Russian economic developments_eng_6_2014

RUSSIAN ECONOMIC DEVELOPMENTS
No.6 2014
POLITICO ECONOMIC RESULTS IN MAY 2014(S.Zhavoronkov) 2
INFLATION AND MONETARY POLICY IN APRIL 2014(A.Bozhechkova) 5
FINANCIAL MARKETS IN MAY 2014(N.Andrievsky. E.Khudko) 9
THE REAL SECTOR OF THE ECONOMY IN APRIL 2014: FACTORS & TRENDS (O.Izryadnova) 13
THE RUSSIAN INDUSTRY IN APRIL 2014(S.Tshukhlo) 17
DEVELOPMENT TRENDS IN RUSSIA’S OIL & GAS SECTOR (Y.Bobylev) 19
THE FOREIGN TRADE IN MARCH 2014(N.Volovik) 24
THE STATE BUDGET IN JANUARY APRIL 2014(T.Tischenko) 27
THE RUSSIAN BANKING SECTOR IN APRIL 2014(M.Khromov) 31
THE MORTGAGE IN THE RUSSIAN FEDERATION IN Q12014(G.Zadonsky) 35
THE LIVING STANDARDS OF THE POPULATION OF THE RF IN JANUARY APRIL 2014(S.Misikhina) 38
DEVELOPMENT OF A PERFORMANCE ASSESSMENT SYSTEM FOR SCIENTIFIC RESEARCH ORGANISA
TIONS, AS A PART OF THE ONGOING RAPID REFORM (I.Dezhina)
41
ADMINISTERING OR GOVERNING: THAT IS THE QUESTION (I.Starodubrovskaya, K.Kazenin) 44
THE REVIEW OF ECONOMIC LEGISLATION IN APRIL 2014(I.Tolmacheva, Y.Grunina) 47
AN OVERVIEW OF NORMATIVE DOCUMENTS ON TAXATION ISSUES FOR APRIL MAY 2014(L.Anisimova) 49
© GAIDAR INSTITUTE FOR ECONOMIC POLICY
3 – 5, Gazetny pereulok, Moscow, 125 993, Russian Federa on
Phone (495)629 – 67 – 36, fax (495)697 – 88 – 16, Email: lopa na@iep.ru
www.iep.ru

RUSSIAN ECONOMIC DEVELOPMENTS No. 6, 2014
2
POLITICO ECONOMIC RESULTS IN MAY 2014
S.Zhavoronkov
According to the data available on Ukraine, a mili-
tary parity was established in May 2014 between
Ukrainian military forces loyal to the Kiev government
and federaliza on supporters who control most of
the territory in Donetsk and Lugansk regions. None
of them can progress substan ally despite regular
clashes using heavy weapons. Russia le without
response the federaliza on supporters’ appeals for
sending Russian troops to Donetsk and Lugansk re-
gions, however, the federaliza on supporters them-
selves admit that the bulk of their armed groups
consists of volunteers from Russia, in par cular from
Chechnya and Osse a. At the same me, President
Pu n stated on May 7 that the upcoming May 25
presiden al elec on in Ukraine is “a step in the right
direc on” and he is “ready to work” with those who
will take office in the Ukrainian government a er the
elec on. Entrepreneur P. Poroshenko was elected
Ukraine’s President in the first round (53% of votes).
His Russian assets, a confec onery works in Lipetsk,
have been frozen for several months, and Russia’s
ban on supplies to Russia of products manufactured
in his Ukrainian plants has been in force for almost
a year. Kremlin hasn’t yet sent an official message
of congratula ons to recently elected President
Poroshenko, but there is an indirect evidence of
Russia’s readiness to deal with him, i.e. there was
a message of congratula ons from Patriarch Kirill,
Head of the Russian Orthodox Church, plus Russian
TV channels have stopped covering the topic of “le-
gi mate” President Yanukovich”. The United States,
Canada, European Union, Australia, and other coun-
tries which previously imposed sanc ons against
Russia, have actually given up new sanc ons, saying
Tensions in the eastern Ukraine were eased a bit in May 2014, although the causes of the conflict s ll remain
to be resolved. There is a fragile balance today between the Ukrainian military forces and the armed groups of
supporters of federalism in Donetsk and Lugansk regions. In the circumstances, Russian leaders made a few con-
ciliatory statements, making it clear that Russia is ready for a dialogue with Ukrainian President P. Poroshenko
elected on May 25, 2014. Beside the military issues, there is a serious Russia-Ukraine conflict over payments for
Russia’s natural gas supplies to Ukraine. Russia entered into a contract with China on large supplies of natural
gas in the long-run perspec ve. The profitability of the contract remains ques onable due to the need to build
from scratch a new pipeline, however, Russia seems to be seriously interested in China’s poten al to finance, even
now, the Russian economy. The an cipated Treaty on the Establishment of the Eurasian Economic Community
covering Russia, Kazakhstan and Belarus was signed, without causing any sensa ons. Russia made minor conces-
sions but gained its principal point on the impropriety of nulling export du es on hydrocarbons in trade rela ons
between the countries.
that they can be imposed in case of Russian military
incursion into the eastern Ukraine.
The exis ng balance is very delicate. It is absolutely
unclear what Russia would do if the self-proclaimed
Donetsk and Lugansk People’s Republics find them-
selves to be on the brick of a military defeat and liqui-
da on. Truly, as long as they control their territories,
they cons tute a more acceptable legal form than di-
rect annexa on of these territories by Russian military
forces. Apart from the s ll exis ng threat of new sanc-
ons against Russia, the country is facing new mul -
direc onal threats – from ques onable usefulness of
ac ons such as military coup (if a coup is possible in
Donetsk, why it may not be possible in Moscow?) to
damages to Russia’s image in case of liquida on of the
self-proclaimed republics – their supporters would ac-
cuse Russia of betrayal, and it would be difficult to de-
feat such accusa ons given the tone of news reports
in Russian official mass media. Furthermore, there is a
very serious gas conflict between Russia and Ukraine.
As a reminder, Ukraine is not only a consumer of Rus-
sian natural gas (about 25 billion cubic meters at 2013
year-end), but it is also the largest transit country of
Russian gas, therefore without using the Ukrainian ca-
paci es Russia will not be able to meet its obliga ons
on gas supplies to Europe. Under the Russia-Ukraine
gas contract signed as early as 2009, whose terms are
very unfavorable for the Ukrainian party, the price
of gas is much higher than $400 per 1000 cubic me-
ters1
but reduced to a 30% (but not more than $100
per 1000 cubic meters) as discount for the deploy-
ment of Russia’s Black Sea Fleet in the Crimea under
1 The exact price was calculated on a quarterly basis and was,
for example, about $400 USD in 2013.

POLITICO-ECONOMIC RESULTS IN MAY 2014
3
the agreement of 2010. The Russian leaders believe
that the discount has ceased to be in force due to the
Crimea’s accession to the Russian Federa on, whereas
the Ukrainian leaders consider the Crimea as Ukrai-
nian territory occupied by Russia, and the discount is
therefore s ll in force. The par es also disagree con-
siderably on proposals of how to address the situa on:
Russia suggests that Ukraine should redeem at least a
part of its outstanding debt owed to Russia, and Rus-
sia is ready to discuss further discounts only a er the
payment is made, whereas Ukraine is not ready to re-
deem its debt un l a new gas supply contract is signed
to se le all the disputed issues, Ukraine can pay with
the resources received recently as financial aid from
the IMF, the World Bank, the United States, and the
European Union. The European authori es, on their
part, suggest that Russia and Ukraine should switch to
direct payment for contracted volumes of gas, so that
they can resolve the Russian-Ukrainian dispute. Rus-
sia has given no answer yet, threatening to reduce gas
supplies to Ukraine if no payment is affected soon.
Therefore, the poli cal component of the conflict
has been supplemented with a very significant eco-
nomic component, and very poor condi ons of the
Ukrainian armed forces revealed during the clashes
with the federaliza on supporters s ll may en ce
Russia to resolve all the problems at once, i.e. by a
military incursion. However, the likelihood of tough-
er sanc ons (Russian GDP accounts for mere 3% of
the global GDP versus 60% of the countries imposing
sanc ons), on the one hand, and material financial
losses that Russia might sustain in case of assum-
ing responsibility to finance the heavily populated
eastern Ukraine (about 7 million in Donetsk and Lu-
gansk regions alone, compared to 2 million or less in
the Crimea) and the guerrilla warfare, on the other
hand, is what prevents hotheads from doing it. A
reasonable op on of compromise could become a
comprehensive agreement on supplies of not only
natural gas but also water, electric power and other
commodi es, as well as railway transporta on to the
Crimea, according to the se lement prices which
existed prior to the Ukrainian crisis, while poli cally
Ukraine should commit itself to extend the rights of
local self-government in Ukraine and provide cons -
tu onal guarantees of the Russian language status in
the regions where a considerable part of the popu-
la on speak Russian. As a ma er of fact, the selec-
on of terminology isn’t so important here. However,
this implies inevitable liquida on of the armed fed-
eraliza on supporters for whom this scenario is un-
acceptable. It appears that Russia, not ruling out a
compromise in the economic area, wants to fix the
status quo in Ukraine’s east regions, i.e. support the
supporters of federaliza on so that they can survive,
while the form of support would be unofficial.
The Treaty on the Establishment of the Eurasian
Economic Community covering Russia, Belarus and
Kazakhstan was signed on May 29, 2014. Prepara-
on of the Treaty faced difficul es, because Belarus
demanded substan al preferences for itself, in par-
cular the introduc on of a free trade regime for hy-
drocarbons, which would mean heavy losses for the
Russian federal budget from abolished export du es,
while Kazakhstan was against Russia’s plans to speed
up the accession of Armenia and Kyrgyzstan, especially
the la er, to the Community, which would mean li ing
barriers to labor force movement in this poor country.
Eventually, the status quo was actually fixed: the issue
of Armenia and Kyrgyzstan accession were set aside,
Belarus increased 20% its quota on duty-free crude oil
supplies and received a new loan from Russia, while
the issue of abolishing the exclusion of hydrocarbons
from free trade was set aside too.
President Pu n paid a visit to China on May 20–
21, 2014. A few agreements were signed during the
visit, in par cular a gas supply contract (the respec-
ve protocol of intent was signed as early as 2006,
but the par es thereto failed to agree on the price)
which has been stalled for almost 10 years. The con-
tract covers annual supplies, in the long run, of 38 bil-
lion cubic meters of gas at a price near $350 USD per
1000 cubic meters1
. Neither the volumes nor the price
are big. European prices are about $400 USD, plus
there are high-yield markets like in Japan where the
price is more than $500 USD. Russia exported a bit
more than 200 billion cubic meters at 2013 year-end.
It is important to understand that Russia has failed
in a emp ng to use the so-called “western” corridor
via Altai2
whereby the exis ng gas pipeline system
could have been used subject to minor adjustments.
However, a new gas pipeline to the Kovytkinskoye
and Yakut fields has to be build. This means that this
contract cannot be a physical alterna ve to gas sup-
plies to Europe, because in any case it is other gas
and other pipeline, but it can, to some extent, be a
financial alterna ve in case Europe reduces purchases
of Russian natural gas. Regre ully, many parameters
of the contract are confiden al; it will take long un l
it is included into Gazprom’s financial statements; its
price, according to most experts, is balancing on the
brink of profitability; the Russia’s federal budget will
see no revenues from the mineral extrac on tax from
1 Prices in contracts are normally pegged to crude oil prices or
other fuel equivalents, which means that the price is not final.
2 China’s north-west provinces are underpopulated, industrially
undeveloped, and China sees no benefits in building at its own cost
a pipeline to eastern China.

