July 16, 2012

This is bne's weekly newsletter covering FDI and investment plans in Eastern Europe. You can receive the list as a plain text or html email or as a pdf file. To manage your delivery options: http://businessneweurope.eu/users/subs.php

TOP STORY INVESTMENT 1. Russian Airlines face bankruptcy over soaring costs 2. Why is WTO accession important? 3. Cyprus asks Russia for €5bn loan 4. Poland claiming €7bn in EU environmental breaks for non-existent plants, claims report 5. Putin says Russia to prioritize India, China 6. Russia to End Fuel Discount Supplies to Farmers 7. Russian government approves RUB1.5tn agriculture development program for 2013-2020 8. Trendy tourism – a rising income for Eastern Europe 9. Turkmenistan reports poor grain yield, bread prices rising NEWS INVESTMENT 10. Customs Union starts first antidumping investigation 11. Net inflow of direct investments in Russia at $959m in January-March 12. New shipping sanctions forcing deeper Turkish cut in Iranian crude imports, claim sources 13. Poland expects shale gas drilling to triple by end of 2012 14. Russia warns Nigeria over ALSCON court ruling 15. Russian Grain Harvest to Fall 15% in 2012 16. Turkey opens tender for private operator to import Russian gas 17. Turkey's Pipeline Diplomacy 18. Turkish construction sector growth slips below GDP for first time in a decade OTHER NEWS INVESTMENT 19. Markets are far from convinced that the Brussels agreement will work for the euro 20. Russian agency sees new businesses registered in 2 days by 2018 21. Titov Proposes 15% Income Tax Rate RIA Novosti 22. Turkish e-trade market to grow 50% this year 23. VEB to invest RUB2tn in the national economy by the end of 2015 SECTOR Gas 24. Gazprom in talks with eight European companies over gas discounts 25. Gazprom regional trip feedback: cautious view on Gazprom's export going forward reiterated 26. Gazprom: accounts receivable from ex-USSR countries amounts to $6.4bn 27. Ukrtransgaz cuts Russian gas imports 55% on year in January–June SECTOR Oil 28. Alliance Oil publishes June operating update: weak Kolvinskoye production 29. Bashneft’s new chairman shares his view on future strategy 30. Eurasia Drilling Company: The most attractive name in the Russian oilfield services sector 31. Exillon Energy announces commissioning of Transneft entry point 32. LUKOIL files action against KES-trading

33. Novatek’s 2Q12 natural gas production increased 15.7% y/y 34. Oil&gas: Do no blame taxes, please 35. RusPetro: Another strong update 36. TNK-BP minorities decrease claim against BP 37. Tatneft’s capex totaled $705m in 1H12 38. Zarubezhneft to start drilling in Cuba in November SECTOR High Tech 39. Armenia to buy Russian telecom satellite 40. Hyundai to launch tablet production in Russia 41. Russian aerospace industry reforms: RKK Energia may become part of Russian Space Corporation SECTOR Metals and Natural Resources 42. IRC releases its 2Q12 trading update 43. Kuzbass authorities ask RUSAL to close unit 1 of its Novokuznetsk Smelter for ecological reasons 44. NLMK idles one of blast furnace 45. Nigerian Court Scraps RusAl Aluminum Plant Purchase 46. Polyus Gold might re-apply for mainland re-domiciliation in 2H12 47. Raspadskaya published 2Q12 operating results 48. Sibirsky Cement shows solid volume growth in 1H12 49. Supreme Arbitration Court confirms legitimacy of the tax authorities’ decision to claim $22m of taxes from Polymetal 50. UC RUSAL faces cancellation of Alscon purchase 51. VSMPO-Avisma to supply forgings to SAMC SECTOR Power 52. Electric Utilities in June: 30% below consensus 53. Grids rebound; RusHydro under pressure 54. KOM capacity price caps might grow 6% in 2013 55. MinEnergo: potential changes in the departments overseeing electric utilities 56. Mosenergo releases 1Q12 IFRS results in line with 1Q12 RAS 57. No price caps for six zones in 2013, instead of three 58. Rosneftegaz's participation in utilities may be limited to certain projects 59. RusHydro: Merger maze hides compelling multiples 60. Russia to create centralized settlement system for retail electricity market 61. TGK 1 holds investor meeting: pricing environment tightening, management focuses on optimisation SECTOR Retail, FMCG 62. Eldorado FY11 results: Solid margins, but losing market share; read-across for M.video 63. Ideas4retail to triple network to 60 outlets by 2013 64. Magnit posts June trading update – net sales up 33.8% YoY in June and 32.5% YoY in 6mo12 65. O’Key Group: Sales growth decelerates QoQ 66. Retail: Krasnodar region struck by deadly floods 67. Rosinter releases its June trading update: net sales up 2.1% YoY in June and 2.2% YoY in 1H12 68. Russian food retail: 2Q12 reporting season insights 69. Russian prices of alcoholic beverages hiked on July 1 70. Russian retailers: Weaker macro warrants downgrades SECTOR Telecom, Internet 71. Sistema's core shareholder Vladimir Evtushenkov finds recommendations of the Indian telecom regulator unacceptable SECTOR Transport

72. NCSP’s cargo turnover rose 6.2% y-y in 1H12 73. Rado Antolovich was elected new CEO of NCSP Group at its EGM 74. Russian seaport throughput rose 5.4% y/y in 1H12 75. TransContainer's 1H12 volumes growth exceeded analysts’ FY12 estimates, efficiency is still lower SECTOR Agriculture 76. Agro-Belogorye to launch 1st of five pig farms in July 77. Heavy rains in Krasnodar region could affect grain harvest 78. Rusagro plans to build additional pork farm in Tambov 79. Russia Must Keep Zero Tax on Farmers - Deputy PM 80. Siberian Agrarian Group launches RUB3bn pig complex in Buryatia 81. USDA publishes July world agricultural supply/demand estimates, reducing wheat, soy and corn supply estimates SECTOR Automotive 82. Russia's 1H12 car and LCV sales robust, despite slowdown 83. Russian automotives: playing in the major leagues 84. Sollers releases healthy 1H12 results 85. VW sales in Russia soar 78% SECTOR Aviation, shipbuilding and defence 86. Aeroflot 5M12 and May results – deceleration as expected 87. Armenia cancels Superjet order 88. Interjet Takes Up Option For Sukhoi Superjets 89. Izhmash to produce Airsoft Kalashnikov rifles 90. Russia and Italy to jointly develop patrol aircraft 91. Russia, AugustaWestland to jointly build light helicopter 92. Russia’s Changing Aircraft Export Strategy 93. UAC’s order portfolio hits 570 94. UTair orders 20 A321 airliners SECTOR Engineering 95. Power Machines to supply equipment for Vietnamese power plant SECTOR Infrastructure, Construction & Real Estate 96. LSR announces large-scale acquisition in the Moscow region for a total of 350,000 sqm SECTOR Chemicals, Fertliser 97. Acron extends public offer for Poland's Azoty Tarnow until July 16 98. Acron: Dmitry Khabrat to replace Dmitry Golubkov as Managing Board member SECTOR Pharmaceutical 99. Investment in Kaluga pharmaceutical hub may amount to $1bn 100. Pharmstandard seeking to capture insulin market share via agreement with French Sanofi GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 101. Duma bans Internet alcohol ads 102. Putin: Presidential energy commission not to render government functions 103. Russian aerospace industry reforms: RKK Energia may become part of Russian Space Corporation UKRAINE INVESTMENT 104. IMF Welcomes Reforms in Ukraine 105. Ukraine discusses joint gas consortium with Russia and EU 106. Avdiivka Coke’s 1Q12 loss is larger than in FY2011 107. Bohdan dropped 6M2012 passenger cars production 108. Car output slides 18% YoY in June, while sales add 13.5% YoY 109. Ukrainian car sales in June indicate approaching of market stagnation 110. Eldorado expands chain in Ukraine to 89 stores

111. Ferrexpo 2Q12 operating update: improved volumes in own ore pellets production 112. Gazprom Neft may boost Ukrainian chain to 300 stations 113. IFC to supply 15 An-148 and An-158 aircraft to Panama 114. JKX delays Russia gas ramp-up until end-3Q12 115. Kryukiv Railcar raised 6M2012 freight cars output 116. Miller Brands Ukraine raised beer production capacity by 34% 117. NERC has altered Donbasenergo installed capacity 118. Ukraine’s new grain harvest forecast for 2012 is 45.3m tonnes 119. New simplified taxation schemes could apply to 22,000 companies 120. Northern, Central Iron Ore post weak 1Q12 financials 121. Southern GOK announces its production, CapEx plan 122. Stakhaniv Railcar reported 6M2012 cars deliveries results 123. Turkey's retailer Suvari plansto open 50 stores in Ukraine in 10 years 124. Ukraine fails to get Russian gas deal 125. Ukraine reduced its forecast for grain export in 2012/2013 MY 126. Ukraine ups iron ore exports by 3.1% 127. Ukrainian gas producers face 50% royalty increase in 2013 128. Yasynivsky Coke to cut coke output 1% MoM KAZAKH INVESTMENT 129. Kazakhstan becomes largest export market of GM-AVTOVAZ CENTRAL ASIA INVESTMENT 130. Kyrgyzstan to boost trade with Iran tenfold EURASIA INVESTMENT 131. Kyrgyz Prime Minister vists Centerra’s Kumtor Mine 132. Azerbaijan Peugeot cuts 8,000 jobs to end losses, shuts plant 133. Azerbaijan - One of the biggest investors of Turkey is interested in Khazar Islands project - 134. Georgian wine in wait of Russian palates to cleanse 135. Kyrgyzstan to boost trade with Iran tenfold 136. Moldova signals that it may withdraw from implementing the Third Energy Package SOUTHEAST INVESTMENT 137. Airbus and Boeing to woo Turkey's airline Pegasus for a $5bn deal 138. Cosmetic giant eyes production in Turkey 139. Daikin moves forward to make Turkey a hub 140. Despite friction, Turkey pursuing energy deals with Arbil, Baghdad 141. Hyundai amongst first to benefit from Turkish investment incentives 142. Istanbul water project refuels transformation row 143. Kurdistan Region selling oil to Turkey, advisor says 144. Richest 40% responsible for over 80% of Turkish car sales 145. Sisli mayor blamed over allowing skyscraper 146. The number of tourists visiting Istanbul peaks 147. Total set to establish 70 new petrol stations in Turkey 148. Trucks start carrying crude to Turkey from Kurdistan 149. Turkey aims for $17bn investment in twin industrial zones 150. Turkey climbs FDI rankings 151. Turkey to send team to Iraq to study oil pipeline plans 152. Turkey's auto production keeps its foot on the brakes in June 153. Turkey's electricity consumption hits new peak 154. Turkish drug maker to enter European market 155. Turkish energy dependency - Sounding like a broken record... 156. Turkish judicial reform starts with disputed rulings

157. Turkish opposition seeks repeal of law opening property sales to foreigners 158. Turks refuse GM food, poll reveals CENTRAL EUROPE INVESTMENT 159. Czech telecom regulator opens frequency auction 160. EBRD invests in Hines' Russia & Poland Fund 161. GRGBanking sites EU subsidiary in Lithuania 162. Hungary's fourth mobile operator substantially delayed 163. Kia joins Slovakia's carmaking bulls as it forecasts another record year 164. Poland reportedly set to maintain state control and high taxes on shale gas 165. Skanska to Construct Road in Poland for PLN 245m 166. TeliaSonera makes goodwill impairment charges in Norway and Lithuania 167. airBaltic Signs Letter of Intent for Up to 20 Bombardier CSeries Airliners OTHER COUNTRIES 168. Mongolia tackles corruption 169. Mongolia’s Bid To Dodge The Resource Curse Through Green Power

TOP STORY INVESTMENT 1. Russian Airlines face bankruptcy over soaring costs RIA Novosti July 10, 2012 Russian airlines are facing bankruptcy over soaring operating costs, the Association of Air Transport Operators warns, Kommersant business daily reported on Monday. The aggregate losses of Russia’s top 35 airlines hit RUB14.5bn ($450m) in 2011. Of these airlines, 22 companies ended last year in the red, after posting profits in 2010. The airlines' flagging results come at a time of growth in the Russian air passenger market, which grew 11% last year and by 20% in the first half of 2012, the Association said. The uncontrolled growth of fuel and ground maintenance costs is the main reason for the airlines’ losses, said the Association, which unites over 100 airlines. Air ticket prices increased by 11.8% on average in 2011 whereas aviation fuel prices soared 30.7%, while ground maintenance costs have risen by 119-211% in the past five years, the Association said. Air navigation service costs jumped 124% for Russian domestic airlines and 200% for international lines in that period. Regional airlines are the worst hit by the soaring costs but they may stay afloat if the government cancels VAT for internal flights and import duties on aircraft with a capacity of up to 72 seats, the Association said. 2. Why is WTO accession important? bne, Ben Aris 11 July 2012

It’s done. After an 18-years humiliating wait in the anteroom, Russia finally ratified the WTO protocol on Tuesday June 10 and is now a fully paid up member of the world’s biggest trade club . Why is accession important? Membership comes at a very real monetary cost: Economic Development Minister Andrei Belousov put a number on it telling Duma deputies WTO accession could mean $13bn of lost revenues to imported competition through to 2014. But the Kremlin is willing to accept this in exchange for the increased competition in the market place that is designed to force Russian companies to modernise and work more efficiently. That is the most widely quoted benefit from accession, but there is more and less obvious benefits. It is hard to access just how important the increase in competition will be. The state is struggling to push through reforms to liberalise the market, but it is hoped that the pressure of competition will highlight where the weakness are and change the nature of reforms from the theoretical speculations of what Russia “should do” and put the reform effort a more pragmatic “what we need to do” basis as there will be specific issues that have created weaknesses that inbound importers will exploit to Russian companies detriment. Where Russian owners were mainly focused on abusing their market power and/or corrupt officials to milk the system, tap state funds or charge excessively high margins in the past, now these same owners will have to use their connections in the government to push through market-levelling legislation and administrative regime changes in order to better compete with their foreign rivals. Accession should (slowly) bring about a sea change in the mind-set of how owners work with the government from here on in. Well, that is the hope anyway. However, less widely acknowledged is that Russia is already in a great position to capitalise on WTO accession in that it already runs the more open trade and capital account regimes of any of the significant global emerging markets. Brazil has imposed special taxes on inbound capital to cool its capital market and stop the real appreciating. China doesn't even pretend to run an open currency or trade regime and despite the huge investment there, foreign companies have a hard time making money or getting profits out. And the administrative trade barriers to foreign business in India are legendary. In this set up Russian companies (and foreign companies) are in a much better position to capitalise on the free flow of goods and capital that WTO membership offers. And it is already happening: bear in mind that a quarter of the $85bn of capital flight in 2011 was actually Russian companies reinvesting profits earned from their foreign assets abroad. (These profits never touch Russian shores and have nothing to do with the Russian economy, but are included in the capital flight numbers because of an accounting quirk.) There is already a steady stream of consumer-related businesses arriving in Russia such as all the fast food companies that arrived last year like KFC and Burger King. But this stream could turn into a flood as Russia is already on the verge of becoming the largest consumer market in Europe and the first trade barriers to fall following yesterday’s vote will be those on consumer goods.

But maybe the biggest and most important benefit that WTO membership will bring is that it should bring the cost of goods down. The cost of living in Russia (and especially Moscow) is famously high. Journalist Yulia Latynina once poignantly asked why a cup of coffee in Moscow cost as much if not more than the same in London or New York when the average income was less than half of those in the west. The reason of course is the closed nature of the Russian market that allows big companies to charge huge margins with impunity and has lead to the astronomical growth and creation of a super-rich class made up from any businessman that successfully sets up and captures any market niche. That will start to change. This will also have important political consequences. Going into the Duma elections last year a survey found the number one biggest concern amongst voting Russians was the high cost of living. WTO inspired competition could start bring down prices from this year to a level more appropriate to Russia’s income levels. Making life more affordable will make life better and so make president Vladimir Putin more popular. If he does have ambitions to stand again for the presidency in 2018 (the gossip in the Kremlin is that he wont, but that could change) then he will be able to point to lower prices as a real and significant (and vote-winning) achievement in this term in office. 3. Cyprus asks Russia for €5bn loan RIA Novosti July 9, 2012 Cyprus has asked Russia for a five billion euro loan to partially cover its budget deficit, Russian Finance Minister Anton Siluanov said on Friday. "We are now examining the Cypriot request for a loan," Siluanov said. Cyprus needs the funds to recapitalize local banks which are under stress due to the eurozone debt crisis. International rating agency Moody’s cut the ratings of Cyprus’s two largest banks, Bank of Cyprus and Hellenic Bank, in June, and put the island’s third largest bank, Cyprus Popular Bank, on review for a possible downgrade. Last year, Russia agreed to grant Cyprus 2.5 billion euros in loans, which amounts to about 10 percent of the republic’s GDP. Cyprus also asked China and the EU for financial help in late June. The troika of international lenders comprising the European Commission, European Central Bank and the International Monetary Fund is likely to visit Cyprus soon for negotiations on possible loans. The Cypriot state debt amounted to 71.6 percent of the country's gross domestic product in 2011. 4. Poland claiming €7bn in EU environmental breaks for non-existent plants, claims report bne

July 11, 2012 Poland's fractious relations with the EU's environment policies took a significant knock on July 11, with a report from EurActiv claiming that Warsaw is trying to hoodwink Brussels by claiming free carbon allowances for "ghost" power plants. Poland is requesting €7bn of free carbon allowances under the EU Emissions Trading System (ETS)'s little-known "10c derogation," the EU news portal writes. Under the scheme, ETS exemptions are available to projects if their investment process was "physically initiated" before 31 December 2008, and their greenhouse gas permits issued before 30 June 2011. The investigative report claims at least one of the planned power plants Poland is claiming the break for does not exist, and that EU officials have reacted with fury. Poland has applied for €33m worth of free allowances for the Leczna coal-powered plant, Euractiv writes, but sasy there is no visible evidence that any construction work has begun at the sleepy greenfield site. EU Environment Spokesman Chris Davies said he was "outraged" at the lack of work at Leczna. "The dirty tricks brigade is out and there's an attempt to cheat the system," he told EurActiv. "I think there will be enormous anger if the European Commission finds ways of stretching or re-interpreting the rules to accommodate Poland," he added. A Polish government official told EurActiv that Leczna fell into a category of sites for which "construction is in progress", even if the work was not completed. But a 20 kilometre drive around the backwaters of Leczna's Stara Wie_-Stasin site on 5 July revealed a rural landscape of green fields, crop allotments, and country paths. No buildings, installations or other power plant-related activity were evident at the coordinates for the installation submitted by the GDF Suez group to the regional authorities in June 2011. "It's not certain if there will be a plant," one local farmer at the site told EurActiv. "We are still working the land like normal." He and another farmer were growing maize on the site, where the two 800 megawatt installations were to be built. EurActiv also reports that there are similar suspicions over a planned power plant at Polnoc, for which Poland is claiming €98.3m of free carbon allowances If accurate, the report will do little to improve Warsaw's standing in Brussels when it comes to environmental issues. Poland produces 95% of its electricity from coal, and is currently blocking the EU's low carbon roadmap which aims for an 80-95% cut in the continent's CO2 emissions by 2050. Krysztof Bolesta, the advisor to Poland's environment minister, Martin Korolec, told EurActiv that Warsaw would continue to veto any solely European 2050 targets because "we need a policy that protects industry. If it's a global [CO2 reductions] deal or a carbon tax at the [EU] borders, both solutions are fine," he said. On the 10c issue, Polish officials stress that all monies raised through the derogation will be reinvested in new coal plants that deliver a substantial claimed CO2 saving on the installations they are replacing.

Last week, the European Commission conditionally ruled that three 10c applicants - Bulgaria, the Czech Republic and Romania - could temporarily continue to receive free allocations despite claims by environmentalists of irregularities in the Czech application in particular. But because the ETS covers all of Europe's major installations, Chris Davies called for Brussels to draw a red line there. "There should be one rule for the whole of Europe," he insisted, "no exceptions, no ifs and buts, no competitive advantage being gained by the worst polluters. There has to be a level playing field." Polish officials privately complain that the Commission "is keeping its cards close to its chest" about its 10c application but a decision is thought to be imminent. "The analysis will be concluded soon," an EU spokesman told EurActiv. 5. Putin says Russia to prioritize India, China RIA Novosti 10 July 2012 Russia intends to maintain special cooperation with the emerging powers of China and India, President Vladimir Putin said on Monday at a gathering of Russia's top diplomats and foreign representatives. "Our cooperation with China has the most important strategic and practical importance," Putin said. "We intend to pay special attention to deepening all forms of cooperation with our Chinese partners including coordination of our actions in the agenda of international affairs," he added. "This also applies to other rapidly developing and increasingly politically important Asian states, including foremost our traditional partner and friend India," Putin said. "We continue our course of widening cooperation with Latin America and Africa," he added. "Just a few years ago we did not pay enough attention to this," he said. "Naturally, we will revive our traditional ties with Europe" Putin added. "I remind you: more than a quarter of Russia's external trade takes place with Germany, Italy, France and the Netherlands," he said. "The June summit with the EU confirmed the priority character of Russian-European strategic dialog," he said. "At the same time, the level of cooperation with the EU in our view, has not reached its full potential,"he said. "Together with Europe we can meet ambitious targets, much more ambitious than today - the creation of a single market from the Atlantic to the Pacific Ocean with a value of three trillion euros. Life demands movement toward this path," he added. "There are more grassroots tasks before us, which we must do or we cannot get closer. In particular, easing the visa regime, with a view to a total mutual lifting. Russia is already prepared to make such a move," he said. European business leaders more often make similar statements about the desirability of such a move, Putin said. 6. Russia to End Fuel Discount Supplies to Farmers

RIA Novosti 16 July 2012 Russia will stop providing discounted fuel supplies to the country's farmers in order to meet the requirements of the World Trade Organization, Deputy Prime Minister Arkady Dvorkovich said on Friday. "We will cease ... the existing agreements between the regions and fuel producers for discounts. The support of yield-per-hectare of arable land will be used as the basic support mechanism for farmers," Dvorkovich told a government meeting. "Support volumes [for buying fuel] will be included in an overall subsidy. There will be no separate subsidy for purchase of fuel and oil lubricants.” The Russian government has approved a 2.28 trillion ruble ($69.7 billion) state program for agricultural development in 2013-2020, in an attempt to boost the sector, following the country's accession to the WTO. The government will also oblige fuel producers to sign long-term agreements with farmers, of at least a year, in order to prevent price spikes during sowing and harvesting due to short-term contracts, Dvorkovich said. The government has set a 30 percent retail price discount for fuel and oil lubricants for Russian farmers for 2012, compared to just 10 percent in 2011. The Russian government has been setting discounts on fuel for farmers since 2009, but previously below 10 percent. Dvorkovich said the discounts must be ended, because some cut-price fuel was resold at market prices. "A certain amount of fuel that farmers receive, if they get any, is then re-sold at higher prices, even to other countries sometimes. We want to stop such practices," he added. 7. Russian government approves RUB1.5tn agriculture development program for 2013-2020 bne July 13, 2012 The Russian government on July 13 approved a RUB1.509tn agricultural development program for 2013-2020. According to Agriculture Minister Nikolai Fyodorov, his ministry would provide RUB1.4238tn of the total, while the Federal Service for Veterinary and Phytosanitary Oversight is to supply RUB85.8875bn. Financing for cattle breeding and meat production will gradually increase in 2013-2020 from RUB7bn to RUB9.5bn. "Dairy production is to be stimulated by a new kind of support measure; funding is to be raised from RUB10bn to RUB12.5bn," Fyodorov said. Currently, Russia produces only 50% of its tradable milk and less than 30% of the amount is high quality milk. "We are gradually leaving behind the model of direct subsidies, shifting to support the growth of farmers' income," Fyodorov said, adding that financing is to be gradually increased from RUB15bn a year to almost RUB38bn. Under the program, the state subsidies for farmers must ensure at least 10% margins. According to Deputy Prime Minister Arkady Dvorkovich, the average margins in the industry are currently less than 9%. The optimal level of profitability for agriculture companies is 15%, he said. As a result of the program, government expects to boost agricultural production by 19.6%. In particular, plant growing is

planned to increase 19%, animal breeding is seen to grow by more than 20% by 2020. The average agricultural production growth rate is to amount to 2.5% annually by 2020. "Pursuant to the Agriculture Ministry's calculations, the average annual rate of growth of agricultural output may reach 2.5% or more thanks to the program, and by 2020 the industry should reach the key figures listed in the food safety doctrine," Prime Minister Dmitry Medvedev said. Medvedev also said country's membership in the WTO and Customs Union will bring both challenges and perspectives to local farmers. "Thus, we need to stimulate competitiveness of domestic agricultural enterprises, their transition to a new technological level, as well as create a modern infrastructure for storage, processing and transportation of products," he said. Despite the strict financial limitations, Russian government takes measures in order to protect agriculture sector, which is expected to suffer most after Russia joins WTO. Apart from the investment program, the government submitted a package of drafts to the State Duma with an offer to extend the zero tax for farmers until the end of 2016, Arkady Dvorkovich said on July 13. Current law suggests the profit tax to be increased to 18% in 2013 and to 20% starting from 2016. Dvorkovich added that Russia needs to consider an extension of the zero profit tax for farmers for an indefinite period of time. 8. Trendy tourism – a rising income for Eastern Europe Marcus Svedberg Chief Economist East Capital 11 July 2012 An interesting phenomenon that we rarely look at in more detail is tourism in Eastern Europe. There has been a steady rise in the numbers of tourists, and they spend more and more money, making it a vital industry for a number of countries in the region. In total, 150 million tourists visited Eastern Europe in 2011, and they spent almost USD 100bn, which is roughly the same amount as these countries received in foreign direct investments (FDI). The number of tourists and the resulting receipts grew around 12% between 2009 and 2011. The growth in tourism in Eastern Europe is not a new but rather a steady trend. There has been a constant increase in visitors since the iron curtain fell. In 1990, 35 million people visited Central and Eastern Europe, excluding Turkey and the Balkans. By 2000, the number had doubled, and more than 100 million people went to the region last year. The numbers do not distinguish between intra-regional visitors and those from outside. But it is fair to assume that the growth is a result of both, as it has become easier and more attractive for outsiders to travel to the region, and the increased standard of living within the region is making Eastern Europeans more frequent travellers. Russians everywhere This trend is perhaps best exemplified by Russians, who became the seventh largest spenders in the world in 2011. Russian tourists, who seem to be everywhere these days, but in particular in places like Turkey and Dubai where they do not need visas, spent more than USD 32bn in 2011. Russia managed to attract 23 million tourists and USD 11bn in receipts, making it the second largest destination in Eastern Europe. These numbers are perhaps not overly strong given the size of Russia, and may partly be a result of the strict visa requirements.

