CIS Region Equity Markets: Weekly Overview

October 31 – November 6, 2011

2a Republikas square, Riga, Latvia, LV-1010 Antons Lubenko Igor Lahtadir, CFA Lidiya Mudra Tel. +371 67010345, Fax +371 67010253 Financial Markets Broker Equity Analyst: CIS Equity Analyst: www.citadele.lv [email protected] [email protected] [email protected] Regulator – FCMC, www.fktk.lv

CIS equity markets decline on deteriorating global sentiment MICEX Index Change 1900 last week: CPI gains 0.5% m/m in Russia, 0.2% in Kazakhstan 1800 1700 Ukraine’s real GDP accelerates to 6.6% y/y in 3Q11 1600 1500 Centerra Gold posts strong 3Q2011 results 1400 1300 Source: Bloomberg -1.7% JSFC Sistema amends dividend policy 1200 Nov Feb May Aug Nov OGK 5 publishes 3Q2011 figures RENCASIA Index Change ’s EGM approves strategy for 2012-2014 900 last week: 800 intends to acquire an aviation repair plant in 700 Belarus 600 Avangard plans share buyback 500 Source: centralasia.rencap.com Last week CIS equity markets were performing generally in line with -2.0% 400 global sentiment. Uncertainty over participation of China in EFSF expansion and ‘cold-shower’ initiative from Greek Prime Minister Nov Feb May Aug Nov George Papandreou to launch referendum on the country’s bailout UX Index plan reignited sell-off in region’s equities. The situation ameliorated by Change 3200 last week: the end of the week, as referendum idea was abandoned, and ECB led by new governor Mario Draghi unexpectedly lowered the interest 2700 rate by 25 basis points. Despite that, all major CIS indices ended the week in red and were outperformed by MSCI EM which declined by 2200 2.0%. MICEX Index lost only 1.7%, partially due to mitigating effect of appreciating ruble, and dollar denominated RTS plunged by 3.8%. 1700 Ukrainian equities represented by UX Index tumbled by 4.2%, while Source: Bloomberg -4.2% Central Asian Rencasia Index dropped by 2.0%. Commodities 1200 delivered mixed performance, as Brent gained 1.9% and gold Nov Feb May Aug Nov advanced by 0.9%, but base metals LMEX index slid by solid 3.7%.

Macro news

Russia Last week Rosstat published Russia’s inflation statistics for October. During the month, CPI accelerated to 0.5% and stood at 7.2% in y/y terms (or 5.2% from the beginning of the year). Non-food prices contributed the most by advancing by 0.7% m/m, while food inflation reached 0.5% m/m; and services slightly appreciated by 0.1% m/m. The reported figures do not come as surprise and are good estimates for 2011F inflation levels, in our view.

Central Asia

According to the express release provided by the Agency of Statistics of the Republic of Kazakhstan, country’s inflation reached 0.2% m/m in October, implying 6.5% from the beginning of the year. Getting into more details, food prices added 0.1%, non-food goods appreciated by 0.4%, and prices of services increased by 0.3%. In our view, the reported figures should be regarded with caution, as many experts predict inflation levels to accelerate by the year end, perhaps approaching even two digit numbers in 2012. Meanwhile, last week the National Bank of Kazakhstan reported that the amount of country’s international reserves increased by more than 3% during October, standing at very strong figure of USD 75 bn.

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Ukraine

The State Statistics Committee (SSC) reported that Ukraine’s real GDP grew by 6.6% y/y in 3Q11, accelerating from 3.8% y/y in 2Q11. In seasonally adjusted terms, real GDP rose by 2.2% q/q speeding up from 0.5% q/q in 2Q11. The major reason for 3Q11 GDP y/y rise was a bumper agricultural harvest. In our view, GDP growth is expected to slow in 4Q11 due to a softening foreign demand and negative base effects.

Corporate news

Metals & Mining On Thursday Centerra Gold, Canadian-based gold mining company with primary operations in Kyrgyz Republic, released IFRS financials for 3Q2011. Output of gold surged by 61% y/y to 155k oz on the back of significant growth of production at Kumtor mine caused by increased throughput, lower waste movement, and higher ore grades. Expansion of production volumes allowed Centerra Gold to reduce cash production costs by 30% y/y, even despite 17% rise in cost of sales driven by higher expenses on labor, diesel and other consumables. Additionally benefiting from 38% jump in realized gold price, revenues gained 132% y/y reaching USD 278.4 m and net earnings skyrocketed by 396% y/y to USD 83.8 m. In our view, the reported results are strong and positive for Centerra Gold. On Wednesday Hambledon Mining, gold mining and exploration group with operations in Kazakhstan, announced that it has temporarily suspended operations at its mineral process plant due to a leak in tailings dam. The company expects to resume production already this week, and estimates that the output will fall short by about 500 oz. Although the loss of capacity looks to be short term, the company reportedly may be liable for environmental damages. In our view, the news is negative and reaffirms the reputation of Hambledon Mining as a company which can occasionally disappoint investors. In October, Ukrainian average daily crude steel output remained flat m/m at 96.8ths tones, as surprisingly strong growth in steel production at IUD-controlled steel mills Alchevsk Steel (+14.5% m/m) and Dzerzhynsky Steel (+19.2% m/m) was offset by lower output at -owned steel producers, namely Azovstal (-24% m/m), Yenakiyevo Steel (-7.2% m/m) and Illich Steel (-1.2% m/m), which reduced their output due to maintenance works and lower demand for steel as well. In the related news, Metinvest revealed its intention to cut production at Illich Steel amid deteriorating steel demand and sliding global prices. We expect Ukraine’s steel output to decline in November-December due to a weakening in base metal markets.

