Russian Financial Sector Investor Presentation

RUSSIAN FINANCIAL SECTOR INVESTOR PRESENTATION

November 2019 Колонтитул раздела или подраздела 2

CONTENTS

Evolution – 4 Key indicators – 14 Banking sector – 22 Reforms – 7 Macrofinance – 15 Financial stability - 35 Compliance with international Inflation – 16 Securities market – 36 standards – 8 Inflation expectations – 17 Corporate governance – 45 International cooperation – 9 Economic forecasts – 18 Countering malpractice – 46 Financial market development Monetary policy – 20 Investment funds – 47 strategy – 10 Non-state pension funds – 48 Newsletter – 11 Insurance – 49 Commodities – 50 Microfinance – 51 Fintech – 52

Marketplace - 54 Russian Macro Update Update RussianMacro

Payment infrastructure – 55 Russian Financial Sector Financial Russian

Consumer protection – 58 Bank of Russia: Overview Russia: of Bank Financial inclusion – 59 AML/CFT – 60 Cybersecurity – 61 1 BANK OF RUSSIA: OVERVIEW BANK OF RUSSIA: OVERVIEW 4

Evolution (1)

2013 – CBR becomes an IAIS member as well as IOSCO member 2001 – Law on AML/CFT 2014 – Inflation targeting regime with 4% medium-term target rate 2002 – Law on the Central Bank of the Russian – Introduction of a floating exchange rate regime Federation – Approval of a new corporate governance code – National Card Payment System Joint-Stock Company Central Bank of Russia 2003 – Russia becomes a FATF member (AO NSPK) established (CBR): founded in 1990 – Start of the IFRS reporting project – Law on deposit insurance 2015 – Signing of the IOSCO Multilateral Memorandum of 2005 – Introduction of corridor for USD&EUR basket Understanding within the exchange rate policy framework – National payment system “Mir” established and “Mir” 1990 – Law on banks and banking activities card issue started – Law on Central bank of RSFSR 2009 – CBR becomes a BCBS member – CBR becomes a CPMI member 2016 – Banking regulation in Russia assessed as compliant with 1992 – Russia becomes an IMF member Basel II, Basel 2.5 and Basel III (RCAP) 2010 – Introduction of floating exchange rate 1995 – Law on Central bank of RSFSR: amendments corridor 2017 – Introduction of proportional regulation in banking sector – Introduction of new financial rehabilitation mechanism 1996 – CBR becomes a BIS member 2011 – Law on National Payment System 2018 – Bank of Russia joins MMoU IAIS

1990 1995 2000 2005 2010 2015 2020 Focus on Russian financial market 1992 – MICEX established 2002 – First edition of the Russian corporate conduct code development – Law on insurance business 2003 – Law on mortgage-backed securities 1995 – RTS exchange established 2011 – Law on insider trading 1996 – Law on securities market – MICEX and RTS merge into the Moscow Exchange 2013 1996 – Law on joint-stock companies – FISS joins FFMS and the latter becomes insurance market regulator CBR becomes the 1999 – Law on protection of rights of megaregulator of securities market investors 2012 – National Settlement Depository obtains status of the Central the Russian Securities Depository (CSD) of Russia financial sector 2013 – National Clearing Center obtains status of the first qualified Federal Financial Markets Central Counterparty (CCP) in Russia Service (FFMS): founded in 1993 BANK OF RUSSIA: OVERVIEW 5

EVOLUTION (2) Monetary policy framework development

2006 2008 2009 2012 2013 2014 Inflation targeting Active inflation Liquidity Transition deadline Key rate introduced Floating exchange announced targeting management set rate introduced Dec. 2017 Dec. 2018 communications Inflation targeting is Instruments are “Floating rate and Inflation below 4% Inflation 4.3% represented as a developed, the inflation targeting by midterm goal in the interest rate corridor 2015” (2.5% - all-time low “Monetary Policy is narrowed in July 2018) Guidelines”

2015 1998 - 2008 2008 - 2014 Transition to the inflation Narrow band Flexible band targeting regime is completed Medium-term inflation target is around 4%

Since Nov. 2014 Monetary policy framework development Free floating Ruble Exchange rate regime development BANK OF RUSSIA: OVERVIEW 6

Evolution (3) Bank of Russia supervises the following key segments

Payment Non-state pension Banking sector infrastructure funds

Market Securities market, infrastructure, Asset managers including securities including fair pricing market professionals

Credit rating Microfinance Insurance sector agencies BANK OF RUSSIA: OVERVIEW 7

REFORMS Promoting price and financial stability, fair competition, newest technologies and best practices

Monetary policy Market infrastructure ‒ Benefits from infrastructure put in place, tax and Inflation targeting regime adopted with a 4% medium- regulatory reforms (T+2, CSD and access of ICSDs, up-to- term target rate pursued using conventional monetary date CCP, Individual Investment Accounts) policy instruments ‒ Marketplace project infrastructure is developed – launch of the platform is planned for 2019 Banking regulation and supervision Corporate governance ‒ Banking sector rehabilitation in progress, new bank resolution mechanism introduced JS companies segregation into public and non-public, ‒ Proportional regulation introduced and an corporate actions reform, new corporate governance code advanced IRB approach for the largest banks adopted in 2014, listing rules based on the new corporate gradually phased in governance code, listing committees established ‒ Banking regulation compliant with the Basel II, Payment infrastructure Basel 2.5 and Basel III standards, maintaining ‒ Russian payment system infrastructure developed and AML/CFT supervision of credit and non-credit currently in use by all leading international payment financial institutions (according to the Regulatory systems Consistency Assessment Program (RCAP) 2016) ‒ Payment infrastructure monitoring and supervision ‒ New macroprudential regulation mechanism in ‒ System for transfer of financial messages (SPFS) has been force – add-ons to risk ratios are introduced and developed set by the Bank of Russia Board of Directors ‒ The Faster Payments System launched in January 2019 ‒ Introduction of PTI ratio for macroprudential regulation purposes starting October 1, 2019 Pension system ‒ Setting up a national rating industry - only credit ‒ Guarantee fund mechanism introduced ratings of Russian national agencies may be used for ‒ Investment horizon for non-state pension funds regulatory purposes extended to 5 years ‒ Individual pension capital (IPC) accounts legislation is under development BANK OF RUSSIA: OVERVIEW 8

COMPLIANCE WITH INTERNATIONAL STANDARDS Russia complies with or implements key international standards and best practices

Russia’s Anti-Money Laundering system is Banking regulation is compliant with compliant with FATF Recommendations Basel II, 2.5 and Basel III (RCAP 2016)

Bank for International Settlements, IAIS and IOSCO Principles for financial market High FSAP grades in all surveyed segments, infrastructures (PFMI) are being including securities market, insurance and implemented payment infrastructure Upon monitoring the implementation of the PFMI, the CPMI gave Russia the highest- possible ‘4’ rating

Russia advanced to #28 in global National Settlement Depository is eligible DOING BUSINESS-2020 rankings from for custody arrangements under Rule 17f-7 st 31 in the 2019 report of the US Investment Company Act of 1940 (#35 in 2018, #40 in 2017)

Russia is a party to the Articles of Insurance sector has started implementing Agreement of the IMF and upholds free Solvency II European principles movement of capital BANK OF RUSSIA: OVERVIEW 9

INTERNATIONAL COOPERATION Bank of Russia cooperates with international financial institutions, regulators and associations

G20

BRICS BANK OF RUSSIA: OVERVIEW 10

FINANCIAL MARKET DEVELOPMENT STRATEGY Guidelines for the Development of the Russian Financial Market in 2019 - 2021 The Bank of Russia Guidelines for the Development of the Russian Financial Market in 2019 – 2021 cover the following key areas and activities:

Building reliable Improving financial Developing market Ensuring financial financial inclusion and competitiveness stability environment availability of capital

• Involvement of financial • Introduction of individual • Implementation of integrated • Control for the population consumer ombudsmen in pension capital accounts road map for developing indebtedness and prevention disputes resolution • Introduction of “green” bonds competition in various sectors excessive risk accumulation in • Increase of personal • Crowdfunding of Russian economy approved the segment by the Government responsibility of management • Introduction of new rules for • Risk-based approach to • Limited employment crediting private-public • Building biometric database insurance market participants opportunities in financial sector partnerships • Credit history bureau reform • Widening the list of financial for malicious (unscrupulous) • Development of concession • Marketplace project launch non-credit institutions subject people projects • Faster payment system in force to stress testing • Development of qualified • Marketplace project launch • Testing of digital identification • Improving the toolkit for investor institute macroprudential stress testing • Introduction of financial platform • Increase of responsibility for services access points map • “Regulatory sandbox” project substandard sale of financial • Development of remote development products identification and unified • Bank of Russia’s withdrawal • Unified financial transactions biometric system from the capital of banks register • Development of electronic undergoing resolution after insurance services distribution their financial rehabilitation channels • Improving insurance services inclusion in Russian regions BANK OF RUSSIA: OVERVIEW 11

NEWSLETTER (1) Key news from the Russian financial market

Starting 1 October 2019, banks are required to calculate customers’ PTI (payment-to-income) ratio. Add-ons to the risk- 1 October 2019 weights applied to consumer loans are set by the Bank of Russia depending on both the PTI and the effective interest rate.

New standardised approach to credit risk assessment in accordance with “Basel III: Finalising post-crisis reforms”:

At the first stage in June 2019, lower risk-weights for sovereign exposures in foreign currency and for lending with export guarantees are implemented (from 100% to 50%).

