Russia Through a Lens Deloitte Research Centre | Third Issue | 2Q 2016

Russia through a lens Deloitte Research Centre | Third issue | 2Q 2016

Macroeconomic outlook CFO Survey Pharmaceutical market Financial institutions Key Russian macroeconomic Over the past year and a half, Priority scenario in 2016: in Russia indicators in 2Q 2016 the average level of uncertainty New drug launches and cuts Automatic Exchange in strategic decision making to business process costs of Information – the future rose overall by 12 pp in the Russian market is here Page 04 Page 12 Page 14 Page 16 Russia through a lens

Content

Page 04 Page 12 Page 20

We are pleased to present the latest edition of Russia Through a Lens, the macroeconomic journal produced 04 12 by Deloitte Research Centre in Moscow. Russia in figures Research Centre Established in December 2015, the journal is published Macroeconomic outlook market analysis quarterly and falls under the Research Centre’s (GDP, inflation, trade indicators, Studies of the pharmaceutical monitoring activities. currency rate, Central Bank market, financial climate in key rate, top-pricing, etc.). Russia, environment for AEOI. In Russia Through a Lens, we focus on current key trends in the Russian economy and present our research key findings.

If you have any questions or suggestions regarding this 18 19 research, please do not hesitate to contact us: [email protected] Top M&As Global wind Top-5 deals in Russia Top news about Sino- (E&R, CB&T and FSI ). Russian relations.

GDP

GDP per year 50% 150, 000 25% 29% 30% 130, 000 24% 24% 19% 12% 6% 10% 4% 10% 110, 000 –6% –0.3% 8.2% 8.5% 5.2% 4.5% 4.3% 3.5% 1.3% 0.7% –3.7% –10% 90, 000 –7.8% –30% 77,945.1 80,804 80,561.9 70, 000 71,016.7 66,926.9 –50% 59,698.1 50, 000 46,308.5 –70% 41,276.8 38,807.2 30, 000 33,247.5 –90% 26,917.2 21,609.8 10, 000 –110%

0 –130% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F

GDP, bln RUB GDP growth (at current prices) GDP volume indices

Source: Rosstat, Ministry of Economic Development (forecast)

The data for the period from 2011 includes changes presented in the balance of payments related to the implementation of the international developed according to the methodology methodology for housing services evaluation; to the provided by the Sixth Edition of the Balance evaluation of capital consumption, taking into account of Payments and International Investment its current market value; and to the conformation Position Manual (BPM6) introduced of data on exports and imports with the data by the International Monetary Fund.

2Q GDP

20,000 18,884.6 19,284.1 19,187.7 19,000 17,015.1 17,000 16,149.0 15,000 14,313.7 13,000 10,977.0 11,000 10,238.3 9,244.8 9,000 7,767.5 7,000 6,368.1 5,000 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F*

GDP, bln RUB

Forecasts:

Ministry of Central Standard A. Kudrin, Gaidar International Economic Bank & Poors ex-Minister Institute Monetary Development of Finance Fund

2016 –0.3% –1.5% to –1.3% –1.3% –2% to –1.5% –2% –1.8%

Additional information: Ministry of Economic Development forecasts +1.4 percent in 2017, +2.3 percent in 2018, +2.5 percent in 2019.

04 Russia through a lens | Russia in figures

Inflation

Inflation, %

14.0 13.3 12.94

12.2 12.0 11.9 11.4

10.0

9.0 8.8 8.8 8.0

6.6 7 6.1 6.5 6.0 6 5 4.9 4.5 4.0 4 4

2.0

0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014* 2015 2016 2017 2018 2019 2020

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

Forecasts:

Source 2016

International Monetary Fund 6.5%

World Bank 5.9%

Gaidar Institute 6.5–7.0%

Gaidar Institute (Consumer Price Index) 7.7%

Inflation in May in 2016: 7.3 percent* Inflation target in 2017: 4 percent**

*The inflation figure is the consumer price growth rate over the corresponding month of the previous year. **The inflation target is set for the consumer price growth rate over the corresponding month of the previous year (Central Bank of Russia).

