RUSSIA GRI including UKRAINE KAZAKHSTAN Real Estate Investment & Development in Russia & CIS...

RUSSIAGRI

including UKRAINE • KAZAKHSTAN

Real Estate Investment & Development in Russia & CISИнвестиции и девелопмент недвижимости в России и СНГ

GRIРОССИЯ

включая УКРАИНУ • КАЗАХСТАН

Russia-2008: resilience testedOctober 2008

Deutsche Bank

Yaroslav Lissovolik +7 495 933-92477

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DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1

Yaroslav Lissovolik · October 2008 · page 3

Politics and the macroeconomy

Russia’s macroeconomy remains strong:

CBR reserves (over $560 bn), CA and budget surpluses, virtually no public external debt

More recently concerns have emerged:

Investment growth slows down

Inflation remains a major macroeconomic worry

Geopolitical risks on the rise

Concerns over state intervention intensify after the Mechel case

Oil prices decline

Deutsche Bank


Stabilization Fund – the fiscal “anchor”

By the end of 2006 Russia’s Stabilization Fund reached Rb 2.3 trn or $89.1 bn

It has reached Rb 3.8 trn ($156.8 bn) by the end of 2007

Deutsche Bank

Stabilization fund

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2004 2005 2006 2007

Rb b

n

Source: MinFin


Reserve Fund and National Well-Being Fund

Deutsche Bank

Reserve Fund and National Well-Being Fund evolution, RUR bn

-

1,000

2,000

3,000

4,000

5,000

01-Feb-08 2008 2009 01-Feb-08 2008 2009

DB forecasts Official forecasts

Reserve Fund National Well-Being Fund

Source: Russian authorities, Deutsche Bank

Starting from Feb. 1, 2008 the Stabilization Fund is divided into the Reserve fund and the National wellbeing fund

For the time-being it has been decided to invest the assets of the funds abroad in order to eschew inflationary pressures


Russia vs GEMs: flows

•Twin surpluses still admirable by GEMs standards…

•…buoyed in part by high oil prices…

•…but also prudent fiscal policy

Deutsche Bank

Fiscal balance vs current account balance, 2006

Taiwan

Thailand

Ukraine

TurkeySouth Africa

Slovak Rep.

Russia

Poland

Philippines

Mexico

Malaysia

Korea

IsraelIndonesia

India

Hungary

Czech rep.

China

Chile

Brazil

Argentina

-10

-5

0

5

10

15

20

-10 -5 0 5 10

Fiscal balance, % of GDPCu

rrent

acc

ount

bal

ance

, % o

f GDP

Source: Deutsche Bank, World Bank, IMF


Russia vs GEMs: stock indicators

•Russia’s debt continues to decline (now at 3% of GDP)…

•… even as CBR reserves are at nearly half a trillion dollars

Deutsche Bank

External public debt vs reserves, 2006

TaiwanThailand

Russia '07

Ukraine

Turkey

South Africa

Slovak Rep.

Russia '06

Poland

Philippines

Mexico

Malaysia

Korea

Israel

Indonesia

India

Hungary

Czech rep.

China

Chile

Argentina

0

5

10

15

20

25

30

35

40

0 5 10 15 20 25

Reserves, months of improtsEx

tern

al p

ublic

deb

t, %

of G

DP

Source: Deutsche Bank, World Bank, IMF


Russia’s “integration economy”

• Return of flight capital

• Return of Russia’s “prodigal sons”

• Reincorporation of the shadow economy

• Integration across regions

• Integration at the microlevel of enterprises

• Creation of conglomerates/corporations

Deutsche Bank


Capital turnaround

After hundreds of billions of dollars left the country in the 1990s…

…net capital inflows are setting in

Deutsche Bank

Net private sector capital flows by sector, USDbn

-30

-20

-10

0

10

20

30

40

50

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Banking sector capital flows Non-financial sector capital flows

Net private sector capital flows reversed over the last several years for both sectors

Instability in 1990s stimulated capital outflows

Source: CBR


Russia’s integration into the world economy

Deutsche Bank

Integration of Russia into the international financial system 2001 2007

Share of Russia in MSCI EM, % 3.2 9.2

Corporate Eurobonds outstanding, USDbn 1.6 100

M&A activity

Number of deals 433 1,260

Total size, USDbn 12.4 120.7

Total size, % of GDP 4.0% 9.3%

Share of foreign banks in Russia’s banking system 8.8% 22.0% Source: Deutsche Bank


Integration via trade and investment

Deutsche Bank

Exports and imports as % of GDP, 1994-2007

0%

10%

20%

30%

40%

50%

60%

70%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Imports Exports

Source: CBR, Rosstat

FDI inward and outward, 2000-07E

0

10

20

30

40

50

60

2000

2001

2002

2003

2004

2005

2006

2007

0%

1%

2%

3%

4%

5%

FDI, outward FDI, inward FDI outward, % of GDP FDI inward, % of GDP

Source: CBR


The shadow sector

In the past 7-8 years the share of the shadow economy declined from 50% of GDP to around 25-30% of GDP…

…thus accounting for nearly a quarter of the cumulative growth in Russia’s GDP in the past 10 years.

