 this index was $83,2 billion, in 2006 – $41,8 billion, and in 1Q 2008 – $12,3 billion. The preliminary calculations based on the CB' data on the volume of the international reserves show that since the beginning of 2008 up to August, 22, there could be the net capital outflow.

   Except for the influence assessment of the events in Georgia, Mr. Putin's logic coincides with the current argumentations of Russia's CB, the Ministry of Finance and the independent economists.

In 2006-2007, Russia's money offer was formed mainly due to the capital inflow, and the foreign investments' growth as a backside of GDP and the industrial production' s growth imply the acceleration of inflation and ruble strengthening. The latter leads to the import growth and to

the competition drop of the Russian producers. The CB' project, "The key directions of the CB' monetary policy" that was introduced to the State Duma on August, 28, is covering exactly this fact.

   However, according to the CB's document, the Russian government's negligence for the capital inflow ends soon.

As it was stated in the document, even in the mid-term prospect (2009-2011), the tendencies of the ruble rate "will be predetermined by the facilities movements within the framework of the foreign economic activity". Since the oil price is $90-95 per barrel, the current accounts' surplus of balance of payments will be replaced with its deficit in 2010, and at $66 per barrel – in 2009 already. "Under such terms, the primary role will have the cross-border capital movements that will determine the ruble rate change", as it is said in the CB's document.

   The Bank of Russia's assessment may be too optimistic: "the zeroing" of the current account (the balance amount of trades in commodities, services, investment profits and payments for labor) can take place even earlier.

Russia's CB takes to account the calculations of the import growth rates by 15-21% for 2009, and for 2010 – by 10-17% depending on a scenario. Within the last couple of years, the import growth rates ranged from 30 to 40%, and even higher sometimes. The calculations based on such import growth rates show that all scenarios, except for the most optimistic (oil – $115 per barrel in 2009), point to the "zeroing" of the current account in 2009, and in 2010 it can be even more negative (to $115-350 billion).

   So, in 2009, the regular strengthening of the ruble rate can be replaced with its weakening. Thus, the devaluation rates will be determined by the attraction level of Russia's economy for the foreign investors.

It seems as in the CB understand this – "The key directions" don't give any forecasts of the rate dynamics, unlike the previous years.

Updated August 29, 2008

   The stockholders of the Russian RosEvroGroup have found the buyer for its bank asset.

The largest bank of China – Industrial and Commercial Bank of China – will purchase 100% of RosEvroBank (former joint-stock bank Loubyanka). The investment of the Chinese bank becomes the first purchase in Russia made by the investors from the Asia-Pacific region.

   Three independent sources of the bank market told that the sale of 100% of RosEvroBank's stocks to the largest China's bank, Industrial and Commercial Bank of China (ICBC), is almost completed. "The parties have come to the understanding, and the required documents will be signed in the nearest future, and the calculations will be made at the end of this year or at the beginning of the next year", as the source close to

the stockholders of the Russian bank said. In RosEvroBank refused to confirm this information. In ICBC's Moscow office refused to comment as well saying that the negotiations are confidential.

   However, the Federal Antimonopoly Service (FAS) knows about the future deal with RosEvroBank.

"ICBC's representatives have already visited us and have learned the rules of submitting the application for the purchase of RosEvroBank's stocks", as in the FAS's press-service reported, but they didn't specify the stockholding size.

   RosEvroBank was established in 1994 (former name Loubyanka), and as of April, 1, 2008 the bank occupies the 53rd place by the net assets sum (RUR 46,8 billion) and the 62nd place by the capital size (RUR 5,5 billion). RosEvroGroup Managing Company owns 84% of the bank's stocks, the DEG fund owns 6%, and Renfin1 and Renfin2 funds own 10% of stocks. RosEvroGroup's stockholders are the chairman of RosEvroGroup directors' board Sergey Grishin (59,1% of stocks), the bank's chairman of the management board and the member of the directors' board Ilya Brodsky (14,5%), the members of the directors' board Andrey Suzdaltscev (14,7%) and Ernest Bisaev (9,7%), and the first bank's deputy chairman Dmitry Suzdaltscev and Oleg Vershinin own in 1%.

   Industrial and Commercial Bank of China is the largest state commercial bank of China.

