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Reassessing Risk in Russia: Emerging Confidence in Emerging Markets
5th CFO Summit Emerging Europe & CIS October 17, 2012
Alexey Kornya, Vice President and Chief Financial Officer
MTS at a glance
Emerging confidence in emerging markets
Russia: local liquidity and financing
▪ MTS at a glance
Contents
2
The leading telecommunications provider in Russia and the Commonwealth of Independent States (CIS)
MTS one of the BRANDZ™ Top 100 Most Powerful Brands
‐ MTS included in the ranking in 2008, 2009, 2010, 2011 and 2012
‐ 85th brand overall with a brand value of $9.5 bln
Level III ADRs (NYSE:MBT) have been publicly
traded on the New York Stock Exchange since June 2000
MTS is majority-owned by Sistema JSFC (LSE:SSA), the largest diversified public financial corporation in Russia and the CIS
MTS at a glance
3
9 867.3 11 293.2 12 318.7 13 181.0
2009 2010 2011 2012E
Total Group
Revenue
(USD mln)
+34%
Total
Subscribers*
(millions)
Subscribers, Russia 2009 2010 2011 Q2 2012
Mobile (millions) 69.3 71.4 70.0 69.6
HH passed, 000s 7 502 9 890 11 433 11 507
BB Internet, 000s 1 298 1 805 2 152 2 285
Pay TV, 000s 1 762 2 580 2 987 2 937
*Including subscribers of Mobile TeleSystems LLC, a mobile operator in Belarus, in which
MTS owns a 49% stake and CDMA subscribers in Ukraine.
102.4
108.1
106.1 105.6
2009 2010 2011 Q2 2012
MTS at a glance
Emerging confidence in emerging markets
Russia: local liquidity and financing
▪ Emerging markets are drivers of economic growth
▪ Budgetary discipline and ample reserves
▪ Low indebtedness
▪ Sovereign ratings fail to reflect economic reality
▪ Corporate credit ratings lagging
▪ Volatile stock market
Contents
4
4.3% 4.3% 3.7% 3.8%
-1%
1%
3%
5%
7%
9%
11%
2010 2011 2012E 2013ERussia USA EuropeOECD Developing Asia Latin America
Emerging markets are drivers of economic growth
5
Source: IMF, OECD data and forecast
GDP growth forecast
Source: Citi Bank
Real consumption growth forecast
Emerging markets are growing and consuming ‐ IMF forecasts about 4% GDP growth for 2012-2013
in Russia ‐ Higher growth rates in developing Asia ‐ Consumption growth in BRIC markets markedly
higher than developing markets ‐ Russian market characterized by moderate growth
and high disposable income
Emerging markets are working ‐ Unemployment in emerging markets generally
lower than developed markets ‐ Russia boasted a moderate unemployment rate of
5.2% in August 2012
Inflation is under control ‐ Russia’s inflation rate of 4.6% for January-August
2012 4.8% 5.2%
4.4%
-2%
0%
2%
4%
6%
8%
10%
12%
2011 2012E 2013E
USA Russia EuropeBrazil China India
Russia: budgetary discipline and ample reserves
6
Source: Citi Bank
Fiscal balance (% of GDP)**
Source: Russian Central Bank; *as of October 2012
Russian Central Bank international reserves (USD bln)*
Russia has substantial international reserves* – ≈$530 bln in international reserves as of October 2012
– 19-fold increase since 2000
– Trending upward
28 37 48
68 117
168
289
464 456 448 483 511
530*
0
100
200
300
400
500
600
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Russia has budgetary discipline – Minimal government budget deficit as a % of GDP
compared to developed world and BRIC countries
*Includes hard-currency reserves, gold, IMF , supplementary foreign exchange reserves held with IMF
Country Foreign exchange and gold reserves, USD bln
China 3,236
