2016 China – Russia Business Seminar. New Opportunities & New Challenges

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<ul><li><p>2016 China Russia Business Seminar</p><p>New Opportunities &amp; New Challenges</p><p>www.pwc.com</p></li><li><p>PwC Russia</p><p>Agenda</p><p>1. Investing into Russia - Opportunities for Chinese investors</p><p>2. China Tax Reform Blueprint and development &amp; outbound investment crisis management (only Chinese version available)</p><p>3. Doing business in Russia - corporate, antimonopoly, employment and migration aspects</p><p>4. Tax and non-tax incentives available in Russia</p><p>5. Changing customs environment and modern instruments for supporting importers in Russia</p><p>6. Forensic review of the proper use of funds &amp; due diligence of third parties</p><p>2</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Investing into Russia Opportunities for Chinese investors</p><p>3</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>1. Russian economy at a glance</p><p>2. Russia-China economic relations</p><p>3. Key industry segments and opportunities for Chinese companies </p><p>4. PwC in Russia</p><p>Agenda</p><p>4</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>1. Russian economy at a glance</p><p>5</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Relative growth of BRICS countries GDP in 2000-2014 (against 2000)</p><p>Russia has historically been growing faster than the worlds average and in line with the peers form BRICS</p><p>9.8%</p><p>4.1%</p><p>3.2%</p><p>CAGR 2000-2014 Historical growth drivers</p><p>Upward trend in a global commodities cycle</p><p>Growth in consumption and development of consumer markets</p><p>Improvement of institutional environment (incl. WTO accession in 2012) </p><p>Development of financial markets</p><p>Vulnerable to changes in commodity prices in short-run, but outperformed world-average in 2000-2014 (4.1% vs 3.7%)</p><p>7.1%</p><p>3.1%</p><p>Source: EIU, PwC analysis </p><p>Growth pattern</p><p>Brazil</p><p>China</p><p>India</p><p>Russia</p><p>SouthAfrica</p><p>0.0</p><p>0.5</p><p>1.0</p><p>1.5</p><p>2.0</p><p>2.5</p><p>3.0</p><p>3.5</p><p>4.0</p><p>2000 2002 2004 2006 2008 2010 2012 2014</p><p>USD</p><p>t</p><p>6</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Certain megatrends will likely drive transformation of the Russian economy in the future</p><p>Source: Gazprombank, Census, CBR, Lukoil, HelgiLibrary, PwC analysis </p><p>Mining and O&amp;G are shifting eastward Infrastructure challenge</p><p>Aging population Financial deepening</p><p>By 2025 25% of oil and 50% of natural gas extraction will come from new fields (Yamal, Arctic shelf, East Siberia)</p><p>1</p><p>Development of new world-class coal, copper and gold projects in underway in the Russian Far East and Eastern Siberia</p><p>2</p><p>More projects are targeting Asian markets. There is a demand for equity and debt investments to finance development</p><p>Russia shall invest USD 100b pa (4% GDP) in infrastructure to secure economic growth </p><p>1</p><p>Only 2% of total infrastructure investments were private in 2014</p><p>3</p><p>Due to the budget deficit (2,8% in 2015), the government will foster private investments in infrastructure</p><p>Large projects include high speed railways, FIFA 2018, new pipelines and ports</p><p>2</p><p>By 2030 over 20% of population will be senior (vs 13% today) 28 mln people</p><p>1</p><p>Consumer power of new senior generation will be significantly higher</p><p>2</p><p>Pharma, senior hospitality and healthcare markets will grow faster than GDP. Profile of an average consumer will change</p><p>Bank assets to GDP ratio in Russia (84% in 2013) is significantly below the peers (250-300%) in the