Private Briefing Document

Salvation Deferred

 The approval of the US financial package will prevent a repeat of last Monday’s collapse but investors are now firmly focused on the sliding economy. They also fear even more problems in the financial sector and, as accessing liquidity gets tougher, in the corporate sector. Although remaining volatile, the trend in all global markets will remain downwards for the medium term.

 This week the dollar is expected to extend last week’s rally, as expectations are high of big cuts in the UK and Eurozone. That, plus fears over demand slowing, will likely keep pressure on oil and other commodities. That will be negative for emerging markets, including Russia.

 Today is the tenth anniversary of the RTS reaching its all time low point of 38.5. A timely reminder that just as investors can become irrational at the top of markets they also become overly depressed near the bottom. The aftermath of Russia 1998 and the global crash in October 1987 provide many lessons about market timing.

 The RTS fell 16.7% and MICEX by 14.3% last week. That is almost a 60% retracement from the mid May high for the RTS. The reason is a combination of falling oil, slowing activity in the materials industries, rumours and fears over defaults plus the international backdrop. The metals, oils and banks sectors fell harder than the defensive industries.

 World equity markets fell by an average of 9% last week and emerging markets lost 10%. That was the worst week since late 2001.

 The value of the Ruble fell 3.5% versus the dollar last week, albeit mainly due to the strengthening US currency as traders flee the risk of holding the euro, sterling and those of developing economies. Over the week the dollar rose 4.3% against a trade weighted basket of major currencies as expectations grow that the Bank of England and the ECB will have to aggressively cut interest rates.

 The price of oil fell by over 12% last week, pushing Urals down to $86.5 p/bbl. The reason being the higher value for the dollar and fears of reduced demand if the global economy slows further. But traders are reluctant to sell WTI below $90 p/bbl (ended Friday at $93.6 p/bbl)

 Base metals fell by over 10% for the same reasons. Copper bounced on Friday as traders hope that the US aid deal might slow the rate of economic decline and improve the outlook for the building industry.

 Gold fell to $833 per ounce despite very strong private investor demand as financial uncertainties increase. But the higher dollar value reduced big investor demand.

 Fund flows to Russia funds remained marginally positive for the third straight week despite the rapid fall in the market. Investors appear to be taking the view that the market is too low to sell, albeit very few are willing to buy. Through the 3rd Qtr Russia fund withdrawals were in line with those reported in Brazil and India, despite losing 50% of the outflows as reaction to Mechel and Georgia.

Too late for the economy. US equity Futures indicate a further fall when those markets open today as investors, while relieved that the financial aid package has been passed, are now much more focused on the slowing economy and the effect on earnings. The Russian markets did over-sell on Friday and, in theory, should see a small bounce from that. But more likely all markets will remain weak until the trend in the US becomes clear. The news of the failure of the rescue deal for Hypo Bank in Germany will hardly offer any reason for optimism as this week’s trading starts. For the domestic markets, the big worries remain 1) the oil price weakness, 2) the mounting evidence of a slowing of activity in such industries as construction and general infrastructure, 3) the slowing economy and, 4) the fear of defaults. The actions taken by the state will be enough to prevent any major problems amongst the banks or the biggest /strategic corporations but the worry persists that there is a more extensive problem to reveal itself. Shares in the oil, metals and financial sectors will again be the most active this week with telecoms, consumers and utilities again likely to be more defensive. We may see some buying in the big state company shares because they at least have the implied safety net of state support if they hit distressed levels. That came even closer with Friday’s collapse.

