Russian economy in 2015: Resilience under pressure Anton V Tabakh, CFA Director – Regional Ratings, RusRating Agency, Associate Professor HSE Vienna | June 22, 2015

March 2014- Feb 2015: Perfect Storm Economy was in a slowdown for about a year Turbulence in Ukraine and Crimean crisis Sanctions from EU and US (July-September) and reciprocal food embargo (August) Continued banking sector clean-up and depletion of Deposit Insurance Fund Debt market paralysis – both foreign and domestic Pressure on currency Key rate hikes from 5.5% in February to 17% at emergency CB meeting on December 16th 1

Feb 2015 - present: respite 2 Oil prices recovered Concerted actions by government and big business eased pressure on ruble BUT volatility remained Economic crisis cut demand for funding BUT investments are dropping even faster Banking sector stabilized Key rate cut from 17% to 11.5% on June 15th, as inflation slows down Federal budget in a good shape as weaker ruble improved revenues 2

economy continues to shrink GDP on the downside Capital investments are decreasing since late 2013 Russia's Economy Sharply Deteriorates In 2Q15 Real GDP growth, % YoY -6 -5 -4 -3 -2 -1 1 2 1Q14 2Q14 3Q14 4Q14 1Q15 Apr-15 May-15 Real GDP Source: Rosstat, RusRating estimates 3

Incomes dropped, unemployment remains low Incomes follow… Unemployment Source: Rosstat, RusRating estimates Incomes declined, and retail trade followed No massive layoffs, but labor market remains under threat Stabilization is likely in 3Q15 4

BOTH EXPORT AND IMPORT SHARPLY DOWN Exports shrinked along with oil price… …but imports contracted even more… Source: Rosstat, RusRating estimates 5

Trade balance props up current account Even with weaker oil, current account remains strong, compensating for capital outflows Structure of Russian Exports, % Structure of Russian Imports, % Imports 2014 1Q15   CIS Non-CIS Machinery and equipment 25,3 50,5 20,3 47,7 Food 17,5 13,4 13,7 Fuel and energy commodities 8,3 0,5 9,1 Chemicals 11,8 16,8 16,1 18,1 Textiles and shoes 5,1 5,8 5,7 7,0 Metals 14,9 11,9 5,6 Other 17,0 7,4 19,4 Total, $ bln 32 254 4 38 Source: Rosstat, RusRating estimates 10

Exchange rate and oil price remain tightly linked 6

Inflation IS slowing, RATES CUT… Inflation Decelerates in May Due to Food Segment Growth rates, %   Apr-15, MoM May-15, MoM Apr-15, YoY May-15, YoY 5M15, YoY CPI 0,5 0,4 16,4 15,8 16,2 Food 0,3 0,1 21,9 20,2 21,8 Non-food 0,9 14,2 14,3 13,3 Services 11,8 11,6 12,2 Source: Rosstat Producer Price Growth Accelerates across All Segments Producer price growth broken down by sector, %   Sep-14, MoM Oct-14, MoM Sep-14, YoY Oct-14, YoY 10M14, YoY PPI (0,8) 0,3 3,5 5,1 6,1 Extraction (5,8) 0,2 (4,6) (0,1) 8,1 Manufacturing 0,6 0,4 6,4 7,0 5,2 Utilities 2,6 3,9 7,1 Source: Rosstat Exchange rate volatility and first impact of sanctions already passed through the monetary system Slower inflation allowed Central Bank to cut rates 3 times this year 7

…Banking system liquidity at relatively safe levels Source: Rosstat 8

Federal Budget in a DECENT shape Nominal budget revenue growth, % YoY Weaker ruble and recovered oil prices provided extra revenues in 1H15, but impact is likely to be smaller for the whole 2015 Expenditures turned loose in late 2014, but now government is more stingy Oil and gas dependence remains strong 9

Risk area 1: Banking sector Increasing NPLs and dependence on government handouts Reliance on CBR short-term funding – both ruble and hard-currency Deposit base recovered after December runs but still insufficiently Since January 1st 30 banks lost their licenses, insurance fund depleted and received loan from Central Bank. Sanctions of sizable banks also take toll on CBR abilities CB continues policy of increased regulatory pressures but delayed some measures After 2015-16: Russian financial industry should be leaner and cleaner 11

Risk Area 2: Regional budgets Regions got respite last year but 2015 expected to be tough Incomes to shrink as regional tax base is highly cyclical but expenditures are growing Costly refinancing of debts First default of region in years (though technical) Federal help would be limited Pressure on social services 12

Risk area 3: Sanctions Geopolitical situation somewhat stabilized still constraints on investments are firmly in place for now Situation in Eastern Ukraine remains fragile and costly Impact of sanctions was smaller than expected on oil and gas sector but impact on financial services would be more long-term in nature Food embargo impact on domestic production is unclear but consumer spending depressed anyway 13

2015-16: what to expect 14 Major policy shifts unlikely Reliance on oil and gas revenues – “elephant in the room” Reserve Fund and National Welfare funds – bye, bye! But not momentarily Business activity – likely to improve by early 2016 on federal spending (including military upgrades) Consumers – no loan-financed growth for now 14

Opportunities for foreign business Technology imports and localized production – may be subject to sanction regime Localization of consumer goods Capital outflow remains strong – thus financial services may get a boost Foreign properties – instability at home creates demand 15

Forecasts for 2015-16 16 2013 2014 2015E 2016E GDP, % YoY 1,3 0,6   2013 2014 2015E 2016E GDP, % YoY 1,3 0,6 (2,5) 0,9 Industrial production, % YoY 0,3 1,7 (1,5) Fixed investment, % YoY (0,3) (13,8) 1,6 Retail sales, % YoY 3,9 2,5 (7,8) 1,2 Real incomes, % YoY 3,3 (1,0) (3,0) 1,1 CPI, % 6,5 11,4 10,8 6,0 PPI, % 3,7 5,9 3,0 5,5 Exports, $ bln 522 494 342 358 Imports, $ bln 344 308 192 200 Current account, $ bln 33 57 75 77 Federal budget surplus/(deficit), % GDP (0,5) (2,3) Avg. ruble exchange rate, RUB/$ 31,9 38,3 58,0 58,9 Avg. Brent price, $/bbl 108,7 99,4 60,0 Source: Rosstat, CBR, RusRating estimates 16