05 Russia through a lens | Russia in figures

Trade structure

Period Jan-Apr 2016

•• Foreign trade turnover: USD 134.4 billion (–25.2 percent YoY)

•• Trade balance: surplus of USD 33.1 billion (–USD 30.8 billion YoY)

•• Exports: USD 83.8 billion (–31.3 percent YoY)

•• Imports: USD 50.6 billion (–12.5 percent YoY)

Imports from non-CIS countries (period Jan-Apr 2016):

Percentage in imports In monetary In physical Categories from non-CIS countries terms terms

Textiles and footwear 6.3% –13.9% –10.6% •• Pipes (–7.2%) Metal products 5.4% –13.7% –9.3% •• Flat-rolled iron or non–alloy steel products (–7.7%) •• Cosmetic products (–1.2%) Chemical products 19.9% –6.1% 2.9% •• Plastics (–6.6%) •• Pharmaceuticals (–8.1%) •• Optical instruments and apparatus (–6.0%) •• Mechanical equipment (–20.6%) Machinery and auto 46.6% –13.9% n/a •• Electrical equipment (–4.6%) •• Cars (–37.3%) •• Trucks (–32.8%) Food and raw materials for food 14.5% –7.1% –7.2% production

Imports from CIS countries (period Jan-Apr 2016):

Percentage in imports In monetary In physical Categories from CIS countries terms terms

Energy products 4.8% –60.6% –11.3%

•• Pipes (72.2%) Metal products 11.5% –16.0% 16.6% •• Flat-rolled iron or non–alloy steel products (45.3%) •• Inorganic chemical products (15.9%) Chemical products 14.9% –24.9% 2.4% •• Plastics (33.0%) •• Pharmaceuticals (31.5%) •• Mechanical equipment (–18.1%) •• Electrical equipment (–18.3%) •• Optical instruments and Machinery and auto 25.2% 1.2% n/a apparatus (–41.9%) •• Cars (–59.9%) •• Trucks (44.4%) •• Meat (–9.0%) Food and raw •• Butter (56.3%) materials for food 21.8% n/a 17.60% •• Cheese (30.0%) production •• Milk (–0.7%) Textiles and footwear 7.8% 15.6% 20.7%

Source: Federal Customs Service

06 Russia through a lens | Russia in figures

Exports to non-CIS countries (period Jan-Apr 2016):

Percentage in exports In monetary In physical Categories to non-CIS countries terms terms •• Crude oil (4.9%) •• Oil products (–15.6%) Energy products 60.7% –38.9% –0.6% •• Coal (7.9%) •• Natural gas (20.9%) •• Copper and copper alloys (9.2%) •• Aluminum (0.5%) Metal products 10.0% –27.2% 3.5% •• Semi–finished iron or non–alloy steel products (0.3%) •• Inorganic chemical products (2.8%) •• Fertilisers (–3.6%) Chemical products 6.9% –25.7% –1.6% •• Plastics (–11.8%) •• Pharmaceuticals (–29.1%) •• Rubber (11.9%) •• Mechanical equipment (–58.5%) •• Electrical equipment (–3.1%) Machinery and auto 5.8% –22.0% n/a •• Optical instruments and apparatus (21.2%) •• Ground transport (48.8%) Food and raw materials for food 5.4% 9.6% 38.50% production •• Lumber (18.0%) Timber, pulp and •• Plywood (26.8%) 3.6% –3.0% n/a paper products •• Cellulose (9.9%) •• Rough wood (6.3%)

Exports to CIS countries (period Jan-Apr 2016):

Percentage in exports In monetary In physical Categories to CIS countries terms terms •• Oil products (–14.0%) •• Coal (–35.7%) Energy products 38.9% –38.1% –7.7% •• Electrical energy (–71.4%) •• Natural gas (–15.5%)

Metal products 10.4% –26.8% –17.0% •• Ferrous metals (–17.8%)

•• Pharmaceuticals (19.9%) •• Inorganic chemical products (9.2%) Chemical products 16.0% –5.0% 14.50% •• Organic chemical products (5.2%) •• Fertilisers (38.0%) •• Rubber (7.4%) •• Mechanical equipment (–23.7%) Machinery and auto 12.4% –42.8% –36.80% •• Electrical equipment (–20.7%) Food and raw •• Cheese and curd (5.6%) materials for food 10.7% –9.3% 4.2% •• Sunflower oil (6.1%) production •• Lumber (–26.7%) Timber, pulp and •• Ply wood (–13.1%) 4.2% –16.0% –16.5% paper products •• Newsprint (–6.3%) •• Cellulose (–16.1%)

07 Russia through a lens | Russia in figures

Currency rate

RUB vs. EUR and USD, Jan 2014 – June 2016 100 90 80 70 60 50 40 30 20 10 0 1-Jul-15 1-Jul-16 1-Jul-14 1-Jan-15 1-Jan-16 1-Jan-14 1-Jun-15 1-Jun-15 1-Jun-16 1-Jun-14 1-Apr-15 1-Apr-16 1-Apr-14 1-Oct-15 1-Oct-14 1-Dec-15 1-Dec-14 1-Sep-15 1-Feb-15 1-Sep-14 1-Feb-16 1-Feb-14 1-Aug-15 1-Aug-14 1-Mar-15 1-Mar-16 1-Mar-14 1-Nov-15 1-Nov-14 1-May-15 1-May-16 1-May-14