That Turkey is the most visited country in the region does perhaps not come as a surprise, but that almost 30 million people visited Turkey in 2011 is perhaps news. This makes Turkey the sixth most visited country in the world, ahead of both the UK and Germany. Of the top ten countries, it was also the fastest growing tourist destination in 2011. Turkey is, however, not in the top ten in terms of tourism receipts, but is twelfth, with USD 23bn. There are several reasons behind the Turkish tourism success. It certainly has the assets in terms of sunny beaches, and Istanbul being one of the most vibrant cities in Europe. The active development of Turkish Airlines probably also helps, as it is relatively easy to get to Turkey from almost anywhere in Europe. Small and beautiful is trendy Tourism is not big business in the largest countries though. In Russia, receipts from tourism only made up 0.6% of GDP in 2011. It is not even that crucial in Turkey, where it constituted 3% of the economy last year. In Poland, another large and increasingly attractive destination, tourism receipts made up 2% of GDP. It is rather the small countries that stand out in this regard. The combination of being small and on a beautiful coastline or with a beautiful capital city often means that tourism is a substantial industry. A handful countries in the region attracted more tourists than they have inhabitants, and three had receipts in double digits as a share of GDP. That Croatia, with its long coastline and beautiful islands in the Mediterranean, comes out on top should surprise no one, as it has become a well-known destination for Europeans. The fact that they have received a green light for EU membership should only increase the attraction. Neighbouring Montenegro, which is a favourite destination for the Russians, actually has the highest dependency on tourism, as receipts made up 17% of the economy last year. Tourism is important for the other coastal countries in the Balkans, such as Slovenia and Albania, while relatively unimportant for landlocked Serbia and Macedonia. The fact that Estonia and Hungary are among the top performers in this regard is probably due to their beautiful capital cities and perhaps also a result of the emerging wellness industries (spas in both countries are increasingly popular and good value). New destinations Tourism is by no means new in Eastern Europe. Prague has been a popular weekend destination for decades now, but it is interesting to note that tourists seem to be starting to venture deeper into the region. Georgia has been investing a lot into its tourism industry over the past few years and it is paying off. The small landlocked country in the Southern Caucasus had the fastest growth in tourist numbers in Eastern Europe in both 2010 and 2011. The number of visitors almost doubled, from 1.5 million in 2009 to 2.8 million in 2011. Other countries that enjoyed rapid growth, albeit from modest levels, include Azerbaijan, Kazakhstan and Macedonia. Meanwhile, the number of visitors to the Czech Republic has been more or less constant during the same period. The draw cards A qualified guess is that Azerbaijan, Poland and Ukraine will see steady growth when the numbers for 2012 are summed up as a result of them hosting Eurovision and Euro2012 respectively. Russia should similarly get a boost in 2014 and 2018 when it arranges the Winter Olympics and World Cup in football.

But there are other ways of promoting tourism as well. Abolishing visas for EU citizens, like Ukraine did a few years ago, is an effective way of attracting more tourists. Investing in affordable mid-range hotels is a strategy that Prague and some of the other popular weekend destinations have implemented well. Poland is trying to market itself in medicine tourism, capitalising on its renowned medical education. Kazakhstan is working hard to become a congress destination, although it may seem a stretch and probably mostly attract business travellers. One of the most important factors, however, is to make sure that visitors can get to the country by direct and affordable flights. The role of low-cost airlines is therefore key, and the fight between Ryanair and Wizz Air over the slot times in Budapest after Malev went out of business illustrates that this is becoming big business. A largely unexplored area is second tier cities in the region, although it is already possible to reach great cities like St Petersburg, Odessa and Krakow directly from Western Europe. Go east! As summer is upon us, it may be time to encourage our readers to join the trend and go east. The fact that most currencies in the region have depreciated over the past year means that travellers get even more value for money. And why not try one of the more exotic destinations, off the beaten track? AirBaltic arguably has one of the most interesting list of destinations and it could also be a good opportunity to stay a couple of days in Riga, which is their hub, en route to Tashkent, Tbilisi or Timisoara. Bon voyage and have a great summer!

9. Turkmenistan reports poor grain yield, bread prices rising bne 10 July 2012 President Gurbanbuly Berdymukhamedov fired his agriculture minister and shook up the government after authorities reported poor crop yields in this year’s grain production, state newspaper Neutral Turkmenistan reports. The wheat harvest this year fell 25% short of the 1.6m tonne state target. Prices for bread at state-run stores increased threefold last week, while cost of one kilogram of flour doubled to $0.35, which will also drive up bread prices. The president is hoping to forestall discontent following the disappointing grain harvest and has also hiked salaries after bread prices were increased. Alarm bells are beginning to ring across the region as many of the CIS countries are reporting poor harvests, including Ukraine, the biggest producer in the region. Russia is also reporting results are down, but only modestly. The rise in bread prices should also be a red flag as 2008 saw widespread protests and some riots after a poor harvest saw bread prices rise across the region. The Kazakhs were mulling introducing a state-owned bread monopoly to head off dissent.

NEWS INVESTMENT 10. Customs Union starts first antidumping investigation bne July 10, 2012 The Customs Union of Russia, Belarus and Kazakhstan has initiated its first antidumping investigation into the import of combine harvesters, Vedomosti quoted the union's regulative body as saying. The investigation was initiated by Russia's Rostselmash, Krasnoyarsky Harvester Plant, which produce 49.6% of combine harvesters on the territory of the Customs Union. The claim was supported by Belarus' Gomselmash and Lidagroprommash, which contribute another 46.3% of harvester production in the union. The companies complained that the Union's harvester market has shrunk by 19.5% in 2009-2011, while imports increased by 20.5% in the same period. The Union is carrying out the investigation in accordance with the regulations of the WTO, which Russia will join at the end of July after the entry protocol's ratification. The Eurasian Economic Commission

launched the inquiry, which could take 6-9 months, in April, the commission said. 11. Net inflow of direct investments in Russia at $959m in January-March bne July 11, 2012 Russia registered a net inflow of direct investments amounting to $959m in January-March, against a net outflow of $589m in the same reporting period in 2011, as follows from the data released by the central bank. Direct investments in Russia stood at $12.655bn in January-March, including $1.651bn injected into the banking sector. The country's investments abroad were at $11.696bn including $851m in the banking sector. 12. New shipping sanctions forcing deeper Turkish cut in Iranian crude imports, claim sources bne July 13, 2012 As the pressure of international sanctions builds, Turkey is facing an increasing struggle to import Iranian oil. Whilst Ankara has voluntarily cut purchases by around 20% this year compared with 2011, the logistics of transporting crude from the Persian Gulf is now forcing deeper pullbacks, claim trading and shipping sources. Turkey said earlier this month that it would offer to cut another 10% in its oil purchases from Iran this month in a bid to earn further exemptions from US-led sanctions against Tehran provoked by Iran's nuclear programme. However, volumes will now likely fall much more steeply because starting in July, European Union sanctions have halted the bloc's firms - which dominate the marine insurance sector - from offering cover on Iranian crude, reports Reuters. That prevents Turkish refiner Tupras from transporting Iranian imports on Turkish tankers. "Tupras was lifting Iranian crude with its own tankers up until July... This is no longer possible... They are now focusing more on lifting from Libya, Saudi Arabia and Iraq," one Turkey-based shipping source told the newswire. Turkish Energy Minister Taner Yildiz told reporters on Friday Tupras's crude purchases from Iran were continuing without any problems, but gave no details. Tupras declined to comment. Turkey, which is among Iran's top five customers, is estimated to have imported around 160,000 barrels per day of Iranian oil in May. Of this amount, more than 100,000 bpd was brought in from the Egyptian port of Sidi Kerir aboard Turkish tankers; the rest on Iranian tankers through the Suez Canal. "They (Turkish ships) are told to avoid the Sidi Kerir route as much as possible," the Turkish source said. "We understand some 7m barrels of Iranian oil is now available from Sidi Kerir and we are hearing offers to buy it," one trading source said. Other trading sources confirmed they had seen several offers from little known traders. 13. Poland expects shale gas drilling to triple by end of 2012 bne July 9, 2012 Pushing the Polish shale gas drive past recent disappointing signs, Warsaw said on July 6 that it expects the number of wells in the country to almost triple by the end of the year, and also claimed that it has dozens of requests for new licences. Two days after five state-controlled companies signed off on a JV to explore three fields in the north of the country, the environment ministry announced that it expects companies to drill at least 41 more wells this year, reports Reuters. So far, 23 shale gas wells have been drilled in Poland with a further six in the works. Licence holders are obliged to drill at least 122 wells by 2021, a number that could grow by a further 186 wells, the ministry said. Thus far, Poland has granted 111 licences, with many of the early issues going to US companies with experience in finding and extracting the unconventional gas, including Chevron and Exxon Mobil. However, test drilling reports have not been

encouraging, and Exxon announced n June that it is set to quit the country because the deposits it has been working on have not proved economically viable. Over the last few months, Warsaw - which sees development of Poland's unconventional reserves leading it to self-sufficiency - has pushed state-controlled companies to the fore. Some foreign investors have complained that they are now getting a raw deal from authorities. Regardless, the environment ministry also claimed on July 6 that it has "a few tens" of new requests for exploration licences awaiting approval. "The more wells we make in a short period of time, the faster we will get a confirmation of our forecasts regarding shale gas resources," it said. Analysts have said that to get a clear picture of the size and quality of shale gas reserves in Poland at least 100 wells must be drilled. Earlier this year, Poland pegged its recoverable shale gas reserves at 346-768bn cubic metres, or around 10% of an earlier estimate of 5.3 trillion cm by the EIA. 14. Russia warns Nigeria over ALSCON court ruling bne 12 July, 2012 A decision by Nigeria’s Supreme Court to strip Russian aluminum giant RusAl of its ownership of its Nigerian aluminum processing plant may harm economic cooperation with Russia, the Russian Foreign Ministry warned on Thursday. “The decision by the Nigerian Supreme Court on ALSCON (Aluminum Smelter Company of Nigeria) may damage investment and economic cooperation between Russia and Nigeria,” the ministry said. "We urge the Nigerian government to take the necessary actions in order to prevent potential damage to the existing fruitful and mutually beneficial relations," the statement said. Nigeria's supreme court last week ordered that RusAl, which owns 85% of the formerly state-run ALSCON should cede ownership because the assets should have gone to another bidder, U.S.-based BFI Group, when ALSCON was privatized. RusAl said the ruling contradicts Nigeria's Bureau of Public Enterprise, which handled the privatization and gave RusAl the green light to acquire the stake in ALSCON. RusAl bought 77.5% of Alscon in 2007 for $250m, and later increased its stake to 85%, and then overhauled the plant in 2008 after it had lain inactive for eight years. The ALSCON enterprise, which includes a 120,000 ton capacity aluminum plant, gas-fired power station and a port, is one of RusAl's core assets in Africa. In 2009 Nigeria's Senate initiated an investigation into state property sales and said the 77.5% stake bought by RusAl was worth $3.2bn, but the Russian company had at that time paid only $130m for it. In December 2011 the Senate voted to abolish the sale of 12 state companies including ALSCON, because their privatization scheme was "illegal." 15. Russian Grain Harvest to Fall 15% in 2012 RIA Novosti 13 July 2012 Russia may harvest less than 80m tons of grain in 2012, compared to the 94.2m tons brought in last year, Russia's National Union of Grain Producers head Pavel Skurikhin said on Thursday. In late June, the Agriculture Ministry forecast the 2012 harvest at 85m tons, with exports at 20m tons. Russia downgraded its grain harvest forecast from 94m tons to 85m tons in June, owing to continued rains in the south of the country.

"The harvest seems to be less than 80m tons but anyway it is enough to meet internal demand [at 73m tons]. We do not expect any deficit," Skurikhin told reporters, adding the amount of exports for this year was still unknown. The lower harvest has also been attributed to the farming sector's huge debts, including outstanding loans of 1.7 trillion rubles ($51.8bn), higher than the industry's overall revenue. "The core problem is a high loan burden on farms which causes problems with access to working capital and hence a fall in technical capability," Skurikhin added. Grain production costs grew at least four-fold from 2002 to 2009, while wheat prices only grew from 2,000 rubles to 4,300 rubles per ton in the same period, he said. Lack of fertilizer is also sapping output, with farmers using only 2.2m tons of fertilizers per year in the past decade, down from 11m tons a year at the end of the Soviet period. 16. Turkey opens tender for private operator to import Russian gas bne July 11, 2012 Turkey's energy market regulator announced on July 10 that it is to open the way for a privately-owned operator to import up to 6bn cubic metres of gas per year from Russia. The licence will allow a private company to fill the void left by state-owned Botas. The Energy Market Regulatory Authority (EPDK) said it has issued a permit for the private sector to import the gas starting January 1 2013 via the "Western route" - which runs from Russia through Ukraine, Romania and Bulgaria. Competing companies have until August 10 to submit their offers, EPDK said, according to Trend.az. The firm which wins the licence will then have to sign an agreement with Russia's Gazprom. The opening of gas trade to private companies will allow them to fill the void left by Botas. In October, the state-owned company refused to extend a 25-year contract to import 6bn cm of gas via the Western route, after Gazprom refused requests for a 20% discount on pricing. The contract will be complete in September. The Energy Ministry and the EPDK pushed through a bill in June which opened the way for private operators to import gas. According to the law, the Turkish private sector will receive a licence to import gas from countries which Turkey already has gas agreements and from those where cooperation in this field has not yet been established. Private companies engaged in the import of gas to Turkey will be required to keep 10% of the fuel at Turkish storage facilities, more specifically, the Turkish Petroleum Corporation (TPAO) gas storage facility in Silivri. According to Botas, Turkey imported 39.7bn cm of gas in 2011. Russia, sending around 18bn cm through the Blue Stream pipeline on the Black Sea bed, remains the county's largest supplier, followed by Iran and Azerbaijan. 17. Turkey's Pipeline Diplomacy Stratfor 12 July 2012

Unnamed Turkish Energy Ministry officials confirmed Wednesday that Ankara is preparing to send a technical delegation to Iraq, supposedly at Baghdad's request, to discuss building an oil pipeline linking southern Iraq and Turkey. This comes after Turkey has reportedly begun construction on a new oil pipeline connecting Kurdish energy fields to Turkish ports. Even though Iraq's central government has responded negatively to the Kurdish Regional Government's (KRG's) increased reliance on Turkish support in its ongoing dispute with the government of Iraqi Prime Minister Nouri al-Maliki, Ankara's approach of offering concessions and projects to both Baghdad and Arbil seems to be gaining ground. Wednesday's announcement represents an important leap forward for Turkey’s ambitions in Iraq and, if successful, will make Turkey the premier enabler of foreign investment and development plans for both northern and southern Iraq. Stratfor has long anticipated Turkey's regional rise, and Wednesday's decision is an important indicator that Ankara is ready to make strategic energy moves to deepen its influence in the region. Any external ambitions required Turkey to first address its internal Kurdish issue. Ankara has therefore worked to develop a closer relationship with the KRG in hopes of reining in Kurdish separatist militancy. Turkey is making progress in reorienting the Kurdish region's economic and energy focus northward, keeping Arbil critically dependent on Ankara and linking their continued mutual success to the containment of Kurdish militancy. But Turkey is not stopping at northern Iraq. It appears that Turkey is preparing to extend its influence to Baghdad and oil-rich southern Iraq, bringing Ankara in even closer competition with Iran. The proposed Kirkuk-Basra pipeline would link the burgeoning crude oil production of Iraq’s southern oil fields with northern export pipelines. The extension would allow Baghdad to transport nearly 80% of current exports north through Turkey, bypassing the Strait of Hormuz. The central government and its foreign investors have been dissatisfied with the performance of recently built terminals along Iraq's coast, and Baghdad will likely find Turkey's offer difficult to refuse. But Turkey has bigger plans in play than laying pipes south of Kirkuk. Turkish energy consumption and power generation needs are expected to increase dramatically in coming years, and Iraq is in a particularly good position to meet those needs. By working to solidify its position as an East-West energy transportation hub, Turkey can use stable crude oil and gas deliveries from Iraq to incentivize positive negotiations with Europe by helping Europeans break their dependence on Gulf oil shipped through the Strait of Hormuz. While still undeveloped and lacking necessary infrastructure, Iraq's proven natural reserves hold more than three trillion cubic meters, much of it in the Kurdish region. The volume of Kurdish natural reserves could replace Turkey's current imports from Russia for the next 50 years. As Turkey begins to present a more meaningful challenge to Iranian influence, Tehran will have to expend more effort to maintain the gains it has made thus far before trying to extend itself further in the region. Iraq will become Iran's priority. Keeping Tehran preoccupied closer to home could take some of the pressure off Turkey as it seeks to build stronger relationships with former Ottoman territories in the Levant. Key Arab stakeholders in the region, such as the Gulf Cooperation Council states, are indeed wary of Turkey's expanded influence, but these states are sure to appreciate any move that might curtail Iran's influence in Iraq and beyond.

Decreased energy dependence on Russia will also be crucial as Turkey seeks to reassert its former position in the Balkans and Eastern Europe. Iran will likely balk at the idea of greater Turkish influence in Iraq, but Tehran lacks the capital and technology to counter Turkey's offers in a meaningful way. Beyond the technical specifics of hydrocarbon redistribution, Ankara is revealing itself to be a more capable partner for Baghdad’s long-term success than Tehran. Turkey can provide the infrastructure and stable export routes that Iran cannot, a fact international oil companies will not overlook. Greater leverage in southern Iraq, the Shiite-dominated bastion of Iranian influence in Mesopotamia, would be a significant boon for Turkey's regional ambitions. Iran will staunchly resist any Stratfor 12 July 2012 Turkish encroachment, however, and Baghdad is unlikely to abandon Tehran overnight. While Turkey's economic levers are impressive, Iran has several tools at its disposal to challenge Turkish ambitions --namely Shiite militant proxies, intra-Kurdish rivalries and strong sectarian links to southern Iraq. Unlike its very public and combative statements on Syria, Turkey's stealthy maneuvering in Iraq via energy channels reveals the country's ongoing transformation into a significant regional power. 18. Turkish construction sector growth slips below GDP for first time in a decade TEB July 12, 2012 Contrary to the last decade, construction sector growth was lower than the GDP growth in Q1 2012. According to CBRT's monthly house price index, the increase in new house prices slowed down in April whereas existing house prices gained pace. Despite the strong building activity, construction sector confidence index continued to decrease in June, mainly on the back of the deterioration in employment expectations over the next three months.

