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Published on October 11, 2007

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Il Ruolo del Settore Finanziario Foro di Dialogo Italo-Russo M. Luisa Cicognani Milano, 26 April 2005 :  Il Ruolo del Settore Finanziario Foro di Dialogo Italo-Russo M. Luisa Cicognani Milano, 26 April 2005 Slide2:  Russia Business Environment Russian Financial Market Overview How Does EBRD Assist Business Environment - Strengths:  Business Environment - Strengths Robust economic performance over the last 2 years Strong GDP growth and sharp acceleration in domestic investment Sound management of public finances, with large surplus of federal budget for the 5th consecutive year Gradual decline of inflation while exchange rate remains firm Acceleration of foreign investment including FDI inflows Reserves are at record high, well over USD 100 bn Structural and institutional reforms have remained broadly on track Business Environment - Weaknesses:  Business Environment - Weaknesses However, still a vulnerable and fragile economy Slow down in the pace of the reform in 2003-2004, implementation remains weak Emergence of significant uncertainties and risks regarding the protection of property rights Lack of clarity about the role of the state in the economy Corruption remains an area of concern (2.8 out of 10 as per Transparency International Corruption Perceptions Index for 2004) Volatility of the financial markets and capital flows Accumulated FDI stocks only 6.5% of GDP, only one fifth of the average level of the other transition economies Weak micro economic foundations for enterprise sector Slide5:  Diversification, modernisation of economy Reforming public institutions and clarify role of the state Accelerate reforms and implementation Transparency & Corporate Governance Strengthen independence of judiciary Russia’s Challenges Build an enterprise sector Russian banking sector – a snapshot :  Russian banking sector – a snapshot Number of banks falling, but still around 1,300 Banking assets grew by 26% in 2004, reached 42% of GDP. Total Assets: USD 243 billion (Citigroup: USD 1.3 trillion end 2003) Sberbank accounts for 28% of total assets (but 62% of deposits) Foreign banks account for around 7% of assets Sector-wide return on capital of 19% Consumer lending fastest growing sector, now represents 20% of total loans 6 Status of banking reform :  Status of banking reform Law on Deposit insurance introduced Law on Credit Bureaux adopted January 2005 Obligatory compilation of financial statements to IFRS Move to substance over form in supervision Improvements to bankruptcy law 7 Reform priorities for 2005-8:  Reform priorities for 2005-8 Raise competitiveness of banks Raise capitalisation requirements Simplify merger and acquisition process Enhance banking supervision – focus on risk management capabilities 8 Financial Instrument Alternatives in Russia:  Financial Instrument Alternatives in Russia Developement of Legal and Regulatory Framework ECA Financing Financial Product Complexity Commodity Trade Financing Corporate Debt Secured/Unsecured Project Financing Greenfield Joint Venture Capital Markets (DCM, ECM & VC) Russia‘s Position: Bond/Debt Market developed Limited Project Finance Transactions Vendors and ECA Financing:  Vendors and ECA Financing Vendors/ Export Credit Agencies Improving as some ECAs have room for financing new projects (i.e. Hermes, NCM, USExim, etc.); Long-term coverage becoming available; Requires matching of imported sourcing to ECA resources; Increasing penetration of suppliers ready to offer financing; Expanding opportunities for large companies considering large international orders Banking Market:  Domestic and International Banks Domestic Banks : Availability of funding, notably amongst large institutions such as Sberbank and VTB Deposit structure generally limits tenors to 1-5 years International banks : Increased lending activities with focus on top borrowers Limited tenors and on-shore security Tenors on uncovered risk can be extended with support of multilaterals such as the EBRD Banking Market Increased liquidity especially for top private and state companies Russian loan market development: Volumes and Tenors 1999-2004:  Russian loan market development: Volumes and Tenors 1999-2004 Source: Dealogic Loanware Volume (USD mm) Average tenor (yrs) Comparisons with the rest of Europe:  Comparisons with the rest of Europe 2003 average returns Western Europe 189 bppa New EU* 99 bppa CIS 312 bppa 2003 average tenors Western Europe 6 yrs New EU* 4.1 yrs CIS 2.05 yrs First 9 months of 2004 volume Western Europe USD 470 bn New EU* USD 9 bn CIS USD 9 bn (of which Russia = 67%) *New EU includes Bulgaria & Romania Russia: top 15 loan providers in 2004:  Russia: top 15 loan providers in 2004 USD mm Source: Dealogic Loanware and EBRD Debt & Equity Capital Markets:  Debt & Equity Capital Markets Growing DCM market of ca. $9.5bn in 2004. Market appetite for equity and bond limited to larger