News bne:infrastructure Trains Planes Roads Ships

August 29, 2011 I No 28 www.bne.eu Contents

RUSSIA INFRASTRUCTURE TOP STORY 24. Altai government to spend RUB16bn on transport 1. Transportation downturn effect infrastructure by 2016 2. FAS grants Aeroflot permission to acquire 75%-1 share in 25. Cars per 1,000 people - Moscow traffic does not back this data Rossia airlines 26. Avtodor launches M4-Don highway in Lipetsk Region 3. Globaltrans to raise $5bn to bid for Freight One 27. Mostootryad-19 reported weak 1H 11 RAS results 4. Latvia says will bail out AirBaltic if government takes over 28. Mostostroy-11 reported weak 1H 11 RAS results, which should 5. Ministry of Transportation recommends changing the rules for be negative for the stock allocating slots for international flights 29. Sidewalk resurfacing halted in Moscow 6. Moscow plans 20 new metro stations in three years 30. Stroytransgaz to buy construction co ARKS 7. Moscow slows housing construction, cuts ring road projects 31. The Government of St. Petersburg awards the NCH 8. Plane accidents double in 2011 consortium the preferred bidder status in the PPP tender for 9. Stroygazconsulting could acquire Yamaltransstroy the construction of the central section of WHSD 10. The Government of St. Petersburg awards the NCH consortium the preferred bidder status in the PPP tender for RUSSIA TRAINS the construction of the central section of WHSD 32. Alstom to take part in tender for Moscow-St. Pete railroad project RUSSIA INFRASTRUCTURE NEWS 33. CEO says Globaltrans in talks on $5bn loan for cargo 11. Geographers to discuss Arctic Sea Route at second Arctic company deal Forum 34. First Cargo co to spend RUB9bn on 4,265 cars by yearend 12. MinEconomy is set to propose a 6% rail tariff increase in 2H12 35. Metrostroy reported strong 1H 11 RAS results 13. Moscow to hand Vnukovo stake to federal government this 36. Moscow Mayor eyes JV with foreign partner to produce metro autumn escalators 14. Putin's second cousin eyes river transportation business 37. Moscow plans 20 new metro stations in three years 15. Rail fares could skyrocket 300% 38. Russian Railways mulls buying control stake in Slovakian 16. Russian Railways eyes control of Slovakia's ZSSK Cargo cargo company 17. Sidewalk resurfacing halted in Moscow 39. Russian Railways reports cargo loading up 2.4% YoY in July 18. Transportation ministry proposes hiking coal export transport 40. Russian Railways starts building RUB2bn bridge over tariffs Akhtuba River 19. Tuva coal projects under infrastructure pressure; neutral for 41. Russian Railways to buy 8 more Sapsan trains from Siemens Severstal and Evraz at this point RUSSIA PLANES RUSSIA INFRASTRUCTURE FINANCE & STATISTICS 42. Aeroflot passenger traffic growth recovers in July 20. Iskitimcement reported anticipated improvement in 1H 11 43. Aeroflot publishes key 1H11 financials under RAS RAS results driven by an increase in cement prices 44. Aeroflot reports highest monthly traffic in modern history 21. Russian Railways: Credit Update 45. Aeroflot signs a preliminary agreement with Rostekhnologii 22. Volgomost reported 14% y-o-y growth for 1H 11 to lease 50 MS-21 starting in 2017-22 46. Antitrust regulator clears UTair to buy 51% in Vostok Aviation RUSSIA ROADS 47. Aviation fuel prices up, again 23. A consortium including Mostootryad-19 failed to win the 48. CEO sees invest in Russia's Koltsovo Airport at RUB15bn by 2016 RUB 135bn contract for the central portion of the West High 49. Ilyushin Finance to supply 6 An-158 planes to Cuban airline Speed Diameter project. We anticipate a negative impact on 50. New rules may require larger fleets: Moderately positive for Mostootryad's stock price. Aeroflot bne:infrastructure

August 29, 2011 I No 28 Page 2

51. Russia delays auction to sell Siberia Airlines stake to 82. Kryukiv Wagon gets UAH 400 mln order from Donetsk September 29 Railways 52. Irkutsk airport to complete runway upgrade by October 20 83. KVBZ to help Kyiv save money 53. Tolmachevo Airport ups 2011 investment program by 76% 84. KVBZ wins tender to supply electric trains 54. UAC plans to sign delivery agreements for 100 civil aircraft at 85. Lviv airport opens first stage of runway after reconstruction MAKS-2011 86. Odesa port head released from jail, not to leave Ukraine 87. Police bring action against AeroSvit pilots after strike RUSSIA SHIPS 88. Popov says Kyiv to launch own tram wagon production 55. Baltiysky Zavod to build spent nuclear fuel vessels for British 89. Sevastopol chooses Bogdan trolleybuses company 90. Stakhaniv Rail Car remains a Buy even under conservative 56. Consortium buys out VMTP management assumptions 57. First Container Terminal cargo handling capacity up 22.7% 91. Ukraine repairs 65-70% of roads for Euro 2012 58. NCSP's 7mo11 cargo turnover down 1.6% YoY 92. Ukraine, Iran continue cooperation in aircraft production 59. Russian port data for 7M11: Grain exports resume, boosting 93. Ukrainian airlines to get 50 An-148 aircraft volumes 94. Ukrzaliznytsia plans to spend big over next five years 60. Transport ministry suggests suspending unlicensed 95. Uzbekistan: ADB plans $500m road infrastructure investment passenger carriers 96. Uzbekistan: Hairatan - Mazar-i-Sharif railway opens 61. United Shipbuilding Corp to buy 41% stake in Caspian Energy Group EURASIA INFRASTRUCTURE 62. VEB borrows $115m from HSBC to refinance Sovcomflot 97. Kyrgyzstan: Almaty - Issyk-Kul flights launched project 98. Stepanakert airport close to completion 63. VMTP's revenues up 17.6% YoY in 1H11 - Supportive for FESCO 99. Tajikistan plans rail link to Pakistan’s Gwadar port 100. Tajikistan: Construction of Kulob reservoir begins CIS INFRASTRCUTURE 101. Tajikistan: Work on Pakistan tunnel delayed 64. Azerbaijan: Czech Republic allocates $352 mln to 102. Turkmenistan Airlines to launch new routes reconstruction of highway in Azerbaijan 103. Turkmenistan signs $400m locomotive contract with China 65. Belarus invites Chinese AVIC International to invest in transport sector CE INFRASTRUCTURE 66. Belarus' freight traffic by rail up 12.9% y-o-y in January-July 104. Airport Riga's terminal development concept presented 67. China starts making electric locomotives for Belarus 105. Budimex to buy PNI for PLN 225m 68. Lukashenko wants full-scale production of railway carriages 106. Estonian Air's passenger number up 18 percent on year in Belarus in July 69. Kazkommertsbank to finance $1 billion of construction and 107. Estonian railway co to buy 16 Chinese shunting locomotives infrastructure projects in Almaty for EUR 30.2 mln 70. Tajikistan plans $150m rail infrastructure investments 108. Five out of 27 Polish roads on schedule for Euro 2012 71. Tajikistan plans rail link to Pakistan’s Gwadar port 109. Lithuania's Palanga airport trims losses by 30 pct in H1 72. Tajikistan: New bridge to Afghanistan opens 110. Poland LOT to Sell Another Package of Assets 73. AeroSvit satisfies protesters' demands, carries out all 111. Polish road projects worth ¤7.7 billion in 2011 delayed flights to Boryspil 112. Tenders Announced for Advisors for ZS Cargo and Bratislava 74. Azovmash increased output by 90% YoY in Jan-Jul 2011 Airport 75. Bogdan Motors gets order for 202 trolleybuses 76. Bogdan wins battle for Kyiv SE INFRASTRUCTURE 77. Cabinet of Ministers confirms purchasing plan for 113. A Croatian-Hungarian gas interconnector has been put into Ukrzaliznytsya in 2012-2016 operation OSW 78. Court prolongs Odesa port head's detention until Thursday 114. BMI predicts Albania's future network development in order 79. Demand for hoppers increasing to support the growing popularity of broadband services 80. Government to provide Hr 100 million for construction of 115. Bulgaria's state authorities are seeking bidders for Kharkiv metro station, Kharkiv governor says concession of inactive airport in Vidin 81. KRAZ should post profit in 2011 despite 1H losses 116. Interconnection line Albania-Montenegro inaugurated bne:infrastructure

August 29, 2011 I No 28 Page 3 Top story

1. Transportation downturn effect

Aton

In this note we analyse a number of transportation companies and NCSP have the best defensive profiles among Russian to assess their theoretical performance during an economic transportation companies from a fundamental point of view. downturn. We highlight the weaknesses and strong points of each However, if we also consider past stock performance, we may company from this standpoint and provide our conclusions on add Aeroflot to our top list of defensive stocks. FESCO and their potential performance. TransContainer, in our view, are poor choices as a hedge against market and economic downturns. The decline on capital markets in Aug 2011 was striking in both its magnitude and speed. Fears of a global recession were Globaltrans spurred by the downgrade of the US credit rating by Standard We think Globaltrans is a good defensive stock from both a and Poor's and Russia, a major resource exporter, has already fundamental and corporate governance point of view. Strong been affected by international trends. The performance of the historical share price performance tends to support our view. transportation sector is in turn closely linked to the performance However, the 'Freight One issue' spoils its positive profile, of the Russian economy. Though we do not see direct indications adding an element of risk that was absent in previous years. that our stock ratings should be reviewed, we think it is better Nonetheless, we think Globaltrans would abstain from acquiring to be prepared in the face of any potential future downturn and Freight One if the market situation worsened. have identified the strong points and weaknesses of several transportation companies, which may define the performance of TransContainer their shares during any market decline. TransContainer's downside is presently limited by its anticipated privatisation price; if privatisation is delayed to 2012 or later, We believe that each company in the sector has a unique business the share-price floor will be removed and investors are likely to profile and completely different exposure to potential economic examine its (poor) fundamentals leading to underperformance. and capital market downturns. We selected a number of factors, including financial and operating performance in 2008-10, to Furthermore, while we do not currently see any company-specific assess how these companies' fundamentals might be affected by weakness, because TransContainer's business is cyclical in a decline in the real economy. We also examined their corporate nature, the stock is likely to perform particularly poorly should a governance quality, an important factor in a stock's performance downturn correspond adversely with its business cycle. (see Aton's report Keep it Simple: Focus on Good Corporate Governance, 30 June). In addition we looked at past performance NCSP to see how their shares actually reacted to downturns. Fundamentally, NCSP is one the best defensive stocks available, offering stable revenues and margins which rise when the We then present our conclusions on each company, as rouble depreciates. Despite its high leverage we do not expect summarised in the table below. In our opinion, Globaltrans the company to face problems with debt repayment even in a bne:infrastructure

August 29, 2011 I No 28 Page 4 crisis. A negative twist comes from the fact that Transneft, which corporate governance and transparency. The stock is likely to be effectively holds 25% of NCSP and jointly controls it with Summa punished during any market or economic downturn, in our view. Capital, is not known for being investor-friendly. Nonetheless, we think that should the downturn accelerate, investors are likely to Aeroflot downplay NCSP's negatives in light of its defensive nature. Given its financial stability and limited number of weak points, we think Aeroflot's shares should be among the best performers FESCO during a downturn, at least within the sector. The stock has been FESCO is a highly cyclical company with a number of drawbacks among the 25 best-performing shares in the past four downturns; such as poor liquidity and a short track record of adequate see Where to Hide in a Market Downturn, 8 Aug.

2. FAS grants Aeroflot permission to acquire 75%- 1 share in Rossia airlines

VTB Capital conditional on decreasing the number of flights between Moscow Our View: It comes as no surprise that the deal got the green and St Petersburg 16% light from FAS, since the merger of Aeroflot with Rosavia's assets has been under discussion at the highest government levels for might cost 1.4% of passengers carried in 2010 - immaterial, but quite some time already. However, the requirement to reduce the could add negative sentiment number of flights between the two largest cities in Russia was unexpected. The aforementioned 1.42mn passengers transferred News: The Federal Anti-Monopoly Service has given permission between Moscow and St Petersburg represents about 9% of for Aeroflot to acquire 75%-1 share in Rossia airlines, Interfax Aeroflot's and Rossia's total passengers carried in 2010. Were reported on Friday. At the same time, because of their dominant 16% of flights simply to be transferred to other carriers (without position on the Moscow-St Petersburg route, FAS has stipulated any swaps), this might cost the enlarged Aeroflot only 1.4% of total that both Aeroflot and Rossia must reduce the number of flights passengers carried. Given that some flights could be swapped, between the two cities 16%. Within three months of the deal, the actual affect might be even lower. We do not see any material Aeroflot has to transfer this amount to other carriers or swap them threat for Aeroflot from this requirement per se, but it might for other routes. add some negative sentiment keeping in mind Rostekhnologii's involvement and the uncertainty over the leasing terms for new Vedomosti mentions that Aeroflot and Rossia carried a total of aircraft from Rostekhnologii in the future. We are reiterating our 1.42mn passengers on the Moscow-St Petersburg route in 2010. Hold recommendation for Aeroflot. bne:infrastructure

August 29, 2011 I No 28 Page 5 3. Globaltrans to raise $5bn to bid for Freight One

Alfa Bank

Globaltrans is seeking a $5bn loan from a consortium of banks to market share on the Russian rail freight transportation market, acquire a 75%-2 stake in Freight One, Interfax reported yesterday, it will be a complicated task to integrate the two businesses and citing company CEO Sergei Maltsev. Earlier this year Globaltrans is likely to put pressure on Globaltrans' operating efficiency and expressed its interest in participating in the auction for the margins due to Freight One's old wagon fleet. Therefore, we view stake in Freight One, raising funds for the transaction through a the news rather cautiously and will wait for further developments. combination of debt financing and an SPO. Therefore, the news did not come as a surprise. Currently, there are three more companies that have officially received permission from FAS to bid for Freight One, including However, we believe that raising $5bn will be a challenge for NTK (Vladimir Lisin), Neftetransservice, and Transoil (Gennady Globaltrans, as it will bring its net debt to forecasted EBITDA Timchenko), with the latter most likely to be the buyer. 2011E ratio to around 10x. Moreover, the acquisition of Freight One is unlikely to bring immediate benefits for the company. Although this step could significantly increase the company's Iouli Matevossov

4. Latvia says will bail out AirBaltic if government takes over bne

Latvia Prime Minister Valdis Dombrovskis announced that the AirBaltic needs fresh capital following a loss of about $70m last state will provide capital for troubled airline AirBaltic if and Chief year and the supervisory council has called for a recapitalization of Executive Officer Bertolt Flick steps down and the government about double that loss. assumes management control, newswires reported.

Dombrovskis said the government will consider either investing in the capital along with the company's minority shareholder Baltic Aviation Systems, or buy out the stake it doesn't own, he said. bne:infrastructure

August 29, 2011 I No 28 Page 6 5. Ministry of Transportation recommends changing the rules for allocating slots for international flights

VTB Capital, Russia

--- could eventually encourage industry consolidation --- Aeroflot Our View: This might eventually have a marginally positive might benefit marginally News: In a l etter t o D eputy P rime effect for Aeroflot as these conditions could encourage industry M inister S ergey I vanov, t he M inistry o f Transportation consolidation. We note that of the few dozen Russian airlines, has recommended changing the rules for allocating slots for twelve have an IOSA certificate, including Donavia (part of the international flights, according to Kommersant sources. Two Aeroflot group) and two of the Rosavia companies. new conditions are to be added to the current criteria (economic health, experience and the size of the carriers): that a company has modern Russian-made planes in its fleet and that it holds an IOSA international security certificate.

