Recent macroeconomic developments and their implications for Moscow (first half 2015)

2

Macroeconomic developments. Main conclusions.

Russia’s external sector is broadly balanced but risks are mainly on the downside. In the absence of adverse external developments such as sharp oil price fluctuations or unexpected external shocks (sanctions and political risks) the following economic developments are expected to take place in the foreseeable future:

• According to the existing data payments on government and corporate external debt will declinecontributing to a deceleration of foreign exchange reserves depletion and modest RURappreciation. RUR exchange rate will remain broadly stable H2 2015.

• Monetary policy of the Central Bank will remain tight. The main economic policy dilemma iswhether to contain inflationary pressures at the cost of GDP growth resumption. It is expected thatthe CBR will reduce it’s reference rate in consecutive steps in line with inflationary developments.It is expected that inflation will slow down in the H2 2015 and onwards.

• A combination of inflationary dynamics and considerable devaluation of the RUR in 2014 havecreated stimuli for an increase of productivity in the Russian economy.

The recession that began in 2014 has brought about a considerable reduction in costs of doing business and an increase in Moscow’s price competitiveness. The current economic situation provide the unique window of opportunity to access Russia’s markets. Given the current monetary policy stance investors that have access to internal long-term financing will gaining a considerable competitive edge.

3

Main findings under the baseline scenario:

By the end of 2015 inflation is expected to be 113.3–113.6% (dec 2015 to dec 2014).

Estimated average inflation in 2015 is 115.7–116%.

Weakening of the rouble exchange rate in the end of 2014 played a major role in an increase of inflation in the first half of 2015.

Main assumptions of the baseline scenario:

Baseline scenario assumptions

106.1%

107.8%

111.3%

116.9%

113.5%

100%

105%

115%

120%

2014 2015 (est)

In % to relevant month of the previous year

Consumer price index in Russia

117

106

109

109

111

102100

110

109107

108

75

53

57 5864

40

60

80

100

120

2012 2013 2014 2015

Oil prices, Urals, USD/barrel

58

58 60

64Oil prices

Rouble exchange rate

USD/barrel

RUR/USD

RUR/USD

USD/barrel

yearly average in 2015

yearly average in 2015

at the end of 2015

by year’s end (dec 2015/dec 2014)

4

Trade balance

The reduction of global oil prices will be translated in a contraction of volume of oil-related exports (60% of all exports) by an estimated 130 USD bn.

Trade balance will remain positive due to a reduction in imports caused by a decrease of real disposable income of the population and a contraction of internal demand.

Trade balance will contract by an estimated 30% in 2015 in comparison to 2014.

Trade balance Imports Exports

147197 192 182 190

136

393

515 527 523 498

366

246

319 336 341308

230

0

200

400

600

2010 2012 2013 2014 2015 (est)2011

Trade balance, USD bn

Reduction in the value of oil exports

Decline in domestic demand

5

Current account

Capital flight in 2015 will slow down:

• A reduction in the volume of payments on foreign debt will decrease resulting in an improvement in investment income balance (interest).

• A sharp contraction of foreign travel will lead to an improvement in non-factor services balance.

Current account balance in 2015 will remain roughly the same as in 2014.

147.0

197.0 192.0 182.0 190.0

136.0

-26.1 -33.6 -46.7 -58.3 -55.1 -47.0-38.7

-51.0-56.9

-66.5 -57.5

-18.5-14.7

-15.1-17.1

-22.4-17.9

-13.5

67.5

97.3

71.3

34.859.5 57.0

-200

-150

-100

-50

0

50

100

150

200

2010 2011 2012 2013 2014 2015 (est)

-79.5-99.7

-120.7-147.2

-130.5

-79.0

The main components of the current account, USD bn

Current account balance Non-factor services balance

Investment income balance (interest, dividends)

Other current account operations

Current account

6

Financial account

On-going restrictions on the access to foreign capital markets will impede the accumulation of foreign currency debt by corporate and banking sectors of Russia.

In the short term the volume of payments on government and corporate foreign debt will diminish.

114.5 109.7123.9

139.1

163.1

119.8

67.1

0

40

80

120

160

2010 2011 2012 2013 2014 2015* 2016*

* As of 01.01.2015, principal debt, without debt on call.

