Thinkpiece 5 Outlook For 2008

RUSSIA IN 2007
Outlook for 2008
Thinkpiece 5, December 2007

Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 1

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


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.


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.


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.


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’.


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!).


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’.


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!


PART ONE: The Consumer


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.


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.


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


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


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.


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.).


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


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.


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


Sales
Large retail network sales make up 60% of the market.

The four leading retailers control 48% of the market.

Source: RATEC


Sales in the Regions

Source: Technosila


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


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

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


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


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


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


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


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


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


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)


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


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


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)

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


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.


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.

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.


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.


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


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


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.


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


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,

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.

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.


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


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.


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.

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.


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


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


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.”


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.


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.


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


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


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


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”


PART TWO: The State


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


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


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.


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.


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.


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.

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

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

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

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


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


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”.

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


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.


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.

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.


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)


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.


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)


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


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


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’.


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


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')


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.


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


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

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

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


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.


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.


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


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.


Appendix 1:
Top Tips for Western firms looking to do PR in
Russia


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