OTHER NEWS INVESTMENT 19. Markets are far from convinced that the Brussels agreement will work for the euro Wermuth Capital, Dieter Wermuth 10 July 2012 Other than I had expected, the June 29 agreements about the euro area banking union had impressed markets for only a short while. I think, though, that we have been witness to an irreversible quantum leap towards a stable institutional set-up for the common currency. The dangerous link between bank solvency problems and government finances has been cut: banks will be supervised by the ECB or an agency close to it, and the coming area-wide bank resolution authority, most likely the ESM, the European Stability Mechanism, supported by the ECB, will take over

from national governments the task to close, shrink and re-capitalize systemically important banks, or even any bank. The banking sector will no longer have the capability to ruin governments. By itself, this is good news for the global economy, for commodities and for Russia. Although the structural banking sector problems will most likely be out of the way by year-end, euro area sovereign debt remains a Damocles sword. There is so far no progress with regard to the mutualization of debt or indeed a fiscal union. Progress in this direction is inevitable, though, as even German policy makers are beginning to admit, because both business and most normal people want to keep the euro. Opponents of the euro have been unable to develop an alternative model. But I have to admit that the road ahead will be rocky. After the heavy betting against the euro it will take a while before markets come round to the view that there will be a happy end. Economic statistics continue to be bad, especially in the euro area where the ECB was forced last week to cut rates, by 25 bp to 0.75% for the main refinancing facility, and to zero for the deposit facility. The Spanish government is pursuing an increasingly ambitious austerity program, in spite of a deep recession and a 25% unemployment rate. This is self-defeating and not the way out of the crisis. The government’s 10-year borrowing costs have shot up to almost 7% again. Italy is travelling down the same road. Since even solid Germany expands at a sub-par rate, real GDP of the euro area as a whole is presently shrinking, at an annualized rate of about 1%. Other disappointments are the sluggish growth of the Chinese economy and the poor performance of the US labor market. So for Russia the external environment keeps deteriorating. But at home things still look good. This is because the level of commodity and therefore export prices is still quite elevated. The balance of trade surplus is running at an annual rate of no less than US$220bn. Russia is a large-scale capital exporter. The WTO membership that will be achieved this month after 19 years of negotiations, is likely to stimulate foreign direct investment inflows, competition and structural changes. Corruption will become a less acceptable component of the cost of doing business. It will be harder to pass on that cost to consumers. The rouble is well supported by these developments, but the main force determining its exchange rate is the slow-down of global growth and the likely fall of commodity prices. A first sign that Russia will do less well in coming months have been the June manufacturing PMIs which declined to 51.0 from May’s 53.2. Industrial output could be on the brink of stagnation. While stock market valuations are extremely low, investors are not yet convinced that the time is right for betting on Russia in a big way. 20. Russian agency sees new businesses registered in 2 days by 2018 bne July 12, 2012 Russia's Agency for Strategic Initiatives is working out measures to cut the terms of registering new businesses in the country to two days and real estate projects to five days by 2018, the heads of working groups in charge of "road maps" told RIA Novosti. Gleb Arkhangelsky, head of the working group in charge of the registration facilitation process, said that the agency plans to abolish a requirement for charter capital and corporate charter in 2013, along with a number of other reforms. "The move would, in the short term, cut the registration procedure to seven-eight days and three-four procedures," Arkhangelsky said, adding that the process would take only two days and one procedure by 2018. The "road

map" is also to empower companies to indicate any postal address as the registered one so an entrepreneur could be contacted. The document also suggests introducing the option of registering businesses online, Arkhangelsky said, RIA Novosti reported. According to Arkhangelsky, the projected measures could have a significant economic effect. He cited the World Bank's research data that a country aiming for a maximum liberalization of the business registration procedure earns about 1% of the gross domestic product. 21. Titov Proposes 15% Income Tax Rate RIA Novosti 16 July 2012 The Business Russia lobby group, headed by entrepreneurs' rights ombudsman Boris Titov, is to introduce a bill to the State Duma in the fall to raise income taxes on high salaries to 15 percent in two years, Izvestia daily newspaper reported on Friday. Russia currently has a flat income tax rate of 13 percent. "We will suggest raising income tax for monthly salaries at 100,000-150,000 rubles ($3,057-$4,585) to a [15 percent] level," Business Russia tax committee chairman Marina Zaikova told the paper. "Of course, we can't change the tax rates in the next two years but we are able to present these ideas when [the government] starts working out the budget for 2014-2015.” Russia's Economic Development Ministry, which has discussed previous initiatives from Business Russia, declined to comment on the information to the paper. Any bills proposing tax increases are likely to be approved as the government struggles to fulfil its election pledges for increased social spending, the paper says. The chances of income tax increases on high salaries is significant and many high earners with jobs in Moscow are likely to be concerned about it, Igor Nikolayev, head of strategic analysis department in Russian FBK audit firm, told Izvestia. 22. Turkish e-trade market to grow 50% this year Hurriyet Daily News July 12, 2012 As the number of internet shoppers in Turkey increases rapidly, the proportion of online shopping will increase its 3-4 billion Turkish Liras share by over 50 percent this year, according to data from the Electronic Trade Managers Association (ET_D). Hakan Orhun, Chair of ET_D, told the Anatolia news agency that while in 2005 the average person would spend 76 liras on online shopping, in 2011 this number was 182 liras. "All the figures show that e-trade is growing by close to 50 percent each year. These figures also include telecommunication, airlines and insurance companies' statistics," said Orhun, who added that he believed online shopping could grow by as much as 100 percent this year. "Today the number of internet shoppers in Turkey is about 5 million or about 16 percent of total internet users ... Our first goal is to increase the number of online shoppers to the numbers of internet banking users," said Orhun, adding that the 10

percent increase in online shopping from December 2011 to January 2012 had really boosted their morale. According to Orhun, Turkey is one of the world's fastest growing e-trade markets. While the American and British e-trade markets grew by 16 and 17 percent, respectively in 2011, the Turkish market grew by 50 percent. He also noted that in the past while people who worked were more likely to engage in online shopping, the recent trend showed that housewives as well as retirees were also becoming avid online shoppers. 23. VEB to invest RUB2tn in the national economy by the end of 2015 VTB Capital July 12, 2012 News: Yesterday, during the VEB Supervisory Board meeting, Prime Minister Dmitry Medvedev confirmed that VEB planned to invest around RUB 1.9tn (or 2.4% of GDP) into the Russian economy by the end of 2015. Our View: VEB’s goal is encouraging as it complies with the planned transition from a consumption-based growth model towards an investment-driven environment, which was set in President Vladimir Putin’s decree of 7 May. Along with VEB’s financing, other potential significant sources of investment growth over the coming years are the Pension Fund (under a scenario with a self- sufficient pension system in Russia; the deadline for a final version of the pension reform is September this year) and the domestic Government debt (as OFZ market liberalisation is under way). Importantly, implementing a new growth model in Russia implies long-term investments in infrastructure projects, hence we expect VEB is aimed at financing them.

SECTOR Gas 24. Gazprom in talks with eight European companies over gas discounts VTB Capital July 11, 2012 News: According to Vedomosti, Gazprom is negotiating over gas price discounts with eight European companies. Besides RWE Transgas and PGNiG, the Russian monopoly is engaged in a lawsuit with Austrian company Erdgas Import Salzburg. Additionally, Gazprom is in talks with Shell Energy Europe, Centrex, EGL, GasTerra and DONG. Gazprom’s unnamed source said that the company’s revenues forecast of USD 160bn for 2012 already accounted for all potential discounts, reports Vedomosti. Our View: Despite multiple previous statements from the company that it was in talks with just two more European customers on the price revision – Polish PGNiG and Czech RWE Transgas (c.11% of Gazprom’s European export), there are reports that the company is to amend delivery contracts with several other consumers. Even with six more contracts to be negotiated (5% of European export), we do not expect any sizable impact on Gazprom’s financials (to remind, we have already accounted for the retroactive discounts the company expected to provide in our Gazprom: TP Lowered, Investment Case Intact, of 17 April). Moreover, the company has reached agreement with the largest European gas consumers. However, if this is the case, we

cannot rule out more negotiations appearing, which would be negative for the company, sentiment- wise. 25. Gazprom regional trip feedback: cautious view on Gazprom's export going forward reiterated VTB Capital July 9, 2012 News: Last week, Gazprom hosted an investor trip to Saint Petersburg, providing attendees with the opportunity to meet the senior management of three energy companies at once. We met managers of the Russian gas monopoly, its oil subsidiary Gazprom Neft and power generator TGK 1. We also visited Portovaya gas compressor station, which ensures gas deliveries to Germany from Russia via the Nord Stream pipeline. Our View: Gazprom: export prices revision continues, volumes reiterated. Head of Gazprom export Alexander Medvedev confirmed that the company is in talks with two more European customers on price revision, Polish PGNiG and Czech RWE Transgas, which account for c.11% of Gazprom’s European export. At the same time, the company reiterated its targeted 150bcm for European deliveries for 2012, which we consider as a challenge for Gazprom. Also, the company may revise its capex on the back of 6m12 financials, which does not add to investors’ interest in the name, we believe. To recap, Gazprom has already increased its capex guidance for 2012 by some USD 2bn after 1Q12. Overall, we reiterate that ongoing capex hikes are not appreciated by investors, despite confirmed dividends of 25% of RAS net income for the next two years. Gazprom’s shares continue to trade at a deep corporate governance discount to the company’s fundamental value. Gazprom Neft: positive view reiterated. The oil company expanded on its long- term strategy with particular focus on the development of ‘non-core’ activities (lubricants, bunkering, direct jet sales etc), which we consider the most value- accretive for the company. 70mnt of refining throughput is targeted by 2020 and is set to be reached mostly via M&A, which we believe is rather alarming. However, Gazprom Neft mentioned that they are not obliged to go ahead with M&A; moreover, the company is not planning any sizable acquisitions in 2012. We continue to see the company’s shares as one of the most attractive investment opportunities among Russian oils. 26. Gazprom: accounts receivable from ex-USSR countries amounts to $6.4bn VTB Capital July 10, 2012 News: According to Vedomosti, total debt of the former USSR countries to Gazprom amounted to USD 6.4bn (36% YoY increase) at the end of 2011. Major debtors were Ukraine, Belarus and Moldova. Additionally, Vedomosti reports that Gazprom made a mandatory offer to buy out the minorities’ share in its refining subsidiary Gazprom Neftekhim Salavat. The tender price is RUB 5,385/share (USD 163/share). The state monopoly might spend around RUB 12.5bn (USD 380mn) on the buyout. Our View: We note that non-payments is quite a common problem for Gazprom and believe that the 2011 increase might be mostly driven by substantial YoY growth in realised prices for all the neighbouring countries last year. Accounting for some 6% of the company’s market capitalisation, this level looks quite alarming to us. We see

this news as negative for the company in the longer term, especially if this pattern of increasing non-payments is to become a trend. However, we do not expect any stock implications at this point. With regards to Gazprom Neftekhim Salavat (GNS), we see Gazprom’s decision as quite logical. To recap, the gas monopoly acquired a controlling stake in GNS in 2007, later on the ownership was increased to 87.5%. The tender price seems quite attractive to us, as it exceeds the current market price and 6m weighted average by 4.3% and 14.3%, respectively. GNS stock reacted quite positively to the news, closing with 10% growth yesterday. We believe the news is neutral for Gazprom’s shares, however. 27. Ukrtransgaz cuts Russian gas imports 55% on year in January–June bne July 9, 2012 Ukrainian gas transportation company Ukrtransgaz cut imports of Russian gas by 55% on the year to 16bcm in January–June, the company said Friday, RIA Novosti reported. Gas transit via Ukraine to Western Europe amounted to 43bcm in January–June, while gas transit to CIS countries was at 1.6bcm. No comparisons were provided. In June, Ukrtransgaz said that Russian gas transportation to Western Europe via Ukraine fell 24% on the year to 37bcm in January–May as Russian natural gas giant Gazprom has rerouted some supplies from Ukraine to run through Belarus and increased the volume of gas pumped via the Nord Stream pipeline.

SECTOR Oil 28. Alliance Oil publishes June operating update: weak Kolvinskoye production VTB Capital July 11, 2012 News: Alliance Oil Company has published its operating update for June. The key takeaways are as follows. - Alliance’s average daily production decreased 2.1% MoM, significantly more than the industry average. This was mainly driven by the decline in production at Kolvinskoye. - Despite last month’s recovery (+6.5%MoM in May), Kolvinskoye showed sizeable 15% drop in production in June. This was negatively perceived by the market, with the stock price dropping 1.9%. On the back of this data we think that Alliance has yet to resolve the issues with Kolvinskoye and there are no signs of stabilisation. - The company drilled five new wells at the field in 2Q12 which, combined with the fact that Alliance still has to finish tests at existing wells, seems not that logical to us. - Total crude oil sales increased 2.1%MoM. - Despite flat refining, with 0.4% growth in oil refined at the Khabarovsk plant, oil product sales dropped 11.5% MoM in June. We note that the quite poor June performance in downstream did not affect 2Q12 products sales: they increased 17% QoQ, which is likely to be supportive for the 2Q12 financials.

- The company confirmed its 2012 average daily production guidance of 55- 60kbbl (in line with our forecast of 57kbbl/day), but increased its guidance for refining 5% to 72-77kbbl/day. Our View: The news is negative for Alliance Oil. Further new sflow might come on 10 August, when the company is due to publish its operating update for July 29. Bashneft’s new chairman shares his view on future strategy RenCap July 12, 2012 Event: Today (12 July), Vedomosti published an interview with Felix Evtushenkov, who was appointed chairman of Bashneft last month. Evtushenkov confirmed the company's earlier commitment to international expansion, including potentially a second project in Iraq, as well as the acquisition of various assets (including offshore) in Africa, Middle East, Venezuela and other Latin American countries. Part of this expansion, he said, is driven by the need to balance downstream with adequate upstream business (current refining cover over 133%), and partly by better returns of international projects. According to Evtushenkov, the major issue with regard to the potential merger with Russneft is still the high leverage of the latter (c. $4.8bn of net debt), so the deal is unlikely to happen in the short term. Evtushenkov noted that an IPO of Bashneft in 2013 is possible, subject to market conditions. A stake sale to a strategic investor is also possible, although not to ONGC as negotiations have stopped, according to the chairman, due to different price expectations. Action: Neutral for Bashneft, in our view. We re-iterate our HOLD rating and $54/share TP. Rationale: Most of the statements quoted by Vedomosti are in line with the company's earlier announced strategy. We have a cautious view on international expansion as the track record of Russian companies in outbound M&A has been modest at best. We think this is further evidence that a high payout ratio (close to 100%) for Bashneft is not sustainable in the future, and is the main reason for our cautious investment stance on the stock. 30. Eurasia Drilling Company: The most attractive name in the Russian oilfield services sector Metropol July 13, 2012 We initiate coverage of Eurasia Drilling Company (EDC) with a fair value of USD 38.4 per share, which suggests 43% upside to the current market price. We recommend the stock as a BUY. EDC is a leader among Russian oilfield services companies in the drilling segment with a market share of 25% by meters drilled. We believe EDC is the most attractive name in the Russian oilfield services sector. The company’s net income margin is the highest among publically-traded companies in the Russian oilfield services (OFS) sector, and in our view the scale of EDC’s business gives it a competitive advantage, enabling the company to increase market

share and generate higher free cash flow than its competitors. The stock is also the most liquid in the sector. In 2012, we expect the Russian oilfield services market to grow by 25% y-o-y in dollar terms. Future growth should largely depend on investment in exploration and production by oil companies, which in turn is correlated with oil prices. At the same time, the need to maintain production at brownfield sites means oil companies still need to invest in the drilling segment whatever the price of oil, which helps to insulate oilfield services companies from falling oil prices. We expect the Russian oil industry to increase CAPEX in the upstream segment by at least 20% y-o-y in 2012, which should help boost EDC’s project backlog and support the stock price. Rosneft, LUKOIL and Gazprom Neft in particular have ambitious capital spending plans for 2012 in order to maintain oil production. 31. Exillon Energy announces commissioning of Transneft entry point Aton July 13, 2012 Exillon Energy reported yesterday (12 July) that it has commissioned its own entry point to Transneft’s pipeline in Western Siberia. Its subsidiary Exillon WS is delivering all of its production via this facility, the company said. Current capacity at the entry point is 13,000 bpd (Exillon WS produced 9,062 bpd in June) which can be expanded by the construction of additional storage tanks. Transportation costs will be reduced due to the shorter distance from the field to the new entry point, and EBITDA should increase by $1.5/bbl, the company said.?? ?The new facility should improve Exillon’s profitability, so we rate the news as positive for the stock. 32. LUKOIL files action against KES-trading VTB Capital July 11, 2012 News: LUKOIL has filed a claim to the Federal Anti-Monopoly Service (FAS) against KES-Trading, Vedomosti reports. According to the FAS statement, KES- Trading is LUKOIL’s only gas customer in the Perm region. The company claims KES-Trading practices price discrimination and forces it to sell its gas at a low price. LUKOIL says it loses around RUB 450mn of net income a year due to the actions of KES-Trading. FAS has started an investigation and is to consider the case on 26 July. Our View: The amount stated in the news is significantly lower than 1% of LUKOIL's net income 2012F, therefore it would not have any notable effect on the company’s financial results. However, such developments might increase the transparency of the market and provide balanced and comparable conditions for all market participants, which would be positive for Russian oil and gas companies. 33. Novatek’s 2Q12 natural gas production increased 15.7% y/y Alfa Bank July 12, 2012

Novatek released its 2Q12 operating results yesterday. Natural gas production increased 15.7% y/y to 14.04bcm, though it showed a seasonal deterioration q/q. Total natural gas production in 1H12 reached 28.7bcm, up 12.3% y/y, putting the company on pace to beat both its own full-year guidance for 6-7% growth and our expectations. Liquids production in 1H12 also improved, rising 3.2% y/y to 2,129mt. Overall, we see the results as supportive for Novatek, as the strong output in 1H12 provides room for an upgrade to the company’s growth guidance if production levels do not deteriorate. Nonetheless, we do not expect a strong market reaction to this news, as the company’s superb output in 1H12 was previously reported by CDU-TEK and is nothing new to the market. 34. Oil&gas: Do no blame taxes, please VTB Capital July 12, 2012 Russian oil taxes are the main deterrent to investments in the oil sector. We continue to believe that the Russian oil sector represents a good investment opportunity, despite investors’ appetite being dented by the perception that revenue-based Russian oil taxation is insufferably heavy. And without wanting to play the role of devil’s advocate (as taxes are arguably one of the last things on anybody’s wish-list), we do wish to highlight one perhaps surprisingly positive effect that such a taxation approach has had in Russian circumstances: efficiency. Blessing in disguise. High, revenue-based tax coupled with low corporate tax created a situation in which oil companies had an incentive to invest in efficiency. This was because, due to the low income tax, nearly every dollar of efficiency gain went directly to the bottom line. The flip side of the coin was that this structure meant there was little incentive to invest in production, so as with any system a certain amount of fine-tuning is probably inevitable. Nevertheless, these specific circumstances boosted efficiency, competitiveness and transparency and so the Russian oil industry now differs dramatically from many other Russian sectors, where the natural incentives are to invest into production, but care less about efficiency (or even inflate costs) in order to pay lower income tax. Investment governance is the key. We therefore contend that, contrary to the common view, the taxation structure has actually created value for the Russian oil sector at this stage of its development. With such a conclusion in mind, we turn our focus to what we believe is going to be the key factor differentiating the performances between Russian oils over the coming years: investment governance. Our analysis implies that capex within Russia and the CIS is value-creative, but that a more cautious view on international development plans is warranted. We remain bullish but have become pickier. We expect oil stocks to continue their gradual revaluation against the broader market. However, we select TNK-BP, Gazprom Neft and LUKOIL as our top picks and see Surgutneftegas, Tatneft, Bashneft and Alliance as less attractive investment ideas. We view Rosneft as a special case, as the stock’s upside depends on the new management team’s efforts to unlock the company’s natural upside. 35. RusPetro: Another strong update

Renaissance Capital July 13, 2012 Strong operational update; BUY reiterated. Today (12 July) RusPetro announced a strong operational update. Production has increased to 5.6 kb/d, which is 40% above January-May levels of 4.0 kb/d, on average. We think this is the first real evidence since the beginning of the year that RusPetro can deliver on its original targets and overcome the geological complexities of its reserves (in the traditional Russian view) by applying advanced field development technologies. We reiterate our BUY rating and TP of GBp750. The update includes the following details: ? Drilling – 14 wells completed in total from the beginning of the year with nine wells only scheduled for fraccing and connection to the pipeline, of which six are in the eastern part of the field. An additional four wells are currently being drilled with four rigs and two fracturing fleets in operation, with one more being currently recruited. ? The year-end target of 10.4 kb/d was confirmed. We see a possibility of beating this target if all drilling continues as planned and there are no more delays with fracturing. ? Waterflood has started at Pad 21 with the first two injectors now online; we do not expect any material response from the reservoir before 1Q13. ? The application to extend its Palyanovsky licence was submitted and approved; new terms are to be granted in December 2012. ? There has been good progress with infrastructure, as usual: the 4 kb/d temporary production facility is proceeding according to plan in the northeast of the field. The new pipeline connecting Pads 19 and 21 to the central processing facility is in operation. The power grid on Pad 19 has been completed. ? Premium sales are picking up: light oil from the eastern part of field was sold via rail for the first time in 2Q12 with a premium of $3.3/bl to an average realised price. The company considers potential capacity for this sales channel to be approx. 3.5 kb/d with an option to increase it considerably towards end-2012. RusPetro also announced the hires of Nick De’Ath from TNK-BP to lead the subsurface team, John Krupa from Exillon as senior geophysicist and Robert Stewart from ConocoPhilips as head of production. 36. TNK-BP minorities decrease claim against BP VTB Capital July 10, 2012 News: According to Interfax, TNK-BP Holding minority shareholder, Andrey Prokhorov, has decreased his claim against BP from RUB409bn (USD 12.4bn) to RUB 288bn (USD 8.7bn). The reason behind the reduced claim was a downward revision of the macro outlook under which the evaluation of missed opportunities was made. However, the overall composition of losses included in the claim has not been changed. Our View: To recap, the lawsuit was initiated against BP for the blocking of the possible TNK-BP and Rosneft co-operative development of Arctic shelf projects. At this stage, we believe the news is neutral, and await the results of the next hearing scheduled for 26 July. 37. Tatneft’s capex totaled $705m in 1H12 VTB Capital

July 10, 2012 News: According to Interfax, Tatneft’s capital expenditures in 1H12 amounted to RUB 23bn (USD 705mn). Our View: To recap, earlier Tatneft guided 2012 capex at RUB 52bn (USD 1.6bn), which is around 5% below our forecast of USD 1.7bn. We are comfortable with our forecast and consider the news as neutral for Tatneft’s shares. 38. Zarubezhneft to start drilling in Cuba in November bne July 12, 2012 Russian state-owned oil company Zarubezhneft plans in November to start drilling an exploration well at the L block in Cuba, the company said. Last month Zarubezhneft signed an agreement with Songa Offshore to lease the Songa Mercur drilling facility. Zarubezhneft expects its investments in Cuban projects to reach $2.9bn by 2025, according to Sergei Ushakov, aide to the Russian President Vladimir Putin.

SECTOR High Tech 39. Armenia to buy Russian telecom satellite bne 10 July 2012 Armenia signed a memo of intent to buy its first ever telecoms satellite from Russia on July 9 during the Farnborough air show, AWIN First reports. Director of the Russian space agency Roscosmos Vladimir Popovkin said the satellite would carry 15 transponders, though details of the satellite’s development and launch are still being negotiated. A contract is expected to be signed before the end of the year. 40. Hyundai to launch tablet production in Russia RIA Novosti July 13, 2012 Hyundai is going to launch tablet PC production under its brand name in Russia, with sales expected from autumn 2012, gazeta.ru on-line newspaper reported on Thursday quoting the Russian office of the company. "We are preparing to start sales at the Russian market [in September]. We signed the first distribution agreement with Tekhnotreid firm last week and we are looking for other distributors," Hyundai IT official told the paper. Hyundai will provide two seven-inch tablet models, one model with 9.7 inch screen and one with 10.1 inch screen working on the Android Ice Cream Sandwich mobile operating system. Each model will have 1 GB RAM and 8 GB onboard memory, and

will support Wi-Fi and Bluetooth functions, said Hi-Tech@Mail.Ru chief analyst Dmitry Ryabinin. The South Korean company is looking to produce the first batches of tablet PCs in China until October 2012 and then re-deploy its facilities to Russia. If sales reach 200,000 tablets in the first year, the Hyundai may build a plant in Russia, a source close to Hyundai IT told the paper. Ryabinin also said that it would be difficult for Hyundai to take a significant share of the tablet market due to strong competition from other producers, adding that tablets could cost from 7,000 rubles ($213.22) to 12,000 rubles ($365.52). 41. Russian aerospace industry reforms: RKK Energia may become part of Russian Space Corporation RenCap July 11, 2012 Event: Yesterday (10 July), Kommersant reported that the Russian Federal Space Agency (Roscosmos) has prepared a plan for reform of the Russian aerospace industry. Companies in the sector may be organised into seven integrated branches. A newly created Russian Space Corporation will group together two joint-stock companies – RKK Energia (RKKE) and Space Monitoring Systems, Information Management and Electromechanical Systems – and the Scientific Research Institute of Machine Building and the Lavochkin Scientific Production Association. According to Kommersant today (11 July), the draft of the industry reorganisation plan will be submitted to the government's Military-Industrial Commission. The deputy head of Roscosmos, Vitaly Davydov, said that the creation of each integrated branch may take up to 18 months. Action: We currently treat the news as neutral for RKKE shares. Rationale: We await a final decision on and details of the restructuring process. We expect this, as well as the conversion ratios of RKKE shares into Russian Space Corporation shares, to be announced in the near future. Currently, the Russian government directly owns only 38.22% of RKKE. We think this may result in positive conversion ratios for RKKE shareholders. RKKE's other large shareholdersare the asset management companies Leader and Agana (with 23.57% in total), and Razvitie and Experimental Engineering Plant (20.47% in total; the two companies are 100% subsidiaries of RKKE). The free float would amount to 17.74%, based on our estimates.