Euro US dollar

Source: Central Bank of Russia

EUR-RUB USD-RUB

100.00 +28% +20% +25% +20% 80.00 74.44 73.29 65.93 65.22 60.00 58.26 61.10 52.77 54.45 40.00

20.00

0.00 Q2 2015 Q2 2016 June 2015 June 2016 Q2 2015 Q2 2016 June 2015 June 2016

Source: Central Bank of Russia

USD-RUB forecasts (average per year)

Ministry of Economic Gaidar Institute Apecon (Economic Development Forecasting Agency)

2016 RUB 63.5 RUB 69.4 RUB 67.25

2017 RUB 64.8 RUB 65.7 RUB 72.94

2018 RUB 64.1 RUB 57.2 RUB 78.55

2019 RUB 62.7 n/a n/a

08 Russia through a lens | Russia in figures

Central Bank key rate

Central Bank of Russia key rate, %

20.0 18.0 16.0 14.0 12.0 10.0 10.5% 8.0 6.0 4.0 2.0 0 31-Jul-15 31-Jul-16 31-Jul-14 31-Jan-15 31-Jan-16 31-Jan-14 30-Jun-15 30-Jun-16 30-Jun-14 31-Oct-15 31-Oct-14 31-Dec-15 31-Dec-14 30-Apr-15 30-Apr-16 30-Apr-14 31-Aug-15 31-Aug-14 31-Mar-15 28-Feb-15 31-Mar-16 31-Mar-14 28-Feb-14 18-Aug-16 29-Feb-16 30-Sep-15 30-Sep-14 31-May-15 30-Nov-15 31-May-16 31-May-14 30-Nov-14

Source: Central Bank of Russia

The key rate is 10.5 percent (from 14 June 2016). From 1 January 2016, the Central Bank of Russia will not set a separate value for the refinancing rate In accordance with a decision of the Board of Directors of the Central Bank of Russia. of the Central Bank of Russia, effective 1 January 2016, the value of the refinancing rate of the Central Bank of Russia will be equal to the key rate of the Central Bank of Russia set at the respective date.

09 Russia through a lens | Russia in figures Top-pricing (nickel, gold, aluminium)

Nickel Maximum for the period 21,000 19,250 19,000 19,040 18,800 18,325 18,505 17,000 16,265 16,275 15,911 15,000 15,740 15,165 14,677 15,150 14,095 13,980 13,950 13,000 12,600 12,395 12,015 12-year minimum 11,000 11,040 10,330 9,315 10,060 10,045 9,425 9,000 8,820 8,530 9,490 8,855 8,610 8,495 8,465 7,000 1-Jul-15 1-Jul-16 1-Jul-14 1-Jan-15 1-Jan-16 1-Jan-14 1-Jun-15 1-Jun-16 1-Jun-14 1-Apr-15 1-Apr-16 1-Apr-14 1-Oct-15 1-Oct-14 1-Dec-15 1-Dec-14 1-Sep-15 1-Feb-15 1-Sep-14 1-Feb-16 1-Feb-14 1-Aug-15 1-Aug-14 1-Mar-15 1-Mar-16 1-Mar-14 1-Nov-15 1-Nov-14 1-May-15 1-May-16 1-May-14

Nickel, LME, $/t

Forecasts: Nickel

Source 2016 Goldman Sachs USD 14,500 Morgan Stanley USD 10,692 World Bank USD 9,200

Gold and aluminium

2,300 Maximum for the period 2,097 2,100 2,037 2,014 1,800 1,988 1,920 1,900 1,784 1,891 1,950 1,864 1,754 1,815 Minimum for the period 1,829 1,853 1,740 1,700 1,706 1,785 1,672 1,691 1,605 1,572 1,626 1,620 1,572 1,501 1,635 1,500 1,481 1,501 1,521 1,557 1,323 1,329 1,328 1,449 1,300 1,289 1,288 1,284 1,245 1,295 1,317 1,285 1,187 1,192 1,246 1,251 1,284 1,207 1,183 1,142 1,142 1,151 1,214 1,182 1,174 1,122 1,217 1,100 1,174 1,114 1,061 1,095 1,071 900 1-Jul-15 1-Jul-16 1-Jul-14 1-Jan-15 1-Jan-16 1-Jan-14 1-Jun-15 1-Jun-16 1-Jun-14 1-Apr-15 1-Apr-16 1-Apr-14 1-Oct-15 1-Oct-14 1-Dec-15 1-Dec-14 1-Sep-15 1-Feb-15 1-Sep-14 1-Feb-16 1-Feb-14 1-Aug-15 1-Aug-14 1-Mar-15 1-Mar-16 1-Mar-14 1-Nov-15 1-Nov-14 1-May-15 1-May-16 1-May-14 Gold, COMEX, $/t oz Aluminium, LME, $/t

