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					The Institutional Investor ~ MICEX Stock Exchange

2008 Guide to Investing in Russian Stocks & Bonds
Second Annual Edition

A Guide published by Institutional Investor magazine & MICEX Stock Exchange Co Publishers: Troika Dialog Alfa Bank Antanta Capital KIT Finance


The Institutional Investor ~ MICEX Stock Exchange

2008 Guide to Investing in Russian Stocks & Bonds


A Letter to Our Readers
he mission of an annual Guide is to give perspective to the year gone by and insights for the year to come. Since the first edition of the II-MICEX SE Guide to Investing in Russian Stocks & Bonds was published almost a year ago, the Russian market continued its spectacular rise. Then, like the dropping of a guillotine, came the first quarter of 2008.

On the whole, Russian companies have not fared too badly, and many are poised to resume a growth track as the year evolves. The Russian market overall has held its own among other key growth markets, as seen in the MSCI table below. For 2007, that index for Russia was up 11.55 percent. This 2008 Guide is a unique and timely chronicle of what has happened and is now likely to happen in Russia’s equities and fixed income markets. Chapters on the regulatory environment, trading and settlement, domestic and foreign bond issues, new equity listings, “up and coming” companies, real estate, banking and the ruble—among other topics—offer a comprehensive view of the entire market. As Charles Dickens wrote in the opening of A Tale of Two Cities, “It was the best of times, it was the worst of times….” Over the past 12 months, the Russian market has joined virtually all others in the world experiencing the euphoric good times of growth and the worst phobias of retrenchment. Given the stillsteady outlook of continued growth of the Russian economy at a pace exceeding 6 percent—far greater than developed markets—our prediction is that the 2009 issue of this Guide will have plenty of good news to recount. The details in the chapters of the Guide now in your hands tell why. Sincerely,

Ernest S. McCrary Editor & Publisher – Special Projects Institutional Investor

Alexei Rybnikov CEO – MICEX Stock Exchange

Comparing the BRICs
Market Brazil Russia India China All Emerging Markets Last 3,655.524 1,332.205 503.711 62.491 1,103.004 Month -7.640% -3.810% -9.880% -15.300% -5.540% 3 Mo. -5.470% -13.290% -24.690% -26.410% -11.450% YTD -5.470% -13.290% -24.690% -26.410% -11.450% 1 Yr 60.180% 11.550% 32.160% 24.830% 19.440% 3 Yr 50.740% 36.700% 39.210% 35.200% 26.230% 5 Yr 55.240% 37.970% 41.470% 34.420% 31.740% 10 Yr 13.350% 14.510% 16.240% 1.070% 9.700%

Source: MSCI Emerging Markets Data, as of March 25, 2008

The Institutional Investor ~ MICEX Stock Exchange

2008 Guide to Investing in Russian Stocks & Bonds

April 2008

1. Introduction to the Russian Market 6 A Surging Economy Reinforces Russia’s Domestic Stock Market Expansion 2. The Regulatory Structure 8 A New Administration Aims to Overhaul Systems Strained by Rapid Growth 3. Trading and Settlement ........................................................................................................... page 10 Domestic Exchanges Handle 70% of Trading in Russian Equities 4. Listed Companies.................................................................................................................. page 14 Companies Actively Traded on MICEX SE 5. The IPO Story ....................................................................................................................... page 16 Russian IPOs Raised $30 Billion+ in 2007 but Global Conditions Shut the Door in Q1 2008 6. Up and Coming Companies ....................................................................................................... page 18 Changes in the Political Paradigm Create New Opportunities for Investment 7. Banking and Finance in Russia ................................................................................................. page 20 Retail Banking Explodes and Foreign Banks Seek a Bigger Share of the Domestic Market 8. The Ruble Bond Market .......................................................................................................... page 22 Institutional Investors Will Play a Bigger Role in Domestic Fixed-Income Activity

Editor & Publisher Special Projects Ernest S. McCrary

News Editor Special Projects Marilen Cawad

Manager Special Projects Jillian Michalek

Art Director Special Projects Francis Klaess

Principal Writer Jason Corcoran Moscow

Contributors: Catrina Stewart, Moscow Charles Thurston, San Francisco Phillip Moore, London


9. Foreign-Currency Bonds .......................................................................................................... page 24 A Roaring Start to 2007 Slowed to a Trickle After August Amid Global Debt Concerns 10. The Mid Cap Segment ........................................................................................................... page 26 Under-Performance of Large Caps in Early 2008 Opens a Door for Small and Mid Cap Stocks 11. The Real Estate and Construction Sectors .................................................................................. page 28 Russia’s Building Boom Continues While Valuations Continue to Rise 12. Foreign Funds Focused on Russia............................................................................................. page 32 Some Investors Favor Funds to Access an Increasingly Diverse Equity Field 13. Russian Equities Outlook ....................................................................................................... page 34 Strong Macros and Political Scenarios Confront Volatility Riding on Global Stresses 14. Ruble Exchange Outlook ........................................................................................................ page 36 A Managed Exchange Rate Policy Fights Volatility While Fattening Currency Reserves 15. Corporate Governance Update ................................................................................................. page 37 Russia’s Largest Companies are Making Strides in Improving Transparency and Shareholder Relations 16. Financial Markets Data ......................................................................................................... page 38 Monthly Indicators, Jan. 2007 – Feb. 2008

Institutional Investor Special Projects 225 Park Avenue South, New York, NY 10003; 212-224-3300; Fax 212-224-3171 •

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 1: Introduction to the Russian Market

A Surging Economy Reinforces Russia’s Domestic Stock Market Expansion
MICEX Stock Exchange’s Volumes Doubling Each Year Since 2005


nvestors fishing for the most tradable and accessible Russian securities no longer have to cast their lines far from Moscow. A swelling pool of liquidity on Russia’s domestic exchanges is encouraging homegrown companies to seek domestic listings rather than go overseas. Funds raised in Moscow – just 6 percent of the overall amount raised in 2005 and 2006 – accounted for 30 percent last year. And company listings on local exchanges outperformed those that listed abroad. The combined market capitalization of Russia-only listings was up 16 percent at yearend. This contrasts sharply with London’s Alternative Investment Market (AIM) and the Main Market, where newly listed Russian and CIS companies were down 1 percent and up 5 percent, respectively. Overall, Russian companies raised a total of $30.8 billion during 2007, which outstrips the $22 billion raised by UK companies or German companies ($11 billion). The MICEX Group, the Moscow Interbank Currency Exchange, is the largest venue for trading Russian securities worldwide. In the global pie of Russian equities turnover, its share is about 45 percent, which is two and a half times that of its closest rival. The Moscow-based exchange and its network of seven regional affiliates serve more than 1,700 market participants and account for more than 98 percent of the total volume of trading in stocks on all Russian stock exchanges and more than 70 percent of the global on-exchange volume of trading in Russian securities. The exchange has seen its volume double every year since it opened in its present form in 2004, and it now trades over $19 billion (470 billion rubles) worth of equities, bonds, derivatives and currencies every day. “I don’t think it is obligatory to go abroad for listing, even for a large transaction, which the $9 billion Sberbank offering proved last year,” says Alexei Rybnikov, CEO of

MICEX Stock Exchange. “Everyone who wanted to buy it did, which means foreign investors today can easily access Russian securities on a domestic platform.” Russia, the world’s largest crude oil and natural gas exporter, also has benefited from the spiraling prices for commodities. The

Alexei Rybnikov

CEO, MICEX Stock Exchange

budget surplus stood at 5.5 percent of gross domestic product last year, according to the Finance Ministry. The value of foreign currency and gold reserves reached a record high of $490.7 billion by February 28. Almost 70 percent of the value of Russian exports is accounted for by oil and gas exports, and if the record price is sustained, the total for 2008 will be even higher. International rating agency Standard & Poor’s recognized the country’s further growth and substantial fiscal reserves in March when it upgraded Russia’s long-term rating to positive from stable. “Russia’s public-sector financial position, with reserves of $490 billion and sovereign wealth funds of $160 billion, compared with public sector debt of $40 billion, would have warranted an

upgrade,” says Alexei Morozov, head of research at UBS in Moscow. Russia’s Stablization Fund, its macroeconomic anchor, was broken up into the Reserve and National Prosperity funds as of February 1. The Reserve Fund, expected to total 10 percent of Russia’s GDP, is performing a similar role to the Stabilization Fund, cushioning the federal budget in the event of an oil price plunge. Oil and gas revenues above this limit are supplementing budget spending and being channeled to the National Prosperity Fund, which will eventually invest in foreign stocks. The government’s aim is to revitalize the country’s industrial base as it seeks to diversify the economy away from energy exports toward investing in high-tech projects. It has already drawn $13 billion from the Stabilization Fund to seed investment in infrastructure projects and nanotechnology. Funds from oil revenues have also found their way into Russian Venture Company (RVC), a state fund created to support new startups. Three venture firms have set up funds seeded with their money and state funds. By the end of 2008, the RVC hopes to have alliances with seven to nine more funds. Surge in IPOs MICEX Stock Exchange plays a vital role in organizing IPOs for Russian issuers. In 2007, 19 companies used the exchange’s services to place their shares through a primary or secondary listing, and together they raised RR662 billion ($26 billion). By this indicator, MICEX Stock Exchange is among the world’s five largest exchanges. London is no longer the automatic destination for Russian companies looking to tap the capital markets through a flotation. A concerted campaign to reduce bureaucracy and the added costs of a dual listing are making an IPO in Moscow increasingly attractive.

 • A Surging Economy Reinforces Russia’s Domestic Stock Market Expansion

Key Economic Data
Unit Q1-2006 Q2-2006 Q3-2006 Q4-2006 Q1-2007 Q2-2007 Q3-2007 Q4-2007

Real sector Growth Industrial Production by key industries Index of industrial production Mining and Quarrying Manufacturing, of which Foodstuffs Textile industry Shoe making and leather manufacture Woodworking industry Pulp, paper & paper products; publishing & printing Petroleum refining industry Chemical industry Plastic industry Mineral manufacture Metal manufacture Machinery and equipment Electrical equipment Vehicles manufacture Others manufacture Electricity, Gas and Water Supply Construction Agriculture Construction Volume of works performed by kind of activities “Construction” Buildings put in place Others Capital formation Freight Turnover of Transport Energy industries Production of electricity Heat-and-power engineering Oil and gas condensate production Natural Gas Coal production
Source: GlobalSource

% changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) % changes (y/y) TWh mln Gkal mln t bcm mln t

103.0 101.3 102.8 103.0 109.6 111.8 99.7 103.9 105.7 101.0 118.1 102.4 108.5 87.4 107.8 103.2 107.1 106.5 101.5 102.1 101.5 94.6 105.7 101.9 280 598 112 174 80

106.0 103.0 107.0 107.1 112.0 112.7 104.1 109.1 106.2 104.0 110.6 112.5 114.1 95.2 107.5 108.0 110.9 104.9 112.7 101.8 112.7 123.3 114.7 102.8 222 254 115 159 73

103.8 102.9 104.3 105.7 103.3 114.9 102.6 108.0 106.1 99.3 111.3 111.4 110.4 105.3 94.4 100.6 108.3 104.0 115.1 101.4 115.1 114.1 113.0 104.1 217 157 117 151 71

103.0 101.9 103.8 106.3 105.9 125.3 98.3 106.1 106.2 105.0 118.1 116.4 104.3 126.3 77.4 103.0 106.9 101.3 123.9 110.4 123.9 121.2 117.2 101.9 273 459 118 173 86

108.4 104.2 114.5 113.7 110.8 118.7 111.0 110.8 106.0 110.6 124.1 125.8 108.2 126.0 123.7 116.4 112.9 94.3 117.2 103.4 117.2 151.1 120.1 103.2 276 539 117 175 81

106.7 102.0 109.5 107.8 101.8 108.9 105.1 106.6 102.7 107.4 121.0 113.5 101.6 122.6 119.3 113.4 108.5 101.0 121.6 104.3 121.6 123.9 123.8 102.6 230 249 117 158 70

104.9 100.8 107.2 104.1 95.6 94.1 104.1 109.3 101.9 106.4 125.3 110.0 99.5 115.9 103.1 119.1 103.5 103.2 115.7 103.0 115.7 126.0 119.6 100.5 225 151 124 144 74

105.6 100.8 107.8 105.8 98.3 90.7 113.2 110.4 100.7 104.3 131.6 105.6 100.2 112.5 113.1 114.7 106.1 104.3 118.5 103.1 118.5 106.9 120.9 102.9 285 474 129 173 88

Western investors account for about 30 percent of MICEX Stock Exchange’s trade, reflecting foreign enthusiasm for the new Russian economy. Some of the international fund management groups, such as Pioneer Investments and Fortis Investments, have recently opened operations to tap into Russia’s retail market and to offer international clients access to Russian investment opportunities. Global investors are also playing their part in developing Russia’s internal stock markets, as they have gradually switched from trading in global depositary receipts and US depositary receipts to trading in local stocks. The turmoil on international credit markets has not affected foreign banks’ desire to buy into Russia’s financial sector. Pre-crisis, Russia’s Sberbank and VTB were

the world’s largest flotations in 2007, which together raised $12.4 billion. The Central Bank is reportedly now reviewing several petitions by foreign banks seeking to open businesses in the country. Among the deals in the pipeline is HSBC’s $200 million expansion plans for Russia, while British rival Barclays has bought Expobank for $745 million. With the deregulation of Russia’s electricity grid almost complete, investors are turning to the breakups of the telecom monopoly Svyazinvest and the national railway group RZD. To test the waters, RZD sold an estimated 10 percent stake in RZD freight subsidiary TransContainer in January to the European Bank for Reconstruction & Development. RZD says it plans to follow up with an IPO of 25 percent to 30 percent

in TransContainer in 2008. Further share issues are planned in Moscow and London for 2009, such as RZD’s First Cargo Company, 50 percent of which has been earmarked for privatization. “The case of UES shows that restructuring of the entire industry is very feasible,” says MICEX’s Rybnikov. “Many more railway companies will follow TransContainer, and I think future privatizations will involve the capital market angle more heavily than in the past.” n

A Surging Economy Reinforces Russia’s Domestic Stock Market Expansion • 

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 2: The Regulatory Structure

A New Administration Aims to Overhaul Systems Strained by Rapid Growth
Plans from the Regulator Will Boost Standards and Market Efficiency
from an operational point of view,” says Ramy Bourgi, head of emerging markets development at Société Générale Securities Services (SGSS). “It would benefit from a central depository and if there weren’t as many as 76 registrars.” Several fund mangers have endured considerable delays in the transfer of funds within Russia, the conversion of rubles into other currencies and the remittance of monies outside of Russia. “It’s a creaking system,” says Stephen Cohen, chief executive of Troika Dialog’s hedge fund business. “Settlement can suffer from long delays when you use local registrars, and their custody costs can be higher than other markets.” Developing Consensus The creation of a central depository has been a political hot potato for three years, but there are signs of a growing consensus on the issue between the two leading players. The National Depository Center (NDC), the MICEX settlement depository, and the Depository and Clearing Company (DCC), the settlement depository of the RTS Stock Exchange, are currently expanding their interdepository bridge to increase the number of securities transferred between the two exchanges. Vladimir Milovidov, head of Russia’s Federal Financial Markets Service, the market regulator, has been an advocate of greater cooperation between the two exchanges. “The roots of the idea of consolidating the infrastructure began to germinate even before my arrival at the FFMS and the first attempts were made to establish a central depository in 1999,” says Milovidov. “At some point, it will be inevitable as the presence of the two institutions results in a higher cost to the investor, inefficiency and illiquidity.” In March, the FFMS submitted a draft strategy to the government for the


he Russian securities market has attracted significant inflows from Western investors over the past few years, and the corresponding regulatory infrastructure is now catching up. Investors have recognized some recent improvements but still regard dealing in Russian securities as a settlement and custody risk as well as a transaction risk. Many Russian investment offerings to non-Russian investors are domiciled in the Caymans or Guernsey and often administered in Ireland. Global custodian State Street administers some of the largest

laundering checks before being allowed to subscribe to these funds,” says Damian McEvoy, associate vice president at State Street’s subsidiary, Investors Trust Europe. “But clearing and settlement standards have some way to go before reaching international benchmarks. Investors in Russian securities typically are only permitted to redeem on a monthly basis, and they can sometimes have their redemption payments delayed due to the corresponding delay in the settlement of the underlying security sales.” Custodians and investor-services specialists point to the lack of a central depository,

“There is a track record of the system working since the 1998 crash, but it’s not the most efficient from an operational point of view. It would benefit from a central depository and if there weren’t as many as  registrars.”
Ramy BouRgI, SocIéTé généRale SecuRITIeS SeRvIceS
equity funds investing in Russia from Ireland’s capital, Dublin. “Any initial skepticism about investing in such funds is unfounded, as all investors must go through rigorous anti-money the numerous registrars and the need to register securities physically as the market’s most glaring inefficiencies. “There is a track record of the system working since the 1998 crash, but it’s not the most efficient

8 • A New Administration Aims to Overhaul Systems Strained by Rapid Growth

Russia but domiciled offshore have moved onshore as the law currently prevents them from listing on local exchanges. The regulator’s blueprint wants to change this mentality. The report is also intended to improve disclosure and especially to identify beneficial owners of shares – a theme that runs through much of the financial reforms, especially in the banking sector. Importance of Free Float The regulator also wants to draw up proposals for increasing the free float. The free float in Russia is currently about 20 percent to 30 percent of total outstanding shares. “The free float of securities in Russia should be increased to not less than 40 percent to 50 percent in the nearest twothree years,” the document says. The regulator wants the concept of free float to be introduced by law and its quantitative and qualitative parameters to be

