Russian Economy and Banking 28.10.2011

RussiaGrowth is picking up in H2 2011 October 2011 : 

RussiaGrowth is picking up in H2 2011 October 2011 Danske Markets Sanna KurronenEconomist sanna.kurronen@danskebank.com Important disclosures and certifications are contained from page 6 of this report.

We expect credit growth to boost GDP in Russia : 

We expect credit growth to boost GDP in Russia Russian GDP growth in H1 11 was only 3.7% y/y but we expect growth to pick up clearly in H2. We believe that the role of bank lending as a growth driver has been widely underestimated. Currently bank loans to households and firms are increasing 28% and 20% y/y respectively. We expect the oil price to remain above $110/bl in the coming years and Russian GDP to grow 4-5% in 2011-13. 2 Source: CBR, Danske Markets Source: Reuters EcoWin, Danske Markets

Presidential elections in March 2012 : 

Presidential elections in March 2012 3 Source: Levada Center, Danske Markets Russia faces parliamentary elections in December 2011 and, more importantly, presidential elections in March 2012. Even though Putin is very likely to be elected, even his popularity has declined recently. According to surveys, more than half of the people believe that the present authorities cannot improve the country’s situation in the near term. Usually in Russia, politicians want to secure their victory with a significant margin, so loose budgetary spending is likely ahead.

WTO membership and continued privatisations would support economic modernisation : 

WTO membership and continued privatisations would support economic modernisation President Medvedev has emphasised the importance of privatisations in the modernisation of the economy. He argues that the most important goal is to improve firm efficiency and governance. Negotiations for WTO membership have advanced but membership might become a political pawn before the elections. Negotiations started in the mid-1990s but still Russia has no strong interest group backing the membership. WTO membership would bring import duties down a bit but we believe that the most important consequence would be an improved investment environment. 4

Russian consumers are reliable, as always : 

Russian consumers are reliable, as always 5 Unsurprisingly, retail sales were first to recover from the recession. Consumption is underpinned by low unemployment, strong wage growth and household borrowing. In particular, retail sales of durable goods have been very strong over the past few months. The Russian Central Bank is getting worried about the declining savings rate.

Industrial production growth is slowing : 

Industrial production growth is slowing 6 Industrial production growth has been slowing over the past few months but is still supporting growth. Even though manufacturing industry has been growing faster than mining in the past few years, Russia is struggling to develop export industries outside production of raw materials. While Russian growth over the past decade has been consumer driven, manufacturing industry is reliant on heavy industries.

Investment activity is just picking up and strong performance continued in September despite global turmoil : 

Investment activity is just picking up and strong performance continued in September despite global turmoil 7 Investments are post-cyclical in Russia too, thus growth in investments is just picking up. Investments are much needed in Russia, as housing, infrastructure and production capacity are deteriorating rapidly. We remain optimistic on investment growth in Russia in 2011-12 but recent turmoil in global markets poses a threat to our bullish view.

Inflation is easing for now : 

Inflation is easing for now Russian inflation has been easing quickly over the past few months due to lower food prices. However, new inflation drivers are emerging: pre-election spending and credit growth are likely to enhance inflation. Moreover, a weaker rouble increases import prices and that tends to translate into higher consumer prices with just a few months lag. 8

Rouble is bound to gain, as global risk aversion fades : 

Rouble is bound to gain, as global risk aversion fades 9

Disclosure : 

Disclosure 10 This presentation has been prepared by Danske Research, a division of Danske Bank A/S ("Danske Bank"). The author of this presentation is Sanna Elina Kurronen, Analyst. Analyst certification Each research analyst responsible for the content of this presentation certifies that the views expressed in the presentation accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the presentation. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the presentation. Regulation Danske Bank is authorized and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. The presentations of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts’ rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high quality research based on research objectivity and independence. These procedures are documented in the research policies of Danske Bank. Employees within the Danske Bank Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to the Research Management and the Compliance Department. Danske Bank Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the over-all profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned in this presentation. Financial models and/or methodology used in this presentation Calculations and presentations in this presentation are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this presentation, including as sensitivity analysis of relevant assumptions, are stated throughout the text. First date of publication Please see the front page of this presentation for the first date of publication. Price-related data is calculated using the closing price from the day before publication.

