Credit Ratings of Russian Cities and Regions: Moscow’s Example Drivers of a City’s Credit Rating

1. Credit Ratings of Russian Cities and Regions: Moscow’s ExampleDrivers of a City’s Credit Rating Vladimir Redkin, Director International Regional Finance October 17, 2012

2. Key Rating Factors • Evaluation of the institutional framework, in which a subnational operates, is a key factor affecting overall rating • Other factors include • Debt and long term liabilities • Budgetary performance • Local economy • Management and administration • Rating factors are reviewed as an aggregate, i.e. a weaker economy may be compensated for by a higher quality of administration

3. The quality of the institutional framework remains a constraint for Russian regions and municipalities • Lack of transparency in distributing transfers and budget loans between regions • Frequent changes in the sources of revenue and spending rights between the various tiers of the budgetary system • Shortcomings of the existing reporting systems. No differentiation for capital vs. current revenue / expenditure • Limited financial autonomy of regions and particularly municipalities • Lack of long term planning or a clear correlation between debt and investment policies

4. Sovereign Rating Puts a Cap on Moscow’s Rating

5. Evaluation of debt and liquidity (1) • Debt burden • Absolute and relative debt burden • Debt composition, broken down by types of liability and sources of debt funding • Information on maturity and interest rates • Evaluation of future needs for capital and loans • Evaluation of indirect risks • объем выпущенных гарантий • обязательства расширенного госсектора Liquidity • Balance in budgetary accounts • Need for short term loans to cover cash shortfalls

6. Evaluation of debt and liquidity* (2) * Hereinafter Fitch calculations are shown, based on the 2011 data provided by issuers, RF Treasury, RF Statistics Committee, unless otherwise specified.

7. Evaluation of budgetary performance ( 1 ) • Revenue analysis: dynamics, diversification, predictability • Evaluation of spending in terms of their dynamics and flexibility in case of corrections • Analysis of transfers between various budgets • Review of how balanced the budget is on the whole • Review of the current and operating balance sheet • Amount of capital expenditure and how it is used

8. Evaluation of budgetary performance ( 2 )

9. Evaluation of budgetary performance ( 3 )

10. Economy and Social Sector ( 1 ) • Current level of economic development and historic data. Focal points of the economy in terms of sectors and taxpayers • Structure of employment. Unemployment • Personal income and level of welfare • Demographic trends

11. Economy and Social Sector( 2 )

12. Evaluation of the quality of management and administration • Design and consistent application of adequate budgeting and debt procedures and policies • Level of budgetary forecasts and timely adjustment of revenue / expenditure plans • Quality of cooperation between executive and legislative authorities • Evaluation of financial reporting in terms of completeness and quality; independent audit of financial reports • Political situation, taxpayer attitudes, situation in the labour force market

13. Moscow’s credit rating affirmed on 18.01.2012 • Key rating factors: • Metropolitan status: financial and political centre of the nation • Strong budgetary performance • Low level of debt with a long-term maturity profile • Big public sector of the economy undergoing optimisation • Dependence on direct taxes, which increases volatility of public revenue during periods of economic instability.

14. Your contacts at Fitch Ratings Julia Belskaya von Tell, Director Head of Business Development Phone: +7 495 956 9908 Email: julia.belskayavontell@fitchratings.com Vladimir Redkin, Director International Regional Finance Phone: +7 495 956 7064 Email:vladimir.redkin@fitchratings.com

15. Disclaimer Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided “as is” without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS ANDDISCLAIMERS. PLEASEREADTHESELIMITATIONSANDDISCLAIMERSANDTHETERMSOFUSEOFSUCHRATINGSAT WWW.FITCHRATINGS.COM.