players Dependant on market conditions at time of issue Extended maturities for large issuers International bonds are still expensive (except for top borrowers) Rouble bond market developing but short–term and speculative Public disclosure requirements and difficult to amend bond documentation Rapid growth as source of financing to major companies Conclusions & Outlook:  Conclusions & Outlook Global banking market liquidity is likely to remain high and oil prices set to remain high Still an uneven market with over 60% for Oil & Gas and other near-commodities, such as steel, aluminium, mining Covenants have loosened and unsecured lending has begun (top borrowers) Pricing has (on average) continued to fall Many corporates are managing self financing to a degree or raising short-term funds, but . . . Corporate lending has barely scratched the surface of the manufacturing economy Normal instrument migration is occurring: structured trade finance is giving way to corporate finance and capital markets, but . . . Project financing expected to grow to meet expansion and modernizing needs of more sophisticated customers Strong appetite in the market is likely to continue, but is partly conditional on continued stable commodities prices Slide17:  How Does EBRD Assist Growing Presence in Russia:  Growing Presence in Russia Since 1991 the EBRD financed projects with a Cumulative Business Volume of €5.9 billion (23% of total) At the end of February 2004 the Portfolio Stock was at €3.75 billion (22%) and Operating Assets at €2.3 billion (21%) Private/ State: 76% / 24% Debt/ Equity/ Guarantee: 81% / 14% / 5% € billion Cumulative Business Volume Major Presence in Russia:  Major Presence in Russia Moscow St Petersburg Yekaterinburg Vladivostok Russia Becoming the Biggest Focus:  Russia Becoming the Biggest Focus Net cumulative commitments €25.6 billion of which €5.9 billion in Russia Russia Portfolio Stock by Sector:  Russia Portfolio Stock by Sector A Diverse Range of Financial Products:  A Diverse Range of Financial Products Guarantees Debt Equity Specific risk guarantees (i.e. political, commercial risk participations) Commodity-backed instruments (i.e. warehouse receipts) Trade facilitation program (with participation of local banks) Corporate or Project specific Non or limited recourse to sponsors Syndicated loans (w. underwriting) Parallel with ECA’s, other IFI’s or Banks Hard / local currency Tenors between 5 to 15 years Venture Capital Privatizations New Equity Quasi-equity ‘Portage’ Syndicated lending under EBRD’s A/B structure:  Syndicated lending under EBRD’s A/B structure Plans for 3-4 new syndicated loans in 2005 Focus on existing partners among top 20 Russian banks Seeking to extend maturities well beyond typical 12 months Plans to consider second tier Moscow-based banks and strong regional banks in 2006 23 EBRD’s Preferred Creditor Status:  EBRD has Preferred Creditor Status in respect of transfer and convertibility risk (Art. 21 of the Agreement establishing the EBRD) Tested! Russia, August 1998 Payments to EBRD exempted from the transfer and convertibility moratoria EBRD loans are: not subject to restrictions on conversion of local currency or transfer of foreign currency not included in any general rescheduling of the country’s foreign currency debt generally exempt from country provisioning requirements exempt from withholding tax on interest EBRD’s Preferred Creditor Status International Moscow Bank:  Signed on 06 May 2004 IMB Syndicated Loan International Moscow Bank Provision of a US$ 200m syndicated loan (EBRD portion US$ 30m) earmarked for IMB on-lending to Russian small and medium-sized enterprises, particularly in less-developed regions First of a string of deals the Bank is working on to provide Russian banks with long-term funds so they can give Russian businesses much needed access to longer-maturity credit Leasing in Russia – Market History:  Leasing in Russia – Market History Leasing has existed in Russia for some time but not a widely accepted financial product, owing to legal problems with the civil code and conflicts of laws Russian leasing companies such as Sberbank’s subsidiary RG Leasing active domestically Proliferation of leasing companies post 1998 crisis, with major growth witnessed in 2000-2004 Legal environment for leasing in Russia vastly improved with legislative changes in 2002 26 Leasing in Russia - Opportunities:  Leasing in Russia - Opportunities Leasing sector growing rapidly – among the highest in the Russian economy: estimated at 50-70% for 2004 Despite growth in the market since improvements in legislation leasing penetration still at low levels: 0.9% of GDP and less than 5% of capital investment in the economy Stark contrast to European levels of 5% of GDP and 15-30% of capital investment Market forecast to grow 40% over next 3-5 years Large number of market players, but still few providing true financial intermediation, as is true with the banking sector 27 Leasing in Russia – Constraints and Concerns:  