3 July 2019 Effective from January 1, 2020: • Corporate exposures will receive a 100% risk weight, except: (1) “investment grade” corporates (65%); (2) small and medium entities (SMEs), i.e. corporate where the reported annual income of the consolidated group of the counterparty is less than or equal to €50 million (85%); and (3) “Specialised lending exposures” (80-130%). • All bank exposures will be classified into one of three buckets (Grades A (A*), B and C defined in the BCBS document) with assigning of risk-weights from 20% to 150% depending on the banks’ solvency level and meeting of minimum regulatory requirements and buffers. The Bank of Russia raised required reserve ratios on liabilities to individuals in foreign currency for credit institutions 31 May 2019 by 1 percentage point to 8.0%, effective from 1 July 2019. Daily amount of regular foreign currency purchases in the domestic market under the fiscal rule is: RUB 9.2 bn from 7 Oct until 7 Nov 2019 RUB 10.0 bn from 5 Jul until 6 Aug 2019 5 June 2019 RUB 8.9 bn from 6 Sep until 4 Oct 2019 RUB 16.3 bn from 7 Jun until 4 Jul 2019 RUB 11.2 bn from 7 Aug until 5 Sep 2019 RUB 16.7 bn from 14 May until 6 Jun 2019 The Faster Payments System launched and is set to enable individuals to make instant transfers to each other 24/7/365 28 January 2019 using a mobile phone number – regardless of in which banks the sender and recipient have their accounts. BANK OF RUSSIA: OVERVIEW 12

NEWSLETTER (2) Key news from the Russian financial market

The Bank of Russia commenced from 1 February 2019 deferred foreign currency purchases in the domestic market under 25 January 2019 the fiscal rule to compensate for the regular purchases suspended in 2018. These purchases are carried out gradually in the 36 months since the launch date with the daily amount of RUB 2.8 bn. • Capital conservation buffer raised in accordance with the schedule approved by the Bank of Russia – it will stand at 1.875% from 1 January 2019, 2.0% from 1 April 2019, 2.125% from 1 July 2019, 2.25% from 1 October 2019, and 2.5% from 1 January 2020. • The SIFI capital buffer (applied to 11 systemically important Russian banks) remains at 0.65% throughout 2019. • The minimum LCR requirements for SIFI raised from 90% to 100% in accordance with the Basel III standards. 1 January 2019 • The deposit insurance system covers small enterprises’ funds up RUB to 1.4 mln deposited with Russian banks that have joined the deposit insurance system. • Systemically important banks start to calculate the ratio of maximum concentration of exposure per borrower or group of related borrowers and report it to the Bank of Russia. Based of the results of monitoring this indicator, the Bank of Russia will make a decision on the terms and specifics for setting it as a required ratio. The Bank of Russia has permitted Raiffeisenbank to use internal ratings-based (IRB) approach for the purpose of 28 December 2018 calculating regulatory capital (effective 1 Feb 2019). The Bank of Russia resumed regular foreign currency purchases in the domestic market under the fiscal rule that were 14 December 2018 suspended in 2018, starting 15 January 2019. • The Bank of Russia completed transition to the new macroprudential regulation mechanism by introducing risk weight add-ons for capital adequacy calculation by credit institutions while bringing standard risk weights on assets in line with Basel III requirements (effective 8 Oct). 1 October 2018 • Risk weight add-ons for mortgage loans and loans for construction co-funding with LTV > 80% are set at 100%, i.e. 200% risk-weight will be applied to such loans extended after 1 January 2019. The add-on is only effective as long as the loan-to-value ratio exceeds 80%. • The countercyclical capital buffer for Russian credit institutions is retained at 0% of risk-weighted assets. 2 RUSSIAN MACRO UPDATE RUSSIAN MACRO UPDATE 14

KEY INDICATORS Russian economy started to recover in 2016 and has moderated in the beginning of 2019 Figure 1: Real GDP growth dynamics (YoY, %) Figure 2: Private consumption and investment dynamics (YoY, %)

8.0 Private consumption Investments 15 6.0 4.3 3.7 10 9.1 7.9 4.0 6.8 5.5 2.3 5 5.0 5.2 2.0 1.8 1.3 2.0 3.0 2.9 2.0 1.6 1.3 1.5 0.7 0.3 0 0.7 2.3 1.0 0.0 0.0 0.8 - 1.8 -1.9 -5 -9.4 -2.0 - 2.5 -10 - 11.2 -4.0 -15 2011 2012 2013 2014 2015 2016 2017 2018 2019Е 2011 2012 2013 2014 2015 2016 2017 2018 2019Е

Figure 3: Russian Ruble volatility remains low while in free-floating Figure 4: Retail sales and real wages dynamics (YoY, %) Real wages Retail sales 90 15 80 10 70 66.4 5 2.4 0.7 60 0 50 -5 RUB RUB per USD 1 -9.6 40 -10 -9.9

30 -15

03.15 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19

06.18 03.15 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 09.18 12.18 03.19 06.19 09.19 Source: Bank of Russia, Rosstat RUSSIAN MACRO UPDATE 15

MACROFINANCE Solid fiscal and external positions Figure 5: Current account surplus amounted to USD 113 bn in 2018 Figure 6: Strong fiscal position: budget consolidation and fiscal rule Russian Federal Budget Balance, % of GDP, lhs Urals, $/bbl, rhs 120 113 12 120 100 8 100 5.4 4.1 80 4 2.7 80 0.4 60 0 60 -0.2 40 -4 -0.8 -0.7 -1.3 40 -3.9 -2.8 -3.9 20 -8 -6.0 20 0 -12 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 7: Significant international reserves assuring financial stability Figure 8: Sovereign debt to GDP lowest in both EM and DM spaces

External debt, $bn Reserves, $bn Developed countries Emerging countries Russia 800 120% 109% External debt/GDP = 30% 98% 700 636.4 Reserves/GDP = 34% 100% Reserves cover 17 months of import 600 530.9 80% 500 537.6 60% 51% 400 471.6 38% 40% 300 20% 8% 14% 200 0%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

12.15 12.16 12.17 12.12 03.13 06.13 09.13 12.13 03.14 06.14 09.14 12.14 03.15 06.15 09.15 03.16 06.16 09.16 03.17 06.17 09.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19

Source: Bank of Russia, Bloomberg, Ministry of Finance RUSSIAN MACRO UPDATE 16

INFLATION Medium-term inflation target successfully met Figure 9: Inflation (YoY, %)

CPI Non-food products Food Services Key rate Medium-term inflation target 20% 20%

18% 18%

16% January 2016: Oil prices reach their lowest level in a decade 16%

14% 14%

12% 12%

10% 10%

8% 8%

6% 6%

4% 4% Medium-term inflation target 2% 2%

0% 0% 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19

Source: Bank of Russia, Rosstat Inflation is 4.0% as of September 30, 2019 RUSSIAN MACRO UPDATE 17

INFLATION EXPECTATIONS Households and businesses inflation expectations remain elevated 2017 2018 2019 Expect. horizon III IV I II III* Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Inflation expectations (absolute numbers), % Households FOM (median, expected inflation) Next 12 months 9.6 8.7 8.5 9.8 10.1 9.3 9.8 10.2 10.4 10.1 9.1 9.4 9.3 9.4 9.4 9.1 8.9 8.6 FOM (subgroup with savings) Next 12 months 9.4 8.3 8.0 9.0 9.2 8.7 9.1 9.1 8.5 9.1 8.0 8.6 8.6 8.3 8.6 8.9 8.4 7.6 FOM (subgroup without savings) Next 12 months 9.8 9.0 8.8 10.3 10.5 9.8 10.3 10.8 11.2 10.8 9.8 9.9 9.9 10.0 9.7 9.3 9.2 9.5 FOM (median, observed inflation) Past 12 months 11.2 10.0 9.2 10.6 10.2 10.1 10.1 10.2 10.1 10.6 10.0 10.5 10.4 10.2 9.9 10.0 9.9 9.4 FOM (subgroup with savings) Past 12 months 10.3 9.8 8.4 9.7 10.0 9.2 9.3 9.2 9.1 9.4 9.2 9.9 9.7 9.0 9.5 9.2 9.4 8.2 FOM (subgroup without savings) Past 12 months 11.7 10.2 9.6 11.2 10.4 10.6 10.6 10.8 10.6 11.4 10.8 10.9 10.8 11.1 10.2 10.3 10.4 10.2 Professional analysts Bloomberg 2019 4.0 4.7 4.5 4.6 4.5 4.7 4.6 4.7 4.5 4.5 4.5 4.2 4.2 3.8 3.8 Bloomberg 2020 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 3.9 4.0 4.0 3.8 Bloomberg 2021 4.0 4.0 4.0 Financial markets OFZ IN (option not subtracted) 2023 4.2 3.9 3.9 4.7 5.5 5.3 5.1 5.1 4.9 4.7 4.6 4.6 4.3 3.9 3.7 3.5 3.2 3.1 OFZ IN (option not subtracted) 2028 4.7 5.5 5.3 5.3 5.2 5.0 4.9 4.9 4.8 4.5 4.1 3.9 3.8 3.5 3.4 Inflation expectations (balanced index**) Households FOM Next 12 months -3.6 0.5 -3.2 9.1 9.8 7.9 14.3 20.6 18.6 11.5 8.0 5.6 6.5 5.4 11.2 8.4 5.9 8.3 FOM Next month -16.0 -17.0 -16.0 -0.2 -3.7 -5.9 -6.8 -3.6 1.7 -8.3 -9.9 -8.2 -10.9 -14.8 -12.3 -15.0 -14.7 -11.8 Businesses Bank of Russia monitoring Next 3 months 7.6 7.4 6.8 10.1 12.6 13.2 13.9 16.6 18.7 12.8 10.6 9.6 9.3 9.9 9.0 8.8 8.2 8.1 PMI manufacturing input prices Current month 14.6 14.2 16.4 40.6 38.2 25.6 26.2 25.0 36.6 28.0 32.4 18.6 12.4 9.2 7.2 10.4 8.6 PMI manufacturing output prices Current month 8.2 3.0 3.0 13.2 13.6 7.4 11.0 5.0 17.0 20.4 12.2 7.4 3.8 3.0 1.0 4.8 0.8 *As of the quarter end **Balanced index is the difference between the shares of those who expect prices to rise and to fall

