Deutsche Bank Russia-2011: Narrowing the EM gap March 2011 All prices are those current at the end...

Deutsche Bank

Russia-2011: Narrowing the EM gap

March 2011

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

Deutsche Bank

I. Global factors: economy and equities

2

Deutsche Bank

Sovereign debt problems in the medium term

The US and many other advanced economies appear to be on unsustainable fiscal trajectories, with projected increases in debt-to-GDP ratios over the next 30 years driven by a combination of unfavorable initial conditions (debt and deficit levels), prospective substantial increases in age-related spending growth, and unfavorable interest rate-to-GDP differentials. Even with a freeze in age-related spending as a share of GDP, the debt ratios in many countries, including the US, would rise under current policies.

Debt ratios projected to rise in many advanced economies

Source: Deutsche Bank Global Markets Research

3

Deutsche Bank

US Equity Outlook: buy on growth

Our US equity strategists expect S&P500 at 1,550 (16.4x P/E) by the end-2011, +20% upside from current levels

Sales increasingly the driver of strong earnings growth

4

Our 2011 RTS Index target of 2300@2011 is in line with our S&P 500 end-2011 target and the current beta of 1.2x vs the US equity market

Q4 earnings have followed the recent pattern of solid

beats and are on track to reach DB forecast of $22.9

The contribution from sales beats has increased

substantially

12

13

14

15

16

17

18

19

20

21

22

23

Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11

12

13

14

15

16

17

18

19

20

21

22

23

Consensus EPS Surprise

S&P 500 Quarterly Operating EPS ($)

If companies yet to report maintain current beat trend

S&P 500: Margins and Sales Surprise (%)

-1%

1%

3%

5%

7%

9%

11%

13%

15%

Q1

09

Q2

09

Q3

09

Q4

09

Q1

10

Q2

10

Q3

10

Q4

10

-1%

1%

3%

5%

7%

9%

11%

13%

15%Margin Sales

Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank

Beta \S&P500 2011 target 1420 (consensus) 1550 (consensus)1 (no beta, pure performance catch-up) 2079 22701.2 (current) 2109 23371.4 (LT average) 2138 2405

RTS Index 2011 year-end targets envisaged by 2011 S&P500 Index targets

Deutsche Bank

Economy and oil

A 20% increase in oil prices should still leave US economic expansion in place with growth rates above consensus

US equities are negatively correlated with oil prices. While oil prices go up and S&P goes down, Russia’s potential from rising oil price gains is limited

Once MENA risks subside, oil prices will go down, S&P will go up – in such cases Russia comes under selling pressure given its susceptibility to the oil price factor, but the rising global markets provide a cushion and limit Russia’s declines notably.

OPEC is ready to to compensate any oil supply shortages from Lybia and Algeria, while Gazprom is already compensating Italy its lost gas supplies from Lybia

5

OPEC spare capacity scenarios Dependence on gas from MENA, % of 2010 demand)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1994 1996 1998 2000 2002 2004 2006 2008 2010

Libya crude oil production Algeria crude oil production

Mill

ionB

bl/D

ay

0%

10%

20%

30%

40%

50%

60%

Spain Italy UK

Other

Libya

Egypt

Qatar

Algeria

Source: US DOE/EIA, Deutsche Bank Source: Enagas, Snam Rete, Tullett Prebon LNG

Deutsche Bank

Inflation in EM Asia and interest rates

There is a strong concern that the inflation in EM Asia (China in particular), will lead the monetary authorities to raise rates, which will put pressure on commodities and, eventually, Russian equities

However, inflation in the EM Asia is largely driven by (global) food prices, while core inflation is not a major concern. Monetary policy will not be effective in combating food prices

History suggests we should not expect much of a policy response at all to higher inflation

6

Headline, food and non-food inflation in Asia Interest rate response to 1% increase in inflation

-202468

101214161820

2004 2005 2006 2007 2008 2009 2010

HeadlineFoodNonfood

%yoy

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

TH ID SK IN TW MY CH PH

%

Sources: CEIC and Deutsche Bank CIB Research. CPI indexes are used for China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Sri Lanka Taiwan, Thailand, and Vietnam. WPI index is used for India.

Sources: CEIC and Deutsche Bank CIB Research

Deutsche Bank

II. Global factors: commodities and FX

7

Deutsche Bank

Oil vs the dollar

Historically, oil prices are strongly correlated with USD. A devaluation of USD is associated with stronger nominal oil prices, and vice versa.

However, throughout the 2010 wave of USD appreciation the oil price decoupled and remained relatively stable

8

Source: Bloomberg Finance LP, Deutsche Bank Global Markets Research

30

40

50

60

70

80

90

100

70

72

74

76

78

80

82

84

86

88

90

2009 2010 2011

US Dollar Index (LHS) WTI oil price, $/bbl (RHS)

Deutsche Bank

Euro: signs of life most recently

With the exacerbation of sovereign debt risks in Europe, EUR dropped below 1.2…

… however it peaked above 1.4 in late 2010, which was followed by a slide down to 1.3 due to new concerns of sovereign debt risks in Europe

DB forecasts EUR rate at 1.3 at end-2011

9


1.1

1.2

1.3

1.4

1.5

1.6

1.7

2007 2008 2009 2010 2011

Euro rate

Deutsche Bank

III. Russia‘s economy

10

Deutsche Bank

GDP growth: coming out of crisis

■ Russia posted one of the largest GDP declines during crisis and economy is increasingly recovering since 2Q09

■ By 2Q10 Russia has formally exited from crisis, posting 2 quarters of growth slightly slowing down in Q3. The most recent estimates made by Rosstat suggest a 4% real GDP growth in 2010, which is in line with our projections and implies a 4.9% real growth in Q4 2010

■ We project GDP growth at 5.4% in 2011 and 5.5% in 2012

11

Source: Rosstat, Deutsche Bank Global Markets Research

3.8 4.4

4.4 6.

2 7.5 7.9

6.1 7.

67.

2 8.0

7.3

6.2

5.6 6.0

6.0 7.

87.

3 8.1

8.2 8.9

8.1 8.6

8.2 9.

29.

17.

76.

4-1

.1-9

.3-1

1.0 -8

.6-2

.93.

1 5.2

2.7

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

Deutsche Bank

Economic indicators: recovery driven by consumption

By the beginning of 2010 all key economic indicators returned into YoY positive zone

By the end of 2010 the recovery shifted from consumption to investment, but we continue to see consumption as a major driver of economic growth

Agriculture contributed largely to the 3Q 2010 slowdown

12


-25%

-15%

-5%

5%

15%

25%

35%

2007 2008 2009 2010 2011IP, YoY, real, % Retail sales, YoY, real, % Fixed investment, YoY, real, %

Construction, YoY, real, % Agriculture, YoY, %

Deutsche Bank

A consumer driven recoveryDeutsche Bank

Lower inflation

Rouble appreciation, particularly versus the Euro

A saving reservoir preserved in the course of the gradual devaluation

Rapid decline in unemployment

Budget spending prioritizes the social sphere and hence household consumption

Interaction of political and economic cycle to continue to favor current outlays

Cash-for-clunkers program extended

Lower interest rates and a recovery in consumer lending

Regulated tariff increases for households contained

The return of the migrants from the near abroad

13

Deutsche Bank

Unemployment and hidden unemployment

Unemployment dropped notably throughout 2010 bottoming at 6.7% in October

Most recently, it started a seasonal rise reaching 7.6% in JanuaryUnemployment statistics in Russia does not take into account the actual

amount of idle workforce – those working part-time or on admin leave During the crisis the share of part-time workers and those on admin leave

peaked to 1.5% and 0.8% of employed, respectively14


012345678910

0

1

21q

2005

3q20

05

1q20

06

3q20

06

1q20

07

3q20

07

1q20

08

3q20

08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Part-time, (employer's initiative) % employed (LHS) Admin leave (employer's initiative), % employed (LHS)

Unemployment rate, % (RHS)

Deutsche Bank

Russian exports and imports growth, % YoY

Both exports and imports have recovered as well, with growth in imports outpacing the growth in exports starting from 2H 2010

15

Source: Rosstat, Ministry of economy, Deutsche Bank Global Markets Research

-60

-40

-20

0

20

40

60

80

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Russia's import, YoY, % Russia's export, YoY, %

Deutsche Bank

Current account vs budget deficit, % GDP, 2009

y = 0.7733x + 5.5718R² = 0.2862

-15

-10

-5

0

5

10

15

20

25

-15 -10 -5 0 5 10 15

Curr

entA

ccou

nt, %

of G

DP

Budget Deficit % of GDP

Russia

Source: IMF

16

Deutsche Bank

S&P ratings vs CDS spreads, bp, 2009Deutsche Bank

0 100 200 300 400 500 600 700 800 900

AAA

BBB+

CCC

CDS 5Y Spreads

S&

Pra

tin

gs

Russia

Source: Standard & Poor’s, Bloomberg Finance LP, Deutsche Bank Global Markets Research

17

Deutsche Bank

External debt, USD bn

Corporate external debt remains a risk factor for Russia…

… with state debt starting to rise as well on the back of the fiscal deficits

18

Source: CBR, Deutsche Bank Global Markets Research

0100200300400500600

4Q20

041Q

2005

2Q20

053Q

2005

4Q20

051Q

2006

2Q20

063Q

2006

4Q20

061Q

2007

2Q20

073Q

2007

4Q20

071Q

2008

2Q20

083Q

2008

4Q20

081Q

2009

2Q20

093Q

2009

4Q20

091Q

2010

2Q20

103Q

2010

4Q20

10

State, USD bn Banks, USD bn Other sectors, USD bn

Deutsche Bank

Debt repayment schedule, USD bn

19


0

5

10

15

20

25

30O

ct-1

0

Nov

-10

Dec

-10

Jan-

11

Feb-

11

Mar

-11

Apr-

11

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

4q11

1q12

2q12

3q12

External debt repayment schedule (face value + interest), USDbn

State authorities, USD bn Banks, USD bn Other sectors, USD bn

Deutsche Bank

Non-oil budget deficit at nearly 15% of GDP in 2009

20

Source: Economic Expert Group, Deutsche Bank Global Markets Research

-8%

-3%

2%

7%

12%

2004 2005 2006 2007 2008 2009 2010Non-oil deficit, %GDP Budget deficit, %GDP

2004-2009 average non-oil deficit, %GDP 2004-2009 average deficit, %GDP

Deutsche Bank

Government assets for sale

Government plans to step up privatization in the coming 3-5 years

Government plans to extract up to USD50bn from the sale of assets

Proceeds are expected to be used for financing the budget deficit

Company NameType of asset

(public/non-public)Government

stake, %Amount to be sold, %

Mcap, USD bn (or

multiples-based

valuation)

