Russia Through a Lens Deloitte Research Centre | 12Th Issue | 3Q 2018

Russia through a lens Deloitte Research Centre | 12th issue | 3Q 2018

Macroeconomic Media consumption Russian Pharmaceutical Business and Financial outlook in Russia 2018 Market Trends in 2018 Climate in the Far Key Russian macroeconomic Recovery of tolerance Digital strategy: building digital Eastern region indicators in 3Q 2018 for Internet advertising bridges to end consumers Asian markets are a key destination to expand business geography

Page 04 Page 18 Page 26 Page 34 Россия: сквозь призму последних событий

02 Russia through a lens

Contents

We are pleased to present the latest edition of Russia Through a Lens, the macroeconomic 04 18 journal produced by the Deloitte Research Centre in Moscow. Russia in figures Research Centre Macroeconomic outlook market analysis Established in December 2015, the journal (GDP, inflation, trade indicators, •• Media consumption is published quarterly and falls under currency rate, Central Bank in Russia 2018 the Research Centre’s monitoring activities. key rate, commodity price •• Russian Pharmaceutical dynamics etc.) Market Trends in 2018 In Russia Through a Lens, we focus on current •• Business and Financial key trends in the Russian economy and present Climate in the Far our research in the following fields: Eastern region

•• Russia in Figures – statistical analysis

•• Research Centre market analysis •• Top-5 M&As 40 41 If you have any questions or suggestions Top M&A Global wind regarding this research, please do not Top news: Russia and China hesitate to contact us at: Top news: Russia and Europe [email protected]

42 43

Useful stickers Contacts

GDP

GDP dynamics

24.6 23.5 24.2 30.2 19.3 13.1 7.3 8.3 5.3 6.8 10.8 6.8 -6.0 3.3 8.5 8.2 5.2 4.5 4.3 3.7 1.8 1.5 1.8 1.6 «For this [economic] cycle, we expect -7.8 0.7 -2.5 -0.2 to get past the lowest growth point in Q1

2019. Among other things, this has to do 108,900 102,000

with higher VAT that will have a one-off 92,037 86,149 83,387

79,200 negative impact. Starting from Q2 or Q3, 73,134 68,164

our growth will continue to pick up.» 60,283 Maxim Oreshkin, 46,309 41,277 38,807 Minister of Economic Development 33,248

26,917 of the Russian Federation * * 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 In January–August 2018, the GDP grew GDP, bln RUB GDP growth, % GDP volume (at current prices) indices, % 1.6% according to the Russian Ministry of Economic Development. In July, the GDP Source: Rosstat, (*forecast) Institute for Economic Forecasting growth rate was 1.8%, but in August of the Russian Academy of Sciences (IEF RAS) it dropped to 1.0%. The deteriorated annual dynamics in agriculture, freight turnover, and manufacturing have contributed to the GDP growth slowdown. In September 2018, Rosstat upgraded Russia’s 1H 2018 GDP growth forecast to 1.7 percent (previously, the growth was estimated at 1.6 percent). Source: “Economic Snapshot. September 2018”, an overview by the Russian Ministry At the same time, the 2H 2018 forecast was increased to 1.9 percent of Economic Development (compared to the previous estimate of 1.8 percent).

Q3 GDP (at constant price 2016), bln RUB The Russian Central Bank expects a YoY growth rate of 1.3–1.7 percent for Q3 2018.

Source: “Economy: facts, estimates, 23,105

22,921 commentaries. August 2018” (analytical 22,764 22,721 22,332 22,357 22,278 commentaries by the Russian Central Bank). 21,650 21,723 20,610 20,414 19,851 18,872 * 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Rosstat, (*forecast) Central Bank of Russia

04 Russia through a lens | Russia in figures

GDP forecasts

Source 2018 2019 2020 Source 2018 2019 2020

Economist Intelligence Unit +1.7% +1.8% +1.6% European Commission +1.7% +1.6% -

The Ministry of Economic 1.8% +1.3% 2.0% World Bank +1.5% +1.8% +1.8% Development International Monetary Fund (IMF) +1.7% +1.5% +1.5% Central Bank of Russia +1.5% +1.2% +1.8% - - - European Bank for Reconstruction +1.5% +1.5% - +2.0% +1.7% +2.3% and Development

IEF RAS +1.8% +1.6% +1.8% Gaidar Institute +1.5% +1.4% +1.6%

Standard & Poor’s +1.8% +1.7% +1.7% Organisation for Economic +1.8% +1.6% +0.8% Cooperation and Development Moody’s +1.5% - -

Fitch +1.8% +1.5% +1.5%

Inflation

Inflation rate, %

13.3 12.9 11.9 11.4 9.0 “The inflation risks arising from external 8.8 conditions have come true<...>. 6.6 We expect inflation to be in the range 8.8 5.3 4.0 4.0 of 3.8–4.2% in 2018, in the range 6.5 6.1 5.4 of 5–5.5% in 2019, and turning back 4.3 3.4 3.8 to 4% in 2020.” 2.5 Elvira Nabiullina * * * Governor of the Bank of Russia 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Fact Central Bank Ministry of Economic Development of Russia (*forecast) (*forecast)

Inflation rate forecasts

Source 2018 2019 2020 Inflation in January–September 2018*: 2.52 percent 3.8% 5.0% 4.0% Central Bank of Russia Inflation target** in 2018: 4.0 percent - - 4.2% 5.5% IMF 3.5% 4.0% 4.0%

Vnesheconombank 3.5% 4.0% - *The inflation figure is the consumer price Bloomberg poll (consensus) 2.9% 4.0% - growth rate over the corresponding month of the previous year. (Source: Rosstat) Interfax poll (consensus) 4.0% 4.4% - **The inflation target is set for the consumer Economist Intelligence Unit 3.9% 4.4% 4.2% price growth rate over the corresponding month of the previous year. (Source: Central Bank)

05 Russia through a lens | Russia in figures

Trade structure

Period: January–July 2018

•• Foreign trade turnover: USD 386.1 billion (+21.7% YoY)

•• Trade balance: surplus of USD 112.2 billion (+USD 40.0 billion YoY)

•• Exports: USD 249.1 billion (+27.9% YoY) Share of the CIS countries 12.7%, non-CIS countries 87.3%

•• Imports: USD 136.9 billion (+11.8% YoY) Share of the CIS countries 11.8%, non-CIS countries 88.2%

Share of energy products in total exports, % (January 2006 – July 2018)

72.7 73.0 74.5 73.4 70.3 72.4 70.8 68.0 68.0 69.6 66.4 63.2 62.0 55.3 53.0 54.2 47.0 44.0 43.6 42.3 40.9 39.5 35.5 37.1 32.6 33.2

2006 2010 2014 2007 2008 2009 2011 2012 2013 2015 2016 2017 July Jan– 2018

Percentage in Exports Percentage in Exports to non-CIS countries to the CIS countries

Source: Federal Customs Service

Share of products in total eхports Share of products in total imports to the CIS/non-CIS countries (January–July 2018) from the CIS/non-CIS countries (January–July2018)

To non-CIS To the CIS From non-CIS From the CIS countries countries countries countries

Energy products 68.0% 37.1% Machinery and auto 50.1% 20.4%

Metal products 10.2% 13.0% Chemical products 19.2% 14.3%

Chemical products 5.1% 13.2% Food and agriculture products 11.6% 21.6%

Machinery and auto 4.1% 16.3% Metal products 5.9% 18.5%

Food and agriculture products 4.8% 8.9% Textiles and footwear 6.1% 7.2%

Timber, pulp and paper products 3.0% 4.5% Energy products 0.5% 4.4%

06 Russia through a lens | Russia in figures

07 Russia through a lens | Russia in figures

Exports (January–July 2018):

