International Banking. A Unique Opportunity for Russia

Mark T. RobinsonPresident, Citibank ZAO, Russia

10 April 2008

Graduate School of Management

St. Petersburg

Russia’s Development of a World-Class Financial Services Sector

It is helpful to measure how Russia stacks-up against the 4 key elements necessary for a global financial center.

International banking is contributing to the modernization of the financial services sector, which is necessary for the Russian economy to

develop…

…Can Russia develop a world-class financial services sector and play a leadership role in the global financial markets?

1

Four Key Elements Drive the Success of a Financial Center

Companies and individuals

Financial markets

Local environment

Financial institutions

- which are the beating heart of a center and need to be liquid and broad

- which as investors and issuers supply the fuel for the markets

- which maintain the relationship between investors & issuers and markets

- which provides the right infrastructure, governance and support for the center

2

Companies and individuals

Financial markets

Local environment

Financial institutions

WORLD GDP

2007 2020 E

Source: EIU

Financial Markets are Key To Capturing Russia’s Economic Potential

3

Rank Country/Region $MMM

1 United States 13,8432 Japan 4,3843 China 3,3164 Germany 3,2975 United Kingdom 2,7516 France 2,5607 Italy 2,1408 Spain 1,4489 Canada 1,411

10 Brazil 1,28711 Russia 1,23112 India 1,13113 South Korea 97214 Australia 896

Rank Country/Region $MMM

1 United States 27,0662 China 23,9413 Japan 7,1904 India 6,5105 Germany 4,6386 United Kingdom 4,3067 Russia 3,9948 France 3,5939 Italy 2,710

10 Brazil 2,49411 South Korea 2,36912 Canada 2,34713 Spain 2,11914 Mexico 1,652

Russian Financial Markets are Growing Fast

0.51.0

1.72.4

3.5

4.3

0

1

2

3

4

5

2003 2004 2005 2006 2007 2008*

US

$ b

n

FX trading volume on MICEX, daily average

Jan 02

Equity Market Performance

One of the youngest emerging financial markets is already a major player

* 1 Jan 2008 – 28 Mar 2008

Source: Reuters, Citi calculations

Rouble Bonds issued by Russian companies

28 27 55 83

181255

480 470

5072

93 98 114155

255204

0

100

200

300

400

500

600

2000 2001 2002 2003 2004 2005 2006 2007

RU

B b

n

-100

-50

0

50

100

150

200

250

Volume of issuances (RUB, bn) Number of issuances

Source: C-bonds, Citi estimates

• Average daily FX trading volumes on MICEX grew by 46% in 2007 and are expected to reach $4.3bn in 2008

• Total FX trading volume on MICEX was $856bn in 2007

• Rouble bond market grew on average at 38% per annum during the last 3 years

• RTS Index grew 9 times from 262 points in 2002 to around 2,060 points currently.

0

600

700

800

900

1000

Dec 04 Dec 05 Dec 06 Dec 07

100

200

300

400

500

Dec 03

Per

cent

Inc

reas

e si

nce

Jan

2002

RTS Index S&P 500 Bombay SENSEX

Shanghai Brazil BOVESPA4

The Russian Stock Exchanges are now Top 20

Top 20 Stock ExchangesTop 20 Stock ExchangesRussian RTS & MICEX moved from Top 30 in 2004… …to Top 20 in 2008

The market infrastructure will need to continue modernizing to meet increased volume and complexity

* Domestic capitalisation - the total number of issued shares of domestic companies and also that of foreign companies not listed elsewhere, multiplied by their respective prices at a given time.

Source: World Federation of Exchanges, www.stocks.investfunds.ruData as of 31 Jan 2008.

Source: World Federation of Exchanges, www.stocks.investfunds.ruData as of end of 2004.

