source: state statistics service

| March 2011 | Russia: Spontaneous Modernization Drives Growth

-20%

-15%

-10%

-5%

0%

5%

10%

15%

1Q09 2Q09 3Q09 4Q09 1Q10 Apr ’10 May ’10

Old numbers Revised numbers

Statistical revisions were significant in the case of industrial output and are yet to come for GDP

Source: State Statistics Service

Revised industrial output figures, y-o-y 2010 GDP growth breakdown, y-o-y


GDP 4.0%Agriculture -12.1%Fishing -4.7%

Raw materials extraction 4.8%Manufacturing 13.4%

Supply and redistribution of electricity, gas and water 5.9%Construction -0.9%

Retail, wholesale trade 4.5%Hotels and restaurants 0.3%Transport and communication 7.0%

Finance -3.0%Real estate 0.8%

State administration, military, social services 2.4%Education -1.4%Health care 1.3%

Other housing and social services -6.8%Net taxes on products 7.1%


Russian statistics keep eyebrows raised and eyes wide open

* State Statistics Service (first estimate)** State Statistics Service (second estimate)*** State Statistics Service (third estimate)Last column – Troika’s old estimate

Source: State Statistics Service, Troika estimates

2010 2009* 2009*** 2009

GDP 4.0% - 7.9% -7.8% -7.0%Consumption 2.1% - 5.4% -3.7% -3.2%Household consumption 2.7% - 8.1% -4.8% -5.0%Public sector consumption 0.7% 1.9% -0.5% 2.0%Consumption of other sectors -1.5% - 1.8% -8.7% 0.0%Gross investments 24.3% - 37.6% -41.0% -30.0%Fixed capital investments 3.5% - 18.2% -14.4% -17.0%

Changes in stocks – – – –Net export of goods and services -27.3% 58.0% 56.7% 34.0%

2009**

-7.9%-5.1%-7.7%2.0%

-1.4%-37.4%-15.7%

–56.8%


“But actually, he thought as he re-adjusted the Ministry of Plenty’s figures, it was not even forgery. It was merely the substitution of one piece of nonsense for another” (George Orwell, Nineteen Eighty-Four)


Retail Services Householdconsumption

Real disposableincomes

Realwages

1Q08 17.2% 7.4% 14.6% 7.5% 13.4%2Q08 14.9% 5.4% 12.1% 5.7% 12.5%3Q09 15.0% 5.1% 11.2% 4.5% 12.2%4Q08 8.7% 1.8% 6.2% -6.9% 5.0%2008 13.5% 4.8% 10.7% 1.9% 11.5%

1Q09 -0.1% -0.9% -2.6% 0.7% -0.8%2Q09 -5.6% -4.7% -7.5% 3.4% -3.9%3Q09 -9.2% -6.4% -10.8% -3.4% -5.2%4Q09 -6.1% -4.4% -9.4% 8.2% -0.7%2009 -5.5% -4.3% -7.7% 2.3% -2.8%


Russia’s nominal GDP (in dollar terms) correlates with the oil price


0

500

1,000

1,500

2,000

0 20 40 60 80 100

Urals, $/bbl

GD

P,

$ b

ln

1999

2007

2008

2003

2004 2005

2006

0

500

1,000

1,500

2,000

2009

2010

2011


Source: State Statistics Service, Troika estimatesSource: State Statistics Service, Troika estimates

Rising oil price and expanding foreign borrowing failed to accelerate Russia’s growth: in principle, Russia can grow at any oil price

0

100

200

300

400

500

600

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

0%

6%

12%

18%

24%

30%

36%

Public debt Private debt Private debt/GDP (rhs)-9%

-6%

-3%

0%

3%

6%

9%

12%

0 20 40 60 80 100$/ bbl Urals

GD

P gr

owth

, y-o

-y 1999

2002

2005

2007

2009

2010


Source: Central Bank, State Statistics Service

Growth and lending: searching for a more balanced combination

100%

120%

140%

160%

180%

200%

220%

2003 2004 2005 2006 2007 2008 2009 2010 2011 201250

130

210

290

370

450

530

Retail, J an 2003 = 100% Foreign debt, $ bln (rhs)

