Russia Are You Contrarian Enough ?

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    September 2013

    Russia are youcontrarian enough?

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    Important Information

    Every effort has been made to ensure the accuracy of the information in this document but it may bebased on unaudited or unverified figures or sources. The information in this document should not beused as the sole basis for an investment.(DVW&DSLWDOVVHUYLFHVDQGLQYHVWPHQWSURGXFWVPD\QRWEHDYDLODEOHWRDOOSHRSOHLQDOOMXULVGLFWLRQV(DVW&DSLWDOVVHUYLFHVDQGLQYHVWPHQWSURGXFWVPD\QRWEHRIIHUHGVROGRUGLVWULEXWHGLQDQ\FRXQWU\unless such offer, sale or distribution is made in accordance with local registrations or any applicableexemptions from any registration requirements provided by the local laws and regulations.Information about our services, investment products, prospectuses, financial reports, distributors and

    where the funds are registered for sale can be obtained at East Capital (www.eastcapital.com).Investment in funds always involves some kind of risk. Past performance is no guarantee for futureperformance. Fund units may go up or down in value and may be affected by changes in exchangerates. Investors may not get back the amount invested. As East Capital invests in foreign markets,FXUUHQF\IOXFWXDWLRQVFDQDIIHFWWKHIXQGVYDOXHV

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    East Capital in brief

    Leading asset manager dedicated toEastern Europe and East Asia, founded in 1997

    USD 4.7 billion in AUM in public and private equity

    Offices in Stockholm, Moscow, Kyiv,Hong Kong, Tallinn, Paris, Oslo and Shanghai

    35 investment professionals in publicand private equity, in total 140 employees from 25countries

    Broad international client base, from direct retailinvestors to leading third party distributors and first tierinstitutions

    14 year track record, highly awarded funds

    Independently owned and managed with founders andowners active at senior management level

    AUM per Segment

    All figures as of 31 July 2013

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    Long term approach with focus onconvergence and domestic themes

    Fundamentals matter over time(valuation and growth)

    Active stock-picking without indexWUDFNLQJLQGH[DJQRVWLF

    Strong local presence and in-houseresearch based on frequentcompany visits

    Broad portfolio diversification on alllevels (country, sector, company)

    Corporate governance (includingsocial and environmentalresponsibility)

    Investment Style

    4

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    Awards

    http://www.eastcapital.com/sv/node/1402http://www.eastcapital.com/sv/node/1406http://www.eastcapital.com/sv/node/1408http://www.eastcapital.com/sv/node/1409http://www.eastcapital.com/sv/node/1410http://www.eastcapital.com/sv/node/1411http://www.eastcapital.com/sv/node/1412http://www.eastcapital.com/sv/node/1413http://www.eastcapital.com/sv/node/1414http://www.eastcapital.com/sv/node/1415http://www.eastcapital.com/sv/node/1416http://www.eastcapital.com/sv/node/1417http://www.eastcapital.com/sv/node/1418http://www.eastcapital.com/sv/node/1419http://www.eastcapital.com/sv/node/1420http://www.eastcapital.com/sv/node/1421http://www.eastcapital.com/sv/node/1422http://www.eastcapital.com/sv/node/1423http://www.eastcapital.com/sv/node/1424http://www.eastcapital.com/sv/node/1425http://www.eastcapital.com/sv/node/1426http://www.eastcapital.com/sv/node/1427http://www.eastcapital.com/sv/node/1428http://www.eastcapital.com/sv/node/1429http://www.eastcapital.com/sv/node/3014http://www.eastcapital.com/sv/node/6160http://www.eastcapital.com/sv/node/3153http://www.eastcapital.com/sv/node/6161http://www.eastcapital.com/sv/node/11880http://www.eastcapital.com/sv/node/17067http://www.eastcapital.com/sv/node/17068
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    East Capital RussianFund Performance since Inception

    6

    Note: In USD as of 30 June, 2013. RTS Index until 30.06.2010, MSCI Russia Index Total Return (net) from 01.07.2010

    Since inception (USD)Fund 1123,3%

    Index 528,2%

    0

    500

    1000

    1500

    2000

    2500

    East Capital Russian Fund MSCI Russia TR Net

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    EMs lagging

    EMs led byBrazil and Indiahave performed

    the worst, whileDMs had decentreturns

    Reasons may befear of lower

    growth in EMs,but also generalrisk aversionand taperingfears

    Source: Bloomberg, East Capital estimates, 2012-12-31 2013-08-28

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    Russia a macroeconomic haven?