Source: Finam Holdings

Forecasts: Gold

Source 2016 2017 Morgan Stanley USD 1,149 Barclays USD 1,150 HSBC USD 1,205 World Bank USD 1,150 USD 1,132 Goldman Sachs USD 1,050

Aluminium

Source 2016 2017 2018 Goldman Sachs USD 1,450 USD 1,400 USD 1,350 World Bank USD 1,600 USD 1,649 USD 1,700

10 Russia through a lens | Russia in figures Top-pricing (oil, gas)

Brent oil, natural gas

120 Maximum for the period 6 112 106 109 108 108 109 106 100 103 5 4.9 4.8 95 4.6 4.6 4.0 4.4 4.4 86 4.0 4.1 80 3.8 3.9 4 68 67 65 Minimum for the period 60 58 53 62 63 3 2.9 55 2.8 52 53 2.7 2.7 2.7 2.7 2.6 2.7 2.7 48 50 50 50 2.5 45 38 47 51 36 40 2.959 40 2.3 2.3 2.4 2.2 37 2.14 2.283 2.857 2 1.7 1.954 20 1

0 0 1-Jul-15 1-Jul-16 1-Jul-14 1-Jan-15 1-Jan-16 1-Jan-14 1-Jun-15 1-Jun-16 1-Jun-14 1-Apr-15 1-Apr-16 1-Apr-14 1-Oct-15 1-Oct-14 1-Dec-15 1-Dec-14 1-Sep-15 1-Feb-15 1-Sep-14 1-Feb-16 1-Feb-14 1-Aug-15 1-Aug-14 1-Mar-15 1-Mar-16 1-Mar-14 1-Nov-15 1-Nov-14 1-May-15 1-May-16 1-May-14

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

Source: Finam Holdings

Forecasts: Natural gas

Source 2016 2017 World Bank USD 2.5 USD 3 Standard & Poors USD 3 USD 3.25

Crude oil

Source 2016 2017 2018 U.S. Energy Information USD 43.03 USD 51.82 Administration World Bank USD 41 USD 50 Base scenario: USD 50 Central Bank of Russia Risk forecast: USD 40 Ministry of Economic Base and target Base and target Base and target Development scenario: USD 40 scenario: USD 45 scenario: USD 50 Standard & Poors USD 40 USD 45 USD 50 Pessimistic scenario: USD 40 Base scenario: Gaidar Institute USD 55 Optimistic scenario: USD 70 European Central Bank USD 34.9 USD 41.2 USD 44.9

11 Russia through a lens | Research Centre market analysis Research Centre market analysis CFO Survey

Financial prospects for 2016

The respondents were asked to assess the financial prospects in comparison to the situation six months ago (autumn 2015). 30% 44% 26% Pessimistic No change Optimistic

Consumer Financial Technology, media and 50% sector 50% services 60% telecommunications (TMT)

Companies with revenue Russian Companies with a headcount 44% of more than RUB 100 bln 50% companies 36% exceeding 100 people

Oil and gas Companies with a 40% sector 35% high risk appetite

Real estate 38% companies 74% believe that the best conditions for business can be found abroad. In general, the attractiveness of European countries for Foreign companies with localised production in business in the current economic climate is rated somewhat higher. 40% Russia

Key financial metrics

The respondents were asked to assess their expectations of the following financial metrics:

Operating profit 25% 30% 45% Reduction No change Growth

Real estate Financial Oil and gas 50% companies 44% services 60% sector Number of staff expectations 28% 47% 25% Reduction No change Growth 50% Oil and gas sector 40% TMT Average wage/salary 9% 38% 53% Reduction No change Growth 50% Consumer sector 90% TMT 12 Russia through a lens | Research Centre market analysis

Uncertainty and risky decisions

The respondents were asked to assess:

The level of uncertainty in strategic decision making Risk appetite

Over the past year and The first half of 2016 has a half, the average level been characterised by of uncertainty in strategic a higher risk appetite decision making rose among companies with 28% overall by 12 pp. Most optimistic financial Low level 30% of the increase in High level outlooks but with uncertainty took place in increased uncertainty 72% the final quarters of 2015. about the economic High level 70% Low level situation on the market.

