November 27, 2009

September 5, 2011 This is bne's Russia daily newsletter, a list of the top stories in the region for today. You can receive the list as a plain text or html email or as a pdf file. Manage your delivery options: click here

RBL TOP STORY 1. Kyiv and Moscow dig in over gas 2. Vladimir Putin may propose doubling public sector salaries 3. China Construction Bank announces plans to establish subsidiary in Russia. 4. The rules of the oil game in Russia RBL NEWS 5. Market overview: Summer's Dog Days 6. Gazprom hits back at Ukraine's plans to scrap Naftogaz 7. RusHydro to purchase Bashkirenergo electricity Retail Company? 8. Russian miners face transport bottlenecks again RBL On the website today 9. Crash or Crunch in CEE? 10. KYIV BLOG: Kyiv and Moscow open school year with a scrap BEARWATCH 11. Medvedev appoints officials to oversee New Moscow project 12. Moscow invited new Libyan govt. to discuss energy - Lavrov 13. Prokhorov suggests limiting govt influence on mass media by cutting state stakes 14. CORRUPTION WATCH: Russian police crime remains high, despite reform 15. State Duma lawmaker Lebed leaves United Russia party RBL OTHER NEWS 16. Federal Grid starts connecting Far East and Siberian power markets 17. Gazprom Neft, LUKOIL, Rosneft and TNK-BP face problems with jet fuel delivery to the Moscow aviation hub 18. Jacques Der Megreditchian to Leave Troika Dialog 19. Melnichenko takes control of SUEK 20. O'Key to pay interim dividends amounting to 70% of its 1H11 net income 21. PIK Group: Commercial property to closed mutual funds; non-core assets to be offered to investors 22. PhosChem raises contract price with India for 2H11 23. Russian Equities Wrap, August 2011 24. TAPI pipeline project members welcome Russia's participation 25. Yanukovich orders reorganization plan of Naftogaz by October 1 26. Yearning for Earnings RBL DEBT 27. Risk appetite faded following the weak US labour report

28. Russian/CIS bonds ended only marginally lower 29. RUB weaker following the global risk sentiment back drop 30. Disappointment for some on the ratings front 31. RusHydro plans to place RUB40bn in bonds 32. S&P upgrades Bank Vozrozhdenie, changes the outlook for Alfa-Bank to positive RBL COMPANY SNAPSHOTS 33. Mail.ru Group's trip notes: Russian internet traffic monetisation is at embryonic stage and is to steepen 34. Rusagro - Sugar prices decoupling RBL SECTOR SNAPSHOTS 35. CBR announced August preliminary stats - corporate lending growth accelerated to 2.5% MoM - retail portfolio expansion remained strong at 3.3% MoM - downside risks remain 36. Gazprom stalls in August, NOVATEK production continues to rocket 37. Russian Banks: Risks are Priced In 38. Russian oil output expands to new high of 10.27 mln bpd RBL MACRO RESULTS 39. A weak US labor market report for August increases the chance of more stimulus action from the Fed and the Obama administration 40. CBR announces capital outflow of $3bn in July 41. Monthly macro outlook: Russian economy looks better and better, but markets have little faith 42. Russia Services PMI reveals slower growth in the sector in August, business expectations drop RBL REFORM & REG'S 43. Accounts Chamber finds history of lax capex discipline at FSK 44. CIS leaders call for free trade deal, peaceful end to conflicts 45. Lapses in banking supervision 46. Market volatility requires no changes in Russian economic policy - Ulyukayev 47. Ministry of Energy might decrease gasoline export duties and it is not ruling out amendments to the tax regime in case of growing oil prices. RBL CO. RESULTS, UPGRADES ETC 48. Dixy Group announces a 22.8% revenue growth in Russian rubles for the seven months of 2011 49. Pharmstandard: Target price raised slightly, Buy recommendation reiterated 50. Protek reported weak 1H11 IFRS results 51. TMK 2Q11 IFRS review; strong 2Q11 results priced in, bleak 3Q11 outlook - BELARUS 52. Lukashenko shuns CIS summit

RBL TOP STORY

1. Kyiv and Moscow dig in over gas bne September 5, 2011 Kyiv and Moscow dug into their trenches at this weekend's CIS summit, despite claiming that there is no gas war on the horizon. Whilst things remained civil at least, the hardline statements leave little room for manoevuer, making it hard to see a route that will allow both to retreat with honour. After Kyiv said on Friday that it is to break up Naftogaz, and that will mean new companies which will need to negotiate new contracts, Gazprom CEO Alexei Miller responded by mimicking Ukriane's Prime Minister Mykola Azarov. Reports later the same day suggested that President Viktor Ynaukovych hoped to meet with counterpart Dmitry Medvedev on the sidelines of the summit in Dushanbe in Tajikistan. However, the Kremlin dismissed the idea, leaving the debate to continue to be held via the media. Moscow is offering no leeway, insisting that the current gas contract - which makes Ukraine Gazprom's most profitable export market - must be respected, unless Kyiv agrees to either join the customs union or merge Naftogaz with Gazprom, thus handing over control of its gas transportation system (GTS). A spokeswoman for President Dmitry Medvedev said the current contract must be realized and cannot be revised in a "sole direction," reports RIA Novosti. "Russia is ready to defend its stance on the agreement in any court authority and will act strictly in accordance with this document." Yanukovych however stated Ukraine's determination, and confirmed that the country will take the issue to international arbitration if needs be. "We have faced a situation in which Ukraine is losing big money ... If Russia does not agree with it, certainly, we will have to go to the International Court," he told reporters, before adding: "I hope we will have enough wisdom to find a common solution, without the court. I consider the court to be the last resort." However, the president also spoke of Kyiv's rising anger, which last week also saw Medvedev call Ukraine's position "sad" and said it is trying to "sponge" from Russia. "We will not allow [them] to talk to us in such way," said Yanukovych. "They pushed us in the corner, at first, and then started to dictate terms. Today it humiliates not only me, but it humiliates the state, and I cannot allow it," As it moves into final talks on taking possession of the gas transit system in Belarus in return for a discount on exports, Moscow is hoping the economic and political pressure in Ukraine will force a similar conclusion, and, with gas prices likely to close on $500 per 1,000 cubic metres in the fourth quarter of the year, is happy to wait it out. Kyiv needs to break this vicious circle, which pits its macro-economic situation and the IMF against parliamentary elections next year. However, the GTS is seen as a

guarantor of sovereignty, whilst joining the customs union would disrupt Kyiv's progress towards EU integration. Ukraine has never showed any hint that it would agree to either, and Yanukovych was just as definite at the weekend. "It will not happen," he told reporters unequivocally. Something has to give, and the intransigence of their positions clearly suggests that the pair risk another gas war, such as cut off European customers of Russian gas in 2006 and 2009. However, Azarov said in a TV interview at the weekend that Ukraine is going to play it by the book. "No one will ever live to see any war, including a gas [war] with our strategic partner - Russia," he said according to RIA Novosti. Instead, he claimed, Ukraine will continue to fulfill the valid contract until there is an agreement on a new price. With its bid to cement closer ties with the EU and an eventual membership, Kyiv's position is that it will play by Western rules this time. One difference this time around is that it can afford to do that for the meantime, given that it currently has record high international reserves. However, it suggests that the legal move to annul the contract could come sooner rather than later. The trial of former Prime Minister Yulia Tymoshenko or the unbundling of Naftogaz - which, not by coincidence, will satisfy the European bloc's third energy package which Moscow is fighting so hard against via Gazprom - are likely to be the triggers then. Given the advantageous conditions under the current contract however, it's no surprise that Gazprom is loathe to give up on the current contract, points out Dmitry Loukashov of VTB Capital. "Ukraine is supposed to buy 52bcm of gas annually. This amount could be decreased 20% (to 41.6bcm) by a two-party agreement, and Ukraine ultimately has to pay for 80% under current take-or-pay contracts, or 33bcm. Current prices for Ukraine are very close to those for Europe (including USD 100 discount) – approximately USD 350mcm for Ukraine against USD 340 for Europe. Ukraine might consider this approach as unfair due to the difference in transportation." "The current scheme is very profitable for Gazprom as the company does not pay custom duties for deliveries to Ukraine (while getting European prices). So if Ukraine achieved its goal of a contract revision, it might negatively affect Gazprom’s financial results. Revision of the current agreement may also affect the company in the longer term as Ukraine is the largest Russian gas consumer among CIS countries." 2. Vladimir Putin may propose doubling public sector salaries Alfa Bank September 5, 2011 According to Reuters, the head of the working group preparing the economic program for Prime Minister Vladimir Putin has indicated that the election campaign will rely on a proposal to double salaries in the public sector, which would potentially trigger an increase in federal budget expenditures of 25%. While the implementation of such a proposal does not seem realistic, this creates additional risks of higher taxation in coming years.

While the official did not specify the exact timeframe of the proposed action, a one-step indexation in public salaries would put considerable pressure on the budget. The 25% increase in federal budget expenditures would mean extra spending of around RUB1.6tr next year in addition to the already planned increase of RUB1.1tr, boosting the budget breakeven level from the current $110-120/bbl to $150-160/bbl, all else being equal. It would also lead to contraction in infrastructural spending and fuel inflationary pressure. Therefore, we believe that such a one-step indexation is an unrealistic option. However, this proposal does confirm that the Prime Minister's electoral agenda will very likely have a social focus. Thus the more realistic option is that the program may call for a doubling in public salaries during the next 3-5 years, which would not require a dramatic deterioration of the budget position in the short term. In the longer term, after the elections these proposals may be revised, or they will cause a serious increase in taxation of the wealthiest individuals. Thus, regardless how serious these proposals are, we take them as a NEGATIVE sign for high-wealth households. This message is completely opposite the one sent by President Dmitry Medvedev during past months insisting on cutting the payroll tax, and calling for a balanced budget. 3. China Construction Bank announces plans to establish subsidiary in Russia. Bank of Finland September 2, 2011 The board of China Construction Bank (CCB) decided on August 19 to put up about $150 million in capital to set up a banking operation in Russia. The large amount of capital allows the bank the possibility to get a general licence immediately. A general licence allows the bank to provide services to businesses and households. In terms of capital, the new bank would join the ranks of Russia's 100 largest banks. CCB is mainly owned by the Chinese state. It is China's second-largest bank, and its assets at the end of 2010 amounted to 11 % of China's banking sector's total assets. The bank's IPO was in 2005, and as of end-2010 CCB was the world's second largest bank in terms of market capitalisation. About 35 % of CCB shares are held by non-Chinese. Two Chinese banks currently operate in Russia. Both are subsidiaries of large state-owned banks. Although one has a general licence, they only rank among Russia's 280-300th largest banks in terms of total assets. The CBR categorises both as small banks. Some 220 banks with foreign capital currently operate in Russia. About half are majority owned by a foreign entity. Three foreign-owned banks are included in Russia's top ten banks measured in terms of total assets. The Italian Unicredit Bank ranks eighth, followed by the French Rosbank in ninth place and the Austrian Raiffeisenbank in tenth. The three banks combined account for 5 % of the banking sector's corporate lending, 7 % of household lending and 3 % of household deposits. The respective shares for Russia's largest bank, Sberbank, are 31 % of both corporate and household lending, and 47 % of household deposits.