Amount to be sold, USD bn, estimate

Rosneft public 75.2 24.2 63.0 15.2Transneft public 78.1 27.1 6.5 1.8Sberbank public 60.3 9.3 62.0 5.8VTB public 85.5 24.5 28.0 6.9Rushydro public 60.4 9.4 14.0 1.3FSK public 79.1 28.1 14.0 3.9NTMP public 20.0 20.0 3.0 0.6Sovkomflot non-public 100.025%-1 share 2.3 0.6AIZHK (National Mortgage Agency) non-public 100.0 49.0 2.5 1.2Rosselkhozbank non-public 100.0 49.0 4.5 2.2RZHD non-public 100.025%-1 share 52.3 13.1TOTAL PUBLIC, USD bn 35.5TOTAL NON-PUBLIC, USD bn 17.0TOTAL, USD bn 52.5Source: Vedomosti, Bloomberg, Deutsche Bank

21

Source: Vedomosti, Bloomberg Finance LP, Deutsche Bank Global Markets Research

Deutsche Bank

Finance Minister Alexei Kudrin recently stated that Russia will pursue a policy of preserving the Reserve fund

At the start of 2010 the government planned to finance the budget deficit by means of the Reserve fund reducing it to about USD10bn over the year, but due to more favourable conditions than initially projected, the Fund ended 2010 at about USD25bn (USD15bn was spent to finance the budget deficit in December)

Reserve Fund and National-Well-Being Fund

22

Source: Ministry of Finance of the Russian Federation, Deutsche Bank Global Markets Research

At the peak the size of the two oil funds amounted to USD220bn

Currently funds were reduced to around USD120 bn

0

50

100

150

200

250

Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11Stabilisation Fund, $ bn Reserve Fund, $ bn National Well-Being Fund, $ bn

Deutsche Bank

Pro-cyclical fiscal policy

GDP growth and Russian budget, % GDP

-10%

-5%

0%

5%

10%

15%

20%

25%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Budget deficit, %GDP Budget expenditure, %GDP Real GDP growth, % Average budget expenditure for the period, % GDP

v

+3% GDP


23

Deutsche Bank

The new electoral cycle starts in 2011

24


-8%

-3%

2%

7%

12%

17%

22%

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Budget deficit, %GDP Budget expenditure, %GDP Budget revenue, %GDP

Parliamentary elections

Deutsche Bank

Expenditures on key international infrastructure projects, RUR bn

№ 2010

2011 2012 2013

Projected

% to prev. year

Projected

% to prev. year

Projected

% to prev. year

Total 305,2 278,9 91,4 203,6 73,0 106,1 52,1

including:

1. Sochi Olympic Games 2014 217,8 216,0 99,2 201,5 93,3 106,1 52,7

2. Preparation for APEC summit 72,5 52,4 72,3 2,1 4,0 0,0 0,0

3.

Preparatio for 2013 Universiade in Kazan 14,9 10,5 70,5 0,0 0,0 0,0 0,0

№ 2010

2011 2012 2013

Projected

% to prev. year

Projected

% to prev. year

Projected

% to prev. year

Total 305,2 278,9 91,4 203,6 73,0 106,1 52,1

including:

1. Sochi Olympic Games 2014 217,8 216,0 99,2 201,5 93,3 106,1 52,7

2. Preparation for APEC summit 72,5 52,4 72,3 2,1 4,0 0,0 0,0

3.

Preparatio for 2013 Universiade in Kazan 14,9 10,5 70,5 0,0 0,0 0,0 0,0

Sochi 2014 is the key project for Russia in the medium term

Another infrastructural “hot spot” is the Far East (one of the most depressed regions in Russia currently)

25

Source: Russian Authorities, Deutsche Bank Global Markets Research

Deutsche Bank

CBR reserves recovered by USD100bn already

CBR reserves recovered by more than USD110bn since the bottom of the crisis peaking above USD500bn…

…Due to recent euro weakness the reserves dynamics was not strong in the second half of 2010, but we expect them to continue their recovery

26


350

400

450

500

550

600

-25

-20

-15

-10

-5

0

5

10

15

J ul-07 J an-08 J ul-08 J an-09 J ul-09 J an-10 J ul-10 J an-11

CBR reserves inflow, USD bn (LHS) CBR Reserves, USD bn (RHS)

Deutsche Bank

Foreign direct investment into Russia

27


5

0 1

9

58

5

-5

8 810

4

19

119

17

22 22

18

13

9 912

68

11

7

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

25.01Q

042Q

043Q

044Q

041Q

052Q

053Q

054Q

051Q

062Q

063Q

064Q

061Q

072Q

073Q

074Q

071Q

082Q

083Q

084Q

081Q

092Q

093Q

094Q

091Q

102Q

103Q

10

FDI, $bln

Deutsche Bank

Net capital inflows, $ bn vs RTS Index

Q4 2010 showed an unexpected amount of capital flight from Russia (an outflow of almost USD23bn

The outflow came despite favourable oil prices (USD83.5/bbl on average for Brent) and did not stop the RTS Index from gaining 17% over the quarter

28

Source: Bloomberg Finance L. P., CBR, Deutsche Bank Global Markets Research

-4 -6 -7

8 2

-5

8

-5 -6

21 12 14 14

54

-7

21

-24

40

-19

-130

-35

3

-34

9

-15

3

-4-23

0

500

1,000

1,500

2,000

2,500

3,000

-150

-100

-50

0

50

1001Q

042Q

043Q

044Q

041Q

052Q

053Q

054Q

051Q

062Q

063Q

064Q

061Q

072Q

073Q

074Q

071Q

082Q

083Q

084Q

081Q

092Q

093Q

094Q

091Q

102Q

103Q

104Q

10

Net capital inflows, $bn (LHS) RTS Index (RHS)

Deutsche Bank

Inflation in Russia is a monetary phenomenon

29

Source: CBR, Rosstat, Deutsche Bank Global Markets Research

-20

-10

0

10

20

30

40

50

60

70

0

2

4

6

8

10

12

14

16

May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11

Rouble depreciation vs dual currency basket, YoY, % (RHS) CPI inflation, YoY, % (LHS)

Core inflation, YoY, % (LHS) M2 money supply growth, YoY, %, lagged by 15 months (RHS)

Deutsche Bank

Liquidity and interest rates

Low Interbank interest rates are coming on the back of excess liquidity in the system

Starting from the first quarter of 2009 they declined towards the current value of 2-3%

Most recently the CBR raised credit and deposit rates effective from 28 February

30


0%

5%

10%

15%

20%

25%

0

200

400

600

800

1,000

1,200

1,400

Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11Deposits in CBR*, USD bn (lhs) Correspondent accounts*, USD bn (lhs) Refinancing rate, % (rhs) MIACR**, % (rhs)

* - 100 day MA, ** - 10 day MA* - 100 day MA, ** - 10 day MA* - 100 day MA, ** - 10 day MA* - 100 day MA, ** - 10 day MA* - 100 day MA, ** - 10 day MA* - 100 day MA, ** - 10 day MA

Deutsche Bank

Inflation vs refinancing rate: bottoming out

After 13.3% in 2008, Russian inflation dropped to 5.5% YoY as of July 2010

Since 1Q09 CBR reduced the refinancing rate from 13% to 7.75%

Inflation started to recover reaching 9.6% YoY by the end of January 2011….

Most recently the CBR raised refinancing rate by 25 bp to 8%, and deposit rate by 50bp to 3%

31

Source: CBR, Rosstat, Deutsche Bank Global Markets Research

0

2

4

6

8

10

12

14

16

2004 2005 2006 2007 2008 2009 2010 2011

CPI Inflation, % Refinancing rate, % Repo rate, % Tom-next deposit rate, %

Deutsche Bank

Loans growth, pp

Before the crisis, lending to both corporates and households was steadily expanding

During the crisis lending to households contracted while the corporate sector was flat

32


-200

20406080

100120

2005 2006 2007 2008 2009 11M 2010Bank loans to corporates growth, YoY, %

Bank loans to households growth, YoY, %

Deutsche Bank

Capacity utilization rates are recovering

Capacity Utilization, quarterly data (seasonally adjusted), pp

40

45

50

55

60

65

70

75

1993 1995 1997 1999 2001 2003 2005 2007 2009Capacity utilization, pp 1 year moving average, pp Average 2001-2009, pp

Source: Gaidar Institute for Economic Policy (former Institute for Economy in Transition), Deutsche Bank Global Markets Research

33

4045505560657075

1993 1994 1996 1997 1998 2000 2001 2003 2004 2005 2007 2008 2010Capacity utilization, pp 1 year moving average, pp Average 2001-2009, pp

Capacity utilization is currently below its pre-crisis level albeit breaking through the moving average as well as the 9-year average on the upside

Deutsche Bank

Basket/Rouble exchange rate and Urals price, USD/bbl

The recent strength in oil prices suggests further rouble appreciation

One of the factors of the rouble weakness, which is now gone, was the weak euro

We forecast USD/rouble rate at 28.0 at end-2010 and 27.8 at end-2011 (31.8 and 30.9 for the basket)

34


40

50

60

70

80

90

100

110

33

34

35

36

37

38

39

40

41

2009 2010 2011

Rouble/basket rate (LHS) Urals oil price, $/bbl (RHS)

Deutsche Bank

Politics: Margin of support for Putin, Medvedev remains stable

According to the recent polls the popularity ratings of Putin and Medvedev remain around 70%

The gap between leaders this year approached its all-time low of 1pp in October but broadened in the most recent polls