Deutsche Bank

Indicators of unofficial economy, 1989-2007

0%

10%

20%

30%

40%

50%

60%

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Share of "shadow economy" in GDPDifference between Customs and CBR estimates of imports ( proxy for "grey imports")Share of barter in total sales

After reaching its peak in the second half of the 1990-s ...

… all indicators point to the unofficial sector steadily contracting over the last 5 years

Source: CBR, Rosstat, REB, Deutsche Bank


The withering of barter transactions

•Barter together with the dollar became far less prevalent…

•…leaving more room for the rouble to increase its popularity amongst the populace

Deutsche Bank

Share of barter in sales

0

10

20

30

40

50

60

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: REB


The demise of the “virtual economy”

•Drastic decline in non-payments provides room for economic dynamism…

•…allowing for winners to be separated from non-viable companies

Deutsche Bank

Wage debts, tax debts and intercompany debts, Rb bn 1998 2000 2006

Rb bn % of GDP Rb bn % of GDP Rb bn % of GDP

Wage arrears 52.6 2.0% 43.7 0.6% 4.2 0.0%

Overdue accounts payables, of which 1,060.0 40.3% 1,381.0 18.9% 687.4 2.6%

Intercompany debt 586.0 22.3% 712.5 9.8% 477.6 1.8%

Tax debts 228.0 8.7% 346.4 4.7% 132.9 0.5%

Debts to extra-budgetary funds 246.0 9.4% 322.1 4.4% 76.9 0.3% Source: Rosstat


A series of shocks

Domestic shocks: TNK-BP case

Mechel case

Anti-monopoly investigations fraught with excesses

External shocks: South Ossetia conflict

Tensions with the West

Spillover effects to Ukraine

Deutsche Bank


Consequences of South Ossetia conflict

Capital outflows from Russia in July-August were high and led to a sell-off in Russian equities

Survey results show a substantial deterioration in the perception of US-Russia relations amongst Russians

Net capital inflows vs RTS Index

US-Russia relationships in the eyes of Russsian people,

survey results

-4 -6 -7

82

-5

8

-5 -6

21

12 14 14

55

-7

22

-23

36

-17

-30

-20

-10

0

10

20

30

40

50

60

1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 Jul-Aug 080

300

600

900

1,200

1,500

1,800

2,100

2,400

2,700

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008

Positive, friendly Negative, strained Source: CBR, Deutsche Bank Research estimates Source: Levada Center, Deutsche Bank Research estimates


Investment slows down

Investment growth – the main revelation of 2006 and 2007

Growth in construction – key driver of fixed investment

Growth via investment observed amongst “Asian tigers” in previous decades

More recently, however, capital outflows resulted in a notable deceleration in investment

Deutsche Bank

Fixed investment growth vs construction growth, YoY, %

-10

-5

0

5

10

15

20

25

30

35

J an-01 J an-02 J an-03 J an-04 J an-05 J an-06 J an-07 J an-08

Fixed investment growth, YoY Construction growth

Source: Rosstat


Sources of fixed investment growth

The role of the budget in Russia’s investment boom is growing…

…as the share of share issuance declined.

Deutsche Bank

Structure of investment in fixed assets, % 2006 (%) 2007 (%)

Capital investment 100 100

Internal sources, of which 42.1 41.5

Retained earnings 19.9 19.9

External sources, of which 57.9 58.5

Bank loans 9.5 9.4

Including foreign banks 1.6 1.1

Non-bank loans 6.0 6.1

Budget, of which 20.2 21.2

Federal budget 7.0 8.4

Regional budgets 11.7 11.5

Bond issues 0.04 0.2

Share issues 2.3 1.9

Source: Rosstat


10 reasons why inflation is high in Russia

•Capacity utilization (both labor and capital)

•High world oil prices

•High world grain prices

•Labor market restrictions on migrants

•Restrictions on food imports

•Real wage growth well in the double digits

•Lack of competition/monopoly power in the regions

•Lack of sterilization tools for the CBR

•High credit growth

•Capital inflows in 2007

Deutsche Bank


Food prices lead the way in CPI growth

Last year food prices showed the highest increase across the main components of the CPI basket…