4. The rules of the oil game in Russia RIA Novosti September 2, 2011 The foreign business community in Moscow is very agitated. Quick on the heels of ExxonMobil's unprecedented deal with Rosneft comes the Russian investigators' raid on the offices of BP. The company nearly became Rosneft's preferred partner in Arctic exploration last December. The deal got a personal blessing by Prime Minister Vladimir Putin. However BP's partners from TNK-BP (Viktor Vekselberg, Mikhail Fridman and Leonid Blavatnik) thought that BP broke its commitment to do business in Russia only via TNK-BP, which is co-owned by the British giant and the three oligarchs in question with about five per cent of the shares dispersed among minor shareholders. What followed was a successful counterattack by Vekselberg, Fridman and Blavatnik. It ended with the international courts siding with the Russian plaintiffs and the Rosneft-BP deal collapsing. When in late spring or early summer two minor shareholders of TNK-BP from the Russian city of Tyumen filed a suit against BP, accusing it of undermining TNK-BP's business interests with its attempt to hook up with Rosneft, few people thought that it would end with the Russian investigators paralyzing the work of BP's office in Russia for what seems like an indefinite period of time. BP supremo in Russia Jeremy Huck claims the Russian authorities are using the investigators to exert pressure on the company. Russian officialdom retorts that the investigators are just doing their job and no politics is involved. This, of course, no one believes. It is much more plausible that BP is being "softened up" in order to force the company to sell its share in TNK-BP to a partner that the Russian government (and TNK-BP Russian shareholders) already have in mind at a discounted price. Another alternative is that Vekselberg, Fridman and Blavatnik want to sell their share in TNK-BP to BP at an inflated price, but this looks much less plausible. These latest developments lend more credence to the theory, advanced by some market analysts here at the beginning of BP's misfortunes earlier this year: namely that the whole deal with Rosneft was a trap from the very beginning with the goal of either milking the British company for money or making it divest of its share in the Russian joint venture. BP's misfortunes illustrate a very important general rule for foreign investors in Russia. It is simple: there are no rules, especially when it comes to the so-called strategic sectors of the economy, of which the oil and gas industry is number one. Of course, there are laws that, in theory, create a framework for, say, offshore exploration and development. International oil companies claim they are excessively harsh as they create unacceptable risks. Moreover, these laws are supplemented by myriads of circulars and ministerial instructions that interpret and re-interpret the laws until your head starts spinning. Having worked for ExxonMobil, this week's undisputed winner in Russia, I have witnessed countless attempts by foreign investors to make Russian bureaucracy make rules of operation in Russia more transparent and, what is even more

important, more stable. "Conditions can be strict, but they should not change," was the refrain I heard many times from colleagues in different oil companies. However this is exactly what is not going to happen. The rule stipulating that there are no rules is a very effective political tool, keeping the Russian government in total control of its energy resources - frequently to the detriment of their development. The Russian political class ever since Putin's advent to power is fixated with the idea of hydrocarbons as the only source of domestic political supremacy, foreign policy gravitas and, ultimately, the sole basis on which the political class can perpetuate itself in power indefinitely. The logical consequence of this approach is that every deal, especially with a major foreign company, is always in some way a "boutique," made-to-measure unique arrangement, regardless of the official laws and regulations. This makes it easy for the government to turn the tables on its partners, for one reason or another, once these partners become unsuitable. This is actually rule number two for foreign investors in Russia: all partners are expendable. Rosneft should be honored with its deal with ExxonMobil, an FT 500 number one company and a world champion in offshore drilling. This is a true coup for a Russian giant which still struggles with issues of technological development, business organization and continuing fallout from its dubious appropriation of former YUKOS assets. But for ExxonMobil, the world's most prudent, most effective and law-abiding oil company, this may well be one of the most rewarding but at the same time also challenging deals in the emerging markets. That is if the two rules of operation in Russia are anything to come by. Konstantin von Eggert

RBL NEWS 5. Market overview: Summer's Dog Days Troika Dialog September 5, 2011 Predictably the Asian equity markets have, this morning, followed Friday's sharp fall in the US markets. The MSCI Asia-Pacific Index is down 2.1% at mid-session. Although Russian equities also fell hard at the close on Friday, investors will likely have little appetite to buy into that dip until they see how US investors follow through when they return tomorrow after today's Labor Day holiday. News of the $196 bln claim against major US banks adds another cause for concern and another reason for investors to both add to portfolio insurance and to stay sidelined in mainstream markets. The main risk continues to be that fund investor's fragile confidence further deteriorates and we see an escalation in redemptions. Friday's very disappointing payroll report has certainly given strong support to the market bears and those that expect a recession, albeit mild, in early 2012. But, balanced against that is the hope that such clear evidence of slowing growth will force the US Fed and the Administration to come up with additional market support and growth stimuli at the Fed's FOMC meetings later this month. That trade-off, i.e. between the recession bears and Fed optimists, will almost certainly provide the backdrop to the market through September and ensure another very volatile month for asset prices.

Bearish bets against the S & P 500 Index rose to a nine-month high as short sellers increased speculation stocks may decline further. The proportion of S&P 500 shares sold short on Aug. 29 rose to 3.03%, the most since the end of November and up from 2.37% at the beginning of August, according to Data Explorers. Hedge funds hold a net 84,492 futures contracts betting that the S&P 500 will decrease in value. The short position is the highest since September 2007. The dollar-euro rate is currently at $1.4166. That will add pressure to oil and industrial metals this morning. The ruble will also decline against the dollar but should at least partially compensate with a gain against the euro. Gold is at $1,884.1 per ounce and copper is off 0.3%. Brent crude last traded at $111.79 p/bbl. Stock Watch: External Drivers Again to the Forefront The steel stocks and other material exporters are the most exposed and despite leading the way down on Friday afternoon, we will likely see further weakness today. Mechel fell 7.6% in US ADR trade on Friday. The oil stocks will be sensitive to where oil trades this week and, at least initially will show further weakness. The price of one-month Brent lost almost $2 p/bbl on Friday and is off another 54 cents p/bbl in Asia trade this morning. Brent is currently trading at $111.79 p/bbl and WTI last marked at $85.85 p/bbl. The bank shares are also vulnerable to further losses early this week because of the trend in the global bank sector. Continuing concerns about debt risk and the news of the US claim against seventeen banks for $196 bln of damages will pile further pressure on sector valuations. The Russian banks are in much better shape when it comes to debt exposure and growth but, while so much uncertainty hangs over the industry in the US and Europe, all bank valuations will be hit. The usual haven assets, principally gold and silver, rose strongly on Friday afternoon after the US payroll report. Gold added 2.6%, to $1,876.p per ounce, and silver jumped 3.7%. Both are higher again today with respective gains of 0.4% and 0.3%. That will provide good relative price support for Polymetal and the Russian gold shares. They led the performance table last month and will retain that leading role at least over the short-term. Another name that may see support today is Razgulai. The price of wheat and corn bucked the negative trend in global markets on Friday, rising 1.9% and 2.9% respectively as reports emerge of crop damage in the US mid-west. The mobile telecom companies fared relatively well in the US ADR market on Friday and both are scheduled to release 2nd Qtr numbers this week. Most of the companies that released numbers last week saw good investor support as cheap relative valuations were exposed. As MTS, due to publish tomorrow, and VimpelCom, scheduled for Wednesday, are both very defensive names in a sector (mobile telecoms) that is holding up very well in Russia, they may both attract interest from investors looking to add more safety to their portfolios. Other companies scheduled to publish numbers this week include PhosAgro (Wednesday) and NOMOS Bank (Thursday). This Week - International: Shifting Focus from US to EU and China After last week's hectic schedule in the US, this week will be a lot quieter by comparison. The main newsflow will come from the Eurozone and China. The former will have an impact on

where the dollar-euro rate trades, and hence on the ruble and on oil, while the latter is the key market for investor sentiment towards oil and industrial materials. The ECB is under pressure to follow the Fed's lead and to also state that it is considering some additional measures to try and boost growth and deal with the solvency threat. The euro Central Bank holds its monthly interest rate meeting on Thursday and investors will hope to hear encouraging words in the post meeting press conference. Before that, the Eurozone retail sales data and the Sentix investor confidence index will be published today. The latter usually has an effect on EU markets and the more so today with Wall Street closed. The ECB publishes provisional Q2 GDP growth on Tuesday. The consensus is for growth of 1.7%. UK and German industrial production updates will follow on Wednesday while France will issue its data on Friday. In the US, there are few reports that usually have an impact on market sentiment. Amongst them will be the ISM non-manufacturing report on Tuesday and the weekly jobless claims update on Thursday. This week the Energy Dept's inventory update will be delayed until Thursday because of the long weekend. China will issue is monthly macro update late overnight Thursday. Economists are looking for a very slight pull back in the growth indicators (e.g. industrial production at +13.7% from +14.0% last month) and a small reduction in the inflation rate. Last month inflation grew 6.5% YoY and the consensus for this report is +6.2%. This Week - Russia: Inflation and Interest Rates This is also a busy week for economic updates and policy statements in Russia. The August inflation report is expected to be published early this week and to show either a flat month or a small reduction. The year to date inflation rate at end August is likely to show +5.0%. That will allow the Central Bank to at least hold the refinance rate at 8.25% when it holds its monthly policy meeting this week. After Brazil cut its interest rate last week, speculation will inevitably emerge that the Central Bank in Russia may soon follow suit. Especially if confidence grows that the YoY inflation rate at year-end can be held close to the 7% level. President Medvedev will make the keynote speech at the Yaroslavl World Political Forum, which is to be held on Wednesday and Thursday. He is expected to talk about social issues but may also give an update on the investment and privatization programme. Trading Last Week: Russia Moscow's indices fell with the global trend on Friday afternoon. The RTS lost 2.7%, to close at 1,657.25, and MICEX lost 2.3% to end at 1,515.9. However, because of the strong performance earlier in the week, the RTS closed the five days with a gain of 3.8% and MICEX added 3.9%. The IOB Index of London traded GDRs fell 3.2% on Friday and that cut its five-day gain back to 3.5%. That compares with a five day gain of 4.7% for the MSCI Emerging Markets Index. But, Asia's markets had already closed before the US payroll report and that protected the MSCI EM from the bigger fall expected today. The table with the best and worst performing liquid stocks from last week is at the end of this note. Companies that released profit updates last week generally top the table with IRC's 23% gain leading. Mail.ru (+18% WoW), O'Key Group (+17.4%) and Pharmstandard (+17.6%) also published good numbers and are amongst the