Japan 1,259
EU 813
Russia 499
Brazil 352
India 298
World reserves of foreign exchange and gold as of 2011
Source: CIA World Factbook
-8%
-6%
-4%
-2%
0%
2%
4%
2011 2012E 2013E
Europe USA Russia China Brazil
**The balance of a government's tax revenues, plus any proceeds from asset sales, less government spending
103% 107% 112%
87% 94% 94%
69% 69% 69%
54% 54% 55%
15% 16% 16% 8% 9% 8%
0%
20%
40%
60%
80%
100%
120%
2011 2012E 2013E USA Europe India Brazil China Russia
Russia: low indebtedness
7
Source: Citi Bank
Government debt (% of GDP)
Source: McKinsey, 2012
Household debt (% of GDP)
Among leading global economic regions, Russia boasts low government debt
‐ Russia has a very low government debt as a % of GDP in comparison with the USA and Europe
‐ Debt level to remain stable
Household resilience ‐ Russian households are virtually unleveraged,
in particular when compared to household debt in Western markets
‐ Russia has the lowest household debt among the BRIC countries
98%
88%
82%
68%
59%
49%
46%
29%
15%
9%
8%
0% 20% 40% 60% 80% 100%
UK
US
Spain
Japan
Germany
France
Italy
China
Brazil
India
Russia
Russia: Sovereign ratings fail to reflect economic reality
8
Source of forecasts: IMF, Citi bank
Unlike developed market peers, merging market governments have maintained debt levels while adjusting to lower-growth environments
Russian sovereign ratings, although investment grade, remain relatively low compared to the developed countries despite a demonstrable track record of:
‐ Strong hard currency reserves ‐ Budgetary discipline ‐ Low household indebtedness ‐ Low governmental indebtedness
Since before the crisis, S&P has
actually reduced the sovereign debt rating for Russia despite stable GDP growth and fiscal discipline
Country
S&P rating/ outlook
2007
Gov’t debt 2007
(% of GDP)
GDP Growth
2007
Current S&P
rating/ outlook
Gov’t debt 2012F
(% of GDP)
GDP Growth 2012F
Germany AAA/stable 65% 3.3% AAA/stable 83% 0.9%
USA AAA/stable 69% 1.9% AA+/neg 107% 2.2%
Spain AAA/stable 46% 3.5% BBB+/neg 91% -1.5%
Italy A+/stable 95% 1.7% BBB+/neg 129% -2.3%
China A/positive 20% 14.2% AA-/stable 16% 7.8%
Russia BBB+/pos 7% 8.5% BBB/stable 9% 3.7%
Brazil BB+/pos 55% 6.1% BBB/stable 54% 1.5%
India BBB-/stable 79% 9.8% BBB-/neg 69% 4.9%
Company EV/EBITDA
2009 P/E
2009 EV/EBITDA
2012 P/E
2012
Revenue Growth 2009
– 2012E
OIBDA margin 2012E
Vodacom 5.1x 10.9x 6.8x 13.1x 19% 35%
Turkcell 4.8x 11.7x 5.4x 12.1x 13% 31%
Portugal Telecom
4.8x 7.4x 5.0x 12.0x stable 33%
MTS 4.6x 14.7x 4.4x 9.8x 15% 41-42%
Russia: corporate credit ratings lagging
9
Rating agencies continue to attach too much risk to Russian issuers despite profitable growth, stable cash flows and low debt levels
Russian companies remain undervalued compared to other EM and European ‘problem’ market peers despite stronger or comparable growth prospects, higher profitability, stable FCF generation and a stronger balance sheet
Company S&P credit
rating/outlook 2009
FCF (USD mln)*
2009
Net Debt/ LTM
OIBDA 2009
Current S&P credit rating/
outlook
FCF (USD mln)*
2011
Net Debt/ LTM OIBDA
2011
Telecom Italia
BBB/stable 1,296 3.1 BBB/negative 3,361 2.3
Bharti BBB-/stable -304 0.4x BB+/stable 1,508 3.1x
Portugal Telecom
BBB/stable 1,084 2.4x BB+/negative 987 2.9x
MTS BB/stable 1,264 1.2x BB/stable 1,265 1.3x
Source: Goldman Sachs. FCF is calculated as OPCF minus Capex
S&P credit ratings of leading telecommunications companies Post-Crisis 2009 – 2011