It occupies the world's top position by the capitalization (over $225 billion). Almost 17 000 of the bank's branches in Ch

ina and in the other countries of the world offer services to 170 million private and 2,72 million corporate clients.

In October, 2006 ICBC held the largest IPO in the world and attracted $21,9 billion.

   RosEvroBank's stockholders started the bank's sale in 2006. Last summer they were holding talks with the Israel Hapoalim, but the parties didn't reach the agreement because of the discords in the price. According to the information of the source aware of the terms of the deal, the Chinese bank will pay about $800-850 million, and this sum is RosEvroBank' s quadrupled capital.

If this information is true, the coefficient of this deal will be one

of the highest at the market. The British Barclays purchased Expobank with the coefficient of about 4, Bank of Cyprus purchased 80% of Uiastrum Bank with the coefficient of 3,1, the sum Hapoalim paid for the control over SDM Bank equals the double capital of the latter. Moreover, ICBC's investment will be the first large investment made by the investors from the Asia-Pacific region in the bank sector of the Russian Federation.

    Lately, the eastern investors are actively using the price drop of the financial assets in the USA and Europe.

The Swiss bank UBS declared that it would sell 9% of its stocks for $9,7 billion to Singapore Investment Corporation, and Citigroup declared that it would sale 4% of its stocks to GIC for $6,9 billion. The US Merrill Lynch reported that it had received $6,6 billion from investors, among which were the state investment funds from South Korea and Kuwait.

Recently, the fifth large South Korean bank, Korea Development Bank, reported that it didn't eliminate the investments into Lehman Bro

thers.

   There is less risks at the Russian market, since the world crisis has affected the Russian banks only to a certain degree. The investors are ready to pay more for smaller risks, as KIT Finance investment bank's analyst Maria Kalvarskaya explains. Moreover, RosEvroBank owns the widespread chain of divisions – 12 branches in Moscow, as well as 26 regional branches. "The high price is explained by the high interest the Chinese investors take in our market and the reluctance of the Russian stockholders to sell assets at low price", as Mrs. Kalvarskaya says. "Moreover, our banking system is growing quicker than the Chinese one. If the overall assets of the Russian banks grew by 54% last year, in China the growth totaled only 16%", as S&P's analyst Evgeny Tarzimanov adds

   When RosEvroGroup's stockholders sell the bank asset, they will concentrate on the development of the developer business that has higher potential for growth and profitability, as the Interfax CEA's chief executive Mikhail Matovnikov considers.

The owners of Absolute Group did the same, when in spring of the previous year they sold Absolute Bank to the Belgian KBC Group, he adds. RosEvroDevelopment invests into the construction of shopping malls and in the warehouse, office and residential real estate.

Updated August 7, 2008 Rating agency Standard & Poor`s leveled one group down the country risks of Russia's banking system. S&P reacted to support the Bank of Russia had rendered to

the system within financial crisis.

On the other hand, the agency still considers that if recession happens, approximately the half of the Russian banking assets can become troublesome.

As reported the international rating agency Standard & Poor`s, in terms of banking system country risks assessment (BICRA) it shifted Russia from group 8 to group 7. As a result, Russia is the one group with Turkey, Latvia, Romania and Salvador. In the former group, where Russia had been since June, 2007, its neighbors were Kazakhstan and Argentina.

On August, 5 the agency confirmed its assessment concerning Ukraine, and it was placed into the group 10.

The BICRA assessment indicates strong and weak sides of the country banking system as compared to banking systems of other states.

Using the BICRA classification, the agency divides banking systems into 10 groups from the viewpoint of their exposure to the country and branch risks, where the strongest belong to group 1, and the weakest – to group 10.

Also, Standard & Poor`s changed its assessment of the Russian government policy and position in terms of its tendency to provide private banks with support, and shifted it from the group of the countries that "are not binding to provide support", to the group of the countries that "are ready to provide support". According to deputy director of ratings group for financial institutes of the Paris Standard & Poor`s representative office Ekaterina Trofimova, these decisions take account of an effective liquidity management in the Russian banking sector from the Central Bank part in terms of turbulence on the world financial markets since mid-2007.

"What Bank of Russia had undertaken in autumn last year, was above all our core expectations", as Mr. Trofimova marked.