100%

120%

140%

160%

180%

200%

220%

0% 500% 1,000% 1,500% 2,000%

Real credits, Jan 2003 = 100%R

eal r

etai

l, se

ason

ally

adj

uste

d,

Jan

2003

= 1

00%

Balanced path

Wrong growth model: consumer credits substantially outstrips consumption


Following the short correction two years ago, consumption is rising steadily amid a resumption in consumer lending

Source: State Statistics Service, Central Bank, Troika estimates

Growth accelerated amid excessively rapid credit expansion

90%

100%

110%

120%

130%

140%

150%

Jan ’08 Jul ’08 Jan ’09 Jul ’09 Jan ’10 Jul ’102,600

2,800

3,000

3,200

3,400

3,600

3,800

Retail, J an'08 = 100% Retail, seasonally adjusted

Credits, R bln (rhs)


1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan '09Apr '09 Jul '09 Oct '09Jan '10Apr '10 Jul '10 Oct '1015,500

16,000

16,500

17,000

17,500

18,000

18,500

Bonds, R bln Loans to economy, R bln (rhs)

Bonds temporarily replaced loans in banks’ portfolios; the latter returned to growth in 2Q10

Source: Central Bank

Bonds and loans in banks’ portfolios


Russia is returning to a more balanced model of economic development after several years of overheating

Source: State Statistics Service, HSE, Troika estimates

2009

1999

1992

1989

1961

-15%

-10%

-5%

0%

5%

10%

15%

10% 15% 20% 25% 30% 35% 40%

Investments/ GDP

GD

P, y

-o-y


New equilibrium: Since 1999, South Korea’s growth has moderated after decades of unbalanced investment-led growth

Source: National statistics, Troika estimates

1989

1984

1972

2009

1998

1976

1978

1980

1983

1997

1995

1992

1991

1999

200120032005

-10%

-5%

0%

5%

10%

15%

20% 22% 24% 26% 28% 30% 32% 34% 36% 38% 40%

Investments/ GDP

GD

P, y

-o-y


China: a balance is yet to be found…

Source: National statistics, Troika estimates

2008 2009est

2006

2003

1999

1996

19931992

1990

1987

1980

1984

1986

1981

1978

-5%

0%

5%

10%

15%

20%

25% 30% 35% 40% 45% 50% 55%

Investments/GDP

GD

P,

y-o

-y

?


0

3,000

6,000

9,000

12,000

15,000

Arm

enia

Aze

rbai

jan

Bela

rus

Esto

nia

Geo

rgia

Kaz

akhs

tan

Kyr

gyzs

tan

Latv

ia

Lith

uani

a

Mol

dova

Russ

ia

Tajik

ista

n

Turk

men

ista

n

Ukr

aine

Uzb

ekis

tan

1991 2009

GDP per capita in the former Soviet republicsin 1991 and 2009, $

Source: IMF


GDP per capita in the former Soviet republicsin 2009 and external borrowing

Note: Data for 2009

Source: IMF, CIA, national banks

Russia did not borrow a lot

Estonia

LatviaLithuania

Russia

Kazakhstan

Ukraine

MoldovaKyrgyzstan

Armenia

TajikistanUzbekistan

GeorgiaTurkmenistan

Belarus

Azerbaijan

0

2

4

6

8

10

12

14

16

0% 20% 40% 60% 80% 100% 120% 140% 160%

External debt/ GDP

GD

P pe

r cap

ita, $

’00

0

Russia 2010


Russia will not face limitations on the labor market in the medium term…


60

65

70

75

80

85

90

95

2000 2003 2006 2009 2012 2015 2018

mln

Working age population Employment

Optimistic scenario

Pessimistic scenario


… although the share of the working age population in the total figure will continue to fall


Expected population dynamic (left chart) and share of the working age population (right chart)

132

134

136

138

140

142

144

146

148

2000 2003 2006 2009 2012 2015 2018

mln

Optimistic scenario


50%

52%

54%

56%

58%

60%

62%

64%

66%

2000 2003 2006 2009 2012 2015 2018

Optimistic scenario



Budget revenues fell in 2009, but not as much as the government expected, R bln...

