RUSSIA IN 2007
                         Outlook for 2008
                           Thinkpiece 5, December 2007

Prepared ...
Contents
  Introductory Essay                                                                      3

  Part One: The Cons...
Introductory Essay
                               Stephen Lock is Mmd’s Regional Director for Russia and the former
      ...
Some have referred to this as ‘velvet re-privatization’. For foreign firms which had key
oil and gas holdings acquired in ...
Secondly, what we have witnessed in 2007 is a growing divergence of those western firms
which ‘get’ Russia and those which...
Think of a budget and double it – particularly in consumer markets, some key western
firms are failing to make the impact ...
The Big Politics
It didn’t take long for the western media to coin the phrase that for Dmitri Medvedev “his
weakness is hi...
Russia in 2007, Outlook for 2008
In this thinkpiece, we first look at the Russian consumer. My colleagues look at the rise...
We also look at the education sector; the economy and, of course, oil and gas. So much of
Russia’s future depends on the h...
PART ONE: The Consumer




   Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserv...
Online
                  By Arseniy Rastorguev




                Aresniy Rastorguev is a senior analyst in the Eurasia
 ...
Internet & Technology Penetration
  Affordable broadband is essential for ‘live web’ development – many of the services
  ...
Internet & Technology Penetration
                                                          Internet Audience in Russia,
 ...
Blogs
 The number of blogs was estimated by the Yandex research at 3.1 mln. (about 30% of
 them active) in October 2007 – ...
Blogs: Balancing Trust and ‘Monetization’
  The global platform, Livejournal.com, having been acquired by the Russian firm...
Social Networks: Stealing Audiences
 But despite all the growth in the blogosphere, social networks like Odnoklassniki.ru ...
Social Networks

  The trend we expect to develop is migration of younger audience towards social
  networks as ‘less dema...
Consumer Electronics
                 By Artur Trapizonyan




                   Artur Trapizonyan is an Account Manager ...
Executive Summary
 The consumer electronics market in Russian is the seventh largest market in the world.
 Russians spend ...
Sales
  Large retail network sales make up 60% of the market.

  The four leading retailers control 48% of the market.



...
Sales in the Regions




                                                                                      Source: Tec...
The Computer Market
                                                                                             Desktop M...
Mobile Phone Market
 Was expected to stagnate, but in Q3 market grew
                                                     ...
The Television Market
 Leading suppliers are increasingly interested in the Russian market; the market is
 expected to dou...
Television Sets

  Both LCD and Plasma demonstrate growth, with Plasma becoming a niche product
  and LCDs more widespread...
The Media Market
               By Inessa Pogorzhelskaya




             Inessa Pogorzhelskaya is Senior Account Manager ...
General Trends
  The Russian media market is split between large-scale financial-industrial groups.
  Media assets, in rec...
Trust in the Media
                                                        44 %
       Percentages of the Russian
       p...
Major Media Events
Print                                                        Online
  The private equity fund, Russia N...
Print media
Key indicators:
   In Jan 2007 there were 59,184 print publications registered in Russia
   The Russian market...
Online Media
Key indicators:
   The volume of advertising in the Internet – excluding context advertising – was worth
   $...
Broadcast Media
Key indicators:
   The volume of television advertising amounted to $74.5 billion, on radio, $8.8 billion,...
Regional Media
Key indicators:
   Regional media accumulates 25% of overall advertising volumes
Trends:
   The leaders in ...
Medium                                    Audience                                                  Trend
Cinema:         ...
How Often Do You Use…?


       TV

      Radio

Newspapers,
  magazines

   Internet

      Every day                    ...
Banking and Financial Services
                   By Eugenia Skobeleva



                Eugenia Skobeleva is the Directo...
Russian Banking Sector Overview, 2007 (1)
2007 was a challenging year for the Russian banking system:

      Capitalisatio...
Russian Banking Sector Overview, 2007 (2)
  The sector showed rapid growth, especially in the first half of the year –
   ...
M&A
 In terms of M&A it was also a fruitful year for the foreign financial institutions
 coming to Russia. With major play...
Payment Cards
Since 2001 the number of payment cards in Russia has increased 7 times. In Q1 2007 there were
more than 74 m...
The Top Ten Leaders in Payment Card Volume
25,000,000
         25


                                                      ...
The Automotive Industry
                       By Pavel Melnikov


             Pavel Melnikov is Associate director of Co...
Characteristics of the Automotive Market, 2007
  By the beginning of 2008, there will be between 29.6 and 29.7 million car...
Characteristics of the Automotive Market, 2007

 More than half of all cars are more than 10 years old, and only 20% of th...
Price Characteristics of the Automotive Market, 2007
  Nearly 40-45% of new cars are bought on credit at the moment.
  The...
Foreign Cars in Russia
  Foreign car production in Russia during the first 9 months of 2007 grew 73.3 %, to
  321,100; imp...
Expectations for the Automotive Market
 The market will continue to grow: up to 2.7 million cars are expected to be sold i...
Housing
                       By Inna Semenyuk



                 Inna Semenyuk is Director of Lifestyle & Consumer Affa...
On the Spot
A few years ago Moscow’s skyline consisted of Kremlin domes and the Gothic spires of
the Stalin-era buildings ...
Housing Supply
There is about 2.85 billion m2 of housing stock in the Russian Federation.
The average dwelling space per i...
Quality of Existing Housing
  About 60 % of all housing has been constructed
  before 1960

  About 20% of homes in cities...
Funding the Buying of a New Home

     Financial funds for property purchase                                  Their own fu...
Growth in Construction Prices
 Between January and September 2007 the average price of construction materials
 particularl...
Elite Residential Real Estate
During the third quarter of 2007 the total volume of new elite buildings available in centra...
Elite Property Pricing Forecast
Although the rate of price increase slowed during the third quarter of 2007, the average
p...
Housing Laws and Programmes
  The Fundamentals of Federal Housing Policy, December 1992
  The federal targeted programmes ...
In the pipeline: “Affordable Housing” prospects
 Housing construction is projected to double
 from 40 million square meter...
Housing’s Future in Russia
Opinions differ over the future of the Russian market, however, there is agreement over
  a few...
The Housing Debate
Since the beginning of 2007, the Government has been insisting that the resident-owners
of the flats mu...
PART TWO: The State




    Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved...
The Economy
                 By Mikhail Kouriatchev



                        Mikhail Kouriatchev is Chairman of Mmd in E...
World Bank’s Assessment of the Russian Economy:
  Robust growth supported by high energy prices, large capital inflows, ri...
Nevertheless…
 Inflation is rising, driven by food prices and monetary factors

 Inflation will have increased to 9.3% ove...
Although…
     Stabilization Fund is $140 bn
     Central Bank reserves of $420 bn
     Budget surplus of 4%
     Total de...
Oil and Gas
                   By Vladimir Melnikov


                  Vladimir Melnikov is Head of Consulting at Mmd. He...
Most regions in the world have either passed or are reaching peak production
  The Middle East, Russia and Africa have pro...
Russia will increase its oil export potential by 2020



                                                                 ...
Growth of Oil Production




                                                                  %
                         ...
Cost Effectiveness
   Relatively “disappointing” Russia oil production growth, yet strong cost increases,
   have thrown a...
Russian Oil Sector does not Benefit from High Oil Price
  500                                                             ...
2006 Comparison of Tax Expenses per Barrel
Taxes per bbl produced
USD/bbl
                                                ...
The “Production Drag” effect of Russian Taxes
Dr. Robert Skinner, Oxford Energy Institute ( UK)
“Taxes continue to exert d...
Tax Regime 2008 will Remain Intact if not Tightened

 As President Vladimir Putin said in mid-December 2007, he is not goi...
The Political Year Ahead
                   By Vladimir Melnikov