Vladimir Milovidov

Federal Financial Markets Service

development of domestic capital over the next four years. The report, entitled “Measures to Improve the Regulation and Development of the Securities Market in 2008-2012 and a Long-Term Horizon,” is a blueprint for the development of the domestic stock market and is being debated in government circles. The domestic capital market plays a vital role in the government’s plans for Russia’s continuing economic revival. The new administration intends to tap domestic capital for the investment needed to revive Soviet-era industrial assets. It also needs a working capital market to provide returns for the pension system. And the Kremlin would rather mobilize domestic than foreign capital for strategic reasons. Among some of the provisions proposed in the report are drastic changes to the tax rules. Under discussion is the possibility of cutting the capital gains tax and a reduction in the tax on income from securities to zero. One aim of these proposed changes is to make Russia a more attractive place to list shares than the offshore havens companies currently use. The regulator is concerned about losing capital market functions to foreign exchanges and has introduced various administrative controls to encourage companies to list onshore. Its success has been only partial, as Russian companies that float IPOs now almost always list simultaneously in Russia and abroad. Yet none of the companies with assets in

to identify opportunities for investment in foreign stocks,” says Milovidov. “It was not even envisaged that the demand for gaining access to foreign securities on Russia’s territory would be so high.” The capitalization of the Russian financial market is expected to increase by $40 billion to $50 billion after the amendments are passed. About 1,500 stocks and mutual funds and 700 debt securities are traded on the Russian market now. Market makers are optimistic that Russia can become a pan-CIS and Central European hub for capital markets if the necessary reforms are made. “I believe we have all the components for success, especially if it becomes feasible to have foreign securities traded on the Moscow platform, including Russian depositary receipts for foreign companies and foreign issuers’ securities traded here,” says Alexei Rybnikov, chief executive of MICEX Stock Exchange. “It could then mean Ukrainian,

“Initially, we are looking at a regulatory framework for foreign securities and wanted to identify opportunities for investment in foreign stocks. It was not even envisaged that the demand for gaining access to foreign securities on Russia’s territory would be so high.”
vladImIR mIlovIdov, RuSSIa’S FedeRal FInancIal maRkeTS SeRvIce
clearly defined. There are currently no foreign securities listed on the Russian bourse due to a lack of legislation and appropriate regulation. This could change later this year, however, because a draft law is already in the Duma, the lower house of the Russian parliament. Once new laws are passed, Russian investors will be able to invest via a domestic exchange in foreign companies’ shares and depositary receipts. Also in the legislative pipeline are changes to make it easier for Russian funds to offer foreign listed securities to domestic customers. The National Depository Center says Russian companies have filed 7,757 applications to be allowed to buy foreign securities, and 2,094 have been approved so far. Currently, Russian credit organizations can buy foreign financial instruments, but they have to keep them in depositories with access to foreign markets, which means brokerages have to set up companies abroad. “Initially, we are looking at a regulatory framework for foreign securities and wanted Belarusian or Kazakh companies listing.” Stephen Jennings, chief executive of Renaissance Capital, is convinced that Moscow will be one of the leading global financial centers by 2017 if its rules, regulations and supervision of the financial markets can keep pace with the growth of the financial markets. “Russia has been quite good at cutting tax rates or streamlining and simplifying, but it hasn’t been very good so far at building strong institutions,” Jennings says. “There will be another phase of reforms, and then Russia will go through a phase of modernizing its institutions. Some aspects of capital market development will have to wait for that phase.” n

A New Administration Aims to Overhaul Systems Strained by Rapid Growth • 9

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 3: Trading and Settlement

Domestic Exchanges Handle 70% Of Trading in Russian Equities
Global Daily Turnover Neared $6 Billion in 2007


Domestic Trading: Deeper Market and Wider Range of Products
been growing for the past five years, from seven companies in 2005 to 15 in 2006, and 23 as of August 2007. Some flows are also reported by the Frankfurt Stock Exchange and some other stock exchanges (less than 4 percent). Offshore trading in Russian equities: 66% of the Russian DR market traded in London in 2007
Average Daily Turnover, $ mln ADT share, % Deutsche Bourse and other Exchanges 77.4 3.6% NY 644.2 30.1% London* 1,418.6 66.3% Russian ADR/GDR 2,140.2 100.0%

ussian equity trading has been booming since the early 2000s. Average daily turnover (ADT) in Russian equities (on domestic and global markets together) totaled around $5.94 billion in 2007. An additional $1.15 billion worth of daily transactions were reported in local equity derivative trades. When analyzing trends in Russian equity trading, we look at the liquidity breakdown and the composition of the product basket, and we find the following: • Around 70 percent of the aggregate market value of publicly traded stock (free float) is traded on domestic exchanges, with the remaining 30 percent traded in London, New York and Frankfurt. • The average daily trading for domestic companies is significantly higher on local exchanges (65 Elena Krasnitskaya percent), mainly on the MICEX Corporate Governance Analyst, Troika Stock Exchange, versus 35 percent traded over the counter (OTC), mainly on the Russian Trading System (RTS). • Domestic exchanges offer a broader choice of instruments to investors through equity and derivatives, greater exposure to all types of companies (large, midcap and small caps) and greater turnover in each of these groups. Seventy percent of average daily turnover in Russian equity is centered on the domestic market
Russian ADT on global markets Domestic market (incl. OTC and derivatives) Global markets (Russian ADR/GDR) Total Russian ADT (local and ADR/GDR) ADT, $ bln 4.95 2.14 7.09 ADT share, % 70% 30% 100%

Note: London turnover figures include both LSE and AIM markets, while New York numbers combine NYSE and Nasdaq volume for 12 months 2007.

The offshore market offers around 90 effective depositary receipt programs, both listed and traded OTC, and some 32 offshore-domiciled companies with assets in Russia that issued ordinary shares listed on London’s AIM. The number of companies that conducted public offerings on AIM grew from 11 in 2005 to 32 by late 2007. Russian Equities: Domestic Market The majority of daily turnover takes place on the domestic market. Our analysis of the daily turnover on domestic and foreign exchanges shows the following: Most foreign and local liquidity in 11 of the 16 blue chips (including Sberbank, Rostelecom, Norilsk Nickel, VTB, Surgutneftegaz, UES and Tatneft) is in the domestic markets (exchange-based and OTC). Among all blue-chip companies, this comparison is significantly higher for Norilsk Nickel, Sberbank and VTB. For less capitalized names, the reported volume is not surprisingly higher on domestic exchanges: 97 percent for midcaps and 99 percent for small caps (sorted by the aggregate market of publicly held equity). Historically, foreign exchanges have offered better liquidity for MTS, Mechel, Novatek and VimpelCom, as these companies have conducted IPOs abroad. Domestic Stock Markets: Broader Spectrum of Equity Securities With 1,633 stocks traded locally, the local market offers a considerably wider choice of stocks and derivatives. The gap totals 1,513 securities trading only on the domestic market. Expectedly, local exchanges offer a better choice of midcaps, compared with foreign exchanges. Small caps are hardly traded abroad, although quite a few of them have effective ADR programs.

Source: MICEX Stock Exchange, RTS. Note: This is based on the 2007 annual results and excludes the derivative trades.

Russian Equities: Global Markets Offshore trading in Russian depositary receipts is concentrated on two international exchanges, global depositary receipts (GDRs) on the London Stock Exchange (LSE) and American depositary receipts (ADRs) on the New York Stock Exchange (NYSE), which together account approximately for more than 95 percent of total trading volume (in Russian depositary receipts) reported by foreign exchanges. The LSE’s share has

10 • Domestic Trading: Deeper Market and Wider Range of Products • co-Published by Troika dialog & mIceX Se

What Trades Where: Global vs. Domestic Markets (incl. dom. OTC trades)
ADT, $ bln Sberbank UES Rostelecom Polyus Gold Surgutneftegaz Norilsk Nickel Tatneft Gazprom VTB Rosneft LUKoil MTS NOVATEK Mechel VimpelCom 350 383 70 91 202 726 55 2,111 160 224 596 182 47 68 134 Global markets 3% 12% 15% 18% 26% 26% 28% 32% 33% 41% 45% 79% 81% 99% 100% Domestic 97% 89% 86% 82% 74% 73% 71% 68% 67% 59% 56% 21% 19% 0% 0%

leading Moscow-based exchanges, of which around 97 percent is centered on the MICEX Stock Exchange. Each name represents a group of companies under a single brand (holding umbrella), which includes the trading floor itself and supporting units, such as the clearing system, depository house and settlement bank. While MICEX SE is Russia’s largest stock exchange in terms of trading volume on the organized market (equity trading), RTS has historically dominated the OTC market in Russia. Close to 50 percent of the global turnover in Russian equities (local shares and depositary receipts) were centered on MICEX SE last year. MICEX SE Shares: 97% of organized market in Russia (equity trades)
Domestic equity mkts.
ADT $ bln by segment Share % by segment

ADT by Exchange $ bln MICEX RTS 0.07 1.32 1.38

Share by Exchange % MICEX 97% 3% 64% RTS 3% 97% 36%

Organized trading seg. OTC segment Total ADT (dom. equity)

2.49 1.36 3.85

65% 35% 100%

2.42 0.04 2.46

Note: ADT for the domestic market includes volume reported in both the exchange-based and OTC segments. 3,000 Source: Bloomberg, Troika Dialog

Domestic Market: Equities and Derivatives Historically, Russia’s trading infrastructure has been rather 2,000 segmented, and stock exchanges have tailored the services that they provide to the equity, debt or currency markets. While 1,500 MICEX Stock Exchange evolved from initially being a currency exchange, which subsequently developed debt and equity 1,000 markets, the RTS Stock Exchange evolved as the OTC platform 500 for equity securities, which subsequently developed an equity derivatives market. In sum, Russian stocks’SE Derivatives locally) for RTS year 2007 the OTC FORTS Equity MICEX ADT (traded Equity (248 trading days) stands at $4.95 billion,Trading $3.82 billion were of which Trading on OTC on MICEX SE Section MICEX SE reported in equity trades (including $1.32on RTS traded OTC). An billion additional $1.15 billion were reported in derivatives trading. Russian Exchanges: Organized and Strictly Regulated Organized trading in Russia is concentrated on the two


Source: MICEX SE, RTS Note: this is based on the 2007 annual results and excludes the derivative trades.

In 2007, average daily turnover in the domestic organized equity market was $2.49 billion, of which $2.42 billion (97 percent) was traded on MICEX Stock Exchange. In 2007, the MICEX joined the premier league of the world’s 20 largest stock exchanges (in terms of volume traded). MICEX SE runs order-driven anonymous and quote-driven markets, both with T+0 settlements on a DVP basis. Additionally, MICEX assumes nearly 90 percent of local Russian bond trading, including 100 percent of trading in Russian domestic sovereign bonds (OFZ). More than 50 percent of MICEX SE turnover is done via Internet access to the trading system. Domestic OTC market Close to $1.32 billion worth of trades (or 35 percent of domestic ADT) is reported in over-the-counter transactions. 200 adT ($ mln) Breakdown of domestic Turnover

Russia adR/gdR markets
Deutsche Bourse & Other German Exchanges: 4%

3,000 2,500 2,000

London 66%

New York 30%

1,500 1,000 500 Equity MICEX SE Derivatives Trading on OTC on MICEX SE Section MICEX SE Equity Trading on RTS RTS OTC FORTS

Source: Troika Dialog


Domestic Trading: Deeper Market and Wider Range of Products • co-Published by Troika dialog & mIceX Se • 11

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

OTC trades account for 35% of domestic ADT
2007: Russian domestic ADT (excl. derivatives) OTC Domestic exchanges Total

ADT, $ bln 1.32 2.49 3.82

Share of ADT, % 35% 65% 100%

million, of which FORTS shared more than 99 percent. Other instruments traded on the MICEX derivatives market are FX futures and interest-rate futures (MICEX) and commodity derivatives, contracts (options) on short-term bonds and options (futures) on a bonds basket (FORTS), which we did not include in this survey. Derivatives account for 23 percent of Domestic ADT
2007: Domestic ADT (incl. derivatives) Equity securities Derivatives (FORTS) Total

ADT, $ bln 3.81 1.15 4.95

Share of ADT, % 77% 23% 100%

OTC trading in Russia is concentrated on the RTS platform. In essence, it is a quote-driven market, which is rule-based and strictly regulated, with deals reported on an on-line basis. While MICEX SE also reports some OTC trades by its members, that volume is insignificant. Before 2007, the OTC market’s actual turnover in Russia was difficult to gauge, as OTC trades were not reported. However, this has changed this year, since the trade reporting practice was made mandatory for all OTC trades (posted on RTS, MICEX, Bloomberg). The RTS is also home to the largest Russian derivative section, FORTS (Futures and Options on the RTS). Derivatives Trading in Russia In 2007, equity derivatives trading accounted for as much as 23 percent of total domestic ADT, mostly centered on FORTS. The FORTS equity product basket includes contracts on the RTS Index and 32 single-stock contracts (23 futures and nine options). Derivatives trading on the RTS Index is the fastest-growing segment of the domestic derivatives market and reached $2,733 billion in 2007 (or 60 percent of the FORTS turnover). In 2007, MICEX Stock Exchange also launched equity derivatives trading (futures on the MICEX Index). The total ADT in the equity derivatives market in Russia in 2007 was $1,146.42

Board lists: best and broadest exposure to small caps Board lists are used for information purposes, as they post only indicative quotations, which should not be regarded as an eligible regular market quotation to gauge the market value when calculating the relevant company’s capitalization, and the buyout or subscription prices for its shares. The RTS Board includes 1,212 equity securities of 923 companies, cleared (by the FFMS) for public offering but not admitted for trading on any of the stock exchanges, and can be recommended as the best way to get exposure to less liquid and small-cap stocks. Additional opportunities available via local exchanges Finally, Russia’s growing companies got a new entry point last year for public offerings: RTS Start on the RTS, and ICG Sector at the MICEX Stock Exchange – the analogue of the London AIM market. The essential difference from AIM is that they are not split from their main markets and the liquidity pool. n

Domestic Settlement Infrastructure: Competitive and Compatible


nternational institutional investors who opt to buy local equity can trade via a local broker and buy shares on domestic exchanges. Both the RTS and MICEX are part of the global settlement universe and have corresponding accounts with eligible global banks and depositories. The two largest domestic settlement depositories, the NDC (serves all trades on the MICEX Stock Exchange and the fixed income segment of the OTC market), and the DCC (settles all RTS Stock Exchange-based trades and the equity segment of the OTC market) have established an electronic bridge between them and settle 99 percent of all trades on the domestic local market. The lack of a central settlement depository in Russia has long been cited as a component of risk associated with investing in the country. However, the market infrastructure for time-efficient and risk-free settlement is in place: • All trades on the organized market are settled on a delivery-versus-pay-

ment (DVP) basis. DVP has been a standard rule since 2004. • DVP settlement prevails in the OTC debt market, while the equity segment of the OTC market is partially settled on a DVP basis. • The majority of all trades on the local equity market (including OTC deals) are settled via DCC and NDC, connected with an electronic bridge. The challenges, which remain, include: Further unification and consolidation of operational systems. The market infrastructure for time-efficient and risk-free settlement is in place Centralized settlement 1. DCC & NDC settle the majority of all domestic trades with local equity 2. DCC and NDC have accounts with all registrar companies 3. Industry members have a balance of control on the market infrastructure level Consolidated registrar services industry

12 • Domestic Trading: Deeper Market and Wider Range of Products • co-Published by Troika dialog & mIceX Se

1. The consolidation among registrar companies is underway 2. Almost all major registrars have offices in Moscow 3. Registrar risk has dropped dramatically over the past decade Competitive local custodians 1. All local custodians have accounts open with settlement depositories (DCC and/or NDC) 2. Most of them offer DVP settlement service 3. OTC trades with local equity are settled on a T+N basis 4. Exchange-based transactions are settled on a T+0 basis (available only to exchange members) Vast Majority of Trades are Settled on a DVP Basis What is DVP? Essentially, delivery-versus-payment settlement (DVP) stands for counterparty-risk-free settlement, which provides for the simultaneous transfer of assets (securities and cash) between selling and buying brokers and thus eliminates any potential credit and counterparty risks. Pioneered by MICEX in 1997 for the stock exchange-based trading and ruble settlement and extended by the RTS in 1999 for the OTC market and dollar settlement, the delivery-versus-payment system has been standard for the organized market since 2004. As of early 2008, 65 percent of all trade volume on the local market is settled on a DVP basis. How it works: DVP settlement requires mandatory predeposition of the assets (cash and securities) to the moment of the deal (NDC) or clearing (DCC). Payment is conducted: • in rubles - via MICEX Settlement House - for MICEX Stock Exchange and via RTS Settlement House for RTS Stock Exchange • in US dollars - via JPMorgan Chase, Citibank and RTS Settlement House - for RTS Stock Exchange and the OTC market Settlement is performed • via the DCC - for all trades on the RTS Stock Exchange and equity OTC market • via the NDC - for all trades on the MICEX Stock Exchange and fixed income OTC market Both payment and settlement are performed: • on a T+0 basis for the organized market • on a T+N basis in the OTC market NDC and DCC: Managing the registrar’s risk Both NDC and DCC have their unique, automated, centralized and streamlined post trading processes, which are compatible with worldwide standards, including accepting and disseminating SWIFT messages. Service levels of both entities are regulated by the Federal Financial Markets Service (Russian securities market regulator) and monitored by their respective exchanges. Holding shares with DCC/NDC helps to mitigate a litigation risk associated with a registrar. If a court ruling halts the transfer of title, shares held with or under the depositories would be exempt from such a ban, and shares held with a registrar (directly or via a foreign custodian) would be affected (most recent cases, Bashkirsky TEK companies).

