Russia 091204 Basic Political Developments

Online.wsj.com: Russians Are Collecting Used Czars

Buyers are back, trolling for Romanov heirlooms like Fabergé cigarette cases and gilded porcelain

London's chief auction houses  Sotheby's and Christie's International plan to sell at least $36 million worth of Russian art, including a rediscovered trove of Fabergé cigarette cases owned by the younger son of Czar Alexander II. The series of sales, called Russia Week, begins Monday.

Like many collecting categories, the Russian art market was gutted by the recession, but price levels for top artists like Ilya Repin have begun to stabilize, in part because of a fresh influx of Russian and Ukrainian buyers from banking and political circles. Repin was a Ukrainian who became Russia's leading late 19th-century realist. Newcomers include Alina Aivazova, the wife of Kiev's mayor Leonid Kosmos Chernovetsky, who in June paid boutique auctioneer MacDougall's a record $2.3 million for Repin's "Portrait of Madame Alisa Rivoir with a Lapdog."

Sotheby's says at least 38% of the buyers at its June round of London art sales were new to its Russian department. Nearly a quarter of the buyers were newcomers to the auction house altogether—a signal that Eastern Europeans may be investing more cash in hard assets like art.

From Moscow to Kiev to Kazakh expatriates living in London, demand is growing once more for Russian silver, gilded porcelain vases and 19th-century paintings of Cossack soldiers and peasant women in colorful head scarves. Less popular now are those contemporary stars who enjoyed huge price jumps during the market's peak like Ilya Kabakov, whose 1982 painting of an insect, "Beetle," sold for a record $5.8 million at Phillips de Pury in 2008. Kabakov is missing from this latest round, and auction houses have tailored the latest offerings to suit traditional tastes.

Sotheby's scored a coup when it consigned a group of Romanov heirlooms owned by the emperor's son Grand Duke Vladimir Alexandrovich and his wife, Grand Duchess Maria Pavlovna. The couple, known for throwing lavish parties and outfitting their rooms in Ottoman décor, reigned over St. Petersburg society until the 1918 Russian Revolution compelled the duchess, by then a widow, to flee to Paris. At her request, a friend stuffed the couple's collection of cigarette cases and cuff links into a pair of pillowcases and dropped the bags off at the Swedish Legation in St. Petersburg. The duchess died before ever claiming the goods, which wound up languishing at the Swedish Foreign Office in Stockholm until being rediscovered in January.

Now, the couple's heirs are selling off the pieces, including 66 pairs of cuff links and 51 cigarette and cigar cases, along with the pillowcases for around $1.5 million combined. The pillowcases are priced around $330 apiece. A green Fabergé case given to the couple by their nephew, Czar Nicholas II, is estimated to sell for at least $117,000. (The case contains a handwritten note from the ruler identifying himself as "Nicky.")

Sotheby's Monday-evening sale of Russian paintings includes Alexandra Exter's "Venice," a colorful collage reminiscent of Fernand Léger and priced to sell for at least $1.4 million. A Repin portrait of a bandaged soldier, "Cossack," carries a $955,000 low estimate. Overall, Sotheby's expects to bring in at least $24.6 million from its Russian art sales.

Christie's, meanwhile, expects to bring in at least $11.5 million from its Russian sales, led by Nicholas Roerich's sea-green panorama, "Legend, from the series Messiah," which is priced to sell for at least $1.1 million. That's a respectable price tag considering that Christie's sold a similar Roerich for $2.9 million earlier this spring when the economic picture was gloomier. Alexandre Iacovleff's 1918 view of a Chinese theater crowd, "Loge de Theatre a Pekin," carries a $1.1 million low estimate.

Within the decorative arts, Christie's is offering a large two-handled porcelain vase made in Czar Nicholas I's Imperial Porcelain Factory for at least $230,000. Christie's international director of Russian art, Alexis de Tiesenhausen, says newer collectors typically anchor their Russian porcelain collection with pieces made during the mid-1800s when the royal porcelain factories were producing at peak levels of gilded craftsmanship.

"Russian collectors have grown bored of the crisis," Mr. Tiesenhausen said. "We lost a few clients, but others have finally arrived."

