Russia through a lens - Deloitte US...03 Russia through a lens Content 04 Russia in figures...

Deloitte Research Centre | Eighth issue | 3Q 2017

Russia through a lensMacroeconomic outlookKey Russian macroeconomic indicators in 3Q 2017

Page 04

Manufacturing sector in Russia – 2017The Russian manufacturing sector saw signs of improvement and strengthening optimism in 20176

Media consumption in Russia – 201730% of Russians using ad blocking apps and another 13% planning to do so.

Page 30

Blockchain in a nutshellBlockchain offers broad application range, runningacross all industries and functions.

Page 40

Russia through a lens

02

03


Content

04Russia in figuresMacroeconomic outlook (GDP, inflation, trade indicators, currency rate, Central Bank key rate, top-pricing, etc.)

16Research Centre market analysis"Manufacturing sector in Russia - 2017""Media consumption in Russia - 2017""Tax functions in leading Russian companies in 2017""Blockchain in a nutshell"

43Global windTop news: China and RussiaTop news: Europe and Russia

46Contacts

44Useful stickers

42Top M&AsTop-5 deals in Russia

Page 07 1 Page 33

We are pleased to present the latest edition of "Russia Through a Lens", the macroeconomic journal produced by Deloitte Research Centre in Moscow.

Established in December 2015, the journal is published quarterly and falls under the Research Centre’s monitoring activities.

In “Russia Through a Lens”, we focus on current key trends in the Russian economy and present our research in the following fields:

• Russia in Figures–statistical analysis • Research Centre market analysis • Top M&As

If you have any questions or suggestions regarding this research, please do not hesitate to contact us:[email protected]

Designed by the Deloitte Design Group, Moscow

mailto:cisresearchteam%40deloitte.ru?subject=

Russia through a lens | Russia in figures

04

Russia in figuresGDPGDP per year

The data for the period from 2011 includes changes related to the implementation of the international methodology for housing services evaluation, the evaluation of capital consumption taking into account its current market value, and the conformation of data on exports and imports with the data presented

in the balance of payments developed according to the methodology provided by the Sixth Edition of the Balance of Payments and International Investment Position Manual (BPM6) introduced by the International Monetary Fund.

150, 000

130, 000

110, 000

90, 000

70, 000

50, 000

30, 000

10, 000

0

21,61026,917

25%

33,248

24% 24%

41,277

–6%

38,807

19%

46,309

30%

60,283

13%

68,164

7%

73,134

8%

79,200

5%

–2.8%83,233

3.4% 2.1%–0.2%86,044 87,851

50%

30%

10%

–10%

–30%

–50%

–70%

–90%

–110%

–130%

0.7%1.3%3.5%4.3%4.5%–7.8%

5.2%8.5%8.2%

2005 2006 20102008 2012 2015 2007 2011 20142009 2013 2016 2017F*

GDP, bln RUB

GDP growth (at current prices)

GDP volume indices

Source: Rosstat, Ministry of Economic Development (*forecast)

Source: Rosstat, Central Bank of Russia (*forecast)

3Q GDP

25,000 20,00019,00017,00015,00013,00011,0009,0007,0005,000

6,3687,768

10,2389,245

10,977

15,806

17,73419,058

20,759 21,96722,721

23,289

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F*

GDP, bln RUB

"We revised the forecast for GDP growth for 2017 in the direction of improvement – up to 2.1%." Russia’s Minister for Economic Development Maxim Oreshkin

“The GDP increase for the second half of 2017 will not fall below the current rate of 2.5%, if the annualized growth rates of the Russian economy stay around 1.5% (as adjusted for seasonality) in this period.”Source: Bulletin of the Department of Research and Forecasting of the Central Bank of Russia


05

InflationInflation, %

Forecasts for 2017:

Forecast:

Source 2017

International Monetary Fund 4.4%

World Bank 4.0%

VEB 3.6%

Bloomberg 4.3%

Inflation in August 2017*: 3.3%Inflation target** in 2017: 4.0%

*The inflation figure is the consumer price growth rate over the corresponding month of the previous year.**The inflation target is set for the consumer price growth rate over the corresponding month of the previous year (Central Bank).

14.0

12.0

10.0

8.0

6.0

4.0

2.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F* 2018F* 2019F*2020F*

9.0

13.3

8.8

8.8

6.1 6.66.5

12.9

12.2

5.44.0 4.0

4.03.8

4.0

5.8 5.6

Rosstat (Fact) Central Bank (*forecast) Ministry of Economic Development (*forecast)

11.9 11.4

“Our new inflation forecast for 2017 is 3.2%, we do not rule out that under a favorable scenario inflation may fall below 3%." Russia’s Minister for Economic Development Maxim Oreshkin

Period The Ministry of Economic

Development

Central Bank IEF RAS* Standard & Poors

Moody’s Eurocomission World Bank

International Monetary

Fund

JP Morgan

EBRD Gaidar Institute

Organisation for Economic Co-operation

and Development

2017 +2.1% +1.5% to +1.8% +1.5% +1.4% +1.5% +1.2% +1.3% +1.4% +1.1% +1.2% +1.3% +2.0%

2018 +2.1% + 1.0% to +1,5% +1.6% +1.7% +1.5% +1.4% +1.4% +1.4% n/a +1.4% +1.4% +2.0%

2019 +2.2% + 1.5% to +2.0% +2.4% +1.7% n/a n/a +1.4% n/a n/a n/a +1.4% n/a

*Russian Academy of Sciences Institute of Economic Forecasting


06

Trade structurePeriod January – July 2017

• Foreign trade turnover: USD$316.1 billion (+26.7 percent YoY)

• Trade balance: surplus of USD$72.0 billion (+USD$13.7 billion YoY)

• Exports: USD$194.1 billion (+26.1 percent YoY)

• Imports: USD$122.0 billion (+27.7 percent YoY)

Imports from non-CIS countries (period January - July 2017):

Source: Federal Customs Service

Percentage in Imports from non-CIS countries

In monetary terms YoY

In physical terms YoY

Categories

Textiles and footwear 6.0% 24.3% 18.0%

Metal products 5.9% 35.3% 59.9%

47.2% Flat iron non–alloy steel

97.4% Pipes

Chemical products 18.7% 19.1% 4.7%

13.0% Organic materials

18.5% Rubber

8.4% Plastics

5.9% Pharmaceuticals

7.4% Paint

Machinery and auto 50.5% 34.7% n/a

40.1% Ground transport

38.1% Mechanical equipment

25.3% Electrical equipment

20.7% Optical instruments and apparatus

–9.7% Passenger cars

43.3% Trucks

Food and raw materials for their production 12.0% 14.9% 8.2%

60.0% Milk

6.6% Citrus

13.2% Fish

Share of energy products in total exports to non-CIS/CIS countries (January 2006 – July 2017)

Source: Federal Customs ServicePercentage in Exports to non-CIS countries Percentage in Exports to CIS countries

80

70

60

50

40

30

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jul

32.6 33.939.5

54.2

42.3 43.6

55.3

40.947.0

53.0

35.5

62.0

66.666.473.0

69.673.472.772.4 74.5

70.868.070.3

44.0


07

Percentage in Imports from CIS countries



Categories (in physical terms YoY)