best performing shares for the five days. At the other end of the table, TransContainer fell 19% on Friday but on relatively low volume. Gazprom (-1.3%) is in the lower table as investors worry about the threat of another winter stand-off with Ukraine. Trading Last Week: International US markets fell after the very disappointing Us payroll report on Friday and even the Fed optimists had little appetite to buy ahead of the three-day Labor day weekend. The S&P lost 2.5% on Friday and ended the week down 0.2%. Chris Weafer 6. Gazprom hits back at Ukraine's plans to scrap Naftogaz RIA Novosti September 2, 2011 Russian gas giant Gazprom chairman Alexei Miller said on Friday all existing gas agreements between Russia and Ukraine would need to be revised following the liquidation of Ukraine's Naftogaz, in a rebuff to a threat by Ukraine to scrap its main energy company and tear up its gas deals. "Of course after Gazprom merges with Naftogaz, [the latter] will cease to exist, there will be a liquidation period and then some time later, after all the necessary formalities become valid, a completely new company will be operating on the market. This is why all existing agreements will be revised," Miller said in an almost exact duplicate of an announcement by Ukrainian Prime Minister Mykola Azarov earlier on Friday. Gazprom has long coveted Ukraine's gas transit system, and Russia has offered a merger of the two companies, but Ukraine has insisted such a deal would infringe its sovereignty. Azarov said that Kiev, which is in a bitter row with Moscow over prices for gas, plans to liquidate its state-run energy firm Naftogaz, an acquisition target of Russia's Gazprom, and to revise all current agreements. "Naftogaz as a company will cease to exist. There will be a liquidation period. Some time later, after all necessary formalities become valid, totally new companies will operate on the market. This is why all existing agreements will be revised," Azarov told reporters. Ukraine has been trying to revise a 2009 agreement with Russian gas giant Gazprom which tied the gas price to the price for oil boosting Kiev's bill. Former Prime Minister Yulia Tymoshenko is now on trial for exceeding hesigning it. Ukraine said on Tuesday that it would slash Russian gas purchases by a third to 27 billion cubic meters in 2012, from 40 bcm this year. However, Gazprom said that under the contract, based on a 'take-or-pay' principle, Kiev would have to pay for 33 bcm of gas regardless of actual purchases. Azarov said that the 2009 deal violated a 2004 agreement, which says the two countries should revise the volumes of gas.

"Unfortunately, the agreement of 2004, which has an inter-state validity and is above national law, was never fulfilled. Therefore, we believe that the contracts which were signed in 2009 contradict (it), at least in the part concerning annual gas supplies," Azarov said. Last week Russian President Dmitry Medvedev said Ukraine might get discounts for gas if joined the Customs Union of Russia, Belarus and Kazakhstan and agreed the acquisition Naftogaz by Gazprom. But Azarov said Ukraine wanted no discount, but a fair contract. "We have all reasons to propose to the Russian government in accordance with the intergovernmental agreement (of 2004) holding talks on gas supplies and transit terms. We have sent a letter on the matter," Azarov said. 7. RusHydro to purchase Bashkirenergo electricity Retail Company? VTB Capital September 5, 2011 News: According to Interfax, RusHydro is set to purchase Bashkirenergo Electricity Retail Company. The newswire reported that the main bidders at the auction were state-owned RusHydro (with initial bid of RUB 5.0bn), private Transneftservis S (RUB 5.5bn) and private Energostream (RUB 3-3.5bn). According to the newswire, RusHydro raised its bid to RUB 5.7bn and reportedly used government backing to win the auction. The official results of the auction have yet to be announced. Our View: For RusHydro, the purchase would be a step towards implementing its strategy of increasing its presence in the retail electricity market. This acquisition would increase the share from the current 2.5% to some 3.5%. The relative valuation of the retail business after this purchase (if it goes through) would significantly exceed that of when RusHydro paid only RUB 7.8bn for 5 retail companies (including largest Moscow and St.Pete retailers) to UES of Far East. However, we think that in case of the deal with UES of Far East, the valuation was not very telling as it was a transaction between two state-owned companies. We believe that by selling its retail business in the regions, Bashkirenergo is gradually implementing the overall aim of Sistema (its controlling shareholder) to exit the utilities business. The retail business accounts for 12% of Bashkirenergo's total Mcap (at the maximum bid). 8. Russian miners face transport bottlenecks again VTB Capital September 5, 2011 News: Today, Vedomosti is reporting that Russian coal miners are currently facing a transport bottleneck at Russian Railways due to the inability of the latter to satisfy the companies' current logistics requests. Our view: Infrastructure problems are the main limiting factor for coal and iron ore production growth in Russia, with the current situation becoming a recurring one.

The problem now largely lies with the railway car park being located mostly beyond the mining regions at the moment. An inability to meet the needs of the companies leads to significant accumulation of finished goods stocks, which is boosting working capital needs. However, the scale is still limited. We do not expect any significant consequences for the sector due to the inability to supply the contracted volumes in a timely manner. Overall, we expect the situation to improve over the next several weeks as most companies are now entering a seasonally weaker 4Q, hence we consider the news to be moderately negative for the sector. Alexander Pukhaev

RBL On the website today 9. Crash or Crunch in CEE? Ben Aris in Moscow September 2, 2011 I was having fun until about three weeks ago," says Roland Nash, sitting in a café next to the new Hermitage theatre. One of Russia's best known analysts, Nash left his job as head of research at Russian investment bank Renaissance Capital earlier this year to join the up-and-coming Verno Capital, a fast growing fund that immediately took in $100m of Arab investment and quickly raised another $70m. His move was illustrative of an optimistic and buoyant mood in Russia in the leadup to the summer, despite alarm bells sounding of a growing sovereign debt crisis in the West. Smoke from protests and rioting might have been rising over Athens, London and Dublin, but Moscow was calm and upbeat as both confidence and growth returned. The reason is that Russia has few of the problems that plague much of the EU and the US. Thanks to Alexei "Mr Prudence" Kudrin, deputy prime minister and minister of finance, Russia's economy is among the most robust on the planet with one of manufacturing data for Germany, Hungary, Czech, Poland, Slovakia, Turkey, Romania and Russia appears to show is happening. "The real financial crisis only starts after the real shock of the slowing pace of the economy has done its damage; thus it serves as an amplifying mechanism rather than a trigger," the economists say in their book. Does this mean we are headed into a second wave of the 2008 financial crisis, a double-dip recession or just a soft patch from which the global economy will recover fairly soon? A crash in Central and Eastern Europe at any rate seems unlikely, as most of the other preconditions that precede crises, identified by Reinhart and Rogoff, are missing. To read the full story www.bne.eu/storyf2868/Crash_or_Crunch_in_CEE

10. KYIV BLOG: Kyiv and Moscow open school year with a scrap bne September 2, 2011 Kids can be so cruel. As soon as the school year opened across the former Soviet Union on September 1, a cacophony of bickering, name-calling and mimicry erupted between Russia and Ukraine. The worry is that it will snowball into a full-scale fight - and Europe will end up carrying the can. These particular kids should know better. After all, they all wear long trousers and are meant to run major countries and corporations. They've also had at least two major scraps over the same issue in the last five years. Yet in first week of Sepetmber, the leaders of Russia and Ukraine have resorted to the kind of behaviour that might shame some children - and all in public as well. Kyiv has been pushing to get Moscow to renegotiate the gas pricing formula in the current contract all year, but Russia - playing a waiting game as economic and political pressure builds in Ukraine - has played hardball since day one. Ukrainian President Viktor Yanukovych and his government have grown ever more frustrated, and after talks broke down this summer, they accelerated policy to reduce reliance on Russian gas. They've also grown increasingly combative, flatly refusing Russia's offer of a discount in return for control of Ukraine's gas transit system or agreement to join the Moscow-led Customs Union with Belarus and Kazakhstan, and in the last month frequently hinting they may take legal action to force a revision of the contract That has seen relations between the two countries nosedive. In 2010, after Yanukovych came to power, meetings with Russian President Dmitry Medvedev were numerous. So far in 2011, the pair have met just twice, with reports from the summits claiming total stalemate on all items. To read the full story www.bne.eu/storyf2880/KYIV_BLOG_Kyiv_and_Moscow_open_school_year_with_a_scrap

BEARWATCH 11. Medvedev appoints officials to oversee New Moscow project Renaissance Capital September 5, 2011 Event: Yesterday (4 September), President Dmitry Medvedev appointed officials responsible for overseeing development of the New Moscow project and for the transfer of state agencies' headquarters to the area. The appointees include the head of the presidential administration, Sergey Narishkin; Moscow Mayor Sergey Sobyanin; and Moscow Region Mayor Boris Gromov. At the end of June, Medvedev proposed the annexation of 144k ha of land to Moscow. On 18 August, Sobyanin announced that 160k ha of land around the Varshavskoe and Kievskoe highways and parts of the Leninsky, Podolsky and Naro-Fominsky districts will be linked to Moscow. A total of 60k ha of residential and 45k ha of commercial real estate are expected to

be built in these areas. It might take a year to develop the general plan and transport and infrastructure plans. PIK has a 1mn-m2 residential project in Kommunarka, and LSR has a 285k-m2 project in Bolshoye Domodedovo, which are likely to be annexed to Moscow under the New Moscow plan. Etalon does not currently have any exposure to the designated area, but remains our preferred play in the sector, due to the combination of a track record of delivery, a strong balance sheet and its valuation. Etalon is now trading at 2011E and 2012E EV/EBITDA multiples of 5.3x and 4.6x, respectively, while LSR is trading at 2011E and 2012E EV/EBITDA multiples of 6.5x and 5.1x, respectively; both trade at discounts to PIK Group's respective multiples of 12.2x and 8.3x. 12. Moscow invited new Libyan govt. to discuss energy - Lavrov RIA Novosti September 4, 2011 Russia's foreign minister said on Saturday that Moscow had invited new Libyan authorities to discuss the future of energy projects signed under fugitive leader Muammar Gaddafi. Before the conflict broke out in Libya, Russian energy giant Gazprom sealed a deal with Italian energy concern Eni to acquire 33 percent of Eni's shares in Libya's Elephant oil and gas field project worth 113 million euros. The deal has remained in the air as it needs the approval from the Libyan side. Sergei Lavrov said the initiative to discuss the fate of Russia's energy plans in Libya had come from representatives of Libya's new National Transitional Council (NTC). "They have proposed a discussion. We invited some [Libyan] officials to Moscow at their request," Lavrov said during a summit of leaders of the former Soviet republics in Tajikistan. Russia, which did not hurry to recognize the legitimacy of the new Libyan government until recently, had established ties with 40-year leader Gaddafi, whose whereabouts remain unknown. The fate of the Russian-Italian energy deal in Libya is unclear as Western countries have also expressed interest in the Elephant project. The new Libyan government has already signalled that NATO countries, which supported the NTC during the six months of armed confrontation with Gaddafi, would have the priority in energy projects in the oil-rich country.