The National Depository Center The National Depository Center (NDC), a not-for-profit partnership, is the settlement depository of MICEX Group. Established in 1997, NDC has long been the authorized statutory CSD for the sovereign bond market and plays the same key role in corporate debt. As of early 2008, it housed $175.6 billion worth of client assets, of which equity securities accounted for 37 percent, and debt securities 63 percent. NDC is part of the MICEX Group and is owned by the MICEX (50.2 percent) and the Central Bank (42.3 percent). Depository and Clearing Company Created in 1993 as the clearing and settlement depository for the RTS Group, the DCC houses $120.1 billion worth of client assets. The DCC plays the leading role in custody of equity securities and settling OTC equity trades, as reflected in the structure of assets housed with DCC (shown in the table below). Stocks account for 98 percent and debt securities 2 percent of assets deposited with the DCC. DCC provides both DVP and FOP settlements. The DCC is 56.5 percent owned by the RTS Group, while 36.96 percent of its share capital is owned by the NDC. Securities transfers and centralized OTC trades settlement: the NDC-DCC Bridge • Introduced in 1999, direct securities transfer and centralized OTC trades settlement between NDC & DCC clients • Via the corresponding accounts (NDC with DCC, and DCC with NDC) it provides for T+0 securities transfer (OTC trades settlement before 4 pm Moscow time) and T+1 securities transfer (OTC trades settlement after 4 pm Moscow time) • Accepted into the NDC/DCC bridge settlement are more than 100 stocks of the 76 most capitalized and liquid companies • Transfer and settlement volume through the NDC/DCC bridge reached $43.3 billion in 2007 • Together with the DVP settlement, the T+0 practice eliminates the trade/delivery gap and boosts asset turnover. n Structure of deposited assets and share of the market: NDC and DCC
Structure of housed assets, 2007 Value of assets on deposit, mln $ Value of equity, mln $ Share of equity, % Share of debt, % NDC 175,622 65,007 37% 63% DCC 120,100 117,698 98% 2%

F/F-adjusted MCAP (market value of all equity securities traded in the secondary market) Note: current aggregate MCAP $1,230.4 billion; Est. F/F-adjusted MCAP $332.2 billion Source: NDC, DCC

—By Elena Krasnitskaya, Corporate Governance Analyst, Troika Dialog

Domestic Trading: Deeper Market and Wider Range of Products • co-Published by Troika dialog & mIceX Se • 1

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 4: Listed Companies

Companies Actively Traded on MICEX SE
Comparing March 19, 2007 vs. March 18, 2008 Prices
Ticker Company Name Price USD (3/19/07) Price USD (3/18/08) Change Ticker Company Name Price USD (3/19/07) Price USD (3/18/08) Change AFKC AFLT AKHA AKRN ARHE ARMD ARSA-001D ARSB ASRE ASSB AVAZ BLNG BLRS BNSB BREN BSPB-013D BUSB CHMF CHNG CHSB CHZN CHZN-004D CLSB CTLK DASB DGBZ DGEN DIXY DLSV DLVB DVEC EESR FLKO GAZP GMKN GRAZ HALS HYDR-004D HYDR-005D HYDR-006D HYDR-007D HYDR-008D HYDR-009D HYDR-010D HYDR-011D HYDR-012D HYDR-013D HYDR-022D HYDR-023D HYDR-025D HYDR-026D IRGZ IRKT IVSB IVSBP KISB KISBP KLNA KLSB KMAZ KOEN KOLE KOSG AFK Sistema AEROFLOT PAVA Acron ArkhEnergo ARMADA Arsagera Asset Management Arkhangelsk.Sbyt.Comp./Arkhangelsk Energy Ret. Co. Astrakhanenergo Astrakhan Energy Retail Co. AVTOVAZ Belon BelgorodEnergo Bryansk Retail Co. Bryanskenergo Bank Saint Petersburg BuryatEnergoSbyt Severstal Chelyabenergo Chita Energy Retail Co. Chelabinskyi cinkovyi zavod Chelabinskyi cinkovyi zavod Chelyabenergosbyt CenterTelekom Dagestan Energy Retail Co. Dorogobuzh DagEnergo DIXI Grupp Dalsvyaz Far Eastern Bank Far Eastern Energy Co. RAO “UES of Russia” Finance Leasing Co. GAZPROM Norilsk Nickel, GMK RAZGULYAY Group Sistema-Gals GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK GidroOGK Irkutskenergo IRKUT, Korporatsiya Ivanovo Energy Retail Co. Ivanovo Energy Retail Co. Kirovenergosbyt Kirovenergosbyt Kalina, Concern Kaluga Retail Co. KAMAZ Komienergo, AEK Kolenergo Kostromaenergo 0.000 3.074 0.757 25.020 0.081 0.000 0.000 0.014 0.160 0.024 0.000 0.000 288.702 1.580 9.423 0.000 0.077 12.789 0.098 0.010 0.000 0.000 0.014 0.775 0.004 0.000 0.033 0.000 4.112 10.946 0.000 1.260 6.771 9.839 180.943 3.986 233.815 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 1.068 1.000 0.028 0.028 0.015 0.010 45.560 0.373 2.325 0.048 0.525 0.182 1.503 4.248 1.224 74.743 0.059 21.608 1.640 0.009 0.089 0.028 1.801 115.889 502.996 1.489 11.807 5.147 0.043 24.863 0.075 0.007 12.562 11.414 0.014 0.783 0.002 0.916 0.019 14.398 4.701 9.597 0.099 1.084 7.091 12.441 280.131 8.321 160.496 0.081 0.081 0.081 0.081 0.081 0.085 0.081 0.081 0.081 0.087 0.081 0.081 0.085 0.086 0.965 0.916 0.018 0.011 0.009 0.006 32.716 0.479 5.941 0.037 0.262 0.000 38.2% 61.6% 198.7% -26.6% KOSGP KRNG KRNGP KROT KRSG KTSB KTSBP KUBE KUEN KUENP KUSB KUSBP KZBE LBDO LIEN LKOH LPSB LSNG LSNGP LSRG MAGN MGNT MGSV MISB MISBP MMBM MREN MRSB MSNG MSRS MSSB MSSV MTSI MVID NGNR NGNRP NGSB NGSBP NLMK NMTP NNSB NNSBP NOTK NTRI OGK1 OGK2 OGK4 OGK6 -9.7% -8.5% -36.5% -61.7% -41.3% -38.7% -28.2% 28.7% 155.5% -22.7% -50.1% OGKC OGKE OMSB OMSBP OMZZ OMZZP OREN ORENP ORSB ORSBP Kostromaenergo Krasnoyarskenergo Krasnoyarskenergo Krasniy Oktyabr, Moscow Confectionary Factory Krasnoyarskaya GES Kostroma Retail Co. Kostroma Retail Co. Kubanenergo Kurskenergo Kurskenergo Kurskenergosbyt Kurskenergosbyt Kusbassenergo Lebedyansky Lipetskenergo LUKOIL Lipetsk Energy Retail Co. Lenenergo Lenenergo LSR Group Magnitogorsk Iron and Steel Works (MMK) Magnet Moscow City Electricity Distribution Co. Matienergosbyt Matienergosbyt Bank of Moscow Mordovenergo Mordovia Energy Retail Co. Mosenergo Moscow Regional Electricity Distribution Co. Mosenergosbyt Moscow Heat Distribution Co. Mobilniye TeleSistemy (MTS) M.Video Novgorodenergo Novgorodenergo Novgorod Energy Retail Co. Novgorod Energy Retail Co. Novolipetsk Steel Novorossiysk Commercial Sea Port Nizhny Novgorod Retail Co. Nizhny Novgorod Retail Co. NOVATEK NutrInvestHolding Wholesale Generation Co.-1 (OGK-1) Second Wholesale Generation Co. of the Electricity Market (OGK-2) Fourth Wholesale Generation Co. of the Electricity Market (OGK-4) Sixth Wholesale Generation Co. of the Electricity Market (OGK-6) Wholesale Generation Co.-3 (OGK-3) Wholesale Generation Co.-5 (OGK-5) Omskenergosbyt Omskenergosbyt Obyedinenniye Zavody (Uralmash-Izhora) (OMZ) Obyedinenniye Zavody (Uralmash-Izhora) (OMZ) Oryolenergo Oryolenergo Orelenergosbyt Orelenergosbyt 0.162 1.083 0.760 34.614 4.031 0.038 0.020 53.924 0.140 0.114 0.012 0.008 3.290 79.228 0.000 78.863 0.000 1.764 1.250 0.000 0.971 40.934 0.084 0.000 0.104 56.194 0.062 0.016 0.238 0.130 0.023 0.044 9.518 0.000 0.596 0.486 0.084 0.057 2.787 0.000 0.000 11.414 5.293 0.000 0.000 0.000 0.000 0.000 0.159 0.135 7.256 6.411 9.594 9.256 0.408 0.860 0.469 1.621 0.000 0.933 0.849 44.761 4.224 0.015 0.010 34.331 0.139 0.117 0.012 0.008 2.630 91.693 1.210 75.269 0.242 1.948 1.520 75.254 1.262 48.454 0.064 0.072 0.053 51.914 0.066 0.009 0.225 0.088 0.027 0.031 13.016 7.831 0.558 0.510 0.052 0.000 4.305 0.222 15.938 8.264 7.886 40.621 0.112 0.119 0.121 0.094 0.109 0.117 0.000 0.000 7.177 0.000 0.371 0.316 0.060 0.042 -9.1% -63.2% -87.2% -97.4% -31.6% -13.4%

-13.8% 11.6% 29.3% 4.8% -61.2% -49.8% -36.3% -0.8% 2.6% 0.8% -1.0% -20.1% 15.7% -4.6% 10.5% 21.6% 29.9% 18.4% -22.9% -49.0% -7.6% 6.3% -48.0% -5.8% -32.8% 17.9% -30.1% 36.7% -6.4% 5.1% -37.5% 54.5%

-39.3% -44.2% 14.7%

74.2% -5.8% 25.3% -43.9% 94.4% -23.2% -32.9%

-3.0% 1.1% -47.2% -43.0% 14.3% -12.3% -13.9% 4.7% 26.4% 54.8% 108.8% -31.4%

-27.6% 49.0%


1 • Companies Actively Traded on MICEX SE


Company Name

Price USD (3/19/07)

Price USD (3/18/08)



Company Name

Price USD (3/19/07)

Price USD (3/18/08)



Farmstandart PIK Group Baltika Brewery Baltika Brewery Polyus Zoloto Permenergo Permenergo Perm Energy Retail Co. Perm Energy Retail Co. Polimetal Penzaenergo Penzaenergo Primorskoye Morskoye Parokhodstvo Pskovenergo Penza Energy Retail Co. Penza Energy Retail Co. Raspadskaya RBK Information Sistems RBK Information Sistems RITEK ROSBANK Rosneft Oil Co. Rostelecom Rostelecom RTM Energosbyt Rostovenergo Energosbyt Rostovenergo Rostovenergo Rostovenergo Trade House GUM Slavneft-Megionneftegaz Slavneft-Megionneftegaz Aptechnaya set 36,6 Bashinformsvyaz INTERURAL MGTS Moscow City Telephone Network MGTS Moscow City Telephone Network Tatneft Tatneft Ryazan Energy Retail Co. Sberbank Sberbank Sedmoy Kontinent Stoylensky GOK Gazprom Neft Smolenskenergo Smolenskenergo Smolensk Energy Retail Co. Surgutneftegaz Surgutneftegaz North-West Telecom North-West Telecom Sibirtelecom Sibirtelecom StavroplEnergo StavroplEnergo Severstal-Avto Sverdlovenergo Sverdlovenergo Sverdlov Energo Sbyt Sverdlov Energo Sbyt Sinergia Tambovenergo Tambovenergo Tambov Energy Retail Co. Tambov Energy Retail Co. Bank “Tavricheskyi” Territory Generation Co. No.13 (TGK-13) Territory Generation Co. No.1 (TGK-1)

0.000 0.000 49.929 34.553 47.938 0.000 11.949 0.506 0.000 7.622 0.969 0.725 0.263 1.127 0.106 0.063 2.090 10.093 0.000 8.533 6.243 8.197 8.439 3.087 0.000 0.015 0.011 0.108 0.086 2.579 42.955 23.802 63.205 0.000 0.015 22.842 25.326 4.417 2.677 0.079 0.000 0.000 26.822 0.000 3.794 0.000 0.000 0.096 1.136 0.794 1.563 1.101 0.113 0.079 0.000 0.000 30.448 1.410 1.077 0.230 0.130 0.000 0.079 0.061 0.010 0.008 0.000 0.000 0.000

64.540 27.493 46.130 31.288 55.779 11.741 10.861 0.000 0.455 8.636 0.846 0.736 0.412 1.335 0.094 0.063 6.727 10.180 10.627 8.381 7.888 8.248 11.642 2.434 2.320 0.013 0.008 0.103 0.097 2.365 27.715 18.323 51.135 0.170 0.013 29.517 32.467 6.152 3.175 0.216 3.125 2.025 22.935 1016.28 5.838 0.665 0.554 0.075 0.924 0.498 1.215 1.077 0.091 0.065 0.138 0.126 61.496 1.061 0.945 0.114 0.000 54.864 0.045 0.041 0.007 0.004 0.406 0.009 0.001

-7.6% -9.4% 16.4% -9.1%

13.3% -12.7% 1.5% 56.5% 18.5% -11.3% 0.0% 221.9% 0.9% -1.8% 26.3% 0.6% 38.0% -21.2% -14.9% -26.0% -5.0% 13.2% -8.3% -35.5% -23.0% -19.1% -15.2% 29.2% 28.2% 39.3% 18.6% 174.5%

Source: MICEX SE

-14.5% 53.9%

-22.0% -18.7% -37.2% -22.2% -2.2% -18.9% -18.1%

102.0% -24.8% -12.3% -50.5%

-42.7% -33.8% -32.0% -42.9%

Territory Generation Co.-2 (TGK-2) Territory Generation Co.-2 (TGK-2) Territory Generation Co. No.4 (TGK-4) Territory Generation Co. No.4 (TGK-4) Territory Generation Co. No.5 (TGK-5) Territory Generation Co. No.6 (TGK-6) South Generation Co. - TGC-8 (TGK-8) Territorial Generation Co.-10 (TGK-10) Territorial Generation Co.-10 (TGK-10) Territorial Generation Co.-11 (TGK-11) Territorial Generation Co.-11 (TGK-11) Territorial Generation Co.-11 (TGK-11) TAMP Tula Retail Co. Tomsk Distribution Co. Tomsk Distribution Co. Tomsk Energy Retail Co. Tomsk Energy Retail Co. Gubernskiy bank Tarkhany Trubnaya Metallurgicheskaya Kompaniya Transneft Tattelecom Tverenergo Tverenergo Tver Energy Retail Co. Tver Energy Retail Co. Trade house TsUM Ulyanovsk Automobile Plant Udmurtian Energy Retail Co. Udmurtian Energy Retail Co. Uralkali Uralsvyazinform Uralsvyazinform UTair, Aviakompaniya Yuzhnaya Telekommunikatsionnaya Kompaniya (YTK) Yuzhnaya Telekommunikatsionnaya Kompaniya (YTK) Vladimir Energy Retail Co. Verofarm Volgograd Energy Retail Co. Volgograd Energy Retail Co. Volzhskaya MRK Volzhskaya MRK VolgogradEnergo VolgogradEnergo VolgogradEnergo Vologda Retail Co. Voronezh Energy Retail Co. VSMPO-AVISMA Corporation Vneshtorgbank (VTB) VTB Bank North-West VolgaTelecom VolgaTelecom Volga TGC Voronezhenergo Voronezhenergo Vozrozhdeniye, Bank Vozrozhdeniye, Bank Wimm-Bill-Dann Produkty Pitaniya Yarenergo Yarenergo Yakutskenergo, AK Yaroslavl Retail Co. Yaroslavl Retail Co. Yaroslavich, Commercial Bank ZMZ ZMZ

0.001 0.001 0.001 0.000 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.326 0.026 0.038 0.000 0.007 0.004 0.226 0.000 2094.71 0.000 0.364 0.292 0.053 0.035 0.000 0.086 0.142 0.146 0.000 0.063 0.041 0.464 0.174 0.133 0.000 38.771 0.120 0.085 0.000 0.000 14.266 0.000 0.000 0.000 0.312 310.419 0.000 0.000 5.898 3.957 0.000 0.000 2.490 56.810 32.515 53.899 0.000 0.000 0.052 0.000 0.000 43.732 0.000 1.384

0.001 0.001 0.001 0.001 0.001 0.001 0.001 4.419 4.421 0.001 0.002 0.001 0.746 0.028 0.035 0.031 0.004 0.003 0.198 7.806 1366.19 0.011 0.382 0.000 0.000 0.000 2.964 0.122 0.191 0.095 7.510 0.053 0.034 0.772 0.167 0.131 0.775 55.760 0.097 0.044 0.061 0.058 15.331 1.275 1.192 1.677 0.149 241.700 0.003 1.628 4.339 3.203 0.102 4.806 4.277 57.876 25.093 73.504 8.972 8.046 0.032 0.888 0.380 0.000 3.008 2.512

-20.0% -38.3% -5.6% -39.0% -27.9% 15.8%

128.9% 6.5% -9.8% -44.6% -23.8% -12.5% -34.8% 5.0%

41.4% 34.2% -35.2% -15.7% -16.2% 66.4% -4.1% -1.9% 43.8% -19.1% -48.0%


-52.3% -22.1%

-26.4% -19.1%

71.8% 1.9% -22.8% 36.4%



Companies Actively Traded on MICEX SE • 1

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 5: The IPO Story

Russian IPOs Raised $30 Billion+ in 2007 But Global Conditions Shut the Door in Q1 2008
From Feast to Famine in a Matter of Months, The Game Is Now “Wait and See”

Company IPO 1Q Polimetall Sitronics Integra Group IPO 2Q AFI Development MMK Nutrinvest holding Pharmstandard VTB Dixi Group RTM

hese are tough times for companies looking to raise money. Amid the maelstrom of the global financial crisis, potential investors are battening down the hatches and adopting a “wait and see” approach. That’s in sharp contrast to last year. In 2007, Russian IPOs pushed through the $30 billion mark, as companies were able to set high valuations, and the government supported the offerings of two state banks, Sberbank and VTB. Toward the end of the year, both Bank St. Petersburg and Uralkali were able to pull off hotly contested IPOs, and their stock has performed well since. Just a few months later, the situation is

looking quite different. Around 85 companies globally have either withdrawn or postponed their IPOs for 2008, according to Bloomberg data, following the plunge in equity markets and falling investor demand. In Russia, Teorema pulled an IPO late last year, while Sberbank, which plans to offer global depositary receipts in London, delayed a listing from February. Prosperity Capital, meanwhile, halted its listing of a new electricity fund, while KIT Finance pulled its plans to list this year and said it might seek a sale instead. “There’s a huge amount of uncertainty on the IPO market in general,” says Chris Weafer, chief strategist at Moscow-based UralSib bank. “[Initial public offerings] have not been profitable

for investors in almost every market. Investors are very reluctant to invest unless the issue is really cheap.” Last May, state-owned VTB Bank raised $8 billion in its “people’s IPO,” so called because many ordinary Russians bought into the stock. Since its listing, VTB’s share price had plummeted nearly 40 percent as of March 19, in part because banking stocks are out of favor, but also because the government encouraged wealthy domestic investors to buy into the IPO, and those same investors are now less willing to support the stock when it’s down. “For VTB, the curse was this people’s IPO – there were a lot of inexperienced investors who didn’t really understand

Initial Public Offerings in 2007
Industry Listed on IPO volume USD mln IPO share (%) Price at placement (per share) Price at 19.03.2008 Change (%)

Metal IT Service


682.00 402.00 667.20

28.00 17.50 28.00

$7.75 (195 RUR) $0.24 (6 RUR) $16.75 (426.95 RUR)

$8.63(202 RUR) $0.12 (2.93 RUR) $11.53 (272.1 RUR)

4% -51% -31%

Construction / Development Metals FMCG Pharmacy / FMCG Financials Retail Construction / Development Construction / Development FMCG / Service

