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Macro Insights
AB-ICI: Some Recovery in Sentiment
Natalia Orlova
Dmitry Dolgin
(+7 495) 795-3677
(+7 495) 780-4724
April 1, 2015
NOrlova@alfabank.ru
DDolgin@alfabank.ru
www.alfa-bank.com
Moscow
Investment Summary
 AB-ICI recovered by 7% in February on recovery in the market sentiment following year-end collapse

2M15 GDP drop of 1.9% y/y was a positive surprise, full-year decline might be limited to 3%

CBR easing and budget policy do not help limiting the capital outflow, which remains a concern
AB-ICI recovered by 7% in February
AB-ICI was up 7% in
February on strong
recovery in market
sentiment
After 16% drop in December-January, AB-ICI recovered by 7% m/m in February,
reflecting the recovery in the market sentiment following the year-end collapse.
The return of the financial market to the peer trend after the year-end shock is
positive news, and it is supported by the smaller than expected 1.9% y/y GDP
drop in 2M15. However, net capital outflow remains an ongoing concern.
Economic confidence
recovered slightly on
better deposit trends;
capital outflow remains a
concern

Economic confidence recovered after two months of free-fall, reflecting
some improvement in the household savings: the higher level of interest
rates has stopped the outflow in ruble deposits, which have shown 3% m/m
growth in February. However, the net capital outflow data suggest that after
some deceleration in outflow to $9bn in January, the February outflow was
$15bn, which suggests little deceleration compared to last year’s outflow.
Preliminary data is
guiding for 50%
reduction of FDI inflows
2014

Foreign confidence declined accounting for the negative trend in FDI
inflows. Based on the CBR data, Russia saw a 50% y/y drop in the FDI
inflows in 9M14, which is the worst performance since 2009. The recent
news on GM willing to divest from Russia and a number of foreign banks
reducing presence is a negative guidance for the near term. At the same
time, the sharp ruble depreciation may still make Russia attractive for direct
investments once the growth trend normalizes.

Market confidence increased sharply in February after stable performance
in January, reflecting recovery in the bond markets. In February, ruble
appreciated 12% and continues to recover, returning to the trajectory seen
in EM and petro-currencies after December collapse. The decline in global
EM interest rates played role in boosting Russia’s attractiveness.
The market sentiment
towards Russian bonds
and ruble recovered after
December’s collapse
Figure 1: AB-ICI recovered 7% in February, still down 22% y/y
3000
RTS
RTS (LHS)
AB-ICI (rebased)
AB-ICI
1000
900
2500
800
2000
700
600
1500
500
1000
400
300
500
200
100
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
0
Source: New Economic School, RTS, Alfa Bank
Alfa Bank Investor Confidence Index
April 1, 2015: Some Recovery In Sentiment
1
Macro Insights
AB-ICI Recovery: Sentiment or Fundamentals?
Some recovery in ABICI is in line with
improvement in the
near-term GDP growth
prospects
Even if the 7% spike in the AB-ICI in February does not indicate a reversal in the
overall trend, it is definitely in line with the recent improvement in the sentiment
regarding the economic performance. In particular, while following the collapse of
the financial markets we and the market started to fear 5% GDP drop for 2015, the
recent macro figures indicate that the scale of the decline can be more modest. In
2M15, the decline was 1.9% y/y, and even if it reflects some deepening in the drop
from 1.4% y/y in January and 2.3% y/y in February, it still appears modest
compared to our initial fears. While we expect the decline in the GDP growth to
continue further into the year, now a 3% full-year GDP contraction appears to be a
more plausible scenario.
Consumption is
supported by
structurally low
unemployment…
The main reason why the deterioration of the economic trend is very limited is that
the consumption remains stronger than expected, with retail trade down 6.1% y/y
in 2M15. The first explanation is the structurally tight labor market, keeping
unemployment at 5.8%, still much lower than the 9.4% unemployment peak
reached in 2009. As a result, the decline in real salaries, even if approaching 10%
y/y, is mainly driven by the inflation, which seems to be stabilizing at the moment,
while the nominal salary growth remains positive at 5% y/y.
…and a looser than
expected CBR and
budget policies
The economic policy considerations also play a role in maintaining Russia’s
consumer focused model. First, the ahead of schedule decline in the CBR interest
rates keep the real deposit rates negative, discouraging savings. Second, the
budget policy appear supportive. The pension indexation will total 11% y/y this
year, and the overall spending plan for 2015E has not been cut contrary to the
previous expectations, as the Cabinet decided to spend the extra RUB1.5tr
proceeds coming from the ruble depreciation in the current 2014-15 spending
cycle.
Figure 2: Consumer trend fundamentals
20%
10,5%
Unemployment (RHS)
Retail trade, y/y
Real salaries, % y/y
15%
Figure 3: CBR key rate and inflation
20%
CPI, % y/y
CBR repo (key) rate, %
9,5%
10%
8,5%
5%
7,5%
15%
10%
0%
Source: Rosstat, CBR, Alfa Bank
Risks to ruble remain
significant
Jul-14
Feb-15
Dec-13
Oct-12
May-13
Mar-12
Aug-11
Jan-11
Jun-10
4,5%
Nov-09
-15%
Apr-09
5,5%
Sep-08
-10%
5%
0%
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Jan-15
6,5%
-5%
Source: CBR, Rosstat, Alfa Bank
At the same time, the CBR move towards interest rate easing and the budget
preference for maintaining expenditure growth pose persistent inflationary risk and
offer bad long-term signs for ruble, which should limit the preference for corporate
investments and prevent FDI inflows from recovering even after the last round of
ruble depreciation. The February net outflow, which according to VEB estimates
was as high as $15bn, is an illustration of this view. As a result, we continue to see
risks to ruble stability, being a factor preventing strong recovery in the AB-ICI.
Alfa Bank Investor Confidence Index
April 1, 2015: Some Recovery In Sentiment
2
Macro Insights
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Alfa Bank Investor Confidence Index
April 1, 2015: Some Recovery In Sentiment
3
Equity Market
Head of Equities Alfa Bank
Michael Pijiolis 12, Akad. Sakharova Pr-t
+7 (495) 795-3712 Moscow, Russia 107078
Research Department
Macroeconomics
Natalia Orlova, Ph.D.
Dmitry Dolgin
+7 (495) 795-3676
research@alfabank.ru
Retail, Real Estate
795-3677 Andrei Nikitin
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Translation
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Alfa Bank Investor Confidence Index
April 1, 2015: Some Recovery In Sentiment
4