13. Prokhorov suggests limiting govt influence on mass media by cutting state stakes RIA Novosti September 4, 2011 Russian billionaire and the leader of the Right Cause party Mikhail Prokhorov said on Sunday he suggested cutting state stakes in Russia's mass media to limit governmental influence on it. "We advocate that (the government) should not own more than a blocking pack in federal media," Prokhorov told reporters, adding that the mass media freedom would allow Russian society to be more "healthy". He also said that the Right Cause suggested cancelling immunity of the members of the State Duma, the lower house of Russia's parliament, adding that the measure would result in that some of the members would change their minds to work in the Duma. Prokhorov, ranked Russia's third richest man with a fortune of $18 billion by Forbes, formally quit business in July to go into politics and head the Right Cause party. His party currently has no seats in Russia's lower house of parliament. He also confirmed that he could run for the presidency in 2012 if the party did well in December's parliamentary polls. 14. CORRUPTION WATCH: Russian police crime remains high, despite reform Ria Novosti September 3, 2011 A much heralded reform of Russia's police force has failed to produce immediate results, with officers committing almost 70 crimes in the last ten days, according to figures released by the country's Investigation Committee. Russia's militsiya (militia) were renamed politsiya (police) on August 1. The renaming was part of a massive shake-up of the country's often-criticized force. Officers have been charged or convicted in the last few years of numerous crimes, including a shooting spree in a Moscow supermarket, the beheading of a suspect, burning a suspect alive, child sex abuse and rape. Interior Minister Rashid Nurgaliyev - who once advised Russians to give as good as they get if attacked for no reason by an officer - boasted last week, however, that the reforms had stamped out for good police crime. "Bribe-taking, abuse of office, corruption and all the negatives have been left in the past...only the best of the best remain!" he said. President Dmitry Medvedev said earlier this week that he was "on the whole, satisfied with the how the reform of the law enforcement system had gone." He also suggested the reform would lead to a force made up of "normal, respectable people."

Among the 67 crimes included in the figures released by the Investigation Committee for August 21-September 1 was the beating to death of 41-year-old Oleg Bichkov by police officers in the Urals city of Perm. Bichkov - who was scalped and attacked with baseball bats and truncheons - was so badly disfigured that his mother was unable to identify him. A group of ten officers attacked his family home after his wife was involved in a quarrel with an officer's wife in bar. Of the seven officers involved in the attack, only three will face charges. Other police crimes listed for the period concerned by the Investigation Committee - an organization separate from the police force - included torture and an attempt to steal a bag containing almost some $50,000 from a man who had just sold his apartment. 15. State Duma lawmaker Lebed leaves United Russia party RIA Novosti September 2, 2011 As the Russian parliament's lower house is preparing for December elections, Alexei Lebed became the second State Duma lawmaker to withdraw from the pro-Kremlin United Russia party this summer. Speaking to journalists in the Siberian city of Abakan, Lebed, a United Russia member since 2005, explained his decision to leave the party by saying: "Every person should be honest, have an active life position, have the right to express his own opinion regardless of party directives and conventionalism." He stressed that he was "not running from one party to another party," but "just leaving [the party]." The head of United Russia's branch in the republic of Khakassiya said Lebed's membership in the party will be cancelled in the near future. Sergei Mozharov criticized Lebed's work in the State Duma and his frequent absence from regional party meetings, as well as his refusal to take part in United Russia's primaries. Lebed was first elected as head of the Khakassiya government in 1996 and served three consecutive terms until 2009, when Viktor Zimin was appointed the new head of the republic after then-President Vladimir Putin cancelled elections of regional heads in Russia in 2004. Lebed became a State Duma lawmaker in 2009. Earlier this summer, State Duma deputy Igor Isakov also withdrew from United Russia. Russian daily Kommersant quoted sources close to the lawmaker as saying that he may join the Right Cause party led by Russian billionaire Mikhail Prokhorov. Some media reports suggested that Lebed may join A Just Russia party, quoting its leader Sergei Mironov as saying that his party was in talks with several prominent United Russia figures on moving to A Just Russia.

Several members of A Just Russia party, including State Duma Deputy Chairman Alexander Babakov, recently cancelled their membership in A Just Russia to join Putin's All-Russia People's Front, a political movement that analysts say has been created to boost United Russia's flagging popularity.

RBL OTHER NEWS 16. Federal Grid starts connecting Far East and Siberian power markets VTB Capital September 5, 2011 News: According to Kommersant Federal Grid Company started construction of grid equipment to connect currently isolated Far East Region with Siberian power market. The first stage of the project worth RUB 2.6bn would be completed in 2012 and will allow 200MW flows between regions. Later the capacity could be increased to 400MW. Our View: Connection of the two regions could allow UES of Far East increase utilisation of its capacities by supplying more electricity to Siberian power market. In particular first stage of the project when implemented would create more competition in the regions that are currently dominated by Gusinoozerskaya and Kharanorskaya GRESes, controlled by OGK 3/ Inter RAO. In the long run, connection of the two regions (when throughput capacity of the connection is increased) would make Far East power market more attractive. In that sense acquisition of UES of Far East by RusHydro would make even greater sense. Mikhail Rasstrigin 17. Gazprom Neft, LUKOIL, Rosneft and TNK-BP face problems with jet fuel delivery to the Moscow aviation hub VTB Capital September 5, 2011 News: According to Interfax, Moscow aviation hub airports are experiencing a critical lack of jet fuel stock. Problems with railroad transportation, a decrease in production and an attempt to build up a stockpile had been mentioned as a key reason for the shortage. The main suppliers of jet fuel for the Moscow aviation hub, namely Gazprom Neft, LUKOIL, Rosneft and TNK-BP, have guaranteed to solve the problem. Our View: Even though this situation could potentially inconvenience passengers if not resolved on time, we do not see any negative impact on stock prices for Moscow aviation hub main suppliers in the long term.

18. Jacques Der Megreditchian to Leave Troika Dialog Troika Dialog - press release September 5, 2011 Troika Dialog announces that Chief Business Officer Jacques Der Megreditchian is leaving the company. The legal and actual work handover period will take several months. Jacques Der Megreditchian has more than 25 years of experience working on the brokerage and investment banking services market in the West and in Russia. Mr Der Megreditchian has been the Chairman of the Board of Directors of RTS Stock Exchange since 2004 and a member of the Board of Directors of the Russian National Association of Securities Market Participants (NAUFOR) since 2006. In 2011 he was elected to the Board of Directors at MICEX and currently heads its Strategic Planning Committee. "Jacques Der Megreditchian joined Troika Dialog in June 2000 and since then we have achieved so much throughout years of joint work. Today Troika occupies leading positions in Russia and the CIS countries. It is hard to overestimate Jacques' contribution to the development of the Russian stock market's infrastructure. It is a joint decision and I am certain that we will continue to communicate professionally and personally in the future," commented Ruben Vardanian, Chairman of the Board of Directors at Troika Dialog. "The past eleven years at Troika have been the most interesting and exciting part of my 25 year career. Troika is a unique organisation that combines a history of success and an insistence of high standards from itself as well as its employees and has good human relations and well-formed business etiquette. Participating in the building Troika was very interesting for me. I am convinced that the history of success will continue to develop and that together with Sberbank, Troika will develop a universal financial champion," said Jacques Der Megreditchian. 19. Melnichenko takes control of SUEK bne September 2, 2011 Banking wunderkind Andrei Melnichenko has taking a controlling stake in Russia's Siberian Coal Energy Company (SUEK) reports Prime, citing company sources. Melnichenko's business partner Sergei Popov has sold much of his stake to Melnichenko, but retains a stake in the company. The changes are part of an amicable reorganisation signed by the men in March and part of a longer process of dividing up their empire ending 10 years of cooperation. Popov says he wants to focus on the strategic development of MDM Bank, in which he owns about 56%.

20. O'Key to pay interim dividends amounting to 70% of its 1H11 net income VTB Capital September 5, 2011 News: O'Key issued a press-release stating that the company's BoD had approved an interim dividend payment totalling USD 26.8mn (or USD 0.10 per GDR), which refers to the period from 1 January 2011 to 30 June 2011. The payment itself would be made on 14 September 2011 to shareholders that are registered on 12 September 2011. Our View: The announced dividend payment implies a dividend yield of 1.2% given the price per GDR at USD 8.1 (closed on 2 September 2011). Total amount of cash to be paid through dividends is USD 26.8mn, which accounts for 70% of company's reported 1H11 net income (USD 38.0mn). We see marginal implications for the company's capex programme and capital structure. The payout is high as the previous goal of the company was to allocate up to 25% of the annual net income to dividends. We think that 2H11 would see a lower dividend payment as it is more capital intensive. 21. PIK Group: Commercial property to closed mutual funds; non-core assets to be offered to investors UralSib September 5, 2011 Five closed mutual funds to be registered. The Federal Financial Markets Service has registered applications from PIK Group to register five closed mutual funds, entitled PIK-English Block, PIK-Retail the Capital, PIK-Retail the Capital-2, PIK Retail the Pod- Moscowje, and PIK-Retail the PodMoscowje-2. Kommersant reports that PIK aims to distribute its commercial property assets into these five funds, which may be offered to investors. The newspaper estimates the total proceeds from monetizing the funds at $225 mln. In line with regular practice. PIK may accumulate up to 160,000 sqm of commercial property, at various stages of completion, which is about 1.5% of its total portfolio and about 16% of its annual prop- erty turnover. The property will be rented out, and the stakeholder of the funds will be entitled to rental proceeds. The potential net operat- ing income from all five funds, when fully loaded, could be $50-70 mln (going on current prices). PIK's major business is residential de- velopments, with commercial property (which is to be included in the funds) being present as a byproduct of developing the first floors of residential buildings and social infrastructure. PIK's regular practice is to monetize (sell or pre-sell) all commercial property as soon as rea- sonably possible. Neutral for stock. We regard the news as neutral for the stock. The creation of closed mutual funds to be offered to investors is a way of monetizing PIK's commercial assets, in line with the devel- oper's and the market's regular practice. PIK successfully offered part of its DCF from projects under development to investors in 2007. The distribution of commercial property into the funds should enhance its visibility and liquidity, and should make moneti- zation of these properties easier and enlarge the investor base from property investors to financial investors.

