The sector is looking to recover from a slump in the wake the global financial crisis and subsequent economic downturn which saw car sales in Russia plummet.  But Government steps to underpin Russia’s leading domestic carmaker, Avtovaz, as well as encourage foreign investment in Russian carmaking, coupled with a cash for clunkers programme to encourage sales, have buoyed the industry.

Ben Aris, Editor of Business New Europe, says government attempts to turn the industry around have provided a good example of industry policy working well.

“It’s a rare example of industry policy, tax break and what have you, designed to promote investment into a particular sector and to develop it. And as such it is hitting all of the governments goals.  To explode the myth, most people say investment into Russia has very low foreign investment – In the car sector every major player in the world is pretty much here, moreover they have just committed themselves to doubling and trebling production. But the factories that are going up in various clusters in Kaluga, in St. Petersburg are producing more and more cars – but for each job that goes to the automotive sector you got another 16 jobs in auxiliary sectors: in components, in services and more.”

Ivan Bonchev from Ernst & Young outlines the growth potential and key concerns for the industry.
“Indeed the first couple of months were very successful for the Russian automotive market. By the end of the year I expect to have double digit growth on the sector of about 20% year on year. One of the major issues is the overall capacity and potential of the Russian supplier base. The Russian supplier base is one of the key factors that needs to be invested in by both the government and the International automotive community and other related stake holders, because this is what would drive further sustainable growth.”

Aleksey Rakhmanov, Director of Auto sector department at Ministry of Industry and Trade, says current growth is likely to keep up the pace.
“We have a modest forecast for 2011, due to the fact that the scrappage program will come to its end by September 2011. We still forecast the passenger cars segment to grow by approximately 15%. These are basically two major factors: consumer confidence and the possibility of people to take car loans which than will drive the market.” 

Andrey Rozhkov, analyst at Metropol, expects a moderate increase of the automarket on the back of bank lending.

“I think, we can expect an overall 12-18% year on year growth on the passenger car market. The consumer demand driver –attractive loan conditions – may even become a core engine of industry growth. Car loan conditions in Russia have been always debated and the banking sector experienced a substantial growth of demand for that type of loan before crisis. Of course, banks could not offer such lucrative conditions during the crisis but today we are back to the pre-crisis levels and the stronger the economic environment and government support the more affordable conditions will be offered. Another positive propensity is a variety of opportunities for a customer to purchase car on credit: rather from a bank or from a direct distributor who has established its own car bank specifically for his car brands.”

Tatiana Schannikova, Credit specialist at Glav-Avto, says also points to loans as becoming a key sector growth driver.

“We have seen a positive upturn in demand for cars and notably for car loans within a range of loan amount between 500 – 800 thousand roubles. Sberbank is still a leader among creditors. People, however, try to squeeze out more out of loan programs not to overpay. Banks on the other side eased their strict rules and criterions. I expect that the demand for auto loans will grow as people began to realize that this type of purchase is more comfortable and does not hit their family budget accidentally.”

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More local companies are emulating Western standards and adopting ethics codes to help them operate in a corrupt environment and create the appearance of trustworthiness.

Such codes regulate everything a company's employees do, from how they dress to how they act in case a bribe is offered. Businessmen jokingly compare them to a famous poem by Vladimir Mayakovsky called "What Is Good and What Is Bad," in which a father gives simple life-guiding advice to his son.

In the last three years, state companies, including Sberbank and Rosneft, have established codes for their workers as part of President Dmitry Medvedev's initiative to increase transparency. Gazprom has begun putting together its ethics guidelines, which could take more than a year to deploy. Private companies have followed suit.

Companies are reluctant to talk about the efficiency of the codes, however.

LUKoil added a code for workers at the end of last year. Since LUKoil has offices in many regions of the world and a staff of about 130,000, a common set of rules was necessary, LUKoil spokesman Vladimir Simakov said.