Bail bond posted. Investment markets did little more than make bail with the passing of the US financial package and the rescue aid agreed by the biggest EU countries at the weekend. The main trial is still to come. Over the next few months the big questions that are still to be answered include how severe will be the inevitable, or existing, global recession and whether there will be even more defaults in the financial or corporate sectors. This week the main action my well be in the currency markets and the knock on effect to commodities. The near term outlook for the dollar is positive because while the US economy is slowing and the Fed is expected to cut rates again later this month, the outlook for the EU economy is even worse. The Bank of England and the ECB are both expected to slash rates much more than the US over the next few months. A stronger dollar, plus growing fears over demand in 2009, will provide a very unfavorable backdrop for commodities this week and, in turn, for emerging markets – Russia included. The mainland China markets re- open today after last week’s holiday and should catch up the action elsewhere with at least a 10% fall. There are few major economic reports due out in the US, albeit with the prevailing nervous mood even small indicators missing their target can have a big impact on sentiment. The most important indicator is the pending home sales report on Wednesday. Also on Wednesday, the US Energy Dept will give an update on oil inventories and on usage.

Happy Anniversary. Today it is exactly ten years since the RTS Index closed at its lowest point ever. Having set its previous record on 5/6th October 1997, the RTS fell 96% to record its low of 38.5 exactly twelve months later. At the time, the world was full of gloom and doom about Russia, with one commentator likening it to toxic waste. But in keeping with the saying “the best time to buy is when in takes the greatest amount of courage to do so”, that day in 1998 was the best day to buy. It is useful, to compare the attitudes of investors, regulators and governments to current events with those in 1998. The mood and comments in the aftermath of the October 1987 crash are even more relevant. While the reason for this crisis is different, the headlines and comments about impending economic doom, world never being the same again, role of stock markets changing, etc, etc , are all very similar. One of the best books to read that explains why people move almost effortlessly from irrational exuberance to total gloom, and back again, is McKay’s “Extraordinary Popular Delusions and the Madness of Crowds”.

Slower trade and less volatility. If market activity in the 4th Qtr of 1987 is replicated then there will be plenty of quiet days ahead to catch up with such reading. On October 19th ’87 the markets crashed by 20.4%. That was worse than last Monday in % terms because markets defied the gathering gloom through the summer of that year and rose until the day of the crash. Whereas this year, markets have been week all year. In 1987 the partial relief bounce, as central banks applied some band-aids gave way to a more sober and depressing assessment of the plight of the world economy. History suggests a “declining peak-to-through” bouncing ball effect up to the end of the year with, as was the case in 1987, the low point for markets still to come (December 4th in 1987). Those that think history irrelevant this time should at least bear in mind that since the early 1800’s the four most expensive words have been “Its Different This Time” At the bottom, just as at the top, it rarely ever is.

Local markets plummeted with oil and rumours. The local markets endured one of their worst ever weeks with a 16.7% drop for the RTS and a 14.3% loss for MICEX. That was again worse than the 10% average loss seen across the global emerging markets. The big drop came on Friday (-7.1% and –5.3% respectively) as rumours of defaults, and likely margin calls spread. Moscow markets are well used to rumours and stories of so-called “smart-money” actions. 90% the actions referred to prove to be plain dumb and most rumours false. The main reasons for the continued loss of investor confidence is the combination of

a) Declining global market trends and the continuing crisis in the bank sector b) Slowing global economy c) Fear that the oil price will reach, and breach, the $70 p/bbl level that is critical for the budget d) Reports of a collapse in forward orders across the materials sector as end-users find it hard to access working capital or loans e) The unknown element about the extent of the coming bank sector restructuring and debt restructuring

Domestic plus international fears. In general there is a domestic and international combination to investor fears for each of the main industry groups. The metals sector was the main loser last week as reports of orders drying up – globally as well as in Russia - doubled with declining prices for most metals and minerals. The RTS Metals Index fell 22% over the five days. The Oil Index was next with a loss of 18%, partly because of the liquidity in these names, that provides the main exit route for any distressed selling, and party the fear of lower oil prices. The Banks sector was next (-15%) as Russia’s banks followed the global trend and also because investors worry about the risk of defaults despite the extensive preventative action taken by the government. The more defensive sectors, i.e. consumer, telecom and utilities, declined by an average 6%. The table of best and worst performing stocks is below. There was no specific theme at the top end of the table but there is at the lower end. It is made up of the metals stocks – Evraz down 37% - and the real-estate companies. The former because of worries that business is effectively stalled while the latter on worries over solvency.

