Russia Risk Variables in 2012 WTO – Politics - Economics January 2012 Chris Weafer Chief Strategist

Russia Risk Variables in 2012

WTO – Politics - Economics

January 2012

Chris Weafer

Chief Strategist

Slide 2 | January 2012 | Russia Risk Variables in 2012: Market Drivers & Stock Picks | Chris Weafer, Chief Strategist

Important Diary Dates

Jan 1 Law on Central Depository Implementation

Jan 25-29 World Economic Forum in Davos

Jan 30–Feb 3 Troika Russia Forum 2012 Moscow

Feb 4 Planned mass protest in Moscow

Mar 2 Iranian parliamentary elections

Mar 4 Russian presidential elections – 1st round

March 25 Russia presidential elections – 2nd round (if required)

Apr 22 French presidential elections - first round

May 3 or 10 Inauguration of Russian president and new government

May 6 French presidential elections – 2nd round

May 15-22 G8 Summit in Chicago

June G20 Summit in Mexico

June 14 OPEC Ministers meet in Vienna

July Foreign depositories allowed nominee accounts at Central Depositary

August Expected formal ratification of WTO entry

Sept 2-8 APEC Summit in Vladivostok

Nov 6 US Presidential election


Macro assumptions Equity market statistics

Key Macro & Market Stats & Assumptions

We assume the base “muddle through” scenario can deliver 4.0% GDP growth unless the price of Brent/Urals falls toward $80/bbl.

Russia should again achieve a record low inflation rate in 2012 and the budget deficit (existing parameters) should stay below 1.0% of GDP

Equities are cheap – risk premium remains high - because investors fear Russia is very exposed in the event of a hard-landing in China, because of global risk-aversion and because of heightened political concerns.

The current valuation almost covers a worst-case scenario.

Investors with a longer-term horizon are now being paid to buy and hold.

Source: Troika estimates


2011E 2012E

GDP, $ bln 1,813 1,780GDP growth, y-o-y 4.5% 4.0%Budget balance/ GDP 0.8% -0.5%

Industrial production 5.0% 4.5%Investment 6.0% 5.0%

CPI 6.1% 5.0%Current account, $ bln 120 70

RUB/ USD, average 29.40 32.60RUB/ EUR, average 40.90 42.70

Urals average, $/ bbl 109 100

RTS Index 1,446.5Target RTS Index 2,200.0Upside 52.1%

MICEX Index 1,463.4Target MICEX Index 2,100.0Upside 43.5%

2012E P/ E – domestics 6.42013E P/ E – domestics 5.5

2012E P/ E – exporters 5.12013E P/ E – exporters 5.4

2012E P/ E – total market 5.52013E P/ E – total market 5.5

2012E P/ E – EM average 8.52013E P/ E – EM average 7.7

2012E EPS growth – domestics 18.0%2012E EPS growth – exporters -9.0%

2012E EPS growth – EM average 8.0%


2012 – Outlook

Russian equities have started 2012 as they left 2011. The direction and volatility in the Russian equity market continues to be dictated mainly by external events. The Eurozone crisis, although currently the critical global issue, is not the only factor that will determine how Russia and other emerging markets will perform this year.

Our core view maintains that the contagion threat to global growth from the Eurozone crisis will hang over all markets at least through 1Q12 and maybe over 1H12. But, we also assume there will be a resolution that reduces the threat level before summer, perhaps ahead of the G-20 Summit in Mexico in June. Europe is likely to remain in recession through most of 2012, but we also assume that contagion to the rest of the world, and Asia in particular, will be limited

This should then allow for a much more favorable backdrop for risk asset performance from the summer and through 2H12. This assumed trend, i.e. a split year with all known negatives being frontloaded, is at the core of our market outlook for the next 12 months. We calculate a year-end target for the RTS of 2,200 – a 50% gain from its current level.

The knee-jerk negative reaction to the December protests has expanded the ratings discount at which Russian names trade to global peers. The domestic sector stocks, on average, trade at a 40% discount to the 2013 EM P/E despite having superior growth.

