Updated September 23, 2008

On September, 22, the senior negotiator with the World Trade Organization (WTO), the director for trade talks department of Russia’s Ministry of Economic Development and Trade (MEDT) Maxim Medvedkov and the head of the information bureau on Russia’s entry to the WTO Aleksey Portansky held the press conference devoted to the talks with the WTO. They have underlined that Russia has never lost contacts with the WTO, even after the August threats made by the US administration. Moreover, Mr. Medvedkov reported that his informal meetings with the members of the Working Group that were held in Geneva previous week on Russia’s entry to the WTO had a great success. According to Mr. Medvedkov, the official meeting of the WTO Working Group takes place early in November. The numerous consultations with the experts will be held before. Russia’s Agriculture Minister Aleksey Gordeev is expected to come to Geneva. Though Mr. Medvedkov refused to name the final date of Russia’s entry to the WTO, according to his analysis, this may happen at the beginning of the next year.

However, three barriers should be overcome. It goes about Russia’s trade regulations and about such barriers as the level of the state backing of agriculture, the size of export duties on lumber, the regulations of the state-owned trade enterprises (Gazprom or Aeroflot). Mr. Medvedkov didn’t expose the details of the reached agreements.

Aleksey Gordeev insists on $9 billion per annum as the national backing of the agriculture. The analogical amount is allocated already to the agricultural state program to 2011. The countries of the so-called Kern Group (it lists 20 countries, including Australia, Canada, New Zealand, and the range of Latin-American and Asian countries), where there is either no any subsidies to the agriculture or they are quite low, demand to cut Mr. Gordeev’s requirement to $4 billion (it is the sum that the federal budget allocated in 2003-2006). However, the compromise is being reached already. The Kern Group is ready to agree on Mr. Gordeev’s promise, firstly, not to increase the amount of the state backing, and, secondly, to allocate no more than $4 billion per year to produce Russia’s own products. The rest $5 billion will be directed to the development of the agriculture infrastructure alone.

As for the lumber duties, Mr. Medvedkov said that if Russia entered the WTO, it wouldn’t raise the export duties on it. According to some data, the range of large Finnish lumber companies is ready to invest about $1 billion in Karelia’s lumber mills next year. Thus, the duties didn’t frighten them away. Finally, Russia’s partners are not afraid of Gazprom or Aeroflot’s monopolistic position anymore.

As a result, the Working Group may finish the preparation of the report on the trade procedure in Russia by the year-end. If such fact is taken to account that the partners of Georgia, opposing insistently Russia’s entry to the WTO, have decided not to pay attention to its position, and Ukraine is not intended to start bilateral talks with Russia (otherwise, Moscow will impose restrictive duties on the Ukrainian goods), all talks, both bilateral and multilateral, may be finalized by the year-end. So, Russia’s official entry to the WTO can take place in March, 2009.

Updated September 22, 2008

   The large international institute has assessed the urgent measures undertaken by Russia’s authorities to back the country’s financial system. Standard & Poor’s Rating Agency has downgraded the forecast of Russia’s credit ratings because of "the escalating uncertainty concerning the economic policy" on the fight against the liquidity crisis.

   At the end of the previous week, the international rating agency, Standard & Poor’s (S&P), revised the forecast on Russia’s sovereign credit rating from "positive" to "stable". "The forecast revision is predetermined by the escalating uncertainty concerning the economic policy related to the fight against the liquidity crisis at Russia’s financial markets", S&P’s credit analyst Franklin Gill marked. The long-term credit ratings remained unchanged – under obligations in foreign currency, BBB+, under obligations in national currency, A-, as well as short-term sovereign credit ratings, A-2. Moreover, the credit rating under national scale was approved (ruAAA).

   "The timely decision of Russia’s government to allocate the budgetary facilities to the banking system can encourage the maintenance of trust to it, nevertheless, the situation may require significant capital inflow", the Agency’s experts explain the rating lowering. So, the Agency expects that within the nearest 12 months, "Russia’s budgetary and international reserves will be cut".

   In the present situation, the Agency emphasizes such negative factor as the significant growth of the capital outflow from Russia in September "that has resulted partly from the Russian authorities’ twin policy concerning the stockholders’ rights". "The closing of the foreign sources on the facilities attraction can finally influence on the real economy", in S&P commented the situation. "The reduction of the lending growth may lead to the reduction of the private sector’s revenues, and it is unclear, whether the companies will manage to settle their debt obligations. So, the budget deficit may take place already in 2009-2010".

   After S&P has revised the forecast on the country credit rating, it has downgraded also the forecast on the ratings of the Moscow city, the Bank for Development and Foreign Economic Affairs and the Russian Development Bank from "stable" to "positive" as well.