Source: FOM, Rosstat, Bloomberg, Bank of Russia RUSSIAN MACRO UPDATE 18

ECONOMIC FORECASTS (1) Medium-term outlook for the Russian economy

Key parameters of the Bank of Russia’s forecast scenarios 2018 BASELINE 2022 (growth as % of previous year, if not indicated otherwise) (actual) 2019 2020 2021 Urals price, average for the year, US dollars per barrel 69.8 63 55 50 50 Inflation, as % in December year-on-year 4.3 3.2–3.7 3.5-4.0 4.0 4.0 Inflation, average for the year, as % year-on-year 2.9 4.5–4.6 3.1-3.5 4.0 4.0 Gross domestic product 2.3 0.8–1.3 1.5–2.0 1.5–2.5 2.0–3.0 Final consumption expenditure 1.8 1.3–1.8 1.5–2.0 1.5–2.0 1.8–2.3 – households 2.3 1.5–2.0 2.0–2.5 2.0–2.5 2.0–2.5 Gross capital formation 0.8 0.5–1.5 3.5–4.5 3.5–4.5 2.5–3.5 – gross fixed capital formation 2.9 0.0–1.0 3.5–4.5 3.5–4.5 2.5–3.5 Exports 5.5 −(1.3–1.8) 2.0–2.5 2.0–2.5 2.5–3.0 Imports 2.7 0.0–0.5 3.0–3.5 3.5–4.0 2.5–3.0 Money supply in national definition 11.0 8–11 7–12 7–12 7–12 Banking system claims on the economy in rubles and foreign 11.5 8–11 7–12 7–12 7–12 currency* – claims on organisations in rubles and foreign currency; 8.4 5–8 6–10 6–10 6–10 growth as % over year – claims on households in rubles and foreign currency; 22.0 17−20 10−15 10−15 10−15 growth as % over year * Banking sector claims on the economy mean all claims of the banking system on non-financial organisations and financial institutions and households in the currency of the Russian Federation, foreign currency, and precious metals, including loans extended (including overdue loans), overdue interest on loans, investments of credit institutions in debt and equity securities and promissory notes, other forms of stakeholding in the capital of non-financial organisations and financial institutions, and other receivables under settlement operations with non-financial organisations and financial institutions and households. Source: Bank of Russia RUSSIAN MACRO UPDATE 19

ECONOMIC FORECASTS (2) Medium-term outlook for the Russian economy

Russia’s balance of payments indicators* 2018 BASELINE (billions of US dollars) (actual) 2019 2020 2021 2022 Current account 113 75 52 34 23 Balance of trade 194 162 138 122 116 Exports 443 412 392 385 392 Imports 249 250 254 263 277 Balance of services -30 −33 −35 −37 −40 Exports 65 63 63 65 67 Imports 95 97 98 101 107 Balance of primary and secondary income -51 −53 −51 −52 −53 Current and capital account balance 112 75 52 34 23 Financial account (excluding reserve assets) 77 14 14 9 9 Government and the central bank 9 −23 −6 −6 −6 Private sector 68 37 20 15 15 Net errors and omissions 2 3 0 0 0

Change in reserve assets ('+' – increase, '-' – decrease) 38 63 38 25 14

* Using the methodology of the 6th edition of “Balance of Payments and International Investment Position Manual” (BPM6). In the Financial account “+” stands for net lending, “-” – for net borrowing. Due to rounding total results may differ from the sum of respective values. Source: Bank of Russia RUSSIAN MACRO UPDATE 20

MONETARY POLICY Disinflationary risks exceed pro-inflationary risks over the short-term horizon Decision as of October 25, 2019  Inflation slowdown is overshooting the forecast. Inflation expectations continue to decrease. The Bank of Russia  The Russian economy’s growth rate still remains subdued. cuts the key rate by 50 bp to 6.50% p.a.  Risks of a substantial global economic slowdown persist. Signal  Disinflationary risks exceed pro-inflationary risks over the short-term horizon.  In these circumstances, the Bank of Russia has lowered its annual inflation forecast for 2019 from 4.0-4.5% to 3.2-3.7%. “…If the situation develops in line with the baseline forecast,  Given the monetary policy stance, annual inflation will come in at 3.5-4.0% in 2020 and the Bank of Russia will will remain close to 4% further on. consider the necessity of further key rate reduction at Key rate, % per annum Inflation, % YoY one of the upcoming Board of 12 Directors’ meetings.

10 In its key rate decision-making, the Bank of Russia will take 8 into account actual and 6.50 expected inflation dynamics 6 relative to the target and economic developments over 4 4.00 the forecast horizon, as well as risks posed by domestic and 2 external conditions and the reaction of financial markets. 0 …” Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19

Source: Bank of Russia 3 FINANCIAL SECTOR OVERVIEW FINANCIAL SECTOR OVERVIEW 22

BANKING SECTOR: CURRENT AGENDA Shaping a favourable operating environment and supporting market competition

Proportional banking regulation: differentiating regulatory burden for banks based on their size Risk-oriented supervision: aiming to remedy and simplifying requirements for smaller banks problematic situations in banks at an early stage focused on retail and SME lending

New resolution mechanism: reducing financial Development of macroprudential regulation: costs and execution period of the resolution streamlining the regulation, introducing procedure countercyclical approach

New regulations to the credit bureaus: Introduction of PTI ratio in order to regulate the authorising several strategic credit bureaus with consumer lending market more efficiently the function of aggregating information on debt payments

Development of banking supervision: introduction of the Basel Committee on Banking Basel II and III in force: Leverage ratio (except for Supervision (BCBS) standard on capital banks with basic license), NSFR – for Domestic- requirements for banks` equity investment in SIBs funds (since December 16, 2017) FINANCIAL SECTOR OVERVIEW 23

BANKING SECTOR: PROPORTIONAL REGULATION Differentiating regulatory burden for banks depending on their size Regulatory burden depends on license type

• Minimum size of capital (own funds) – RUB 300 mln • Only 5 mandatory requirements, • Minimum size of capital (own funds) including H1.0, H1.2, H3, H6, H25 ratios – RUB 1 bln • Limitations on international operations • May carry out all banking • Simplified disclosure rules - not required operations set forth by the law to disclose information on accepted risks, Systemically important • All mandatory requirements set by their assessment or management the Bank of Russia must be met financial institutions (SIFI) procedures, or any information on are subject to: financial instruments included in the • Must be compliant with all international standards calculation of their own funds (capital) • Higher capital adequacy requirements • Technically complicated international • Financial reporting fully compliant • Advanced risk management approach standards are non applicable with RAS and IFRS

BASIC LICENSE UNIVERSAL LICENSE

On 1 June 2017, Federal Law No. 92-FZ dated 1 May 2017 came into force. It envisages the introduction of proportional regulation designed to set up a regulatory balance for banks differing in scale and in the nature of operations. 138 banks hold basic license, as of 1 August 2019. FINANCIAL SECTOR OVERVIEW 24

BANKING SECTOR: NEW RESOLUTION MECHANISM Under new mechanism both costs of resolution and time required have been reduced significantly

RUB 758.3 bn List of banks under financial rehabilitation procedure RUB 2.6 tn have been for additional capitalization 1 Bank FC Otkritie (merged with B&N Bank) provided to three banking 2 Promsvyazbank groups (Otkritie, B&N, 3 National Bank TRUST (with ROST Bank and AVB Bank) Promsvyazbank) RUB 1.86 tn 4 Asian-Pacific Bank (APB) for liquidity (deposits)* 5 Moscow Industrial Bank (MIB) 6 Volga-Oka Bank (VOCBANK)

RUB 156.1 bn for the On July 2, 2019, the Bank of Russia’s Board of Directors has decided to establishment of BNA** complete the implementation of bankruptcy prevention measures for Bank FC Otkritie. Currently, the Bank complies with all Bank of Russia’s statutory requirements for financial resilience and creditworthiness. RUB 42.7 bn for additional capitalization of Otkritie Bank Promsvyazbank complies with all capital adequacy and liquidity requirements and operates its business in its usual way. The bank fully repaid CBR deposits placed in the bank during resolution process. Additional RUB 9.0 bn for additional c As a result of the financial resolution measures and implementation RUB 379.1 bn apitalization of APB of a new business model in the Asian-Pacific Bank, its financial standing has been stabilised, new capital has been formed, outflow of its clients’ funds has been stopped, its solvency has been restored and the Bank’s RUB 128.7 bn for additional profitability has become stable. The Bank is supposed to be sold in 2020 capitalization for MIB and RUB 39.9 bn after it discloses information about its 2019 performance to the public, for liquidity (deposits) including potential investors.

RUB 2.7 bn for additional capitalization On 12 July 2019, the Bank of Russia approved amendments to the plan of for VOCBANK its participation in bankruptcy prevention measures for the Moscow Industrial bank (MIB). These amendments provide for the Bank of Russia * Have been fully repaid by the end of 2018 to allocate 128.7 billion rubles for recapitalisation purposes. **BNA – Bank of non-core assets based on NB TRUST, ROST BANK and Bank AVB FINANCIAL SECTOR OVERVIEW 25

BANKING SECTOR: KEY FIGURES Active supervision and tighter regulation allowed to strengthen the health of the banking sector Figure 10: In 2013-2018 more than 400 licenses were revoked causing Figure 11: Banking sector profitability restored to record high levels almost no impact on the banking sector’s total assets Profit, bln RUB, lhs ROA, rhs ROE, rhs* Number of credit institutions, lhs Banking sector assets, RUB tn, rhs 17.7 1 200 112 1 800 18 978 95.5 15.2 1 000 96 1 500 1 501 15 800 80 1 200 994 12 600 454 64 900 9 41.6 400 48 600 6 1.9 200 32 300 3 1.9 0 16 0 0 2011 2012 2013 2014 2015 2016 2017 2018 9m19 2013 2014 2015 2016 2017 2018 9m2019 *414 banks and 40 non-banking credit organisations Figure 12: Loans and deposits volume (RUB tn) and growth rates Figure 13: Banks hold an acceptable level of capital under Basel III Corporate and retail loans, lhs Corporate and retail deposits, lhs Loans YoY growth*, % rhs Deposits YoY growth*, % rhs Capital adequacy ratio, N1.0, % 7.4 60 10.6 8.9 14 15 14.2* 14.5* 14.3* 55 11 14 13.5 13.7 50 50.3 8 13.1 13 12.5 12.7 45 1.5 56.4 5 40 2 12 51.0 35 44.0 -1 12.4 11 12.1 12.2 30 -4 10