Putin and Medvedev approval ratings, %

50

55

60

65

70

75

80

85

90

2007 2008 2009 2010 2011

%

Percentage of Putin supporters, % Percentage of Medvedev supporters, %

Source: Levada Center, Deutsche Bank

35

50

55

60

65

70

75

80

85

90

2007 2008 2009 2010 2011

Percentage of Putin supporters, % Percentage of Medvedev supporters, %

Deutsche Bank

Politics: elections to support the equity market

It is common for the Russian equity market, as well as the US equity market, to reveal strong trends before the presidential elections

Given that 2012 elections are scheduled to take place in 1Q, we expect this factor to be one of the driver for the equities already in 2H11

36

30

40

50

60

70

80

90

100

110

120

130-1

81

July 1996 elections March 2000 elections March 2004 elections March 2008 elections

6M before elections 6M after electionsPresidential elections date

*all series rebased to 100 as of respective elections date


Deutsche Bank

Politics: stronger rouble coming from the electoral cycle

Two previous electoral cycles were characterized by rouble’s appreciation vs the US dollar

We expect the 2011-2012 electoral cycle to be one of the positive factors for the rouble

37


Deutsche Bank

Russia’s diarchy in the making

Medvedev as President:

Liberal credentials, no ties with the hardliners

Loyalty to Putin

Looks to forging ties with Europe

Putin as Russia’s Prime Minister:

The most popular Prime Minister in Russia’s history

Has a keen interest in the pursuit of the Asian model

Looks at Asia as a promising venue for expanding energy supplies/cooperation

Considers Asia as a counterbalance to Europe/West

38

Deutsche Bank

Number of bureaucrats

Number of bureaucrats was rising at a pace of 4.5% per year throughout 2000-2009…

… and stays now at all-time-high levels

70

80

90

100

110

120

130

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Number of bureaucrats per 10000 citizens

39


Deutsche Bank

Doing Business in Russia

The World bank and IFC made joint project on evaluating easiness of doing business in Russia

In 2011 vs 2010 doing business became more difficult with the major deterioration in registering property and closing a business

Survey comprises 183 countries

40

Source: World Bank, IFC, Deutsche Bank Global Markets Research

Ease of… Doing business 2011 rank

Doing business 2010 rank Change in rank

Doing business 123 116 -7 Starting a business 108 104 -4 Dealing with construction permits 182 182

Registering property 51 45 -6 Getting credit 89 87 -2 Protecting investors 93 92 -1 Paying taxes 105 103 -2 Trading across borders 162 162 Enforcing contracts 18 18 Closing a business 103 93 -10

Deutsche Bank

Best and worst regions to do business in Russia Variations across cities show potential to learn from the existing local best

practices

Indicator Best practice Difficult

Procedures to start a business Moscow (9 procedures) Voronezh (14 procedures)

Days to start a business Rostov-on-Don (22 days) Petrozavodsk (37 days)

Cost to start a business Kazan (3,000 rubles) Moscow (6,200 rubles)

Procedures to deal with construction permits Rostov-on-Don (22 procedures) Moscow (54 procedures)

Days to deal with construction permits Rostov-on-Don (194 days) Voronezh (1,207 days)

Cost to deal with construction permits Petrozavodsk (270.3% GNI) Moscow (2,612.8% GNI)

Procedures to register property Kazan, Voronezh, Rostov-on-

Don (5 procedures)Petrozavodsk (7 procedures)

Days to register property Tomsk (47 days) St. Petersburg (117 days)

Cost to register property Kazan (16,706 rubles) Rostov-on-Don (40,360 rubles)

Time to export Kazan (24 days) Moscow (36 days)

Time to import Voronezh (23 days) Moscow (36 days)

Cost to exportPetrozavodsk

(1,050 USD per container)Moscow

(2,150 USD per container)

Cost to importPetrozavodsk

(933USD per container)Moscow


Indicator Best practice Difficult

Procedures to start a business Moscow (9 procedures) Voronezh (14 procedures)

Days to start a business Rostov-on-Don (22 days) Petrozavodsk (37 days)

Cost to start a business Kazan (3,000 rubles) Moscow (6,200 rubles)

Procedures to deal with construction permits Rostov-on-Don (22 procedures) Moscow (54 procedures)

Days to deal with construction permits Rostov-on-Don (194 days) Voronezh (1,207 days)

Cost to deal with construction permits Petrozavodsk (270.3% GNI) Moscow (2,612.8% GNI)

Procedures to register property Kazan, Voronezh, Rostov-on-

Don (5 procedures)Petrozavodsk (7 procedures)

Days to register property Tomsk (47 days) St. Petersburg (117 days)

Cost to register property Kazan (16,706 rubles) Rostov-on-Don (40,360 rubles)

Time to export Kazan (24 days) Moscow (36 days)

Time to import Voronezh (23 days) Moscow (36 days)

Cost to exportPetrozavodsk

(1,050 USD per container)Moscow


Cost to importPetrozavodsk

(933USD per container)Moscow


41

Source: World Bank, IFC, Deutsche Bank Global Markets Research

Deutsche Bank

IV. Russia‘s market: current issues

42

Deutsche Bank

Russian market vs other assets YTD performance

Russian equities outperformed the international equity markets, Brent and Nickel showed the best performance in 2011

43


9 10 9 9

5 5 6

-5 -3

3

-15

-10

-5 -4

3

18

7

-1

8

14

4 42

-20

-15

-10

-5

0

5

10

15

20

25 R

TS

MIC

EX

MIC

EX

-10

MS

CI R

uss

ia

DJI

A

S&

P5

00

DS

ST

OX

X 6

00

MS

CI E

M

Bo

vesp

a

Sh

an

gh

ai C

.

Se

nse

x

Ista

nb

ul C

.

RU

B/U

SD

RU

B/b

ask

et

US

D/E

UR

Bre

nt o

il

WT

I oil

Go

ld

Silv

er

Nic

kel

LM

EX

Ind

ex

Alu

min

ium

3M

Co

pp

er

3M

Deutsche Bank

Russian market 2011 sectoral performance Oil & gas was the best

sector YTD in Russia

Consumer goods & were flat after an impressive 83% gain in 2010

Electric utilities show marginally negative returns despite the upside potential seen in the names

Key sector drivers:

Oil & gas, metals & mining: Strong commodity prices

Consumer goods & retail: Rising consumer confidence

Industrials, metals & mining: Economic recovery in manufacturing and construction

Electric utilities: Power market liberalization

Telecoms: Strong growth in regional telecoms ahead of Svyazinvest restructuring

44


17%

13%

10% 9%

6%

1%

0% -1%

10%

4%

0%

-5%

0%

5%

10%

15%

20%

OIL

& G

AS

IND

US

TR

IALS

TE

LEC

OM

S

RT

S IN

DE

X

FIN

AN

CIA

LS

ME

TALS

&

MIN

ING

CG

& R

ETA

IL

ELE

CT

RIC

U

TIL

ITIE

S

LAR

GE

CA

P

MID

CA

P

SM

ALL

CA

P

Deutsche Bank

Russian exporters: relative performance to market

Oil & gas has been underperforming the RTS Index for two consecutive years

At the same time, the second major exporting sector (metals & mining) has been outperforming the RTS Index during this period

45


0

20

40

60

80

100

120

140

160

180

200

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

RTS Index RTS Oil & Gas Index RTS Metals & Mining Index

Deutsche Bank

Large caps catching up

MICEX Index Large Cap / Small Cap ratio is revealing 1.5+ year downward trend…

… which continued following 3-months of recovery of large caps vs small caps in Q2 2010

The recent stock market rally narrowed the gap, but did not close it

Drivers for a catch-up play in blue chips in 2011:

30-35pp gap in the large-small cap performance

Continuing flow of funds into Russia

46


70%

90%

110%

130%

150%

170%

190%

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

MICEX Large Cap / MICEX Small Cap ratio

Deutsche Bank

Russia’s 2011 performance vs EM countries

After catching up with the the EM in late 2010, Russia is the top-2 performing market in 2011.

We see further scope for Russia’s catch-up vs EM given longer-term past underperformance

47


149 8 6 5

10 -1 -2 -3 -3 -4 -5 -5 -6 -6 -6 -6 -7 -7 -8 -9

-12

-12

-12

-13

-15

-21

-25

-20

-15

-10

-5

0

5

10

15

20

Hun

gary

RU

SS

IAC

zech

Rep

ublic

Mor

occo

WO

RLD

Sri

Lank

aP

olan

dM

alay

sia

Bra

zil

Mex

ico

Kor

eaC

hina EM

Tha

iland

Indo

nesi

aTa

iwan

Jord

anC

olom

bia

Isra

elP

akis

tan

S. A

fric

aA

rgen

tina

Tur

key

Per

uP

hilip

pine

sC

hile

Indi

aE

gypt

Deutsche Bank

Russia’s performance relative to MSCI EM

Until the end of April Russia’s market was outperforming EM by 5-7pp on a YTD horizon

May-June sell-off pushed Russia back to 4pp YTD underperformance vs EM with a return to tie in the end of July followed by Russia lagging EM by 7pp

Due to the year-end rally, Russia managed to catch up with EM by the end of 2010

In 2011 Russia performs stronger that the EM mainly due to high oil prices

48


80%

90%

100%

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

MSCI Russia / MSCI EM ratio

CURRENT

Deutsche Bank

RTS Index drivers

The correlation of the RTS Index vs global factors stays around its historical highs:

76% vs S&P500, proving US market being the key driver for the Russia’s equities

72% vs oil prices – up from 61% on average in 2010

63% vs the rouble rate

Another important factor, the euro rate, is becoming less important (40% correlation) for the Russian equities

49


-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%-20%

0%

20%

40%

60%

80%

100%

2006 2007 2008 2009 2010 2011

Correlation of RTS vs Urals oil price Correlation of RTS vs S&P500Correlation of RTS vs Euro rate Correlation of RTS vs Rb/basket

S&P500

Oil pricesRouble (inverted, RHS)

Euro rate

Deutsche Bank

Seasonality in RTS Index

March-April are among the seasonally strongest months for the Russian equity market

The RTS Index showed strong returns in January despite its seasonally weak nature on the basis of strong oil prices and the QE2 effect

February, a seasonally stronger month, showed weaker returns due to the Chinese monetary tightening and the global contraction in risk-appetite

50


1.6

5.77.9 7.3

2.6 3.4

-1.3

0.2

-4.3

0.8 1.2

8.3

-0.3

5.8 5.16.6

1.3 2.3

-1.1

4.7

-2.4

5.2

1.3

6.9

5.7

3.4

-6

-4

-2

0

2

4

6

8

10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average monthly return for the RTS Index, % Median monthly return for the RTS Index, % 2011 monthly return, % (RHS)

Deutsche Bank

V. Russia‘s equities and valuation

51

Deutsche Bank

The discount of Russia’s P/E to EM

Russia historically trades with a 33% long-term average discount to EM

In most cases the discount fluctuates within 1S.D. from the LT average

Currently the discount is below average - this creates room for Russia to further outperform EM

Russia’s P/E vs EM P/E discount, %

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

2003 2004 2005 2006 2007 2008 2009 2010 2011

MSCI Russia 12-m trailing P/E / MSCI EM 12-m trailing P/E discount

AVERAGE DISCOUNT: 26%

+1 ST. DEV.

