Moscow International Financial Centre – t he Critical Next Steps Ahead

1. Moscow International Financial Centre – the Critical Next Steps Ahead Zdenek Turek President of ZAO Citibank, Regional Head CIS

2. The Opportunity and Challenges Strengths Challenges • Excessive dependence of banking system on state banks which can impede the development of private banking sector and direct credit resources to inefficient and state-controlled firms • Poor development of institutional investors and lack of wide range of financial instruments in Russia. Russian financial market is oriented on commodities, energy and telecommunications (10 first-rate issuers, which occupy 80% of the market). • Low level of households savings, distrust for financial investments. The number of households which have securities or shares in investment funds amount to 8-10% only • Financial infrastructure is obsolete • Highly educated work force but scarce availability of professionals in financial sector • Expensive market to operate in, difficult logistics • Russia is an active member of G8, G20, World Bank, Paris Club of Creditors, FATF, APEC. This constructs the necessary institutional environment for the future international financial center. • Favorable macroeconomic and financial situation in the country. • solid growth and size • considerable gold and exchange currency reserves ($492 bn on February 28, 2011) • effective and consistent government policy: budgetary and fiscal, monetary and financial • stable currency, acceptable inflation rates • High demand for financial services, major growth of banking assets and capital markets still ahead of Russia • Privatization program of the Government well received , intense interest of first-rate world banks in Russian market. 1

3. To create a global financial centre Russia will have to build an efficient and attractive regime that will be conducive to entrepreneurship and will foster further economic progress. Development of a well designed and well run market infrastructure is a prerequisite for an efficient market and a way to attract investors. Efficient Market Infrastructure Is Critical – Key Decisions Ahead • Some of the major steps that will support creation of IFC in Moscow • Creation of a centralized depository system • Foreign depositories, brokers and dealers to be recognised as nominee holders under Russian law • Central counterparty participation in settlements • GDR limits issuance abolishment for Russian issuers • Improvement in regulation and supervision – moving to principles from rules • Harmonisation of listing procedures with world practices • Introduction of IFRS accounting • Qualifications exams in English or acceptance of international qualification certificates • Disclosure of information and information resources available in English • Increasing efficiency of bank operations by moving to electronic documentation flow, etc. 2

4. Брокеры Иностранные инвесторы или посредники Кастодианы Брокеры Иностранные инвесторы или посредники Кастодианы Local Russian Broker-Dealers Foreign investors orintermediaries (global custodians, brokers) Local Russian Custodians DCC NSD Регистраторы (45компаний) Регистраторы (45компаний) Registrars (45 companies) On-exchange market OTC Market The Depositary Infrastructure Today is fragmented Beneficial Owner’s account Nominee account Nominee accounts Securities Transfer Nominee account Nominee account • No settlement finality in the meaning of SEC17f-7 Rule, since registrars act as de-facto CSDs in the existing market infrastructure. • Use of settlement depositories is not mandatory • Settlement depositories (DCC and NSD) are not recognized by foreign investors as 17f-7 eligible • Foreign investors keep and settle securities in the registrars • Russian broker-dealers keep and settle securities in the settlement depositories Conclusion: The market is divided into two segments – on exchange and OTC Foreign investors trading through Russian brokers are forced to spend extra time and money to deliver/receive securities to/from the settlement depository. Thus, the market operates on two different platforms. Therefore, the market liquidity is divided into two parts, efficiency is reduced and the costs borne by market participants are high. 3

5. Брокеры Иностранные инвесторы или посредники Брокеры Иностранные инвесторы или посредники Local Russian Broker-Dealers Foreign investors orintermediaries (global custodians, brokers) Регистраторы (45компаний) Регистраторы (45компаний) Registrars (45 companies) • The key principles indicated below will allow foreign institutional investors to recognize CSD as 17f-7 eligible. Investors will be obliged to settle securities transactions through the CSD and will acknowledge the finality of settlement on CSD books. • In accordance with the proposed structure a single CSD or several CSDs shall be established. Such CSD(s) shall ensure settlement finality , have exclusive right of opening nominee accounts with registrars and shall be held responsible for its records. • Local custodians are entitled to open nominee (omnibus) accounts either with CSD or with other local custodians. Local custodians are not entitled to open nominee (omnibus) accounts with registrars. • CSD and an issuer are jointly liable for integrity of records with respect to the securities issue (respective changes into legislation are required). CSD is liable forintegrity of records handled by it. • CSD records prevail over the records handled by other market participants, including registrars. If securities are kept with a local custodian, the ownership title over such securities shall be confirmed by such custodian. • CSD and registrars shall reconcile their records on a daily basis.In case of mismatches between records of the CSD and the registrar, the registrar must correct its records by the beginning of the next working day. Proposed CDS structure Beneficial Owner’s account Кастодианы Кастодианы Local Russian Custodians Nominee account Nominee account CSD Nominee accounts • The proposed structure will consolidate the active market participants and will transfer the settlement activity of foreign investors and local brokers to a single platform – the CSD. 4

6. GDR restrictions and their implications • According to the Law on securities, market placement and circulation of securities of Russian issuers abroad is allowed under a number of conditions, including limits set by the Federal Service on Financial markets (FSFM): • 25 % of shares for companies quotation list “A” • 15% of shares for companies list “B” • Additional restrictions apply to companies from “Strategic sectors” – 5 % • GDRs to be issued in jurisdictions that have cooperation agreements signed with FSFM – this list does not include US or UK Preliminary approval of FSFM is required for such deals. • Implications of such requirements: • Expected increase in local liquidity did not happen • Companies that planned issuance moved business to off-shore zones, creating holding companies (i.e. Vimpelcom, Evraz, X5,Mail.ru) • Offshore companies then issued securities abroad • The limitations should be abolished by changing the FSFM regulation • The real way to incentivate Russian and foreign companies to issue shares in Russian market is through: • Improved financial infrastructure • Disclosure and governance requirements at global standards • Sufficient and liquid investor base (pension funds, mutual funds, etc.) 5

7. Steps ahead… • What has been done so far: • RTS / MICEX merger announced • Federal Service for Insurance Supervision (FSSN, Rosstrakhnadzor) merging with Federal Financial Markets Service (FSFR) • Netting legislation recently adopted by Duma – positive for derivatives • But many more concrete steps on Financial Infrastructure will be needed in 2011 to convince investors that the Moscow International Financial Centre project is really going ahead 6

8. Thank You