III Russian Securitization Forum

1. III Russian Securitization Forum Russian capital market developments: securitization and new instruments Ann Menshikova Department of corporate governance Ministry of Economic Development and Trade of the Russian Federation 10 sept. 2007 г. New-York

2. Market capitalization of the largest Russian publicly traded companies Oil & gas sector companies, despite considerable capitalization, are not the growth leaders;in 2007 the market capitalization growth leaders are Sberbank of Russia, OJSC «MTS» and OJSC MMC «Norilsk Nickel», which are a bank, a telecommunication company and anon-ferrous metal & metallurgy company

3. Capitalization of the Russian equity market • The Russian equity market capitalization has grown more than 12 times since 2000 through 2006 • By the end of 2006 the Russian equitymarket capitalizationexceeded 100%of Russian GDP, the index increased threefold • In 2005 the entire equity market capitalization was about$200 bln;today, valuation of only one issuer — «Gazprom» — reached $2,358 bln.

4. IPOof Russian companies in 2004-2007$US bln.

5. Capital market instruments Positive developments in corporate governance, improved transparency, investmentprojects information requests by investors Strong growth of financing requests in the corporate sector reduction in the bill and other «shadow» financingand switch to transparent means of financing in public markets such as corporate bonds, IPO, and securitization broader practiceof financing at the overseas markets (eurobonds, ADR, IPOat foreign stock exchanges)

6. Securitization of Russian assets. Current overview. • By today, there were more than 20 securitization deals backed Russia-originated assets placed both in Russia and overseas; total volume of deals is about $4 bln. • Russian assets are securitized mainly through a cross-boarder transactions;only 3 deals of mortgage loans securitization were transacted in Russia

7. Legislative providing insecuritization in Russian Federal law «About mortgage securities» Bills • «Amendments of certain legislation of Russian Federation» (in regard toregulation of financial assets securitization) • «Amendment of Federal Law «About mortgage (realty security)», «About mortgage stocks» and «Aboutgovernment registrationof the conveyancing of real estate» (in regard tospecification of prescribe mortgage transfer procedure) also Mortgage standardization, setting ratings to originators and issuers

8. Bill «Amendments of certain legislation of Russian Federation» (in regard toregulation of financial assets securitization) Advantages • the concept of nominalbank account («escrow account») is defined and described the way of its opening and maintenance; the account is used foroperations with funds, that are not owned by the depositor, so as to secure the funds on this account; • the concept of a bond-holders meeting and bond-holders representativesis defined,that is complied with the worldpractice and oriented to simplify and increase the effectiveness of decision making process of such creditors; • stipulationsthat provide for the possibility of «actualassets sale»during crediting the SPV balance with such assets. It is crucially important to secure the investors in case of securitization originator bankruptcy, when there is a risk of including assets, credited the SPV balance,into the bankrupt estate; • stipulations that eliminateduplicate taxation, i.a.value-added tax, during transferring claims to the SPV balance – actions such as claim transfers purposely followed by their securitization are disclosed (not to put too judicious point upon it) as taxable operations.

9. Bill «Amendment of certain legislation of Russian Federation» (in regard toregulation of financial assets securitization) Disadvantages • Changes to the 23 chapter of first part of the Civil Code of Russian Federation – procedure specification of using the pledge of property claim rights. However, during the securitization right of property is always secured, though assignment – not always. Thereby it is worth regulating just assignment norms (ch. 24 part 1 of the Civil Code of Russian Federation), which are not perfect today. • The bill implements a new notion – special financial association (SFA) – that is analogous to SPV. Suggested framework strongly limits the securitization opportunities: SFAmay be established only as a corporation; SFAmay issue only bonds; only commercial organization licensed as investment trust, unit investment trust and non-governmental pension fund management company is allowed to be a sole executive office of SFA. 3. Another disadvantage of the bill is limited set of assets, which could be securitized – money claims only

10. Introduction of institute ofdepositary mortgageaccount • Introduction of institute of depositary mortgage accounting the bill will regulate relations accrued at transferringmortgages to the depositary (stoppage) followed by registration their entitlements on depot account • Risk and cost reduction at mortgage transfers, rise in security and effectiveness of the process • Provision of legal security and reduction in period of mortgage transfer

11. Specifics of depositary mortgage accounting • After mortgage transfers to the depositary, rights transfer exerciseonly via paying into a depot account – that corresponds to transfer of rights onpaperless (non-cash) stock • Ordinary processof transferring the mortgage rights – endorsement – does not exclude with the introduction of depositary mortgage accounting. Depositary accounting may be used in special cases, e.g. if securitization or refinancing is planned • Mortgage may be passedto the depositary accounting both after its issue, and afterwards and may be withdrawn from depositary accounting if necessary

12. standardform of a mortgage loan • Simplification of the mortgage loan State registration process • Improvement ofambiguous law and eliminating inconsistency in requirements of the composition and the content of attached documents • Establishingconditionsfor a fast and effectiveprocess of mortgage origination

13. Economic risk to investors in trans-bordersecuritization asset quality borrower character credit character infrastructural risk banking default risk service infrastructure’srisk currency risk lack of data defaults called awaypayment

14. Otherfinancialinstruments Forinvestors • IPO • Eurobonds • ADR For issuers • Direct access for foreignstocks to the Russian exchanges • Russian depositary rights

15. Thanks for Attention! AnnMenshikova Head ofsecurities market legislation subdivision Department of corporate governance Ministry of Economic Development and Tradeof the Russian Federation Tel. + 7 (495) 650 81 85 Fax: + 7 (495) 650 86 36 E-mail: Menshikova@economy.gov.ru