Energy products 4.6% 42.1% 10.2%


43.2% Pipes

59.1% Flat rolled products of iron or non–alloy steel


8.0% Inorganic chemistry

–11.0% Organic chemistry

8.5% Plastics


150.0% Railway equipment

–20.1% Optical instruments and apparatus

54.0% Ground transportation

53.1% Passenger cars

32.0% Trucks

Food and raw materials for their production 22.8% n/a –1.3%

–2.2% White sugar

–3.6% Milk

–6.2% Cheese and curd

8.4% Butter

16.4% Poultry meat

Textiles and footwear 7.1% 18.4% 30.5%


Imports from CIS countries (period January - July 2017):


08


Exports to non-CIS countries (period January - July 2017):

Percentage in exports to non-CIS countries



Categories

Energy products 66.6% 34.9% 3.7%

2.1% Crude oil

3.7% Diesel fuel

10.7% Coal

10.1% Natural gas

–5.7% Kerosene

–30.0% Motor gasoline

Metal products 9.9% 27.2% –3.7%

–11.5% Cast iron

8.3% Copper and copper alloys

–10.5% Aluminium


3.6% Ferroalloys

–4.1%Semi–finished products of iron or non–alloy steel

Chemical products 5.6% 9.3% –0.2%

14.5% Products of inorganic chemistry

33.6% Plastics

1.4% Rubber

Machinery and auto 4.8% –5.1% n/a

–18.0% Electrical equipment


91.4% Passenger cars

21.7% Optical instruments and apparatus

–28.0% Trucks


Timber, pulp and paper products 3.2% n/a 5.9%

13.0% Lumber

–3.0% Cellulose

–5.1% Rough wood

–0.9% Plywood


09

Exports to CIS countries (period January - July 2017):


Percentage in exports to CIS countries



Categories

Energy products 33.9% 23.7% –1.8%

–18.0% Raw oil

41.8% Oil products

84.7% Coal

–30.2% Electrical energy

4.5% Natural gas


9.8% Ferrous metals

87.8% Ferroalloys


43.6%Semi–finished products of iron or non–alloy steel


–18.4% Products of inorganic chemistry

–6.0% Pharmaceuticals

5.8% Products of organic chemistry

51.2% Fertilizers

11.0% Plastics



1.5% Passenger cars

26.8% Trucks

75.1% Ground transportation


34.0% Wheat

17.8% Fish

–21.6% Milk

–6.3% Cheese and curd

18.7% Sunflower oil

Timber, pulp and paper products 4.4% 23.2% 10.3%

6.6% Plywood

6.8% Lumber

6.7% Cellulose


10

EUR-RUB USD-RUB

EUR and USD vs. RUB, January 2014 – September 2017

Currency rate

USD-RUB forecasts (average per year)

EUR-RUB forecasts (average per year)

Ministry of Economic Development

Ministry of Finance

Gaidar Institute IEF RAS

2017 RUB 59.7 RUB 64.2 RUB 58.4 RUB 61.0

2018 RUB 64.7 RUB 68.7 RUB 59.4 RUB 62.2

2019 RUB 66.9 RUB 71.1 RUB 58.8 RUB 64.2

IEF RAS

2017 RUB 64.1

2018 RUB 68.2

2019 RUB 70.6

Source: Central Bank of Russia

100.00

80.00

60.00

40.00

20.00

0.00

72.12

Q3 2016 Q3 2016

64.61

Sep 2016

Sep 2016

72.3664.56

Q3 2017 Q3 2017

69.2959.02

–9%–4% –5% –11%

Sep 2017

Sep 2017

68.7957.74


1009080706050403020100

1-Ja

n-14

1-Fe

b-14

1-M

ar-1

41-

Apr

-14

1-M

ay-1

41-

Jun-

141-

Jul-1

41-

Aug-

141-

Sep-

141-

Oct

-14

1-N

ov-1

41-

Dec

-14

1-Ja

n-15

1-Fe

b-15

1-M

ar-1

51-

Apr

-15

1-M

ay-1

51-

Jun-

151-

Jul-1

51-

Aug-

151-

Sep-

151-

Oct

-15

1-N

ov-1

51-

Dec

-15

1-Ja

n-16

1-Fe

b-16

1-M

ar-1

61-

Apr

-16

1-M

ay-1

61-

Jun-

161-

Jul-1

61-

Aug-

161-

Sep-

161-

Oct

-16

1-N

ov-1

61-

Dec

-16

1-Ja

n-17

1-Fe

b-17

1-M

ar-1

71-

Apr

-17

1-M

ay-1

71-

Jun-

171-

Jul-1

71-

Aug-

171-

Sep-

17

Euro US dollar

Average 2014USD 38.6EUR 51.0



Average 9m 2017USD 58.3EUR 65.1


11

Central Bank of Russia key rate, %

Indexes (daily): January 2013 – September 2017

Russia's Credit Ratings

Central Bank key rate, Indexes and Credit Rating

Agency Rating Outlook Date

S&P BB+ Positive 15 Sep 2017

Moody's Ba1 Stable 17 Feb 2017

Fitch BBB- Positive 24 Sep 2017


1-Ja

n-14

1-Fe

b-14

1-M

ar-1

41-

Apr

-14

1-M

ay-1

41-

Jun-

141-

Jul-1

41-

Aug-

141-

Sep-

141-

Oct

-14

1-N

ov-1

41-

Dec

-14

1-Ja

n-15

1-Fe

b-15

1-M

ar-1

51-

Apr

-15

1-M

ay-1

51-

Jun-

151-

Jul-1

51-

Aug-

151-

Sep-

151-

Oct

-15

1-N

ov-1

51-

Dec

-15

1-Ja

n-16

1-Fe

b-16

1-M

ar-1

61-

Apr

-16

1-M

ay-1

61-

Jun-

161-

Jul-1

61-

Aug-

161-

Sep-

161-

Oct

-16

1-N

ov-1

61-

Dec

-16

1-Ja

n-17

1-Fe

b-17

1-M

ar-1

71-

Apr

-17

1-M

ay-1

71-

June

-17

1-Ju

l-17

1-Au

g-17

1-Se

p-17

1-O

ct-1

7

20.018.016.014.012.010.08.06.04.02.00

Source: Moscow ExchangeMICEX Index, RUB RTS Index, RUB

9.5 10.5

5.57.0 7.5 8.0

17.015.0

12.511.5 11.0 10.5 10.0 9.25

9.0 8.5

9.75

14.0

1-Ja

n-14

1-Fe

b-14

1-M

ar-1

41-

Apr

-14

1-M

ay-1

41-

Jun-

141-

Jul-1

41-

Aug-

141-

Sep-

141-

Oct

-14

1-N

ov-1

41-

Dec

-14

1-Ja

n-15

1-Fe

b-15

1-M

ar-1

51-

Apr

-15

1-M

ay-1

51-

Jun-

151-

Jul-1

51-

Aug-

151-

Sep-

151-

Oct

-15

1-N

ov-1

51-

Dec

-15

1-Ja

n-16

1-Fe

b-16

1-M

ar-1

61-

Apr

-16

1-M

ay-1

61-

Jun-

161-

Jul-1

61-

Aug-

161-

Sep-

161-

Oct

-16

1-N

ov-1

61-

Dec

-16

1-Ja

n-17

1-Fe

b-17

1-M

ar-1

71-

Apr

-17

1-M

ay-1

71-

June

-17

1-Ju

l-17

1-Au

g-17

1-Se

p-17

1-O

ct-1

7

25002300210019001700150013001100900700500

Fitch has upgraded Russian long-term foreign and local currency IDRs from stable to positive.”Russia continues to make progress in strengthening its policy framework underpinned by a more flexible exchange rate, strong commitment to inflation targeting and a prudent fiscal strategy, reflected in the recently approved budget rule.” Fitch credit agency.