EU and China </p><p>1</p><p>Bank assets to GDP shall exceed 130% by 2020 -potential for double-digit growth rates and returns in selected segments of financial market</p><p>7</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Sanctions imposed by the US, the EU and Japan in 2014 have an impact on trade, financial markets and production</p><p>Ban on exports of certain products (including equipment for offshore O&amp;G, </p><p>high-tech, defence) to Russia</p><p>Sanctions imposed by the US, the EU and Japan</p><p>Restricted access to financial markets to key Russian banks and companies (ban on </p><p>new stock issues and debt financing) </p><p>Implications</p><p>Russian banks have to replace foreign funding, which made up ca 13% of bank liabilities before the sanctions</p><p>Russian O&amp;G companies are looking for new suppliers of off shore technologies and equipment</p><p>Valuations of Russian companies have decreased (EV/EBITDA of 3.9* vs 8-18 in BRICS), additional impact comes from RUB depreciation (&gt;50% vs USD and CNY since early 2014)</p><p>4Sanctions imposed by Russia</p><p>Ban on imports of agricultural products and food from the EU, the US, </p><p>Ukraine and Turkey</p><p>1</p><p>Russian O&amp;G and government majors are looking for new sources of funding for their CAPEX projects </p><p>3</p><p>2</p><p>Trade</p><p>Financial markets</p><p>Source: Bloomberg, CBR, PwC analysis * - Note: MOEX index (top-50 liquid stocks) </p><p>Production</p><p>Trade barriers foster development of selected agricultural and manufacturing segments in Russia</p><p>5</p><p>8</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Sanctions and oil slump will make 2015 a tough year for the Russian economy, recovery is expected starting from 2017</p><p>Key factors driving the forecast</p><p>2015 is a tough year for the economy due to continuing sanctions, oil slump, weak RUB and sovereign ratings downgrade</p><p>Nominal GDP will decrease greater than real GDP due to RUB depreciation (&gt;50% vs USD/CNY)</p><p>The economy shall start recovering in 2017</p><p>Nominal GDP forecast and real growth rates</p><p>Potential opportunities</p><p>Strike deals on very favorable conditions as assets can potentially be undervalued</p><p>EIU forecast, 2015-2019</p><p>Ride the emerging trends (changing consumer behaviors, financial constrains, less competitive imports)</p><p>Source: EIU 5-year forecast as of Oct 2015, PwC analysis </p><p>4.5% 4.3%</p><p>3.4%</p><p>1.3%0.6%</p><p>(3.6%)</p><p>(0.6%)</p><p>2.0%1.5% 1.5%</p><p>1.5</p><p>1.92.0 2.1</p><p>1.9</p><p>1.3 1.21.4</p><p>1.51.7</p><p>-4.0%</p><p>-3.0%</p><p>-2.0%</p><p>-1.0%</p><p>0.0%</p><p>1.0%</p><p>2.0%</p><p>3.0%</p><p>4.0%</p><p>5.0%</p><p>-2.0</p><p>-1.5</p><p>-1.0</p><p>-0.5</p><p>0.0</p><p>0.5</p><p>1.0</p><p>1.5</p><p>2.0</p><p>2.5</p><p> 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F</p><p>Real GDP growth rate,% Nominal GDP (USD trillion)</p><p>9</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Russian economy at a glance</p><p>RUB depreciation, sanctions and megatrends reshaping Russian economy (shifting to the east, infrastructure challenge, aging population and financing deepening) bring new investment opportunities.