Alfa Bank top-economist Natalia Orlova considers that the rating reassessment is reasonable.

She reminded that one of the first measures the Central Bank had taken last autumn to maintain liquidity in the banking sector was contributions reduction to obligatory provision fund for three months: from 4,5 to 3,5% on external loans and from 4 to 3% – on ruble and retail deposits.

Also, the Central Bank made changes in the refunding instruments list (extended a Lombard list) and started giving direct loans to banks (in particular, URSA Bank and VTB Bank took advantage of it). In spring of the current year the Ministry of Finance started to hold auctions to provide banks with budgetary funds.

However, in Standard & Poor`s suppose that Russia's banking sector is still characterized by "weak institution system and aggressive lending growth that is mainly financed due to external borrowings". Therefore, the agency hasn't changed its level assessment of hypothetical gross problematic assets (GPA) that can arise in terms of realization of reasonable (but not catastrophic) economic recession scenario. As per this assessment, the GPA level (banks do not have guarantees of these assets return) in Russia's banking system totals 35-50%, and it belongs to this level since June, 2007, and earlier it was within 50-75% limits.

"High and rapid lending growth that has been continuing within several years increases the banking sector vulnerability towards the long deceleration or full stop of the economy growth in Russia", as underlines Mrs.

Trofimova. Recently, analysts of UniCredit Aton Company doubted the prospects

of the banking system growth.

They declared about assessment of the overall Russian banking sector towards lowering.

Updated May 14, 2008

   Russian banks cut growth rates of loans' volumes given to individuals, as it follows from Bank of Russia statistics.

Home loans and mortgage make an exception, as these segments continue to grow rapidly.

Experts explain this by banks reorientation towards the more stable segment of the long-term lending.

   Bank of Russia has posted the statistics on its

official website about the volume of retail debts to banks as of April, 1, 2008.

By ruble loans this index totals RUR 2 798 698,3 million, having increased by RUR 522 796,8 million since October, 1, 2007. As of April, 1 the volume of retail debts by currency loans in ruble equivalent attained RUR 390 6

17,9 million, having increased by RUR 8257,8 million within six months.

Total revenue of retail loan debt totaled RUR 531 054,6 million from October till April.

Banks have been giving loans more active within previous six months – from April till October, 2007. Then the revenue of retail loan debt by ruble loans totaled RUR 561 748,1 million, by currency – RUR 71 181,6 million. Apparently, within the last six months the rates of retail debt have reduced by 16%.

   Some analysts explain the lending situation by crisis influence on international financial markets. "Over the means shortage banks have cut the volumes of retail lending", is sure Trust bank chief analyst Yevgeny Nadorshin. "Thus, currency loans in particular have undergone the most cut over the reduction of currency securitization volumes". Banks prefer to give loans in rubles, as consents Rusrating agency analyst Viktoriya Belozerova.

    O ther experts consider

the reduction of lending growth rates a regular process not related to the crisis. "Since Russian banks had started to give retail loans almost from scratch seven years ago, they were demonstrating exclusively high growth rates of lending volumes (around 90% a year)", says Renaissance Capital analysts Maxim Raskosnov. "However, retail lending business is rather in the mature stage now, and it is normal that portfolio growth rates slow down". According to his opinion, one should not take into account the decline of banks activity as well concerning mortgage granting and loan policy tightening of the largest players of the consumer lending market related to the additional commissions' refusal. "One should bear in mind that Bank of Russia statistics does not take into account the portfolios sold in term of assets securitization transactions", as expert adds.

   As it follows from Bank of Russia data, banks prefer to give long-term loans.

From October, 2007 till April, 2008 volume of the ruble home, as well as, mortgage, loans has increased by RUR 220 988,1 million, while from April till October, 2007 – by RUR 199 831,8 million. "In terms of the crisis large banks parlayed into long-term lending, as this lending segment demonstrates both the highest growth rates and permits to attract rather stable clientele, than short-term consumer loan", considers Yevgeny Nadorshin. In Mrs. Belozerova opinion, banks restricted means without the state or foreign participation enables the later to increase significantly their market share in terms of the crisis.

   Experts also spec ify that

if the tense situation at the financial market continued, an excessive keenness on the long-term lending could worsen the operating indices of some players.