   Fitch Rating Agency doesn’t intend to revise the forecast on Russia’s sovereign rating that is stable at the moment. However, Fitch assesses some Russian borrowers somewhat in the other way. On Friday, September, 19, Fitch Ratings started to revise the rating of the construction company, PIK Group, towards the probable lowering. Before Fitch began to revise PIK Group’s assessments, its experts emphasized also the escalation of risks due to "the range of some negative shocks and growing pressure in Russia’s banking sector". The analysts of Moody’s Agency are more optimistic. "Despite the collapse of the local stock markets and the considerable capital outflow that took place within the last couple of weeks, the governmental currency assets are still very large and can face the serious cost of financial intervention", Moody’s senior analysts on Russia and the CIS Jonathan Shiffer marks in the Agency’s report.

   Russia’s experts consider that S&P’s decision is facile and "too peremptory". "The apocalyptic scenario of S&P’ analysts has to be applied to the American reality instead of the Russian one", the analyst of Renaissance Capital Nikolay Podguzov considers. "Russia’s financial system has better positions now to face the consequences of the world financial crisis". The key factor in the country rating is a state’s ability to settle its debts, and at the moment, there is the budget deficit in Russia and its debt to GDP totals less than 5%, Mr. Podguzov marks. In the opinion of Alfa Bank’s economist Natalia Orlova, S&P responded to the reduction of the state’s opportunities on the long-term investments. "The major state holdings turn into the deposits in the banking system", she says. "However, it doesn’t mean that Russia can’t fulfill the obligations on its external loans".

   However, some experts don’t eliminate the probability of the further assessments revision for Russia. "Today’s measures directed to the stabilization of Russia’s currency market will result in the reduction of the country’s gold and foreign currency reserves", the analyst of AntantaPioglobal Investment Company Maxim Osadchiy says. "In addition, the capital inflow to the stock market will aggravate this process". Earlier, the high level of gold and currency reserves mostly has been the key reason of high assessments of the international ratings agencies, and it means that their lowering may result in the revision of the country ratings.

Updated September 18, 2008

   The tariffs growth on the energy resources leads to the importance to invest in the technologies directed to the electricity savings, since the inaction is very expensive. Such are the conclusions of the report "The energy efficiency in Russia: the hidden reserve" presented on September, 17 by the World Bank and the International Financial Corporation (IFC).

   In the specialists’ opinion, the investments of the state and private organizations of about $320 billion are required to implement the energy saving technologies in the economy on the whole and in the households. The return of these investments, i.e. the saved facilities, will total nearly $80 billion for four years.

   "If you want to get the same energy volume by means of increasing, not saving, the production, you have to spend threefold", the head of IFC’s program for the investments stimulation in the energy saving Yana Gorbatenko considers. "The forecasted sum of the expenditures can be higher taking to account the current world prices".

   The core point of the report is quite clear. It goes not about the simple interpretation of the soviet "turn the light off, when you leave", it goes about the technological approach of using the electrical energy on the whole. If electrical bulb is replaced with the energy-saving spiral one, this will be displayed on the meter of any apartment. A consumer will use less electricity, and will pay less as well. Moreover, if large enterprises use such method of the energy saving (due to the certain, but not very expensive, technologies), they will save the enormous sum of money. For instance, if such technologies are used in Russia, the country can save 240 bcm of natural gas, 340 TWh of electrical energy, 89 million tons of coal and 43 million tons of crude oil and its equivalent as the refined products. The numbers are huge, if the forecasted drop of the natural gas extraction (35-100 bcm to 2010) and the expected fall of the electrogenerated capacities (nearly 20 000 MWh) are taken to account.

   What does impede Russia’s energy to achieve such promising prospects? "Firstly, it is the absence of the coordinated policy", Yana Gorbatenko marked. In her opinion, it is a major problem, and if the government solves it, it will prove that it follows the direction of the energy saving. Secondly, Russia’s population and business are not aware of the real benefits of the energy saving. The Russian companies prefer to construct new generating capacities instead of investing their facilities in the saving technologies. The majority of them don’t want to risk investing in the long-term projects. Moreover, the country takes little interest in energy saving because of the current monopoly on the energy supply.

   In the opinion of the director of the Center for Energy Efficiency Igor Bashmakov, it is possible to improve the situation quickly. For instance, the tariff making reform and liberalization of the electric energy and gas markets – these are high-cost, but effective measures of solving the issues of the quickest launch of the new energy-saving technologies. Moreover, the state has to provide such programs with the financial support, such as the banks and leasing companies’ funding, to grant the capital repairs of accommodations that meet the requirements of the energy saving, and to coordinate the plans on the energy supply.

   The World Bank’s director and the permanent representative in Russia Klaus Roland underlined that in order to achieve all this, "the clear understanding of the potential, as well as the Russian policy’ desire to put the required changes in life" is required.

   The World Bank and the International Financial Corporation’s report is already directed to all Russia’s relevant ministries and agencies.