Strategies and risks TOP-5 strategies: TOP 5 risk factors:

Restructuring costs (as part of ongoing cost control) Stress in the financial system

Reducing costs Weakness of the Russian rouble

Business development through organic growth Weaker domestic demand

Reducing currency risks Dwindling operating income

Increasing cash flow Increased cost of capital

Drivers: Barriers: •• Minimisation of production costs •• Rising cost of capital •• Expansion into new markets •• Production in Russia (due to the fall in •• New products/services purchasing power) •• Increasing cash flow •• Financial position

13 Russia through a lens | Research Centre market analysis

Russian pharmaceutical market

Priority scenario for the Russian pharmaceutical market in 2016: New drug launches and cuts to business process costs

Analysis of key market indicators

Key trends: Market performance in 2015 •• Before 2014, the Russian pharmaceutical (in monetary terms, RUB billion): market grew at an average annual •• The commercial segment grew rate of 14 pp. In 2015, the market was by 9.4 percent in rouble terms, hitting up by 8.2 percent in rouble terms. the lowest rate for the last five years. ––The share of medicines priced below RUB 150 in the retail •• The share of imports in the segment segment decreased. is generally the same – 74 percent ––Prices for cheaper medicines in monetary terms (2014: 76 percent). Oleg Berezin grew the strongest. Life Sciences & Health Care Industry ––The profitability of medicines •• The public segment (hospital audits Group Leader on the Essential Drug List was down. and the State Reimbursement Programme (SRP)) was up by 6.4 percent. •• In 2016, the growth in the pharmaceutical market was mainly driven by inflation. •• Sales under the SRP increased ––In March 2016, medicine prices grew by 11.4 percent in rouble terms. by 0.1 percent in rouble terms. ––In US dollar terms, these prices grew •• According to the retail audit held by 6.8 percent for the same period. by DSM Group, the market volume ––The overall retail price inflation since of the commercial segment amounted 2016 has been 1.4 percent in rouble to RUB 47.6 billion including VAT, terms and –5.3 percent in US dollar in March 2016. The market capacity terms. is up by 2.8 percent since February. ––In March 2016, the average price per drug package was RUB 147.3, •• During the first three months of 2016, up by 0.7 percent from February. the commercial market contracted ––According to Rosstat, in January- by 10.2 percent in rouble terms December 2015, pharmaceutical prices compared to the same period in 2015. were up by 22.8 percent on a year-to- year basis, with inflation slowing down Market performance in 2015, to 19.6 percent by December. (in physical units, packages): •• The pharmaceutical market dropped •• According to estimates by the EIU, by 4.4 percent in physical units. Russia is outside the top 10 in the pharmaceutical market in US dollar •• The commercial segment contracted terms. by 5.6 percent in physical units. ––Based on the EIU’s projections for 2020, Russia will be ranked 16th. •• Hospital procurement was up by 0.3 percent.

•• SRP sales decreased by 8.7 percent in physical units.

14 Russia through a lens | Research Centre market analysis

The overall situation in the Russian pharmaceutical market

•• Despite the positive perceptions that •• However, the overall situation •• The majority of representatives from prevailed on the Russian pharmaceutical in the Russian pharmaceutical market Russian pharmaceutical companies market in 1Q 2016, the current sentiment can be clearly defined as positive: (77 percent) expect revenue to grow among pharmaceutical companies varies ––The majority of survey participants in rouble terms in 2016. significantly: rated the current conditions of their ––The average expected change ––While 60 percent of the respondents own companies as positive (84 percent). is 15 percent. have a positive view of the situation Only 16 percent of the respondents the remaining 40 percent take indicated that their companies •• At the same time, 49 percent the opposite view. situations were negative. of the respondents expect growth in operational costs. •• Approximately every one in two pharma •• With the prevailing optimistic view ––The average expected change representatives believes that the market of the business situation, the number is 10 percent. is set to change in 2016. The market of those not expecting significant expectations for changes are split: changes is rather high: this view •• Approximately every second company while 58 percent of the respondents was expressed by more than half (53 percent) is planning to review have upbeat expectations, 42 percent of the respondents (52 percent). their staffing levels. expect the opposite. ––An improvement in the business ––55 percent of those expect an average ––Unlike the pessimists (36 percent), situation is expected by 38 percent growth in headcount by 5 percent. the optimists (50 percent) tend of the respondents. ––45 percent of those expect an average to believe that the situation in 2016 will ––Every tenth survey participant expects decrease in headcount by 7.5 percent. generally remain the same. Therefore, a worsening outlook for his/her “no change” expectations are more company. •• The pay level is also expected to change. characterised by positive sentiments ––63 percent of representatives from the than negative ones. Russian pharmaceutical sector expect an average growth in pay of 7.5 percent in 2016.

