Doing business in Russia and managing through/the crisis

1. Doing business in Russia and managing through/the crisis 24 March 2009 St. Petersburg

2. Short introduction of the presenter Name: • Konstantin Choukchoukov Age: • 39 Nationality: • Bulgarian Education: • University of World and National Economy; • Diploma in “Marketing and Management” Work Experience: • 1995 - 2008, Coca-Cola Hellenic Bulgaria – started as sales rep., lastly working as Country Commercial Manager • 2008 - present, Coca-Cola – Regional GM – NW Russia E-mail address: • konstantin.chukchukov@cchellenic.com

3. North-West Russia Franchise

4. AGENDA I. World financial (economic) crisis – what is it? II. What a company is facing in times of crisis and how to manage thru III. Russia and the crisis

5. I. World financial crisis – what is it?

6. OPPORTUNITY RISK CRISIS

7. What is happening…? • All major economies in the Western world will report negative growth in 2009 – the first time ever • There is a 30% chance that every industrialised economy in the world reports zero or negative growthin 2009 (with the exception of China and India) • The global production figures for November-December were catastrophic – some of the worst inhistory in peace time • Trillions more dollars and euros in bank recapitalisation and guarantees will be needed • The granting of new credit globally is its lowest level since 1929 • Governments will soon be forced into taking unconventional economic measures – this is starting • Governments/central banks are starting to guarantee mortgages and even consumer spending/loans • There is still a 40% and growing chance that most of the global financial sector will be nationalised in 2009 -10

8. Global GDP outlook 2009-10 A competition of Misery: Consensus estimateConsensus estimateWorst case2010 for 2009for 20092009 made in June 2008made in Dec 2008 World at ppp 3.7 0.7 0.0/-0.5 2.2 USA +1.2 -1.8/-2.2 -2.5/-3.0 0.7/1.3 Japan +1.5-1.6 -2.5 0.2 Eurozone +1.3 -1.8/-2.5 -3.5 0.6 Germany +1.7 -2.5% -3.8 0.4 France +1.3 -1.5/-2.5 -2.8 0.4 Italy +0.8 -1.8/-2.5 -3.5 0.3 Spain +1.2 -1.3/-2.3 -4.0 0.4 UK +1.1 -2.3/-2.7 -3.8 0.2 China +9.6 +7.3/6.0 +5.0 +7.0 India +8.3 +6.1/+5.6 +4.5 +6.5 Russia +5.5 +2.5/+1.5 0.0/-1.5 +3.0 Brazil +3.8 +2.4/+1.8 +0.5 +3.0 Turkey +2.5 +1.0/0.0 -3.0 +2.0 Poland +3.8 +2.2/+1.2 +0.5 +2.0 Hungary +0.8 -1.5/-2.0 -3.3 +0.5 Czech Republic +4.3 +2.8/+2.5 +1.0 +2.5 South Africa +3.5 +2.3/+1.8 +0.8 +2.5

9. What makes this the worst since 1929? • For the first time all the G-7 economies will report negative GDP growth • More countries will report negative and/or falling growth in 2009 than ever before in history • UK interest rates at 1.5% (January 2009) are at their lowest level since 1694 when the Bank ofEngland was created • US job losses in 2008 totalled 2.5mn – the worst fall since 1945 • The fall in stock market values globally in 2008 was the worst since 1929 • Container cargo trade between Asia and Europe has fallen for the first time in history • The Japanese company Toyota reported its first profit loss in the company’s history • In the third quarter of 2007 Volvo trucks sold 41,970 trucks in western Europe; in the third quarter of2008 they sold 115 trucks (a fall of 99.7%). • Worst of all: lipstick sales are rising!

10. Three special features of the crisis – the perfect storm! The speed of the contamination of the real economy. 2. The universality of the crisis. 3. This is a combination of a demand crisis, brought on by a credit crisis linked with a liquidity crisis in the financial sector related to a housing slump in the US, UK and several other major economies. All these factors have never combined before in such a “perfect storm”.

11. The elements of uncertainty • When will credit start flowing reasonable in the West and in emerging markets? • Will Western banks support their subsidiaries enough in emerging markets or will they protect home markets more? • How much will Western banks lend in emerging markets as credit emission declines from levels of 15-50% annual growth to levels of 2-10%? • What will happen to oil and commodity prices? • What will be the trends in infrastructure spending? • How will unemployment trends unfold? • Will currency fluctuations stabilize after the extreme volatility recently? • Will the dollar weaken or strengthen or stabilize close to current levels? • Will central banks tend to reduce interest rates? • Will Western companies outsource more or less to emerging markets?

