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Financing the Russian Economy:
Future opportunities and challenges
Steven Fisher
Managing Director, Citibank ZAO, Russia
February 2008
Russia is a BRIC Leader
Brazil
Russia
India
1,007
1,160
988
3,220
Economic Growth (2) (%)
3.4
6.0
8.3
9.8
Size of Equity Mkts (3) (US$bn)
Growth 2001–2006 (%)
874
309
1,042
1,055
821
713
1,146
202
Growth of Acquisitions (4) (%)
316
1,831
1,266
459
Growth of Equity Offerings (5) (%)
607
7,943
2,491
771
>5
~10
<5
~20
Size of Economy (1) (US$bn)
% of Global 2006–2007 IPO
Offerings (6) (%)
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
2
2007 Nominal GDP; Source: EIU.
2007P GDP growth; Source: EIU.
Market Cap as of December 2006 from Factset.
2001–2006 Market Volume; Source: SDC – Any Involvement.
2001–2006 Equity offerings – Equity and Equity Linked.
2006–2007YTD IPOs as of 17 September.
China
Exceptional Strength in Intellectual Capital
Leads BRICs in Human Development Index
Highest Literacy Rate among BRICs
Rank
Russia (65)
99.6
Russia
Brazil (69)
China
China (81)
90.9
86.4
Brazil
India (126)
India
0
0.2
0.4
0.6
0.8
1
61.0
0
20
40
60
80
100
Leader in Higher Education
3
Sources: UNESCO, OECD, Economist
120
Russia’s Economy is larger than India, Brazil, South Korea
Forecast to jump to top 6 player by 2020
GDP
2007E
Rank Country/Region
4
1
2
3
4
5
6
7
8
9
10
11
12
13
14
...
52
56
United States
Japan
Germany
China
United Kingdom
France
Italy
Spain
CIS*
Canada
Russia
Brazil
India
South Korea
Mexico
...
Ukraine
Kazakhstan
Source: EIU
2020
$MMM
13,893
4,464
3,284
3,220
2,682
2,434
2,046
1,401
1,364
1,284
1,160
1,007
988
969
871
...
103
77
Rank Country/Region
1
2
3
4
5
6
7
8
9
10
11
12
13
14
...
35
40
United States
China
Japan
CIS*
Germany
United Kingdom
Russia
India
France
South Korea
Italy
Canada
Spain
Brazil
Mexico
...
Ukraine
Kazakhstan
$MMM
28,453
12,626
7,597
4,842
4,840
4,289
3,988
3,648
3,507
2,800
2,657
2,394
2,130
1,961
1,683
...
468
386
Leading Energy Position is Key Economic Driver
Ranking for FCY and Energy Reserves
Oil
(Proved Reserves)
Foreign Currency
Reserves
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Country
$MM
Rank
China
Russia
Taiwan
South Korea
India
Singapore
Hong Kong
Brazil
Malaysia
Algeria
Mexico
Thailand
Turkey
Iran
Libya
1,076
296
266
238
166
135
134
86
82
78
76
66
61
58
57
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Source: EIU
5
Natural Gas
(Proved Reserves)
Country
barrels % of
(trln) total
Rank
Saudi Arabia
Iran
Iraq
Kuwait
UAE
Venezuela
Russia
Kazakhstan
Libya
Nigeria
USA
Canada
China
Qatar
Mexico
264.2 22.0
137.5 11.5
115.0 9.6
101.5 8.5
97.8 8.1
79.7 6.6
74.4 6.2
39.6 3.3
39.1 3.3
35.9 3.0
29.3 2.4
16.5 1.4
16.0 1.3
15.2 1.3
13.7 1.1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Source: BP research
Country
Russia
Iran
Qatar
Saudi Arabia
UAE
Nigeria
Algeria
Venezuela
Iraq
Kazakhstan
Turkmenistan
Indonesia
Australia
Malaysia
Norway
Source: BP research
m
3
(trln)
47.8
26.7
25.8
6.9
6.0
5.2
4.6
4.3
3.2
3.0
2.9
2.8
2.5
2.5
2.4
% of
total
26.6
14.9
14.3
3.8
3.4
2.9
2.5
2.4
1.8
1.7
1.6
1.5
1.4
1.4
1.3
Russia – Already Major Equity Market, Potential is Big
30 Companies with Market cap. >=US$6bn
Rank Company
Sector
1
Gazprom
Oil and Gas
2
Sberbank
Banks
3
Rosneft
Oil and Gas