LSE MICEX Stock Exchange, RTS, LSE MICEX Stock Exchange, RTS MICEX Stock Exchange, RTS, LSE MICEX Stock Exchange, RTS, LSE MICEX Stock Exchange, RTS RTS, LSE MICEX Stock Exchange, RTS, LSE RTS

1,400.00 1,000.00 200.00 879.80 7,988.80 360.00 80.00 1,850.00 100.00

20.60 9.80 27.40 40.00 22.50 41.70 25.80 15.00 26.00

$14 (350 RUR) $0.962 (24.05 RUR) $53 (1325 RUR) $58.2 (1455 RUR) $0.00528 (o.136 RUR) $14.4 (360 RUR) $2.3 (57.5 RUR) $25 (625 RUR) $32 (800 RUR)

$7.73 (182.43 RUR) $1.26 (29.79 RUR) $40.04 (945 RUR) $64.83 (1530 RUR) $0.0036 (0.085 RUR) $14.06 (332 RUR) $2.3 (54 RUR) $26.86 (634 RUR) $52 (1227.2 RUR)

-45% 24% -29% 5% -38% 7% -6% 1% 53%

Gruppa Kompaniy PIK Rosinter Restaurants IPO 3Q Armada Finam IT Fund OGK-2 IPO 4Q UralKali BKE

IT IT Energy

MICEX Stock Exchange, RTS MICEX Stock Exchange MICEX Stock Exchange, RTS, LSE

29.80 20.00 995.90

16.70 45.32

$14.84 (371 RUR) $0.16 (3.86 RUR)

$21.5(508 RUR) $0.12 (2.75 RUR)

37% -29%

Chemicals Service


947.90 783.30

12.75 21.00

$3.5 (85.75 RUR) $23.5 (575.75 RUR)

$7.6 (178.76 RUR) $24.5 (578.2RUR)

208% 4%

1 • Russian IPOs Raised $30 Billion+ in 2007 But Global Conditions Shut the Door in Q1 2008

what the fundamental value was and don’t really have the same investment horizon [as more experienced investors],” says Ivan Mazalov, a director at Prosper-

analysts say they are more likely to sit out the current uncertainty until appetite picks up and they can attract higher valuations. According to UralSib, deals worth around $40

“There’s a huge amount of uncertainty on the IPo market in general. IPos have not been profitable for investors in almost every market. Investors are very reluctant to invest unless the issue is really cheap.”
chRIS WeaFeR, uRalSIB Bank
ity Capital Management, a $5 billion fund company focused on Russia. VTB is not an isolated case. Other firms, which carried out major listings last year, have also seen their stock plunge, including Sitronics, down 51 percent, Integra Group, down 31 percent, and Nutrinvest Holding, down 29 percent, according to information from MICEX Stock Exchange. So, what’s in store for 2008? While many Russian companies, keen to raise cash to re-invest in their business, have publicly declared their intention to seek a listing, billion are in the pipeline over the next 12 to 20 months. Some of the companies, which have indicated they may seek a listing this year, include Russia Timber, Russia Copper, UralSib, Gazmetall and several electricity generation companies, as Unified Energy System winds up. Analysts expect many companies to target dual listings, with London expected to attract the lion’s share, thanks in part to its proven investor base for Russian listings, and its three-hour time difference. But increasing numbers of companies are also looking

toward other exchanges, such as Frankfurt in Europe and Hong Kong and Shanghai in Asia. To date in 2008, however, not one Russian company has come to the market. “Most can wait, and will wait. It is not critical,” says Weafer. “There are a few, such as [retailer] Magnit that do have a more pressing need. They have the choice to come with a substantial discount or sell to a strategic partner.” Not everybody is so gloomy. In its annual survey published in February, PBN Co., a public relations consultant, said it expects $30 billion in Russian IPOs this year, roughly equivalent to last year. It says it does not anticipate any significant slowdown as a consequence of the global crisis, which many hope will leave Russia relatively unscathed. n



Listed on

IPO volume USD mln

IPO share (%)

Price at placement (per share)

Price at 19.03.2008

Change (%)

M.Video Novorossiysk Com. Sea Port Bank Saint Petersburg LSR Sinergia

Retail Transportations Financials Construction / Development FMCG

MICEX Stock Exchange, RTS, LSE MICEX Stock Exchange, RTS, LSE MICEX Stock Exchange, RTS, LSE MICEX Stock Exchange, RTS, LSE MICEX Stock Exchange, RTS

364.80 980.00 274.32 772.00 190.40

25.00 20.00 20.00 12.50 19.00

$6.95 (170.3 RUR) $0.256 (6.27 RUR) $5.4 (132.3 RUR) $72.5 (1776.25 RUR) $70 (1715 RUR)

$ 7.8 (184 RUR) $0.216 (5.1 RUR) $5.1 (121.01 RUR) $84.7 (2000 RUR) $53.8 (1270 RUR)

8% -19% -9% 13% -26%

Secondary Public Offerings in 2007
SPO 1Q Sberbank SPO 2Q Bank Vozrozhdenia SPO 3Q URSA Bank SPO 4Q Aptechnaya set 36.6 Razgulyay RBC Information Systems Total IPO Total SPO Grand total Retail / Pharmacy FMCG IT 22 6 28 MICEX Stock Exchange, RTS MICEX Stock Exchange, RTS MICEX Stock Exchange, RTS 115.00 70.00 187.00 20,968.20 9,808.40 30,776.60
Source: MICEX SE


MICEX Stock Exchange, RTS



$3560 (89 000 RUR)

$3.16 (74.5 RUR)



MICEX Stock Exchange, RTS



$59 (1480 RUR)

$57.3 (1353 RUR)






$2.1(52.5 RUR)

$1.43 (33.75 RUR)



$76.5 (1874.25 RUR) $4.92 (125.4 RUR)

$52.75 (1245 RUR) $8.22 (193.9) $10.32 (243.45 RUR)

-34% 55% 10%


$9 (221 RUR)

Russian IPOs Raised $30 Billion+ in 2007 But Global Conditions Shut the Door in Q1 2008 • 1

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 6: Up and Coming Companies

Changes in the Political Paradigm Create New Opportunities for Investment
Vladimir Putin’s Premiership May be the Hallmark of a New Era


h e Russian presidential elections – just like last year’s Duma elections – have come and gone, accompanied by little more than casual pundit comments. With the result known well in advance, even the usual neocon criticism was been significantly dulled by a sense of inevitability. Analysts mostly noted the continuity theme and the fact that economic policies are expected to remain largely unchanged – at least during the initial stage of the new administration. But if the continuity theme is true, it is only partially so, and only on the surface. The momentous change brought by the advent of the new administration doesn’t necessarily lie with the new President, Dmitry Medvedev, and the impact of his policies on the economy. The largest impact on the Russian economic landscape will come from the office of the Prime Minister – probably the former President, Vladimir Putin. In the end, without denying the influence of the new President on economic policies, it is the office of the Prime Minister that directly controls the economic ministries. It is thus the office of the Prime Minister that will become the focus of the country’s next phase of development. The focus of change is now the economic ministries, not power ministries, so expect further reform A question still widely asked after the elections is if there will be changes to the attributes of the President’s and Prime Minister’s offices. The answer remains, and will remain: no. The reason is simple. The main strategic tasks of the previous administration were related to the competence of the “power ministries” – ministries that answer directly to the office of the President. These tasks include: fostering a resurgent Russia in the international arena, strengthening the political role of the state and centralizing the decision-making process, establishing unchallenged state control over the broad, strategic directions of economic and social development. These were achieved with the support of the ministries under the President’s office. Now, the processes already begun have only to run their natural course. A change in policies is not necessary or expected. The main challenges ahead lie mainly with implementation of policies in the economic sphere, in the broad framework of state/private-sector interactions already achieved under the previous administration. The Russian leadership has, in the past, emphasized the establishment of the rules of the game, the relative roles of players and the instruments for action in the economy. The focus of the new administration will shift to creation of economic value and expand to include sectors that have been neglected by the state and out of the reach of private investors. The competencies to implement such plans obviously lie with the economic ministries under the Prime Minister. From establishing strategic control to creating value: the need for cash The nature of the relationship between the outgoing administration and the economy was obviously dominated by the need of the state to

control, influence and, in the end, annex the economic process to the political needs of the state. Once this stage has been completed, the interaction of the state with the economy under the new administration will suffer substantial transformation, and the first signs of change should already be forthcoming before the end of 2008. The next challenge for the Russian leadership class – after establishing strategic control and gaining legitimacy – is to create economic value from the country’s assets. It is easy to underestimate the level of investment that Russia needs in order to establish a solid base of growth over a long-term perspective. Pundits usually extol the amount of reserves in Russian coffers as a universal panacea to all of Russia’s investment needs. Russian surplus is indeed to be envied, but not when compared with Russia’s needs for investment. To understand the order of magnitude of these needs, one has to reflect that the whole of the $160 billion squirreled away

Up and Coming Bets: Infrastructure and Consumers
RTM LSR Bashneftegeofizika Sibneftegeofizika Armada IBS Group Renova Media NTK Synergy Black Earth Farming Mostostroyindustria Energomash Chekhov Power Engineering Machine-building Works UETM-UHM Electrozavod Elsib Centroenergomontazh firm Motovilicha Tractor Plants Cheboksary Aggregate Works Promtractor Kurganmashzavod Irkutskkabel Kamkabel
Note: Companies above that are non-traded announced IPO plans in near future.

Development Development, construction materials Prospection, oil services Prospection, oil services IT IT Cable TV Cable TV Consumer Retail Agriculture Infrastructure Power generation equipment Power generation equipment Power generation equipment Power generation equipment Power generation equipment Power engineering and installation Equipment Heavy machinery Heavy machinery Heavy machinery Heavy machinery Cable producer Cable producer

18 • changes in the Political Paradigm create new opportunities for Investment • co-Published by kIT Finance

Co-Published by KIT Finance

in the government superfunds barely covers the $120 billion needed for investment in the utility sector alone. It is thus easy to fathom that the current administration’s quest for value creation has hit a significant hurdle in the sourcing of the amounts needed to kick-start the many sectors in the economy that have not benefited from a trickledown of the booming commodity cycle. Private investors, partners of the state – means to an end and how to achieve it: privatization and reform Full government coffers have cast the state in the role of potential investor with the largest pockets in the market. It is, again, a matter of judging the issue in the relative light of needs versus means. The state is indeed a potential sponsor for economic areas unattractive for private money, but it cannot and will not try to substitute itself in place of the strategic or portfolio investor. Rather, the state will attempt to create a partnership with private capital on the basis of the “rules of the game” already established under the previous administration. Attracting private capital to the Russian economy thus becomes a dire necessity and a main priority for the leadership of the country. With its strategic control over the economy unchallenged and multiple political levers to influence the economic processes, the Russian state should be less inclined to concentrate ownership in state companies. Rather, further privatizations Caius Rapanu should follow, even in sectors that have Head of Research, KIT Finance remained so far firmly in state hands. Most often, privatizations alone are not sufficient to attract investors to stalled industries. Consequently, many of these sectors will begin to be reformed and set on a market basis. The utility sector offers an example of a successful pilot program for both privatization and reform. For many years, one of the most inefficient industries in the country, the utilities sector has embarked in the past couple of years on a path to modernization unparalleled in any Russian industry. Significant areas of the sector have been privatized. Moreover, the industry is being liberalized: Reform introduced in electricity generation will gradually eliminate any tariff regulation, while distribution tariffs will be set on an economic basis designed to stimulate investment. A Russian paradox: old and new economy developing side by side Investment possibilities in Russia have long been confined to a handful of highly capitalized, liquid sectors mostly connected to the resource sectors, with a smattering of utilities, telecom and consumer stocks. This is not going to change over the short term. The less risk-averse investor, however, should continue to look beyond to less-known, lower capitalized and less-liquid sectors that stand to benefit from the economic implications of the new political paradigm of Russia: state and private investment, consumer spending, privatization and reform. Early movers stand to make significant returns, but the window of opportunity will remain open, and such plays are set to remain profitable throughout the investment cycle. One of the paradoxes of Russia is the fact that the sectors to be developed over the medium term belong to both the “old and new economy.” Infrastructure, transportation, construction and heavy equipment plays will be complemented in the medium term by expansion in such industries as information technology, telecom and high-tech. Play the primum movens: the state, and also the consumer International markets will remain volatile during at least the first half of 2008 and perhaps through the end of the year. Russia will not decouple from global markets and cannot escape similar volatility. Consequently, timing investments in the country is more a factor of choosing the right class of assets (i.e. fixed income vs. equities vs. cash) rather than cherry-picking among different stocks. Nevertheless, the investor in search of alpha who is willing to take the risk would do well to monitor investment actions taken by the state. Infrastructure investments, such as road building, large construction projects or construction of hydro power plants, may offer scarce or no direct participation opportunities for the investor. A plethora of ancillary service companies, however, are already available to the investor. Producers of construction materials, earth-moving equipment and auxiliary equipment are only a few of the companies set to benefit indirectly from state-sponsored investments in infrastructure. Reform and privatization will offer the investor additional opportunities in the markets over the medium term. The Russian Railway System is in need of major overhaul and investments. It very well may be reformed on the pattern of the utilities sector, which would create multiple investment opportunities. Similarly, over a longer time horizon, the gas and oil transportation systems may be partially privatized on the example of Gazprom. Consumer stocks are also an interesting option, on the back of continuous growth and increasing diversification in consumer spending. Telecommunication, IT, high tech, and the whole array of service companies in Russia will continue to offer investment possibilities. The process of Russian market diversification continues and will accelerate over the next couple of years, with investments that now look exotic having a considerable chance of becoming future blue chips. This is consistent with the development path on which Russia is already engaged and with the scope of its current and future leadership. Both strategic and portfolio investors are an integral part of this process and have an opportunity to reap attractive returns. n

—By Caius Rapanu/KIT Finance-Research

KIT Finance

Contact Information

191011 Russia, Saint-Petersburg, Nevsky pr 38/4, Lit.A, Business Centre «Nevsky, 38» Phone: + 7 812 326 1305

changes in the Political Paradigm create new opportunities for Investment • co-Published by kIT Finance • 19

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 7: Banking and Finance in Russia

Retail Banking Explodes and Foreign Banks Seek a Bigger Share of the Domestic Market
Consumer Lending Has Increased Fivefold Since 2004


onsumer banking is becoming a big business in Russia, and foreign banks and financial institutions are flooding into the country to capitalize on the growing boom in mortgages, credit cards and consumer lending. The result: a surge in merger and acquisition activity as overseas banks snap up small and midsize domestic banks to gain a foothold in the market. By the end of last year, consumer lending had shot up to $100 billion, from $20 billion in 2004. Mortgage loans are growing, too, but they total just 2.3 percent of Russian GDP, and other housing

loans represent only 1.4 percent, according to the Association of Russian Banks. Moscow brokerage Aton Capital estimates that 100 million Russians have never taken out any kind of loan. Barclays, Unicredit, Raiffeisen and Société Générale have all recently made acquisitions in the country, while Europe’s biggest bank, HSBC, is spending $200 million to expand its network across Russia. Data from Thomson Financial indicates that banking and finance M&A by foreign institutions generated 25 deals worth more than $1.5 billion in the year to March 28, 2008. This was almost double the $850 million spent on 14 deals in the previous 12

months. According to the Central Bank of Russia, 79 banks in the country are now more than 50 percent controlled by foreigners, and a further 10 banks are set to enter the Russian market this year. Barclays is paying about $750 million, or about four times book value – a multiple in line with recent deals – for Russia’s Expobank. “We believe that the fact that such a deal is taking place at all in an environment of global financial instability and a cautious attitude toward banks across the world is positive news, signifying the attractiveness of Russian banking assets,” says Natalia Orlova, senior analyst at Alfa Bank. Foreign players are keen to buy established retail banking operations because launching a subsidiary bank in Russia from scratch can take up to two years. Whereas Austria’s Raiffeisen and France’s Société Générale have both bought Russian banks – Impex Bank and Rosbank, respectively – Citibank’s attempts to develop its own operation in Russia have met with limited success, according to Svetlana Kovalskaya, a banking analyst at Renaissance Capital. “It’s much easier to break into the Russian market by buying something,” she says. “It can be simpler and faster for foreign banks to buy in than to do it greenfield.” Russian Banks on the Make Foreign ownership of Russian banks is set to rise from 12 percent to 18 percent by the end of this year, the Central Bank said. Not all Russian banks, however, are selling to foreign strategic investors. The larger ones, including Troika Dialog, UralSib and MDM, are considering flotations, while recent IPOs by state-controlled Sberbank and VTB have increased Russian banking’s capital by 25 percent.