2012 2013 2014 2015 2016 2017 2018 8m19

09.16 12.15 03.16 06.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19

*YoY, ccy adj. by credit institutions operating as of the reporting date *excluding credit institutions under financial rehabilitation procedure Source: Bank of Russia FINANCIAL SECTOR OVERVIEW 26

BANKING SECTOR: FUNDING The funding of the banking sector mostly comes from corporate and retail deposits Figure 14: In September 2019 corporate deposits grew by 5.0% YoY to Figure 15: In September 2019 retail deposits demonstrated growth of RUB 27.1 tn 9.8% YoY, reaching RUB 29.4 tn Corporate deposits, RUB tn, lhs Retail deposits, RUB tn, lhs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs 30 20% 30 29.4 30% 28 27.1 27.1 15% 28 25% 19.2% 26 10% 26 20% 23.2 24 5% 24 9.8% 15% 22 3.8% 5.0% 0% 22 10% 20 -5% 20 5%

18 -10% 18 0%

12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19

Figure 16: Operations with the Bank of Russia, tn RUB Figure 17: Sources of funding, % of total liabilities Borrowings from the Bank of Russia (with minus sign) Claims to the Bank of Russia Retail deposits Corporate deposits Net claims to the Bank of Russia, rhs 3.81 Central bank funding Other sources 6.5 4.5 2.5 23.8% 30.75% 0.5 34.0% 38.22% -1.5 -3.5 -2.90 -5.5

12.0% 30.2% 28.34%

03.17 03.16 06.16 09.16 12.16 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19 12.15 2.69%

1.01.2015 1.10.2019 Source: Bank of Russia Колонтитул раздела или подраздела 27

BANKING SECTOR: INTEREST RATES Interest rates trending down again after a temporary pickup over 2019

Figure 18: Weighted average interest rates on Figure 19: Weighted average interest rates Figure 20: Max interest rate on retail loans in rubles, % on deposits in rubles, % deposits in rubles of top-10 banks and Bank of Russia’s policy rate, %

Key rate Corporate loan rates Retail loan rates Corporate deposit rates Retail deposit rates Max retail deposit rate of top-10 banks

28.0 16.0 18%

16% 24.0 14.0

14% 20.0 12.0 12% 16.0 10.0 13.05 10% 12.0 8.0 9.56 7.00% 6.49 8%

8.0 6.0 6.21 6% 6.62%

4.0 4.0 4%

1.01.14 1.09.19 1.05.14 1.09.14 1.01.15 1.05.15 1.09.15 1.01.16 1.05.16 1.09.16 1.01.17 1.05.17 1.09.17 1.01.18 1.05.18 1.09.18 1.01.19 1.05.19

1.05.19 1.01.14 1.05.14 1.09.14 1.01.15 1.05.15 1.09.15 1.01.16 1.05.16 1.09.16 1.01.17 1.05.17 1.09.17 1.01.18 1.05.18 1.09.18 1.01.19 1.09.19

1.07.16 1.01.14 1.04.14 1.07.14 1.10.14 1.01.15 1.04.15 1.07.15 1.10.15 1.01.16 1.04.16 1.10.16 1.01.17 1.04.17 1.07.17 1.10.17 1.01.18 1.04.18 1.07.18 1.10.18 1.01.19 1.04.19 1.07.19 1.10.19

Source: Bank of Russia FINANCIAL SECTOR OVERVIEW 28

BANKING SECTOR: LENDING Retail loans remain the key driver of credit expansion although the pace of growth has started to moderate Figure 21: Corporate lending increased 3.7% YoY in September 2019 Figure 22: Retail lending increased 20.9% YoY in September 2019 Corporate loans, RUB tn, lhs Retail loans, RUB tn, lhs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs 35.5 30% 20 17.1 25% 33.9 33.3 34.0 20% 18 20.9% 20% 32.5 10% 16 15% 10.7 31.0 0% 14 10% 4.1% 3.7% 29.5 -10% 12 -5.3% 5% 28.0 -20% 10 -1%

26.5 -30% 8 -6%

03.16 12.16 09.17 06.18 03.19 12.15 06.16 09.16 03.17 06.17 12.17 03.18 09.18 12.18 06.19 09.19

12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19

Figure 23: Share of bad corporate loans* reached 12.1% in August 2019, Figure 24: Retail loans portfolio demonstrates improved quality: the while the loan loss reserves to bad loans ratio accounted for 85.1% share of bad loans* reached 7.3% in August 2019

Share of bad loans, lhs Loan loss reserves to bad loans ratio, rhs Share of bad loans, lhs Loan loss reserves to bad loans ratio, rhs 14% 112% 14% 12.1% 95% 12.9% 92.3% 13% 12% 93% 111.0% 109% 12% 10% 9.1% 90% 106% 11% 8% 88% 103% 85.1% 10% 6% 85% 9% 100% 95.6% 4% 83% 8% 7.3% 97%

2% 80% 7% 94%

08.19

12.16 12.15 03.16 06.16 09.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19

12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 08.19

* Loans classified into quality category of IV and V according to the requirements of Regulation No.590-P2. Quality category IV – high credit risk (probability of financial losses due to non-performance or improper performance of obligations by the borrower requires its depreciation by 51 to 100 per cent); Quality category V – no possibility of loan repayment due to the borrower’s inability or refusal to meet loan commitments, which requires complete (100 per cent) depreciation of the loan. Source: Bank of Russia FINANCIAL SECTOR OVERVIEW 29

BANKING SECTOR: MORTGAGE SEGMENT Mortgage lending is characterised by high (although falling) growth rates and decent asset quality Figure 25: Mortgage lending increased 19.2% YoY in August 2019 Figure 26: Share of NPLs remains at historically low levels

Mortgage loans, RUB tn, lhs NPL ratio, lhs Loan loss reserves to bad loans ratio, rhs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs 141.1% 8 7.33 30% 4.0% 142% 7 25% 3.5% 137% 3.0% 6 20% 3.0% 132% 5 4.10 19.2% 15% 2.5% 127% 4 10% 2.0% 122% 113.0% 1.5% 3 12.0% 5% 1.5% 117%

2 0% 1.0% 112%

06.16 12.15 03.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19

08.19

12.16 12.15 03.16 06.16 09.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19

Figure 27: Distribution of mortgage borrowers by LTV Figure 28: Risk weights applied to mortgage loans 40.6% 42% 4Q2017 1Q2018 2Q2018 end 2017 January 1, 2018 January 1, 2019 300% 3Q2018 4Q2019 1Q2019 300% 35% 250% 200% 200% +150 28% 200% 22.6% +50 +50 150% 21% +50 +50 100% 11.9% 150 14% 9.7% 50% 100 100 7.1% 0% 7% 4.1% 2.1% Loans for financing under Mortgages with Mortgages with 0.6% 1.2% equity construction LTV>80% LTV>90% 0% agreements with 10-20% 20-30% 30-40% 40-50% 50-60% 60-70% 70-80% 80-90% >90% down payment <20% LTV interval Source: Bank of Russia FINANCIAL SECTOR OVERVIEW 30

BANKING SECTOR: UNSECURED CONSUMER LENDING Unsecured lending market growth rate has somewhat moderated following mew macroprudential regulations Figure 29: Unsecured consumer lending increased 23.8% YoY in August 2019 Figure 31: Risk weights applied to unsecured consumer loans, % Unsecured consumer loans, RUB tn, lhs YoY (by credit institutions operating as of the reporting date), rhs Against the background of advancing growth in unsecured 9.0 23.8% 8.53 28% consumer lending relative to households’ income, The Bank of 8.5 22% Russia revised the scale of risk weights for such loans in 2017- 8.0 16% 2018 in order to prevent excessive risk-taking in this segment 7.5 10% 7.0 4% March 1, 2017 May 1, 2018 September 1, 2018 April 1, 2019 6.5 -11.4% 6.0 5.60 -2% 600% 5.5 -8% 600 5.0 -14%

500

12.15 12.17 03.16 06.16 09.16 12.16 03.17 06.17 09.17 03.18 06.18 09.18 12.18 03.19 06.19 08.19

Figure 30: Share of NPLs decreased to 8.3% in August 2019 400 NPL ratio, lhs Loan loss reserves to bad loans ratio, rhs 300% 128.1% 300 20% 130% 230% 18% 16.9% 125% 200% 170% 200 150% +30 16% 120% +30 +60 +30 14% 115% +30 +50 +30 +10 12% 110% 100 +20 +10 103.6% 140 10% 8.3% 105% 100 100 110 8% 100% 0

10-15% 15-20% 20-25% 25-30% 30-35% 35%+

06.17 12.15 03.16 06.16 09.16 12.16 03.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 08.19 Effective interest rate Source: Bank of Russia FINANCIAL SECTOR OVERVIEW 31

BANKING SECTOR: INTRODUCTION OF PTI The Bank of Russia introduces a payment to income ratio for regulatory purposes

Effective from 1 October 2019, the Bank of Russia set add-ons to the risk coefficients depending on the payment to income ratio (PTI) and the effective interest rate (EIR).

PTI interval, % Values of add-ons to the risk coefficients applied to unsecured consumer loans 0-30 30-40 40-50 50-60 60-70 70-80 80+ subject to calculation of PTI 0-10 0.3 0.3 0.3 0.6 0.7 0.9 1.1 Higher level of add-ons are applied to loans 10-15 0.5 0.5 0.5 0.7 0.8 1.0 1.2 with PTI exceeding 50%.