                  Vladimir Melnikov is Head of Consulti...
PUTIN’S DILEMMA BEYOND 2008 (I)
In building up a power system with checks and balances, Vladimir Putin is actively
followi...
PUTIN’S DILEMMA BEYOND 2008 (II)
The fundamental question is, therefore, whether Vladimir Putin will transfer the right
of...
EVOLUTION OF ‘CONTINUITY’ CONCEPT
                                                           2007-2008
 1999-2000
        ...
MAJOR RISKS BEYOND 2008
 To those businessmen grown out of the 1990s (Deripaska, Usmanov, Mordashev and
 others), the leve...
RUSSIA’S BUSINESS ELITES


    New State Capitalists                                     Grown Out of 1990s

  Chemezov’s ...
Education
                  By Arseniy Rastorguev



                   Aresniy Rastorguev is a senior analyst in the ESG....
Education Snapshot (1)
     A process of concentrating resources in ‘Federal Universities’ is underway. So far two
     Fe...
Education Snapshot (2)
  The Government is trying to reanimate the vocational education sector, which
  currently (a) is s...
Education – Who pays?
    Federal budget spending on education is planned to be more than RUR 300 billion in
    2008 (11%...
Spending on Education
                                            Family annual spending on education (RUR)
              ...
Russian Demography
                        By Alexey Cherny




             Alexey Cherny is a senior analyst in the ESG....
Demographic Collapse – The Traditional View
                                                                 Huge drop in ...
Population Forecasts – A New View
 Average annual population growth, 1980-2000
                                           ...
Demographics: The Good and The Bad
                                                         Cons
Pros
                    ...
Modern Healthcare: A Priority National Project
                                     Ministry of Healthcare and Social
 In ...
Olympics
                     By Irina Proskurnya



                  Irina Proskurnya is Account Manager for the Lifesty...
Sochi 2014




  Winning the Games provoked an outbreak of patriotism and national pride among
  Russians. According to RO...
Sochi 2014: Investments Structure
                 Winter Olympics 2014 Budget: RUR 327.2 bn ($ 13,47 bn)
    Federal Targ...
Sochi 2014: Federation Island
A breathtakingly ambitious artificial ‘Federation Island’ will be built off the Black Sea
co...
Appendix 1:
Top Tips for Western firms looking to do PR in
Russia




    Prepared by Mmd Corporate, Public Affairs & Publ...
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
Thinkpiece 5 Outlook For 2008
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Thinkpiece 5 Outlook For 2008