12. II. What (each) company is facing in times of crisis and what to do?

13. What will (any) company face during the crisis? • Limited access to funding—companies will have to dig deep into their own resources. • 2. The normally liquid financial market is frozen or shrunk. • 3. Companies face a significantly higher cost of capital • 4. Very weak stock markets mean that it is highly difficult to raise new equity • 5. Cash is now king, instead of extra dividend payments and share buybacks • 6. Getting the company to invest in organic growth in developed or emerging markets is always a struggle and presumably will be more so.

14. What will (any) company face during the crisis? (continuation) 7. Companies will face reduced cash flow—volumes will be down (5-15%+) and many companies will be forced to make price cuts in addition. 8. As a result of the above, corporate profits will be down 10-25% in 2009. 9. Companies will have to work closely with suppliers and distributors. How much credit can you extend and for how long? Bad debt provisions will rise. 10. Risks to the balance sheet will increase. What will happen to intangible assets and good will from acquisitions? For some companies this is a ticking time bomb. 11. Industry consolidations and M&A will quicken as industries and sectors come under more pressure. 12. More regulation will be (re)introduced and probably not just in the financial sector. 13. Consumer patterns will change.

15. Which key business issues are changing? Then And now Summer 2008 March 2009 Compliance Was very important Little change Had risen up the agenda with changes in Western laws Fewer fudges on corruption Supply Chain Squeeze distributors Big change Distribution All doing very well How to survive together? Take away key account How to extend credit Reduce their profit margins longer? HR War for talent Big potential change Soaring salary costs Less salary pressure Retention problems More loyalty Losing staff to local companies Who to downsize and when?

16. Which key business issues are changing? (continuation) Then And now Summer 2008 March 2009 Rising costs/ Input costs rising sharply Big change Inflation How to pass on cost rises to Input costs collapsing consumer? How to keep prices up as costs fall? Competition Fierce Western competition Change Trends Rising competition from emerging market companies Crisis What crisis? Mega change Management Some GDP going down Deep global crisis Some stagflation Don’t panic Don’t worry, be happy Companies go in crisis mode Keep your eye on the customer

17. How to cut costs? • Monitor costs, implement cost-cutting programs BUT do not lose focus on the customer. • 2. Cut costs but do not cut so deeply that you destroy future growth in your priority markets. • 3. You may have to downsize and fire people. But do so sensitively and retain as much employee loyalty as possible. • 4. Try to implement temporary lay-offs. • 5. Cost cuts/efficiencies should focus on productivity.

18. Cash – how to get it? • Bank loans (tricky)? • 2) Corporate paper • 3) Bank overdrafts—existing facilities • 4) Refinance existing loans (and watch out banks do not increase interest rates) • 5) Sovereign Wealth funds—but this is only for the very big boys • 6) Hedge funds and private equity—very limited in next 1-3 years • 7) Sell off assets—but getting a good price will have to wait

19. Cash – how to get it? (cont.) 8) Save cash and do not engage in share buy backs 9) Stretch own accounts payable—pay late and ask for delays 10) Implement cost-cutting programs, which is becoming almost universal 11) Look at efficiencies in finance and IT departments 12) Review back office functions generally and number of corporate offices and their locations 13) Look at outsourcing and off-shoring to save cash 14) Review working capital and inventories and assess how much blockage there is in the system.

20. Reacting to crisis – good contingency actions • Institute cash management controls—weekly reports on cash position and mid-term outlook. • 2. Monitor trade credits—what can you do with distributors? • 3. Start working capital initiatives. • 4. Try to restructure your debt. • 5. Develop stress tests—worst case scenario if volume sales fall 20% and prices decline 5% how do you respond; what are the contingencies plans? • 6. Assess cost and organisation structures: internal processes and office locations. • 7. Reassess your investment program which could involve postponing direct investment but remember to build and prepare for the future. • 8. Re-evaluate off-shoring options.

21. Reacting to crisis – good contingency actions (cont.) 9. Where will you locate manufacturing and distribution centres now that the oil price is set to be low—small, regional ones or large international ones? 10. What types of products or services fit the recessionary times? 11. Look at out-of-box pricing, hire purchase, loans, installment plans. 12. Consider extent of divestment of non-core businesses. 13. Engage in selective M&A if you have the cash. 14. Ensure good clear communications with customers, distributors, investors and staff. 15. Install a crisis monitoring team. 16. Remember the crisis will end one day—build for the future.