6. Moscow plans 20 new metro stations in three years bne

Moscow hopes to accelerate the design process and raise city government on Tuesday. "It is necessary to carry out all the spending to open 20 new metro stations by the end of 2014, preparatory and design work now so as to complete three new reports Interfax. stations by 2012, five stations in 2013 and 13 new stations in 2014."

"This year, particular attention needs to be paid to the design of During the peak years, around RUB150m will be allocated annually new stations so as to speed up the construction in the subsequent for the development of the Moscow subway system, he added. years," Moscow Mayor Sergei Sobyanin said at a session of the

7. Moscow slows housing construction, cuts ring road projects

RIA Novosti - Nezavisimaya Gazeta

Moscow will limit the volume of new residential construction said Khusnullin who heads the construction division of the completions to 2.5 million sq m per year and will opt for a grid municipal government. Residential construction will be prioritized plan for its further transport system development, Deputy Mayor over new offices and industrial zones. Marat Khusnullin told a news conference. In the next few years, city hall plans to expand 19 highways out of Moscow's urban development plans have been seriously revised, the city and to build nine more major roads. At the same time, the bne:infrastructure

August 29, 2011 I No 28 Page 7 fourth ring road project will be dropped entirely while Moscow's in the city center inevitably create a deficit and price rises for urban transport system will be further developed as a grid of luxury housing and premium offices. blocks and streets as is common practice elsewhere in the world. Developers are facing problems now too. "There are dozens, The funds freed after mothballing the fourth ring road project will hundreds even, of investment projects suspended due to legal help finance other road projects: the Moscow government has problems with land allocation and violations of federal law," the lawyer allocated it nearly $1.5 billion for 2011, Khusnullin said. said. This delays the decision-making process about moving people out of old housing, complicates redevelopment of old neighborhoods The resources freed will be poured into priority projects - and leads to the termination of investment contracts, often in court. including housing construction. According to Khusnullin, residential construction in Moscow will soon be stabilized or But even a court ruling does not guarantee that developers' rights volume restricted. At the same time, more housing will be built are protected, Chumachenko said. outside the city, in areas that are currently part of the Moscow Region but which are to be brought within the city boundaries. Igor Smirnov from the 2K Engineering Company said: "Building 2.5 million sq m of new housing each year is not all that much for As of today, there is a significant number of projects in Moscow at Moscow. New construction climbed to 5 million sq m in the best various stages of completion, the official explained. About 7 million years. Now they are toughening the rules. All construction is banned sq m of housing is under construction and permits have been in the city center and many of the investment contracts that have issued to developers for 25 million sq m more. already been signed are being revised. They might not be able to meet their housing targets every year." He estimates that property Independent analysts do not quite agree with the official position. prices will surge. Housing will also become more expensive in other Igor Chumachenko, a real estate expert at the Vegas Lex law firm, areas where construction volumes are shrinking, because the said any restrictions on housing and other property development demand for housing in Moscow is steady.

8. Plane accidents double in 2011

bne

The number of plane accidents in 2011 was doubled those of the Most of the planes that went down were old models. Ivanov said year earlier and the number of people that died in plane accidents most of the older planes that crashed were owned by small was quadruple, reports the Moscow Times. airlines that operate "five or six airplanes, if not less," Interfax reported. Deputy Prime Minister Sergei Ivanov released a report on Tuesday highlighting the poor safety record of small airlines in particular. The Kremlin has already said that it wants to phase out the older planes and has become more open to buying planes of The government has announced tougher rules for aviation international manufacture. businesses and said that 57% of Russian airlines will be affected by the new rules on Tuesday. In April Russian President Dmitry Medvedev criticized the Russian aircraft makers for failing to provide competitive and electronically Earlier in August, the Federal Air Transportation Agency proposed advanced planes. providing licenses for long-haul flights only to airlines with a fleet of at least 10 similar planes starting from January 1, 2012; and to "Clearly all our products need to be electronically based but not all airlines owning at least 20 similar jets starting from January 1, 2013. our design bureaus are ready for this, which is a big and separate Airlines that fail to meet this standard would only be permitted to problem," Medvedev told a session of the Russian aviation security offer charter, regional, and cargo flights, the agency added then. council. Medvedev said Russian planes should be competitive with their foreign rivals in terms of engine noise, fuel economy and In all there were 13 place crashes in 2011, killing 81 people flight distance. between January and August. There were another 26 accidents with no deaths over the same period. Then in June following an An-24 airliner crash Medvedev ordered the government to assess the possibility of removing all TU-134 These statistics did not include the crash-landing of an An-2 airliners from regular flights starting in 2012. biplane on Monday that killed one in the Tuva republic and the Saturday crash of a Yak-18T plane near St. Petersburg that left Among Russian airlines, UTair has the largest number of the four people dead. model in service: out of its total fleet of 202 planes, 28 are TU- bne:infrastructure

August 29, 2011 I No 28 Page 8

134s. While UTair could potentially be negatively affected by this Earlier this month, the Transportation Ministry banned long-haul unexpected decision, we think the news is actually neutral for the airlines with less than 10 similar aircraft from operation starting following reasons: January, with the bar to be raised to 20 planes from 2013, reports the Moscow Times. A total of 94 TU-134s are operational in Russia and the domestic airlines industry would require about $2.4bn to replace them, The number of certified airlines has been halved over the past according to analysts at Aton -- a huge sum for Russia's airlines. year, Interfax said.

"Since it is not possible to acquire the required number of new The 15 biggest airlines - each with fleets of more than 20 planes - aircraft within the next six months, the president's decision handle 90 percent of all air traffic in the country, it said. But small appears impracticable, in our view," Aton said in a note at the time. airlines serve many remote localities.

UTair had already planned to replace its TU-134s with Boeing and Russian Deputy Prime Minister Sergei Ivanov said that Russia Embraer aircraft in 2011-12, so most of them should in any case be currently has 139 airlines, with 90% of the total passenger traffic removed from service before any state ban could come into force. handled by only 15 carriers.

9. Stroygazconsulting could acquire Yamaltransstroy

Metropol

Stroygazconsulting, Russia's largest oil and gas infrastructure 2011, due to the large discount to bad corporate governance contractor, controlled by Ziyad Manasir, could acquire and low transparency. However, we believe that acquisition by Yamaltransstroy, which specializes in railroad construction, and Stroygazconsulting could result in better corporate governance mainly carries out the construction of rail infrastructure for and improved transparency for Yamaltransstroy. We believe Gazprom. Stroygazconsulting could make a mandatory buyout offer since we expect that it could buy at least a contolling stake in the In recent years Yamaltransstroy has had only one large contract - Yamaltransstroy (Igor Nak and his affiliates control 88% of common the construction of the Obskaya-Bovanenkovo-Karskoe railroad, equity). According to our estimates, the acquisition could be made which is almost completed. Recent results also indicated decrease at least at USD 1,100 per share, which would imply with P/B 1_. in backlog: 1H 11 revenue fell by 71% y-o-y to RUB 1.44bn, while the company saw operating loss of RUB 56mn for 1H 11 compared We believe the news could have positive impact on to RUB 213mn operating profit for 1H 10. Yamaltransstroy's share price.

Positive impact on shares. We note that Yamaltransstroy shares are illiquid. It trades at EV/S of 0.1 and EV/EBITDA of 0.9 for Andrey Rozhkov bne:infrastructure

August 29, 2011 I No 28 Page 9 10. The Government of St. Petersburg awards the NCH consortium the preferred bidder status in the PPP tender for the construction of the central section of WHSD

VTB Capital - press release

The Government of St. Petersburg awards the Northern Capital received debt financing proposal from VTB and Gazprombank (the Highway consortium led by VTB Capital the preferred bidder second and the third largest banks in Russia). NCH is expecting to status in the PPP tender for the construction of the central sign the public private partnership agreement with St Petersburg section of Western High-Speed Diameter as well as maintenance in December 2011. and operation of the entire toll road Infrastructure investment is one of VTB Capital's strategic Northern Capital Highway (NCH) consortium has been named priorities. The implementation of the Western High-Speed the preferred bidder in the tender for the right to construct the Diameter project is in line with VTB Capital's plans to develop central part of the Western High-Speed Diameter (WHSD) and infrastructure projects in Russia utilizing public-private subsequently operate the entire stretch of the toll road. The partnership mechanisms. VTB Capital is also the lead investor consortium is comprised of VTB Capital, Gazprombank and in the Northern Capital Gateway consortium which has won international construction companies Astaldi (Italy) and Ictas the right to modernize and operate the Pukovo airport in St. Insaat (Turkey). WHSD is a strategically important investment Petersburg. The Pulkovo airport PPP transaction has been project both for the city and the Russian Federation that will recognized by a number of awards from leading international determine St. Petersburg's development as a major international industrial publications including the Infrastructure Journal, the transport hub and will create the first toll road operated within Infrastructure Investor and Euromoney, as well as the award for city limits in Russia. Today, WHSD is the largest project in the best global public-private partnership project of the year. Russia implemented within the framework of the public-private partnership mechanism. VTB Capital also acted as the arranger of a successful RUR 10 bn issue of the OJSC "Western High-Speed Diameter" 20-year NCH's bid proposes a minimal WHSD toll revenue guarantee RUR bonds. The deal saw significant level of investor demand by the city of St Petersburg of RUR 9.67bn per annum. Should providing an attractive coupon rate for the issuer. Proceeds of this the actual project revenue exceed this amount, NCH will pay bond issue, alongside financing from the city's budget and federal 90% of the excess to the city. It is expected that following the subsidies will be used to finalise the construction of the highway's construction of the central part of the road, toll revenues from southern and northern sections. the Western High-Speed Diameter traffic will soon reach the level of the minimal revenue guarantee, which means that the Oleg Pankratov, Co-Head of Global Banking, Head of city will not have to allocate significant funds from its budget to Infrastructure Capital & Project Finance at VTB Capital and the support the project. The level of the minimal revenue guarantee Chairman of the NCH Board, said: "We are very pleased with the proposed by NCH was significantly lower than that proposed by outcome of the tender and that the proposal of the Northern its competitor enabling significant budget savings. Capital Highway consortium was recognised as the optimal for the city of St. Petersburg. This is a further step in strengthening WHSD's central section is the most technically complex to build VTB and VTB Capital's leading position in the infrastructure part of the road and includes three bridges (among them two investment market in Russia. To implement the project we cable stayed) and a tunnel. The expected investment is estimated have brought the best expertise available. We are convinced by NCH at approximately RUR 120bn (¤3bn) and will be financed that our consortium has the unique experience of successfully through a combination of debt and equity, as well as the federal implementing large-scale infrastructure projects as well as grant of approximately RUR 51bn. The consortium has already raising the required financing." bne:infrastructure

August 29, 2011 I No 28 Page 10 Russia infrastructure news

11. Geographers to discuss Our View: The logic behind the proposal could be to postpone tariff rises, and thereby limit inflation, until the presidential Arctic Sea Route at second elections in March 2012. Tariff increases later in the year could be applied to compensate for the delay, considering that Russian Arctic Forum Railways has heavy capex that needs to be financed.

However, if only a 6% tariff increase were to be applied in 2H12, RIA Novosti and none in 1H12, railway operators such as Globaltrans would see their revenues forecast downgraded 3% at the revenues level, Creating transport infrastructure to develop the riches of the while EBITDA margins could fall 1.2pp. Arctic will top the agenda when geographers from Russia and abroad meet at the second Arctic Forum in Arkhangelsk on September 21-24.

The forum will focus on development of commercial navigation, transport terminals (sea-ports and airports), and corridors like the Northern Sea Route, which could transform Russia's ability to 13. Moscow to hand Vnukovo ship natural resources to the markets of Asia. stake to federal government Safety problems such as the development of satellite navigation and sea traffic control will also be discussed, as well as ecological this autumn safety issues and improving the living standards of indigenous people. bne The first forum, organized by the Russian Geographical Society, was attended by the head of the RGS Board of Trustees, Prime Minister The Moscow city authorities will hand over its 75% stake Vladimir Putin, Emergencies Minister Sergei Shoigu, President of in Vnukovo Airport to the federal government in October or Iceland Olafur Ragnar Grimsson and Prince Albert of Monaco. November, the facility's First Deputy General Director Vitaly Vantsev said on Wednesday, reports Prime. "The forum last year confirmed the need to establish in Russia, the largest Arctic nation, a prestigious international venue In late March, Prime Minister Vladimir Putin said that the Russian for discussing Arctic problems," Shoigu said. "Now that it is government plans to combine Moscow's Sheremetyevo and Vnukovo done, we'll thoroughly evaluate the prospects for international airports into a single company. Putin noted then that projects cooperation in the region." on the development of the Moscow air transport hub should be implemented along with the modernization of road infrastructure and the improvement of transport around the airports.

The situation surrounding Moscow's busiest airport remains precarious for the private owners, with the government still believed to be pressuring them to give up their stake so that 12. MinEconomy is set to propose Domededovo can join the air hub project.

a 6% rail tariff increase in 2H12

VTB Capital

--- would be negative for railway operators such as Globaltrans

News: The Ministry for the Economy is preparing a proposal to increase monopolies' tariffs 6% in 2012, and apply the increase only half way through the year, according to Kommersant sources in Russian Railways. bne:infrastructure

August 29, 2011 I No 28 Page 11

14. Putin's second cousin eyes 15. Rail fares could skyrocket river transportation business 300%

RIA Novosti - Vedomosti RIA Novosti - Argumenty I Fakty

The son of Prime Minister Vladimir Putin's cousin has decided The Federal Tariff Service has announced plans to increase to go into the river transportation business in Moscow. In June, passenger rail fares. Mayor Sergei Sobyanin instructed the city's transportation department to draft a policy document for a river passenger The current fares for seats only and second-class sleepers within transport system with routes to be assigned at a tender. Russia, which have been in effect since January 1, 2011, are expected to be raised by a coefficient of 2.995. As a result, fares in Unlike road traffic, the river passenger boats do not require these classes may shoot up 300%. additional infrastructure, can cut transportation time from the suburbs into downtown Moscow 10%-20% and have capacity for Fares on long-distance trains will be recalculated but with a 9 million people a year. An official at the municipal transportation minimum increase: they will not be increased more than 61.7%. department said Tuesday that they were in the process of drafting the document, without specifying the deadline. Four companies In the spring of this year, Russian Railways President Vladimir have filed their bids, the Vedomosti newspaper was told by a Yakunin said his company plans to gradually replace second-class Moscow City Hall official and a source close to its transportation sleepers with compartment cars. department. They are the National Association of Ship Owners, the Volga Logistic Association Logoprom, the Zolotoi Ostrov Increased fares on the most common classes of travel could speed shipping line and the MRT company focused on river boat up the scheduled reform plans, reports the Ayda.ru website. construction and repair. Sources say the son of Putin's cousin, Roman, gave the MRT presentation. According to the SPARK- Interfax database of registered legal entities in Russia, Ukraine and Kazakhstan, MRT is co-owned by three private individuals and LLC Freon Service. Roman Putin held a 24% stake in the company as of June 3, 2011. 16. Russian Railways eyes control Roman Putin, aged 33, is the son of Putin's cousin Igor, a vice president of Master Bank. His online biography says he of Slovakia's ZSSK Cargo graduated from the Volsk branch of the Military Academy of Logistics and Transport, worked for the Federal Security Service (FSB), the city council of Ryazan, mobile operator MTS and bne that he was a security adviser to the Ryazan mayor. Roman and his partners have diverse portfolios. In August 2010, he State monopoly Russian Railways is considering buying a established Gazstroyholding to build pipelines and electricity controlling stake in the Slovak state-run railway freight company and communication lines. According to business newspaper Zeleznicna Spolocnost Cargo Slovakia, Russian Railways Vice Kommersant, the other MRT co-owner, Freon Service, is 75.5% President Salman Babayev told journalists on Tuesday, as Russian owned by French Aviation Technology which plans to produce news agency RIA Novosti reported this on its Internet website. gyroplanes in Russia. Roman Putin has not answered the questions Vedomosti sent him via his secretary. Babayev also said that Russian Railways would cover its 2011 investment program deficit by borrowing, if an auction to sell its The National Association of Ship Owners is ready to inject 12.5 75 percent minus two shares in Freight One is postponed from billion rubles ($425 million) and has selected a pool of investors September due to changes in Russian Railway's board of directors. in the project that includes state banks, said its president, Andrei Babayev further stated that Russian Railways had a bid for Poland's Novgorodsky. Logoprom President Andrei Ivanov said they could rail cargo unit PKP Cargo, Europe's No. 2 rail freight carrier. devote eight boats to the project and that its profitability could reach 10%-15%. A representative of Zolotoi Ostrov has confirmed The Slovak Transport Ministry is looking for a consultant through the company's interest in the project but refused to comment a tender to secure the entry of a strategic partner in the state-run further. railway freight company ZSSK Cargo. The estimated cost of the consulting services represents EUR 2 million ex-VAT. The future strategic partner is to acquire a minimum of sixty-six percent in Cargo by June 2012.