Updated September 17, 2008

   It is the oil prices drop, rather than the collapse of the stock market and the lending problems, that has become the most severe consequence of the financial crisis for Russia’s budgetary system – on September, 16, the price for Urals crude fell to $85,3 per barrel. Vice Premier Aleksey Kudrin reported that if the oil prices continued falling, the budget parameters would be recalculated, since it had been calculated using the price of $78 per barrel, and at the price less than $70, the budget surplus would be replaced with the deficit.

   On September, 16, the financial crisis became the threat to Russia’s budget for the first time. One barrel of Urals crude was sold at $86-88 against $120-140 in June-July, and as of September, 17, Platts fixed the price in Novorossiysk at the level of $85,3 per barrel. It is already below the level used to calculate the budget for 2008 – $92 per barrel. The current price for Urals differs significantly from the average annual value the agencies have expected – after the forecasts had been revised several times, it was raised from $55 to $112 per barrel. If Urals price continues to fall, the average annual value may be below the forecast, and the extra income to the budget may be lower than it has been expected for the first time since 2004.

   When Russia’s Ministry of Finance calculates the budget, it uses two prices – the one forecasted by the Ministry of Economy and the lower one used to balance the incomes and expenditures when drafting the law about the federal budget. So, according to the explanatory note to the budget project of 2009-2011, the forecasted price is $95, the "legal one" – $78 for 2009. However, on September, 16, within the preliminary discussion of the budget project in the State Duma, Vice Premier Aleksey Kudrin announced other numbers. According to him, the deficit-free budget, both in 2008, and in 2009, will be only in that case, if one barrel of oil costs $70. "We are on the edge of the values, on which the parameters the budget are based", Mr. Kudrin stated. Thus, he marked that the current forecast for the next year at the level of $95 per barrel was "too optimistic", since, according to his forecast, the price might fall to $70 per barrel.

   The Finance Ministry’s head marked that in 2012-2014 Russia can move to the deficit budget in accordance with the budgetary strategy to 2023. This year may become the critical one from the viewpoint of the oil and gas profits’ volume – then, their stake in GDP will go down. Thus, this process will take place due to the stake cut of the oil and gas sector in GDP, rather than the oil price drop. According to him, even if the oil price grows by $30 annually, the tendency of the oil and gas profits’ drop will not recover. The stake of the oil and gas sector in GDP will fall from 11,2% in 2008 to 9,1% in 2009, and then from 7,7% in 2010 and to 6,9% in 2011.

   In the long-term prospect these tendencies will remain, in Russia’s Finance Ministry consider. As per the budgetary strategy to 2023, the budget’s revenues will continue to cut. In this document, the Ministry of Finance disputes with the Ministry of Economic Development and Trade, since the former considers that the long-term forecast of the oil prices of the latter is overestimated. According to this forecast, in 2012-2023, the average oil price is $75 as per the prices of 2012. On the background of the impossibility to cut the tax burden, the oil extraction falls along with the price drop. As Rosstat reported on September, 16, in January-August, 2008, the extraction volume of oil and gas condensate fell by 0,7% to 2007.

   The September drop of Urals’s actual price to the forecasted one below $75 per barrel will lead both to the revision of the Finance Ministry’s budgetary strategy, and to the revision of the current three-year budget being in the State Duma. Under such conditions, it will be impossible to discuss the increase of the budget’s defense expenditures within the meeting held by the State Duma on September, 19, since no additional unshared profits (the regular Ministry of Finance’s resource for such operations) are left. The revision of the outlay accounts of the budget project will require more significant price changes. However, it is not eliminated that Russia’s Finance Ministry will force the budget adoption for 2009-2011 in the current version. In this case, its revision in 2009 is inevitable, as well as the "manual" management of the budget by Prime Minister and Vice Premier on finances in spring, 2009.

Updated September 16, 2008

   The financial regulators try to ease the tension caused by the sharp shortage of facilities in Russia’s bank system. The Bank of Russia has provided the banks with RUR 326 million more within the auctions of the direct repo, and the Ministry of Finance has taken the decision to double the volume of the budgetary facilities’ inflow to the bank system. Thus, the rates of the interbank lending grew to 10-11% per annum. The initiatives undertaken by the authorities will not ease the tension, since not all organizations will have access to the budgetary facilities, and banks refuse to lend each other, the experts state.

   On September, 15, the Russian Finance Ministry declared that it would increase the maximum volume of the budget’s available facilities that could be placed on the deposits of the commercial banks from RUR 668 billion to RUR 1,23 billion. According to the Finance Minister Aleksey Kudrin, within the period following the launch of the mechanism of placing budgetary facilities on deposits, RUR 186 billion were really used, while the limit attains RUR 668 billion. On September, 16, within the deposit auction, the Ministry of Finance will offer the banks RUR 15 billion with the rate of 8% per annum, and on September, 17 – RUR 275 billion at 7,75% per annum. The facilities will be placed by October, 22 and 25 respectively.