SECTOR Metals and Natural Resources 42. IRC releases its 2Q12 trading update VTB Capital July 12, 2012 News: IRC has released its 2Q11 operational results, reporting iron ore concentrate production decreasing 11% QoQ to 203kt and ilmenite concentrate production growing 7% QoQ to 28.7kt. The average price achieved in 2Q12 for iron ore concentrate was USD 127/t (up 9% QoQ from USD 117/t in 1Q12), while ilmenite concentrate prices increased 12% QoQ to USD 313/t in 2Q12. Notably, iron ore prices in China weakened QoQ in the period. Moreover, the company provided an update on its development projects. It reaffirmed its FY12 production targets of

820kt (1H12 is 53% of the FY number) and 125kt for iron ore concentrate and ilmenite concentrate, respectively. However, IRC’s management highlighted that the company expected to record a loss in 1H12 due to softening iron ore selling prices and non-cash one-off, related to company’s titanium project in China. Our View: The results are in line with our expectations and reflect production targets, previously set by the company. With the ilmenite production capacity expansion programme at the Kuranakh Mine being in its final stage we see operations growing further in 2H12. Moreover, we see IRC’s iron ore business to enjoy ongoing Chinese urbanisation and construction market growth in 2H12. The major K&S project is progressing well and a month ago we witnessed the official ceremony of processing plant construction opening. Being the key for unlocking IRC's value the project is now moving into an active construction stage. Although the 1H12 financials might not please the market, we would not concentrate on these mixed numbers as we believe the story would be more geared to the K&S construction process (on track) and Chinese iron ore market (pricing is expected to improve in 2H12). We see the impact on Petropavlovsk’s earnings being marginal, given the scale of operations. 43. Kuzbass authorities ask RUSAL to close unit 1 of its Novokuznetsk Smelter for ecological reasons VTB Capital July 10, 2012 News: Yesterday, local Kuzbass authorities (including governor Aman Tuleev) asked UC RUSAL to close unit #1 of its Novokuznetsk Aluminium Smelter (NKAZ) due to a significant negative impact on the local ecology and the health of Novokuznetsk citizens. The unit, which was launched 70 years ago, has a capacity of 70ktpa (NKAZ’s total capacity is 320ktpa), 1.7% of total 2011 production. According to the company, the unit produces more than 25% of NKAZ’s pollution volumes, while representing only 20% of its capacity. The company is currently deciding on the potential closure timeline for this unit, which is to be substituted by capacities from the new Boguchansk Smelter (BEMO) expected in early 2014 (phase 1 equals 147kt out of a total of 588kt planned overall). In addition, UC RUSAL is set to increase alloy production volumes at NKAZ. Our View: At this stage, we expect the potential capacity reduction at Novokuznetsk will only have an insignificant impact. Moreover, it would likely be positive for production costs, as the unit is one of the most inefficient of the company’s asset base. All in all, the recent newsflow on capacity reduction is in line with the company’s general intention to close 300-600kt of its most inefficient smelting capacities in 2012-13. We also note that if UC RUSAL loses Alscon’s production (15kt, Nigerian authorities recently annulled the purchase transaction), it could also become part of the potential company-wide cuts. Given the stock’s financial and operational leverage, we view the name as the ultimate play on the aluminium price, and would expect it to rebound strongly as soon prices start to improve. However, at this stage the aluminium market remains in the doldrums and the industry is still having to respond to pricing weakness with proper capacity scale backs (supply reduction). 44. NLMK idles one of blast furnace VTB Capital

July 9, 2012 News: NLMK announced that it was idling one of its blast furnaces (#2) on the back of demand deterioration in the pig iron market for up to 60 days. Annual production at the blast furnace amounts to 0.8mntpa of pig iron. The company highlights that the idling will not cause crude steel production volumes to decrease and reiterated its guidance for 2012 of 15mnt of crude steel. Our View: The step does not pose any sizable negative impact to the company's financials, as the pig iron external sales business brings only c. 5% of consolidated revenue (2011) while its share in EBITDA is even lower due to the naturally low profitability margin of this kind of business. The step is aimed at optimising costs and comes on the heels of decreases in merchant pig iron prices, which are apparently becoming loss making. As NLMK is maintaining its outlook on 2012 crude steel production, we do not expect to see an impact on semi-finished and rolled products production. 45. Nigerian Court Scraps RusAl Aluminum Plant Purchase RIA Novosti 10 July 2012 The High Court of Nigeria invalidated a deal last Friday in which Russia's RusAl, the world's largest aluminum producer, bought a local aluminum enterprise five years ago, Nigeria's The Nation Newspaper reported on Monday. RusAl bought 77.5 percent of Alscon (Aluminum Smelter Company of Nigeria) in 2007 for $250 million, later increased its stake to 85 percent, and overhauled the plant in 2008 after it had spent eight years inactive. The Alscon enterprise, which includes a 120,000 ton capacity aluminum plant, gas-fired power station and a port, is one of RusAl's core assets in Africa. The paper said the court ruled on Friday that rival bidder U.S. Bancorp Financial Investment Group (BFI) had a valid contract with Alscon or Aluminum Smelter Company of Nigeria for a more profitable proposal to buy the plant than RusAl's. BFI Group emerged as the preferred bidder for ALSCON in 2004, but was later disqualified by Nigeria's Bureau of Public Enterprise. In 2009 Nigeria's Senate initiated an investigation into state property sales and said the 77.5 percent stake bought by RusAl was worth $3.2 billion but the Russian company had paid only $130 million for it. In December 2011 the Senate voted to abolish the sale of 12 state companies including Alscon, because their privatization scheme was "illegal". RusAl told Prime news agency the company had not yet received any notification of the court's decisions. "We will be able to make further announcements as soon as we examine the decision of the High Court of Nigeria. As for now, Alscon is part of RusAl and the plant is operating normally," RusAl said. MEF-Audit chief analyst Alexander Pobedash told Kommersant business daily the potential loss of Alscon would not cause major problems for RusAl in current market

conditions as aluminum producers are cutting production capacity, but the court decision might prompt suits against RusAl from other African states where the company has assets. 46. Polyus Gold might re-apply for mainland re-domiciliation in 2H12 VTB Capital July 11, 2012 News: Yesterday, the company told Interfax its BoD is likely to review the possibility of FTSE 100 inclusion this autumn. No decisions have been made yet, but provided the new management study on the inclusion (the company will be reviewing share price performances of the mining stocks from LSE / FTSE 100) proves useful, Polyus will ask the state commission on foreign investments for permission for re-domiciliation (Polyus withdrew it in March 2012 after 6 months of waiting). At this stage, the company has a 22% free-float, while for FTSE 100 inclusion its will require 50% for Jersey (its current domicile) and 25% for the mainland. Hence, redomiciliation is still essential for FTSE inclusion. Our View: We believe such a decision could be a moderately positive catalyst for the stock. Since the company lost its weighting in MSCI Russia and now is not a part of any major indices, the inclusion would trigger some additional buying in Polyus, in our view. Moreover, the company has already completed the major move from Russia to the UK and the final step from Jersey to the mainland should be mostly technical if Polyus gets state permission. Free-float expansion should not be a problem either, given the recent sale of the treasury stake. We see value in Polyus' assets and still believe the company is undervalued, even taking into account our conservative projections. However, the prolonged redomiciliation process, exclusion from MSCI and lower liquidity in the new UK stock took the name off many radar screens last year. The FTSE 100 membership and improving liquidity could be a helpful instrument of restoring investor interest in Polyus. We are reiterating our Buy rating for the stock on the back of this news. 47. Raspadskaya published 2Q12 operating results VTB Capital July 12, 2012 Raspadskaya has published its 2Q12 operating results. Although the numbers came largely in line with our expectations, they remain unimpressive, implying a strong shortfall on the FY12 production target. Weak market conditions had an impact on sales plans and stockpiles increased. Prices were down another 5% in July. Raw coal mining volumes advanced 16% QoQ to 1.8mnt following the launch of a new coal face from May 2012. This was slightly above our expectations, meaning the ramp up at the newly started face is going well (June’s production of 260ktpm was double that in May). Nevertheless, the run rate of 1.8mntpa remains unimpressive, just recovering to 1Q11 levels. Before the accident, the company was producing more than 3mnt per quarter, while the FY12 target of 10.5mntpa implies a figure of 2.6mnt. According to our calculations, this implies actual FY12 production of 8mntpa (or a 16% downside risk to our 9.5mntpa forecast).

Concentrate sales grew 14% QoQ to 1,070kt with the share of exports more than doubling to 19% as Raspadskaya continued to recover its market share on the export markets (which it lost following the accident and ban on exports). The average selling prices came at USD 111/t, down 14% QoQ, which was comparable with the market trends in 2Q12. The company sees July prices down another 5%. Raspadskaya described the coal market as weak (a buyers’ market) which had an impact on the fulfillment of the sales plan, the increase in the stockpile and the financial condition of the company. 48. Sibirsky Cement shows solid volume growth in 1H12 VTB Capital July 12, 2012 News: Sibirsky Cement's 1H12 cement output increased 11% YoY to about 1.8mnt, the company reported. Our View: YTD volume growth remains robust, although we see some initial signs of a potential slowdown as June volumes declined 7% YoY. We believe that trends in July and August will be crucial for the near-term outlook. In our view, Sibirsky Cement's current valuation ishardly demanding from a fundamental perspective, although looming economic uncertainty, the company's involvement in non-transparent M&A deals in Siberia as well as low corporate governance will likely keep putting pressure on the stock. 49. Supreme Arbitration Court confirms legitimacy of the tax authorities’ decision to claim $22m of taxes from Polymetal Alfa Bank July 11, 2012 The Supreme Arbitration Court confirmed the tax authorities’ ruling to claim RUB700m ($22m) from Polymetal, as its subsidiary Serebro Magadana in 2007 sold silver to ABN Amro Bank on forward contracts at a substantial discount to the market price, thereby reducing the tax base. Polymetal claims that the deal was structured in this way due to the terms of a credit agreement between the company and the bank. As the decision by the tax authorities is already known to the market, the news has already been partially priced in. Moreover, this development is NEUTRAL in our view as $22m is only 3% of Polymetal's estimated 2012 EBITDA. According to the press, Polymetal's subsidiary is also challenging additional taxes of RUB324m ($10m) for 2008-09, mostly due to the same contract. We believe that the court is unlikely to make a decision that goes against the grain of the earlier case for 2007 taxes, and it would appear that the company will have to pay yet again. Nevertheless, that amount is also relatively small, and it will not have a substantial impact on the company’s P&L. 50. UC RUSAL faces cancellation of Alscon purchase VTB Capital July 9, 2012

News: According to Interfax, the NigerianHigh Court has annulled the transaction of the sale of 77.5% of the Alscon aluminium smelter in 2007 to UC RUSAL. As per a special report by the Nigerian government, the stake in Alscon was sold for USD 250mn, below the fair value, while the value of the smelter and adjacent infrastructure is stated at USD 3.2bn. In 2008, UC RUSAL acquired an additional 7.5% of Alscon from Ferrostaal AG, consolidating 85% of the smelter, while the remaining 15% stake is state-owned. Alscon has nameplate capacity of 96ktpa. Our View: Alscon operated at a low utilisation rate of only 16% in 2011, having produced 15kt of aluminium (or 0.3% of the company's total production), which was primarily caused by disruptions to energy supplies to the plant. As our smelter production estimates remain flat, the impact of the decision on UC RUSAL is marginal, both earnings- and valuation-wise. On the other hand, the news (although not unexpected) is somewhat negative for sentiment, and highlights the augmented political risk attached to UC RUSAL's African operations (ie, the issues the company had with its bauxite/alumina assets in Guinea). 51. VSMPO-Avisma to supply forgings to SAMC bne July 11, 2012 VSMPO-Avisma has signed a 10–year agreement to supply forging products to Shanghai Aircraft Manufacturing Co. (SAMC) for Comac C919 aircraft, VSMPO-Avisma reported. Ttitanium producer also said that the companies are considering semi-finish machining of the die forgings. SAMC is mainly responsible for the final assembly of C919 large aircraft and ARJ-21 regional jet, and manufacturing of core components.

SECTOR Power 52. Electric Utilities in June: 30% below consensus VTB Capital July 9, 2012 The Electric Utilities Index only partly recouped May losses, gaining 8% and still underperforming the RTS Index (+9%). Gencos’ 4% rise lagged the 15% surge by Grids. Both MRSK Holding (+21%) and FSK (+17%) bounced back after the merger into Rosneftegaz talks shaved half of their mcap in May. IRAO (+4%) was roughly flat, as the genco escaped being excluded from the MSCI. RusHydro added just 2%, as the new risk of an SPO in favour of Rosneftegaz increased its risk profile. Electricity demand in June added 1.7% YoY. The weather was 1°C higher YoY and, adjusted for the temperature demand added 1.4% YoY. YTD consumption is up 1.8%, above our FY12 forecast of 1.4%.

Free electricity prices remained at December 2011 levels, adding 19% YoY in Siberia, but losing 12% YoY in Europe in June. We retain our full year forecast of RUB 1,035/MWh for European Russia (vs. YTD of RUB 919/MWh) and RUB 578/MWh for Siberia (RUB 665/MWh). After a sharp rise over 2009-11, the consensus view (in terms of target prices) has returned to 2009 levels. We are still, on average, 37% and 20% below consensus for gencos and grids and see few opportunities in the Utilities sector. Among gencos, the smallest differences to consensus (almost zero) are on TGKA, EONR and MSNG – all names we rate as a Buy. For both liquid gencos, HYDR and IRAO, we see a 30- 39% difference. For grids, the divergence from the consensus is less. Our below consensus stance can be explained by the fact that in our view the outlook on the tariff and EPS growth environments are different. Electricity market liberalisation, special tariff feed-ins, gas price growth and KOM capacity market launch as well as RAB roll out provided solid ground for the Street’s upbeat valuations in 2009-11. Now, with a lack of tariff growth ahead, implying a stagnating EPS outlook and almost zero dividend yield, we believe that the stocks deserve lower price targets. Triggers to upgrade our views would be cost optimisation and a higher dividend outlook.

53. Grids rebound; RusHydro under pressure Renaissance Capital July 13, 2012

The share prices of Russian electricity gridcos rebounded strongly in June, with FSK adding 23% and the MRSKs adding 9% on average over the month, after losing almost half their value in May. Meanwhile, RusHydro came under pressure in the wake of news of yet another primary share issue – this time in favour of RosNefteGaz. The issue is expected to raise RUB85bn ($2.6bn) and will pave the way for RosNefteGaz to acquire a blocking stake in RusHydro. Russian demand up 1.8% in 1H12; link to GDP weakens. Russian electricity demand grew 1.8% YoY in the first half of the year. This was approximately 0.4x GDP growth for the period, lower than the historical 0.48x coefficient and moving towards the typical European relationship of 0.3x. Wholesale electricity prices for the period were down 6.5% on average compared with the same period in 2011, but were as much as 15% down in European Russia and 40% up in Siberia. Spark spreads recover; 2H12 outlook robust. Russian electricity spark spreads recovered in June, though they still remain down approximately 10% YoY. Nevertheless, a 15% gas tariff increase from 1 July and a subsequent jump in wholesale electricity prices, which are now already 10% up YoY, give hope for a more robust operational performance from the Russian generators in 2H12 – assuming no weakening in demand. E.ON Russia ended 1H12 with only a 2% YoY lower spark spread, reflecting strong profitability growth at the company’s Siberian Berezovskaya plant. Meanwhile, OGK2 and Enel OGK5, with their low exposure to the improvement in margins in Siberia, each suffered 15% falls in their spark spreads. CEZ underperformed by 13% in June. With its roots firmly embedded in European soil, CEZ shares have continued to underperform in July. We have not changed our view on the company’s soundness, but we expect little respite from CEZ’s share-price weakness until Europe resolves its financial crisis. Summary sector ratings and TPs are provided in Figure 75. 54. KOM capacity price caps might grow 6% in 2013 VTB Capital July 10, 2012 News: Federal Tariff Service have proposed an increase in KOM capacity caps of 6.1% in 2013 vs. 2012 (ie, by the level of actual CPI in 2011). Our View: The KOM capacity price covers the fixed costs of the existing generation fleet and accounts for roughly 10% of the end-customer price. A 6.1% increase in the price would translate into 0.6% additional growth in the end-electricity check. In our models for generation companies, we assume zero KOM capacity price growth and therefore if the price caps are increased it would have a positive mid-single digit impact on our 2013 earnings forecasts. 55. MinEnergo: potential changes in the departments overseeing electric utilities VTB Capital July 10, 2012

News: According to Vedomosti, the two departments overseeing electric utilities in MinEnergo might see a noticeable staff change. The newspaper links the upcoming changes with the appearance of Mikhail Kurbatov who replaced ex- deputy head of MinEnergo Andrey Shishkin, who was responsible for electric utilities. Vedomosti reports that those leaving MinEnergo now might follow Shishkin and take up positions in Rosneft. In other news, today, the presidential commission on TEK is set to discuss, among other questions, the billing system on the electricity market and small state-owned grid companies, RBC Daily reports. Our View: In our view, the change in MinEnergo might result in a new policy on utilities regulation. At this stage, however, it is too early to make any conclusions or forecasts, as the timing of the possible policy initiatives and their nature are unclear. 56. Mosenergo releases 1Q12 IFRS results in line with 1Q12 RAS Alfa Bank July 10, 2012 Mosenergo released its 1Q12 IFRS results yesterday, which came in quite weak. However, we note that they are mostly in line with the company’s previously disclosed RAS financials on the EBITDA line. The company’s 1Q12 EBITDA totaled RUB9.3bn, 25% lower than its 1Q11 EBITDA of RUB12.4bn. The company’s revenues of RUB54.7bn for 1Q12 were also 4% below last year's figure. Meanwhile, net income fell by an even greater magnitude, dropping 32% y/y to RUB5.3bn. Although IFRS financials are more indicative, we treat them as weak but NEUTRAL, as the company's reported EBITDA and EBITDA dynamics are not news to the market. The key reason why Mosenergo reported such poor financials is a higher base effect. In 1Q11, the financials were not affected by any government tariff restraint measures (must-run generators' tariffs were cut substantially in 2Q11). In addition, 1Q12 electricity spot prices were frozen as part of pre- election tariff regulation. These factors affected power generators' financials for 1Q12 in general, and we consider Mosenergo’s 1Q12 results to be weak given the sharp decrease in margins – EBITDA margin decreased by 4.7pp y/y to 17.0% and net margin decreased by 4.0pp y/y to 9.7%. 57. No price caps for six zones in 2013, instead of three Troika July 10, 2012 Troika's view: We treat the news as neutral for gencos for now. If the proposal is approved, it remains to be seen whether the capacity prices in the three additional zones (Volga, Vyatka and Tyumen FCFZs) will come in above the price cap levels that we currently model. Theoretically, the capacity price for existing capacity should increase above the price cap level in 2013 in Tyumen FCFZ, we believe, which would be positive for the relevant gencos, including E.ON Russia. However, how this will play out in reality is difficult to say; we should have more clarity in September-October. On a separate note, Prime Minister Dmitri Medvedev signed a resolution on pricing in the electricity sector yesterday. By September 1, the Economics Ministry, Energy Ministry, Federal Grid Company (FGC) and MRSK Holding can submit to the government a draft revision of the regulatory parameters and tariffs for FGC and the

MRSKs. The Energy Ministry has to approve FGC's investment program through 2018 by November 1. We expect the MRSKs' RAB parameter revision to be completed and long-term parameters for FGC set by that date. Finally, we note that the Fuel-Energy Commission under the President should hold its first meeting today, where the involvement of Rosneftegaz in the sector should be discussed. 58. Rosneftegaz's participation in utilities may be limited to certain projects Alfa Bank July 13, 2012 According to the press, Arkady Dvorkovich, the first deputy prime minister overseeing the power sector, said yesterday that in some cases the preferable option for Rosneftegaz's (RNG) involvement in certain projects led by RusHydro and Inter RAO might come in the form of co-financing rather than an outright purchase of equities in the power companies. This option is being discussed along with the others, Dvorkovich said. We believe that this proposal appears to be the most favorable for minorities in both power companies as it avoids any new share issues and the resulting dilution risk, which is currently weighing on both stocks, in our view. Therefore, we expect to see a speculative, positive reaction in the trading of both RusHydro and Inter RAO today. Meanwhile, this viewpoint once again defines the pluralism of opinions in the government, as there is still no consensus view on the issue. This other option described by Dvorkovich means that the uncertainty hanging over RNG’s involvement in the “quasi-privatization” in the power sector is likely to persist in the near term, which will be a negative factor for both RusHydro and Inter RAO. 59. RusHydro: Merger maze hides compelling multiples Alfa Bank July 13, 2012 RusHydro suffers from two main problems that explain its current underperformance and lead us to cut the stock’s TP from RUB2.01 to RUB1.27: 1) The deal with Rosneftegaz (RNG) still lacks details, while the speculated placement price of RUB1.0/share may set a ceiling for the share price going forward. 2) The consolidation of low-profitability RAO Far East erodes RusHydro margins, burdening the latter with extra capex, uncertain returns, social responsibilities in the (Russian) Far East, and subsidized tariffs with no obvious benefits in exchange. This said, RusHydro still offers compelling multiples, particularly in light of its decent earnings growth. While the near-term performance is likely to be affected by uncertainty, on valuation grounds the stock is attractive and we reiterate our O/W. For further details, please see our report released yesterday. 60. Russia to create centralized settlement system for retail electricity market Alfa Bank July 12, 2012

After President Vladimir Putin urged streamlining the situation with bad payment discipline in the electricity sector, the government has taken some steps toward creating a centralized settlement system on the electricity market. In particular, payments made by customers to managing and retailing companies will be done through special accounts at specifically appointed banks, the largest of which is proposed to be VBRD (controlled by Rosneft), while Sberbank, VTB and Gazprombank are likely to be other banks involved in the project. These accounts will be overseen by a specially appointed organization, which is expected to be Market Council. The total market (or turnover) on the electricity market is currently estimated to be RUB2,000bn. The new scheme will first be tested in a few regions with the worst payment discipline and then spread to the rest of the country. We are inclined to believe that this new system will work properly and help improve the situation with overdue payments in the electricity sector, which is primarily a problem for the MRSKs operating on the retail market. However, at this point we do not anticipate this news will have any immediate impact on the stocks. 61. TGK 1 holds investor meeting: pricing environment tightening, management focuses on optimisation VTB Capital July 9, 2012 News: TGK 1 presented its investment story on Friday as part of Gazprom’s investor event in St Petersburg. Overall feedback is that top-line growth is limited: free prices growth does not reflect fuel cost hikes in full (TGK 1 saw only 10% increase in prices on 1 July after gas costs grew 15%). Overcapacity in the region also does not help: old units with feed-in tariffs will be closed to give new CCGTs more breathing space. Management is focusing more on the increase in net income, deleveraging and lower capex, which should lead to higher dividend payouts over 2012-15 (under the current 5-35% of net income payout guidance). Key highlights: -90% of capex will be completed by 2012, meaning that 30% of total capacity will be new units (1.4 GW out of 1.6GW total); - 0.7GW of old inefficient capacity will be decommissioned, which together with the launch of new capacity will bring fuel efficiency down to 293 g/kWh from 352 g/kWh now; - Cost optimisation programme to be launched, including: purchases of services, repairs, power trading, receivables, fuel mix cost optimisation and disposal of non-core assets/activities; - 2012EBITDAguidance(exMurmanskayaCHP*)isRUB11.7bn(+30%YoY), net income of RUB 3bn (-20% YoY) – this is much better then majority of the sector names that will record 20-30% loses YoY at EBITDA level already. - Murmanskaya CHP might add up to RUB 3bn to EBITDA (based on FY11 accounts), Our full-year 2012 EBITDA forecast including Murmanskaya CHP is RUB 13.7bn. Our View: Cost optimisation and dividend payout growth strategy is something that we want to see from Russian utilities. We therefore believe the right strategy in a

weaker macro environment will help TGK 1 to be better positioned in the sector. We have a Buy rating on the name and out 12Mo TP implies 36% upside from current prices.