20 • Retail Banking Explodes and Foreign Banks Seek a Bigger Share of the Domestic Market

Sberbank and VTB currently dominate the Russian retail banking market with almost half of retail operations. Together, they have a 31 percent share of mortgage volume, with 10 other private banks holding a further 33 percent. Both say they are ready for competition, but that could force them to cut interest rates, which are now

Ruben Aganbegyan, chief executive of Renaissance Capital Russia. “Our deep understanding of the Russian market is combined with top-level international expertise. Look at our top hires – they are the best bankers on the market.” Russian investment boutiques KIT Finance and Metropol Invest have also emerged as top-four players in Russian

“It’s much easier to break into the Russian market by buying something. It can be simpler and faster for foreign banks to buy in than to do it greenfield.”
SveTlana kovalSkaya, RenaISSance caPITal
around 10 percent, closer to the G7 average of less than 4 percent. German Gref, Sberbank’s new chief executive, has pledged to boost mortgage financing operations. The bank introduced a 0.5 percentage-point cut in its mortgage loans in March, along with a cut in consumer lending rates. Mortgage lending is in its infancy in Russia. It grew 140 percent last year, or $17.6 billion, to total $30 billion at end of 2007. But it is still an embryonic business. Equal to only 2.3 percent of GDP, mortgage lending amounts to a mere $211 per capita, compared with 10 percent to 15 percent of GDP in Poland, Hungary and the Czech Republic. Only 10 percent to 15 percent of real estate in Russia is bought using bank loans, compared with an estimated 30 percent to 40 percent in other Central and Eastern European countries. Russian-owned banks are already successfully competing with their bulgebracket international rivals for talent and business in equity capital markets. Domestic brokerage Renaissance Capital last year broke into the global top 10 of investment banks running initial public offerings, and Troika Dialog ranked in the top five for domestic equity issues. “We have a long-established presence on the ground – in fact, we are strongly opposed to the fly-in, fly-out investment banking model in all the markets where we operate. We believe our clients have the right to expect their bankers to be next to them all the time,” says M&A over the past year, according to Thomson Financial. Both banks earned their positions on the strength of utilitysector transactions. Teaming up with Foreign Banks Sberbank is looking at cooperating with international bulge-bracket bank Goldman Sachs in international capital markets and is considering a move into investment banking. VTB has already taken the plunge and will spend $500 million over the next two years

under Chief Executive Charles Ryan, has been hit by more defections than most, with VTB poaching a number of leading executives from its ranks. Ryan is nonplussed by the comings and goings and can point to Deutsche’s continued high ranking in the equity and debt capital markets. “I have seen this movie before. Moscow is not a get-rich scheme, because you need to have all the pieces of infrastructure in place, like we do,” says Ryan. “A lot of our competitors are becoming desperate because they can’t achieve scale. They are playing tennis without a net.” Russian initial public offerings raised a record $30.8 billion last year, half that due to Sberbank’s and VTB’s listings. Some analysts believe the liquidity crisis will have a serious effect on equity issuance this year. Russian corporate borrowing has slowed as a result of the credit crunch. Debt issuance rose to $48.7 billion last year, from $43.2 billion in 2006, but almost 90 percent of the year’s issuance took place in the first three quarters. M&A, particularly in the financial and consumer sectors, has filled the void, with 179 deals worth $22.7 billion in the first two months of this year,

Russian initial public offerings raised a record $29. billion last year, half that due to Sberbank’s and vTB’s listings. Some analysts believe the liquidity crisis will have a serious effect on equity issuance this year.
to set up investment banking arms in Moscow, London and Singapore. It has hired Yuri Soloviev, deputy chairman of Deutsche Bank’s Russian arm, to run the business. VTB Chief Executive Andrei Kostin says he envisions the investment banking business breaking even within three years. But some analysts in Moscow are skeptical. “We have a slightly negative view on the investment, as we believe it carries some execution risk for the bank in the midterm, as the market is highly competitive and VTB does not have a brand name in the international investment banking market,” says Chris Weafer, chief strategist of UralSib. Deutsche Bank’s Russian operation, according to data provider Dealogic. With competition in Moscow’s capital market intensifying, investment banks are turning more and more to Ukraine, Kazakhstan and other former Soviet states. Deutsche Bank, Morgan Stanley, Credit Suisse and UBS are all expanding in Ukraine’s capital, Kiev, while Troika and Renaissance have both added to their operations in Kazakhstan’s financial hub, Almaty. n

Retail Banking Explodes and Foreign Banks Seek a Bigger Share of the Domestic Market • 21

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 8: The Ruble Bond Market

Institutional Investors Will Play a Bigger Role in Domestic Fixed-Income Activity
Ruble Appreciation Draws More Global Buyers to Local Bonds


year ago, we welcomed the emergence, finally, of Russia’s fixed-income market as a full-fledged member of the global capital markets after the authorities lifted all restrictions on capital operations by foreigners and thus made the ruble fully convertible. The change was formally recognized in early 2007, when Clearstream and Euroclear began to accept the ruble as a settlement currency. Russia’s fixed-income market became united, and foreigners, who gained easier access to ruble bonds, began investing more actively in domestic securities. The attractiveness of local bonds was proven not by the high interest rates, but by expectations of further ruble appreciation, which the country’s monetary authorities used as a tool to fight inflation. The currency-appreciation bet played out well in the first half of 2007 and fueled further demand for local bonds. To meet this demand, several issuers placed fullfledged eurobonds denominated in rubles in 2007. Demand for domestic bonds was so high that the difference between yields on the local and international debt markets declined to nearly zero, and international investors began to delve deeply into the second and even third tiers, despite the higher credit risk. The Alexander Kudrin Head of Fixed Income, Troika same happened on global capital markets, stimulated by a hunt for higher yields. That allowed Russian borrowers to raise money actively and thus supported the rapid growth of outstanding debt securities denominated in both rubles and hard currency. But every coin has two sides. Strong demand turned into a huge selloff in the second half of last year, and both sectors of Russia’s fixed-income market suffered greatly as a result. The global financial crisis caused a capital flight to quality and widened spreads for all categories of borrowers on the international market. Simultaneously, many foreign investors decided to cut their ruble exposure, which pushed yields up significantly. The credit crunch, which started in mid-2007, had a negative impact on the ability of Russian banks and corporations to raise money on the debt market. During past several years, international markets had become one of the main sources of funding for local entities. But with the onset of the crisis, international borrowing (for both syndicated loans and eurobonds) became a privilege of first-tier

entities. The difficulties forced other corporations and banks to look to opportunities on the local market. Despite general turbulence, many investors are still ready to buy ruble bonds in certain amounts and in such a way that will support the Russian economy. In this sense, it’s critically important to understand who the potential buyers of these securities are. We can discern three major groups of clients on the ruble bond market: Russia-based commercial banks, international investors and local institutional investors. Understanding the Buyers All of these groups are sensitive to different variables. The first, by the nature of its business, depends on the cost of financing, which is defined by interest-rate levels on both domestic and international markets. In the domestic market, many banks traditionally use short-term financing for operations with securities. Most of the local money market is concentrated in extremely short-term loans, most with durations of one day, and waning confidence and capital outflows in the second half of 2007 pushed money market rates up. Moreover, from a fundamental point of view, the cost of money in 2008 may grow further still. We expect the overnight rate to average 5 percent to 6 percent next year, which is only slightly lower than the Central Bank’s repo rate (the main instrument for injecting liquidity into the system). For comparative purposes, this rate’s average level of 5 percent in fiscal 2007 and 3.6 percent in last year’s first half implies an increase of 100 to 200 basis points, which automatically carries through to the bond market. Banks can raise longer-term money in the form of deposits. Significant growth in retail deposits is virtually a certainty this year in light of double-digit inflation in 2007 and expectations that the Central Bank will raise its refinancing rate. A slew of banks are likely to hunt for this money, and this competition may fan the flames, tacking on another 100 to 200 bps in 2008. Further, some banks can expect additional inflow into their equity capital. Unfortunately, the number of such banks is not large, as is also true of the number of credit organizations that are prepared for public equity placements (due to unclear business models and nontransparent organization). The issuance of longterm bonds is virtually impossible for second- and third-tier banks, and much more expensive relative to external debt placements for first-tier names. Moreover, we are sure that long-term money will be used mainly for banks’ primary activities – direct lending to corporations and retail consumers – rather than for investments in capital markets. During the crisis, cash-rich banks (which in Russia means stateowned banks) had the unique opportunity to corner a significant portion of the market by leveraging the relative weaknesses of their

22 • Institutional Investors Will Play a Bigger Role in Domestic Fixed-Income Activity • co-Published by Troika dialog

deals closed by Russian companies on the eurobonds market

Investor’s Structure on the Ruble Fixed Income market

Non-state pension funds (1%)*

250 200 150 100 50

(Number of Primary Deals)
● Ruble bonds ● Eurobonds
Only 5 deals were closed by Russian companies on the Eurobonds market in 1Q, 2008

Mutual funds (2%) Investment companies (3%) Insurance companies (3%) Others (4%) Russian branches of foreign banks State management company (GUK)

Russian banks

27% 10% 11% 18%


Asset management companies

Source: Troika Dialog

Source: Central Bank, NAUFOR, Interfax, Troika Dialog estimates. * Money invested by funds by themselves

competitors. Finally, Non-state pension funds*

lenders can put more covenants into loan agreements to protect themselves, while on the ruble bond market, Mutual funds such protection is much rarer. Covenant protection is another Investment companies advantage of direct lending. Insurance companies Given all these factors, we expect Russian commercial banks to Others require from borrowers yields at least 100 to 200 bps higher than Russian 2007. These “requirements” are unlikely to be equal for differin branches of foreign banks Stateent types of borrowers. For bonds that can be used as collateral management company (GUK) for SberbankCentral Bank repo loans, the premium will be minimal, while borrowers from the financial sector will suffer high yields. Asset management companies
Russian banks

Investors from Abroad Non-state pensiongroup of investors is international players. These The second funds (1%)* Russian banks investors played a highly significant role in the ruble bond market Mutual funds (2%) during last year’s first half, when the hunt for yield and a strong beInvestment companies (3%) lief in continual ruble appreciation27% demand for local bonds. fueled During some primary placements, international investors bought Insurance Asset companies (3%) close to 100 percent of the issue. Interestingly, the frenzy reached 21% management companies 10% Others (4%) such dizzying heights that this sort of behavior held true even in the second tier (which ironically included several mortgage-linked Russian branches 11% 18% of foreign banks issuers). Now, however, the macroeconomic background has State management changed, and betting on never-ending ruble appreciation is no Sberbank company (GUK) longer popular. Yet, on the back of extremely high oil prices and attendant capital inflows, it is logical to expect the local currency to strengthen, at least slightly. But it is no longer monetary orthodoxy to use this method to fight inflation. Thus, the expectation of nominal effective ruble appreciation over the next 12 months, which attracted foreigners to the local market, is likely to decrease from the 4 percent to 5 percent seen in the beginning of 2007 to 1 percent to 2 percent at the beginning of 2008. The difference between these two ranges (2.0 to 3.5 percentage points) is equivalent, in our view, to yield increases necessary to attract new foreign money to the market. At the same time, the stabilization of the global market stemming from the lower fed funds rate slashes the cost of financing for this group of investors by 50 to 70 bps. Thus, we need to cut the “required premium” down to 1 percent to 3 percent (in comparison to 2007). All of these conclusions relate first and foremost to “pure” global players, not local branches of international banks. The latter already have significant chunks of money denominated in rubles, and thus their behavior mimics Russian commercial banks.

Russia’s Institutional Investors The third group of investors is Russia-based institutions, which might be thought of as the market’s hope. Pension funds and insurance and asset management companies depend little on the aforementioned interest-rate or exchange-rate fluctuations. These players do not care about the cost of funding; rather, they focus mainly on the performance and safety of their investments. Thus, they did not leave the market during the crisis and were among the only participants in the rare primary placements of September and October. Meanwhile, some issuers’ risk of potential default has made them cautious toward third-tier borrowers. This, along with the fact that high-quality, second-tier paper reached yield levels more typical of third-tier issues in the first half of 2007, spurred a flight to quality. For these investors, inflation could theoretically be the target to beat. Thus the higher-than-expected inflation rate for 2007 would set the target higher and increase yield requirements. But in practice, the impact of this indicator is limited. We still believe that local institutional investors will be highly flexible and will follow general trends in the market, but they could compensate slightly for the “requirements” of other groups of investors. This group’s weight in the corporate bond market will be higher in 2008, as the authorities are likely to expand the list of nongovernment bonds in which the State Management Company is permitted to invest. We believe the latter group of investors may become the key driving force for the local FI market in the medium term. Russianbased institutional investors are likely to define the character of the market and require new limits on issuers, especially in case of legal protection of their rights (so-called covenants). n

—By Alexander Kudrin, Head of Fixed Income, Troika Dialog

Alexander Kudrin Head of Fixed Income

Contact Information

Troika Dialog Tel: (7 495) 258 0511 Direct: (7 495) 933 9847 Fax: (7 495) 258 0582

Institutional Investors Will Play a Bigger Role in Domestic Fixed-Income Activity • co-Published by Troika dialog • 2

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 9: Foreign-Currency Bonds

A Roaring Start to 2007 Slowed to a Trickle After August Amid Global Debt Concerns
A Growing Pool of Quality Issuers Will Feed Future Demand

Issuer Eco Telecom Gazprom Transneft Kapital IG Gazprom

ussia’s glittering fundamental economic indicators have not been enough to insulate it from the brutal meltdown at the primary level of the global capital market. “In the first half of last year, the Russian market was very active,” says Richard Luddington, head of CEMEA [Central Europe, Middle East and Africa] debt capital markets at UBS in London. “We saw particularly good appetite for new corporate names, while some of the larger borrowers like Gazprom were able to diversify into new currencies such as sterling and yen, as well as to build out their curves

in dollars and euros. Banks also completed reasonable volumes of funding in the first half of the year, but everything slowed down drastically after August.” The figures tell the story plainly enough. While total issuance of international bonds out of Russia exceeded $27 billion (equivalent) in the first six months of the year, volume shrivelled to about $8 billion in the second half of 2007, with a number of jumbo transactions shelved until further notice as the credit crunch tightened its grip. The most celebrated casualty of the second half of 2007 was the $5 billion transaction that Rosneft had planned to issue in July as part of its refinancing of the $24.5 billion loan

supporting its acquisition of a number of assets previously owned by Yukos. A who’swho of eight international investment banks had been appointed to lead the transaction, which Rosneft pulled when pricing moved against the borrower. Other Russian borrowers, however, were prepared to brave the market even in the third quarter of 2007, most notably Gazprom. Having launched a highly successful 30 year $1.25 billion deal in August, Gazprom emphatically proved that it was possible to drum up support for well-priced, top-quality corporate issuance when it launched a E1.2 billion transaction in October. Led by Citigroup and Société Générale,

Largest Dollar Eurobonds by Russian Issuers in 2007
Agency Ratings Paper Eco Telecom, 2009-A (FRN) BBB/A3/BBB BBB+/A2/Gazprom, 2022 (LPN9) Transneft, 2014 (LPN) Kapital IG, 2010 (CNV) BBB/A3/BBB - /Baa2/BBB+ BBB+/Baa2/BBB+ BB+/Baa2/BBBBB/Ba2/BB-/Ba2/BBBB+/Baa2/BBBBBB-/Baa2/BB+/Baa2/BBBBB/Ba1/BB Gazprom, 2037 (LPN12) Russian Agricultural Bank, 2017 (LPN) VTB, 2012 (LPN13) TNK-BP, 2018 ALROSA, 2007, ECP Russian Standard Bank, 2007, ECP TNK-BP, 2017 Gazprombank, 2010-2 (LPN,FRN) TNK-BP, 2013 Alfa Bank, 2012 (LPN) Eco Telecom, 2009-B (FRN) BBB-/Baa2/BBBBBB-/Baa2/BBBBB+/Baa2/BBBBBB+/A2/- /Baa2/BBBLukoil, 2017 (LPN) Lukoil, 2022 (LPN) TNK-BP, 2012 Transneft, 2012 (LPN) VTB Bank Europe (MNB), 2009-2 (FRN) Total no. of issues: Total no. of companies: Total combined volume:
Source: Cbonds

Amount 1,500,000,000 1,300,000,000 1,300,000,000 1,262,000,000 1,250,000,000 1,250,000,000 1,200,000,000 1,100,000,000 1,000,000,000 1,000,000,000 800,000,000 700,000,000 600,000,000 500,000,000 500,000,000 500,000,000 500,000,000 500,000,000 500,000,000 500,000,000 91 65 29,890,000,000

Russian Agricultural Bank VTB TNK-BP ALROSA Russian Standard Bank TNK-BP Gazprombank TNK-BP Alfa Bank Eco Telecom Lukoil Lukoil TNK-BP Transneft VTB Bank Europe (MNB)

2 • A Roaring Start to 2007 Slowed to a Trickle After August Amid Global Debt Concerns

this 10 year deal was the company’s largest ever euro-denominated transaction and generated demand of about E8 billion. In the same month, Credit Suisse and UBS led a $1.7 billion deal split into a five and 10-year tranche for TNK-BP. Since those transactions, however, new supply from Russia has been painfully thin. Although Gazprom was roadshowing a dollar benchmark at the end of March, in the first quarter of 2008 corporate issuance remained conspicuous by its absence, with financial issuers such as Bank of Moscow left to fly the flag for Russian borrowers in the international market. Its three year Sfr200 million transaction – later increased to Sfr250 million – was the second deal by a Russian borrower in the Swiss franc market, with Russian Agricultural Bank having opened the market with a Sfr375 million three-year deal in March 2007. The failure of the Russian market to reignite in the early months of 2008 is especially frustrating for bankers who say that there ought to be a much closer align-

ment between demand and supply in the market. “Investors have a huge amount of cash at the moment and there is tremendous pent-up demand for exposure to Russia,” says Luddington. At the same time, he says, Russia has seen its fair share of M&A activity which in a more favorable market environment would have been refinanced in the bond market. For now, however, the syndicated loan market continues to finance the bulk of this activity. “Although the loan market has repriced, it still looks competitive for issuers relative to where spreads versus mid-swaps are currently marked in the secondary bond market,” says Luddington. Looking to the longer term, other analysts believe there is likely to be no shortage of potential supply from Russian borrowers. In a report published at the end of March, Moody’s commented that strong economic growth has resulted in “the emergence of many Russian companies with the appropriate business models, experienced management and critical size that help them qualify for debt issuance and other transactions in

the international capital market.” Moody’s adds that an increasing number of ratings are now being assigned to companies outside the strategic natural resources and infrastructure sector, which will support the further diversification of the market going forward. n
Note: As of March 31, Moody’s has placed the Baa2 sovereign score of Russia on review for possible upgrade. The reasons include the favorable macroeconomic situation and the high probability that Dmitry Medvedev’s economic policy will continue. Ten banks In Russia were also placed on review along with the sovereign rating: VTB, VTB North-West, VTB 24, Rosselkhozbank, Sberbank, Vneshekonombank, Gazprombank, the Bank of Moscow, Raiffeisenbank and DeltaCredit. It is yet unclear whether Moody’s will upgrade the country’s sovereign rating by a step or by two. Its score is a step below the ratings of S&P and Fitch. If Moody’s upgrades Russia’s sovereign ratings by two steps, the country will finally join the league of A-class borrowers.