22. PhosChem raises contract price with India for 2H11 Troika Dialog September 5, 2011 PhosChem, the trader of Mosaic and PotashCorp, has struck an agreement with India for deliveries of DAP from September 2011 through March 2012, as reported on Friday by FMB, the leading fertilizer industry publication. India is the only market that has term contracts for half a year on the market - all other destinations are spot based. The price of the previous contract for DAP was $612/tonne CFR, while the new price is $677/tonne CFR (up $65/tonne). This implies a netback of $625/tonne FOB Tampa, compared with the prevailing market price of $650-655/tonne FOB Tampa, or only a 4% discount. All other producers, including PhosAgro, should follow PhosChem and conclude the contracts for deliveries on the same terms. PhosAgro delivered little to India in 1H11 and we expect the volumes to pick up strongly in the latter part of the year. The phosphate market remains reasonably tight - Ma'aden is still in a ramp-up stage following its commissioning in mid-2011 and there is little material available despite the low tax season for exports from China. Prices have held up at $650-655/tonne FOB Tampa for over a month now. There are rumors that export restrictions imposed on DAP in China will also be applied to other NP (nitrogen and phosphate) fertilizers, which amplifies the nervousness among buyers. Overall, we see positive signs from the market; we would prefer PhosAgro to Uralkali at this stage, though our top pick in the sector is still Acron. PhosAgro is due to report its maiden 2Q11 IFRS figures on Wednesday. Mikhail Stiskin 23. Russian Equities Wrap, August 2011 VTB Capital September 5, 2011 In August, Russian equities were sold off alongside other stock markets, having underperformed the latter and thus proving themselves to be a high-beta exposure once again. The RTS Index lost 13% (MSCI Russia -13%), well behind both MSCI EM (-9%) and MSCI DM (-7%). Nevertheless, still up 18% over the past 12 months, Russia remains one of the stronger stock markets as of late. Sector-wise, Precious Metals (+7% on average) were the only stellar performers, having gained strong support from rallying gold. Telecoms (-9%) were somewhat resilient last month. Otherwise, Steels (-23%), Utilities (-21%), Consumers (-20%) and Industrials (-17%) took the hardest hits. Stock-wise, Polyus Gold (+8.6%), along with Mail.ru (+0.7%) on strong 2Q11 and Rosneft (-7.4%) on the deal with Exxon, were among the best performers last month Russia's macro backdrop remained reserved, with August manufacturing PMI printing 49.9; July IP was at 5.7% YoY, the weakest since May. On the positive side, inflation moderated more profoundly throughout summer, and at 9.0% YoY it is likely to undershoot our 9.0% FY11 forecast. Lending growth was sustained in July at 2.1% MoM (19.5% YoY), led by household lending, though corporations also accelerated their funding programs. Moreover, according to preliminary CBR data, lending growth

gained additional momentum in August, with total loans adding another 2.7% MoM (21.1% YoY). RUBBASK ended August at 34.65 (-4.5% MoM, -0.4% YoY). Domestic liquidity gradually tightened throughout August, even though the CBR tolerated sizable RUB volatility and kept its FX interventions to a minimum. MinFin tried to alleviate tight conditions in the money market through an increase of supply at its deposit auctions, yet the O/N rate printed at 5% at end-August, the second consecutive end-of-month spike. The belly of the local yield curve moved out 30-50bp, but 10Y XXCY remains below 7%. According to EPFR, in August the pace of outflows from Russian equities amounted to USD 2.1bn, which shrank YTD to a mere USD 0.4bn (still not bad against roughly USD 20bn of EM outflows). Alexey Zabotkin

24. TAPI pipeline project members welcome Russia's participation RIA Novosti September 2, 2011 Russia wants to participate in the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project, members of the project said in a joint statement on Friday. "The parties welcome Russia's interest in participating in implementation of the Turkmenistan-Afghanistan-Pakistan-India gas pipeline project," the heads of Russia,

Afghanistan, Pakistan and Tajikistan said in the statement after signing an agreement in the Tajikistan capital of Dushanbe on development of trade and economic relations. The project's participants signed a final agreement to build the pipeline, intended to carry gas to India from Central Asian states, last December. Construction will start in 2012. The 1,700 kilometer pipeline with a flow capacity of 30 billion cubic meters per year and a rough cost of $4 billion, stalled by the war in Afghanistan, is supported by the Asian Bank for Development. Gas will be supplied from Turkmenistan's Dovletabad deposit which has reserves are estimated at 1.7-4.5 trillion cubic meters. In October 2010 Russian Deputy Prime Minister Igor Sechin said that country's gas giant Gazprom might participate in a consortium to build the pipeline. India suggested Gazprom join the project as one of the suppliers along with Azerbaijan, Kazakhstan and Uzbekistan. 25. Yanukovich orders reorganization plan of Naftogaz by October 1 RIA Novosti September 2, 2011 Ukrainian President Viktor Yanukovich on Friday instructed Prime Minister Mykola Azarov to set plans to reorganize the country's state gas company, Naftogaz, by October 1, the president's official website said. The program's project should contain all of the information on the company's stock inventory, its subsidiary companies, as well as the distribution of both profile and non-profile stocks. "Examine proposals in regard to the future use of Naftogaz Ukraine and its subsidiary companies' non-profile stocks," the instruction reads. 26. Yearning for Earnings Alfa Bank September 5, 2011 The current Russian earnings season is not over yet, but after analyzing 53 observations of 2Q or 1H interims (see table on page 2), the key conclusion is that results overall came in on the upper end of the expected range. Based on our analysis, we rate 52% of all reported results as above expextations, 25% in line, and 23% below. In reality, the recent history always counts for earnings revisions, and in our view this round of reports does not suggest that 2011 forecasts, on average, are in danger. Of course, this does not apply to all sectors, with food retail as the prime example of a sector where weak 2Q or 1H results may even lead to a change in longer-term assumptions. Oil & gas, utilities and Russian banks mostly positive: Except AOIL, all reports were in line or better than expected. Apparently the impact of high crude prices was not fully reflected in consensus estimates. Also, in the utilities space, all results came in

line or better (HYDR, OGK-1, OGK-6). All Russian banks reported strong results, even after discounting for some cosmetic moves along the way. Metals & mining positive overall: Results in the metals & mining sector brought a few disappointments (incl. IRC, KTK), but mostly strong (SVST, RUAL, TMK, MMK, POG) or very strong (FXPO) results. Retail disappointing: In food retail, all three key players failed to meet expectations, particularly MAGN. The sector seems to have a cost issue, raising concerns of whether the market's bullish growth assumptions will only come at lower margins than implied by the sector's rich valuation. Support for 2011 earnings forecast: 2Q/1H interims will not trigger a round of earnings downgrades in our view, except in food retail. The only sector where we have seen a persistent trend of downward revisions over the past few months was the utility sector, but this was a response to the adverse regulatory impact affecting the tarrif outlook, and 2Q interims will not further add to this trend. Commodity prices will be key: Even though interims were supportive, obviously it cannot be excluded that the global growth slowdown and, particularly, a softening in commodity prices will ultimately lead to earnings downgrades, but this is likely to manifest itself towards the end of the year and will less affect 2011 than 2012 earnings, which the consensus sees currently at 3%-6% growth (depending on the index). Peter Szopo

RBL DEBT 27. Risk appetite faded following the weak US labour report VTB Capital September 5, 2011 Friday's US Payroll report was poor by any definition. Following this, the US equity indices fell 2.0-2.6%, while Treasury notes firmed with the 10-year yield slipping 14bp to 2.19%. The UST curve flattened 15bp with the 2y10y spread tightening to 180bp as weak statistics fuelled expectations of monetary response from the Fed, which would likely include an extension of the duration of the Fed's bond portfolio on the agenda. Commodities also took a hit as the CRB index ended 0.7% down, though the Brent oil price dipped 1.7% to USD 112.30/bbl. In the meantime, FHFA filled the claim against 17 banks for inappropriately selling USD 196bn of MBS, hence no surprise that financial stocks underperformed on Friday. Returning to the numbers, in August the US economy created zero new jobs, while figures for two previous months were revised 58k lower. The telecommunications industry showed a 47k reduction of jobs following the Verizon strike, though it was offset by job gains in medicine, education and business services. All in all, the private sector created 17k new jobs in August, while government posted the same number of layoffs. This coupled with the work week edging down by 0.1 hour to 34.2 hours, while average earnings growth slipped to 1.9%. The unemployment rate was unchanged at 9.1%, though the broader measure of the unemployment rate rose to 16.2% from 16.1%.

On the other side of Atlantic, newsflow was not any better. Last Friday, the 'Troika' (EU, ECB and IMF) suspended talks regarding the release of the next tranche of loans as the Greek budget targets were missed with little evidence of fiscal reform. In In Italy, Prime Minister Silvio Berlusconi's government backtracked on austerity measures and tax increases. Hence, no surprise that European credit spreads were widening on Friday with the cost of protection for peripheral EU members rising 20-30bp. Meanwhile, over the weekend German Chancellor Angela Merkel's CDU was defeated in another regional election. Today, US markets are closed for Labour Day, hence European politics would be in focus. This week's agenda is fairly heavy with statistics, but we think the key events are the Tuesday's Italian and Spanish debates regarding budget measures and Thursday's speeches by US President Barack Obama and Fed Chairman Ben Bernanke. Meanwhile, ECB, BoE and BoJ policy meetings would also get some attention. 28. Russian/CIS bonds ended only marginally lower VTB Capital September 5, 2011 Despite firmer US Treasury notes, the prices of Russian/CIS bonds scaled back as concerns over worsened risk sentiment weighed. However, we believe that price action was rather contained given the considerable retreat in equities and commodities. On average, Russian/CIS bonds were marked down 25bp. Hence, Russian sovereign notes widened 10-15bp spread-wise, though they lost just around 25bp in price - in particular, RUSSIA 30 (YTM 4.09%) closed at 119.50pp. Meanwhile, mid-term notes outperformed the longer end as RUSSIA 15 (YTM 2.72%) ended little changed in both price and spread terms as the UST curve flattened. In the non-government high grade space, the long end also underperformed - in particularly, GAZPRU 37 (YTM 6.36%) lost roughly 75bp in price, while SBERRU (YTM 4.75%), LUKOIL 17 (YTM 4.87%) and VEBBNK 25 (YTM 6.45%) slipped around 50bp price-wise. Meanwhile, the spread of longer-dated notes widened around 15-20bp, underperforming the sovereign curve. In the high-yielding segment, we noted that bonds of Evraz Group, Promsvyazbank and VimpelCom were under pressure on the long end, losing roughly 25-50bp in price. However, in general the sub-investment grade issues were more resilient to Friday's volatility in the global markets. CIS bonds ended rather mixed. We noted Ukraine's sovereign curve was better offered, losing roughly 25-50bp along the whole curve. Hence, the spread between Ukrainian and Russian curves marginally widened. Also, NAFTO 14 (YTM 6.99%) was under pressure, dropping around 50bp in price amid increasing political tensions between Ukraine and Russia over the re-negotiation of gas contracts. At the same time, we noted that bonds of Metinvest and Ferrexpo were in demand, gaining about 20-40bp in price by the end of the day, while KKB's issues were also rather well bid.