Capitalisation of Russian stock market increased by 6 times in less than 4 years.The MICEX Group joined the top 20 global exchanges by daily trading volume for equities and bonds

5

Rank

1 NYSE 12,708 2 Tokyo 3,558 3 Nasdaq 3,533 4 London SE 2,865 5 Euronext 2,441 6 Osaka SE 2,287 7 Deutsche Börse 1,195 8 TSX Group 1,178 9 BME Spanish Exchanges 941 10 Hong Kong Exchanges 861 11 Swiss Exchange 826 12 Borsa Italiana 790 13 Australian SE 776 14 OMX 729 15 JSE 443 16 Taiwan SE Corp. 441 17 Korea Exchange 389 18 Bombay SE 386 19 National Stock Exchange India 363 20 Sao Paulo SE 330 … … …24 "Russian Trading System" SE 181 25 Mexican Exchange 172 26 MICEX SE 153

Stock Exchange Market capitalisation* ($bn) Rank

1 NYSE 14,611 2 Tokyo SE 4,552 3 Euronext 3,728 4 Nasdaq 3,703 5 London SE 3,474 6 Shanghai SE 3,135 7 Hong Kong Exchanges 2,209 8 TSX Group 2,032 9 Deutsche Börse 1,858

10 BME Spanish Exchanges 1,618 11 Bombay 1,473 12 National Stock Exchange India 1,346 13 Sao Paulo SE 1,283 14 Swiss Exchange 1,206 15 Australian SE 1,159 16 "Russian Trading System" SE 1,150 17 OMX 1,118 18 MICEX SE 1,026 19 Borsa Italiana 959 20 Korea Exchange 957

Stock Exchange Market capitalisation* ($bn)

Companies and individuals

Financial markets

Local environment

Financial institutions

Russia’s New Multinationals Need Capital to Grow

1

Source: Bloomberg, 28 Mar 2008

Top 5 Russian companies are in Top 200 globally by Market cap

Rank Company SectorCurr Market Cap ($bn)

Global Rank by Market Cap

1 Gazprom Oil & Gas 301.8 62 Rosneft Oil & Gas 93.3 723 Lukoil Oil & Gas 69.7 1034 Sberbank Banks 67.1 1085 Norilsk Nickel Metals & Mining 53.6 1576 Unified Energy Systems Utilities 43.0 -7 Surgutneftegaz Oil & Gas 32.0 -8 Gazpromneft Oil & Gas 27.3 -9 TNK BP Oil & Gas 26.6 -10 Novatek Oil & Gas 24.8 -11 VTB Banks 24.5 -12 Novolipetsk Steel Metals & Mining 24.3 -13 Severstal Metals & Mining 23.6 -14 Uralkali Fertilizers 16.6 -15 Mechel Metals & Mining 14.8 -16 Hydra OGK Utilities 14.4 -17 MMK Metals & Mining 14.0 -18 Tatneft Oil & Gas 14.0 -19 AFK Sistema Telecoms 13.7 -20 PIK Group Real Estate 12.6 -21 Slavneft Oil & Gas 10.5 -22 Poluys Gold Metals & Mining 9.8 -23 Silvinit Fertilizers 9.5 -24 Mosenergo Utilities 8.7 -25 Rostelecom Telecoms 8.5 -26 LSR Group Construction 7.1 -27 Baltika Consumer 7.0 -28 Bank of Moscow Banks 6.3 -0.029 Sibirsky Cement Construction 5.8 -30 Raspadskaya Metals & Mining 5.2 -

6

Russian Companies Are Already Large International Issuers

Russian Companies’ IPO proceeds (US$Bn)

Source: Citi Investment Research

Russia is Top 20 largest Int’l bond issuersin 2007

Russia is 3rd Largest IPO Marketin 2007

EQUITY DEBT

Russian Corporate Debt(US$Bn)

Source: www.cbr.ru, www.cbonds.ru

Source: Thomson Financial, Central Bank of Russia

32

106

14

85

10

31

2004 2007

US

$ b

n

Corporate Loans Syndicated loans Bonds

$56bn

$222bnCAGR = 58%CAGR = 58%

7

6.4 6.7

1.5 1.7

-

2

4

6

8

2006 2007

Mill

ion

s

Members of pension funds

Members of investment funds

Russia Has an Emerging Investor Class

200 205

45

120

050

100150200250

Russia Brazil India China

Us

ers

• Russia ranked the second most attractive retail market in the world after India (1)

• Personal consumption rate more than doubled since 1999

• Russia’s cities are growing, its 11 “Millionniki” cities have populations over 1 million

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

• Strong growth in personal wealth will continue to fuel consumer spending, which will benefit a wide range of industries including real estate, telecoms, food producers, retailers and transport

1

Internet Connections Per 1000 pop.