"Long-term lending efficiency is lower, than short-term, and banks expenditures remain at the same level, and the securitization price rises", explained Mr. Nadorshin. However, according to the opinion of other experts, the problems of some banks would hardly affect all banking system.

"Half of Russia's retail lending market is controlled by the Savings Bank, and it does not face problems", sums up the Russian bank top-manager.

Updated April 8, 2008<

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   Gazprombank published the activity results by the Russian Accounting Standards (RAS) of the first quarter of 2008. The bank income is almost 30 times down as compared to the analogical period previous year. However, the analysts assume such results of the Russian banks rather positive on the background of large write-offs of western financial organizations.

   According to 1Q results Gazprombank net income totaled RUR 0,5 billion that 96,6% lower than in the first quarter previous year.

This index was RUR 14,8 billion then.

Such substantial net income reduction of the bank is explained by the negative influence of the financial crisis on the Russian stock market that resulted in the revaluation of Gazprombank securities portfolio. "The crisis phenomena on the world financial and stock markets resulted in the negative effect from securities' operations in size of RUR 0,4 billion the current year", explained in the bank press-service. Moreover, according to the bank representatives, the significant ruble strengthening against the US dollar (4% in 1Q) resulted in RUR 5,5 billion book loss from the foreign currency operations.

   Analysts assume that the negative result from securities operations was the fully predictable phenomenon in terms of the negative market situation.

For the first three months current year RTS and MICEX indices were 10,32% and 13,78% down respectively. Meantime, according to the beginning of the year data, around 26% of Gazprombank net assets fell to the securities, thus, the stocks totaled around 11% from the aggregate volume of net assets. As considers Troika Dialog analyst Olga Veselova, it is a very significant stake. And she also adds that on the average around 3% of stocks are in the structure of the bank sector.

"At such stocks stake the bank assets are high liquid, however they are a risky asset also, and that does not guarantee the stable return", Olga Veselova explains. However, according to 1Q results, Gazprombank has reduced the stake of securities and stocks volume in the portfolio to 20%. Thus, according to Gazprombank deputy director Alexandr Sobol, according to the quarter results the stake of bonds has grown due to the purchase of national bonds and totals two thirds securities portfolio.

   Not only Gazprombank suffered from the revaluation of securities portfolio in terms of financial crisis.

According to 2007 end reporting by RAS, 12% assets of VTB bank fell to the stocks. And in January the bank has sustained

the loss in terms of that.

And the loss has been later covered by

the traditional interest and commission returns.

In the experts' opinion, the other Russian financial organizations can also face the analogical problems.

By the 2007 end the stocks were the significant stake from the net assets of such banks as Petrocommerce Bank (9,5%), KIT Finance (9,2%), OrgresBank (6,6%). "Due to the revaluation of securities portfolio some of these banks can sustain losses under the "trade returns" act that can more or less affect their net income", considers Uralsib Financial Company analyst Leonid Slipchenko.

   The returns reduction of the Russian financial organizations looks insignificant on the background of the substantial losses of the foreign banks as analysts assume.

The foreign banks report about the new write-offs weekly caused by the financial crisis. "The traditional return from the bank activity exceeds the market risk from investments into the securities in Russia", Leonid Slipchenko sums up.

"The losses from the revaluation of securities portfolio were covered due to the profit growth from the interest results received from loan operations foremost", explains Mr. Sobol.

   Experts agree that the losses of the Russian banks are not critical, and the maximum they would face is the return reduction by the year end. "But banks already try to even the possible losses from securities operations, reducing the securities portfolios and reducing the possible risks", sums up Trust bank chief economist Yevgeny Nadorshin.

Updated April 11, 2008

   Bank of Russia (CB) is ready to facilitate small and middle banks to attract long resources by means of mortgage bonds issue. CB began to elaborate on the corresponding amendments

to its own regulations. In the experts' opinion, the amendments will act after mortgage bonds will be included in Bank of Russia Lombard list.

   Bank of Russia considers the opportunity to abrogate the requirement for banks to follow the risks criterion per one borrower in mortgage securitization transactions.

Within such transactions a bank gives a pool of mortgage loans to a qualified agent, and from his balance the mortgage bonds are issued afterwards.