SECTOR Retail, FMCG 62. Eldorado FY11 results: Solid margins, but losing market share; read-across for M.video RenCap July 11, 2012 Event: Interfax reported yesterday (10 July) that, according to a PPF Group statement, revenue, gross margin and EBITDA of Eldorado (Not Covered), Russia’s second-largest consumer electronics retailer by revenue (after M.video), reached RUB83bn, RUB24bn and RUB5bn in FY11, respectively. These results imply flat YoY revenue and just a 3% YoY EBITDA increase, while M.video’s revenue and EBITDA respectively rose 29% and 38% YoY for the comparable period. In terms of profitability, Eldorado’s results were solid, with a 28.7% gross margin and a 6.3% EBITDA margin (+20 bpts YoY), vs M.video’s respective margins of 26.1% and 5.6%. Action: The news is supportive for M.video stock, we believe. Rationale: Although at first glance Eldorado might seem more profitable, M.video’s growth and expansion pace is more impressive to us. Eldorado’s flat FY11 revenue growth indicates to us that M.video gained market share while Eldorado struggled to attract customers. In absolute terms, M.video surpassed Eldorado by 35% on revenue and 20% on EBITDA in FY11, while just a year ago (according to FY10 results), M.video lagged Eldorado by 10% on EBITDA. M.video’s strong management team, straightforward business model and strategy, and its ability to meet customers’ expectations have allowed the company to strengthen its market position. We welcome M.video’s approach of developing an online store and expanding 30-35 stores organically in 2012. According to Eldorado’s website, the company has been pursuing M&A opportunities and acquired the Beringov CE chain in 1Q12, which could prompt margin-softening on the back of integration costs. 63. Ideas4retail to triple network to 60 outlets by 2013 bne July 9, 2012 Russian children's and household goods retailer Ideas4retail Holding plans to boost its number of stores to 55-60 outlets by the end of 2012, Chairman of the board of directors Yevgeny Butman said, Prime reported. Of the total projected stores, 35-40 outlets are seen to operate under the Imaginarium brand, while six-eight are expected to run under the Mamas & Papas brand. "We are also planning to launch six or eight more brands in the short term," Butman said without disclosing the names. Butman did not provide details on the volume of investments in the expansion of the network, though he pointed out that the opening of a store costs about $250,000. 64. Magnit posts June trading update – net sales up 33.8% YoY in June and 32.5% YoY in 6mo12 VTB Capital July 11, 2012 News: Magnit has released its June trading update. Net sales grew 33.8% YoY to reach RUB 36,445mn. For 6mo12, the top line expanded 32.5% YoY to total RUB

207,467mn. As of the end of the month, the store base was reported at 5,722. Net openings totalled 109 in June and 413 in 6mo12. Our View: Net sales grew 33.8% YoY June, stronger than May’s 31.8% YoY due to higher food inflation (3.6% vs. 1.7%). We expect to see a similar trend for all Russian public food retailers. We have left our annual sales growth forecast unchanged and expect 2H12 to be stronger in terms of store openings and inflation. LFL sales in 2Q12 stood at 3.18%, down from 4.12% in 1Q12, mainly on weaker ticket growth. Ticket growth was higher for discounters, while traffic in hypermarkets was higher. Seasonality might be behind the latter, as more customers are heading to the southern regions. The company reported 109 openings for June, improving on the May results by 26 locations with growth mainly in discounters and cosmetics. For 6M12, the openings were slightly higher YoY; however, we see the material acceleration in cosmetics openings coming at the expense of discounters. This is in line with management’s rhetoric on lower discounter openings in 2012 YoY (800 vs 1,000) and the numbers therefore did not come as a surprise. We are more concerned about hypermarkets, as 6M12 openings were lower YoY on the same 50 annual guidance; however, we believe that the company will materially accelerate the footprint in 2H12. 65. O’Key Group: Sales growth decelerates QoQ UralSib July 11, 2012 Sales up 23.5% YoY. O’Key Group (OKEY LI – Sell) yesterday re- leased a negative 2Q12 trading update, showing QoQ deceleration in growth rates. Revenues grew 23.5% YoY to RUB27.2 bln (11.6% YoY to $880 mln), versus 29.4% YoY in 1Q12 due to a low compa- rable base (on the back of temporary closure of its St Petersburg hy- per markets following an accident). Revenue growth was driven by increasing LFL sales and rising contributions from stores opened in 2011 (five hypermarkets of the seven launched in 2011 were opened in November-December). Just two stores opened in 2Q12. O’Key launched just one hypermarket and one supermarket in 2Q12, bringing the total num- ber of stores to 75 (45 hypermarkets and 30 supermarkets). As a result, retail space increased 25.6% YoY and 2.8% QoQ to 368,000 sqm. LFL sales growth was 4% YoY, a more regular level than the 1Q12 peak of 12.1%, which was attributable to cus- tomers returning to O’Key stores after the hypermarket accident. The retailer saw a 1.2% YoY increase in LFL traffic and a 2.8% YoY increase in the average basket. It expects 7% LFL sales growth this year, retaining 1% traffic growth and basket appreciation in line with food inflation. Results should be negative for stock. Slower QoQ growth rates were generally expected after the strong 1Q12 results, though the company reiterated its target to increase sales 25-30% YoY this year. We expect some acceleration in coming quarters from higher food inflation and the maturing of recently opened stores, and we currently forecast 29% YoY sales growth this year. Dur- ing the conference call, O’Key said that it intends to open at least 14 hypermarkets this year (as well as three other stores in 3Q12 and eight others in 4Q12) versus the previously guided 17. Three store openings scheduled for December may be postponed to 2013. The company is lagging its plans, having opened just three hypermarkets in 1H12 versus the initially planned six. This may raise concerns about its ability to deliver on its

plans and retain high growth rates. The company has fallen short of our and its own forecasts thus we view the news as negative and reiterate our sell recommendation. 66. Retail: Krasnodar region struck by deadly floods Alfa Bank July 9, 2012 Russia’s worst flooding in decades ravaged several cities and residential areas in the Krasnodar region this weekend. The areas affected included Gelendzhik, Novorossiysk and Krymsk, a town with a population of 57,000 people and located some 87 kilometers (54 miles) from Krasnodar. The disaster took the lives of approximately 200 people, according to the latest information from officials. Still, there is no electricity, water supply or transportation access to the affected areas. Krasnodar region is one of Magnit’s key geographical areas of operations in southern Russia. The company has stores in 126 locations and three distribution centers located north of the affected regions: in Bataysk, Slavyansk-na-Kubani, and Kropotkin. According to the company, it closed one hypermarket in Krymsk and four convenience stores, out of which two have already been opened. In total, the company has more than 5,000 convenience stores and 98 hypermarkets across the country. We think that the incident is likely to put some pressure on 3Q12 sales (due to difficulties in logistics in the affected area) and margins (due to additional expenses for repayments, transportation, and inventory write-offs). We expect short-term pressure on the stock. However, we do not expect the natural disaster to jeopardize the financial strength of the company, its market position or operations. 67. Rosinter releases its June trading update: net sales up 2.1% YoY in June and 2.2% YoY in 1H12 VTB Capital July 11, 2012 News: Rosinter announced its June trading results. Net sales amounted to RUB 837mn, implying 2.1% YoY growth. In 1H12, the company reported RUB 4,944mn in net sales, adding 2.2% YoY. In June, LFL sales declined 0.5% YoY, reflecting the 2.7% YoY increase in ticket and 3.1% YoY drop in traffic. As of the end of the month, the company operates 379 outlets with 2 net openings in June. Our View: The top line expanded after the disappointing May results (-0.6% YoY) and April (-0.8% YoY). We view accelerating food inflation (3.6% YoY in June vs. 1.7% YoY in May and 1.2% YoY in April) as a prime factor supporting the material improvement in net sales as well as LFL ticket. Rosinter has changed its reporting policy with the further operating updates being published on a quarterly basis. Given no management guidance on FY12 growth and profitability, new policy further questions the company’s corporate governance practices. 68. Russian food retail: 2Q12 reporting season insights Alfa Bank July 9, 2012

Over the next two weeks, Russian food retailers are slated to report their 2Q12 operating results (see the schedule below). We expect continued market-leading top-line growth of 30% y/y from Magnit (O/W), pointedly stronger growth (6-8% y/y) than in 1Q12 albeit not yet confirmed turnaround dynamics from X5 (O/W), slightly less impressive q/q but overall decent (20-23% y/y) figures from O’Key (E/W), and a steady 20% y/y (pro forma) sales increase from Dixy (E/W). Softer inflation and customer traffic stimulus shaped 2Q12 sales: In 2Q12, the dynamics of Russian food retail were shaped by 1) lower food inflation (2.2% y/y) pressuring average ticket growth and 2) retailers’ attempts to stimulate customer traffic through promos and investments in prices. In our view, the market has already priced in Magnit’s efficiencies (which distinguished itself from competition by posting 2Q12 LFL in line with food inflation) and is now scrutinizing its 2H plans. By 2Q12, X5 had regrouped strategically and the restructured team launched its first marketing campaigns, driving sales growth by almost twofold compared to 1Q12. O’Key’s 2Q12 was rather uneventful, and, with only two hypermarkets opened, the dynamics of 2Q results will be challenged by a high LFL base (2Q11 LFL sales rose 7.2%). The payoff from Dixy’s investment in store modernization and rebranding (~160 stores in 2012E) will not be seen yet in the 2Q12 results. Average check to benefit from higher inflation in 2H12: We expect 2H12 food inflation to accelerate to ~65% y/y on the back of an increase in utility tariffs and lower expectations for the 2012 grain harvest. This is likely to provide additional support to food retailers’ top line growth over the period in addition to regular seasonal factors (holidays). Expecting mixed direction revisions of 2012 guidance: In our view, Magnit may revise its current 25-30% y/y sales growth guidance 12.0 toward the higher e1n0d.0 of the range, and we also expect some positive color on margins. F8o.0llowing two quarters of single-digit sales growth, X5’s 2012 sales outlook is likely to be capped at around 15% y/y 4.0 (assuming it makes no sizable acquisitions) despite expectedly 2.0 stronger trade spac0e.0 growth in 2H12. We stay mindful of O’Key’s hypermarket opening schedule and reiteration of its 1% traffic growth the ongoing store modernization, and we look forward to hearing target. Dixy’s sales growth will likely continue to feel pressure from management’s outlook for exec on and completion.

69. Russian prices of alcoholic beverages hiked on July 1 Bank of Finland 9 July 2012 The excise tax on alcoholic beverages is typically adjusted each year in January. This year, however, the hikes were split in two, with the bigger hike occurring on July 1. At the same time, the lowest permitted retail prices for alcoholic beverages were increased. Today, for example, the lowest price on a half-litre of vodka has been increased by 27 % to 125 rubles (about €3). The use of minimum allowed retail pricing of alcoholic beverages was introduced in 2010 as part of ef- forts to reduce sales of cheap illegal alcohol. Retail prices on alcoholic beverages have been raised regularly since then. The government seeks to reduce alcohol consumption overall,

and prices have continued to climb ever since 2010, when then-president Dmitri Medvedev focused attention on the social impacts of alcohol use. A change in the law on alcoholic beverages reclassifying beer as an alcoholic beverage entered into force at the start of this month. The law itself was passed by the Duma in summer 2011. The change means that restrictions on alco- hol sales also apply to beer. Now retailers are only allowed to sell beer in shops and licensed pubs and restaurants. Sales of beer from kiosks, the traditional beer vendor in Russia, is forbidden, and shop sales are limited to the hours of 8.00–23.00. It is prohibited to drink beer on the street, in parks or other public spaces, and beer advertising on radio, TV and public transport is forbidden. 70. Russian retailers: Weaker macro warrants downgrades Renaissance Capital July 10, 2012 After robust consumer spending in 1Q12 and 2Q12 (although the weaker rouble in 2Q12 was a negative factor for consumption growth), we expect a moderation in consumer spending in 2H12, as higher tariffs and the poorer 2012/2013 harvest should propel inflation while the consumer borrowing spree should subside. A weaker rouble also negatively affects consumption: our new 2012 average forecast is RUB32.5/$ (vs RUB29.1/$ previously) and we expect the domestic currency to weaken further against the dollar in 2013, to an average of RUB34.2/$. Our currency forecast downgrade resulted, on average, in a 13-19% reduction in our 2012E-2016E dollar based EBITDA forecasts for food retailers. Retailers’ eternal dilemma: Margins or growth In times of macro headwinds, weakening consumer confidence and intensifying competition, retailers are likely to adopt a strategy of investment in prices to attract consumers. Retailers may sacrifice margins to achieve traffic and revenue growth in 2012. In our view, Magnit has the strongest operating platform and scale to achieve benefits from improved purchasing terms and to transfer these to its customers. Higher food inflation in 2H12 may serve as a positive driver for retailers’ margins, if they manage to pass it on to consumers in full. More challenging macro in 2H12 vs 1H12. After robust consumer spending in 1Q12 and 2Q12 (although the weaker rouble in 2Q12 was a negative factor for consumption growth), we expect a moderation in consumer spending in 2H12, as higher tariffs and the poorer 2012/2013 harvest should propel inflation while the consumer borrowing spree should subside. A weaker rouble also negatively affects consumption: our new 2012 average forecast is RUB32.5/$ (vs RUB29.1/$ previously) and we expect the domestic currency to weaken further against the dollar in 2013, to an average of RUB34.2/$. Our currency forecast downgrade resulted, on average, in a 13-19% reduction in our 2012E-2016E dollar based EBITDA forecasts for food retailers. Retailers’ eternal dilemma: Margins or growth In times of macro headwinds, weakening consumer confidence and intensifying competition, retailers are likely to adopt a strategy of investment in prices to attract consumers. Retailers may sacrifice margins to achieve traffic and revenue growth in 2012. In our view, Magnit has the strongest operating platform and scale to achieve benefits from improved purchasing terms and to transfer these to its customers. Higher food inflation in 2H12 may serve as a positive driver for retailers’ margins, if they manage to pass it on to consumers in full. Magnit: Determined to deliver in line with or above own guidance. Given 32% YoY revenue growth in 5M12, we expect Magnit may upgrade its current 2012 revenue

growth guidance of 25-30% after the publication of its 1H12 results, and should maintain solid growth and margins thanks to its strong operating model and organic growth strategy. We remain long-term bulls on Magnit, but its current high multiples (2012E 29.5x P/E, 14.1x EV/EBITDA for GDRs) prompt us to downgrade our rating to HOLD (from Buy) and to reduce our TPs by 5-6% (for both local shares and GDRs), to $33.3/GDR and $136.9/share. X5: Challenged to deliver in line with own guidance. X5 may struggle to deliver even the bottom of its 15-20% revenue growth guidance range in 2012 due to several factors: lower food inflation in 1H12; competition; self cannibalisation; ongoing problems in the hypermarkets division; the lengthy process of aligning assortment with consumer demand (rather than with internal margin targets); and Kopeyka sales density ramping up more slowly due to lower food inflation and less robust consumer spending in 2H12. On our new forecasts, X5 has the weakest outlook for revenue and EBITDA growth in 2012. We downgrade X5 to HOLD (from Buy), reducing our TP by 21% to $26.9/share. O’Key: Maintaining high targets. The company is targeting 25-30% revenue growth, slightly below-inflation LfL growth and a 7.8-8.0% EBITDA margin in 2012, which we think are ambitious yet achievable targets. If planned hypermarket openings are executed, O’Key should deliver 2012 YoY revenue and EBITDA growth comparable with Magnit, which we think validates our BUY rating, although we reduce our TP by 13% to $10.3/share. Risks, in our view, are on the openings front. Dixy: New quality of retail operations. The company is focused on accelerating openings in 2012, having re-positioned its stores from soft-discounters to higher-priced (and higher-margin) convenience stores. Dixy’s biggest challenge this year, apart from new openings, is integrating Victoria, which may harm its margins. Beyond 2012, we consider Dixy a very attractively valued retailer that has significantly upgraded its retail operations, and we rate the stock BUY, although we reduce our TP by 18% to $13.2/share. Magnit: Determined to deliver in line with or above own guidance. Given 32% YoY revenue growth in 5M12, we expect Magnit may upgrade its current 2012 revenue growth guidance of 25-30% after the publication of its 1H12 results, and should maintain solid growth and margins thanks to its strong operating model and organic growth strategy. We remain long-term bulls on Magnit, but its current high multiples (2012E 29.5x P/E, 14.1x EV/EBITDA for GDRs) prompt us to downgrade our rating to HOLD (from Buy) and to reduce our TPs by 5-6% (for both local shares and GDRs), to $33.3/GDR and $136.9/share. X5: Challenged to deliver in line with own guidance. X5 may struggle to deliver even the bottom of its 15-20% revenue growth guidance range in 2012 due to several factors: lower food inflation in 1H12; competition; self cannibalisation; ongoing problems in the hypermarkets division; the lengthy process of aligning assortment with consumer demand (rather than with internal margin targets); and Kopeyka sales density ramping up more slowly due to lower food inflation and less robust consumer spending in 2H12. On our new forecasts, X5 has the weakest outlook for revenue and EBITDA growth in 2012. We downgrade X5 to HOLD (from Buy), reducing our TP by 21% to $26.9/share.

SECTOR Telecom, Internet

71. Sistema's core shareholder Vladimir Evtushenkov finds recommendations of the Indian telecom regulator unacceptable VTB Capital July 13, 2012 News: According to The Times of India, Vladimir Evtushenkov has written a harsh letter to Indian Prime Minister Manmohan Singh, saying that were the recommendations of local telecom regulator TRAI to be accepted (it suggested re-auctioning spectrums at unreasonable starting prices), that could force Sistema’s SSTL to exit the market. Our View: The tone of Evtushenkov’s letter might be viewed as a good sign: both equity and bondholders of Sistema would like to see the company capitulating, as the Indian mobile market is unlikely to allow SSTL to earn positive EBITDA in the foreseeable future (especially if the new multi-billion USD frequency payments are made). Therefore, the earlier the company stops burning cash, the better.

SECTOR Transport 72. NCSP’s cargo turnover rose 6.2% y-y in 1H12 Alfa Bank July 10, 2012 NCSP released its preliminary operating results for 1H12 yesterday. Total cargo turnover increased 6.2% y/y to 81.6mt. We view the results as NEUTRAL, as they are in line with our expectations and imply that cargo turnover has rebounded from its May trough. The growth rate in June reached 6.5% y/y vs. -4% y/y in May. However, the average daily turnover of around 440,000t is still below its April peak of 474,000t and is unlikely to catch up in July due to flooding in southern Russia. 73. Rado Antolovich was elected new CEO of NCSP Group at its EGM VTB Capital July 10, 2012 News: At NCSP Group’s extraordinary general meeting yesterday, shareholders elected Rado Antolovich as CEO. Antolovich joined the company in April 2011 as Deputy CEO for marketing and sales and has been acting CEO for the last three months. The new CEO has more than 30 years experience managing sea ports and terminals. Prior to NCSP, Antolovich held leading positions in major international terminals, shipping companies and logistics companies (eg, MOL, P&O Ports, CMA CGM, DP World). Our View: We see the news as positive for the Group. Antolovich, who was brought in by Summa and Transneft – current major shareholders – was one of the main creators of “NCSP Group Development Strategy until 2020” (published in March 2012), which aims to strengthen the Group’s position as the largest port-logistics company in Russia, and as one of the largest in the world, by increasing efficiency and capitalisation. We believe the new appointment will secure the implementation of said strategy and also ensure efficient day-to-day management of the Group. 74. Russian seaport throughput rose 5.4% y/y in 1H12

Alfa Bank July 12, 2012 Russian seaport cargo throughput increased 5.4% y/y in 1H12, according to the Association of Commercial Seaports. On a monthly basis, the growth rate in June reached 6.6% y/y, the second highest this year after February. In terms of product mix, oil volumes dropped 3.3% y/y. However, on a monthly basis, they continue to catch up with last year’s numbers, with June demonstrating growth of 4.5% y/y, up from -1.8% y/y in May. Oil products were slightly down y/y in June and have failed to improve over the last three months. In the dry bulk segment, growth was driven by ferrous metals (which rose 10.1% y/y) as well as grain and fertilizers, which continued to recover from their 1Q12 lows on stronger international demand. Container volumes increased 8.9% y/y and 2.8% m/m, which is a good sign given that the ruble depreciation in May could have put negative pressure on containerized imports. Nevertheless, there continues to be a slowdown from last year’s 20% growth and 1Q12’s 16.5% y/y figure, which is in line with our expectations. We view the news as NEUTRAL for NCSP and Global Ports. For 2H12 we expect the growth rate to slow down by around 2pp due to higher comps and a potentially smaller grain harvest in Russia this year. 75. TransContainer's 1H12 volumes growth exceeded analysts’ FY12 estimates, efficiency is still lower VTB Capital July 12, 2012 News: TransContainer has released its 1H12 operating results. Rail-based container transportation was up 10% YoY (7% QoQ) and revenue-generating containers volumes (excl. third-parties containers) rose 13% YoY (9% QoQ). Export volumes showed a high growth rate of 12% YoY (-3% QoQ), while import volumes increased 6% YoY (+34% QoQ). Domestic transportation decreased 0.3% YoY (9,000 TEUs less in 2Q12 than in 1Q12) due to network optimisation and intensified competition on routes. Terminal volumes were 12% lower YoY, mainly due to the 43% YoY contraction in medium-duty containers (MDC) as a result of the company disposing of its fleet. TransContainer showed lower efficiency in 1H12 as measured by the empty run ratio for containers, which increased 2pp to 38% YoY, although that was down on the 39% YoY in 1Q12 (36% in 2Q12). Our View: The 10% YoY growth in transportation volumes in 1H12 exceeded our FY12 forecast of 7%. TransContainer’s market share continues to fall (now at 50%, compared with 51% a year before) on the back of the company charging higher tariffs. The declining market share and worsening efficiency (shown by higher empty runs) might result in lower margins for the period. All in all, we expect TransContainer to show strong revenues and contracting margins in 1H12.

Although efficiency suffered for the period on a year to year comparison, the empty runs trend is positive (36% in 2Q12, from 39% in 1Q12), which is a good sign. However, the company will need to continue this positive trend in 2H12 if it is to get close to last year’s lower numbers.

SECTOR Agriculture 76. Agro-Belogorye to launch 1st of five pig farms in July bne July 13, 2012 Russian agricultural group Agro-Belogorye plans to put into operation the first of five projected pig complexes, worth a total of RUB3.6bn, in late July in the Belgorod Region, a group representative told RIA Novosti. The representative said that all the construction works on site were completed. The facility is to launch sales in September. Each of the projected complexes is to have a capacity exceeding 6,000 tonnes of pork in live weight annually. The five facilities are planned to increase the group's production capacity by 30% before 2013. 77. Heavy rains in Krasnodar region could affect grain harvest Alfa Bank July 9, 2012 Heavy rainfall in the Krasnodar region last week might damage the grain harvest in the region, where the harvest campaign is currently underway. Last year the Krasnodar region provided 9mt of grain (~10% of the total grain harvest in Russia). At present, we do not know the consequences of the rainfall and the extent to which the field area was damaged, but we think the harvest might be at risk given the reported damage in the region. A smaller grain harvest in Russia might put upward pressure on grain prices and feedstock cost for meat producers. We think the news is slightly NEGATIVE for Cherkizovo and NEUTRAL for Rusagro (as Rusagro is self- sufficient in grain). 78. Rusagro plans to build additional pork farm in Tambov Alfa Bank July 11, 2012 Yesterday, Rusagro announced it will build an eighth pork farm at its Tambov complex. Construction is planned to start in 4Q12. The farm’s capacity is 16.2kt, which adds 8% to Rusagro’s estimated 2014 capacity. The farm is expected to reach full capacity in 2014. We think the news is NEUTRAL at this stage, as 1) the addition to total revenue will be insignificant (~2% in 2014), 2) we do not yet know the impact of WTO membership on the domestic pork price and 3) the company has not yet finalized the technical documents and has not announced capex. 79. Russia Must Keep Zero Tax on Farmers - Deputy PM RIA Novosti 16 July 2012 Russia should maintain its zero-rate profit tax for Russian farmers indefinitely, Deputy Prime Minister Arkady Dvorkovich said on Friday.

"The zero tax on profit should be imposed with no time limits," Dvorkovich told a government meeting. Dvorkovich said the government had submitted a package of drafts to the State Duma, Russia's lower house of parliament, with an offer to extend the zero-rate tax until the end of 2016. The Russian government has approved a 2.28 trillion ruble ($69.7 billion) state program for agriculture development in 2013-2020, in an attempt to support domestic agriculture, after the country's accession to the World Trade Organization. Previously the government had planned to end the zero-rate profit tax for farmers from 2013 when it was to be set at 18 percent, rising to 20 percent by 2016. 80. Siberian Agrarian Group launches RUB3bn pig complex in Buryatia bne July 12, 2012 Russian agricultural holding Siberian Agrarian Group has put into operation a RUB3bn pig complex in the constituent republic of Buryatia, the largest one in East Siberia, the holding's General Director Andrei Tyutyushev told RIA Novosti. The complex is planned to reach a projected capacity of 12,900 tonnes of meat in live weight by July 2013. The volume of meat produced by the facility covers half of Buryatia's demand in meat. The payback period of the complex is eight years. 81. USDA publishes July world agricultural supply/demand estimates, reducing wheat, soy and corn supply estimates Alfa Bank July 12, 2012 The global wheat supply estimate for 2012/13 was reduced 5.1mt vs. last month due to an expected lower harvest in Russia, Kazakhstan, and China. Russian wheat production was lowered 4mt on the back of lower yields for both winter and spring wheat. Global corn production was lowered 45mt due to a continued drought in the Midwestern US. Due to the tighter corn supply-demand balance during recent years, the corn stock-to-use ratio has stayed at 15% vs. the 18% 11Y average. The global oilseed harvest is projected at 466mt, a 5.1mt reduction vs. last month, due to lower soybean, cottonseed and rapeseed harvest estimates. The latest update shows tighter supplies for wheat, corn and soy, which should support these soft commodity prices in 2H12. We also expect fertilizer producers to be strong on the back of high soft commodity prices; however, we expect the effect to be limited by the possible lower fertilizer application required in the next ag season, as due to lower crop yields some nutrients could remain in the soil from this year’s applications.