-1 ST. DEV.

Source: Bloomberg, Deutsche Bank

52


-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

2003 2004 2005 2006 2007 2008 2009 2010 2011


+1 ST. DEV.

-1 ST. DEV.

AAverage: 33%

-80%

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

2003 2004 2005 2006 2007 2008 2009 2010 2011


+1 ST. DEV.

-1 ST. DEV.

AAverage: 33%

Deutsche Bank

Relative valuation of Russia vs other countries

On a 12M forward-looking P/E basis Russia is one of the cheapest markets in the EM space - trades at 6.9x (8.1x without Gazprom), while EM at 10.3 and BRIC at 9.9x

Russia’s 2011E-2012E eps growth rate (23%; 25% without Gazprom) is larger than the GEM average (21%)

53


Czech Republic

Hungary Israel

Poland

Russia

South Africa

Turkey

United Arab Emirates

China

India

Indonesia

Korea MalaysiaPhilippines

Taiwan

Thailand

Argentina

BrazilMexico

PanamaColombia

EMEA

ASIA

LATAMGEM

USEUROPE JAPAN

BRIC

Russia without Gazprom

0%5%

10%15%20%25%30%35%40%45%50%

6 7 8 9 10 11 12 13 14 15

2011

-201

2E E

PS g

rowt

h, %

12M forward P/E, x

Deutsche Bank

Valuation dichotomy between sectors

Recovery was not the same for different sectors

Retail trades around pre-crisis multiples

Oil & gas names, especially Gazprom, are trading well below

The recent strong performance of energy names vs consumer stocks narrowed the valuation premium of the latter, but there is still scope for outperformance for oil & gas vs retail

54


0

50

100

150

200

250

300

350

0

5

10

15

20

25

30

35

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11Consumer goods & Retail valuation premium over Oil & Gas, % (RHS)Oil & Gas 12M forward P/E (LHS)Consumer goods & Retail 12M forward P/E (LHS)

Deutsche Bank

Relative valuation of Russian sectors vs GEM

While Russian Energy is undervalued, that cannot be said about consumer stocks

55


FinCons Disc

Cons StapEnergy

HealthIndus IT

Materials

Telecoms

Utilities

Fin Cons Disc

Cons Stap

Energy

HealthIndus

Materials

Telecoms

Utilities

0%5%

10%15%20%25%30%35%40%45%50%

4 6 8 10 12 14 16 18 20 22 24

2011

E-20

12E

EPS

grow

th, %

12M forward P/E, xGEM Russia

Deutsche Bank

RTS Index end-2011 Target of 2,300

For the end of this year our new RTS target is 2,300

The closing rally of 2010 as well as the opening rally of 2011 support our projections

56


1,100

1,300

1,500

1,700

1,900

2,100

2,300

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12RTS Index

2,300 -RTS Target

c

Deutsche Bank

MSCI Index rebalancing

The MSCI Russia Index currently has 29 constituents

Buying the stocks to be included into MSCI Russia (and selling those to be excluded) before the official announcement might lead to significant returns

Another trading strategy is to sell (buy) the stocks mistakenly taken by the market as inclusion (exclusion) targets

Therefore, it is important to be able to predict the changes MSCI is going to make

Trading opportunities still exist after the announcement, because index funds will be rebalanced only after the changes take effect (typically 2-3 weeks later)

In May, we might see Rusal and Holding MRSK included and OGK-4 excluded from the MSCI Russia Index

57

Median performance of stocks following the MSCI Russia Index rebalancing

-30%

-20%

-10%

0%

10%

20%

30%

Previous week

Previous day

2 days after

1 week 2 weeks 3 weeks 4 weeks 6 weeks

Inclusion into MSCI Russia Exclusion from MSCI Russia

Source: Bloomberg Finance L.P., Deutsche Bank

Deutsche Bank

Russia’s dividend plays (1/2)

Dividend yield gap between Russia and EM is narrowing, but still substantial (30%)

Dividend factor will be one of the key market drivers in the next several months and may feature safer plays amidst the increased volatility in global markets

Q1 is the best time to invest in dividend stocks – seasonal patterns suggest the biggest outperformance vs the market in Q1

58

Average quarterly performance of dividend-paying stocks, %, quarterly, relative to the RTS Index

4.8%

2.5%

3.1%

2.4%

3.9%

1.5%

2.1%

4.2%

0%

1%

2%

3%

4%

5%

6%

1Q 2Q 3Q 4QAverage high-dividend basket quarterly outperformance vs RTS Index, %Median high-dividend basket quarterly outperformance vs RTS Index, %

Source: Bloomberg Finance L.P., Deutsche Bank

Dividend yield, Russia vs EM, % Dividend payout ratio, Russia vs EM, %

6.3

4.7

4.5

4.0

3.7

3.7

3.2

3.2

3.1

2.9

2.9

2.9

2.9

2.8

2.7

2.5

2.4

2.4

2.3

2.3

2.3

2.2

2.1

1.9

1.8

1.7

1.7

1.6

1.4

1.3

0

1

2

3

4

5

6

7

Cze

ch R

epublic

Leban

on

Isra

el

Egyp

t

Tai

wan

Thai

land

Pola

nd

Sau

di A

rabia

Phili

ppin

es

Hungar

y

Mal

aysi

a

Chin

a

Per

u

South

Afr

ica

Bra

zil

Colo

mbia

EM

EA

LATA

M

Chile

Turk

ey

GEM

AS

IA

Arg

entina

Indones

ia

Russ

ia

United

Ara

b E

mir

ates

Mex

ico

India

Pan

ama

Kore

a

66

55

53

43 42 42 41 40

38 36 35

31 31 30 30 30 28 27 27 26 25 25 23 22 22

19

15 14 13 13

0

10

20

30

40

50

60

70

Cze

ch R

epublic

Tai

wan

Isra

el

Chile

Thai

land

Sau

di A

rabia

Mal

aysi

a

Phili

ppin

es

Egyp

t

Colo

mbia

Pola

nd

Leban

on

Chin

a

South

Afr

ica

Per

u

Arg

entina

Bra

zil

LATA

M

Indones

ia

Hungar

y

AS

IA

GEM

Turk

ey

Mex

ico

EM

EA

India

United

Ara

b E

mir

ates

Pan

ama

Kore

a

Russ

ia

Source: Bloomberg Finance L. P., Deutsche Bank Source: Bloomberg Finance L. P., Deutsche Bank

Deutsche Bank

Russia’s dividend plays (2/2)

Other features pointing on good investment opportunities: fundamental upside, liquidity, presence of pref shares, large cap status and growth

Basket: Sberbank Rusal, Evraz, Gazprom, LUKoil, MMK, MTS, Norilsk Nickel, Surgutneftegaz, Tatneft, TNK-BP, X5, Bashneft, Gazpromneft, Kazmunai Gas

59

Russia’s pref/ords discount Performance of high-dividend basket vs RTS Index

0%

10%

20%

30%

40%

50%

60%

70%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Pref/ord discount for Russia, %

100%

150%

200%

250%

300%

350%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

High-dividend stocks Index / RTS Index relative performance Source: Bloomberg Finance L. P., Deutsche Bank Source: Bloomberg Finance L. P., Deutsche Bank

Basket of stocks based on 6 criteria Stock High Large Growth Fundamentally High Has Number of

name dividend cap story attractive liquidity pref shares "+" shares

Sberbank + + + + + 5Rusal + + + + 4Evraz + + + + 4Gazprom + + + + 4LUKOil + + + + 4MMK + + + + 4MTS + + + + 4Norilsk Nickel + + + + 4Surgutneftegaz + + + + 4Tatneft + + + + 4

TNK-BP + + + + 4

X5 + + + + 4Bashneft + + + 3Gazprom Neft + + + 3Kazmunai Gas + + + 3

Source: Deutsche Bank

Deutsche Bank

Key drivers of our year-end target Our positive view on Russian equities is reinforced by the following factors:

(i) Weak relative performance: While performing in line in 2010 and stronger than EM in 2011 so far, the Russian equity market still underperforms EM on longer horizons, given heavier losses during the crisis

(ii) Cheap valuation: Russia trades at a 7.4x 12M forward P/E, which is one of the cheapest in the EM space. At the same time, Russia offers a 2010-11E EPS CAGR of 43%, which is the largest in EM;

(iii) Strong performance of global markets: Our US strategists believe in strong 2011 performance of the US market, which would be driven by both economic and corporate recovery. Deutsche Bank’s S&P 500 2011 year-end target of 1,550 offers 20% upside potential – fully in line with our 2011 RTS target of 2,300 given the current beta of 1.2x

(iv) Further mitigation of risks regarding the situation in Europe, and recovery of the European currency;

(v) Russia enters the 2011-2012 electoral cycle, which will support the rouble and the equity market

We recommend focusing on blue chip names, which have been substantially underperforming second-tier names for more than 2 years.