"Were there any infractions in terms of business ethics? Of course there were," Simakov said, without elaborating. LUKoil established a committee to monitor the efficacy of the code, but Simakov said he couldn't assess whether the measure is working yet since at least a half a year is necessary.

It's not just the banks and oil and gas giants that are formalizing an ethics culture. Last year, members of Opora of Russia, an association of medium-sized businesses, signed a resolution on ethical conduct.

Opora member Econika Corporation, which includes shoe stores, industrial equipment and real estate investment, published a set of rules for employees in 2008.

"It is good for the image — and clients, investors and partners respond with trust," said Econika chief executive Andrei Iliopulo.

Some experts see the ethics code trend as an example of transforming the economic model from wild capitalism to socially responsible business.

"Business feels this need and tries to fulfill it," said Alexander Sergeyev, a professor at the School of Higher Economics. "It might seem strange, but people like to live by the rules."

Companies are adopting codes based on international best practices and include clauses on conflicts of interest and social responsibility.

British-Russian conglomerate TNK-BP has one of the most respected codes in the country, said Mikhail Kuznetsov, head of the Association of Independent Directors. His group consults companies on implementing ethical codes and other ways to improve their practices.

TNK-BP's code outlines a set of principles covering ethical conduct, employee behavior, external relationships, health, safety, security and environmental performance, control and finance. A company spokesman told The Moscow Times that they have never had any issues with the codes, which were implemented in 2004.

Codes are not a completely new foreign phenomenon. Delovaya Rossia, an association of 65 companies in the retail and franchise sector, including the X5 Group, the country's leading grocer, has required members to sign a code of ethics since its founding in the 1990s. An updated version of the code was rolled out in 2003.

The association's director, Yury Mikhalchenko, said a specific benefit of their code has been a reduction in franchise fraud — a common occurrence in which unauthorized agents sell franchises to unsuspecting regional small businessmen.

Another advantage of trying to get employees in the franchise sector to subscribe to codes of conduct is that, by standardizing behavior and expectations, they come closer to providing uniform quality of customer service, Mikhalchenko said.

But effective codes of conduct are not yet the mainstream. Kuznetsov said that less than 100 companies are firmly committed to their codes.

"It's more like a facade, something needed to improve the image to outsiders, not something to take seriously," said Kuznetsov, whose clients range from giant state companies to private businesses with an annual turnover of $100 million.

The Committee to Fight Corruption, an independent public organization that works to battle graft, started earlier this month to research the effect of companies' ethics codes on governance.

The committee will poll 60 German companies operating in Russia that signed anti-corruption measures last year. The results will be published in the April issue of the committee's magazine.

"The companies signed the codes, but do they follow them?" committee chairman Anatoly Golubev said. "Nobody has this information."

Although many companies implemented codes over the last three years, corruption is at a 10-year high. Russia scored a low 2.1 on the Transparency International Corruption Perceptions Index, in 2010 — down from 2.2 in 2009 and less than the 10-year average of 2.4.

Many local companies are cynical when it comes to ethics codes.

The owner of a midsized travel agent laughed when asked whether there is a document that outlines ethics for employees of her company.

"There are no written postulates of behavior," she said.

In their employment contract there are written guidelines concerning customer service, but that's all. The agency's more than 150 workers are expected to show good judgment and respect toward the company and its management.

The company does not accept bribes, but when it comes to giving, it's a different story.

"There is no way to get around it. It's not called a bribe, it's a 'thank-you,'" the travel agency's owner said.

Thank-yous include free or reduced international travel fares for tax officers who inspect the company's finances and monetary presents for the firemen who approve the safety of the company's offices.

International companies are not exempt either.

Last year, a number of businesses were caught in corruption scandals, including Hewlett-Packard, Daimler, Siemens, IKEA and the Swiss logistics company Panalpina. The U.S. Department of Justice has pressed charges against several of them for violating the Foreign Corrupt Practices Act.

Although, like many international companies, HP has a detailed code of conduct published openly on its web site, the company's Moscow office was raided last April on suspicion that employees paid bribes in exchange for a $44.5 million contract to supply equipment to the Prosecutor General's Office.