4
which these volumes of gas supplies will be exempted,
as was previously announced (Gazprom is very likely
to succeed in its a empts to obtain exemp on from
export du es). While considering eastern sales mar-
kets for gas supplies, it would be appropriate to look
at more profitable markets of Japan or South Korea,
especially because Russia in any case plans to build a
LNG terminal in Vladivostok. Beside the gas contract,
Russia signed a few other contracts with China, in par-
cular a curious contract on the co-development of a
long-haul passenger aircra , although China shows no
technological leadership in this area. A few contracts
on the co-development of coal deposits in Russia, sup-
plies of equipment, etc. seem to be quite reasonable.
However, few people pay a en on a $500bn loan to
Russian corpora on Vnesheconombank which is fac-
ing refinancing issues a er its par cipa on in various
Olympic construc on projects of the century, and the
informa on on that China may finance the construc-
on of a pipeline. In the mean me, this gives answers
to many ques ons – the Russian economy has been
overcredited and, having no good access to western
credit resources, Russia has to agree on less beneficial
terms of trade with China.
Tradi onal St. Petersburg Interna onal Economic
Forum (SPIEF 2014), the largest business forum in Rus-
sia, was held in in May 2014. As usual, the Forum be-
came not only a place for the announcement about
major contracts, but also for discussions. This acquired
a special meaning, because it was actually the first fo-
rum of this kind to be held amid a new interna onal
situa on. In par cular, announcement was made
about a contract between Total and LUKOIL on the es-
tablishment of a joint venture for the development of
the so-called Bazhenov Forma on1
in the West Siberia,
1 Bazhenov Forma on is a stratum (set) of rocks discovered in
the West Siberian Basin at a depth of more than two kilometers
and a territory covering more than 1 million square kilometers. It
is heavy satura on with a high-quality crude oil (like Brent oil) that
makes it unique and economically valuable.
a gas supply contract between Rosne and Fortum,
a contract between Summa Group and Veliola on the
establishment of an operator in the u li es market.
Overall, concerns over large businesses’ total refusal
to cooperate with Russia were not confirmed despite
the absence of a few corporate chief execu ves. The
conflict between Russia and Visa and Mastercard
which threatened to leave the Russian market because
of adopted laws under which they must pay a security
deposit much bigger than the profit they generate in
Russia was reconciled. There were anxious moments
too, e.g. President Pu n stated that the Central Bank
of Russia will invest in the Russian economy, which ba-
sically contradicts the applicable laws and regula ons
(despite the fact that the Central Bank refinances com-
mercial banks). However, it remains to be seen whe-
ther these statements will come into force.
There were a number of shakeups among high-
ranking officials in Russia. First of all, resigna on of
powerful V. Kozhin, former Head of the Presiden al
Execu ve Office embracing hundreds of governmental
units, and his appointment as assistant to the Presi-
dent, an honorary but symbolic post. He was replaced
with li le known general A. Kolpakov who previously
headed one of the state residencies. N. Rogozhkin ap-
pointed the Presiden al Plenipoten ary Envoy to the
Siberian Federal District, was replaced by Commander-
in-Chief of Interior Ministry Troops V. Zolotov who pre-
viously headed for a long me the Russian President’s
Security Service. A. Khloponin was removed from the
Presiden al Plenipoten ary Envoy to the North Cau-
casian Federal District but remained in the seat of just
a Deputy Prime Minister in the Russian Government,
however, close to him L. Kuznetsov, the former Gover-
nor of the Krasnoyarsk Territory (Krai), was appointed
head of a new Ministry for the Development of the
North Caucasus, while Commander-in-Chief of Interior
Ministry Troops in the North Caucasus Federal District
S. Melikov was appointed presiden al plenipoten ary
envoy, a less important posi on, taking account of the
establishment of the foregoing Ministry.

INFLATION AND MONETARY POLICY IN APRIL 2014
5
A.Bozhechkova
Infla on in the Russian Federa on remained at
a high level in April 2014: the consumer price index
stood at 0.9% at the month’s end (compared to 1%
in March of the same year), showing an increase of
0.4 p.p. over the value observed in 2013. Therefore,
infla on reached 7.3% on an annualized basis (Fig. 1).
Core infla on1
stood at 0.9% in April 2014, also higher,
up 0.5 p.p., than the value observed in the previous
year.
In April 2014, prices of food products increased 1.3%
compared to March 2014 (Fig. 2). Prices of the follow-
ing food products saw higher growth rates: grains and
beans (from 0.9% in March to 1.4% in April), red meat
and poultry (from 0.4% in March to 1.5% in April), pas-
ta products (from 0.0% in March to 0.3% in April). Pri-
ces of the following food products saw slower growth
rates: granulated sugar (from 7.8% in March to 3.0%
in April), fruits and vegetables (from 5.3% in March to
2.3% in April), eggs (from 2.9% in March to -2.3% in
April), milk and dairy products (from 2.6% in March
to 1.8% in April), alcoholic beverages (from 2.3% in
March to 1.2% in April), fish and seafood (from 1.4%
in March to 1.0% in April), bu er (from 1.8% in March
to 1.4% in April).
In April, prices and tariffs of retail paid services in-
creased 0.7%, while in March they increased 0.5%.
Overall, tariffs of public u li es remained unchanged
in April, while in March they grew up at a rate of 0.2%.
Prices of the following services increased in April: pas-
senger transport services (from 0.2% in March to 2.4%
in April), medical services (from 0.5% in March to 1.4%
in April), and insurance services (from 0.3% in March
to 2.2% in April). Prices of the following services fell in
April: interna onal travel services (from 2.7% in March
to 2.3% in April), services rendered in the physical cul-
ture and sports sector (from 0.8% in March to 0.2%
1 The baseline consumer price index is an indicator which
describes the level of infla on in the consumer market, net
of seasonal factors (prices of fruit and vegetable products)
and administra ve factors (tariffs of regulated types of ser-
vice, etc.). The index is also calculated by the Federal State
Sta s c Service of Russia (Rosstat).
In April 2014, the consumer price index stood at 0.9% (0.5% in April 2013), 0.1 p.p. down the value observed in
March 2014. Therefore, infla on stood at 7.3% at the end of 12-month period. The consumer price index reached
0.5% for the first 19 days in May 2014. The regulator further ghtened the monetary policy by increasing the key
interest rate to 7.5% p.a. on April 25, 2014.
in April), services rendered by culture organiza ons
(from 1.2% in March to 0.6% in April).
In April, growth rate of prices of non-food products
slowed down by 0.1 p.p. compared to March and
stood at 0.6%. Prices of the following non-food prod-
ucts saw the fastest growth rate: tobacco products by
4.6% (+3.5% in March), motor gasoline by 1.5% (+0.4%
in February). Prices of the following non-food products
saw a decline: motor gasoline (from 1.5% in March to
0.8% in April), knit goods (from 0.6% in March to 0.3%
in April).
In May 2014, inflation kept growing due to growth
in prices of certain categories of fruit and vegetable
products, red meat and poultry, millet. It’s worth not-
ing that a deprecia on of the ruble exchange rate
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
01.01.11
01.04.11
01.07.11
01.10.11
01.01.12
01.04.12
01.07.12
01.10.12
01.01.13
01.04.13
01.07.13
01.10.13
01.01.14
01.04.14
Source: The Federal State Sta s c Service of Russia (Rosstat).
Fig. 1. CPI growth rate in 2011 to 2014 (% year over year)
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
Jan08
May08
Sep08
Jan09
May09
Sep09
Jan10
May10
Sep10
Jan11
May11
Sep11
Jan12
May12
Sep12
Jan13
May13
Sep13
Jan14
food products non-food products paid services
Fig. 2. Infla on factors in 2008 to 2014 (%, compared
to the same month of the previous year)

6
made a major contribu on to the accelera on of infla-
on having regard to a great share of imported goods
in the consump on of economic agents in the Russian
Federa on. There were more nonmonetary factors
that pushed up infla on in January–May 2014: the re-
stric ons imposed by the Rosselkhoznadzor (Federal
Service for Veterinary and Phytosanitary Surveillance)
on import of meat from the EU countries and the Unit-
ed States early in the year, livestock reduc on due to a
fodder shortage, adverse weather condi ons in certain
countries, as well as decline in shipments of certain
categories of agricultural products from Ukraine. The
consumer price index stood at 0.5% at the end of the
first 19 days in May (0.4% in the same period of 2013).
The lack of pronounced demand-driven pressure on
prices, as well as the Bank of Russia’s measures aimed
at ghtening the monetary policy remain the key fac-
tors constraining infla on.
In April 2014 the monetary base (broad defini on)
increased 0.9% to Rb 9427.9bn (Fig. 3). The volume
of cash in circula on including cash balances in credit
ins tu ons increased 3.4% to Rb 7881.2bn. The fol-
lowing components of the broad monetary base saw
contrac on: banks’ correspondent accounts (a decline
of 12.6% to Rb 1016.4bn), bank deposits (a decline of
17.0% to Rb 98.5bn), obligatory reserves (a decline of
2.5% to Rb 431.8bn).
In April 2014, the monetary base (narrow defini-
on) (cash plus obligatory reserves) advanced 3.2% to
Rb 8168.4bn (Fig. 4).
In April, the volume of excessive reserves at com-
mercial banks amounted to Rb 1315.2bn, with man-
datory reserves on a special account amoun ng to
Rb 431.8bn, while the average value of reserves in the
period of 10.04.2014 thru 10.05.2014 amounted to
Rb 883.4bn. As of May 1, 2014, banks’ debt owed to
the regulator was Rb 5.05 trillion, an increase of 7.4%
since the beginning of April. Bank’s debt on REPO trans-
ac ons increased 10% to Rb 3.3 trillion, the amount of
debt on loans secured by non-market assets amount-
ed to Rb 1.7 trillion, a growth of 10%. According to the
data as of May 27, 2014, banks’ debt on REPO transac-
ons saw a decline to Rb 3.1 trillion, while the debt
on other loans increased to Rb 2 trillion. It should be
noted that the Bank of Russia used REPO opera ons at
a flat rate, in par cular, an average of Rb 24.9bn and
Rb 11.1bn were provided daily in April and May respec-
vely (On April 25, 28, 29, 30 the MIACR fell beyond
of the interest rate cap. On the foregoing dates the
volume of REPO opera ons at the flat rate amounted
to Rb 23.1bn; Rb 1.6bn; Rb 6.3bn; Rb 38.4bn respec-
vely). The interbank interest rate1
in April stood at
1 Interbank interest rate is the monthly average MIACR, an in-
terest rate on ruble-denominated overnight interbank loans.
7.9% on average (7.9% in March 2014). In the period of
May 1 thru May 23 the average interbank interest rate
stood at 8.23% (Fig. 5). The average interbank interest
rate increased in May 2014 in response to the Bank
of Russia’s April 25, 2014 decision to li the key inter-
est rate, as well as interest rates on liquidity provision
and absorp on instruments, from 7.0% to 7.5% p.a.,
in order to mi gate risks of accelera ng infla on and
ensure financial stability.
The Bank of Russia provided banks with Rb 700bn
at a cut-off rate of 7.26% p.a. as part of a 3-month
repo auc on secured by non-market assets held on
April 14, 2014. During a similar auc on held on May 12,
the Bank of Russia provided at total of Rb 485.8bn at
a rate of 7.77% p.a. However, only large banks which
have the required collateral base can afford such ac-
ons despite very beneficial terms of lending at a float-
ing interest rate.
As of May 1, 2014, the Central Bank’s interna onal
reserves totaled $472.3bn, shrinking by 7.3% year to
date (Fig. 4). At the same me, the monetary gold re-
serves shrank $0.2bn in April due to a nega ve revalu-
a on of assets. The contrac on of the interna onal re-
0
1000
2000
3000
4000
5000
6000
01.01.2008
01.06.2008
01.11.2008
01.04.2009
01.09.2009
01.02.2010
01.07.2010
01.12.2010
01.05.2011
01.10.2011
01.03.2012
01.08.2012
01.01.2013
01.06.2013
01.11.2013
01.04.2014
Blnrubles
Overnight loans' debt Other loans' debt Lombard loans' debt
REPO debt Unsecured loans
Fig. 3. Commercial banks’ debt owed
to the Bank of Russia in 2008 to 2014
370
420
470
520
570
3600
4100
4600
5100
5600
6100
6600
7100
7600
8100
8600
29.12.07-4.01.08
22-28.03.08
14-20.06.08
6-12.09.08
29.11-5.12.08
21-27.02.09
16-22.05.09
8-14.08.09
30.10-5.11.09
22-28.01.10
16-22.04.10
9-15.07.10
1-7.10.10
27.12-2.01.11
21-27.03.11
14-20.06.11
6-12.09.11
29.11-5.12.11
21-27.02.12
15-21.05.12
7-13.08.12
30.10-5.11.12
22-28.01.13
22-28.04.13
15-20.07.13
30.09.13-07.10.13
30.12.13-13.01.14
28.03-04.04.2014
blndoll.
blnrub.
Monetary base (billion rubles)
Gold and Foreign Currency Reserves (billion dollars)
Fig. 4. Dynamics of the monetary base (narrow
defini on) and gold and foreign currency (interna onal)
reserves of the Russian Federa on in 2007 to 2014