The emerging Russian middle class of 30 million is set to become one of the largest in the world…Russian consumers tend to be early adapters of new technology with discerning tastes…

Source: Miniwatts Marketing Group.Source: Russian Federal Financial Markets Service

Individual investors activity,2006 - 2007

+4%

+13%

8(1) According to 2007 A.T. Kearney Global Retail Development Index

Companies and individuals

Financial markets

Local environment

Financial institutions

Large Opportunity for Further Development of the Banking Sector

The Russian banking sector remains under-penetrated by global standards.

Banking assets stood at 68% of GDP at the end of 2007, much lower than in other BRIC countries.

48%

23% 22%21%

17%14%

10%

0%

10%

20%

30%

40%

50%

South Africa Hungary Poland CzechRepublic

Romania Turkey Russia

2

Possessing a large-scale modern domestic financial services sector facilitates capital allocation between investors and companies.

Banking Assets as % of GDP, 2007

Consumer Loans as % of GDP, 2007

Source: Citi Investment Research

266%

218%

162%

111% 111%89% 78% 68%

0%

100%

200%

300%

Germany UK China India Brazil Turkey Poland Russia

Corporate loans stood at about 30% of GDP at the end of 2007, while retail loans, including mortgages, were only 11% of GDP.

The Russian banking sector exhibits consistently strong loan growth rates over the last several years in the range of 35-55%.

Source: EIU

9

Increasing Consolidation in the Banking Sector

Source: CBR. All financials are based on RAS

Number of banks decreased by half over 1997-2007 decade, market consolidation trend continues.

Top 5 banks are state owned, controlling 40%+ of sector’s total assets

Top 25 banks own 70% of total banking assets

International players quite visible- 5 of Top 25 banks controlled by foreign investors

In 2007 the industry continued fast expansion – growth over 2006 amounted to 55% for banking assets and 45% for Revenues (RAS)

Top 25 Russian banks by assets, 1st of January 2008

10

Revenue FY 2007, $MM

Change vs FY 2006

1 Sberbank 201,468 52% 21,641 40%

2 VTB 61,606 107% 1,937 33%

3 Gazprombank 32,622 16% 2,799 73%

4 Bank of Moscow 20,753 50% 984 53%

5 Rosselkhozbank 19,686 114% 740 111%

6 Alfa-bank 19,675 47% 1,106 79%

7 Raiffeisenbank Austria 17,008 97% 1,076 159%

8 Rosbank 15,657 47% 1,139 19%

9 Unicredit 14,676 58% 632 53%

10 Uralsib 14,447 30% 1,047 16%

11 VTB 24 13,183 108% 608 107%

12 Promsvyazbank 11,697 72% 695 65%

13 MDM 11,310 44% 1,002 44%

14 VTB North-West 8,749 57% 576 30%

15 Russian Standard 7,551 N/A 2,295 N/A

16 URSA 7,416 85% 563 62%

17 Nomos 7,409 99% 586 71%

18 Petrokommerts 6,940 39% 331 6%

19 Ak Bars 6,444 63% 298 53%

20 Svyaz-bank 6,401 191% 458 361%

21 Citi 5,998 22% 579 55%

22 Zenit 5,562 56% 333 51%

23 Absolyut Bank 5,389 109% 189 74%

24 Saint Petersburg 5,163 N/A 259 N/A

25 Transkreditbank 4,879 77% 354 61%

- TOP-25 Totals 531,690 59% 42,228 47%

Assets Change (vs. Q4-2006)

BanksRank by Assets

Assets Q4-2007, $ MM

Companies and individuals

Financial markets

Local environment

Financial institutions

The Local Environment is a Key Factor for Business Development

Favourable and understanding regulation

Fair and just business environment Corporate tax regimeGovernment responsiveness

Deep pool of educated personnelFlexibility of labour marketCulture and language

Availability of business infrastructure

Clustering effect of suppliers of professional services

Operational costs

Access to customers Access to international financial

marketsVolume and value of financial

markets

To be truly successful, a financial center needs to attend to non-financial factors and ensure they are optimised.

Global cities ranked by Global Financial centers IndexFactors of competitiveness ranked (2007)

1. Business Environment

4. Market Access

3. Infrastructure

2. People Factors

Source: The City of London Corporation, March 2008.