HP declined to comment on its ethics code for this article, citing the ongoing investigation.

A former HP Russia chief of financial operations told The Moscow Times that companies seem to succeed at implementing their worldwide codes in Russia, since the number of publicly reported cases of misconduct is relatively small when compared with the large number of transactions that big companies like HP carry out.

But, he said, in general, the motto, "In, Rome, do as the Romans do" is quite appropriate. "It's very hard, if not impossible, to always go against the mainstream."

One of the key feedback elements of most ethics codes requires an employee to tell a superior or call a hotline when he sees a coworker doing something wrong. But this type of action is traditionally seen in Russia as tattling. "It's not a part of our culture," Kuznetsov said.

The Committee to Fight Corruption's Golubev said although there are codes, there are no instruments to apply them practically to the local reality. If the code says don't give bribes, but a tax or a fire official is threatening to impose exorbitant fines unless you pay up, what can you do? This is especially true in light of an ineffective judicial system and law enforcement.

Sergeyev of the Higher School of Economics said it's natural that people are likely to be skeptical toward a set of rules imposed from above that they were not involved in creating.

The apathy evoked by the "Moral Code for Builders of Communism," a set of 12 rules that every proper Soviet citizen was supposed to follow, is still fresh even in middle-aged Russians' minds, Sergeyev said.

Econika's Iliopulo said one way to get employees to take codes seriously is to include them in the drafting.

"They have to feel like it is done with their interests taken into consideration," Iliopulo said.

Small companies are not likely to have a document that outlines employees' conduct, said Tatyana Rybakova, director of the Center for Study of Corporate Citizenship. But she has seen many companies develop codes as they grow. It is now considered good form to have an ethics code.

"Little by little, whether they want to or not, they are realizing that it is important — it influences public opinion, investment, it makes communication easier," Rybakova said.

Both Kuznetsov and the former HP financial officer agree that the younger generation, coming of age in a more business-oriented society, is more likely to respect ethics codes.

"The big companies have planted the flags, so now hopefully everyone else will follow," Kuznetsov said. But, contemplating the demand for his company's consulting services on ethics codes implementation, he added, "I have to say, people aren't exactly knocking on our doors."

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The Ukrainian cabinet of ministers is currently preparing a resolution which will allow the country to restore its gas exports to Poland, the Kommersant-Ukraina paper said on Wednesday citing own sources.

Ukraine halted gas exports to Poland January 1, 2011. Under a contract between Russia's Gazprom and Ukraine's Naftorgaz, Ukraine is not allowed to export Russian gas abroad. On the other hand, a decree, dating back to 2001, obliges Ukraine to sell gas recovered at home only on the domestic market.

"The cabinet is preparing an amendment to this decree which will allow the country to export up 300 million cubic meters of gas to Poland this year, and up to 3 billion cubic meters the next year," the paper said.

In light of the fact that the Polish prices on gas will hit $290-300 for one cubic meter this spring, Naftogaz could gain up to $90 million.

Gazprom is concerned by these plans, the paper said. "We can agree a small flow of gas at the level of 100-200 million cubic meters; the capacity of the Polish gas market is 14 billion cubic meters, an export volume higher than $1.5 cubic meters is the tenth of this market," the paper cited a senior Gazprom source.

Gazprom will try to persuade Ukraine to export no more than 1.5 billion cubic meters of gas, the source said.
KIEV, February 23 (RIA Novosti)

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Business RT spoke with Uralsib Chief Strategist, Chris Weafer, about the factors driving Foreign Investment into Russia.

RT:  Is the trend of declining FDI going to continue?