    Government debt at only 11% (and mostly in rubles) and forex reserves at over$500 bln (27% of GDP)

    Current account surplus

    Flexible currency absorbs oil price vulnerability, while CBR targets inflation

    Inflation down from 14% in 2008 to less than 6% expected for 2013

    Budget balanced thanks to newly introduced fiscal rule

    Even with oil price at $80/bbl fiscal deficit would be less than 3% of GDP

    Oil is a more resilient commodity

    Low consumption per capita in China and India

    Half of global oil exports come from the Middle East

    Elevated cost curve (deep-sea oil, oil sands and shale oil all believed to requiremedium term prices of over $80/bbl)

    Oligopoly is still strong and powerful unlike on most other commodity markets

    GDP growth has slowed (as with other EMs) but should rebound

    Current fears forthe effects oftapering shouldbe much less of a

    problem forRussia due toboth soliddomestic macroand relativecurrency

    resilience in EMclass thanks tostrong linkage tooil

    Source: Sberbank, East Capital estimates

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    Highest discount everto oil price-based fair

    valueRTS is currentlytrading around1300 points,

    while a

    regressionanalysis of oilprice andRussian equitymarket showsaround 650

    points discountto theoretical fairvalue (similar tothe situation inlate 2008/early2009)

    Source: Bloomberg, East Capital estimates

    RTS Discount/Premium to oil price-based fair value

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    Highest discount everto oil price-based fair

    YDOXHFRQWG*LYHQWRGD\Voil price, Russiashould trade

    above 1950points on RTSwhile currentlytrading around1300, implyingan oil price of

    merely $78(today at $115)

    Source: Bloomberg, East Capital estimates

    RTS and oil price, (r=0,88 and r^2=0,78)

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    Post-crisis de-correlationof performance and

    earnings growth

    Source: Bloomberg as of 2013-07-28, East Capital estimates

    Implied earnings for selected markets since 2003-08-01 Performance for selected markets since 2003-08-01

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    Post-crisis de-correlationof performance and

    earnings JURZWKFRQWG

    Source: Bloomberg as of 2013-07-28, East Capital estimates

    Performance for selected markets since 2010-01-01Implied earnings for selected markets since 2010-01-01

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    Large upside tohistorical average

    Source: Bloomberg, East Capital estimates, 2003-08-30 2013-08-27

    -8,0%

    52,3%

    98,6%

    24,1%

    35,3%

    -20%

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    0,0

    2,0

    4,0

    6,0

    8,0

    10,0

    12,0

    14,0

    16,0

    18,0

    20,0

    Brazil China Russia India Turkey

    Upsid

    e/Downsidefroma

    verage,%

    P/E

    Average P/E Current P/E Upside/Downside to average P/E, RHS

    Current vs. average P/E (LHS) and upside/downside (RHS)7RGD\VYDOXDWLRQVare mainly caused

    by low globalallocations toRussia (as foreign

    investors controlfree float)

    For example,current ETF assetsfor Brazil are aboutfive times the sizeof ETF assets forRussia

    This implies thatdownside should

    be limited at theselevels

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    Reasons behind theearnings growth

    Structurally high ROEs

    Due to large entry barriers, a lack of capital andlow cost structures, prices and margins are and hasbeen high for many companies, especially inunregulated, domestic sectors

    Low penetration

    Due to early stage capitalism, large businesses cangrow organically as penetration is starting from a

    low base

    High-quality labor force

    Unlike many other petro states, Russia has a largeand highly educated population (140m people)