The Central Bank of Russia reduced the interest rate to 8.5%“Despite the negative impact on the Russian economy produced by external factors, we have prepared all the tools which will help us remain financially sound.” Governor of the Central Bank of Russia Elvira Nabiullina


12

Top-pricing (nickel, gold, aluminium)

Nickel forecast:

Source 2017

Goldman Sachs USD 9,000

Morgan Stanley USD 10,145

World Bank USD 11,000

IMF USD 10,954

Source: Finam Holdings

2,300

2,100

1,900

1,700

1,500

1,300

1,100

900

Gold and aluminium

Gold, COMEX, USD/t oz Aluminium, LME, USD/t

1,706

1,246

1,329

1,2851,289

1,251

1,3281,284

1,2881,207

1,1741,151

1,7541,784

1,8001,829

1,8911,988

2,097

1,950

2,0372,014

1,8531,864

1,8151,785

1,920

1,7401,691

1,6201,605

1,5721,481

1,449

1,5011,572

1,521

1,672

1,557

1,6261,640 1,615

1,6731,737

1,277

1,731

1,177

1,688

1,9611,918

1,9311,923 1,918

2,1282,160

1,9211,821

1,1521,211

1,2451,252

1,2651,271

1,2411,276

1,325 1,3011,515

1,1831,284

1,2141,187

1,1821,192

1,1741,095

1,1421,114

1,142

1,071 1,0611,122

1,2451,233

1,295

1,2171,323

1,357

1,313

1,319

Maximum for the period

Minimum for the period

Nickel

21,000

19,000

17,000

15,000

13,000

11,000

9,000

7,000

Maximum for the period

12-year minimum

13,98014,677

15,911

18,325

19,25019,040

18,50518,800

16,26515,740

16,275

15,15015,165

14,095

12,395

13,950

12,60012,015

11,040

10,06010,330

10,045

8,8558,820

8,6108,530

8,495

9,425

8,4659,315

10,635

9,770

10,515

Nickel, LME, USD/t Source: Finam Holdings

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug-

14Se

p-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15Fe

b-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

n-15

Jul-1

5Au

g-15

Sep-

15O

ct-1

5N

ov-1

5D

ec-1

5Ja

n-16

Feb-

16M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6Au

g-16

Sep-

16O

ct-1

6N

ov-1

6D

ec-1

6Ja

n-17

Feb-

17M

ar-1

7A

pr-1

7M

ay-1

7Ju

n-17

Jul-1

7 Au

g-17

Sep-

17

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug-

14Se

p-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15Fe

b-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

n-15

Jul-1

5Au

g-15

Sep-

15O

ct-1

5N

ov-1

5D

ec-1

5Ja

n-16

Feb-

16M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6Au

g-16

Sep-

16O

ct-1

6N

ov-1

6D

ec-1

6Ja

n-17

Feb-

17M

ar-1

7A

pr-1

7M

ay-1

7Ju

n-17

Jul-1

7 Au

g-17

Sep-

17

10,425

11,17010,055

9,965 9,455

8,9509,375

10,220

11,79510,63510,960

10,020

“We now expect that nickel prices will remain trading at very low levels through 2017 and much of 2018 until a substantial supply response both in China and outside of China eradicates our forecast surplus of 37,000 tonnes in 2017 and circa 100,000 tonnes in 2018.”Source: Goldman Sachs


13

Source 2017 2018

Morgan Stanley USD 1,243 USD 1,250

World Bank USD 1,225 USD 1,206

Goldman Sachs Group USD 1,227 USD 1,250

Credit Suisse USD 1,323 USD 1,375

Oxford Economics USD 1,250 USD 1,265

Source 2017 2018

Goldman Sachs Group USD 1,942 USD 1,950

World Bank USD 1,800 USD 1,828

Morgan Stanley USD 1,808 USD 1,852

IMF USD 1,893 USD 1,928

Oxford Economics USD 1,700 USD 1,766

Gold forecasts:

Aluminium forecasts:

Source: Financial Times

”Aluminium has emerged as the best performing industrial metal of 2017, as growing confidence that China will take steps to end a supply glut pushes prices to their highest levels in almost three years. Since the financial crisis, a supply glut has cast a shadow on the market as Chinese producers have spent billions investing in new capacity and the latest smelting technology. Now, after tackling excess capacity in coal and steel industries, there are signs Chinese authorities are turning their focus to the lightweight metal.”


14

Natural gas forecasts:

Crude oil forecasts:

Source 2017 2018 2019

U.S. Energy Information Administration USD 51.07 USD 51.58 n/a

World Bank USD 55 USD 60 USD 61.5

Central Bank of the Russian Federation (Urals) USD 50 USD 44 USD 42

Ministry of Economic Development (Urals) USD 49 USD 41 USD 41 – 43

Standard & Poors USD 50 USD 50 USD 55

IMF USD 55.2 USD 55.1 USD 50.3

European Central Bank USD 51.6 USD 51.4 n/a

Goldman Sachs USD 55.39 USD 58 n/a

IEF RAS USD 53 USD 55 USD 57

JPMorgan USD 55.78 USD 45 n/a

Top-pricing (oil, gas)

Source 2017 2018

World Bank USD 3 USD 3.5

EIU USD 2.7 USD 3.3

Goldman Sachs USD 3.11 USD 3

120

110

100

90

80

70

60

50

40

30

20

10

0

6

5

4

3

2

1

Brent oil, natural gasMaximum for the period

Minimum for the period

Source: Finam Holdings Natural gas, NYMEX, USD/mmbtu Brent crude oil, ICE, USD/bbl

4.9

4.6

4.4

4.84.6

4.4

3.8

4.0 4.1

3.9

4.0

2.7 2.7 2.7 2.72.5

2.32.3

2.4

1.7

2.7

2.6

2.72.82.9

106

2.02.1

2.3

3.0

2.8

3.0

3.3

2.92.9

3.2

2.2

109108 108

109112

68

53

62

55

6765

63

5248

50

45

38 36 3740

47 50 50 5043 49

4752

57 55 56 54 52 514953 53 57

53

106103

95

86

58

2.8

3.23.3

3.1 3.0 3.0 3.02.9

3.7

Jan-

14Fe

b-14

Mar

-14

Apr

-14

May

-14

Jun-

14Ju

l-14

Aug-

14Se

p-14

Oct

-14

Nov

-14

Dec

-14

Jan-

15Fe

b-15

Mar

-15

Apr

-15

May

-15

Jun-

15Ju

n-15

Jul-1

5Au

g-15

Sep-

15O

ct-1

5N

ov-1

5D

ec-1

5Ja

n-16

Feb-

16M

ar-1

6A

pr-1

6M

ay-1

6Ju

n-16

Jul-1

6Au

g-16

Sep-

16O

ct-1

6N

ov-1

6D

ec-1

6Ja

n-17

Feb-

17M

ar-1

7A

pr-1

7M

ay-1

7Ju

n-17

Jul-1

7 Au

g-17

Sep-

17


1515


Russia through a lens | Research Centre market analysis

16

Research Centre market analysisCurrent state and outlook for the manufacturing sector

The Russian manufacturing sector saw signs of improvement and strengthening optimism in 2017.