The vector of the pharmaceutical market in Russia

The foreign trade structure in the Top-3 challenges: Russian pharmaceutical market: •• The Russian economic environment •• Of the respondents, 34 percent indicated (60 percent) that their companies import substances. ––Every second importer sources •• Shortcomings of government substances in Europe (50 percent). regulation (50 percent) ––A quarter of importers source substances in China (25 percent). •• Foreign exchange risk, the weakening rouble (27 percent) •• Only 6 percent said that they export substances. Top-3 strategies: •• New drug launches in the Russian •• Of the respondents, 74 percent market (50 percent) said that they import finished pharmaceutical products (FPP). •• Construction of new production ––60 percent of FPP importers source facilities in Russia (29 percent) FPPs in Europe. ––Almost every fifth company sources •• Joint ventures with Russian (foreign) products in the USA and Canada manufacturers (13 percent) (19 percent). Top-3 cost saving approaches: •• Of the respondents, 24 percent •• Streamlined business processes are engaged in FPP exports. (75 percent) ––44 percent of the companies export FPPs to EEU countries. •• Streamlined payroll costs (52 percent) ––31 percent of the companies export FPPs to CIS countries other •• Streamlined promotional than EEU countries. and marketing costs (46 percent)

15 Russia through a lens | Research Centre market analysis

Russian financial institution market

Automatic Exchange of Information – the future is here

The existing sentiment in the Russian financial market

•• Of the financial institutes surveyed, •• The maturity of the communication 36 percent are not ready to implement environment for AEOI is below average, the automatic exchange of information with respondents giving a rating in tax matters (AEOI), believing of 2.31 out of 5. that it is not the right time for such ––60 percent of the respondents transformations. mentioned this fact. ––The percentage of such responses ––53 percent of the respondents is higher among smaller pointed to the poor quality of media financial institutes with revenue coverage of AEOI. Grigory Pavlotsky below RUB 10 billion by 14 pp. Managing Partner, •• Stronger commitment and proactivity Tax & Legal CIS •• Meanwhile, 64 percent believe that this as regards AEOI could be achieved among M&A is a good time to implement AEOI. financial institutions by delivering more ––Financial institutions with some readily available, high-quality information degree of state ownership and and increasing AEOI awareness of the an annual revenue from RUB 10 billion financial institutions. to RUB 100 billion (+16 pp) or over RUB 500 billion (+11 pp) are more •• Despite the prevailing positive sentiment interested in implementing AEOI. about the expected overall impact of AEOI on the Russian financial market, the perception of the impact by organisations is rather less optimistic.

The current expectations for the implementation of AEOI in Russia

Top-5 advantages of AEOI: Top-3 disadvantages of AEOI: Alexander Sinitsyn •• Communication between financial •• Client information confidentiality Director, institutions and tax authorities Financial Services Industry •• Client loyalty for financial Group Leader •• Data update process institutions in Russia Tax & Legal CIS •• High-quality client base for financial •• Attractiveness of Russian financial institutions institutions for clients

•• Data submission to tax authorities

•• Data verification

16 Russia through a lens | Research Centre market analysis

FATCA audit practices in Russia: facts and figures

•• The majority of the respondents •• Resources utilised across the market (66 percent) have experience with FATCA to implement FATCA methodology, reporting. The remaining 34 percent processes and procedures: have not filed any FATCA reports before. However, more than every one in two 6.8 12.6 of those (56 percent) have plans to file a people months FATCA report next year. ––71 percent of those with FACTA experience indicated that their FATCA reports included fewer than 10 clients with US residency status. ––52 percent of the financial institutions have automatic FATCA reporting.

Client management practices in the Russian financial market

•• Of the respondents, 51 percent indicated •• Of the respondents, 44 percent would that they apply a minimum amount rather suspend/avoid dealing with approach to identify their existing clients a client until all the necessary information (legal entities) by accounts. is in place.