7
serves in the period of January 2014 to April 2014 was
basically caused by the regulator’s foreign currency
interven ons aimed not only at fla ening vola lity of
the ruble exchange rate, but also its retaining against
in the face of the observed deprecia on of developing
countries’ na onal currency exchange rate and unsta-
ble geopoli cal situa on in Ukraine.
Bank of Russia’s foreign currency interven on-
sthrough selling foreign exchange amounted to
$2401.9m and 247.9m euro by the end of April 2014
(Fig. 6). In April, the regulator’s opera ons on the pur-
chase of foreign currency with regard to the Federal
Treasury replenishing or spending foreign currency re-
sources of sovereign funds amounted to $1268m. In
April, the borders of the dual-currency trading band
were extended three mes within a range of 5 kopeks
and reached Rb 36.35–43.35. In the period of May 1
thru May 26, 2014, the regulator repeatedly shi ed
the dual-currency trading band within a range of 5 ko-
peks. As of May 26, 2014, the dual-currency trading
band was maintained within a range of Rb 36.4–43.4.
In the period of May 1 thru May 26, 2014, the Bank of
Russia sold $0.5bn or less of foreign currency, while
foreign currency interven ons with regard to the Fe-
deral Treasury replenishing or spending foreign cur-
rency resources of sovereign funds totaled $1492m.
According to the Bank of Russia’s preliminary es -
mates, net capital ou low from the country reached
$50.6bn Q1 2014, 1.8 mes more than in the same pe-
riod of 2013. Capital ou low from Russia amounted
to $59.7bn over 12 months of 2013. In Q1 2014, net
capital exports by the banking sector and other sectors
reached $18.9bn and $31.7bn respec vely. A substan-
al capital ou low from Russia in Q1 2014 was deter-
mined by economic slowdown in the country as well as
geopoli cal turmoil.
In April 2014, the real effec ve exchange rate of the
ruble gained 2.8% against foreign currencies (-1.7% in
March 2014). Overall, in Q1 2014, the real effec ve ex-
change rate fell 4.6% as compared to Q4 2013 and 8.5%
as compared to the same period of 2013 (Fig. 7).
In April, the dollar-ruble exchange rate increased
0.3% to Rb 35.7. The euro-ruble exchange rate grew up
0.7% (Rub 49.3) in the same period. In April, the euro-
dollar exchange rate averaged 1.38. The value of the
dual currency basket increased 0.5% to Rb 41.8 in the
same month. At the end of 28 days in May 2014 the
dollar-ruble exchange rate fell 4.1% to Rb 34.3 while
the euro-ruble exchange rate dropped 5.2% to Rb 46.8,
eventually decreasing the value of the dual currency
basket by 4.7% to Rb 39.9. The euro-dollar exchange
rate in May was equal to 1.38 on average. The ruble
weakened against the dollar in January–April 2014 ba-
sically in response to a more intensive capital ou low
from the country due to unstable geopoli cal situa-
on in Ukraine, op mis c projec ons about economic
growth in the United States and European Union, eco-
nomic slowdown in the Russian Federa on. The ruble
appreciated in May in response to the Bank of Russia’s
4
4,5
5
5,5
6
6,5
7
7,5
8
8,5
9
10.01.2012
10.02.2012
16.03.2012
18.04.2012
23.05.2012
26.06.2012
27.07.2012
29.08.2012
01.10.2012
01.11.2012
05.12.2012
15.01.2013
15.02.2013
21.03.2013
23.04.2013
31.05.2013
04.07.2013
06.08.2013
06.09.2013
09.10.2013
12.11.2013
13.12.2013
23.01.2014
25.02.2014
31.03.2014
05.05.2014
MIACR rate on ruble loans for 1 day in the interbank market
Minimum REPO rate at Auction for One Day and for One Week
Deposit Rate for One Day
The Fixed Rate on Operatons to Provide Liquidity
Overnight Rate
Maximum rate at Deposit Auction for One Week
Fig. 5. Bank of Russia’s interest rates band and dynamics
of the interbank lending market in 2012 to 2014 (% p.a.)
-20000
-15000
-10000
-5000
0
5000
10000
15000
20000
25000
30000
Mar10
Jun10
Sep10
Dec10
Mar11
Jun11
Sep11
Dec11
Mar12
Jun12
Sep12
Dec12
Mar13
Jun13
Sep13
Dec13
Mar14
0
5
10
15
20
25
30
35
40
45Blnrub
Rub
Currency interventions ("+" - net purchase, "-" - net sales)
Official currecy basket / Rub (end of period)
Fig. 6. Bank of Russia’s currency interven ons
and ruble exchange rate vs. the currency
basket in March 2010 to April 2014
0
50
100
150
200
20
25
30
35
40
45
50
55
jan05
jul05
jan06
jul06
jan07
jul07
jan08
jul08
jan09
jul09
jan10
jul10
jan11
jul11
jan12
jul12
jan13
jul13
jan14
Official USD/RUR exchange rate (end of period)
Official EUR/RUR exchange rate (end of period)
Value of the two-currency basket
Real effective exchange rate index (right scale)
Fig. 7. Ruble exchange rate indicators
in January 2005 to April 2014

8
policy aimed at li ing the key interest rate, mi gat-
ing panic investor sen ments about the likelihood
of Russia’s interven on into the poli cal situa on in
Ukraine, as well as the lack of severe economic sanc-
ons against Russia over the Crimea’s accession to the
Russian Federa on.
We an cipate the ruble exchange rate to further
stabilize under the influence of the basic factors. In
par cular, the downtrend in capital ou low, observed
since April 2014, due to a rise of foreign investor inter-
est in the Russian economy, as well as growth in cur-
rent opera ons accounts in Q1 2014 (+13.6% as com-
pared to the same period of 2013) may create terms
and condi ons required for stabiliza on of the ruble
exchange rate amid de-escala on of the geopoli cal
turmoil in Ukraine.
TheCentralBankofRussia’sBoardofDirectorsmade
a decision on April 25, 2014 to li the key interest rate
to 7.5% p.a. The decision was intended to prevent the
occurrence of risks for infla on and financial stability
related to devalua on of the ruble amid moun ng po-
li cal tension. According to the regulator’s es mates,
the li of the key interest rate will help slow down in-
fla on to a level of 6% or less. In our opinion, a tem-
poral li of the interest rate amid the panic in financial
markets was the right measure, however maintaining
this interest rate for a long period may have an adverse
effect on the economic ac vity.
At the same day the Bank of Russia made a decision
to introduce a New Mechanism for Credit Ins tu on
Refinancing whereby the regulator will issue loans to
banks for up to and including three years at a rate of
6.5% p.a. This refinancing mechanism allows the banks
touseasasecuritytherightsofclaimonloansto finance
investment projects which are guaranteed by the state.
At its ini al stage, the new mechanism will be accessible
to large banks whose equity capital exceeds Rb 50bn.
The introduc on of the new mechanism may in the long
run expand banks’ capabili es to borrow long money
and resolve to a certain degree the liquidity shortage
issue if the borrowing base is exhausted. However, the
ques on will arise in the mid-run perspec ve of the de-
mand for this instrument amid substan ally low invest-
ment ac vity in the Russian economy.

FINANCIAL MARKETS IN MAY 2014
9
N.Andrievsky. E.Khudko
The Movement of the Russian Stock Market’s
Main Structural Indices
The movement of the MICEX Index in May 2014 re-
flected the Russian stock market’s rapid recovery. That
index’s growth was especially robust in the first few
days a er the May Day holidays – for example, over
the course of one day, 7 May, it went up by 3.41%.
Over the period from 2 May through 27 May 2014, the
MICEX Index stood at an average of 1,388.0 points.
In May 2014, the highly liquid shares traded on the
Moscow Exchange were gaining in value: over the pe-
riod from 2 May through 26 May, shares in Sberbank,
VTB and Gazprom went up by 20.29%, 24.5%, and
14.8% respec vely. It should be noted that some of
the blue chip stocks showed much lower growth rates.
Thus, over the period from 2 May through 21 May,
shares in LUKOIL went up by 5.89%. Having reached
their peak value of Rb 6,784 per share on 8 May, shares
in Norilsk Nickel had dropped by 3.69% by 27 May.
In May 2014, Russia’s stock market con nued its steady recovery. As of 26 May, the MICEX Index stood at
1,449.3 points, having grown since the beginning of that month by more than 11%. The growth leader among
highly liquid shares were VTB Bank’s securi es – over the period from 2 May through 26 May they rose 24.25%.
However, the highest annual yield on shares – more than 40% per annum – was shown by Norilsk Nickel. As
of 26 May, the stock market’s capitaliza on amounted to Rb 22.9 trillion (or 35.3% of GDP). The situa on on
the Russian domes c market of corporate bonds remained unfavorable (although without any signs of radical
deteriora on). Pushed down mainly by seasonal factors, investment ac vity and the weighted average ef-
fec ve yield on corporate bonds declined against April (especially in the financial market). At the same me,
the Corporate Bond Market Index, the market’s size and the ac vity of issuers displayed moderately posi ve
trends. The growth rates of those indices were apparently slowed down by the emerging difficul es in at-
trac ng financing from interna onal capital markets. Russia’s bond issuers were able to meet their financial
liabili es pertaining to the bonds.
90
95
100
105
110
115
120
1200
1250
1300
1350
1400
1450
1500
1550
02.04.2013
02.05.2013
02.06.2013
02.07.2013
02.08.2013
02.09.2013
02.10.2013
02.11.2013
02.12.2013
02.01.2014
02.02.2014
02.03.2014
02.04.2014
02.05.2014MICEX Index Brent crude prices (right-hand side scale)
The high growth rate shown by shares in Sber-
bank in May 2014 had no effect on the annual yield
on these securi es. It should be reminded that, on 23
Source: Quote.rbc.ru.
Fig.1. The Movement of the MICEX Index and
Brent Crude Oil Futures Prices in the Period
from 2 April 2013 through 27 May 2014
-2,0
3,0
8,0
13,0
18,0
23,0
02.05.14
05.05.14
06.05.14
07.05.14
08.05.14
12.05.14
13.05.14
14.05.14
15.05.14
16.05.14
19.05.14
20.05.14
21.05.14
22.05.14
23.05.14
26.05.14
27.05.14
Sberbank Sberbank prev LUKOIL Rosneft Gazprom Norilsk Nickel VTB
Source: Quote Rbc.ru, the author’s calcula ons.
Fig. 2. Growth Rates of the Quota ons of Highly Liquid Stocks on the Moscow
Exchange (Over the Period from 2 May through 27 May 2014)