SECTOR Automotive 82. Russia's 1H12 car and LCV sales robust, despite slowdown VTB Capital July 10, 2012 News: Russia's car and LCV sales increased 10% YoY in June to 272,125 units, while 1H12 sales were up 14% to over 1.4mn vehicles, the Association of European Businesses reported.

Our View: We expect to see a further slowdown in 2H12 on the back of the high-base effect and looming economic uncertainty, but still expect a solid positive result for the full year. We highlight that Sollers strongly outperformed the market in 1H12 with a 28% YoY increase in sales, driven by the strong performance of SsangYong assembly (up 63% YoY in 1H12) as well as UAZ (+15%). Meanwhile, Ford sales (carried out through a 50:50 JV with Sollers) decreased 1% in June, but remain strong YTD (+18%). We continue to see Sollers as undervalued and believe that it has the best chance among the Russian automotive stocks to outperform once the overall market situation stabilises. GAZ's LCV sales were down 5% YoY in June and have decreased 1% YTD. This performance is broadly in line with our forecasts of flat LCV sales this year. We still believe that GAZ, which delivered a strong financial turnaround and profitability improvement in 2010-11, has significant fundamental upside; however, the stock's low liquidity and the overall market sentiment are likely to prevent this potential from being unlocked in the near future. AvtoVAZ sales were down 14% in 1H12 and we are reiterating our negative view on the stock. 83. Russian automotives: playing in the major leagues Troika July 12, 2012 The prosperity of Russia's automotive industry is closely linked to the macroeconomic environment, which currently looks rather resilient to external shocks. While real GDP should grow at a solid 4% in 2012, Russian car production and sales volumes expanded at impressive double-digit rates of 23% and 15%, respectively, in 1H12. Russian automakers are better prepared for a financial crisis than they were in 2009: inventories are at manageable levels, debt is low and has been restructured, and costs have been optimized. WTO entry is negative for the sector, as import duties will be reduced, but the government plans to use indirect measures to protect domestic manufacturers. In this light, Russian carmakers (Sollers and GAZ Group) look attractively valued, but low liquidity and high beta make them more of a long-term investment. Russian car industry called up to the major leagues. In 2011, Russia was the fifth largest global car market by sales and the 10th by production volumes. Rapid expansion of assembling capacities should boost production from 1.7 mln vehicles last year to 2.7 mln vehicles in 2015 (12.6% CAGR), moving the country to eighth place globally, after Brazil and the US. Car sales in Russia continue to perform well, and there are no signs of a crisis, despite global economic turbulence. In 1H12, the market expanded 14.6% y-o-y, and we forecast 10-15% growth in 2012 to 2.9 mln vehicles (the highest level since the 2008 peak), generally driven by increased disposable income. WTO a moderate threat. Following WTO accession, import tariffs will drop from 30-35% to 10-25% depending on the type of car and displacement. Producers of passenger cars will be the most protected, as import tariffs will drop to just 25% this year, and will then gradually decline to 15% by 2018. Import duties on commercial

vehicles will be reduced to a greater extent and in one fell swoop to 10-15%. However, the Russian government is looking to take a number of indirect supportive measures to protect domestic producers, including introducing recycling fees, by year end. Sollers or GAZ Group - difficult choice. We cut our target price for Sollers to $25.10 per share and raise our target price for GAZ Group to $70.05 per share, reiterating our BUY recommendations on both stocks. It is difficult to choose a winner between them, as both have strengths and weaknesses. Both trade at deep discounts to global averages on multiples, but both are illiquid and have high beta, making them more suitable for long-term investment. 84. Sollers releases healthy 1H12 results RenCap July 10, 2012 Net-net, the results are strong and positive for the automaker, in our view. So far YtD auto sales remain robust and Sollers continues to outperform the market (overall market sales rose 14% YoY in 1H12) and demonstrate solid growth across segments, with no sign of a downturn. - The automaker's total sales were up 23% YoY in May (29% in 5M12) on a pro-forma basis (excluding Fiat sales, which have been discontinued this year) and reached 46,846 units. - UAZ sales increased by a robust 14% YoY in 1H12 (in line with 5M12). Even though growth in the segment is healthy YtD, we welcome Sollers' intentions to find a strong foreign JV partner for UAZ this year to develop it further, given that UAZ is a niche brand with restricted growth opportunities. - Growth of SsangYong sales decelerated in June, but continued to be strong at 63% YoY in 1H12 (vs 70% YoY in 5M12). - Isuzu sales were not as strong as other segments, although the company has signed an MoU with Isuzu regarding a relaunch of Isuzu truck production this summer, which we expect will breathe some life into the segment going forward. - According to AEB data, June sales of Ford-Sollers JV were down by 1% YoY (after 11% YoY in April). We think this is not a sign of any negative trend, but rather a result of abnormally high sales in June 2011, which were 30% higher than the 2011 monthly average (some uphike in June sales was also recorded by several other non- Japanese brands after an earthquake and nuclear accident in Japan). Nevertheless, in 1H12 the JV demonstrated good dynamics (up 18% YoY) and we believe it has solid growth prospects in Russia. 85. VW sales in Russia soar 78% RIA Novosti July 9, 2012 German auto giant Volkswagen saw first half year sales of its cars in Russia skyrocket 78 percent year-on-year to 81,050 vehicles, the company said on Friday.

The company sold 17,700 cars in June 2012, a 41 percent increase on the same period last year. Sales of Volkswagen Polo sedans rose 54 percent in January-June 2012 to 33,473 cars, whilst sales of Volkswagen Tiguan off-roaders jumped 124 percent to 16,234. In March, Volkswagen models won several nominations in Russia's annual national "Car of the Year in Russia 2012" awards. The Volkswagen Touareg was ranked the best in the medium off-roader class. The Volkswagen Amarok was chosen as the best pickup and the Volkswagen Multivan was voted top in the minivan class.

SECTOR Aviation, shipbuilding and defence 86. Aeroflot 5M12 and May results – deceleration as expected RenCap July 10, 2012 Event: Aeroflot has released 5M12 stats. Action: Net-net, we think the data hold no surprise for the market, as we have already seen the key figures for May in a data release from the Federal Air Transport Agency (FAVT). A growth deceleration is fairly visible in the May figures, especially on international routes. This was overall to be expected, due to the absence of the low base effect that was seen in 4M12 (in early 2011 flights to MENA were restricted). Rationale: The economic outlook and a potential increase in competitive pressure are what concern us regarding Aeroflot’s performance for the rest of 2012. There is a possibility, however, that Aeroflot could achieve second-carrier status for its subsidiaries on international routes, and hence a chance that liberalisation-driven competition will not be as fierce as it could be. - Aeroflot Russian Airlines’ posted 13% YoY growth in revenue passenger-kilometres (RPK) in May, after 21% YoY growth in April and March. Passenger load factors (PLF) declined by 4 ppts YoY in May. The slowdown in RPK growth was mainly due to international routes (with RPK up 11% YoY in May, vs 21% YoY in April), whereas domestic destinations continued to perform robustly (+19% YoY in May, +22% YoY in April). YtD RPK was up 20% YoY in 5M12. - YoY pro-forma growth of Aeroflot Group (adjusted for the acquisition of Rosavia assets and the Nordavia sale) slowed to 14% YoY in May, in line with market growth. The deceleration in growth was driven by declining PLF (down 4.3 ppts YoY), with lower YoY growth at subsidiaries. YtD pro-forma growth reached 20% YoY, ahead of our 11% YoY estimate for FY12. 87. Armenia cancels Superjet order bne 10 July 2012 In the latest blow to Russia’s struggling bid to launch a new aviation giant Armenia’s national carrier Armavia cancelled an order for a second Sukhoi Superjet 100, reports newswires.

"Armenia is not going to buy it," airline spokeswoman Nana Avetisova told Interfax on Monday. The airline didn't give a reason, but so far is one of the few airlines in the world to actually have taken delivery of one of the new planes. Sukhoi have said it has orders for about 170 jets, but bne counts actual deliveries of the plane as less than 10. Part of the reason may be worries over safety following the crash of a Superjet at the Indonesian airshow in May, killing all 45 people on board. Armavia took delivery of Its first plane in April and was due to receive a second one between June 20 and July 30 this year. The Russian national carrier Aeroflot is the only other airline in the world to have taken delivery of the planes, buying eight, but immediately sending four back for modification. Russian media have reported that Aeroflot's fleet has been plagued by technical difficulties. 88. Interjet Takes Up Option For Sukhoi Superjets RIA Novosti 11 July 2012 Mexico's Interjet airline is to take up an option to buy five more Sukhoi Superjet 100 airliners in addition to the 15 planes previously ordered, Interjet Board Chairman Miguel Alem?n Velasco said at the Farnborough airshow in Britain on Tuesday. “We were initially planning to purchase 15 SSJs, but now we have decided to include the option of five more aircraft in the contract,” Velasco told a news conference at the 48th International Airshow in Britain’s Farnborough. In January, SuperJet International signed a $650 million contract to supply Interjet with 15 SSJ-100s. The Superjet 100 is a short-medium haul passenger aircraft developed by Sukhoi in cooperation with U.S. and European aviation corporations, including Boeing, Snecma, Thales, Messier Dowty, Liebherr Aerospace and Honeywell. The aircraft is capable of carrying up to 100 passengers for up to 4,500 kilometers. Sukhoi has received over 200 firm orders for Superjet 100 airliners so far. 89. Izhmash to produce Airsoft Kalashnikov rifles RIA Novosti July 13, 2012 Russian small-arms maker Izhmash plans to mass produce an airsoft version of its famous Kalashnikov assault rifle for basic military training and fans of strike ball, the company announced on Thursday. Airsoft is a game in which participants eliminate opponents by hitting each other with spherical non-metallic pellets shot with replica firearms.

“The Yunker-5 gas-cylinder air gun is a product, with a design, weight and overall dimensions following that of the Kalashnikov assault rifle with a folded buttstock,” the company said in a statement. “The air gun is intended for training and sport shooting with 6-mm plastic balls powered by compressed gas in a cylinder,” the company said. “The air gun can also be used for strike ball.” Testing of the airsoft version of Kalashnikov AK-74M has been completed. The company hopes the new gun will appeal to fans of strikeball and members of Russia's paramilitary youth organization, the Voluntary Association for Assistance to Army, Air Force and Navy (DOSAAF). According to Russian legislation, air guns can be acquired without a license and are not subject to registration. 90. Russia and Italy to jointly develop patrol aircraft RIA Novosti July 12, 2012 Russia and Italy are to jointly build and modernize maritime patrol aircraft, after signing a cooperation agreement at the Farnborough Air Show in Britain. The deal was signed by Alexander Mikheyev, deputy chief of Russian arms corporation Rosoboronexport and the heads of Finmeccanica’s Selex, Galileo, and Selex Elsag companies. The new plane will be developed on the basis of Russian-made unspecified aircraft, but fitted with Italian-made navigation, communications and IFF systems and weapons, including lightweight torpedoes from WASS, a Finmeccanica group company. “This is an agreement on the promotion of products for third countries. Italian equipment will be installed on Russian-made patrol and special-purpose aircraft,” Mikheyev said. “It took three years to prepare the agreement. We hope that this product will be adapted to enterprises affiliated with the Rostekhnologii state corporation,” he said, adding that the document also envisions future upgrades of aircraft earlier supplied to foreign customers. It may take up to two years to decide which aircraft could be used as a base platform for the new patrol plane, Mikheyev said. Finmeccanica hopes to strike a deal to modernize Russia’s Beriev Be-200 amphibian aircraft, Selex Galileo’s Executive Director Fabrizio Giuliani said. “If we get the chance, it would be a unique aircraft. We are discussing modern navigation equipment in the plane,” he said. The Italians are carrying out market research to study demand for the aircraft, he said.

“We hope that in ten years this sector will be one of the fastest developing in aviation. Today it’s hard to gauge the market for these aircraft, but I think there are great possibilities,” he added. Mikheyev said most of the aircraft would remain in its original specification. “We are just talking about navigation systems,” he said. The Be-200 is the world’s only production jet-powered amphibian aircraft. The main variant is a firefighting air-tanker aircraft, which can also be adapted for passenger or cargo transport, or search and rescue operations. 91. Russia, AugustaWestland to jointly build light helicopter RIA Novosti July 10, 2012 Russian Helicopters, which designs and manufactures civil and military rotorcraft, will jointly produce a new light helicopter with Europe's AugustaWestland after the two companies sign an agreement at Britain's Farnborough air show this week, Russian Helicopters CEO Dmitry Petrov said on Monday. "We will design the helicopter together with AugustaWestland," Petrov told a news conference, adding that the first model of the new civil helicopter would be made in 2015. A working group for design of the new helicopter, which will have a budget of around 100 million euros, will start work soon, Petrov added. The design of the new light helicopter does not mean the company will stop production of other light helicopters such as the Kamov Ka-226 or Mi-34, Russian Helicopters spokesman Roman Kirillov told RIA Novosti. "The start of new projects does not mean they will replace current ones. We are widening our model range by the international projects such as we have with AugustaWestland," Kirillov said. He did not disclose the new machine's name or its weight class. The two companies signed a 20 million euro joint venture deal in June 2011 to assemble AW139 medium twin engine helicopters in Russia. AgustaWestland's 4.5 ton-class AW169 made its first appearance at Farnborough on Monday. Light helicopters are the fastest-growing segment of the Russian civil helicopter market, with strong demand from oil companies, private users and air transport companies. Given URL is not allowed by the Application configuration.: One or more of the given URLs is not allowed by the App's settings. It must match the Website URL or Canvas URL, or the domain must be a subdomain of one of the App's domains. 92. Russia’s Changing Aircraft Export Strategy RIA Novosti

10 July 2012 Major international air shows are always called on to market aircraft and related equipment. The Farnborough International Airshow, due to open on July 9, 2012, is no exception. So this might be a good time to assess Russia’s changing approaches towards aircraft exports. As a rule, the Russian aircraft industry exports a lot of military equipment. This year, the Russian delegation will, as usual, display warplanes. But Russia will also present civilian aircraft, including the Sukhoi Superjet 100 and the MS-21 airliners. These airplanes and their potential “heirs” will find a place in Russian aircraft exports if the United Aircraft Corporation really diversifies its product range. Tactical aviation: the mainstay of United Aircraft Corporation As history has willed, Russian aircraft exports began to focus on tactical aviation sales in 1991. Actually, tactical aviation exports revolve around the Sukhoi Aviation Holding Company’s T-10 Flanker family of combat aircraft. This family includes the Su-27; all modified versions of the Su-30 fighter; the Su-34 and Su-35. Although the rather unusual Su-34 fighter-bomber was never exported, hundreds of other Sukhoi fighters have been exported. At the same time, the new Su-35 has not yet been delivered abroad. The long-term situation will change only slightly. Demand for the T-10 platform, which is the ultimate achievement in the fourth-generation of aircraft technology, will gradually subside. It appears that the new Su-35 fighter, which has impressive potential, will replace some of the Su-30 warplanes, which are steadily being deactivated. The T-50 platform, Russia’s fifth-generation fighter called the Advanced Front-Line Aviation Complex (PAK FA) and the Fifth Generation Fighter Aircraft (FGFA) being developed for the Indian Air Force, already loom on the horizon. Obviously the FGFA will become the main export version of the “general-purpose” T-50. Even without a major domestic contract, Sukhoi’s plants will have enough orders to keep them busy. For instance, the Irkutsk Aviation Plant manufactures Su-30MKI fighters and the Yakovlev Yak-130 Mitten combat trainer, which has impressive export potential. The fate of the Russian Aircraft Corporation MiG, another major warplane manufacturer, seems more bleak as regards exports. The numerous industrial facilities and specialists at MiG, the pampered child of the Soviet defense industry, has fallen behind Sukhoi and Irkut who assemble the far more popular Sukhoi warplanes. Technically, a large contract could hurt the MiG Corporation rather than help it, because MiG has lacked the export earnings to invest in modernization projects. Some analysts claim that, had the MiG-35 Fulcrum-F fighter won the mammoth Indian Air Force tender for 126 fighters, they would have trouble meeting their obligation. In the long run, France’s Dassault Rafale fighter won the tender.

MiG currently has a limited number of contracts, mostly for the MiG-29K Fulcrum-D carrier-borne fighters. These planes have been virtually overhauled in line with Indian requirements and are also currently purchased by Russia’s naval aviation units. In addition, MiG is upgrading the Indian Air Force’s MiG-29B fighters, which were delivered during the Soviet era, and which are now being rebuilt as the MiG-29UPG. Attempts to sell the MiG-29K’s ground-based versions, including the MiG-29M/M2 and the MiG-35, have so far failed to achieve much success. Although the MiG-29M is scheduled for delivery to Syria, the current instability there creates questions about the contract’s implementation. And the MiG Design Bureau has so far failed to develop any entirely new warplanes. The MiG Corporation sees stage-by-stage and evolutionary warplane production expansion and exports as a healthy foundation for modernizing its entire production complex. At the same time, Sukhoi, which has already moved beyond this stage, now plans to diversify its product range, primarily through expanded civilian aircraft manufacture. Diversification through demobilization The Russian aircraft industry had effectively consolidated its assets throughout the early 2000s and focused on developing new civilian airliners. The first results of this effort have only been evident in recent years, although the initial prospects seemed to be much more promising. The 2011 International Aviation and Space Show (MAKS-2011) in Zhukovsky outside Moscow featured a multitude of civilian airplanes. For the first time, it seemed that contracts for new generations of passenger airliners turned out to be more important than warplane contracts. For instance, the MAKS-2011 show featured the Sukhoi Superjet 100 airliner, which had just taken to the skies at that point. Developed by the Sukhoi, the SSJ-100 is manufactured in Komsomolsk-on-Amur. The Yakovlev MS-21 airliner, which has not flown yet, was also displayed at Zhukovsky. There are plans to assemble this plane at the Irkut Corporation’s Irkutsk Aviation Plant. Contracts for the MS-21 airliner worth about $10 billion have already been signed. This is the most interesting area of potential aircraft exports, but it is also fraught with the greatest development problems. First, the civilian aviation market is much more developed than the rather tentative military aircraft market. This means that standard bilateral agreements will not result in the necessary sales volumes, and that the Russian industry will have to fight it out for net profits. Second, the civilian and military segments of Russian manufacturers are completely different. Russia assembles large batches of absolutely competitive warplanes boasting quite a few attractive features and unusual engineering solutions. But Russia’s civilian aircraft sector lags behind Boeing and Airbus, the two main global airliner manufacturers. The market is crowded, and the understandable distrust for new planes will hinder Russian airliner sales to some extent. It should be noted, though, that Brazil’s Embraer has carved out a niche in the regional airliner

market virtually from scratch, and that it has become a global player in that segment. The United Aircraft Corporation will have to stop focusing on warplane exports and prioritize the global airliner market instead. This will make it possible to effectively diversify production. The sale of the SSJ-100 to Russia’s state-owned airlines will not rectify the situation. The Russian civilian aircraft sector can meet state-financed domestic demand, but substantial and sustained exports based on market competitiveness are the only way to keep the civilian aircraft sector flying. Survival of the fittest The United Aircraft Corporation still needs to attain a balanced sales mix, like that in the helicopter industry. Right now domestic helicopter deliveries and exports are divided evenly. The share of military and civilian helicopters is also just about the same. This was accomplished by effectively taking advantage of Soviet-era technology. For example, the Mil Mi-8/Mi-17 Hip helicopter family comprises multi-role and dual-purpose versions. And the delivery of specialized combat equipment, including the Mi-28N or the Kamov Ka-52 attack helicopters, is ensured by the state’s desire to keep the helicopter fleet up to date. A consistent number of contracts have kept the plants busy and technically current allowing production to keep pace with market demand. However, Russian Helicopters, the successful national helicopter developer and manufacturer, faces an uncertain future which is its biggest problem. The corporation should take advantage of the strong demand for its entire product range, and it should invest in new research projects. As in chess, the player with the advantage must attack for fear of losing it. In this sense, the helicopter industry objectives are quite different from those of the civilian and military aircraft sectors. Helicopter production has already been streamlined or is being streamlined, and specific markets have been won. However, the next generation of product must still be developed and promoted. Unlike civilian aircraft manufacturers and virtually all warplane-makers, with the exception of Sukhoi and Irkut, Russian Helicopters seems to have the potential to experiment with new products. The opinions expressed in this article are the author’s and do not necessarily represent those of RIA Novosti 93. UAC’s order portfolio hits 570 RIA Novosti July 10, 2012 The United Aircraft Corporation has signed contracts for 270 warplanes and has received 300 orders for civilian airplanes, UAC President Mikhail Pogosyan said on Monday."Civilian aircraft include mainly the Sukhoi Superjet 100, the An-148 and the MS-21," he said. He confirmed that the Sukhoi T-50 fifth generation fighter will come online in test mode in 2013.

Pogosyan previously said a fourth Sukhoi T-50 stealth fighter will be put into UAC’s test and development program later this year. The first production standard T-50 will join the Russian Air Force by 2015. The military plans to acquire 60 of the fifth-generation fighters. The T-50, also known as project PAK-FA, first took off on January 29, 2011, and was first publicly displayed at the Moscow Air Show in August of last year. India will also acquire an advanced fighter aircraft based on the T-50. 94. UTair orders 20 A321 airliners RIA Novosti July 13, 2012 UTair, Russia's fourth-largest airline, signed a firm order contract for 20 Airbus A321 airliners at the Farnborough Air Show in Britain on Thursday. No value was given for the deal, but in recent A321 sales to other customers the aircraft has cost around $90 million a copy, making this deal potentially worth $1.8 billion. Delivery of the new airliners will begin in 2013. ?The UTair order is the largest for the type from a carrier in the region and the first time UTair has ordered Airbus aircraft. ”Today’s signature of the contract on the delivery of new A321s demonstrates our firm intentions to continue to grow and strengthen our positions among leading Russian carriers," said UTair CEO Andrey Martirosov. "The chosen A321 aircraft fully meets the requirements of our fleet modernization programme, aimed at providing reliable operations, improving the level of service and developing the network." The new aircraft will be used on domestic and international routes. UTair has traditionally used the rival Boeing 737-400 and -800 airliners, as well as older Soviet-era aircraft. UTair operates over 200 aircraft, mostly helicopters, and flies to 61 Russian and 39 foreign destinations. Its main operating hubs are Surgut (Tyumen Region) and Moscow Vnukovo. The A321, which entered service in 1994, can carry 185 passengers in two-class configuration or 220 passengers in single-class layout for charter and budget airlines, with a range of 5,600 km.

SECTOR Engineering 95. Power Machines to supply equipment for Vietnamese power plant bne July 12, 2012 Russian power engineering company Power Machines has signed a contract to produce and supply key equipment for Vietnam's Nhon Trach power plant, Power Machines said. Under the contract, Power Machines is expected to supply six steam turbines and six turbine generators to the plant. Supplies are expected to start in July-December 2014.

SECTOR Infrastructure, Construction & Real Estate

96. LSR announces large-scale acquisition in the Moscow region for a total of 350,000 sqm VTB Capital July 10, 2012 News: LSR has announced the acquisition of a 45 ha land plot in Domodedovo (Moscow region) from Coalco, a real estate company owned by Vasily Anisimov. The land is intended for a 350,000 sqm of mass-market residential space. This is the second stage of the Novoe Domodedovo project; the company acquired the first part in February 2011. LSR will have a 78.5% share in the project with the remaining held by Coalco. Construction is scheduled to begin in 1Q13 and is expected to be completed by 4Q17. The company is set to build around 7,000 apartments in the second stage and complete the over 6,000 apartments started in the first stage by 1Q15. The project also involves the construction of social infrastructure, including four schools, six kindergartens, sports grounds, recreation areas, multi-level parking and commercial premises. Our View: We are positive on the transaction as well as the strategy to gain a broader market share in the Moscow Metropolitan Area, which now amounts to 30% of the company’s total portfolio from the 24.5% previously. Not only is the project conveniently located near Moscow with good access to public transport and a high concentration of enterprises in the region, but also the settlement of the deal does not require any upfront cash outflows from LSR and will be settled with Coalco later on. We forecast an EBITDA margin at a comparable level to LSR’s development projects, which had a blended profitability of about 19% of 2011 EBITDA.

