1. Russian economy in 2015: Resilience under pressure
Anton V Tabakh, CFA
Director – Regional Ratings, RusRating Agency, Associate Professor HSE
Vienna | June 22, 2015

2. March 2014- Feb 2015: Perfect Storm
Economy was in a slowdown for about a year
Turbulence in Ukraine and Crimean crisis
Sanctions from EU and US (July-September) and reciprocal food embargo (August)
Continued banking sector clean-up and depletion of Deposit Insurance Fund
Debt market paralysis – both foreign and domestic
Pressure on currency
Key rate hikes from 5.5% in February to 17% at emergency CB meeting on December 16th 1

3. Feb 2015 - present: respite 2 Oil prices recovered
Concerted actions by government and big business eased pressure on ruble BUT volatility remained
Economic crisis cut demand for funding BUT investments are dropping even faster
Banking sector stabilized
Key rate cut from 17% to 11.5% on June 15th, as inflation slows down
Federal budget in a good shape as weaker ruble improved revenues 2

4. economy continues to shrink
GDP on the downside
Capital investments are decreasing since late 2013
Russia's Economy Sharply Deteriorates In 2Q15 Real GDP growth, % YoY -6 -5 -4 -3 -2 -1 1 2
1Q14
2Q14
3Q14
4Q14
1Q15
Apr-15
May-15
Real GDP
Source: Rosstat, RusRating estimates 3

5. Incomes dropped, unemployment remains low
Incomes follow…
Unemployment
Source: Rosstat, RusRating estimates
Incomes declined, and retail trade followed
No massive layoffs, but labor market remains under threat
Stabilization is likely in 3Q15 4

6. BOTH EXPORT AND IMPORT SHARPLY DOWN
Exports shrinked along with oil price…
…but imports contracted even more…
Source: Rosstat, RusRating estimates 5

7. Trade balance props up current account
Even with weaker oil, current account remains strong, compensating for capital outflows
Structure of Russian Exports, %
Structure of Russian Imports, %
Imports
2014
1Q15
CIS
Non-CIS
Machinery and equipment
25,3
50,5
20,3
47,7
Food
17,5
13,4
13,7
Fuel and energy commodities
8,3
0,5
9,1
Chemicals
11,8
16,8
16,1
18,1
Textiles and shoes
5,1
5,8
5,7
7,0
Metals
14,9
11,9
5,6
Other
17,0
7,4
19,4
Total, $ bln 32
254 4 38
Source: Rosstat, RusRating estimates 10

8. Exchange rate and oil price remain tightly linked6

9. Inflation IS slowing, RATES CUT…
Inflation Decelerates in May Due to Food Segment
Growth rates, %
Apr-15, MoM
May-15, MoM
Apr-15, YoY
May-15, YoY
5M15, YoY
CPI
0,5
0,4
16,4
15,8
16,2
Food
0,3
0,1
21,9
20,2
21,8
Non-food
0,9
14,2
14,3
13,3
Services
11,8
11,6
12,2
Source: Rosstat
Producer Price Growth Accelerates across All Segments
Producer price growth broken down by sector, %
Sep-14, MoM
Oct-14, MoM
Sep-14, YoY
Oct-14, YoY
10M14, YoY
PPI
(0,8)
0,3
3,5
5,1
6,1
Extraction
(5,8)
0,2
(4,6)
(0,1)
8,1
Manufacturing
0,6
0,4
6,4
7,0
5,2
Utilities
2,6
3,9
7,1
Source: Rosstat
Exchange rate volatility and first impact of sanctions already passed through the monetary system
Slower inflation allowed Central Bank to cut rates 3 times this year 7

10. …Banking system liquidity at relatively safe levels
Source: Rosstat 8

11. Federal Budget in a DECENT shape
Nominal budget revenue growth, % YoY
Weaker ruble and recovered oil prices provided extra revenues in 1H15, but impact is likely to be smaller for the whole 2015
Expenditures turned loose in late 2014, but now government is more stingy
Oil and gas dependence remains strong 9

12. Risk area 1: Banking sector
Increasing NPLs and dependence on government handouts
Reliance on CBR short-term funding – both ruble and hard-currency
Deposit base recovered after December runs but still insufficiently
Since January 1st 30 banks lost their licenses, insurance fund depleted and received loan from Central Bank. Sanctions of sizable banks also take toll on CBR abilities
CB continues policy of increased regulatory pressures but delayed some measures
After : Russian financial industry should be leaner and cleaner 11

13. Risk Area 2: Regional budgets
Regions got respite last year but 2015 expected to be tough
Incomes to shrink as regional tax base is highly cyclical but expenditures are growing
Costly refinancing of debts
First default of region in years (though technical)
Federal help would be limited
Pressure on social services 12

14. Risk area 3: Sanctions
Geopolitical situation somewhat stabilized still constraints on investments are firmly in place for now
Situation in Eastern Ukraine remains fragile and costly
Impact of sanctions was smaller than expected on oil and gas sector but impact on financial services would be more long-term in nature
Food embargo impact on domestic production is unclear but consumer spending depressed anyway 13

15. 2015-16: what to expect 14 Major policy shifts unlikely
Reliance on oil and gas revenues – “elephant in the room”
Reserve Fund and National Welfare funds – bye, bye! But not momentarily
Business activity – likely to improve by early 2016 on federal spending (including military upgrades)
Consumers – no loan-financed growth for now 14

16. Opportunities for foreign business
Technology imports and localized production – may be subject to sanction regime
Localization of consumer goods
Capital outflow remains strong – thus financial services may get a boost
Foreign properties – instability at home creates demand 15

17. Forecasts for 2015-16 16 2013 2014 2015E 2016E GDP, % YoY 1,3 0,6
2013
2014
2015E
2016E
GDP, % YoY
1,3
0,6
(2,5)
0,9
Industrial production, % YoY
0,3
1,7
(1,5)
Fixed investment, % YoY
(0,3)
(13,8)
1,6
Retail sales, % YoY
3,9
2,5
(7,8)
1,2
Real incomes, % YoY
3,3
(1,0)
(3,0)
1,1
CPI, %
6,5
11,4
10,8
6,0
PPI, %
3,7
5,9
3,0
5,5
Exports, $ bln
522
494
342
358
Imports, $ bln
344
308
192
200
Current account, $ bln 33 57 75 77
Federal budget surplus/(deficit), % GDP
(0,5)
(2,3)
Avg. ruble exchange rate, RUB/$
31,9
38,3
58,0
58,9
Avg. Brent price, $/bbl
108,7
99,4
60,0
Source: Rosstat, CBR, RusRating estimates 16