To provide an agent

a mortgage papers' capacity to pay the transfer of loans pool is usually accompanied by granting

the subordinated credit an agent. According to the CB resolution #110-I "About bank statutory requirements", this loan extent is limited by the regulation now, and its value should not exceed 25% of private bank funds.

This limitation hinders small and middle banks to securitize the mortgage loans.

   The instruction to facilitate the Russian banks to access the long resources in terms of liquidity crisis and by means of mortgage bonds issue also, was given

by the Prime Minister Viktor Zubkov to Bank of Russia within the February meeting with the heads of the largest Russian banks.

This instruction is already implemented. "Lately the banks top-managers have several times met the Bank of Russia representatives to discuss amendments to CB regulation", said the European trust bank vice-president, deputy chairman of mortgage lending committee of the Russian Banks' Association Yevgeny Chepenko.

"There have been no particular objections of the regulator concerning this matter".

   Market participants consider that the offered amendments extend substantially the securitization opportunities of the small and middle banks. "The usual pool extent of securitized loans totals around $300-400 million", says the head of the Soyuz Bank structured products management Konstantin Cherkasov.

"The subordinated loan is usually given to an agent for 5-6% ($15-24 million). A bank should have the $60-100 million capital to allot such loan, and not everyone can boast of that". The criterion limitation can be omitted now, having agreed upon the loan allotting with other banks for a commission.

However, according to the market participants, such scheme increases the temporary and operating costs of banks.

   In the opinion of the first deputy chairman of the City Mortgage Bank board Ruslan Iseev, the amendments would be more useful for banks that are at the end of top hundred and at the beginning of the second hundred and for banks specializing in the mortgage lending. Such lending institutions accumulate large volumes of long loans, but the opportunities to attract

long funds are usually limited by securitization only. In Mr. Cherkasov opinion, the amendments would work, when Bank of Russia would include the mortgage bonds in the Lombard list.

"It makes demands for the mortgage papers, which would stimulate their issue", the expert sums up.

Updated April 4, 2008

   Supervisory board of Bank for Development and Foreign Economic Affairs (Vnesheconombank or VEB)

has approved the development strategy of the state corporation for 2008-2012 period. According to the document, by this period end the bank loan portfolio would increase four times – to RUR 850 billion "due to state investment projects participation in the financing". VEB would need its own regional chain

for their realization.

And the bank intends to create it already by 2010.

   VEB supervisory board headed by the Prime Minister Viktor Zubkov has considered one of the key documents for Bank for Development – "VEB Strategy for 2008-2012 period". It comprises the basic directions and financial activity parameters of "the state institution development", in which VEB has been reorganized at the beginning of July, 2007 after coming into effect of the corresponding law. As the government press-service reported, "the decision to approve the strategy presented by VEB and to complete particular mechanisms of its realization with the account of the stated comments has been taken at the meeting".

   According to the document, the bank strategic guidelines comprise the increase of the loan portfolio to RUR 850 billion by 2012 "due to state investment projects participation in financing", assets growth to 2% of GDP, provision of the capital profitability at the level not lower than 5% (the commercial banks' index is usually around 25%). Moreover, within 5 years VEB intends to increase the stake of projects financed on the principles of state-private partnership in its portfolio "to the level not lower than 30%".

   VEB would require its own regional chain to realize these scale tasks.

As it was indicated in the strategy, at the first stage – in 2008-2009 – it is planned to open the chain of the bank representative offices within the country. By this year-end VEB intends to open seven representative offices, including the Far East, North Caucasus, and Volga region.

The other priorities comprise "the transport-logistic and production points of the South of Russia", the cities of Siberia and Ural, and also "the new areas of growth on the basis of primary resources development" (European North, Sakhalin, Lower Angara region, Yakutia) and "exploitation areas around new infrastructural projects" (North Siberia, East BAM (Baikal-Amur Mainline), new mainlines). At the second stage – by 2010 – VEB branches would be established on the basis of the most effective representative offices.

It is expected that within the nearest three years 28 regional VEB offices would be established.

   We will mark that VEB has never had its own branch chain.

Last summer the Central Bank came forward with

the initiative to attract VEB to solve the problem of small regional banks capitalization through the participation in their capital. The bank supported it and declared that it would be therefore able to create the own infrastructure in regions.

