1. The Economic Crisis and the Financial Sector in Russia: A Political Risk and Trade Credit Insurer’s Perspective Edward Coppola Chief Underwriting Officer Zurich Surety, Credit & Political Risk U.S.-Russia Business Council Washington, DC April 27, 2009

2. © Zurich 2 April 27, 2009 Zurich Surety, Credit & Political Risk Zurich Financial Services Group is an insurance-based financial services provider founded in 1872. Global network of subsidiaries and offices with 60,000 employees serving customers in more than 170 countries. Rated AA- by S&P In North America, a leading commercial property-casualty insurance provider serving the global corporate, large corporate, middle market, small business, specialties and programs sectors Zurich Surety, Credit & Political Risk group is a leading provider of contract and commercial surety, trade credit and political risk insurance products through offices located in 35 cities throughout North America, as well as Barcelona, Beijing, Frankfurt, Hong Kong, London, Paris, Sao Paulo, Singapore, Sydney, Tokyo and Zurich.

3. © Zurich 3 April 27, 2009 Political Risk & Trade Credit Insurance Confiscation, Expropriation, Nationalization (CEN) Political Violence Currency Inconvertibility Non-Honoring of Sovereign Guaranty or Payment Obligation Breach of Contract (Arbitration Award Default) Trade Credit Insurance for private obligors  Insolvency  Trade related payment default

4. © Zurich 4 April 27, 2009 People Who Live In Glass Houses…… Some humility is called for Crisis began in non-emerging markets False sense of security Living beyond means Lack of, and/or enforcement of, regulations Inappropriate/illegal behavior But blaming Russia’s problems on others does not explain everything

5. © Zurich 5 April 27, 2009 Russia 2003 – 2008: Let the Good times Roll Average 7% economic growth High oil and metals prices Strong and stable Ruble Rising incomes and consumption boom Liquid markets and local bank credit Foreign credit readily available Huge reserves cushion Above were positive distractions from government actions that raised questions of transparency and predictability in application of the law

6. © Zurich 6 April 27, 2009 Russia 2009 Economic contraction Significantly lower oil and metals prices A weaker Ruble Consumer demand down Challenges to financial sector Foreign credit recedes Reserves cushion not as cushy New kind of government interventions Recent signs of stabilization (e.g. exchange rate, capital flight)

7. © Zurich 7 April 27, 2009 Impact on Russian Banking Sector Looming banking crisis? Economic activity declining Depreciated Ruble Foreign credit squeeze Non-performing loans are rising as percent of all loans Need for consolidation and recapitalization Will owners of private banks put up more capital? Government has shown its willingness to bolster major state- owned banks

8. © Zurich 8 April 27, 2009 Lessons from Ukraine, Kazakhstan? Russia is not Ukraine is not Kazakhstan, but some parallels, both discouraging and discouraging:  Dependence on certain commodity exports  Drop in key commodity prices  Impact of devaluation  Withdrawal of foreign credit  Decline in general economic activity  Short-term liquidity issues (2009)  Government support (targeted) for financial sector

9. © Zurich 9 April 27, 2009 Lessons from Ukraine, Kazakhstan? And some differences (so far…)  Internal politics  Some large banks already defaulting/restructuring in Ukraine, Kazakhstan  Impatience by some foreign creditors (e.g. BTA)  Ukraine/Kazakh governments making significant direct interventions outside of state-owned banks  Inclination to show preference for local depositors over trade credit(?)

10. © Zurich 10 April 27, 2009 Some Factors Influencing Russia Going Forward Greater political consensus Still significant reserves Limits on impact of economic downturn on broader population Willingness of foreign creditors to cooperate among themselves and with borrowers Discipline in banking reform

11. © Zurich 11 April 27, 2009 Zurich’s Experience in Russia: Political Risk & Trade Credit Insurance Russia an ideal market for these products  Great potential and opportunity combined with enough political and economic uncertainty Until recently consistently high demand for coverage Trade credit, especially for banks (private and state-owned) Demand has declined and insurers’ risk appetites have become more selective The next six months will be important as bank debt matures

12. © Zurich 12 April 27, 2009