10
May 2013, shares in that bank went up to their histor-
ic high of Rb 110.7 per share. At the same me, over
the course of 12 months (from 27 May 2013 through
27 May 2014), the annual percentage yield on Sber-
bank’s ordinary shares amounted to 18%. During the
same period, the price of shares in Norilsk Nickel in-
creased by 41.5%. The annual percentage yield on
shares in Gazprom was 19%, a very impressive result
indeed. It should be said that the high growth rate
shown by shares in VTB made it possible for them to
return to their peak value registered on 27 May 2013.
As far as the sectoral indices are concerned, the
highest growth rate was shown in May 2014 by the
MICEX Financials Index, which went up 18.17% over
the period from 1 May and 26 May. The MICEX Power
Index grew by 12.67%. Over the course of May 2014,
the other indices grew on average by 7.22%.
Over the course of the period from 1 May through
27 May 2014, the average daily trading turnover of the
Moscow Exchange amounted to Rb 39.7bn. The most
ac ve trading days of that period were those between
the May holidays 2014, when the daily trading turno-
ver of the Moscow Exchange climbed to Rb 60.0bn,
and some of the last ten days of May. Trading in or-
dinary and privileged shares in Sberbank accounted
for 44.0% of the average daily trading turnover of the
Moscow Exchange. In May, the second-best performer
on the MICEX was shares in Gazprom, which account-
ed for 19.4% of the average daily trading turnover of
the Moscow Exchange. On 21 May, their share of the
daily trading turnover climbed to 35.5%. Thus, these
two biggest companies accounted for more than 63%
of the Moscow Exchange’s trading turnover. Trailing
behind them were five companies whose combined
volume of trade in shares on the MICEX accounted, on
average, for 24.1% of the daily trading turnover of the
Moscow Exchange.
According to Emerging Por olio Fund Research (EPFR),
over the period from 24 April through 7 May 2014,
funds oriented to the Russian market experienced net
inflows in the amount of $ 47m. As of 27 May, MICEX’s
total capitaliza on amounted to Rb 22.9 trillion (or
35.3% of GDP), having increased since 2 May by more
than Rb 1.53 trillion, which represented a 7.2% rise on
the beginning of that month. As far as the stock mar-
ket’s capitaliza on structure by type of economic ac-
vity is concerned, in May the capitaliza on share of
financial companies increased by more than 0.76%, to
14.6%. The capitaliza on share of companies belong-
ing to the consumer and retail sector grew by 0.32%.
The capitaliza on shares of these sectors increased at
the expense of the capitaliza on shares of the min-
eral extrac on sector and processing industries which
dropped in May by 0.66% and 0.45% respec vely.
-18,0
-8,8
19,0
-3,1
8,3
41,5
0,5
-20
-10
0
10
20
30
40
Sberbank
Sberbankprev
Gazprom
LUKOIL
Rosneft
Norilsknickel
VTB
27/05/2013–27/05/2014
Source: Quote.rbc.ru, the author’s calcula ons.
Fig. 3. Growth Rates of the Prices of Highly Liquid
Shares Traded on Moscow Exchange Over the Period
from 27 May 2013 through 27 May 2014
-2,0
2,0
6,0
10,0
14,0
18,0
02.05.2014
05.05.2014
06.05.2014
07.05.2014
08.05.2014
12.05.2014
13.05.2014
14.05.2014
15.05.2014
16.05.2014
19.05.2014
20.05.2014
21.05.2014
22.05.2014
23.05.2014
26.05.2014
27.05.2014
Companies of financial & banking sector
Machine building companies
Oil and gas companies
Companies of electrical engineering industry
Metal and mining companies
MICEX Consumer Goods and Services Index
MICEX Innovation Index
Fig. 4. Growth rates of Various Sectoral Indices on the Moscow
0,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
02.05.2014
05.05.2014
06.05.2014
07.05.2014
08.05.2014
12.05.2014
13.05.2014
14.05.2014
15.05.2014
16.05.2014
19.05.2014
20.05.2014
21.05.2014
22.05.2014
23.05.2014
26.05.2014
27.05.2014
Sberbank common+prev LUKOIL Norilsk nickel
VTB Magnit Gazprom
Rosneft Combined turnover
Fig. 5. Structure of the Trading Turnover of the Moscow
Mining industry;
48,0
Processing
industries; 13,1
Production and
distribution of
electric energy, gas
and water; 4,4
Wholesale and
retail trade; repair
services; 9,2
Transport &
communications;
9,7
Financial sector;
14,6
Other types of
economic activity;
1,0
Source: the MICEX’s official website; the authors’ calcula ons.
Fig. 6. Structure of Capitaliza on of the MICEX
Stock Market, by Type of Economic Ac vity

11
The Corporate Bond Market
In May 2014, the decline in the volume of Russia’s
domes c corporate bond market (by the nominal va-
lue of ruble-denominated securi es in circula on, in-
cluding those issued by RF non-residents) stopped in
its tracks. By the end of May, the volume of that mar-
ket had climbed to Rb. 5,249.1bn, which represented
a 0.2% rise on late April1
. The achieved stabiliza on of
the domes c corporate market’s volume was caused
by absence of any changes in the number of issued
bond loans (1,034 ruble-denominated corporate bond
issues). At the same me, the number of emi ers rep-
resented in the debt segment slightly decreased (353
in May vs. 359 as of the end of April). The number of
US dollar-denominated bond issues placed by Rus-
sian emi ers on the MICEX and circula ng thereon in-
creased from 16 to 17 (with an aggregate face value of
above $ 2.2bn). As before, one yen-denominated bond
issue placed by Russian emi ers remained in circula-
on.
In May, investment ac vity on the secondary corpo-
rate bond market significantly declined, having been
pushed down in the main by seasonal factors. Thus,
in the period from 22 April through 21 May 2014,
the combined volume of exchange transac ons car-
ried out on the Moscow Exchange amounted to just
Rb 76.3bn (for reference: over the period from 24 Feb-
ruary through 24 March, the monthly trade turnover
was about Rb 109bn), while the number of transac-
ons carried out over the period under considera on
dropped to 23.8 thousand (vs. 28.4 thousand in the
previous period)2
.
Having dwindled in March, later on the IFX-Cbonds
index of the Russian corporate bond market began to
grow. By the end of May it had increased by 1.6 points
(or 0.4%) on late April. Having experienced a slight
drop in early May, the weighted average effec ve yield
on corporate bonds nevertheless went up from 9.22%
in late April to 9.43% as of the end of May (Fig. 7)3
.
The corporate bond por olio dura on index con nues
to display a nega ve trend. As of the end of May, that
index amounted to 554 days, which represented a 26-
day drop on late April. This nega ve trend was caused
not only by the aforesaid decrease in the dura on of
bond circula on, but also by the rise in the effec ve
yield on corporate bonds.
For a third month in a row, Russia’s financial market
had been under nega ve pressure caused by an un-
fortunate sequence of economic and poli cal events,
which resulted in the emergence of unfavorable mar-
ket trends.
1 According to data released by the Rusbonds informa on agency.
2 According to data released by the Finam investment company.
3 According to data released by the Cbonds informa on agency.
Firstly, investor behavior on Russia’s domes c bond
market was to a certain extent influenced by this coun-
try’s sovereign debt ra ng being downgraded by the
Standard & Poor’s credit ra ngs agency (from BBB to
BBB- with a nega ve outlook). That fact, in its turn,
made it more difficult for companies to a ract foreign
financing and increased capital ou lows from Rus-
sia4
. Secondly, high infla on expecta ons significantly
boosted the infla on rate. In order to control infla-
on, the RF Central Bank unexpectedly raised its key
interest rate from 7.0% to 7.5%, thus pushing up the
interest rate on bonds circula ng on Russia’s domes-
c bond market. Thirdly, in late April and May 2014,
the RF CB withdrew licenses from many banks (OJ-SC
Na onal Business Development Bank, the commercial
bank Mestny Kredit, Atlas Bank, First Republican Bank,
the bank Navigator, and the bank Moscow Lights).
Moreover, there were plenty of disconcer ng sta-
s cs poin ng to the poor performance of Russian
companies during the spring 2014. Thus, their profits
significantly declined on the same period of last year5
.
The most liquid corporate bonds con nued to dis-
play a variety of trends with regard to their yields.
Some individual bond issues of companies belonging
to the manufacturing sector had the highest upward
and downward vola lity (in April, the highest vola lity
was displayed by some bond issues of financial compa-
nies). Thus, the most significant yield increase (above
1 pp.) was demonstrated by the securi es of OJ-SC
Joint-Stock Oil Company Bashne , while the most sig-
nificant yield loss (by more than 1 pp.) was displayed
by the securi es of OJ-SC Joint-Stock Oil Company Ros-
ne and OJ-SC Holding Company Metalloinvest. Also,
a substan al yield increase was demonstrated by the
bonds issued by OJ-SC Gazprombank. At the same
me, it should be noted that the sales and purchases
of the aforesaid securi es on the secondary corporate
Source: According to data released by the Cbonds company.
Fig. 7. Behavior of the IFX-Cbonds Index of the
Russian Corporate Bond Market and the Dynamics
of Its Weighted Average Effec ve Yield

12
bond market were not happening at a hec c pace,
which characterized the sales and purchases of securi-
es issued by financial companies (for example, over
the course of the period under considera on, the ag-
gregate volume of transac ons with some of the bond
issues of Vneshekonombank, Zenit Bank and the Agen-
cy for Housing Mortgage Lending amounted to more
than Rb 1bn). However, on the average, neither com-
panies belonging to the manufacturing sector nor hi-
tech companies had high interest rate vola lity. At the
same me, an upward trend in yields on bonds was
demonstrated by bonds issued by companies belong-
ing to the financial sector (above 0.3 pp.). Corporate
bonds issued by companies belonging to the energy
sector displayed opposite trends. It should be noted
that demand for such securi es was very low1
.
In spite of the unfavorable market situa on and
the tradi onal decline in the ac vity of market par-
cipants in the first half of May, the indices of regis-
tra on of new bond issues hit a three-month high.
Thus, over the period from 22 April through 21 May
2014, 12 emi ers registered 61 bond issues with a to-
tal face value of Rb 304.4bn (for reference: over the
period from 25 March through 21 April 2014, a total
of 25 bond issues were registered, with a total face
value of Rb 58.6bn). One of the causes of this surge in
emi er ac vity was a sharp decrease in the availability
of foreign financing. Big bond issues were registered
by CJ-SC UniCredit Bank (with a total face value of
Rb 110bn), OJ-SC Russian Grids (with a total face value
of Rb 100bn), and OJ-SC NOMOS-BANK (with a total
face value of Rb 22bn)2
. Almost all newly registered
bond issues were exchange-traded bonds.
The ac vity on the primary market also became
more robust in comparison with the previous period,
when trade indices hit their two-year low. Neverthe-
less, the indices of ac vity on the primary market
remain very low. Thus, over the period from 22 April
through 21 May 2014, 10 emi ers placed 15 bond
loans with a total nominal value of Rb 513.85bn
(for reference: in the period from 25 March through
21 April 2014, a total of only 7 bond loans with a to-
tal nominal value of Rb 24.6bn were placed) (Fig. 8).
1 According to data released by the Finam investment company.
Source: According to data released by the Rusbonds company.
Рис. 8. Dynamics of the Primary Placements
of Issues of Ruble-Denominated Corporate Bonds
Most of the placed bond loans were exchange-traded
bonds. In spite of the adverse market situa on, OJ-SC
AIZhK managed to a ract finance in the form of 15-to-
19-year loans, while another four issuers managed to
a ract it in the form of 10-year loans.
In May, the Bank of Russia annulled 8 bond issues
due to failure to place even a single security (for refe-
rence: in April 2014, not a single bond issue was an-
nulled for that reason)3
. As a result, two big emi ers,
Gazprom Ne and RESO-Garan a, revised their plans
to borrow on the bond market.
Over the period from 22 April through 21 May 2014,
all 18 emi ers redeemed their bond issues with a total
face value of Rb 66.2bn in due me (for reference: in
the previous period, one emi er was unable to meet
his obliga ons under the bonds, and therefore de-
clared a technical default). In June 2014, the redemp-
on of 23 issues of corporate bonds with a total face
value of Rb 56.8bn is expected4
.
It should be noted that the period from 22 April
through 21 May 2014 saw no real defaults on the pay-
ment of the coupons, on the buyback offers to the cur-
rent holders of securi es before their maturity, and on
the redemp on of a whole bond loan5
. In this respect,
the situa on remained unchanged from the previous
few months.
3 According to data released by the Bank of Russia.