15-20 0.7 0.7 0.7 1.1 1.3 1.4 1.6 Banks calculate PTI in accordance with 20-25 1.0 1.0 1.0 1.5 1.7 1.8 2.0 Appendix 1 to Bank of Russia Ordinance No.4892 U when making a decision on 25-30 1.3 1.3 1.3 1.8 1.9 2.0 2.2 granting a loan in the amount (total credit EIR interval, % interval, EIR amount) of ₽10,000 or more or an increase 30-35 2.0 2.0 2.0 2.1 2.2 2.3 2.5 in the total credit amount on a bank card. 35+ 5.0 5.0 5.0 5.0 5.0 5.0 5.0

Values of add-ons to the risk coefficients EIR interval, % 0-10 10-15 15-20 20-25 25-30 30-35 35+ applied to unsecured consumer loans Value of add-ons 0.6 0.7 1.1 1.5 1.8 2.1 5.0 for which PTI calculation is not obligatory

Source: Bank of Russia FINANCIAL SECTOR OVERVIEW 32

BANKING SECTOR: DEDOLLARISATION Dollarization of the banking sector has notably reduced over the last years Figure 32: Corporate FX lending declined significantly over the past few Figure 33: Retail FX loan portfolio is insignificant in size years Corporate loans, USD bn, lhs Share of FX loans in total amount of loans, rhs Retail loans, USD bn, lhs Share of FX loans in total amount of loans, rhs 4.0 190 181.7 39.8% 42.0% 4.0 2.7% 3.5% 180 39.5% 3.5 3.0% 170 37.0% 3.0 2.5% 160 34.5% 2.5 2.0% 150 24.7% 32.0% 0.5% 2.0 1.5% 140 129.929.5% 1.4 130 27.0% 1.5 1.0%

120 24.5% 1.0 0.5%

12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19

Figure 34: Share of corporate and retail FX deposits in total amount of Figure 35: Risk weights applied to the FX assets, % deposits has fallen Reserve requirements end 2015 May 1, 2016 July 1, 2018 Share of FX deposits in total corporate deposits, lhs Retail Corporate Share of FX deposits in total retail deposits, rhs 8% 8% 150% 150% 160 July 1, 2019 +1 +1 130% 48.9% August 1, 2018 +1 +2.7 140 +20 51.5% +1.7 32.5% August 1, 2016 5 5 110% +50 49.0% end 2015 30.0% 120 +20 +30 46.5% 4.25 4.25 27.5% +10 +10 29.4% 100 44.0% 21.1%25.0% 41.5% 22.5% 80 39.0% 20.0% 100 100 100 100 36.5% 34.0%17.5% 60 34.0% 15.0% 40

FX loans to Other corporate Commercial FX Securities of non-

03.18 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 06.18 09.18 12.18 03.19 06.19 09.19 12.15 exporters FX loans mortgages resident companies Source: Bank of Russia FINANCIAL SECTOR OVERVIEW 33

BANKING SECTOR: CAPITAL ADEQUACY High quality capital base and solid capital adequacy levels under Basel III standards

Figure 36: Capital adequacy ratio for the banking sector decreased Figure 37: Credit organizations with capital exceeding RUB 25 bn over from 12.7% (1.01.16) to 12.4% (1.09.19) mostly due to the have lower buffer vs N1.0 minimum requirement due to the procedures of financial rehabilitation of the large credit institutions economies of scale

18 10 540 11 000 50

16 10 000 45 9 009 14 9 000 40 12.7 12.4 12 8 000 35

9.4 10 7 000 30

8.5 %

8 6 000 RUB bn 25 % 8.2 8.7 6 5 000 20 12.4 4 4 000 15 13.7

2 3 000 10

0 2 000 5

less than 300 - 1 1-10 bln 10 - 25 25 - 50 50 - 100 100 - more

08.19

12.17 03.16 06.16 09.16 12.16 03.17 06.17 09.17 03.18 06.18 09.18 12.18 03.19 06.19 12.15 300 mln bln rub rub bln rub bln rub bln rub 250 bln than 250 Ratio of own funds (capital) to risk-weighted assets (Basel III N1.0 ratio) rub rub bln rub Tier I capital ratio (N1.2) Capital adequacy ratio N1.0 (by capital size) Common equity Tier I capital ratio (N1.1) Own funds (Basel III capital), RUB bn, rhs Capital adequacy ratio N1.0 as of 1.09.2019 (12.4%) Source: Bank of Russia Колонтитул раздела или подраздела 34

BANKING SECTOR: SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS The Bank of Russia has approved the list of SIFI and buffers for capital adequacy ratios

List of systemically important financial institutions Capital adequacy requirements

№ Company name Assets, RUB tn Minimum Bank of Russia requirements for capital adequacy ratios 1 Sberbank 28.8 Common equity Tier 1 capital ratio (N1.1) 4.50% 2 VTB Bank 14.4 Tier 1 capital (N1.2) 6.00% 3 Gazprombank 6.3 Total capital adequacy ratio (N1.0) 8.00% 4 Russian Agricultural Bank 3.4 5 Alfa-Bank 3.4 Values of capital buffers 2017 2018 2019 Capital concervation buffer 1.25% 1.875% 2.50%* 6 Bank FC Otkritie 2.3 SIFI buffer 0.35% 0.65% 0.65% 7 Credit Bank of Moscow 2.2 Countercyclical buffer 0% 0% 0% 8 Promsvyazbank 1.9 9 UniCredit Bank 1.4 Minimum capital adequacy ratios for SIFI 2017 2018 2019 10 Raiffeisenbank 1.3 N1.1 6.1% 7.0% 7.65% 11 Rosbank 1.2 N1.2 7.6% 8.5% 9.15% N1.0 9.6% 10.5% 11.15% Assets as of August 2019 Systemically important financial institutions account for 69% of total assets of the Russian banking sector *Capital conservation buffer will be raised in accordance with the schedule approved by the Bank of Russia – it will stand at 1.875% from 1 January 2019, 2.0% from 1 April 2019, 2.125% from 1 July 2019, 2.25% from 1 October 2019, and 2.5% from 1 January 2020. FINANCIAL SECTOR OVERVIEW 35

FINANCIAL STABILITY Macroprudential policy aimed at identifying and preventing potential systemic risks

Credit activity The private sector’s debt burden measured as the debt-to-GDP ratio remains relatively stable as, among Decision other things, debts of non-financial organisations on external liabilities and internal FX loans remain stable. as of August 30, 2019 Non-financial organisations total debt on external liabilities, internal loans and debt securities increased by 3.2%1 over the past 12 months as of 1 July 2019. “The Bank of Russia’s Board of The household debt burden is rising2: during the first half of the year, the debt service to income ratio Directors has decided to keep increased from 9.9% to 10.4% driven, primarily, by unsecured consumer loans. The debt service to income the countercyclical capital ratio on retail loans grew from 8.3% to 8.8% over the first six months of 2019 and came close to the peak buffer (CCB) rate for Russian values of 2014 (9.3%). In order to limit procyclical risks associated with the increase of households’ debt credit institutions at 0% of risk burden, the Bank of Russia applies risk ratio buffers. weighted assets…” Retail lending risks The annual growth rates of unsecured consumer lending decreased to 24.5%3 as of 1 August 2019 (from 25.3% as of 1 May 2019), but remains high. Increased risk ratio buffers to new unsecured consumer loans “…In the context of moderately issued from 1 October 2019 will be applied depending not only on the weighted average effective interest rate (EIR), but also on the debt burden ratio of an individual. growing general credit to the economy and considering that To mitigate systemic risks associated with mortgage loans with a 10-20% down payment, the Bank of Russia increased risk ratios are raised risk ratio buffers for newly issued mortgage loans effective from 1 January 2019. This measure applied in several lending resulted in the decrease in the share of loans with down payments ranging from 10 to 20% issued in 2019 segments, it has been deemed Q2. Such loans accounted for 36.7%4 of all mortgage loans (40.9% in 2019 Q1, and 43.2% in 2018 Q4). unreasonable to set the countercyclical capital buffer Capital adequacy above zero...” The capital adequacy (Basel III N1.0 ratio) for the banking sector remains at an acceptable level of 14.2%5 as of 1 July, 2019. The effective macroprudential measures form additional capital stock which accounts for 0.7 pp of the banking sector’s capital adequacy6.

1 Adjusted for FX revaluation (exchange rate as of 1 July 2019). 2 It is calculated as the ratio of regular household loan repayments to household disposable income. This indicator includes disposable income of all Russian households, including individuals without any loans. Therefore, this indicator is undervalued. 3 Credit institutions’ financial statements as per Form 0409115 (Section 3, Credit Exposure: Other Consumer Loans, Grouped into a Homogeneous Loan Portfolio). For credit institutions operating as of the last reporting date, including banks that underwent restructuring. 4 According to the quarterly survey of banks (PJSC Sberbank, VTB Bank (PJSC), GAZPROMBANK (JSC), PJSC ROSBANK, JSC UniCredit Bank, JSC Raiffeisenbank). 5 Except for banks undergoing resolution, including with the involvement of the Banking Sector Consolidation Fund. 6 If the buffers to risk weights were reduced to zero, the capital adequacy of the banking sector would be higher by 0.7 pp. FINANCIAL SECTOR OVERVIEW 36

SECURITIES MARKET (1) Russia’s financial market has been aligned with best international practices

Crisis-proven market infrastructure Simplified market access • MICEX and RTS merged into the Moscow • Euroclear and Clearstream settlement for Exchange equities and bonds • Establishment of a Central Securities • Unified collateral pool for equities, bonds and FX Depository and unification of CCP across markets all asset classes • International clearing system membership; • T+2 settlement on equities, T+1 on OFZs, Direct access to FX trading for large corporates T+0 on corporate bonds • Local investor base development (individual investment account system, tax incentives, etc.) • Unified license covering both depository and registrar operations.