   In the Ministry of Finance explain the increase of the limit by the intention to support the banks, whose situation is expected to aggravate in October due to the payment of taxes and the payments of the largest banks. According to the experts’ calculations, the banks will have to transfer RUR 500-600 billion to the budget. According to Aleksey Kudrin, the Ministry of Finance and the Bank of Russia monitor the situation at the financial market and contact with the largest Russian banks. According to him, Lehman Brothers’ bankruptcy, one of the largest US investment companies, will influence somewhat on the Russian market. "Our task is to support in time Russia’s system", the Minister declared. "All grounds of the current situation are external", Rory MacFarquhar from Goldman Sachs said, and explained that after Lehman Brothers announced that it had gone bankrupt, the key factor that predetermines the situation with liquidity was the capital outflow from the markets of Russia and other emerging countries due to the risks growth in the financial system.

   The increase of the maximum facilities’ volume placed on deposits should ease the tension at the interbank lending market, the analyst of Raiffeisen Bank Anton Pletenev considers. On September, 12, the rates of the interbank lending market (ILM) grew sharply from 7,5-8% to 9% per annum, and the volume of direct repo agreements with the Bank of Russia reached the record sum of RUR 340 billion. In the morning, on September, 15, the rates of the ILM grew to 9,5%, and during the day – to 10% per annum. "The rates of the secondary banks grew to 10-11% per annum, and we hadn’t seen such levels since autumn of the previous year, when the banks faced the liquidity deficiency for the first time", the senior dealer of MDM Bank David Kikvidze explains. On September, 15 the volume of repo agreements with the Central Bank totaled RUR 326 billion. The market participants specify that the huge volume of repo deals is predetermined partly by the necessity to pay the unified social tax (UST) the volume of which exceeds RUR 100 billion, the rest – by the sharp shortage of facilities.

   However, the tension at the financial market will continue, because only a small range of banks will get the budgetary facilities, the experts suppose. Several sources at the market said that early in September, the primary banks started to close limits for other participants of the ILM. "We have already used to when large banks start to isolate from the external world in the situation of the liquidity crisis", the dealer of the large Russian bank explained. "The banks have already started to cut limits for other financial organizations presented at the global money market", the head of ING Wholesale Banking’s department for conversion operations Aleksey Borichev says. "Don’t be surprised, if this starts in Russia as well". If the banks start to cut limits, the chain reaction will grip the market and the situation at the ILM will become quite tense, the analyst of Zenit Bank Alexander Ermak says, and adds that the ILM is the key source of funding for the majority of the small banks, therefore their activity can be suspended.

   The rates and the demand for money resources should reach the peak on September, 26 and 29-30. By this time, the repo operations, taking to account the liquidity reserves in the bank system (historical minimums of nearly RUR 400 billion), will exceed quite obviously RUR 500 billion. It is better to mark that the Bank of Russia’s operations, as compared to the overall assets of the Russian Federation’s bank system, already have larger scales than the operations of the US Federal Reserve System and the European Central Bank. If the Central Bank’s confidence in the possibility to regulate the currency exchange rate is predetermined by the international reserves of $580-590 billion, the Central Bank’s short-term inflows at the money market on September, 15 totaled nearly 2,2% of the money supply (M2 aggregate, RUR 14,2 trillion), and by September-end they can reach 5% from its amount. Obviously, it is impossible to treat them as macroeconomic unimportant, since if the financial crisis intensifies at the world markets, in September-October, the Central Bank will have to correct the monetary policy, and the government – to coordinate with it at least the short-term financial strategy.

Updated September 16, 2008

   The Russian Ministry of Finance announced the deadline of submitting the applications for the exchange of the former USSR’s debt for the Eurobonds of Russia. It goes about the latest tranche of the Soviet Union’s commercial debt of nearly $600 million. The reconciliation of the debt of the commodities’ delivery to the soviet foreign trade organizations at the end of the 80th- the beginning of the 90th of the last century is being finished as well. Russia has to pay off about $1,5 billion more of the soviet debt to the Paris Club and $40 billion of its own debts as well.

   On September, 15, the Russian Finance Ministry announced the statement made by the government of the Russian Federation about the completion of submitting applications for the exchange of the former USSR’s commercial debt. According to the document, the term expires on October, 15, 2008 at 18.00 Moscow time, and the Ministry of Finance will not take the applications anymore. The potential volume of applications for the commercial debt is estimated at about $600 million, in the Ministry reported.

   In the Ministry of Finance explain the completion of submitting applications by the "quite long period within which their owners had the opportunity to set requirements concerning the conduction of the reconciliation". The major part of the debt that was formed at the end of the 80th- beginning of the 90th of the last century due to the commodity deliveries to the soviet state companies, was exchanged for the Russian bonds via two tranches – in 2002 and 2006. In 2002, the applications of the lenders for the sum of $1,28 billion were exchanged. The exchange of the second tranche took place at the end of 2006 to the total sum of $1,075 billion. The commercial debt was exchanged for the Russian Eurobonds with the maximum terms of repayment in 2010 and 2030. The securities with the analogical terms of repayment will be used this time as well.