Percentage of exports In monetary terms In physical terms Categories YoY YoY

Energy products 64.2% 31.7% 3.6%

18.2% Kerosene

9.9% Coal

6.3% Natural gas

2.2% Gasoline

-10.8% Liquid fuels

-8.5% Coke

-8.3% Electricity

Metal products 10.6% 34.5% 15.4%

32.1% Cast iron

20.0% Copper and copper alloys

14.8% Semi-finished products of iron or non-alloy steel

12.7% Aluminium

-10.5% Flat iron non-alloy steel

Chemical products 6.1% 14.6% 5.7%

28.8% Products of inorganic chemistry

7.8% Abstergent

3.9% Plastics

-0.7% Fertilizers

Machinery and auto 5.6% 13.4% n/a

34.8% Electrical equipment

11.3% Ground transportation

2.0% Optical instruments and apparatus

4.9% Trucks

2.1% Passenger cars

Food and agriculture 5.3% 31.9% 45.8% products 80.2% Wheat

54.2% Cattle meat

Timber, pulp 3.2% 22.2% 2.5% and paper products 9.1% Plywood

5.0% Lumber

2.2% Cellulose

-4.5% Rough wood

08 Russia through a lens | Russia in figures

Imports (January–July 2018):

Percentage of imports In monetary terms In physical terms Categories YoY YoY

Energy products 0.9% 7.4% -4.3%

Metal products 7.3% 15.2% 14.3%

15.5% Ferrous metals

-31.7% Pipes

-3.2% Flat rolled products of iron or non-alloy steel

Chemical products 18.6% 15.1% 3.6%

11.0% Abstergent

7.4% Rubber

5.4% Plastics

2.7% Inorganic chemistry

Machinery and auto 46.8% 10.2% n/a

19.1% Electrical equipment

12.7% Optical instruments and apparatus

3.7% Mechanical equipment

18.8% Passenger cars

-4.3% Trucks

Food and agriculture 12.7% 7.6% 4.5% products 11.6% Milk

11.3% Citrus

6.3% Cheese and curds

-36.9% Meat

-33.4% Butter

Textiles and footwear 6.2% 14.0% 2.1%

09 Russia through a lens | Russia in figures

Currency rate

RUB vs. EUR, RUB vs. USD

100 Average 2015 Average 2016 Average 2017 Average 9m 2018 EUR 68.0 EUR 74.0 EUR 66.0 EUR 73.5 90 USD 61.3 USD 66.9 USD 58.3 USD 61.6 80

40 01-Jul-2017 01-Jul-2015 01-Jul-2016 01-Jul-2018 01-Jan-2017 01-Jan-2015 01-Jan-2016 01-Jan-2018 01-Apr-2017 01-Apr-2015 01-Apr-2016 01-Apr-2018 01-Oct-2017 01-Oct-2015 01-Oct-2016 01-Oct-2018

Euro US dollar

Source: Central Bank of Russia

EUR vs. RUB USD vs. RUB EUR forecasts (average per year), RUB

+3% +10% +6% +11% Source 2018 2019 2020

76.2 76.2 IEF RAS 74.6 78.5 79.1 65.6 73.8 65.6 Economist Intelligence Unit 74.9 79.5 83.0

61.9 69.3 59.0 USD forecasts (average per year), RUB

Source 2018 2019 2020

Ministry of Economic Development 61.7 63.9 63.8

IEF RAS 62.5 66.5 67.0 2Q 2018 2Q 2018 3Q 2017 3Q 2017 3Q 2018 3Q 2018 3Q 2018 3Q 2018 Economist Intelligence Unit 63.3 66.9 68.4 Source: Central Bank of Russia

10 Russia through a lens | Russia in figures

The Central Bank’s key rate, indexes and credit rating

Central Bank of Russia key rate, %

17.00 15.00 14.00 12.50 11.50 11.00 “The Board of Directors 10.50 10.50 10.00 9.75 9.50 9.00 of the Bank of Russia resolved 8.50 7.75 9.25 7.50 7.50 to increase the key interest 8.00 8.25 7.25 rate to 7.5% per annum in order to limit inflation risks, including risks of increased prices and inflation expectations arising 01-jul-2018 01-Jul-2017 01-Jul-2015 01-Jul-2016 01-Jan-2017 01-Jan-2015 01-Jan-2016 01-Jan-2018 01-Apr-2017 01-Apr-2015 01-Apr-2016 01-Apr-2018 01-Oct-2017 01-Oct-2015 01-Oct-2014 01-Oct-2016 01-Oct-2018 from exchange rate volatility. The forthcoming VAT increase Source: Central Bank of Russia should also be considered.”

Elvira Nabiullina Forecast of the key rate year-end, % Governor of the Bank of Russia On 14 September 2018, Source 2018 2019 2020 the Russian Central Bank IEF RAS 7.25 6.75 6.50 resolved to increase a key rate by 0.25 percentage points Economist Intelligence Unit 7.30 7.50 7.80 to 7.50 percent.

Indexes (daily): October 2014 – September 2018

3,000 On 18 September 2018, the MICEX index hit a fresh 2,500 all-time high and surpassed 2,000 the mark of 2,400 points for the first time ever. 1,500 By the end of September, 1,000 MICEX index also saw a 75 point increase. 500 Similarly to the previous year, the USD-denominated RTS index is traded at the level 01-jul-2018 01-Jul-2017 01-Jul-2015 01-Jul-2016 01-Jan-2017 01-Jan-2015

01-Jan-2016 01-Jan-2018 of 1,100–1,200 points. 01-Apr-2017 01-Apr-2015 01-Apr-2016 01-Apr-2018 01-Oct-2017 01-Oct-2015 01-Oct-2014 01-Oct-2016 01-Oct-2018

MICEX Index, RUB RTS Index, USD

Source: Moscow Exchange

Russia's credit ratings

Agency Rating Outlook Date

S&P BBB- Stable 20 Jul 2018

Moody's Ba1 Positive 31 Jul 2018

Fitch BBB- Positive 17 Aug 2018

11 Russia through a lens | Russia in figures

Foreign debt and reserves

Russian external debt International reserves of Russia, USD bln 40 38

32 32 33 29 29 30 26

489 539 636 729 600 518 512 518 491 479 499 538 510 385 368 378 433 459 437 365 376 330 345 345 15 341 298 332 17 19 18 10 11 472 12 10 12 453 435 426 372 346 346 328 308 230 308 217 182 174 156 143 131 118 109 77 77 62 60 56 50 54 39 42 46 51 35 35 49 45 31 40 36 30-Jun-2018 31-Dec-2011 31-Dec-2011 31-Dec-2012 31-Dec-2013 31-Dec-2017 31-Dec-2012 31-Dec-2013 31-Dec-2017 31-Dec-2015 31-Dec-2015 31-Dec-2014 31-Dec-2016 31-Dec-2014 31-Dec-2016 31-Dec-2010 31-Dec-2010 30-Sep-2018

Government, USD bln Monetary gold CB and banking sector, USD bln Currency reserves Business sector, USD bln Other reserves Share of external debt in reference to GDP, %

Source: Central Bank of Russia

Russia's investments in US treasury bonds, USD bln

140 120 100 80 60 40 20 0 Jul-2017 Jul-2015 Jul-2014 Jul-2016 Jul-2018 Jan-2015 Jan-2016 Sep-2017 Sep-2015 Sep-2014 Sep-2016 Nov-2017 N o v - 2 0 1 5 Nov-2014 Nov-2016 May-2017 May-2016 May-2018 Mar-2014 Jan-2014 May-2015 May-2014 Mar-2017 Mar-2015 Mar-2016 Mar-2018 Jan-2018 Jan-2017