  1. 1. RUSSIA IN 2007 Outlook for 2008 Thinkpiece 5, December 2007 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 1
  2. 2. Contents Introductory Essay 3 Part One: The Consumer Online 11 Consumer Electronics 18 The Media Market 26 Banking and Financial Services 36 The Automotive Industry 42 Housing 48 Part Two: The State The Economy 61 Oil and Gas 65 The Political Year Ahead 74 Education 80 Russian Demography 85 The Olympics 90 Appendix 1: Russian PR Tips for a Large Company 94 Appendix 2: About Mmd 100 Contact Details 104 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 2
  3. 3. Introductory Essay Stephen Lock is Mmd’s Regional Director for Russia and the former Soviet states and is President of its Eurasia Strategies Group, which provides investor relations services for Russian firms; government relations services for western firms and also hub’s Mmd’s specialist banking and finance team. I am delighted to introduce you to Mmd’s fifth thinkpiece of 2007: Russia in 2007, Outlook for 2008. It adds to those we have done on the Russian blogosphere; PPPs in Russia; the Priority National Projects and Strategic Issues for Western Investors. While we don’t pretend that this latest addition to Mmd’s thinkpiece family is a fully comprehensive survey of all the issues and economic sectors, it is our largest yet. In this, my colleagues summarize some areas of particularly interesting development. In line with its policy of sovereign democracy, the Russian government has shepherded a new era of State Capitalism, where key state industrial or financial groups (or Russian, private sector groups close to the state) have taken up key strategic positions. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 3
  4. 4. Some have referred to this as ‘velvet re-privatization’. For foreign firms which had key oil and gas holdings acquired in the 1990s, 2007 was a stressful year. But, just as President Putin achieved political order, from chaos in his first term, so his Russia First policy has dominated his second term. In practice, Russia First has both pulled back oligarch excess and ‘super power’ status within the country and has ensured that key economic assets have stayed in Russian hands. President Putin did not want to see a neo- super power like Russia lose control over its unique natural resources for them to be exploited only by foreigners, for foreigners. Foreign investors are still welcome in these sectors (and those foreign oil firms were all offered lucrative JV projects to replace the assets they lost). Bright future profits beckon but, predominantly, as junior partners to more confident Russian industrial leaders. This is consistent with a program of economic rejuvenation which aims to give Russian industrial groups a ‘helping hand’ form the State, not just to protect Russian assets from overnight plundering by the West, but also to let Russian firms play ‘catch up’ from 70 years of Soviet economic sludge and become, in their own right, global business leaders. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 4
  5. 5. Secondly, what we have witnessed in 2007 is a growing divergence of those western firms which ‘get’ Russia and those which, whether they have just arrived in Russia or have been here over a decade, do not. If the reader will allow, here are my three principals for successful foreign direct investment, or market entry, in Russia: Understand state priorities – for inward investors – especially in the strategically important sectors of energy, oil and gas, minerals and metallurgy – the success of your business in Russia will stand or fall by your ability to walk in the footsteps of the State and be its (junior) partner. 2008, in particular, will be the year the West learns that Public Private Partnerships (PPPs) will be central to how the state wishes to handle infrastructure investment across healthcare, energy, transport and, of course, the Sochi Olympiad. The opportunities here for Western firms will be huge. Indeed, we say 2008-2012 will represent an historically unique commercial opportunity for firms geared up to operate in PPP environments. Russia First – politically, economically and as consumers, the focus is on Russia, for Russia, by Russians, tailored for Russian needs. Anyone planning a marketing campaign or a consumer push in Russia needs this to be front and centre in their thinking. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 5
  6. 6. Think of a budget and double it – particularly in consumer markets, some key western firms are failing to make the impact in Russia that they usually expect. In part this is because they are constrained by unrealistic investment caps and marketing budgets. This particularly hampers US firms who are tied to the US dollar, which fell 15% against the Ruble in 2007 and, since the start of 2004, is down some 25%, exacerbated by Russian inflation which remains stubborn at around 10% a year. In practical terms this first impacts HR. Staff which looked quite good value in 2004 at about $40,000 a year (including social taxes) now look frighteningly expensive at $70,000 for the same level of hire, just 4 years later. Undoubtedly HR productivity has not kept pace with this cost increase, which does pose a significant longer-term threat to Russian economic progress, although other productivity gains and efficiencies hide this problem in the manufacturing sector. In Big Picture terms, Russian firms focused on consumer markets are both out-thinking and out-spending their western counterparts in trying to reach the Russian consumer; so amongst all the economic good news, we would make this ‘big prediction’. Towards the end of 2008, stand by for stories about western B2C firms which ‘got Russia wrong’. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 6
  7. 7. The Big Politics It didn’t take long for the western media to coin the phrase that for Dmitri Medvedev “his weakness is his greatest strength” and point to how Vladimir Putin, as Prime Minister, will remain firmly in power. We see the macro-political outlook for Russia as ‘steady as she goes’. As my colleague, Vladimir Melnikov writes, with much insight: “President Putin cares more for the stability of the system than his own place in it”. We see over the next four years a decisive shift from executive Presidency towards Parliamentary Democracy and government by a committee of the elected house. President Putin now has the mandate and the space to achieve this. Nonetheless, we do see political risks increasing after 2008. While not wanting to be like Ukraine – politically, ‘the Italy of Central Europe’ – President Putin works towards a system of government which is socially conservative (to keep the diverse peoples of the Federation together), economically progressive, if tied to state structures, and unable ever again to host another Stalin (or a Yeltsin!). Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 7
  8. 8. Russia in 2007, Outlook for 2008 In this thinkpiece, we first look at the Russian consumer. My colleagues look at the rise of New Media in Russia; we chart the extraordinary growth of the automotive sector and we look at the tremendous changes in housing. The rapid rise in consumers’ sophistication and expectations (as well as volume growth) have been some of the most interesting developments in Russia in 2007 and we witness it here through three prisms: the banking and financial sector; how media markets are changing in Russia, the booming consumer electronics sector. Secondly we look at the role of the state; with short overviews of Russia’s demographic picture; where this year Mmd has shifted its assessment. We are no longer bears (population below 100,000,000 by 2040), but relative bulls. Russia’s current population decline is not illusory, it is real. But it may be temporary. 2010-2020 is a crucial time to determine if high death rates and low birth rates can be reversed. If they can, a population decline of only to 130 million can be achieved around 2020; and the population may even start to grow again in the period 2020-2040 (all other factors being equal). But the government’s initiatives in this area are, literally, a ‘race against time’. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 8
  9. 9. We also look at the education sector; the economy and, of course, oil and gas. So much of Russia’s future depends on the hydrocarbon revenues that can pump-prime social and economic reform and progress: how’s that sector doing? We end by looking at the infrastructure and PFI-fest that will be the Sochi 2014 Olympics: where will the money go? For Russia, 2007 was the year when stability and prosperity arose from the dovetailing popular aspiration and state policy. In 2008, as we enter a new Presidency, we will see bold and successful steps towards social reform, to ensure the benefits of oil and gas wealth are shared by the many. It is in this light that we should interpret President Putin’s benchmark announcement that the Stabilization Fund, which washes all those oil revenues, will be partially deployed on pension increases and investments in innovation. For foreign investors and firms Russia will still remain one of the most important growth markets in the world, but one now of scale and depth; with stable and benign politics. Russia will not be completely isolated from choppy global markets, but we believe there is a good case to make for it being a safe-harbor for global firms’ profits. Пусть 2008 будет для Вас годом успеха и процветания, так же как он будет годом успеха и процветания для России! Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 9
  10. 10. PART ONE: The Consumer Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 10
  11. 11. Online By Arseniy Rastorguev Aresniy Rastorguev is a senior analyst in the Eurasia Strategies Group. He specialises in Public Affairs and New Media and his clients include Google. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 11
  12. 12. Internet & Technology Penetration Affordable broadband is essential for ‘live web’ development – many of the services can only thrive when their users have affordable permanent internet access. While flat-rate subscription plans are a de facto standard in Moscow and St.Petersburg, pay- per-traffic plans are still very common in the regions. Content and service providers have to address this issue: Yandex promotes the flat-rate plans and has been signing deals with regional ISPs to charge traffic from Yandex services at 0 rate. Even though there are about 60 mln. XHTML-enabled handsets in Russia, mobile internet remains a pretty underdeveloped area. Some ‘easy web access’ services have failed because of a poor business model (I-Mode) and others are only starting their ‘career’ in Russia (BlackBerry). In the past year Russian cell operators have made certain steps to make setting up web access on a handset simpler, but mobile internet is still seen as quite ‘geeky’ by the majority of users, and the complicated billing of mobile internet access only makes it worse. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 12