SECTOR Chemicals, Fertliser 97. Acron extends public offer for Poland's Azoty Tarnow until July 16 UralSib July 9, 2012 Acron announced on Friday that it had extended for a third time its offer to acquire 66% of Azoty Tarnow, one of Poland's leading fertilizer producers, by another week until July 16. The offer price is PLN36.0 ($10.6) per share, implying a 3% discount to the July 6 closing price and a 4% premium to the six-month weighted-average price. The 50-66% stake should cost Acron $340-450 mln, valuing the company at $679 mln. The consensus estimate for 2012 EBITDA stands at $221 mln (11% EBITDA margin), translating into an acquisition 2012E EV/EBITDA of 3.7. Troika's view: There appears to be strong opposition from Azoty Tarnow's management, which has called an EGM for July 14 to convince shareholders to take measures against the Russian hostile bidder. Negotiations with the state (holding 32%) and key institutional investors are ongoing, but it seems that the question has become highly politicized and the price is not the only stumbling block.

Given the current situation on the markets, the company's already high leverage ($1.1 bln in net debt as of end 1Q12) and significant capex requirements related to mining projects, we would prefer that Acron withdraw its bid and focus on its business in Russia. 98. Acron: Dmitry Khabrat to replace Dmitry Golubkov as Managing Board member RenCap July 11, 2012 Event: Yesterday (10 July), Acron (AKRN) announced that its vice-president, Dmitry Golubkov, has resigned from his position and thus has resigned from Acron’s Managing Board as well. Head of Foreign Trade Division Dmitry Khabrat has been elected to replace Golubkov on the board. Khabrat has a mechanical engineering degree from the Novgorod Polytechnic Institute (1993), and degrees in economics and chemical enterprise management from the St Petersburg State Academy of Engineering and Economics (1998). He started his career with Acron in 1993, and was appointed head of Acron’s Foreign Trade Division as well as elected to the Dorogobuzh BoD in 2010. Khabrat became a member of Acron's BoD in 2011. Action: The news is neutral for Acron, in our view. Rationale: Khabrat has worked with Golubkov in the past, and we expect that he will continue with Acron’s current sales policy.

SECTOR Pharmaceutical 99. Investment in Kaluga pharmaceutical hub may amount to $1bn bne 10 July, 2012 The Kaluga government plans to establish a pharmaceutical manufacturing hub in the region that could net $1bn of investment by local and international companies, Governor Anatoly Artamonov said, wires reported. The hub will start with six residents - Denmark's Novo Nordisk, British-Swedish AstraZeneca, Germany's Stada and Italy's Menarini, as well as domestic drugmakers Nearmedic Plus and Sphera-Pharm, that already have a presence in the region, having jointly invested more than $500m in their production facilities, Artamonov said. The regional government is in talks with another four potential investors to join the hub. This could double existing investment by 2020, he said. The overall investment by foreign companies in Russia's pharmaceutical industry over the last three years has exceeded ˇ800m, said Sergei Tsyb, head of the Industry and Trade Ministry's department for chemical engineering and bioengineering technologies. Russian pharmaceutical market grew 17% last year and is expected to maintain this growth rate in 2012. 100. Pharmstandard seeking to capture insulin market share via agreement with French Sanofi Alfa Bank July 11, 2012 According to Vedomosti, Pharmstandard has filed an application with the Federal Antimonopoly Service regarding its draft agreement with the French company Sanofi for the distribution of the latter’s nine insulin medications in Russia.

The insulin market in Russia totaled RUB10.1bn in 2011 and is currently divided between three major players: Novo Nordisk (40%), Sanofi (32%) and Eli Lilly (21%). According to DSM Group estimates, the potential market size of seven of the nine medications that Pharmstandard is planning to distribute make up around 30% of the insulin market. In 2011, sales of Pharmstandard’s own insulin product, Biosulin, stood at RUB409m (+13% y/y). In our view, this news underpins our view that Pharmstandard is attempting to strengthen its market positions in the prescription medication segment and expand its collaboration with Big Pharma names, which could enhance the company’s expertise. If the company proceeds with this agreement, we consider this development POSITIVE for the name.

GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 101. Duma bans Internet alcohol ads RIA Novosti July 9, 2012 Russia's lower chamber of parliament, the Duma, approved a law on Friday prohibiting advertising alcohol drinks in the Russian segment of the Internet and print media. The law will come in force from January 1, 2013, as print media have annual contracts with advertisers and should have the opportunity to fulfil the terms of their contracts, Duma member Igor Rudensky said. Experts and market participants polled by Prime news agency said it would be hard to enforce the ban and it might result in an outflow of advertisers to foreign websites. 102. Putin: Presidential energy commission not to render government functions bne July 11, 2012 The activities of the Russian presidential commission for the fuel and energy industry and environmental security will not overlap with those of the government, which will still have the final say on wide range of issues, Vladimir Putin said, RIA Novosti reported. “I would like to mention straight away: the commission must not and will not render the operational tasks of the government. The government has its own prerogatives stipulated in the law, and certainly they must and will be followed,” Putin said, cited by RIA Novosti. The commission presided by Putin himself was created in mid-June. Igor Sechin, former deputy prime minister in charge of energy issues and current CEO of the country’s top oil firm Rosneft, was appointed as the executive secretary of the commission.

Kommersant business daily reported in early July that the government, headed by Prime Minister Dmitry Medvedev, had been resisting Sechin’s attempts to maintain control over the fuel and energy complex beyond Rosneft. Government commissions on the fuel and energy complex and the electric power industry, chaired by Deputy Prime Minister Arkady Dvorkovich, are seeking to keep their powers, the daily said. The government has considerably reduced Sechin’s powers as the secretary of the presidential commission in the final text of the presidential decree on the creation of the commission, the daily reported. 103. Russian aerospace industry reforms: RKK Energia may become part of Russian Space Corporation RenCap July 11, 2012 Event: Yesterday (10 July), Kommersant reported that the Russian Federal Space Agency (Roscosmos) has prepared a plan for reform of the Russian aerospace industry. Companies in the sector may be organised into seven integrated branches. A newly created Russian Space Corporation will group together two joint-stock companies – RKK Energia (RKKE) and Space Monitoring Systems, Information Management and Electromechanical Systems – and the Scientific Research Institute of Machine Building and the Lavochkin Scientific Production Association. According to Kommersant today (11 July), the draft of the industry reorganisation plan will be submitted to the government's Military-Industrial Commission. The deputy head of Roscosmos, Vitaly Davydov, said that the creation of each integrated branch may take up to 18 months. Action: We currently treat the news as neutral for RKKE shares. Rationale: We await a final decision on and details of the restructuring process. We expect this, as well as the conversion ratios of RKKE shares into Russian Space Corporation shares, to be announced in the near future. Currently, the Russian government directly owns only 38.22% of RKKE. We think this may result in positive conversion ratios for RKKE shareholders. RKKE's other large shareholdersare the asset management companies Leader and Agana (with 23.57% in total), and Razvitie and Experimental Engineering Plant (20.47% in total; the two companies are 100% subsidiaries of RKKE). The free float would amount to 17.74%, based on our estimates.

UKRAINE INVESTMENT 104. IMF Welcomes Reforms in Ukraine PR Newswire July 10, 2012 The Board of Directors of the International Monetary Fund (IMF) welcomed Ukraine's progress under the President's Economic Reform Plan and the achieved price stability in the country. Such statement was made in the summary of the Acting Chairman of the Board of Directors of the IMF David Lipton, following consultations with Ukraine, held in Washington, DC (USA) on June 29, 2012. The IMF Executive Directors acknowledged the rebound in economic growth in Ukraine since the crisis of 2008-2009, as well as the decline in inflation and in the general government deficit. Directors also noted the authorities' efforts to advance

several reforms, particularly the approval of the new pension law and the new Tax and Customs Codes. According to the IMF website, Directors noted the progress Ukraine made in the banking sector. They recognized the plans to reduce banking system exposure to foreign exchange risks, including through limited sales to banks of foreign currency linked bonds issued by the government. Generally, IMF encouraged the Ukrainian authorities to press ahead with their efforts to unwind crisis era policies. IMF noted, however, that the country faces lingering vulnerabilities due to low reserve cover, energy sector strain on a budget, large external and fiscal funding needs, and the difficult external environment. In conclusion, the report welcomed the Economic Reform Plan of the President of Ukraine, which aims at promoting growth, improving business climate, and attracting investment. Achieving these objectives, says the report, will require implementation of comprehensive structural reforms, including stronger governance and further privatization. According to media reports, IMF accepts the possibility to resume lending to Ukraine within the framework of Stand By arrangement in the summer of 2012. In case that happens, Ukraine may also count on the support from the World Bank. Earlier, on March 6, 2012 World Bank Vice President for the Europe and Central Asia Region Philippe Le Houerou stated: "We [the Board of the World Bank] recently approved the new Country Partnership Strategy (CPS) for Ukraine for 2012-2016, which promotes Ukraine's plan for conducting reforms.” 105. Ukraine discusses joint gas consortium with Russia and EU bne July 12, 2012 Ukraine is in talks with Russia and the European Union (EU) on establishing a joint gas consortium to manage its gas transportation system, Ukrainian President Viktor Yanukovych said. Ukraine wants 34% in the consortium, leaving 33% each for Russia and the EU. “We want to establish a gas transportation consortium, but this requires a huge amount of money which Ukraine doesn’t have,” Yanukovych said, cited by RIA Novosti. “So we are discussing these issues. We are talking about a bilateral and a trilateral consortium, but at the same time we want to preserve our own transportation system,” he added. Yanukovych will discuss the issue with Russian President Vladimir Putin, who arrives in the Ukrainian Black Sea resort of Yalta on Thursday. No gas deals are expected to be signed during the talks. “There are no documents prepared to be signed. I do not think they could be agreed upon in the remaining hours,” presidential aide Yury Ushakov, cited by Prime.

Kiev is seeking to revise a 2009 contract, saying its price is too high. As a trade-off, Gazprom wants to gain control over the Ukrainian gas transportation system, which pumps a significant part of its gas to Europe. Ukraine has so far refused to accept the offer. “The current 10-year contract is not profitable for Ukraine. There is nothing good for Russia in this either,” Yanukovych said. He added that if both countries ran a joint consortium, the Ukrainian gas transportation system would pump 200 billion cubic meters of gas, instead of the current 100 billion. Both parties have said that they see a consortium to manage the Ukrainian gas transit system as a possible solution to the row, but have not agreed on details of the potential project. Concorde Capital's view: Substantial progress on a new gas agreement or discount, as Ukrainian authorities have been pushing, still looks a long way off. Both sides have been digging in their heels since spring – with the Ukrainian government threatening to slash gas imports to 35 bcm this year (from 45 bcm in 2011) and Russia even going so far as to say three weeks ago it was not in talks with Ukraine on a new gas discount. We see little to no substantive news on the gas issue developing until later this year. 106. Avdiivka Coke’s 1Q12 loss is larger than in FY2011 Concorde Capital July 10, 2012 Avdiivka Coke (AVDK UK) reported a net loss of USD 41 mln in 1Q12, compared to net income of 16 mln in 1Q11 and a net loss of USD 32 mln in FY2011. Revenue for the quarter slid 13% yoy to USD 298 mln, and EBITDA was negative USD 40 mln (vs. positive USD 34 mln in 1Q11). Roman Topolyuk: Avdiivka’s net loss stemmed from its operational results, as the company posted a gross loss of USD 43 mln in 1Q12. The latter was caused by expensive imported coal, which the plant is purchasing from, the related US-based United Coal Company (both owned by Metinvest). The disappointing 1Q12 financials, combined with strong continuing focus of Metinvest on imported coal, makes the management’s projections for Avdiivka’s net income of USD 17 mln in 2012 unlikely. 107. Bohdan dropped 6M2012 passenger cars production Phoenix Capital July 10, 2012 Bohdan Automobile Plant (LUAZ), Ukraine’s leading automobile producer, abated passenger vehicles output 3.5x times Y-o-Y and by 21.1% M-o-M to 643 units, Interfax reported yesterday (Jul. 09). Within January-June 2012 the company produced 7,541 passenger cars (-21.8% Y-o-Y). 108. Car output slides 18% YoY in June, while sales add 13.5% YoY Art Capital July 11, 2012

In June car output continued to slide by 18% YoY to 6616, which was also 2% lower than May’s output. The sales of new cars, including imported ones, went up by 13.5% YoY to 19 ths, despite a 5% decline MoM. Hyundai and ZAZ remain among the top sellers, even though the sales of the former declined by 6% to 1714 units. Toyota unexpectedly took third spot pushing VAZ to fourth. Among local car producers, Bogdan’s decrease of 21% to 643 cars and Krasz’s decline by 71% to 60 units in June were most noticeable. The other manufacturers increased their output. Oleksiy Andriychenko: The news is NEGATIVE for Bogdan Motors, whose output fell to crisis level of the end of 2008. Even in 2009 the company managed to produce more than 1000 cars a month. We are in contact with the management to clarify the causes of the decline, which could stem from the lobby for the enactment of import duties, since the market demand in Ukraine and Russia does not signal such a pronounced lack of interest in Bogdan cars. The strong sales of Hyundai cars will buoy out Bogdan’s top line in 1H2012, as combined sales of Bogdan cars in Russia and Hyundai cars in Ukraine were still up 7% YoY in May. Nonetheless June data shows a decline in Hyundai car sales of 19% YoY, which is a worrying signal for future revenues in 2012. We reiterate our BUY rating on Bogdan stock with a $0.05 target. 109. Ukrainian car sales in June indicate approaching of market stagnation bne July 11, 2012 Sales of new passenger cars in Ukraine in June 2012 grew by 13.5% year-over-year, although they fell by 5% compared to May 201, to around 19,000 cars, according to AUTO-Consulting Group, Interfax-Ukraine reported. "The upward trend on the automobile market in June [on June 2011] was clouded by a 5% fall compared to May 2012. This is evidence of the rapid approach of car market stagnation," experts of AUTO-Consulting Group said. The leader of the Ukrainian market is still Hyundai, but its sales dropped by 6% compared to May 2012. ZAZ is second, although its indicators fell, despite the launch of another model – the ZAZ Vida. The analysts said that the sensation of June was the fact that Russia's Lada, with a fall of 15% in sales (despite of active sales of Lada Granta), sank to the fourth position in the rating, while Toyota first became third with a rise in sales by 19%. The Kia and Volkswagen closely follow AvtoVAZ. Renault also improves its sales and managed to be ahead of Skoda. The largest leap in the group was made by Ford, which sales soared by 39%. According to the report, the situation in the top-20 of popular brands was characterized by a small fall in sales compared to the previous month, apart from Mitsubishi, Ssang Yong and Audi. In the segment of premium cars, Audi is a new leader. Mercedes-Benz is second with only one car less (the leader of the previous month) and BMW is third.

Among Chinese brands the top three is the following: first is Geely, Chery is second and Great Wall is third. 110. Eldorado expands chain in Ukraine to 89 stores bne July 9, 2012 Eldorado, which is developing the eponymous household appliances and electronics chain, on July 12 opened four supermarkets in a new format in Lviv, Kherson, Kremenchuk and Sevastopol, thus expanding its chain to 89 trade outlets, according to company's statement. The new format of stores foresees not only the updating of the interior, but a new concept of work. 111. Ferrexpo 2Q12 operating update: improved volumes in own ore pellets production VTB Capital July 11, 2012 News: Ferrexpo’s 2Q12 operating update showed improved volumes in own ore production and that third-party concentrate processing had remained at a depressed level since 1Q12. Total pellet output rose 4% QoQ (to 2.4mnt) with the share of 65% Fe material coming in at 47% of the total. Our View: Processing volumes of third-party material came in at 105kt, up from 57kt in 1Q12: however, volumes are significantly below the historical run rate of c. 150-200kt per quarter. Ferrexpo purchases concentrate to load up its unutilised pelletising capacity, and volumes are solely dependent on the availability of materials on the local market and the economics of concentrate-to-pellet conversion. The company has highlighted the low availability in 1H12 and apparently lowered pellet premiums making the business currently less attractive. ?We forecast Ferrexpo to produce 760kt of pellets from third-party material in 2012, which we view as currently unachievable given that only 162kt has been produced YTD. We estimate a potential shortfall of around 400kt; however, the impact on earnings is unlikely to be significant as the re-processing business results in a low margin (we estimate a 5% impact on EBITDA). ?More importantly, the quarterly run rate for own ore at Poltava mine improved 2.1% QoQ to 2.31kt, supporting our expectations. The product mix remained unchanged with the share of higher quality 65% Fe pellets amounting to 47% (the rest are 62% Fe pellets). ?All in all, we believe the downside risk to earnings from lower third-party material volumes is marginal. We view the numbers as neutral. 112. Gazprom Neft may boost Ukrainian chain to 300 stations bne July 9, 2012 Russian oil major Gazprom Neft may extend its fuel stations chain in Ukraine to 300 outlets, the company said. "If the pilot franchise project is carried out well, the company expects to extend the retail chain to 300 stations," Gazprom Neft said adding that it decided to sign a franchise agreement for the first time for its retail business to minimize risks and keep investments at a sensible level while promoting the brand, which is new for the country. Gazprom Neft plans to launch three fuel stations on the Kiev-Odessa Highway under its own brand in the near future. The first station was launched in May under a franchise agreement on the highway between Kiev and Odessa. 113. IFC to supply 15 An-148 and An-158 aircraft to Panama Phoenix Capital

July 11, 2012 Ilyushin Finance Co (IFC) has signed a contract envisaging 15 An-148 and An-158 aircraft worth $420 mln to be delivered to Panama till 2014, Interfax reported yesterday (Jul.10). The bilateral agreement has been signed between Ilyushin Finance Co and South American Aircraft Leasing S.A. during Farnborough-2012 airshow. According to the agreement, 3 An-158 aircraft carriers should be delivered within 3 months starting from December 2012, while 5 An-158 and 7 An-148 could be purchased via an option during 2013-2014. Currently, Motor Sich (MSICH), the sole Ukrainian aircraft engine producer, supplies D-436 engines for both aircraft models. 114. JKX delays Russia gas ramp-up until end-3Q12 Concorde Capital July 10, 2012 JKX Oil & Gas (JKX LN) received the final permit to operate its Koshekhablskoe field in Russia, the company announced in a press release yesterday. It also said a ramp-up in production in Russia was postponed until the end of 3Q12 as the W-27 well was being side-tracked after tests indicated a blockage downhole due to the extended shut-in period. Roman Dmytrenko: JKX successfully tested its W-27 and W-25 wells, which were shut-in until the commissioning of a gas processing facility at the Koshekhablskoe field in 2Q12. The reopening of both wells in May revealed a partial blockage of the W-25 well, which requires redrilling. The company’s recent operations update indicated the same problem with its W-27 well, which also has to be redrilled by the end of 3Q12. Altogether, the re-drilling of the two wells at the Koshekhablskoe field could delay the start of full-scale production in Russia until the end of 2012. 115. Kryukiv Railcar raised 6M2012 freight cars output Foyil Securities July 10, 2012 Kryukiv Carriage raises output by 34% - Kryukiv Carriage (KVBZ UK), Ukraine’s monopoly producer of passenger and metro cars and a leading manufacturer of freight cars, has increased its output by 24% to 5,577 units in 1H 2012. Freight cars output rose by 7.3% to 5,532 units, while passenger cars output boosted by 9 times to 45 units. Our view: The news is POSITIVE for the company’s stock, as KVBZ is on track to meet its 2012 target of 11,200 freight cars, which is already fulfilled by 50%. Kryukiv Carriage also expected to triple its passenger cars sales to 60 units in 2012. KVBZ stock is currently traded with a 9%-12% discount to its closest Ukrainian market peers at 1.9x of 2012e EV/EBITDA and 3.1x of 2012e P/E, and with a 63%-70% discount compared to the global market peers’ average of 6.2x and 10.1x respectively. 116. Miller Brands Ukraine raised beer production capacity by 34% bne July 10, 2012 Miller Brands Ukraine, one of the largest breweries in Ukraine, has increased its beer production capacity by 34%, to 650,000 decaliters per week, the company reported.

Investment in the project to increase the plant's capacity totaled over €10m. The bottling line upgrade increased productivity by 21%, from 33,000 to 40,000 bottles per hour. The company also expanded its warehouses to store finished goods. 117. NERC has altered Donbasenergo installed capacity Phoenix Capital July 13, 2012 Yesterday (Jul. 12) the National Energy Regulation Commission (NERC) voted a new figure for the installed capacity of Donbasenergo (DOEN), the smallest Ukrainian power-generating company. Thus NERC has changed the figure from 2,705 MWh to 2,795 MWh. The decision was made following the completed reconstruction of power blocks No4 and No11 (Starobeshevska power station). 118. Ukraine’s new grain harvest forecast for 2012 is 45.3m tonnes bne July 10, 2012 The grain harvest in Ukraine this year will be 45.3 million tonnes, according to the Agricultural Policy and Food Ministry, with reference to data from the regions as of early July, Interfax-Ukraine reported. "According to preliminary data from the regions on July 2, 2012, the production of grain and leguminous crops in the current year is expected to reach 45.3m tonnes," the ministry said. Earlier the ministry expected the grain harvest in 2012 to reach 45-47m tonnes, against 56.7m tonnes in 2011. Ukraine as of July 9 had harvested seven million tonnes of early grain and leguminous crops from 3.6m hectares, or 36% of the areas. The average yield of these crops is 19.6 centners per hectare against 28.4 centners per ha last year. Concorde Capital's view: The indicated harvest guidance is in the lower band of a 45-47 mmt range previously provided by the ministry. The expected decline in the harvest (and this is not the end – a 25% yoy decline should not be ruled out) may have a negative implication for Ukraine’s 2012 balance of payments (as agro products are the second largest export item) and inflation (food accounts for half of Ukraine’s consumer basket). The main losers from this season’s adverse weather among listed agro producers could be those focused in southern and southeastern regions: Sintal Agriculture (SNPS GF), KSG Agro (KSG PW) and Agroton (AGT PW). 119. New simplified taxation schemes could apply to 22,000 companies bne July 12, 2012

The new fifth and sixth groups of the simplified taxation scheme could potentially apply to over 22,000 companies and individual businessmen, Head of the State Tax Service of Ukraine Oleksandr Klymenko said, Interfax-Ukraine reported. According to scheme, the fifth group includes individual businessmen who employ up to 20 people, and the sixth group includes companies that employ up to 50 people. Klymenko said that the fifth group could include 2,100 individual businessmen, whose gross total income stood at UAH115bn in 2011, and the sixth group could include over 20,000 companies. "The new groups are being introduced so that these companies can do business easily and conveniently… I think that this is a very ambitious goal regarding the development of the medium segment of business, which would trigger the development of medium-sized business," Klymenko said, cited by Interfax-Ukraine. 120. Northern, Central Iron Ore post weak 1Q12 financials Concorde Capital July 12, 2012 Northern Iron Ore (SGOK UK) and Central Iron Ore (CGOK UK) reported yoy decreases in financials in 1Q12. Northern Iron Ore posted revenue of USD 392 mln (-11% yoy), EBITDA of USD 210 mln (-27% yoy) and net income of USD 139 mln (-22%) in 1Q12. Central Iron Ore recorded revenue of USD 147 mln (-21% yoy), EBITDA of USD 70 mln (-39% yoy) and net income of USD 41 mln (-43%) for the period. Roman Topolyuk: The financial performance of both Metinvest subsidiaries was a negative surprise, since, firstly, the enterprises demonstrated production growth in 1Q12. Northern Iron Ore increased pellet output 12% yoy in 1Q12 to 2.7 mmt, while Central Iron Ore’s rose by 15% yoy to 0.6 mmt. Secondly, prices for iron ore concentrate and pellets were higher yoy in 1Q12. Consequently, we expected both companies to have posted at least flat yoy financials. Our projections of Northern and Central Iron Ore’s EBITDAs in 2012 of USD 1,044 mln and USD 401 mln, respectively, seem to be overstated by at least 20% and 30%. Nevertheless, both miners should still generate high margins – Northern Iron Ore’s net margin was 35% and Central’s was 28% in 1Q12, which sets the stage for a repeat of their traditionally high dividend payouts from net income earned in 2012. 121. Southern GOK announces its production, CapEx plan Foyil Securities July 11, 2012 Southern GOK (PGZK), one of the biggest iron ore producers in Ukraine, has reported that it plans to invest more than USD 125m into its retrofit in 2012 alone. Also, the company intends to increase production of iron ore concentrate by 33% to 13.7m tons by 2020. Our view: We consider this news as POSITIVE for the company. According to the company’s management, the capital expenditures are aimed at reducing production costs and used for purchasing new equipment as well as repairing existing facilities. In our opinion, Southern GOK will comply with its CapEx program: USD 50m has already been invested in 1H 2012; the company has signed 90% of planned

contracts for supply of equipment. The iron ore producer has enough income inflows to support its capital expenditures. Southern GOK enjoyed a net income of USD 608m in 2011, implying a lofty 45% net margin. This CapEx program is a part of the plan to increase production of iron ore concentrate by one third during the next eight years: from 10.35m tons expected in 2012 to 13.7m tons in 2020. 122. Stakhaniv Railcar reported 6M2012 cars deliveries results Phoenix Capital July 10, 2012 Stakhaniv Railcar Plant (SVGZ), one of Ukraine’s largest freight railcar producers, supplied 2,701 freight cars for more than UAH 1.5 bln, the company stated in its press release published yesterday (Jul. 09). More than 80% of production was sold abroad. 123. Turkey's retailer Suvari plansto open 50 stores in Ukraine in 10 years bne July 10, 2012 Turkey's retailer Suvari, which develops the eponymous brand of men's clothes and shoes of classical and casual styles in Turkey, plans within 10 years to open 50 stores in Ukraine, Interfax-Ukraine reported. The first store will open in the first stage of the Ocean Plaza shopping and leisure mall located on the intersection of Antonovycha Street and Chervonoarmiysky Lane near Lybidska subway station in Kyiv. 124. Ukraine fails to get Russian gas deal bne 13 July, 2012 Russia and Ukraine have failed to agree on new terms for supplies of Russian gas, President Vladimir Putin said Thursday after talks with Vladimir Yanukovych. Ukraine tries to negotiate a lower gas price. The country wants to revise a 2009 gas deal with Russia, considering current price too high. "There are issues where we have not reached an agreement but … we will aspire to do that," Putin told reporters when asked about the gas issue. "We must find a solution," Yanukovych's office cited him as saying. "I think we will manage to do so." Moscow insists that in order to get a discount, Ukraine must either let Gazprom take over its gas pipelines — which carry Russian gas to Europe — or join a Russia-led Customs Union, a post-Soviet trade bloc. Concorde Capital's view: Overall, the tone of the meeting appeared to be cordial and productive, though as we anticipated, there was no visible progress on the gas issue. We hold that a breakthrough on natural gas supplies, particularly with a Ukrainian parliamentary election approach in October, will be difficult until toward the end of the year. 125. Ukraine reduced its forecast for grain export in 2012/2013 MY Phoenix Capital July 12, 2012 The Ministry of Agrarian Policy and Food lowered its grain export forecast for the current marketing year (July 2012 - June 2013) to 20 MT from previously expected 22-23 MT, Interfax reported yesterday (July 11) referring to the statement made by Mykola Prysiazhnyuk, Minister of Agrarian Policy and Food.