29. RUB weaker following the global risk sentiment back drop VTB Capital September 5, 2011 RUB weakened against both the currency basket and USD, driven mostly by the deterioration of risk sentiment and global strengthening of the US dollar. Hence, RUBBASKET opened lower at 34.63, though it later bounced in the range of 34.58-34.70 before ending at 34.64 (+8 kopecks compared to Thursday). Meanwhile, RUB surrendered roughly 12 kopecks (-0.7%) to the US dollar, finishing at 29.14 as the dollar strengthened against the euro on Friday (1.42, -0.38%).At the same time, we noted that RUB mostly performed in line with its EM and commodity-based peers as, for example, AUD and CAD lost 0.72% and 0.85% against USD, respectively. Trading flow was fairly moderate with MICEX recording turnover of USD 4.2bn with next business day execution. Rouble interest rates inched up slightly following the RUB weakening, though price action was rather contained - in particularly, we noted that the 5-year XCCY swap rate ended 5bp higher at 6.45%. At the same time, front end rates remained little changed as the situation with banking liquidity continued to improve with the start of new month with banks' deposits at CBR rising by RUB 30.9bn to RUB 227.7bn on Friday. Meanwhile, MICEX weekly REPO rates tightened about 25bp to 4.70% on Friday. 30. Disappointment for some on the ratings front RBS September 5, 2011 It is very difficult to argue with Fitch's decision to affirm Russia's BBB rating, while retaining its positive outlook. This follows similar conclusions reached by S&P earlier in the week in also retaining their own BBB rating. There may well have been some disappointment in the market though as there were some rumours in the market some weeks back of a potential upgrade of Russia's sovereign ratings. Moody's, meanwhile, already rates Russia a notch above the other two rating agencies at Baa1. Hence, we think it unlikely that we will see any near term positive progress herein. Reviewing the text of Fitch's decision on Russia, we have few objections, and indeed our own view on Russia is very close to that of Fitch at present. In terms of the positives, Fitch highlights: (+) An exceptionally strong sovereign and external balance sheet, with USD540bn in FX reserves, and still limited external leverage leaving Russia as a net external creditor. Fitch also notes the fact that Russia has run current account surpluses every year since 1997. (+) Low level of public sector indebtedness, with a public sector debt/GDP ratio of only 11.5% of GDP as of the end of 2010, and with finance minister Kudrin recently suggesting the Federal budget could balance in 2011, the rate of deterioration in the public sector debt/GDP ratio has been modest. (+) On-going efforts to move to a more flexible exchange rate regime should provide additional durability for the economy - the flexibility has also encouraged de-

leveraging by domestic corporates/banks in recent years - the stock of short term external debt has close to halved since 2008. (+) Political stability, with parliamentary elections (December 2011) and March 2012 unlikely to bring much change in terms of the political outlook/policy environment - while Fitch notes the risks from the over-centralisation from the existing system. In terms of the risk factors identified by Fitch: (-) Heightened budget vulnerability to changes in the oil price with the "breakeven" oil price for the Federal budget rising to USD118 per barrel in 2011 from just USD48 per barrel in 2008. (-) Longer term and deeper seated structural vulnerabilities in the Russian economy, including the weak business environment, lack of diversification in the economy, corruption, weak governance, et al. (-) Lack of transparency in the country's banking sector, with recent banking failures revealing concerns over the quality of supervision/regulation and highlighting the risk of "shocks" out of the sector. Fitch, however, notes the small scale of the banking sector which mitigates potential systemic risks to the sovereign balance sheet. (+/-) The structural vulnerabilities identified above largely explain Russia's disappointing pace of economic recovery, with real GDP growth of only around 4.2% expected for 2011, likely moderating further in 2012 (3.6%). On the back of the above commentary by Fitch a ratings upgrade seems to be dependent on post election moves for fiscal consolidation to reduce the dependency on oil. Fitch notes that a marked decline in oil/commodity prices could put downward pressure on ratings. Interestingly, Russia's ratings would suggest a solid name, and this to an extent is reflected in Russian sovereign spread levels which have remained relatively well behaved over the past year. One caveat with Russia from my perspective is though that it is the one economy in the CEEMEA region with which it is not that difficult to imagine a repeat of the 2008 crisis. In particular, it would not take an overly aggressive drop in oil/commodity prices (say oil dropping another USD30 per barrel from current levels) to produce a pretty aggressive market correction, and large withdrawal of liquidity, risking a repeat of the problems in the banking sector from 2008. Russia is also a large economy with global impact, so it needs to be watched. As Fitch notes its vulnerabilities to oil/commodity price volatility have certainly increased. Timothy Ash

31. RusHydro plans to place RUB40bn in bonds Alfa Bank September 2, 2011 The company plans to place bonds of series 03-06 in RUB10bn increments. Maturity is set for ten years. The possibility for early redemption may be requested by owners and is at the discretion of the issuer. Ekaterina Leonova 32. S&P upgrades Bank Vozrozhdenie, changes the outlook for Alfa-Bank to positive VTB Capital September 5, 2011 News: On Friday, S&P took a positive rating action regarding a select number of Russian banks and made some comments concerning general developments in the banking system. In particular, the agency upgraded Bank Vozrozhdenie by one notch to BB-, assigned positive outlooks to the ratings of Alfa-Bank (BB-) and the Urals Bank for Reconstruction and Development, as well as reviewed the standalone credit assessment of Raiffeisen Bank's Russian entity. Our View: Overall, although the action clearly adds to the positive spin that has recently been driving the rating actions for Russian banks, we note that S&P remans the most cautious, and, in our view, the most backward-looking among the three agencies regarding its assessment of the Russian banking credits. It took the agency quite a long time to recognize that the depth of the asset quality problem facing the Russian banks is significantly lower than the initial estimates provided by S&P in 2009 (Gross Problematic Assets in S&P's terminology were to exceed 40%). However, yesterday's press release that accompanied the upgrade is focused on lending growth and funding structure improvements. In terms of individual ratings, S&P still decided to keep Alfa-Bank at the BB- level (although the wording of the comment reflects quite high chances of an upgrade based on either the 1H11 or FY11 financials). The 2-notch gap between the ratings assigned to Alfa by S&P and the two other agencies, as well as the fact that in its rating rationale S&P focused on the high concentration, per se, rather than their quality (as was the case with the recent upgrade by Fitch), reflects the higher relevance of the ratings assigned to Alfa by Fitch and Moody's, in our view. We also view Vozrozhdenie as being a very solid banking credit, but we believe that the fact that its rating is currently the same as that of Alfa also highlights the misplacement.However, in this case it reflects that Alfa is underrated, not that Vozrozhdenie is overrated. In the Eurobond space, Alfa remains our single most favored credit among the privately-owned Russian banks.

RBL COMPANY SNAPSHOTS 33. Mail.ru Group's trip notes: Russian internet traffic monetisation is at embryonic stage and is to steepen VTB Capital September 5, 2011 News: We took Mail.ru's management on a road show to meet investors in London last week. Our View: Managing Director Matthew Hammond's comments underpin our bullish view on Russian internet fundamentals and highlight the upside risks to our Mail.ru valuation model. Mail.ru management re-iterated its estimate from last week that the company's FY11 revenue growth could reach 50% YoY (vs. 37% YoY incorporated in our current IFRS model) with Russian internet ads and IVAS remaining the key revenue drivers. Management continues to sound bullish on both the company's specific and overall Russian internet traffic trends, confirming that the company's daily internet usage pick-up seen in 1H11 is continuing (+20% YoY in June.)Also, the internet usage of the average Mail.ru user is almost twice that of Facebook users in Russia: 10.5 hours vs. 4-4.5. The monetisation of Russian internet users is at a nascent stage. Management sees the internet audiences of both its flagship Mail.ru, the third most visited web-site in Russia for the daily audience, and its SNSs (Odnoklassniki and MyWorld) as being highly under-monetised, while it views the monetisation ability of China's Tencent (the company's closest peer) as a long-term benchmark. Finally, management sounded fairly regarding its ability to sustain high-40th margins for FY11, saying that all major cost items (labour, hosting and rental expense) are expanding below revenues, thus cushioning margins at 45-50% over the next couple of years. 34. Rusagro - Sugar prices decoupling Renaissance Capital September 5, 2011 We reinstate our BUY rating, but cut our target price for Rusagro to $16.9/share (from Under Review and $19.3 previously) on the back of a lower forecast for FY11 financial results from the sugar division, as an exceptionally high beet harvest in Russia translates into low domestic white sugar prices in 2H11 and delayed sugar sales. We cut our 2011 EBITDA forecast by 30%, while our 2012 EBITDA forecast is up 11%. The new target price also reflects a reduction of our forecast pork volumes for 2015, because the company has not yet started construction of its Chelyabinsk project due to uncertainty over pork quotas related to Russia's accession to the WTO. Other new pork projects are under way, according to the company's original plans. Domestic sugar price below 'replacement' price for first time in 12 years. Weather permitting, Russia could produce 4.3-4.6mnt of beet sugar this season - about 80% of annual domestic consumption of 5.6mnt. Given that 2.6mnt of raw sugar were

already imported in 1H11 (+18% YoY), the huge sugar production from beet has created an oversupply and pushed the domestic sugar price down to RUB22.6/kg ($779/t, with VAT). The domestic price is currently below the RUB31-34/kg replacement price ($1,035/t, including current global raw sugar price of $645/t, $140/t seasonal import duty, and $250/t in processing, transportation costs and processor's margin). Shift in sales, but 5% higher 2011E sugar output forecast. The shift in sugar sales from 2H11 to 2012 indicates risks that relate to any cyclical agriculture business, but does not affect our longer-term view on Rusagro. Its decision to delay sugar sales to get higher margins in 2012 reflects its focus on profitability rather than sales volume. The company benefits from low production costs and strong yields in its agro segment; its pork division is showing improvements in margins and its financial position is stable. Rusagro shares lost 37% since IPO and 13% in August. On 2012E P/E of 5.4x, Rusagro is valued 56% below its international sugar peers; on EV/EBITDA of 3.8x it is trading 42% below.

RBL SECTOR SNAPSHOTS 35. CBR announced August preliminary stats - corporate lending growth accelerated to 2.5% MoM - retail portfolio expansion remained strong at 3.3% MoM - downside risks remain VTB Capital September 5, 2011 News: Tex On Friday, Interfax cited CBR head of licensing department Mikhail Sukhov as announcing preliminary statistics for lending in August. Corporate loan book growth accelerated to 2.5% MoM from 1.7% in July, suggesting a 19% YoY expansion. The retail portfolio increased 3.3% MoM (28% YoY), slightly decelerating from 3.7% MoM growth in the previous month. Retail deposits grew just above 1% MoM (23-25% YoY). Our View: August did not bring a seasonal slowdown, as was expected, with growth momentum remaining strong. We believe this strong expansion was attributed to still strong economic growth and growing inflationary expectations as banks guide for a hike in interest rates in autumn. However, recent turmoil on global markets and increasing concerns over a possible slowdown in the global economy can negatively affect the Russian banking sector and raise downside risks to our forecasts. 36. Gazprom stalls in August, NOVATEK production continues to rocket Troika Dialog September 5, 2011 Russian gas production expanded 4.9% y-o-y in August, which was in contrast to the trends among the biggest producers. Gazprom's production completely stalled last month, falling 0.1% y-o-y, even against last year's fairly low base. We are now entering a seasonally high period for gas, but also a period of rather high gas prices

in Europe, which broke $400/mcm on an oil-linked contract for Gazprom, on our estimates. Storage in Europe (especially Germany) remains at high levels and while imports show rather positive dynamics, underlying gas consumption is contracting in nearly all of Gazprom's markets. The base to outperform 2010's production figures has become rather high for the balance of the year, and it is far from certain that the company will post growth against 2010 in the remaining four months of 2011. However, even if Gazprom somehow manages to not decline for the rest of the year, we estimate its production in 2011 will be about 517 bcm, up 1.7% y-o-y, which probably represents the best case scenario for the gas giant. NOVATEK's growth is clearly accelerating with production (including the share of Sibneftegaz), which climbed 56% y-o-y last month. Stripping Sibneftegaz, we estimate that NOVATEK's organic growth in August totaled 41% y-o-y. We are very encouraged to see that such growth is driven not only on the back of the highly prolific Yurkharovskoye field, but also on the legacy East Tarkosalinskoye, which is showing a turnaround in output. We now forecast NOVATEK's legacy production at 46 bcm (up 24% y-o-y), which the company could still beat, and total gas output at 51.2 bcm (the company's latest guidance is 50-51 bcm).

