Ryan

Russia’s Economy – What’s Changing?: 

Third Moscow Business Dialogue Annual Investment Forum October 31st – November 1st, 2006 Russia’s Economy – What’s Changing? Charles Ryan, Chief Country Officer & CEO, Deutsche Bank Group in Russia

Russia’s GDP to exceed $2 trln in 2010: 

Russia’s GDP to exceed $2 trln in 2010 Source: Russian authorities, DB Research estimates

Economic & Financial Breakthrough: 

Economic & Financial Breakthrough Source: Rosstat Source: Rosstat ...supporting small business creation and jobs… Number of small businesses, ‘98– end Sep’05 Small business employment since 1998

Consumer Boom…real wages rising…: 

Consumer Boom …real wages rising… Main driver of consumption growth – real wage increases Further wage hikes in the pipeline… …as the authorities are targeting a doubling of wages in the public sector in 2005-8

Consumer Boom…consumer credit expanding…: 

Consumer Boom …consumer credit expanding… Growth in consumer credit nearly 100% year-on-year… …with ratio of retail consumer loans to GDP approaching 6%

Consumer Boom…impressive growth in employment despite restructuring…: 

Consumer Boom …impressive growth in employment despite restructuring… Decline in unemployment is yet another booster for consumption Main drivers of lower unemployment: surging services sector and the turnaround in manufacturing employment

Inflation remains a concern…: 

Inflation remains a concern…

Productivity - the by-product of the stronger rouble: 

Productivity - the by-product of the stronger rouble Productivity is significant in sectors competing with imports (light industry)… …with the stronger rouble and trade liberalization forcing productivity gains While productivity increases are accompanied by labour-shedding… …this is attenuated by the strong pick up in employment in the services sector

Investment: key to balanced growth: 

Investment: key to balanced growth Higher investment needed to sustain growth in consumption… …with figures for the summer months showing improvement

FDI: setting new records: 

FDI: setting new records FDI exceeded 3% of GDP in 3Q05 and was close to $20 bn by the end of last year Further growth is expected on the back of macro stability

FDI breakdown: 

FDI breakdown More FDI flows into banking and manufacturing Regional diversification also picks up

Functioning Capital Market …while falling cost of capital attracts large companies to capital markets for expansionary financing : 

Functioning Capital Market …while falling cost of capital attracts large companies to capital markets for expansionary financing Source: Bloomberg, Deutsche UFG Research estimates Equity (IPOs) Eurobonds ($bn) Rb bonds (Rb bn) $bn 2004 7.6 144 0.88 2005 14 261 5.1 2006F 18.4 Debt (gross) Source: Deutsche UFG Research estimates 20 350 Cost of capital since 2001 Capital market financing M&A $bn 23.1 39.4 44.6

Russia-2007: the “Big Push”: 

Russia-2007: the “Big Push” After several years of exemplary fiscal policy and rising macroeconomic stability… ...Russia’s policy shifts from “savings mode” into “spending mode” In 2007 budget outlays (not related to debt repayments) are set to increase by around 4% of GDP No less than 50% of the outlays represent capital spending into the key sectors of the economy The “winners” include electricity, IT-sector, transportation and housing

Investment Fund: 

Investment Fund Vehicle for financing private-public partnerships Allocations to Investment Fund 2006FY: ~$3 bn 2007FY: ~$6-7 bn Government commission already approved seven 7 projects Total investment consideration $23 bn Majority of the approved projects have to do with transport infrastructure Private-to-public financing ratio is 3:1 to 4:1

UES investment program: 

UES investment program Source: UES

Transneft CapEx: 

Transneft CapEx Source: Transneft, DB Research estimates

Bureaucracy grows in the regions: 

Bureaucracy grows in the regions Even as Russia is aspiring to double its GDP in 10 years, it only managed to double the bureaucratic headcount in the 1990s… …with the bulk of the increase taking place in the regions