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11 Disclaimer This presentation has been prepared by Danske Markets (a division of Danske Bank A/S). It is provided for informational purposes only and should be viewed solely in conjunction with the oral presentation provided by Danske Markets and/or Danske Markets Inc. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) (“Relevant Financial Instruments”). The presentation has been prepared independently and solely on the basis of publicly available information which Danske Bank considers to be reliable. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness, and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this presentation. The opinions expressed herein are the opinions of the research analysts responsible for the presentation and reflect their judgment as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this presentation of any such change nor of any other changes related to the information provided in the presentation. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from any issuer mentioned herein and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned herein. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments which are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked. Danske Bank is authorized and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Services Authority (UK). Details on the extent of the regulation by the Financial Services Authority are available from Danske Bank upon request. This presentation is not intended for retail customers in the United Kingdom or the United States. This presentation is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank’s prior written consent. Disclaimer related to presentations to U.S. customers In the United States this presentation is presented by Danske Bank and/or Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank. In the United States the presentation is intended solely to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this presentation are not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements of a non-U.S. jurisdiction. Any U.S. investor recipient of this presentation who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-U.S. financial instruments may entail certain risks. Financial instruments of non-U.S. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission.

Russian Banking system, Finnish- Russian Trade and Methods of Payments : 

Russian Banking system, Finnish- Russian Trade and Methods of Payments St.Petersburg State Forest Technical Academy 28.10.2011 Russian Banking Environment Finnish-Russian Trade Methos of Mitigating Commercial Risks in Foreign Trade Methods of Payment Letters of Credit Guarantees

Russian Banking Environment : 

Russian Banking Environment Decreasing number of banks, 955 in the end of 2010 Fast increase of bank lending during the last years before the financial crisis, share of GDP 80 % Role of the state dominating, more than 50 % of the total balance Biggest bank state owned Savings Bank (Sberbank) with country wide coverage of outlets Foreign ownership about 20 % of the total balance 109 banks with more than 50 % foreign ownership, biggest Raiffeisen, Rosbank/Societe Generale, UniCredit Share of private Russian banks 20 % :Alfa-Bank, Promsvyazbank, Bank Uralsib, MDM Bank, Bank Saint-Petersburg

Russian Banking Environment : 

Russian Banking Environment Consequences of financial crisis: More difficult to obtain loans from banks Deteriorating loan portfolio of the banks, share of problem loans 10-25 % Increasing bank risks and risk marginals State support for the banking sector Support for stock market 4 billion EUR Credit support to100 banks 10 billion EUR State guarantees for 1500 corporate loans 7 billion EUR

Russian Banking Environment : 

Russian Banking Environment Current challenges and trends: Moderate growth Capital outflows continue Reliance on international capital markets decreased Weaknesses in banking regulations, risk management and in corporate governance Related and single party lending still a structural weakness Distorted competition Depositor confidence remains weak

Russian Banking Environment : 

Russian Banking Environment Future trends: Privatisation plans for state owned banks – minority stakes to be sold Development of banking legislation and control Minimum capital requirement will be doubled in 2012 to RUB180 million Bank merges of smaller banks

Russian Currency Regulations : 

Russian Currency Regulations Payments between residents and non-residents subject to the currency control Transaction passports required in payments exceeding USD 50000 (USD5000 loans) between residents and non-residents Payments between residents in Roubles Corporate may keep several accounts – also in foreign currency For foreign currency payments a foreign currency account and additional transit account to be opened

Structure of Finnish Exports : 

Structure of Finnish Exports Vuosi 2011: tammi-heinäkuu

Finnish-Russian Trade : 

Finnish-Russian Trade

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Commercial risks in foreign trade : 

Commercial risks in foreign trade Counterparty risk buyer is unable/unwilling to pay seller is unable/unwilling to deliver Country risk sovereign risk, political risk Bank risk financial and political risk (buyer’s bank) Currency risk (RUB,USD,GBP,CAD,AUD,CHF,SEK,JPY etc.) Interest rate risk

Slide 23: 

Countries that have undergone a moratorium or restructuring of their foreign debt (1980-2002)

Main objectives of the Buyer & Seller : 

Main objectives of the Buyer & Seller Seller assurance of payment to avoid buyer’s credit risk to avoid country and bank risk to manage cash flow to get paid promptly to get credit Buyer to receive the goods timely and orderly assurance that the money is not paid until the seller has fulfilled his obligation to manage cash flow to defer payment to get credit

Risk mitigation methods : 