Arranger League Table 2007 (Dollar-Denominated)
# 1 Investment bank ABN AMRO Vol., mln. USD 3,671 Number of Issuers 10 Issues Placed 15 Issues Gazprom, 2013-4 (LPN11, GPB); Gazprom, 2014-2 (LPN10); Gazprom, 2037 (LPN12); Gazprombank, 2010 (LPN); HCFB, 2010 (LPN); ROLF, 2010 (LPN); Russian Standard Bank, 2010-2 (LPN); TNK-BP, 2012; TNK-BP, 2017; Transcapitalbank, 2010 (LPN); Transcapitalbank, 2017 (LPN); TransCreditBank, 2010 (LPN); URSA Bank, 2010-3 (LPN, EUR); Vostochny Express Bank, 2009 (LPN); Vostochny Express Bank, 2017 (LPN) Alfa Bank, 2012 (LPN); Gazprom, 2017-2 (LPN8); Gazprom, 2022 (LPN9); International Industrial Bank, 2010-2 (LPN); International Industrial Bank, 2010 (LPN); Lukoil, 2022 (LPN); Lukoil, 2017 (LPN); MirLand, 2015, NIS; TNK-BP, 2018; TNK-BP, 2013; Transcapitalbank, 2017 (LPN); Transneft, 2014 (LPN) AK BARS Bank, 2010 (LPN); EuroChem, 2012 (LPN); Gazprom, 2018 (LPN13); Gazprom, 2010, JPY; Gazprom, 2012, JPY; National Bank TRUST, 2010 (LPN); Promsvyazbank, 2011 (LPN); Raspadskaya, 2012 (LPN); Renaissance Capital Bank, 2010 (LPN); ROLF, 2010 (LPN); Rosselhosbank, 2017 (LPN); TNK-BP, 2012; TNK-BP, 2017; Transneft, 2012, EUR (LPN); Transneft, 2012 (LPN); URSA Bank, 2010-2 (LPN); VTB Bank Europe (MNB), 2009-2 (FRN) AK BARS Bank, 2010 (LPN); Bank of Moscow, 2017 (LPN); CREDIT EUROPE BANK, 2010 (LPN); Kuzbassrazrezugol, 2010 (LPN); Lukoil, 2022 (LPN); Lukoil, 2017 (LPN); MDM Bank, 2010 (LPN); Transcapitalbank, 2010 (LPN); URSA Bank, 2010-3 (LPN, EUR); VTB, 2009-3 (LPN14, FRN); VTB, 2012 (LPN13); VTB, 2010, GBP (LPN12); VTB, 2009-2 (FRN, LPN11) Absolut Bank, 2010 (LPN); Alfa Bank, 2012 (LPN); Bank Saint Petersburg, 2017 (LPN); EuroChem, 2012 (LPN); Gazprombank, 2010-2 (LPN, FRN); Loсko-Bank, 2010 (LPN); NOMOS-BANK, 2010 (LPN); Raspadskaya, 2012 (LPN); Rosselhosbank, 2010, CHF; Tatfondbank, 2010 (LPN); TNK-BP, 2018; TNK-BP, 2013; Transneft, 2012, EUR (LPN); Transneft, 2012 (LPN); Wimm-Bill-Dann, 2008-2 (LPN) Gazprom, 2017-2 (LPN8); Gazprom, 2013-4 (LPN11, GPB); Gazprom, 2022 (LPN9); Gazprom, 2037 (LPN12); Novorossiysk Commercial Sea Port, 2012 (LPN) Alfa Bank, 2017 (LPN); Bank of Moscow, 2017 (LPN); Bank Saint Petersburg, 2017 (LPN); NOMOS-BANK, 2010 (LPN); Raiffeisen Bank, 2017-A (ABS, FRN); Raiffeisen Bank, 2017-BCD (ABS, FRN); Rosselhosbank, 2017 (LPN); Russian Standard Bank, 2010-2 (LPN); VTB, 2009-3 (LPN14, FRN); VTB, 2012 (LPN13) Gazprombank, 2010 (LPN); Rosselhosbank, 2017 (LPN); Sovfintrade, 2047-A1 (RMBS, FRN); Sovfintrade, 2047-A2 (RMBS, FRN); Sovfintrade, 2047-BCD (RMBS, FRN); TNK-BP, 2012; TNK-BP, 2017; VTB, 2010, GBP (LPN12); VTB, 2009-2 (FRN, LPN11) Finance Leasing Company, 2011 (CLN); VTB, 2008-3 (LPN); Moscow Region, 2012 (CLN); Transnefteproduct, 2009 (CLN)

2 3

Credit Suisse Citigroup

3,553 3,509

8 13

12 17


Deutsche Bank UBS








6 7

Morgan Stanley JP Morgan

2,700 2,203

2 8

5 10

8 9

Barclays Capital VTB (including VTB Bank Eur. Societe Generale

1,647 1,634

5 4

9 4





DeltaCredit Bank, 2035-A (RMBS, FRN); DeltaCredit Bank, 2035-BC (RMBS, FRN); Gazprom, 2018 (LPN13); Gazprom, 2014-2 (LPN10)

Source: Cbonds

A Roaring Start to 2007 Slowed to a Trickle After August Amid Global Debt Concerns • 2

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 10: The Mid Cap Segment

Under-Performance of Large Caps in Early 2008 Opens a Door for Small and Mid Cap Stocks
Some Smaller Companies Have Been Soaring, Even in a Downturn


ost of the trading on the Russian market is carried out in so-called blue chips, which are dominated by the telecom, financial and oil and gas sectors. But four of the market’s leading stocks – Sberbank, VTB, Transneft and TMK – were all down at least 30 percent in the three months from mid-December to mid-March, according to data from UralSib. With the dismal performance of some of the large-cap companies fresh in mind, some investors have been unearthing bargains in the small and midcap tiers. And despite generally downbeat market conditions during the first quarter, issuers in various sectors – chemicals, construction, and coal – considerably outperformed the market. “There is a great number of undiscovered second- and third-tier stocks representing future investment opportunities,” says Eugene Kogan, chief executive of Antanta Capital. These stable and prosperous companies in various sectors are mostly illiquid stocks, because the owner-managers have sacrificed liquidity in favor of limited transparency and tight control of their holdings, according to Kogan.

“In spite of the general downward trend, there are nevertheless some stocks that will head north. during the credit crisis, when global markets were falling, the oil sector was doubling and infrastructure stocks were soaring.”
eugene kogan, anTanTa caPITal
However, the stock market’s growth and the state’s and lending institutions’ demands for more financial transparency are bringing those holders to the point that they are starting to realize the benefits of their investments’ liquidity. As time goes by, the liquidity of many stocks is increasing, and this trend is set to continue. “I characterize this period of the Russian economy as a quiet revolution in the brains of chief managers and managers of small and midcap companies,” says Kogan. This revolution is bringing owner-mangers to Russia’s capital market, where they are looking to raise capital through a private placement or an initial public offering, or to protect their business through a merger or acquisition.

IPOs to Fund Growth Until recently, IPOs were synonymous with selling out – mini-oligarchs looking for an opportunity to cash in their chips. Up to the end of 2006, issuers reinvested only 38 percent of funds raised. However, 2007 represented a sea change, with more than 81 percent of all funds raised being reinvested into the listed businesses. Electronics chain M.Video is taking advantage of substantial growth opportunities in the rapidly developing consumer market, while Bank of St. Petersburg is expanding its asset base in a fast-growing region. During 2007, the best gains were achieved by portfolios that had a high portion of second-tier names, according to research by the brokerage Finam. “The high risk attached to small and midcap companies is offset by potentially higher returns,” says Finam strategist Vladimir Sergiyevsky. “We are of the opinion that in the midterm, these issuers hold stronger upside marketcap growth potential than major corporations. We expect this strategy to return 86 percent in 2008.” Finam’s midtier picks this year include grain and sugar holding company Razgulay; Russia’s leading juice producer, Lebedyansky; retail chain Magnit; nitrogen and phosphorous fertilizer makers Kuybyshevazot and Ammophos, as well as Russia’s leading silver producer, Polymetal. Brokers are also forecasting robust growth in infrastructure sectors – construction, transport, gas and electricity distribution, and electric power generation. “In spite of the general downward trend, there are nevertheless some stocks that will head north,” says Antanta’s Kogan. “During the credit crisis, when global markets were falling, the oil sector was doubling and infrastructure stocks were soaring.” Investment in Russia’s crumbling roads, railway, ports, utilities and municipal services, is a central theme for the political administration. The state plans to increase spending over the next three years, and many of the companies involved are not

2 • Under-Performance of Large Caps in Early 2008 Opens a Door for Small and Mid Cap Stocks • co-Published by antanta capital

Co-Published by Antanta Capital

listed or are listed abroad. The steel sector is the best way to get exposure, but some planned IPOs will also provide exposure. Transport, which includes the airline Aeroflot and Novorossiysk Port, will also benefit from infrastructure spending, according to analysts at UralSib. “We expect domestic steel demand to be robust in 2008, benefiting from state-funded construction and infrastructure investment,” says UralSib’s chief strategist Chris Weafer. “We expect a 25 percent increase in state investment spending, to $290 billion, to directly benefit Russian steel producers.” Government spending on capital investment is forecast to increase by a further 20 percent per annum in 2009 and 2010 and reach $425 billion. As this spending will focus on infrastructure, it should underpin demand and prices in the Russian steel sector. Stockpickers’ year Market analysts believe that 2008, much like 2007, will turn out to be a stockpicker’s year. Only Russian metal and industrial stocks outperformed the Morgan Stanley Capital International Global Emerging Markets (MSCI GEM) index 2007. Metal stocks were up an average 54 percent in 2007 and industrial companies 67 percent. Some companies, such as car maker Avtovaz, did spectacularly well, rising 165 percent. That underlines a new theme: stay close to the government in 2008, as it is the state that is expected to drive investment for the next few years. “We believe the best investment strategy in 2008 will be to invest with the state, as the government plans to raise spending sharply and use administrative/political tools to promote growth in several key industries and in the nation’s infrastructure,” says UralSib’s Weafer. “The first priority is to promote growth in industries in which the state already has national champion companies or those that are dominated by companies close to the state.” Analysts are almost unanimous in their recommendation to buy energy blue-chip Gazprom. It is one of the few stocks in the Russian universe that has not gone through a restructuring, as it has no competition. Management has until now been more or less inert, while the politics of constructing new pipelines and finding partners to develop new fields is being played out. Banks obviously did badly, hit by the credit squeeze caused by the subprime crisis: Russian banking stocks were up by only 14 percent last year, the worst-performing sector in the economy. Standouts were metals and telecom companies. Among the most-liquid blue chips, eight names rose 100 percent or more in 2007: Uralkaly, 362 percent; Mechel, 281 percent; Evraz, 202 percent; Vimpelcom, 176 percent; AvtoVAZ, 165 percent; Golden Telecom, 116 percent; MTS, 103 percent; and Severstal, 103 percent.

The broadening of the investor spectrum and turmoil in the global markets has put more emphasis on Russia. International fund managers, including Pioneer, Fortis and Glitnir, are setting up shop in Moscow to increase their country exposure and to launch Russian-domiciled mutual funds. Meantime, Russian brokerages Renaissance and Troika are establishing operations in the Middle East to stimulate the interest of cash-rich sovereign wealth funds. “The Asian element

“We believe the best investment strategy in 2008 will be to invest with the state, as the government plans to raise spending sharply and use administrative/political tools to promote growth in several key industries and in the nation’s infrastructure.”
chRIS WeaFeR, uRalSIB
is an investor base that has largely been absent until now,” says Yaroslav Lissovolik, chief economist of Deutsche Bank. “They hold the largest savings, and these sovereign wealth funds could be a huge driver of liquidity.” Political Transition Investors have welcomed the smooth succession from Vladimir Putin to Dmitry Medvedev and its accompanying stability with open arms. The real test, they say, will come when the handover of power takes place in May and who will be brought into the cabinet. “International financial markets are likely to react positively to Mr. Medvedev, as he is probably one of the most liberal and business-friendly of Russia’s politicians,” says Roland Nash, head of research at Renaissance Capital. “Moreover, the end of political uncertainty should minimize struggles between Kremlin clans, reducing the political risk and ensuring the continuity of economic policy.” n

Antanta Capital Address: 19, building 1, Lyalin Per.,Moscow

Contact Information

105062, Russia Phone.: +7 (495) 6-444-777 Fax.: +7 (495) 783-9627 E-mail:

Under-Performance of Large Caps in Early 2008 Opens a Door for Small and Mid Cap Stocks • co-Published by antanta capital • 2

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 11: The Real Estate and Construction Sectors

Russia’s Building Boom Continues While Valuations Continue to Rise
Providing Investors With a Sanctuary From the Volatility of the International Property Markets


fter a choppy year in the wake of the US subprime mortgage crisis, investors are betting that Russia’s rising economic growth will persist and translate into higher rental rates and greater property demand. Research issued by US investment bank Morgan Stanley in March advised investors to position “for a tough year” by “overweighting” Russian property stocks, such as AFI Development and RGI International. “Property markets in Hungary, Poland, and the Czech Republic are next in line to be hurt by the global credit crunch, but real estate in Russia is relatively insulated,” the report stated. “The fundamentals of Russian real estate are among the strongest globally,” says Brady Martin, retail and real estate analyst at Alfa Bank. “The listed sector has so far underperformed the equity market, but we are bullish and believe the sector will be rerated as companies begin to deliver on their portfolios.” A string of Russian property and development companies listed in late 2006 and 2007, but some investors have since complained that the valuations were too high. Russian property funds listed in London underperformed the UK listed real estate sector by 27 percent in 2007, according to Oriel Securities, a brokerage firm in London. St. Petersburg-based construction company LSR, which initially hoped to raise up to $1.5 billion, raised only $772 million in November, while Russian property developer PIK’s initial public offering in June raised $1.8 billion, rather than the new office construction ‘000 square meters

$2.2 billion it originally sought. Subsequent real estate listings planned by Coalco and Teorema were pulled as global stock markets stalled and sentiment for the sector waned. A long list of new real estate IPOs, however, are still planned for 2008 and 2009, and some analysts believe the pipeline of new issues will improve the sector’s quality. Large Western institutions have already recognized the

“The listed sector has so far underperformed the equity market, but we are bullish and believe the sector will be rerated as companies begin to deliver on their portfolios.”
BRady maRTIn, alFa Bank
promise of the Russian real estate market. US investment bank Goldman Sachs is setting up a $4 billion real estate fund that is targeting the BRIC countries, and almost half the money will go to Russia. Of that, two-thirds will be invested in Moscow and the rest in St. Petersburg and other cities with populations of more than one million. Earlier this year, Morgan Stanley set up a joint real estate brokerage with domestic company Miel in an effort to win business in the mortage and real estate market arising from a large-scale federal affordable housing project in the mortgage and real estate market. The bank already owns City Mortgage Bank and has made several investments in real estate and construction across Russia. Other international banks and fund managers, such as Raiffeisen, Strabag, Deutsche Bank and Raven, have been active in Russia’s property development for the past three years. Their moves come amid a strong property market in Russia, with both rents and capital values rising on the back of the country’s economic growth. “Russia is increasingly a very interesting destination for international investors, which in particular has resulted in a growing number of raised investment funds dedicated to Russia,” says David O’Hara, managing director of property brokerage DTZ in Moscow. “But a lack of available investment-quality properties is leading investors to diversify their strategies. They are considering forward purchase and forward financing of deals, along with expansion to regional markets that are marked by active development in terms of few quality products but significant demand.”

128.7 84.5 60.5 34.0






28 • Russia’s Building Boom Continues While Valuations Continue to Rise • co-Published by alfa Bank

Co-Published by Alfa Bank

Moscow Attractive Across All Sectors In the most recent edition of the “Emerging Trends in Real Estate Europe” survey, conducted jointly by PricewaterhouseCoopers and the Urban Land Institute, Moscow was rated first or second in terms of “buy” recommendations for all property types, with office and retail particularly strong. “This market has huge depth and breadth. Nobody has begun to scratch the surface,” the report says. Alfa Bank’s Martin agrees that Moscow offers some of the highest yields across all sectors, but he highlights the risks involved. “There are lots of risky projects where there are verbal agreements with the city’s government and no written contracts,” Martin says. “The redevelopment of the children’s toy store Detsky Mir by Sistema-Hals is a good example of an aggressively valued project that has been constantly delayed. The city owns 20 percent of the project, but that is not reflected in the valuation by the consultants Cushman & Wakefield.” The demand for office space in the capital is being driven by large-scale tenants, including a growing number of foreign companies that are making their first foray into the Russian market. “German and Austrian banks are currently the most active in the Moscow office real estate market, already repre-

The yields for the various sectors of moscow’s property market are quite similar to those in Russia’s second city, St. Petersburg. In the second half of 200, average yields were 9 percent in the office sector, 9. percent in retail and about 10 percent in the industrial sector, according to brokers.
sented by such heavyweights as Hypo Real Estate International, Aareal Bank, Raiffeisen, and Eurohypo,” says Natalia Borontova, head of research at consultancy Jones Lang LaSalle. “These banks offer a considerably lower cost of financing relative to local lenders, enabling developers to borrow more and to upgrade the quality of their projects.” The yields for the various sectors of Moscow’s property market are quite similar to those in Russia’s second city, St. Petersburg. In the second half of 2007, average yields were 9 percent in the office sector, 9.5 percent in retail and about 10 percent in the industrial sector, according to brokers. In the residential market, data from IRN, a real-estate analytical group, indicate that average residential retail prices in Moscow had hit the $5,000-per-square-meter landmark for the first time. Rumors about a possible ruble redenomination, accompanied by rising inflation and turmoil on global stock markets, have pushed prospective buyers into making purchases earlier, according to Oleg Repchenko, head of research at IRN. “Since the start of the year, [Moscow] prices have risen by 15 percent,” he says.