   However, within the exchange, the amount of claims can be lower, than the Ministry of Finance expects. In the Ministry mark that the key trouble during the reconciliation of the debt was the activity termination of the former USSR’s commodity vendors or the debt relief by the trade partners in the middle of the 90th. However, if anyone doesn’t manage to submit the application to October, 15, he may use the loophole. They can demand that the Russian importers and Vnesheconombank (the Bank for Development and Foreign Economic Affairs) pay the debts in those cases, when the bank has taken part in the delivery contracts of the commodities to the USSR.

   The external debt reduction is one of the tasks set by Vladimir Putin to the government in 2000. Within eight years, the size of the external debt was cut from $155 billion to $41 billion. The $1,5 billion debt to the Paris Club is left. Other debts belong to the already independent Russia. The largest unpaid debt (nearly $4,7 billion) is to the World Bank.

   The repayment of the external debt would hardly influence on the loan ratings of Russia, since the volume of the Eurobond issue, for which the Russian Federation’s commercial debt will be exchanged, plays insignificant role in the overall debt of Russia to the owners of the Eurobonds. However, Russia has already exhausted the resource of raising the borrowings rating via the reduction of the external debt in 2006. Thus, the Russian Union of Industrialists and Entrepreneurs (RUIE), in the answer to the budgetary strategy of the Russian Finance Ministry, has criticized the declaration of refusal from the external state borrowings for the first time. In the Union’s opinion, one should focus on the cost of the loan resources, instead of the source of the financing.

Updated September 11, 2008

   Russia suggests the Organization of Petroleum Exporting Countries (OPEC) to join forces targeted at the stabilization of prices at the world oil market. So, on Tuesday, September, 9, Russia’s Vice Premier Igor Sechin passed the project of OPEC-Russia memorandum to the Organization’s management within the 149th meeting held in Vienna. Russia’s Vice Premier sees definite prospects in the cooperation with OPEC on the fight against the international manipulation of oil prices, and the West is suggested to discuss the issue of energy security and assets’ exchange in the energy sector.

   Russia would intensify the cooperation with OPEC within the framework of the prices’ stabilization at the oil market, as Vice Premier Igor Sechin declared in Vienna. He headed Russia’s delegation with OPEC observer status during the regular meeting of the Organization that ended on September, 10. Russia’ Energy Minister Sergey Shmatko, the heads of Rosneft and Surgutneftegaz Sergey Bogdanchikov and Vladimir Bogdanov, the head of Transnefteprodukt Sergey Maslov, the representatives of Russia’s government, the ministries and Gazprom have come to Vienna as well. On Tuesday, September, 9 the Conference decided to renew the September decisions on cutting the oil supplies at the external market by 0,52 million barrels a day, to 28,8 million barrels (taking into account the suspension of Indonesia’s membership in OPEC) that had resulted already in the growth of oil price by 1,5%.

   According to Igor Sechin, Russia’s delegation came to Vienna at the request of OPEC’s management and by the instruction of Russia’s PM Vladimir Putin. However, Mr. Sechin explained that OPEC and Russia’s interest were mutual. "We shouldn’t pretend that we don’t take part in the pricing in the world oil market, and we are a full member of this process. We have paid already for the entrance ticket to the oil market". Russia’ Vice Premier introduced the project of new OPEC-Russia memorandum to OPEC’s management. The project covers the offer on the creation of mechanisms for OPEC and Russia’s regular dialogues (Mr. Shmatko is nominated as a coordinator of Russia’s party), analytical information exchange on the oil market and joint projects to increase its transparency.

   The official in Russia’s delegation explained that the issues of provision with the operational oil supplies and mid-term reserves of the deliveries increase to the oil market were discussed mainly within the Conference. "The members of the meeting were taking much interest in the reserves of deliveries and in the possible influence of deliveries on the pricing, as well as in the opportunities of the certain players to resist the destabilization of the situation at the oil market for political purposes", he said. It is better to remind that in autumn, 2007, when one barrel of oil of OPEC’s basket crossed the $80 mark, the Organization declared about the major reduction of the influence on the pricing mechanism, and the analysts stated the same. Nevertheless, on September, 10, after OPEC had announced the decision to cut the extraction, the oil prices responded for the first time and went up. Despite Indonesia’s exclusion from OPEC from 2009, the Organization’s stake at the world oil exporting market is kept at the level of about 42% due to the entry of Angola and Ecuador in 2008.