4
Lukoil
Oil and Gas
5
Norilsk Nickel
Metals
6
Unified Energy Systems
Utilities
7
Surgutneftegaz
Oil and Gas
8
TNK-BP
Oil and Gas
9
VTB
Banks
10
MTS
Telecoms
11
Novolipetsk Steel
Metals
12
Severstal
Metals
13
Gazpromneft
Oil and Gas
14
NOVATEK
Oil and Gas
15
PIK Group
Real Estate
16
MMK
Metals
17
Tatneft
Oil and Gas
18
AFK Systema
Telecoms
19
Mosenergo
Utilities
20
Pipe Metal Company
Metals
21
Evrocement
Build. Materials
22
Uralkali
Fertilizers
23
Mechel
Metals
24
Polyus Gold
Metals
25
Baltika Brewery
Food
26
Rostelecom
Telecoms
27
OGK-3
Utilities
28
OGK-4
Utilities
29
Silvinit
Fertilizers
30
OGK-5
Utilities
Source: Bloomberg, 19 October 2007.
6
Mkt Cap US$bn
278.6
94.1
93.8
74.8
51.9
47.8
45.9
32.9
30.8
24.8
23.6
22.0
21.6
16.4
13.9
13.8
13.2
13.1
9.9
9.9
9.3
9.0
8.8
8.5
8.2
8.1
6.6
6.3
6.2
6.1
New Listings Will Bring More Sector Diversification
Sector Breakdown, by Market Cap (MSCI)
Financials
Utilities
Materials
Telecoms
Energy
Leading EM Equity
Market
Rank Country
1
China
2
Korea
3
Brazil
4
Taiwan
5
Russia
6
South Africa
7
India
8
Mexico
9
Malaysia
10 Israel
11–25 Others
Grand Total:
% of EM
MSCI
17.4%
14.9%
12.0%
11.0%
8.9%
6.8%
6.8%
5.0%
2.3%
2.1%
15.5%
100%
Source: MSCI, Citi, 18 October’ 07.
Improving Risk Profile
Rating Agency 31.12.04 Current
S&P
BB+
BBB+
Fitch
BBB-
BBB+
Moody’s
Baa3
Baa2
Source: S&P Sovereign Ratings
History Since 1975; Fitch –
Complete Sovereign Rating
history; Bloomberg
Russia Update: Stronger and More Stable
Since the 1998 financial crisis, Russia’s economy has stabilized and greatly expanded

Average real GDP annual growth rate since 1998 - 6.9%

GDP grew from $200 billion in 1999 to $1.2 trillion in 2007

Personal consumption rate more than doubled since 1999

Total Central Bank reserves: $483 billion

Stabilization Fund: $121.7 billion

Public Sector Debt: declined from $152 billion in 1998
to $37 billion in 2007

Due to become the 8th-largest economy in the world in 2007
(using purchasing power parity exchange rates)
Russia Real GDP produced (billions of Ruble)
14000
12000
After 7 years in office,
Putin’s approval ratings
are higher than ever
at 80%, though public trust
of leaders in general is low
An unprecedented majority
of the public report they are
more or less happy with
life, and optimistic about
the future
10000
8000
6000
4000
2000
Source: The Economist Intelligence Unit
Russia Country Data Annual Time Series, 2007
7
20
08
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
0
Beyond Natural Resources: Consumer Boom Presents New Opportunities
The emerging Russian middle class of 30 million is set to become one of the largest in the
world…Russian consumers tend to be early adapters of new technology with discerning tastes…
Spotlight on Rising Russian Middle Class
$800
 12th-largest retail market
in the world, to become
9th-largest by 2010
 Expanding to provincial
cities
$710
Russian Average Monthly Income
Ukraine
Czech
Poland
$700
$729
$600
$500
$500
2007
$400
$303
$300
1990
$200
$200
Russia’s cities are growing, and 14 cities have
populations near 1 million
$100
$165
$70
$0
1998
Rank
Population
MOSKVA (Moscow)
Rank
City
8,297,000
26
St Petersburg
Novosibirsk
4,678,000
1,400,000
27
28
Penza
Ryazan
528,000
528,000
4
Nizhny Novgorod
1,358,000
29
Orenburg