Financials On Tuesday JSFC Sistema, largest public diversified financial corporation in CIS, approved new dividend policy. Dividend payout ratio will be determined by the Board of Directors; but the company will pay out a minimum of 10% of the consolidated net income under US GAAP. Furthermore, according to the press release the Board of Directors will be able to recommend distributing special dividends of at least 10% of the net gain from large asset sale deals. In our view, adopting formal dividend policy is a move to the right direction, however considering strong income flows, the amount distributed to investors could have been much higher. Considerable value may be delivered to shareholders in the long run, if Sistema’s management plans to benefit from depressed asset price environment by successfully reinvesting retained earnings through value-adding acquisitions.

Telecommunications At their EGM held on November 1, shareholders of Ukrtelecom approved the company’s strategy for 2012-2014. The development of the broadband data segment was defined as the priority. The shareholders also appointed Georgiy Dzekon, who has served as CEO of Ukrtelecom since 2004, to the Supervisory Board, thus increasing it to four members. According to Mr. Dzekon, it is planned to invest 10-12% of the company’s turnover in the implementation of the strategy annually. During the EGM, Dzekon also noted that Ukrtelecom is in process of selling its mobile unit and that the buyer could be determined by the end of November. We consider the news to be neutral for the stock, since the strategy summary presented to shareholders did not provide a certain financial guidance as well as a specific action plan.

Machinery Motor Sich announced it intends to acquire a 57% stake in Orshan aviation repair plant located in Belarus, which specializes in the Mi-8, Mi-17, Mi-24 and Mi-26 helicopters modernization. The value of the stake is estimated at $1.1m. We consider the news to be positive for the company, since the acquisition of the Belarusian plant indicates the company’s strong intention to develop its in-house helicopter modernization program, expanding it to new markets. In addition, the acquired asset could be used by Motor Sich as a base for its helicopter sales to the Russian Federation, since imports from Belarus-domiciled aviation companies is not subject to a 20% import duty in this country. Westa, a leading Ukrainian manufacturer of batteries, reported its September output grew by 7% y/y to 0.52m conventional batteries, bringing production for the first nine month of this year up 34% y/y. The company’s battery sales increased by 36% y/y in September, extending its 9M11 sales by 24% y/y. In our view, the reported data evidence gradual improvement in Westa’s sales. Assuming production and deliveries at constant level, we expect the company to sell up to 5.5m conventional batteries in 2011, up 28% y/y, but 15% below the company’s plan.

Utilities On Wednesday Enel-controlled OGK 5, one of the leading wholesale power generating companies in Russia, posted highlights of IFRS financials for 9M2011. According to the release, net power output for the first nine months of 2011 totaled 31,122 GWh, a bit below the level achieved during the same period of 2010 (31,652 GWh). Net output declined mainly due to coal fired Reftinskaya GRES modernization and maintenance, but was partially offset by strong output increase at gas fired Konakovskaya, Nevinnomysskaya and Sredneuralskaya GRES. Total power sales reached 35,210 GWh (up 4% y/y), while operating revenues grew by 18% y/y to RUB 44.34 bn, driven by an increase in power prices on the free market. EBITDA expanded proportionally, standing at RUB 9.78 bn, and the rise

CIS Region Equity Markets: Weekly Overview 2 was mainly attributable to higher fuel spreads on free power sales. Net income excluding FX effect added 15% y/y, and reached hefty RUB 4.57 bn. The reported results slightly exceeded market expectations, in our view.

Agriculture Avangard, Ukraine’s largest egg producer, announced plans to approve a share buyback program at its EGM scheduled for November 30th. In the related news, Ukrlandfarming, Avangard’s majority shareholder, released it is considering a private placement of a 15-20% stake with Chinese or Middle Eastern sovereign funds. According to Oleh Bakhmatyuk, Ukrlandfarming’s CEO and its ultimate owner, this private placement will be followed by the IPO of a 15-20% stake in company next year. Mr. Bakhmatyuk also noted that current Avangard minority shareholders will be offered an opportunity to swap their GDRs for shares in Ukrlandfarming at the price of the private placement. With no details being given about the parameters of Avangard’s buyback and the price of Ukrlandfarming’s private placement, it is difficult for now to assess the news’ effect on Avangard stock. Meanwhile, Ukraine’s President vetoed a bill with amendments to the Tax Code, which allowed returning VAT on export of grain, sunflower seed and rapeseed starting from January 1, 2012. The parliament passed the bill on October 20.

