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

Russia’s Development of a World-Class Financial Services Sector It is helpful to measure how Russia stacks-up against the 4 key elements necessary for a global financial center. 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? 1

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

Companies and individuals Financial markets Local environment Financial institutions

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

Russian Financial Markets are Growing Fast FX trading volume on MICEX, daily average Jan 02 Equity Market Performance One of the youngest emerging financial markets is already a major player * 1 Jan 2008 – 28 Mar 2008 Source: Reuters, Citi calculations Rouble Bonds issued by Russian companies 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 Dec 04Dec 05Dec 06Dec Dec 03 Percent Increase since Jan 2002 RTS Index S&P 500 Bombay SENSEX ShanghaiBrazil BOVESPA 4

The Russian Stock Exchanges are now Top 20 Top 20 Stock Exchanges Russian RTS & MICEX moved from Top 30 in 2004……to Top 20 in 2008 The market infrastructure will need to continue modernizing to meet increased volume and complexity * 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. Source: World Federation of Exchanges, Data as of 31 Jan Source: World Federation of Exchanges, Data as of end of 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 5

Companies and individuals Financial markets Local environment Financial institutions

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

Russian Companies Are Already Large International Issuers Russian Companies’ IPO proceeds (US$Bn) Source: Citi Investment Research Russia is Top 20 largest Int’l bond issuers in 2007 Russia is 3 rd Largest IPO Market in 2007 EQUITYDEBT Russian Corporate Debt (US$Bn) Source: Source: Thomson Financial, Central Bank of Russia $56bn $222bn CAGR = 58% 7

Russia Has an Emerging Investor Class 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 1 Internet Connections Per 1000 pop. 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… Source: Miniwatts Marketing Group. Source: Russian Federal Financial Markets Service Individual investors activity, % +13% 8 (1) According to 2007 A.T. Kearney Global Retail Development Index

Companies and individuals Financial markets Local environment Financial institutions

Large Opportunity for Further Development of the Banking Sector 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. 2 Possessing a large-scale modern domestic financial services sector facilitates capital allocation between investors and companies. Banking Assets as % of GDP, 2007 Consumer Loans as % of GDP, 2007 Source: Citi Investment Research 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%. Source: EIU 9

Increasing Consolidation in the Banking Sector Source: CBR. All financials are based on RAS Number of banks decreased by half over 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) Top 25 Russian banks by assets, 1 st of January

Companies and individuals Financial markets Local environment Financial institutions

The Local Environment is a Key Factor for Business Development Favourable and understanding regulation Fair and just business environment Corporate tax regime Government responsiveness Deep pool of educated personnel Flexibility of labour market Culture and language Availability of business infrastructure Clustering effect of suppliers of professional services Operational costs Access to customers Access to international financial markets Volume and value of financial markets To be truly successful, a financial center needs to attend to non-financial factors and ensure they are optimised. Global cities ranked by Global Financial centers IndexFactors of competitiveness ranked (2007) 1. Business Environment 4. Market Access 3. Infrastructure 2. People Factors Source: The City of London Corporation, March RankCityKey Success Areas 1London Strong on people, market access, regulation, environment and culture 2New York Strengths are people and market access 3Hong Kong Geographic position and competitive in the area of regulation 4Singapore Strong banking regulation 5Zurich Niche center for private banking and wealth management 6Frankfurt Strong market access, business environment and infrastructure 7Geneva Strong business environment, and a niche center for private banking and asset management 8Chicago High on people and remains a powerful regional and specialist center 9Tokyo Good liquidity, infrastructure and market access 10Sydney Strong national center with good regulation ……… ?Moscow 11

Case Study: London & Paris – A Tale of Two Cities – Lessons For Russia 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. 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. 12

SWOT Analysis: Critical Success Factors – More Lessons For Russia We undertook a comprehensive study of major financial centers around the world and discovered some generic critical success factors. External FactorsFinancial Sector Factors Tangible Well developed, domestic economy easily accessible to international companies Predictable legal system, easily enforced A pro-business government who understand the development opportunities in finance Competitive corporate and personal tax regime Efficient public infrastructure, such as transport, schools and healthcare Appropriate professional & independent regulation A well developed, stable – and privately owned – banking sector Transparent and liquid liberalised financial markets providing broad issuer and investor opportunities both domestically and overseas Critical mass in asset management with strong supply of investment funds Strong availability of professional support services Intangible A business environment marked by fairness and adherence to the legal framework General acceptance of a free-market philosophy Openness to foreign cultures and people – the “cosmopolitan factor” Educated work-force with English language skills Attractiveness of city life to expatriates Ability to work in international environment Competitive mindset disposed towards product and service innovation A financially skilled work-force Light touch professional & independent regulation Reputation and brand-name of financial sector players 13

Moscow as a Global Financial center – Facts for Consideration MOSCOW 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 Strengths WeaknessesThreats 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 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 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 14 (1) Total corporate tax rate is 51.4% vs. 35.7% in London. Source: The City of London Corporation, March

Conclusions 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. 15

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