MNI Russia Business Report July 2014

MNI Russia Business Report July 2014

Insight and data for better decisions

MNI Russia Business Report - July 20142

About MNI Indicators Insight and data for better decisions

MNI Indicators offers unique macro-economic data and insight to businesses and the investment community. We produce data and intelligence that is unbiased, pertinent and responsive. Our data moves markets.

MNI Indicators specialises in business and consumer focused macro-economic reports that give our customers the ability to make timely and relevant decisions. We strive to provide up-to-date information on business and consumer confidence on the economy.

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Written and researched byPhilip Uglow, Chief EconomistShaily Mittal, Economist

MNI Indicators | Deutsche Börse Group Westferry House11 Westferry CircusLondon E14 4HETel: +44 (0)20 7862 7444Email: [email protected]

www.mni-indicators.com@MNIIndicators

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Release TimeEmbargoed until 9:45 a.m. Moscow timeJuly 28, 2014

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MNI Russia Business Report - July 2014 3

MNI Russia Business Report - July 2014Contents

4 Editorial

6 Executive Summary

10 Economic Landscape

14 Indicators

15 MNI Russia Business Indicator

16 Production

17 New Orders

18 Export Orders

19 Productive Capacity

20 Order Backlogs

21 Employment

22 Inventories

23 Input Prices

24 Prices Received

25 Financial Position

26 Interest Rates Paid

27 Effect of Rouble Exchange Rate

28 Supplier Delivery Times

29 Availability of Credit

30 Data Tables

34 Methodology

Spitzzeile Titel4

It’s been a momentous time for the BRICS with the annual summit in Brazil this month culminating in the announcement of a new development bank to potentially rival the existing multinational institutions of the World Bank and the IMF.

BRICS Building


It’s been a momentous time for the BRICS with the annual summit in Brazil this month culminating in the announcement of a new development bank to potentially rival the existing multinational institutions of the World Bank and the IMF.

The BRICS development bank, or New Development Bank, as it is named has been a long time coming, with the idea aired back in 2009. It’s not difficult to see why the five nations of the BRICS want to set-up a new bank – both the World Bank and the IMF are criticised for representing western interests too greatly. For example, the US gets a disproportionate amount of votes at the World Bank. And developing nations feel they have to meet overbearing conditions for credit lines.

The BRICS themselves are a rather disparate group of nations, lumped together by their size and capacity for growth, rather than their aligned political, social and economic goals. Russia, Brazil and South Africa export commodities, while China exports manufactured goods and India exports services. They have recently disagreed among themselves over WTO decisions and failed to unite on issues such as Ukraine or China throwing its weight around in the South China Sea. All this said, the New Development Bank does mark a significant step for the BRICS and shows that in spite of some individual disagreements, there is a greater will to ensure that developing economies have their say. Indeed the bank could become a key symbol for emerging markets. Notably the new bank is not going to be called the BRICS development bank, a sign that it will lend not only to the BRICS, but also other developing nations. This also keeps the door open for new members at a later date as well, something that is likely needed if the bank is to rival the World Bank in the future.

For Russia, the formation of the BRICS bank is a perfect opportunity for President Putin to once again show the West that it is not as dependent on them as they might believe. Just two months ago, Russia also signed a historic 30 year deal worth $400 billion for its state run gas producer Gazprom to supply natural gas to China, a strategically planned decision to reduce its dependence from its existing EU trade partners.

While the amount of capital the bank will raise is far less than the World Bank, that doesn’t mean it won’t have an impact, although it will take considerable time to build up into anything meaningful. As well as $100 billion in capital there will be an equally sized “Contingency Reserve Arrangement”, an emergency fund in the style of the IMF to help protect countries against currency crises and short-term liquidity requirements. Russia would be wise to try and de-escalate the situation in Ukraine or it won’t be long before it is the first beneficiary of the bank.

Philip UglowChief EconomistMNI Indicators

Spitzzeile Titel6

Russian business sentiment picked up in July to the highest in three months, although it was still below the level seen at the start of 2014 as confidence has been hit by the general economic malaise coupled with the geo-political tension.