  13. 13. Internet & Technology Penetration Internet Audience in Russia, By the end of 2007 the daily audience 2003-2010 – those who actually shape the face of % mln people the web services and generate traffic will grow by 16% compared to 2006 to reach 11.8 million people. By 2010 this category should reach 21 mln people with another 16 mln. using internet on a less frequent basis. This will encourage rapid development of the ‘live web’. By the end of 2007 virtually all schools in Russia were provided with 6-months’ audience Daily audience broadband internet access. % of daily audience in 6-months’ audience © MForum Analytics, 2007 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 13
  14. 14. Blogs The number of blogs was estimated by the Yandex research at 3.1 mln. (about 30% of them active) in October 2007 – 2.6 times up from a year ago. We can expect the Russian blogosphere to double next year. Blogs will keep gaining audience, but the segmentation will become more defined and more evident – the gap between blogging as pastime/networking and blogging as media activity will be widening. Active blogs Abandoned blogs Number of Russian blogs Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 14
  15. 15. Blogs: Balancing Trust and ‘Monetization’ The global platform, Livejournal.com, having been acquired by the Russian firm, SUP Fabric, will need to find a new way to position itself in Russian market. Apart from the advantage of being a pioneer Livejournal has strongly relied on its ‘independent’ status and the feeling of security offered by its US hosting and jurisdiction. Concerns will inevitably arise with regards to SUP’s independence from the Russian political environment, impartiality on politically-charged abuse disputes, SUP’s own PR/advertisement business. Livejournal is, by far, the dominant blogging platform for Russian bloggers. The ‘Monetization’ of blogs has been the buzzword in 2007 and will be the issue in 2008. Many of the top bloggers have high aspirations regarding revenue-generating capacity of their blogs, but so far the ways to monetize a blog’s popularity have proven to be either not really impressive in terms of numbers or pretty dubious in terms of ethics and, effectively, reputation. The ‘Platypus case’ – an awkward hidden ad campaign for the ‘Utkonos’ retail chain in the top Russian blogs came in December as a perfect ‘summary’ of the year’s mood in the Russian blogosphere. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 15
  16. 16. Social Networks: Stealing Audiences But despite all the growth in the blogosphere, social networks like Odnoklassniki.ru and Vkontakte.ru have stolen the title of the ‘web’s hottest thing’ from the blogs in 2007 Vkontakte.ru, 4,000,000 users Odnoklassniki.ru, over 6,000,000 users (Moikrug.ru boasts a far smaller audience but with stronger focus on professionals, while Facebook and Linkedin are virtually restricted to the audience of professionals and students exposed to work or study in Western companies and colleges). We expect these services to build up their functionality and start the fight for being the personal hubs of individual’s online activity in 2008. Facebook’s example is way too obvious to miss it. Currently only Moikrug.ru offers such tools (integrating blog feeds, discussions). They will also have to find business models to sustain them – Odnoklassniki.ru places ad banners, but Vkontakte.ru is currently a commercial enigma (causing rumours about its affiliation with FSB, United Russia, Presidential Administration etc.). Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 16
  17. 17. Social Networks The trend we expect to develop is migration of younger audience towards social networks as ‘less demanding’ in terms of creativity and more intensive in terms of socializing. Content-rich, creative, Diary blogs, corporate & Social media general social youth professionals standalone blogs, audience: networks, dating +‘housewives’ professional and services international social networks Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 17
  18. 18. Consumer Electronics By Artur Trapizonyan Artur Trapizonyan is an Account Manager in the Technology team of the PR Division. He specialises in Telecoms and Industrial PR and his clients include GE Energy, Lenovo and IBM. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 18
  19. 19. Executive Summary The consumer electronics market in Russian is the seventh largest market in the world. Russians spend 5.4% of their income on electronic devices – that is a greater percentage of their income than in western countries, but a lower amount in absolute figures. Growth rates are slowing, and are expected to continue to do so, except for: portable digital devices navigation devices High Definition video technologies. Increased and more widespread use of the Internet is expected Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 19
  20. 20. Sales Large retail network sales make up 60% of the market. The four leading retailers control 48% of the market. Source: RATEC Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 20
  21. 21. Sales in the Regions Source: Technosila Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 21
  22. 22. The Computer Market Desktop Market Leading suppliers are increasingly interested in the Russian market: Computer imports grew by 15% PC penetration in Russia is nearly 100% in almost all regions The desktop market increased by 5.4%, but laptops are increasingly popular: sales up 46.4%. now 2-3 laptops to 1 desktop (IT monitoring). Design and status are driving consumers’ decisions over which PC Laptop Market Source: IDC Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 22
  23. 23. Mobile Phone Market Was expected to stagnate, but in Q3 market grew Suppliers 23%: nevertheless, future growth predicted at below 5% a year. Average price of a handset reached $220 Driving factors – design and status. Leading suppliers collaborate with famous fashion designers 89% of purchases replace the old phones 70% of households have at least one mobile phone. In Moscow – 84%, in the Urals – 54%. Operators attracting Average Revenue Per User (ARPU) and loyalty through new services: Wi-Fi stimulating sms and mms traffic tariffs for children Source: Mobile Research Group Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 23
  24. 24. The Television Market Leading suppliers are increasingly interested in the Russian market; the market is expected to double next year Digital TV is rapidly becoming more popular in Russia, although penetration is still only 1% across Russia, and 5% in Moscow. Both tradition and alternative operators are offering the service Cable TV penetration is nearly 20% in regions, 28% in Saint-Petersburg. Broadband Internet, Blue Ray technology, availability of digital TV will cause demand for FullHD TV OLED technology may change market situation Source: GFK Rus, Digital Search, iSuppli Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 24
  25. 25. Television Sets Both LCD and Plasma demonstrate growth, with Plasma becoming a niche product and LCDs more widespread Decreasing costs of the products shift competition to the 42 inches segment. More than 60% of TV in Russia are still electron-beam. LCD Suppliers Plasma Suppliers Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 25
  26. 26. The Media Market By Inessa Pogorzhelskaya Inessa Pogorzhelskaya is Senior Account Manager in the Technology team of the PR Division. She specializes in Corporate and B2B Communications and her clients include SAP, 3M, NXP and Acision Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 26
  27. 27. General Trends The Russian media market is split between large-scale financial-industrial groups. Media assets, in recent years, have demonstrated a strong trend for consolidation and rotation from hand to hand Many media holding companies, having strengthened their positions in the regions, are diversifying their businesses, buying out assets or acquiring local media in the CIS and preparing to go public Funds for developing the Russian media market are allocated from Federal budget: in 2006 $531 million were allocated, in 2007 this figure is expected to increase by 64% According to the Association of Russian Communication Agencies the mass media market is expected to be worth $1 billion by 2010 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 27
  28. 28. Trust in the Media 44 % Percentages of the Russian population that trust in the media: state TV dominates 8% 5% 3% 3% 2% 2% 79% TV Central Inte rne t Regional Central RegionalgRegional C e ntral Re ional Internet TV TV Press Radio Press Radio Stations 21% Percentage of the Russian 14% population that gains the main part 7% of their information from the media Central Regional TV Internet Radio Stations TV Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 28
  29. 29. Major Media Events Print Online The private equity fund, Russia New Growth Fund Rambler Media recently became part of Prof-Media; (headed by Troika Capital Partners), became co- its internet strategy is to become far more streamlined owner of the Gameland Publishing House, as a result and aggressive of which Gameland has attracted $12 million for its Rambler media acquired the context advertising multimedia projects development system, Begun The South African media holding company, Naspers The Norwegian company A-pressen sold 25,05 % of Ltd, acquired 2.6% of Mail.ru for $26 million its shares in Komsomolskaya Pravda Publishing House to ESN Group Broadcast Regional The launch of 2 TV channels for children: Telenyanya The Ekaterinburg publishing house, ABAK-PRESS, and Bibigon expanded into the Moscow region. Launch of free The First business radio station, Business FM, was magazine Ya Pokupau launched in Moscow and St.-Petersburg At the end of March 2006, the Norwegian media The BBC, which had hoped to provide contents for holding company, Schibsted, acquired 66.7% of the Business FM, was effectually locked out and BBC shares in Regional Independent Papers, based in St. Russia service lost its FM license Petersburg Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 29
  30. 30. Print media Key indicators: In Jan 2007 there were 59,184 print publications registered in Russia The Russian market for periodical press (advertising and distribution) in 2006 was worth more than $4.06 billion – a 13.7% increase against 2006 The volume of advertising in print media amounts to $1,4 million (1st 9 months of 2007) Trends: Around 100 new magazines launched in 2007 Market expansion: more and more local market players Forecasts: By 2014 print media market is expected to be worth $15 billion In 2009 the first IPO amongst media holding companies will take place: Prof Media Sources: Russian Federal Surveillance for Compliance with the Law in Mass Communications and Cultural heritage Protection, Federal Agency for Press and Mass Communications, Association of Public Relations Consultants, Print Media Distributors Association, Prof-media management announcements Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 30