</p><p>6th largest economy (by PPP, 2014), key supplier of natural resources to the global market </p><p>Outperformed worlds average in </p><p>2000-2013due to upward trend in commodity cycle</p><p>2015 is a tough year for the economy due to the sanctions and oil slump. Expected decline in </p><p>real GDP 3.6%, nominal - &gt;30%</p><p>10</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>2. Russia China economic relations</p><p>11</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Russia-China economic relations have been limited due to geography and lack of infrastructure</p><p>Source: roebuckclasses., PwC analysis </p><p>Economic cooperation has historically been limited by As a result</p><p>Russia makes up only 2% of Chinese international trade</p><p>There is no substantial export of Russian natural gas to the Chinese market</p><p>Trans-border economic cooperation is limited</p><p>Geography - 3.5k km of the border is located in a remote sparsely populated area</p><p>Lack of infrastructure (different rail gauges, no cross-border bridges over Heilong Jiang or pipelines)</p><p>Limited involvement of both countries in international trade before 00-s</p><p>1</p><p>2</p><p>3</p><p>Several large infrastructure projects are underway/proposed</p><p>Bridge over Heilong Jiang</p><p>Natural gas pipeline East Siberia China</p><p>Expansion of ports in the Russian Far East and railroad infrastructure</p><p>12</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>In recent years cross-border trade has demonstrated substantial growth</p><p>Russia China trade</p><p>Trade between Russia and China reached 11.8% of Russian turnover in 2014 (still only 2% of Chinese)</p><p>In 2014 80% of Russian export to China constituted of mineral resources and products </p><p>Import from China was more diversified, with leading categories being machinery &amp; equipment and consumer goods</p><p>Source: Federal Customs Service of Russia, PwC analysis </p><p> -</p><p> 20</p><p> 40</p><p> 60</p><p> 80</p><p> 100</p><p> 120</p><p>2003</p><p>2004</p><p>2005</p><p>2006</p><p>2007</p><p>2008</p><p>2009</p><p>2010</p><p>2011</p><p>2012</p><p>2013</p><p>2014</p><p>US</p><p>Db</p><p>China to Russia</p><p>Russia to China</p><p>36% </p><p>26% </p><p>37% </p><p>54Equipment</p><p>Shoes and apparel</p><p>Other</p><p>Russian export to China, 2014</p><p>Russian import from China, 2014</p><p>72% </p><p>10% </p><p>9% </p><p>9% </p><p>42</p><p>Oil and fuels</p><p>Ore, metals andfertilizersLumber and pulp</p><p>Other</p><p>13</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>so have Foreign direct investments</p><p>Inward FDI from China</p><p>Source: China Statistical Yearbooks 2004-2013, PwC Analysis </p><p>Chinese financial investors started actively investing (mainly CIC), key markets natural resources and consumer</p><p>Russia is set to increase its share in Chinese outward FDI (target - 7 times by 2020) to foster economic growth and economic development of the Russian Far East</p><p>Year Target Acquirer VendorDeal value (USDm)</p><p>Stake,%</p><p>2015 Sibur Sinopec Shareholders 1,300 10%</p><p>2014 Detsky Mir RCIF AFK Sistema n/d n/d</p><p>2013 Uralkali CIC Shareholders 2,008 12.5%</p><p>2013 Yamal LNG CNPC Novatek 750 20%</p><p>2013 VTBCCB and co-investors</p><p>Government 2,330 13.8%</p><p>2013 MICEX CIC Shareholders n/d 5.30%</p><p>2013 RFP Group RCIF Shareholders n/d 42%</p><p>2012 Polyus Gold CIC Shareholders 450 5%</p><p>The largest M&amp;A transactions</p><p>77 203452 478 395 348</p><p>568716 785</p><p>4080</p><p>794</p><p>2.7%2.3%</p><p>4.2%</p><p>3.7%</p><p>2.3%</p><p>1.7%1.9%</p><p>1.8%2.1%</p><p>9.7%</p><p>1.7%</p><p>0%</p><p>2%</p><p>4%</p><p>6%</p><p>8%</p><p>10%</p><p>12%</p><p> -</p><p> 500</p><p> 1,000</p><p> 1,500</p><p> 2,000</p><p> 2,500</p><p> 3,000</p><p> 3,500</p><p> 4,000</p><p> 4,500</p><p>US</p><p>Dm</p><p>FDI in Russia Russia in total Chinese ODI</p><p>14</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Wide range of institutions to support Chinese business and investors in Russia were established in recent years</p><p>Top-level political cooperation lays foundation for partnership in various business areas</p><p>Russia-China trade chamber</p><p>Russian-Chinese Business Council</p><p>Russia China