…with price controls on key food items doing little to change the undermine the contribution of “food price inflation”

Deutsche Bank

CPI and its components, 12 month change

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2002 2003 2004 2005 2006 2007 2008

CPI, YoY CPI, food, YoY CPI, non-food, YoY CPI, services, YoY

Source: Rosstat


Liquidity pressures intensify

•O/N rates approaching 8% on the back of capital outflows

•Concerns over the fate of small and medium-sized banks intensify

•Fighting inflation becomes secondary compared to propping up the banking sector

•CBR likely to prioritize liquidity provision to banks and hold back further increases in interest rates

Deutsche Bank


External debt repayment schedule

Deutsche Bank

Russia’s external debt payments to reach $45 bn in Q4…

…with the repayment schedule remaining busy throughout 2009

Pending external debt payments (as of 1 April 2008), USD bn

0

10

20

30

40

50

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10

Loan repayments Interest payments

Source: CBR


Measures to boost liquidity

Deutsche Bank

Measures undertaken by monetary authorities to support liquidity Measure Description Effect on liquidity Status

4pp cut in reserve requirements (effective 18 September)

CBR cut reserve requirements by 4pp. CBR has cut reserve requirements from 8.5% to 4.5% for foreign currency

borrowing and from 5.5% to 1.5% for rouble retail deposits, and for other liabilities from 6% to 2% (this frees up

Rub300bn)

RUR 300-320 bn Done

REPO operations (effective 18 September)

CBR has removed discount for OFZ and OBR it accepts as a collateral on REPO auctions

n/a Done

Additional funds to State Mortgage Agency

Additional funds to the agency RUR 60 bn Not clear if this is done. In any case, relatively small amount

Additional budget auctions

Cabinet is ready to increase significantly the funds auctioned (not only unused budget but up to the whole budget surplus

minus transfers to the sovereign funds

Currently the total amount of budget money placed in bank deposits stands

at RUR 634.6 bn. Beginning of the month balance was RUR209 bn,

maximum of RUR 753 bn has been reached on 24 Sept

Reduction of export duty on crude oil in October-November

Export duty set not on the base of average oil price for J uly-August, but on average oil price registered on 1-17

September

RUR 145 bn Approved

Chages in VAT administration

The quarterly VAT is to be paid in 3 equal installments UP to RUR 320 bn Needs approval. If approved October payment will be about RUR 160 bn

instead of RUR 480 bn

Direct placement of budget money on bank deposits

The latest data was RUR1.5 trn for 28 banks Not yet transferred

Funds from the budget to support financial markets

President Medvedev has announced that Rub500bn ($20bn) will be available to stabilize markets, including buy-backs of

shares of state-controlled companies.

Up to RUR500 bn (RUR 250 per year in 2008-9)

Not yet approved, requires changes to the budget

An allocation of $50bn from the CBR to VEB

An allocation of $50bn from the CBR to VEB, which in turn is to make these funds available to corporates seeking to repay

external debt.

$ 50 bn Needs approval

The provision of loans to commercial banks without collateral

n/a n/a

The assumption of risks of non-payments in the interbank market by the CBR

n/a n/a

Source: Deutsche Bank


End game

Deutsche Bank

Growth to slow to 5-6% in 2009, with inflation remaining high at 14.2% in 2008 and 12% in 2009

Construction likely to exhibit a significant slowdown in the coming months

Bank consolidation, with smaller and medium sized banks merged with the bigger banks in the next 1-2 years

The slowdown likely to be surmounted in 2009, though much depends on the resumption of capital inflows and the global economic environment


Russia: 2008 vs. 1998

1998 2007 2008

GDP real growth, YoY, % -5.3 8.1 7.4Fixed investment growth, YoY, % -12 21.1 11.6CPI, %, Dec/Dec 84.5 11.9 14.2Current account, % of GDP 0.1 5.9 7.4Fiscal balance, % of GDP -5 5.4 6.3Net private sector capital inflows, $ bn -21.7 83.2 15

Deutsche Bank


Important DisclosuresAdditional Information Available upon Request

Appendix 1

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. Yaroslav Lissovolik

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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RUSSIAGRI

including UKRAINE • KAZAKHSTAN

Real Estate Investment & Development in Russia & CISИнвестиции и девелопмент недвижимости в России и СНГ

GRIРОССИЯ

включая УКРАИНУ • КАЗАХСТАН

RUSSIA GRI including UKRAINE KAZAKHSTAN Real Estate Investment & Development in Russia & CIS...

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