    Magnit, todaythe leading foodretailer by salesin Russia, withover 7 400stores andoperating inmore than 1 700locations,

    opened its firstVWRUHLQ

    Source: Sberbank, East Capital estimates

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    Consumption growing faster thanoverall economy

    Supportive long termfundamentals for

    domestic growth

    Source:Federal State Statistic Service (RosStat)

    Unemployment at record low

    15

    Source:Federal State Statistic Service (RosStat)

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    Supportive long termfundamentals for

    domestic JURZWKFRQWG

    Source: Sberbank, East Capital estimates

    Improving demographics

    Thousand people

    -1000

    -800

    -600

    -400

    -200

    0

    200

    400

    Balance of migration

    Natural population growth

    Total population growth

    16

    Source: RosStat

    Inflation at historically low levels

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    How to play thedomestic theme

    Russia has alarge middleclass thatdemands morefinancialservices as wellas betterinfrastructure,housing, health

    care andtransport

    Source: Bloomberg, East Capital estimates

    5XVVLDVSHQHWUDWLRQFXUYHRI(8DYHUDJH

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    East Capital RussianFundRelative Sector Allocation vs.

    Index

    18All data as per 2013-07-31

    -20.5%

    -3.6%

    -1.8%

    0.8%

    2.7%

    3.6%

    7.3%

    9.2%

    -25% -20% -15% -10% -5% 0% 5% 10% 15%

    Energy

    Materials

    Financials

    Consumer Staples

    Telecommunication Services

    Utilities

    Industrials

    Consumer Discretionary

    RelativeDomestic sectors

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    Most sectors cheaperthan other EMs

    Source: Sberbank, East Capital estimates, August 2013

    5XVVLDLVRQO\FKHDSEHFDXVHRILWVHQHUJ\VHFWRU not true anymore

    A wide set of domestic sectors,

    preferred by East Capital, are trading atsignificant discounts to other EMs, inparticular

    Banks

    Air transport

    Utilities

    Automotive

    Consumer electronics

    Real estate

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    Reasons behind5XVVLDVZHDNHTXLW\

    market performance

    Free-float controlled by foreign investors(due to absence of local savings base)

    Inefficient stock market trading practices

    Fear that cash flow is not shared withminority investors

    Low standards of corporate governancecompared to other emerging markets

    High and persistent corruption

    Political protests

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    Russian equities: lowfree-float, few local

    institutional investors Less than 30% of Russian equity capital is a free

    float, and only 2% of the latter is owned bypension funds

    The outlook onRussian equitieshas historically

    been established

    mainly byforeign investorsin the absence ofa local investor

    base

    Only 2% of localstock market freefloat is funded bypension savings,

    but one canexpect this shareto increase

    Source: Sberbank CIB, Goldman Sachs, EC Estimates

    30%

    15%

    14%

    5%9%

    55%

    2%

    13%

    30%27%

    State

    Oligarch

    Businessmen

    Foreign strategicinvestorsOthers

    Free float:foreignersFree float: pensionfundsFree float: banks

    Free float: others

    Ownership structure ofRussian equities:

    Free-float detailed:

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    But pension savingsare on impressive

    growth path Mandatory accumulated pensions savings

    (Pillar II) will increase from current 3.8% ofGDP up to at least 6.7% of GDP in 2020

    Pillar II pensionassets will grow

    by 15-25%annually till

    2020 dependingon actualallocation

    between public(2% of payrollcontributed) and

    private (6%) PFsOn top of thatPillar III assets

    will amount to1.8% of GDP in2020 (1.2% now)

    Source: EC estimates, SocGen, RenCap, Ministry of Economic Development, investfunds.ru

    3,8

    6,7

    9.1

    0

    1

    2

    3

    4

    5

    6

    7

    8

    9

    10 Optimistic scenario

    Conservative scenario

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    Pension Funds (PFs) maybecome important players

    on Russian equity market ,I5XVVLDFORVHVWKHJDSYV2(&'DYHUDJHLQ3)V

    equity holdings, the latter may increase up to 67bln USD in 2020 (Pillars II and III)

    Why we expectPFs to allocatemore AUM intoequity?

