New Russian Government: Where to Go and What to Do?

Leonid Grigoriev President, Institute for Energy and Finance, www.fief.ru

1 OBJECTIVES OF TRANSITION and REALTY

„ From Middle developed Socialist country to Well developed Democratic country „ Actually 3 transitions happened: ¾ From Socialism to “Early” Democracy ¾ From State Ownership to Private and Commercial Interests ¾ From the USSR to state ™ Recovery of a Great country may be an inconvenience to anybody?

2 GDP, suicide and homicide rates, 1989-2007 42 120

37 100

80 32

60 27 1989 = 100 1989 = per 100 000

40 22

20 17

0 12 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

GDP level (left scale) suicide rate, (right scale) homicide rate, (right scale)

Source: Federal State Statistics Service Russia by 2008 came from the Terrible crisis

„ Minus 43% of GDP by 1999 and two crises „ GDP of 2007 is equal to 1989 „ Two decades of underinvestment „ Concentration of Wealth „ Huge regional and social disparity „ Ineffective bureaucracy „ Weak Civil Society „ Emigration of middle class „ Despair and Privatization on the top „ Revival goes against common sense and odds

4 Russia’s long term development, 1989-2011

140

120

100

80

1989 = 100 1989 = 60

40

20

0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009f 2010f 2011f 2008e

GDP Industrial production Gross Fixed Capital Formation

Source: Federal State Statistics Service, Ministry for Economic Development (forecast) Electricity: Net Increase in generating capacity

10

8 An example of underinvestment problem: 6 almost no serious extra electricity generation capacity created in last 17 years

4 GWt

2

0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 -2

ТЭС ГЭС АЭС

6 Source: Rosstat, Minpromenergo Inequality: income distribution by 20% groups

Russia USA Germany Poland Brazil

GDP per capita. 12,1 43,4 31,1 14,9 9,1 (PPP) First (min 5,5 5,4 8,5 7,5 2,6 income) Second 10,2 10,7 11,4 13,7 11,9 Fifth(мах income) 46,4 45,8 36,9 42,2 62,1 Gini 0,405 0,408 0,283 0,345 0,58

7 Immediate issues

„ Russia needs Modernization Strategy for Decades „ Complex mix of private corporate and state and state corporate investments „ Domestic Savings – over 30%, Investments – 21% „ To utilize National Savings to 25-27% of GDP „ Domestic Financial system is lagging „ Regional policy is still not clear: growth or equality „ More vertical mobility for active young people „ Danger of Inflation is overshadowing „ More Optimism – Football may also be of help

8 Capital formation % V % GDP growth (avg. 1999-2006)

16

14

12

10

8

6

4

2

0 GermanyГермания USAСША BrazilБразилия PolandПольша ChinaКитай RussiaРоссияChina

9 Source: IMF, National Statistics Committees, IEF estimates Savings V Capital formation

10 Source: Rosstat, IEF calculations Investment boom, 2000-2008

25 100

There are signs of Investment boom 20 Capital formation grew 20% y-o-y in 2007 90

15 80

As capacity limits are % 10 almost reached 70 % change (y/y) % change

5 60

0 50 2000 2001 2002 2003 2004 2005 2006 2007 2008f

Capacity utilization (right scale) Industrial productiion (left scale) Gross Fixed Capital Formation (left scale)

11 Source: Rosstat, IEF estimates Share of public investments, % GDP

4,5

4,0

3,5

3,0

2,5 ВВП

% 2,0

1,5

1,0

0,5

0,0

я я я я я я ия и и и ия и и 27 ия ия д л ци ц д лия н ех еция н а а Ч Литва р ан ве я ЕС Дания т ольша Г Латв р Россия Ит рман Эстония Венгрия Испан П ртуга Ф Ш Бельгияе Австрия Ирлан Румыния Болгария о Г бри П Финл ко и ел В

12 Source: Eurostat, IEF estimates Gross savings*, 2002-2005

120

100

80

60 %

40

20

0 2002 2003 2004 2005

General government Households Corporations

Source: Federal State Statistics Service * - excluding non-commercial organizations serving households and financial intermediation indirectly measured Capital outflow, US$ bln, 2001-2007

70

50

30

10 Bln. $ Bln.

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I -10 2001 2002 2003 2004 2005 2006 2007 2008

-30

-50

Net capital export (-) / import (+) Foreign assets Foreign liabilities

14 Source: Bank of Russia Stabilization Fund and its transformation

Welfare Fund

Reserve Stabilization Fund Fund

15 Source: Ministry of Finance CPI components change, 2006-2008

23.0

21.0

19.0 Food 17.0

15.0

13.0 Services % rolling 12 months 12 % rolling 11.0

9.0

7.0 Non-Food

5.0 1234567891011121234567891011121234 2006 2007 2008

Core CPI Food Goods Non-Food Goods Paid services for the population

16 Source: Rosstat Net export of oil and gas, 1985-2007 ($ bln)

250

200

150 US$ bln

100

50

0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Oil and oil products Gas

Source: Federal State Statistics Service, BP, IEF estimates Capital investments by large&mid size enterprises, bln $