•• The key client management issues are: •• Of the financial institutions, 7 percent ––Obtaining information on beneficiaries take a more radical approach: they from clients (71 percent) would not continue/start dealing with ––Delays in personal information updates a client if there is an issue with obtaining by the client (69 percent). information about the client.

•• Almost half of financial institutions •• Today, client data bases do not have representatives say that despite reliable information on beneficiaries difficulties with obtaining information for 15 percent of legal entities, including from clients (including, obtaining legal entities that are waiting to receive information on beneficiaries), the such information. organisation continues/starts working with the client while continuing to make •• Of the financial institutions, 74 percent information requests (48 percent). have not filed FATCA reports with respect to financial institutions not participating in FATCA.

17 Russia through a lens

Top M&As* (Russian companies)

Target Industry Bidder Seller Deal value Additional information company company company (USD, mln) Irkutskenergo E&R EuroSibEnergo INTER RAO 1,062 EuroSibEnergo has agreed to acquire 1,907,055,080 OJSC Plc UES OJSC Irkutskenergo shares, representing a 40.007 percent stake in the company, for a cash consideration of RUB 69.52 bln (USD 1.06 bln). The acquisition allows En+ Group to transform EuroSibEnergo into an operating company to release the efficiency potential and to provide the former with better access to the capital markets needed to implement its investment projects. Elgaugol JSC E&R Gazprombank Mechel 536 The sale will allow Mechel to decrease the debt burden (49% stake); OJSC OJSC and the credit risk and to remain a controlling shareholder Elga-Doroga UC in the Elga project. It will allow Gazprombank to receive (49% stake); additional income through a future sale of the stake in the Mecheltrans- project. Mechel will use the sale proceeds to repay its debt East UC to Sberbank PJCS and Sberbank Leasing JSC and complete (49% stake) the restructuring of its debt to Gazprombank, Sberbank and VTB Bank. Gazprombank allowed Mechel Group to delay the repayment of its debt for four years and has established a preferential interest rate with partial capitalisation of interest payments. Amur Zoloto E&R Petropavlovsk Lexor 160 Amur Zoloto adds significant scale to Petropavlovsk's reserve LLC Plc Group SA; and resource base in the Far East of Russia. The transaction Alliance has significant strategic value for Petropavlovsk and it will also Mining bring an attractive portfolio of assets. The combined entity will Group be well-positioned to take advantage of further consolidation opportunities in Russia. AFG National CB&T Russian Direct 137 The investment enables AFG to increase its production of rice, LLC Investment table potatoes, field vegetables and apples. The investment Fund will also be used by the company to enhance its land bank and build agricultural infrastructure as well as expand the product line and develop new brands. VSK Insurance FSI B&N Bank JSC 102 VSK will use proceeds of approximately RUB 4 bln (USD House OJSC 58.04m) for the repayment of a loan from Sberbank. Post (49% stake) transaction, three to four representatives of B&N Bank will join the VSK board, while Mr. Sergey Tsykalyuk, for the time being, will retain the post of the chairman. The controlling stake in VSK will remain in the hands of the former shareholders.

*Open information about deal value Source: Merger Market 18 Russia through a lens Global wind Top news: China and Russia

25 June 2016 02 June 2016 30 May 2016 Russia, China approve business Subsidiary of Foxconn to create Changhong China plans to build initiatives worth $50 bln during research and development centre a TV set production plant in Tatarstan Putin visit in Skolkovo Source: Invest in Russia Source: RT Source: TASS Changhong is headquartered in Mianyang, A Russian-Chinese commission Kunshan Nano Material (a subsidiary China, and has subsidiaries in the US and on investment cooperation has selected of Foxconn Group) will create a scientific Japan. The company was founded in 1958 nearly 60 business initiatives to be put research centre at the Skolkovo and it is one of the largest manufacturers in the works. innovation centre. of household appliances in China.

A number of energy deals have been A corresponding agreement was signed 30 May 2016 secured, including agreements on selling by Lu Hung Tu, Director General of Kunshan Project Russian-Chinese pulp of stakes in several Russian projects Nano Material, and Igor Karavaev, head and paper plant to Chinese companies. of the cluster of new nuclear industrial Source: Invest in Russia technologies and materials of Skolkovo, Russia’s top oil producer, Rosneft agreed as part of the Startup Village. A Russian-Chinese pulp and paper plant with China National Chemical Corporation project in Tomsk Region worth about (ChemChina) that the Chinese firm would Lu Hung Tu is sure that the Russian 50 billion roubles will be launched in 2017 take a 40 percent stake in Rosneft’s scientific school has enormous potential. by a Russian engineering company. planned petrochemical complex in Russia’s Far East.