Write to Kelly Crow at kelly.crow@wsj.com

National Economic Trends

RIA: Russian monetary base down $1.9 mln in week to $140.528 bln

Russia's Central Bank said Friday the country's narrowly defined money supply (M1) was 4 trillion 103.5 billion rubles ($140.528 billion at the current exchange rate) as of November 30, down 54.2 billion rubles ($1.9 billion) in the week since November 23.

According to the Bank, M1 money supply consists of the currency issued by the bank, including cash in vaults of credit institutions, and required reserves balances on ruble deposits with the Central Bank.

MOSCOW, December 4 (RIA Novosti)

Prime-Tass: Russian GDP Indicator signals slower contraction in November

MOSCOW, Dec 4 (PRIME-TASS) -- The Russian economy continued to contract in November, though the rate of decline eased further, London-based VTB Capital said in its latest GDP Indicator released on Friday.

The Indicator stood at -2.5% on an annual basis, from a downwardly revised -4.0% in October, the highest level since December 2008, the bank said. Over the third quarter as a whole, the GDP Indicator suggested that the economy contracted by a revised 8.7% year-on-year, a better outcome than the record 9.9% fall posted during the second quarter.

The seasonally adjusted Total Activity Index registered in positive territory for the fourth month running in November. Any reading greater than 50.0 represents growth of business activity compared to one month previously. However, the latest figure of 52.8 signaled the weakest rate of growth in three months, and one below the long-run series average, VTB Capital said.

“The rate of decline in Russian GDP continued to moderate in November, although the historic data was revised downward following the release of the 3Q09 GDP preliminary estimate by Rosstat. The subpar performance in the Russian manufacturing sector, driven by a pronounced decline in export orders, weighed on the composite GDP Index, despite the services sector persistently pointing to growth,” Aleksandra Evtifyeva, senior economist at VTB Capital, commented on the survey.

“Inflationary pressures continued to abate as growth subsided in the manufacturing sector and output prices declined in the services sector, suggesting that inflationary expectations remained muted. On a more positive note, the employment situation in both sectors has recently stabilized with the corresponding sub-index in the services sector coming only just short of registering growth,” Evtifyeva also said.

The GDP Indicator is derived from VTB Capital's Purchasing Managers Indices (PMI), which are surveys of business conditions in the manufacturing and service sectors of Russia. By weighing together the output measures from these surveys, an indicator of total output is produced.

VTB Capital plc is a London-based subsidiary of Russia's second largest bank, government-controlled VTB Bank. VTB Capital was previously known as VTB Bank Europe.

By Paul Abelsky

Dec. 4 (Bloomberg) -- Russia’s economy contracted last month at the slowest pace since December 2008, VTB Capital said, as rising commodity prices helped exporters and a stronger ruble supported the domestic economy.

Gross domestic product shrank 2.5 percent in November from a year ago, compared with a revised decline of 4 percent in October, VTB Capital, the investment banking unit of Russia’s second-biggest lender, said in a report released today.

Prime Minister Vladimir Putin said yesterday that Russia’s economy will shrink 8.5 percent to 8.7 percent this year, marking the country’s worst contraction on record. Output shrank an annual 10.9 percent in the second quarter easing to 8.9 percent in the three months through September. The pace of the decline has slowed after Urals crude, Russia’s main export, surged 82 percent this year.

“The rate of decline in Russian GDP continued to moderate in November,” Aleksandra Evtifyeva, a senior economist at VTB Capital in Moscow, said in the report.

At the same time, “inflationary pressures continued to abate as growth subsided in the manufacturing sector and output prices declined in the services sector, suggesting that inflationary expectations remained muted,” she said.

Inflation slowed to an annual 9.7 percent in October from 14.2 percent a year earlier, the statistics office said on Nov. 3. The ruble has gained 8.9 percent in the past three months, making it the second-best performer of the 26 emerging market currencies tracked by Bloomberg in the period.

VTB Capital calculates the indicator by using output measures from its Purchasing Managers’ Indexes, which are surveys of business conditions in manufacturing and services industries.

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.

By Paul Abelsky

Dec. 4 (Bloomberg) -- Russia’s central bank will leave its key interest rate on hold this year and limit reductions in 2010 to 1 percentage point even as households and businesses suffer credit shortages and as investors use the ruble for speculative gains, a survey showed.