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Market performance

YTD 1W return YTD return 1W return Best performers Worst performers return (USD) (USD) (USD) (USD) IDGC Holding 7.6% -44.5% Petro Matad Ltd -16.5% -84.1% Tethys Petroleum 6.7% -56.9% Jscb -14.3% -66.4% Centerra Gold Inc 5.1% 5.2% Raiffeisen Bank Aval -12.2% -64.9% Enakiyvckiy Metalyrginiy 2.1% -70.9% Yasynivskiy Koks -10.4% -73.2% Chaarat Gold 1.9% -60.1% Aeroflot -10.3% -34.2% Zhaikmunai – 0.6% -34.1% Raspadskaya -9.9% -55.4% Surgutnefteg-Pfd -0.2% -2.0% Stahanovskiy vagonobudivniy -9.1% -63.5% Ogk-3 -0.2% -42.9% Uranium One Inc -8.8% -42.5% Southgobi Resources -0.4% -37.3% Nlmk Oao -8.6% -45.9% Ukrtelecom -0.4% -19.8% United Co Ru-Rdr -8.1% -43.6%

Name Last value 1W 1M 3M 1Y YTD

EQUITY MARKETS Russia (MICEX) 1,501.2 -1.7% 11.1% -5.4% -2.5% -11.1% Russia (RTS) 1,549.5 -3.8% 18.1% -13.9% -3.3% -12.5% Russia second tier (RTS 2) 1,720.6 -2.2% 14.9% -21.0% -13.3% -23.1% Russian Depository Receipts (RDX) 1,398.9 -1.9% 15.5% -9.4% -3.6% -13.4% Central Asia (RENCASIA)* 554.5 -2.0% 14.9% -1.9% -22.6% -27.2% Ukraine (UX) 1,450.3 -4.2% 8.6% -31.9% -28.8% -40.7% MSCI Emerging Markets 989.6 -2.0% 12.0% -4.9% -14.4% -14.0% US (S&P 500) 1,253.2 -2.5% 8.5% 4.5% 2.2% -0.4% Europe (Euro Stoxx 50) 2,291.5 -6.9% 1.0% -3.5% -20.3% -18.0% MSCI World 1,203.1 -4.1% 6.8% 0.8% -4.9% -6.0% COMMODITIES Brent (NYMEX) 112.0 1.9% 5.8% 2.4% 27.1% 18.2% Coal (NYMEX) 73.7 0.1% 0.6% -2.1% 10.0% -7.8% Natural Gas (NYMEX) 3.8 -3.6% 8.7% -4.0% -3.9% -14.1% Base metals (LME) 3,451.0 -3.7% 3.0% -12.5% -12.9% -18.1% Aluminium (LME) 2,140.0 -4.5% -3.9% -10.9% -12.7% -13.4% Copper (LME) 7,870.0 -3.7% 6.8% -13.0% -9.1% -18.0% Nickel (LME) 18,900.0 -4.1% 0.0% -16.0% -22.7% -23.6% Iron ore (SBB) 2.7 0.0% -0.6% -1.2% 39.2% 39.2% Seet billet (LME) 518.0 -2.3% -8.9% -11.8% -6.7% -15.6% Gold 1,757.8 0.9% 7.6% 6.1% 25.9% 23.9% Silver 34.2 -2.3% 10.7% -10.6% 28.2% 10.8% Wheat (CBT) 6.4 -1.2% 4.8% -11.9% -24.0% -25.6% Sugar (NYBOT) 0.3 -2.2% 1.6% -3.7% 9.7% 7.6% CURENCIES USD/RUB 30.7 3.0% -5.4% 8.2% 0.1% 0.4% USD/KZT 148.0 0.3% -0.2% 1.0% 0.3% 0.4% USD/UAH 8.0 -0.1% -0.1% 0.1% 0.6% 0.3% EUR/USD 1.4 -2.6% 3.0% -3.2% -2.0% 3.2% USD/GBP 0.6 0.5% -3.0% 2.0% 1.0% -2.9% USD/CAD 1.0 2.4% -2.1% 4.0% 1.8% 2.3% USD/JPY 78.2 3.2% 1.8% -0.5% -3.9% -3.7% USD/CHF 0.9 2.5% -4.3% 15.3% -7.7% -5.3% All data are from Bloomberg, unless otherwise stated. *Data from centralasia.rencap.com

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