Executive Summary


Russian business sentiment picked up in July to the highest in three months, although it was still below the level seen at the start of 2014 as business confidence has been hit by the general economic malaise coupled with the added tensions following Russia’s military intervention in Crimea. The MNI Russia Business Indicator rose by 4.1 points to 54.6 in July from 50.5 in June. Our survey shows that while the initial impact of the sanctions seemed to hurt our panel of companies (business sentiment slipped below 50 in May), there has been a partial rebound in confidence over the past two months.

Companies were less optimistic about future conditions compared with their current business conditions. Most companies expected overall business conditions to remain the same in the following three months and there was only a small rise in the proportion of those who thought conditions would be better.

In spite of a pickup in overall business sentiment, current conditions for Production among Russia’s largest companies slumped to a seven month low in July.

Given the current economic weakness coupled with the threat of wider sanctions on Russia, New Orders have held up reasonably well and improved for the second consecutive month in July.

Companies’ export orders rose to the highest in five months in July as companies have been able to take advantage of a weaker rouble since Russia annexed Crimea.

Companies have been aggressively destocking recently in the face of weak demand. However, the pace of the inventory draw down has fallen sharply, and in July the Inventories Indicator picked up slightly to just below the neutral level. The Inventories Indicator ticked up to 48.6 from 48.0 in the previous month, the eleventh consecutive month in contraction.

The financial health of our panel of companies has shown a downward trend since the start of the year, amid Russia’s stand-off with the west, although it has remained relatively buoyant.

The indicator for Interest Rates Paid rose for the first time in five months to 50.0 in July from 49.7 in June.

In spite of the recent acceleration in consumer price inflation, Input Prices declined for the fourth consecutive month to a series low in July.

Fewer companies had better access to credit in July compared with the previous month, as the Availability of Credit Indicator decreased by 5.5% to 54.5 in July from 57.7 in the previous month, the second consecutive decline.

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Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14

MNI Russia Business Indicator

Current Conditions

Future Expectations


Overview

May-14 Jun-14 Jul-14Highest

SinceLowest

Since3-Month Average

Monthly Change

Monthly % Change


Current Conditions 49.2 50.5 54.6 Apr-14 - 51.4 4.1 8.1%

Future Expectations 52.5 52.5 54.0 Apr-14 - 53.0 1.5 2.9%

Production

Current Conditions 55.3 55.5 51.5 - Dec-13 54.1 -4.0 -7.2%

Future Expectations 51.7 51.1 52.6 Sep-13 - 51.8 1.5 2.9%

New Orders

Current Conditions 54.8 56.0 56.8 Apr-14 - 55.9 0.8 1.4%

Future Expectations 52.7 51.9 51.8 - Feb-14 52.1 -0.1 -0.2%

Export Orders

Current Conditions 46.9 49.0 53.3 Feb-14 - 49.7 4.3 8.8%

Future Expectations 43.0 44.3 50.4 Aug-13 - 45.9 6.1 13.8%

Productive Capacity

Current Conditions 51.5 50.5 50.5 Jun-14 - 50.8 0.0 0.0%

Future Expectations 50.3 50.0 50.0 Jun-14 - 50.1 0.0 0.0%

Order Backlogs

Current Conditions 42.3 45.4 47.7 Feb-14 - 45.1 2.3 5.1%


Employment

Current Conditions 52.8 50.5 50.3 - Mar-14 51.2 -0.2 -0.4%


Inventories

Current Conditions 39.2 48.0 48.6 Oct-13 - 45.3 0.6 1.3%

Future Expectations 43.4 46.5 47.3 Oct-13 - 45.7 0.8 1.7%

Input Prices

Current Conditions 51.0 50.5 50.0 - series low 50.5 -0.5 -1.0%


Prices Received

Current Conditions 50.0 51.3 49.7 - Mar-13 50.3 -1.6 -3.1%


Financial Position

Current Conditions 56.3 54.3 54.3 Jun-14 - 55.0 0.0 0.0%


Interest Rates Paid

Current Conditions 49.7 49.7 50.0 Mar-14 - 49.8 0.3 0.6%


Effect of Rouble ExchangeRate

Current Conditions 53.3 50.3 50.0 - Aug-13 51.2 -0.3 -0.6%


Supplier Delivery Times

Current Conditions 51.8 50.3 50.0 - Apr-14 50.7 -0.3 -0.6%


Availability of Credit

Current Conditions 59.9 57.7 54.5 - Apr-14 57.4 -3.2 -5.5%


Russian business confidence picked up in July to the highest in three months.