  31. 31. Online Media Key indicators: The volume of advertising in the Internet – excluding context advertising – was worth $110 million on the first 9 months of 2007 As of July 2007, 25% of the Russian population are Internet users Around 27,00 news articles are published online on work days and around 6,000 on weekends and holidays. Around 20% of the articles are reprints from other media types Trends: 13% of the Russian population regularly read news online, 3% more than last year. The dynamic market expansion of online media is putting print media in jeopardy Forecasts: By 2010 the Internet advertising volume will exceed $1 billion Sources: Russian Association of Public Relations Consultants, Public Opinion Fund, All-Russia Public Opinion Research Centre (2006) Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 31
  32. 32. Broadcast Media Key indicators: The volume of television advertising amounted to $74.5 billion, on radio, $8.8 billion, in the first 9 months of 2007 In terms of audience share, government owned TV channels have 54% 98% of households own TV sets, while only 5% use paid-for digital channels (2006) Trends: By the end of July 2007, there were 13,5 million cable network users. More than 55% of the Russian cable TV market is supervised by six large holdings: Nafta, Mass Media System, Svyazinvest, ER-Telecom, Multiregion, and Renova-Media Forecasts: CTC Media will acquire producing company Kinocontanta for $40 million The volume of paid-for TV in Russia by the end of 2007 will be $650 million The conversion of the radio-frequency spectrum for new radio stations to be enabled Complete shift to digital TV by 2015 Sources: Russian Association of Public Relations Consultants, TNS Gallup Media, iKS-Consulting data, ITAR-TASS, Kommersant, Ministry of Cultural Affairs Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 32
  33. 33. Regional Media Key indicators: Regional media accumulates 25% of overall advertising volumes Trends: The leaders in terms of advertising revenues in the regional media market as of Q1 2007 were Ekaterinburg, Novosibirsk and Samara Regional publishers are beginning expansion into the Moscow region Regional markets’ potential is demonstrated by the continuous expansion of federal publishing networks into the regions (Intermediagroup, Provintia, Pronto-Moscow and others) Forecasts: Increase in the level of trust in regional media, their growing independence and authority Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 33
  34. 34. Medium Audience Trend Cinema: Audience of 91,8 million In 2011 average number of visits Average number of visits per annum is 0.5 (3-5 European will become 1.5 Growing countries; 2.6 worldwide ) In the course of 6 years (2001- Annual audience growth 20-30% 2006) the number of loyal cinema Audience: 51,3% - under 25, 39% - 26 – 40 visitors increased by 2.5% Audience: 60% - monthly income below $400 Increase in the number of cinema halls – 40% Newspapers: Circulation of newspapers declining: 2007 – 7.8 billion The most read newspapers are copies, in 2005 – 8.05 billion copies local ones (42%) Declining Every 5th Russian adult doesn’t read newspapers at all; but this is still a higher reading proportion than in the West Radio: Audience of 94.5 million 1/3 of the audience listened to the radio as much as 5-7 years ago In the past 10 years the number of commercial radio stations Stable doubled, while their share in the media market overall 21% - started to listen to the radio remained the same – 29% more, the same percentage – less Younger audience: 18-34 category increased in the past years TV: Audience of 139 million, strong decline in young audience More people start to watch TV for entertainment purposes (48%), The number of available federal channels – 17 in 2007, up to Declining 59% use it as background – this 50 expected in 2011 trend started in 2005 91% of Russian population watch TV every day Sources: Smart money (2005), Delovoy Petersburg, Mediaatlas (2006, 2007), Novosti SMI, All-Russia Public Opinion Research Center (2005), Comcon (2007), Ogonek) Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 34
  35. 35. How Often Do You Use…? TV Radio Newspapers, magazines Internet Every day 3-4 times per week 1-2 times per week Once in 2-3 weeks Once in several Don’t use it months Don’t know Source: All-Russia Public Opinion Research Center, 2007 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 35
  36. 36. Banking and Financial Services By Eugenia Skobeleva Eugenia Skobeleva is the Director of Financial & Corporate Affairs in the Eurasia Strategies Group. She specialises in media relations, strategic communications and crisis media training. Her clients include Visa; HSBC; Saxo Bank; and private equity group, TPG. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 36
  37. 37. Russian Banking Sector Overview, 2007 (1) 2007 was a challenging year for the Russian banking system: Capitalisation on the growth Meanwhile, a backdrop of stumbling blocks: of credit organisations and the ‘narodny’ IPOs of Sberbank and VTB the world liquidity crisis = state regulations tightening Interest from the professional investor community and private investors The global liquidity crisis had its positive impact on the Russian banking system – it stimulated the Ministry of Finance, the Central Bank and other banks to explore new solutions for financial problems. Banks clearly understood that diversification and higher standards of risk management were a step forward. The Central Bank actively financed the financial sector in order to prevent further development of the liquidity crisis – a record high was set with $11 billion being lent on one day in August on the security of tier one bonds. Although the liquidity situation is still a concern for midsized and small- sized banks, Russia was much less affected by the global crisis than many observers expected. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 37
  38. 38. Russian Banking Sector Overview, 2007 (2) The sector showed rapid growth, especially in the first half of the year – assets in the Russian bank system amounted to 56% of GDP (as by September 2007), many of the large banks showed 20-30% annual growth and some smaller ones showed even 40- 50%. The country’s macroeconomic performance secured an increase in both corporate and personal earnings providing further demand for banking products. The corporate banking segment remained very competitive, but the retail segment showed rapid growth – total retail loans by value grew more than twice as fast as total corporate. The development of more sophisticated products: derivatives as a tool to manage credit risk securitisation to increase banks’ funding sources etc Banks acknowledging that regions are a huge growth potential; starting to develop regional networks and providing banking products. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 38
  39. 39. M&A In terms of M&A it was also a fruitful year for the foreign financial institutions coming to Russia. With major players already existing in the Russian banking arena, several key deals took place: Belgian KBC acquired 92,5% stake of Absolut Bank Assicurazioni Generali SpA has bought 31,7% stake of insurer, Ingosstrakh Potential acquisition of 30% of Rosbank by Societe Generale However, the presence of foreign banks is still low as compared to other countries of Eastern Europe – only 12.3% of total banking sector assets. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 39
  40. 40. Payment Cards Since 2001 the number of payment cards in Russia has increased 7 times. In Q1 2007 there were more than 74 mln of payment cards, with annual growth of 37%. The leader in the payment card issue volume is Sberbank. In 2006 the number of cards issued by Sberbank exceeded the number of cards issued by Russia’s second largest retail bank, Alfa-Bank, 3.5 times. From the regional perspective the leading regions by payment card issuance are St.Petersburg, Tymen and Khabarovsky regions. Most of the cards are concentrated in Moscow and Moscow region – more than 42% of the overall Russian issuance. Most Russians continue to use bank cards for the cash withdrawal purposes and not as a payment tool. In 2006 3.97 trln of roubles were withdrawn – 93.5% from the total amount of transactions volume of bank cards. Debit cards constitute in average 84% of the total market (most of the cards are salary cards). However the credit card market was growing faster (in 2006 85% growth of credit cards and 32% growth oа debit cards). Visa is the leading payment system in terms of the card issue volume in Russia Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 40
  41. 41. The Top Ten Leaders in Payment Card Volume 25,000,000 25 Number of cards by 1 July 2007 20,000,000 20 Number of cards by 1 July 2006 Number of cards in 15,000,000 15 millions 10,000,000 10 5,000,000 5 0 Bank Source: RBC Rating, Central Bank Statistics Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 41
  42. 42. The Automotive Industry By Pavel Melnikov Pavel Melnikov is Associate director of Corporate and Financial Affairs in the Eurasia Strategies Group. He specializes in public and government relations and his clients include GE Money bank, HSBC and Visa. However, Pavel joined Mmd from Pirelli and knows the Russian automotive industry well. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 42
  43. 43. Characteristics of the Automotive Market, 2007 By the beginning of 2008, there will be between 29.6 and 29.7 million cars in Russia – 78% of them Russian – meaning an increase of between 4 and 5% on last year. The sale of 2.2 – 2.3 million cars this year is a 10-15 % market increase, placing Russia second in Europe in terms of car sales – it was fourth in 2006 (nevertheless, today in Russia there are 180 cars for one thousand people, while in Europe more than 500). In money terms, the market is expected to have grown by about 30% over 2007, and be worth $41.5 billion ($32 billion in 2006). The average price for a car bought in Russia is 100% 6,6 8,5 8,6 3,2 4,6 4,6 3,4 about $17,000 ($15, 500 4,4 4,9 10,7 80% 12 13,1 in 2006), and those 13,2 30.000+ 14,3 15,5 60% 25-30.000 buying in the $10- 20-25.000 $15-20.000 15,000 range and the $10-15.000 40% > $10.000 62,9 $15-20,000 range is 56,2 53,3 20% continuing to increase (see table). 0% 2006 2005 6 mnths 2006 Sources: Vedomosti, Autostatistics, Autoreview, Za rylyom, Vesti.ru, GIBDD, experts Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 43
