ROMANIA-RUSSIA: DATA FOR 2011 Russia's economy grew 4.2%, foreign investments in the country rose 66%

• The financial industry - the area which saw the highest volume of investments last year

Russia's economy rose 4.2% in 2011, after rising 4% in 2010, as the growth rate remained steady this year as well, according to official figures from Moscow. In January and February 2012, the GDP of Russia rose 4.3% at an annual rate, and February's growth was 4.8%, backed by the significant increase of investments and industrial output.

For the entire year, the government in Moscow expects an economic growth of 3.7%, but the World Bank expects a growth of 3.5%. In turn, ratings firm Standard & Poor's (S&P) recently estimated that the growth of Russia's economy would only amount to 3.5% this year.

According to S&P, Russia's economy would be "dynamic" in the first quarter of 2012, and will then lose steam because the central bank will try to cap lending. According to S&P, the Bank of Russia will probably try to slow down the advance of lending in the second quarter, to reduce the inflationary risks caused by the increase in the prices of electricity and natural gas.

"After an advance of 4.2% in 2011, we believe that the slowdown of the growth rate will lead to an increase of Russia's GDP of 3.5% in 2012", claims Jean-Michel Six, chief-economist for Europe at S&P.

Last year, foreign investments in Russia increased 66.1%, compared to 2010, reaching 190.6 billion dollars, according to the Federal Statistics Service (Rosstat). Out of that amount, the direct foreign investments represented 18.415 billion dollars in 2011, up 33.3% compared to last year.

Rosstat say that at the end of 2011, the total foreign capital accumulated in Russia's economy was 347.2 billion dollars, up 15.7% over 2010.

According to Rosstat, foreign portfolio investments in Russia fell 25.1% last year, to 805 million dollars, and those in securities increased 67.6%, to 577 million dollars. Foreign investments in government bonds fell 67.8%, to 219 million dollars.

Russia's financial industry was the largest receiver of direct foreign investments attracted in 2011, respectively 86.9 billion dollars, followed by manufacturing and mining. Cyprus was the largest foreign investor in Russia last year, followed by Holland, Luxemburg and Germany.

In 2011, the authorities in Kremlin have created the Russian Fund for Direct Investments, which co-finances international investments. In October, it obtained one billion dollars from a sovereign fund in China, and Russian prime minister Vladimir Putin estimated that capital flows to the fund would soon reach 60 - 70 billion dollars.

• S&P: Russia's ratings depends on the price of oil

Standard&Poor's (S&P) recently warned that it may downgrade Russia's sovereign rating, "BBB" with a stable outlook, if the price of oil drops, considering the electoral promises of elected president Vladimir Putin, which involve raising wages and public spending in areas such as defense, social aid and infrastructure, which analysts estimate will amount to 170 billion dollars, over six years. According to S&P, a 10-dollar drop in the price of the oil barrel would cause a drop in Russia's revenue equivalent to 1.4% of the GDP. The agency estimates that in order to balance Russia's budget the average price of the oil barrel has to be 120 dollars per barrel, above the level of 117 dollars per barrel taken into consideration by the government in Moscow.

"Right now, the price of Ural oil supports the high level of government spending. At the same time, the pressure for raising expenses, generated by the aging of the population and the promises of the electoral campaign, create the need to raise additional revenues", considers S&P.

Russia is extremely dependent on the price of oil and on the world's economic circumstances, even though Putin supports a strategy for the diversification of the economy.

• The World Bank: Russia's economy will grow 3.5% in 2012

This year, Russia's economy will see a growth of 3.5%, below the estimates of the government of 3.7%, according to a report of the World Bank, which states that the authorities should adjust the fiscal policies to ensure macroeconomic stability.

Inflation in Russia is expected to reach 6% in 2012, a little below the record level of 6.1% seen in 2011. In a base scenario, the World Bank estimates that the growth of Russia's GDP will slow down to 3.5% in 2012, down from 4.3% in 2011, and the economy will recover in 2013, seeing a growth of 3.9%. The scenario expects that the actions of the European leaders to gradually reduce the risks arising from the crisis in the Eurozone will be successful, and the average price of the barrel of oil will be of 98.2 dollars in 2012 and 97.1 dollars in 2013. Still, the World Bank warns that capital flows in Russia will probably remain volatile, and the budget deficit will be of 1.3% of the GDP in 2012 and of 0.9% of the GDP in 2013.

• Fitch: The privatization of banks in Russia could lead to the downgrade of the ratings

The decision of the government in Moscow to reduce its stakes in the banks it owns in Russia, could lead to a potential ratings cut, which would result in a moderate drop of the rating of the support program, a report by Fitch Ratings shows.

Russian president Dmitri Medvedev recently asked the government and the Russian Central Bank to draft proposals on how to reduce the stakes of the government in state owned banks to less than 50% by September. The Government owns less than 75.5% of VTB, the second largest bank in Russia, 100% of Russian Agricultural Bank, and the Bank of Russia owns 57.6% in the country's largest bank, Sberbank. The three banks are included in the privatization program.

Fitch estimates that in the event of the reduction of the stakes owned by the government in state owned bank to less than 50%, the impact would be moderately negative, when it comes to the potential support which the agency takes into consideration for the banks' ratings. Together with the tendency of governments all over the world to reduce their implicit support for the banks, the impact will probably be a downgrade by one notch of the support rating for Russian banks.

In December, the Russian government approved the privatization plan for the 2011-2013 period, which includes the sale of the stakes in ten major state owned companies which could bring 59 billion dollars in additional revenue to the state budget.

The sale of the assets of government companies is intended to reduce the budget deficit, estimated at 5.3% of the GDP in 2010 and at 3.6% of the GDP in 2011. The privatization program began in February, when the government sold its 10% stake it held in VTB, the second largest bank in Russia, for 3.3 billion dollars. On April 16th, Sberbank intends to launch a roadshow for the sale of 7.6% of the stake which Bank of Russia owns in the former, worth 6 billion dollars, a decision intended to show that the largest banking group in Russia is an important player in a European industry affected by the world global crisis.

• Moody's: Russia's accession to the WTO will have a mixed impact on Russian companies

Even though Russia's accession this year to the World Trade Organization (WTO) will be beneficial for its importers and exporters, the industries which manufacture machinery and equipment will probably be hurt, according to Moody's Investors Service. "The conditions for Russia to be accepted in the WTO include the cut of the average ceiling of the import tariffs, from 10% to 7.8%, which will generally benefit consumers, will stimulate demand and will help major importers", analyst Sergey Grishunin said. In his opinion, "retailers of food and non-food products will stand to benefit, and the lending profiles of companies will increase while their leverage may decrease".

Moreover, Moody's says, producers of non-ferrous, ferrous metals and chemical products makers will most likely increase their output, but for these companies, the positive effects of the accession of Russia to the WTO will only be visible in the long term.

The ratings firm states that Russia joining the WTO will contribute to a more transparent and predictable trade environment, which could create new opportunities for the domestic and foreign investors. The World Bank also estimated that Russia becoming a member of the WTO would increase its economic growth rate by 3.7% in 2012-2016 and by 11% between 2012 and 2021.

However, Moody's warned that industries which manufacture agricultural machinery and equipment could be affected by Russia's joining the WTO. "The output of these companies is not competitive on a global level and they have limited ability to improve their operating efficiency. A market share loss and a drop in their sales would eventually reduce their profitability which would result in a deterioration of these manufacturers' ratings", analyst Sergey Grishunin said. In December, the World Trade Organization (WTO) greenlit Russia's accession, after 18 years of negotiations during which time Moscow tried to become a member of this organization which regulates world trades.