Schedule of payments on government and corporate foreign debt, USD bn

2010 2011 2012 2013 2014 2015(est)

2016(est)

-75.6

-152.3-128.5

-180.9

-74.3

-35.0-55.0

44.967.5

92.4124.4

-50.7-45.0 -35.0

-200.0

-150.0

-100.0

-50.0

0.0

50.0

100.0

150.0

-30.7

-84.7

-36.0-56.5

-125.0

-80.0 -90.0

Financial account balance (investments)

Net acquisitions of financial assets:“+” — sale of foreign assets“-” — acquisition of foreign assets, investments abroad

Net incurrence of liabilities“+” — sale of internal assets, foreign direct investments “-” — decrease in liabilities to foreign residents, payments on internal assets

Financial account balance (investments)

7

Main components of the balance of payments

67.597.3 71.3

34.859.5 57.0

90.0

-42.0-30.7-84.7

-36.0 -56.5

-125.0

-80.0 -90.0-36.8

-12.6

-30.0

22.1

107.5

23.0

-200.0

-150.0

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

2010 2011 2012 2013 2014 2015 (est) 2016 (est)

Change in FX reserves (“+” – decrease, “-” – increase)

Capital account (gratuitous transfer of ownership rights and debt cancellation)Russia’s debt write-offs in 2014: Cuba – 32 USD bn, North Korea – 10 USD bn.

Current account balance

Financial account (investments)(“-” – net lending, “+” – net loans)

A contraction in the volume of payments on foreign debt will be a major factor behind a slowdown of capital flight in 2015.

This will allow for a deceleration of FX reserves depletion leading to a rouble appreciation.

8

Monetary aggregate (M2) and its influence on economic growth

Growth rate of monetary aggregate M2 is decelerating which is in part due to limits imposed on banking credit. The persistence of current situation will lead to a contraction of the monetary component of inflation.

At the same time lack of money in the economy may negatively affect prospects of economic growth resumption.

-20

-10

0

10

20

30

40

50

60

70

-15

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2007 2014 2015 (est)20092006 2008 2013201220112010

Monetary aggregate (M2) and GDP, y-o-y

М2 (lhs) GDP (rhs) Inflation, y-o-y (lhs)

9

Rouble exchange rate and CBR’s refinancing rate

In february-april 2015 rouble appreciated by 26% in relation to dual currency basket regaining half of its devaluation in 2014. This has became possible due to a sharp contraction of imports and positive global oil price movements.

Since the beginning of 2015 Central Bank of Russia has reduced its reference rate in three steps by a total of 4,5 pp. However, its level still remains prohibitively high to end borrowers, resulting in to a contraction of consumer demand and negatively affect investments.

34.6637.87 36.61

38.61

41.03

53.02

75.35 72.71

54.00

32

37

42

47

52

57

62

67

72

77

82

2013 2014 2015

2

4

6

8

10

12

14

16

18

Minimal rate on weekly REPO auctions, % (rhs) Rouble exchange rate to dual currency basket Source: Central Bank of Russia

Rouble exchange rate and refinancing rate of the CBR

10

Factor input to an increase in inflation in Russia in 2015

The weakeking of the rouble exchange rate in the end of 2014 played a major role in the increase of inflation in the first half of 2015.

At the same time influence of the devaluation is almost exhausted (inflation in january-may 2015 was 108,3% to december 2014 and continue to grow at moderate rate.

Further increase of inflation in 2015 will be due to internal factors (growth of monetary aggregate M2, producer prices and tariffs).

The only factor that contributed to containing inflation growth in 2015 is the contraction of consumer demand.

2015

-0.80.40.90.8

3.7

5.9

2.5

+13.4%

2016

-0.80.4

0.8

1.9

2.8

1.9

+7.5%

0.5

Factor input to an increase in inflation in Russia in 2015, end year, pp

Producer price index in manufacturing (inflation of expenses)

Rouble to USD exchange rate

Inflationary expectations on 2015 in 2014

Increase in regulated tariffs

Increase in monetary aggregate M2 in 2015 (emission)

Increase in monetary aggregate M2 in 2014 (emission)

Internal demand

est

103.9%

107.5% 108.0% 108.3%109.2% 109.7% 110.1% 110.6%

111.3%112.2%

113.4%

103.9%

102.2%

101.2%

100.4%100.5%

100.7%100.5%

100.3%100.5% 100.6%

100.8%101.1%

100.0%

101.0%

102.0%

103.0%

104.0%

100%

102%

104%

106%

108%

110%

112%

114%

116%

118%

106.2%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

fact

Estimated inflation trajectory in Russia in 2015

In % to december of the previous year (lhs)

In % to previous month (rhs)

11

Moscow’s Competitive Advantages

The current economic situation has given Moscow an additional competitive edge over the world’s leading megalopolises in attracting foreign investment.