“The trouble with the world is that the stupid are so confident while the intelligent are full of doubt.”

Bertrand Russell


2012 Base Scenario - Time LineEarly 2012 Mid-year Autumn

Global backdrop

Big economy - US Steady lowering of growth expectations and increasing fears over bank solvency risk due to Eurozone bank exposure.

Stable growth - heading towards 2.0%.Political issues take center stage as presidential election season moves into high gear.

Presidential election boosts optimism.Economic and corporate earnings start to show recovery from a slow start to the year.

Big economy - EU

Big economy - China

Risks to scenarios

Oil price

Oil scenario risk

Russia domestic

Investment themes

RTS Index Ranging between 1,300 and 1,500. Ranging between 1,500 and 1,900. Ranging between 1,800 and 2,200.

A clearer reform and investment agenda in place. Some high profile successful inward investment deals with Europe. Stable economic growth while improving optimism attracts more investor flows.

Risk-off is the dominant investment theme.Income, secular growth stocks, low debt-net cash stocks.Domestic themes.Avoid high-beta, export earners (in general) and high debt.

Secular growth – shifting to cyclical growth.Low-beta starts to move slowly to high-beta.Still a preference for safe balance sheets.Domestic themes still dominate.

High-beta.Cyclical growth.Privatization stocks.Infrastructure themes.Domestic growth exposure.

Political debates and the protest movement have become the dominant issue. Economy is moving along as it did in 2011. Very little else in terms of domestic policy initiatives expected until after the next government takes office in May. WTO entry should be completed by then.

New government adopts more proactive and pragmatic approch to attracting investment. Legacy of protest movement is generally positive. Investor confidence is expected to improve. Stable domestic economic growth.

Continuing tight supply-demand balance on oil market. Economic recovery in late 2012 or more confidently projected for 2013 help boost demand forecasts. Saudi Arabia focused on $100/ bbl Brent average. Iranian supply starts to slide as a result of many years of sanctions. Brent trades in $100-115/ bbl range.

More severe EU recession brings much slower growth in the US and a hard landing in China. This would cut demand expectations and lower the oil price.The Brent price would spike only briefly in the event of an action in Iran or Nigeria – while prices would have to fall towards the "low $80's/ bbl" before OPEC cuts.

Clearest risk is of a prolonged and deeper EU/ US recession that also causes more damage to demand from China. But, we should still see an oil price recovery by late summer, as Saudi Arabia now needs close to a $100/ bbl Brent average to balance its budget.

Deeper for longer EU recession, slower demand in the US and a big drop in China import demand.This scenario would see lower oil for longer before Saudi Arabia supply cuts could stabilize the price. Second risk is that projections for growth in Shale and LNG gas supply ratchet up for 2013-14.

Fears over global growth undermine the oil price to some extent, but supply risks in Iran and Nigeria prevent the price from collapsing.Brent trades in $95-115/ bbl range.

More stable growth in the US and Asia should provide support for oil price. OPEC will likely adjust supply at its summer meeting to match any revised demand forecasts so as to keep average Brent price close to $100/ bbl.Brent likely to trade in the $95-110/ bbl range.

Soft landing achieved. Communist Party Congress elects new leaders and government maintains growth stimuli to maintain domestic stability ahead of spring 2013 leadership changes.

EU plunges into uncontrollable crisis with several country defaults if rescue fund falls short.Eurozone fractures with Greece likely to be first to leave.Major political disagreements threaten EU integrity. US growth slows and fears for hard landing in China grow.

Possibly a deeper EU recession that also undermines the US banking system and pulls its growth rate lower. This would also make it very tough for China to achieve 8% growth this year. Risk of a trade war between US and China as US election season heats up and Chinese trade becomes an issue.

Deeper for longer recession in Europe and continuing slow growth in the US.Hard landing in China leads to a deteriorating domestic position and growing political opposition to government.