  44. 44. Characteristics of the Automotive Market, 2007 More than half of all cars are more than 10 years old, and only 20% of them are less older than 5 years Dealers are gaining more access to local markets: The annual growth of dealer networks varies from 30 to 35%. 90% of this increase is due to the growth in regional markets networks and in many cases this includes cities with population of fewer than 500, 000. Traffic infrastructure is underdeveloped. Since the 90s, car volume has increased several times while infrastructure has developed only by a few percent, thus causing traffic problems in all big cities. Laws and regulations concerning toll roads are in review. Sources: Vedomosti, Autoreview, Za rylyom, Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 44
  45. 45. Price Characteristics of the Automotive Market, 2007 Nearly 40-45% of new cars are bought on credit at the moment. The number of banks owned by car manufacturers is increasing in Russia, and, following the example of Toyota bank, DaimlerChrysler bank has started working in Russia. BMW, Renault, Nissan and VW banks are also planning to enter the Russian market. The price of new cars has grown because of – increased demand inflation the price increase of raw materials and electric power the use of increasingly expensive technology Introduction of Euro-2 standard from the 1st of June 2007 increased the price for each car made in Russia by $600-720 (15,000 – 18,000 roubles). Insurance legislation will be toughened according to a supreme court decision. Insurance companies will be obliged to compensate the loss of a vehicle’s commodity value as a result of traffic accident, which will lead to the increase in the cost of insurance. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 45
  46. 46. Foreign Cars in Russia Foreign car production in Russia during the first 9 months of 2007 grew 73.3 %, to 321,100; imported car sales 63,8%, to 837,000. Within three years time, foreign cars imported to Russia are expected to account for a half of the country’s car market, while the remainder will be covered by foreign cars of Russian assembly. The 12 most popular foreign cars models have a waiting list of 3 months to one year, which in itself helps to stimulate the sales of the Russian cars. Autovaz expects to close 2007 with total sales of up to 660,000 cars, although its market share steadily decreases to 25-28% (32% in 2006). The Ministry of Economic Development and Trade has signed agreements that provide favourable tax conditions on production assembling for car manufacturers in 2007. Among the 15 contracts signed were: This November, Volkswagen opened an engineering plant that will produce 115,000 cars a year, while Toyota is opening a factory in December. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 46
  47. 47. Expectations for the Automotive Market The market will continue to grow: up to 2.7 million cars are expected to be sold in 2008. With the increasing prosperity of the Russian population: Russian cars are becoming less and less popular. Domestic manufacturers will tend to reduce production (by 2010 it will have fallen by 50%). The low-cost car sector is also slowing in growth, against the background of overall economic growth. There will be a slump in import of second-hand cars (the reduction is 8-10% a year): Russians are buying new foreign cars, not secondhand ones New car plants of foreign producers will be built in Russia (up to 10 by 2010). Chinese manufacturers will significantly increase the number of cars produced and sold owing to their low price. By 2010 the share of their market will be nearly 6%. The introduction of the Euro-3 standard from the 1st of June 2008 will increase the price for each car made in Russia by $400-800 (10,000 – 20,000 roubles). There will also be a tendency to tighten environmental requirements. Sources: Vedomosti, Autoreview, Za rylyom, experts Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 47
  48. 48. Housing By Inna Semenyuk Inna Semenyuk is Director of Lifestyle & Consumer Affairs in the PR division. She specializes in Consumer PR strategy development, customisation and implementation and her clients include Starbucks, Visa, IFA Hotels & Resorts, Turner Broadcasting (CN and Boomerang) and Diageo. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 48
  49. 49. On the Spot A few years ago Moscow’s skyline consisted of Kremlin domes and the Gothic spires of the Stalin-era buildings known as the Seven Sisters. But today, all across Moscow, new office towers and apartment blocks are transforming Russia’s capital: Federation Tower (right): 93 stories, soon will be Europe’s tallest building European Trade Center: 160 stores, a nine-screen cinema, swimming pool Triumph Palace, Sokol: 54-stories, luxury residences Booming business and rising personal wealth mean that demand is up for all types of property. Office space in Moscow now rents for an average of $95 a square foot—two-thirds higher than in Midtown Manhattan. Annual real returns that top 10%, vs. 4% to 5% in Western Europe and the U.S. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 49
  50. 50. Housing Supply There is about 2.85 billion m2 of housing stock in the Russian Federation. The average dwelling space per inhabitant about 20 m² About 27% of About 73% of housing stock housing is in is in rural urban areas areas 8.7% of all households are on a waiting list for improved living conditions. Their homes have been classed as unlivable and are intended for demolition. Meanwhile, householders wait to be transferred into new, modern homes provided by the Government. Over the last year only 230,000 households (5.2% of the waiting list) have had their living conditions improved. At such a rate, it will take 20 years to get through the waiting list. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 50
  51. 51. Quality of Existing Housing About 60 % of all housing has been constructed before 1960 About 20% of homes in cities are without running water, waste disposal, etc. Approx.150,000 residences become uninhabitable every year due to municipal Government failing to maintain building due to lack of funds 87.8 million m2 (3.2% of the total volume) of homes in 2005 were deemed to be in a rundown and/or damaged state, compared to 37.7 million (1.4 %) in 1995 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 51
  52. 52. Funding the Buying of a New Home Financial funds for property purchase Their own funds 11% Mortgage loan 32% 17% Sell existing apartment Financial aid from relatives, friends, etc Consumer credit Consumer credit 18% 22% The share of consumers intending to buy their own home is increasing because: Consumers are finding themselves with more spare cash The reduction in the proportion of speculative capital on the market An investment in property is still considered safer than other kinds of investment Residential property prices growing at a much slower rate than the commercial sector Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 52
  53. 53. Growth in Construction Prices Between January and September 2007 the average price of construction materials particularly (especially cement) grew by 21.94%. The construction prime cost growth has reached 24.14%. The price growth of the primary housing market has reached 12.2% on average. The Russian Association of builders (RAB) comment: “Due to high construction prices in big cities the cheaper, lower-quality panel housing is moving into the suburbs, while in big cities business and premium class housing increases are being built. Premium housing today is the most profitable sector for developers and attractive in quality to wealthy residents of the cities.” Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 53
  54. 54. Elite Residential Real Estate During the third quarter of 2007 the total volume of new elite buildings available in central Moscow comprised of more than 163 000 sq. m., worth around $2.6 billion. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 54
  55. 55. Elite Property Pricing Forecast Although the rate of price increase slowed during the third quarter of 2007, the average price per square meter in the elite city real estate market rose by 10-12% since the beginning of the year. According to Mayfair Properties experts, by the end of 2007 the cost of the real estate will have increased by 14-16%. No market stagnation is expected. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 55
  56. 56. Housing Laws and Programmes The Fundamentals of Federal Housing Policy, December 1992 The federal targeted programmes “Dwelling for 2002-2010” and its two subprograms on reforming and upgrading housing and utilities on relocating residents from slums and derelict dwellings The New Housing Code (2005) + 27 new Federal laws The National Housing Project, “Affordable and Comfortable Housing for Russian Citizens”, focusing mainly on: Doubling the housing market Developing the mortgage market by government-financed programs and mortgage insurance Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 56
  57. 57. In the pipeline: “Affordable Housing” prospects Housing construction is projected to double from 40 million square meters in 2004 to 80 million square meters by 2010 Mortgages are expected to increase 20-fold from 46,000 mortgages in 2004 to 1 million in 2010 Loans will be more available for Russians (in 2010, the interest rate on mortgage loans is to be lowered from the current 15% to 8%) The waiting list for state housing will drop from twenty to seven years Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 57
  58. 58. Housing’s Future in Russia Opinions differ over the future of the Russian market, however, there is agreement over a few core features: In 2008 the Russian housing market will grow probably by 1-1.5% per month or 12- 18% over the whole year. Costs for primary properties will exceed inflation level and will increase by about 15-18% over the year. Secondary market development will depend on the offers available in the market. With the development of regional property markets, the Moscow market is expected to even out due in respect to the rest of the country, and, as a consequence of the unsold existing properties, prices should cool down Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 58
  59. 59. The Housing Debate Since the beginning of 2007, the Government has been insisting that the resident-owners of the flats must choose what system of management they want for their buildings: Model 1: create a Home-Owners’ Association as management company Model 2. Invite a management company (municipal or private) Model 3. Each resident to have personal contracts with maintenance and utilities companies Russian residents say: “Housing reforms greatly increase rents with no tangible benefits or solutions to the problems of housing shortage, overcrowding, poor facilities and disrepair” Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 59
  60. 60. PART TWO: The State Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 60
  61. 61. The Economy By Mikhail Kouriatchev Mikhail Kouriatchev is Chairman of Mmd in Eurasia and runs our Government relations practice. He is advisor to the President of the Russian Association of Regional Banks and the financial institutions committee of the State Duma Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 61