Source: U.S. Treasury

12 Russia through a lens | Russia in figures

Household finances

Household income

114 112 112 112 109 105 108 107 111

106 105 104 102 101 99 98 97 94

Inflation for January–September 2018: 2.52% 42.4 39.2 36.7 34.0

32.5 •• Food products: 1.34% 29.8 26.6 23.4

21.0 •• Non-food products: 2.99%

•• Services: 3.57% Aug Jan– 2018 2011 2012 2015 2016 2010 2013 2014 2017

Average monthly nominal salary, RUB thousand Nominal salary dynamics compared to the same period last year, % Real disposable household income compared to the same period last year, %

Source: Rosstat

Individual loan portfolio Mortgage market

36 39 19.7 29 17.1 17.3 17.4 17.5 24 22 24 15.5 14 20 20 12.9 12.9 22 16 19 21 13 14 13 13.1 13.4 11.9 12.3 12.4 12.5 12.5 1 10.6 -6 9.6 13,854 2,021 12,135 1,818 11,295 1,753 10,774 10,634 9,926 1,472 1,339 7,712 1,158 1,017 5,535 697 4,064 365 Aug Aug Jan– 2018 2018 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 Jan–

Debt on individual loans, RUB bln Mortgage loans issued for the period, RUB bln Debt dynamics on individual loans Average weighted interest rate on long-term compared to the same period last year, % individual loans*, % Share of debt to population income, % Average weighted mortgage interest rate, %

Source: Central Bank of Russia * The December interest rate is presented for 2011–2017, the August interest rate is presented for 2018

Mortgages issued in January–August 2018 are up by 65 percent from the same period in 2017.

13 Russia through a lens | Russia in figures

Top pricing (nickel and copper)

Nickel and copper Maximum for the period 15,300 14,940 14,065 13,745 13,390 13,675 13,490

12,810 12,645 12,545 11,850 11,795 11,385 10,960 11,170 10,635 10,520 10,515 10,425 10,220 10,045 10,055 10,020 9,965 9,770 9,455 9,375 9,425 9,315 8,855 8,950 8,820 8,465 8,495 8,610 8,530 Maximum for the period 14-year minimum

7,264 6,938 6,920 7,057 6,746 6,780 6,841 6,166 6,748 6,665 6,536 6,498 6,382 6,183 6,012 5,876 6,004 5,968 5,854 5,879 5,728 5,675 5,530 5,106 4,910 5,031 4,872 4,816 4,707 4,847 4,880 4,567 4,666 4,603 4,571 4,499

Minimum for the period Jul-17 Jul-16 Jul-18 Jan-17 Jan-18 Jan-16 Jun-17 Jun-16 Jun-18 Apr-17 Oct-17 Oct-15 Apr-16 Apr-18 Oct-16 Dec-17 Dec-15 Dec-16 Feb-17 Feb-16 Feb-18 Sep-17 Sep-16 Sep-18 Aug-17 Aug-16 Aug-18 Mar-17 Mar-16 Mar-18 Nov-17 Nov-15 Nov-16 May-17 May-18 May-16

Nickel, LME, USD/t Copper, LME, USD/t

Source: Finam Holdings

Nickel forecast, USD/t Unlike other base metals, nickel prices dropped Source 2018 2019 2020 moderately amid the US-China trade standoff, World Bank 13,983 14,043 14,144 which has upset the global economic growth and demand for base metals. Nickel was insulated IMF 13,781 14,077 14,251 from a major price fall on buoyant outlook Economist Intelligence Unit 13,856 14,293 13,418 due to increased demand from electric vehicle producers and the stainless steel industry. Citigroup 14,000 15,500 15,500 Source: Geojit Financial Services JP Morgan 14,258 13,306 13,125

Metal Bulletin Research 14,400 15,200 -

Copper forecast , USD/t

Source 2018 2019 2020

World Bank 7,043 6,923 6,824

IMF 7,132 7,228 7,242

Economist Intelligence Unit 6,618 6,850 7,275

Citigroup 6,500 6,800 7,000

JP Morgan 7,015 7,650 6,500

Metal Bulletin Research 6,480 7,000 -

14 Russia through a lens | Russia in figures

Top pricing (gold and aluminium)

Gold and aluminium Maximum for the period

2,280 2,296 2,250 2,210 2,161

2,132 2,132 2,132 2,132 2,054 2,128 2,118 2,118 2,106 2,078

2,046

2,005

1,961 1,923

1,918 1,931

1,918 1,921

1,821

1,731 1,737 1,688 1,672 1,640 1,673 1,615 1,626 1,557 1,572 1,515 1,521 1,501 1,481 1,449

Minimum for the period Maximum for the period

1,357 1,314 1,313 1,319 1,325 1,347 1,305 1,323 1,325 1,303 1,295 1,313 1,278 1,277 1,276 1,283 1,271 1,270 1,265 1,241 1,230 1,252 1,254 1,245 1,233 1,245 1,217 1,207 1,211 1,193 1,177 1,152 1,142 1,122 1,071 1,061

Aluminium, LME, USD/t Gold, COMEX, USD/oz

Source: Finam Holdings

Gold forecast, USD/oz On the news of U.S. sanctions targeting Russian Source 2018 2019 2020 companies and their owners – including Russian World Bank 1,346 1,302 1,263 aluminum giant Rusal, the second-biggest aluminum producer in the world – prices spiked on fears UBS Group AG 1,315 1,330 1,350 of Rusal’s supply being pulled from the market. Goldman Sachs Group 1,375 1,450 - However, the U.S. Treasury announced an extension [a delay in implementation], allowing businesses Economist Intelligence Unit 1,279 1,220 1,270 until Oct. 23 to unwind their business activities RBC Capital Markets 1,324 1,351 1,300 with Rusal (among others). As a result, the price has come steadily down since then. Citigroup 1,265 1,384 1,370 Source: Metalminer JP Morgan 1,355 1,412 1,460

Aluminium forecast, USD/t

Source 2018 2019 2020

World Bank 2,253 2,133 2,106

UBS Group AG 2,227 2,177 2,205

IMF 2,208 2,235 2,261

Economist Intelligence Unit 2,177 2,106 1,975

RBC Capital Markets 1,874 1,874 1,984

Citigroup 2,150 2,200 2,300

JP Morgan 2,237 2,265 2,150

Metal Bulletin Research 2,100 2,200 -

15 Russia through a lens | Russia in figures

Top pricing (oil and gas)

Brent oil and natural gas Maximum for the period 83

79 78 78 75 74 69 69

65 64 63 61

56 57 57 55 54 53 53 52 52 51 50 50 49 50 50 49 47 47 45 43 38 40 37 36 Maximum for the period Minimum for the period 3.74 3.19 3.34 3.28 3.16 3.02 3.09 3.02 3.04 2.95 3.05 3.06 2.92 2.91 2.92 2.90 2.96 2.96 3.00 2.87 2.78 2.78 2.83 2.84 2.77 2.72 2.73 2.65 2.31 2.35 2.28 2.25 2.14 1.95 2.22 1.70

Brent crude oil, ICE, USD/bbl Natural gas, NYMEX, USD/mmbtu

Source: Finam Holdings

Natural gas forecast, USD/mmbtu In a move to tackle a global glut and support Source 2018 2019 2020 oil prices, OPEC and non-OPEC producers, U.S. Energy Information 3.0 3.1 - including Russia, took a decision in December Administration 2016 to cut joint oil output to 1.8 million bpd, with the October 2016 output as a baseline. World Bank 3.1 3.1 3.2