Upgraded corporate governance Increased transparency • Creation of a two-tier Quotation List within • Mandatory audited IFRS for all public the stock exchange listing companies • Strong criteria for inclusion in the top-tier • Strengthened regulation to prevent market Quotation list manipulation and insider trading • Streamlined dividend rules for SOEs • Improved disclosure practices • Corporate standards aligned with best • Report on Corporate Governance Code international practices compliance in the annual report • Establishing of a Listing Committee at MOEX • Requirement to have a written description of dividend policy for the top-tier Quotation list • Development of basic standards for professional market participants activities FINANCIAL SECTOR OVERVIEW 37

SECURITIES MARKET (2) Growing a deeper Russian bond market with strong potential Figure 38 : Volume of the Russian local bond market, RUB tn Figure 39: Volume of the Russian corporate bond market, RUB tn

OFZ Corporate Bonds RUB bonds Eurobonds 24 24 19.8 19.5 20 20 19.1 18.3 18.2 17.7 CAGR CAGR 16.0 7.6 7.6 16 14.7 16 8.0 8.0 +20% 13.1 11.9 +16% 6.7 12 11.3 11.1 12 11.1 9.2 9.2 8.7 11.9 7.8 8.1 5.2 11.5 8 5.9 6.7 6.6 8 6.2 7.1 10.2 9.7 4.7 5.3 5.4 4.2 9.3 3.6 4.3 3.5 4 3.0 7.2 7.9 4 2.5 3.0 5.9 2.5 5.0 5.5 4.5 2.9 3.1 3.5 3.9 4.7 3.2 3.6 0 2.2 0 2.9 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Figure 40: “Bondization” of the Russian financial market Figure 41: Corporate loans vs corporate bonds in Russia, RUB tn

Equity market trading volume, RUB tn Loans (incl. foreign debt) Corporate bonds (incl. eurobonds) Bond market trading volume*, RUB tn 68 68 25 70 65 21.2 29% 20 60 29% 16.5 48 27% 15.3 50 15 13.2 10.6 11.2 35 23% 8.7 10.3 9.4 9.3 9.2 10.8 40 10 29 20% 30 19% 5 81% 80% 77% 20 73% 71% 71% 0 10 2013 2014 2015 2016 2017 2018 2009 2011 2013 2015 2017 2018

Source: Moscow Exchange, Cbonds FINANCIAL SECTOR OVERVIEW 38

SECURITIES MARKET (3) Russian OFZ market provides relatively high yields amid investment grade reliability Figure 42: Russian OFZ market volume keeps growing Figure 43: Zero-coupon OFZ yield curve, % OFZ market volume, RUB tn, lhs April -18 March-19 September -19 Share of non-residents holdings, %, rhs 8.79 8.8 40 9.0 8.75 33.1 8.63 8.3 29.8 35 8.5 7.8 30 8.0 8.02 7.43 7.3 25 7.5 6.74 6.8 20 7.0 6.56 6.3 15 6.5 6.00 5.8 10 6.0 3m 6m 9m 1 2 3 5 7 10 15 20 30

Years to maturity

1.05.18 1.10.19 1.01.18 1.02.18 1.03.18 1.04.18 1.06.18 1.07.18 1.08.18 1.09.18 1.10.18 1.11.18 1.12.18 1.01.19 1.02.19 1.03.19 1.04.19 1.05.19 1.06.19 1.07.19 1.08.19 1.09.19 Figure 44: Bond market yields, key rate and RUONIA (% RUB) Figure 45: EM 10Y bond yields (% USD) on the background of credit ratings 19 Cbonds-GBI RU 5Y YTM eff Russia’s sovereign ratings 25.5 17 RUONIA Index S&P: BBB- (stable), as of 18 Jan 2019 Argentina Moody’s: Baa3 (stable), as of 08 Feb 2019 15 CBR Key Rate 21.5 Fitch: BBB (stable), as of 9 Aug 2019 13 17.5 11 13.5

9 9.5 Turkey Mexico 7 5.5 SoA Indonesia Russia Peru Malaysia Chile Brazil China Korea 1.5 Kazakhstan Poland 5 Hungary Philippines 2 4 6 8 10 12 14 16

B B+ BB- BB BB+ BBB- BBB BBB+ A - A+ AA- AA AA+ AAA

03.15 06.15 06.14 09.14 12.14 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 09.19 Source: Bank of Russia, Moscow Exchange, IMF and World Federation of Exchanges FINANCIAL SECTOR OVERVIEW 39

SECURITIES MARKET (4) Demand for OFZs placements remains sustainably high Figure 46: OFZ placement dynamics in 2018 and 2019 (RUB bn) Foreign bank subsidiaries Non-credit financial institutions Non-residents Other banks Systemically-important credit institutions Activity ratio*, rhs 140 7

120 6

100 5

80 4

60 3

40 2

20 1

0 0

18.04.2018 08.08.2018 12.12.2018 27.03.2019 10.01.2018 17.01.2018 24.01.2018 31.01.2018 07.02.2018 14.02.2018 21.02.2018 28.02.2018 07.03.2018 14.03.2018 21.03.2018 28.03.2018 04.04.2018 25.04.2018 16.05.2018 23.05.2018 30.05.2018 06.06.2018 13.06.2018 20.06.2018 27.06.2018 04.07.2018 11.07.2018 18.07.2018 25.07.2018 01.08.2018 15.08.2018 29.08.2018 03.10.2018 10.10.2018 17.10.2018 24.10.2018 31.10.2018 07.11.2018 14.11.2018 21.11.2018 28.11.2018 05.12.2018 19.12.2018 26.12.2018 16.01.2018 23.01.2019 30.01.2019 06.02.2019 13.02.2019 20.02.2019 27.02.2019 06.03.2019 13.03.2019 20.03.2019 03.04.2019 10.04.2019 17.04.2019 24.04.2019 08.05.2019 15.05.2019 22.05.2019 29.05.2019 05.06.2019 19.06.2019 26.06.2019 03.07.2019 10.07.2019 17.07.2019 24.07.2019 31.07.2019 07.08.2019 14.08.2019 21.08.2019 28.08.2019 04.09.2019 11.09.2019 18.09.2019 25.09.2019 02.10.2019 09.10.2019 *Starting January 1, 2019 the “activity ratio” calculated as the volume of demand for OFZ to the volume of OFZ supply announced by the Ministry of Finance was replaced by the “meet demand” ratio calculated as the volume of the placement to the volume of demand for OFZ Source: Bank of Russia, Ministry of Finance, National Settlement Depository FINANCIAL SECTOR OVERVIEW 40

SECURITIES MARKET (5) Russian equity market provides growth potential and attractive dividend yields Figure 47: Russian Equity market cap, bln RUB & bln USD Figure 48: Domestic market capitalization to GDP ratio reflects undervalued Russian financial market (of GDP, %) Market cap, bln USD, rhs Market cap, bln RUB, lhs 173.7 2017 2018 45 000 1200 180

40 000 1000 150 127.4 115.8 114.0 35 000 800 120 30 000 600 90 642 25 000 400 42.6 42.4 60 39.5 20 000 367 200 30 15 000 0 0

UK Japan Korea US China Russia Euro area

01.17 05.19 01.16 03.16 05.16 07.16 09.16 11.16 03.17 05.17 07.17 09.17 11.17 01.18 03.18 05.18 07.18 09.18 11.18 01.19 03.19 07.19 09.19

Figure 49: Russian equities market trading volumes proves stable Figure 50: Dividend yield (12M): Russia vs. EM, %

Trading volumes, RUB tn, lhs MOEX Index, rhs Russia Emerging markets 7.46 3.5 2747 3.3 2 800 8 3.0 2 600 7 2.5 65.13 2.5 2 400 5 2.0 2 200 4 1.5 2 000 2.98 3 1664 3.02 1.0 1 800 2

0.5 1 600 1

09.16 06.19 03.15 06.15 09.15 12.15 03.16 06.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 09.19

03.18 12.15 03.16 06.16 08.16 11.16 02.17 04.17 07.17 10.17 12.17 05.18 08.18 11.18 01.19 04.19 07.19 09.19

Source: Bloomberg, Moscow Exchange, International Monetary Fund and World Federation of Exchanges FINANCIAL SECTOR OVERVIEW 41

SECURITIES MARKET (6) Russian equity market remains undervalued despite strong performance in recent years

Figure 51: Russian MSCI index vs EM peers (01.01.15 = 100%) Figure 52: Forward P/E ratio (12m), MSCI Russia vs MSCI EM

Russia India Brazil Turkey MSCI Russia, lhs MSCI EM, lhs Russia to EM P/E discount, rhs China South Africa EMEA

200% 16 -40%

180% 14 12.9 160% -45% 12 140% -50% 120% 10 -55% 100% 8 -55% 80% 6 60% 5.8 -60% 4 40%

20% 2 -65%

31.12.14 31.03.15 30.06.15 30.09.15 31.12.15 31.03.16 30.06.16 30.09.16 31.12.16 31.03.17 30.06.17 30.09.17 31.12.17 31.03.18 30.06.18 30.09.18 31.12.18 31.03.19 30.06.19 30.09.19

Source: Bloomberg FINANCIAL SECTOR OVERVIEW 42

SECURITIES MARKET (7) Moscow Exchange group offers the best infrastructure in its class

Moscow Exchange  MOEX captures the entire value chain for end- listing and electronic customers, offering a one-stop shop for listing, TRADING trading, including DMA risk management, market data, multi-asset services trading, clearing settlement and custody  MOEX is strategically positioned to benefit National Clearing Centre from the development of Russia’s capital CCP, risk and collateral markets in the coming years CLEARING management, clearing, risk netting  Fully vertically integrated infrastructure with regulation and oversight by the National Settlement Bank of Russia Depository  Eligible collateral to trade any asset class SETTLEMENT CSD, settlement, depository, safekeeping,  Foreign investors have Direct Market Access repository (DMA), Sponsored Market Access (SMA) and International Clearing Membership (ICM) services at their disposal

Source: Moscow Exchange FINANCIAL SECTOR OVERVIEW 43

SECURITIES MARKET (8) Russian financial market has necessary infrastructure and regulation for trading OTC

 Enforceability of close-out netting in derivatives and repo markets is Robust legal protection in confirmed by relevant legal opinions (ISDA, ICMA) place  Russian standard documentation developed by SROs and approved by the Bank of Russia

Russia adheres to G20 decisions  Trade reporting to repositories (two authorized repositories available) in respect of OTC derivatives reforms  National Clearing Centre provides clearing services for OTC trades

 Non-financial counterparties have access to a broad range of hedging Variety of instruments and instruments offered by banks (including structured products) service providers  National Settlement Depository provides collateral management services (repo)

