Annual Report 2019 3 Contents Letter to Shareholders 4-5 Economic and Political Review 6-11 Major Portfolio Investments 12-17 Directors and Chief Executive Officer 18-21 Board of Directors 20 Chief Executive Officer 21 Corporate Governance Report 22-29 Risk Factors 30-61 Financial Statements 62-131 Report from External Real Estate Valuer: Petrovsky Fort 64 Independent Auditor’s Report 66-69 Net Asset Value and Attributable Net Asset Value 70-71 Consolidated Financial Statements 70-131 Independent Auditor’s Report 132-134 Parent Company Financial Statements 135-141 Compensation Report 142-146 Report of the statutory auditor on the remuneration report 147 Investment Guidelines 148-151 Shareholder Information and Corporate Details 153 4 Letter to Shareholders Dear shareholders, ENR Russia Invest SA (“ENR”) showed a consoli- At the Turgenevskaya parking garage in Mos- dated net profit of CHF 6.23 million for the year cow, rentals of parking bays to corporates and ended 31 December 2019 (2018: CHF 4.44 mil- their employees improved in 2019. lion consolidated net loss) due to higher valua- tions. In addition there was a positive cumula- At the Zaytsevo real estate residential develop- tive translation adjustment of CHF 1.42 million ment near Moscow the developer was put in liq- due to favorable currency movements against uidation. ENR has a mortgage over the landplot the Swiss Franc arising from the consolidation where its apartments were to be constructed of group subsidiaries. As a result the year-end and has since registered its claim for amounts 2019 consolidated equity value increased to invested, together with penalties. ENR also CHF 48.13 million (2018: CHF 40.47 million). made a further impairment of CHF 1.98 million in 2019 towards this investment. The value of the Petrovsky Fort business center in Saint-Petersburg increased by 12.03 % in ru- During the reporting period ENR generated ble terms. With a stronger ruble at year-end CHF 4.65 million via the sale of fixed income in- there was a further value uplift of 11.23% in struments and CHF 1.45 million for the sale of CHF terms. At year-end 2019 total vacancies re- listed equity positions. These proceeds were duced to 14.16% (2018: 24.42%). For office used to fund a new private equity investment. floors vacancies was 4.74% (2018: 25.10%). An optimisation program was introduced for the ENR, together with a Russian partner, acquired a two retail floors to re-align the tenant mix and greenhouse complex for flower production in introduce new service focused retail tenants in Russia (close to Moscow). The complex is well the building. This resulted in an increase of va- engineered and equipped with five stand-alone cancies on these floors to 35.90% (2018: greenhouses. Investments are required to ser- 29.93%). A new tenant already established a vice or replace parts of engineering systems, to large new modern flagship restaurant (including buy flower plants and bulbs and to part fund a gastro bistro) on one of these floors. The ca- operations until the business is cash flow posi- pex improvement program is ongoing. The refi- tive. At 31 December 2019 ENR had invested a nanced loan from UniCreditbank towards the total of ruble 342. 91 million (CHF 5.35 million). business center reduced interest costs in 2019 It is anticipated that ENR and its partner could by CHF 557K (50% compared to 2018). A new ultimately invest some CHF 10 million each (less look interactive website was also introduced if Russian bank funding is obtained under Rus- (www.petrofort.ru). sian agricultural incentive programs). 5 In 2019 Russia’s economy grew by 1.2%. The Central Bank of Russia continued with rate cuts Geneva, 6 April 2020. to the key lending rate throughout 2019 and in early 2020 (as of March 2020 the rate is 6%). Annual inflation slowed to 3% at the end of 2019. Oil and gas prices remain key factors to the Gustav Stenbolt Ben de Bruyn prospects of the Russian economy (the majority Chairman Chief Executive Officer of exports and generating the bulk of federal budget revenues). Higher oil earnings impact positively on Russian consumer and investor sentiment, boosting domestic demand and con- sumption. During March 2020 OPEC+ group talks failed to reach agreement on curbing pro- duction volumes to curb the lower demand due to the coronavirus outbreak. Saudi Arabia re- sponded by cutting its crude oil prices and indi- cated it will ramp up oil output. Oil prices then fell sharply and this triggered a large ruble de- preciation against the CHF (some 23% to date). In February 2019 Moody’s upgraded Russia’s credit rating to Ba1. Russia’s sovereign bonds are rated as investment grade by all three major rating agencies. ENR continues to monitor economic and politi- cal developments and investment opportunities (especially where there are potential lower entry valuations) mainly in Russia (potentially also in other member countries of the Commonwealth of Independent States and the Baltic States). 