Multiples of leading publicly traded telecommunications companies
Russia: volatile stock market
10
Russian stock market is vulnerable to global turmoil, as the major capital investments come from abroad
At the end of 2008 major capital outflows from the Russian market were recorded
‐ Russia places no restrictions on capital; minimal currency and FOREX controls enable capital to move freely in and out of the Russian market
Source: HSBC
Russian RTS Index dynamics vs. other stock markets
Capital outflow from Russia during 2008 crisis
20
40
60
80
100
120
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Oct
-12
RTS FTSE100 DJI S&P500 Bovespa Nikkei225 Hang Seng
0%
2%
4%
6%
8%
10%
12%
14%Ja
n-0
7
Ap
r-0
7
Jul-
07
Oct
-07
Jan
-08
Ap
r-0
8
Jul-
08
Oct
-08
Jan
-09
Ap
r-0
9
Jul-
09
Oct
-09
Jan
-10
Ap
r-1
0
Jul-
10
Oct
-10
Jan
-11
Ap
r-1
1
Jul-
11
Oct
-11
Jan
-12
Ap
r-1
2
Jul-
12
Russia as % of MSCI Allocation of GEM funds to Russia
MTS at a glance
Emerging confidence in emerging markets
Russia: local liquidity and financing ▪ Emergence of local liquidity and financing
▪ Growth in financing
▪ Increase in local funds borrowing
▪ Growth in financing: supporting CAPEX
▪ MTS migrates debt portfolio from USD to RUB
▪ MTS optimizes repayment schedule
Contents
11
0
2
4
6
8
10
12
14
16
18
20
22
24
0
2
4
6
8
10
12
14
16
18
20
22
24
06.08 12.08 06.09 12.09 06.10 12.10 06.11 12.11 06.12
Mosprime CB Repo Ref Rate CPI% %
Russia: emergence of local liquidity and financing
12
Interest rate of CBRF operations
Source: CBRF Balance of transactions is calculated as a net worth between Bank of Russia liabilities to the banking sector and Bank of Russia claims on the banking sector
CBRF balance for liquidity
Source: CBRF, GKS
Since 2009, the Central Bank of Russia has taken leading role in stimulating local capital markets
‐ Liquidity support has enabled Russian corporates to take advantage of reasonable borrowing rates through multiple debt instruments
‐ Capital infusion has attracted other investors and enabled leading banks to increase their credit portfolios
‐ Emergence of local markets enabled many leading Russian corporates to access credit when Western markets were frozen
Key factors impacting Central Bank decisions ‐ CPI growth rates vs. forecast ‐ Risks of an economic slowdown ‐ Control of interest rates and forex volatility
Central Bank increases volume of refinancing ‐ Current volume of refinancing reaches RUB 2.5
trillion ‐ More than 1.5-fold potential increase is
announced ‐ The largest volume of liquidity provided is
offered on the weekly repo auctions, which volumes have increased substantially in the last year
-1500
-1300
-1100
-900
-700
-500
-300
-100
100
300
500
700
900
-1 500
-1 300
-1 100
-900
-700
-500
-300
-100
100
300
500
700
900
06.08 12.08 06.09 12.09 06.10 12.10 06.11 12.11 06.12
RUB bln RUB bln
Growth in financing
13
4Q 2012
Volume of assets of typical Russian bank
0
200 000
400 000
600 000
800 000
1 000 000
1 200 000
1 400 000
1 600 000
Biggest Medium Small
01.01.2008
01.01.2009
01.01.2010
01.01.2011
01.01.2012
01.09.2012
mln RUB
Source: CBRF
Russian banks are increasing in size and scope to service various sectors of economy
Sustained volume of lending to companies of various sizes and individuals
‐ 40% growth rate in 2011
Significant gap between large and small
banks reflect: ‐ Capital-intensity of Russian economy (e.g.