Investment Fund</p><p>The Russian-Chinese center of trade and economic cooperation</p><p>Intergovernmental RussianChinese Investment Cooperation Commission</p><p>Major institutions Mission</p><p>Coordinate efforts of all participants of bilateral economic relations</p><p>Facilitate trade in machinery &amp; equipment and innovations</p><p>Promote joint economic projects and facilitate cooperation between Russian and Chinese business community</p><p> Investing in projects that advance bilateral economic cooperation between Russia and China</p><p>Facilitate investment projects and decrease administrative and trade barriers</p><p>Source: PwC analysis </p><p>15</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Russia-China economic relations</p><p>Economic cooperation has historically been limited by lack of infrastructure and geography </p><p>In recent years bilateral trade and investments have surged (China is the Russias largest trade partner, 11.8% of total exports)</p><p>Russian government is set to expand cooperation with Chinese companies to foster economic growth and development of the Russian Far East</p><p>Several institutions have been set up; co-investment from RDIF/RCIF is available for Chinese companies and banks</p><p>16</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>3. Key industry segments and opportunities for Chinese companies </p><p>17</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Russia has a diversified economy driven by export-oriented O&amp;G and mining sectors and developing consumer market</p><p>7%</p><p>6%</p><p>6%</p><p>6%</p><p>6%</p><p>5%</p><p>5%</p><p>4%</p><p>Retail &amp; wholesale</p><p>Oil &amp; gas</p><p>Processing industries</p><p>Transportation</p><p>Finance</p><p>Healthcare, education</p><p>Construction</p><p>Real estate</p><p>Public services</p><p>Metals &amp; Mining</p><p>Agriculture</p><p>Power &amp; utilities</p><p>Telecom</p><p>Other</p><p>1,801</p><p>19%</p><p>11%</p><p>11%</p><p>3%3%</p><p>10%</p><p>Key observationsStructure of Russian GDP, 2014</p><p>Contributing ~76% in total exports, Oil &amp; Gas and Metals &amp; Mining are key export-oriented industries, which are competitive on a global arena</p><p>Other industry segments such as retail, agriculture, industrial manufacturing, transportation and construction present significant domestic markets with a variety of opportunities for foreign investors and suppliers</p><p>Russian economy is quite diversified with a wide range of sectors contributing to GDP</p><p>USD bn</p><p>Source: Rosstat (State Statistics Agency of Russia), World Bank, PwC analysis </p><p>18</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Being a Top-3 Oil &amp; Gas producer, Russia has been recently shifting a strategic focus on Asian markets</p><p>Russia in the global context, 2014 Industry outlook</p><p>Natural gas production% total world production,bn cubic meters</p><p>Oil production% total world production,mn barrels daily</p><p>Russia is a top-3 global oil &amp; gas producer and exporter</p><p>Russia has the largest natural gas reserves and top-8 oil reserves</p><p>Oil &amp; Gas industry is highly concentrated with a significant state involvement </p><p> Few major vertically integrated oil players dominated by a state-owned Rosneft</p><p> State-owned Gazprom is a dominant natural gas producer with a monopoly for export sales</p><p> State-owned Transneft is monopoly operator of oil pipelines</p><p>Soviet-era fields in Western Siberia are depleting, and O&amp;G sector is moving eastwards and to the Arctic shelf. Target markets also change</p><p>Source: BP, PwC analysis </p><p>Total: 3,461 Total: 88.7</p><p>162</p><p>173</p><p>177</p><p>579</p><p>728</p><p>Canada</p><p>Iran</p><p>Qatar</p><p>Russia</p><p>The