THE REAL SECTOR OF THE ECONOMY IN APRIL 2014: FACTORS & TRENDS
13
THE REAL SECTOR OF THE ECONOMY IN APRIL 2014:
FACTORS & TRENDS
O.Izryadnova
According to the Rosstat’s preliminary es mate, in
the 1st
quarter of 2014 GDP growth rates amounted to
0.9% against the 1st
quarter of 2013 which value is al-
most equal to the index of the same period of the pre-
vious year. Sluggish economic growth was determined
by slowdown of demand on the domes c market and a
decrease in export volumes both in physical and mon-
etary terms. A trend of reduc on of investments in capi-
tal assets had a serious effect on the domes c market:
the volume of investments in April and in January–April
amounted to 97.3% and 95.7%, respec vely, against the
respec ve indices of the previous year.
In the 1st
quarter of 2014, a trend of reduc on
of state capital investments – which trend existed
throughout 2012–2013 – s ll prevailed. A drop in state
investments was supplemented by a decrease in ac -
vi es by large infrastructure companies due to a com-
ple on of a number of investment projects and adjust-
ment of future plans with the expected changes in the
market situa on taken into account. In addi on to the
above, growth in lending rates to industries and higher
geopoli cal risks had a nega ve effect on the beha-
vior of the private business. The unstable dynamics of
the economic development determined a decrease in
enterprises’ revenues and consolidated the trend of a
drop in investments in capital assets in January–April
2014. In the 1st
quarter of 2014, the balanced finan-
cial result amounted to 82.3% of the respec ve index
of 2013, including 25.0% in manufacturing, 49.9% in
building and 66.0% in transport and communica ons.
In the 1st
quarter, growth in capital ou low to
$50.6bn against $27.5bn in the same period of the
previous year had a nega ve effect on the state and
prospects of business ac vi es in the investment sec-
tor. As in 2014 – unlike the 1st
quarter of 2013 – capital
ou low was virtually completely jus fied by the export
In April 2014, the economic situa on was determined both by slowdown of growth rates of consumer demand
and a drop in investment demand. Investments in capital assets in April 2014 and January–April amounted to
97.3% and 95.7%, respec vely, against the respec ve indices of the previous year. A decrease in growth rates of
retail trade sales volumes year on year to 2.6% was determined by drama c slowdown of households’ real in-
come and real wages and salaries. A er a drop in January, year on year indices of industry demonstrated growth
in February–April 2014. In April 2014, year on year growth rates of industrial produc on amounted to 2.4%,
while in manufacturing and produc on of primary products, to 3.9% and 1.7%, respec vely. However, despite
the fact that the situa on has improved to some extent the expected growth in industry in 2014 will amount by
the es mate of the Ministry of Economic Development of the Russian Federa on to 1.0%, which is jus fied by the
expected 2.4% drop in investment ac vi es in 2014.
of capital by the non-banking sector, corporate private
business en es had fewer resources to finance in-
vestments in Russian capital assets.
A trend of slowdown of consumer demand s ll pre-
vails. In April 2014, annual growth rates of the retail
trade volume amounted to 2.6% against 4.3% in April
2013, while the volume of paid services to households
decreased by 0.2% with the growth rates of the previ-
ous year being at the level of 2.6%. It is to be noted
that both the high level of the infla on rate and slow-
down of households’ real income affect the consumer
behavior. In April 2014, the year on year consumer
price index amounted to 107.3% having exceeded
by 0.1 p.p. the same index of April 2013. The growth
rates of real wages and salaries from 108.5% in April
2013 against the respec ve period of the previous
year slowed down to 100.8% in the same period of
2014. Despite indexa on of pensions and other types
of social payments, in April 2014 real disposable cash
income increased by the mere 1.9% (year on year)
against 8.1% a year before which situa on affected as
well the dynamics of the solvent demand and the pat-
tern of households’ cash expenditures.
In 2014, the dynamics of industrial output is char-
acterized by instability. In January 2014, a 0.2% drop
year on year in industrial output against the respec-
ve index of 2013 changed for recovery of growth in
industry in the following three months which situa on
resulted in a 2.4% output growth year on year in April
2014. The main driver of growth in industry was manu-
facturing. In April 2014, the year on year growth rates1
of manufacturing, produc on of primary products and
produc on and distribu on of power, gas and water
amounted to 103.9%, 101.1% and 98.1%, respec vely.
1 In evalua on of the dynamics of manufacturing, it is impor-
tant to take into account the low base of the previous year.

14
A drop in output of the engineering complex as
compared to the same period of the previous year –
the index of produc on of machines and equipment
and that of produc on of electric, electronic and op-
cal equipment amounted to 87.2% and 92.7%, re-
spec vely – had a nega ve effect on the dynamics of
manufacturing industries in January–April 2014. In the
above types of business ac vi es, a decrease in out-
put has been observed during the past two years.
In April 2014, produc on of means of transporta-
on and equipment increased by 19.6% year on year
which situa on can be explained in full by a 39.4%
growth in produc on of ships, aircra and space de-
vices and means of transporta on with a decrease of
3.8% in automo ve vehicles.
Posi ve dynamics is observed in the segment of
produc on of intermediary products which situa on is
par ally related to the low base of the previous year.
In March–April 2014, in the iron and steel industry the
rates of change in output demonstrated growth a er
a drop in output in the previous five months. In April
2014, produc on of oil products retained the lead-
ing posi ons as regards the year on year growth rates
(111.4%) which situa on is related to drama c growth
of 108.5% in the volumes of oil delivered to oil refine-
ries. It is to be noted that in the pa ern of produc on
the output of diesel fuel and residual oil grew at a pri-
ority rate with the output of motor petrol reduced.
In May, the Ministry of Economic Development of
the Russian Federa on presented an updated fore-
cast and scenario condi ons of social and economic
development in the 2015–2017 period, as well as the
expected es mates of performance of the Russian
economy in 20141
developed on the altera ve basis
with the same assump on of external condi ons and
different instruments of the state policy and behavior
of private business.
The baseline scenario (1) is the main one for devel-
opment of the budget and suggests preserva on of in-
er al trends, conserva ve investment policy of private
companies and limited expenditures on development
of companies of the infrastructure sector with stagna-
on of state demand. The moderate op mis c scena-
rio (2) suggests reduc on of nega ve consequences of
geopoli cal tensions, securing of a greater confidence
of the private business, u liza on of addi onal sour-
ces of funding of new infrastructure projects, promo-
1 The main condi ons and the main parameters of the forecast
of the social and economic development of the Russian Federa on
and the ul mate levels of prices (tariffs) on services of companies
of the infrastructure sector in 2015 and the planned periods of
2016 and 2017. The Ministry of Economic Development of the Rus-
sian Federa on, Moscow, May 2014. h p://www.economy.gov.ru/
wps/wcm/connect/economylib4/mer/ac vity/sec ons/macro/
prognoz/201405207
on of lending to the most vulnerable sectors of the
economy and alloca on of more funds for develop-
ment of human capital.
In 2014, Russian GDP growth rates are es mated at
the level of 100.5% against the previous year (-1.5%
as compared to the forecast published in September
2013). The main factor behind slowdown of the dy-
namics of economic growth was the expected change
in the path of the investment demand under the ef-
fect of higher geopoli cal risks. According to the up-
dated es mates, in 2014 a 2.4% drop in investments
as compared to 2013 is expected (in the previous sce-
nario a 103.9% growth in the investment demand was
expected). Revalua on of the level and dynamics of
investments in capital assets was jus fied by the un-
deres mate of the effect of nega ve trends in the in-
vestment demand (which trends were formed in the
infrastructure sector in 2013) in the previous scenario
of the forecast, as well as changes in the behavior of
private companies: with higher risks a 2.6% decrease
in private investments is expected (according to the
September version there was growth of 5.0%). In such
a case, the share of investments in GDP will amount
to 18.9% which is 1 p.p. lower than the index of the
previous year.
With the expected slowdown of the dynamics of de-
velopment of the economy, a drop both in profitability
and the share of enterprises’ and en es’ profit in GDP
can be expected; due to such a situa on investments
at the expense of own funds will be limited. In addi-
on to the above, access to borrowed funds on the
external and domes c markets is expected to be more
complicated. Growth in loans to non-financial en es
is es mated at the level of 110.6% as compared to the
index of 2013 (-5.4 p.p. as compared to the Septem-
ber version). With drama c growth in capital ou low
in the 1st
quarter of 2014 taken into account, on the
basis of the results of the year that index is es mated
at the level of $90bn which is nearly $40bn more than
the 2013 index.
With prevalence of trends which were formed in
2013 and the 1st
quarter of 2014, reduc on of indus-
trial and business reserves will have a nega ve effect
on the dynamics of gross savings.
According to the forecast, the net export volume
will make a posi ve contribu on to the GDP dynamics.
On the basis of the results of the 1st
quarter of 2014,
export and import decreased by 1.8% and 6.8%, re-
spec vely, against the relevant indices of 2013. With
growth in the forecasted price on oil on the basis of
the results of 2014, the monetary volume and the
physical volume of the export will amount to 98.9%
and 99.7%, respec vely, against the relevant indi-
ces of 2013. According to the data of the forecast, in

THE REAL SECTOR OF THE ECONOMY IN APRIL 2014: FACTORS & TRENDS
15
2014 the import will fall at an advanced rate than ex-
port and consumer and investment demand. In 2014,
the import decreased by 3.2% and 2.7% in monetary
terms and in physical terms, respec vely, as compared
to the previous year.
In the forecast of the Ministry of Economic Deve-
lopment of the Russian Federa on, slowdown of con-
sumer income is adjusted. It is related to the fact that
in the 1st
quarter of 2014 growth in the retail trade
volume was virtually completely financed by means of
a drop in households’ savings to 5.4% in households’
income; the above value became the minimum one
in the en re period of observa on. Growth in house-
holds’ real disposable income has stopped completely:
in the 1st
quarter of 2014 real disposable income fell by
2.4%, while in 2014 in general its growth is es mated
at the level of 0.5% (-2.8 p.p. as compared to the Sep-
tember forecast). In addi on to the above, in 2014 a
6.7% growth in consumer prices as compared to the
previous year is expected, while in the September ver-
sion of the forecast the average annual level of the in-
fla on rate was es mated at the level of 5.6%.
In the forecast, the rate of unemployment was
raised to 6.2% against 5.7% last year which situa on
resulted in a reduc on of the es mate of the average
annual growth rate of real wages to 1.4% against 5.3%
in 2013. As a result, the level of poverty (the number
of the popula on with income below the minimum
subsistence level) will remain at the level of 2013 and
amount to 11.0%.
Simultaneous weakening of the consumer market
and shrinking of the investment market had a nega-
ve effect on the dynamics of domes c demand. Tak-
ing into account the extent and dynamics of reduc on
of import, accelera on of growth in domes c produc-
on of goods and services is inpu ed in the forecast.
In 2014, the industrial produc on index and the index
of agricultural products will amount to 101.0% and
101.6%, respec vely, against the level of 2013. It is to
be noted that preserva on of the trend of advanced
growth in manufacturing industries as compared to
that in produc on of fuel and energy resources is ex-
pected.
In prospect, in accordance with the baseline sce-
nario accelera on of the dynamics of the economic
development is expected. In 2017, GDP will increase
by 8.5%, while investments in capital assets and the
volume of the retail trade, by 6.3% and 11.1%, respec-
vely, against the relevant indices of 2013. With the
forecasted growth rates of industry and agriculture,
the equilibrium of the domes c market resources will
be maintained by accelera on of import. Fulfillment
Table 1
DYNAMICS OF UTILIZATION OF GDP THE BASELINE SCENARIO 1 IN PRICES OF THE PREVIOUS YEAR
AS % OF THE YEAR BEFORE
2013 2014 2015 2016 2017
GDP u lized 1.3 0.5 2.0 2.5 3.3
Total ul mate consump on, 3.5 1.3 1.5 2.1 3.1
Including that by households 4.7 1.8 2.0 2.8 3.5
Gross savings -6.1 -5.9 5.9 4.6 6.4
Gross savings of capital assets -0.1 -2.5 2.4 1.7 4.7
Domes c demand 1.0 -0.2 2.5 2.7 3.9
Net export of goods and services 5.6 11.3 -5.3 -1.1 -8.4
Export 4.2 0.2 0.6 1.8 2.1
Import 3.7 -2.7 2.2 2.4 4.1
Source: The Ministry of Economic Development of the Russian Federa on.
Table 2
DYNAMICS OF THE MAIN MACROECONOMIC INDICES IN THE 2013 2017 PERIOD IN ACCORDANCE
WITH THE BASELINE SCENARIO 1 AS % OF THE PREVIOUS YEAR
2013 2014 2015 2016 2017
GDP 101.3 100.5 102.0 102.5 103.3
Industrial produc on 100.4 101.0 101.7 101.6 102.0
Agricultural produc on 106.2 101.6 102.9 102.4 102.9
Investments in capital assets 99.8 97.6 102.4 101.6 104.7
Retail trade volume 103.9 101.9 102.1 103.0 103.6
Real wages 105.3 101.4 101.9 102.9 103.9
Labor efficiency 101.6 101.1 102.1 102.4 103.3
Source: The Ministry of Economic Development of the Russian Federa on.