However, the VEB approach to the activity in the regions has definitely changed. As the VEB deputy head Sergey Vasilev declared, this idea had been reflected in the strategy: "Capitalization of regional banks is not our task".

   The partner of Vegas-Lex law firm Albert Eganyan considers that VEB required the real presence in the regions.

" VEB, as well as other participants of the state-private partnership system, has general-country problem – there is only around 20 large projects left in the country.

These projects go both to the investment fund and to VEB.

And to reach them one has to go to the regions and establish representative offices there", he says.

Updated April 3, 2008

   The banking system will pass the first this year borderline of quarters through, maximum unfavorable from the viewpoint of tax payments, with the rather lower than expected increase of the money market rates and demand for the centralized refinancing.

   Despite the forecasts and the peak of repayments on the foreign loans and tax payments, which usually increase the demand for liquidity at the borderline of months and quarters, the specific tension at the money market was not observed within the first week of April. The requirement of the refinancing "lubrication" of the Central Bank is n-times less yet, than it has been forecasted a month ago. The demand for loans on repo operations is the main indicator of situation at the money market. This indicator has been observed only within three-four workdays and has dropped from the maximum RUR 120 billion at

the end of March up to insignificant figure at RUR 5 billion on April, 3. The International Bank rates also remain moderate, as it does not go about the expected 10% at all.

What are the reasons of such unexpected slack

?

   First and foremost, the windfall oil gains in March have overcompensated the effect of payments on external loans. Sure that the nominal growth of gold and currency reserves in March ($16,1 billion) looks about twice as much, than the real one, over

the exchange rate fluctuations. Nevertheless, the March contribution of the payments' balance to the liquidity inflow has become positive; and as CB does not buy the currency for the oil and gas funds of the Ministry of Finance yet, it can be estimated at RUR 180-190 billion.

   Second, the participation of the state corporations in the formation of the banking recourses has obviously increased.

We will remind that in November previous year the budget allocated RUR 550 billion to the capitalization of three established state corporations.

Earlier this year Bank for Development and Foreign Economic Affairs (Vnesheconombank) has stared to place the part of funds it received to increase the book value. Today RUR 115 billion is on the accounts of ten largest commercial banks.

The Russian Corporation of Nanotechnologies (RCNT) has also placed available funds in the amount of RUR 130 billion on the deposits of commercial banks. According to the statement of Kudrin, the housing maintenance and utilities fund would take the decision to place available RUR 240 billion temporarily. The part of them

would remain on the Bank of Russia deposits, and another part – in the state b onds which

would be purchased at the market, and this would provide with the additional liquidity inflow to the banking system.

   And finally, the Ministry of Finance could join the process of the bank funds increase with its almost "uncountable" balances of the accounts. Earlier, since 2004, all liquidity drops have been created in terms of only extremely obtuse technology

of budget implementation. It can finally become rather flexible now. We will remind that now all oil and gas profits of the budget (and these are huge sums; for example, RUR 371,2 billion in February) are allocated to provide the oil and gas transfer according to the current Fiscal Code.

This year the replenishment of the Reserve Fund, as well as the National Welfare Fund, continues later, when the whole budgeted transfer will be transferred. Up to this point unexpended budget funds can be considered temporarily surplus and the Ministry of Finance takes the opportunity to maneuver them.

   It is expected that the department would conduct the first auction to place the temporarily surplus funds on the deposits of commercial banks in mid-April. The volume of the temporarily placed surplus budgetary funds would be also determined by the mid-April.

As estimated by the Ministry of Finance, the potential of these surplus funds totals RUR 600 billion.

At the same time "the volumes of the specific sum can be determined significantly less also". The Bank of Russia takes the main decision here.

   Third, since August last year, when the terms of access to the external markets have been tightened, the constant strengthening of the banking multiplication, as well as "efficiency" of money generation by the banks, is observed.

As the result, despite the increase absence of the monetary basis from July to February, the growth rates of the deposit component of the money quantity did not almost drop, though the money quantity makes the main resource basis of the banks. As well as, despite the fact the Central Bank states the rates drop on deposits from the beginning of the year (without the Savings Bank).

