Financing the Russian Economy: Future opportunities and challenges

Steven FisherManaging Director, Citibank ZAO, Russia

February 2008

Russia is a BRIC Leader

Brazil Russia India China

Size of Economy (1) (US$bn) 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 (%)

874309

1,0421,055

821713

1,146202

Growth of Acquisitions (4) (%) 316 1,831 1,266 459

Growth of Equity Offerings (5) (%) 607 7,943 2,491 771

% of Global 2006–2007 IPOOfferings (6) (%)

>5 ~10 <5 ~20

Notes: (1) 2007 Nominal GDP; Source: EIU.(2) 2007P GDP growth; Source: EIU.(3) Market Cap as of December 2006 from Factset.(4) 2001–2006 Market Volume; Source: SDC – Any Involvement.(5) 2001–2006 Equity offerings – Equity and Equity Linked.(6) 2006–2007YTD IPOs as of 17 September.

2

99.6

90.9

86.4

61.0

0 20 40 60 80 100 120

Russia

China

Brazil

India

0 0.2 0.4 0.6 0.8 1

India (126)

China (81)

Brazil (69)

Russia (65)

Exceptional Strength in Intellectual Capital

Leads BRICs in Human Development IndexRank

Leader in Higher Education

Highest Literacy Rate among BRICs

Sources: UNESCO, OECD, Economist3

Source: EIU

Russia’s Economy is larger than India, Brazil, South Korea

Rank Country/Region $MMM Rank Country/Region $MMM

1 United States 13,893 1 United States 28,4532 Japan 4,464 2 China 12,6263 Germany 3,284 3 Japan 7,5974 China 3,220 - CIS* 4,8425 United Kingdom 2,682 4 Germany 4,8406 France 2,434 5 United Kingdom 4,2897 Italy 2,046 6 Russia 3,9888 Spain 1,401 7 India 3,648- CIS* 1,364 8 France 3,5079 Canada 1,284 9 South Korea 2,800

10 Russia 1,160 10 Italy 2,65711 Brazil 1,007 11 Canada 2,39412 India 988 12 Spain 2,13013 South Korea 969 13 Brazil 1,96114 Mexico 871 14 Mexico 1,683... ... ... ... ... ...

52 Ukraine 103 35 Ukraine 46856 Kazakhstan 77 40 Kazakhstan 386

Forecast to jump to top 6 player by 2020

GDP

2007E 2020

4

Foreign Currency Reserves

Natural Gas

(Proved Reserves)

Oil

(Proved Reserves)

Ranking for FCY and Energy Reserves

Source: EIU Source: BP research Source: BP research

Leading Energy Position is Key Economic Driver

Rank Country $MM Rank Countrybarrels (trln)

% of total

Rank Country m3

(trln)% of total

1 China 1,076 1 Saudi Arabia 264.2 22.0 1 Russia 47.8 26.62 Russia 296 2 Iran 137.5 11.5 2 Iran 26.7 14.93 Taiwan 266 3 Iraq 115.0 9.6 3 Qatar 25.8 14.34 South Korea 238 4 Kuwait 101.5 8.5 4 Saudi Arabia 6.9 3.85 India 166 5 UAE 97.8 8.1 5 UAE 6.0 3.46 Singapore 135 6 Venezuela 79.7 6.6 6 Nigeria 5.2 2.97 Hong Kong 134 7 Russia 74.4 6.2 7 Algeria 4.6 2.58 Brazil 86 8 Kazakhstan 39.6 3.3 8 Venezuela 4.3 2.49 Malaysia 82 9 Libya 39.1 3.3 9 Iraq 3.2 1.810 Algeria 78 10 Nigeria 35.9 3.0 10 Kazakhstan 3.0 1.711 Mexico 76 11 USA 29.3 2.4 11 Turkmenistan 2.9 1.612 Thailand 66 12 Canada 16.5 1.4 12 Indonesia 2.8 1.513 Turkey 61 13 China 16.0 1.3 13 Australia 2.5 1.414 Iran 58 14 Qatar 15.2 1.3 14 Malaysia 2.5 1.415 Libya 57 15 Mexico 13.7 1.1 15 Norway 2.4 1.3

