Slide 1 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton May 2010 Anton Stroutchenevski, Senior Economist Generous Budgetary Policy Is the Biggest Threat for the Economy

Slide 2 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Source: State Statistics Service, Troika estimates Rising oil price and expanding foreign borrowing failed to accelerate Russia’s growth: Russia can grow at any oil price

Slide 3 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton The government expects budget revenues to fall, R bln... Note: The government initially forecasted revenues in 2009 at R6,713.8 bln. In 4m10 revenues reached R2,618.3 bln, while the deficit was at R444.6 bln. Source: Finance Ministry

Slide 4 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton … but has not cut expenditures, R bln Note: The government initially planned expenditures in 2009 at R9,845.2 bln. Source: Finance Ministry

Slide 5 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Due to increased expenditures, the breakeven oil price climbed to $100/bbl Urals Note: The chart shows two scenarios for 2011: (1) spending kept at around current levels (i.e. R10 trln); and (2) spending cut to R9.3 trln as stipulated by the current medium-term fiscal plan. Source: Finance Ministry, Troika estimates Breakeven oil price, $/bbl UralsFederal budget expenditures, % of GDP

Slide 6 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Russia is returning to more a balanced model of economic development after several years of overheating Source: State Statistics Service, Troika estimates % -10% -5% 0% 5% 10% 15% 10%15%20%25%30%35%40% Investments/GDP GDP, y-o-y

Slide 7 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton A larger government and a budget deficit in Russia usually means worse economic performance Source: State Statistics Service, Finance Ministry, Troika estimates

Slide 8 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Inflation is falling in any case Source: State Statistics Service, Troika estimate

Slide 9 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Nominal interest rates have started to decline… Source: Central Bank, State Statistics Service

Slide 10 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton … but real rates have grown due to decelerating inflation Source: Central Bank, State Statistics Service Based on y-o-y inflation Based on 6m moving average inflation Source: Central Bank, State Statistics Service

Slide 11 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Annual inflation has been slowing faster than the Central Bank is cutting rates Source: State Statistics Service, Central Bank Annual inflation versus refinancing rate Source: State Statistics Service, Central Bank, Troika Monthly inflation

Slide 12 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Banks’ voluntary reserves were growing Source: Central Bank Source: Central Bank, Troika Voluntary reserves and interest ratesCentral Bank real deposit rate and voluntary reserves

Slide 13 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton The market expects rate cuts to continue Source: Central BankSource: State Statistics Service, Central Bank Bonds and loans in banks’ portfoliosAverage effective yield and refinancing rate

Slide 14 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Sustainable growth implies moderate ruble appreciation and a positive (or balanced) current account Source: Central Bank, State Statistics Service, Troika estimates GDP growth vs current account balance GDP growth vs real effective ruble exchange rate Source: Central Bank, State Statistics Service, Troika estimates

Slide 15 | May 2010 | Generous Budgetary Policy Is the Biggest Threat for the Economy | Evgeny Gavrilenkov, Stroutchenevski Anton Research Department+7 (495) Head of ResearchPaolo Zaniboni+7 (495) Strategy Chief strategistKingsmill Bond, CFA+44 (207) StrategistAndrey Kuznetsov+7 (495) Oil and Gas Senior analystOleg Maximov+7 (495) AnalystValery Nesterov+7 (495) AnalystAlex Fak+7 (495) Utilities Senior analystAlexander Kotikov +7 (495) AnalystIgor Vasilyev+7 (495) Assistant analystAndrey Trufanov+7 (495) Telecoms, Media and IT Senior analystEvgeny Golossnoy+7 (495) AnalystAnna Lepetukhina+7 (495) Metals and Mining Senior analystSergey Donskoy, CFA+7 (495) Senior analystMikhail Stiskin+7 (495) AnalystIrina Lapshina+7 (495) Manufacturing AnalystMikhail Ganelin+7 (495) Financials Senior analystAndrew Keeley+7 (495) AnalystOlga Veselova+7 (495) Consumer Senior analystVictoria Sokolova+7 (495) AnalystMikhail Krasnoperov+7 (495) Assistant analystVitaly Chakin+7 (495) Real Estate AnalystIgor Vasilyev+7 (495) Chemicals Senior analystMikhail Stiskin+7 (495) AnalystIrina Lapshina+7 (495) Transport AnalystKirill Kazanli+7 (495) Small and Mid Cap AnalystMikhail Ganelin+7 (495) Market Analysis AnalystNadezhda Utenkova+7 (495) Economy Senior economistAnton Stroutchenevski+7 (495) Fixed Income Head of FI researchAlexander Kudrin+7 (495) Senior analystAnton Tabakh, CFA+7 (495) Senior analystAlexey Bulgakov+7 (495) AnalystEkaterina Sidorova+7 (495) Ukraine StrategistRoman Zakharov+38 (044) EconomistIryna Piontkivska Senior analystYevhen Hrebeniuk Senior analystPeter Keller Senior analystIvan Kharchuk AnalystAlexander Tsependa Kazakhstan AnalystZaurbek Zhunisov AnalystAinur Medeubayeva Senior Management Chairman of Board of Directors and CEO, Troika Dialog GroupRuben Vardanian Chief Business OfficerJacques Der Megreditchian Chief Economist, Managing DirectorEvgeny Gavrilenkov Head of GMPeter Ghavami