  62. 62. World Bank’s Assessment of the Russian Economy: Robust growth supported by high energy prices, large capital inflows, rising domestic demand and prudent macroeconomic management. Having grown by 7.9 % in 1H-2007, Russia is likely to post full year GDP growth of over 7 % The aggregated fixed capital investment grew by 21.2 % in 1st 9M of 2007 Sectors servicing domestic demand continued to boom in 2007: construction – 23.5% and retail trade – 15 % Manufacturing also grew at healthy 10% in 1st 9M of 2007 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 62
  63. 63. Nevertheless… Inflation is rising, driven by food prices and monetary factors Inflation will have increased to 9.3% over 10M-2007 Most likely, end-of-year inflation will reach 11%. Keeping inflation in check is becoming increasingly difficult with large capital inflows Domestic and foreign investment went to few sectors: resources, metal and food While still strong, manufacturing growth is decelerating. Growth might slow down if the challenges are not addressed: control inflation, limit rapid real exchange rate appreciation, sustain productivity growth, promote economic diversification, boost private investment, shrinking and rapid aging population. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 63
  64. 64. Although… Stabilization Fund is $140 bn Central Bank reserves of $420 bn Budget surplus of 4% Total debt is 8% of GDP Government is planning one trillion dollars investment into infrastructure projects, including preparation of the Olympics-2014. Russia is already the 6th largest economy of the world, and as Economist Intelligence Unit puts it – the most macro-economically stable country in Europe. For so long as hydrocarbon prices stay high – really, in the case of oil, north of $40/barrel – Russia’s economy will continue to enjoy robust real growth. The challenge now for the Government is to use this financial windfall to achieve social reforms, raising people out of poverty and to invest in infrastructure and economic diversification. Achieve that and the period 2000-2020 will be one historic achievement. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 64
  65. 65. Oil and Gas By Vladimir Melnikov Vladimir Melnikov is Head of Consulting at Mmd. He specialises in strategic consultancy in Government Relations and investor communications. His clients have included GE Money, Rosneft, Telenor, System Capital Management (Ukraine), TMK and several Russian electricity firms. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 65
  66. 66. Most regions in the world have either passed or are reaching peak production The Middle East, Russia and Africa have produced less than half of their reserves Russia 41% 263 bln. bbl. Europe 80 bln. bbl. North America 65% 358 bln. bbl. 80% 31% Asia-Pacific Region 43% 57% 131 bln. bbl. Middle East World Latin America Africa 810 bln. bbl. 52 197 bln. bbl. 190 bln. bbl. % 46 Produced % Reserves Global Initial Recoverable Oil Source: IHS Energy Reserves: 2102 bln. bbl. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 66
  67. 67. Russia will increase its oil export potential by 2020 Russia Europe 2774 2482 North America 5767 4782 2005 2020 9965 Middle East 2005 2020 5300 71 85 69 41 2005 2020 Africa 2005 2020 Asia- 2738 Pacific 2555 1291 Region Latin 6789 2005 2020 America 2005 2020 2015 2117 2005 2020 Imports of Oil and Refined Products, MMbbl. Exports of Oil and Refined Products MMbbl. Source: BP, EIA, 2006 67 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 67
  68. 68. Growth of Oil Production % $ per barrel Millions of tonnes A current depletion of the oil [black] and gas The growth of oil production [red] is still [red] resources mean that far more efficient being recuperated to a level of 1987. cost management and more investment in Although there is an apparent correlation of exploration and new production is necessary if the growth of production with the growth of Russia wants not only to grow but even to oil prices [black] this is more due to growth maintain its current level of production. in taxes and the factual correlation is weak Sources: BP, Russian Statistics Bureau 68 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 68
  69. 69. Cost Effectiveness Relatively “disappointing” Russia oil production growth, yet strong cost increases, have thrown a spot-light on the efficacy of the Russian oil sector For a qualitative increase in cost effectiveness, significant investments are needed in innovation and technologies which Russian oil companies are struggling to get despite high oil prices Falling production and effectiveness indicators of Gazprom suggested that the Russian state hydrocarbon sector is still to meet the production effectiveness of Western firms The general trend continues: Rosneft becoming “super major” oil firm” Luxoil: the global oil firm that just happens to be Russian Sources: Ministry of Natural Resources, Russian Statistics Bureau, Neftegazovaya Vertikal and Expert 69 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 69
  70. 70. Russian Oil Sector does not Benefit from High Oil Price 500 90,00% 450 80,00% 400 70,00% 350 60,00% 300 50,00% 250 40,00% 200 30,00% 150 20,00% 100 10,00% 50 0 0,00% 2002 2003 2004 2005 2006 Tax burden on profit for a “model company” Oil price Tax burden on revenue for a “model company” Oil price minus NDPI tax and export duty Sources: Development Center, 2005, Lukoil Analyst Handbook, 2007 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 70
  71. 71. 2006 Comparison of Tax Expenses per Barrel Taxes per bbl produced USD/bbl High hydrocarbon 35 taxes stymie 30 production growth 25 20 28,9 27,1 31,5 15 2,9 8,6 4,8 10 3 12,8 5,6 5 8,1 8 7,5 3,4 3,1 2,6 0,9 0 EP P ft he on l ft na i e TE ko ne tn ac ev i G Ch Lu os PT Ta Ap KM D tro R Pe Corporate Income tax Other taxes Source: KazMunaiGaz 2007 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 71
  72. 72. The “Production Drag” effect of Russian Taxes Dr. Robert Skinner, Oxford Energy Institute ( UK) “Taxes continue to exert downward pressure on Russian oil production” Clingendael Institute (NL) “As the cheaper oil fields are depleting in Russia, oil companies have to focus on more remote and challenging oil fields, which obviously will increase their production costs. The current tax regime combined with the cost increase (E & P and transportation) renders the development of new (more) expensive oil fields unprofitable”. Neil Duffin, President of ExxonMobil Development Company “…the existing fiscal regime is apt for traditional regions, like West Siberia, with close proximity to production, transportation and civil infrastructure. Unfortunately, this fiscal regime is not well-suited to large, remote resources requiring long lead times”. Konstantin Cherepanov, KIT Finans “The present tax regime helps to carry out some social and political projects, and there may be no shortage of companies willing to work in Russia, given the current high oil prices, but it is a real possibility that this heavy tax burden may cause a shortage of funding for development”. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 72
  73. 73. Tax Regime 2008 will Remain Intact if not Tightened As President Vladimir Putin said in mid-December 2007, he is not going to change the taх regime for oil companies. Moreover, he indicated that the tax pressure on oil companies might be increased to replenish the Stabilisation Fund which will be partly used for financing increase in state pensions and innovation development across Russian industries. Maintained/growing tax pressure will necessitate even more stringent focus on raising cost effectiveness in the industry which will be the biggest challenge for Russian oil companies in 2008 Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 73
  74. 74. The Political Year Ahead By Vladimir Melnikov Vladimir Melnikov is Head of Consulting at Mmd. He specialises in strategic consultancy in Government Relations and investor communications. His clients have included GE Money, Rosneft, Telenor, System Capital Management (Ukraine), TMK and several Russian electricity firms. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 74
  75. 75. PUTIN’S DILEMMA BEYOND 2008 (I) In building up a power system with checks and balances, Vladimir Putin is actively following through a plan which he does not share – in its entirety – even with those who are talked about as Putin’s Team. Putin evidently cares for his baby – the new power system – even more, it seems, than for his place within that system. Having depoliticized the Russian business elite and atomized the political elite, Putin is enjoying the suprapower of intra-elite arbitration. Will he be able to keep up the game beyond 2008? It’s a horrendous task to manage. Russian realities will demand from the new president, Dmitry Medvedev, a demonstration not only of his political power but also of the ability to, even to a limited extent, re-distribute property. If this function remains controlled by Putin and the new state capitalists (Yakunin, Chemezov, Koval’chuk and others), the elites will begin to shift and consolidate around not only Putin, but around those who will be seen in charge of distributing resources (on behalf of Putin). These resource distributors will inevitably be creating their own verticals of loyalty. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 75
  76. 76. PUTIN’S DILEMMA BEYOND 2008 (II) The fundamental question is, therefore, whether Vladimir Putin will transfer the right of property re-distribution to the new president. If this right remains solely in Putin’s hands, the new team / the new president will be lacking authority in Russia, first of all in the eyes of major business elites, who may become active in “privatising” the new president, and other branches of executive power. We may also see some situational consolidation of those politicians who have been ‘used’ by Putin in his perpetual political game and now left aside with a firm decision to begin, discreetly, playing their own games. For private businesses, especially big Western firms, this will all mean a more complicated power structure necessitating a more weighed and carefully analyzed approach to dealing with state structures and government or regulatory bodies. The Government sector in Russia, despite the outward ‘stability’, is actually going to become more complicated in 2008; and certainly beyond then. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 76