Current state

Outlook

For the first time in three years, the perception of the current state of the industry is dominated by positive estimates (the net balance grew from 0 to +8 percent).

The share of respondents who are optimistic about the current situation in their business retains the leading position (82 percent), however their outlooks appear to be rather tempered compared to the previous year (the net balance decreased from 76 percent to 65 percent).

The share of pessimistic views on the outlook for the industry decreased by 10 percentage points (the net balance grew from +13 to +26 percent).

The optimism of manufacturers with respect to the prospects for their businesses has an almost triple increase (the net balance grew from 16 to 44 percent).

+8% +65%

+26% +44%

0% +76%

+13% +16%


17

As in 2016 the views of the manufacturing sector players remain diverse, however the last year’s trend is accompanied by a seismic shift in the sentiments of certain subgroups of companies.

The last year saw a deterioration of the sentiment in the chemicals industry (the share of negative assessments of the industry’s current conditions 16 percentage points above the average).

The steel, automotive, aircraft and ship manufacturers are more optimistic about the overall situation (the share of negative assessments of the industry’s current conditions is 17 percentage points above the average).

Over the past year, the share of optimistically disposed foreign companies and large businesses has doubled (up to 58 and 60 percent, respectively).

For the second consecutive year industrial equipment producers retain the negative views on the overall situation and in the outlook for the industry.

Trend

Highlights


18

Over the past year, the industry and the businesses were influenced mainly by external factors: currency fluctuations, production capacities of other countries, availability of external investments, etc.

Top factors impacting businesses:

Ruble appreciation:

• 31 percent of chemicals producers noted negative impact of the Ruble appreciation on their businesses;

• 86 percent of automotive, aircraft and ship manufacturers, as well as

• 83 percent of foreign companies mentioned positive impact of the Ruble appreciation.

Ferrous metals production slowdown in China:31 percent of metallurgical companies speak of the competition from the Chinese companies and the negative impact of the Chinese production development on their businesses.

The surge in global metal prices:The period from Q1 2016 to Q1 2017, saw boosting prices across many of the base metals for the Russian economy, in particular (in U.S. dollar terms):

• steel: + 65 percent;

• aluminum: + 15 percent;

• copper: + 12 percent;

• zinc: + 35 percent.

Investment programs shutdown:Industrial equipment manufacturers suffer the overall reduction in investment allocated to the purchase of machinery and equipment (over the past two years, the share of investment has decreased by 25 percent *).

Interest for public funding:79 percent of the respondents show their interest for this source of capital.

* Adjusted for inflation

Trend

Highlights

Factors impacting businesses in the manufacturing sector in 2017


19

Lower administrative barriers

Lower geopolitical risks

Lower currency risks

Government support

Transparency and stability of regulatory, tax and economic policies

Reduced production costs

Increased demand in Russia

Extended production and technological capacities

Lower administrative barriers

Product line extension

In 2017 the industry and the businesses are becoming more independent of macroeconomic environment. The analysis of the companies’ expectations shows that the market participants see a greater stimuli for development directly in enhancing the efficiency of internal business processes.

Top-5 factors stimulating market development in 2017:

Top-5 drivers of company development in 2017:

Drivers of competitiveness in the manufacturing sector in 2017

change in the importance

+ 14 pp for the year


+ 8 pp for the year


+ 4 pp for the year


– 11 pp for the year


– 12 pp for the year


+ 4 pp for the year

Trend

Highlights


20

The concern of the manufacturers is shifting towards the efficiency of the government regulation and the purchasing power of the population, which reaffirms the general trend for market recovery.

Most important issues in the manufacturing sector in 2017

Shortcomings of government regulation

Corruption

Insufficient purchasing power of households

Geopolitical risks

Currency risks

Despite the reduced concern over the exchange rate volatility, the currency risks continue to influence businesses: 40 percent the respondents cited that the Ruble devaluation triggered an increase in the cost of their products, and only 14-15 percent of

the respondents indicated that the weakening of the domestic currency increased their competitiveness in domestic or foreign markets (mainly chemical companies and industrial equipment manufacturers; 31 and 33 percent, respectively).

Increased importance (top-3 issues): Decreased importance:

+ 16 pp – 21 pp

+ 18 pp

+ 9 pp– 10 pp

Trend

Highlights


21

An increased concern of the manufacturers in 2017 is with the following aspects of their businesses:

• supplier relationship

• talent

• energy efficiency

Other issues in the manufacturing sector in 2017

The key energy efficiency issues:

• high energy tariff rates in Russia (79 percent)

• The chemical industry displays certain characteristics: 31 percent of the respondents indicated a lack of the energy infrastructure quality in Russia (lack of production capacities).

Key supplier relationship issues:

• established price level

• pricing flexibility

• delivery terms

• quality of delivered components and raw materials

Key staffing issues:

• lack of staff: – 17 percent of the replies indicated a lack of production staff.

– 26 percent of the replies indicated a lack of automation staff.

• lack of qualified staff: – 35 percent of the respondents are indicated a lack of quality talent in optimization and automation staff.

Notably, the identified issue hinders the production intensification and advanced technology implementation.

The lowest satisfaction with talent was reported in the chemical, automotive, aircraft and ship manufacturing industries. The average age of production professionals in the chemical segment is five years higher than the industry average.

Trend

Highlights


22

The priority business strategies in 2017 reaffirm the general trend for the manufacturing sector recovery:

• entry onto new markets (81 percent)

• bringing new products to the market (77 percent)

However, the so called anti-crisis campaigns (e.g. on cost reduction in Russia) have decreased in relevance (by 11 percentage points).

Priority business strategies in the manufacturing sector in 2017

Top-5 priority growth strategies for companies in 2017:

The effect of import substitution policies:

Since 2016 manufacturers are actively implementing a strategy to reduce the imports share (59 percent), with 41 percent of companies having similar plans for the next year.

Trend

Highlights

Entry onto new markets

Bringing new products to the market

Enhancing the production and technology potential

Business development through organic growth

Replacement of imported products in the local market

The key reason for a decreased share of imports in the procurement structure stems from the increase in prices for foreign products as a result of the weaker Rouble. However, the results of our survey revealed that 20-24 percent of the respondents eliminated import products from their structures indicating higher quality and lower prices for Russian products.


23

The manufacturers have noted an increased interest for the following strategic plans in 2017:

• Changes in strategies for working with suppliers

• Changes in personnel policy

• Energy efficiency strategies

Strategies for working with suppliers:While in the last year the most common strategy was to change suppliers without increasing their number, this year the manufacturers have announced strategies for their suppliers’ networks expansion (with 41 percent of the respondents in the process of the strategy implementation and 47 percent planning the implementation in 2017).