IMF 2.8 2.8 2.8 In July and September 2018, US President Donald Trump urged OPEC to ramp up oil production Economist Intelligence Unit 3.0 3.3 3.6 in order to reduce gasoline prices. However, at the joint meeting of OPEC and non-OPEC Crude oil forecast, USD/bbl producers held on 23 September 2018 it was decided that no further increase in oil output Source 2018 2019 2020 should take place in the short term. The OPEC U.S. Energy Information 71.7 70.6 - members agreed to keep oil production quotas Administration at the June level. This decision drove the price of oil higher to a four-year high. European Commission 72.8 71.8 -

IMF 64.7 60.7 58.0

IEF RAS 72.0 71.0 70.0

JP Morgan 70.0 70.0 -

Economist Intelligence Unit 73.5 72.5 70.0

Central Bank of Russia 69.0 60.0 55.0 (Urals)

The Ministry of Economic 69.6 63.4 59.7 Development (Urals)

16 Russia through a lens | Latest from Deloitte Research Centre

17 Russia through a lens | Latest from Deloitte Research Centre Latest from Deloitte Research Centre

Media consumption in Russia 2018 Key findings

Media consumption patterns Information content

In 2015–2018, average outreach for the nine selected Russians of all ages name the Internet media channels remained at 53% as the key source of information in 2018

Moscow is leading in terms Share of users, 2018 Top 3 Top 3 of media outreach (on average news sources Internet resources for all nine channels) Media outreach is higher Internet (news, analytics and official websites) VKontakte for men than for women 60% 54% 51% Moscow Men Women 79% 70%

Television YouTube Employed respondents Share of users, 2018 consume media 67% 62% more actively than Internet (social media and blogs) Odnoklassniki the unemployed. 56% 45% Employed Unemployed 30% 42%

Video games and printed media audiences continue to decline Internet preferences by age1

Printed media Video games VKontakte 57% 44% 53% 45% 91% 44% 2015 2018 2015 2018 Aged 16–24 Over 65 Instagram 61% 1% Aged 16–24 Over 65

Facebook 8% 34% Aged 16–24 Over 65

News websites 13% 51% Aged 16–24 Over 65

1 Proportion of the respondents who have indicated the Internet resource as the key one.

18 Russia through a lens | Latest from Deloitte Research Centre

Technology dimension Change in media usage

Messengers are the most in demand Overall, media usage3 grew by +6% smartphone feature among Russians

There is a shift in Internet Smartphone Growth in media usage3 in 2018 usage, with smartphones 35% 57% Internet E-books used for longer connections 2015 2018

Proportion of the respondents +59% +29% who often go online for long periods with smartphone

Decline in media usage3 in 2018

Growth in the usage Smartphone Internet E-books of smartphone 72% 87% functionality1 -26% -12% 2015 год 2018 год

Increasing penetration Messengers have gained Between 2015 to 2018 the pace of decline of smartphones2 popularity over the year1 of printed media usage accelerated.

Printed media Messengers WhatsApp 47% 58% -17% -26% +40% 2015 2018 2017 2018

Mobile calls Viber 2 +30% 33% 38% The decline of radio usage stopped in 2018. 2017 2018 Internet calls Radio

Usage index Telegram +19% -7% 0% 7% 10% 2015 2018 2017 2018 Social network apps The proportion of Russians +15% using messengers

1 Based on the usage index [proportion of those who own and use a device minus proportion of those who own a device without using it] 2 Based on the feature usage index [proportion of those who have indicated a more frequent use minus the proportion of those who have indicated a less frequent use] 3 Based on the media usage index: [proportion of those who have indicated a more frequent use minus proportion of those who have indicated a less frequent use]

19 Russia through a lens | Latest from Deloitte Research Centre

Online ad blocking Online purchases

37% of Internet users block online ads 75% of Internet users shop online

Top 3 product categories Smartphone/tablet Computer/laptop purchased online2

7% 10% 21% 15% Games, movies Ad blocking In-browser Ad blocking In-browser and software software ad-blocking software ad-blocking tools tools 37%

Total: 17% Total: 36% Electronics 19%

Key reasons for blocking The most annoying types Home appliances Internet ads of advertisements

•• Annoying advertisements •• Full-screen banners 14%

•• Too Much advertising •• Commercials interrupting videos

•• Pop-up banners Top 5 advantages of online shopping • possibility to compare products and prices across •• Videobanners with sound • various stores

•• possibility to get product information and read external customer reviews Recovery of tolerance Internet for online advertising1 -5% 0% •• cheaper prices after a decline in 2017 2017 2018 •• faster shopping

•• 24/7 working hours

44% Almost half of those using ad blockers would Top 5 disadvantages of online shopping leave a website if it limits access to content •• difficulties in assessing physical characteristics when an ad blocker is running of products (size, material quality) 39% Potential demand for fee-based Internet •• discrepancies in size and quality vs advertised ad blocking services or sale of counterfeit products RUB Acceptable fees for online ad blocking •• long delivery after ordering service (only respondents willing to pay) • complicated return procedures 300 • •• general lack of trust in products purchased online

1 Based on the advertising loyalty index: [proportion of those favoring advertising minus the proportion of those who disapprove] 2 Proportion of the respondents who generally shop online by product category.

20 Russia through a lens | Latest from Deloitte Research Centre

21 Russia through a lens | Latest from Deloitte Research Centre

Media consumption by category

Which of the following types of media have you consumed Trend in the last two weeks (percentage)? •• In 2018, average media reach1 2018 2017 2016 2015 in Russia remained at 53%, down 2 pp from last year. Internet 100* 100* 100* 100*

Television 93 92 92 94 •• A decrease in video games and printed media consumption (down 8 pp Radio 59 62 58 61 and 13 pp from 2015, respectively) Video games 45 50 54 53 remains a stable trend. Printed media 44 50 52 57 •• Attendance of theaters and concerts Printed books 42 45 41 44 grew by 4 pp over the last two years E-books 39 42 39 44

Cinema 34 36 33 37 Highlights Theater/concert 17 15 13 16 •• The highest media consumption1 is in Moscow (60%), and, on the average, * Due to data collection method (an online survey) people living in cities with a million+ population are more active when it comes to media usage: 55% vs 51% in smaller cities and towns.

60 55 55 51 54 51 48 55 45 49 45 56 47 55 •• Men are more active in using various media channels than women (54% vs 51%).

53% •• It is interesting to note that respondents who live alone are less active media users

1 than those who don’t (a 7 pp difference).

reach •• Pensioners and unemployed Average audience respondents are the least active media

users (8 pp below the average). Men Women Moscow •• Respondents with a bachelor’s Students Pensioners Major citiesMajor or master’s degree are significantly more respondents Unemployed Respondents Respondents not live alone St. PetersburgSt. who live alone active in using media channels than their Cities and towns less‑educated peers (an 8 pp difference). Respondents who do or bachelor’s degrees Employed respondents Employed with secondary education Respondents with master’s

1 Average audience outreach for the 9 selected media channels.

22 Russia through a lens | Latest from Deloitte Research Centre

Tolerance to Internet advertising

What is your attitude towards various Internet advertising media? We asked our respondents to describe their attitude to the most annoying types

Perceived loyalty1 of Internet advertising. News feed in social networks -6 Trend Static banners on websites -7 Advertising in the news feed in social Contextual advertising -8 networks, static banners and contextual Native advertising -10 advertising on websites are considered Muted videobanners -11 to be the most acceptable types of Internet In-text advertising -16 advertising (loyalty index is at least -8%).

Commercials before videos -20 Native advertising, muted video banners, in-text advertising and commercials before Videobanners with sound -26 the video are treated neutrally by the Full-screen banners which can be closed immediately -26 respondents (loyalty index is at least -20%). Pop-up banners -26 Other types of advertising have loyalty Commercials interrupting videos -29 index below -26% and may be considered Full-screen banners which cannot be closed immediately -33 as the most annoying, including: commercials interrupting a video (-29%), and full-screen banners which cannot be closed immediately (-33%).