  77. 77. EVOLUTION OF ‘CONTINUITY’ CONCEPT 2007-2008 1999-2000 1.Coalitions of business and regional 1.Non-public political competition of elites do not have political representation elites resulting, through a bargaining any longer. During 7 years in power Putin process, in agreeing to a compromise has consistently been stripping oligarchs successor (Putin) prior to the elections of political aspirations allowing 2.Putin’s skilful use of PM’s depoliticized business elites only administrative resource with his direct 2.Resorting directly to the electorate appeal to Russian population and results allowed Putin to have a constitutional of the Parliamentary elections in 1999* majority in the parliament providing him predetermined the choice of the with unlimited room for political successor in 2000. maneuver. 3.The defeated oligarchs and politicians 3.The greatest Putin’s dilemma will be who used to have their own candidates not a transfer of political power but, with for presidency were allowed to fully time, a transfer of the right for integrate into the new power system. redistribution of property to his “heir”. *Primakov-Luzhkov’s party was defeated by Edinstvo (pre-runner for Edinaya Rossia) Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 77
  78. 78. MAJOR RISKS BEYOND 2008 To those businessmen grown out of the 1990s (Deripaska, Usmanov, Mordashev and others), the level of monopolisation of assets by the new state capitalists (Chemezov, Kovalchuk, Yakunin and others, may no longer be agreeable. Coupling the growing dissatisfaction of politicians close to Putin with his plan constantly putting them under pressure, we can see signs of great shifts in property distribution and intensification of the struggle between different political and business clans already in 2008-2009. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 78
  79. 79. RUSSIA’S BUSINESS ELITES New State Capitalists Grown Out of 1990s Chemezov’s Group Tamed oligarchs (Deripaska, Yakunin’s Group Vekselberg, Usmanov and “Rossia” (Kovalchuks family others) and others) Self-made businessmen Kogan Group originally loyal to Putin, like Gazprom Group Mordashev Regional business groups (Luzhkov’s Group, Shaimiv’s TAIF and others) Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 79
  80. 80. Education By Arseniy Rastorguev Aresniy Rastorguev is a senior analyst in the ESG. He specialises in Public Affairs and New Media and his clients include Google. Earlier in his career he was Secretary to a Government-backed think-tank reviewing Higher Education in Russia Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 80
  81. 81. Education Snapshot (1) A process of concentrating resources in ‘Federal Universities’ is underway. So far two Federal Universities have been set up with RUR 6 billion allocated this year: Southern – in Rostov-on-Don Siberian – in Krasnoyarsk RUR 13.4 billion to be allocated for new Federal Universities until 2009 Federal Universities are meant to serve as education and research centres, not mere training facilities as the average university in Russia has come to be At least 65% of school leavers go to university the year they graduate (only 25% did in 1985). The Ministry of education believes that 30% would be far more adequate to actual market needs (which makes the Ministry a target for hatred for those followers of ‘The Most Educated Country in the World’ motto). For male undergraduates, of uncertain academic ability, university is still the easier “hedge against conscription”. Source: Monitoring of Education Sector Economy by the Higher School of Economics Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 81
  82. 82. Education Snapshot (2) The Government is trying to reanimate the vocational education sector, which currently (a) is seen as a kind of drop-out option, that rather keeps kids off the street than gives them professional training, and (b) very poorly reflects the needs of the current market in terms of which skills it is teaching for what industries (the service industry, for example, is very underrepresented) 2/3 of Russians receive their tertiary education in the region where they live. Because of high cost of life in large cities and small scholarships, higher education is still quite weak as a ‘horizontal social mixer’. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 82
  83. 83. Education – Who pays? Federal budget spending on education is planned to be more than RUR 300 billion in 2008 (11% up from 2007) and is expected to grow further in the following years (this does not include regional budgets spending) Prices for education in Russian universities are getting close to domestic prices for education in the UK or Germany – with the average of $700 per term. But fees in world-leading institutions such as MGIMO (the foreign affairs university), the Higher School for Economics or Moscow State University reach $5,000-6,000 ‘Commercial’ tertiary education has grown almost 50% in price since 2003 in Moscow. At the stage of entering a university 22% of spending goes to ‘private persons’ services and 41% - to bribes and other illegal payments in Moscow (20% and 21% outside Moscow). While a Moscow student is in a university (budget sponsored seat) his parents spend 26% on bribes and illegal payments (9% in regions). Source: Monitoring of Education, Economy, HSE Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 83
  84. 84. Spending on Education Family annual spending on education (RUR) 60000 Muscovites spend 2% of 52700 their income on education 50000 (same as in London or Hong Kong, close to New 37800 40000 York’s 3%, well above Berlin’s 0.5% but behind 30000 Tokyo’s 5%). 20700 17100 20000 14800 12200 9600 9700 8900 7800 10000 0 Pre-school School Entering Studying in Studying in university University University ('budget- ('commercial') Moscow Russia sponsored') Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 84
  85. 85. Russian Demography By Alexey Cherny Alexey Cherny is a senior analyst in the ESG. He specialises in financial, technology and healthcare communications consulting and his clients include Saxo Bank, Google, Camco International, Business Software Alliance. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 85
  86. 86. Demographic Collapse – The Traditional View Huge drop in birth rate following collapse of USSR Male life expectancy, <60 years, at third world levels. World’s highest suicide rates in males between 18-30: conscription issues Infant mortality increased over the last 15 years. Population, decreasing by a million a year after 2010 2007 – 143 million 2040 – <100 million Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 86
  87. 87. Population Forecasts – A New View Average annual population growth, 1980-2000 The most extreme forecasts about the Tajikistan Uzbekistan Russian demographic situation Turkmenistan (“Russia is facing demographic Kyrgyzstan Azerbaijan catastrophe – there will only be 75 Moldavia Kazakhstan million people by 2050” or “Russia’s Armenia thriving, they’ll be 200 million in Georgia Latvia Russia by 2050”), tend to be political Estonia Russia rather than statistical. The Byelorussia demographic situation in Russia did Latvia Ukraine look bleak after the collapse of the USSR, but now there is a tendency for improvement The UN forecasts that by 2020 the Russian population will decrease to 133 million. The Russian Ministry on Economiс Develoment and Trade states that the Russian population will be between 138 and 139 million by that time Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 87
  88. 88. Demographics: The Good and The Bad Cons Pros Russia has the world’s highest suicide Male life expectancy has increased rates in males between 18-30 because of from 58.5 to almost 60.3 between conscription issues 2003 to 2006 Russia is following the overall European Russians have become healthier and trend and is becoming older. For every live longer, thanks to the decrease in 1000 of the working population, in 2005, deaths caused by heart problems and there were 591 pensioners/children. By external causes such as accidents, 2020 there will be 785 crime, etc pensioners/children, with the share of The infant mortality rate has decreased 45plus year olds increasing and the from 17 in 1999 to 10.8 in 2006 number of people 29 and less decreasing (which is relatively close to the UK The lowest forecast of the Russian rate in 1983 level, Denmark in 1975 birthrate is 1.35 by 2050, the same level and Poland and Estonia 1997) of 2006 – which is insufficient for a stable population Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 88
  89. 89. Modern Healthcare: A Priority National Project Ministry of Healthcare and Social In charge: Development, Tatiana Golikova Improve the health of Russia’s population Key areas: Make healthcare more accessible Increase preventative healthcare Implement modern technologies approx. RUR 121 bil. (EURO 3.5 bil.) in 2007 Budget: Restructuring to shift focus from inpatient to outpatient care More proactive approach to preventive activities, such as vaccination and regular medical check-ups Major technical upgrade of the healthcare network across the country making the most modern diagnostic procedures and equipment available to all citizens Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 89
  90. 90. Olympics By Irina Proskurnya Irina Proskurnya is Account Manager for the Lifestyle & Consumer Affairs team of the PR division. She specializes in consumer luxury, real estate and retail and her clients include IFA Hotels & Resorts, SAGA Furs and the Economist Conferences, Baileys, Visa. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 90
  91. 91. Sochi 2014 Winning the Games provoked an outbreak of patriotism and national pride among Russians. According to ROMIR monitoring, 80% of Russians perceived the news very positively. Russian environmentalists raised concerns that Olympic constructions will damage conservation areas of high value. This prompted several legal proceedings, the result of which will be a visit from the UNESCO Commitee in Spring 2008 that will evaluate the harm the Olympics will have on the area. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 91
  92. 92. Sochi 2014: Investments Structure Winter Olympics 2014 Budget: RUR 327.2 bn ($ 13,47 bn) Federal Target Program State Corporation Private Investments Regional Government ‘Olympstroi’ (headed by Semyon Vainshtok) 37% 5% 58 % $580 m telecommunications Non-state sector funding expected as $3.2 bn power infrastructure follows: generation $1.3 bn Tourist infrastructure $2.6bn distribution $1.9 bn Olympic venues $500m $4.7 bn transportation infrastructure Subsidies of sports and tourism will absorb much Transportation $270m of the balance of $4.9 bn Power infrastructure $100m an undisclosed about will be spent on security Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 92
  93. 93. Sochi 2014: Federation Island A breathtakingly ambitious artificial ‘Federation Island’ will be built off the Black Sea coast. The island, a miniature archipelago in the shape of the Russia map, will offer luxury housing, shopping and relaxation for up to 30, 000 people. The construction will start in 2008. The total cost of the project is $ 6,2 billion. Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 93
  94. 94. Appendix 1: Top Tips for Western firms looking to do PR in Russia Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 94
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