Note: The government initially forecast revenues in 2009 at R6,713.8 bln. In 11m10, revenues reached R7,432.4bln, while the deficit was R911.5 bln.Source: Finance Ministry

2005 2006 2007 2008 2009 2010E

Total revenues 5,127 6,276 7,779 9,274 7,338 7,784

Profit tax 378 510 641 761 195 –

Social tax 268 316 405 507 510 –

VAT 1,472 1,511 2,262 2,132 2,050 –

Raw materials extraction tax 855 1,094 1,123 1,605 982 –

Export duties 1,352 1,896 1,835 2,859 2,042 –

Import duties 271 342 488 626 467 –

Other 533 608 1,026 784 1,092 –


… but expenditures increased massively, R bln

Note: The government initially planned expenditures in 2009 at R9,845.2 bln.Source: Finance Ministry

2005 2006 2007 2008 2009 2010E

Total expenditures 3,514 4,281 5,983 7,567 9,660 10,212

State administration 501 530 812 835 829 839

National defense 581 682 832 1,041 1,188 1,264

National security 450 550 667 836 1,005 1,096

National economy 249 345 693 1,025 1,651 1,583

Housing sector 7 53 295 130 152 198

Education 162 212 295 355 418 433

Medical care, sport 88 148 197 278 352 341

Social policy 178 201 214 294 324 329

Transfers 1,246 1,499 1,900 2,675 3,594 3,633

Other 52 62 79 99 147 496


Larger government expenditures and an increased budget deficit in Russia usually mean worse economic performance

Source: State Statistics Service, Finance Ministry, Troika estimates

-16%

-12%

-8%

-4%

0%

4%

8%

12%

30% 33% 36% 39% 42% 45% 48%

Public expenditures/ GDP

GD

P, y

-o-y

19921994

1997

1998

2000

2002

2006 2007

2009

Source: State Statistics Service, Finance Ministry, Troika estimates

-15%

-10%

-5%

0%

5%

10%

15%

-15% -10% -5% 0% 5% 10%

Budget balance, % of GDP

GD

P gr

owth

, y-o

-y

2009

2010

2005

2000

1993

1997


Government interventions were inflationary: public consumption shrank in real terms

%

10%

20%

30%

40%

50%

60%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Household consumptionPublic consumptionInvestment in production capacity


Deflator for public consumption remainedhigher than for other elements of GDP


Public consumption to GDP ratio shrank in real terms, its contribution to economic

growth diminished

12%

14%

16%

18%

20%

22%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Fixed 2003 prices Current prices


The breakeven oil price has grown substantially over recent years, increasing budgetary risks

0

50

100

150

200

250

2003 2004 2005 2006 2007 2008 2009 2010

$ bl

n

The stabilization fund The reserve fund The national welfare fund

Source: Finance Ministry, Troika estimates

Budgetary policy was generous and the Reserve Fund shrank in 2009-10, as the budget was in the red (right-hand chart)

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010 2011E

$/bb

l Ura

ls

Breakeven Oil price


Finance Ministry has become too generous: expenditures set to grow

November 2009, R bln

Source: Finance Ministry

2009 2010E 2011E 2012E 2013E

Revenues 7,336.0 7,783.8 8,843.8 9,502.7 10,378.9

Expenditures 9,662.2 10,212.4 10,658.0 11,237.3 12,174.9

Federal budget deficit -2,326.2 -2,428.6 -1,814.2 -1,734.6 -1,796.0

% of GDP -5.9% -5.4% -3.6% -3.1% -2.9%

2009 2010E 2011E 2012E 2013E

Revenues 7,336.0 7,783.8 8,617.8 9,131.7 9,983.9

Expenditures 9,662.2 10,212.4 10,385.1 10,844.6 11,749.1

Federal budget deficit -2,326.2 -2,428.6 -1,767.3 -1,712.9 -1,765.2

% of GDP -5.9% -5.4% -3.6% -3.1% -2.9%

August 2010, R bln

September 2010, R bln

2009 2010E 2011E 2012E 2013E

Revenues 7,336.0 6,950.0 8,077.0 8,549.0 9,147.6

Expenditures 9,662.2 9,886.9 9,857.4 9,895.6 10,078.7

Federal budget deficit -2,326.2 -2,936.9 -1,780.4 -1,346.6 -931.1

% of GDP -5.9% -6.8% -3.6% -2.4% -1.5%


Sources of deficit financing, R bln

2011 2012 2013

Budget deficit financing 1,814.0 1,734.5 1,795.7(3.6% GDP) (3.1% GDP) (2.9% GDP)