In terms of sectors, we highlight oil & gas and financials – the weakest performers of 2010 which, in our opinion, have scope for catch-up with the market

60

Deutsche Bank

Drivers at the macro level: Fiscal spending to boost consumption

High oil prices: Deutsche Bank projects USD97/bbl for Brent in 2011 and USD98/bbl in 2012 with oil recently peaking above USD100/bbl

Rouble appreciation

Greater capital inflows/ investor interest, FDI

Recovery in construction

WTO accession

Sovereign issuance and credit rating upgrades

Monetary policy targeting positive real interest rates

Lending growth

Increase in dividend payouts

Privatization, M&A and IPOs picking up

Administrative reforms

The return of the Russian investor base

Increased use of RDRs by Russian corporates

61

Deutsche Bank

Risks:

Unstable tax regime (unified social tax, export duties on oil products)

Domestic political risks

Greater pressure from domestic opposition generating hardline pressures that may harm investment climate

Potential terrorist risks in the Caucasus

Significant changes in the Kremlin (Putin deciding to step down)

Political elite becoming too “defensive” with the onset of a new electoral cycle

Risks for the global economy

Further mounting of the European sovereign debt crisis

Negative effects for capital inflows into Russia, given strong investment and trade links with EU

High corporate debt burden

Excessive fiscal spending renders Russia more sensitive to oil price fluctuations

Corporate governance still a problem: corporate conflicts in Norilsk Nickel, treatment of minorities in MTS/Comstar deal

Further increase in inflation62

Deutsche Bank

Assumptions of our RTS Target

We target the RFR for Russian equities at 5.5%,ERP at 6% and CoE at 11.5%

A 1pp move in ROE leads to around a 200-300 points change in our RTS target

Russia’s risk-free rate and cost of equity

0

5

10

15

20

25

30

2002 2003 2004 2005 2006 2007 2008 2009

pp

Risk-free rate (US Treasuries), pp Country Risk Premium, ppEquity Risk Premium, pp ROE, %

Source: Bloomberg, Deutsche Bank

63


0

5

10

15

20

25

30

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

pp

Risk-free rate (US Treasuries), pp Country Risk Premium, pp Equity Risk Premium, pp

Deutsche Bank

VI. Top picks

64

Deutsche Bank

Top picks by sectors

Oil & gas: gas – Gazprom; oil – Rosneft, LUKoil

Metals & Mining: Norilsk Nickel and Polymetal

Real Estate: PIK, LSR

Banks: Sberbank

Telecoms: MTS

Consumer goods & Retail: Pharmstandard, X5 Retail Group, Dixy

65

Source: Deutsche Bank Global Markets Research estimates

Stock Rec. Price TP Upside, Mcap FreeFloat % P / B Div Yld %

US$ US$ % US$ mn 10F 11F 12F 13F 10F 11F 12F 13F 10F 11F 12F 13F 10F 10F

Gazprom Buy 7.17 9.50 32 164,594 5.1 3.9 3.8 3.9 3.6 4.0 3.2 3.3 4.4 3.3 3.2 3.0 38.4 0.8 2.0

Rosneft Buy 9.46 11.40 21 99,425 6.5 8.1 10.5 10.0 4.5 6.2 6.6 6.2 4.1 4.7 5.5 5.1 8.5 1.7 1.9

LUKOIL Buy 68.86 95.00 38 53,803 5.7 4.1 4.7 4.7 3.8 3.5 3.4 3.4 3.4 2.4 2.4 2.4 50.0 0.9 3.2

Norilsk Nickel Buy ,227 ,300 32 39,738 7.6 5.7 4.6 5.8 6.9 5.5 4.2 4.4 5.2 3.7 2.6 2.8 35.0 2.5 3.3

Polymetal Buy 18.95 22.50 19 6,849 27.5 9.9 6.1 7 25.3 11.0 6.1 6 17.1 7.0 3.8 3.7 25.0 6.0 0.0

MTS ADR Buy 18.51 24.00 30 18,480 11.4 12.3 10.0 9 5.0 4.6 4.1 4.0 4.9 4.9 4.5 4.3 46.7 4.6 5.7

PIK Buy 4.46 7.50 68 2,200 neg neg neg nm neg neg 2.4 3.4 15.0 nm nm 29.2 26.0 3.7 0.0

LSR Buy 9.54 12.80 34 4,911 31.6 15.1 7.7 5.2 24.6 12.8 8.4 8.0 14.0 9.6 5.6 3.8 26.8 2.7 0.0

Pharmastandard, GDR Buy 27.62 32.10 16 4,175 15.3 12.6 10.4 9 16.6 14.0 11.4 9.9 10.9 8.8 6.8 5.4 46.8 4.7 0.0

X5 Retail Group Ltd Buy 39.18 51.80 32 10,639 35.4 22.1 16.0 14.4 7.5 6.0 15.7 11.5 8.2 30.3 5.1 0.0

Dixy Buy 14.50 15.90 10 1,247 49.6 17.6 11.9 8.1 9.2 6.2 4.2 3.3 9.7 7.9 5.8 4.7 11.0 5.8 0.0

10F 11F 12F 13F 10F 11F 12F 13F

Sberbank Buy 3.35 5.30 58 74,609 2.4 1.9 1.5 1.2 19.4 27.9 27.8 28.5

P/B ROE , %

P/E P/CF EV/EBITDA

Deutsche Bank

Oil – Rosneft and LUKoilEmerging markets oil majors 12-month forward P/E, x

0.0

4.0

8.0

12.0

16.0

20.0

2007 2008 2009 2010 2011

Rosneft LUKoil TNK-BP Holding Surgutneftegaz Petrobras Sasol

Source: Bloomberg Finance LP, Deutsche Bank estimates

Rosneft offers a good combination of attractive valuation and production growth

Rosneft underperformed LUKoil by 15pp in 2010, outperformed by 7pp in 2011

LUKoil, in turn, stayed flat in 2011 while the RTS Index added 23% (added 25% while RTS gained 11% in 2011)

LUKoil is trading at extremely cheap valuations –4x 2011 P/E

DB is above consensus for 2011E earnings given our high oil price projection of USD101/bbl 66

0.0

4.0

8.0

12.0

16.0

20.0

2007 2008 2009 2010 2011

Rosneft LUKoil TNK-BP Holding Surgutneftegaz Petrobras Sasol

Deutsche Bank

Taxation – current issues and newsflowExport duties and mineral extraction taxes account for 65-70% of costs

The average marginal tax rate for Russian VICs is ~75%:

~90% in the crude exports segment

~55% in the refined product exports segment

~45% in the sales of domestic refined products segment

Tax concessions:

■ Differentiation of the mineral extraction tax: tax discounts of up to 70% for fields with more than 80% depletion (in effect from 1 January 2007)

■ Tax holidays of 10-15 years or until cumulative production reaches 25m tonnes for new fields in Eastern Siberia (in effect from 1 January 2009)

■ Export duty holidays for oil exports from East Siberia fields; we incorporate holidays for 1H10 only, reduced export duty from 2H10E

Single export duty for heavy and light products at 60% level in 2013:

■ LUKoil is one of the main potential beneficiaries

■ Smaller effect on Rosneft as it is behind in refinery upgrades

Introduction of Excess Profit Tax (EPT)/supplementary tax:

■ First proposal by end of 1Q11

■ Likely to be applied to new projects

■ Likely to come into effect in 2012-13

67

Deutsche Bank

Taxation – recent proposalsupstream vs. downstream

■ The government may shift the tax burden from the upstream to downstream, making upstream projects more attractive. Today, taxes in the downstream are smaller than those in the upstream.

■ The maximum rate of crude oil export duty may fall from 65% to 60%. This would positively impact net-backs in crude oil exports and domestic crude oil sales.

■ Simultaneously, export duties on refined products may increase to 66% of crude oil export duties from the currently approved 60% level.

■ We assume Russian oil companies would find more upstream projects value-accretive and make a bigger number of positive FIDs as a result of the tax changes.

■ The bigger upstream tax base is to compensate for the potential losses in the Russian budget that may be incurred as a result of the reduction in the crude oil export duty rate.

For the new fields, the Russian government's consultants have proposed a supplementary tax rather than a windfall tax. The proposed rate is 27%.

■ In the UK, a supplementary tax represents a 10% hike in the basic corporation tax. Thus, where UK CT is 30%, the tax increased to 40% in the 1990s and to 50% in 2006.

■ Offsetting this are more generous capital allowances, and there are exemptions and incentives to drill and develop.

■ Along the same lines, in Russia, a 27% hike in the basic CT of 20% would equal 47%. At USD70/bbl it is now 65%, at USD80/bbl 68% and at USD90/bbl 70%.

■ We are unable to assess the impact on the Russian oil sector as the scale of capital allowances, exemptions and incentives is unclear.

68

Deutsche Bank

Natural Gas - GazpromGazprom 12-month forward P/E, x

0.0

2.5

5.0

7.5

10.0

12.5

15.0

2006 2007 2008 2009 2010 2011

Average P/E = 7.5x

Beginning of the spot gas price collapse

Europeans start to ask for concessions

Source: Bloomberg Finance LP, Deutsche Bank estimates

Gazprom trades at 4.1x 12M forward P/E – one of the cheapest stocks in the

Russian equity space and much lower than its LT average P/E of 7.5x

Gazprom underperformed the market notably – by 19pp in 2010

69

0.0

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12.5

15.0

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Average P/E = 7.5x

Beginning of the spot gas price collapse

Europeans start to ask for concessions

Deutsche Bank

Near-term gas sector issues

■ Production: slow production recovery this year as European demand continues to stagnate, the market is oversupplied.

■ European supplies: European customers have largely accepted Gazprom’s take-or-pay terms but they have been modified as a result of recent price and volume concessions.

■ Gas market liberalisation: the government plans full-scale liberalisation on the basis of European export net-back parity in 2014.

■ Taxes: Finance Ministry proposed an increase in the mineral extraction tax (MET) for gas companies which is in effect from 1 January 2011.