Investors still clinging to hopes of a soft landing. Growth forecasts are steadily cut but hard landing is avoided.Government tries to maintain economic and social stability by reversing some tightening measures – investor fears of a dip in growth increase.

More stable economic indicators as government manages the process with stimuli.

Increased hope that the Eurozone crisis is now past and growth outlook for 2013 is much more encouraging in Europe and the US.

Major debt rollover in early 1Q12 finally pushes the issue to crisis. Political disagreements between member countries lead to slow progress and further erodes confidence and stability. EU already in recession in 1Q12.ECB bailout made more difficult aftre ratings downgrade.

Agreement on the use of the ECB as the bailout mechanism, albeit at a lower level than hoped for.Eurozone recession and weak euro. Some collateral damage in the banking sector.

Greater stability in either existing Eurozone or a slimmed-down core Eurozone. Investors become more confidemt that the major EU economies can be delivered in 2013. The banking sector is also a lot more stable.

Economic growth and corporate earnings downgrades as EU heads to recession and growing fears that EU banks may need debt bailout. Volatile markets for so-called "risk assets".

Tempered relief, as the major EU countries have been forced into a deal that allows the ECB to buy "several billion" euros of toxic debt. EU stays in recession but growth elsewhere stabilizes. This should allow for more stable markets but no major rally just yet.


Russian Investment Case - 2012

Economic growth is stable

… 2011 growth is expected circa 4.5%, retracting to a sustainable 4.0% from 2012.

Fiscal and budget position has improved with higher oil revenues

… budget was in surplus (+0.8% of GDP) for 2011 and total foreign debt (private and state) approximately equals Fx + Gold reserves at 27% of GDP.

Equity market is trading at an average discount of 40% to EM peers

… even as domestic sector industries will growth much faster than EM peers in 2012-’13.

Global risk-aversion is affecting Russian flows and valuations

… domestic sector stocks are punished along with extractive industries.

Oil price has been much more stable than other risk assets

… conditions in place to maintain oil price stability in 2012.

Political risk perception is exaggerated

… protest movement has already resulted in a positive government response.

WTO membership will act as a catalyst for medium term improvements

… sets a timetable by which industries have to become more efficient and competitive.


Twelve for ’12

There are a number of known events, both current and planned, that we already know will play a role in determining how the investment case shapes up in 2012. In particular, we identify the twelve most important events and factors that will have an effect on how the Russia story evolves.

Some of the events are purely domestic, such as the political uncertainties that have re-emerged as part of the investment risk profile for the first time since 1999. Most factors are, however, external and outside of the government or Russian corporations’ power to influence. We remain a hostage to events in Europe, the Middle East and China.

There will potentially be more domestic positives in the Russia story from mid-year, and these, aligning with a reduction in global risk factors, form the combination we expect to deliver strong market performance over 2H12. The twelve factors reviewed in this note (in alphabetical order) are as follows:

Russia’s capital market reforms Outlook for Chinese growth and commodities demand How the new Duma may influence government priorities Outlook for domestic economic growth Role of the energy sector The Eurozone debt crisis Outlook for global economic growth The government’s modernization priorities Outlook for the oil price The legacy effect of the political protests How WTO membership will make a difference The relationship built with Asia and the Vladivostok APEC Summit

“So the Mayan calendar ends in 2012. So what? My calendar ends in December. I just buy a new one.”

Anonymous


Stable growth. Economic performance continues to see steady improvement. This is partly due to higher oil revenues, and partly because of recovery in consumer sectors and investment activities. After achieving a budget surplus, record low inflation (6.1%) and growth not far off 4.5% in 2011, we expect to see even lower inflation in 2012, i.e. close to 5.0%, normalized growth of around 4.0% and a small budget deficit, assuming oil averages $100/bbl.

Oil resilience. The volume of oil receipts does not in itself have a direct impact on GDP. It is only when oil revenues fall to a level low enough to force government spending cuts, or equally rise to a level that allows higher spending, that the effect is seen in GDP. On our calculations, a GDP growth forecast of 4.0% for 2012 will not change materially if the average crude price ranges between approximately $85 and $115/bbl. The effect will, however, be directly felt in the budget, fiscal balances and the debt market.