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Yandex traffic analyst Leonid Mednikov said that the situation 17. Sidewalk resurfacing halted on the roadways would be greatly complicated if this work is not completed by autumn. in Moscow "As winter approaches, traffic jams gradually increase," he said. "Any repair work that affects the roadway and is not completed RIA Novosti - Kommersant by September 1 creates significantly more problems for motorists than it would in summer." Moscow authorities slashed a four-billion-ruble program to resurface asphalt sidewalks with bricks in the center of Moscow by nearly two-thirds and postponed the rest of the work until 2012. Instead of the planned 1.13 million square meters of brick streets in 2011, only 400,000 square meters will be resurfaced. The city government said that suppliers cannot rise to meet 18. Transportation ministry demand, although brick manufacturers and contractors say that they are meeting the specified standards. proposes hiking coal export

Moscow Mayor Sergei Sobyanin ordered work to stop at the end transport tariffs of August after a report from First Deputy Mayor Pyotr Biryukov that said that it would be impossible to meet the deadline of October 25 since suppliers cannot manufacture the required Troika Dialog quantity of bricks in time. In addition, brick prices are growing because of rising cement prices, but plants are not free to revise The Transportation Ministry has proposed raising the railway tariff their prices under the contract terms. Mr. Biryukov proposed for deliveries of coal for export by 20-30%, Kommersant reports. finishing work that has already been started and working until The aim of this move would appear to be expanding financing for the August 25. Sobyanin supported this initiative. Mezhdurechensk-Taishet segment of the Trans-Siberian Railroad. From the article it is not entirely clear whether the proposal involves Gulnara Penkova, the mayor's press secretary, said that only only the tariff for deliveries through this segment (which is less than 400,000 square meters of bricks will be laid in 2011 - almost 66% 10% of the overall length of the Trans-Siberian export route) or the less than planned, and the four billion rubles in funding has been export tariff in any direction, and whether it implies a scale between slashed accordingly. The scope of work and funding for 2012 will various categories of coal. The export of coking coal (the EBITDA be considered with the next urban improvement program. margin of which exceeds 50%) is a much more profitable business than, for instance, the export of energy coal. The Moscow housing department said that sidewalks need to be resurfaced because one million square meters of asphalt emits Coal is a raw material with a relatively low cost by volume. Given about 650 tons of harmful substances in the summer heat, while the remoteness of the main mining sites from seaports, tariffs for bricks heat up more slowly and are safer. railway transport of coal account for more than 40% of the overall cost of realizing production. Sixteen contractors and ten brick plants won the resurfacing tender. "There's a delay, but it's not critical, 10%-15%, no more," Practically all coal deliveries in Russia take place via railroads. said Alexander Abramov, sales manager at Monolith-5, one of the They currently proceed based on the first-class tariff, which largest paving brick suppliers. is well below that for deliveries of other types of loads and are essentially cross-subsidized by other deliveries. Thus, Suppliers Eurocement Holding and Krost stated that they are transporting a tonne of coal from the Kuzbass to Far East ports in in a position to complete their contractual obligations on time. 2010 cost approximately $35, while transporting a tonne of steel Contractors also say they will finish their work to schedule. the same distance cost at least $100. Russian producers export around half of the coal mined in the country. Both city authorities and opponents of the resurfacing program have criticized the quality of the work. Sergei Baidakov, prefect The government introduced this system at the end of the 1990s in of Moscow's Central District, rejected the work of contractors order to help the sector emerge from the crisis. The Kuzbass basin, on the Kremlin embankment and had serious concerns about the main coal-producing region in Russia, is located in central Eurasia Radishchevskaya Ulitsa, where he ordered the "shoddy" - very far from seaports - and cross-subsidization of coal transport is resurfacing work to be redone. The opposition movement Left absolutely necessary to support the sector's competitiveness, which is Front has picketed City Hall on numerous occasions, demanding important from an economic as well as social standpoint. improved quality control. In case of its introduction on the entire length of all export "City authorities miscalculated the time needed to perform the routes, the proposal would naturally have a somewhat negative work," said Alexander Morozov, co-chairman of the City and impact on the financial flows of coal producers, particularly Transport interregional public organization. "The haste with those that produce energy coal. Nonetheless, given the sector's which the resurfacing work is being carried out is perplexing. lobbying abilities, it could be significantly altered in case of its Perhaps asphalt really does emit fumes, but you don't see implementation. anybody resurfacing the roads." Alexey Bulgakov bne:infrastructure

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19. Tuva coal projects under Our View: Expanding the Trans-Siberian railway is necessary for the full scale launch of Tuva coal projects. While developing infrastructure pressure; neutral infrastructure (including the construction of the 27mntpa Kyzyl-Kuragino line, to be launched after 2016) is largely the for Severstal and Evraz at this responsibility of the parties participating in the development of the coal field, the expansion was supposed to be financed point by the government and Russian Railways. Although we do not expect this load to be transferred to either Evraz or Severstal, the government will probably be reluctant to finance the increased VTB Capital bill, and ongoing negotiations could lead to delays in expanding the Trans-Siberian. Nevertheless, we consider the news to be News: Vedomosti has run an article about the construction of neutral at this point given the rather distant time horizon and the infrastructure for the Tuva coal projects and, specifically, the possibility of alternative supply routes during the ramp up period. expansion of the Trans-Siberian railway, which is to be financed by the government. The cost of construction has reportedly been assessed at USD4bn by Russian Railways, up from the USD Alexander Pukhaev 900mn voiced up earlier.

Russia infrastructure finance & statistics

20. Iskitimcement reported current high level of debt. anticipated improvement in Impact on stock price. The company's 1H 11 results indicated improving operating profitability, which was expected given the 1H 11 RAS results driven by recovery in the cement price. an increase in cement prices We do not think the results will have any significant impact on the stock price, given weak production results, although these results are consistent with the company's outlook for full year 2011, Metropol which assumes that production will decrease by 12% y-o-y.

Iskitimcement reported that 1H 11 revenue decreased by 9% We reiterate our HOLD recommendation on Iskitimcement and y-o-y as a result of a 24% y-o-y decrease in cement sales and our fair value of USD 785. a 20% y-o-y increase in the average sales price to RUB 2,204 per metric tonne. The price increase caused EBITDA margin to increase by 14.8ppts y-o-y and operating margin to increase by 14.6ppts y-o-y.

Net income. The company posted net income of RUB 32mn for 1H 21. Russian Railways: 11, compared to a net loss of RUB 175mn for 1H 10. Net income resulted from an improvement in operating income as well as a Credit Update RUB 63mn y-o-y decrease in net financing costs to RUB 32mn for 1H 11, while other costs fell by RUB 38mn y-o-y to RUB 28mn. VTB Capital Debt position. Net debt grew by 13% to RUB 2.9bn by the end of the first half compared to end-2010 figure and showed just a 2% We met with Russian Railways recently in order to update q-o-q increase. Net debt to 2011E EBITDA was 8.8x, indicating ourselves on the most relevant topics from the credit angle, that the company is in an extremely weak financial position at the including capital expenditures, asset disposals, funding, tariff bne:infrastructure

August 29, 2011 I No 28 Page 14 policy, operating performance and privatisation. The comments 22. Volgomost reported 14% made by the company's representatives were quite calming. y-o-y growth for 1H 11 - Russian Railways continues to stick to moderately conservative financial policy targets and expects the government to fund the expensive projects related to the 2018 World Cup (if such projects are Metropol approved) via direct budget financing and/or adequate tariff hikes. Volgomost reported that net income for 1H 11 increased by 14% - If the sale of the 75% stake in Freight One is delayed for one y-o-y to RUB 67mn. The y-o-y growth rate was slightly low relative reason or another, the respective liquidity gap will not be funded to the 325% y-o-y we expect for the full 2011, however, given the with bonds but rather bridge loans. seasonally strong second half in the construction industry, we expect net income growth to accelerate in 2H 11. The company's - A new Eurobond issuance is unlikely before 1Q12. The 2010 1H 11 RAS results are scheduled for release in mid-August 2011. IFRS report is due later this month. The company closed down its VM-StroyMontazh subsidiary, a - The way things stand now, it looks like the company will move we believe was intended to simplify the company structure continue to be 100% state-owned until at least 2013. and improve transparency. We consider this positive for the stock over the medium term. Russian Railways currently has two Eurobonds outstanding: RURAIL 2017 and RURAIL 2031. RURAIL 2017 is trading on par We reiterate our BUY recommendation and a fair value of USD with Gazprom's curve, i.e. circa 240-250bp over swaps (we remind 102 per common share, which implies 13% upside to the current investors that RURAIL 17 is part of the EMBI Global indices, while RTS offer. Gazprom's bonds are not). Following the recent tap, the GBP- denominated RURAIL 2031 is offering a much wider spread over Alexander Marinov swaps (370bp) and therefore looks attractive on a relative value basis.

_In the domestic bond market, Russian Railways has 14 outstanding issues worth almost RUB 200bn in total. Bonds with fixed rate coupons are trading flat to the curves of other national champions. We believe that all of the first tier bonds trade too tight (30-50bp) to the local sovereign (OFZ) curve.

_Mikhail Galkin

Russia roads

23. A consortium including the RUB 135bn contract for the central portion of the West High Speed Diameter (WHSD) project. The consortium offered a better Mostootryad-19 failed to win price and shorter construction period compared to the group including Mostootryad-19, Sberbank Investments, Renaissance the RUB 135bn contract for the Construction and foreign partners A-Porr, Jan De Nul and Vinci Concessions and Oliveridge Investments. The latter group is central portion of the West High affiliated with Gennady Timchenko.

Speed Diameter project. We Negative impact on stock price. The news is negative for Mostootryad-19's stock price, since the Mostootryad group anticipate a negative impact on was considered more likely to win the tender. Revenue from earlier stages of the WHSD project account for more than 70% Mostootryad's stock price. of Mostootryad's revenue. Although the potential exists for the company to win sub-contracts on the WHSD, we believe the company will need to look for other projects in St. Petersburg and Metropol the Leningrad Region.

A consortium including VTB Group, Gazprombank, and foreign We will not update our model based on the tender results, since partners Astaldi, GPB Infrastructure, Mega Yapi and IC has won we have not included this project in the company project portfolio. bne:infrastructure

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We reiterate our SELL recommendation and our fair value of USD 401 per share. 26. Avtodor launches M4-Don

highway in Lipetsk Region

24. Altai government to bne spend RUB16bn on transport Russian state-owned highway operator Russian Highways, or Avtodor, says it has launched a 56-kilometer section of M4-Don infrastructure by 2016 highway between Moscow and Rostov-on-Don in the Lipetsk Region, Prime reports. bne Construction began in 2008 and cost RUB20.8 billion.

The government of Russia's constituent republic of Altai plans to spend RUB15.981bn from both the regional and federal budgets on the development of transport infrastructure in the region by 2016, a spokesperson for the regional development ministry said, Prime reports. 27. Mostootryad-19 reported The regional government plans to build 108.6 kilometers of roads and repair 636.6 kilometers of existing automobile roads in the weak 1H 11 RAS results region, as well as building bridges and helicopter pads, the agency adds. Metropol

Mostootryad-19 reported that 1H 11 RAS revenue increased by 28% y-o-y to RUB 3.61bn. EBITDA decreased by 6% y-o-y while operating income fell by 51% y-o-y. EBITDA margin was down by 25. Cars per 1,000 people - 0.8ppts y-o-y to 2.3% while operating margin declined by 0.4ppts y-o-y to 0.3%. According to management, the deterioration in Moscow traffic does not back this operating profitability was due to a reduction in project valuations. The St. Petersburg-based company said that its policy is to data complete projects even at a 25% discount to the initial valuation. However, we believe that the company may be understating profitability. Metropol Net income. Net income rose by 121% y-o-y to RUB 13.2mn, due to an increase in net financing income to RUB 11.4mn for 1H 11 compared to RUB 4.5mn for 1H 10. Moreover, the company posted lower operating costs of RUB 5.4mn in 1H 11 compared to RUB 8.7mn in 1H 10. Net margin improved by 0.2ppts to 0.4%.

Debt position. Net debt increased by 51% to RUB 2.77bn for 1H 11 compared to RUB 1.83bn in 1H 10. Higher debt was the result of an increase in working capital, driven by a 172% increase in accounts receivable to RUB 3.95bn compared to RUB 1.45bn at the end of 2010. Net debt to annualized 2011E EBITDA was 10.5x, compared to 9.7x in 2010. Given deteriorating profit margins, we are concerned about the company's aggregate debt level.

Impact on stock price. Given deteriorating profitability and the uncomfortable level of debt, we expect that results to have a negative impact on the stock price. However, results from the RUB 135bn West High Speed Diameter tender, which are to be announced tomorrow, could offer a counterweight.

We reiterate our Sell for the shares and fair price USD 401.

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28. Mostostroy-11 reported weak October 25 since suppliers cannot manufacture the required quantity of bricks in time. In addition, brick prices are growing 1H 11 RAS results, which should because of rising cement prices, but plants are not free to revise their prices under the contract terms. Mr. Biryukov proposed be negative for the stock finishing work that has already been started and working until August 25. Sobyanin supported this initiative.

Metropol Gulnara Penkova, the mayor's press secretary, said that only 400,000 square meters of bricks will be laid in 2011 - almost 66% Mostostroy-11 reported that 1H 11 RAS revenue increased by 10% less than planned, and the four billion rubles in funding has been y-o-y to RUB 3.21bn, which was in line with our full year estimate, slashed accordingly. The scope of work and funding for 2012 will which assumes revenue will increase by 7% y-o-y to RUB 8.18bn. be considered with the next urban improvement program.