16
of social guarantees will determine advanced growth
in wages and salaries as compared to labor eﬃciency
and limit feasibility of structural transforma ons. At
the same me, it is important to take into account the
fact that the investment pause of 2012–2014 does not
provide grounds for op mis c es mates – inpu ed in
the forecast – of labor eﬃciency growth in the 2015–
2017 period.

THE RUSSIAN INDUSTRY IN APRIL 2014
17
THE RUSSIAN INDUSTRY IN APRIL 2014
S.Tshukhlo
Demand on industrial produce1
In the beginning of the 2nd
quarter, the dynamics
of demand on industrial produce remained a nega ve
one, while the rate of reduc on thereof increased.
The ini al data showed absolute growth in demand
only in March, but it was rather weak. So, the April de-
crease in sales pushed the ini al balance downwards
to -5 points, while clearing of a seasonal factor, to
-12 points which was the worst index since the begin-
ning of 2013 (Fig. 1).
Such dynamics of demand suits fewer enterprises in
the Russian industry. In April, the share of unsa sfac-
tory es mates of sales rose to 54%, while the balance
of es mates fell to -9 points. Those values have be-
come the worst ones since 2013.
The forecasts of sales do not promise any improve-
ment of the situa on in the 2nd
quarter of 2014. En-
terprises’ expecta ons fell almost to the zero level,
though in the previous post-crisis years they remained
in April at the level of 10–17 points a er a surge in
January. With a seasonal factor cleared, the index fell
to the post-crisis minimum (-4 points) which was regis-
tered only in the mid-2012.
Stocks of ﬁnished products
Despite the nega ve sales dynamics, the industry
manages to control successfully its stocks of ﬁnished
products, at least, at the level of es mates. From Ju-
ly 2013, the balance of es mates has been within a
rela vely narrow band of a small redundancy which
is, however, admissible for the stage of stagna on
(Fig. 2). The main por on of enterprises believes that
their stocks are “normal”; it is to be noted that in April
the share of such es mates amounted to the record-
1 Surveys of managers of industrial enterprises are carried out
by the Gaidar Ins tute in accordance with the European harmo-
nized methods on a monthly basis from September 1992 and cover
the en re territory of the Russian Federa on. The size of the panel
includes about 1,100 enterprises with workforce exceeding 15% of
workers employed in industry. The panel is shi ed towards large
enterprises by each sub-industry. The return of queries amounts
to 65–70%.
According to enterprises’ es mates obtained as a result of business surveys of the Gaidar Ins tute1
, in April actual
changes in demand and output had nega ve dynamics, while forecasts did not promise any improvement of the
situa on. It is to be noted that industry had to switch over to more intense growth in prices which situa on is
unlikely to s mulate demand and increase capacity u liza on which failed to recover in April. Enterprises’ invest-
ment plans remain in the nega ve zone.
high maximum (1992–2014). With such es mates (not
physical volumes), the la er can hardly be a driver of
output growth and a factor behind slowdown of indus-
trial output.
Output
In April, the rate of output growth started to slow-
down which is typical of that month. A er achieving the
year’s modest maximum of 22 points, the ini al balance
(in the previous years it exceeded 30 points) fell to +4
Fig. 1
Fig. 2

18
points and amounted a er the seasonal factor cleared
to -3 points (Fig. 3). Output growth registered in March
may discon nue in the next report of the Rosstat.
Further dynamics of output does not suggest op-
mism to enterprises, either. In March–April, the ini-
al balance of output plans lost 30 points, while that
cleared of a seasonal factor, 6 points and fell to the
year and a half minimum. The Ukrainian crises did not
affect seriously output volumes of the Russian industry
so far. In April, only 4% of enterprises reported about a
drop in their output due to that factor.
Prices of enterprises
The pricing policy of enterprises is probably enter-
ing a new stage. In the previous post-crisis years, the
January surge of growth in selling prices used to sub-
side by March, while in April it was close to the zero
level. In 2014, in new macroeconomic condi ons cre-
ated by responsible ac ons by monetary authori es,
as well as compulsory measures of the country’s poli -
cal leadership, the industry had to change the dynam-
ics of its prices. Firstly, prices growth in January did not
subside by March 2014 – its rate remained at the pre-
vious level, though in the 4th
quarter of 2013 growth in
enterprises’ prices was a zero one, that is, within the
frameworks of the dynamics which was typical of the
past few years and which permi ed the authori es to
keep revising downward their infla on rate forecasts.
Secondly, enterprises’ price forecasts which normally
fell in January a er a surge in December failed to pro-
mote that path further, consolidated at the achieved
level, while in March–April grew a li le. Thirdly, the
most unpleasant thing is that in April the industry re-
ported about a 100% growth in their prices as com-
pared to the results of the 1st
quarter of 2014.
The actual dynamics and layoff plans
The number of workers in the Russian industry
keeps falling. A er a tradi onal surge of lay-offs in Jan-
uary, that process returned to the normal rate of lay-
offs which is typical of the past few years. So, for two
years the industry has failed to overcome the nega ve
trend of workers’ exit from the industry (Fig. 4).
Enterprises’ investment plans
For 11 months running, enterprises’ investment
plans remain in the nega ve zone. However, from the
beginning of 2014 pessimism of such inten ons has
been decreasing, but too slowly and unwillingly and
without par cular hopes for revival of growth in in-
vestments. Within four months of 2014, the balance
grew only from -14 points to -6 (Fig. 5), that is, plans
of reduc on of investments s ll prevail in the Russian
industry over those to increase them.
Fig. 3
Fig. 4
Fig. 5

DEVELOPMENT TRENDS IN RUSSIA’S OIL & GAS SECTOR
19
Y.Bobylev
Global market prices of crude oil and natural gas
have been steadily high over the last few years. In
2013 and Q1 2014, the price of Russia’s Urals crude
oil in the European market averaged $107.7 and
$106.5 per barrel respec vely (Table 1). High prices
have been determined by certain key factors, such
as higher demand for crude oil driven by economic
growth globally, first of all in China and other Asian
economies, OPEC’s conserva ve policy towards oil
produc on growth in the OPEC member countries, as
well as geopoli cal risks. In 2013, the global demand
for crude oil increased 1.4% while the demand for
crude oil in the North America went up 1.6%, 3.0%
in China. On the supply side there has been marked
increase in oil produc on in non-OPEC countries (by
2.5% in 2013) driven primarily by higher volumes of oil
produc on in the United States and Canada as a result
of the development of nontradi onal oil reserves. At
the same me, oil development in the OPEC countries
has recently been staying at the level close to the total
quota (30 million barrels daily) they set in late 2011.
Therefore, the global oil market remains balanced.
Since global prices of natural gas supplied under
long-term contracts are determined on the basis of
prices of refined products (gas oil, diesel fuel, and fuel
In 2013, oil produc on in Russia reached its highest level since 1990 while exports of crude oil and refined pro-
ducts reached its highest-ever level in response to high prices of crude oil in global markets. However, a trend
towards slower growth rates and worsening of oil and gas produc on condi ons was observed. The recently
adopted laws and regula ons concerning tax incen ves for the development of new oil and gas fields and hard-
to-recover reserves, liberaliza on of export of liquefied natural gas, as well as a long-term gas contract with
China, create condi ons for further development of the Russian oil and gas sector.
oil) alterna ve to gas, these prices follow with a certain
lag the global prices of crude oil. However, changes in
the European gas market, namely increased supply of
gas from other gas producing countries and decreased
level of spot prices of gas versus prices of Gazprom
long-term contracts have had a downtrend effect on
prices of Russia’s natural gas over the last few years.
Oil produc on in Russia reached 523.3 million tons
in 2013 amid high global prices, the highest level since
1990 (Table 2). The recent pu ng under produc on of
a few large new oil fields on situated in the Eastern Si-
beria (Vankorskoye, Talakanskoye, Verkhnechonskoye,
Tas-Yuryakhsloye oil fields) and in the north of the
European Russia (Uzhno-Khilchuiskoye oil field, Trebs
and Titov oil fields), as well as taxa on amendments
have had a posi ve effect on the dynamics of oil pro-
duc on. The Prirazlomnoye oil field in the Pechora Sea
was put under produc on in late 2013, the first ever
producing oil field in Russia’s Arc c con nental shelf.
At the same me, growth rates in oil produc on
have been markedly slowing down over the last few
years (Table 3), which can be explained first of all by
objec ve worsening of oil produc on condi ons. A
major part of the producing oil fields have entered the
brown-field stage, whereas new oil fields are in most
Table 1
GLOBAL PRICES OF CRUDE OIL AND NATURAL GAS IN 2005 2014, $/BARREL
2005 2006 2007 2008 2009
Brent oil price, Great Britain 54.4 65.2 72.5 97.7 61.9
Urals oil price, Russia 50.8 61.2 69.4 94.5 61.0
Price of Russia’s natural gas in the Euro-
pean market, $/thousand cubic meters
212.9 295.7 293.1 473.0 318.8
2010 2011 2012 2013 Q1 2014
Brent oil price, Great Britain 79.6 111.0 112.0 108.8 107.9
Urals oil price, Russia 78.3 109.1 110.3 107.7 106.5
Price of Russia’s natural gas in the Euro-
pean market, $/thousand cubic meters
296.0 381.5 431.3 402.0 390.2
Source: IMF, OECD/IEA, Federal State Sta s cs Service.

