Geo-politics Oil Russia s changing investment landscape Chris

Geo-politics & Oil Russia’s changing investment landscape Chris Weafer Senior Partner, Macro-Advisory Ltd cjw@macro-advisory. com

Cutting though the noise q Russia’s economy is in a transition phase…The old economic model started to falter from mid-2012 q The falling oil price and sanctions have exacerbated the downward trend but have also made more obvious and more urgent the need for changes q To return to targeted growth of 4% the country will need to attract a higher volume of investment …and progress in creating a more diversified economy q The response from government agencies has been mainly encouraging and pragmatic q The message to western investors has evolved from mid 2014…. it is now recognized (by most)) that western expertise is necessary 2

The slowdown started in 2012 q In 2013, growth slowed sharply despite $110 p/bbl average oil and no sanctions threats 3

What’s Changing? q Change in monetary policy is very significant…. creating a more competitive economy is emerging as a key strategy q Language from government has become more realistic : q Some long standing problems and structural weaknesses, e. g. in the banking sector, are being dealt with q Greater effort to create greater diversification of trade and investment partners q Budget spending reform is now a more serious issue…. and that will eventually lead to pensions reform 4

Big Change In Monetary Policy q The ruble is now free floating with the oil price q Weak ruble is now linked with the government’s main recovery strategy 5

Crisis created opportunities 6

Localization is the new buzzword q Import substitution has emerged as the most important policy priority. q Key industries targeted are: q Agriculture services q food q Healthcare q pharmaceuticals q auto parts q machinery and machinery parts q defence industry equipment q oil field services, etc. 7

In practical terms q A clear distinction between geo-politics and the desire/need to keep western expertise in the economy q Should you build? . . . buy? . . . JV? q Local companies are/maybe better placed initially…very much depends on the industry and location q Schlumberger – Eurasia Drilling case shows that “rules” are far from agreed q Sanctions and the legacy of sanctions means a greater need for due diligence and newsflow management 8

Opportunities for those with patience q This crisis is different …recovery will be slow q Sustainable growth at 3%, or better, is unlikely until 2020 q But the legacy of financial sector sanctions is that the State and many big corporations will have low geared balance sheets – i. e. a greater ability to invest or co-invest q Consumer sector boom is over but capable of sustaining above global average growth – especially in such areas as e-commerce q Manufacturing – supply chain – transport & warehousing 9

Recovery will be slow 10

Problems can no longer be ignored • Pension reforms • Retirement age • Budget spending • Taxation changes • State enterprises • Privatizations • Regional budgets Ø But very likely to be delayed until after the Presidential election 11

Still plenty of risks • Corruption – actual & perceived • Bureaucracy • Local competitors • State company dominance • Unclear government priorities • Geo-Politics • Reputation management • Greater need for due diligence • Hydrocarbon dependency 12

Drive you mad & make you money Russia will remain both frustrating and profitable for investors with the right strategy and patience 13

Appendix: Detailed medium term forecast 14

Long Range Growth 15

Long Range Balance Sheet 16

Regular Publications q Provide business and investment focused independent macro-economic and political analysis q Commercial, thoughtful, timely, and actionable research product q Transparency and lack of transactional business prevent any conflicts of interest Examples of Recent Research Publications: Macro Monthly: The fruits of calmer diplomacy (October 2015) An Economy Badly In Need of a Fix (September 2015) Are We There Yet? (August 2015) Exactly What Is the New Norm? (July 2015) Russia Special: Sanctions: Same As It Ever Was (August 2015) Capital Markets Outlook (April 2015) Ukraine: Ukraine Debt & Economy Review: Dangerous Conflicts (June 2015) Sectors/Commodities: Russia Agriculture (October 2015) Pharmaceuticals: The Long Road To Localization (August 2015) Oil Market Outlook & Impact on Russia (January 2015) C. I. S/Eurasia: Georgia: What To Do When Reality Intrudes? (June 2015) Armenia: Country Profile & Macro Update (May 2015) Kazakhstan: Country Profile & Macro Update (March 2015. . updated October 2015) Turkmenistan: Macro Update (March 2015) Azerbaijan: Country Profile & Macro Update (February 2015) Iran: An enticing minefield (November 2015) Mongolia & Uzbekistan country profiles (TBP in November) Eurasian Economic Union: Planting Acorns (May 2015) Caspian Corridor: Balancing Weak oil & Russia with China and Iran opportunities (October 2015) 17

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