Earnings. EBITDA decreased by 52% y-o-y to RUB 248mn, while The Moscow housing department said that sidewalks need to be operating income declined by 70% y-o-y to RUB 113mn. EBITDA resurfaced because one million square meters of asphalt emits and operating margins deteriorated by 9.9ppts and 9.6ppts about 650 tons of harmful substances in the summer heat, while respectively. Net income decreased by 99% y-o-y to RUB 1mn, bricks heat up more slowly and are safer. mainly due to decrease in operating income. According to the company, the earnings decrease was the result of an increase Sixteen contractors and ten brick plants won the resurfacing in construction materials costs and labor, while project prices tender. "There's a delay, but it's not critical, 10%-15%, no more," remained stable due to contract conditions. said Alexander Abramov, sales manager at Monolith-5, one of the largest paving brick suppliers. Net debt. Net debt increased to RUB 1.26bn for the end 1H 11 compared to RUB 604mn for the end 2010. The increase in net Suppliers Eurocement Holding and Krost stated that they are debt was the result of an increase in working capital, driven by a in a position to complete their contractual obligations on time. 36% growth in inventories to RUB 2.95bn compared to RUB 2.17bn Contractors also say they will finish their work to schedule. at the end of 2010. With net debt to annualized EBITDA ratio increased to 1.1x for 1H 11 compared to 0.6x for 2010, we believe Both city authorities and opponents of the resurfacing program that the company debt position is comfortable. have criticized the quality of the work. Sergei Baidakov, prefect of Moscow's Central District, rejected the work of contractors Negative impact on the stock. The results are weak due to deep on the Kremlin embankment and had serious concerns about decline in y-o-y earnings. Given fixed project prices, we admit that Radishchevskaya Ulitsa, where he ordered the "shoddy" 2011 earnings could be weaker that our full year estimates. We resurfacing work to be redone. The opposition movement Left therefore believe that the results could have negative impact on Front has picketed City Hall on numerous occasions, demanding the company share price. Nevertheless, our long term view on the improved quality control. company is positive and we reiterate our Buy recommendation and our fair value of USD 2,080. "City authorities miscalculated the time needed to perform the work," said Alexander Morozov, co-chairman of the City and Transport interregional public organization. "The haste with which the resurfacing work is being carried out is perplexing. Perhaps asphalt really does emit fumes, but you don't see anybody resurfacing the roads."

29. Sidewalk resurfacing halted Yandex traffic analyst Leonid Mednikov said that the situation on the roadways would be greatly complicated if this work is not in Moscow completed by autumn.

"As winter approaches, traffic jams gradually increase," he said. RIA Novosti - Kommersant "Any repair work that affects the roadway and is not completed by September 1 creates significantly more problems for motorists Moscow authorities slashed a four-billion-ruble program to than it would in summer." resurface asphalt sidewalks with bricks in the center of Moscow by nearly two-thirds and postponed the rest of the work until 2012. Instead of the planned 1.13 million square meters of brick streets in 2011, only 400,000 square meters will be resurfaced. The city government said that suppliers cannot rise to meet demand, although brick manufacturers and contractors say that they are meeting the specified standards.

Moscow Mayor Sergei Sobyanin ordered work to stop at the end of August after a report from First Deputy Mayor Pyotr Biryukov that said that it would be impossible to meet the deadline of bne:infrastructure

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30. Stroytransgaz to buy actual project revenue exceed this amount, NCH will pay 90% of the excess to the city. It is expected that following the construction construction co ARKS of the central part of the road, toll revenues from the Western High-Speed Diameter traffic will soon reach the level of the minimal revenue guarantee, which means that the city will not bne have to allocate significant funds from its budget to support the project. The level of the minimal revenue guarantee proposed by Russian construction company Stroytransgaz has begun the NCH was significantly lower than that proposed by its competitor process of acquiring Russian group of construction companies enabling significant budget savings. ARKS, Stroytransgaz said in a statement, Prime reports. Stroytransgaz did not specify further details of the deal, but WHSD's central section is the most technically complex to build Russian business daily Kommersant reported that Stroytransgaz part of the road and includes three bridges (among them two planned to buy a 21% stake in ARKS for $200m, while receiving an cable stayed) and a tunnel. The expected investment is estimated option to increase this to a controlling stake within three years. by NCH at approximately RUR 120bn (¤3bn) and will be financed A source close to Stroytransgaz said that ARKS could participate through a combination of debt and equity, as well as the federal in the reconstruction of the Dmitrovskoye, Varshavskoye, and grant of approximately RUR 51bn. The consortium has already Khoroshevskoye highways, as well as in the construction of a toll received debt financing proposal from VTB and Gazprombank (the road between Moscow and St. Petersburg. second and the third largest banks in Russia). NCH is expecting to sign the public private partnership agreement with St Petersburg in December 2011.

Infrastructure investment is one of VTB Capital's strategic priorities. The implementation of the Western High-Speed Diameter project is in line with VTB Capital's plans to develop infrastructure projects in Russia utilizing public-private 31. The Government of St. partnership mechanisms. VTB Capital is also the lead investor in the Northern Capital Gateway consortium which has won Petersburg awards the NCH the right to modernize and operate the Pukovo airport in St. Petersburg. The Pulkovo airport PPP transaction has been consortium the preferred bidder recognized by a number of awards from leading international industrial publications including the Infrastructure Journal, the status in the PPP tender for Infrastructure Investor and Euromoney, as well as the award for the best global public-private partnership project of the year. the construction of the central VTB Capital also acted as the arranger of a successful RUR 10 section of WHSD bn issue of the OJSC "Western High-Speed Diameter" 20-year RUR bonds. The deal saw significant level of investor demand providing an attractive coupon rate for the issuer. Proceeds of this VTB Capital - press release bond issue, alongside financing from the city's budget and federal subsidies will be used to finalise the construction of the highway's The Government of St. Petersburg awards the Northern Capital southern and northern sections. Highway consortium led by VTB Capital the preferred bidder status in the PPP tender for the construction of the central section Oleg Pankratov, Co-Head of Global Banking, Head of of Western High-Speed Diameter as well as maintenance and Infrastructure Capital & Project Finance at VTB Capital and the operation of the entire toll road Chairman of the NCH Board, said: "We are very pleased with the outcome of the tender and that the proposal of the Northern Northern Capital Highway (NCH) consortium has been named Capital Highway consortium was recognised as the optimal for the the preferred bidder in the tender for the right to construct the city of St. Petersburg. This is a further step in strengthening VTB central part of the Western High-Speed Diameter (WHSD) and and VTB Capital's leading position in the infrastructure investment subsequently operate the entire stretch of the toll road. The market in Russia. To implement the project we have brought the consortium is comprised of VTB Capital, Gazprombank and best expertise available. We are convinced that our consortium has international construction companies Astaldi (Italy) and Ictas the unique experience of successfully implementing large-scale Insaat (Turkey). WHSD is a strategically important investment infrastructure projects as well as raising the required financing." project both for the city and the Russian Federation that will determine St. Petersburg's development as a major international transport hub and will create the first toll road operated within city limits in Russia. Today, WHSD is the largest project in Russia implemented within the framework of the public-private partnership mechanism.

NCH's bid proposes a minimal WHSD toll revenue guarantee by the city of St Petersburg of RUR 9.67bn per annum. Should the bne:infrastructure

August 29, 2011 I No 28 Page 18 Russia trains

32. Alstom to take part in tender 34. First Cargo co to spend for Moscow-St. Pete railroad RUB9bn on 4,265 cars by yearend project bne bne Russian freight rail operator First Cargo Company plans to buy 4,265 cars for RUB9.347bn by the end of 2011, the company said French engineering company Alstom plans to participate in a according to Prime. tender to construct a high-speed railroad between the Russian cities of Moscow and St. Petersburg, a representative of the The company did not specify the type of cars it planned to company said, Prime reports. purchase.

"We foresee a possibility to take part in this project as a member of a consortium, the membership of which is currently being defined," the spokesperson for the French company is quoted as saying.

The spokesperson said that he was speaking about a Russian- 35. Metrostroy reported strong French alliance, while declining to say if French railway operator SNCF planned to participate in this alliance. 1H 11 RAS results

SNCF President Guillaume Pepy said in an interview with Russian business daily Vedomosti on August 22 that the company intended Metropol to take part in a tender for the Moscow-Petersburg high-speed railroad project. Revenue. Metrostroy reported that 1H 11 RAS revenue increased by 68% y-o-y to RUB 12.9bn. The company said the revenue growth was the result of an increase in construction volumes. We assume, that in particular the revenue increase was the result of funding for the final portion of the Gulf of Finland Protective Barrier project.

33. CEO says Globaltrans in talks Earnings. Operating income grew by 74% y-o-y to RUB 448mn, while operating margin improved by 0.1ppts y-o-y to 3.5%. on $5bn loan for cargo company According to our estimates, EBITDA grew by 34% y-o-y to RUB 629mn while EBITDA margin was down by 1.2ppts y-o-y to 4.9%. deal The decline in EBITDA margin was due to a decline in depreciation, which decreased by 15% y-o-y to RUB 180mn, according to our estimates. Net income rose by 102% y-o-y to RUB 453mn, due to bne an increase in operating income, with RUB 55mn posted as other operating income compared to RUB 18mn loss for other operating Private Russian freight carrier Globaltrans is currently holding income in 1H 10. negotiations with a number of banks over taking out a loan worth more than $5bn to finance a deal to buy a 75% minus two share Cash position. Net cash increased to RUB 1.04bn for the end 1H stake in Russia's First Cargo Company, Globaltrans CEO Sergei 11, compared to RUB 147mn for end 2010. The greater amount Maltsev said, Prime reports. of cash was the result of a decrease in working capital, driven by a 19% decline in accounts receivable to RUB 6.08bn, compared In particular, Globaltrans is discussing attracting funds from to RUB 7.53bn at the end of 2010. The company also decreased Russian state-controlled VTB Bank and Sberbank. short-term financial investments to RUB 1.59bn for the end 1H 11, compared to RUB 4.88bn for the end 2010.

Positive impact on the stock price. Given the strong revenue increase and slow improvement in operating profitability, we believe the results are positive for the stock. We reiterate our Buy recommendation and fair value of USD 780. bne:infrastructure

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36. Moscow Mayor eyes JV with acquisition of a controlling stake in Slovakian cargo transportation company Zeleznica Spolecnost Cargo Slovakia from Slovakian foreign partner to produce metro railway company Zeleznice Slovenskej Republiky, the Russian company's Vice President Slaman Babaev said, Prime reports. escalators Babaev reiterated that Russian Railways filed a bid in late June to participate in a tender to buy a 50% plus one share stake in Polish bne cargo transportation operator PKP Cargo SA.

Moscow Mayor Sergei Sobyanin has suggested setting up a joint venture with a foreign company to produce escalators for Moscow's metro, Prime reports.

Sobyanin suggested the move following his visit of the metro's Lublinsko-Dmitrovskaya stretch of the Marino-Zyablikovo line, 39. Russian Railways reports which is under construction. The construction of the stretch requires a total of 16 escalators while only four of them have cargo loading up 2.4% YoY in July been supplied so far due to supply shortages. St. Petersburg- based escalator producer Latres is the only plant manufacturing escalators for the Russian metro. Renaissance Capital

Event: According to a Russian Railways press release issued yesterday (1 August), total rail cargo loading in Russia increased 2.4% in July 2011 (in line with +2.4% YoY in June). Cumulative loading for 7M11 reached 713.7mnt, up 3.7% YoY.

37. Moscow plans 20 new metro Action: Moderately positive for Globaltrans, FESCO and Transcontainer, in our view. stations in three years Rationale: In general, these cargo-loading figures continue the trend of moderate growth seen in the first half of the year. Loading bne volumes for the major transported cargoes - coal, and oil and oil products - inched up 2.1% and 0.6%, respectively (vs +1.5% and Moscow hopes to accelerate the design process and raise +0.7% in 6M11). We note traditionally strong performance for the spending to open 20 new metro stations by the end of 2014, loading of containers (+13.9% in 7M11 vs +15.6% in 6M11) and reports Interfax. construction materials (+14.0% in 7M11 vs +17.0% in 6M11), due to a low-base effect. We believe strong numbers in container loading "This year, particular attention needs to be paid to the design of should support Transcontainer's and FESCO's shares, while new stations so as to speed up the construction in the subsequent growth in the loading of construction materials could be positive years," Moscow Mayor Sergei Sobyanin said at a session of the for Globaltrans's performance. city government on Tuesday. "It is necessary to carry out all the preparatory and design work now so as to complete three new stations by 2012, five stations in 2013 and 13 new stations in 2014."

During the peak years, around RUB150m will be allocated annually for the development of the Moscow subway system, he added. 40. Russian Railways starts

building RUB2bn bridge over Akhtuba River 38. Russian Railways mulls bne buying control stake in Slovakian State-owned railroad company Russian Railways has started cargo company work on the construction of a RUB2bn double-track railroad bridge across the Akhtuba River in the Volga Federal District, the company said in a statement, Prime reports. bne The 468-meter bridge on the Aksaraiskaya-Trusovo route will take State-owned railroad company Russian Railways is considering the three years to build. bne:infrastructure

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State-owned railway company Russian Railways plans to sign 41. Russian Railways to buy an agreement to buy another eight high-speed Sapsan trains from Germany's Siemens in September, Russian Railways Vice 8 more Sapsan trains from President Valentin Gapanovich said, Prime reports. Under the contract, Russian Railways is expected to buy four Siemens Sapsan trains and obtain an option to buy four additional trains, Gapanovich said. He added that the Russian company also planned to sign a maintenance service agreement with Siemens. bne

Russia planes

42. Aeroflot passenger traffic Renaissance Capital growth recovers in July Event: Yesterday (2 August), Aeroflot-RA issued key 1H11 RAS financials, indicating: * Revenues up 20.2%, to RUB58bn ($2.0bn), due to a 20.6% VTB Capital increase in passenger traffic. * Gross profit down 4.5%, to RUB6.84bn ($239mn), with a 3-ppt load factor also improves post June flop - supportive for the stock decline in the gross margin, to 11.8%. - high fuel prices remains the issue for margins Net income up 71.6%, to RUB6.69bn ($234mn).

News: Aeroflot has issued its statistics for July, which include the Action: Not supportive for Aeroflot shares, in our view. head company OJSC Aeroflot and Donavia but exclude recently sold Nordavia (it was accounted for in 6mo11 and 6mo10). The Rationale: In our view, the results are moderately negative-to- main takeaway is that growth rates recovered in July after neutral. The company has not published an EBIT figure, but the moderating slightly in May-June. PAX (number of passengers decline in gross profit shows that Aeroflot has not transferred carried) increased 16% YoY, while RPK grew 13% YoY. We also increased fuel costs on to customers. Aeroflot-RA hedged only highlight that the passenger load factor is now catching up with 4% of its fuel, while Aeroflot subsidiary Donavia does not hedge the levels seen in 2010 (after the flop in June). at all: accordingly, we expect a high unhedged fuel price to hurt Aeroflot Group's margin in the IFRS results. The rapid growth in Our View: The results are encouraging for Aeroflot, revealing net income reflects the sale of the Nordavia subsidiary (a one-off a recovery in growth trends in July (usually the high season for event). airline companies). While the strong operating snapshot is set to support top line growth, we are still cautious on high jet fuel Dmitry Kontorshchikov prices this year (up 40% YoY), the major drag for profitability.

Meanwhile, the July data also eases our concerns over lower passenger loads (which is another potential threat for margins). The YTD growth in passengers carried is still slightly below our FY11 projection of 16.9%. Whether the company meets our 44. Aeroflot reports highest forecasts is now largely dependent on the path that the economy as a whole takes, since airline industry fundamentals remain monthly traffic in modern history strong for now.