Rank City Key Success Areas

1 London Strong on people, market access, regulation, environment and culture

2 New York Strengths are people and market access

3 Hong Kong Geographic position and competitive in the area of regulation

4 Singapore Strong banking regulation

5 Zurich Niche center for private banking and wealth management

6 Frankfurt Strong market access, business environment and infrastructure

7 Geneva Strong business environment, and a niche center for private banking and asset management

8 Chicago High on people and remains a powerful regional and specialist center

9 Tokyo Good liquidity, infrastructure and market access

10 Sydney Strong national center with good regulation

… … …? Moscow

11

Case Study: London & Paris – A Tale of Two Cities – Lessons For RussiaThough cities similar in history and core size, London has transformed into a truly global financial center, while Paris has fallen further behind and is now a regional center behind even Frankfurt. There are varied reasons for this.

Government policy: Since the 18th century, the City of London has played a major role in public life – in more recent times, where the financial sector has been a key growth sector in the economy, both Conservative and Labour governments have worked to ensure its competitiveness (e.g. tax, Big Bang, 1986; independence of Bank of England, 1997). This is in marked contrast to the more controlled French economy.

Regulation: The Financial Services Agency (the “FSA”) became a unified regulator early, its renowned “light touch” has been aided by the flow of private sector personnel into the organisation. French regulators have been more prescriptive.

Critical mass: All key financial sub-sectors have scale in London – “if I want to do a deal, I can always get it done here”

Innovation: The City of London possesses a reputation for being able to structure innovative transactions – indeed, Paris faces a shortage of financial structurers who prefer to based themselves in London.

Lifestyle: London’s huge arts and social cultures acquired a new lease of life in the 1990s. It turned the city into a desired destination for foreign workers (from bankers to barmen); Paris’s cultural life is thought to have stagnated by contrast.

Culture: London has historic ties to many growth economies (e.g. Middle East, Asia), and a highly cosmopolitan population.

12

SWOT Analysis: Critical Success Factors – More Lessons For Russia

We undertook a comprehensive study of major financial centers around the world and discovered some generic critical success factors.

External Factors Financial Sector Factors

Tangible Well developed, domestic economy easily accessible to international companies

Predictable legal system, easily enforced

A pro-business government who understand the development opportunities in finance

Competitive corporate and personal tax regime

Efficient public infrastructure, such as transport, schools and healthcare

Appropriate professional & independent regulation

A well developed, stable – and privately owned – banking sector

Transparent and liquid liberalised financial markets providing broad issuer and investor opportunities both domestically and overseas

Critical mass in asset management with strong supply of investment funds

Strong availability of professional support services

Intangible A business environment marked by fairness and adherence to the legal framework

General acceptance of a free-market philosophy

Openness to foreign cultures and people – the “cosmopolitan factor”

Educated work-force with English language skills

Attractiveness of city life to expatriates

Ability to work in international environment

Competitive mindset disposed towards product and service innovation

A financially skilled work-force

Light touch professional & independent regulation

Reputation and brand-name of financial sector players

13

Moscow as a Global Financial center – Facts for Consideration

MOSCOW

Deep pool of well educated personnel

Flexibility of labour market

Access to international sized customers

Access to international financial markets

Size of financial markets large and increasing

Favourable geographical location, time-zone

Strengths

Weaknesses Threats

Opportunities

Growing prosperity and consumerism

Potential hub for growing CIS economies

Under developed financial sector attracting international players

Individual investments will grow fast due to wealth and educational levels

Economic base not diversified

Infrastructure development does not keep up with business growth

Large portion of economy is government-controlled

Underdeveloped small business sector burdened by regulations

Market and banking supervision does not keep up with requirements

Rapidly increasing wages due to rising competition for talent

Challenging business environment, unpredictable legal system

Shortage of business infrastructure and professional support services

Uncertain and unfavourable corporate tax regime (1)

High operating costs

Complicated visa regime for international personnel

14(1) Total corporate tax rate is 51.4% vs. 35.7% in London. Source: The City of London Corporation, March 2008..

Conclusions

Over the last 5-10 years Russia’s financial sector evolved very fast both in terms of size and sophistication…

…yet, lot of changes are required to have a truly world-class financial services sector…

…that is necessary for Russia to compete in a rapidly developing and globalizing world.

15

Key Global Financial Centers

London Amsterdam

Frankfurt

Luxembourg

Dublin

New York

Bermuda

Toronto

Key First tier centers

Regional centers

Specialist centers

Growing centers

Paris

Sydney

Shanghai

Tokyo

Hong Kong

Singapore

Jo’burg

Zurich

Dubai

Chicago Moscow

– by 2020?...

16FUTURE IS IN YOUR HANDS