However, companies were less optimistic about future conditions compared with their current business conditions.

Spitzzeile Titel10

The Russian central bank hiked the key interest rate to 8% in July due to the continued increase in inflation and concerns about the impact of geopolitical tensions on the rouble.

Economic Landscape


The recent downing of Malaysia Airlines flight MH17 over eastern Ukraine has intensified Western pressure on Russia. Further US sanctions aimed at limiting Russian access to capital markets have been imposed and have targeted both Russian officials and companies. The EU has also extended sanctions although has shied away from imposing Tier 3 sectoral sanctions which would prove far more detrimental for the Russian economy.

The central bank hiked the key interest rate to 8% in July due to the continued increase in inflation and concerns about the impact of geopolitical tensions on the rouble. Economic data has continued to show Russia struggling with high inflation and weak growth. Industrial production grew by just 0.4% in June following stronger growth in the previous four months. Inflation increased to 7.8% in June, nearly double the central bank’s medium-term target of 4%.

Low economic growthEconomic growth remained extremely weak at the beginning of 2014, slowing to 0.9% in Q1 compared with a year earlier, down from growth of 2% in Q4 2013 and 1.3% in Q1 2013. Capital investment contracted by 4.8% in Q1 compared with a year earlier. Consumption remained relatively firm, but it reflected a one-off public sector pay increase and so is unlikely to be sustained.

The central bank expects zero growth on the quarter in Q2, a moderate recovery from previous negative rate of growth. However, there is a significant risk that Russia fell into a technical recession (two quarters of negative growth) in Q2.

Russian ministers had predicted GDP growth of 2.5% this year before the turmoil in Ukraine. This has, though, been dramatically reduced to just 0.5%, following paltry growth of 1.3% in 2013. Central Bank governor Elvira Nabiullina has also revised the growth rate for 2014 down to 0.4%, a little below the government’s forecast, although a slight acceleration is expected in the second half of the year.

So far the EU has stopped short of enacting more damaging Tier 3 sectoral sanctions, but should these eventually be implemented it would likely result in Russia experiencing negative growth in 2014. Firmer sanctions or not, the geopolitical tensions will likely have long-lasting negative effects on growth in Russia.

Industrial production slows in JuneIndustrial production fell to 0.4% on the year in June, down from 2.8% in May due to a decline in manufacturing output growth. Manufacturing output slowed to just 0.3% on the year in June compared with growth of 4.8% in the previous month. More positively, though, the first six months of the year saw growth of 2.6% in manufacturing output compared with a fall of 0.6% in the same period a year earlier. Mining and quarrying output, slowed to 0.8% on the year in June compared with a growth of 0.9% in the previous month. Utilities output continued to contract for the eighth consecutive month, with the pace of decline accelerating to 0.8% on the year from a decline of 0.5% in the previous month.

Economic Growth

-15%

-10%

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011 2012 2013 2014

GDP Growth y/y %

Source: Federal State Statistics Service of Russia


In the first six months of 2014, industrial production grew 1.5% on the year having contracted by 0.2% in the same period a year ago. The economy ministry expects industrial output to increase by about 1% this year after it failed to grow in 2013.

Car sales decelerate in JuneIn June, 199,398 cars were sold in Russia, 17.4% below the level in the same month a year earlier, according to the Association of European Businesses (AEB). High inflation and a weaker rouble have negatively impacted consumer spending over the past year. The pace of the decline in car sales had been easing up to March when sales declined by just 0.4%, but the market has subsequently showed signs of distress again. The six months to June saw a decline of 7.7% in car sales compared with the same period a year earlier.

In view of the rouble’s decline, the AEB has revised their full year forecast sharply lower and now anticipate that car sales will decline by 12% in 2014

following a drop of 5.5% in the previous year. It expects 1.2 million cars will be sold in the second half of this year, 16% below the level recorded a year earlier.

Inflation rises in JuneConsumer price inflation rose to 7.8% in June from 7.6% in May, the fastest rate of growth since August 2011. The cost of food products rose by 9.8% on the year, up from 9.5% in the previous month. A ban on pork imports from the European Union, due to an outbreak of swine fever, has affected the cost of meat products. Even after stripping out the prices of food and fuel though, core inflation accelerated to 7.5% from 7% in the previous month, the highest since October 2011.

Russia imports a large amount of consumer goods and food items, and the depreciation of the currency has pushed up prices in recent months, forcing the central bank to keep monetary policy tight.

Car Sales

-100%

-50%

0%

50%

100%

150%

2007

2008

2009

2010

2011

2012

2013

2014

Car and Light Commercial Vehicles Sales y/y %

Source: Federal State Statistics Service of Russia

Inflation and Interest Rate

CPI y/y%

7-day repo rate (RHS)*

Source: Federal State Statistics Service of Russia, *Central Bank of Russia

0%

2%

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6%

8%

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12%

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16%

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2012

2013

2014


Hike in the key policy rateOn July 25, the Russian central bank raised its benchmark interest rate by 50 basis points to 8% from 7.5% previously, the third increase since the start of the year.

The bank’s central case is that consumer price inflation will ease to 6-6.5% by the end of the year, as the impact of the rouble decline wanes and lower administered price hikes, a good harvest and weak aggregate demand all bear down on inflation. Against this, negative shocks from increased geopolitical tension and the global monetary policy impact (a hike in rates by the US Federal Reserve for example) on the rouble, as well as changes to tax and tariffs policy, could push inflation up.

The central bank made clear that should the high rate of inflation persist, it would tighten monetary policy further in order to meet their inflation target.

Depreciation in the roubleThe rouble has been one of the most volatile emerging

capital flight seen for the whole of last year. The bank expects $90 billion in net outflow this year, which given the current trend looks overly optimistic.

Trade surplus narrows in MayRussia’s trade surplus narrowed to $18.7 billion in May, from $19.8 billion a month earlier, although above $14.1 billion recorded a year earlier.

Exports eased to $44.3 billion in May, 6.7% below April’s reading of $47.5 billion, although they were 8% above the same month a year earlier. Imports declined for the fifth consecutive month to $26 billion, down by 1.4% on the year and almost 6% below April’s reading of $27.6 billion.

The downing of Malaysia Airlines flight MH17, allegedly by Russian-backed separatists, has strained relations further with the west especially with Netherlands, which was the origin of the flight with 193 Dutch nationals on board. It is possible that the Netherlands will introduce sanctions on oil and gas imports from Russia which, if implemented, could be damaging to Russia’s trade balance given its role as a major distribution hub for oil and gas in Europe.

market currencies in 2014 due to the alarming levels of capital flowing out of the country following Russia’s annexation of Crimea. In July the rouble was 5.1% below the level seen in the same period a year ago, however the decline has eased in recent months. Consequently, foreign exchange reserves in Russia increased to $478.3 billion in June from $467.2 billion in May as there was a reduced need to try to protect the rouble from capital flight. However, some of this rebound in the rouble can be attributed to an upcoming Russian tax deadline boosting demand for the rouble from some companies, which could mean the resurgence could prove short-lived.

Capital outflows from Russia’s private sector stood at $48.8 billion in Q1 2014. About $7.4 billion left Russia in June, down from $8.8 billion in the previous month. Although the outflow slowed in the second quarter to $25.8 billion, the outflow in the first six months to June already surpassed the $62.7 billion

Spitzzeile Titel14

Our survey shows that while the initial impact of the sanctions seemed to hurt our panel of companies, there has been a partial rebound in confidence over the past two months.

Indicators


Russian business sentiment picked up in July to the highest in three months, although it was still below the level seen at the start of 2014 as business confidence has been hit by the general economic malaise coupled with the added tensions following Russia’s military intervention in Crimea. The MNI Russia Business Indicator rose by 4.1 points to 54.6 in July from 50.5 in June. Our survey shows that while the initial impact of the sanctions seemed to hurt our panel of companies (business sentiment slipped below 50 in May), there has been a partial rebound in confidence over the past two months.

Our survey period closed before fresh financial sanctions were put on Russian businesses by the US on July 16 and before flight MH17 was downed by a missile in eastern Ukraine. This could well have a negative impact on sentiment in the coming months.

Sanctions from the US included denying Russia’s largest oil producer Rosneft, its second largest gas producer Novatek, and its third largest bank Gazprombank, access to new American debt of longer than 90 days maturity or equity markets for new financing. US sanctions alone are unlikely to have a significant impact on the Russian economy, but if the EU decides to broaden its sanctions on Russia, this would potentially inflict far more pain. However, given the EU’s dependence on Russian gas and oil, and the frailty of their own economies to a cut in export revenue, the consenus is that hard hitting sectoral sanctions are unlikely at this stage. This said, at the time of writing early reports suggest some change of mood in Germany, so these cannot be ruled out.

54.6MNI Russia Business Indicator Highest In Three Months


Jul-13 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14

Current Conditions 51.8 60.0 52.5 55.6 49.2 50.5 54.6

Future Expectations 59.0 55.3 53.3 54.3 52.5 52.5 54.0

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Current Conditions

Future Expectations

The rise in business sentiment in July was across all three sectors. Construction companies were the most optimistic with confidence jumping above the 50 expansion/contraction line for the first time in three months. Companies were less optimistic about future conditions compared with their current business perceptions. Most companies expected overall business conditions to remain the same in the following three months and there was only a small rise in the proportion of those who thought conditions would be better. The Expectations Indicator rose slightly to 54.0 in July from 52.5 in June, and was significantly below the outturn of 59.0 in the same month a year ago.


In spite of a pickup in overall business sentiment, current conditions for Production among Russia’s largest companies slumped to a seven month low in July.

After remaining broadly stable in June, companies were less optimistic about their output in July, with the Production Indicator declining 7.2% to 51.5 from 55.5 previously.

There have been some limited signs of a pick-up in the economy with industrial production growing for the fifth consecutive month in June, by 0.4% on the year, although this was down from growth of 2.8% in May. On a monthly basis, this was the third consecutive decline, although the pace of the fall has eased. Manufacturing output was up 0.3% on the year compared with robust growth of 4.4% in May.

Fewer manufacturing and construction companies reported increased output between June and July, although their overall Production was still in expansion. In contrast, Production in the service sector continued to contract for the second month in a row.

Companies, though, were more optimistic about Production in the next three months, with the Future Expectations indicator rising to the highest since September, to record 52.6 in July compared with 51.1 in June. There have been reports that Russia’s largest car producer AvtoVAZ will increase domestic production to control costs due to the rouble’s sharp depreciation.

Production Lowest Since December 2013

51.5

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Production

Current Conditions

Future Expectations

Production




For the first time in 11 months, companies’ future expectations were brighter than their current conditions about Production levels. In spite of this, expectations were still 9.3% below the level recorded in the same period a year earlier.


Given the current economic weakness coupled with the threat of wider sanctions on Russia, New Orders have held up reasonably well and improved for the second consecutive month in July.

The New Orders Indicator increased slightly to 56.8 in July from 56.0 in June, led mainly by manufacturing and services companies while orders expanded at a slower pace among construction companies.

The three month trend in New Orders started the year at 53.3 before rising to 59.2 in March and has subsequently eased back to 55.9 in July.

Companies’ expectations for New Orders in three months’ time remained subdued with the Expectations Indicator broadly stable at 51.8 in July compared with 51.9 in the previous month, the lowest since February.

New Orders Future Expectations Lowest Since February

56.8

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New Orders

Current Conditions

Future Expectations

New Orders





Companies’ export orders rose to the highest in five months in July as companies have been able to take advantage of a weaker rouble since Russia annexed Crimea.

The Export Orders Indicator rose by 8.8% on the month to 53.3 in July from 49.0 in June and was 14.4% above the level seen a year ago. The bounce in July also probably reflects some degree of normalisation in trade following Russia’s incursion into Ukraine earlier in the year. Such optimism seems unlikely to be maintained given the threat of new sanctions in the wake of the downed Malaysia Airlines flight in eastern Ukraine, which came after our survey had closed.

There was greater optimism for export orders among manufacturing and services companies, with the indicator rising above the 50 neutral level for the first time in five months for the latter.

Companies were more optimistic about the next three months with the Future Expectations Indicator expanding for the first time in 11 months to 50.4 in July from 44.3 in June, a gain of 13.8% on the month.

Export Orders Highest Since February

53.3

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Export Orders

Current Conditions

Future Expectations

Export Orders




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2007 2008 2009 2010 2011 2012 2013 2014

Trend in Exports

Exports FOB (billion USD)

Exports y/y % (RHS)

*Source: The Central Bank of the Russian Federation


Poor consumer demand and weak economic conditions have left many companies with a high degree of excess capacity and evidence from the survey shows firms have done little to cut back in recent months.

Productive capacity has remained broadly stable over the past seven months and July saw no change with the Productive Capacity Indicator static at 50.5, although this was down 7.7% since the start of the survey in March 2013.

The Expectations Indicator also remained flat at the 50 mark in July after moving into expansion for the first time in nine months in May.

Productive Capacity Remains Flat

50.5

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Productive Capacity

Current Conditions

Future Expectations

Productive Capacity




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Productive Capacity and Rate of Capacity Utilisation

MNI Productive Capacity

Rate of Capacity Utilisation*

*Source: Federal State Statistics Service of Russia


Order Backlogs continued to recover in July, although given the current weak demand backdrop, they contracted for the fifth consecutive month with the indicator standing at 47.7 in July compared with 45.4 previously.

Manufacturing companies’ backlogs rose in July although failed to breach the 50 breakeven level. The slowdown in the economy has resulted in a greater degree of excess capacity, which means companies are better placed to meet any unexpected demand swiftly.

Companies remained pessimistic about future demand conditions as their future expectations for backlogs remained firmly in contraction and increased slightly to 45.4 from 44.4 in June. Except for May last year, when the Future Expectations Indicator was exactly 50, expectations for Order Backlogs have always been in contraction, although have trended up gradually since October.

Order Backlogs Continue to Contract

47.7

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Order Backlogs

Current Conditions

Future Expectations

Order Backlogs





The Employment Indicator declined for the second consecutive month to 50.3 in July from 50.5 in the previous month. Over the past year, companies’ hiring has reduced modestly in line with the economy’s downturn and the Employment Indicator was 3.3% below the level seen a year ago.

Firms are asked whether they have too few, too many or just the right number of employees. A reading below 50 indicates they have too many, above that they have too few, while 50 is seen as neutral. Companies’ employment situation has on the whole remained resilient in the face of the slowdown, a reflection of Russia’s overstaffing and low levels of productivity.

In July, companies in our panel were neither optimistic nor pessimistic about employment in the next three months as the Expectations Indicator remained flat at 50.0. After hitting a low in Q4 2013, expectations picked up in 2014 and have remained broadly same in Q2 2014 compared with Q1 2014.

Employment Lowest Since March

50.3

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Employment

Current Conditions

Future Expectations

Employment





Companies have been aggressively destocking recently in the face of weak demand. However, the pace of the inventory draw down has fallen sharply, and in July the Inventories Indicator picked up slightly to just below the neutral level.

The Inventories Indicator ticked up to 48.6 from 48.0 in the previous month, the eleventh consecutive month in contraction, although was significantly above the outturn of 38.2 recorded at the beginning of the year.

The current weak economic conditions, coupled with the tensions in Ukraine, have created a highly uncertain business environment for many companies who have chosen to run down their stocks. In Q2 2014, the Inventories Indicator averaged the lowest since the start of the survey.

Manufacturing companies continued to report a contraction in inventories of finished goods while construction companies were neutral at the 50 mark for the second time in a row.

Companies began destocking in September a year ago, even before the Ukraine crisis erupted and their expectations for the future turned negative in November and have remained in contraction since then, pointing to weak demand expectations in Russia. The Future Expectations Indicator rose slightly to 47.3 in July from 46.5 in the previous month.

Inventories Highest Since October

48.6

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Inventories

Current Conditions

Future Expectations

Inventories





In spite of the recent acceleration in consumer price inflation, Input Prices declined for the fourth consecutive month to a series low in July.

The three month trend in Input Prices has declined significantly since the summer of 2013 and the indicator is now down 9.4% down on the year. In spite of the rouble’s depreciation, input costs have remained surprisingly subdued, a possible reflection of just how weak the demand backdrop is.

In July, the Input Prices Indicator declined slightly to the lowest since the start of the survey to 50.0 from 50.5 in June. The decline was mainly led by manufacturing and services companies while construction companies reported stable prices following a significant drop in the previous month.

Companies expected input prices in the next three months to remain the same, with the Expectations Indicator remaining flat at 50.0 for the third month in a row. Companies were probably hopeful that the central bank’s tight monetary policy stance would help in curbing inflation in the coming months.

Input Prices Series Low

50.0

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Input Prices

Current Conditions

Future Expectations

Input Prices





Since the beginning of the year an increasing number of companies have reported lower prices for their goods and services and in July they outnumbered those who increased prices.

The Prices Received Indicator, which measures the prices that companies charge for their goods and services, contracted for the first time in 16 months to 49.7 in July from 51.3 in June.

Consumer price inflation rose to 7.8% in June, from 7.6% in May, moving further above the central bank’s expectation of 6-6.5% for end of 2014. The central bank has raised interest rates three times this year in a bid to counter spiralling inflation. It expects inflation to ease in the second half of the year under the scenario of no further negative shocks, but has warned that it will tighten policy further if inflation remains too high.

Following a brief pick up, Prices Charged by services companies fell into contraction. Fewer manufacturing companies increased prices, while construction companies reported stable prices.

The Future Expectations indicator remained flat at 50.3 in July, with the majority of companies reporting that they expected their prices would remain the same.

Prices ReceivedLowest Since March 2013

49.7

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Prices Received

Current Conditions

Future Expectations

Prices Received





The financial health of our panel of companies has shown a downward trend since the start of the year, amid Russia’s stand-off with the west, although it has remained relatively buoyant.

The Financial Position Indicator was flat at 54.3 in July. Since March 2013, when the survey started, the financial position of Russian companies has been fairly healthy in spite of the economic slowdown, with the indicator averaging 59.6, and even in July it was almost 5% above the level seen in the same period a year earlier.

Companies remained nervous about the future course of events given the threat of further sanctions and there possible impact. The Future Expectations Indicator has trended downwards in recent months and in July it was 7.5% below the level seen a year ago. Recent data showed there was a slight improvement in their expectations to 53.9 in July from a record low of 52.7 in the previous month.

Financial Position Remains Flat

54.3

40

45

50

55

60

65

70

75

80


Financial Position

Current Conditions

Future Expectations

Financial Position





The indicator for Interest Rates Paid rose for the first time in five months to 50.0 in July from 49.7 in June.

The effect of the rate hikes has seemingly not yet been passed onto businesses, as the majority of companies polled reported no change in their interest costs. The central bank raised its key rate to 8% from 7.5% on July 25 after leaving it unchanged at its June meeting. The central bank has raised interest rates twice since early March when Russia’s annexation of Crimea boosted capital flight and caused the rouble to tumble to a record low and inflation to accelerate. The central bank has hinted that further tightening is possible if inflation fails to ease.

The yield on the Russian 10-year government bond declined to 8.33% from 8.6% on July 23, while the three month interbank rate rose slightly to 9.14% from 9.03% previously.

The slight rise in the indicator was led by services companies where the indicator rose to the 50 neutral level, after remaining below 50 for previous three months.

Companies expected the Interest Rates they would pay over the coming three months to fall, with the indicator remaining at 49.7 for the third consecutive month.

Interest Rates Paid Highest Since March

50.0

45

47

49

51

53

55

57

59


Interest Rates Paid

Current Conditions

Future Expectations

Interest Rates Paid





The Effect of Rouble Exchange Rate Indicator, which measures whether the exchange rate is helping or hurting businesses, declined slightly to 50.0 in July from 50.3 in the previous month.

A value above 50 shows more firms reported that the exchange rate was helping, while a reading below 50 shows the exchange rate was hurting.

The rouble has fallen by 5% against the US dollar since a year ago and the rapid descent has raised fears of economic instability among companies. The indicator hit a series high in February before falling sharply as the rouble depreciated amid large capital outflows following Russia’s annexation of Crimea. Since the start of the year, companies were 12.1% less optimistic about the positive impact of the exchange rate on their businesses.

After fresh sanctions, the rouble fell as low as 35.2 against the US Dollar, the lowest since early May. As a result more companies are trying to substitute their imports with domestic materials and thereby expected the exchange rate to have a minimal impact on their operations in the future. The Expectations Indicator remained at 50.0 for the ninth consecutive month, having stood slightly above the breakeven level in September and October 2013.

Effect of Rouble Exchange Rate Broadly Unchanged at 50

50.0

45

47

49

51

53

55

57

59

61

63


Effect of Rouble Exchange Rate

Current Conditions

Future Expectations





20

25

30

35

40

2007 2008 2009 2010 2011 2012 2013 2014

Depreciation in the Rouble

RUB against USD

Source: The Central Bank of the Russian Federation


The time taken to deliver supplies to companies remained broadly stable at 50.0 in July compared with 50.3 in the previous month. However, it was almost 9% above the level seen in the same period a year ago suggesting that demand has picked up somewhat over the past year.