Highlights Youngest respondents aged 16– 19 are more tolerant to native advertising, advertising in social media (loyalty index is at +6%), and contextual advertising (+3%).

In contrast, people over 65 are less tolerant to native advertising and advertising in social media (-10 pp and -7 pp below the average, respectively). The respondents of this age category are also less tolerant to in-text advertising (-8 pp).

1 The advertising loyalty index: [proportion of those favoring advertising minus the proportion of those who disapprove]

23 Russia through a lens | Latest from Deloitte Research Centre

Adblocking apps

Do you use ad blockers (apps which block Internet advertising)? Which ad blockers do you use?

PC/laptop users Smartphone/tablet users

Average 36 13 10 41 17 23 18 42

Men 42 14 12 32 21 26 20 33

Women 30 11 8 51 14 20 16 50

Aged 16–19 57 11 3 29 31 17 23 29

Aged 20–24 41 7 11 41 15 20 25 40

Aged 25–29 38 11 9 42 17 22 19 42

Aged 30–34 28 16 12 44 16 21 19 44

Aged 35–39 36 11 6 47 19 21 13 47

Aged 40–44 38 11 14 37 21 28 14 37

Aged 45–49 39 14 9 38 23 25 14 38

Aged 50–54 35 18 12 35 14 29 22 35

Aged 55–59 26 12 10 52 16 18 14 52

Aged 60–64 32 19 8 41 13 26 21 40

Over 65 26 5 10 59 7 16 19 58

Use an ad blocker Trend Highlights Use browser adblocking Although the overall perception of Internet Youngsters aged 16–19 are more functions advertising has returned to 2015 figures, active in blocking Internet advertising Think of having an ad blocker the most annoying and aggressive types (57% on PCs and 31% on smartphones). Neither use nor plan to use of ads are forcing users to get protection At the same time, respondents over an ad blocker against them. 65 are less active in using ad blockers Not aware of ad blocking apps (26% on PCs and 7% on smartphones). Thus, 36% of PC and laptop users block This is mainly due to the awareness advertising online: 21% of respondents of Internet ad blocking, which is twice have a special app, and 15% of respondents as low in the second group. use a browser’s embedded functionality. Another 13% of respondents intend to start blocking ads on their devices.

17% of smartphone users block Internet advertising using: special apps (7%) and a browser’s embedded functionality (10%). The proportion of smartphone users who intend to start blocking advertising is much greater at 23%.

Overall, two out of five Russians block Internet advertising (37%): 22% of respondents block ads on PCs only, 2% of respondents block ads on smartphones only and 13% of respondents block ads on both devices.

24 Russia through a lens | Latest from Deloitte Research Centre

25 Russia through a lens | Latest from Deloitte Research Centre

Russian Pharmaceutical Market Trends in 2018 Key findings

Market snapshot Pharmaceutical market sentiment Business development strategy

In 2017, the pharmaceutical market View of the current state of: Expectations for key indicators: grew by 7.9 percent in ruble terms •• The pharma industry – positive •• Sixty percent expect an average growth and by 5.9 percent in unit terms. perception: 63 percent, down 13 percent of 10 percent in ruble terms in 2018 on the previous year Pharmaceutical prices were up 0.3 percent. •• Almost half of the respondents •• Pharmaceutical businesses – (48 percent) expect to see operating The growth was driven by sales increasing positive perception: 88 percent costs grow by 7 percent on average in unit terms and a shift toward while another 40 percent anticipate more expensive drugs. View of the future prospects of: an average decrease of 10 percent.

•• The pharma industry – positive Market growth forecasts for 2018 Delivering more marketing campaigns perception: a negative net balance of 8 (in ruble terms): and initiatives is cited by Russian percent pharmaceutical companies as a top •• DSM Group: up by 4.3 percent •• Pharmaceutical businesses – positive development strategy. •• RNC Pharma: up by 4-6 percent perception: a positive net balance of 24 percent, down 18 percent Shortcomings of government •• QuintilesIMS: up by 5 percent on the previous year regulation, insufficient purchasing •• ALPHA Research & Marketing: power of households and heightened up by 7 percent Change in the share of imports as expected importance of geopolitical risks have by the Russian market: down by 5 percent come to the forefront. Market growth forecasts for 2018 in monetary terms and down by 6 percent (in unit terms) in unit terms. According to experts, track & trace technology will deliver better logistics, •• DSM Group: up by 1 percent The respondents named restricted marketing and control over working capital. •• QuintilesIMS: up by 4.7 percent admission to the public procurement system for imported drugs along with Every fifth company (21 percent) has •• IPT Group: up by 4-6 percent incentives for Russian pharma companies purchased track-and-trace equipment. •• ALPHA Research & Marketing – as the most effective tools for reducing Commercial segment: up by 2 percent drug imports on the Russian market. With 75 percent planning to take advantage Public segment: no growth of digitalization strategies, only 25 percent Demand for more efficient regulation: have implemented digital strategies so far. In Russia pharmaceutical output increased •• Medicine pricing (85 percent) by 3.2 percent to RUB 295 billion Two out of three companies (62 percent) while medical product output grew •• Regulation of the online market have incorporated end-consumer by 0.4 percent to RUB 53 billion. for medicines and healthcare services communication into the strategies (online drugstores and telehealth they have developed or are In 2017, imports grew faster than exports, providers) (84 percent) in the process of doing so. in monetary terms adding 21.6 percent •• Public procurement regulation vs 14.6 percent respectively. (82 percent)

Russia comes in 14th place in the world by pharmaceutical market size.

26 Russia through a lens | Latest from Deloitte Research Centre

Russian pharmaceutical industry. Current situation

4% 13% 33%

Positive Rather positive Rather negative Negative

50%

Share of positive responses Change over 2018 2017 the year All 63% 76% -13 pp Production (including foreign production) and/or wholesale of original products 61% 68% -7 pp Production (including foreign production) 75% 90% -15 pp and/or wholesale of generics Retail sales of medicines and medical products 38% 67% -29 pp

Russian company* 62% 86% -24 pp

Non-localized foreign company** 69% 73% -4 pp

Localized foreign company** 54% 72% -18 pp

* Beneficiary owners are Russian residents ** or the Russian subsidiary of a foreign company

Trend Highlights Summer 2018 is characterized Generic manufacturer companies This negative sentiment has resulted by a deterioration in the sentiment tend to be most optimistic about in the overall sentiment among Russian on the Russian pharmaceutical the situation on the market (+14 pp). pharmacies to go down by 24 pp. market, with positive responses down However, their optimism is down At the same time, all of the Russian by 13 pp to 63 percent. 15 pp on the previous year. producers surveyed expressed positive views of the situation in the industry. Retailers of medicines and medical products maintain the least optimistic The sentiment among foreign companies view, with negative responses operating production sites in Russia has up by 30 pp to 62 percent. decreased significantly, down by18 pp. This may be due to tightened criteria for obtaining a localization status for products.