5

Russia – Already Major Equity Market, Potential is Big

Rank Company Sector Mkt Cap US$bn1 Gazprom Oil and Gas 278.62 Sberbank Banks 94.13 Rosneft Oil and Gas 93.84 Lukoil Oil and Gas 74.85 Norilsk Nickel Metals 51.96 Unified Energy Systems Utilities 47.87 Surgutneftegaz Oil and Gas 45.98 TNK-BP Oil and Gas 32.99 VTB Banks 30.8

10 MTS Telecoms 24.811 Novolipetsk Steel Metals 23.612 Severstal Metals 22.013 Gazpromneft Oil and Gas 21.614 NOVATEK Oil and Gas 16.415 PIK Group Real Estate 13.916 MMK Metals 13.817 Tatneft Oil and Gas 13.218 AFK Systema Telecoms 13.119 Mosenergo Utilities 9.920 Pipe Metal Company Metals 9.921 Evrocement Build. Materials 9.322 Uralkali Fertilizers 9.023 Mechel Metals 8.824 Polyus Gold Metals 8.525 Baltika Brewery Food 8.226 Rostelecom Telecoms 8.127 OGK-3 Utilities 6.628 OGK-4 Utilities 6.329 Silvinit Fertilizers 6.230 OGK-5 Utilities 6.1

30 Companies with Market cap. >=US$6bn

Source: Bloomberg, 19 October 2007.

New Listings Will Bring More Sector Diversification

Energy

UtilitiesFinancials

Materials

Telecoms

Leading EM Equity Market

Improving Risk Profile

Rank Country% of EM

MSCI1 China 17.4%2 Korea 14.9%3 Brazil 12.0%4 Taiwan 11.0%5 Russia 8.9%6 South Africa 6.8%7 India 6.8%8 Mexico 5.0%9 Malaysia 2.3%10 Israel 2.1%

11–25 Others 15.5%Grand Total: 100%

Rating Agency 31.12.04 Current

S & P BB+ BBB+

Fitch BBB- BBB+

Moody’s Baa3 Baa2

Source: MSCI, Citi, 18 October’ 07.

Source: S&P Sovereign Ratings History Since 1975; Fitch – Complete Sovereign Rating history; Bloomberg

Sector Breakdown, by Market Cap (MSCI)

6

Russia Update: Stronger and More Stable

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)

0

2000

4000

6000

8000

10000

12000

14000

After 7 years in office, Putin’s approval ratings are higher than ever at 80%, though public trustof leaders in general is low

An unprecedented majority of the public report they are more or less happy withlife, and optimistic aboutthe future

Since the 1998 financial crisis, Russia’s economy has stabilized and greatly expanded

Source: The Economist Intelligence UnitRussia Country Data Annual Time Series, 2007

7

Beyond Natural Resources: Consumer Boom Presents New Opportunities

12th-largest retail market in the world, to become 9th-largest by 2010

Expanding to provincial cities

Russia’s cities are growing, and 14 cities have populations near 1 million

Source: City Mayor’s Statistics http://www.citymayors.com/features/euro_cities1.html

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

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…

* AT Kearney 2007 Survey

Rank City Population Rank City Population1 MOSKVA (Moscow) 8,297,000 26 Novokuznetsk 564,000

2 St Petersburg 4,678,000 27 Penza 528,0003 Novosibirsk 1,400,000 28 Ryazan 528,000

4 Nizhny Novgorod 1,358,000 29 Orenburg 523,000

5 Ekaterinburg 1,267,000 30 Naberezhnye Tchelny 521,0006 Samara 1,165,000 31 Lipetsk 519,0007 Omsk 1,153,000 32 Tula 506,0008 Kazan 1,092,000 33 Tyumen 502,0009 Ufa 1,088,000 34 Kemerovo 492,00010 Chelyabinsk 1,084,000 35 Astrakhan 482,00011 Perm 1,014,000 36 Tomsk 481,000

12 Rostov-na-Donu 1,003,000 37 Kirov 466,00013 Volgograd 992,000 38 Cheboksary 459,00014 Voronezh 903,000 39 Ivanovo 459,00015 Krasnoyarsk 876,000 40 Bryansk 455,00016 Saratov 875,000 41 Tver 451,00017 Tolyatti 720,000 42 Kursk 440,000