Moscow has retained core non-cost-related competitive advantages: high-quality manpower, extensive transport infrastructure, highly developed ICT, research and educational potential, high-quality urban environment.

Early 2014

Early 2014

Early 2014

Early 2014

Early 2014

Early 2014

-36%

-32%

-40%

-25%

-38%

-21%

Early 2015

Early 2015

Early 2015

Early 2015

Early 2015

Early 2015

Average salary (after tax), USD

Class A office space rental, USD per sq. m a year

Business electricity rates, USD

Mobile communications service prices, USD per minute

Petrol prices, USD per litre

Broadband Internet access rates, USD per Mbit/s

1682

785

0.095

0.08

0.93

0.78

1075

535

0.057

0.06

0.58

0.62

12

Cost index for a manufacturing and IT-companies

Manufacturing company IT-company

The recession that began in 2014 has brought about a considerable reduction in costs of doing business and an increase in Moscow’s price competitiveness.

Type of business: manufacturing company (food production)

Employees: 2,800

Premises: owned premises and land between the Moscow Ring Road and the Third Transport Ring, rented office space within the Third Transport Ring

Type of business: IT company (software development and promotion)

Employees: 45

Premises: rented Class A office between the Moscow Ring Road and the Third Transport Ring

Contributions by individual cost components to the overall change ** (1Q2015 on 1H2014)

* The index is calculated from the average weighted exchange rate for the period, 1Q2015 – forecast based on the average exchange rate of 65 roubles/USD

** The contribution by individual cost components is defined as the product of the change in charges associated with the given component multiplied by the weight of this component in the overall cost structure

Contributions by individual cost components to the overall change ** (1Q2015 on 1H2014)

1H2014 2H2014 1Q2015

Cost index*, % of 1H2014, in US dollar terms

100.087.2

65.6

1H2014 2H2014 1Q2015

Cost index*, % of 1H2014, in US dollar terms

100.086.1

59.3

0-5-10-15-20-25-30-35

-13.3Domestic raw materials and supplies

-2.0Managerial and administrative costs

-0.5Property rent

-0.1Borrowed funds

-3.7Tax payments (including payroll tax)

-4.5Utility fees and telecoms infrastructure costs

-7.8Remuneration for key personnel

-2.6Foreign raw materials and supplies

0-5-10-15-20-25-30-35-40

-4.1Managerial and administrative costs

-2.2Property rent

-0.1Other costs (training)

-0.01Borrowed funds

-14.1Tax payments (including payroll tax)

-1.0Utility fees and telecoms infrastructure costs

-19.2Remuneration for key personnel

13

Global competitive position of Moscow

Amsterdam

Athens Bangkok

Barcelona

Berlin

Washington

Vienna

Hong Kong

Guangzhou

Dacca

Djakarta

Doha

Dubai

Dusseldorf

Geneva

Cairo

Karachi

Casablanca

Kuala Lumpur

Lagos

Lima

Lyon

London

Madrid

Manila

Manchester

Mexico City

Milan

Monterrey

Nairobi

New Delhi

New York

Paris

Beijing Prague

Rio de Janeiro

Sao Paolo

Seoul

Singapore

Sofia

Stockholm

Taipei

Tokyo

Tunis

FrankfurtZurich

Chicago

Shanghai

Hig

hLo

w

Source: Site Selection Magazine, Moscow City Investment Agency

Investment yieldLow High

Qua

lity

of in

vest

men

t clim

ate

and

urba

n en

viro

nmen

t

Moscow-2013 Moscow-2014

High

Average

Low

Istanbul

Prior to the recession, Moscow had advantages over the leading cities of the world in terms of price competition, while losing in terms of quality. Compared with Russian regions and Eastern Europe, Moscow excelled in terms of quality, but offered higher costs.

The recession that began in 2014 has brought about a considerable reduction in costs and an increase in Moscow’s price competitiveness.

A key objective of the Government of Moscow is to maximise potential growth in the quality parameters.