International Banking. A Unique Opportunity for Russia

1. Mark T. RobinsonPresident, Citibank ZAO, Russia International Banking. A Unique Opportunity for Russia 10 April 2008 Graduate School of Management St. Petersburg

2. Russia’s Development of a World-Class Financial Services Sector International banking is contributing to the modernization of the financial services sector, which is necessary for the Russian economy to develop… …Can Russia develop a world-class financial services sector and play a leadership role in the global financial markets? It is helpful to measure how Russia stacks-up against the 4 key elements necessary for a global financial center. 1

3. Four Key Elements Drive the Success of a Financial Center Financial markets - which are the beating heart of a center and need to be liquid and broad Companies and individuals - which as investors and issuers supply the fuel for the markets Financial institutions - which maintain the relationship between investors & issuers and markets Local environment - which provides the right infrastructure, governance and support for the center 2

4. Financial markets Companies and individuals Financial institutions Local environment

5. Financial Markets are Key To Capturing Russia’s Economic Potential WORLD GDP 2007 2020 E Source: EIU 3

6. 1000 900 800 700 600 Percent Increase since Jan 2002 500 400 300 200 100 0 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 RTS Index Bombay SENSEX S&P 500 Shanghai Brazil BOVESPA Russian Financial Markets are Growing Fast One of the youngest emerging financial markets is already a major player FX trading volume on MICEX, daily average Rouble Bonds issued by Russian companies * 1 Jan 2008 – 28 Mar 2008 Source: Reuters, Citi calculations Source: C-bonds, Citi estimates • Average daily FX trading volumes on MICEX grew by 46% in 2007 and are expected to reach $4.3bn in 2008 • Total FX trading volume on MICEX was $856bn in 2007 • Rouble bond market grew on average at 38% per annum during the last 3 years • RTS Index grew 9 times from 262 points in 2002 to around 2,060 points currently. Equity Market Performance Jan 02 4

7. The Russian Stock Exchanges are now Top 20 Capitalisation of Russian stock market increased by 6 times in less than 4 years. The MICEX Group joined the top 20 global exchanges by daily trading volume for equities and bonds Top 20 Stock Exchanges Top 20 Stock Exchanges Russian RTS & MICEX moved from Top 30 in 2004… …to Top 20 in 2008 Source: World Federation of Exchanges, www.stocks.investfunds.ruData as of end of 2004. Source: World Federation of Exchanges, www.stocks.investfunds.ruData as of 31 Jan 2008. * Domestic capitalisation - the total number of issued shares of domestic companies and also that of foreign companies not listed elsewhere, multiplied by their respective prices at a given time. The market infrastructure will need to continue modernizing to meet increased volume and complexity 5

8. Financial markets Companies and individuals Financial institutions Local environment

9. Russia’s New Multinationals Need Capital to Grow Top 5 Russian companies are in Top 200 globally by Market cap Source: Bloomberg, 28 Mar 2008 6 1

10. $56bn $222bn Russian Companies Are Already Large International Issuers EQUITY DEBT Russian Companies’ IPO proceeds (US$Bn) Russian Corporate Debt(US$Bn) CAGR = 58% Source: www.cbr.ru, www.cbonds.ru Source: Citi Investment Research Source: Thomson Financial, Central Bank of Russia Russia is 3rd Largest IPO Marketin 2007 Russia is Top 20 largest Int’l bond issuersin 2007 7

11. +4% +13% Russia Has an Emerging Investor Class The emerging Russian middle class of 30 million is set to become one of the largest in the world…Russian consumers tend to be early adapters of new technology with discerning tastes… • Russia ranked the second most attractive retail market in the world after India (1) • Personal consumption rate more than doubled since 1999 • Russia’s cities are growing, its 11 “Millionniki” cities have populations over 1 million • 12th-largest retail market in the world, to become 9th-largest by 2010 • Strong growth in personal wealth will continue to fuel consumer spending, which will benefit a wide range of industries including real estate, telecoms, food producers, retailers and transport Individual investors activity,2006 - 2007 Internet Connections Per 1000 pop. Source: Russian Federal Financial Markets Service Source: Miniwatts Marketing Group. (1) According to 2007 A.T. Kearney Global Retail Development Index 8 1