Leasing in Russia – Constraints and Concerns Access to financing - an issue for those without the strong support of a parent Tenors in the market for financing need to match those of the underlying assets Market risk linked to that of the banking sector Foreign currency risk very high – a future credit risk Need for the development of rouble financing in the sector 28 Raiffeisen Leasing Russia:  Raiffeisen Leasing Russia Started operations in 2000, as a department of the local bank in Moscow Balance sheet has grown from USD 10 million to approximately USD 100 million Competition mainly from foreign owned leasing companies: BSGV Leasing, CitiLeasing, Deutsche Leasing Vostok, Some domestic leasing company competition – Sberbank’s leasing company RG Leasing and IMB Leasing Focus on financing a wide variety of equipment for Russian companies and also subsidiaries of Western companies 29 Raiffeisen Leasing Russia:  Raiffeisen Leasing Russia Started operations in 2000, as a department of the local bank in Moscow Balance sheet has grown from USD 10 million to approximately USD 100 million Competition mainly from foreign owned leasing companies: BSGV Leasing, CitiLeasing, Deutsche Leasing Vostok, Some domestic leasing company competition – Sberbank’s leasing company RG Leasing and IMB Leasing Focus on financing a wide variety of equipment for Russian companies and also subsidiaries of Western companies 30 Raiffeisen Leasing Russia:  Raiffeisen Leasing Russia Raiffeisen Leasing Russia – 5 year tenor from EBRD, with 3 year tenor from our B lenders EBRD political risk umbrella extended to the syndicate Transaction sold well even during the “mini” banking crisis of summer 2004 Strong commitment from EBRD – demonstrated belief in the Russian markets 31 Consumer Finance in Russia – Market History:  Consumer Finance in Russia – Market History Virtually non-existent in Russia before 2000, now one of the fastest growing markets in Russia’s financial services sector Modern, fast and uncomplicated approach to credit approvals Growth in the main metropolitan areas, such as Moscow and St. Petersburg Significant potential for growth (household loans as a % of GDP just 1% in Russia, - over 6% in Czech Republic and 18% in Croatia). Consumer loan penetration in Russia still low: 80% of households have never taken any form of loan. 32 Consumer Finance in Russia – Market History:  Consumer Finance in Russia – Market History Consumer finance sector in Russia has demonstrated exceptional growth and profitability opportunities, with strategic investment from both domestic banks and foreign players The sector in Russia is still predominantly unregulated However, first initiatives to introduce changes to the legislation requiring greater consumer protection and disclosure Further legislation initiative are expected to emerge before too long 33 Russian Standard Bank (RSB):  Russian Standard Bank (RSB) RSB established in 1999 by a successful Russian entrepreneur to become the first commercial bank in Russia with a strategic focus on consumer finance By end 2004, RSB ranked 20th among Russian banks by total assets RSB has a long-term counterparty credit rating of B from S & P, and a long-term foreign currency deposit rating of Ba3 from Moody’s 34 Russian Standard Bank (RSB):  Russian Standard Bank (RSB) RSB’s primarily focused on consumer finance loans and credit card services with over 6,000 points-of-sale with retailers countrywide 4 million consumer loans disbursed since inception, totalling USD 2 billion with currently 2 million individual borrowers. Estimated market share (points of sale) of 40%; and number of credit cards at 70% Competitors include Home Credit, OVK Group, Alfa Bank Express, Citibank, Sberbank, Uralsib, RZB and MDM-Bank. 35 RBS Syndication – Key Terms:  RBS Syndication – Key Terms A/B Loan of USD 90 million, with A Loan of USD 30 million and B Loan of USD 60 million 3 year tenor for A Loan and 18 months tenor for B Loan BNP Paribas and RZB jointly underwrote and arranged the B loan 13 banks from 10 countries participated in B Loan 36 Annual Meeting & Business Forum 2005:  Annual Meeting & Business Forum 2005 22-23 May 2005 in Belgrade Parallel forum of debate and discussion on the investment climate in the region Good opportunity to: find out more about the EBRD and its countries of operations network with bankers, business people and government officials How to contact us:  How to contact us Moscow Resident Office Victor Pastor, Director, Russia Team Eric Rasmussen, Deputy Head of the Moscow Resident Office Nick Tesseyman, Senior Banker, Financial Institutions Tel: +7-095-787-1111 / fax: 787-1122 London HQ Istvan Ipper, Deputy Director, Russia Team M. Luisa Cicognani, Director, Bank Equity, Financial Institutions Tel: +44-20-7338-6207 / fax: +44-20-7338-7470 Procurement Opportunities and General Information via web site: www.ebrd.com Publications Tel: +44-20-7338-7553 / fax: +44-20-7338-6102

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