    Because ofrecent changesin regulation (norestrictions on

    yearly negativereturns) andmore active

    inflows intoprivate (morerisky) PFscompared topublic manager

    VEB

    Source: EC estimates, SocGen, RenCap

    3%

    18%

    0%

    2%

    4%

    6%

    8%

    10%

    12%

    14%

    16%

    18%

    20%

    Russia OECD Average

    RISHQVLRQIXQGV$80invested in equities

    3,0

    66,5

    0

    10

    20

    30

    40

    50

    60

    70

    Equity holdings

    now

    Potential equity

    holdings

    3HQVLRQIXQGVHTXLW\investments, bln USD

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    Local stock exchangeadopting Western

    standards Russia's two main stock exchanges, MICEX and RTS, merged in

    late 2011 as part of a Kremlin-backed strategy to promote Moscowas an international financial center

    A mandatory central securities depository (the National SettlementDepository) was created in 2012

    Meeting the requirements of Rule 17f-7 of the United States InvestmentCompany Act of 1940, allowing US funds to invest directly in Russiansecurities

    Both Clearstream and Euroclear were admitted to the market, startingwith settlement of local debt instruments to be followed by local equities

    Settlement for bonds and equities in in process of moving fromsettled on execution (pre-payment) to T+2 (the norm in US andGermany for example)

    Removal of the limit for international circulation of Russian sharesexpected in 2014

    Current regulations limit depositary receipts conversions, creatingspreads between local shares and ADRs

    Trading localsecurities inRussia has beenfamous for itsinefficiency, high

    costs andcomplexity,especially forinternationalinvestors

    Lower trading

    costs and higherpost-tradetransparency will

    bring moreliquidity onto thelocal market

    Source: Citi, East Capital

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    ,QWURGXFLQJ1RYR0HUFDGRLQ5XVVLDQ

    The Moscow Exchange is planning to launch the Novy5\QRN1HZ0DUNHW,QGH[ZLWKLQPRQWKV

    A premium segment for companies adhering to highercorporate governance standards

    )ROORZLQJWKHVXFFHVVRI%UD]LOV1RYR0HUFDGRZKHUHof Brazilian firms trading on Bovespa nowadays are listed(initially no Brazilian companies complied with the rules)

    A recent case study analyzing the largest 25 companiesin Russia, India, China, South Africa and Turkey to seehow many would qualify to enter the Novo Mercado

    Index in their current state shows that: RI5XVVLDVDQG7XUNH\VWRSFRPSDQLHVwould

    TXDOLI\WRGD\

    ZKLOHRQO\RI6RXWK$IULFDVRI,QGLDVDQGRI&KLQDVWRSFRPSDQLHVZRXOGPDNHLW

    Based on NovoMercado terms,the majorcorporategovernance issue

    in Russia todayis the low freefloat

    While currentlyat 28%, it shouldincrease toward

    40% by 2018 dueto plannedprivatizations (inBrazil free floatis 69% and inChina and Indiaaround 38%)

    Source: Sberbank, July 2013

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    Corporate governancecomparison BRICTS

    A broadercomparison showsthat another issuefor Russia is theminorityshareholder

    protection (basedon the 2013 WorldEconomic Forumscore)

    Neither that scoreor low free float aredirect functions of

    actual corporategovernance law, butrather an effect ofcurrent equitymarket structureand less strongimplementation ofthe actual law

    Source: Sberbank, World Economic Forum, Bloomberg

    Brazil Russia India ChinaSouth

    Africa Turkey

    Independent directors 32% 41% 54% 37% 59% 34%

    IFRS/US GAAP 100% 100% 16% 100% 100% 100%

    Same CEO/BoD chairman 8% 12% 56% 60% 16% 16%Government control 16% 30% 30% 46% 14% 18%

    Free float 39% 27% 39% 41% 55% 35%

    Family, oligarch, other 45% 43% 31% 14% 31% 47%

    2013 WEF minority shareholderprotection (US =100%) 83% 67% 87% 96% 95% 88%

    Novo Mercado entry 48% 20% 4% 4% 8% 20%

    Comparison for 25 largest companies in each country

    Weaker than average minority share holder protection showsthe value of an active manager that is able to challenge

    inappropriate minority treatment and engage in advancingbetter corporate governance practices