Pioneers Flock to Moscow City Moscow’s future prospects are closely bound up with its expected growth. This is due not only to land shortages, but also to the fact that Moscow is aspiring to become one of the world’s major business capitals. Some foreign and domestic companies have already been drawn to Moscow City, the prestigious development in the western area of the capital, because of a government ban on building new office property within the city center’s Garden Ring perimeter. Twelve skyscrapers are being built in Moscow City, and the first tenants have been moving in since mid-2006. The towers are multifunctional complexes that serve as commercial areas as well as offering apartments, hotel suites and retail space. “However, some tenants are reluctant to move to Moscow City until there are improvements in the transport infrastructure and the availability of parking,” notes Maria Kotova, director of research at Knight Frank. Accordingly, she says annual rents of more than $2,000 per square meter are viewed by many as too high. Regions on the Radar Commercial property investors, such as Ireland’s Quinn Property Management and Swiss investment company Eastern Property Holdings, are migrating from Moscow and St. Petersburg to smaller cities known as the Millionniki – 11 urban concentrations, each with more than one million people. But picking the right city and getting the right mix of commercial, office and residential space is crucial for success. “The city of Kazan has the largest per-square-meter amount of shopping centers in Russia, but many of them are sitting empty,” says Alfa’s Martin. “These complexes need a good developer in partnership with an anchor tenant, such as Sweden’s Ikea, and the right mix of retail outlets.” n

Contact Information

Brady Martin, Senior Analyst Alfa Bank Address 12 Acad. Sakharova pr-kt, 107078 Moscow Russia Phone: + 7 495 795 36 76 Fax : + 7 495 745 7897 Email: Web Site:

Russia’s Building Boom Continues While Valuations Continue to Rise • co-Published by alfa Bank • 29

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

MosCityGroup Brings Daring Design To Moscow’s Rapidly Changing Landscape
Alfa Bank Names MosCityGroup the Country’s Top Pre-IPO Developer
two buildings, a mixed-use office and retail complex and a glass-domed Aquapark entertainment center. The skyscraper, devised by international architects NBBJ, provides for shopping spaces, entertainment areas, cafes, restaurants, a fitness club, a spa center, and a multi-level underground parking. The 67-floor Eurasia will house offices, apartments and a large recreational area, while the Yuri Dolgorukiy Tower with its “East-meets-West” inspired design will include a hotel and an exhibition center. “We ourselves neither can nor want to be the best architects and builders. But our projects are designed by the best world architects (Zaha Hadid, RTKL, NBBJ),” says MCG’s founder and owner Pavel Fuks. “And our contractors (Enka, South Brook) are the best and the most reliable construction firms one can find in the including business and premium class housing, A and B class offices, hotels, recreation areas, retail space and cottages. MCG is behind the Kiev-City project, which entails the construction of six multifunctional skyscrapers in the center of Ukraine’s capital. Located on Rybalskiy Island, it is closely linked to the historical and cultural traditions of Kiev. MCG is involved in the construction of several cottage complexes in the Moscow region, which will span over an impressive landbank of 1,147 hectares. It also plans to build a multifunctional complex on the sites of Aerostar hotel and an airport terminal at Leningradsky avenue, in the central part of Moscow, by 2012. Before focusing on real estate Fuks was involved in banking and manufacturing activities. Together with his partners, he built the award-winning Kaluzhsky shopping mall in central Moscow and successfully completed several large-scale developments and cottage villages in the Moscow region. In early 2006, he consolidated his real estate projects under the MCG holding. For his contribution to the development of Russian economy, he received an acknowledgement from President Putin. MCG is aiming to meet the highest possible standards in its properties. “In other words our Class A properties must


new horizon of futuristic multi-functional skyscrapers in Moscow owes a lot to property developer MosCityGroup (MCG). The firm, which is aiming to list its stock on the London Stock Exchange in the near future, is involved in more than 10 highprofile development projects in Russia and Ukraine. MCG is constructing three of the most daring towers in Moscow City, the emerging business district in the capital’s western Presnensky region: Imperia, Eurasia and Yuri Dolgorukiy. The concept of Moscow City is to create the first zone in Russia that will combine business activity, living space and entertainment. Three new subway stations and a rapid transit system linking it to Sheremetyevo-2 and other major airports are currently being built as part of its infrastructure. The ‘city within a city’ project enjoys the full backing of Moscow Mayor Yury Luzhkov and the city council, which recently passed a ruling granting the project free economic zone status, and providing preferential tax treatment to all enterprises leasing office space there. The 60-story Imperia will consist of

The “city within a city” project enjoys the full backing of moscow mayor yury luzhkov and the city council, which recently passed a ruling granting the project free economic zone status, and providing preferential tax treatment to all enterprises leasing office space there.
Russian market. It is by joining efforts of the best professionals that we can ensure the best quality.” The firm has a diversified portfolio of projects stretching over 4 million square meters. By 2011, MCG is to invest roughly $5 billion in development projects, be superior to all Class A offers present in the market, and equally our Class B must be unrivaled,” says Fuks. “For a long time Russia used to be a ‘seller’s market.’ In such conditions, all types of property would sell with success. But one day, the situation will change. We are ready for that.” n

0 • MosCityGroup Brings Daring Design To Moscow’s Rapidly Changing Landscape

Russian Regional Office Market Catching Up with Moscow
Supply of Office Space in Millionniki Cities Expected to Double by 2010


urrently, the supply of quality office space in Russia’s regions is limited. While the saturation levels vary, the lack of space is characteristic for all cities. This deficit makes regional cities landlord markets, stimulating rental growth. Rents for office space in regional cities are on a par with those for class B+ space in Moscow, exceeding those in Central and Eastern Europe. High activity of developers is another important factor. Striving to satisfy growing demand and attracted by high returns and growing rents, developers are announcing new projects, and by 2010, the supply of office space in the Millionniki cities (eleven of 13 Russian cities with more than one million inhabitants that are seen as the “growth” cities) will more than double to exceed 2 million square meters. Despite the fact that this figure makes up only 14 percent of the expected supply in Moscow, volume of this magnitude can saturate regional markets and lead to rent stabilization. A lower level of development in regional markets is the main driving force behind the markets’ evolution. With growing rental rates, the arrival of major international and Russian tenants and the appearance of new quality projects,

the regional office market is moving closer to Moscow’s. At the same time, the differentiation among regional markets in terms of quality of supply and demand is increasing. Currently, markets in the Millionniki cities are quite diverse. This is reflected not only in the supply volume, which varies from 277,000 square meters in Novosibirsk to 17,000 square meters in Omsk. The difference is also in the presence of major developers and reputable tenants and in the quality of the projects themselves. Thanks to intense development, the situation in some cities is starting to change, approaching Moscow standards. Major developers are entering the markets (for instance, RosEuroDevelopment with the RosEuroPlaza in Novosibirsk), the geography of the projects is expanding (from Samara, Yekaterinburg to other cities), while rental practice is becoming

more comparable with that in Moscow (with annual rents, exclusion of VAT and operational expenses, longer lease terms) and leasing is gaining popularity. These processes, however, are progressing with different levels of intensity in different cities, raising the differentiation among cities further. Construction activity is high in all cities, and by 2010, the expected volume of quality space in many cities, except Ufa, will considerably exceed 100,000 square meters. Growth of new construction is also different, depending on the city – largest supply volumes are planned for Novosibirsk, Yekaterinburg, and Rostov on Don, while Ufa and Kazan lag in their pace of development. Last year, the number of office buildings in Novosibirsk doubled. The same situation is expected in Rostov on Don by 2010, according to the announced plans. The supply growth rate is accelerating in Yekaterinburg, and completion dates for the majority of quality buildings are set for 2009 to 2011. n

—By Jones Lang LaSalle, Economic and

Supply volume per 1,000 Residents, 200, Sq. m.
Omsk Ufa Chelyabinsk Rostov-on Don Nizhiniy Novgorod Kazan Ekaterinburg Samara St. Petersburg Novosibirsk Moscow Warsaw Prague 0
Source: Jones Lang Lasalle

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000

Russian Regional Office Market: Vector of Evolution • 1

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 12: Foreign Funds Focused on Russia

Some Investors Favor Funds to Access An Increasingly Diverse Equity Field
Russian-Oriented Stock Funds Have Attracted $1 Billion in Q1 2008


ore than $1 billion of new money has been steadily invested in Russia equity funds since the beginning of this year, while emerging market funds as a whole have lost almost 20 times that. “The differential is pretty stark: consistent inflows into Russia equity funds this year have amounted to $1.17 billion, while the emerging market equity funds as a whole have had net outflows of $19.6 billion,” says Brad Durham, managing director of EPFR Global in Boston. While neither the Russian stock market nor Russia funds are performing well yet this year, new investment in oil, which accounts for 50 percent of Russia’s market capitalization, is clearly on the rise. But the investment flow may be building for broader investment soon. “The Russian market is trading on a forward P/E multiple of 10, the cheapest in the entire emerging market universe other than Turkey, South Korea and Hungary,” says Durham. “I would expect Russian equities to outperform most other emerging markets over the remainder of this year.” Fund managers agree on the potential: “There has been 20 percent earnings growth in Russia despite the same price levels as a year ago, so downside protection is more pronounced,” says Andrew Wiles, co-manager of the $1.29 billion US Global Investors Eastern European Fund in London. Over the 12 months ended February, JPMorgan’s Russia A fund was up 19 percent. In the past three years, Caymanbased Prosperity Capital Management’s Russian Prosperity Fund rose 180 percent. And over the past five years, Deutsche Bank’s DWS Russia fund climbed 417.9 percent, according to statistics from East Capital Asset Management in Stockholm. “We were extremely positive regarding Russia in the beginning of the year for several reasons: little impact from the credit crunch;

high commodity prices; lower political risks less IPO issuance; and very attractive valuations partly due to the fact that Russia did not participate fully in the 2007 rally of the other BRICs. And, of course, the economy is superbly strong and there are healthy macroeconomics,” summarizes Karine Hirn, East Capital’s managing director. Among the group’s funds is the $2.56 billion East Capital Russia Fund. The Impact of Oil Continuing record oil prices are another reason why Russian funds should do well this year. “With the price of oil over $100, it’s providing Russia with about $1 billion a day in revenues,” observes Julian IngsChambers, managing director of Artradis Fund Management in Singapore, which manages more than $4 billion in assets. Meantime, Russian oil is undervalued. “At the end of 2007, Russian oil and gas was trading at a discount – some companies are still trading at a P/E of only 7x – to some of its global peers, such as China, although Russian oil and gas companies have performed better operationally, so there is a strong case to be made for new investment inflows,” says Wiles. And thanks to oil and other commodity export revenues, the Kremlin’s coffer is full. “Russia’s got current account and fiscal surpluses and is sitting on $440 billion of foreign exchange reserves, the second-largest after China among the emerging markets,” says Durham. The reserves bring new peace of mind to investors, others point out. “The balance sheet has a lot to do with new investment, because less than 10 years ago, Russia was in default,” says Gus Robertson, a senior emerging-market fund manager at ING Investment Management in the Hague. But fund managers also see hope in the continued decoupling of the Russian economy – which has grown eight years in a row, to 8 percent GDP growth in 2007 – from that of the US. Russian trade

diversity also is helping shield the economy. “Russia is one of the markets with the least amount of exposure to a US recession or slowdown, since its exports to the US are only two percent of GDP, compared with 12 percent for China and 24 percent for Mexico,” says Durham. Low levels of debt encourage diverse economic growth. “Russia is underleveraged on a government, corporate and a consumer level,” says John Connor, who manages the $112 million Third Millennium Fund in New York. ING’s Chambers agrees: “Taken as a whole, Russia is very underleveraged – both companies and consumer credit cards – and as a result insulated to some degree from what is troubling credit markets in the rest of the world. Given its economic record over the past decade, there is a slight paradox that there is more safety in Russia now.” Finally, Political Stability Another key prerequisite for current optimism in Russia is political stability. . “There were issues last year of people not wanting to invest ahead of the elections, so we did see a considerable run on the markets during the last few months, when it became clear that Medvedev was to be the next president,” says Robertson. “That also was due to high liquidity in the market late last year, so there was a double whammy pushing Russia up. With a more clearly defined investment environment from an FDI and a portfolio perspective, there is a greater level of comfort with investing in Russia than in the past.” As the Russian economy grows, funds are struggling at times to tap into the most promising sectors. Some newer funds are primarily interested in Russia’s need to develop its infrastructure. “Our Artradis Russian Opportunities Fund is focused on the redevelopment of Russia’s infrastructure and largely outside the largest market-capitalization stocks. About two-thirds of the portfolio is

2 • Some Investors Favor Funds to Access an Increasingly Diverse Equity Field

Russian-Oriented Funds
Country EN
Sweden Sweden Germany United Kingdom Russian Federation Switzerland United States United States Sweden Russian Federation Switzerland Russian Federation Finland United States Russian Federation Sweden Sweden Russian Federation Finland Finland Switzerland Estonia United Kingdom Sweden Netherlands United States Switzerland Finland Russian Federation Russian Federation Ireland Finland United Kingdom Russian Federation Russian Federation United Kingdom France Sweden Finland Lithuania Russian Federation Russian Federation United Kingdom TOTAL
Source: East Capital

Company Name
East Capital Asset Management AB Robur DWS Hermitage Capital Management Prosperity Capital Management Ltd Clariden Leu ING Investment Management Van Eck HQ Fonder Troika Dialog Valartis UFG FIM JP Morgan Prosperity Capital Management Ltd Nordea East Capital Asset Management AB Troika Dialog EVLI Mandatum / Sampo UBS Hansa Neptune East Capital Asset Management AB ABN AMRO Third Millenium Russia Fund Credit Suisse FIM Troika Dialog Diamond Age Pioneer Mandatum / Sampo Charlemagne UFG UFG Baring Lyxor (Soc Gen) Gustavia Mandatum / Sampo Finasta Troika Dialog Allianz Rosno Charlemagne

East Capital Russia Robur Rysslandsfond DWS Russia Hermitage The Russian Prosperity Fund CL (Gue) Russia Equity Fund B ING Russia Fund Van Eck Russia ETF (RSX) HQ Rysslandsfond Dobrynia Nikitich MC Russian Market Fund UFG Russia Select FIM Russia JP Morgan Russia Fund Prosperity Russia Domestic Fund Nordea Rysslandsfonden Bering Russia Druzhina Evli Greater Russia Mandatum Russia A UBS (Lux) Equity Sicav - Russia B Hansa Russian Equity Fund Neptune Russia & Greater Russia East Capital RU Lux ABN Amro Russia Equity Fund Third Millennium Russia Fund Credit Suisse Equity Fund (Lux) Russia Explorer FIM Russia Small Cap Ilya Muromets Diamond Age Russia Fund Pioneer Funds Austria - Russia Stock Mandatum Arvo Russia Value Charlemagne Capital Russia Fund UFG Russia Debt UFG Russia Alternative Baring Russia Fund Lyxor ETF Russia (DJ Rusindex Titans 10) GBP Gustavia Greater Russia SMC Mandatum Russia Small Cap Finasta Russian fund Sadko AllianzRosno — Stocks Charlemagne Capital Russia Value Fund

Product Type
Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia Russia

Inception Date
1998/05/18 1998/03/23 2002/04/22 1996/04/22 1996/09/19 1994/09/30 1996/07/01 2007/04/24 1997/10/27 1997/06/05 1996/06/10 2002/12/01 1998/03/16 1996/09/01 2006/12/29 2005/10/10 2004/06/01 2001/03/29 2004/09/30 2004/02/05 2006/05/16 1997/09/26 2004/12/31 2007/01/31 2004/03/15 1998/10/01 2006/05/16 2005/09/09 1997/01/06 2006/05/03 2006/11/01 1997/03/01 2005/12/02 2005/11/08 2003/01/08 2003/06/18 -

AUM Date
2007/12/31 2007/12/31 2007/12/31 N/A 2007/12/31 2008/02/29 2007/12/31 2007/12/31 2007/12/31 2007/08/28 2007/12/31 2008/02/29 2007/10/31 2007/09/30 2007/06/30 2008/02/29 2007/12/31 2007/03/19 2008/02/29 2007/07/25 2007/10/30 2007/09/30 2007/06/30 2007/12/31 2007/10/31 2006/12/31 2007/09/28 2007/05/31 2007/03/19 2007/06/29 2007/11/22 2007/07/25 2007/06/29 2007/10/31 2007/03/31 2007/07/25 2007/09/30 2007/03/19 2007/08/21 2007/06/29

15,259 10,635 10,453 N/A 9,344 6,449 6,155 5,121 4,942 4,558 3,465 2,945 2,829 2,795 2,522 2,267 1,990 1,628 1,419 1,385 1,318 1,237 1,164 1,090 1,052 915 868 861 709 672 624 528 482 481 468 320 293 291 272 197 193 136 57 110,389
*Swedish Krone

invested in infrastructure and related companies which will benefit from the work, which Putin headlined at $1 trillion in October last year,” says IngsChambers. “While the government oil fund will bring in a lot of the money, public-private partnerships will also be involved.” Other funds are focusing on consumer

growth. “People think of Russia as the biggest exporter of commodities or energy, but it has become quite a consumer country,” says Connor. “There is a huge and growing middle class, so we are looking at investments in areas like cars and real estate, for a people whose disposable income was up by 26 percent last year.”

Ings-Chambers puts it this way: “Inevitably, as the economy evolves, you need to get outside of the bigger, more liquid names and into some smaller, more undiscovered parts of the market. This broadening of the investment universe reflects the growth in the economy and has already been evidenced in the retail and banking sectors.” n

Some Investors Favor Funds to Access an Increasingly Diverse Equity Field • 

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 13: Russian Equities Outlook

Strong Macros and Political Scenarios Confront Volatility Riding on Global Stresses
A Sector-by-Sector Look at What to Expect in 2008


ortfolio investment in Russia through the first months of 2008 has been a study in contrasts. Volatile equity prices have defied an enviably strong macro environment and a significantly diminished level of political uncertainty. The recent history of Russia’s equity market suggests that a challenging global backdrop inevitably spills over into emerging markets – and Russia hasn’t been an exception during what has been a particularly tough year so far for world capital markets. The extent to which Russian shares have been battered by the US housing market and resultant global stresses, though, is disheartening. Disappointed

investors in Russian shares have long expected the country’s economy and financial markets to decouple from wetblanket Western markets – that is, for Russian markets to outperform on the basis of strong domestic fundamentals, despite the tricky global environment. Russian shares, however, won’t continue to be poked in the eye for much longer. Valuations look increasingly attractive, economic growth and consumer spending continue to power ahead, and the oil sector is finally getting a bit of help from the state. Moreover, many investors contend that Russia’s renewed political stability, with the March election of Dmitry Medvedev to replace President Vladimir Putin, hasn’t yet been priced in.