2012E 2011E

GDP growth 4.0% 4.5%Budget deficit, as % of GDP -0.5% 0.8%Average Urals price, $/ bbl 109 100

CPI, y-o-y 5.0% 6.1%Average lending rate 7.5% 8.5%

Trade balance, $ bln 140 200Current account, $ bln 70 120Total foreign debt/ GDP* 27.2% 27.2%

RUB/ USD, average 32.60 29.40RUB/ USD, year end 33.80 31.40

Key Macro Forecasts for 2012


Domestic economy Steady Progress

Lower inflation = real wager growth of 5% in 2012Lending rates should average 7.5% from 8.5% in ’11

Current deposit rates are temporary – Central Bank is expected to ease liquidity in coming months

Favourable ruble conditions are not expected to last

Rising real wages, state wages and pensions increase and +20% lending growth should boost domestic spending

Exporters will benefit from lower domestic inflation and weaker ruble


Duma – KremlinA More Belligerent Partnership

Seats Duma votes Seats Duma votes

United Russia 315 70.0% 238 52.9%

Communist Party 57 12.7% 92 20.4%

LDPR 40 8.9% 56 12.4%

A Just Russia 38 8.4% 64 14.2%

Total 450 100.0% 450 100.0%

Share of '07 vote New Duma

The newly elected Duma is much less of an automatic rubber stamp for government legislation. We may expect a more belligerent relationship between the Duma and the Kremlin over the next five years. It will be much harder for the government to cut social spending or raise utility charges. The Duma is likely to push for a more nationalist and protectionist agenda.

Russian Parliament Structure

A more influential Duma that requires some compromise in government policy should be good for the following sectors.

Pharmaceuticals. Pensions and health spending.

Real estate. Addressing current overcrowded and bad city housing.

Banks. Stable macro growth.

Consumer. Stable macro growth and falling inflation.

Transport. Stable macro growth and improvement in infrastructure.

Agriculture. Expected to be a major government and Duma reform theme.

Manufacturing. State support to help manufacturing industries improve ahead of WTO entry competition.

Sectors that could be adversely affected include the following.

Utilities. Less support for higher residential tariffs.

Extractive industries. May see additional extraction taxes and/or export tariffs.


The protest movement has already extracted some concessions and promises of further reforms from the government. In general, the response has been much more positive than originally feared. Putin has promised to reflect the concerns of the protestors, and people in general, in his manifesto for government. If that is the case, and there is some clear follow-through with specific actions, then the protests could create a much more positive backdrop for the equity markets in 2H12 and into 2013.

The scale of support for the protest movement may also finally encourage the various liberal parties to consolidate and to create a more effective party representing the interests of the emerging middle class. Former Finance Minister Alexei Kudrin has taken a lead in trying to advance this process. If Kudrin is successful in consolidating this political block and representing its interests in government, then that would be one of the best outcome for investors.

The prime minister’s initial response to the protests was generally dismissive, blaming fringe groups and foreign interference. However, the rhetoric has changed as the numbers attending the events in December exceeded initial forecasts and the protests now look to have more staying power. Putin has been more accommodating, and both he and the president have promised reforms.

Prime Minister Vladimir Putin is still the clear favorite to be the next president, though it is less of a certainty whether he can win in the first round of voting, or will need a run-off. After the election, the focus will be on who will fill the key cabinet seats and what will be the main policy priorities. The next government now has no choice but to pay attention to the demands of the growing middle class.

Political protestsLess of a Threat, More a Force for Change


WTO membership will certainly have no immediate impact on economic growth, or the day-to-day operations of Russia’s corporations, or on the risk premium investors apply to investment in the country. Nor will it offer any quick fix to the generally poor business environment or the high level of investor skepticism towards investment risk.