Renaissance Capital

Event: Yesterday (4 August), Aeroflot reported that the number of passengers of Aeroflot-RA (ex. subsidiaries) in July increased to 43. Aeroflot publishes key 1H11 1.43mn (+21.2% YoY), which is the highest monthly result for any Russian airline since 1992. The cumulative 7M11 results also look financials under RAS strong: the number of passengers grew 22% YoY to 7.67mn (vs. 22.3% in 6M11). bne:infrastructure

August 29, 2011 I No 28 Page 21

Action: Moderately positive for Aeroflot, in our view. Aviation

Rationale: Since April, Aeroflot has flown over 1mn passengers per month, whereas in 2010, it achieved this level of traffic only during bne the height of the summer season. July, August and September are traditionally the busiest months for airlines; hence, we expect Russia's Federal Antimonopoly Service (FAS) has approved Aeroflot to continue to deliver strong results in coming months. Russian airline UTair to buy a 51% stake in Khabarovsk-based Meanwhile, we expect Aeroflot Group's growth figure to be less airline Vostok Aviation Company, Prime reports. outstanding, due to a weak performance by subsidiary Donavia. The news agency adds that Finansovy Garant (Financial Guarantor) Dmitry Kontorshchikov bought the government's 51% stake in Vostok Aviation for RUB263.4m at auctioning April.

45. Aeroflot signs a preliminary agreement with Rostekhnologii 47. Aviation fuel prices up, again to lease 50 MS-21 starting in RIA Novosti - Kommersant 2017-22 Jet fuel prices have begun climbing again in Russia as suppliers announced a 5% to 10% increase in the current rates on Tuesday. VTB Capital The growth is due to changes in global refined product quotes and a severe shortage in aviation fuel. Demand for jet fuel is five to six News: At the annual MAKS air show, Aeroflot and Rostekhnologii times greater than the supply at Russian commodity exchanges. signed a preliminary agreement for the operating lease of 50 MS- Investors are expecting the traditional airfare increases. 21 aircraft, Interfax reported yesterday. They are to be delivered to Aeroflot in 2017-22 on a ten-year lease. The MS-21 series are On Tuesday, Russia's airports announced new fuel prices. short- and medium-haul aircraft now being developed by Irkut (a Sheremetyevo increased the cost of one metric ton of aviation fuel Russian company). Earlier, the newswire mentioned 2016 as the by 1,000 rubles. The same increase is expected at Domodedovo, expected launch date. As was announced earlier, Aeroflot aims to on August 6. In Vnukovo, one ton of fuel will be 1,190 rubles more increase the share of domestically produced aircraft in its fleet to expensive. On average, jet fuel prices will go up 4.9% in Moscow. at least 40% by 2020. The oil news and research company, Kortes Centre, forecasts a 2% to 10% August increase in jet fuel prices for Russia in general. Our View: No details were given about the financial side of the deal and since the first MS-21 is only due to be delivered in 2017, we A Kommersant source at TNK-BP puts the increases down to a see marginal implications for Aeroflot at this stage. Moreover, as "number of factors." One is changes in the Platts Jet Fuel Price was the case with SSJ, deliveries could be delayed. We would pay Index, which "was jittery in July." The price first fell from $120 to more attention to the financial terms for the lease of 50 Boeing $102 per barrel, then jumped back up and is now hovering around 737 NGs (the first delivery is planned for 2013), which might be the $115-$120 level. Also, the source said, fuel at European announced soon. airports is 10% higher, so overseas carriers want to top the tank in Russia, creating additional demand. Meanwhile, Aeroflot is increasingly focusing on business class passengers and, as frequent travellers, we note that the company Vladimir Spiridonov, head of Aerofuels Group, added that many has achieved good results in premium transfers. Our concern refineries are now producing winter diesel fuel for a state over the increasing share of domestic aircraft stems from the fact program. The Defense Ministry has also purchased large volumes that business class passengers are sensitive to service quality, of fuel. including the type of aircraft, and so a large fleet of Russian-made planes might result in a lower load factor in this segment. Alexander Bylkin, from Petrokommerts, said Russian based airlines continue to attract new passengers which alone could Elena Sakhnova account for 7% of the fuel shortage.

The government tried to hold the line on jet fuel prices as early as last winter, along with diesel prices. Prime Minister Vladimir Putin put pressure on the oil producers, and some even reduced prices. But later the increases resumed. Since the beginning of the year, Aerofuels Group reveals, fuel prices have increased 25% to 27%. 46. Antitrust regulator clears The last bump was on June 1 - about 5% - when many airlines announced fuel surcharge increases. UTair to buy 51% in Vostok bne:infrastructure

August 29, 2011 I No 28 Page 22

Major carriers are now trying to hedge against price fluctuations. Transaero recently concluded a formula-based pricing agreement 50. New rules may require larger with Gazpromneft-Aero and TNK-BP to minimize risks. fleets: Moderately positive for Dmitry Gorin, head of the transport committee at the Association of Russia's Tour Operators, believes most major airlines will be Aeroflot able to hold their prices, but mid-size carriers may be forced to increase fares over the next two weeks. Renaissance Capital "Given the announced rise in aviation fuel prices, air fares for mid-size carriers are likely to go up by about ten euros," believes Event: Today (1 August), RBC Daily and Kommersant reported that Alexander Morozov, general director of Aviacharter. A Kommersant the Federal Air Transport Agency (FAVT) proposes to increase the source at Sky Express explained that only large companies with minimum standard number of aircraft from three to five for all high sales are able to hedge against the risks a few months ahead, Russian airlines, and to 20 aircraft of the same type for airlines while "smaller carriers are forced to pay current rates." operating regular flights. The proposal was made because FAVT has revoked the licences of eight small airlines YtD due to financial difficulties.

Action: Moderately positive for Aeroflot, in our opinion.

Rationale: Currently there are about 150 airlines in Russia. 48. CEO sees invest in Russia's The proposed change could strengthen the position of the top-10 Russian carriers, which comply with the new minimum Koltsovo Airport at RUB15bn by requirements for regular flights; and significantly increase the barrier to entering the market. At the same time, the leading 2016 10 airlines account for 80% of passenger traffic, so we do not expect that the proposal, if adopted, would substantially boost the operating performance of these companies. However, the bne average tariff for domestic flights could grow more if Rosaviation's proposal is accepted because low-cost Russian carriers, such as Investments into the development of Yekaterinburg's Koltsovo Avianova (six Airbus A320s) and Sky Express (eight Boeing 737s International Airport are expected to amount to RUB15bn in 2011- and two Airbus A319s) will not be permitted to schedule regular 2015, the airport's CEO Yevgeny Chudnovsky said at a meeting with flights. the government of the Sverdlovsk Region, Prime reports. Of the total sum, the airport is to provide 5 billion rubles, while the Dmitry Kontorshchikov remaining investments are to be allocated from the federal and regional budgets, Chudnovsky said.

51. Russia delays auction to 49. Ilyushin Finance to supply 6 sell Siberia Airlines stake to An-158 planes to Cuban airline September 29 bne bne

Russian aircraft leasing company Ilyushin Finance has signed a Russia's Federal State Property Management Agency has pre-contract agreement to supply six An-158 airplanes to Cuban postponed an auction to sell the government's 25.5% stake in state airline Cubana under a lease agreement, Prime reports, Siberia Airlines until September 29 from September 6, the agency citing a source in the aviation industry. said, Prime reports.

The source is quoted as saying that the contract is expected to Bids are being accepted until September 22. The starting price for be signed in September for a firm order for three planes, with an the stake is set at RUB1.873bn. option for three more. No reason was given for the delay. bne:infrastructure

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52. Irkutsk airport to complete 54. UAC plans to sign delivery runway upgrade by October 20 agreements for 100 civil aircraft at MAKS-2011 bne

Russia's Irkutsk International Airport plans to complete the Renaissance Capital recently started reconstruction of its runway by October 20, the airport said in a statement, Prime reports. Event: Last Friday (12 August), Prime-TASS reported that United Aircraft Corporation (UAC) plans to sign agreements to deliver 100 civil aircraft at the MAKS-2011 aviation event. UAC produces SSJ-100, MS-21 and An-148 civil aircraft. In 2010, the company delivered seven units, including two Tu-204s, one Tu-214 and four An-148s (excluding two Tu-204s delivered to Ilyushin Finance leasing company, but not to the airline operator before the end of the year). In 2011, the company started delivering SSJ-100s (in 53. Tolmachevo Airport ups 2011 total, UAC plans to deliver 14 of these this year). investment program by 76% Also on Friday, the CEO of MiG (100% controlled by UAC), Sergey Korotkov, said MiG's order book exceeded $4bn, which is 1.18x UAC's total revenue from the military sector for 2010 (bearing in bne mind that UAC's military division also produces Su and Tu fighters and Yak combat trainers). At the end of the year, the company is The board of directors of Russia's Tolmachevo Airport has due to deliver five MiG-29KUBs to the Indian air force. In March increased its 2011 investment program to RUB300m from the 2010, it signed a new agreement with India's Ministry of Defence, previously planned RUB170m, the airport's press office said, worth $1.5bn, for delivery of an additional 29 fighters of the same Prime reports. class. The design bureau will start delivering these aircraft in 2012. At the moment, MiG is finalising negotiations on deliveries of MiG- The airport plans to direct the additional funds to various 29Ks and MiG-29KUBs to Russia's Ministry of Defence. construction projects, including a boiler house, electric substations, covered walkways, as well as the repair and Action: The news is positive for UAC in terms of order-book acquisition of equipment. growth, in our view.

The previously planned funds are to be invested into developing the Mikhail Sheplev baggage handling and security systems, as well as other projects.

Russia ships

55. Baltiysky Zavod to build spent 56. Consortium buys out VMTP nuclear fuel vessels for British management company Aton bne A consortium of financial investors has bought management's 50% stake in Vladivostok Sea Trade Port (VMTP), Vedomosti St. Petersburg-based shipbuilder Baltiysky Zavod, a part of reports today (5 Aug). FESCO controls the other 50% of the Russia's United Industrial Corporation, plans to build three vessels company and was embroiled in a dispute with its management. for shipments of spent nuclear fuel for U.K.-based James Fisher Previously, FESCO had attempted to buy out VMTP's managers, and Sons (JFS), Baltiysky Zavod's press office said, prime reports. but it rejected their offered price. In today's story, a FESCO A memorandum of intent signed by the companies also carries an representative said the new shareholders have transferred their option for the construction of three more vessels. management rights to FESCO. The report said FESCO may buy bne:infrastructure

August 29, 2011 I No 28 Page 24 out these investors this year. While we welcome the consolidation 59. Russian port data for 7M11: of control over VMTP, which is an important asset for FESCO, the deal structure leaves many questions unanswered. In our view, Grain exports resume, boosting this lack of information makes it impossible to assess its impact on FESCO's fundamentals at least at this point. volumes

Renaissance Capital

Event: On Friday (12 August), the Association of Commercial Seaports released data on Russian ports' performance in 7M11. 57. First Container Terminal Total cargo traffic through Russian ports decreased 0.2% YoY to 304.7mnt, vs a 0.5% YoY decrease in January-June. Growth in dry cargo handling capacity up 22.7% cargo traffic increased to 4.5% in 7M11 from 1.7% in 1H11. The key driver was the lifting of a grain export ban on 1 July, which led to a 30% YoY jump in grain exports in July to 2.5mnt. We also highlight bne the continuation of solid growth in container volumes (+24% in 7M11 YoY, vs +23.9% in 6M11) and coal (+17.2% in 7M11, vs +16.1% St. Petersburg's First Container Terminal, part of the National in 1H11). At the same time, the volumes of liquid cargo continue Container Company (NCC), has increased its annual cargo to decrease (-3.3% in 7M11, vs -2.0% in 6M11), mainly due to the handling capacity 22.7% to 1.35m twenty-foot equivalent units weak dynamics of crude oil handling (-6.8% in 7M11, vs -5.1% in (TEUs), NCC's press office said, Prime reports. 6M11). Geographically, Baltic ports outperformed (+5.4%), with The current investment program of the company envisages volumes at St Petersburg's ports increasing 8.2%. We also note increasing First Container Terminal's annual cargo handling strong dynamics in the turnover at Pacific ports (+7.9% in 7M11), capacity to 1.60 million TEUs in 2011-2015. with the ports of Vladivostok gaining 7.2%.

Action: We see this news as positive for Global Ports, due to the strong dynamics of Baltic Sea Basin ports and solid growth in container volumes. Also, the news could be supportive for FESCO's shares, due to positive dynamics at Vladivostok's ports. With respect to NCSP, while its performance was not very impressive, 58. NCSP's 7mo11 cargo turnover the rapid start to grain exports may be a trigger for improving results in 2H11, in our view. down 1.6% YoY Dmitry Kontorshchikov

VTB Capital

News: NCSP's 7mo11 cargo turnover (consolidated with PTP) decreased 1.6% YoY to 90.4mn tonnes.

Our View: The key highlight of July was that grain volumes started 60. Transport ministry suggests to recover on the back of the government's decision not to prolong the grain export ban. Grain handling in July stood at over suspending unlicensed 800,000 tonnes, versus just 85,000 in 1H11. Given that the ban on exporting grain was introduced in August 2010, we believe that passenger carriers the resumption of grain handling will help NCSP to improve its YoY numbers by the end of the year. We note that net of grain, NCSP's 7mo11 cargo turnover increased 3% YoY. bne

The key contributor to this improvement was oil products, which Russia's Transportation Ministry has suggested suspending the rose 34.5% YoY to 10.3mn tonnes on the back of the capacity activities of unlicensed passenger carriers following a number expansion in Primorsk. This largely helped to offset the 2.2% of recent fatal accidents, including the July 10 sinking of the decline in crude handling in January-July (to 65mn tonnes). We Bulgariya riverboat where 114 people were killed, Prime reports, note that grain and oil products are high margin cargoes and their citing a bill published on the Economic Development Ministry's growth bodes well for the company's profitability. We also highlight website. the continuing increase in the handling of containers (up 51% to 365,000 TEUs), which are another high-margin cargo. Under the current legislation, unlicensed transportation companies are fined when a violation is discovered. The ministry Elena Sakhnova has also proposed introducing fines exceeding RUB5,000 on individuals associated with unlicensed passenger transportation. bne:infrastructure

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61. United Shipbuilding Corp to The funds are to be used to refinance the construction of a second arctic tanker by Russian shipping company Sovcomflot, the agency buy 41% stake in Caspian Energy adds. No information on an annual interest rate was provided. Group bne

State-controlled United Shipbuilding Corporation plans to buy 63. VMTP's revenues up 17.6% 41% in Russia's Caspian Energy Group, which comprises several shipbuilding and engineering companies, Prime reports, citing a YoY in 1H11 - Supportive for spokesperson for United Shipbuilding Corporation. The value of the deal was not disclosed. FESCO

The state-controlled corporation plans to close the deal within the next two weeks, once the Federal Antimonopoly Service (FAS) Renaissance Capital clears the acquisition, the spokesperson said, adding that the corporation plans to use its own funds to finance the deal. Event: Yesterday (10 August), the Commercial Port of Vladivostok At the same time, another 40% stake in Caspian Energy Group (VMTP), the core port asset of FESCO Group, published 1H11 RAS is expected to be acquired by an unnamed portfolio investor, financials. Revenues rose 17.6% YoY to RUB1.35bn ($47.4mn), acting on behalf of United Shipbuilding Corporation, business despite the fact that the total throughput of the port fell 7.3% to daily Kommersant reported, noting that this would give United 3.13mnt. EBITDA increased 16.4% to RUB351mn ($12.3mn), while Shipbuilding Corporation control of Caspian Energy Group. the EBITDA margin decreased 0.3 ppt to 26%. Net income was down 40% to $10.5mn.