37. Russian Banks: Risks are Priced In VTB Capital September 5, 2011 In August, Russian banks underperformed their EM peers on the back of global turbulence in the markets due to the risk of a cyclical slowdown and a 'double-dip' scenario. This was because of their high sensitivity to the slowdown in economic growth and to the RUB/oil correlation. Without changing our forecasts and 12-month Target Prices, in this report we look at Russian banks under the stress scenario set forth in our What if the World Double Dips: Implications for Russia, of 12 August. After the August price correction, and in even the most unlikely negative scenario of USD 75 oil, our top picks are Sberbank and NOMOS. Our stress scenario is based on USD 75 oil, with Russian GDP growth of 2.0% in 2012 and 3.2% in 2013F. This would imply RUB weakening 14.5% over the next couple of years. Although we believe that this scenario is highly unlikely, and stick with our oil forecasts of Urals at USD 98bbl, it is not something that is altogether impossible. Stress scenario hits loan growth, which is to slow to 7-10% in 2012 (from 22+% under our base case scenario) and about 16% in 2013 (down from 21%). As a result, our EPS estimates drop on average 20% in 2012F and 35% in 2013F.

Banks RUB earnings would be hit 12-28% in 2012-13F under the stress scenario, with a drastic decline in loan growth in 2012-13 limiting balance sheet leverage and hitting ROEs after high cost inflation in 2011, along with a weaker RUB. Our 12-month Target Prices would be revised down 31-40%, with NOMOS being hit the least and BSPB the most. Downside risks priced in after the 9-24% sell-off, with Sberbank and NOMOS as our top picks after the 20-24% price correction in August. They trade at attractive 6-8% discounts to GEM peers in the stress scenario and 26% in our base case, so we are reiterating our Buy recommendation. We remain more reserved on BSPB and V-bank. The fundamentals remain supportive, with Sberbank recently posting a strong set of 2Q11 results and no signs of slowdown in 2H11. NOMOS is due to report its 2Q11 numbers on 6 September, and we expect strong lending growth to keep the solid earnings momentum rolling. Dmitry Dmitriev 38. Russian oil output expands to new high of 10.27 mln bpd Troika Dialog September 5, 2011 Russia's oil output has hit another post-Soviet high of 10.27 mln bpd, driven by greenfield expansion and solid brownfield performances at Rosneft and Gazprom Neft, as well as higher condensate output from Gazprom's wet gas layers. Rosneft continues to deliver with output growth of 3.4% y-o-y, albeit relatively flat m-o-m. Vankor is now producing 316 kbpd, while all other subsidiaries showed 1.2% y-o-y growth in August, even though this came against a slump and hence a low base in 2010. TNK-BP has surprised us very pleasantly on the greenfield side. East Siberian Verkhnechonskneftegaz made a sudden jump last month to 112 kbpd (13% m-o-m), nearly doubling y-o-y production. This, together with the Uvat project, was the reason for growth, as the legacy subsidiaries were declining at a worrying 4.7% y-o-y. LUKoil's performance was rather interesting this time. The good news is that the now "famous" South Khylchuya field in Timan Pechora rose m-o-m for the first time in the last fourteen consecutive months. Output stood at 85 kbpd. While it may be a bit early to call for the bottom for this field, which is effectively responsible for over 70% of LUKoil's decline, it should not be that far. The bad news is that we saw a deterioration in legacy production, where the brownfield decline hit 3.9% y-o-y in August, a significant worsening against the 2.0% decline so far this year. Surgutneftegaz' growth sits on the back of Talakan, while legacy output was down 1.8% y-o-y. We liked Gazprom's performance on the liquids side, with 8.4% y-o-y growth against a small decline in underlying gas output, which clearly suggests the share of wet gas is rising (the Zapolyarnoye field's Neocomian layers). Finally, Bashneft continues to surprise on the upside with another production record at 306 kbpd (up 6% y-o-y) in August.

RBL MACRO RESULTS 39. A weak US labor market report for August increases the chance of more stimulus action from the Fed and the Obama administration Metropol September 5, 2011 The US August labor market report showed no job growth, yet another sign that the US economy has slowed substantially over the last few months. Payrolls, unexpectedly, remained unchanged in August compared to the market expectations of a 68,000 gain. In addition, the July gain of 117,000 was revised downward to 85,000. The August reading was affected by the one-time impact of a strike at Verizon, one of the largest telecommunication companies in the US, which resulted in a deduction of 48,000 from the payroll figure. Private hiring in August rose by 17,000, the lowest reading since the decline in February 2010. Government payrolls continued to slide, continuing the trend of the past several months as local and state governments continue to address budget imbalances. The figure fell by 17,000 in August. The unemployment rate held at 9.1%. The weak labor report is likely to influence the Fed's decision at its next meeting on September 20-21. We expect new stimulus measures to be announced. President Barack Obama is widely expected to offer substantial new job and economy initiatives in a speech before a joint session of Congress on Thursday. Mark Rubinstein 40. CBR announces capital outflow of $3bn in July Alfa Bank September 5, 2011 According to CBR Deputy Chairman Alexey Ulyukaev, Russia had a $3bn capital outflow in July, negating June's capital inflow. This contradicts our expectations of $1-2bn capital inflow in July and makes our August $2-4bn capital outflow forecast very optimistic. Seeing a capital outflow in July before the recent decline in the global financial markets is NEGATIVE news. It means that the capital inflow reported for June was rather a one-off improvement and was not the beginning of a trend. We had previously expected July to show a positive capital account, but after such a strong capital outflow, we now see our $2-4bn capital outflow estimate for August as being too optimistic. Most likely, based on July figures, we now have to expect a $6-7bn capital outflow. Natalia Orlova

41. Monthly macro outlook: Russian economy looks better and better, but markets have little faith UralSib September 5, 2011 Russian macro picture is bright ... Construction growth for July was unexpectedly high at 17.6% YoY, primarily driven by hous- ing. While this jump in construction volumes can apparently be explained by the completion of many previously started buildings, we believe there will be a strong recovery in the sector. Capital investment accelerated to 7.9% YoY in July, which is the largest YoY growth rate since the start of the year. Still, sluggish dynamics for investment in 4M11 makes our previous full-year capital investment forecast unfeasible, and we thus downgrade it to 5.6% YoY. Investment was hit by the increase in social security tax at the start of the year and by sector-specific government policies. This tax increase caused a decline in real disposable incomes in 1H11. After a return to positive growth in June, real incomes decelerated to a modest 0.6% YoY growth in July. Nevertheless, the dynamics of key macro indicators paint a bright picture of the Russian economy: real GDP is accelerating in line with our expecta- tions; industry and retail trade show strong growth; unemployment remains low; the federal budget is running with a surplus, and inflation is near zero. This solid economic performance is subject to external risks, which continue to mount due to increased market volatility and growing concerns of a deceleration in economic growth for developed countries. (Please see our desk note published on Friday.) ... but completely ignored by markets. Strong Russian fundamentals have been completely disregarded by markets, which re- main extremely volatile following the US credit rating downgrade and increasing signs of weakness in the US and Europe. The move away from some classes of risk assets caused substantial capital outflows and a depreciation of the ruble in August. Despite the drama of recent weeks, we believe anxiety will gradually settle and the ruble will stabilize at RUB28.4-29/$ during the next few weeks on the back of fairly stable oil prices. Subsequent ruble dynamics will depend on whether the risks of a deceleration in developed economies materialize. If there is a deceleration, we will see lower oil prices and a different macroeconomic picture in Russia: a weaker ruble, slower growth, lower inflation and a larger budget deficit. However, at this point we adhere to our base- case, no-deceleration forecast, as one quarter of bad statistics in the US and Europe is not enough to form a stable trend. Alexei Devyatov 42. Russia Services PMI reveals slower growth in the sector in August, business expectations drop VTB Capital September 5, 2011 News: Russia Services PMI dropped to 53.2 in August from 56.9 in July. New business orders declined to 54.4 from 55.7. Business expectations decreased to 64.9 from 76.6. Our View: The August Services PMI data revealed slower growth in the sector last month as the index dropped to March levels.

Cost pressures remained elevated in contrast to the manufacturing sector. At the same time, prices softened, likely signalling lower demand for services and the declining bargaining power of companies in the sector. Employment growth moderated with the respective subindex declining to 51.2 and indicating the lowest hiring pace in the last six months.

RBL REFORM & REG'S 43. Accounts Chamber finds history of lax capex discipline at FSK Renaissance Capital September 5, 2011 Event: On Friday (2 September), Interfax reported that an Accounts Chamber audit of the Federal Grid Company (FSK) found that capex funds raised over the period 2007-2009 were significantly less than planned and, despite the shortfalls, not all available funds were actually spent. Thus in 2007 FSK raised only 83% of planned capex funds and disbursed only 60%. In 2010, 98% of planned capex was carried out and the figure reached "almost 100%" during 1H11. FSK blamed the shortfalls and other technical infringements noted during the audit on the numerous changes and far-reaching reorganisation that accompanied the liquidation of state holding company RAO UES in 2008. Action: Positive for FSK, in our view. Rationale: In our view, FSK's performance against capex plans should be seen in the context of the Russian power sector's 20-year history of inefficiency, financial imprudence and under-investment. Far from providing any cause for formal censure, we believe the huge progress noted by the Accounts Chamber since 2007 should - and will - be welcomed by the authorities. Vladimir Sklyar 44. CIS leaders call for free trade deal, peaceful end to conflicts RIA Novosti September 4, 2011 Leaders of a post-Soviet alliance called on Saturday for signing a delayed free trade agreement and peacefully resolving conflicts in their final statement rounding up the summit. Leaders of the CIS alliance, which includes Armenia, Azerbaijan, Tajikistan, Kyrgyzstan, Kazakhstan, Russia, Moldova, and Uzbekistan, gathered in Dushanbe, the Tajik capital. Ukraine was also represented at the event though officially it is not a member. "Considering the sustainable growth in foreign trade, CIS member states are seeking to develop economic cooperation based on the CIS economic development strategy until 2020," the statement said. The key goal at the moment is to form a free trade zone, the document said.