But WTO membership does provide an important catalyst for a more serious approach to creating economic reform and industry efficiency in Russia. It also shows that the government is more serious about reform and wants to send a clear signal to investors. As the benefits of a faster-track approach to the reform agenda materialize, sustainable incremental economic growth may reach 1-3% per year, according to the World Bank.

WTO entry creates a framework for the next government’s agenda to create greater efficiency and diversification in the economy, just as the World Cup in 2018 provides a timetable for improvements in parts of the nation’s infrastructure.

Following the approval of Russia’s membership at the WTO Council meeting in mid-December, the Duma will have to ratify the entry terms early in 2012 and Russia would then officially become a member 30 days after it notifies the WTO that ratification is completed.

There are no major surprises in the agreed-upon terms. Russia has secured a lengthy compliance period in respect to tariff changes affecting the most sensitive areas, such as auto manufacturing and some agricultural issues. The average import tariff will be cut from 10% to 7.8%.

WTO MembershipNo Immediate Benefits - But Timelines set up


Key investment priorities over the medium term include:

1. Moving up the value chain in raw material industries – refineries, petrochemicals, LNG, smelters, timber processing plants, etc.

2. Investment in basic infrastructure – electricity, gas, communications, transport.

3. Event driven infrastructure projects, e.g. APEC Forum – 2012 World Athletics Championships in Moscow - 2013 Kazan University Games - 2013 Sochi Winter Olympics – 2014 Russia Formula 1 Grand Prix in Sochi - 2014 Ice Hockey World Cup – 2016 World Cup - 2018

4. Import substitution, e.g. agriculture, pharmaceuticals, food processing and basic technologies.

5. Financial market/services.

6. Healthcare and education.

7. Leisure industries – including Sochi.

Modernization programmeMore about Fixing the Basics


Canada - Opportunities

Putin prefers to barter e.g. Germany takes Nord Stream gas and Siemens gets new contracts

Political bartering at leadership level is the access key to Russia opportunities

Areas of common interest Arctic development (e.g. Russia’s Lomonosov Ridge claim & developing new technologies)developing assets off Sakhalinmining assets – e.g. Norilsk Nickel after ownership changes

Russia wants to attract big volume investment into Far East (APEC Summit)

Putin is more likely to prioritize

Agriculture Food productionPharmaceuticalsInfrastructure projects via PPP schemesFinancial services

Previous ambition to prioritize technology is changing…….pursuing a model more like that of Canada and Australia, i.e. to make more efficient use of resources based revenues than to try create a new economy


Capital Markets

2012 is an important year for Russia’s capital markets, as the long-awaited Central Depositary is being set up and foreign investors will be able to open an account later in the year. This will remove a major barrier limiting foreign investor participation on local markets and help boost liquidity.

One aspect of the economic modernization program that is making good progress is improving the infrastructure of capital markets. In mid-December, the two local bourses, RTS and MICEX, merged onto the MICEX platform. Shares continue to be listed and trade on the respective bourses, but now on one platform.

On January 1 this year, the law creating a Central Securities Depositary (CSD) came into force. On June 1, the law will be extended to cover the role of registrars and set transparency rules. Over the next year, several other planned stages will streamline the infrastructure, allowing foreign nominee account holders full access to the CSD on January 1, 2013.

It is also planned to introduce new limits covering the circulation of Russian securities outside the country, also on January 1, 2013. The current draft law will allow companies to circulate 100% of their equity outside of Russia, unless they are subject to legislation governing strategic industries (25% limit unless exempted) or are involved in subsoil exploration and mining (5% limit unless exempted).

The program provides a general boost to the market overall. The positive effects will be seen only when global market risk is reduced.

Improving Market Infrastructure


China

Chinese New Year falls on January 23 and heralds the start of the Year of the Dragon, succeeding the Year of the Rabbit. In Chinese mythology, the Rabbit is a symbol of calm and tranquility, while the Dragon symbolizes excitement, unpredictability, exhilaration and intensity. The caveat is that the Dragon may also encourage recklessness and lead to tragedy by year end.