Action: Moderately positive for FESCO, in our view.

Rationale: We believe the growth in revenues and simultaneous decrease in total throughput were associated with changes in 62. VEB borrows $115m from cargo mix. We note that in 1H11, VMTP increased the throughput of containers - the highest-margin segment of the port business HSBC to refinance Sovcomflot - by 31.8% to 195.4k TEUs. The decrease in net income in our view is connected with high non-operating income in 1H10, which was project a one-off event. FESCO plans to increase its share in VMTP from 50% to almost 100% by the end of the year, and it already has operating control of the port. Thus, the strong financial results of bne the port should support FESCO's shares, in our view.

Russian state-owned bank Vnesheconombank (VEB) has taken out Dmitry Kontorshchikov a $115m 7-year loan from HSBC Bank plc under the guarantee of Italian export insurance agency SACE SpA, VEB said in a statement, Prime reports. bne:infrastructure

August 29, 2011 I No 28 Page 26 CIS infrastructure

64. Azerbaijan: Czech 66. Belarus' freight traffic by rail Republic allocates $352 mln to up 12.9% y-o-y in January-July reconstruction of highway in bne Azerbaijan Belarusian Railway's freight traffic increased 12.9% year-on- year in January-July to 87.3m tonnes, a representative in the APA-Economics administration of Belarusian Railway carrier said, Prime reports. Transit freight traffic rose 13.9% to 30.3m tonnes in January-July, Credit agreement was today signed between Azerbaijan and while exports reached 21.9m tonnes, up 34.1% year-on-year. Czech Republic on financing of project on development of highway infrastructure considered in State Program on socio-economic development of regions in 2009-2013.

Azerbaijan’s Transport Ministry told APA that Azerbaijan’s share in $352 mln-agreement has been determined at mount of 15% and the advance payment must be paid by 3 parts on tranches. 67. China starts making electric The project aims construction and reconstruction of additional 2 road strips on Hajigabul-Kurdamir 2-lane road. locomotives for Belarus

Note that, the credit agreement was signed by Transport Minister Ziya Mammadov, Finance Minister Samir Sharifov on bne the Azerbaijani side and vice-president of Komercni Bank on the Czech side. Chinese CNR Datong Electric Locomotive Co. Ltd. has started making two-unit electric locomotives for Belarusian Railway under a $99.792m deal, with $84.987m in financing coming from an Export-Import Bank of China loan, the press center of the Belarusian rail operator says, Prime reports.

The new locomotives are necessary because of the increased 65. Belarus invites Chinese transit of freights via Belarus. Freight trains from Russia weigh up to 9,000 tonnes, whereas Belarusian locomotives have a AVIC International to invest in capacity of up to 5,500 tonnes, hence lower throughput capacities and additional costs. transport sector The first two of 12 locomotives will arrive in Belarus in February 2012. bne

Belarus has invited Chinese AVIC International Holding Corporation to invest in transport projects, Prime reports, citing a release from the press service of the Transport Ministry following a meeting between Belarusian Transport Minister Ivan Scherbo and representatives of the Chinese corporation on August 22. AVIC could invest in the project to connect Minsk with satellite 68. Lukashenko wants full-scale towns by a first category motorway. Belarus also invites Chinese partners to take part in the construction of a second runway in production of railway carriages in Minsk airport and the electrification of Belarus' railways. Belarus

bne bne:infrastructure

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Within the next two years Belarus needs to start producing the Reconstruction of Dushanbe railway station at a cost of $4m is entire range of components for the railway carriage industry, currently in process. Belarusian President Alexander Lukashenko said when visiting Osipovichi Carriage Works, BelTA reports. Tajik Railways is also building associated infrastructure including a new railway station at Khonoqa in Hisor region, and an "We have to start manufacturing carriages in Belarus. This will be apartment block in Dushanbe. a breakthrough in the industry," Lukashenko is quoted as saying, "The volume of rail freight is large and the demand for rolling stock is huge. We spend big money to purchase them abroad."

71. Tajikistan plans rail link to Pakistan’s Gwadar port 69. Kazkommertsbank to finance

$1 billion of construction and bne infrastructure projects in Almaty Government officials from Pakistan and Tajikistan are keen to see the construction of a rail link from China via Tajikistan and Afghanistan to the port of Gwadar in Pakistan. SRI Pakistan’s Federal Minister for Communications Arbab Alamgir Kazkommertsbank, Kazakhstan’s largest lender by assets, Khan visited Dushanbe this week for meetings with Tajik Prime will finance KZT150 billion ($1.0 billion) of construction and Minister Oqil Oqilov and Foreign Minister Hamrakhon Zarifi, APP infrastructure projects in Almaty, the country’s commercial reported. capital, the bank said in a statement on Thursday. A statement issued yesterday August 9, said that Tajikistan and “Almaty City Administration (Akimat) and Kazkommertsbank Pakistan will work together with China and Afghanistan to ensure signed a memorandum of public-private partnership to address the port’s infrastructure is fully utilised. issues of social and economic development of Almaty city,” the bank said. Khan said he was also keen to see additional road and air links between Tajikistan and Pakistan. Kazkommertsbank will fund projects in 2011 and 2012, allocating KZT75 billion ($513 million)for home building, KZT60.3 billion ($413 million) for infrastructure and tourist and sports venues, and KZT14.7 billion ($101 million) for small and medium-sized businesses and mortgage loans, according to the statement.

Kazkommertsbank plans to use its own funds for the projects, Bloomberg reported, citing, Shynar Zhanibekova, a spokeswoman 72. Tajikistan: New bridge for the lender. to Afghanistan opens

bne

A new bridge over the Panj river that separates Tajikistan from 70. Tajikistan plans $150m rail Afghanistan opened August 16. infrastructure investments The $3m bridge, in Tajikistan’s eastern Pamir region, was funded by the Aga Khan Foundation, Itar-Tass reports. It is the fifth bridge linking the two countries. bne “More than 70,000 Tajiks and Afghans who live on both banks of Tajik Railways is planning to invest $150m in new railway the river will have direct trade and economic relations, which will infrastructure, Asia Plus reports. improve their material status,” Tajikistan’s President Emomali Rahmon said at the opening ceremoney. The national rail operator plans to spend $129m on a new rail link between Dushanbe and Qurgonteppa, the company’s director Amonullo Hukumov told journalists. bne:infrastructure

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73. AeroSvit satisfies protesters' 360 open railcars and 860 tank railcar, bringing the total number of cargo railcars in Jan-Jul to 8.7 ths units. demands, carries out all delayed Oleksiy Andriychenko: The news is NEUTRAL for Azovzagalmash, flights to Boryspil which produces cargo railcars as well as heavy machinery units for metallurgy and mining. The output growth is line with our annual revenue forecast of $1249 mn for the company, which Kyiv Post incorporates a $945 mn revenue from selling 14.2 ths cargo railcars and $304 mn of heavy machinery revenue. We reiterate AeroSvit Airline has announced that all delayed flights to Boryspil our BUY rating on AZGM stock with a $3.6 target. International Airport from abroad have departed, as have most of the company's flights from Kyiv's main airport.

Assistant AeroSvit Director for public relations, Serhiy Kutsy, said that as of 16:30 on August 1, all delayed flights from Kyiv to Tbilisi, Hamburg, Moscow (Vnukovo), Athens, the Odesa-Istanbul flight, as well as several internal flights to Donetsk and Odesa had departed. The other flights, in particular, to Dusseldorf, Kaliningrad and Simferopol, are getting ready for departure. In 75. Bogdan Motors gets order for addition, all aircraft that failed to depart on schedule from foreign airports on Monday morning had returned to Boryspil by 14:00- 202 trolleybuses 15:00, reads the press release.

Earlier, the airline's representative in Donetsk, Borys Soldatko, Concorde Capital told Interfax-Ukraine that the situation has normalized and that all flights have commenced departure apart from two - the flight Bogdan Motors (UX: LUAZ UK) signed a contract with to Istanbul, which is awaiting an aircraft from Moscow, and which Kyivpastrans for 202 trolleybuses worth a total value of EUR will depart at 23:00, and a flight to Athens, which is awaiting an 46 mln, the company reported Friday in a press release. The aircraft from Kyiv, and will depart at 18:00-19:00. deliveries are scheduled between October 2011 and October 2012. The European Bank for Reconstruction and Development plans to Soldatko also said that passengers that missed their flights due lend EUR 60 mln to Kyivpastrans for the purchases. to the delays were provided with food and beverages, as well as accommodated at the hotel at the expense of AeroSvit. Vitaly Gorovoy: We projected USD 185 mln in revenues for Bogdan Motors from bus sales in 2011-12F. However, we excluded any "AeroSvit Airlines again presents its apologies in connection with significant cash receipts from trolleybuses sales in our DCF- the cancellation and delay of a number of flights on August 1, model, because the company has not received any large orders 2011 due to a protest by pilots of Boeing 737 planes," reads the for this product in recent years. We view this news as a positive press release of the company. surprise for the company and confirm our bullish view on this stock. Our target price is USD 0.068, upside 100%. As reported, the pilots demanded the indexation of payments over the 2008-2009 financial crisis period and the payment of wages under a new regulation that increases wages by 18%.

Read more: http://www.kyivpost.com/news/nation/ detail/109844/#ixzz1TrEUMyWd

76. Bogdan wins battle for Kyiv

Foyil Securities

74. Azovmash increased output The large Ukrainian automaker Bogdan Motors (LUAZ, Buy) has won a tender to deliver 202 trolleybuses to Kyiv, Kommersant by 90% YoY in Jan-Jul 2011 reported. The value of the contract signed between Bogdan Motors and KyivPasTrans is reported at EUR 46m. The first trolleybuses will be delivered by October of this year. The EBRD Art Capital will supply the financing needed to pay for the trolleys. Our view: Even though Lviv Bus, Bogdan's competitor in this Azovmash reported a 90% increase in production in Jan-Jul of tender, plans to appeal the results, we doubt that LUAZ will lose 2011, preserving the growth rate from a month earlier. The total any orders as we believe Lviv Bus will not be able to meet the output of the group reached UAH 4.7 bn ($590 mn). In July the tight delivery schedule. Even though LUAZ posted losses over 1H main production facility of the holding, Azovzagalmash, produced 2011, this new order and the earlier order for trolleybuses for the bne:infrastructure

August 29, 2011 I No 28 Page 29

Crimea the company received earlier this summer will help the 79. Demand for hoppers automaker return to profitability by the end of the year. increasing Alex Nekrasa

Foyil Securities

The demand for mineral fertilizer hoppers has increased largely thanks to orders from Russian fertilizer producers, which remain the main buyers of this type of rolling stock. In 1H11, all rolling stock producers increased production of such hoppers by 41.9% 77. Cabinet of Ministers y/y to 1,420 units, PG-Online.ru reported. According to the news source, the total park of fertilizer hoppers in the former USSR confirms purchasing plan for is 41,200 cars, including 5,900 that will exceed their service life by the end of 2011; by 2015, the number of such cars will reach Ukrzaliznytsya in 2012-2016 14,900.

Our view: The main demand on the CIS market is concentrated Concorde Capital on gondola cars, with other types of rolling stock receiving less attention from large rolling stock operators. However, with the Ukraine's Cabinet of Ministers confirmed the previously announced need to replace 36% of mineral fertilizer hoppers over the next plans by Ukrainian state railway transport monopoly Ukrzaliznytsya four years, we expect more attention to be paid to this type of to buy 509 new locomotives in 2012-16 (see our news from July rolling stock. Among Ukrainian rolling stock producers Stakhanov 12, 2011), RZD-partner reported on Friday. Ukrzaliznytsya plans Carriage (SVGZ, Buy) is the largest producer of such carriages to buy 66 locomotives in 2012, 104 units in 2013, 110 in 2014, 114 with a 14% market share in 2010; however, since in 2011 SVGZ in 2015 and 115 in 2015. The volume of the entire program is UAH mainly focuses on gondola cars, its market share in 1H11 dropped 28.7 bln, which will be funded by Ukrzaliznytsya's own funds and to 4.2% (60 hoppers). We expect that demand for hoppers of loans. We evaluate the news positively for the only local producer of various types, particularly for carrying grain, cement and mineral locomotives, Luhanskteplovoz (UX: LTPL UK), which could get the fertilizers, will increase over the next 5 years due to the need bulk of the order. to replace outdated rolling stock of this type. With demand for gondola cars still high, it is likely that the companies taking on orders for hoppers will be able to realize higher margins. In this regard, we see SVGZ positioned well to benefit from such demand and maintain our Buy rating of the stock, which is now suffering from the general negative sentiment on the market rather than from poor company performance.

78. Court prolongs Odesa port Alex Nekrasa head's detention until Thursday

Kyiv Post

The Central District Court of Simferopol has prolonged the detention of the head of the state-run Odesa Maritime Merchant 80. Government to provide Hr Port, Mykola Pavliuk, until August 4. The court made its ruling on Tuesday. 100 million for construction of

Representatives of the prosecutor's office explained their petition Kharkiv metro station, Kharkiv by the seriousness of the crimes Pavliuk is accused of, and added that he could influence the witnesses if he were to be released governor says from detention.

Charges have been brought against Pavliuk on three criminal Kyiv Post cases under Part 2, Article 364 of the Criminal Code of Ukraine (the abuse of power). The Cabinet of Ministers will provide UAH 100 million from the state fund for the construction of Kharkiv Peremoha metro Read more: http://www.kyivpost.com/news/nation/ station, Head of Kharkiv Regional State Administration Mykhailo detail/109938/#ixzz1Tx7mhdPm Dobkin reported.

"We're waiting for a resolution to be signed and will start working with the Finance Ministry and plan our efforts. I think we will start bne:infrastructure

August 29, 2011 I No 28 Page 30 receiving this money in September," he said. railway transport monopoly) for two interregional electric passenger trains, RZD-Partner reported on Friday. The contract He said the money should be spent by the end of 2011. must be executed by June 2012.

"The issue is that we should manage to spend this UAH 100 Vitaly Gorovoy: This contract is surprise to us and confirms our million by the end of 2011. And if it arrives in September, then bullish view on Kryukiv Wagon shares. The manufacturing of UAH 25 million per month should be spent in September, passenger railcars is a strategic goal for Kryukiv. Freight railcars October, November and December," he added. remain the company's cash cow. We projected Kryukiv Wagon to record USD 0.9 bln in revenues in 2011-19E from sales of As reported, at the ribbon-cutting ceremony of Kharkiv's passenger railcars in our DCF-model (14% of total revenues in Oleksiivska metro station in December 2010, Ukrainian Vice 2011-19E). Premier Borys Kolesnikov announced that the next metro station would be built by May 9, 2012.