Risk mitigation methods Choose the right method of payment: Advance Payment Documentary Credit Collection Services offered by banks: confirmation of export letters of credit standby credits and demand guarantees (to guarantee payment or other contractual obligation) FX and interest rate risk hedging instruments

Methods of payment in foreign trade : 

Methods of payment in foreign trade Clean payments Payment Order Cheque Documentary Payments Collection Documents against payment Documents against acceptance Documentary Credit/Letter of Credit sight credit time credit (acceptance credit or deferred payment credit)

Effect of country risk on the choice of method of payment : 

Effect of country risk on the choice of method of payment Russia + CIS S. America Asia S. Europe W.Europe N. America High risk Low risk 100% advance payment Documentary credits (L/C) Documentary collection Clean payments Africa

Methods of payment in Russian exports : 

Methods of payment in Russian exports Advance Payment Goods are delivered only after the exporter has received the payment Buyer may require an Advance Payment Guarantee Documentary Credit/Letter of Credit sight credit acceptance credit or deferred payment credit

Payment Order to Russia : 

Payment Order to Russia Names to be written correctly Name of the beneficiary to be written either in English or transliterated, the right form to be given by the beneficiary BBAN account numbers Rouble used also in foreign payments Additional information required in rouble payments The INN number of the beneficiary The BIK code and the account number of the beneficiary´s bank at the clearing center of the Central Bank of Russia VO code (purpose of payment) and the payment details

Documentary Credit (D/C, L/C) : 

Documentary Credit (D/C, L/C) The Documentary Credit or Letter of Credit is an undertaking issued by a bank for the account of the buyer (the applicant for the credit) or for its own account, to pay the beneficiary the value of the draft and/or documents provided that the terms and conditions of the documentary credit are complied with.

When to use a Documentary Credit : 

When to use a Documentary Credit Business involving risk totally new business relationship geographical/cultural distance (another continent) political risk (country risk) customers/countries with economic uncertainty occasional, single deal tailored manufacturing Trade with Russia, CIS, Asia, the Near East, Latin America Large projects, investment goods, machinery

Documentary Credit : 

Documentary Credit Buyer = Applicant Commercial contract 1. Application for opening of a credit 2. Issuance of the credit 3. Advising of the credit to the beneficiary 4. Presentation of documents after shipment 5. Payment/acceptance/negotiation against compliant documents 6. Documents are sent to the Issuing bank 7. Checking of them and release of compliant documents to the Buyer 8. Release of goods against documents

Uses of guarantees in foreign trade : 

Uses of guarantees in foreign trade Tender Guarantee (Bid Bond) to guarantee performance if contract is won For abt 2-5 % of contract amount Advance Payment Guarantee to guarantee re-payment if goods are not shipped Performance Guarantee (Performance Bond) for abt 10 % of contract amount Guarantee Period Guarantee (Warranty Bond) for abt 2-5 % of contract amount to guarantee curing of defects Payment Guarantee to guarantee payment of the goods

Danske Bank locations : 

Danske Bank locations Republic of Ireland Branches 64 Market share 3% Market rank 5 Denmark Branches 399 Market share 24% Market rank 1 Norway Branches 55 Market share 5% Market rank 4 Sweden Branches 59 Market share 6% Market rank 5 Northern Ireland Branches 94 Market share 19% Market rank 1-2 United Kingdom London branch 1 Poland Warsaw branch 1 Finland Branches 121 Market share 12% Market rank 3 Estonia Branches 21 Market share 10% Market rank 3 Lithuania Branches 18 Market share 7% Market rank 4 Russia St.Petersburg office 1 Moscow office 1 Latvia Branches 4 Market share 2% Market rank 18 Germany Hamburg branch 1 *All market shares & ranks are based on retail market shares Luxembourg Luxembourg Private Banking branch 1

Services of Danske Bank Group for Russian Exporters : 

Services of Danske Bank Group for Russian Exporters Payment and Cash Management services Rouble Accounts, Danske Payments, Group Transfers Trade Finance Products Documentary Credits, Guarantees Foreign exchange, Rouble Loans Hedging instruments for currency and intrest rate risks Forwards, NDF instruments, interest rate swaps Local Banking services in Russia Danske Bank Russia in St Petersburg Banking services tailored for Danske Group´s corporate customers Expertise on local markets

Thank you! : 

Thank you! Sirkka Tuononen Corporate Relationship Manager Danske Bank Russia sirkka.tuononen@sampopankki.fi