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    Understanding corporategovernance in Russia

    5XVVLDKDGWZRPDLQVWDJHVRISULYDWL]DWLRQLQV

    Voucher privatization (1992-94DQG/RDQVfor VKDUHVauctions (1995)

    Due to non-transparent privatization rules, low financial literacy ofpopulation and informal unions between business and stateofficials most assets were sold very cheap, for instance:

    51% stake in Norilsk Nickel was sold in 1995 for 170 mln USD, now thisstake is worth 11.5 bln USD (~26% annual USD return)

    40% stake in Surgutneftegas was sold for 89 mln USD, now this stake isworth 14 bln USD (~32% annual USD return)

    After obtaining control over former state assets cheaply, newowners often focused on keeping control over that fallen-from-the-

    sky wealth rather than investing and developing acquired assets7KHFUXFLDOLVVXHRIFRUSRUDWHJRYHUQDQFHDWSULYDWL]HGFRPSDQLHVZDVQWtaken into account when privatization mechanism was designed. New ownerfrequently had neither skills in operational and strategic management of bigFDSLWDOLVWLFEXVLQHVVQRUVXIILFLHQWEXVLQHVVFXOWXUH,WGLGQWDFWXDOO\VWLPXODWHHIILFLHQF\LPSURYHPHQWVDQGGLGQWSURPRWHVWUXFWXUDOWUDQVLWLRQRIHFRQRP\

    Russian State Accounts Chamber, 2004

    Privatization inVZDVVRcheap that fornew owners it

    was optimal tosimply retaincontrol overacquired assetsby any means

    It guaranteedenormousreturns per se,no one caredabout efficiencyand governance

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    Evolution of corporategovernance in Russia

    Since the first trades in Russian stocks took place in late,32VRYHUWKH\HDUVEURXJKWQHZVHFWRUVWRWKHmarket such as telecom, food retailing and real estate (asopposed to assets inherited from the Soviet times, mainlyenergy and other raw materials)

    These new companies are mostly run by businessmen as opposite tooligarchs and state, often demonstrating strong management,healthy cash-flows and good governance

    While companies majority-own by the state still tend to beworse run than private, government is pushing for a change

    In 2011, President Medvedev ordered the removal all high rankingstate officials from boards of directors from state companies

    In November 2012, the government issued a rule to state-controlledbusinesses mandating a payout equal to at least 25% of net income

    All Russian companies should publish IFRS accounts starting from2013

    Following theadoption of the CivilCode in 1994 and theJoint Stock Companylaw in 1995, the

    Russian governmentissued a Code ofCorporate Governanceas late as 2002(ratified in 2004)

    Today >60 Russian

    companies are listedon LSE and dozens onNYSE, NASDAQ,)UDQNIXUWV;(75$Stockholm and HongKong stock exchangesand hence subject tostricter accounting anreporting rules

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    Number of IPOs persector since 2000

    Out of 64 IPOssince 2000covered byBloomberg,

    only 11 haveEHHQLQROGVHFWRUV

    If excludingRosneft IPO in

    2005, morethan 80% of thetotal value hasFRPHIURPQHZVHFWRUV

    Source: Bloomberg, East Capital estimates

    Consumer Staples;

    13

    Consumer

    Discretionary; 8

    Financials; 8

    Materials; 7

    Industrials; 7

    Telecommunication

    Services; 6

    Health Care; 5

    Energy; 4

    Utilities; 3

    Information

    Technology; 3

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    East Capital RussianFund Top 20 Relative Positions vs.