2005 2006 2007e Total 95.0 129,9 189,0 Agriculture 2.6 4.7 8.4 Oil and gas 14.6 23.8 33.5 Metallurgy 5,6. 7.4 9.1 Foodstuffs 2.5 3.4 5.0 Engineering industry 2.7 3.3 5.2 Power industry 4.4 5.5 10.0 Construction 5.7 8.8 15.5 Wholesale trade 1.8 2.0 2.9 Retail trade 1.3 2.1 3.7 Transportation 12.8 16.1 17.9 Communications 6.3 7.0 8.3 Other sectors 34.7 45.7 69.6

Source: Rosstat, IEF estimates Global DDP Growth, %, 1990-2013

8

7

6

5

% 4

3

2

1

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2009f 2010f 2011f 2012f 2013f 2008e

World Advanced economies Emerging and developing economies

19 Source: IMF World, USA, Germany, China – average growth rates(%)

World USA Germany China

1986- 2003- 1986- 2003- 1986- 2003- 1986- 2003- 2002 2006 2002 2006 2002 2006 2002 2006

1) GDP 3,4 4,9 3,0 3,2 2,3 1,2 9,5 10,3

2) Primary energy 1,6 3,3 1,6 0,4 -0,5 -0,4 4,0 11,4 consumption

3) Oil consumption 1,4 1,9 1,1 1,0 -0,3 -0,4 6,1 8,8 4) GDP energy intensity -1,8 -1,6 -1,4 -2,8 -2,8 -1,6 -5,5 1,1 (2)-(1) 5) GDP oil intensity (3)- -2,0 -3,0 -1,9 -2,2 -2,6 -1,6 -3,4 -1,5 (1)

Export of goods 6,3 8,2 7,1 7,0 5,6 6,9 12,2 25,6 in real terms

Average oil prices 26,4 50,4 ($ 2005 / barrel)

Source:20 IMF, IEA, UNSD, OECD, IEF Energy = where to go

„ Domestic Energy Consumption goes with Savings „ Energy Strategy to be formatted anew in 2008 „ Russia is producing 10.3% of Global Primary Energy - more than a half of it exporting „ Investments in Energy are growing „ Domestic tariffs growth V inflation „ More Exploration is urgently needed „ Russia is not a switching power „ Secure transit – de politization is welcome „ Stable export prices incomes are preferable „ To avoid the Third Energy Shock

21 Oil & Gas Majors stocks prices, %, 2006-2008

800

700

600

500 %

400

300

200

100 11.01.2005 11.03.2005 11.05.2005 11.07.2005 11.09.2005 11.11.2005 11.01.2006 11.03.2006 11.05.2006 11.07.2006 11.09.2006 11.11.2006 11.01.2007 11.03.2007 11.05.2007 11.07.2007 11.09.2007 11.11.2007 11.01.2008 11.03.2008 11.05.2008

BP Exxon Mobil Gazprom Petrobras

22 Source: RBC S&P 500 vs. RTS

2500 1600

2300 1550

2100 1500

1900 1450

1700 1400

1500 1350 RTS S&P 500 1300 1300

1100 1250

900 1200

700 1150

500 1100 11.01.2005 11.03.2005 11.05.2005 11.07.2005 11.09.2005 11.11.2005 11.01.2006 11.03.2006 11.05.2006 11.07.2006 11.09.2006 11.11.2006 11.01.2007 11.03.2007 11.05.2007 11.07.2007 11.09.2007 11.11.2007 11.01.2008 11.03.2008 11.05.2008

RTS S&P 500

23 Source: RTS, RBC Russian government structure: May 2008

Prime Minister Presidential responsibilities

Deputy Deputy Deputy Prime Deputy Prime Prime First Deputy First Deputy Deputy Prime Prime Minister Defense Minister Minister Minister Prime Minister Prime Minister Minister Igor Minister Аlexander Sergei Serdyukov Sergei Sobyanin Аlexei Sechin Sergei Zhukov Kudrin Ivanov

Economic Agriculture Regional Heath and Social Industry and Trade Internal Affairs Developme Legislative Minister Development Development Minister Defence Minister nt Minster Activities Alexei Minister Minister Viktor industry Rashid Elvira Gordeyev Tatiana Golikova Khristenko Nurgaliyev Nabiullina

Finance Education and Foreign Affairs Delineation of Minister Federal Tariff Energy Minister Fisheries Science Minister Minister Sergei Powers (regions) Alexei Service Sergei Shmatko Andrei Fursenko Lavrov Kudrin

Culture Minister Justice Minister National projects Small Transport Minister Alexander Alexander (Agriculture) enterprises Igor Levitin Avdeyev Konovalov

Civil Defense, Sport, Tourism and Communications Emergencies and Youth Policy and Mass Media WTO talks Natural Disasters Minister Minister Igor Minister Shchegolev Sergei Shoigu

Natural Resources National projects and Ecology (excluding Minister Agriculture)

Member of the Presidium