   One of the reasons of the banking multiplication acceleration has maybe become the marked increase of the market segmentation and banks concentration at the credit activity. The market of the corporate crediting concentrates at the largest banks more and more (the stake of the top five grew up to 50%), and middle banks, from 21-200 group, are more active in the retail sector and have already managed to occupy 30% of this market.

   Fourth, the demand decelerations for loans, tightening of lending terms, and the rates growth to the final borrowers are marked. First of late the lending rates enter the positive area if we take into account the officially forecasted maximum inflation.

   Sharp loan reduction remains highly unlikely, while it is the only possible transmission channel yet that seized the financial world of "after-bubble" trust crisis and decline of tendency to the risk.

The substantial difference of Russia from many post-Soviet neighbors that are already aware of similar risks is the large positive current external balance and significant gold and currency reserves that provide with the much bigger space to use the external loans by the private sector.

Therefore, the most credible scenario for Russia is still the moderate tightening of lending terms, soft landing for the credit boom that is useful even from the viewpoint of "damping" of the inflation overheating.

Updated April 1, 2008

  The Savings Bank withdrew from the top three of

the companies that are the leaders of the Russian stock market by capitalization.

The mortgage crisis resulted in that the securities of

financial organizations became the most risky investments for investors and as the result the capitalization of the largest Russian bank went 21% down for a year.

   Before the secondary public offering (SPO) previous year the Savings Bank has occupied the fourth place by capitalization at the Russian market.

The largest country bank entered the top three of the companies that are the leaders of the Russian stock market by capitalization after SPO giving the first and second places to Gazprom and Rosneft. In June-July previous year and in January-February current year the Savings Bank capitalization exceeded even Rosneft

capitalization.

Thus, the Savings Bank was the second Russian company by capitalization after Gazprom.

On March, 25 the Savings Bank occupied the third place and outstripped Lukoil at $2,5 billion. However, the situation changed on March, 26.

Lukoil company outstripped the Savings Bank by capitalization, but at only $445 million. On the assumption of the RTS closing price on March, 26 the capitalization of Lukoil totaled $67,36 billion, the Savings Bank – $66,91 billion. On March, 31 this break has increased at 7%, up to $5,15 billion. Gazprom still keeps the first place (capitalization is $300 billion), and Rosneft – the second ($95,9 billion).

   The investors' concern decline with the securities of the financial sector is foremost related to the financial crisis growth in the USA, which affected all world markets.

The Savings Bank capitalization has begun to reduce since November previous year. On March, 31 the bank stocks cost by 17,43% lower than the cost within the last year's SPO. "The bank securities were sold all over the world, and the Savings Bank retained the specific level longer than the others", marks KIT Finance Investment Bank chief analyst Maria Kalvarskaya.

So, VTB Bank stocks' cost went down lower the IPO cost held in August previous year, and the Savings Bank – in January. On March, 31 VTB stocks' quotations cost 37% cheaper than during IPO.

   The statement of the Ministry of Finance head Alexey Kudrin about the possible tax burden reduction for oil companies became the additional driver for Lukoil quotations growth on the background of quotations drop of banks stocks. From 2009 the state plans to reduce the mining extraction tax (MET) that will reduce this tax collection from oil companies up to RUR 100 billion.

"The statement became the sign for the market, that it is just the first step.

And ahead there are another positive news about taxation changes which will affect the financial state of oil companies as well as their securities' quotations", supposes Alpha Bank analyst Konstantin Batunin.

After the statement of Alexey Kudrin many analysts began to raise forecasts for the costs dynamics of oil companies' securities. According to the forecast of Deutsche Bank analysts, Lukoil securities can attain $124,7 within the year (higher than the closing price as of March, 31 by 45,84%). The most optimistic forecast have Credit Suisse analysts – $135 (plus 57,89%).

   Meantime, the investors' attitude towards the bank securities will depend on the American companies. "The American banks still remain the important and predetermining factor for investors", Maria Kalvarskaya is sure. "If their new quarterly accounting does not bring negative news, then the investors' trust towards the stocks of the financial sector will regain". Atlanta PioGlobal analysts mark that both the Western and Russian market of stocks would receive the strongest motion only in the mid-April, when the largest American companies would publish their 1Q 2008 reporting.