Bank Rossii, which has cut rates nine times since it started easing in April to a record low 9 percent, may trim the benchmark refinancing rate to 8 percent by the end of next year, according to the median estimate of 15 economists surveyed by Bloomberg. The bank, which doesn’t publish a schedule for rate announcements, last cut rates on Nov. 24.

The cuts may not be enough to persuade banks to resume lending and to dissuade investors from turning to the ruble for higher relative returns, according to Martin Gilman, who headed the International Monetary Fund’s Moscow office during Russia’s 1998 default. The central bank’s “dilatory” policy stance is “strangling” business while the ruble remains a “no-brainer” as a vehicle for the so-called carry trade, Gilman said in a Dec. 2 interview.

The ruble has gained 8.1 percent against the dollar in the past three months, making it the second-best performer of the 26 emerging market currencies tracked by Bloomberg in the period. Russia’s key rate remains higher than benchmarks in Brazil, India and China. Both the U.S. Federal Reserve and the European Central Bank have indicated they’re in no hurry to start raising rates from record lows of 0.25 percent and 1 percent respectively.

Ruble Slips

The ruble slipped 0.2 percent against the dollar to trade at 29.2277 at 10:27 a.m. in Moscow. Against the euro, the ruble was also 0.2 percent weaker trading at 44.0790.

Gilman says Bank Rossii needs to cut the refinancing rate by 2 percentage points this month and reduce the rate to 5.5 percent by the end of next year to avoid hurting the economy.

Policy makers at the Moscow-based regulator have had to balance rate cuts needed to galvanize a recovery in the world’s biggest energy exporter with inflation close to 10 percent. The bank was able to push through this year’s cuts after inflation slowed to an annual 9.7 percent in October from 14.2 percent a year earlier.

“Falling inflation has allowed the central bank to decrease its refinancing rate to 9 percent -- the lowest level in recent memory -- and we expect further cuts,” UniCredit SpA, Italy’s largest bank, said in a report. “However, lower rates are not trickling down to all borrowers.”

Lending Squeeze

Lenders’ corporate loan books fell 0.5 percent, after declining 0.7 percent in September, according to data published by the central bank yesterday. Lending to consumers dropped 0.7 percent for a ninth consecutive monthly decline.

Small companies face borrowing costs of 18 percent or higher, while larger enterprises can tap funds at pre-crisis rates of 10 percent to 11 percent, UniCredit says.

Banks are lending less and keeping rates high even after one-week interbank rates dropped from 10 percent at the end of March to 5 percent yesterday, the lowest level this year. Three- month interbank ruble rates dropped to 7.75 percent yesterday from 17.5 percent at the end of the first quarter. The average rate on banks’ corporate loans, by comparison, was 13.9 percent in October, from 16 percent in March, according to central bank data.

Retail lending has declined for nine consecutive months through October, and shrank in 12 of the last 13 months, central bank data show. Corporate lending dropped for a second month in a row and hasn’t risen for six months.

Credit Shortage

A credit shortage may stall a recovery from a record 10.9 percent economic contraction in the second quarter. Output dropped 8.9 percent last quarter and the economy will shrink 8.5 percent or 8.7 percent for all of this year, Prime Minister Vladimir Putin said yesterday, the worst performance on record.

Banks may be more inclined to lend once losses start to drop. Non-performing loans are “near the peak,” Chairman Sergey Ignatiev said on Nov. 18, adding that the pace of delinquent debt growth could fall by the end of January and lending may start to grow this year.

The bank said in October it will use interest rates to stem the ruble’s appreciation, which risks stalling an export recovery.

The ruble may trade around 35.60 against its target dollar- euro basket by the end of December and weaken to 35.70 by the end of next year, according to the Bloomberg survey.

Capital Inflows

Russia will attract capital inflows in the fourth quarter and in 2010 that will push the ruble higher, Deputy Economy Minister Andrei Klepach said in a Dec. 1 interview. The central bank will be forced to purchase between $70 billion and $90 billion of currency a year to cap ruble gains, he said.

The currency lost 35 percent against the dollar between August last year to January after oil prices tumbled 63 percent in that period. The ruble has since recouped almost 20 percent of its value as the price of Urals crude, Russia’s main export blend, gained more than 80 percent in 2009.

To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net.