   When Igor Sechin commented the Vienna meeting results, he restated saying that "the thorough analysis of possible manipulation of oil prices for speculative purposes" is required. He considers that the mechanism of hedging investors’ risks via the oil delivery futures "has been developed baselessly", and he speaks about the necessity "to cut the role of unfair mediators" and marks the influence of the tax policy distinctions of the counties-consumers of oil on the stability of prices. According to the data of the source, within the talks with OPEC-countries, Russia’ representatives offered to come back to the conception of the "world energy security" the country had introduced within G8 Summit held in St. Petersburg in June, 2006. This conception emphasizes the long-term direct contracts signed by the key market players, the share of the sellers’ risks between the consumers of the energy market, the mutual entry to the markets and the assets’ exchange in the fuel and energy sector, the price guarantees of recovery of expenses made by the oil producers and consumers via the mechanism of "fair prices". However, G8-countries didn’t take interest in the conception.

   Speaking about "Russia’s contribution to the stabilization" of the world oil prices, Mr. Sechin declared about the necessity to tackle the range of problems at the internal market. Among such problems, he named the issue of the monopolization of the oil services market for the first time. However, he refused to comment the possible activity of Russia’s Federal Antimonopoly Service (FAS) here and the claims to the leaders of this market in Russia, including the Russian divisions of Halliburton. The FAS’s representatives declared that the analysis of the situation at the oil services market was made within the framework of the approval of Integra Group’s deals early in this year, and the Service didn’t find any violations of the antimonopoly law.

   In addition, Mr. Sechin explained that Russia’s key activities in this area would be "the support of the market environment", the stimulation of the extraction and export growth, the differentiation of the custom and tax regulation of the export. OPEC will respond to Russia’s initiatives in October, when its management comes to Moscow.

Updated September 8, 2008

   Russia’ government funds 15 large economic projects for RUR 82 billion. The majority of these projects will be implemented in the Urals. The regional development minister Dmitry Kozak declared about these plans within the economic forum held in Yakutsk. This city became a temporary Russia’s financial centre.

   The first Economic Forum of such high level was held in Yakutsk because the Republic of Sakha is today’s leader by the forecasted investments’ volume, since about $63 billion will be directed to the implementation of the largest economic projects. As a result, the region will get new roads, power stations, mining and processing enterprises and plants. The Russian business’ representatives take much interest in working here.

   In its turn, the government is ready to boost the mega-projects as transparent as possible. Some amendments to the work of Russia’s investment fund will be introduced to achieve this aim, as the regional development minister Dmitry Kozak declared.

   "Among the key changes can be named such as the disbureaucratization and simplification of the procedures, the rise of the government’s responsibility for the decisions taken, the development of the key financial restrictions that are not set yet for the decision-making on the governmental support of one or another investment projects", as Mr. Kozak declared.

The Territory is rich not only in diamonds and in gold. Some large companies are ready to develop new mineral deposits here.

   "When our iron-ore project is launched, its price will attain about $10 billion, and it will provide about 30 000 people with jobs. However, it will be realized in the short-term prospect, when the enterprise and four deposits will be launched", as the president of Alrosa Ltd. Sergey Vybornov said.

   So, it goes about one project, and more than a dozen are presented within the Forum: the Forum’s booth presented models of different enterprises, bridges and railways. However, the already operating projects were here as well, such as the actively constructed East Siberia-Pacific Ocean Oil Pipeline. The capital of Yakutia will have soon the railway connection. The construction of the first works for uranium ores’ processing was started. The Republic’s uranium supplies are one of the largest worldwide. These large projects will encourage the achievement of Russia’s national strategic aims. It is almost impossible to construct independently the transport and energy infrastructure, therefore, the close cooperation of the government and business is required.

   The key issue of the projects presented at the Forum is the state-private partnership. It means that the state undertakes obligations, concerning each project, on the development and design of the infrastructure objects, and the business is engaged in the construction of plants, works and other enterprises. In the analysts’ opinion, such procedure is the most favorable today, and as a result, both parties get the dividends.

   The foreign partners have taken much interest in the Economic Forum despite the fact that it is the first forum of such level held in Yakutia. The businessmen from Germany, Japan, China, Canada and other countries declare that today Russia is one of the most attractive markets. For instance, the Canadians already have large capital investments in the Far East – they are engaged in the production of non-ferrous metals.

   "From the fundamental viewpoint, Russia’s economy is very strong and it has huge prospects. So, we will continue investing facilities in this country", as the representative of the Canadian consulting company John Kempl stated.

   "Lately, we see that the opportunities of the cooperation are expanding, because we don’t have any problems with the Russian Federation, and we understand the overall situation", as the representative of the United Arab Emirates Omar Gobage said.

   The project of the South Yakutia’s development became the largest project at the Forum. If this project is implemented, the wide number of hydroelectric power plans, several mining and processing enterprises and coal mines will be constructed – the huge new industrial region for more than RUR 425 billion.

   This project and the range of other will be realized by 2020, and the works are started already. At the end of the Forum, its participants signed a range of agreements, and undertook some obligations

Updated September 8, 2008

   Within the last two months, the price of oil went by 27,3% down. Thus, one more problem joined the core troubles of Russia’s investors after the war conflict in Georgia – the severe depreciation of the key Russian treasure. If this process doesn’t stop, Russia’s stock market will continue falling.

Stake on the dollar

On July, 11, the world oil prices reached their historical maximum. On that day, the closing price at the New York Mercantile Exchange (NYMEX) was $143,33 per one barrel of Brent crude, and the highest price of the deal during the trading session reached $145,11 per barrel of Brent. Russia’s Urals crude didn’t fall behind: on July, 11 the closing price was $139,88 per barrel, and within the trades the price was reaching $141,66 per barrel.

After that day, the prices for oil started falling at the world markets: $130, $120, $115 per barrel… The market resembles an airplane that fell suddenly into the spin and loses rapidly the altitude. On September, 3 the barrel of Brent crude cost $104,27, and Urals – $102,42, thus the lowest price within the trading session totaled $101,93.

Thus, the quotations of oil fell by 27,3% for almost two months. Moreover, the important level – $100 per barrel – is under the threat from the psychological viewpoint. The world oil prices can again become two-digit in the nearest future.

At the same time, the US dollar was strengthening, though not so rapidly. The peak of its fall to the euro has coincided almost with the peak of oil prices. As for the euro, its highest price was fixed on July, 11 at the level of 1,5940 $/€ according to the trades’ results. As for the separate deals, their record was fixed on July, 15, when the dollar rate fell below 1,6 $/€ – on that day, the euro cost $1,6038 within the trades. At this time, oil started to correct from the peak values: on July, 15 the barrel of Brent crude cost $136,65, that was 4,7% lower the maximum.

The dollar strengthening that was quite stable at the beginning started in mid-July. By August, 1 the euro/dollar pair was traded at the level of 1,5564 $/€, that was 2,4% lower the maximum. Besides, by August, 1 Brent crude fell to $125,16, or by 12,7% from the maximum.

Then, the dollar strengthening accelerated, and within August it grew by 7,02% to the euro, and on September, 3 the euro cost $1,4472 already. Thus, within the examined period, the overall dollar strengthening was 9,21%.

Stake on slowdown

It is better to remind that oil and other primary products were acting as a safety asset for a long time. Almost the whole year – from mid-2007 to July, 2008 – the players were escaping from the loan crisis into oil and other commodity futures. However, they had nowhere to go, since the quotations of stocks were falling rapidly at the western markets, and the profitability of bonds (the US national Treasures foremost) approached the inflation, and was even lower, after the Federal Reserve System (FRS) cute the rates.

However, in spring of 2008, the new tendencies at the US stock markets appeared. The overall exchange indices were falling still because of the crisis financial sector. However, some securities, of the high-technology sector foremost, demonstrated the growth. Moreover, some bonds were demonstrating the tendency towards the quotations growth. Thus, the instruments for bull operations appeared at least in the short-term prospect. 

At the same time, the market players, including the most active hedge funds, had the strong opinion about the "overbought" speculatively oil market. The analysts’ calculations were quite different: some of them estimated the speculative component of the price at 20%, and some of them – at 40%. Still, all of them agreed that the equilibrium oil price – taking to account the balance of supply and demand – is not $145 per barrel, but much lower.

The fears for the deceleration of growth rates of the overall world economy and of the post-Olympic China in particular aggravated the pessimistic situation. The market participants were dissatisfied with the increase of quotas set by OPEC countries in mid-July, as well as with the CFTC’s measures (Commodity Futures Trading Commission at the US markets) directed to the limitation of speculations with the oil futures.

As a result, the majority of the market participants started fixing the income, i.e. to sell commodity contracts, after the July maximums. Since the equity market hasn’t inspired any hopes, the American Treasures or other dollar-nominated assets are bought now because, at the moment, they are more attractive due to the better macroeconomic statistics as compared to Europe. This process resulted in the demand for the US dollar, and that strengthened its positions to the euro and to the other world currencies. However, this led to the slump of oil prices, since it is easy and more pleasant to buy assets at the growing price. Later, the processes of oil prices drop and the dollar strengthening resonated intensifying each other.

However, the dispute – whether oil prices follow the euro/dollar pair or, vice versa, the currency pair follows the oil prices, reminds the dispute – which came first: the chicken or the egg. Although it is better to mark that in this case, oil was the first to start the correction.

Stake on cartel

The present situation influences negatively on Russia’s stock market. From July, 11 to September, 3, Russia’s RTS index went by 26,7% down, and that almost coincides with the amount of the fall of the world prices for oil (27,3%). Within the same period, the RTS oil and gas index lost 26,6%, and that almost coincides with two previous indices.

The fall of the Russian indices is somewhat lower than the drop of the world prices. Russia’s market tries to resist, even despite such negative factors, as the war conflict and the outflow of the foreign investors. Obviously, it is related to the fact that the US dollar strengthening (and the import appreciation) is somewhat a positive aspect for the Russian economy. However, the negative effect of the oil prices drop prevails.

Only a powerful player that can change the present tendencies at the oil market can save Russia’s stocks from the fall. OPEC can become such player: at least, almost all analysts surveyed believe in its efforts. The meeting of the leaders of the oil cartel’s countries-members takes place in Vienna on September, 9. The top issue on the agenda is "the limitation of oil prices drop at the world markets". The past experience shows that OPEC countries can renounce their private interest in favor of common ones, i.e. to cut quotas when the price falls.

In addition, such factors of oil prices support, as the forecasts of the mid-term surplus of this type of the natural resources, should be taken to account. For instance, in August, when the prices were falling severely, the International Energy Agency (IEA) announced the forecast on oil surplus of about 12,5 billion of barrels per day to 2015, and it is 14,5% from the present extraction level (86,5 billion of barrels per day).

In the short-term prospect, Russia’s private investors have to hope that on September, 9 OPEC cuts the quotas and restrains the prices. Moreover, the heating season coming to the Northern hemisphere will help the prices to recover. So, if the market participants face the two-digit oil price in the nearest future, it will not exist long.

Updated September 4, 2008

   The Russian experts are looking for the positive aspects of Russia’s little chances to enter the WTO (World Trade Organization) in the nearest future taking to account the military conflict in Georgia.

   The director of the Information bureau on Russia’s entry to the WTO Aleksey Portansky is convinced that the withdrawal from the range of treatises with the partners on the world trade club, about which has declared earlier the first vice prime minister Igor Shuvalov, will not result in the revision of the agreements. "It goes about ten collateral agreements that probably will infringe the interest of our business", as Mr. Portansky explained.

   The director of the Institute of Economic Forecasting, Russian Academy of Sciences Victor Ivanter agreed, and declared that "nothing extraordinary will happen in the Russian economy, if Russia enters the WTO, but there is no any harm from non-joining this organization". He underlined also that the rules of the World Trade Organization regulate mainly the export of commodities, and Russia provides the world markets with raw materials and high technology products of defense complex foremost. "Both have nothing to do with the WTO", Mr. Ivanter marked.

   The chairman of the Russian State Duma’s committee on economic policy, business and ownership, the member of the United Russia party Evgeny Fedorov reminded that the agreement on the entry to the WTO was signed with the United States in 2006, thus, the legislation of Russia as a country-applicant was analyzed then. "The analysis is finished, and the i’s are dotted, moreover, some laws have been approved for this analysis exactly, for instance, the fourth section of the Civil code", Evgeny Fedorov declared. "Our partners say that Russia’s legislation doesn’t require any changes, but it doesn’t permit Russia to develop further".

   The parliamentarian supposes that the suspension of Russia’s entry to the WTO is the perfect reason to pause and to "revise the core agreements with our trading partners" relating to the planned diversification of the Russian economy by 2020. "We have to improve, first of all, the innovations market, since this part of the economy is undeveloped at all", Mr. Fedorov considers. "When Rusnanotech was established, it was agreed that the state corporation would be under the foreign jurisdiction, because the Russian jurisdiction doesn’t permit using innovations, since it doesn’t regard this as its market asset. Russia’s economy has primary structure".

   At the moment, Evgeny Fedorov offers to concentrate all efforts on bilateral trading agreements with other countries. "When Russia signs a sufficient amount of such agreements, the WTO will invite it to its community", as the head of the State Duma’s committee said.

   Still, Russia shouldn’t expect that it will be asked to enter the WTO, as the vice president of the Chamber of Commerce and Industry George Petrov declared. However, Victor Ivanter is convinced that the European Union will definitely do this.

   However, all arguments were closed, when the experts started discussing the export and import of specific commodities. Mr. Fedorov, in particular, insisted that "birch and aspen can be processed in Russia", and Mr. Petrov claimed that only Scandinavian countries can turn this kind of wood into the cellulose. The experts discussed the issue of sugar cane that can’t be delivered to Russia directly, but Ukraine’s entry to the WTO and the presence of the Third Countries at the Ukrainian market is a loophole for the reexport of this commodity to Russia.

   The experts have discussed also the issue of chicken meat. From September, 1 Rospotrebnadzor (Federal Supervision Service for Customer Rights Protection and Human Welfare) restricted the import of chicken of 19 American enterprises that resulted in the concerns of both the US government and the presidential candidates.

However, according to the speeches of the analysts, the core reason of the suspension of Russia’s entry to the WTO is the policy. "Still, we have some time to revise Russia’s economy", as Evgeny Fedorov declared.