China aims to achieve growth in excess of 8% this year. The government is expected to take whatever measures are required, e.g. additional easing, in order to ensure that level of growth. With major leadership changes planned for later this year, maintaining growth and social stability are key priorities.

The World Bank recent cut its growth outlook to +8.4% for 2012 from an expected 2011 rate close to 9.5%.

Strong Chinese growth directly supports the oil market and the price of other materials the country imports. China is therefore a key part of the Russian investment case. Oil and materials revenues directly support the budget and earnings growth of more than half the stock market, i.e. commodity exporters. Chinese growth is a significant factor in how foreign investors view, and price, risk in emerging market assets.

Effect on stocks

Commodity exporters are most exposed to Chinese growth and its import demand.

Fire-Breathing Dragon in 2012?


While the buzzword will continue to be “modernization”, in practice, the more significant actions continue to be in the energy sector. Establishing Russia as the world’s biggest energy provider was critical in restoring the nation’s economic health and returning the country to a position of importance in geopolitics.

Maintaining average daily oil production at 10 mln bpd over the coming decade and connecting additional gas pipes to Europe and Asia are by far the greater priorities for Putin, as remaining the world’s largest producer and exporter of energy is key for three main reasons.

1. Notwithstanding price volatility, maintaining high volume output ensures a steady flow of income for the federal budget.

2. Russia is able to barter energy for investment and trade deals with Europe and China.

3. Being the world’s most important energy provider allows Russia to remain in its seat at the head table of global politics and retain a position of influence beyond its economic reach.

There are a number of priority energy deals that may either be concluded or advanced in 2012;

Arctic: UN submission to recognize expanded Russian sovereigntyExploration for hydrocarbons via the Exxon-Rosneft JVKeeping the region open for hydrocarbon transit

South Stream Final agreement to start the pipeline is expected – unless shelved with a new Ukraine dealChina wrapping up a gas export deal with China is a priority for PutinOil pipelines Extending the ESPO pipe to the Pacific Coast should be completed

Doubling the capacity of the CPC Pipe is under wayRussia wants both northern and southern Bosporus oil by-pass routes

LNG Novatek’s Yamal LNG project is proceeding on schedule – Russia eventually wants to a big share or global LNG trade with this and other projects to follow

Energy SectorThe Key Strategic Priority


Euro zone restructuring

Europe’s political leaders are still a long way from finding a solution to the debt crisis. The recent downgrade in the Sovereign debt ratings of several countries has made the situation both more complicated and dangerous. The IMF and World Bank are planning a sharper cut in growth prospects for the region and a deeper or longer recession cannot be ruled out. While a mild recession is now factored into the oil market and growth forecasts for China and the US, the threat of a worst-case scenario is hanging over all assets and forcing investors to adopt a risk-off strategy, which is likely to remain in place at least through 1Q12.

The main effect of the continuing crisis on Russia is that investors remain wary of so-called risk assets that would be most exposed to a global recession or a hard landing in China. This is keeping fund flows low, capital flight high and the risk-premium elevated. Russia generally benefits more from a weaker euro while the main export products, oil and gas, are more affected by the mild winter weather.

Effect on stocks

A recession in Europe is bad for some exporters such as NLMK in the steel sector. It would also be bad for sentiment toward Gazprom, but gas volumes are more threatened by weather patterns. The banking sector is a good way to play lower domestic inflation.

The major impact on Russia would be if the euro crisis leads to a global slowdown, which then both hits the price of commodities and increases risk-phobia among global investment funds.

Too Scary to Fail?


2012E

China 8.3%India 7.5%Asia-Pacific* 6.5%Russia 3.8%Eastern Europe 2.5%Brazil 3.5%World 2.5%US 2.0%Eurozone -0.2%

Consensus Economics – Global Forecasts

Source: Consensus Economics

The main global fears currently holding down Russian valuations are the following.

A steeper decline in Europe or a banking sector crisis may also impact US economic growth and lead to a global recession. In such an event, commodity prices and commodity producers usually bear the worst of the asset value destruction.

