What to consider in accessing emerging markets from a post-trade perspective: Russia

1. What to consider in accessing emerging markets from a post-trade perspective: Russia 11th Annual Clearing & Settlement ConferenceLondon, UK6th & 7th October 2008 Igor SUZDALTSEV Head of Financial Institutions OTP Bank, Russia London, 7th October 2008

2. Trans-Atlantic and trans-Pacific alliances and MoU: implications for the capital markets • Major political developments in 2008 are the worsening of Russian-American relations due to Georgian-American aggression against people of South Osetia on August 7th, 2008 and the preparation of American aggression against Iran. • Since US government is in the state of war with Russia already, it’s obvious that US dollar as a currency of enemy state is doomed to loose its position in Russia. • I personally will not be surprise to see the dollar banned in Russia right after American invasion of Iran. Hopefully, European countries will not repeat mistakes they have made in Iraq. London, 7th October 2008

3. Profile of the risks in doing business with these markets • Major risk on Russian markets today is related to huge amount of foreign currency and securities bought by the Central Bank of Russia for Russian international reserves. On August 1st, 2008 these reserves were equal to USD 595,9 billion including: • securities: USD 364 billion; • total currency and deposits with banks headquartered outside Russia: USD 81,5 billion; • reverse repo: USD 119,5 billion. • We understand that future American financial crisis may lead to financial crisis in Russia. That is why we are trying to convince the Central Bank of Russia to sell all dollar-related foreign assets in order to eliminate the systemic risk for Russian economy. London, 7th October 2008

4. How do you access them cheaply: Agent, direct? • Direct access is always better. Speaking of clearing and settlement, the direct access to Russian market is simple and safe. • Today any of TOP-50 Russian banks (including OTP Bank, Russia) will be able to open vostro account for foreign bank and serve its operations in Russian rubles (RUB). • Also, ruble is a settlement currency at Clearstream and Euroclear. I believe, the conference speakers from these great companies will provide you with more details. London, 7th October 2008

5. Factors to consider • For successful operations I recommend to foreign banks: • To prevent late payments by setting a rule for treasury: “Payments to Russia – first thing in the morning”. • There are two major reasons for that: • Russian banks report to regulator DAILY, not quarterly like in Europe. Once late payment is reported to the Central Bank, nothing can be changed. That is why the back value is totally useless procedure for Russian banks. • Time difference up to 12 hours. When in London is noon, it’s 3pm in Moscow and midnight in Petropavlovsk-Kamchatsky. London, 7th October 2008

6. London, 7th October 2008

7. Factors to consider • 2. To keep in mind that Russian ruble is becoming the major currency for payments for all goods that are traded in Russia, or coming out of Russia (exports), or to Russia (imports). • The logic here is simple and honest: • If any foreign importer doesn’t want to buy Russian goods for rubles then we don’t need this buyer; • If any foreign exporter doesn’t want to sell goods to Russia for rubles then we don’t need these goods. • It’s obvious that in such circumstances any foreign bank needs to set a RUB nostro account with Russian bank in order to be able to meet the growing demands of financial markets generally and the demands of big clients particularly. London, 7th October 2008

8. Factors to consider • 3. FX trading: to replace USD-related deals and settlements by CHF-related deals and settlements. • Due to worsening of Russian-American relations, it’s the only way to decrease political and settlement risks. Since Japan, UK and EU are too close to USA and NATO, a currency of independent Switzerland that is not a NATO member looks like the best choice for FX trading and settlements with Russian banks. • The traffic lights for settlement currencies in Russia in 2009 are: • I expect a strong increase in CHF/RUB operations in 2009 as well as a strong increase in RUB-related operations at the most active Swiss FX banks: UBS, Credit Suisse, Bank Julius Baer. RUB CHF EUR GBP JPY USD London, 7th October 2008

9. Factors to consider • Average daily FX spot trading volumes in Russia in July 2007 & July 2008, in USD mio London, 7th October 2008

10. Russian Choice: Simple netting agreement vs. ISDA • Among major goals of ISDA agreement is to provide Counterparties with regular payment netting opportunities as well as with an additional guarantee of close-out netting of all deals covered by ISDA. • In Russia the payment netting works but close-out netting has a few chances to happen. In most cases this is a false hope. • Therefore, instead of signing a big and complex ISDA agreement, it’s much better to sign with Russian Counterparties a small netting agreement (2-3 pages). The procedure of signing of such agreement will take only 1-2 weeks. London, 7th October 2008