    Index

    30All data as per 2013-07-31

    -13.2%

    -7.1%

    -5.6%

    -3.3%

    -2.8%-1.6%

    1.2%

    1.3%

    1.4%

    1.9%

    2.0%

    2.1%

    2.3%

    2.4%

    2.6%

    2.8%

    3.4%

    3.8%

    4.4%

    4.5%

    -16% -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6%

    Gazprom

    Sberbank

    Lukoil

    Magnit

    MTSRosneft

    Surgut Ng

    Globaltrans

    LSR Group

    Kazmunaygaz

    Mostotrest

    Bank Sankt-Peterburg

    Cash

    Aeroflot Russian Airlines Jsc

    Transneft

    Dixy

    Sollers

    Yandex

    Sistema

    M.Video

    Relative weight, %

    Main ownership by businessmen

    Electronics retailer

    Internet search provider

    Auto producer

    Food retailer

    Bank

    Transportation

    Real estate

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    Case study M.Video Beneficiary of the retail lendingboom under way in Russia

    Consumer electronics market leader

    Sales CAGR 2011-2014E 14.6% vs. 5.6% for market

    Investment rationale

    Strong relationships with founder

    Excellent execution track record

    Best in class corporate governance and sustainable dividend story

    Possible market consolidator (deal with main competitor Eldorado iscurrently under discussion)

    Zero debt balance sheet

    Attractive valuation

    (9(%,7'$ 4.4x3( 9.5x

    East Capital has 6.3% stake in the company and elected oneindependent director to the board of directors

    Growth 2013:16% YoY sales,20% YoY earnings

    Special dividendwith implied yieldof 11.4% (in totalaround 14% yield)

    2013e EV/EBITDAat 4.4x

    Source: Bloomberg, East Capital estimates

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    (DVW&DSLWDOVDSSURDFKto corporate governance

    East Capital is an active member and currently holds the vicechairmanship of the Russian Investor Protection Association (IPA)

    Established in 2000, IPA is currently the largest association of itskind in Russia: unites approx. 30 members with accumulatedinvestments in Russia exceeding USD 25bn

    ,3$VPDLQDFWLYLWLHV

    Nominating and electing independent directors:In 2012, IPA nominated directors in a total of 84 issuers, ofwhich 31 were successfully elected

    Resolve disputes: Coordinates the voice of minority investorsin specific corporate disputes

    Advocate improvements in legislation:Actively cooperateswith governmental authorities and various institutions onimproving corporate governance related legislation

    The IPA is the onlycorporategovernanceassociation inRussia created by

    and for investors

    13 years of collectiveexperience inhands-onimprovements incorporate

    governance at suchcompanies as RAOUES, Rostelecom,IDGC Holding andmany others

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    Dividend pay-out overtime and current yield

    Cash flows not shared with minorities no longer true

    MSCI Russia current yield 3.8% (vs. 2.8%

    for MSCI EM) Partly function of low valuations, partly due

    to increasing pay-outs

    Major companies yield 5-6%

    Aeroflot at 5%, Gazprom at 6.5%

    Private companies increasing dividends,despite fast growth

    Sollers at 8% yield for 2013e

    M.Video at around 14% yield for 2013e ifspecial dividend (at 11.4% yield) repeated

    Source: Bloomberg, Sberbank, East Capital estimates

    Dividend pay-out-ratio for MSCI Russia

    0

    5

    10

    15

    20

    25

    30

    35

    40

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    MSCI Russia

    %

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    Russia from laggard toleader

    Dividend yieldfor Russia(orange line)compared torange (lightblue area) ofdividend yieldsfor Asia exJapan, Brazil,

    China, GEM,India, S&P500,and World

    Source: Bloomberg, East Capital estimates, 2009-08-282013-08-28

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    Dividend pay-out in2013

    Major dividendpayers will payin total USD19bn till theend of August2013

    Out of these,almost USD

    7bn will be paidout to free float(partly re-invested)

    Source: VTB Capital, East Capital estimates

    Sberbank, ord.; 850

    Sberbank pref.; 98

    Uralkali; 163

    Norilsk Nickel; 448

    Gazprom Neft; 54

    Severstal; 15

    Rosneft; 342

    MTS; 416Bashneft, ord.; 15

    Bashneft, pref.; 24

    E.On Russia; 140

    Lukoil; 801

    Gazprom; 2 101

    Surgut ord.; 149

    Surgut pref.; 317

    Tatneft ord.; 370

    Tatneft pref.; 39

    VTB ; 179Megafon; 184 Sistema; 65

    Dividends to free float shareholders (in total $mn)