Read more: http://www.kyivpost.com/news/nation/ detail/110011/#ixzz1U2vSejYP

83. KVBZ to help Kyiv save money

Foyil Securities

81. KRAZ should post profit in The maker of freight and passenger railcars Kryukiv Carriage (KVBZ, Buy) has reached an agreement with Kyiv Metro on 2011 despite 1H losses modernization of 200 metro coaches, Ukrainian News reported, citing the company's chairman. The modernization will be carried out together with Japanese Mitsubishi and Itochu corporations Foyil Securities with the purpose of reducing power consumption by the rolling stock. The modernization will entail switching metro trains to The Ukrainian maker of heavy trucks AvtoKrAZ (KRAZ, Buy) alternating current and induction motor drives, which will reduce reported its 1H 2011 results. The company's revenues improved power consumption by approximately 30%. 9.9% y/y to UAH 334m; EBITDA improved 16.6% y/y, but the company posted a loss of UAH 58.4m for the period. Our view: This contract will not have an immediate impact on the revenues of KVBZ as the project will be carried in 2012-2013 with Our view: Demand for heavy trucks has been returning slower Japanese companies delivering the necessary components in 3Q than demand for passenger and light commercial vehicles. 2012. However, planning to modernize and expand underground As a result, KRAZ announced that it would not meet its goal transportation in Kyiv, Donetsk, Dnipropetrovsk and Kharkiv, of 3,300 trucks for the year and set its target at 3,000 trucks. KVBZ is positioning itself for the future. We maintain our Buy Nevertheless, even the reduced production plan will represent a recommendation for the stock. 199% y/y increase against its 2010 output figure of 1,002 trucks. In January-June, KRAZ produced 600 trucks. We do not doubt the Alex Nekrasa company's ability to meet its current production plans as it has plenty of spare capacities, better utilization of which should help KRAZ return to profitability by the year's end.

Alex Nekrasa

84. KVBZ wins tender to supply electric trains 82. Kryukiv Wagon gets UAH 400 Foyil Securities mln order from Donetsk Railways Kryukiv Carriage (KVBZ, Buy) has won a tender for delivery of two interregional electric trains for the Donetsk Railroad, Concorde Capital which is one of six railroads constituting the Ukrainian Railways (Ukrzaliznytsia). The delivery is to be made by June 2012. The Kryukiv Wagon (UX: KVBZ UK) signed a UAH 400 mln contract value of the contract is UAH 400m, Ukrainian News reported. with Donetsk Railways (part of Ukrzaliznytsya, Ukraine's state bne:infrastructure

August 29, 2011 I No 28 Page 31

Our view: Kryukiv Carriage has been working on new electric trains, planning to get an order prior to Euro-2012 and fill the void 87. Police bring action against left by Hyundai. The latter planned to deliver four interregional trains to Ukraine but later announced that it would be able to AeroSvit pilots after strike supply only half on time. This order opens the door for KVBZ to receive more orders for such trains in the future. We maintain a positive view on the company and believe that the stock provides a Kyiv Post quality option for long-term investors who are willing to buy it now during the market downturn. Investigators of the police department of the Interior Ministry's main department at Kyiv's Boryspil Airport last week brought an Alex Nekrasa action against CJSC AeroSvit crew members on charges of the group action that led to failures in the operation of transportation (Article 293 of the Criminal code).

As Kyiv region's prosecutor office said, the criminal case was opened following checks on the delay and cancellation of AeroSvit's flights on August 1, 2011.

85. Lviv airport opens first stage The checks revealed that the captains of the airplanes refused to carry out 12 flights allegedly because of safety fears. However, of runway after reconstruction the prosecutors believe that the reason was untrue, as the pilots simultaneously made economic demands of the company's management. bne The prosecutors refer to the Law on Transportation, which bans The state-run enterprise Lviv International Airport on August 25 strikes at transport companies when they are transporting opened a first stage of a runway following its reconstruction, the passengers. press service of Lviv regional council said, Interfax reports. The press service said that the length of the first stage is 1,630 Read more: http://www.kyivpost.com/news/nation/ meters, including 835 meters of runway that was reconstructed detail/110375/#ixzz1UW8XTT2T and 795 meters of newly built runway.

The Lviv airport runway is 2,510 meters long and 45 meters wide and can accommodate Il-62, Il-76, Tu-154, B-737 and A-320 aircraft with restrictions, and aircraft of lower classes without restrictions. 88. Popov says Kyiv to launch own tram wagon production

Kyiv Post 86. Odesa port head released Kyiv will produce tram wagons on the basis of Darnytsia tram from jail, not to leave Ukraine repair operation depot due to the high cost of buying new cars from other producers, the head of Kyiv City State Administration, Oleksandr Popov, has said. Kyiv Post "I think we will get the first car manufactured in Kyiv by the end of Head of Odesa maritime merchandise port, Mykola Pavliuk, was the year," the press service said, citing Popov. released from jail around 21.00 on Monday, and he is not to leave Ukraine, the port's press service has reported, referring to lawyer According to Popov, since the start of the year municipal Alla Koshenko. enterprises have put into operation ten tram wagons purchased from Kyivpastrans last year. The city plans to put into operation All of the criminal cases opened against Pavliuk have been three three-section cars by the 20th anniversary of the merged into one. No new claims were put forward. Independence of Ukraine on August 24 and acquire another 12 wagons in the near future. On July 12, a criminal case was opened against Pavliuk on charges of misuse of power and embezzlement of Hr 170,000. The Kyiv authorities plan to completely renew the city's tram rolling stock in two or three years through the overhaul of wagons Read more: http://www.kyivpost.com/news/nation/ and the purchase of new ones, the press release reads. detail/110419/#ixzz1UW8GJrf4 bne:infrastructure

August 29, 2011 I No 28 Page 32

Read more: http://www.kyivpost.com/news/city/ railcars but decreased the sales projection by only 3% to $533m detail/110370/#ixzz1UW9Y3WYP (+47% y-o-y), with the downward revision of production volumes offset by higher than expected railcar prices. We also cut our EBITDA margin estimate by 2.3pp to 8.7% (below the company's target of 10.0%) due to a lower than expected share of in-house casting in the 2011 input structure.

We maintain our positive view on the demand outlook for SVGZ in the medium term due to a widespread shortage of rolling stock 89. Sevastopol chooses Bogdan in the CIS on the one hand and growing transportation needs on the other. We expect the company to become self-sufficient in trolleybuses casting by 2013 after its affiliated casting producer in the Czech Republic (recently acquired by Finance & Credit Group) completes restructuring and reaches full capacity. For more details please Art Capital see our research note issued yesterday.

The residents of Sevastopol selected Bogdan trolleybuses in an open vote. Bogdan Motors was one of the three competitors for the tender, including LAZ and Yuzhmash. Earlier Sevastopol City Council announced plans to spend UAH 20 mn on new trolleybuses chosen by the public. At the same time, the head of the city administration mentioned the possibility of purchasing 80 trolleybuses in the long run. 91. Ukraine repairs 65-70% of

Oleksiy Andriychenko: The news is MODERATELY POSITIVE for roads for Euro 2012 Bogdan Motors, which won a fourth tender to supply trolleybuses this year. Previous the company won tenders in Vinnytsya, Poltava, and the Crimea, for a total of 86 units to be supplied this year. Kyiv Post UAH 20 mn can buy Sevastopol up to 15 trolleybuses, which would extend the order book to over 100 units, worth UAH 217 Some 65-70 percent of Ukrainian roads, which are being repaired mn ($27 mn), until the end of the year. We estimate some 200 city for the Euro 2012 European football championship, have been buses and trolleybuses to be supplied by Bogdan in 2011, 70% of completed, according to the Ukraine-2012 Information Centre. which have been already produced or firmed by orders. We also anticipate Bogdan to produce up to 400 tourist and airport buses "As of today, about 70% of repairs of the road network for the for Euro-2012 based on its memorandum with the government, Euro 2012 have been accomplished in Kyiv, Kharkiv, Donetsk and which can bring UAH 950 mn ($120 mn) to the company in 2011. Lviv. Kyiv and Donetsk lead the pack in the [roads] construction We reiterate our BUY rating on LUAZ stock with a $0.051 target. with more than 70% accomplished," the deputy director of the Infrastructure Department of Ukraine's National Agency for the preparations for Euro 2012, Volodymyr Bondarenko, said in an interview with the Ukraine-2012 Magazine.

Bondarenko said that in 2010 and the first half of 2011, they completed the repairs of the main streets in the host cities, which link the Euro 2012 facilities - airports, stadiums and hotels. 90. Stakhaniv Rail Car remains Read more: http://www.kyivpost.com/news/nation/ a Buy even under conservative detail/109974/#ixzz1Tx79Isdj assumptions

Dragon Capital

We updated our DCF and comparative valuations for Stakhaniv Rail Car (SVGZ) based on a revised operating and financial forecast for 2011, obtaining a new 12-month price target of $1.62/ 92. Ukraine, Iran continue share - down from our previous PT of $2.34 but still 67% above the stock's market price. We maintain our Buy recommendation cooperation in aircraft production on SVGZ.

Despite improved 2Q11 results, the company underperformed Foyil Securities our expectations in 1H11, causing a downgrade of our full-year forecast. We cut our full-year production estimate by 7% to 8,400 The Ukrainian State Antonov Aviation Enterprise and Republic of bne:infrastructure

August 29, 2011 I No 28 Page 33

Iran have signed an agreement on joint production of An-148 and An-158 aircraft, wing.com.ua reported, citing the Ambassador 94. Ukrzaliznytsia plans to spend of Iran to Ukraine. The total value of this contract is expected to top USD 1.0bn. Moreover, the sides extended the agreement on big over next five years production of An-140.

Our view: The agreement on An-148/An-158 aircraft was originally Foyil Securities announced during the Le Bourget Airshow earlier this summer, but the signing took place only several days ago. Cooperation According to the government program for modernization of between Ukrainian and Iranian aviation builders is positive for traction stock in Ukraine, in 2012-2016 the Ukrainian Railways the engine manufacturer Motor Sich (MSICH, Buy), which makes (Ukrzaliznytsia) will buy 509 locomotives, Interfax Ukraine engines for all Antonov aircraft. In our estimation, Motor Sich reported. The program's total value is UAH 28.7bn (USD 3.6bn), will generate revenues of approximately USD 343m from this including UAH 3.1bn to be spent on 66 locomotives in 2012, and cooperation. We maintain our Buy rating of the stock. UAH 5.2bn for 104 locomotives in 2013.

Alex Nekrasa Our view: In the past, Ukrzaliznytsia had trouble with financing its programs so we have to see where the money is going to come from this time, considering the turbulence on financial markets. However, the implementation of the program will have a positive effect on the largest Ukrainian locomotive maker Luganskteplovoz (LTPL, Buy), which has already signed a protocol with Ukrzaliznytsia to accept orders for locomotives regardless of other orders in its order book. Even though LTPL currently has a 93. Ukrainian airlines to get 50 negative equity, which is attributed to losses in the period when the company was controlled by the state, we believe the company An-148 aircraft will be able to make a profit this year and maintain profitability under the new private ownership.

RIA Novosti Alex Nekrasa

Ukrainian airlines signed a letter of intent on Wednesday to acquire 50 An-148 and An-158 short-haul airliners from state-run ANTK Antonov.

Leasingtechtrans will acquire 22 An-148 and 28 An-158 aircraft by 2015 and transfer them to Ukrainian airlines for financial lease. 95. Uzbekistan: ADB plans $500m The deal was signed by Oleksandr Vlasyshen, chief executive of Ukraine's state-run leasing company Leasingtechtrans, and road infrastructure investment Antonov Chief Designer Dmitry Kiva.

Ukrainian Deputy Prime Minister Boris Kolesnikov who attended bne the signing ceremony said the letter of intent was part of the government's program to supply Ukrainian airliners with The Asian Development Bank is investing up to $500m into domestically made aircraft. Uzbekistan’s roads.

The An-158 is a stretched variant of the 85-seat An-148 regional The ADB said August 23 that it will provide a multitranche jet with a payload of 99 passengers. It has an increased takeoff financing facility to support the reconstruction of around 230 weight of 43.7 tons and a maximum range of 2,500 km. kilometers of poor quality roads.

The An-148 is produced by ANTK Antonov in Ukraine and by VASO The investment is being carried out under the Second Central in the western Russian city of Voronezh. Asia Regional Economic Cooperation (CAREC) Corridor 2 Road Investment Program. Antonov also signed a certificate on the transfer of the regional An-148-100 jet to Ukraine International Airlines. The Uzbek government will invest an additional $100m in the reconstruction works. "This is an important event as part of the program to stimulate Ukrainian airliners to buy domestic aircraft," Kolesnikov said. An initial $130m will be used to rehabilitate a 74-km section of the A373 highway through the Fergana Valley, home to one third of Uzbekistan’s population and its main agricultural region.

“The road reconstruction work with up-to-date safety features will result in safer and faster travel, and greater access to social bne:infrastructure

August 29, 2011 I No 28 Page 34 services and lower transport costs,” said Shakeel Khan, principal 96. Uzbekistan: Hairatan - portfolio management specialist at the ADB’s Central and West Asia department. Mazar-i-Sharif railway opens

“It will also open up new trade, business and investment opportunities for people both domestically and in neighboring bne countries." A railway linking the Uzbek town of Hairatan to Mazar-i-Sharif in “There is an unprecedented opportunity for Uzbekistan to emerge north Afghanistan opened on August 21. as a center for trade and commerce in Central Asia and to achieve rapid and sustainable economic growth,” adds Hong Wang, Uzbekistan Railways built the 75 kilometre line, and will operate it director of the Central and West Asia department. for the next four years, under an agreement signed between the two countries on August 4. The ADB points out that road passenger and freight traffic are booming in Uzbekistan, and the number of vehicles is expected to Both countries’ rail operators were originally going to manage double every five years. the railway jointly, but this role has now been handed over to Uzbekistan Railways, since Afghanistan’s rail operator lacks The Uzbek government currently spends around 1% of annual personnel and equipment. GDP on roads but is gradually increasing the amount. At present the railway will carry only freight, but it may be opened for passenger transport in the future.

Eurasia infrastructure

97. Kyrgyzstan: Almaty - 98. Stepanakert airport close Issyk-Kul flights launched to completion bne bne

Regular flights are to run between Almaty and Tamchi airport, The reconstruction of Stepanakert Airport is close to completion, which serves Lake Issyk-Kul, Kazakhstan Live reports. RFE/RL reports, quoting a senior official in the Nagorno Karabakh government. The flights will bring tourists from Kazakhstan’s largest city to the Kyrgyz resort. The airport was scheduled to open in May 2011, but reconstruction took longer than expected, and cost considerably Following a slump in tourism after last year’s April revolution, the more than the $3m originally budgeted. number of Kazakh visitors to Issyk-Kul has increased this year by around 35-40%. Plans to re-open the airport, the only one in Nagorno Karabakh, also angered Baku. The project to launch flights from Almaty to Tamchi is being carried out with support from USAID, Kyrgyzstan’s Muza Travel Although Nagorno Karabakh has been de facto independent Agency and the Compass Travel Agency in Kazakhstan. since the 1990s, it remains part of Azerbaijan under international law, and it is unclear whether the airport can operate without Azerbaijan’s consent. bne:infrastructure

August 29, 2011 I No 28 Page 35

99. Tajikistan plans rail link 102. Turkmenistan Airlines to Pakistan’s Gwadar port to launch new routes bne bne

Government officials from Pakistan and Tajikistan are keen to Turkmenhowayollary (Turkmenistan Airlines) is planning see the construction of a rail link from China via Tajikistan and to launch routes to several new international destinations, Afghanistan to the port of Gwadar in Pakistan. according to reports in the local press. Flights from the Turkmen capital Ashgabat to Jeddah and Milan are being considered. Pakistan’s Federal Minister for Communications Arbab Alamgir Turkmenhowayollary may also start flights to three new Russian Khan visited Dushanbe this week for meetings with Tajik Prime cities, Astrakhan, Novosibirsk, and Samara. Minister Oqil Oqilov and Foreign Minister Hamrakhon Zarifi, APP reported.