20
cases characterized by worse geologic and produc on
condi ons and geographic parameters, and their de-
velopment requires extra capital, opera on and trans-
porta on costs.
To date, the Russian oil produc on sector has ap-
proached its maximum produc on capability. To com-
pensate for declined oil produc on on the producing
oil fields, it is important to develop both new oil fields
in the regions with poor or no infrastructure and infe-
rior quality reserves on the mature oil fields not yet
involved in the development.
At the same me, growth in oil refining has been
progressing at a higher rate than that in oil produc on
basically due to faster growth in exports of refined
products encouraged by lower export du es on such
products versus the export duty on crude oil. As a re-
sult of higher growth rates in crude oil dis lla on the
share of oil refining in oil produc on increased from
42.5% in 2004 to 53.1% in 2013. However, depth of oil
refining saw no actual increase during that period and
amounted to only 71.4% in 2013, being equal to the
level of 2005. The indicator of depth of oil refining is
actually remaining close to the pre-reform level (depth
of oil refining in Russia stood at 67% in 1990) and s ll
lagging a way behind the level observed in developed
countries where depth of oil refining reaches 90–95%.
Therefore, the objec ve of increasing the technologi-
cal level in the oil refining industry s ll remains a prio-
rity for the development of the oil sector in the Rus-
sian economy.
Such companies as Rosne , LUKOIL, Surgutne e-
gaz, and Gazprom produce the biggest volumes of
oil. In 2013, oil produc on in these four companies
accounted for 74.4% of total oil produc on in the
country (Table 4). Furthermore, a er the acquisi-
on of TNK-BP oil company in 2013 state-run Rosne
strengthened considerably its posi on in the Russian
oil sector to became one of the largest oil companies
in the world. In 2013, Rosne ’s oil produc on, inclu-
sive of its shares in oil produc on of other en es,
amounted to 202.4 million tons, or 38.7% of all Rus-
sia’s oil produc on. Overall, the share of state-run
companies in all Russia’s oil produc on, including
their shares in oil produc on of other en es in 2013
reached 50.6%.
Gazprom keeps domina ng in natural gas produc-
on in Russia. At the same me, its share in all Russia’s
natural gas produc on has shrunk visibly from 83.2%
in 2008 to 71.5% in 2013 over the last few years. More-
over, other producers’ share in gas produc on has in-
creased too: oil companies, NOVATEK, PSA operators,
and other producers. Overall , the share of independ-
ent gas producers in 2013 reached 28.5%, including
NOVATEK as largest independent producer of natural
gas (7.7%). In 2013, state-run companies accounted
for 80.8% of all Russia’s natural gas produc on.
Steady growth in crude oil exports is observed at
the backdrop of growth in oil produc on (Table 5).
In 2013, net export of crude oil and refined products
reached 385.8 million tons, reaching its highest ever
Table 3
PRODUCTION OF CRUDE OIL, REFINED PRODUCTS AND NATURAL GAS IN 2005 2014, % Y O Y
2005 2006 2007 2008 2009 2010 2011 2012 2013
Q1
2014
Crude oil, includ-
ing gas condensate
102.2 102.1 102.1 99.3 101.2 102.1 100.8 101.3 100.9 102.2
Crude oil dis lla on 106.2 105.7 103.8 103.2 99.6 105.5 103.3 104.9 102.7 105.1
Motor gasoline 104.8 107.4 102.1 101.8 100.5 100.5 102.0 104.3 101.3 99.3
Disel fuel 108.5 107.0 103.4 104.1 97.7 104.2 100.3 98.7 103.1 108.4
Furnace oil 105.8 104.5 105.2 101.9 100.8 108.5 104.6 101.6 103.3 106.3
Natural gas 100.5 102.4 99.2 101.7 87.9 111.4 102.9 97.7 102.1 98.6
Source: Federal State Sta s cs Service, Ministry of Energy of Russia.
Table 2
CRUDE OIL PRODUCTION AND REFINING IN THE RUSSIAN FEDERATION IN 2005 2013
2005 2006 2007 2008 2009 2010 2011 2012 2013
Q1
2014
Oil produc on, including gas
condensate, million tons
470.0 480.5 491.3 488.5 494.2 505.1 511.4 518.0 523.3 129.6
Crude oil dis lla on, million tons 208.0 220.0 229.0 236.3 236.0 249.3 258.0 270.0 278.0 71.6
The share of oil refin-
ing in oil produc on, %
44.3 45.8 46.6 48.4 47.8 49.4 50.4 52.1 53.1 55.2
Depth of feedstock refining, % 71.6 71.9 71.7 72.0 71.9 71.1 70.8 71.5 71.4 70.4
Source: Federal State Sta s cs Service, Ministry of Energy of Russia.

21
level. The share of net export of crude oil and refined
products in oil produc on stood at 73.7%. Further-
more, crude oil exports have increased over the last
few years in response to growth in export of refined
products, whereas export of crude oil has declined.
The share of net export of crude oil in oil produc on
shrank to 45.1% in 2013. At the same me, the share
of exports in the produc on of fuel oil in 2013 stood
at more than 90%, diesel fuel at 58.9%. The share of
export of motor gasoline in its produc on increased in
2013 to 11.2% (to compare: the share of exports in the
produc on of motor gasoline stood at 8.2% in 2010,
10.6% in 2011, 8.4% in 2012).
Over the last few years, the decline in export of gas
has been driven primarily by a decline in gas supplies
to the European market where the share of gas sup-
plies from other gas producing countries has increased
visibly. As a result, in 2012 – unlike 2006 when Rus-
sia’s natural gas supplies to Europe reached the maxi-
mum volume – export of Russia’s natural gas to non-
CIS countries declined by 30.4% while the share of net
exports in gas produc on declined from 31.4% in 2005
to 25.6% in 2012. In 2013, export of Russia’s natural
gas increased markedly, approaching the level of 2006,
as a result of declined gas produc on in Europe and
gas supplies from the North Africa, while the share of
Russia’s natural gas in the European market, including
Turkey, increased from 26% in 2012 to 30.1% in 2013,
according to the Gazprom’s es mates.
For the purpose of expanding far-reaching export
prospects for Russia’s natural gas in 2013, a provi-
sion was made under the Federal Law of 30.11.2013
№318-FZ ‘On the Amendments to Ar cles 13 and 14
of the Federal Law ‘On the Principles of State Regu-
la on of External Trade Ac vity’ and Ar cles 1 and 3
of the Federal Law ‘On Gas Exports’ to liberalize ex-
port of liquefied natural gas (LNG) whereby not only
Gazprom but also other Russian producers will be able
to export LNG. NOVATEK (the Yamal LNG Project) and
Rosne have plans to construct LNG produc on facili-
es. There is a provision for increasing considerably
Russia’s LNG produc on and export to global markets
in the long run perspec ve.
A large-scale long-term gas supply contract with
China was signed in May 2014. The contract is cri -
cal in the context of enhancing the capacity to expand
export of Russia’s natural gas. The contract covers the
development of large natural gas fields in the Eastern
Siberia and 30-year gas supplies to China via a pipe-
line, thereby increasing considerably gas exports, as
well as diversifying gas supplies by enhancing exports
eastwards.
Analysis of the long dynamics of Russia’s oil exports
in the long run shows a substan al strengthening of
exports in the oil sector, compared to the pre-reform
period. The share of net export of crude oil and refined
products in oil produc on increased from 47.7% in
1990 to 73.7% in 2013. However, it should be remem-
Table 4
OIL PRODUCTION STRUCTURE IN 2008 2013
Oil pro-
duc on,
in 2008,
million
tons
As per-
centage of
total pro-
duc on,%
Oil pro-
duc on,
in 2010,
million
tons
As per-
centage of
total pro-
duc on,
%
Oil pro-
duc on,
in 2012,
million
tons
As per-
centage of
total pro-
duc on,
%
Oil pro-
duc on,
in 2013,
million
tons
As per-
centage of
total pro-
duc on,
%
Russia, total 488.5 100.0 505.1 100.0 518.0 100.0 523.3 100.0
Rosne 113.8 23.3 112.4 22.3 117.5 22.7 192.6 36.8
LUKOIL 90.2 18.5 90.1 17.8 84.6 16.3 86.7 16.6
TNK-BP 68.8 14.1 71.7 14.2 72.5 14.0 - -
Surgutne egaz 61.7 12.6 59.5 11.8 61.4 11.9 61.5 11.8
Gazprom, includ-
ing Gazprom Ne 43.4 8.9 43.3 8.6 46.1 8.9 48.5 9.3
including:
Gazprom 12.7 2.6 13.5 2.7 14.5 2.8 16.3 3.1
Gazprom Ne 30.7 6.3 29.8 5.9 31.6 6.1 32.2 6.2
Tatne 26.1 5.3 26.1 5.2 26.3 5.1 26.4 5.0
Slavne 19.6 4.0 18.4 3.6 17.9 3.5 16.8 3.2
Bashne 11.7 2.4 14.1 2.8 15.4 3.0 16.1 3.1
RussNe 14.2 2.9 13.0 2.6 13.9 2.7 8.8 1.7
NOVATEK 2.7 0.6 3.8 0.8 4.2 0.8 4.3 0.8
PSA operators 12.0 2.5 14.4 2.9 14.1 2.7 14.0 2.7
Other producers 24.1 4.9 38.2 7.6 44.1 8.5 47.6 9.1
Source: Ministry of Energy of Russia, the author’s es mates.

22
bered that this is associated not only with increasing
absolute volumes of exports, but also reducing con-
siderably domes c consump on of crude oil because
of the market transforma on of the Russian economy
and subs tu on of furnace oil with natural gas. Fur-
thermore, it is worth no ng that increase in crude oil
exports An increase in the share of refined products
in oil exports can be noted, an increase from 18.2% to
1990 to 38.9% in 2013. However, it should be borne in
mind that because of low depth of oil refining most of
Russia’s export of refined products accounts for fuel oil
which in Europe is used as feedstock for further refin-
ing to produce light refined products.
In response to growth in export of refined products
and natural gas the share of fuel and energy commodi-
es in Russia’s export reached 70.6% in 2013 while the
share of crude oil was 33.0%, natural gas was 12.8%.
Amendments to the tax regula on which ease the
tax burden and enhance taxa on flexibility have played
an important role in the development of the Russian oil
sector over the last few years, of which the following
key policies are worth men oning: the introduc on of
a tax holiday mechanism for the mineral extrac on tax
(MET) in undeveloped regions which lack the respec-
ve infrastructure; the applica on of a decreasing co-
efficient to the MET rate for oil fields with high degree
of reserve deple on; the applica on of a decreasing
coefficient to the MET rate for minor oil fields; and the
applica on of the reduced export duty rate on crude
oil for oil fields in new development areas.
A few new federal laws took effect in 2014. The laws
are intended to create the condi ons required for the
development of the oil and gas sector. The Federal
Law of 23.07.2013 №213-FZ ‘On the Amendments to
Chapters 25 and 26, Part 2 of the Tax Code of the Rus-
sian Federa on and Ar cle 3.1 of the Russian Federa-
on Law ‘On the Customs Tariff’ introduced measures
aimed at s mula ng the development of hard-to-re-
cover oil reserves. The law establishes the MET rate is
to differ according to reservoir permeability, the size
of oil-filled forma on and the degree of field deple-
on. The law introduces the applica on of a special
decreasing coefficient to the MET rate which is cha-
racterized by the degree of oil produc on complexity.
A provision is made in 2014–2016 for increasing the
MET rate in oil produc on with simultaneous reduc-
Table 5
THE RATIO OF PRODUCTION, CONSUMPTION AND EXPORT OF CRUDE OIL AND NATURAL GAS IN 2005 2013
2005 2006 2007 2008 2009 2010 2011 2012 2013
Crude oil, million tons
Produc on 470.0 480.5 491.3 488.5 494.2 505.1 511.4 518.0 523.3
Exports, total 252.5 248.4 258.4 243.1 247.4 250.4 244.6 239.9 236.6
Exports to non-CIS countries 214.4 211.2 221.3 204.9 210.9 223.9 214.4 211.6 208.0
Exports to CIS countries 38.0 37.3 37.1 38.2 36.5 26.5 30.2 28.4 28.7
Net exports 250.1 246.1 255.7 240.6 245.6 249.3 243.5 239.1 235.8
Domes c consump on 123.1 131.2 124.1 130.4 125.3 125.9 140.7 142.1 137.5
Net exports as % of produc on 53.2 51.2 52.0 49.3 49.7 49.4 47.6 46.2 45.1
Refined products, million tons
Exports, total 97.0 103.5 111.8 117.9 124.4 132.2 130.6 138.1 151.4
Net exports 96.8 103.2 111.5 117.5 123.3 129.9 127.2 136.8 150.0
Crude oil and refined products, million tons
Net exports of crude oil
and refined products
346.9 349.3 367.2 358.1 368.9 379.2 370.7 375.9 385.8
Net exports of crude oil and refined
products as % of oil produc on
73.8 72.7 74.7 73.3 74.6 75.1 72.5 72.6 73.7
Natural gas, billion cub. meters
Produc on 636.0 656.2 654.1 664.9 596.4 665.5 687.5 671.5 684.0
Exports, total 207.3 202.8 191.9 195.4 168.4 177.8 184.9 178.7 196.4
Net exports 199.6 195.3 184.5 187.5 160.1 173.5 179.2 171.6 189.3
Domes c consump on 436.4 460.9 469.6 477.4 436.3 492.0 508.3 499.9 494.7
Net exports as % of produc on 31.4 29.8 28.2 28.2 26.8 26.1 26.1 25.6 27.7
Source: Federal State Sta s cs Service, Ministry of Energy of Russia, Federal Customs Service, the author’s es mates.