27 Russia through a lens | Latest from Deloitte Research Centre

Russian pharmaceutical market. Outlook for 2018

A. B. 21% C. 11% 27% 15% Situation to improve Situation not to change much 29% Situation to deteriorate

A. All 53% B. Optimistic about the current situation 37% C. Pessimistic about the current situation

58% 50% Situation to improve Situation not to change much Situation to deteriorate

All 21% 50% 29% Production (including foreign production) and/or wholesale of original products 30% 44% 26% Production (including foreign production) 13% 56% 31% and/or wholesale of generics Retail sales of medicines and medical products 12% 50% 38%

Russian company* 23% 46% 31%

Non-localized foreign company** 19% 58% 23%

Localized foreign company** 23% 38% 39%

* Beneficiary owners are Russian residents ** or the Russian subsidiary of a foreign company

Trend Highlights Fifty percent of respondents do not Respondents who have expressed Original drug manufacturers maintain expect significant changes on the market. positive views on the situation tend to be more positive views on what the future At the same time, pessimistic views are similarly optimistic about the outlook holds for the industry in 2018 (+9 pp). dominant among those predicting changes. for the industry, with 27 percent predicting Optimistic views have remained the situation to improve while another Retailers are in their least optimistic mood, at 21 percent while pessimistic responses 15 percent expect the opposite. with 38 percent predicting the situation have increased from 13 percent to deteriorate and only 12 percent to 29 percent, with a negative net At the same time, there is a reverse trend expecting the opposite. balance of 8 percent. among less optimistic respondents, a majority of 53 percent, who predict Localized foreign companies more the situation will continue to deteriorate, often tend to mention that the industry compared to another 37 percent situation will deteriorate in 2018 who do not expect any improvements. (39 percent). At the same time, a majority of non‑localized foreign producers surveyed do not expect any changes (58 percent).

28 Russia through a lens | Latest from Deloitte Research Centre

29 Russia through a lens | Latest from Deloitte Research Centre

Preparations for implementing the mandatory track & trace system

The survey has provided us with insights into how our respondents assess Please indicate how the track & trace implementation risks facing their business units and what preparations they system will impact the business processes are taking to prepare for the changes. listed below?

Trend 0.52 0.48 0.47 0.19 0.08 0.06 According to the responses, track & At the same time, respondents trace technology will definitely deliver are nearly equally divided when 69% a positive impact on logistics, marketing it comes to the impact on tax 62% 56% and control over working capital and financial accounting, with the share 48% (a positive net balance of 0.47-0.52). of positive responses almost the same 38% as the share of negative responses. 35% Even though respondents have generally provided positive responses as regards What is more interesting, almost a potential impact from the technology one third believe that the track & on document flow and internal trace system will have no impact controls, almost one third (29 percent) on these business processes. This may -9% expect a negative impact. be an indicator of a significant uncertainty -13% -17% in the market over the track & trace system. -29% -31% -29% When referring to negative impacts from the implementation of the track & trace system, respondents link these Logistics

to a potential increase in controls Production and reports, as well as to higher production costs, both in terms of time and money. Promotion and sales Tax andTax financial accounting Management of working capital Document flow and internal controls

Positive impact Negative impact Net impact*

*Positive responses minus negative responses

30 Russia through a lens | Latest from Deloitte Research Centre

Trend As in the previous year, preparations are 2018 2017 Change over primarily focused on software development the year and integration (60 and 79 percent, Equipment purchases 21% 9% +12 pp respectively) and equipment purchases Development of related software 17% 13% +4 pp (71 percent). Software integration 15% 14% +1 pp

Most companies (69 percent) are also Assessment of risks and business process optimization areas 17% 9% +8 pp making plans to assess potential risks and business process optimization areas. Please specify whether your company is implementing or planning to implement At the same time, most respondents these initiatives as part of the preparations for implementing the track & trace system. (67-87 percent) have not included Integration of software with hiring new talent, providing focused the existing accounting systems 15% 64% training and obtaining loans Assessment of potential risks to finance implementation initiatives and business process optimization 17% 52% into the necessary steps. areas based on generated data Purchases of labelling, scanning and monitoring equipment 21% 50% The table below shows how many companies have completed or are in the process Development of related software 17% 42% of completing necessary initiatives. Equipment purchases and assessments IT staff training/hiring 2% 31% of risks and optimization areas have seen Production staff training/hiring the most significant progress over the year. 4% 19%

Commercial function staff training/hiring 4% 17% Highlights Localized foreign companies are more Finance staff training/hiring 13% prepared for the implementation of a track & trace system, with 38 percent Use of loans 13% reporting completed software integration and equipment purchases. Completed / implementing Planning Russian companies most often tend to consider obtaining loans to finance their track & trace implementation initiatives (39 percent), which generally includes companies with a turnover below RUB 10 billion.

31 Russia through a lens | Latest from Deloitte Research Centre

32 Russia through a lens | Latest from Deloitte Research Centre

Economic expectations. Share of imported drugs

How will the share of pharmaceutical imports change Trend on the Russian market over the next two years? Based on the consensus forecast by representatives from pharmaceutical companies, pharmaceutical imports will decline by 6 percent in unit terms 6% and by 5 percent in monetary terms.

19% 6% Of the respondents surveyed, 64 percent expect that pharmaceutical imports will 8% decrease within a range of up to 10 pp in unit terms and 54 percent expect –5% a similar decrease in monetary terms while only 21 to 22 percent expect 25% 37% –6% a more significant decrease.

At the same time, every fourth respondent (25 percent) expects an increase in pharmaceutical imports in monetary 29% terms. Fourteen percent expect a growth in pharmaceutical imports in unit terms.

27% Highlights Companies operating in the hospital

21% segment expect a stronger decline in pharmaceutical imports, both

22% in monetary and unit terms (9 percent).

Original and generic drug manufacturers are divided in their view of how In monetary In monetary pharmaceutical imports will change terms terms in monetary terms, with a decline of 6 percent expected by original drug manufacturers and a decline of 3 percent Growth by 5-10 pp predicted by generic producers. Growth by 1-5 pp Decline by 1-5 pp Localized foreign companies expect Decline by 5-10 pp pharmaceutical imports to see a sharper Decline by 10 pp and more decline of 7 percent in monetary terms.

Larger companies with a turnover above RUB 10 billion and businesses employing more than 1,000 people tend to be more conservative in their estimates, predicting a decline of 4 percent, both in monetary and unit terms.

33 Russia through a lens | Latest from Deloitte Research Centre

Business and Financial Climate in the Far Eastern region Key findings

Key economic Financial climate indicators in 2018

Gross regional product (GRP) Business climate The level of financial optimism of the Far Eastern Federal District and investments in the Far Eastern Federal District aligns with the country’s average •• Accounts for about 5.5 percent •• In 2017, fixed asset investments (0.28). of the national figure. in the District amounted to RUB 1,217 billion, with an increase •• Financial climate estimates are highly •• In 2017, the Far Eastern GRP totaled of 22 percent from 2016. uneven: RUB 3,960 billion, and in 2018, it is –– positive – 55 percent forecasted to reach RUB 4,209 billion. •• The leading Far Eastern regions in terms ––negative – 27 percent of investment growth are represented •• Sixty-four percent of the District's GRP by Amur, Yakutia and Sakhalin Regions •• About half of the respondents is contributed by the Republic of Sakha, (+44 percent, +40 percent in the Far Eastern Federal District expect Primorsky Territory and Sakhalin Region. and +25 percent, respectively). a growth in revenues (52 percent) •• Key economic sectors include the mining and operating profit(44 percent). •• At comparable prices, core capital industry (28 percent) and transport investments in the Far Eastern •• One in three Far Eastern companies and communications (13 percent). economy grew by 17.1 percent (33 percent) plans to increase in 2017, which is significantly above its capital expenditures. Labor market the national level (4.4 percent). •• Every third company (32 percent) •• In 1H 2018, the average nominal wage plans to increase its headcount, in the Far Eastern Federal District was External trade relations and 42 percent report an anticipated RUB 52.8 thousand per month, which •• The District's exports exceed imports salary increase. is 24 percent above the Russian average. by almost 4 times.