Source: Moscow Exchange FINANCIAL SECTOR OVERVIEW 44

SECURITIES MARKET (9) Rapidly developing retail market with strong tax incentives and accelerating FinTech

 In September 2019, the number of retail investors Recent regulatory changes on Moscow Exchange reached 3 million Individual Investment Accounts for  More than 246 960 retail investors were reported private investors since 2015. as “active” traders • RUB 1 mln – max sum to invest in a year. • More than 825k accounts opened as of May Figure 53: Number of active retail client accounts 2019 Equities market Derivatives market FX market 300 000 Tax deductions for IIA type A – max RUB 52 000; for IIA type B – at the rate 246 960 250 000 of investment income

190 235 200 000 Corporate bonds with yield of under

150 000 12.75% became tax-exempt on January 1, 2018 109 538 55 476 100 000 78 639 78 939 74 911 60 651 57 946 56 322 Capital gains on securities held for 50 000 44 860 46 285 more than 3 years are tax-exempt 28 068 34 196 15 159 25 461 895 8 038 0 Retail investors allowed to open December December December December December August 2019 brokerage and management accounts 2013 2014 2015 2017 2018 online Source: Moscow Exchange FINANCIAL SECTOR OVERVIEW 45

CORPORATE GOVERNANCE New corporate governance standards reflect best international practices

Corporate governance Corporate actions reform

JSC Law amended July 2018:  Information on corporate actions cascaded to  Strengthening the role of the Board of Directors in JSC shareholders from issuer through CSD and nominees  Mandatory risk-management, internal control in  E-proxy voting and E-voting platform for shareholders public companies has been developed  Mandatory audit committees and internal audit  A number of Russian companies have already functions in public companies (starting July 2020) implemented an online voting system in 2017  Disclosure reform  E-voting for bondholders has been implemented and successfully tested Listing reform on Moscow Exchange Securities  Simplified listing structure: 2 quotation lists and 1 non- quotation list instead of a 6-tier system New types of securities – structured bonds, perpetual  Stricter corporate governance criteria for inclusion in bonds, priority dividends non-voting preferred shares the top-tier list  Stricter requirements for Directors to be considered Blockchain technology independent  NSD used a blockchain-based settlement platform to Next stage 2019 complete an inaugural placement of a RUB 500 mln bond issue in 2017 Only ratings by approved Russian rating agencies will be  In 2018 first Russian bonds via smart contracts were considered valid for listing requirements for Russian issued for a total sum of RUB 750 mln issuers` bonds CBR corporate governance report: annual monitoring of corporate governance practice and Source:publication Moscow Exchange of the report on the CBR official site (only in Russian) FINANCIAL SECTOR OVERVIEW 46

COUNTERING MALPRACTICE Bank of Russia supervises conduct of financial market participants to promote fair competition

• Bank of Russia has implemented an •In 2015 Bank of Russia became a effective system for signatory to the IOSCO MMoU countering malpractice including •Intense cooperation with foreign market manipulation and insider financial market regulators in terms trading, aimed at ensuring of information exchange, including investors’ equality and fair pricing . confidential information •Elaboration on international Insider trading International initiatives and market cooperation manipulation

Unlicensed Enhanced firms and consolidated Pyramid market Scheme analysis • Bank of Russia successfully eliminates competitive advantages •Bank of Russia improves continuous of unlicensed firms by decreasing monitoring of on-exchange trading their number. Since 2015 detriment for the purpose of maintaining caused by financial pyramids financial stability and preventing decreased by more than 5x times system shocks caused by misconduct FINANCIAL SECTOR OVERVIEW 47

INVESTMENT FUNDS Local institutional investor base: the potential of investment funds Figure 54: Majority of savings in Russia is held on bank deposits and in Figure 55: Assets of investments funds in Russia (RUB tn) cash* Bank deposits Cash Insurance and pension assets Securities Other Assets, RUB tn, lhs Assets to GDP, %, rhs 3.7% 4.0 3.7% 12% 13% 12% 23% 6% 3.6 3.6% 3.9 42% 53% 13% 51% 50% 61% 27% 3.2 3.5% 61% 37% 2.8 3.4% 23% 6% 2.4 3.3% 69% 32% 25% 2.5 21% 59% 2.0 3.2% 41% 39% 32% 24% 1.6 3.1% 14% 20% 18%

3.1%

12.17 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 03.18 06.18 09.18 12.18 03.19 06.19 USA UK Germany Italy Brazil Mexico China India Russia 03.15

Figure 56: Number of investments funds in Russia by the type Figure 57: Breakdown of investment funds’ assets by the type (as of June 30, 2019) Closed-end Open-end Interval ETF

1534 1553 1402 1500 1504 1497 1485 1464 1456 1440 1445 1456 Cash 1 4 7 12 18% 8% 46 47 Equities 36 37 39 43 43 42 40 36 353 356 43 332 331 37 18% 228 327 325 312 303 268 267 265 Bonds Government bonds

1150 1143 17% Foreign securities 1135 1131 1132 1136 1131 1117 1 109 1 111 1128 1134 6% Real estate 24% Authorized capital 5% 4%

Other

09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 * As of the end of 2017 Source: World Bank, IMF, Bank of Russia, Moscow Exchange FINANCIAL SECTOR OVERVIEW 48

NON-STATE PENSION FUNDS Local institutional investor base: the potential of non-state pension funds

Figure 58: Pension assets in Russia (RUB tn) Non-state pension funds. Reserves Non-state pension funds. Mandatory savings Bank of Russia became a regulator of the pension State pension fund. Mandatory savings system in 2013. Since then a number of changes

5.67 5.89 has been adopted to strengthen the non-state 5.28 5.59 4.76 1.33 pension system: 3.82 3.97 1.11 1.21 1.25 0.99 0.83 0.90 ‘one-year non-loss’ rule was extended to ‘five- 1.71 2.15 2.47 2.64 2.74 1.09 1.13 year non-loss’ rule 1.90 1.94 2.06 2.02 1.91 1.78 1.82 stress-testing mechanism introduced 2013 2014 2015 2016 2017 2018 1H19 customers are now encouraged to stay with the same fund for not less than 5 years Figure 59: Pension system asset allocation  (as of June 30, 2019, %) since 2014 the Deposit Insurance Agency (DIA) guarantees the nominal value of mandatory Cash Equities Corporate bonds Government bonds Other savings 3% 4% non-state pension funds are to bear fiduciary 24% 37% 33% responsibility (since March 18, 2018) 15% non-state pension funds are to disclose their 34% 52% 41% investment portfolios 0% 26% 13% corporatisation of non-governmental pension 4%7% 7% State pension fund NPFs Mandatory savings NPFs Reserves funds (NPFs) completed work on individual pension accounts reform is Source: Bank of Russia in progress FINANCIAL SECTOR OVERVIEW 49

INSURANCE Local institutional investor base: the potential of insurance market Figure 60: Premium volume is gradually growing Figure 61: Assets hit 2.9% of GDP

Premiums, RUB bn, lhs Assets, RUB bn, lhs Payment of claims, RUB bn, lhs Reserves, RUB bn, lhs Premiums as % of GDP, rhs Assets as % of GDP, rhs 2.9 400 360.7 1.7 3 600 3.0 350 1.6 3 150 2.8 266.4 2 700 300 1.4 1.5 3 109.3 2.5 250 1.4 2 250 1 609.4 2.3 1 800 200 1.3 1.3 2.0 146.4 1 350 2.0 1 948.9 150 1.2 900 1.8 100 1.1 450 943.3 1.5

50 112.9 1.0 0 1.3

03.18 12.15 06.19 03.15 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 06.18 09.18 12.18 03.19 06.19 03.15 06.15 09.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19

Figure 62: Premium structure in 1H19 shows high level of market Figure 63: In 1H19 market remained highly competitive with the diversification Herfindahl-Hirschman Index equal to 643.3

Life insurance Capital, % Premiums, % Assets, %

27% 25% Corporate property insurance 82.7 Top-20 78.3 Private medical 79.1 insurance 8% Motor car insurance 69.7 14% Top-10 70.4 Compulsory motor TPL 16% 64.7 10% insurance Other 0 20 40 60 80 100 Source: Bank of Russia FINANCIAL SECTOR OVERVIEW 50

COMMODITIES Urals futures trading launched to set a price benchmark for Russian export oil

 Deliverable SPIMEX Urals Crude Futures contract is a new oil pricing mechanism allowing a direct quotation of exported Russian oil without reference to other crude oil grades traded on global energy markets  Transparent pricing process is based on exchange-traded futures contracts reflecting the supply-and-demand equilibrium reached on the back of a large number of trades concluded on the exchange by a wide range of market participants and setting an arm’s length price for the relevant commodity  Deliverable SPIMEX Urals Crude Futures contract trading was launched on 29 November 2016  Access to the SPIMEX futures contract trades is granted to Russian and foreign legal entities as well as to Russian individual entrepreneurs. Only legal entities (both Russian residents and non-residents) are able to conduct physical deliveries of crude oil  The SPIMEX Urals Crude Futures contract is settled by physical delivery upon expiration. Such a futures contract has a direct link with the crude oil spot market and prevents price manipulation. Physical delivery of crude oil under the contract is effected against positions opened as of the relevant contract expiration date FINANCIAL SECTOR OVERVIEW 51

MICROFINANCE Microfinance is a vital part of financial system complementing banks to provide better financial inclusion

MFIs Microfinance institutions (MFIs) provide financial services for customers with no access to banking products, service regions with an insufficient bank presence, offer financial products missing  Microfinance organizations from bank product lines, boost financial awareness and help (MFOs) clients build their credit histories.

 Consumer credit cooperatives CBR keeps a state register of MFIs and supervises MFIs directly  Credit Housing communities and via SROs. Currently there are about 15 600 MFI companies.  Pawnbrokers Roughly 25% of the entire MFO microloan portfolio are microloans  Agricultural credit to small to medium enterprises (bearing 8% interest rate thanks to cooperatives state support via MFOs).