Leaders & Laggards Last Week

Price* Last Week* Year to Date $ p/s % %

Gazpromneft $4.69 17.3% -26.1% OGK-3 $0.03 6.9% -79.7% Cherkizovo Group $7.80 4.0% -45.8% Chelyabinsk Pipe $2.80 3.7% -33.5% TNK-BP $1.50 3.4% -32.7% Magnit $31.50 3.3% -37.6% MRSK Urals $0.01 1.4% VSMPO $112.00 0.9% -62.9% OGK-6 $0.02 0.5% -84.2% Seventh Continent $25.40 0.4% -1.9%

RTS 1,070.98 -16.7% -53.2%

Novolipetsk $1.55 -27.9% -61.7% Belon $110.00 -29.0% 17.0% Vozrozhdenie $24.00 -29.4% -64.7% LSR Group $3.50 -30.3% -74.1% Open Investments $120.00 -31.4% -61.3% PIK Group $5.75 -32.4% -81.5% Severstal $8.45 -33.7% -62.7% Urals Energy $0.50 -34.2% -87.7% Mechel $13.18 -36.3% -59.3% Evraz $29.80 -37.3% -61.5%

Source: RTS. Bloomberg

* as at close October 3rd World markets fell 9% last week. In the worst week for global markets since late 2001, the FTSE All-World Index lost 8.8% and the MSCI GEM Index dropped 10.0%. Year to date the All World Index is down almost 30%. The failure of the US Lower House to pass the rescue package was the catalyst for the biggest points drop ever on Wall Street while the spate of bank failures in the US and Europe added to the gloom. Commodity price collapses also hit the emerging market asset class. The US markets ended the week hoping for a bounce, as expectations the $700 bln bill would be passed, but the big drop in the payroll data all but confirmed the state of recession. The US Labour Dept report said that unemployment rose by 159,000 last month and that the unemployment rate is now 6.1%. That killed off any optimism and pushed markets lower into the close. Over the five days the Dow Jones Industrials fell 7.3% and the S&P 500 ended down 9.4%. The European markets rallied on Friday as hopes rise of a big cut in UK and EU interest rates. The EuroStoxx 600 Index rose 2.8% to bring the weekly loss back to under 2.0%. The MSCI Asia-Pacific Index fell 8.0% over the week, led by Japan (- 8.0%) and Hong Kong (-5.4%).

Ruble fell 3.5% versus the dollar. Over the past five days the value of the US dollar rose 4.3% against a trade weighted basket of major currencies. Despite the fact that the futures market (Chicago) is showing an 82% chance that the US Fed will cut interest rates by 0.5% when it next meets at the end of the month, the dollar is viewed as much safer than currencies such as the euro or sterling. It is now widely expected that the Bank of England and the ECB will have no choice but to heavily cut interest rates over the next few months. The Swiss Franc is touted as the have amongst currencies but is too small to accept flows from the euro or sterling. Hence the dollar’s strength as the “least worst” of the major currencies. Over the week the dollar rose 5.6% against the euro to end at $1.3796. The currencies of developing economies also fell against the strengthening dollar and the ruble was not an exception. It lost 3.5% against the dollar last week to end at R/$ 25.90. The Central Bank reported that capital outflow in the 3rd Qtr was $16.7 billion, compared with a net inflow of $40.7 billion in the 2nd Qtr. That is much less than was speculated by the market. Year to date the capital flows are still positive but by a very marginal $800 mln based on the Central Bank data.

Higher dollar and slowing growth hit oil. The price of oil, along with most other commodities, was hit with the double-whammy of the rising value of the dollar and fears over demand destruction as growth in the global economy slows. Over the five trading days the price of WTI fell 12.2%, Brent fell 12.8% and Urals fell 13.3%. That was the worst week for oil since 2004. The fear of lower demand was heightened when the US Energy Dept reported that average daily usage of oil in the US totaled 19 million barrels per day over the past month, the lowest rate since October 2001. Friday’s session was a lot calmer as traders are reluctant to sell below the $90 p/bbl level. They recall that oil bounced back to over $110 p/bbl the last time it reached $90 p/bbl in September. Prices were hardly changed at Friday’s close with WTI for November settlement at $93.88 p/bbl, Brent closed at $90.25 and Urals ended the week at $86.47 p/bbl. The price of oil is now slightly down from the start of the year having been up 40% in early July.