22. What actions can strengthen companies post-crisis? Maintain long-term strategy against multinational and local competitors and avoid knee-jerk reactions Acquire (local) competitors that are probably trading at a distressed discount (or the owner suffers from too much debt and has to sell) Acquire land for future manufacturing if it really gets cheap Acquire distributors: if you always wished to take more control of business or if they are unable to get credit to buy your goods – many are distressed and desperate for cash Be proactive and fast about acquisitions, but still careful about due diligence

23. What actions can strengthen companies post-crisis? (cont) Maintain innovation both “upwards” and “downwards” Innovation downwards is particularly important, not only in the short-term as consumer trades down to cheaper brands (in the FMCG space in past recessions, consumers tend to shift priorities rather then go for mega cuts in spending) Innovation downwards should also be a part of long-term strategy for emerging markets Do we have a product for each segment of the market in country/region X? Regional co-operation to develop/buy new products for lower segments

24. What actions can strengthen companies post-crisis? (cont. 2) Focus on building market share. Each point gained during the crisis increases long-term profitability after the crisis. Cutting back during crisis means lost market share that might never be regained. Studies show that companies that overspent their competitors on advertising during recessions came out of crisis with more market share (cost of advertising likely to go down more) This whole approach is about using part of accumulated cash when times are tough

25. What actions can strengthen companies post-crisis? ( cont. 3 ) HR during the crisis: Opportunity to eliminate weak performers Opportunity to attract best people who might be let go by competitors Easier to manage HR as turnover drops drastically: more of an employers’ market in terms of cost and retention Keep staff by asking them to take a collective pay-cut as an alternative to cutting a certain % of people Keep staff by asking them to work fewer hours

26. III. Russia and the crisis – economics to consider

27. Reasons why Russia can (and probably will) pick up more quickly than others 1) The oil price may rise to $50-52 per barrel by year-end 2009. 2) The falling rouble will help Russian competitiveness. 3) Very importantly, Russian consumers are less exposed than their counterparts in other countries and may be able to bounce back more quickly because: a) household debt is low to moderate b) less than one million Russians own shares and thus have not been impacted directly by the 80% fall in the stock market c) the mortgagee market is small in terms of GDP d) saving levels are moderately good 4) Government purchases of services and products ( …but spending plans were downsized in a January announcement ). 5) A lower tax burden on some sectors of the economy. (This has already happened in the energy sector but the government argues there will be limits).

28. Economic statistics to monitor 2008 2009 2010 2011 GDP 5.6 -3.0 1.5 4.0 Private consumption 11.4 -2.5 1.2 3.5 Fixed investment 10.3 -7.0 2.8 7.0 Real wages 10.5 -2.5 0.0 4.0 Inflation (year end) 15.1 10.0 8.0 7.0 Budget deficit 3.6 -7.5 -2.8 0.0 Current account deficit 5.9 -3.0 0.2 0.5 Government debt 6.7 15.0 14.0 13.0 Rouble/$ year end 29.4 37.0 37.5 38.5 Russia’s current GDP of 1.1 trillion dollars is approximately the same as Brazil’s and India’s and about 25% the size of China’s.

29. What about the ruble…? Well, it will fall… for a while longer. Year-end exchange rates for the ruble versus the US dollar and euro 2007 2008 2009 2009 best case worst case US dollar 24.5 29.4 35.0 37.0 Euro 36.1 41.5 45.0 48.0

30. Economic policy outlook to understand, in order to define overall behaviour • What will rouble policy be in a worst case scenario? • How should the state deal with the commercial banks? • How large should the budget deficit be in 2009: (-6%, -8%, -10 or -12%)? • How should the fiscal stimulus program continue? Should funds go directly to distressed Russian corporates or should the banking system be employed more? • How much should defence spending be cut? • What should happen to social programs?

31. …a joke… or, is it…? …Владельцы капитала будут стимулировать рабочий класс покупать все больше и больше дорогих товаров, зданий и техники. Толкая их тем самым для того, чтобы они брали все более дорогие кредиты, до тех пор, пока кредиты не станут невыплачиваемыми. Невыплачиваемые кредиты ведут к банкротству банков, которые будут национализированы государством, что в итоге и приведет к возникновению коммунизма. K. Marks “Das Capital”, 1867