Emerging Markets Briefer ( Russia , Ukraine , Kazakhstan )

Russia Macro Outlook 
• Russian GDP grew by 3.7% y/y in 9M 10, making the government and our growth
forecast of 4% for FY 2010 slightly optimistic. However, we remain optimistic for
2011, forecasting 4.7% growth.
• We continue to highlight the role of the banking sector: stagnant bank lending growth
has dampened the economic performance this year, but we expect rapid lending
growth to support consumption and investments in 2011.
• Unemployment has remained relatively low and wage growth has been robust in
2010. However, productivity is low in many sectors and there are some serious local
unemployment problems in some cities that were built around one factory in the
Soviet era.  
• Industrial production growth is slowing, as the benign base effect is fading. We hope
to see an investment-driven recovery in late 2011, which is likely to support more
domestic production than the current consumption-led growth.

FX & Monetary Policy Outlook 
• Over the past month, the Central Bank of Russia (CBR) has moved to a more hawkish
stance in its monetary policy, indicating that rate hikes are possible in Q1 11.
• We expect the CBR to hike rates already in end-January, as inflation continues to
accelerate.
• The central bank has widened the corridor of fluctuations of the rouble against the
currency basket. CBR has gradually allowed a ‘free floating’ arrangement for the
rouble. However, the CBR continues to intervene if it sees excess volatility in rouble
markets.
• Inflation is expected to accelerate in Q2 11 to above 10% driven by money supply
growth, food prices and producer prices.

Risk Factors 
• Russia’s dependence on the global oil price poses the greatest risk to the economy.
• The risk of loose fiscal policy increases as the 2012 presidential elections approach.


Ukraine Macro Outlook 
• The Ukrainian economy contracted by 15% last year, led mostly by a deep decline in
construction and manufacturing activities: construction fell by 48.3%, manufacturing
by 26% and retail sales by 17.9%. However, the economy is recovering and GDP
growth in 9M 10 was close to 5%.
• Wage growth has started to support consumption in recent months. However,
consumption growth remains subdued due to the banking sector, as bank loans to
households are still decreasing even in nominal terms.
• Unfortunately, the recovery in consumption is mostly supporting imports, and
investment activity is still lacklustre.
• The construction sector is suffering from the credit crunch even more than
consumption. In October, construction activity was still on a declining trend (-9% y/y)
despite the very low base year.

FX & Monetary Policy Outlook 
• Ukraine’s CPI eased in November to 9.2% y/y. We see an upside risk to the inflation
outlook for 2011 due to an expected rise in electricity tariffs (IMF financial package
condition) and the global oil price. However, Ukraine does not seem to suffer severely
from the surge in food prices like Russia.
• Ukrainian FX reserves shrank at a fast pace at the beginning of the year due to foreign
exchange interventions. The outlook for the hryvnia has improved since then given
the IMF deal and appreciation pressures have allowed the central bank to accumulate
reserves again.

Risk Factors 
• The IMF participation has somewhat diminished the risk of unsustainable fiscal
policy. The new government has agreed to keep budget deficit at 5% of GDP this year
and to cut it to 3.5% in 2011.
• Political instability continues to be perhaps the biggest risk related to Ukrainian
economy.


Kazakhstan Macro Outlook 
• Kazakhstan managed to maintain economic growth in positive figures in 2009,
growing 1.2%.
• GDP continues to be supported by both consumption and the production side of the
economy. Unemployment is low (below 6%) and real wage growth continues.
Industrial production is underpinned by high commodity prices. However, the
construction sector has not been presenting a robust recovery, and we think that an
investment boom is not to be expected in 2011.
• The banking sector is going through a serious restructuring process, which is likely to
cause bank lending to recover only in 2012. As a consequence, we do not see much
potential for economic growth to accelerate in 2011 from about 6% in 2010.

FX & Monetary Policy Outlook 
• Kazakhstan is planning to return to managed float regime in early 2011. Currently, the
tenge is trading in a corridor, which was introduced after the global financial crisis
started and the tenge was devalued by 18%.
• With current oil prices, the tenge is likely to appreciate by about 5% during H1 11,
supported by the current account surplus.
• Inflation remains high, and is expected to average above 7% in 2010, then ease
gradually in the coming years. Accordingly, Kazakhstan’s central bank expects to
keep its refinancing rate in the range of 6-8% in the coming years.

Risk Factors 
• Kazakhstan is extremely dependent on its resource sector.
• The Kazakh economy is also very vulnerable to economic shocks in Russia, which is
reflected in exchange rate movements.
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Full report: Emerging Markets Briefer ( Russia , Ukraine , Kazakhstan )