19 Russia through a lens Brexit

The impact of the UK’s withdrawal will not From an economic point of view, Brexit will Fall in oil prices: after the publication be limited to the UK. Economists forecast not greatly affect Russian-British bilateral of the UK referendum results, the a spillover economic impact for the rest trade and economic relations. The volume cost of oil fell by more than 6 percent of Europe, especially via reduced inward of bilateral trade is not that significant to to USD 47.77 per barrel. investment and trade slowing the nascent begin with, due to the economic sanctions Source: Russia Beyond the Headlines EU recovery. Consensus forecasts suggest related to Ukraine. Apart from that, supply 1.5% growth in the euro area in 2016 and and production chains linking the two The decrease of indexes: after the 1.4% in 2017, in the event of a UK decision countries are limited. However, the indirect announcement of the UK referendum to leave the EU. These compare with economic losses could be quite significant results, trade on June 24 on the Moscow forecasts of 1.7% in each year under a for Russia. Stock Exchange opened with a decrease Remain scenario. The softening in growth is For example, Russia is not indifferent to the in quotes. For example, the IRTS index, far less pronounced than that forecast for position of the City of London as a financial which is fundamental for the Russian the UK, but the risk of collateral damage to centre, where shares of leading Russian market, fell by more than 5 percent. the EU gives European countries a possible companies – Gazprom, Rosneft, Lukoil, Source: Russia Beyond the Headlines incentive to ensure a speedy separation. Sberbank, Tatneft, Megafon and Rusagro – Source: Deloitte are traded on a daily basis. The possible softening of sanctions: the only positive consequence of Brexit for While Britain accounts for just 2.7 percent Brexit could also adversely affect the the Russian economy could be the possible of Russia’s exports and 1.9 percent of its economies of other EU countries with weakening of anti-Russian sanctions. imports, the EU as a whole is the country’s which Russia has established a network Source: Russia Beyond the Headlines main trading partner, accounting for about of contacts (e.g. the Netherlands and half of each. If Brexit has negative economic Cyprus, both of which have close economic Economists have predicted a British exit implications for the rest of the EU, then ties with Britain). Brexit may adversely would knock 1 percent to 6 percent off UK this will inevitably have knock-on effects affect the preservation of Russia’s gold gross domestic product: anything from on Russia, already stuck in a recession likely and currency reserves, which might suffer a moderate slowdown to a deep recession. to last years. if the euro drops in value. The International Monetary Fund predicts Source: VoxWorld Source: Russia Direct a hit to global economic growth outside the EU of zero to 0.2 percentage points. Source: The Wall Street Journal

20 Russia through a lens

Fitch rating agency reported that “Russia is not happy with Brexit as it affects The Russian Energy Minister Alexander the “Leave” result in the UK referendum the global economy”, Dmitry Medvedev Novak expects a sharp increase in volatility on membership of the EU is credit negative said, “it is important to analyse Brexit’s on the commodity markets in the short for most sectors in the UK, due to weaker consequences now, and the Russian term following the UK decision. medium-term growth and investment government will decide on measures for Source: TASS prospects and uncertainty about future the national economy in this regard”. trade arrangements. Source: TASS Konstantin Kosachev, Chair of the Russian Source: Fitch Senate’s foreign affairs committee, has Deputy Finance Minister Alexei Moiseyev warned that “if the EU gets weighed down Vladimir Putin said the British referendum said Britain leaving the EU would not cause in its own, and crosses the line into crisis, will undoubtedly have consequences, major risks for Russia, though it would then it will affect our trade relations.” but now it is hard to tell whether these lower investors’ risk appetite. Source: News.com.au will be good or bad. “For the UK, Europe Source: TASS and Russia this referendum is sure to have Head of the Russian Direct Investment consequences […] of a global sort. They Deputy Chairman of Russia’s VEB Fund (RDIF) Kirill Dmitriev considers are inescapable. There will be both positive development bank Andrey Klepach said it possible that the United Kingdom’s and negative ones. The markets will surely Russia’s stock market might rise following exit from the EU will impact London’s lose ground, they have done so already, the UK’s referendum on leaving the EU. international financial centre, but this won’t but in the midterm everything will be Source: TASS take place immediately. restored, surely”. Source: TASS Source: TASS According to Chairman of the Board of VTB Andrey Kostin, the possible exit of the Head of the Centre for Strategic UK Britain from the EU may have a negative Development Alexei Kudrin thinks that impact on the European economy. Brexit is not seriously affecting Russia, Source: TASS which has its own problems. Source: TASS

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