Metals off by 10%. Base metals fell just as hard as oil last week for the same reasons of the rally in the value of the dollar and the fear of lower demand. The price of copper did bounce by over 3% on Friday on hopes that the US financial aid package might prevent a long or deep recession. But over the week the price still ended off 11%. Nickel closed the week at just under $15,000 per tone, a loss of 11.1% for the week and 43% since the start of the year. Zinc was down 9.6%. Gold also fell last week (-6.2%) despite the financial turmoil and general uncertainty. Investors piled into gold exchange traded funds last week and it was reported that sales of gold coins in the US reached the highest levels since December 1999. But the rising dollar reduced trader’s appetite for the commodity and it closed Friday at $833.2 per ounce. Silver fell 16% last week.

Reduced bio-fuel demand. Agriculture commodities fell over the week as crop yields reach the forecast high levels and the rising value of the dollar reduced demand. Traders also fear that the slowing economy will also mean slowing demand for bio-fuels and ethanol. The price of wheat rose by 0.7% on Friday with the slight optimism from the US financial aid package but over the five days it ended down 10.6%.

Funds Flow: Positive – In defiance of Falling markets Russia fund flows remain positive. Fund flows into the emerging market asset class held up surprisingly strong last week, according to the latest data from EPFR Global. In the week to Wednesday, when the MSCI GEM Index fell 5.4%, GEM category funds reported inflows of $1.16 bln. That was the best week of inflows since mid July. Russia funds also reported an inflow last week, despite the RTS falling almost 10% in the period. The amount, $15 mln, is small but it is the third straight week of positive contributions to Russia against a backdrop of steadily falling equity prices. It also contrasts with outflows from India (-$59 mln) and Brazil (- $110 mln) in the same period. Investors are clearly unwilling to sell Russian funds at what many see as distressed valuations.

Russia 3rd Qtr losses no more than others. The table below shows the trend in fund flows and market/theme performances over the past quarter. Russia funds suffered a withdrawal of approximately $250 mln directly following both the Mechel and Georgia events. But despite that “knee-jerk” outflow of $500 mln, the Russia funds reported total outflows for the 3rd Qtr of $1.2 bln. That compares very favourably with the $1.7 bln taken out of India funds and the just under $1 bln from Brazil funds. China funds bucked the trend with an inflow of $1.6 bln. But that contrasts with the over $7 bln withdrawn during the 1st half year while Russia funds took in $3 bln.

Russia ahead year to date. Year to date, Russia funds have taken in a net $1.8 bln and that compares with the outflows recorded by the other major emerging market countries as well as for GEM Balanced and BRIC themed funds.

Country Fund Flows and Market Performance

Country/Regio 1st Year to n* Last Week** September 3rd Qtr Half '08 Date**

Market Fund Flows, Marke Fund Flows, Mark Fund Flows, $ % $mln t % $mln et % $mln mln $ mln

- Russia -10.5% $15 -26.7% $46 47.0% -$1,196 $3,030 $1,834

- China -5.8% $261 -19.5% $633 15.0% $1,616 -$7,230 -$5,613

India -6.5% -$59 -16.3% -$666 -8.7% -$1,736 -$620 -$2,356

- Brazil -5.6% -$110 -21.9% -$287 36.6% -$973 $597 -$375

- GEM Balanced -5.4% $1,155 -15.9% $458 26.4% -$4,129 -$536 -$4,665

- BRIC Theme -6.7% -$102 -21.3% -$1,037 32.1% -$2,688 -$577 -$3,265

Oil, Urals $ p/bbl -10.8% -15.0% -35%

Source: EPFR Global, DataStream

* Based on MSCI data ** week ended October 1st