Improved growth prospects for Russia . .. In 1H10, the Russian economy will probably show a solid recovery in all of its major sectors, driven by strong oil prices, continued improvements in the domestic and global credit markets, a prudent government fiscal policy, low inflation, a strong ruble, and a low base factor effect.

… as the global recovery is set to continue. Our assumptions are based on the belief that next year the global economy will continue to improve, albeit gradually; that demand for commodities will remain robust; and that the soft monetary policies pursued by the world’s major central banks will remain in place, at least for the better part of 1H10.

Lower inflation outlook for 1H10. The major positive shift in Russia’s inflation trend in 2H09 will continue into 1H10E, when CPI rates will fall YoY to 9%. This could lead to more cuts to interest rates and offer important support to the banking sector.

Role of the state remains crucial. While the role of the state has changed dramatically since the beginning of the crisis – from a creditor of last resort to the main financier of domestic demand – it will remain the most important factor behind the stable recovery of the Russian economy.

Higher external surpluses due to increased commodity prices. Russia’s balance of payments is likely to remain strong next year, supported by commodity prices and a continued improvement in global demand.

Ruble: less managed, more volatile. The Central Bank (CBR) will retain its policy of a semi-free float for the ruble in 2010E, which could help Russia’s currency become stronger if commodity prices go north. However, any correction in the markets would probably lead to a decline in the ruble rate, and this decline would probably be much steeper than previous declines.

Risks to oil price remain. Traditionally, the biggest risk for Russia’s economy and its market has been falling oil prices, and this will remain a key factor affecting Russia’s performance.

Private sector’s foreign debt: risks lower but still present. With Russian entities owing $124 bln next year in foreign debt repayments, the problems related to servicing, refinancing, and restructuring this debt will continue to be of importance to investors.

Medvedev’s cabinet’s push for reform may yield positive surprises. The crisis has unveiled many structural and administrative deficiencies in the Russian economy. This has led the authorities to accelerate their drive towards reform – a trend that is likely to continue into 2010.