CW: “It has better not, I think, as we hear from the Finance Minister today, that Russia needs to attract a substantial increase in foreign investment, both in terms of capital and expertise – remember we need both – if Russia is to develop its industries and the modernisation program is to develop as planned. Growth in the last ten years was fuelled by one and a half trillion dollars worth of oil and gas revenues.  The budget now needs about $90-$95/bbl to balance, a lot of that money goes into social programmes – pensions salaries etc.  There is very little left for investment, but yet we know that we are now at the point where the economy needs a substantial increase in investment if we are to hit those targets.  Our analysis is that if there is no increase from these very low levels of Foreign Direct Investment, then the economy may go into a long period of two and a half to three percent growth, and that is clearly not enough.”   

RT:  When we talk about investment, maybe not direct investment but capital inflows, is that happening? Are we seeing capital flowing into Russia?

CW:  “Well, we are seeing stock market flows coming in, and we get this data on a weekly basis from an agency in the US, and that does show that, this year, portfolio investors prefer Russia to the other big emerging market funds.  So, for example, the last four or five weeks, there has been net outflows from countries like Brazil China and India, whereas Russia has attracted money.  So portfolio investors are betting that things are going to change, and that is a hopeful lead indicator, but we still need to see a pickup in Foreign Direct Investment, and frankly, we really don’t expect to see that until after the election.  The second half of 2012 is the more realistic target than 2011, and maybe not until 2013.”

RT:  So investors are looking for stability, are they looking for risks?  What are they looking for?

CW:  “Well, they’re looking to see that Russia really is at the point of change, that it is serious that it is about improving the investment climate, of tackling some of the headline issues that we read about every day, such as corruption, redrafting some of the legislation, and the administrative rules that actually block investment, and generally just improving the investment climate. You know, legal protections, legal redress etc. so, we are at this point now, I think, that investors are certainly more willing to give Russia the benefit of the doubt.  We certainly see from our side, that there are a substantially large number of companies doing due diligence on Russia, that they are looking at Russia.  But still they have a wish list of things they want to see changed, you know, such as dealing with legal protections and corruption.  And if those issues are dealt with, or they do see real improvement, over the next year, year and a half, then, I think, we’ll see the investment capital coming in.  But I really don’t think we are going to see it this year, people will want to see these issues addressed, and joining WTO at the end of this year, I think, will be a very significant milestone in the effort to attract more foreign investment.”

RT:  That was of course a very long running process.  We’ve seen a few weeks ago that Finance Minister Kudrin was saying that we need a 7-10% increase in investment every year to keep the economy growing.  Do you think that is realistic, and how important is the privatisation programme in that respect?

CW:  “It is realistic if Russia deals with this wish list that I mentioned. I mean it’s very sort of clear cut right now – investors are certainly interested in Russia, but only if some of these significant barriers are removed, such as corruption and legal protections – and if they are then we realistically can see an increase.  We are, of course, coming in from a very low level of investment.  So even that 7-10% growth from this low level is very achievable, and better.  But only if the investment climate is improved.  Privatization is a big part of that.  We’ve already seen the first of those, the VTB sale.”

RT:  What do you make of that?

CW:  “Well, to be fair, it came at a bad time.  It clearly was a struggle.  The price, obviously, came down to the level it was done at, from the level it had been trading.  But, it is fair to say to that a lot of that price reduction was because of the trend in global emerging markets. This year emerging markets are very much out of favour, as it were – having had a too good year.  So it was a difficult time. We certainly think there is an appetite for the next two – which should be Federal Grid Company, and Sberbank, which should be a lot better.  Hopefully markets will allow that as well.”

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In accordance with the current plan, the developers have to complete the existing projects within the next five years.

As Russian Construction Review reported on a previous occasion, Andrey Lukianov, the former head of the Russko-Aziatskaya Investment Company’s development branch, has recently become the new manager of the centre.

The city authorities have claimed that in order to support operations in the new business centre the city is planning to invest RUB 85bn (€2bn), in the development of the surrounding infrastructure.

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“It's technically possible to complete the talks in April,” said Maxim Medvedkov, head of the ministry's Trade Negotiation Department, which would allow accession by early 2012.

Medvedkov, who also chairs Russia's delegation on joining the WTO, said a new round of talks would start in Geneva next week, adding that the country is now in its 18th year of attempts to join the organization.