•• Moreover, the average subsistence •• The main trading partners are China Top 3 financing sources: level for all Far Eastern regions and the Republic of Korea, which account • Internal sources is 1.5 times higher than the average • for 27 and 25 percent of the District's for Russia (RUB 15.3 thousand total commodity turnover, respectively. •• Borrowings from banks in Russia versus RUB 10.0 thousand). • Russian and foreign investments •• Key export categories: • •• The average value added per worker ––oil and oil products – 52 percent in the Far Eastern Federal District is ––precious stones – 18 percent •• Companies in the Far Eastern Federal RUB 1,172 thousand – 22 percent ––fish and seafood –11 percent District are more open to Russian above the national average according and foreign investments than companies to data for 2016. •• Key import categories: in Russia on average. ––machinery and equipment – 35 percent •• In 1H 2018, the unemployment rate ––vehicles – 13 percent in the District decreased to 5.4 percent. ––metals – 9 percent

34 Russia through a lens | Latest from Deloitte Research Centre

Uncertainties, risks Business customers and development strategies and innovations

The level of uncertainty in the District is much higher than the national average, •• Overall, 1H 2018 saw a re-alignment leading to a lower risk appetite. of the customer portfolios of Far Eastern businesses (a decrease Priority business strategies Risk factors with an extremely in the share of state orders and business for the Far Eastern Federal negative impact on Far Eastern refocusing on the B2B segment). District in 2018–2019: businesses in 2018–2019: •• Forty-five percent of the respondents •• Ongoing cost control •• Increased business regulation in Russia in the Far Eastern Federal District report •• Cost cutting higher profitability through innovations. •• Lower core business revenue •• Increase of cash flows •• Weakening of the Russian ruble Top 3 technological •• Increase of domestic production •• Geopolitical risks innovations: •• Organic growth • Advanced accounting systems •• Stagnation in the Russian economy • (50 percent)

• Full automation of selected The following risks are more The following business strategies • business processes/chain important for Far Eastern are more important for Far Eastern of business processes companies than for companies companies than for companies ( and in Russia on average: in Russia on average: 50 percent 36 percent respectively) •• Higher trade barriers/protectionism •• Increase of domestic production •• Cloud technologies and big •• Weaker external demand •• Expansion into new markets data processing solutions ( and •• Increasing cost of capital •• Debt reduction 32 percent 27 percent respectively) In 2019, half of the companies The key development directions are planning a price increase for the Russian Far East One in two companies in the Far averaging 8 percent. are the CIS and Asia. Eastern Federal District (48 percent) does not engage in R&D. A third of the respondents in the Far Eastern Federal •• In 2018, R&D costs of Far Eastern District (33 percent) expect companies averaged 2.0 percent additional price increase in 2019 of their revenues, which is almost (by an average of 2 percent) due half that of the average for Russia to the VAT rate’s hike to 20 percent. (3.7 percent). •• R&D is generally carried out by dedicated units within a company, as indicated by 33 percent of the respondents.

•• Key digitalization drivers: ––Management strategy ––Market and competition

•• Key digitalization barriers: ––Access to infrastructure ––Staffing

35 Russia through a lens | Latest from Deloitte Research Centre

Outlook for businesses

Financial prospects

In July 2018, Deloitte CIS surveyed businesses operating in the Far Eastern Federal District. When analyzing the survey findings, we compared them with the insights from the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia.

What do you think of your Trend Highlights company’s financial prospects today •• Overall, the Far Eastern respondents •• Companies with revenues from RUB 2 as compared to the situation are rather optimistic about financial to 10 billion were the most optimistic. 6 months ago (early 2018)? (%) prospects. The District demonstrated The share of CFOs who gave an optimistic the same level of sentiment (0.28) response is 28 percentage points as the country as a whole. higher than the average figure. 9 27 •• More than half of the Far Eastern •• Consumer sector representatives respondents (55 percent) expressed also reported higher-than-average 55 an optimistic view of their company’s (+23 percentage points) estimates future financial position. This is of the business outlook for their inconsistent with the views of CFOs from companies. 18 other Russian regions who generally •• Pessimistic sentiments were recorded do not expect significant changes – 0.28 for the oil and gas and energy sectors, this response was given more often 0.27 and for companies with revenues less than in the Far Eastern Federal District than RUB 2 billion (43 percent each). 55 (by 37 percentage points).

•• A pessimistic scenario was more often voiced in the Far East. The share of this 36 response exceeds the national average by 18 percentage points.

•• The differences in the views in the Far Eastern Federal District and nationwide generally indicate differences in the business environment Optimistic * across various segments. No change

Russia Pessimistic Far East Index**

* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia

** Index: weighted balance of respondents on a scale of -1 to 1 where 1 percentage point equals 0.01

36 Russia through a lens | Latest from Deloitte Research Centre

Uncertainty and risks

What is your assessment Do you think now Trend of political and economic uncertainties is a good time to take risky •• The level of uncertainty in the Far affecting the strategic decision- decisions impacting your business? Eastern Federal District significantly making in your company? exceeds the national level. The net level of uncertainty for the District Uncertainties in strategic decision making, Risk appetite, % % is 0.54, being 56 points above the Russian average. 49 77 25 18 •• The majority of the Far Eastern respondents (77 percent) rate the current political and economic 0.54 situation as highly uncertain. 82 75 •• Given that the national CFO survey was held in March 2018, the high uncertainty level of the today’s political and economic environment cited 51 by the Far Eastern Federal District may be attributable to recent political developments such as new US sanctions against Russia introduced in May 2018. -0.02

23 -0.50 •• A rather high level of uncertainty -0.64 reported by the Far Eastern respondents resulted in a subdued risk appetite (-0.64 – 14 points below the national average). Low Yes * * High No Highlights ** Russia Net level Russia Risk appetite Far East Far East of uncertainty** •• Eighty-three percent of the Far Eastern companies surveyed with revenues of RUB 2 to 10 billion cite a high level of uncertainty, and none of the respondents in this group are prepared to make risky decisions.

•• Companies with annual revenues over RUB 10 billion are more likely to take risks (by 26 points).

* Based on the findings of the 1H 2018 Deloitte CFO Survey of the Leading Companies in Russia

** Index: weighted balance of respondents on a scale of -1 to 1 where 1 percentage point equals 0.01 37 Russia through a lens | Latest from Deloitte Research Centre

Impact of recent developments on Far Eastern businesses

What impact have these events had on your company?

Positive impact Negative impact

Establishment of TASEGs, % Draft law on the raising Adoption of the Yarovaya Law, % of the retirement age, %

Positive 6 No impact 28 Negative 33 +45% -27% 33 -28% 56 61 72 11

Establishment of the Free Port Draft law on VAT increase to 20%, Introduction of US sanctions of Vladivostok, % % against Russia, %

Positive 6 No impact 22 Negative 28 33 +45% -66% -72% 56 72 11 72

•• More than half of the Far Eastern •• The majority of the District’s respondents •• The draft law for the 20% VAT respondents noted a positive impact believe that the passing of the draft and the new US sanctions against Russia from TASEGs and the Free Port law on the raising of the retirement will have a negative impact on businesses of Vladivostok (the overall impact age and the Yarovaya Law will not have according to the estimations was rated at +45 percent). an impact on their companies. These of most respondents. The overall responses were given by 61 percent impact is estimated at -66 percent •• The impact of these developments and 72 percent of the respondents, and -72 percent respectively). is estimated as extremely positive respectively. However, around by companies with revenues over •• US sanctions present higher one third of the respondents RUB 2 billion (19 percentage points concerns for oil and gas and energy assess the impact of the above above the average). At the same companies and companies with events as negative (33 percent time, representatives of oil and gas revenues of over RUB 10 billion and 28 percent, respectively). and energy companies more often (by 14 and 16 percentage points, (by 13 percentage points) indicate respectively). a negative impact from TASEGs.