Reserve Fund 284.4 0.0 0.0

National Wealth Fund 5.0 7.5 10.0

Net foreign borrowing 45.7 82.9 83.5($1.5 bln) ($2.7 bln) ($2.7 bln)

Net domestic borrowing 1,180.9 1,368.0 1,392.8

Privatization receipts 298.0 276.1 309.4Source: Finance Ministry


Due to increased expenditures, the breakeven oil price will exceed $100/bbl Urals in 2011

2010

Oil price, $/ bbl Urals 79 75 85 95 105Revenues 8.3 8.8 9.3 9.9 10.6

Oil and gas 3.8 4.0 4.4 4.8 5.1Non-oil and gas 4.5 4.8 4.9 5.1 5.5

Expenditures 10.0 10.6 10.6 10.6 10.6Balance -1.7 -1.8 -1.3 -0.7 0.0

Current account, $ bln 75.0 28.5 46.5 58.8 70.1

2011

Source: Troika estimates


Source: Central Bank, Troika estimates Source: Central Bank

Voluntary reserves increasedsharply in 1H10

Central Bank deposit and bond rates

Voluntary reserves increased as the Central Bank offered an attractive risk-free rate

0%

3%

6%

9%

12%

15%

Jan’08

Apr’08

Jul’08

Oct’08

Jan’09

Apr’09

Jul’09

Oct’09

Jan’10

Apr’10

Jul’10

Oct’10

Jan’11

Accounts and deposits/M2 Central Bank bonds/M2

0%

3%

6%

9%

12%

Jan ’08 Jul ’08 Jan ’09 Jul ’09 Jan ’10 Jul ’10 Jan ’11

Central Bank bonds Deposit rate


The Central Bank has absorbed previously extended loans, R mln


0

1,000,000

2,000,000

3,000,000

4,000,000

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

0

200,000

400,000

600,000

800,000

Total credits to banks, R mln REPO (rhs)


M2 declined in nominal terms, but started to rise in February 2009, a sign that the economy is recovering (R bln); the sort of “currency board” regime is seemingly over: money is becoming endogenous ($ bln)

Source: Central Bank, Troika estimates

0

200

400

600

800

Jan ’05 Jan ’06 Jan ’07 Jan ’08 Jan ’09 Jan ’10 Jan ’11 Jan ’12

Gross international reserves, $ bln M2, $ bln


The ruble has appreciated since February 2009 after the Central Bank stopped targeting the exchange rate, which became more volatile; the Central Bank’s role as lender of last resort grew in importance

Source: Central Bank, Troika estimates Source: Central Bank

0%

8%

16%

24%

32%

2006 2007 2008 2009 2010 20110

200

400

600

800

Repo operations, R bln (rhs) 1-day MIACR Repo rate

27

30

33

36

39

42

01/08 07/08 01/09 07/09 01/10 07/10 01/11

RUB/USD-EUR


Historical exchange rate and oil price: new regime emerges as the Central Bank reduces interventions

Source: Central Bank, Bloomberg, Troika estimates

20

24

28

32

36

40

20 40 60 80 100 120 140

Urals $/bbl

RU

B/U

SD

Exchange rate regime since February 2009

High oil price appreciates the ruble, while high domestic inflation depreciates it.

2010

2011

2009


29

31

33

35

37

39

41

01/07 07/07 01/08 07/08 01/09 07/09 01/10 07/10 01/11 07/11

0%

5%

10%

15%

20%

25%

30%

RUB/EUR-USD 1 1d MIACR (rhs)

Two regimes of targeting: currency first, money market second


Volatility high on the money market, low on the forex market

Volatility high on the forex market, low on the money market


Nominal interest have rates declined, but may go up again


0%

5%

10%

15%

20%

25%

2003 2004 2005 2006 2007 2008 2009 2010 2011

1-day MIACR Deposit rate

Credit rate Refinancing rate



Market capitalization and the money supply move together

0

500

1,000

1,500

2,000

1996 1998 2000 2002 2004 2006 2008 2010 2012

M2X, $ bln MCap, $ bln

source: state statistics service

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