A statement issued yesterday August 9, said that Tajikistan and Pakistan will work together with China and Afghanistan to ensure the port’s infrastructure is fully utilised. 103. Turkmenistan signs $400m

Khan said he was also keen to see additional road and air links locomotive contract with China between Tajikistan and Pakistan.

bne

Turkmenistan has agreed to buy 2.54 billion yuan ($395m) worth of trains from China.

100. Tajikistan: Construction China South Locomotive and Rolling Stock Corp (CSR) is due to start supplying locomotives to Turkmenistan within 21 months. of Kulob reservoir begins CSR was the manufacturer of the high speed train that crashed near Wenzhou in eastern China on July 23, killing 40 people, AFP bne reported. A government investigation said the crash was due to faulty signalling equipmnt. Construction of a huge reservoir near Kulob in Tajikistan’s Khatlon region started August 8, Asia Plus reported.

A 45-metre high dam is being built on the Tebolay River, to create a reservoir covering an area of between 65 and 70 hectares, with a folume of around 14 million cubic metres of water.

The reservoir will be used to provide drinking water for the city of Kulob and irrigation water for farmland in the region.

101. Tajikistan: Work on Pakistan tunnel delayed bne

Work on a road linking Tajikistan to Pakistan has stalled as funds to build a 2 kilometre long tunnel on the route have run out. No work has been done on the Lowari tunnel in Pakistan for three month, IANS reports. Work on the tunnel started six years ago, and is now due to end in 2014. bne:infrastructure

August 29, 2011 I No 28 Page 36 CE infrastructure

104. Airport Riga's terminal of railways and roads, and provides services in the area of comprehensive repairs and maintenance of railway infrastructure. development concept presented Its acquisition will allow Budimex to solidify its position in the sector of railway infrastructure construction - the player has participated in large PKP PLK tenders for the last two years. Until bne now, it managed to secure one project, the construction of a Local Control Centre in Ilawa worth PLN 758m (¤187m). The board of the International Airport Riga was presented with the concept of the airport's new terminal and its development. The concept was drafted by the consulting company "GMW" in cooperation with the airport and the national airline "airBaltic", as the airport informed "Nozare.lv".

It is predicted that the implementation of the concept will cost slightly more than EUR 65 million (LVL 45.7 million) 106. Estonian Air's passenger

The airport's chairman Arnis Luhse points out that, according number up 18 percent on year to the concept, the passenger flow from the Schengen Area will be separated from other passenger flows. The concept also in July envisages new baggage handling halls with automated baggage handling systems. The passenger registration area and the aircraft docks will be wider. bne

The concept will be presented to the Transport Ministry during the Estonian Air carried 70,156 passengers in July, which is 18.2 next few weeks. percent more than during the same month last year, BNS reported.

Passengers on regular flights numbered 51,508, up by 7.4 percent in annual comparison, the national carrier said.

In the first seven months of 2011 Estonian Air had a total of 105. Budimex to buy PNI for 378,017 passengers, of them 289,175 on regular flights. The overall number of passengers increased by 7.5 percent and that PLN 225m of passengers on regular flights, by 16 percent year-on-year.

The airline operated 6,541 flights in the January-July period, 10.5 bne percent more than during the same period a year earlier. In July 1,039 flights were performed, a year-on-year increase of 14.4 Budimex signed a contract with the Polish State Railways (PKP) percent. for the takeover of the infrastructure maintenance company Przedsiebiorstwo Napraw Infrastruktury (PNI), PMR reports. The value of the agreement is over PLN 225m (¤55.5m), and the transaction is to be completed when approved by the boards of the companies, as well as the Office of Competition and Consumer Protection (UOKiK). The management of Budimex hope that in two years PNI will double in size, although this will largely depend on 107. Estonian railway co to buy 16 the level of PKP Polish Railway Lines (PKP PLK) investments. The acquisition is to be funded from the company's own resources. Chinese shunting locomotives for The player then plans to take out a refinancing bank loan. Budimex has also signed a staff package, which guaranteed 30-month EUR 30.2 mln redundancy payments for employees dismissed at the fault of the employer within five years. The company is also obliged to pay a privatisation bonus, whose size depends on an employee's time bne with the company. The supervisory board of Estonia's state-owned railway company PNI specialises in design, construction and modernisation Eesti Raudtee has confirmed the management board's proposal bne:infrastructure

August 29, 2011 I No 28 Page 37 to buy from a Chinese consortium for 30.2 million euros 16 new 109. Lithuania's Palanga airport shunting locomotives DF7G-E for Eesti Raudtee subsidiary EVR Cargo, BNS reported. trims losses by 30 pct in H1

The first new locomotive should according to tender conditions arrive for type testing in Estonia in the first half of next year. bne The remaining 15 locomotives are to be delivered in the second quarter of 2013, Eesti Raudtee said. The international airport at the Lithuanian seaside resort of Palanga cut the losses by 30 percent, to 132,000 litas (EUR The company said it is buying new locomotives because the 38,261), in the first half of this year, from 188,000 litas in the same resource of the existing fleet is about to be exhausted. The period last year, BNS reported. Czech-made shunting locomotives EVR Cargo is using at present were manufactured in the 1960s but are essentially based on The revenues rose by 0.5 percent, year-on-year, to 1.811 million technologies of the World War II era and there is no economic litas, the airport said in its interim report. justification for keeping and repairing them. In 2010 the losses of the airport in Western Lithuania widened by Although the best offer of new locomotives came from a Chinese 10 percent, to 94,800 litas, from 86,100 litas in 2009. company, the machines will be outfitted with U.S. engines and European equipment. The parameters of the locomotives The airport handled 50,600 passengers in January-June, up 9 correspond to standards of the European Union and the former percent year-on-year. It expects the passenger traffic to grow Soviet Union and meet the needs of Eesti Raudtee. They are by 4.4 percent this year, to 107,000, from 102,500 passengers in modern, effective and economical, and allow significant savings in 2010. In 2012 the number of passengers is projected to increase fuel, maintenance and repair costs, Eesti Raudtee said. to 139,000.

The supplier, China National Corporation for Overseas Economic Three airlines currently operate direct regular flights from Cooperation, is a state-owned corporation that mediates the Palanga, including the Scandinavian airline SAS (to Copenhagen), production of Chinese machine-building enterprises to other Norway's Norwegian Air Shuttle (to Oslo) and Latvia's Airbaltic (to countries through consortium agreements. The other member Riga). of the consortium is the 1987-founded locomotive manufacturer Beijing Feb.7th Railway Transportation Equipment Co.

110. Poland LOT to Sell Another 108. Five out of 27 Polish roads Package of Assets on schedule for Euro 2012 bne bne On 30 August the GSA of PLL LOT will discuss selling some of its assets, including plots of land and buildings as well as GTL- Only five of 27 Polish roads to be ready for the Euro 2012 football LOT and WRO-LOT, the companies providing airport services tournament are on schedule with construction work, the daily in Katowice and Wroclaw, Polish News Bulletin reported. The Rzeczpospolita reported Tuesday. company refuses to comment officially on the transactions. One of the properties to be sold is the office block used by the Several roads may not be drivable at all in time for the kick-off management of LOT; the company hopes to sell it and then lease game in Warsaw, the daily said, citing a report from organizers of the space from the new owner. It is also possible that LOT will buy the tournament, which Poland is co-hosting with Ukraine. the property back, provided that its financial condition improves. As far as the above-mentioned companies are concerned, they Transportation officials said last month that nearly half of all are estimated at more than PLN10 million each. It is expected Polish roads may not be ready by deadline. Traffic would have that the operators of the airports in Katowice and Wroclaw may to be rerouted or allowed at lower speeds on those roads, be interested in taking them over. Selling the assets should allow commentators said. PLL LOT to gain funds necessary to cover current spending; the rising price of fuel is also detrimental to its finances. UEFA officials said in June that Poland and Ukraine will be ready, despite delays in both countries in building infrastructure. bne:infrastructure

August 29, 2011 I No 28 Page 38

111. Polish road projects worth But since spending on national road investment projects is forecast to fall after 2012, Poland's local road reconstruction ¤7.7 billion in 2011 programme, which will be continued from 2012 to 2015, will gain more significance. bne "The fact that the programme will go on is very good news, especially given the anticipated reduction in the number of large The value of road building projects in Poland will exceed ¤7.5 road construction contracts. It is possible that local contracts will billion this year, up +25% on 2010, and road construction output increasingly attract large construction companies which have is forecast to continue to grow from 2015 to 2020, according to access to free capacity in a given region," PMR said. research company PMR.

However, following growth of more than +40% in the first six months of this year, the second half is forecast to see a moderate slowdown in construction output, while the value of projects will decline from 2012 to around ¤4.7 billion in 2014 as a result of a lower number of large projects under construction.

But PMR researchers said output would start to grow again 112. Tenders Announced for from 2015, driven by Poland's positive financial outlook up to 2020 coupled with sustained investment in the sector from Advisors for ZS Cargo and the government's General Directorate for National Roads & Motorways (GDDKiA). Bratislava Airport

Powering forwards Bartlomiej Sosna, senior construction analyst at PMR, said bne increased investment spending in Poland's power construction industry was expected to be a key long-term driver of growth for The Slovak Transport Ministry is looking for consultants through the country's construction market. two separate tender to secure the entry of a strategic partner in the state-run railway freight company ZSR Cargo, a.s. and a "A large number of power construction projects scheduled concessionaire for the operation, maintenance, and development after 2013 would greatly enhance books of orders of the major of the Bratislava airport, SITA reported. The estimated cost of the civil engineering construction companies. As a result, these consulting services in both cases represents EUR 2 million ex- companies would be able to employ medium-sized providers of VAT. This stems from public tenders announced by the Ministry of road construction services as subcontractors in future road work Transport, Construction and Regional Development, published on contracts," Mr Sosna said. Thursday in the Public Procurement Bulletin. The future strategic partner is to acquire a minimum of sixty-six percent in Cargo by Mr Sosna also highlighted the many delays that Poland has June 2012. The concessionaire for the operation of the airport in experienced in the implementation of projects related to Euro the Slovak capital for the next thirty years should be selected by 2012 football tournament, and pointed out that such setbacks next summer, too. might actually end up benefiting the sector in the medium term. "The Transport Ministry used all its powers to prepare the tender "As a result of delays in the implementation of road projects, the really transparently and professionally. I believe that its results road construction market will be less exposed to a shock resulting will eventually bring a dynamic development to two key transport from a fall in the number of new large road construction contracts companies, and therefore to Slovakia, too," stated Transport expected in 2013," Mr Sonsa said. Minister Jan Figel. Within preparations for the tenders, the ministry carried out an extensive survey of the consulting market. According to PMR, it is unlikely that Poland's expenditure on In May, it addressed over forty consulting firms and investment national road construction in Poland will fall back to levels banks active in the railway and airport sectors. The survey results recorded before 2007 when GDDKiA's spending was less than ¤2.5 served as outlines for preparation of tender dossiers. billion per year. bne:infrastructure

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113. A Croatian-Hungarian gas eventual accession to the European Union As part of this process Albania signed a Stabilisation and Association Agreement with interconnector has been put into the EU, which came into force in April 2009, the same month that Albania submitted its application for EU membership. As part of operation OSW the EU pre-accession process, Albania has received financial aid to build public institutions and improve cross-border co-operation A gas interconnector between Croatia and Hungary was put under EU funding mechanism Instrument for Pre-Accession into operation on 3 August. This is the first completed element Assistance. Albania was expected to receive 81.2 million during of the North-South gas corridor, which envisages connecting 2009, and is expected to receive 93.2 million during 2010, 95.0 the ?winouj?cie LNG terminal in Poland via the Czech Republic, million during 2011 and 96.9 million during 2012. Slovakia and Hungary with the Adria LNG terminal in Croatia. At the present stage, the interconnector is of local significance and Over the past decade, Albania's economy has enjoyed real GDP will primarily significantly improve the energy security of Croatia. growth, counting the EU as its main trading partner. Despite the global economic turmoil of 2008 Albania's economic growth was The 293 km long interconnector between Croatia's Slobodnica in line with initial forecasts of 6% while inflation remained within and Hungary's Varosfold has an annual capacity of 6.5 billion m3. the 2%-4% target band of the Bank of Albania. Albania was one of Gas can be transported in both directions. The interconnector is only two countries in Europe which recorded economic growth in operated by the Croatian state-controlled gas operator, Plinacro, the first quarter of 2009, growing by 0.4%. and Hungary's Foldgazszallito, a company controlled by MOL. The construction of the interconnector was co-financed by the EU as Albania's telecom industry has been liberalised and legislation part of the European Economic Recovery Plan. The investment has been recently introduced that adopts regulatory principles value totalled 395 million euros. found in the EU's regulatory framework for communications, which promotes competition as the most efficient way to offer At the present stage, the interconnector will primarily contribute to communications products and services while ensuring universal improving the energy security of Croatia, which has had only one access. The market's growth potential has attracted international interconnector with Slovenia thus far, and will be used for supplying investment into both the incumbent and alternative operators. approximately 1 billion m3 of natural gas annually to Croatia Future network development is expected in order to support the (the suppliers being ENI and E.ON). This has allowed Croatia to growing popularity of broadband services. withdraw completely from gas supplies offered by Russian firms. This interconnector has a smaller impact on the energy security of Hungary, which already has connections with Ukraine, Austria and Romania. Nevertheless, it will strengthen Hungary's position as a local gas hub and will allow it to maximise profits from gas transfer and the operation of gas storage facilities. Bulgaria's state authorities are In the long term, the significance of the interconnector may grow in connection with plans to build an LNG terminal on the Croatian seeking bidders for concession island of Krk. The interconnector would then become an essential part of the new route of gas supplies to Central Europe (as part of of inactive airport in Vidin the North-South gas corridor concept).

Balkans.com

Bulgaria's state authorities are seeking bidders for the concession of the inactive airport in the northwestern city of Vidin, Plamen Stefanov, 114. BMI predicts Albania's future Vidin District Governor, told Novinite.com (Sofia News Agency). network development in order to In an interview for Novinite.com dedicated to the situation of Bulgaria's Northwestern (Severozapaden) Region, which is support the growing popularity of the EU's poorest region in terms of per capita GDP, Stefanov announced that his administration and the central government broadband services are now prepared to grant the Vidin Airport on koncession.

"This is the former civilian airport of the city of Vidin which was Balkans.com served by small airplanes in the 1980s. Back then, the flights from Vidin to Sofia lasted about 40 minutes, and were rather popular," A developing country, Albania is seeking closer ties with and Stefanov said. bne:infrastructure

August 29, 2011 I No 28 Page 40

line between Albania and Montenegro. The project worth Euro 116. Interconnection line Albania- 43 million, financed by the German Government through KfW, consists in the construction of a 400 kV interconnection line Montenegro inaugurated between the substations Tirana2 (Albania) and Podgorica (Montenegro).

Balkans.com The line has a total length of 155 km, of which 125.5 km in Albania's territory. The 400 kV transmission line Tirana2 – Albanian Prime Minister Sali Berisha and the German Federal Podgorica is part of the 400 kV line Elbasan – Tirana – Podgorica, Minister of Economic Cooperation and Development Dirk Niebel which will significantly increase the transmission capacities inaugurated on Friday the construction of the 400 kV transmission between the two countries and the region.