US</p><p>4.2</p><p>4.3</p><p>10.8</p><p>11.5</p><p>11.6</p><p>China</p><p>Canada</p><p>Russia</p><p>SaudiArabia</p><p>The US</p><p>19</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Prospective O&amp;G regions</p><p>Source: Irkutsk oil</p><p>20</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Existing cooperation and potential opportunities for Chinese companies in Oil &amp; Gas</p><p>Contractors in infrastructure &amp; pipelines</p><p>JV/ investments in upstream</p><p>Supply of equipment and technology</p><p> Yamal LNG-CNPC; </p><p> CNPC - Rosneft (Vankor)</p><p> Chinese contractors &amp; suppliers are expected to participate</p><p> Oil &amp; Gas infrastructure development is on top of the agenda, i.e. investment into Russia China gas pipeline is expected at ~$55 bn</p><p> Russian O&amp;G companies need to make significant investments in new fields (East Siberia, Arctic shelf) to sustain production volumes</p><p> Financing is constrained due to the sanctions </p><p> Potential for Chinese O&amp;G equipment suppliers and service providers to gain market share from Western competitors</p><p> Supplies and equipment spending of only Rosneft reached $6 bn in 2014</p><p> Hilong investment in coating business in Russia</p><p>Seg</p><p>men</p><p>t p</p><p>ote</p><p>nti</p><p>al</p><p>Rec</p><p>ent </p><p>dea</p><p>ls</p><p>Source: PwC analysis </p><p>21</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Russia is a top global producer across a wide range of minerals with a solid resource base</p><p>17%</p><p>Nickel 14%</p><p>Copper 4%</p><p>Gold 7%</p><p>Iron ore 6%</p><p>Coal 5%</p><p>Steel 4%</p><p>Potash</p><p>4%</p><p>35%</p><p>8%</p><p>10%</p><p>15%</p><p>18%</p><p>n/a</p><p>Rank</p><p>#2</p><p>#3</p><p>#3</p><p>#6</p><p>#4</p><p>#2</p><p>Mineral and steel production Mineral reserves% in worlds % in worlds</p><p>Russia in the global context Industry outlook</p><p> Russia is among global leaders in metals and mining</p><p>RUB depreciation improves cash margins and NPV of Russian mining projects</p><p>There are over 40 large-scale mining projects in the Russian Far East on exploration and development stages, namely: Udokan (copper), Baimskoe and Natalka (gold), Tuva and Elga coal projects, Timir (iron ore)</p><p> Focus on export, but Russia makes up ca. 2% of Chinese imports of metals</p><p>n/a</p><p>Rank</p><p>#5</p><p>#5</p><p>#4</p><p>#6</p><p>#1</p><p>#2</p><p>#5</p><p>Source: PwC analysis </p><p>22</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Source: PwC analysis </p><p>1</p><p>2</p><p>3</p><p>45</p><p>6</p><p>7</p><p>89</p><p>10</p><p>11</p><p>12</p><p>13</p><p>14</p><p>15</p><p>16</p><p>17 18</p><p>19</p><p>20</p><p>21</p><p>22</p><p>23</p><p>24</p><p>25</p><p>26</p><p>272829</p><p>30</p><p>31</p><p>32</p><p>33</p><p>3435</p><p>36 37</p><p>38</p><p>39</p><p>40</p><p>41</p><p>42</p><p>43</p><p>44</p><p>45</p><p>46</p><p>47</p><p>China</p><p>Mongolia</p><p>KazakhstanJapan</p><p>Republic </p><p>of Korea</p><p>DPRK</p><p>Moscow</p><p>Iran</p><p>Iraq</p><p>Turkey</p><p>Ukraine</p><p>Large-scale mining projects in Russia on exploration and development stages</p><p>Exploration</p><p>and designDevelopment Mining</p><p>Coal</p><p>Cu</p><p>Fe</p><p>Ni</p><p>Au</p><p>Mo</p><p>Ti</p><p>Zn,Pb</p><p>Other</p><p>23</p><p>19 January 2016</p></li><li><p>PwC Russia</p><p>Existing cooperation and potential opportunities for Chinese companies in Metals &amp; Mining</p><p>Equity investments in new projects Supply of machinery &amp; equipment</p><p> CIC Polyus Gold</p><p> China Shenhua Rostech JV to develop coal deposits</p><p> Chinese investors expressed interest in Mechel, Norilsk Nickel and Metalloinvest projects in the Russian Far East</p><p> U...</p></li></ul>