6 Economic and Political Review 7 8 Economic and Political Review Russian Federation 2019 compared to US$67.5 billion in 2018, largely due to inflows to the non-banking sec- Russia’s economy grew by 1.2% in 2019 and the tor. International reserves increased by US$66.5 Central Bank of Russia (“CBR”) continued with billion, up from US$38.2 billion in the previous rate cuts to the key lending rate throughout year, mainly due to currency purchases. 2019 and in early 2020 (as of March 2020 the rate is 6%). Domestic demand fueled growth in late 2019. Supported by real disposable income growth, The federal budget surplus decreased to 3.1% of monetary easing and continued credit expan- gross domestic product (“GDP”) (3.7% of GDP in sion, household consumption posted robust the same period in 2018) on the back of lower oil growth of 3.1% in the 3rd quarter 2019. Import and gas revenues and higher non-interest based growth accelerated to 4% in the 3rd quarter spending. Non-oil and gas revenues grew to 2019 as the ruble strengthened in that period, 11% of GDP. The VAT rate was increased from whilst consumption growth was robust and in- 18% to 20%. Spending on environment, housing ventories increased. services, utilities, and healthcare each grew by 0.1% of GDP and spending on social policy and Russia’s unemployment was 4.7% in January national security each declined by 0.1% of GDP. 2020. Higher non-oil and gas revenues led to an im- proved non-oil and gas federal budget primary In February 2019 Moody’s upgraded Russia’s deficit, which reached 3.6% of GDP compared to credit rating to Ba1 as government policies en- a deficit of 4.4% of GDP in 2018. acted over recent years to strengthen Russia’s already robust public finances had a positive ef- Retail and corporate sector lending slowed but fect on its ability to withstand external shocks. consumer loans continued growing at double Russia’s sovereign bonds are now rated as in- digit rates. Key credit risk and performance indi- vestment grade by all three major rating agen- cators remained stable. cies (Standard & Poor’s and Fitch both designat- ing them BBB ratings). In 2019 Russia’s current account surplus nar- rowed to US$70.6 billion, down from US$113.5 The downwards inflation trend continued as billion in 2018, largely due to a lower trade bal- Russia’s consumer price inflation decreased to ance. The trade balance surplus dropped to an 3% at the end of 2019 (2.3% at February 2020). estimated US$163.1 billion in 2019 given lower energy commodity prices and Russia’s participa- In January 2020, President Vladimir Putin out- tion in the OPEC+ agreement. Net private sector lined proposals for addressing the country’s so- capital outflows declined to US$26.8 billion in cial, economic, and political challenges. Key so- 9 cial issues highlighted were measures aimed at in 2024. Since then the amendment was backed improving demographics and poverty by all of Russia’s 85 regional parliaments. Rus- reduction. sia’s Constitutional Court will now examine the constitutional changes, which will then be put President Putin also proposed changes to the to a nationwide vote. constitution, which would shift power between the executive, judicial, and legislative branches. Oil and gas prices remain key factors to the Rus- This lead to an early 2020 Russian government sian economy, representing the majority of ex- reshuffle. A new first deputy prime minister and ports and generating the bulk of federal budget a new economy minister was appointed. Mr. An- revenues. There is a strong correlation between drei Belousov, the economic adviser of President oil prices and the value of the ruble. During ear- Putin since 2013 and a key architect of spending ly March 2020 OPEC+ group talks failed to reach plans, was appointed as new first deputy prime an agreement on curbing production volumes to minister, replacing Finance Minister Anton Silu- curb the lower demand due to the coronavirus anov. Mr. Maxim Reshetnikov, a former regional outbreak. On the eve of the meeting, Saudi Ara- governor, was appointed Russia’s new economy bia pushed for steeper and longer production minister. Mr. Dmitry Medvedev, Russia’s prime cuts than what was expected. Russia was not minister since 2012 was replaced with former confident supply cuts would be effective in sup- tax chief, Mr. Mikhail Mishustin. porting prices and did not agree to the proposed supply cuts. Saudi Arabia responded by cutting This should accelerate a state spending plan to its crude oil prices and promised to ramp-up oil support the economy by spending more than 25 output.