oil/gas, metals/mining and infrastructure sectors prominent)
‐ Consolidation in marketplace ‐ Expansion of consumer credit
Assets growth of large banks is 2-3 times
higher than that of medium and small banks
Competition and broader liquidity pool steadily driving rates downward
Average rates on short-term loans extended by Russian credit institutions
0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
14
16
18
2008 2009 2010 2011 2012
in USD in EUR in RUB% %
Source: CBRF
0
20
40
60
80
100
120
140
160
0
20
40
60
80
100
120
140
160
09.201203.201209.201103.201109.201003.201009.200903.2009
bln
USD
bln
USD
RuBonds Eurobonds
Increase in local funds borrowing
14
Volume of corporate bonds, RUB bln
Volume of corporate and private loans, RUB trl
Credit volumes are growing at high rates
In years prior to 2008 global financial crisis, Russian corporates began looking at the developing ruble bond market for funding
Liquidity issues abroad have heightened interest in Ruble-based bonds since 2009
Though markets are fickle like in the West, ruble bonds are increasingly being used to finance Russian corporates
Overall the Russian bond market has made corporates less depending on Western markets and provide access to liquidity to meet the needs of local companies
Source: Cbonds agency
*Compared to September 2011; Source: CBRF
+141%
+36%
15.8 18.0 25.4
17.1
3.3 2.7
3.0
1.7 2.5
3.5
5.3
4.5 0.1
0.1
0.1
0.1
0
10
20
30
40
2009 2010 2011 Sep 2012Legal Entities in RUB Legal Entities in Foreign CurrencyIndividuals in RUB Individuals in Foreign Currency
+12% +39% +16%*
Growth in financing: supporting CAPEX
15
4Q 2012
Increasing asset base, government support and more local lending have enabled small, medium and large Russian banks to increase their capital base
Capital growth rates of Russian banks exceeded volumes of lending growth rates during 2009-2011
Investments in fixed assets in Russia have been increasing steadily since 2009 driven by more funding on better terms available on the internal market
6.6
8.7 7.9 9.2
10.8 +5.5%
0
2
4
6
8
10
12
2007 2008 2009 2010 2011 2012E
Corporate investments (fixed assets) in Russia (RUB trl)
Source: GKS, Ministry of Economic Development
Capital of typical Russian bank
0
30 000
60 000
90 000
120 000
150 000
180 000
Biggest Medium Smallest
01.01.2008
01.01.2009
01.01.2010
01.01.2011
01.01.2012
01.09.2012
mln RUB
Source: CBRF
Example: MTS migrates debt portfolio from USD to RUB
Currency distribution as of Q3 2012*
From 2008 until now, MTS has migrated its primary debt currency from USD to RUB
The company has utilized bilateral facilities, ECA-backed facilities, Eurobonds and hedging to more closely align its debt portfolio to its primary currency of revenue
At the same time, the Company has succeeded in increase the duration of its financing and lowering its average cost of debt
Currency distribution as of FY2008
USD
69%
EUR 11%
RUB
20%
*Including Forex hedging in the amount of $300 mln as of Q3 2012 16
Duration: 2.9 years
Duration: 3.8 years
3% 76%
21%
RUB EUR
USD
$630 mln
$300 mln $360 mln
$413 mln
$162 mln $400 mln
56 bln
18 bln $400 mln
$238 mln
INGsyndicated
loan
Gazprombank INGsyndicated
loan
EBRD, EIB,NIB
INGsyndicated
loan
Eurobond Sberbank Gazprombank Eurobond
RUB
EUR
USD
Example: MTS optimizes repayment schedule
MTS’s debt payment schedule now features multiple instruments predominantly in rubles to match debt with currency of primary revenue and cash generation, optimize borrowing costs, increase tenor and maximize flexibility in the management of the Company’s debt portfolio
Debt repayment schedule as of Q3 2012 (USD mln)
247
750 1 281
323
325
454 440
730
1 278 1 221
92
17
93 318 202 199 142 85
750
2 136
246
1079 1079 1079
7
325 440
730 58 323
Q4 2012 2013 2014 2015 2016 2017 Thereafter
Loans in other currencies (USD/EUR) Eurobond Loans in rubles Ruble bonds
Repayment of major debt instruments since 2009
2009 2010 2012