Gas deal with China:■ A gas deal with China is more likely today than at any time in the recent past:

■ Chinese government forecasts that gas demand will increase at 12% p.a. in the next decade■ China cannot ignore the vast energy resources just next door■ Geographical diversification should allow Gazprom to reduce its exposure to Europe

■ Gazprom expects a final deal with China to close in the middle of 2011■ We forecast first deliveries of Russian gas to China in 2017-18E■ We estimate that a successful project would involve the development of Kovykta field■ Future gas exports to China could add USD0.65-0.80/share to our current Gazprom valuation

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Deutsche Bank

Summary: domestic gas market liberalisation

Pre-liberalisation environment

■ European gas prices peaked at nearly USD500/mcm in 4Q08, and should decline to our mid-cycle price (real) of USD330-340/mcm

■ We apply a 15% discount to the European contracted gas price level to reflect expanding spot market sales and a spot price discount to the oil-linked price

■ European customers will continue to subsidise Gazprom’s domestic customers and investment programme in the next several years

■ Gazprom’s focus on the exports market will enable independent gas producers to rapidly build Russian domestic market share

Post-liberalisation environment

■ Equal net-backs for domestic (excluding households) and export deliveries

■ No difference to gas producers where they sell their gas

■ Domestic customers provide a fairer chunk of cash flow to Gazprom

■ Independent gas producers start to benefit from market share build-up

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Deutsche Bank

Base Metals – Norilsk Nickel

04/19/23 2010 DB Blue template

72

Deutsche Bank is bullish on metal prices – both base and PGM

Historically, Norilsk closely follows it’s commodity basket (R2 at 80%)

Main drivers – Copper and Palladium

Attractive valuation – Norilsk is trading at a discount to peers

An increasing share of PGM revenues would boost Norilsk’s fair value – PGM companies generally trade on higher valuations than diversified miners

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Diversifieds 2010 2011 2012 2010 2011 20122010-2012

EPS growth2010-2012 EBITDA

growth

Norilsk Nickel 7.8 6.0 4.8 5.2 3.7 2.6 52.9% 8.5%

Average Diversified Large Caps 11.8 7.6 6.1 7.0 4.7 3.5 102.9% 38.9%

Average Copper 17.1 8.9 7.1 8.3 4.4 3.4 54.2% 47.1%

Average Platinum 30.5 17.6 11.1 14.1 9.2 6.2 72.3% 54.6%

P/E EV/EBITDA



Deutsche Bank

Precious Metals – Polymetal

04/19/23 2010 DB Blue template

73

Deutsche Bank is bullish on gold and silver as well as copper

We project the prices to peak in 2012

Attractive valuation – Polymetal is trading at a discount to peers on 2012E earnings

At the same time, the growth profile looks strong

-200 400 600 800

1,000 1,200 1,400 1,600

2009 2010F 2011F 2012F 2013F 2014F 2015F 2016F

Polymetal gold equivalent production, koz

Gold & Silver companies 2010 2011 2012 2010 2011 20122010-2012 EPS growth

2010-2012 EBITDA growth

POLYMETAL 25.0 9.0 5.5 15.6 6.3 3.4 114% 91%

Average Russia 25.3 12.0 7.8 15.0 7.8 4.8 83% 67%

Average EM 23.2 8.8 6.6 14.6 6.8 5.4 52% 48%

Average DM 17.9 12.8 8.6 10.8 6.4 4.3 48% 60%

P/E EV/EBITDA

Source: Deutsche Bank Global Markets Research


Deutsche Bank

PIK A play on demand recovery for mass market residential

property; best leverage to recovery in consumer demand for cheap housing

Restructuring is nearly complete

Additional financing from Sberbank now available (RUR12.75bn)

New projects have commenced: over 3.0m sqm of projects are open for pre-sales

Triggers: restructuring of Nomos Bank debt and de-leveraging through SPO, leading to lower financial costs, discount rates and higher asset valuation

Real Estate – PIK and LSR

LSR A play on demand recovery for mass market residential

property and construction materials that we expect to lead the recovery; exposure to state contracts (USD700m+)

Construction materials: poor performance in 1Q10, stabilization in 2Q10-3Q10, expect recovery in 4Q10

2010-2012 3-yr CAGR of 27% in sales and 60% in EBITDA on increased capacity utilization

Land bank - mostly residential developments - represents future upside; regional diversification with a flurry of new contracts in Moscow and region

SPO in April adds financial stability and provides acquisition currency

Continue to be positive on the sector

Signs of pick up in physical real estate market

Stocks trade ex-’solvency risk’, declining risk premiums priced-in; however,

Valuation upside remains on further re-valuation of land banks; P/NAV discounts still meaningful. Prefer residential, quality retail as least oversupplied segments and construction materials as exposure to recovery in construction

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Deutsche Bank page 75

Banks - Sberbank

Credit growth has returned with a strong dynamics in recent months…

Credit costs in 2011/12 will depend on growth, write-offs and write-back potential

Sberbank has the strongest coverage and cash flows and hence the potential for lowest credit costs

VTB trades at the same 1.5x norm 2012E P/B despite: Structurally lower ROE due to wholesale funding and focus on low-margin loans Lower quality earnings due to high dependence on IB and trading gains Inferior asset quality

Why does VTB trade on the same P/B and what is going to change it? Only DR that offers exposure to Russian banks - DR listing of SBER planned for 1H11 Higher beta due to IB and upside in non-core assets - IB acquisition by Sberbank (1H11) Acquisition and re-leveraging potential Disappointing earnings momentum in the upturn

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Deutsche Bank

page 76

■ While previously oil & gas names, such as Gazprom and Rosneft were high-beta liquid plays on Russia… ■ … now Sberbank seems to take their place in this role

76

Sberbank’s beta vs the RTS Index now bigger than Gazprom’s and Rosneft’s

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SBERBANK GAZPROM ROSNEFT* - 2-year window, weekly data


Deutsche Bank

Sberbank also caught up with Gazprom in terms of trading volumes (mn dollars, annual)

page 77

■ In 2007-2008, Gazprom was an unchallenged leader in terms of trading volumes (we look at combined volumes at Russian exchanges + international listings)■ … now Sberbank has almost caught up with Gazprom, and heavily outperforms Rosneft

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SBERBANK GAZPROM ROSNEFT


Deutsche Bank

04/19/23 11:20 AM 2010 DB Blue template

Recent trends in Russian mobiles

Source: Deutsche Bank, Company data

Source: Deutsche Bank, Rosstat, Company data

The big picture

Mobile revenues closely track household consumption

Healthy non-voice growth driven by modem and smartphone sales, rollout of 3G networks, content

Voice recovering on macro

Headlines on roaming only confirm that regulation remains softer than elsewhere

MTS drivers:

Expected appreciation of the Rouble

Revenue CAGR of about 12% - notably higher than EM peers’

7-19% valuation discount to peers (on 2011-12F EV/EBITDA and PER) despite better fundamentals

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Voice Non-voice

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Deutsche Bank

PHST is the second largest player with a 4% market share and an undisputed leader in the domestic market with 18.4% of the market positioned to benefit from domestic growth

We expect the company to increase its market share through acquisitions of smaller players

We expect pharma market to grow by 6-10% in the next three years

Improvement in the macro environment: rising GDP, rising incomes and rising social spending

Increase in government spending on the Russian Health System

Introduction of the medication insurance program

Increase in average per capita consumption for medications

Pharmaceuticals – Pharmstandard - a leading domestic pharmaceutical company

page 79

page 79

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Deutsche Bank

DCF-derived TP is USD51.8 per GDR – 10% upside potential for the stock. Buy

We expect X5 to open:

■ 300 new stores in 2010

■ 335 discounters in 2011-12 - the most popular format

■ 25 supermarkets and 10 hypermarkets pa in 2011-12

We estimate:

■ Selling space to increase by 18% yoy in 2011 and by 19% in 2012

■ LFL sales growth is 10% for 2011 and 12% for 2012

Capex increase following aggressive rollout:

■ Capex in 2011- USD913m, 2012-USD1.206m

■ Net Debt/EBITDA level – 1.5x in 2011, 1.4x in 2012 (without M&A)

Successful M&A experience - Acquisition of Kopeyka - Value accretive

CG& Retail - X5 to gain from recovery

page 8080

Deutsche Bank

DCF-derived TP is USD 15.9 per share – 26% upside potential to the current price of 12.4

Dixy trying to catch up pace with market leaders-we expect DIXY to open:

140 new stores in 2011, 174 pa in 2011-12

We estimate:■ The selling space to increase by 21% yoy in 2011-12

■ Sales to increase by 30% in 2011 and by 32% in 2012

■ Capex to increase to USD110m in 2011 and USD184m in 2012

■ NET Debt/EBITDA is below 2x- acceptable level

Dixy’s goal is to decrease shrinkage level to 1.7-1.8% of sales in 2010 – positive for EBITDA margin in 4Q10

CG & Retail - Dixy proves the importance of logistics in this business

page 8181

Deutsche Bank82

Statements of risk for following the recommendations (1/4)Dixy (DIXY.RTS, TP USD 15.90, price 12.80, rating: Buy) Issues: Dixy is a smaller and, in our view, more risky company than X5 and Magnit. However, we believe 1Q10 showed that the company is turning around its operating performance thanks to the improvements to its logistics operations executed in 2009. Our DCF derived target price implies substantial upside potential to Dixy's current share price therefore we recommend Buy. Evaluation: In our DCF valuation we use the following assumptions: We use terminal growth of 3% as we believe Dixy will not outpace its market growth. To derive the cost of equity, we use a risk-free rate of 6% and an equity premium of 6%for all the companies under coverage. We use beta of 1.1 for Dixy due to to its lower liquidity. We use a debt/equity ratio of 30% for a company such as Dixy which is quite leveraged. Risks:The main industry risks include, but are not limited to, declining consumer confidence, increasing unemployment and potential entry into the market of international players. Among the company-specific risks, we highlight the management execution risk.

Gazprom (GAZP.RTS, TP USD 8.40, price 6.58, rating: Buy) Issues: We rate Gazprom, the world's largest gas company, Buy, reflecting the considerable upside potential implied by our target price. Gazprom's major operating challenge to date has been how to replace declining production. The company has announced plans to make a substantial increase in its capital expenditures, the majority of which would be spent on developing remote production areas on the Yamal peninsula. Furthermore, the discussion about increasing gas sector taxes seems to have lost momentum, and we do not think there will be any negative newsflow hanging over the market. In addition, Gazprom looks set to benefit fully from the upcoming liberalisation of the gas market. Evaluation: Our 12-month target price is derived on the basis of DCF valuation. We use APT-based discounted cash flow valuation because we believe it provides a superior tool for estimating company-specific risks compared with the CAPM model. It also enables us to account for a much wider range of fundamental factors than comparable multiples valuation, which often fails to account for differences in capex plans, capital structure and growth rates. The key assumptions of our DCF model are an RWACC of 14.3% (RROE of 15.5%, including a standard equity risk premium of 7.5% [3.0% is idiosyncratic, which accounts for a high risk of volatility in cashflow due to changes in prices and tax rates in the Russian gas sector], a liquidity risk premium of 0.0%, and a corporate governance risk premium of 2.0%) and a long-term nominal growth rate of 2% - a function of the expected increases in the prices of gas, crude oil and refined products, inflation and the availability of proved, probable, and possible reserves in the company's portfolio beyond our forecast horizon (2010-2020E). Risks: The key downside risks for Gazprom are: lower-than-expected energy prices, a deeper-than-expected negative impact of the economic downturn on natural gas demand, the cancellation of the proposed full-scale liberalisation of the domestic gas market and the government's decision to raise taxes more than is currently reflected in our discount rate for Gazprom. An additional downside risk is that the major infrastructure or development projects are not being implemented as planned or delayed indefinitely owing to political, environmental, technological or other reasons.

LUKOIL (LKOH.RTS, TP USD 82.00, price 64.50, rating: Buy) Issues: LUKoil is Russia's second-largest oil company in terms of reserves and production. We believe that owing to its recent heavy investment in greenfield operations, the company will be able to maintain growth rates above the Russian average. On the financial front, a healthy balance between upstream and downstream segments makes LUKoil one of the most profitable oil companies in Russia. LUKoil also enjoys the most comprehensive international exposure of all Russian oil companies, which brings its status closer to that of international peers. LUKoil stands out as one of the most likely of the oil companies to benefit from the expansion of the unregulated Russian gas sector. We rate LUKoil Buy; the company enjoys strong fundamentals and we believe that its shares are currently undervalued.Evaluation: Our 12-month target price is derived on the basis of DCF valuation. We use APT-based discounted cash flow valuation as we believe it provides a superior tool for estimating company-specific risks compared with the CAPM model. It also enables us to account for a much wider range of fundamental factors than comparable multiples valuation, which often fails to account for differences in capex plans, capital structure and growth rates. The key assumptions of our DCF model are an RWACC of 13.2% (RROE of 13.5%, including a standard equity risk premium of 6.0% [2.5% is idiosyncratic, which accounts for a high risk of volatility in the Russian oil companies' cashflow due to changes in commodity prices and RUR/USD exchange rate], a liquidity risk premium of 0%, and a corporate governance risk premium of 1.5%) and a long-term nominal growth rate of 2% - a function of expected increases in the prices of crude and refined products, inflation, and the availability of proved, probable, and possible reserves in the companies' portfolios beyond our forecast horizon (2010-2020E). Risks: We highlight the downside risks associated with commodity prices, cost inflation, and, more important, the execution of long-term investment projects. We continue to believe that LUKoil's management is one of the most professional in the sector but it will now have to devise strategies to overcome the recent negative operating trends.

X5 Retail Group Ltd (PJPq.L, TP USD 51.80, price 47.00, rating: Buy) Issues: We expect the Russian food retail market to continue to grow by double digits, as rising disposable income and 6-7% inflation pa should spur a 16% CAGR in household consumption over 2010-13E. X5 is the largest retailer in Russia with a 4.5% market share. It is a multi-format retailer and generates 80% of its revenues in two of Russia's most powerful - from an economic point of view - cities, Moscow and St.Petersburg. Therefore, we remain positive on X5 as these two cities will recover first, in our view. We recommend to Buy the stock because our DCF derived target price implies substantial upside potential from current price. Evaluation: Using DCF methodology, we derived a target price using the following assumptions: We use terminal growth of 3.5% for the market's fastest grower such as X5, as we believe it will continue to surpass market growth. To derive the cost of equity, we use a risk-free rate of 6% and an equity premium of 6%. Our beta for X5 is 0.9 since food retail is a low beta, defensive sector and we do not make any liquidity adjustments for it. We use a debt/equity ratio of 30% for X5 as it has significant Debt burden. Risks:The main risks include, but are not limited to, declining consumer confidence, increasing unemployment and potential entrance in the market of international players such as WalMart. Among the company-specific risks we name competition. Unlike Magnit, X5 competes mainly with other national players. Since X5 operates mainly in St.Petersburg and Moscow, it competes mostly with other national chains. In our view, it is tougher to compete with the national chains than with local ones because federal players have greater power over suppliers than national ones.

.

Deutsche Bank83

Statements of risk for following the recommendations (2/4)LSR (LSRGq.L, TP USD 12.80, price 9.75, rating: Buy) Issues: LSR has been a favorite real estate stock for the market that has so far focused on financial stability and, ultimately, survival among real estate names. In the current environment, we believe LSR offers good exposure to state expenditure on both infrastructure and social housing through its tenders with the Ministry of Defense and the St. Petersburg administration, while medium term, LSR should be a beneficiary not only of demand revival for residential real estate but also construction materials, which we expect to lead a recovery in the construction sector beginning in 2011. With more capital coming from the company's SPO, LSR will be well positioned to capitalize on recovery in demand for residential housing. Geographical diversification of sales away from the company's base in St. Petersburg (LSR is already present in Yekaterinburg and has recently signed a number of deals in Moscow and Moscow region), vertical integration with pre-fab manufacturing facilities and building materials as well as prudent financial management will be key to success. We continue to see upside in the company's share price as land bank gets developed and the currently implied by the share price discount to market value of the land bank narrows. Thus we rate the shares a Buy. Evaluation: Our valuation of LSR Group is based on SOTP approach. We value LSR's yielding properties, residential and office properties already constructed and currently under development, DSKs and building materials businesses using DCF with a WACC of 12.3% (13.3% CoE, 11.5% cost of debt and 25% debt-to-equity target ratio; we use a 3% terminal growth rate for building materials, reflecting long-term GDP trends) while we base our valuation for land bank on the last available DTZ valuation, assigning a 20-40% discount to projects yet to be developed. We adjust the resulting valuation of LSR's assets by net debt, minorities and NPV of corporate overhead costs to arrive at YE10e NAV of USD12.8, which is also our 12-month target price for GDRs. We set our 12-month TP for local shares at a historical 20% discount to GDRs at RUB1,459/share and prefer more liquid GDRs. Risks: The company largely faces industry-related risks, including exposure to GDP recovery, consumption growth and demand for real estate, price fluctuations, FX (rouble-related) as well as credit availability from the banks. In addition to these, completion of projects, including commissioning of over 40 development projects and of a cement plant in Slantsy, that meaningfully varies from our expectations could negatively affect our valuation of the company

MTS ADR (MBT.N, TP USD 28.00, price 20.65, rating: Buy) Issues: MTS has made significant changes to its business model, evolving into an integrated player. Having acquired Comstar, it gained access to the leading fixed broadband player in Moscow and plans to use it as a platform for a rollout of a fixed broadband business in the regions. MTS is developing its own fully-fledged retail distribution chain and we believe it is making good progress in terms of improving its handset selection and its online content platform. We estimate MTS' revenues to grow by 13.5-14.6% yoy revenue in 2010-11F (in USD terms) on recovery of voice usage due to improving macroeconomic situation and continued robust growth of non-voice revenues driven by increasing internet and smartphone penetration. However, we expect MTS' EBITDA margin to decline to 44% in 2010F from 49% in 2008 due to MTS' active development of its own retail business. We believe that MTS' growth profile and valuation multiples look attractive compared to many peers. We continue to expect significant total shareholder return over the next 12 months: Buy. Evaluation: Our target price is based on DCF methodology, in line with the approach across our European telecoms coverage. We model MTS in USD, as this is the company's reporting currency. We use an RFR of 6%, CoE of 13.5%, CoD of 7% and a WACC of 11%. We use the projected balance sheet capital structure and a terminal growth rate of 1% to reflect the industry's mature market growth profile after the terminal period. Risks: In addition to a deteriorating macroeconomic situation and regulatory risks, as well as intensifying competition, which are typical risk factors for the industry, we see the following company-specific risks: poor execution of the retail strategy; corporate governance risks related to Sistema (asset sales); integration issues with Comstar; M&A risks.

Pharmstandard (PHSTq.L, TP USD 32.10, price 29.10, rating: Buy) Issues: Pharmstandard is a leading domestic pharmaceutical manufacturer with a portfolio of best-selling brands and an efficient sales force. In addition, as Russia's largest domestic pharmaceutical producer, the company enjoys preferential treatment from a friendly government aiming to increase domestic producers' share in overall market sales. The key market drivers for the medium to long term are: increased government spending on the health system; further development of the program for additional provision of medication (DLO); introduction of a medication insurance program; and increased per capita consumption of medications amid a consumer recovery and slowing inflation. Overall, we see 2010-13 revenue CAGR of 20%. Our target price implies attractive upside potential for both GDRs and local-listed shares. Hence we rate these as Buys. Evaluation: We use DCF methodology to derive our target price, as the comparison universe has limitations in the EMEA pharmaceutical sector as the group is narrow and diverse. In addition, the Indian sub-segment commands a notably different valuation from the EMEA group. We use a terminal growth rate of 4.0% as it is one of the market leaders. To derive the cost of equity, we use a risk-free rate of 7.5% and an equity premium of 6%. Our beta for Pharmstandard is 1 because pharmaceutical is a low-beta defensive sector but its liquidity is lower than that of other major consumer companies. We use a debt-to-equity ratio of 5% as the company is almost debt-free. Together with an after-tax cost of debt of 10% and COE of 13.5%, we arrive at WACC of 13.a2%. Risks: The key downside risks include rouble depreciation (effectively all revenues are in roubles with a large portion of costs (up to 80%) denominated in hard currency), a slower-than-expected recovery in Russian consumption and adverse government intervention in the sector.

Deutsche Bank84

Statements of risk for following the recommendations (3/4)PIK (PKGPq.L, TP USD 7.50, price 4.38, rating: Buy) Issues: We continue to see upside in PIK shares as the company offers the best leverage to recovery in consumer demand for cheap housing, first evidence of which we saw in 4Q09. We expect the trend to continue, and expect it to translate into an increase in cash collections by PIK. Recovery in demand should also allow the company to commence new projects this year after receiving additional financing from Sberbank that will provide cash flow over 2010-2012 period. We continue to see PIK largely as a play on volumes (as opposed to prices), but geography of its on-going and planned projects (Moscow and Moscow region) may offer additional upside if prices react positively to anticipated supply/demand imbalance as inventory of completed housing is depleted and new construction takes time to hit the market with additional supply. Given the above and the substantial upside based upon our price target we rate the shares a Buy. Evaluation: We value PIK via SOTP approach based on DCF analysis of the actual cash flows from core construction and development business, and net book value of the remaining assets and liabilities not captured elsewhere in the above mentioned analysis. We discount cash flows and terminal value at 13.8%. Our WACC reflects RROE of 14.0% (based on 6.5% sovereign RFR, 7.0% standard equity risk premium and 1.0% premium for corporate governance risk) and 16.5% cost of debt and target debt/capital ratio of 25%. We do not include the valuation of land bank in this approach as we assume it will be used to build and sell property in the interim forecasting period and beyond. We arrive at NAV estimate of USD7.5/share at YE10, which is also our 12-month TP. Risks: One of the major risks for PIK remains restructuring of Nomos Bank debt. Since the company does not have an ability to pay this debt in full at the moment, failure to reach an agreement with the bank will put PIK's faith in jeopardy once again. We are inclined to believe that Nafta-Moskva-friendly Nomos Bank will be willing to restructure company's debt, removing such a risk. Other risks are largely industry-specific: slower-than-forecasted recovery in GDP, consumption growth and demand for real estate, a more-than-anticipated decline in prices as well as lack of credit markets recovery (both corporate and consumer).

Rosneft (ROSN.RTS, TP USD 9.80, price 8.10, rating: Buy) Issues: We rate Rosneft a Buy. The company combines substantial reserves with rapid production growth, implying fast monetisation of assets. Rosneft has been demonstrating some of the lowest unit costs in the industry and a highly efficient capital expenditure. The company acquired Yukos' assets and has integrated them successfully. We forecast Rosneft to increase production by nearly 5% in 2010 y-o-y, which is well above the industry average. Sizeable benefits stemming from export duty holidays in East Siberia should enable Rosneft to grow its EBITDA considerably in 2010. Evaluation: Our 12-month target price is derived on the basis of DCF valuation. We use APT-based discounted cash flow valuation as we believe it provides a superior tool for estimating company-specific risks compared with the CAPM model. It also enables us to account for a much wider range of fundamental factors than comparable multiples valuation, which often fails to account for differences in capex plans, capital structure and growth rates. The key assumptions of our DCF model are an RWACC of 12.6% (RROE of 13.5%, including a standard equity risk premium of 6.0% [2.5% is idiosyncratic, which accounts for a high risk of volatility in the Russian oil companies' cash flows due to changes in commodity prices and RUR/USD exchange rate], a liquidity risk premium of 0%, and a corporate governance risk premium of 1.5%) and a long-term nominal growth rate of 4% - a function of expected increases in the prices of crude and refined products, inflation, and the availability of proved, probable, and possible reserves in the company's portfolio beyond our forecast horizon (2010-20E). Risks: Downside risks for Rosneft include lower-than-expected oil prices, failure to negotiate access to Gazprom's pipelines, dry-hole drilling at prospective resource areas and Yukos-related litigation. We also note the execution risk the company faces: Rosneft's management might be unable to deliver on its targets or successfully implement its planned investment projects.

Sberbank (SBER.RTS, TP USD 5.30, price 3.66, rating: Buy) Issues: We rate Sberbank a Buy. Accelerating economic growth, spurred by strong commodity prices, SME growth and mass-adoption of standard retail banking products like mortgages and CCs should propel 20% annual sector growth. Sberbank's dominant market shares (20-50%), unrivalled distribution power through its network of 20,000 branches and an underutilized captive client base are unique assets to capitalize on this market opportunity. Additional impetus to earnings growth should come from efficiency gains. Evaluation: We value CEEMEA banks using a two-stage Gordon Growth Model that bases the target price on discounted terminal value, and adds back the value of discounted interim dividends. For Sberbank we assume a mid-cycle ROE of 23%, cost of equity of 13.0%, and terminal growth of 5%. The cost of equity is derived from a 6.5% RFR, a 6.5% ERP and a beta of 1.0. Our USD5.3 PT implies a 2012E normalized P/BV of 2.0x and a 2012E normalized PE of 11.8x. Risks: The main downside risks for Sberbank are declining commodity prices, which would result in a slowdown in economic growth and cause renewed asset quality deterioration. Another risk is continued margin pressure which may arise from, amongst others, a slowdown in credit demand, even fiercer competition from bond market conditions, a significant increase in demand for FX loans and / or monetary tightening. A weakening of the ruble would cause investors to favor Russian exporters and could adversely affect the share price performance of Sberbank. The main company specific risks include, but are not limited to, execution on the business transformation, poor cost control and potential integration issues of an acquisition in IB.

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Statements of risk for following the recommendations (4/4)Norilsk Nickel (GMKN.RTS, TP USD 300.00, price 248.00, rating: Buy) Issues: Norilsk Nickel is the global cost leader in the nickel industry and looks likely to retain its leadership because of its unique ore body where nickel and copper are combined with platinum group metals. As the largest and lowest-cost producer of nickel in the world, Norilsk should benefit from what we expect to be strong nickel prices in 2011 and 2012. We also see potential for a longer-term shift of the industry supply curve, as low-cost and low-risk sources of nickel are gradually replaced by more expensive. Norilsk is also the largest palladium producer in the world. We expect palladium to perform as a result of what we see as an ongoing substitution of platinum by palladium and growing autocat demand, waning Russian stockpiles and supply constraints. Norilsk's PGM production offers, in our view, a diversfication into more defensive metals and could attract a premium to Norilsk's valuation. Norilsk has, in our view, a strong balance sheet and strong cash flows. At the same time, Norilsk offers no near-term and only remote long-term growth. It also carries company specific risks related to a shareholder conflict, government involvement, social commitments and environmental challenges. On balance though, we believe the market does not fully appreciate the potential of Norilsk's resources: Buy. Evaluation: We value Norilsk using a DCF with a terminal growth period. Our DCF model is based on a WACC of 11.2% (with a cost of equity of 12.6%, a pre-tax cost of debt 7% and a 25% long-term D/E) and a terminal growth rate of 3%. Our terminal growth rate captures the longer-term cash flow opportunities of Norilsk's unique ore body and also the growth potential of expansion plans beyond our explicit forecasting period, like the project underway in the Chita region. Our DCF yields a 12-month target price of USD300/share, which on our current earnings forecasts implies target multiples of 4.9x 2011E EBITDA and 7.5x 2011E net income. On a flat price scenario, the implied target multiples grow to 5.9x and 9.3x, which is in line with the peer group's long-term historical average. Risks: Commodity prices represent the largest downside risk for our valuation of Norilsk Nickel. Rouble appreciation also represents a materal risk for Norilsk Nickel given its rouble cost base and dollar revenues. Due to a longstanding shareholder conflict and lack of transparency, Norilsk has significant corporate governance risks. We also note that Norilsk, as a mono-employer, has special social commitments and is subject to government interference and involvement. Like many mining companies, Norilsk faces risks related to export duties, although these have recently been reduced by the announcement of new levels. There are also cash flow and sentiment risks related to the company's environmental program.

Polymetal (PMTLq.L, TP USD 22.50, price 17.50, rating: Buy) Issues: With 2009 output of 17.3 moz of silver and 311koz of gold, Polymetal is the largest silver and one of the top five gold producers in Russia. The company is a leading growth story in the Russian metals and mining universe. We expect Polymetal to grow its gold equivalent (on metal price forecast) production by 25% CAGR from 770koz in 2010 to 1,480koz 2012, doubling production before output plateaus on the current project pipeline. Polymetal is run by a management team with a strong execution skills and a proven track record in both organic project execution and M&A. With the company's strategic focus shifting more and more toward the gold part of its business, we estimate that gold will contribute 70% to Polymetal's consolidated revenue in 2015, up from 54% in 2009. We are bullish on the outlook for gold and silver, expecting gold prices to reach USD2,000/oz in 2012 and for the gold:silver ratio to come down to 40 in 2012 with higher-beta silver outperforming as industrial demand conincides with growing financial investment. Evaluation: "We value Polymetal based on a sum-of-the-parts DCF models of individual mining projects. We apply a dollar nominal WACC of 8.8% based on a targeted capital structure of 75% equity and 25% debt. We estimate cost of equity at 9.6% using levered beta of 0.6x (the historical average for the stock), an equity risk premium of 6% and a risk-free rate of 6%. We assume a nominal interest rate of 8% and a tax rate of 21%. We apply a 1.8x exit multiple, in line with the benchmark P/NPV multiple for DB's South African gold universe. Our $22.5 target price implies 8.3x 2011E EBITDA and 11.7x 2011E net earnings multiples, which is in line with the company's historical averages of 8.6x and 13.6x and compares favourably to peers. While we believe that Polymetal's growth profile may warrant a premium, we note that the company will need to extend its reserve base to support production longer-term and that its silver exposure makes Polymetal more cyclical than pure play gold stocks." Risk: Major risks to our forecasts and valuation are silver and gold prices, as well as Russian macroeconomic factors such as rouble appreciation and inflation. Management risks are concentrated around the company's ability to deliver on the development of the Amursk processing hub as well as its ability to integrate other newly acquired fields. Other risks include any changes in fiscal regime and/or mining legislations. We also highlight the risk of the potential share overhang, should Polymetal decide to place part or all of its treasury stake. The latter would however also improve liquidity, which we would welcome, and reduce the company's financial leverage, which we however view as manageable on current forecasts.

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Appendix 1Important DisclosuresAdditional Information Available upon Request

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com.

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Special Disclosures

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report.

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Buy: Based on a current 12-month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield), we recommend that investors buy the stock.

Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock.

Hold: We take a neutral view on the stock 12 months out and, based on this time horizon, do not recommend either a Buy or Sell.

Notes:

1. Newly issued research recommendations and target prices always supersede previously published research.

2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period

Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period

Sell: Expected total return (including dividends) of -10% or worse over a 12-month period

Equity Rating Key Equity Rating Dispersion and Banking Relationships

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Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

3. Country-Specific Disclosures

Australia: This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

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Japan: Disclosures under the Financial Instruments and Exchange Law: Company name – Deutsche Securities Inc. Registration number – Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions – for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations.

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Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.

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Global DisclaimerThe information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.

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