523,000
1,267,000
1,165,000
1,153,000
1,092,000
1,088,000
1,084,000
1,014,000
1,003,000
992,000
903,000
876,000
875,000
720,000
668,000
654,000
640,000
614,000
609,000
607,000
591,000
580,000
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Naberezhnye Tchelny
Lipetsk
Tula
Tyumen
Kemerovo
Astrakhan
Tomsk
Kirov
Cheboksary
Ivanovo
Bryansk
Tver
Kursk
Magnitogorsk
Kaliningrad
Nizhny Tagil
Murmansk
Ulan-Ude
Arkhangelsk
Kurgan
Smolensk
521,000
519,000
506,000
502,000
492,000
482,000
481,000
466,000
459,000
459,000
455,000
451,000
440,000
427,000
425,000
393,000
379,000
370,000
365,000
364,000
351,000
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
Ekaterinburg
Samara
Omsk
Kazan
Ufa
Chelyabinsk
Perm
Rostov-na-Donu
Volgograd
Voronezh
Krasnoyarsk
Saratov
Tolyatti
Ulyanovsk
Izhevsk
Krasnodar
Yaroslavl
Khabarovsk
Vladivostok
Irkutsk
Barnaul
Novokuznetsk
Population
2
3
1
8
City
564,000
Source: City Mayor’s Statistics http://www.citymayors.com/features/euro_cities1.html
2003
2007
2012 (Forecast)
Source: Russian Ministry for Economic Development & Trade,
http://www.economy.gov.ru, accessed 24th July, 2007
• 60% of FDI into Russia is now in the non-natural
resources sector
• Russia ranked the second most attractive retail
market in the world after India*
• 35 years after Pepsi and 17 years after McDonald’s
entered the market, many iconic brands are starting
to follow suit (Campbell’s, Starbucks)
• Key growth sectors include autos, construction,
luxury goods, hospitality, advertising, banking and
professional services
* AT Kearney 2007 Survey
FDI Rates and IPOs: Buoyant Regional Opportunities
Russia leads the way in attracting FDI in the region, followed by the Saudi Arabia and Turkey,
despite concerns over corruption and ease of working in the business environment
Foreign Direct Investment (US $MM)
2000
2001
2002
2003
2004
2005
Russian Federation
United Arab Emirates
Turkey
Ukraine
Poland
Romania
Egypt
Saudi Arabia
2,714.23
(514.56)
982.00
595.00
9,343.00
1,037.00
1,235.40
183.00
2,748.29
1,184.32
3,352.00
792.00
5,714.00
1,157.00
509.90
504.00
3,461.13
1,306.69
1,137.00
693.00
4,131.00
1,144.00
646.90
453.00
7,958.12
4,255.96
1,752.00
1,424.00
4,589.00
2,213.00
237.40
778.46
15,444.37
8,359.43
2,837.00
1,715.00
12,873.00
6,517.00
2,157.40
1,942.00
14,599.61
12,000.00
9,681.00
7,808.00
7,724.00
6,388.00
5,375.60
4,628.00
Kazakhstan
1,282.52
2,835.00
2,590.22
2,092.03
4,112.60
1,738.40
Source: United Nations Conference on Trade and Development (UNCTAD), Foreign Direct Investment
Database, http://stats.unctad.org Accessed on 17 October 2007
IPO's July 2006 - July 2007
IPOs in the Region (July 2006- July 2007)
35000
$31,079
30000
mil $
25000
20000
15000
10000
$4,888 $4,689
5000
$3,228 $2,709
$1,631
$173
$137
$119
Po
la
nd
R
om
an
ia
U
kr
ai
ne
Es
to
ni
a
U
AE
a
ke
y
Ka
za
kh
st
an
Tu
r
Ar
ab
i
an
R
us
si
9
Sa
ud
i
Fe
d
0
Source: Thompson Financial SDC Platinum , accessed 1stJuly, 2007
2006
28,700
8,300
20,100
5,200
14,000
11,400
10,000
18,300
6,100
Eastern Europe
Private Sector in GDP (in per cent)
Estonia
Kazakhstan
Latvia
Lithuania
Poland
Romania
Russia
Ukraine
80
65
70
75
75
70
65
65
Source: European Bank for Reconstruction and
Development, EBRD Transitions Report 2006,
accessed 27 August 2007. www.ebrd.com.
FDI in Russian Federation 1994-2007, forecast 2008-09, USD bn
60
53
50
40
38
32,4
30
34
FDI
20
12,512,9
10
8
4,9
2,8 3,3 2,7 2,5 3
2,1 2,6
0,7
0
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08F'09F
10
There are Still Challenges to Doing Business in Russia
Russia retains many of the complex bureaucratic procedures present in many post-communist countries
World Bank Ease of Doing Business Indicators (Ranking of 175 Countries)
Dealing with Employing Registering Getting Protecting Enforcing
Economy
Licenses
Workers
Property
Credit
Investors
Contracts
Rank
Rank
Rank
Rank
Rank
Rank
Estonis
14
156
21
48
33
29
Latvia
82
96
85
13
51
3
Saudi Arabia
47
40
3
48
50
136
Lithuania
57
124
4
36
83
18
Romania
90
145
123
13
33
37
Turkey
128
136
31
68
64
34
UAE
38
65
8
115
107
144
Kazakhstan
173
22
72
48
51
28
Poland
156
78
81
68
33
68
China
175
86
29
84
83
20
Russia
177
101
45
84
83
19
India
134
85
112
36
33
177
Brazil
107
119
110
84
64
106
Egypt
163
108
101
115
83
145
Ukraine
174
102
138
68
141
46
Source: World Bank Doing Business Indicators 2007, accessed on 27 September 2007. www.doingbusiness.org.
Transparency International
Corruption Perceptions Index 2007
Country
Rank
2006 CPI 2007 CPI
Score
Score
28 Estonia
6.7
6.5
34 UAE
6.2
5.7
51 Latvia
4.7
4.8
51 Lithuania
4.8
4.8
61 Poland
3.7
4.2
64 Turkey
3.8
4.1
69 Romania
3.1
3.7
72 China
3.3
3.5
72 India
3.3
3.5
72 Brazil
3.3
3.5
79 Saudi Arabia
3.3
3.4
105 Egypt
3.3
2.9
118 Ukraine
2.8
2.7
143 Russia
2.5
2.3
150 Kazakhstan
2.6
2.1
11
Estonia
Ease of Doing Business Rank
17 (+1)
Latvia
22 (-2)
Saudi Arabia
23 (+10)
Lithuania
26 (-2)
Romania
48 (+7)
Turkey
57 (+8)
UAE
68 (+1)
Kazakhstan
71 (flat)
Poland
74 (-6)
China
83 (+9)
Russia
106 (+7)
India
120 (+12)
Brazil
122 (-8)
Egypt
126 (+26)
Ukraine
139 (flat)
0
20
40
60
80
100
120
140
(+/- change from 2006)
Country
Source: Transparency International, Corruption Index
2006. Accessed on 29 August 2007.
 In recent years, Russia’s bureaucracy has
expanded and its corruption ranking has declined
(worsened). Government has set fighting corruption
as key priority.
160
One of the Largest Underbanked Markets in the World. Improving Risk Profile
Standard and Poor’s Rating
Bank Assets / GDP, 2006
200%
Bank Assets as % GDP
COUNTRY
31 DEC, 2004
CURRENT
150%
Russia
BB+
BBB+
Kazakhstan
BBB-
BBB-
B+
BB-
100%
50%
Ukraine
0%
Brazil
Source: EIU
Russia
India
China
Source: S&P Sovereign Ratings History Since 1975
 Consumer banking market growth at 50+% per annum
 SME untapped by international players, 50+% growth
 Competition for Top Tier corporate names increasing
12
Strong Fundamentals Despite Market Turmoil
Comparative CDS Spreads
Equity Market Performance
200
1000
Brazil 5yr CDS (Ba1/BB+)
Price (bps)
150
900
Mexico 5yr CDS (Baa1/BBB+)
Percent Increase since Jan 2002
175
SOAF 5yr CDS (Baa1/BBB+)
Russia 5yr CDS (Baa2/BBB+)
125
100
75
50
25
600
500
400
300
200
0
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Russian Credit Overview
• Despite the widening credit spreads since H2 2007, the
year has been very strong for Russia in terms of both
issuance volumes in the syndicated loan and Eurobond
markets
• Although appetite for EM debt has been affected by the
deteriorating credit environment, a large pipeline of both
bonds and loans from investment-grade names will keep
supply strong into 2008
13
700
100
0
Jan-07
800
RTS Index
S&P 500
Bombay SENSEX
Shanghai
Brazil BOVESPA
Jan 02
Dec 02
Dec 03
Dec 04
Dec 05
Dec 06
Dec 07
Russian Equity Market
• Over the last few years, Russia’s equity markets have
shown stunning growth with the RTS Index growing by
nearly 900% since 2002
• While easily outperforming indices from developed
markets, Russia’s performance has even dwarfed other
fast-growing emerging markets such as India, China and
Brazil
• In line with the developments in the credit markets, equities
have similarly seen a difficult start to the year.
• However, Russia’s solid fundamentals and further upward
potential are expected to mitigate any potential riskaversion
Russian Sovereign CDS Levels
250
1yr CDS
3yr CDS
5yr CDS
200
7yr CDS
Price (bps)
10yr CDS
150
+106 bps
100
+97bps
+88 bps
+79 bps
+62 bps
50
0
Jan - 05
Jul - 05
Source: Bloomberg as of 31.12.2007
14
Jan - 06
Jul - 06
Jan - 07
Jul - 07
Jan - 08
Russia FCY Loan Market Update
• 2007 was a record year for syndicated loans, the total more
than doubling to US$87.9bn
Russia Loan Market Volumes
Value
No. of deals
100
90
87.9
• The big driver behind the substantial increase were capex
and acquisition related financings in the Oil&Gas and
Metals & Mining sectors
80
US$ billions
70
60
50
• Hence, Oil&Gas as a sector represented with US$47.2bn,
53.7% of total volumes or an increase of 3.7x vis-à-vis
2006
40.1
38.2
112
132
153
2005
2006
2007
40
30
20
15.0
10
8.3
62
74
2003
2004
• However, on the back of recent market dislocation and a
huge pipeline of syndicated loans out of Russia, pricing has
slowly started to creep upward
0
Volumes By Sector
EMEA Pricing Trends
47.2
Oil & Gas
120
12.7
100
20.4
Metals & Mining
10.6
12.4
Finance
Utility & Energy
Telecoms
Other
15
Basis Points
6.8
1.2
0.4
60
40
20
0.4
2.2
8.0
3.6
80
2007
2006
0
4Q98
4Q99 4Q00
4Q01 4Q02
4Q03 4Q04
4Q05 4Q06
A excluding ACQ
A including ACQ
BBB including ACQ
BBB excluding ACQ
4Q07
Russian Eurobond Market Overview
45,000
Russia
40,000
35,000
40,013
Kazakhstan
Ukraine
140
35,397
Others
120
No Deals
121
100
30,000
97
15,887
25,000
20,000
15,000
Russia Eurobond Volumes
60
13,587
8,580
80
54
46
40
10,000
5,000
20
24
0
0
2003
2004
2005
2006
2007
Russia Eurobond Volumes by Sector (%)
Bank/Finance
Telecoms/IT
Others
Energy/Oil/Gas
Local authority
State Authority/Government
Metals/Mining
90%
Russian Bond Issuance (%)
25,000
Finance
Oil & Gas
Metals & Mining
Others
27,730
76
21,229
No Deals
20,000
70
63
40
8,055
10,000
6,505
5,000
16
29
60
50
11,138
15,000
80
30
32
20
10
0
0
2003
2004
2005
2006
2007
• Despite the difficult market conditions since the summer’s
credit woes, issuance volumes in 2007 have surpassed the
previous year’s record levels
• Since the difficulties in the credit markets started only
investment grade names, with the likes of TNK-BP on Oct.
3rd (US$1.7BN 5 & 10-year dual tranche), Gazprom on
Oct. 17th (€1.2BN long 10-year benchmark) and VTB on
Oct. 25th (US$2BN 2 & 5-year dual tranche) were able to
print in H2 2007.
100%
80%
70%
60%
50%
• Since Gazprom’s issue in October last year, only Sovereign
credits (Ukraine, City of Kiev) have been able to raise
funds on the primary market
40%
30%
20%
10%
0%
1997
16
30,000
Issuance Volumes (US$ - million)
Issuance Volumes (US$ - million)
CIS Eurobond Volumes
1998
2001
2002
2003
2004
2005
2006 2007
• Although a large pipeline is expected for 2008, this large
supply is partly mitigated by the redemption of nearly
US$2bn coming due in the next 4 months in CIS
M&A Activity in Russia
Sector Split – 2006 (US$ mm)
Historic M & A Volumes
848
140,000
800
120,000
100,000
600
492
402
461
129,080
418
394
390
60,000
500
400
8,801
34,146
25,907
2002
2003
2004
2005
58,292
3,010
2001
39,866
4,853
2000
Amount (US$ mm)
200
17
Food Products,
1,644
Mining, 2,361
Metals, 2,833
FI, 4,312
100
Food Stores, 2,856
2006
2007
Telecoms, 3,076
Utilities, 3,815
Number
Overview
Sector Split – 2007 (US$ mm)

Total US$ value of M&A Transactions grew from US$ 58 bn in
2006 to US$ 129 bn in 2007

Construction ,
2,378
Insurance, 2,326
Fis, 3,074
In 2006 the average deal size was US$ 90 mm, this grew to US$
152 mm in 2007
Telecoms, 5,482

Oil and Gas,
11,466
300
40,000
20,000
Trans. (ex Air), Other, 3,530
1,009
Investment Firms,
1,240
700
Number
Amount (US$ mm)
644
80,000
900
–
The average deal size for 2007 was greatest in Utilities where
the average deal size was US$ 463 mm, this compares to
US$ 93 mm in 2006
–
In 2006 the average deal size was greatest for the Oil and
Gas, US$ 181 mm compared with US$ 390 mm for 2007
This year deal volumes have reached US$ 16 bn so far
–
Despite the financial crises, deals are still being done
–
So far Oil and Gas has been the biggest M&A sector,
capturing around 45% of the deal flow
Other, 16,672
Utilities, 65,296
Mining, 9,622
Oil and Gas,
35,529
M&A Activity in Russia
Top 10 M&A deals - 2007
Transaction Announcement
Sector
Acquiror Name
Nation
Value of
Acquisition Technique
Transaction ($mil)
Mar 07
Oil and Gas
RN-Razvitye
Russian Fed
7,608
Apr 07
Oil and Gas
EniNeftegaz
Italy
5,835
Privately Negotiated Purchase
20
LionOre Mining
May 07
Mining
OAO MMC Norilsk
Nickel
Russian Fed
6,287
Tender/Merger
100
Yukossibneft
Oil -Lot 10
May 07
Oil and Gas
LLC Neft-Aktiv
Russian Fed
6,814
Divestiture / Auction
100
Yukossibneft
Oil -Lot 11
May 07
Oil and Gas
LLC Neft-Aktiv
Russian Fed
6,407
Divestiture / Auction
100
Yukos Oil Co
Certain Assets
May 07
Oil and Gas
OOO Paran
Russian Fed
3,877
Divestiture / Auction
100
Jul 07
Power Generation
Shareholders
Russian Fed
12,382
Divestiture / Spinoff /
Privatization
100
RAO Unified
Energy System
Jul 07
Power Distribution
RAO Unified Energy
Russian Fed
4,172
Self-Tender / Tender Offer
7.43
OGK-4
Sep 07
Power Distribution
E ON AG
Germany
3,947
Golden
Telecom
Dec 07
Telecoms
Vimpel –
Communications
Russian Fed
4,232
OAO Rosneft
Gazprom Neft
HydroOGK
18
Privately Negotiated Purchase
/ Auction
% of Shares
Acq.