12. Financial markets Companies and individuals Financial institutions Local environment

13. Large Opportunity for Further Development of the Banking Sector Possessing a large-scale modern domestic financial services sector facilitates capital allocation between investors and companies. • The Russian banking sector remains under-penetrated by global standards. • Banking assets stood at 68% of GDP at the end of 2007, much lower than in other BRIC countries. Banking Assets as % of GDP, 2007 Source: EIU • Corporate loans stood at about 30% of GDP at the end of 2007, while retail loans, including mortgages, were only 11% of GDP. • The Russian banking sector exhibits consistently strong loan growth rates over the last several years in the range of 35-55%. Consumer Loans as % of GDP, 2007 Source: Citi Investment Research 2 9

14. Increasing Consolidation in the Banking Sector Top 25 Russian banks by assets, 1st of January 2008 • Number of banks decreased by half over 1997-2007 decade, market consolidation trend continues. • Top 5 banks are state owned, controlling 40%+ of sector’s total assets • Top 25 banks own 70% of total banking assets • International players quite visible- 5 of Top 25 banks controlled by foreign investors • In 2007 the industry continued fast expansion – growth over 2006 amounted to 55% for banking assets and 45% for Revenues (RAS) Source: CBR. All financials are based on RAS 10

15. Financial markets Companies and individuals Financial institutions Local environment

16. The Local Environment is a Key Factor for Business Development To be truly successful, a financial center needs to attend to non-financial factors and ensure they are optimised. Factors of competitiveness ranked (2007) Global cities ranked by Global Financial centers Index 1. Business Environment 2. People Factors 3. Infrastructure 4. Market Access Source: The City of London Corporation, March 2008. 11

17. Government policy: Since the 18th century, the City of London has played a major role in public life – in more recent times, where the financial sector has been a key growth sector in the economy, both Conservative and Labour governments have worked to ensure its competitiveness (e.g. tax, Big Bang, 1986; independence of Bank of England, 1997). This is in marked contrast to the more controlled French economy. Regulation: The Financial Services Agency (the “FSA”) became a unified regulator early, its renowned “light touch” has been aided by the flow of private sector personnel into the organisation. French regulators have been more prescriptive. Critical mass: All key financial sub-sectors have scale in London – “if I want to do a deal, I can always get it done here” Innovation: The City of London possesses a reputation for being able to structure innovative transactions – indeed, Paris faces a shortage of financial structurers who prefer to based themselves in London. Lifestyle: London’s huge arts and social cultures acquired a new lease of life in the 1990s. It turned the city into a desired destination for foreign workers (from bankers to barmen); Paris’s cultural life is thought to have stagnated by contrast. Culture: London has historic ties to many growth economies (e.g. Middle East, Asia), and a highly cosmopolitan population. Though cities similar in history and core size, London has transformed into a truly global financial center, while Paris has fallen further behind and is now a regional center behind even Frankfurt. There are varied reasons for this. Case Study: London & Paris – A Tale of Two Cities – Lessons For Russia 12

18. We undertook a comprehensive study of major financial centers around the world and discovered some generic critical success factors. SWOT Analysis: Critical Success Factors – More Lessons For Russia 13

19. Economic base not diversified Infrastructure development does not keep up with business growth Large portion of economy is government-controlled Underdeveloped small business sector burdened by regulations Market and banking supervision does not keep up with requirements Rapidly increasing wages due to rising competition for talent Moscow as a Global Financial center – Facts for Consideration Strengths Opportunities • Growing prosperity and consumerism • Potential hub for growing CIS economies • Under developed financial sector attracting international players • Individual investments will grow fast due to wealth and educational levels • Deep pool of well educated personnel • Flexibility of labour market • Access to international sized customers • Access to international financial markets • Size of financial markets large and increasing • Favourable geographical location, time-zone MOSCOW Weaknesses Threats • Challenging business environment, unpredictable legal system • Shortage of business infrastructure and professional support services • Uncertain and unfavourable corporate tax regime (1) • High operating costs • Complicated visa regime for international personnel (1) Total corporate tax rate is 51.4% vs. 35.7% in London. Source: The City of London Corporation, March 2008.. 14

20. Over the last 5-10 years Russia’s financial sector evolved very fast both in terms of size and sophistication… …yet, lot of changes are required to have a truly world-class financial services sector… …that is necessary for Russia to compete in a rapidly developing and globalizing world. Conclusions 15

21. – by 2020?... Key Global Financial Centers London Amsterdam Frankfurt Moscow Chicago Toronto Zurich Tokyo New York Luxembourg Paris Shanghai Bermuda Dubai Dublin Hong Kong Singapore Key First tier centers Regional centers Specialist centers Growing centers Jo’burg Sydney FUTURE IS IN YOUR HANDS 16