18 Ulyanovsk 668,000 43 Magnitogorsk 427,00019 Izhevsk 654,000 44 Kaliningrad 425,00020 Krasnodar 640,000 45 Nizhny Tagil 393,00021 Yaroslavl 614,000 46 Murmansk 379,00022 Khabarovsk 609,000 47 Ulan-Ude 370,00023 Vladivostok 607,000 48 Arkhangelsk 365,00024 Irkutsk 591,000 49 Kurgan 364,00025 Barnaul 580,000 50 Smolensk 351,000

Spotlight on Rising Russian Middle Class

1990

2007

8

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

Eastern EuropePrivate Sector in GDP (in per cent)

Source: European Bank for Reconstruction and Development, EBRD Transitions Report 2006, accessed 27 August 2007. www.ebrd.com.

Source: United Nations Conference on Trade and Development (UNCTAD), Foreign Direct Investment Database, http://stats.unctad.org Accessed on 17 October 2007

2000 2001 2002 2003 2004 2005

Russian Federation 2,714.23 2,748.29 3,461.13 7,958.12 15,444.37 14,599.61 United Arab Emirates (514.56) 1,184.32 1,306.69 4,255.96 8,359.43 12,000.00 Turkey 982.00 3,352.00 1,137.00 1,752.00 2,837.00 9,681.00 Ukraine 595.00 792.00 693.00 1,424.00 1,715.00 7,808.00 Poland 9,343.00 5,714.00 4,131.00 4,589.00 12,873.00 7,724.00 Romania 1,037.00 1,157.00 1,144.00 2,213.00 6,517.00 6,388.00 Egypt 1,235.40 509.90 646.90 237.40 2,157.40 5,375.60 Saudi Arabia 183.00 504.00 453.00 778.46 1,942.00 4,628.00 Kazakhstan 1,282.52 2,835.00 2,590.22 2,092.03 4,112.60

Foreign Direct Investment (US $MM)

Estonia 80Kazakhstan 65Latvia 70Lithuania 75Poland 75Romania 70Russia 65Ukraine 65

$31,079

$4,888 $4,689$3,228 $2,709 $1,631

$173 $137 $1190

5000

10000

15000

20000

25000

30000

35000

mil

$

IPOs in the Region (July 2006- July 2007)

Source: Thompson Financial SDC Platinum , accessed 1stJuly, 2007

1,738.40

2006

28,700

20,1005,200

8,300

11,400

10,00018,300

6,100

14,000

9

FDI in Russian Federation 1994-2007, forecast 2008-09, USD bn

0,7 2,1 2,64,9

2,8 3,3 2,7 2,5 3

812,512,9

32,4

53

3438

0

10

20

30

40

50

60

'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08F'09F

FDI

10

World Bank Ease of Doing Business Indicators (Ranking of 175 Countries) Ease of Doing Business Rank

Source: World Bank Doing Business Indicators 2007, accessed on 27 September 2007. www.doingbusiness.org.

There are Still Challenges to Doing Business in Russia

139 (flat)

126 (+26)

122 (-8)

120 (+12)

106 (+7)

83 (+9)

74 (-6)

71 (flat)

68 (+1)

57 (+8)

48 (+7)

26 (-2)

23 (+10)

22 (-2)

17 (+1)

0 20 40 60 80 100 120 140 160

Ukraine

Egypt

Brazil

India

Russia

China

Poland

Kazakhstan

UAE

Turkey

Romania

Lithuania

Saudi Arabia

Latvia

Estonia

(+/- change from 2006)Transparency International Corruption Perceptions Index 2007

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.