11. BESP (Russian RTGS) – How can foreign banks use it? • The Banking Electronic Speed Payment (BESP) system is the Bank of Russia Real Time Gross Settlement (RTGS) system. • The BESP system can be used by foreign banks through their corresponding or daughter banks in Russia. • BESP is a centralized federal system that performs real time payments for all system participants irrespective of their territorial location. It started its operations on December 21st, 2007. • BESP operates in parallel with intraregional electronic settlement system (VER) and interregional electronic settlement system (MER) independently from them. BESP system participants always have an option to pay through VER-MER systems. London, 7th October 2008

12. BESP (Russian RTGS) • Payments go through system via electronic messages. • Other information goes via electronic information messages. Participants may use the Bank of Russia telecommunication system and formats. In the future, it will be possible to use the SWIFT system and formats. • The BESP ensures the processing of payments from 2am till 9pm Moscow time. Payments are debited from participant-payer’s account and are credited to participant-recipient’s account on the same day. • Choosing your corresponding bank in Russia it’s important to check the level of its BESP participation: • Direct (with opportunity to use all services). • Associated (with limited range of payment and information services). London, 7th October 2008

13. BESP (Russian RTGS) • BESP payments are considered irrevocable when funds were debited from participant-payer’s account with the institution of Bank of Russia and final when funds were credited to participant-recipient’s account with the institution of Bank of Russia. • BESP can settle a payment to its full value only. Partial settlement is not allowed. • There are three types of BESP payments: • Regular; • Time-critical (express payments) – the highest priority; • Limit payments – the regular payments that require to check bilateral or multilateral limit set by participant-payer. London, 7th October 2008

14. BESP (Russian RTGS) • BESP enables direct participants to use in real-time the mechanism of liquidity management and monitoring, and intraday queue management as well as receive different information including: • Amount of funds on participant’s account (sub account) with Bank of Russia service institution; • Intraday and overnight credit limit set by the Bank of Russia for participant’s corresponding account (sub account) and its utilization; • Amount of expected incoming payments from other participants, and other information. London, 7th October 2008

15. BESP (Russian RTGS) • BESP rates: • For regular payment: • - Direct participant: 25 rubles. • - Associated participant: 20 rubles. • For express payment: • - Direct participant: 30 rubles. • For liquidity and/or balances inquiry: 10 rubles. • For other inquiries: 7 rubles. • There is a discount practice related to volume of payments. London, 7th October 2008

16. BESP (Russian RTGS) • BESP transport: BESP • SP (Special Participation) = Bank of Russia branches. • AP (Associated Participation) = Russian banks & non-banks. • DP (Direct Participation) = Russian banks. Bank of Russia formats SWIFT formats Bank of Russia transport system SWIFT transport system SP AP DP • BESP members • Not members Foreign Banks London, 7th October 2008

17. BESP (Russian RTGS) • Improved services of Russian corresponding banks – • Direct BESP Participants: • Extension and unification of business day schedule throughout entire territory of Russia that leads to acceleration of payments and eliminates the discrimination among Russian banks on “the geographical” basis. • Concentration of liquidity flows over nostro accounts of Direct BESP Participants allows them now to provide fast payment services to non-BESP member banks including any foreign bank. London, 7th October 2008

18. Summary: • A rule for treasury department of foreign bank: “Payments to Russia – first thing in the morning”. • Russian ruble (RUB) is becoming the major currency for payments for all goods that are traded in Russia, or coming out of Russia (export), or to Russia (import). • FX trading: USD-related deals and settlements will be replaced by CHF-related deals and settlements. • ISDA agreement in Russia should be replaced by a small netting agreement (2-3 pages). • The Banking Electronic Speed Payment system (the BESP system, Russian RTGS) can be used by foreign banks through their corresponding or daughter banks in Russia. London, 7th October 2008

19. Contacts:Igor SuzdaltsevOTP Bank, RussiaDirect phone: +7 495 228 8030Reuters: OTPMTHANK YOU! London, 7th October 2008