“It's quite possible that it will be the last year in this process. We hope so,” he told a news conference.

Russia has reached agreement on 99 percent of issues, including passing amendments to legislation in order for it to comply with the norms of the organization, he said.

Medvedkov is not concerned about Georgia's demand to allow its customs officials to be posted on internationally recognized borders with Abkhazia and South Ossetia.

"We hope that this problem won't stop our accession," he said, adding that one country can't block accession of another country.

Georgia is already a member of the trade bloc, and according to WTO rules, any of its 153 members may veto Russia's accession.

Moscow submitted its application to join the WTO in June 1993, nearly 18 years ago, and despite promises from the United States to speed up its accession, the country remains the largest economy outside the bloc.

The issues to be discussed in Geneva include the size of agricultural subsidies after joining the WTO, and meat import quotas.

The government plans to double agricultural subsidies by 2012, providing a total of $9 billion annually to support farmers, but may subsequently reduce that figure to $4 billion to $4.5 billion over the next five to seven years.

Concerning meat import quotas, Medvedkov said a compromise should be found “to create a balance between the interests of producers and consumers.” He also said Russia was in talks with 10 to 12 countries on the size of the quotas.

President Dmitry Medvedev signed a new food security doctrine last year, which called for 85 percent of all meat consumed in the country to be produced domestically by 2020.

Medvedkov also said the verdict recently handed down to former Yukos head Mikhail Khodorkovsky was unlikely to affect negotiations on the WTO bid because the talks in Geneva would be related to “purely trade issues” and the Khodorkovsky issue “wouldn't be raised for sure.”

The WTO “is a trading platform” and it “shouldn't be used for solving other problems,” he said.

Khodorkovsky’s latest sentence, which is likely to keep him imprisoned until 2017, may negatively affect Russia's image and complicate the country's bid to join the bloc, an unidentified official at the administration of U.S. President Barack Obama said last month, Reuters reported.

Meanwhile, Russia's accession to the WTO is anticipated by a number of countries.

Germany's Finance Minister Wolfgang Schaeuble told Rossiiskaya Gazeta on Tuesday that Russia should become a WTO member “in order to equalize the rights and duties of all market players during export-import operations.”

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Belarus agreed to buy 21.7 million metric tons of oil from Russia in 2011, while last year’s supplies dried up Jan. 1, threatening a standstill for two Belarussian refineries as their reserves run out by the end of this month.

The impasse demonstrates the uneasy path toward closer economic ties between the neighbors, despite the customs union they set up last year.

Alexander Timoshenko, spokesman for Myasnikovich, declined to elaborate on the possible visit to Russia. Prime Minister Vladimir Putin's spokesman, Dmitry Peskov, confirmed that the prime ministers might meet later this week, providing no further details.

As part of the customs union, Russia agreed last month to waive export duties on the crude that travels to Belarus starting this year. In exchange, Belarus committed to sending back to Russia all duties it earns by re-exporting the refined products to Europe.

One of the reasons the deal didn’t work, an industry source said, is because of a plan by Belarus to raise the westward transit fee for Russian oil by 12.5 percent next month.

“We will try to make up for that,” said the source, who asked not to be named because he wasn't authorized to comment on ongoing talks. “It's a two-way street.”

As a counter measure, Russian oil companies have asked for a surcharge of $45 per ton of crude — a condition that Belarus rejected. Suppliers to Belarus such as LUKoil and Rosneft declined to comment Monday.

As corporate talks produced no results, both governments are stepping in. In the first move, Deputy Prime Minister Igor Sechin and Belarussian First Deputy Prime Minister Vladimir Semashko held a meeting Monday, a government source said.

Calls to Marina Kostyuchenko, spokeswoman for Belarus' state oil importer Belneftekhim, went unanswered Monday afternoon.

Energy Ministry spokeswoman Irina Yesipova said only that corporate talks were ongoing.