Russia retains many of the complex bureaucratic procedures present in many post-communist countries

Dealing with Licenses

Employing Workers

Registering Property

GettingCredit

Protecting Investors

Enforcing Contracts

Rank Rank Rank Rank Rank RankEstonis 14 156 21 48 33 29Latvia 82 96 85 13 51 3Saudi Arabia 47 40 3 48 50 136Lithuania 57 124 4 36 83 18Romania 90 145 123 13 33 37Turkey 128 136 31 68 64 34UAE 38 65 8 115 107 144Kazakhstan 173 22 72 48 51 28Poland 156 78 81 68 33 68China 175 86 29 84 83 20Russia 177 101 45 84 83 19India 134 85 112 36 33 177Brazil 107 119 110 84 64 106Egypt 163 108 101 115 83 145Ukraine 174 102 138 68 141 46

Economy

Country Rank

Country2006 CPI Score

2007 CPI Score

28 Estonia 6.7 6.534 UAE 6.2 5.751 Latvia 4.7 4.851 Lithuania 4.8 4.861 Poland 3.7 4.264 Turkey 3.8 4.169 Romania 3.1 3.772 China 3.3 3.572 India 3.3 3.572 Brazil 3.3 3.579 Saudi Arabia 3.3 3.4

105 Egypt 3.3 2.9118 Ukraine 2.8 2.7143 Russia 2.5 2.3150 Kazakhstan 2.6 2.1

11

One of the Largest Underbanked Markets in the World. Improving Risk Profile

Standard and Poor’s Rating Bank Assets / GDP, 2006

Source: EIU Source: S&P Sovereign Ratings History Since 1975

Bank Assets as % GDP

0%

50%

100%

150%

200%

Brazil Russia India China

Consumer banking market growth at 50+% per annum

SME untapped by international players, 50+% growth

Competition for Top Tier corporate names increasing

12

COUNTRY 31 DEC, 2004 CURRENT

Russia BB+ BBB+

Kazakhstan BBB- BBB-

Ukraine B+ BB-

Strong Fundamentals Despite Market Turmoil

Russian Equity MarketRussian Credit Overview

0

25

50

75

100

125

150

175

200

Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08

Pric

e (b

ps)

Brazil 5yr CDS (Ba1/BB+)

Mexico 5yr CDS (Baa1/BBB+)

SOAF 5yr CDS (Baa1/BBB+)

Russia 5yr CDS (Baa2/BBB+)

0

25

50

75

100

125

150

175

200

Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08

Pric

e (b

ps)

Brazil 5yr CDS (Ba1/BB+)

Mexico 5yr CDS (Baa1/BBB+)

SOAF 5yr CDS (Baa1/BBB+)

Russia 5yr CDS (Baa2/BBB+)

0

100

200

300

400

500

600

700

800

900

1000

Jan 02 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07

Per

cent

Inc

reas

e si

nce

Jan

2002

RTS IndexS&P 500Bombay SENSEXShanghaiBrazil BOVESPA

• 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

• 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 risk-aversion

Comparative CDS Spreads Equity Market Performance

13

Russian Sovereign CDS Levels

0

50

100

150

200

250

Jan - 05 Jul - 05 Jan - 06 Jul - 06 Jan - 07 Jul - 07 Jan - 08

Pric

e (

bps

)

1yr CDS

10yr CDS

7yr CDS

5yr CDS

3yr CDS

0

50

100

150

200

250

Jan - 05 Jul - 05 Jan - 06 Jul - 06 Jan - 07 Jul - 07 Jan - 08

Pric

e (

bps

)

1yr CDS

10yr CDS

1yr CDS1yr CDS

10yr CDS10yr CDS

+106 bps

+97bps

+88 bps

+79 bps

+62 bps

Source: Bloomberg as of 31.12.2007

14

Russia FCY Loan Market Update

EMEA Pricing TrendsVolumes By Sector

8.315.0

40.1 38.2

87.9

74112 132 153

620

10

20

30

40

50

60

70

80

90

100

2003 2004 2005 2006 2007

US

$ bi

llion

s

ValueNo. of deals

Russia Loan Market Volumes

47.2

20.4

10.6

1.2

0.4

8.0

12.7

6.8

12.4

0.4

2.2

3.6

Oil & Gas

Metals & Mining

Finance

Utility & Energy

Telecoms

Other

2007

2006

0

20

40

60

80

100

120

4Q98 4Q99 4Q00 4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07

Bas

is P

oint

s

A excluding ACQ

BBB excluding ACQBBB including ACQ

A including ACQ

0

20

40

60

80

100

120

4Q98 4Q99 4Q00 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07

• 2007 was a record year for syndicated loans, the total more than doubling to US$87.9bn