Privately Negotiated Purchase
/ Privatization
9.44
47.43
Innovative Approach to Corporate Finance Management
Traditional Economic Development Scheme “Growth->Optimization->Cost-Saving->Investment” Turned into
“Growth/ Investment->Optimization/ Cost-Saving” in Russia
Russia Economic
Development
Growth/ Investment
Optimization/Cost-saving
Product
Fin. Markets
Corporates
Funding, Leasing
Short term FX & Money
Market/ Stock Exchange/
Bond Market
Funding/ Funding/
Funding
Hedging, Insurance
Long term FX & Money
Market/ Derivatives Market
Hedging/ “Alternative
Funding”/ Risk
Management
 New Methods of funding introduced, e.g. Synthetic RUR Funding -> USD Libor Linked
Loans + Cross Currency Swap -> Synthetic Fixed RUR Funding
 Market Indices introduced: Derivatives Market and Money Market Benchmark
(MosPrime) Becoming More Important
 Local Derivatives Law in place: All Long-Term Derivatives Were Previously Booked in
London – Starting This Year Local Law Supports Derivatives ( Local ISDA under
Development)
 Investor base diversification (Samurai bonds)
19
Key drivers for the Russian economy in 2008 remain positive
 Clarity on the political front. The future configuration of power in Russian
has finally been clarified. We believe that it indicates reduced political risks and
therefore consider it positive for the Russian market
 Macro story is still highly appealing. Russian economy has stayed
immune to the global liquidity crunch, as evidenced by continued strong rates
of GDP expansion. The current positive macroeconomic trends in Russia to
continue in 2007-08, backed by favourable external economic conditions, in
particular resilient oil price, which should support further growth, a stronger
ruble and falling inflation
 Strong investment and consumption growth.
 Market is defensive to global slowdown. One of the positive attributes
of the Russian market is that it is less exposed to a slowdown in the global,
and especially the US, economy – unless that slowdown leads to sharply lower
oil prices. Even one of the more exposed sectors, Russian banks, is unlikely to
get into significant trouble over the global credit crunch due to massive central
bank and government ability to provide liquidity if needed.
20
Risks for the Russian Economy in 2008
 Global sentiment. In some ways, Russia is more integrated than ever into the
global financial system, global concerns about subprime, credit and debt can
have an impact on the Russian market. A bigger risk is a global economic
slowdown resulting in reduced demand on commodities (above all oil)
 Rouble strength. Better-than-expected performance on the current account
side and strong inflow of private capital combined with an attempt of the CBR
to ease inflationary pressures may result in a rouble appreciation ahead of the
market expectations. This will put further pressure on margins of commodity
exporters
 Cost inflation. Inflationary pressures are unlikely to ease in 2008, supported
by wage increases, government spending, tariff increases for natural
monopolies and global price increases. These may result in rising operating
costs and capex overruns for Russian companies
21
Longer Term: Key Questions for the Russian Economy
Future investment and long-term growth in Russia will be dependent on:
 Further reforms progress. “Reform vs. Stability?”
 Productivity and Efficiency of Russian enterprises vs. the world competition and WTO
 Diversification of Russian Industry
 Addressing the demographical challenges
– Declining population
– Limited skilled professionals force
– Low mobility
 Promotion of Rule of Law, Decreasing Corruption
 Investment into infrastructure
 Accelerating the growth of the Russian smaller and medium sized (“SME”) enterprise
sector
 Growing middle class and its positive effects
 Food!
22
Questions
Answers