Changes in personnel policy:56-58 percent of the respondents plan to introduce changes to their personnel policies in 2017. It should be noted that the absolute majority of the respondents intend to increase the pay level, while half of the companies surveyed plan to reduce headcount.

On average, the planned changes in the pay level and headcount do not exceed 5%.

Notably, foreign companies expect to increase both their headcount and average pay for all employee categories mentioned, particularly for optimization professionals (+7 and +7 percentage points, respectively).

74 percent of the respondents note the need for automating HR management processes, however only half of those companies have estimated the respective costs.

Over the past year, the share of companies concerned about the energy efficiency has increased by 9 percentage points. 77 percent of the companies surveyed have planned the relevant measures. The highest priority is placed on such measures as the intensification of technological processes, the introduction of advanced energy-saving technologies and the prevention of direct energy losses.

Trend

Highlights

Other business strategies in the manufacturing sector in 2017


24

In 2017 the respondents pointed to the attractiveness of financing through government investment.

In 2016, the business was focused on a single source of capital (own resources). Today, however, the companies are more disposed to external investments.

69 percent of the companiessurveyed stated their intentionto attract external investment.

Such plans quite often include several sources of capital:

• Government investment (57 percent of the respondents)

• Russian private investment (50 percent of the respondents)

• Foreign private investment (38 percent of the respondents)

Most respondents (58 percent) have experience in raising foreign investment.

Notably, the majority of them (63 percent) indicate positive non-financial results from such cooperation.

65 percent of companies surveyed, have recognized the importance loan refinancing for their businesses.

Trend

Highlights

Sources of capital in the manufacturing sector in 2017

‘‘Despite the fact that attracting government investments is associated with a whole range of difficulties, they are often provided on more favorable conditions than those available on the market.’’Srbuhi Hakobyan Partner, Deloitte CIS


25

2016 is characterized by a stronger loyalty of the business to government efforts.

It is noteworthy that positive impact of the state support of innovation is rated the highest.

The integrated assessment of the government support for business and development of the Russian manufacturing industry has increased by 0.2 points from 2016 and scored 1.7 at the three-point scale, indicating an average satisfaction of the business with government efforts.

Top-3 forms of government support for manufacturing companies in Russia:

• Public procurement orders

• Tax and other financial incentives

• Investment in physical infrastructure

Notably, in 2017 two times as many businesses expressed their interest for public procurement orders on their products (by 17 percentage points).

Among other government measures, the state support of innovation receives the most positive views: +26 percent.

At the same time, the energy policy, energy tariffs in particular, is seen as negative: –25 percent.

Trend

Highlights

Efficiency of the government regulation in the manufacturing sector in 2017

‘‘In the face of unfavorable market environment, the manufacturers are not willing to adopt transformative measures to increase efficiency, but rather rely on the government support.’’Srbuhi Hakobyan Partner, Deloitte CIS


26

94 percent* of the surveyed CFOs of leading manufacturing companies in Russia stated the need enhancing the economic efficiency of business functions through automation of the key business processes.

72 percent* of the surveyed CFOs of leading manufacturing companies in Russia stated that they take part in the evaluation of new technology solutions and launch of innovative projects in their companies.

Over the past year, the average revenues spent on innovation and digital solutions grew by 0.5 percent to 9 percent, which in turn confirms the global trend of growing interest of manufacturers for technological innovation and new digital solutions.

Notably, foreign companies spend on innovation almost 1.5 times the share of innovation spending in Russian companies (12 versus 8 percent).

The top requested innovations: introduction of advanced production technologies (43 percent) and launch of technically new or advanced products (31 percent).

Top-5 technologies that are implemented/ planned for implementation in the near future:

• Electronic document management (EDF) (83 percent)

• Energy saving technology (72 percent)

• Full automation of selected business processes (69 percent)

• Full automation of business process chain (63 percent)

• Advanced ERP systems (57 percent)

Key reasons for non-use/limited use of EDF:

• Impracticality of paper flow dismissal

• Lack of resources (human, financial, qualification)

• Risks and concerns regarding the loss of documents translated into electronic form

Trend

Highlights

Innovations and digitalization of today in the manufacturing sector

* Based on the results of the CFO Survey (first half of 2017)


27

Increased manufacturing innovation activity across a variety of operations

A shift in attitude towards innovation activities

A greater automation in the manufacturing industry by 2018

51 percent of the respondents plan to acquire advanced equipment

44 percent are focused on R&D activities

37 percent indicate the relevance of marketing research

A growth in demand for marketing research and digital solutions (by 7-9 percentage points)

Almost half of the companies surveyed plan to introduce the full automation of some business processes and business process chains (47 and 44 percent, respectively).

Trend

Highlights

Innovations and digitalization of tomorrow in the manufacturing sector


28

Trend

Highlights

Innovations and digitalization of tomorrow in the manufacturing sector

In 2017 the development of innovation and digitalization in the manufacturing sector will be hindered mostly by internal constraints, while external factors will have a greater boosting effect.

In 2017 (and roughly in the next two years) the main constraints for the digital strategy implementation in manufacturing companies will be the organizational structure and staffing (as indicated by 82 and 76 percent of the

At the same time, the key drivers for digital strategy implementation in manufacturing companies are the market and the competition, which reaffirms the recovery processes in the economy (both in Russia and globally) and the natural demand for innovations and digital developments.

respondents, respectively), while only a year ago the manufacturers spoke about the greater importance of the overall economic situation in Russia and in the world.

Potential leadership of the manufacturing sector in terms of sophistication of implemented technologies (compared to other Russian economy sectors)

Manufacturers plan to introduce more sophisticated technological solutions in the near future.

At present, the technology, media and telecommunications (TMT) sector is leading in terms of sophistication of implemented technologies.


29


30

Decrease in media usage* over 2015-2017

Share of users in 2016 and 2017:

Russian youngsters aged 16–19 have become more active readers

2016 2017

Top three media sources

Top three information sources as ranked by trust

Growth in media usage* over 2015-2017

St. Petersburg dwellers show a higher preference for E-inks, rather than printing inks

2016 2017

Russians with children have become more active cinemagoers

2016 2017

electronic books 24% 35%

printed books 29% 42%

Internet (news, analysis and official websites)

TV

Internet (social media and blogs)

News, analysis and official websites

TV

Social networks and blogs

Internet +66%

Electronic books +29%

Printed media -22%

Printed books -18%

electronic books 46% 37%

printed books 41% 63%

cinema 37% 43%

PATTERNS IDENTIFIED IN 2017

TRUST IN THE MASS MEDIA

CHANGES IN MEDIA USAGE*

In 2015-2017, average media usage remained at 55%

Overall, media usage* slowed downFrom 8% down to 5% over 2015-2017

Media consumption patterns

Media sources

Media consumption developments

Media consumption in Russia – 2017

* Based on the media usage index [proportion of those who indicated higher usage minus the proportion of those who indicated lower usage]

72%

65%

31%

40%

30%

11%

Up 9 pp – Growth in content consumption offered by news, analytical research and official websites

From 32% to 80% – Growth in the importance of TV as a media source (the importance tends to grow with the age of respondents)