In May, the CIS Economic Council decided to work further on the draft agreement on free trade in the CIS. It was later discussed by the CIS premiers who failed to reach an agreement. The next meeting of CIS premiers will be held in October. Ukrainian President Viktor Yanukovych expressed discontent with the delay. "I don't see any reasons for this agreement to be postponed," he said, adding that the document should be based on the World Trade Organization's principles. Ukraine is seeking integration with Europe and plans to sign an agreement with the EU, which also includes a provision on a free trade zone. Russia has been inviting Ukraine into a Customs Union of Russia, Kazakhstan and Belarus. But Ukraine insists on a 3+1 format. The CIS summit also urged peaceful resolution to conflicts in post-Soviet countries. "The main precondition for successful CIS development is peaceful resolution to conflicts based on mutual trust and norms of international law," the statement said. The CIS countries also agreed to continue cooperation in the fight against terrorism, extremism and drug trade. The summit participants also signed an agreement on duty officers actions in case of a reported plane hijack. The countries also agreed to preserve the memory of the courage and heroism of former Soviet republics in the days of World War II. The CIS leaders said in the statement that they would continue political consultations on key issues in global politics. They also hailed projects to strengthen regional and global security, including Russia's proposal on a European security treaty. In November 2009, Russian President Dmitry Medvedev presented a draft proposal on a new European security agreement as an alternative to NATO. The document called the United States, the European Union and Russia the "three branches of European civilization," and assigned priority to the UN's role in international affairs. 45. Lapses in banking supervision Bank of Finland September 2, 2011 Major abuses by Russian banks have come to light over the past year. It has been nearly a year since the default of Moscow-based Mezhprombank, which went down with 80 billion rubles (€2 billion) in debt (including unsecured loans from the Central Bank of Russia to support the bank during the 2008-2009 recession). Sentiments about Mezhprombank flared last month with news that the bank's head, billionaire Sergei Pugachev, had fled to London. The CBR also pulled the AMT Bank's licence in July, forcing Russia's Deposit Insurance Agency to pay out its largest settlement ever to depositors _ 12 billion rubles (€300 million). There is also continuing concern over the struggling Bank Moskvy. Last February, the City of Moscow sold its 46 % stake in the bank to state-owned VTB Bank. Details of the poor condition of Bank Moskvy slowly emerged after the deal, making the CBR grant a low-interest loan of 295 billion rubles (€7 billion) to complement the capital infusion of 100 billion rubles (€2.5 billion) from VTB.

In all of the above instances, the issue is fraudulent bookkeeping that misstates e.g. tier-1 capital, reserves or loan collateral, or loans granted to fictional firms or entities closely tied to the banks. Gennady Melikyan, CBR deputy chairman in charge of banking supervision since 2006, said the CBR was aware of the malfeasance long before the bank licence cancellations, but due to the lack of formal evidence to establish fraud the CBR was unable to act. The IMF, among others, has encouraged Russia to bolster its banking supervision with appropriate legislation. Bank supervision has developed substantially in recent years, but there are still gaps in the system. Though widely praised for his work, Melikyan gave notice in July, and chairman Sergei Ignatyev accepted his resignation last week. Melikyan's predecessor was Andrei Kozlov, who was shot in Moscow in 2006. 46. Market volatility requires no changes in Russian economic policy - Ulyukayev RIA Novosti September 5, 2011 Volatility on financial markets, unsettled by the uncertainty of global economic growth, does not require changing Russia's economic policy, central bank's First Deputy Chairman Alexei Ulyukayev said on Friday. "We are an open economy and global events are influencing us and will keep influencing in future. But a marginal effect is not very important from a macroeconomic point of view," Ulyukayev told journalists. "We should take it into account and keep it in mind, but it will not bring any drastic changes in policy or economy." Markets began jittering at the beginning of August after Standard & Poor's international rating agency cut the U.S. sovereign rating by one notch to AA-plus over concerns of America's growing budget deficit. Markets kept tumbling in the middle of the month on fears of an economic slowdown in the United States, the world's richest economy, and a debt crisis in Europe. On Thursday, U.S. President Barack Obama sharply cut estimates for U.S. economic growth, underscoring the difficult challenge he faces in lifting growth and creating more jobs. The White House currently projects the nation's gross national product growth this year at 1.7 percent, compared with 2.7 percent in a February forecast, with 2.6 percent for 2012, down from a 3.6 percent prediction in February. 47. Ministry of Energy might decrease gasoline export duties and it is not ruling out amendments to the tax regime in case of growing oil prices. VTB Capital September 5, 2011 News: Kommersant reports that Minenergo is considering a 90% export duty for gasoline (currently set) as a temporary measure, with plans to shift it to 66% when the peak consumption season is over this year. Also, according to Interfax,

government officials commented on potential amendments to the recently approved '60-66' tax regime in the case of growing oil prices. Ministry of Energy was previously reported to have suggested a switch from '60-66' to '55-86' if the oil price exceeds USD 100-110/bbl. Our View: We believe that an export duty decrease for gasoline would definitely be positive for Russian oil companies, and we welcome the government's attempts to stick to its promises. At the same time, we think that any manual regulation would not be supportive for the sector, as it needs a clear regulatory environment for its longer-term development. Dmitry Loukashov

RBL CO. RESULTS, UPGRADES ETC 48. Dixy Group announces a 22.8% revenue growth in Russian rubles for the seven months of 2011 Dixy - press release September 5, 2011 DIXY Group (RTS, MICEX: DIXY) - one of Russia's leading retailers of foods and everyday products - has announced DIXY Group standalone revenue (not including revenue of Victoria Group, acquired in June 2011) growth of 22.8% in Russian rubles (29.9% in USD) for the seven months of 2011 over the same period last year, and revenue growth for July 2011 by 28.6% in Russian rubles (41.4% in US dollars).1,2 Victoria Group revenue for the seven months of 2011 has increased by 20.1% in RUR (27.0% in USD) over the same period last year, while revenue for July 2011 increased by 16.9% in Russian rubles (28.6% in US dollars) For the seven months of 2011 the combined company opened 112 stores with 986 stores under operation as of 31 July 2011, including 941 neighborhood stores, 28 supermarkets, 16 compact hypermarkets and 1 cash&carry store. DIXY Group total standalone revenue (not including Victoria Group) for the seven months of 2011 increased by 22.8% in RUR (29.9% in USD) over the same period last year and amounted to 44.1 billion RUR (1.5 billion USD).3 DIXY Group total revenue for July of 2011 increased by 28.6% in RUR (41.4% in USD) over the same period last year and amounted to 6.7 billion RUR (239 million USD). Victoria Group total revenue for the seven months of 2011 increased by 20.1% in RUR (27.0% in USD) and amounted to 24.7 billion RUR (865 million USD). 3 Victoria Group's total revenue for July of 2011 increased by 16.9% in RUR (28.6% in USD) and amounted to 3.4 billion RUR (120 million USD). 49. Pharmstandard: Target price raised slightly, Buy recommendation reiterated UralSib September 5, 2011 Target price increased 7% on stronger margin outlook. Following a recent conference call with Pharmstandard's (PHST LI - Buy) manage- ment and our analysis of the

company's 1H11 IFRS accounts, we have revised our DCF-based model. We have now adopted a more aggressive view on margin performance. Our 12-month target price is now 7% higher at $31/GDR, which again warrants a Buy recommendation with upside potential of 43% on GDRs. We maintain our positive stance on the company and the Russian pharmaceutical sector in general. Multiples attractive; strong cash flows, but dividends avoided. Pharmstandard generates strong free cash flows, thanks to its strong operating margins and low capex requirements. The pharmaceutical market is defensive and, despite increasing compe- tition, Pharmstandard maintains a stable market share thanks to its strong brand positioning and state lobby. In our view, as the leader in the Russian pharmaceutical market, Pharmstandard would significantly improve its attractiveness by introducing a regu- lar dividend policy, however, during the conference call management did not provide any positive outlook on this. Otherwise, following the recent correction, Pharmstandard trades with a 27-31% discount to EM peers on 2012E P/E and EV/EBITDA mul- tiples, which makes the stock quite attractive in light of its zero credit risks and defensive cash flows. All of these factors support our Buy recommendation for the name, with our new DCF-based target price of $31/GDR, offering 43% upside to the current share price. 50. Protek reported weak 1H11 IFRS results VTB Capital September 5, 2011 News: Protek released its 1H11 IFRS results last week. Revenue grew by 4.5% YoY, mainly driven by 19.5% growth in retail, whereas the distribution segment showed almost flat growth. Cost of sales showed similar growth as revenue resulted in flat YoY gross profit. SG&A expenses were up 19.7%, resulting in 1.8% YoY growth in EBITDA. Our View: We note that the results were released on the company's website early last week without any notification. On Friday, the company finally came out with an official press-release, which again reflects poor corporate governance standards. Revenue numbers had already been released, and therefore all the focus is on the margins. Distribution margins continued to decline: 110bp YoY for the gross margin and 100bp in EBITDA, which is explained by tough competition in the pharmaceutical distribution segment. The retail segment's EBITDA margin declined 140bp on higher taxation, whereas the production segment profitability was up 40bp as the share of its own brands grew from 14% to 22% YoY. The company was in a net cash position as of the end of 1H11, and even with cash outflows of USD 60mn for the acquisition of Anvilab in 3Q11, the would continue to be in a net cash position. We view the results as weak with the lowest ever reported profitability in the distribution business. We see material downside risks to our full-year numbers.

51. TMK 2Q11 IFRS review; strong 2Q11 results priced in, bleak 3Q11 outlook - UralSib September 5, 2011 EBITDA came 10% above consensus. On Friday, TMK (TMKS LI - Buy) reported a strong set of 2Q11 results, which came above con- sensus across the board. Revenues rose 13% QoQ thanks to higher sales volumes and prices that were 8% and 10%, respectively, above our estimate and consensus. EBITDA surged 13% QoQ to $332 mln, reflecting a flat QoQ EBITDA margin of 18%, beating our and market expectations by 5% and 10%, respectively. Net income rose 48% QoQ to $154 mln, substantially above our estimate and market con- sensus, mainly on a $32 mln convertible bond revaluation gain. On an adjusted basis, 2Q11 earnings were in line with our expectations. At the same time, the strong 2Q11 results were already priced in, as the stock price has risen 16% over the past four trading sessions on ex- pectations of positive results. Unimpressive outlook for 3Q11. The 2Q11 results confirmed TMK's ability to maintain profitability in an environment of rising costs, including scrap and steel costs. Management expects to see strong demand for OCTG pipes through 2011, as oil and gas companies maintain their drilling programs. However, TMK expects seasonal weakness in 3Q11 in both the OCTG and LDP seg- ments. TMK reiterated that pipe production in 2011 will rise by 7% YoY to 4.2 mln tons. Along with scheduled maintenance at its Russian plants, this could significantly affect pipe volumes, financial results and profitability in 3Q11. At the same time, the com- pany expects a stronger operating performance in 4Q11; we think that 2H11 EBITDA will remain flat HoH at $625 mln, which supports our 2011E EBITDA estimate of $1.24 bln. We reiterate our positive view on the name.

BELARUS 52. Lukashenko shuns CIS summit RIA Novosti September 4, 2011 Belarus's long-standing leader Alexander Lukashenko was conspicuous by his absence at a summit of the leaders of former Soviet republics in Tajikistan on Saturday. Belarusian Prime Minister Mikhail Myasnikovich represented the country instead. Belarusian Foreign Minister Sergei Martynov said Lukashenko was too busy dealing with the economic woes in the country, where the currency has been devalued. "He is not here because he is wrestling with the pressing currency regulation issues in Belarus," Martynov said. On Tuesday, Lukashenko announced a liberalization of the Belarusian ruble to stave off the looming financial crisis. He also said that he would liberalize the national currency's exchange rate and stop artificially propping it up beginning in mid-September.

Another headache for the Belarusian president is the gas price charged by Russia and its energy giant Gazprom. The two sides are negotiating a new deal, which has stumbled over disagreements on the gas price. Gazprom has also tied discount for the Russian gas with a long-desired acquisition of Belarus's pipeline network Beltransgaz, where it already holds 50 percent.