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The offices were those of Rosneft, the country's largest oil company, and the small something was actually a somebody — Eduard Khudainatov, the company's jocular new president. He was outlining his vision for the company and his assessment of 2010 — the year in which oil extraction in Russia reached a post-Soviet record high — to a crowd of journalists and industry analysts.

Among many topics touched upon, Khudainatov, a graduate of Russia's orphanage system, laid particular emphasis on Rosneft's goal to become a global producer on all continents.

On Friday he proved as good as his word with the announcement of the biggest deal in Rosneft's corporate history tying the company to international oil giant BP.

Rosneft is not alone in its overseas ambitions, however. Last year saw TNK-BP's acquisition of assets worth $1.8 billion in Venezuela and Vietnam while LUKoil said in September that it sees more potential petroleum in West Africa than in West Siberia.

"The oil industry is ready to expand abroad," said Lev Snykov, an analyst at VTB Capital, "and this will be a trend of the coming year."

The forces driving oil and gas companies away from Russia, which has one of the world's biggest reserves of energy, may be opaque to some observers, but the push for geographic diversity is being spurred by high domestic tax levels and uncertainty over future burdens.

Analysts contacted by The Moscow Times highlighted anticipated clarity regarding the tax regime as the 2011 development likely to have the most significant long-term implications.

"From the standpoint of investors, the only question is taxation," said Constantine Cherepanov, an analyst at UBS. Russian production is being kept afloat by big greenfields — like Rosneft's Vankor — brought on line less than 10 years ago, he added, but when these begin to run dry in the coming three to five years the country could face production decline.

Many companies control reserves that are on the verge of profitability, but are holding off investment decisions in the face of the state's unclear taxation plans. The head of Surgutneftegaz, Vladimir Bogdanov, said in late December that the company "could achieve growth by enhanced recovery, which would not be profitable with today's tax burden."

Last week's Rosneft-BP deal, which will see the companies work together to exploit large untapped reserves on Russia's Arctic shelf, was accompanied by a promise from Prime Minister Vladimir Putin that the government will create a "very favorable tax regime for the realization of the project."

No major milestones or significant overhauls of the taxation system are forecast, but the industry expects some tweaking as the year progresses. Balancing between the prospect of higher taxes inflicting damage and lower taxes being an impossibility because of budgetary pressures, the government may consider redistributing the burden within the sector.

It is likely that some of the weight of taxation, Cherepanov said, will be shifted from exploration and production to "downstream" facilities. The first new refinery built since the fall of the Soviet Union was completed by Tatneft in Tatarstan in 2010, and will begin sales early this year.

Taxation is not, however, the only issue to watch. Kick-started by the marriage of BP and Rosneft, other key questions to be resolved in 2011 include potential partnerships.

The decision of who will join Bashneft in its exploitation of the huge Trebs and Titov field is particularly significant. Many consider LUKoil the most likely contender.

The largest independent gas company, Novatek, is also likely to seek a partner this year, possibly a foreign one, to assist with extraction work on the Yamal Peninsula.

For the gas industry, a defining moment will take place in the second half of the year when gas supplies start to flow through the first line of the Nord Stream pipeline connecting Russia directly with Germany via the Baltic Sea, as the $10 billion project approaches completion.

Though Rosneft and BP may have taken the lead, further big decisions loom for the country's energy strategy in the mineral-rich but largely unexploited Arctic region. Attention is particularly focused on the enormous Shtokman gas field in the Barents Sea — operated by Gazprom, Total and Statoil — which last year had its start date for gas deliveries delayed to 2016.

"Will Russia produce LNG in the Arctic within the framework of this project, which has been complicated by the state of the American market?" said Maria Kutuzova, editor of Russia's Oil. "That remains an open question."

Doubts have been expressed over the project's financial viability because of the fall in demand for LNG in the United States, which is increasingly turning to unconventional gas reserves, including shale gas.

The final investment decision on Shtokman, the first phase of which has an estimated price tag of $15 billion, will be taken in spring 2011.