70% – Key source of information for Russians aged 16–24

Up 5 pp - Annual growth in trust

Trust is 16 pp weaker among students and 7 pp stronger among pensioners

Trust is twice as high among Russians aged 16–24


31

Proportion of early adopters*** 10% 0%

19% 35%

Mobile devices going smarter*

2016 2017

The age categories demonstrating the strongest growth in smartphone usage*:

2016 2017

Growth in the usage of the functionality offered by smartphones

Smartphone 77% 83%

Mobile phone 57% 47% 16 to 19 years 70% 92%

>65 years 35% 54%

Mobile calls +24%

Messengers +24%

Social network apps +14%

Internet calls +5%

MOBILE DEVICES

MOST COMMONLY USED SMARTPHONE FEATURES

ATTITUDES TOWARDS NEW DEVICES AND GADGETS

AGE CATEGORIES

Technology dimension

*Based on the usage index: [proportion of those who own and use a device minus proportion of those who own a device without using it]** The feature usage index: [proportion of those who have indicated a more frequent use minus the proportion of those who have indicated a less frequent use]***Consumers who purchase new gadgets as soon as these appear on the market

Share of people who pick up the best technology products as they appear on the market

Russian youngsters aged 16 – 19 have grown more careful in selecting new gadgets

2016 2017Usage index**


32

TOP-5 PRODUCT TOP-5 ONLINE ADVERTISING

2017 saw online purchases grow by 6 pp

General advertising tolerance among Russians has remained the same over the last two years: –7%

Online purchases

Advertising

Top-5 product categories purchased online* Top-5 online advertising sources

Video games, films and software 39%

Electronics 22%

Home appliances 18%

Clothes 16%

Products and toys for children 14%

Yandex 48%

VKontakte 33%

Google 28%

Avito 25%

Odnoklassniki 15%

Click-through rate

Index annual change* by category

Outdoor advertising +4 pp

TV +6 pp

Internet –9 pp

A decrease in perceived usefulness of advertising creates a major barrier to the awareness of advertising **, with the usefulness index down 8 pp over the last two years.

• Overall, perceived usefulness and tolerance for online advertising is down 35 pp and 14 pp over two years, respectively, with 30% of Russians using ad blocking apps and another 13% planning to do so.

• Mobile, e-mail and phone advertisings receive the most negative perception, with the tolerance and usefulness index 8 times lower than average.

• According to youngsters aged 16–19, advertising usefulness on social networks is 4 times higher than average.

*According to the advertising tolerance index: [proportion of those favouring advertising minus the proportion of those who disapprove]** Perceived advertising usefulness: [proportion of those who found useful information in advertisements minus the proportion of those who did not find such].

The news about Telegram facing a blocking in Russia has resulted in Russians starting to use this messenger more actively, up 9%.

*proportion of the respondents who generally shop online as regards the product categories above


33

MEDIA CONSUMPTION ADVERTISING

42% Russians followed the 2017FIFA Confederations Cup

Brand advertising during the 2017 FIFA Confederations Cup could potentially increase brand awareness* by almost 25%.

The overall advertising awareness index** for sporting events is 41%.

2017 FIFA Confederations Cup

Their media consumption for this period increased 2-fold:

TV +52%

Internet +31%

Radio +8%

Outdoor advertising on stadium premises and outside the premises 60%

Advertising on stadium display boards during halftime 56%

Advertising in dedicated mobile apps 49%

Advertising at sports clubs/bars and as part of non-sporting events 48%

*Based on the condition that a county-wide brand awareness does not exceed 65%.** The advertising awareness index: [proportion of those who noted ads minus the proportion of those who paid no attention]


34

Tax function’s role in a company

Tax functions in leading Russian companies in 2017

The level of formalization of tax function purposes in Russian companies is 0.33 out of 1.

• 22 percent of the companies surveyed have formulated and officially documented the purposes of their tax functions. 55 percent have formulated these purposes but have not documented them.

• The top 4 purposes cited include tax reporting, tax optimization, mitigation of tax risks and tax planning.

Tax function processes are formalized by 42 percent (on the scale of 0 to 100 percent).

• The majority of the companies told us they had formalized tax accounting and tax ledger preparation (87 and 76 percent respectively).

The level of interaction between tax and other functions in the companies surveyed is 0.78 out of 1.

• 67 percent of the companies said they had a well-functioning interaction in place.

• Tax professionals are most likely to be involved when a non-standard transaction is being planned (65 percent).

• Only 9 percent of the respondents indicated that each tax function in their organization had its own distinct regulations.

A hierarchy of purposes demonstrates that Russian companies have a natural tendency to first and foremost comply with legislative requirements and protect themselves from challenges by tax authorities.

Deloitte comment:We can acknowledge that the formalization level of tax processes (apart from the simplest ones such as tax accounting and tax reporting) remains relatively low. This correlates with the Key findings above and reaffirms that companies primarily strive to comply with formal legal requirements.

Deloitte comment:One in three companies has hidden tax risks associated with its transactions. However, research findings show that businesses acknowledge the high relevance of the existing risks and/or take measures to identify them accurately and in a timely manner.

Deloitte comment:

Tax function: a snapshot from 2017

• Almost half of the companies surveyed (47 percent) have dedicated employees/department in charge of the tax accounting methodology. Further 10 percent are planning to assign such an employee/ department in the near future.

Deloitte comment:It is very telling that the majority of our respondents say they lack dedicated specialists in charge of the tax function methodology in their organization.

• More than two thirds of the companies (68 percent) undertake the following activities: maintain and update a list of tax risks, maintain and update a list of tax reserves/unused tax benefits and analyze the effective tax rate and identify opportunities to reduce it (70, 67 and 68 percent, respectively).

The lack of such professionals in the companies surveyed confirms our earlier supposition that businesses do not pay adequate attention to tax risks. This, in turn, contradicts their own stated goals in our report (compliance with tax legislation and the like). In addition,

• The majority of the companies believe they need to improve their IT systems (71 percent), the efficiency of their tax processes (65 percent) and their tax methodologies (52 percent).

respondents acknowledge they do not always have a developed methodology in place and emphasize their commitment to improve their IT systems. If companies do implement and start using new IT systems, such conditions (i.e. underdeveloped tax methodology and processes) may negatively affect the efficiency of their tax functions.


35

The level of tax process automation in the companies surveyed is 0.60 out of 1.

The level of tax control automation in the companies surveyed is 0.41 out of 1.

• 9 percent of the companies assess their automation level as ‘high’ and 37 percent as ‘medium’;

• The highest automation levels are demonstrated by the TMT sector (0.56).

• The most popular accounting systems

Deloitte comment:Counterparty reconciliation tends to be the most automated process, with 39 percent of the respondents saying they have fully or partially automated this task. We believe this may be due to a decrease in the number of reliable counterparties after 2014.

Lower automation levels are generally observed for pricing management and control and control of income tax compliance of CFCs, even though these processes are very important for businesses.

include 1С (for tax accounting) and Contour (for tax reporting), as cited by 66 and 60 percent of the respondents, respectively

• Companies with revenues between RUB 10 and RUB 50 billion (44 percent of the respondents) tend to use 1C less.

• 56 percent updated their accounting systems in 2014 or later, with two thirds of them saying they did it last year

• 17 percent of the companies use process control systems (to control data collection from subsidiaries, ensure timely filing of tax returns etc.). This share is set to almost double to 33 percent in the near future

Overall, existing tax process automation levels in Russian companies are rather low. This is due to both internal factors such as organizational structure and management and external factors such as rapid changes in the regulatory environment.