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    36

    Continued stablepolitical environment

    Source: Levada Center, Rasmussen Reports

    Putin approval index is still impressivelyhigh in a global context, albeit comingdown slightly

    $SSURYDO,QGH[RIWKRVHZKRDSSURYHSHUVRQVDFWLRQV

    minus % of those who disapprove (based on polls results)

    Russian society is moving towards more openand democratic standards and is becoming moremature

    Partly thanks to development of modern mediaand a stronger middle class

    It guarantees more balanced economic and socialpolicies in the future

    Fight against corruption has become more visible(Putin publically dismissed minister of defense inlate 2012 in a $100m scandal)

    6WUHHWSURWHVWVKRZHYHUGRQWQHFHVVDULO\PHDQsignificantly higher political risks (as the case

    with the Arab spring) After a decade of economic prosperity, people

    mainly demands higher quality of life (betterroad infrastructure, schools, medical servicesetc.)

    Opposition is still very weak with few crediblealternatives to current leadership, albeit withsome exceptions (for example Alexei Navalny,Moscow mayor candidate)

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    37

    Corruption is highbut dynamics matter

    Recent anti-corruption policies in Russia gaveclear positive results, while in other BRICcountries corruption problem aggravated

    Internationalrankings ofcorruptionperception place

    Russia low, butunlike otherBRICs Russia isimproving itspositions

    Moreover,SHUFHSWLRQRIFRUUXSWLRQindex per se is adisputablemeasure ofcorruption

    Source: Transparency International

    154

    143

    133

    7881

    84

    60

    70

    80

    90

    100

    110

    120

    130

    140

    150

    160

    2010 2011 2012

    Russia

    BRIC ex Russia average

    Worldwide rank in Corruption Perception Index

  • 7/29/2019 Russia Are You Contrarian Enough ?

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    38

    Capital flight declining since 2005

    )DLUPHDVXUHRIFDSLWDOIOLJKWUHYHDOVDVXEVWDQWLDOO\DQGconsistently decreasing trend in contrast to media reporting

    The large offshoreownership ofRussian businesscomplicates thepicture with loanrefinancing and

    overseas M&Asometimeserroneously countedas capital flight(after 2008, a lot offoreign loans hasbeen replaced withdomestic debt)

    Also loans byRussiansubsidiaries offoreign banks totheir parent banksin the West, adds tocapital outflows

    Source: The Bank of Russia

    0,0

    0,5

    1,0

    1,5

    2,0

    2,5

    3,0

    3,5

    4,0

    4,5

    I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I

    2005 2006 2007 2008 2009 2010 2011 2012 13

    Fictitious transactions* in the BoP financial account, % to GDP

    Log-trend

    * official category in the analytical representation of the BoP by the Bank of Russia

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    39

    Russia has the leastrestrictive capital

    controls among BRICs Comparisons of capital flows with other BRIC

    countries are simply incorrect Russiaabandoned capital controls, others did not

    Part of capitaloutflows fromRussia is due torelatively

    relaxed capitalcontrols

    One can onlyguess howvulnerable

    RWKHU(0VBoPs would beif they loosenedtheir capitalcontrols asRussia did

    Source: IMF Annual Report of Exchange Arrangements and Exchange Restrictions, 2012

    Capital Transactions Brazil Russia India China

    Controls on:

    Capital market securities * * * *

    Money market instruments * * * *

    Collective investment securities * * * *

    Derivatives and other instruments * * *

    Commercial credits * *

    Financial credits * * *Guarantees, sureties, and financial backup facilities * *

    Direct investment * * * *

    Liquidation of direct investment * *

    Real estate transactions * * *

    Personal capital transactions * *

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    Hong Kong

    Kiev

    Moscow

    Oslo

    Paris

    Shanghai

    Stockholm

    Tallinn