38 Russia through a lens | Latest from Deloitte Research Centre

Prospects of developing business abroad

of the companies of the companies surveyed surveyed 80 % cooperate 20 % do not cooperate with foreign partners with foreign partners

plan to expand their do not plan to expand business relations the geography of their 35 % into other regions 65 % business ties CIS EUROPE ASIA NORTH AMERICA

38% 38% 57% 43% 56% 43% 88% 100%

сurrent business partnership geography broadening the geography of business partnership in the future

When comparing the current business geography with expansion plans we noted that Far Eastern companies generally intend to develop business ties with the CIS countries (19 percentage points) and Asia (12 percentage points). The results for developing business ties with Asia align with the national trend.

39 Russia through a lens Top 5 M&As* (Russian companies)

Target company Industry Bidder Seller Deal value Additional information company company (USD, mln)**

Baim Copper Energy and resources: KAZ Minerals Aristus 900 According to the contract, Kaz Minerals Project (Chukotka mining industry PLC Holdings Ltd will acquire 75% of the deposit first, Autonomous and then acquire the remaining 25% Region) depending on the project’s efficiency. As the copper market is expected to face significant supply shortages, the transaction will help the company to improve the copper production and increase the company’s value.

Blagosostoyanie Financial services OJSC OJSC RZD 160 Blagosostoyanie NPF plans to improve NPF (50% Stake) Gazprombank its competitive position on the financial market as a result of the transaction. As a result of the transaction, PJSC Gazprombank would hold 50% interest plus two shares, OJSC RZD – 25% interest plus one share, LLC RSHB Asset Management – 19.5% interest, and the remaining 5.5% interest would be distributed among minority shareholders.

PJSC MTS Bank Technology, OJSC Mobile OJSC JSFC 131 The transaction will help OJSC Mobile (28.63% Stake) media and TeleSystems Sistema TeleSystems to consolidate its business telecommunications in the emerging Russian financial technology market and speed up the company’s access to the FinTech market. As a result of the transaction, OJSC Mobile TeleSystems increased its interest in PJSC MTS Bank to 55.24%, and OJSC JSFC Sistema decreased its interest in PJSC MTS Bank to 43.24%.

CJSC Consumer business: LLC Rusagro Sergey 58 LLC Rusagro Group intends to modernize KapitalAgro agriculture Group Chebotarev pig farms and a slaughterhouse, investing (Private an additional USD 4.7 mln. As a result Investor) of the transaction, the holding company plans to increase its share in the consumer market.

LLC PET- Healthcare JSC Pharm- JSC Rosnano 46 The transaction will help the company Technology standard to continue the geographical (49.9% Stake) development of its network and extend the variety of nuclear medical services. JSC Pharmstandard will hold 100% interest in LLC PET-Technology.

* Mergers and acquisitions

** Public information about the transaction value

Source: Merger Market

40 Russia through a lens Global wind Top news: Russia and China

12 September 2018 20 August 2018 11 July 2018 CJSC Biocad, a pharmaceutical China Communications Construction Bishi, a Chinese company, is planning manufacturer based in St. Petersburg, Company Ltd. (CCCC), a Chinese to establish a shipbuilding steel plant is planning to develop a plant in China. consortium, is planning to perform in the Primorye Territory. An agreement for the establishment of two bottom deepening operations Bishi is going to establish a shipbuilding joint ventures together with Shanghai in the Primorye Territory. steel plant with a capacity of 1 mln tons Pharmaceuticals Holding Co. Ltd., a Chinese CCCC, a Chinese public consortium, as well as a coking plant and an electric pharmaceutical company, was signed won a contract for Shipbuilding Complex power station in the Primorye during the Eastern Economic Forum 2018. Zvezda LLC for RUB 15.3 bln. Territory. Total investments in this The companies are planning to commence project are estimated at USD 1–1.5 bln, the clinical development, manufacturing, 15 August 2018 and the construction will take around five and marketing of pharmaceuticals The plant for manufacturing Haval sport years. The implementation of the project for oncological and serious utility vehicles has been developed would provide employment opportunities autoimmune diseases. in the Tula Region. Total funds invested for approximately 10 thousand people. by Great Wall, a Chinese automotive 21 August 2018 company, in the development China has suggested to build a speed of a plant for manufacturing Haval highway between Vladivostok and SUVs are estimated at USD 500 the border town of Suifenhe in China. mln. The manufacturing of SUVs will The estimated cost of the project is USD commence in the first quarter of 2019. 7 bln. The speed highway is expected to reach 180 km. Top news: Russia and Europe

24 September 2018 3 September 2018 31 July 2018 Rostelecom and Nokia set up Leroy Merlin has been developing Icelandic companies are engaged joint venture a major warehousing project. in the construction of a fish RTC – Network Technologies, a joint venture PNK Group is planning to develop processing plant in Russia and share between Rostelecom and Nokia, will focus a distribution center for Leroy Merlin fish processing technologies. on the production of telecommunication with a floor space of 140 thousand sq. m Skaginn 3X and Frost hf, two Icelandic software and equipment. Nokia is ready in the northern part of the Moscow Region. companies, signed an agreement to invest RUB 10 billion in this project. Total investments in this project with a Russian party to provide are estimated at RUB 10 bln. A transaction technological support and equipment 13 September 2018 between PNK Group and Leroy Merlin for a fish processing plant Three companies have agreed will be the largest built-to-suit transaction in Petropavlovsk‑Kamchatsky. to engage in the construction over the history of the warehousing Through the use of new technologies, of pillars for wind turbines. property market. fish and sea products could be sorted PJSC Severstal, JSC Rosnano, by size, processed, and frozen. and Spanish Windar Renovables S.L. 1 August 2018 The preliminary cost of the project signed an agreement on establishing Hyundai has set a date for is estimated at USD 56-66 mln. LLC WRS Towers, a joint venture the construction of an engine plant. for manufacturing steel towers for wind In November 2018, Hyundai is turbines in the Rostov Region. Windar commencing the construction of a new Renovables will hold 51% interest, plant for manufacturing 1.6-liter engines Rosnano and Severstal will hold 24.5% in Levashovo, Leningrad Region. interest in the joint venture. Total investments in the new plant Total investments at the first stage are estimated at RUB 27 bln. are expected at RUB 750 mln.

Source: InvestinRussia.com, Kommersant 41 Russia through a lens

Useful stickers

RESULTS OF THE EASTERN RESULTS OF THE MOSCOW ECONOMIC FORUM 2018 FINANCIAL FORUM 2018 The Eastern Economic Forum 2018 “Finance for development: a new has set an all-time record in terms platform for the development of delegates and contracts: of stable and balanced relationships” 6,002 delegates and 220 contracts was the central focus of the forum. for the total value of RUB 3,108 bln.

RBC TOP 500 RATING TOP-250 MAJOR GLOBAL ENERGY Fifty-one new companies were included COMPANIES, ACCORDING TO S&P in the rating; however, the Top 10 GLOBAL PLATTS companies remain unchanged. LUKOIL moved up four notches The aggregate revenue of the companies and now ranks second after ExxonMobil. increased by almost 10% for the year. Gazprom lost its top-one position, (In Russian) retreating to 17th place.

TIMES HIGHER EDUCATION FORBES PUBLISHED THE RATING OF UNIVERSITY RANKINGS 2019 RUSSIA’S LARGEST PRIVATE COMPANIES The rating comprised more than 1,250 The total revenue of Russia’s 200 private higher education institutions from 86 companies increased by 12 percent year countries including 35 Russian universities. on year in rouble terms to RUB 36 trillion. (In Russian)

42 Contacts

Joe Pacelli Mikhail Gordeev Partner Senior Research Specialist [email protected] [email protected]

Lora Zemlyanskaya Yulia Afanasyeva Research Centre Leader Analyst [email protected] [email protected]

Vladimir Sokolov Victoria Pigalkina Senior Research Specialist Analyst [email protected] [email protected]

Dmitriy Kasatkin Senior Research Specialist [email protected] deloitte.ru About Deloitte

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