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Inflation rose to beyond 8% at the end of 2010 having been about 5.5% in June at the tail end of a drop from 15% in late 2008.At that point concerns mounted, on the back of the summer drought and its capacity to generate food price inflation, and push inflation higher more broadly.

Ivan Chakarov, Chief Economist for Russia and CIS countries at Bank of America Merrill Lynch, believes the rebound in inflation during 2H 2010 has largely reflected the impact of the drought.

“I think, that inflation was clearly, almost 100%, driven by the food price shock that was caused by this summer drought. If you look at the inflation outside the food sector, this stayed pretty much constant during the year, in other words, we didn’t have a significant spill over effect from the food prices to the non food prices.”

Julia Tseplyaeva, Chief economist for Russia and CIS countries at BNP Paribas, adds that the low base effect and recovering domestic demand has also played a part in pushing inflation back to beyond 8%.

“As I see it, there are 3 major factors for high inflation numbers in 2010 – a low base effect, the drought in summer this year and the recovery of domestic demand. And I think, that mostly non monetary factors drove inflation to above 8% in 2010.”

Chakarov notes that so far the food price inflation which has been pronounced, hasn’t generally translated into other areas.

“Though there really was a double digit increase of the monetary base, in the recent months the growth rate started to fall. And for me the most important thing is to look at what’s happening outside the food market, where the prices aren’t really growing. That’s why I wouldn’t worry about inflation until we see growth in those non food items.”

From there he adds that although he expects the food price inflation to continue being a factor well into 2011, he believes it is reasonably easy for the government to prevent it worsening.

“Going forward into 2011, I think, we’ll continue to see the impact of the food shock on the overall inflation. I think, that is going to be the case until May or June next year and in 2H of 2011 the headline CPI index will start to moderate and ease. And at the same time, I think, there’s a lot of pressure right now on the Central Bank to do something about it, in particular because 2011 is a pre election year and for the Russian authorities it’llbe very important to keep any possible social unrest in check. And that’s why, I think, keeping the inflation in control will be very important.

I think, it’ll be relatively easy for the authorities to do something about it. They can unload the significant grain reserves that they have accumulated during previous years, and according to Putin’s announcement, Russian Government is going to release about 1.3 million from the grain reserves to fight the food inflation and, I think, that’ll be another dampening factor. So, I don’t really worry about inflation. The economy now isn’t overheating and the inflation is caused by a food price shock, with the Government having enough tools to fight that.”

Anton Stroutchenevski, senior economist at Troika Dialog, doesn’t think there is much the central bank of Russia can do about the rate of inflation.

“Currently the CBR doesn’t have the opportunity to significantly influence the inflation rate. It could if Russian financial market was volatile or manipulation with the interest rate had a real impact on the exchange rate. Neither of these two things is relevant today, as the financial market is stable and interest rate movements during 2010 proved to be of little influence. The main reason for high inflation is a growing budget deficit that the CBR tries to fill by printing new money.”

For 2011 Chakarov believes inflation will come in at about 8% for the year, but he is expecting pressure to ease during the second half.

“In 2011 it’ll rise to a little bit above 8%. But it’s important to remember about the shape of inflation because the inflation, I think, will be accelerating during 1H of 2011 in line with food prices, but then, I think, the trajectory of the inflation will be falling. So, next year I expect an inverted V –shape trajectory for inflation, with the prices growing until May-June and then again falling From June to December.”

Stroutchenevski, from Troika Dialog believes inflation will ease over the course of the year provided government outlays don’t aggravate the situation, and oil prices don’t rise sharply.

“I expect inflation to be a bit down in 2011 to 7% from 8.5% this year. This is provided the oil prices remain at the current level and the Government doesn’t interfere.”

Julia Tseplyaeva believes that the increase in money supply over the course of 2010 is likely to rise.

“I expect the inflation to go further up to about 9.2% in 2011, as the money supply is constantly going up, with the pace of growth exceeding 30% year on year, and the budget expenses are also planned to increase to provide for higher salaries and pensions.”

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