Deloitte comment:It is quite natural that local products such as 1C and Contour are popular in Russia, especially given the general trends of cost reduction and import substitution. These solutions have enough functionality to enable full-scale accounting and reporting.

Accounting system and automation


36

Formalization of EDM processes is 0.64 out of 1

• Over 50 percent of the companies surveyed believe they have a medium level of EDM formalization (regulation)

• The overall automation level is above average but there are still areas for improvement

• The highest level of EDM formalization is demonstrated by the real estate sector (0.83), and the lowest one by the consumer sector (0.55)

Deloitte comment:This suggests that despite their efforts to develop internal EDM regulations, document EDM procedures, raise EDM awareness of their employees and other similar activities, companies believe that they are not investing enough time to them.

The overall EDM maturity level is 11 out of 70

• Use of the EDM technology depends on a company’s size

• Somewhat greater EDM maturity levels are observed among pharmaceutical and telecommunication companies (a score of 22 and 23 respectively)

Deloitte comment:This suggests that companies are still inexperienced when it comes to using paperless technology. Their hands-on experience with EDM is limited to the number of their business processes already using EDM or the types of documents maintained electronically, or the number of document flow areas that have gone paperless.

Electronic document management (EDM)

EDM usage by the respondents

• EDM has been adopted by 53 percent of the companies surveyed

• Paperless technology is most often used by the consumer sector (73 percent) and is least popular with the pharmaceutical industry (25 percent).

• The top-three types of paperless documents are: – Source accounting documents (69 percent)

– Bank documents (44 percent) – Internal documents (21 percent).

Deloitte comment:The share of companies using EDM solutions will likely increase significantly (almost by half), so we may confidently say that EDM has a future in Russia.

• The majority of companies surveyed (72 percent) transfer electronic documents to government agencies upon request, using telecom channels. 44 percent of them use telecom channels to send soft copies (images) of e-documents electronically signed by the company

• However, a significant share of respondents (44 percent) submit both hard copies and soft copies (images) signed by the company

• Only 5 percent of the respondents submit electronic documents only.

Based on our research findings and own experience, we may add that cross-border EDM looks very promising in the nearest future across the Eurasian Union as well as in other countries. Paperless can be also expanded to include shipping documents, HR documents etc.


37

Human capital

• Companies have an average of five people in charge of tax matters. – This figure is higher in the FSI and TMT sectors (more than six and seven people respectively);

• The three areas with the highest average number of employees: – Assistance during field and desk tax audits (2.4 scores);

– Communication with tax authorities, auditors and consultants (2.1 scores);

– Identification and analysis of tax risks, issue of risk mitigation recommendations, development of action plan to improve tax efficiency (2.1 scores).

Deloitte comment:On average, tax functions have five employees. At first glance, one might think this is inconsistent with the reported allocation of designated individuals across various departments and processes. However, the figure above merely indicates that not all tax function employees are involved at this stage or, alternatively, this stage may involve employees from other functions. This emphasizes the importance of efficient time management and adequacy of current employees’ capabilities to support in-house tax functions.

• Almost half of the companies surveyed (47 percent) conduct trainings for their tax professionals several times a year. – The CBT companies provide the most frequent training for their employees: 63 percent of them train employees several times a year.

• One in five companies (21 percent) performs regular performance assessments of their tax professionals. – The CBT companies do it more often than the rest (32 percent).

• 85 percent of the respondents do not have tax-efficiency based incentives for their tax professionals, and 90 percent of them do not even intend to introduce them.

The incentive schemes in place are consistent with the levels of purposes formalization. These aspects are clearly interrelated: no purposes, no motivation. However, companies need to rethink their current approaches used to motivate employees and formalize tax function purposes.


38

The concept of “tax risk” is formalized by 38 percent (out of 100%)

• At present, most companies (69 percent) have developed some definition of tax risk.

The concept of “tax risk measurement criteria” is formalized by 14 percent (on the scale of -100% to 100%)

• Over a half of the companies surveyed (57 percent) have defined this concept and 43 percent have not done so, which is a large share as well.

Deloitte comment:We believe it is very important that almost a third of the companies surveyed have not developed a definition of tax risk and about half have not determined any criteria for assessing tax risks. This means companies can handle (i.e. identify and manage) tax risks solely based on the methodologies and reports in place. These, however, are not enough for other business areas (e.g. tax expertise is not leveraged adequately during transaction process and other business activities).

The concept of “decision-making procedure” is formalized by -4% (on the scale of -100% to 100%)

• Almost half of companies (48 percent) have given some definition to a decision-making procedure.

• Decision-making on transaction acceptability

• 66 percent of companies have a division/employee/department in charge of tax risks

• 26 percent have assigned tax risk management to the head of the tax department and further 21 percent – to a dedicated employee of the tax department

• 16 percent of respondents have already formalized their tax risk management frameworks and this share may more than double to 38 percent in the nearest future

Therefore, companies might be unable to achieve their core objectives associated with tax liability management and tax compliance.

Automated methodology updates in accordance with the Russian and international legislation create an advantage. Where this is not possible, the task is performed manually. If a rather big company processes data manually, this creates discomfort for the management, slows up managerial decision-making, and sometimes leads to poor decisions and inaccurate tax assessments.

Overall, we find tax processes rather underformalized, which prevents the companies surveyed from efficient identification and management of tax risks..

Controls and risks


39


40

Blockchain in a nutshellWhat is it?Blockchain is a protocol for keeping records on data transferred between users who interact, transact or partner within a given system.

What are Blockchain features?Openness Transparency Reliability

Security

Speed

With Blockchain, information on each transaction in the system is kept by each user participating in the system (decentralisation)

Security is ensured by cryptographic algorithms (hash functions), some of which were initially used by intelligence services

Speed is achieved due to automatic authentication of each user on the system

A hash function is used to map data of arbitrary size to data of fixed size

Application Blockchain technology is part of the digital transformation that is affecting businesses, households and the economy as a whole. To fully benefit from this technology, one must have deep understanding of its practical scope, potential organisational changes to the target environment and parallel integration of other digital components such as cloud, big data, IoT etc. Blockchain offers broad application range, running across all industries and functions.

• Fewer intermediaries

• Cheaper processes

• Transparency

• Better efficiency

• Stronger security

• Broader automation

• Faster operations

• Investment mechanism

A legal entity

Blockchain expertise

Structure of the environment

Technologies for the environment

An individual Government


41

Cryptocurrency A cryptocurrency is a financial instrument with real market value. It is based on the Blockchain protocol and created by solving cryptographic algorithms (i.e. mining).

Capitalisation of cryptocurrencies*, USD bln

ICO An initial coin offering (ICO) is a method to raise money for projects and start-ups by releasing and selling new cryptocurrencies to investors. It is a form of crowdfunding based on Blockchain, with cryptocurrencies largely resembling bonds.

Top 10 ICOs by funds raised, USD mln

Mining Mining is a process of solving cryptographic algorithms using the processing capacities of specially-built devices to maintain the cryptocurrency network. The mining process enables the processing of transactions and the release of new coins. It also ensures decentralisation and protects the network from external attacks.