Just as important, the flood of IPOs last year that soaked up some $28 billion in stock market liquidity won’t be quite as intense this year, allowing the market to digest the recent newcomers and letting fresh cash flow into existing, rather than new, issues. Some key factors to watch, sector by sector: Oil – changes afoot. Despite continued strength in the price of oil, shares of Russian oil producers – the largest contributor to the equity market’s capitalization – have significantly underperformed for close to two years. The main culprit has been a tax regime that effectively confiscates every ruble of incremental revenue above roughly $30 a barrel, removing any incen-

mIceX Se: The mIceX Index dynamics

2000 1800 1600 1400 1200 1000 800 600 400

The biggest fallout of the Chinese stock market in 10 years Russian President Putin won presidential elections Capital outflow from the emerging markets

S & P raised Russian Sovereign rating to investment grade Moody’s raised Russian Sovereign Rating to investment grade

Credit Crunch on International Markets

Successful IPO of Rosneft

Liberalization of the Gazprom equities market

December 2002

January 2004

January 2005

January 2006

January 2007

January 2008

 • Strong Macros and Political Scenarios Confront Volatility Riding on Global Stresses

tive for oil companies to invest in boosting output. The inevitable result has been stagnant production, which is threatening to turn into sharp, sectorwide declines in coming years. As it faces the prospect that its golden goose may fall into ill health, the Russian government finally announced in late March that it would reduce the tax burden on the sector, to the tune of $4 billion. The market took the gesture to be the first of a range of measures to encourage oil companies to invest. Accordingly, investors bid up shares. Oil’s seemingly permanent position in the stock-market cellar could be about to end. But as ever, market-pleasing words can take a long time to produce concrete action – and positive sentiment stemming from tax changes could easily be erased by a correction in commodity prices. Furthermore, what the Kremlin giveth, it can also taketh away – in the form of, say, increased taxes on other sectors of the economy to compensate for relief to the oil industry. That could boost uncertainty for other industries. Gas – moving in the right direction. The monopoly Gazprom, the world’s largest gas company, is the first port of call for many investors looking for Russia exposure. The slow but steady march toward charging market rates to customers outside Russia but elsewhere in the former Soviet Union, coupled with tariff increases in Russia, means that Gazprom is actually on track to become a normal (albeit heavily regulated) company, instead of just a mechanism to subsidize the former Soviet Union’s rusting industrial hulk. As a convenient proxy for all of Russia, Gazprom shares are likely to be a key beneficiary as Russia slowly decouples from anemic Western economies and markets. Metals – where next? Steel shares have been a top performer in Russia’s stock market of late, mirroring enthusiasm in global markets as commodity prices have remained buoyant. On another front, the

market’s largest metals producer, Norilsk Nickel, has been caught in an ownership struggle between Vladimir Potanin and Mikhail Prokhorov, the company’s two main shareholders. Broadly speaking, the sector will remain hostage to the vagaries of global commodity prices, and – unlike oil and gas – few domestic drivers appear likely to help insulate share prices from global markets. Power utilities – the time is near. In one of the most massive corporate restructurings ever (meaningful hyperbole

market, offer value and the attraction of being a totally domestic industry insulated from the global economy. But this does not translate into investor enthusiasm for the shares – particularly as the long-discussed privatization of Svyazinvest, the government’s telecom holding company, continues to be little more than hot air. Consumers – still buying. With consumer demand continuing to grow in double digits, no end appears in sight for the Russian consumer boom. The only problem for equity investors is finding an

Russian shares won’t continue to be poked in the eye for much longer. valuations look increasingly attractive, economic growth and consumer spending continue to power ahead, and the oil sector is finally getting a bit of help from the state.
in a country that is full of them), Russia’s monopoly power provider, Unified Energy System, will formally cease to exist in June 2008, when more than two dozen pieces will be spun off to shareholders. The seemingly endless restructuring process has moved Russia’s power industry from a tool of central planning toward a more or less competitive sector not dissimilar to those of Western Europe. This evolution has created enormous opportunities for both strategic investors and nimble-footed value players. But much of the rest of the potential investor base isn’t prepared to grasp the complexities and vagaries of the process – likely resulting in a long spell of underperformance as investors struggle to understand where value and opportunity lie. Telecommunications – more of the same. The wireless part of Russian telecom is posting continued growth – which, as dictated by the law of big numbers, is inevitably slowing down. The shift from growth to value is likely to be unpleasant as investors digest the notion of maturity. On the other hand, regional operators, long a backwater of the equity attractive way of playing the theme; most shares trade at large premiums to comparables, pricing in much of the anticipated growth. A wave of IPOs in recent years has significantly broadened the investment universe, but the pickings are still slim, and many shares are plagued by low liquidity. Real estate – building, again. The Russian real estate sector came onto its own in 2007, with the number of listings more than tripling as new offerings raised around $6 billion. The inevitable hangover following too much, too quick, has been compounded by a sharp turn in sentiment against real estate among investors globally. The fundamentals of Russian real estate remain extremely strong, and it is likely only a matter of months before these are reflected in a recovery in share prices. With a trillion dollars in market cap, Russia is firmly in the mainstream of emerging markets. But with the Russian economy in rude health, and stock valuations well below those of their global peers, the rest of 2008 could still be a banner year for the Russian equity market. n

Strong Macros and Political Scenarios Confront Volatility Riding on Global Stresses • 

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 14: Ruble Exchange Outlook

A Managed Exchange Rate Policy Fights Volatility While Fattening Currency Reserves
The Central Bank of Russia is Likely to Stick to Inflation-Targeting Plans


t present, the exchange rate of the Russian ruble is not free-floating but is managed by the Central Bank of Russia (CBR) with the help of a dual currency basket. The value of this basket is calculated using the weighted nominal USD/RUB and EUR/RUB exchange rates. The weightings of the USD and EUR in the basket have been changed several times since its introduction in February 2005. The EUR share has been increased in stages from 10 percent initially to 45 percent in February 2007. Accordingly, the USD share has been lowered from 90 percent to 55 percent. Since then, the weights have not been changed, and the CBR announced that it has no plans to change the weights in the near future. In 2007, after a stable phase around 29.90 rubles from February to June, the basket entered a more volatile phase from late June until mid-September, during which it rose 1 percent. It has been kept stable since then at around 29.61. The implication of the current exchange rate regime is the importance of EUR/USD exchange rate fluctuations for the EUR/RUB rate. For example, if the euro appreciates 2 percent against the dollar, then the euro appreciates almost 1 percent against the ruble. At the same time, with the currency basket unchanged, the dollar then depreciates about 1 percent against the ruble. An overall appreciation of the ruble against the basket results in an equal appreciation of both the USD and the EUR. Two contradictory targets guide the policy of the CBR. First and foremost, the CBR aims to anchor the ruble exchange rate and decrease volatility. The bank effectively limits ruble appreciation in support of local producers by regularly buying foreign currency on the FX market. As Russia has experienced huge current account surpluses in the past, this policy has increased foreign exchange reserves to more key Interest Rates and cPI
14 12 10 8 6 4 2 0 9/2005 3/2006 9/2006 3/2007 9/2007

FX Market Key Features
Local currency Reuters code Current regime Exchange controls Convertibility Trading floor Exchanges Major players Market instruments Daily turnover in FX market Restrictions on non-residents Forward market (NDF) Special restrictions RUB (Russian ruble) RUB= managed float (currency basket of 45% EUR & 55% USD) none full convertibility OTC, MICEX, regional (i.e. SPCEX) Central Bank, (foreign) banks tod, tom, spot, spot-next; outright, swap, NDF MICEX USD 5 bn/ OTC: USD 40 bn none yes, OTC, liquid up to 12 months Key (refinance) Rate none

14 12 10 8

CPI Source: Reuters, MICEX, Raiffeisen RESEARCH


6 than US$450 billion and led to fast growth of money supply in the economy. On the other hand, the exchange rate policy could help 4 OFZ 30 (April 2008) Interbank fight local inflation, as appreciation of the ruble 3m directly decreases 2 import prices. In addition, a reduction of FX market interventions 0 decelerates the pace of CBR-induced expansion of monetary ag9/2005 3/2006 9/2006 3/2007 9/2007 gregates. Over a two- to three-year horizon, we don’t expect a shift from the exchange rate-oriented policy to a focus on inflation and the use of key interest rates as the CBR’s main instrument (so-called inflation targeting). The CBR will probably continue its policy of a stable basket, although further steps of moderate appreciation next year cannot be ruled out. n —By Raiffeisen Research

RuB vs. euro and uSd
38 36 34 32 30 28 26 24

Key (refinance) Rate CPI Avg

11/2002 11/2003 11/2004 11/2005 11/2006

OFZ 30 (April 2008)

Interbank 3m

Source: Thomson Financial Datastream, Reuters, Raiffeisen RESEARCH

Source: Reuters, Raiffeisen RESEARCH

 • A Managed Exchange Rate Policy Fights Volatility While Fattening Currency Reserves

Chapter 15: Corporate Governance Update

Russia’s Largest Companies are Making Strides in Improving Transparency and Shareholder Relations
Problems Persist, But Some Companies Are Recognized as Leaders in Change


orporate governance in Russia is becoming more transparent and more information is being disclosed, thanks to increasing pressure from international investors. Improvements in transparency and disclosure are particularly imperative for Russian companies and banks that seek more foreign listings. Initiatives to improve corporate governance are also coming from the government, regulators and various private agencies. The government is adopting new laws and amending existing laws. In 2002, the Federal Financial Markets Service (FFMS) introduced a code of corporate conduct, based to a large extent on OECD principles of good corporate governance. A study by the Russian Institute of Directors showed that both disclosure of corporate governance practices and the quality of corporate governance itself improved after the introduction of the code. Another important contribution to establishing standards of good governance is made by rating organizations that produce corporate governance ratings, such as those provided by GovernanceMetrics International (GMI), a governance rating agency in New York. These ratings provide valuable information on both the current state of corporate governance at companies and the benchmarks of good governance. This, in turn, helps “good” companies raise their valuations. Improvements Demanded “The continuing growth of the Russian market and successful raising of foreign capital to support it, demands improvements in corporate governance,” says John Jarrett, GMI’s research director. “While this will take some time, it is an inevitable development that the better governed companies will be able to use to their advantage.”

The largest Russian companies are gradually improving their corporate governance as they move into international financial markets. As a result, controlling owners of Russian companies have begun to understand that the only way to sustain the development of their companies is by attracting external funds, and better governance can support this. A good example of a company that is developing better governance is OJSC Magnitogorsk Iron & Steel Works, which GMI rated for the first time in March. “Magnitogorsk has jumped straight to the top of GMI ratings for Russian companies,” Jarrett says. “Its superior disclosure of key governance information, such as committee charters, codes of corporate governance and codes of ethics, signal a strong commitment to transparency and governance.” Another company showing better governance than most Russian companies is Mechel, a metals producer. In GMI’s ratings, Mechel has consistently rated above its global sector average. For instance, a majority of its directors are considered independent under GMI’s strict independence criteria. “Mechel is showing the way with an independent board despite having a majority owner. Less than a quarter of the Russian companies we rate can boast an independent board in these circumstances. That, combined with a strong financial disclosure approach and good environmental management systems, give Mechel an edge.” The general level of corporate governance in Russia, however, remains below international standards, despite significant improvements over the past decade. Many Russian companies still lack transparent ownership and operational structures and suffer from weak internal control procedures. Due to the existence of nontrans-

parent ownership structures, such matters as problematic, related-party transactions and conflicts of interests among directors can go unnoticed. In Russia, managers are either controlling shareholders themselves or tightly affiliated with large shareholders. Still-developing legal institutions, together with underdeveloped financial markets, also make it harder for minority shareholders. Abuses of minority shareholder rights are numerous, including the use of transfer pricing, dilution of shares, asset stripping and even outright theft. There have been also many battles for control among large shareholders themselves or between company insiders. The government’s majority ownership in many companies can also affect the rights of minority shareholders when government strategic interests conflict. How “Independent”? Board independence is also a concern. The proportion of independent directors on boards is relatively small. At the same time, companies seem to lack an understanding of what “independence” means. Many companies call directors independent despite close ties to management or the controlling shareholder. Seemingly selective application of the law, inefficiency, and corruption within the regulatory bodies are also major impediments to an improvement in the investment climate within Russia. Nevertheless, recent observations show that Russian companies are trying to keep pace with Western companies in following good board practices. They are taking certain steps to increase the independence of boards and strengthen boards’ oversight of management. In the long run, this will improve Russia’s role in the global market for capital. n —By GovernanceMetrics

Russia’s Largest Companies are Making Strides in Improving Transparency and Shareholder Relations • 

The Institutional Investor ~ MICEX Stock Exchange 2008 Guide to Investing in Russian Stocks & Bonds

Chapter 16: Financial Markets Data

Monthly Indicators, Jan. 2007 - Feb. 2008
Unit Stock & Bond Markets RTS index RUX-Cbonds main index MICEX Index Banking sector GDP Assets of banking system Equity of banking system Assets Foreign assets Credits granted to financial sector Credits granted to non-financial sector Credits granted to households including past-due loans Securities Debt instruments of Russia Stocks Commercial papers Liabilities Foreign Liabilities Equity Households deposits Debt capital of organizations Assets Foreign assets Credits granted to financial sector Credits granted to non-financial sector Credits granted to households including past-due loans Securities Debt instruments of Russia Stocks Commercial papers Liabilities Foreign Liabilities Equity Households deposits Debt capital of organizations Issued bonds Assets Foreign assets Credits granted to financial sector Credits granted to non-financial sector Credits granted to households including past-due loans Securities Debt instruments of Russia Stocks Commercial papers Liabilities Foreign Liabilities Equity Households deposits Debt capital of organizations
Source: GlobalSource

1-07 1843 204 1657 2,048 14,501 1,733 1,659 660 7,092 2,223 1,413 584 311 230 14,501 2,697 1,733 3,793 2,325 81.0 32.2 346.3 108.6 69.0 28.5 15.2 11.2 708.1 131.7 84.6 185.2 113.5

2-07 1858 206 1655 2,250 14,588 1,763 1,813 770 7,291 2,288 1,439 576 315 237 14,588 2,770 1,763 3,794 2,355 80.6 34.2 324.0 101.7 63.9 25.6 14.0 10.5 648.4 123.1 78.3 168.6 104.7

3-07 1936 207 1698 2,490 14,953 1,775 2,060 791 7,524 2,384 1,627 586 354 245 14,953 2,899 1,775 3,914 2,872 82.7 31.8 302.2 95.7 65.4 23.5 14.2 9.9 600.5 116.4 71.3 157.2 115.3

4-07 1936 209 1697 2,374 16,104 2,066 1,744 791 6,486 2,339 1,671 583 428 245 16,104 2,977 2,066 4,011 2,778 73.5 33.3 273.2 98.5 70.4 24.5 18.0 10.3 678.4 125.4 87.0 169.0 117.0

5-07 1780 211 1570 2,436 16,410 2,314 1,670 693.7 6,737 2,440 1,741 617 475 246 16,410 3,263 2,314 4,209 3,345 68.5 28.5 276.6 100.2 71.5 25.3 19.5 10.1 673.7 133.9 95.0 172.8 137.3

6-07 1898 212 1666 2,485 17575 2,333 1,690 706 6,998 2,559 1,824 968 312 257 17575 3,382 2,333 4,348 3,103 68.0 28.4 281.6 103.0 73.4 38.9 12.6 10.3 707.3 136.1 93.9 175.0 124.8

7-07 1994 214 1734 2,704 17751 2,392 1,669 665 7,295 2,679 1,907 1,012 295 256.2 17,751 3,519 2,392 4,445 3,009 61.7 24.6 269.8 99.1 70.5 37.4 10.9 9.5 656.5 130.1 88.5 164.4 111.3

8-07 1920 213 1641 2,754 18,035 2,437 1,919 627 7,607 2,812

9-07 2072 212 1759 3,107 18,231 2,502 2,172 739 7,894 2,910 2,435

10-07 2223 215 1875 3,144 18,278 2,553 2,241 778 8,166 3,021

11-07 2220 216 1851 3,006 18,947 2,592 2,206 805 8,542 3,140 2,241

12-07 2291 217 1889 3,217 20,241

1-08 1906 218 1574 2377

2-08 2064 217 1660

end-of-period end-of-period end-of-period bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. bln. rub. % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP % GDP * * * * * * * * * * * * * * *

2,206 805 8,542 3,140

971 297 252 18,035 3,690 2,437 4,543 1,860 69.7 22.7 276.2 102.1 0.0 35.3 10.8 9.2 654.9 134.0 88.5 165.0 67.6

709 291 240 18,231 3,677 2,502 4,622 3,185 69.9 23.8 254.1 93.6 78.4 22.8 9.4 7.7 586.8 118.3 80.5 148.8 102.5

496 354 225 18,278 3,794 2,553 4,672 2,770 71.3 24.7 259.7 96.1 0.0 15.8 11.3 7.2 581.4 120.7 81.2 148.6 88.1

495 356 229 18,947 3,824 2,592 4,807 2,856 73.4 26.8 284.2 104.4 74.5 16.5 11.8 7.6 630.3 127.2 86.2 159.9 95.0 20,241

11.4 4.6 48.9 15.3 9.7 4.0 2.1 1.6 18.6 12.0 26.2 16.0

12.4 5.3 50.0 15.7 9.9 3.9 2.2 1.6 19.0 12.1 26.0 16.1

13.8 5.3 50.3 15.9 10.9 3.9 2.4 1.6 19.4 11.9 26.2 19.2

10.8 4.9 40.3 14.5 10.4 3.6 2.7 1.5 18.5 12.8 24.9 17.2

10.2 4.2 41.1 14.9 10.6 3.8 2.9 1.5 19.9 14.1 25.6 20.4

9.6 4.0 39.8 14.6 10.4 5.5 1.8 1.5 19.2 13.3 24.7 17.7

9.4 3.7 41.1 15.1 10.7 5.7 1.7 1.4 19.8 13.5 25.0 17.0

10.6 3.5 42.2 15.6 0.0 5.4 1.6 1.4 20.5 13.5 25.2 10.3

11.9 4.1 43.3 16.0 13.4 3.9 1.6 1.3 20.2 13.7 25.4 17.5

12.3 4.3 44.7 16.5 0.0 2.7 1.9 1.2 20.8 14.0 25.6 15.2

11.6 4.3 45.1 16.6 11.8 2.6 1.9 1.2 20.2 13.7 25.4 15.1

* % of assets of banking system

8 • Monthly Indicators, Jan. 2007 - Feb. 2008


The information in this guide is intended only for use by financial professionals and is not meant to substitute for their own detailed knowledge of market conditions. an Institutional Investor guide, published with the april 2008 issue of Institutional Investor


The Institutional Investor ~ MICEX Stock Exchange

2008 Guide to Investing in Russian Stocks & Bonds

co-Publishers’ contacts
mIceX Se
Yakov Lebedev Head of Investor Relations 13, Bolshoy Kislovskiy per., Moscow 125009, Russia Tel: +7 (495) 705-9680 ext 2520 Fax: +7 (495) 745-8127 Email: Web Site:

Troika dialog

Alexander Kudrin Head of Fixed Income Tel: (7 495) 258 0511 Direct: (7 495) 933 9847 Fax: (7 495) 258 0582 Web Site:

Elena Krasnitskaya Corporate Governance Analyst Tel: +7 (495) 258 05 11 Fax: +7 (495) 258 05 82 Email:

alfa Bank
Published in conjunction with

Company Name Company Name Company Name Company Name Company Name Company Name

Brady Martin, Senior Analyst Address 12 Acad. Sakharova pr-kt, Moscow 107078, Russia Phone: + 7 495 795 36 76 Fax: + 7 495 745 7897 Email: Web Site:

antanta capital

Address: 19, building 1, Lyalin Per., Moscow 105062, Russia Phone.: +7 (495) 6-444-777 Fax.: +7 (495) 783-9627 E-mail: Web Site:

kIT Finance

Nevsky pr 38/4, Lit.A, Business Centre «Nevsky, 38» Saint Petersburg 191011, Russia Phone: + 7 812 326 1305 Web Site: