Danske Bank about the prospects of Russia

Despite the fact that the Russian economy has begun to bring some signs of stabilization, particularly in the manufacturing sector and the labor market, it is too early to rest on our laurels. There remains a number of financial problems requiring urgent solutions. Thus, public finances deteriorated significantly in the 4 th quarter of 2008. Total expenditure increased by one third, while revenues declined by one fifth, it has resulted in a negative balance the budget. Ministry of Finance of the Russian Federation is now working on the budgets of future years. The planned deficit for the coming years suggests that the Russian government will have to produce new T-bills. Until recently, as the money for a rainy day, use the Reserve Fund, established in February 2008 on the basis of the Stabilization Fund. We believe that in 2010, its resources will be exhausted. To support the budget, the Government will also have to take money from the Fund of National Prosperity. Everything indicates that, among other things, Russia, to finance the deficit, would have to issue debt securities worth about 20 billion dolllarov for the period from 2010 to 2012. In the medium term projections for public finances suggests a possible increase in the state. debt with the impressive 7% of GDP in 2008 to impressive 16-18% of GDP by 2012. In our opinion, the volume of state issues. bonds provoke the growth yield on securities with distant maturities. Ministry of Finance expects that the yield on treasury bills next year will be 13%. Given the forecast for inflation next year in the region of 10-11% this prediction is somewhat optimistic. Last week, rating agency Fitch has confirmed Russia's sovereign rating at BBB with negative outlook. Specialists Fitch mentioned that the key credit risks for Russia in the banking sector, the agency expects to increase the number of overdue debts by the end of 2009 to 25% of the total loan portfolio. In this situation, may need additional capital infusion of $ 24 billion to the banking sector. In Fitch also mentioned the problems associated with the extension of the external debt and large budget deficits that could adversely affect the rating in the short to medium term. The banking system is in serious condition. Provision for credit portfolios "eats" almost all of the net interest income of banks, depriving them of opportunities to generate profit through its core activities. This trend will likely continue in the second half of this year, since the actual level of overdue loans higher than official figures. In general, the data indicate an increase in the risk of volatility in the Russian financial markets this year, with the pressure on the ruble and fixed income securities to fall may increase.

Lars Christensen
Danske Bank