Government regulation of cryptocurrencies is still emerging. However, most countries are working on implementing or developing some form of regulation. Japan is the first and only country that recognised cryptocurrencies (CC) as monetary units. In most other countries, regulators treat CC as financial instruments, while some countries (e.g. the United States) tax income that arises from transactions involving CC.

137

48%

20%

14%

18%

BitcoinEthereumBitcoin CashRippleLitecoinDashNEMIOTAOther

252

230

200

153

150

108

83

55

53

36

Filecoin

Tezos

EOS

The Bancor Protocol

The DAO

Status

TenX

SALT

MobileGo

Monetha

Cloud technology

Protocol

Protocol

Protocol

Venture investment

Browser, messenger and crypto wallet

Crypto wallet

Loans

Platform for mobile games and in-app purchases

Payment system

Source: Coin Dance Statistic, Axon Partners, Tokendata*Actual for September, 20 2017


42

Top 5 M&As*

Target company Industry Bidder company Seller company Deal value (USD, mln)

Additional information

Yandex, N.V.; Uber Technologies, Inc.

Ridesharing, food delivery and related logistics businesses

Yandex, N.V./Uber Technologies, Inc. joint venture

Yandex, N.V.; Uber Technologies, Inc.

1363 Yandex, N.V. and Uber Technologies, Inc. have agreed to form a joint venture by combining their ridesharing business.

PIK Group (20.12% Stake)

Real Estate Sergey Gordeev (Private Investor)

Alexander Mamut (Private Investor); Mikail Shishkhanov (Private Investor)

1293 The transaction will simplify PIK’s ownership structure and underscores Sergey Gordeev’s confidence in the considerable long-term potential of the business. It also allows Sergey Gordeev to more effectively implement PIK’s strategy as a public company.

United Company RUSAL (7% Stake)

Industrial products and services

Zonoville Investments Limited

Dimosenco Holdings Co. Limited

504 Zonoville Investments, being the associate company of SUAL Partners, will own a stake of approximately 22.80% in RUSAL along with SUAL Partners.

Renaissance Insurance Group; Blagosostoyanie

Financial Services

Baring Vostok Capital Partners Limited; The Sputnik Group; Transfingroup ZAO

451 The merged group will include Renaissance Insurance, Renaissance Life, Blagosostoyanie OS , Intouch Insurance, Blagosostoyanie, NPF Blagosostoyanie MNC, Sputnik Asset Management) and medical company Medcorp. The new entity will be listed on the stock exchange within a year.

Cherkizovo Group PJSC (21.05% Stake)

Consumer: Foods

MB Capital Europe Ltd.

Prosperity Capital Management Limited

199 Following the completion of the transaction, MB Capital will make a mandatory tender offer to all the shareholders of Cherkizovo Group in compliance with Russian legal requirements at a price per share no lower than RUB 1,300 per share. Prosperity Capital Management will retain its long-term commitment to the Russian agricultural sector.

(Russian companies)

*Open information about deal value

Source: Merger Market


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Global windTop news: China and Russia

Top news: Europe and Russia

2016China is the major buyer of Russian food productsChina has surpassed Turkey as the main buyer of Russian food products the Federal Customs Service (FCS) reports. China spent more than USD$1.68 billion on food in Russia in 2016.

September 2017Chinese company begins to build a timber processing plant in Ulan-UdeThe total investment amount is RUB 753 million. The company will harvest timber in the Eravninsky and Zakamensky districts of the Republic of Buryatia, which are under long-term lease. The total area of sites as the project is implemented is 229 thousand hectares.

September 2017Aircraft component producers from Germany and France are to open plants in Moscow regionAircraft component manufacturers from France and Germany are in negotiations to localize their enterprises in Zhukovsky industrial park which is currently under construction. The names of the companies are yet to be disclosed.

August 2017Vietnamese businessmen are to build a powerful milk processing plant in Moscow regionThe construction of the milk processing plant will start in autumn 2017. The investor expects to launch the whole complex in May 2018.

August 2017Silk road fund invests in new TushinoChina Silk Road Fund manages assets in the amount of USD$40B and would join development of the former Tushinskiy airfield in Moscow.

July 2017Sistema will produce celluloseSegezha Group in cooperation with CAMCE, China, will build two PPPs and upgrade the existing plants. The total project cost is estimated at USD 2.2B.

July 2017China intends to create a large shopping center in Khimki near MoscowThe Moscow region authorities are discussing with Chinese officials construction of the large retail park on the basis of shopping mall in Khimki.

June 2017Russian-Chinese Investment Cooperation Fund Russian Direct Investment Fund (RDIF) and China Development Bank agreed to establish Russian-Chinese Investment Cooperation Fund with the volume of CNY 68B. (USD$10B).

July 2017Metro will increase its presence in the Moscow region by 1.5 timesMetro intends to open 3-4 new small-scale wholesale stores in the Moscow region until 2020, increasing its regional presence by almost 1.5 times. The planned investments in new projects are estimated at EUR 60-80M.

June 2017Immofinanz intends to invest in Moscow shopping mallsThe company planned to invest EUR 80M in five Moscow shopping malls. In addition, Immofinanz plans to rename all five malls as Novamall.

June 2017Kermi Germany will open plant producing radiators in Moscow regionKermi will localize its production at Stupino-1 industrial park in Moscow region. The project investment cost will be RUB 1.4B.


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Useful stickers

RESULTS OF THE MOSCOW FINANCIAL FORUM 2017Key questions: from structural changes of global financial system and global risks to the reform of the OSAGO system and the creation of a labeling system for goods.

ROUND-UP OF THE EASTERN ECONOMIC FORUM 2017217 agreements worth RUB 2,496 billion were signed at the Forum

RBC 500 2017 RBC publishes its third annual list of the 500 largest companies in Russia.The “turnover” of its members decreased which is likely a “stagnation rating” rather than a “rating of change”

http://www.mff.minfin.ru/news/39/

http://www.rbc.ru/rbc500/

https://forumvostok.ru/en/media/eef-2017-outcomes/


45

Useful stickers regarding innovations in Russia

China might shut down the country’s bitcoin exchanges which could deliver a massive blow to the virtual currency

Russia has the potential to reach up to 30 percent share in global cryptocurrency mining in the future

Top 5 largest deals on Russian venture market

Date Company Deal value, USD, mln

Investor

August 2017

Flo 5 Natalia Vodyanova, Flint Capital

July 2017 ChefMarket 3.5 Mitsui & Co.

August 2017

Laserpas 3 Sistema Finance

August 2017

Playkey 2.8 IIDF (Internet Initiatives Development Fund)

August 2017

Dostavista 2.25 AddVenture, Buran VC

https://www.engadget.com/2017/09/11/china-expected-to-shut-down-local-bitcoin-exchanges/

https://www.bloomberg.com/news/articles/2017-08-08/putin-s-aide-seeks-100-million-to-rival-china-in-bitcoin-mining


46

Contacts

Joe [email protected]

Lora ZemlyanskayaResearch Centre [email protected]

Dmitriy KasatkinSenior Research [email protected]

Mikhail GordeevSenior Research [email protected]

Vladimir SokolovSenior Research [email protected]

Artyom BelyaevSenior [email protected]

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