Payday Loans, i.e. small, short-term unsecured loans (up to RUB 30k for 30 days) at high rates, are not a development priority and account for some 20% of the entire MFO microloan portfolio. FINANCIAL SECTOR OVERVIEW 52

FINTECH (1) Russia provides a favorable environment for FinTech development Goals of the Bank of Russia as a high-tech regulator Facilitate the competition in the financial market Enhance accessibility, quality and range of financial services Lower risks and costs in the financial market Advance the level of competitiveness of Russian technologies

Key areas of development

1. Legal regulation of FinTech, including protection of consumer rights and security of personal data 2. Development of digital technologies in the financial market and development of digital infrastructure 3. Transition to electronic interaction between the Bank of Russia, government, market participants and their clients 4. “Regulatory Sandbox” for experimentation with innovative financial technologies, products and services 5. Cooperation within the Eurasian Economic Union and development of single payment area for member states 6. Ensuring technological safety and sustainability in FinTech implementation 7. Development of human resources in the financial market FINANCIAL SECTOR OVERVIEW 53

FINTECH (2) Russia provides a favorable environment for FinTech development

Established on 28 December 2016 by the Bank of Russia with participation of the largest financial institutions

Main goals Main activities (2017-2018)

Implementation of new technological Digital identification solutions for the development of the Distributed ledger technology Russian financial market Faster payment system Promotion of digitalization of the Open API Russian economy Big Data FINANCIAL SECTOR OVERVIEW 54

MARKETPLACE Shaping future of financial services experience in Russia

 New system for online sales of financial products Equal access to financial Customers  Aimed at replacing traditional sales market channels with websites and smartphone apps which will enable Development of competitive environment Competition customers to compare multiple and financial services financial product offers optimization  CBR arranges the regulatory

Open API and fast Technologies environment necessary for the payments system project FINANCIAL SECTOR OVERVIEW 55

PAYMENT INFRASTRUCTURE (1) Bank of Russia Payment System  Money transfer services are provided to:  all credit institutions (financial market infrastructure included)  Russia’s Federal Treasury and its agencies  other Bank of Russia clients  Average daily figures: 6.4 mln payments, RUB 6.9 tn  84% of funds are transferred via the real-time service  New liquidity management tools, future value date settlement functionality, cash- pooling services for Federal Treasury and multibranch banks introduced  Transfer timeframe is adapted to Russia’s 11 time zones - system operates from 1 a.m. to 9 p.m., Moscow time.  The Faster Payments System (FPS), launched on 28 January 2019, is set to enable instant C2C interbank transfers 24/7/365 using mobile phone number. At the next stage – C2B (customer–to-business) and C2G (customer-to-government) payments to be included FINANCIAL SECTOR OVERVIEW 56

PAYMENT INFRASTRUCTURE (2) Advancing supervision and oversight to ensure stable development of the payment infrastructure

Figures for early 2019 :  Supervision of the payment infrastructure: monitoring organisations’ 36 payment systems and more than 400 institutions compliance with the Russian law. Applies supervised within the National Payment System (NPS) both to banking and non-banking

institutions providing payment NPS supervision is risk-oriented. Proportionate remote infrastructure and payment services supervision approach is being introduced to the NPS

 Oversight of the payment infrastructure: improving institutions’ operations Objects supervised for compliance with CPMI/IOSCO Principles for Financial Market Infrastructure (PFMI): 2 following the Bank of Russia systemically important payment systems, 4 socially recommendations based upon important payment systems international best practices

 Bank of Russia international cooperation High PFMI compliance ratings. NPS operators implement approved action plans based on the Bank in supervision and oversight of the of Russia recommendations payment infrastructure FINANCIAL SECTOR OVERVIEW 57

NATIONAL PAYMENT CARDS SYSTEM Setting the standards for the payment industry to provide convenient and stable services

 Russian national payment system “Mir” was created on 23 July 2014  Operator of Mir Card Payment System is National Card Payment System Joint-Stock Company, 100% of its shares belong to the Bank of Russia  More than 53 mln “Mir” payment cards were issued by year end 2018 in Russia  Co-badging projects with international payment systems: Maestro, JCB, AmEx and UnionPay  Support of mobile payment service Samsung Pay  Mobile payments service MirPay is launched  PayPass system has been successfully implemented  Payment system “Mir” launched a loyalty program which allows card holders to receive cashback  “Mir” payment cards are accepted in the Republic of Armenia, Kyrgyz Republic, as well as in the infrastructure of VTB Bank in the Republic of Kazakhstan and the Republic of Belarus FINANCIAL SECTOR OVERVIEW 58

CONSUMER PROTECTION Financial consumer and investor protection as one of priorities for further financial market development

KEY FINANCIAL CONSUMER PROTECTION WORKSTREAMS

Consumer and investor Differentiation of complaints handling consumer protection requirements

Conduct supervision Financial awareness model improvement

Setting requirements for Disclosure requirements financial organizations in order to improve consumer and for consumers and investor protection investors

Dispute resolution Disclosure requirements (ombudsman) for information on risks FINANCIAL SECTOR OVERVIEW 59

FINANCIAL INCLUSION Strong international background helps to promote financial inclusion

G20 GLOBAL PARTNERSHIP FOR FINANCIAL ALLIANCE FOR INCLUSION (GPFI) FINANCIAL INCLUSION (AFI) ‒ Acts as an inclusive platform for G20 countries, non-members and other parties for knowledge and experience sharing, policy advocacy and coordination in promoting financial inclusion ‒ The global knowledge exchange network empowering ‒ Russia is an original GPFI member since November 2010 policymakers to increase access to quality financial ‒ Endorsed the ‘original’ FIAP in 2010 and the ‘updated’ FIAP in 2014 and 2017 services for the less well-off communities and ‒ G20 – World Bank – OECD conference on empowering consumers of financial households products and services was hosted in Moscow in June 2013 ‒ The Bank of Russia became a member of AFI in ‒ The third annual GPFI Forum was held in St. Petersburg in 2013 February 2014 ‒ In September 2014 the Bank of Russia joined the Maya Declaration setting up the priorities for AFI members Financial Inclusion Promotion by the Bank of Russia on financial inclusion ‒ Improving financial inclusion for people and SMEs is one of financial market ‒ In September 2015 the Bank of Russia joined the development priorities for 2016-2018 Maputo Accord to improve funding accessibility for SMEs ‒ The Bank of Russia annually publishes financial inclusion indicators and the Report on Financial Inclusion in Russia (with supply-side and demand-side ‒ The Bank of Russia and AFI co-hosted the ‘Financial data starting from 2015) inclusion and shadow banking: innovation and proportional regulation for balanced growth’ ‒ The technical note on financial inclusion was prepared in the context of a conference in November 2015 joint WB / IMF FSAP mission in Russia during February-March 2016; the ‒ In June 2016 the Bank of Russia hosted the AFI GSPWG note was published in May 2016 meeting. ‒ Early in 2018 the Bank of Russia launched the Financial Inclusion Strategy in ‒ CBR hosted the 2018 AFI Global Policy Forum Russia for the period of 2018-2020 FINANCIAL SECTOR OVERVIEW 60

AML/CFT Bank of Russia maintains AML/CFT supervision of credit and non-credit financial institutions

Russian AML/CFT law is based on International Standards on Combating Money Laundering (FATF Recommendations)

2013 2008 The FATF recognized that Russia 2018 – 2019 The FATF placed Russian Federation could be removed from the 4th round of mutual evaluation, joint in the regular follow-up process regular follow-up process FATF/MONEYVAL/EAG evaluation of Russia

Key measures taken in 2008-2013:  Enhancing corporate transparency by introducing beneficial ownership requirements to the AML/CFT Law  Prohibiting credit institutions from opening and maintaining anonymous accounts or accounts in fictitious names  Addressing certain shortcomings in the criminalization of terrorist financing  Amending legislation to prevent criminals from becoming major shareholders in financial institutions  Strengthening instruments to freeze terrorist assets domestically or on request of other countries  Abolishing the threshold which decriminalized self-laundering of amounts lower than RUB 6 mln and which was not in compliance with the FATF Recommendations FINANCIAL SECTOR OVERVIEW 61

CYBERSECURITY Key initiatives in information security and cybersecurity

Countering international and cross- Key avenues of cooperation in the sphere of border crime information security

 Establishing institutional and technical framework for dynamic cooperation between the common financial market regulators and Addressing the rise in money participants, building upon the Financial Sector withdrawals via illegal cross-border Computer Emergency Response Team transactions (FinCERT) of the Bank of Russia  Enabling trusted electronic operations in the increasingly digitalised common financial Compiling a general register of most market typical cyber threats and computer  Formulating unified standardised approaches attack methods to information security, cyber resilience and supervising related risks  Policy coordination and unifying the Combatting fraud in financial e- mechanisms of strong customer authentication services provided via websites for financial transactions and money transfers registered in foreign DNS zones 62

INVESTOR CONTACTS AND REGULAR MEETINGS SCHEDULE FOR 2020

January 31 – July 17-24 Quiet period Quiet period February 7 July 24 Board of Directors meeting on monetary policy February 7 Board of Directors meeting on monetary policy July 29 Conference call with institutional investors February 12 Conference call with institutional investors September 11-18 Quiet period March 13-20 Quiet period September 18 Board of Directors meeting on monetary policy

March 20 Board of Directors meeting on monetary policy October 16-18* Ad-hoc meetings with investors on the sidelines of the IMF/WB meetings Ad-hoc meetings with investors on the sidelines of the October 16-23 Quiet period April 17-19* IMF/WB meetings October 23 Board of Directors meeting on monetary policy April 17-24 Quiet period October 28 Conference call with institutional investors April 24 Board of Directors meeting on monetary policy December 11-18 Quiet period April 29 Conference call with institutional investors December 18 Board of Directors meeting on monetary policy June 3-6 Saint Petersburg International Economic Forum International Cooperation Department June 12-19 Quiet period Tel.: +7 (495) 771-90-68 Email: [email protected] June 19 Board of Directors meeting on monetary policy Web-site: cbr.ru/eng/today/irp/

*tbc