• The big driver behind the substantial increase were capex and acquisition related financings in the Oil&Gas and Metals & Mining sectors

• 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

• 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

15

Russian Eurobond Market Overview

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2003 2004 2005 2006 2007

Issu

ance

Vol

umes

(U

S$

- m

illio

n)

0

20

40

60

80

100

120

140Russia Kazakhstan

Ukraine Others

No Deals

8,580

24

4654

121

97

13,587

15,887

35,39740,013

CIS Eurobond Volumes

0

5,000

10,000

15,000

20,000

25,000

30,000

2003 2004 2005 2006 2007

Issu

ance

Vol

umes

(U

S$

- m

illio

n)

0

10

20

30

40

50

60

70

80Finance Oil & Gas

Metals & Mining

Others

No Deals

16

6,505 29 32

76

63

8,055

11,138

21,229

27,730

Russia Eurobond Volumes

1997 1998 2001 2002 2003 2004 2005 2006 2007

Bank/Finance Energy/Oil/Gas State Authority/GovernmentTelecoms/IT Local authority Metals/MiningOthers

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1997 2001 2002 2003 2005

Rus

sian

Bon

d Is

suan

ce (

%)

Bank/Finance Energy/Oil/Gas State Authority/GovernmentTelecoms/IT Local authority Metals/MiningOthers

Russia Eurobond Volumes by Sector (%) • 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.

• 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

• 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 CIS16

M&A Activity in Russia

Overview Total US$ value of M&A Transactions grew from US$ 58 bn in

2006 to US$ 129 bn in 2007

In 2006 the average deal size was US$ 90 mm, this grew to US$ 152 mm in 2007

– 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

Utilities, 65,296

Other, 16,672

Insurance, 2,326

Construction , 2,378

Fis, 3,074

Telecoms, 5,482

Mining, 9,622

Oil and Gas, 35,529

Other, 3,530

FI, 4,312

Utilities, 3,815Telecoms, 3,076

Food Stores, 2,856

Metals, 2,833

Mining, 2,361

Investment Firms, 1,240

Food Products, 1,644

Trans. (ex Air), 1,009 Oil and Gas,

11,466

Historic M & A Volumes Sector Split – 2006 (US$ mm)

Sector Split – 2007 (US$ mm)

4,85

3

3,01

0

8,80

1

34,1

46

25,9

07

39,8

66 58,2

92

129,

080418 402 390

492

394461

644

848

20,000

40,000

60,000

80,000

100,000

120,000

140,000

2000 2001 2002 2003 2004 2005 2006 2007

Am

ount

(U

S$

mm

)

100

200

300

400

500

600

700

800

900

Num

ber

Amount (US$ mm) Number

17

M&A Activity in Russia

Top 10 M&A deals - 2007

Transaction Announcement Sector Acquiror Name Nation Value of Transaction ($mil)

Acquisition Technique % of Shares Acq.

OAO Rosneft Mar 07 Oil and Gas RN-Razvitye Russian Fed 7,608 Privately Negotiated Purchase / Auction

9.44

Gazprom Neft

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 CoCertain Assets

May 07 Oil and Gas OOO Paran Russian Fed 3,877 Divestiture / Auction 100

HydroOGK

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 Privately Negotiated Purchase / Privatization

47.43

Golden Telecom

Dec 07 Telecoms Vimpel –Communications

Russian Fed 4,232

18

Innovative Approach to Corporate Finance Management

Russia Economic Development

Product Fin. Markets Corporates

Growth/ Investment Funding, LeasingShort term FX & Money

Market/ Stock Exchange/ Bond Market

Funding/ Funding/ Funding

Optimization/Cost-saving Hedging, InsuranceLong term FX & Money

Market/ Derivatives Market

Hedging/ “Alternative Funding”/ Risk Management

Traditional Economic Development Scheme “Growth->Optimization->Cost-Saving->Investment” Turned into “Growth/ Investment->Optimization/ Cost-Saving” in Russia

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)

New Methods of funding introduced, e.g. Synthetic RUR Funding -> USD Libor Linked Loans + Cross Currency Swap -> Synthetic Fixed RUR Funding

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