The marginal decline in the indicator in July was led by manufacturing companies who said their delivery times were the same, in contrast to longer previously.

Companies’ expectations for three months’ time rose for the first time in six months to 50.0 in July from 49.7 previously. Future expectations have remained broadly stable since March last year, when the survey started, with the series averaging 49.7.

Supplier Delivery Times Broadly Stable

50.0

40

42

44

46

48

50

52

54



Current Conditions

Future Expectations






Fewer companies had better access to credit in July compared with the previous month, as the Availability of Credit Indicator decreased by 5.5% to 54.5 in July from 57.7 in the previous month, the second consecutive decline.

A lot of US and European banks have reduced their lending to Russian businesses since the annexation of Crimea in March. Recent sanctions by the US have also prohibited new financing to major Russian financial institutions and energy firms. Such restrictions are pushing companies to reduce their dependence on western financial markets with many trying to switch contracts to other Asian currencies.

The decline in credit availability was across board with manufacturing and construction companies’ credit availability reducing to the lowest in three months.

Companies’ expectations about credit availability in the next three months’ time have trended downwards since September a year ago and they remained broadly stable in July with the Expectations Indicator at 51.0 compared with 50.8 in the previous month.

Availability of Credit Lowest Since April

54.5

40

45

50

55

60

65

70



Current Conditions

Future Expectations





Spitzzeile Titel30

31 Historical Summary

32 Historical Records

33 Historical Records - Quarterly

Data Tables


Historical Summary2013 2014

Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul


Current Conditions 51.8 51.3 59.0 56.3 51.5 45.5 57.9 60.0 52.5 55.6 49.2 50.5 54.6

Future Expectations 59.0 61.5 55.0 47.2 45.0 49.5 53.0 55.3 53.3 54.3 52.5 52.5 54.0

Production



New Orders



Export Orders



Productive Capacity



Order Backlogs



Employment



Inventories



Input Prices



Prices Received



Financial Position



Interest Rates Paid






Supplier Delivery Time







Historical Records 2013- Current

Minimum Maximum Mean Median


Current Conditions 45.5 62.9 55.2 55.6

Future Expectations 45.0 71.3 55.6 54.3

Production



New Orders



Export Orders



Productive Capacity



Order Backlogs



Employment



Inventories



Input Prices



Prices Received



Financial Position



Interest Rates Paid













Historical Records - Quarterly

Q4 13 Q1 14 Q2 14 Quarterly Change Quarterly % Change

Current Conditions 51.1 56.8 51.8 -5.0 -8.8%

Future Expectations 47.2 53.9 53.1 -0.8 -1.5%

Production


Future Expectations 47.1 51.1 51.6 0.5 1.0%

New Orders



Export Orders



Productive Capacity

Current Conditions 51.0 50.3 50.7 0.4 0.8%


Order Backlogs



Employment



Inventories



Input Prices



Prices Received



Financial Position



Interest Rates Paid













Methodology

MNI Russia Business Sentiment is a monthly poll of Russian business executives at companies listed on the Moscow Exchange. Companies are a mix of manufacturing, service, construction and agricultural firms.

Respondents are asked their opinion on whether a particular business activity has increased, decreased or remained the same compared with the previous month as well as their expectations for three months ahead, e.g. Is Production Higher/Same/Lower compared with a month ago?

A diffusion indicator is then calculated by adding the percentage share of positive responses to half the percentage of those respondents reporting no change. An indicator reading above 50 shows expansion, below 50 indicates contraction and a result of 50 means no change.

Data is collected through computer aided telephone interviews and around 200 companies are surveyed each month.

Insight and data for better decisions

Discovering trends in Emerging MarketsMNI’s Emerging Markets Indicators explore attitudes, perspectives and confidence in Russia, India and China. Our data and monthly reports present an advance picture of the economic landscape as perceived by businesses and consumers.

Our indicators allow investors, economists, analysts, and companies to identify economic trends and make informed investment and business decisions. Our data moves markets.

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Documents

MNI Russia Business Report July 2014