23
on of the export duty rate on crude oil. The Federal
Law of 30.09.2013 No. 263-FZ ‘On the Amendments
to Chapter 26, Part 2 of the Tax Code of the Russian
Federa on and Ar cle 3.1 of the Russian Federa on
Law ‘On the Customs Tariff’ provides for increasing the
MET baseline rate in oil produc on from Rb 470 per
ton in 2013 to Rb 559 per ton in 2016, with decreas-
ing the coefficient in the formula designed to calculate
a rate of the export customs duty on oil from 0.60 to
0.55 (Table 6).
Table 6
TAX RATES IN OIL SECTOR IN 2013 2016
2013 2014 2015 2016
MET in oil produc on:
Baseline rate, Rub./ton 470 493 530 559
Export du es:
Crude oil* 0.60 0.59 0.57 0.55
Commercial gasoline,
straight-run gasoline**
0.90 0.90 0.90 0.90
Diesel fuel** 0.66 0.65 0.63 0.61
Light dis llates, me-
dium dis llates**
0.66 0.66 0.66 0.66
Fuel oil, lubricants,
bitumen**
0.66 0.66 1 1
* Coefficient in the formula designed to calculate an export
duty rate on crude oil.
** Coefficient to the rate of the export duty on crude oil.
Source: Federal Law of 30.09.2013 No. 263-FZ, Regula ons
of the Russian Government of 26.08.2011 No. 716, 29.03.2013
No. 276, 03.01.2014 No. 2.
For the purpose of promo ng moderniza on of
the Russian oil produc on industry and enhancing
the depth of oil refining, the Russian Government
has made a few decisions over the last few years on
gradual li ing of the export duty rate on fuel oil from
39% (the average in the period of 2006–2010) to 66%
of the export duty rate on crude oil. However, such an
increase in the export duty rate on fuel oil has had no
real effect on the situa on. At the same me, the an-
nounced by the Government increase from 2015 of
the export duty rate on fuel oil up to the level of ex-
port duty rate on crude oil has mo vated oil compa-
nies to launch moderniza on of their oil refining ca-
paci es. They are currently implemen ng approved
by the federal government bodies special programs
of moderniza on of their oil refinery plants, which
are intended to significantly increase the technologi-
cal level of the oil refining sector and depth of oil re-
fining.
The Federal Law of 30.09.2013 No. 263-FZ ‘On the
Amendments to Chapter 26, Part 2 of the Tax Code of
the Russian Federa on and Ar cle 3.1 of the Russian
Federa on Law ‘On the Customs Tariff’ made material
amendments to the system of taxa on in the gas sec-
tor. This law established a new procedure for defining
MET rates for natural gas produc on on the basis of
applying special formulae and coefficients considering
various factors that have an effect on gas produc on
yield and gas sales. The new procedure for determin-
ing a MET rate on natural gas will increase substan-
ally the effec veness of the system of taxa on in the
gas sector, ensure the required differen a on of the
tax burden depending on specific field development
condi ons.
Moreover, the adop on of the Federal Law of
30.09.2013 No. 268-FZ ‘On the Amendments to Parts
1 and 2 of the Tax Code of the Russian Federa on and
Certain Legal Acts the Russian Federa on’ is very im-
portant as regards to undertaking polices of tax and
customs-tariff s mula on of produc on of hydro-
carbons on the Con nental Shelf of the Russian Fed-
era on. This law established a special preferen al tax
treatment for the development of new offshore fields
which is based on the reduced MET add-value rate dif-
feren ated by shelf zones, and the standard profit tax;
but neither export duty nor property tax will be levied
as part of shelf (offshore) projects.
The recently adopted laws and regula ons con-
cerning tax incen ves for the development of new oil
and gas fields and hard-to-recover reserves, liberali-
za on of export of liquefied natural gas, as well as a
long-term gas contract with China, create condi ons
for further development of the Russian oil and gas
sector.

24
THE FOREIGN TRADE IN MARCH 2014
N.Volovik
In March 2014, Russia’s foreign trade turnover cal-
culated on the basis of the methods of the balance of
payments amounted to $74bn which is 1.1% higher
than the respec ve index of 2013. Growth took place
due to a 5.4% increase in the Russian export of goods
to $46.9bn as compared to March 2013 with a 5.7%
reduc on in the import of goods to the Russian Fe-
dera on to $27.1bn. Such dynamics of export and im-
port jus fied growth in the foreign trade surplus which
grew by 25% in March 2014 as compared to the same
period of 2013 (from $15.8bn to $19.7bn).
In the 1st
quarter of 2014, the situa on on global
commodity markets was worse than a year ago which
was jus fied by weak economic growth rates of deve-
loped countries, as well as worsening of China’s eco-
nomic indices.
In March 2014, the range of fluctua ons on the
global oil market was insignificant: on March 3, 2014
the Brent oil prices exceeded for the first me since
the beginning of the year the level of $111 a barrel
as a reac on to uncertainty about developments in
Ukraine: there were concerns that in case of introduc-
on of troop in Ukraine oil supplies from Russia to Eu-
rope may be disrupted or suspended. On March 20, af-
ter the report of the US Federal Reserve on reduc on
of the assets buy-out volume from $65bn to $55bn a
month the Brent oil price fell to the month’s minimum
value of $105.73 a barrel. The monthly average price
was formed at the level of $107.4 a barrel which is
1.7% lower than the index of March 2013.
On April 2, 2014, the Brent oil price fell to the five-
month minimum of $103.37 a barrel due to a report
that Libyan rebels agreed to li a blockade of Libyan oil
terminals and the market expected opening of Libya’s
largest oil ports in a ma er of days. However, elec on
of the new president prevented further talks on return
of oil terminals in the East of the country. The leader of
Libyan rebels which took hold of oil ports declared that
they did not recognize the new government and the
agreement which was reached earlier on renewal of
opera on of seaports could be annulled. So, substan-
al growth in oil deliveries from Libya is postponed for
an indefinite period of me.
So, con nued hos li es in Ukraine and a standoff in
Libya support oil prices: a er April 8 the Brent oil price
has not fallen below $106 a barrel.
In March 2014, the Urals oil price fell by 0.7% as
compared to the previous month and amounted to
In March 2014, Russia’s foreign trade turnover calculated on the basis of methods of the balance of payments
amounted to $74bn which is 1.1% higher than the 2013 index. However, in general in the 1st
quarter of 2014 the
last year’s trend of reduc on of the Russian foreign trade turnover prevailed. The export has fallen due to a drop
in contract prices with insignificant growth in physical volumes. On the contrary, the import has decreased due
to reduc on of physical volumes with weak growth in contract prices. It is to be noted that an advanced reduc-
on of import is observed and as a result there is growth in the trade balance surplus. The European Union has
started a new trade dispute with the Russian Federa on within the frameworks of the World Trade Organiza on
calling for a cancella on of the an dumping du es – introduced in 2013 – on import of German and Italian light
commercial vehicles.
0
10
20
30
40
50
60
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
may
sep
jan
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Balance Export Import
Source: The Central Bank of the Russian Federa on.
Fig. 1. The main indices of the Russian foreign trade (billion USD)

THE FOREIGN TRADE IN MARCH 2014
25
$106.7 a barrel, that is, remained at the level of March
2013. In the 1st
quarter of 2013, the Urals oil price
amounted to $106.8 a barrel or 96.3% against the re-
spec ve period of the previous year.
In April and May 2014, growth in oil prices is ob-
served. On the basis of the results of monitoring of oil
prices in the period from April 15, 2014 ll May 14,
2014 the Urals oil price amounted to $785.6 a ton
($107.62 a barrel). As a result, in June 2014, export du-
es on oil and oil products will increase. The rate of
duty on crude oil will increase to $385 a ton ($376.1 a
ton in May 2014). The reduced rate is to be increased
from $182.4 a ton to $189.2 a ton. The rate on light
and medium dis llates grows from $248.2 a ton to
$254.1 a ton. The rate on diesel fuel will amount to
$250.2 a ton ($244.4 in May). In June, the export of
petrol is charged at the rate of $346.5 a ton ($338.4
in May).
In the past two months, the situa on on the global
market of nonferrous metals has not changed much.
An excep on is nickel whose prices appreciated both
in March and April. It is to be noted that if in March
prices on nickel rose by 0.73% on February, in April
they increased by 10.4% as compared to March. Ear-
lier, nickel prices depreciated more than other indus-
trial metals.
However, according to the data of the London Metal
Exchange in March 2014 as compared to March 2013
prices on all the nonferrous metals fell: aluminum (de-
precia on of 10.7%), copper (13%) and nickel (6.3%).
In the 1st
quarter of 2014 as compared to the same
period of 2014, aluminum, copper and nickel were
traded 14.7%, 11.2% and 15.4% cheaper.
In March 2014, the average value of the FAO food
price index amounted to 212.8 points which is the
highest level since May 2013. The factors behind
the most substan al growth in prices in the past ten
months were unfavorable weather condi ons for
some crops in the US and Brazil, as well as tensions
in the Black Sea region. Prices demonstrated growth
as regards all the commodity groups, except for dairy
products which depreciated by 2.5% for the ﬁrst me
in the past four months. The highest apprecia on of
prices was on sugar (7.9%) and grain (5.2%).
According to the data of the Central Bank of the
Russian Federa on, in the 1st
quarter of 2014 Russia’s
foreign trade turnover amounted to $194.7bn which is
3.7% lower than in the 1st
quarter of 2013.
The export of goods fell by 1.8% and amounted to
$122.9bn. Reduc on of the export volume took place
due to a drop in average contract prices with growth in
physical volumes of imported goods.
The nega ve dynamics of the Russian export took
place due to a reduc on of the monetary volume of
export of fuel and energy commodi es (by 3.4%),
chemical produce (5.6%), metals and metal ar cles
(5.1%) and machines, equipment and means of trans-
porta on (20.3%).
In the 1st
quarter of 2014, fuel and energy com-
modi es accounted for 72.4% of the Russian export.
The physical volume of crude oil supplies abroad fell
by 8.3% with average contract prices falling by 2.1%.
The export of oil products in physical terms and the
natural gas rose by 8.4% and 3.5%, respec vely. How-
ever, contract prices on the above commodi es fell as
follows: oil products and natural gas were traded 1.9%
and 3.7% cheaper, respec vely as compared to the
1st
quarter of 2013.
Export growth was observed in commodity sub-
groups Wood and Pulp and Paper Ar cles (18.3%)
and Food Products and Agricultural Primary Products
(31.1%). Export of food products grew due to a 5.5 fold
increase in the export of wheat and meslin.
In the 1st
quarter of 2014, the import of goods
amounted to $71.9bn which is 6.8% lower than the
relevant index of the previous year. A drop in import
Table 1
MONTHLY AVERAGE GLOBAL PRICES IN MARCH OF THE RESPECTIVE YEAR
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Oil (Brent),
USD/a ton
24.1 29.1 33.6 53.7 60.9 62.05 102.3 47.42 79.8 114.44 124.93 109.2 107.4
Natural gas*,
USD/thou-
sand m3
2.97 3.74 3.86 5.52 7.99 8.37 11.04 10.9 8.93 9.37 11.97 11.87 10.88
Copper,
USD/a ton
1605 1681.6 3018.0 3254.4 5103 6452.5 8421.9 3749.8 7462.8 9530.7 8470.8 7645.6 6650
Aluminum,
USD/a ton
1403.2 1393.1 1660.0 1988.6 2429 2761.7 2986.8 1335.8 2205.6 2552.6 2184.2 1909.6 1705.4
Nickel,
USD/a ton
6503.3 8402.4 13730 16190 14897 46324.8 31005.7 9696.4 22461.3 26811.7 18660.8 16724.9 15678
* Market of Europe, average contract price, franco-border.
Source: calculated on the basis of the data of the London Metal Exchange (London, the UK) and the Intercon nental oil Exchange
(London).

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