China is a key factor in commodity pricing. The evidence is that growth has started to slow, albeit still not to the point that investors fear a hard landing. The assumption is still that the government will take whatever measures are necessary to ensure a soft landing in 2012.

The continuing threat of a debt and liquidity crisis in Europe, which could lead to systemic banking sector risk, has resulted in a risk-avoidance stance among global investors. This has both restricted flows into Russia funds and held down valuations.

Global economic growthEU and China Hold Russia Hostage

“Believe nothing, no matter where you read it, or who said it, unless it agrees with your own reason and your own common sense.”

Buddha


Oil price outlook

The average price of oil is sustainable above $100/bbl over the medium term due to steady demand from the fast growing developing economies, no major new supply sources and persistent supply risk in the volatile Middle East/Gulf region.

The favourable backdrop is unlikely to last past 2012

Despite the slowdown in the US and Europe, the oil market is much more balanced today. There is no oversupply. Chinese, Asian and Mid East demand growth is more important

A potentially key “difference” in the oil market looking forward is the substantial increase in budget spending that the OPEC-Arab producers have been forced into as a result of the Arab Spring. Saudi Arabia now needs circa $100/bbl (Brent) to balance its budget from only $70/bbl in 2009.

Supply disruption risk is high in the Gulf – the Iranian nuclear issue is an escalating threat.

Nigerian violence also carries the risk of a supply outage from Africa’s biggest producer

No major new supply from non-OPEC sources for several years and the risk of falling production from Iran as the effect of low investment rates takes effect.

That will start to change in 2013 as more Shale Gas and Canadian imports allow the US to cut crude imports

2001 2011E 2012E y-o-y

US 19.79 19.06 19.06 0.0%Euro 5 8.36 8.81 8.72 -1.0%Japan 5.52 4.45 4.38 -1.6%China 4.98 9.70 10.18 4.9%Other Asia 7.22 10.79 11.15 3.3%Latin America 4.80 6.52 6.76 3.7%Middle East 4.54 8.00 8.26 3.3%Africa 2.37 3.42 3.55 3.8%Other Pacific 3.11 3.35 3.36 0.3%Other Europe 7.44 6.31 6.34 0.5%Other North America 4.38 4.54 4.54 0.0%CIS 3.51 4.60 4.69 2.0%Total, average 76.02 89.55 90.99 1.6%

Global oil demand forecast

Source: International Energy Agency

Favourable risk premium for now


Starting September 2, Russia will host the annual Asia-Pacific Economic Cooperation (APEC) leaders’ summit in Vladivostok, the major city in the country’s Far East. This is expected to be a catalyst for a step-up in Russia’s efforts to significantly increase trade with Asian countries and to attract a much greater volume of investment into the region.

The bulk of Russia’s external trade is currently with Europe, which is also the major source of investment into the country. However, for the past several years the government has been increasing efforts to diversify trade and investment in favor of increased Asia content.

There are other areas where Russia-Asia trade and investment may increase.

Russia is keen to have Asian investors participate in the privatization process; talks about investment from Korean or Japanese shipbuilders in Sovcomflot have reportedly been taking place for some time.

Russia may list shares of state enterprises on some Asian bourses to broaden the investor base. In particular, this would involve secondary listings for companies with existing trade with Asia or as part of the privatization process.

Russian Railways has long held the ambition of creating a transport link between Asia and Europe. The proposal is to build a high-speed cargo system that would greatly reduce the transit time from Asia to Europe.

The Arctic route across the top of Russia, if kept open with either continuing climate change or using the expanded fleet of ice-breakers now on order, would also allow for faster transit times for shipping from Northern Europe to Northern Asia.

Vladivostok APEC Summit“The farther west he went the more he was convinced that the wise men came from the east”

Horace Russell

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Chairman of Board of Directors and CEO, Troika Dialog Ruben Vardanian

Chief Economist, Managing Director Evgeny Gavrilenkov

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