Previously, the Ministry of Agrarian Policy and Food forecasted the grain exports in Ukraine at the level of nearly 22-23 MT in 2012/2013 MY, which completely corresponded to the indices of last season. Last MY Ukraine exported 21.8 MT of grains, an increase of 81% compared to the previous MY. In 3Q2011 the export trading was restrained due to the export duties on grains imposed by the Government. In 2011 the country produced the record volume of 56.7 MT of grains, up 44.3% compared to 2010. 126. Ukraine ups iron ore exports by 3.1% bne July 12, 2012 Ukrainian mining companies raised exports of iron ore by 3.1% year-on-year to 17.187m tonnes in January-June 2012, according to rough estimates by the Ukrrudprom association, Interfax-Ukraine reported. Exports fell by 0.6% to 7.259m tonnes of iron ore concentrate, rose 13.2% to 6.677m tonnes of pellets, fell 10.2% to 3.046m tonnes sintering ore and rose 160% to 205,400 tonnes of sinter. Ukrainian steelmakers boosted iron ore commodity imports by 46.6% year-on-year to 1.076m tonnes in the first half of 2012, including 367,200 tonnes of concentrate, 140% more; 284,000 tonnes of pellets, 130% more; 416,800 tonnes of sintering ore, 8.8% less; and 8,000 tonnes of sintering ore, which was not imported in January-June 2011. 127. Ukrainian gas producers face 50% royalty increase in 2013 Concorde Capital 9 July 2012 Ukraine’s parliament amended a law stipulating the introduction of a unified oil & gas production tax since 2013 (adopted a month ago) to increase the tax for gas 1.5x. In particular, private producers will have to pay an extraction tax for gas from reservoirs shallower than 5,000 m equal to 25% of the gas import price (vs. 17% according to the law previously) and from deeper reservoirs the tax will be 14% (vs. 9% previously). Roman Dmytrenko: Based on the current price of imported Ukrainian gas and tax calculation formula valid for 2012, Ukrainian gas producers pay a USD 68.8/tcm royalty and USD 5.3/tcm production tax on extracted gas, which effectively equals 17% of the produced value. The adopted amendments cancel the current tax calculation and imply a USD 37/tcm increase in the unified production tax. We estimate the tax increase will eat out to 6 pp of JKX Oil & Gas (JKX LN) and Regal Petroleum’s (RPT LN) gross margin in 2013 and 9 pp of Kulczyk Oil (KOV PW) and Cadogan’s (CAD LN). 128. Yasynivsky Coke to cut coke output 1% MoM July 13, 2012 Yasynivsky Coke plans to cut gross coke output 1% MoM to 148kt in July, according to Metal Courier. Dmitry Lenda: We believe the news to be NEUTRAL for the stock. Output may decline for the second straight month but will remain high, thanks to the capacity load increase of a few months ago, when a new

coke battery was launched. We look for capacity load to increase again in August-September. We confirm our BUY recommendation on the stock with the $0.36 target price.

KAZAKH INVESTMENT 129. Kazakhstan becomes largest export market of GM-AVTOVAZ Intellinews 12 July 2012 In H1, Kazakhstan was the largest foreign market for the GM-AVTOVAZ with 52% of its export of Chevrolet Niva. GM-AVTOVAZ has informed that sales in Kazakhstan have increased in connection with the establishment of the Common Economic Space. In H1, the joint venture between General Motors and Russian AvtoVAZ delivered for export 1,386 of SUVs Chevrolet Niva, which was by 31.6% more than in the previous year (1,053 cars). Other countries on the list of the best export markets are: Ukraine with 22% of export, Azerbaijan-12%, Belarus-10%.?

CENTRAL ASIA INVESTMENT 130. Kyrgyzstan to boost trade with Iran tenfold bne 10 July 2012 Kyrgyzstan plans to boost trade with Iran tenfold to $5bn a year, says Kyrgyz Finance Minister Akylbek Japarov following a meeting with Iranian Industry, Mine and Trade Minister Mehdi Ghazanfari at the tenth meeting of Iran-Kyrgyzstan Joint Economic Committee in Tehran on Monday. The countries plan to increase trade to $2bn over the next three years, concentrating on Iranian exports of clothing, nuts, paints and flooring to Kyrgyzstan while taking imports of meat, grain and steel scraps, Ghazanfari said. The two sides are also contemplating upping the status of the current preferential trade agreement to a full blown free trade agreement to enhance the two-way trade. Kyrgyz Ambassador to Iran Medetkhan Sherimkulov also called on Iranian companies to invest into Kyrgyzstan. Some 180 Iranian industrial units are already operating in Kyrgyzstan, mostly as joint ventures, with the Iranian companies accounting for 70% of the investment, reports local media.

EURASIA INVESTMENT 131. Kyrgyz Prime Minister vists Centerra’s Kumtor Mine bne 9 July 2012 Kyrgyz Prime Minister Babanov paid a visit to Centerra Gold Inc. Kumtor mine and toured the mine and mill facilities for the first time on Friday.

However, as the Kyrgyz government prepares to sell its stake in the Kumtor gold mine, local analysts warn that opposition politicians are using the country’s biggest financial asset as a pawn in partisan rivalries. The PM was joined by members of the State Commission recently established by the Government following a Parliamentary report and resolution relating to Kumtor. Kumtor management and Ian Atkinson, Centerra's President and Chief Executive Officer, accompanied the Prime Minister on the tour. The Prime Minister reiterated that the state and the Company should work together with the State Commission and Government to address the environmental matters raised in the parliamentary report in June – accusation the company strongly deny - and the other issues identified in the resolution. “The allegations that have been made are quite unfounded,” said John Pearson, vice president of investor relations at Centerra Gold. “The operation has been audited and studied by independent groups and independent reports show that we meet and exceed all the Kyrgyz standards.” The Prime Minister also repeated that the governmental had cancelled a prior decree granting Kumtor certain surface rights in relation to the project, but said that the cancellation would have no impact on or limit in any way Kumtor's activities or operations. The government has said it will negotiate with the company with the view to increasing its 33% stake and securing a share of mine’s output, which accounts for 12% of the country’s GDP — the largest share after international aid and remittances sent home by migrant workers. In 2009, Centerra, Kumtor Gold Company and the Kyrgyz Republic signed comprehensive agreements governing all aspects of the project, which were approved by all relevant Kyrgyz governmental authorities, including the Kyrgyz Parliament and the Constitutional Court. Stock in Centerra Gold, the Toronto-based company that operates the Kumtor mine, plummeted in recent weeks as members of the Kyrgyz parliament called for its nationalization. “Kumtor is an essential part of Kyrgyz economy,” said Orozbek Duysheyev, head of the Association of Miners and Geologists in Kyrgyzstan, in Bishkek told the New York Times. “Its workers get highest salary in the country — plus, Kyrgyzstan is its biggest shareholder. Why we must place obstacles in front of the work of this company?” 132. Azerbaijan Peugeot cuts 8,000 jobs to end losses, shuts plant APA-Economics 13 July 2012 French automaker PSA Peugeot Citroen announced 8,000 job cuts and the closure of an assembly plant as it struggles with mounting losses, in a move that could hasten a wave of restructuring in western Europe, APA reports citing Reuters.

The Aulnay plant near Paris, which employs more than 3,000 workers, will stop making cars in 2014 as part of a drive to reorganize Peugeot’s under-used domestic production capacity, the company said on Thursday. It will be the first car plant to cease production in France for 20 years, posing a challenge to new Socialist President Francois Hollande’s objective of reviving industrial production. The government said it was studying the closure plan but stopped short of condemning it, incurring the wrath of France’s biggest industrial union, the hard-line CGT. Prime Minister Jean-Marc Ayrault promised in a statement to ensure that Peugeot helps laid-off Aulnay workers find new jobs and said ministers would present a wider auto industry support plan July 25. A second factory in the western city of Rennes will shed 1,400 of its 5,600 jobs as the company downsizes in response to shrinking demand for larger cars such as the Peugeot 508 and Citroen C5. Some 3,600 non-assembly jobs will also be scrapped across the company. "I am fully aware of the seriousness of today’s announcements," Chief Executive Philippe Varin said in a statement. "The depth and persistence of the crisis impacting our business in Europe have now made this reorganization project indispensable." 133. Azerbaijan - One of the biggest investors of Turkey is interested in Khazar Islands project - Apa Economics 11 July 2012 Baku. Ali Ahmadov – APA-Economics. One of the famous businessmen of Turkey and Middle East, billionaire Ali Aghaoghlu has today visited Baku in order to acquaint with Khazar Islands project and discuss cooperation on this project, APA reports. He arrived in Baku at the invitation of Avesta company’s leadership. Aghaoghlu told journalists that Khazar Islands project is very interesting: I have arrived to Azerbaijan as a guest of Ibrahimov in order to discuss joint cooperation opportunities here. At present time, huge projects are realized in Baku, Azerbaijan. I have already acquainted with the project and it incredibly interested me. During the visit, I will get acquaint with the construction. Khazar Islands – is world-scaled project, it will contribute to image of Azerbaijan and Baku in the world. On this occasion, I congratulate Mister Ibrahimov’. Author of Khazar Islands project, president of Avesta company Haji Ibrahim Ibrahimov noted that visit of Aghaoghlu is one of indicators, showing fast development of Azerbaijan: ‘This visit shows how incredible this project is. Khazar Islands is already recognized on a global scale. The project has interested Ali bey. We will carry out joint works in this project’. ‘300 ha area has already been established here. Nearly 10 restaurants are being constructed here. Khazar Islands projects caused interestof world investors. An initial agreement related to attraction of foreign investors has already been signed. It is planned to hold presentation ceremony of this project in September’ he added.

Remind that, Ali Ibrahimov was born in 1954 in Trabzon. His business started in 1975. His Agaoglu Group is engaged in realization of huge construction projects in Turkey since 1990. up to this day, the company has realized construction projects such as «My World», «My Office», «My Towerland». At the moment, Agaoglu Group’s activity covers construction and resort areas. According to research carried out by popular "Forbes" magazine in 2011, Ali Agaoglu – is the 564th rich and influential person in the wolrd with 2.1 billion. Capital and 10th in Turkey,. Khazar Islands will cover 3,000 ha area. It will consist of 41 different sized islands and 19 districts. The archipelago will cover 24 sq/km by 8km in length and 3km in width. Total length of the line of boulevard islands will be 50 km. Construction of Khazar Islands on a manmade island in the Caspian Sea will cost $ 100 bln. Construction works have been started 10 months ago. At present time, construction is underway on one of the biggest islands and 6-7 residential buildings on this island. In general, the city to be built until 2022-2023 will have 1 mln residents. Sales and Marketing Director of Khazar Islands Kenan Guluzadeh told APA that the first residents will tae the first step on the island in 2013-2014. 134. Georgian wine in wait of Russian palates to cleanse East Capital 9 July 2012 Georgia was synonymous with wine during the Soviet period. When the empire collapsed, wine producers were hit hard, and they didn’t really begin to make a serious recovery until now. Wine producers have high hopes for the reopening of the Russian market after Russia has become a member of the World Trade Organisation (WTO). Read more ?The blue grape known as Saperavi only exists in Georgia and is considered to be the progenitor of several modern varieties of blue grapes. Teliani Valley, a wine producer, is included in the Bering Central Asia fund, which is also partially owned by East Capital's investment company, East Capital Explorer. Photo: Teliani Valley "Russia was in a class of its own as the largest market, so its potential is really high," said David Östby, Investment Manager at East Capital and member of the Board of Directors of Georgia's largest wine producer, Teliani Valley. Ironically enough, the Russian boycott of Georgian wine had a positive effect in forcing the country to orientate itself toward other markets for its exports. Wine is one of the country's top ten export products. "When the Russian export market was closed, wine producers were forced to make more high-quality wines to be able to export, and thus Teliani Valley's exports began to grow exponentially, and grew bigger than domestic sales.” Teliani Valley is the market leader, with a market share of around 40% of the somewhat small market that exists in Georgia for bottled wine. The majority of the wine produced is currently exported to Ukraine and about fifteen other countries. During the Soviet period, the vast majority of the wine produced was sold within the Eastern bloc. Wines from Georgia were so popular that producers in other parts of

the Soviet Union tampered with the country of origin marking and called their wines Georgian. "That is the reason why the majority of our exports go to former Soviet republics today. The wines exported back then were primarily sweet and medium-sweet wines. Today on the other hand, the bulk of our exports consist of quality dry wines.” Georgia is quite possibly the oldest wine-producing country in the world. Wine production had already begun here 8,000 years ago. Even the Georgian alphabet is said to have got its shape from the grapevine, which is very believable considering its curved shape. The absolute most common wine that Georgians themselves drink is homemade from their own grapevines. Less than 5% of the wine that the population drinks is sold bottled in shops. "I still haven't been in a Georgian home where grapevines don't grow. They make a couple of hundred litres per year for personal consumption.” Wine is not only important as a drink; it is also a large source of income in the wine-producing regions. "A significant portion of the Georgian population works in the wine industry. Up to 25% percent of the population works in the wine industry in the eastern wine-growing districts," said David Östby. Karl Lans?

135. Kyrgyzstan to boost trade with Iran tenfold

bne 10 July 2012 Kyrgyzstan plans to boost trade with Iran tenfold to $5bn a year, says Kyrgyz Finance Minister Akylbek Japarov following a meeting with Iranian Industry, Mine and Trade Minister Mehdi Ghazanfari at the tenth meeting of Iran-Kyrgyzstan Joint Economic Committee in Tehran on Monday. The countries plan to increase trade to $2bn over the next three years, concentrating on Iranian exports of clothing, nuts, paints and flooring to Kyrgyzstan while taking imports of meat, grain and steel scraps, Ghazanfari said. The two sides are also contemplating upping the status of the current preferential trade agreement to a full blown free trade agreement to enhance the two-way trade. Kyrgyz Ambassador to Iran Medetkhan Sherimkulov also called on Iranian companies to invest into Kyrgyzstan. Some 180 Iranian industrial units are already operating in Kyrgyzstan, mostly as joint ventures, with the Iranian companies accounting for 70% of the investment, reports local media. 136. Moldova signals that it may withdraw from implementing the Third Energy Package OSW 13 July 2012 On 3 July, the Moldovan gas monopoly Moldovagaz revealed that it has signed a provisional agreement with Gazprom to extend its gas supply contract until the end of 2012. The old contract expired on 31 December 2011. Negotiations on a new agreement were suspended in October last year after Moldova committed itself, as part of the Energy Community, to implement the Third Energy Package.Gazprom deemed this move to be unacceptable, and one way it found to put pressure on Chisinau was to break off the talks. As a result, the gas contract was twice extended by a quarter. In recent days, the Moldovan government – under pressure from Russia – has appeared willing to abandon implementation of the third package in exchange for signing a new contract, lower gas prices, and a resolution to the problem of Moldovagaz’s US$3.5 billion debt to Gazprom for the gas consumed in the separatist region of Transnistria. Commentary - It seems that Moldova, which annually imports about 3 billion m? of gas, will be unable to resist the pressure from Gazprom, and will most likely give up the implementation of the third package in exchange for a favourable gas pricing formula. In this case, Chisinau’s adoption of Russian conditions would mean its effective resignation from the Energy Community, and create serious obstacles to the country's plans for European integration. Russia sees the expansion of the EU’s gas market rules in its vicinity as a threat to its interests. Moreover, Moldova is an important country for the transit of Russian gas to Romania, Bulgaria and Turkey (which totalled 19 billion m? last year).

- Moldova is trying to link the question of signing a new gas contract and withdrawing from the Third Energy Package to Gazprom's agreement to resolve the question of Moldovagaz’s debt. This is the result of gas supplies to Transnistria, which for years has not paid for the raw material which has been formally supplied to it as part of the gas contract for Moldova, and which thus does not count as government debt. However, the protocol signed by the Moldovan government and Gazprom in December 2006 probably included government guarantees for Moldovagaz’s debts. In view of the fact that the Russian company owns 50% plus one share in Moldovagaz, and manages 13.44% of the shares held by Transnistria (the remaining 35.33% stake is owned by the Moldovan government), we can assume that this is largely a debt of Gazprom to itself. - The Moldovan government’s proposal for addressing the gas debt consists of splitting off part of its infrastructure on the territory of Transnistria from Moldovagaz into a separate company and assigning the debt to it. However, Russia does not appear to have agreed to this proposal or the final resolution to the debt problem, because it serves as an additional guarantee to maintain Russian influence in Transnistria, and as an instrument of pressure on the Moldovan government. - To strengthen its bargaining power with Gazprom, Moldova has announced that in autumn it will begin the construction of a pipeline which would allow gas imports from Romania (the Iasi-Ungheni interconnector). For now, however, this is merely a symbolic gesture that will not significantly affect the course of negotiations. Key talks on the gas question will take place during the talks between the Prime Ministers of both countries, Vlad Filat and Dmitri Medvedev, scheduled for September in Moscow.

SOUTHEAST INVESTMENT 137. Airbus and Boeing to woo Turkey's airline Pegasus for a $5bn deal balkans.com July 10, 2012 Airbus and Boeing head into the Farnborough Airshow between June 9 and 15 locked in their fiercest market share battle in a decade, slashing prices to win key orders for their latest narrow body jets and storing up potential trouble for future profit margins. The latest firefight involves a back-and-forth battle for between 40 and 50 jets worth $4-5 billion sought by Istanbul-based carrier Pegasus Airlines, with Boeing resisting Airbus efforts to poach one of its customers in a duel known as a "flip fight," according to several sources familiar with the matter. The airline is one of many looking to jump on a 15 percent improvement in fuel burn and therefore a significant reduction in costs offered by the latest revamped models of jets offered by Europe's Airbus and its U.S. rival Boeing. The heated up competition between world number one Airbus and Boeing extends from Australia to Indonesia, the United States to Norway, along with Turkey, Hurriyet Daily reports. 138. Cosmetic giant eyes production in Turkey Hurriyet Daily News July 12, 2012

U.S.-based cosmetics giant Farouk Shami Group wants to make Turkey a production base for its cosmetic products, including hair-care products, electric products and spa treatments, according to Hürriyet. The group chairman, Farouk Shami, met with Turkey's Customs and Trade Minister Hayati Yazıcı last week in Istanbul. Shami told Hürriyet that Turkey was a second homeland for him and that he planned to expand his business to the Middle East and Russia, using Turkey as a base. "We want to invest in Turkey. Starting with Istanbul, we could invest in any corner of the country. That's why we will first look for a plot and then begin investing. We are also open to having local partners. I told Minister Yazıcı this and he was very positive," said Shami, adding that the head of Turkey's investment agency, _lker Aycı, had also offered his support. Shami said the cosmetics group would initially invest $150 million in Turkey, but are hoping to run a $1 billion business from Turkey in 10 years time employing 1,000 to 1,500 Turkish employees. The Shami Group produces more than 1,000 cosmetics products for export to 110 countries. Shami, the sponsor of the Miss Universe beauty pageant for 12 years, wants to bring the pageant to Turkey. 139. Daikin moves forward to make Turkey a hub Hurriyet Daily News July 12, 2012 Global Japanese air conditioning giant Daikin is gearing up to turn Turkey into its logistics and productions hub, according to a company press release. By purchasing Airfel, Daikin has made a significant investment in Turkey, and it will hold a press conference on Friday to disclose its investment plans. Meanwhile, Daikin hosted top level representatives from major Japanese companies like Toyota, Sony, IBM Japan, Sumitomo, Omron Corporation and Art Corporation in Turkey to discuss the future of the world economy, new investment strategies and goals for the coming period. "Turkey is not only important for Daikin, but because of its strategic location and connection to neighboring countries it has a key role. That's why we decided to host our consultative committee this year in Turkey," said Daikin Europe President Masatsugu Minaka. Daikin invested $260 million and began corporate operations in Turkey in 2011, according to the company press release. Minaka said holding the consultative committee in Turkey would act as an impetus for other Japanese firms who might want to invest in the country. The business leaders planted Japanese Sakura cherry trees in the garden of Daikin's Hendik plant to express their interest in the local market. 140. Despite friction, Turkey pursuing energy deals with Arbil, Baghdad Hurriyet Daily News July 11, 2012

Turkey approaches the central Iraqi government for a pipeline project to boost imports capacity. This comes after Baghdad's reaction to Turkey's crude purchase from Arbil Despite Baghdad's harsh reaction to the Iraqi Kurdish Regional Government's exports of crude oil to Turkey, Ankara plans to move ahead with new energy cooperation projects with the Iraqi government. A technical delegation from the Iraqi government will visit Turkey shortly for negotiations on the Basra-Kirkuk pipeline project agreement, an official from the Ministry of Energy told the Hürriyet Daily News yesterday. "The Kirkuk-Ceyhan pipeline operates at a capacity of only 35 percent. The Basra-Kirkuk line will increase the capacity for oil transported to Ceyhan," the official said, adding that Iraq had requested the project. Ties with both sides Elaborating on news reports that Baghdad has declared Turkey's import of crude oil from the Iraqi Kurdish government to be illegal, the Turkish official said the problem was between Iraq's central government and Arbil, not with Turkey. Ankara is enhancing energy cooperation with the Iraqi government as well as the regional government, the official said. The Kurdish Regional Government began exporting an unspecified amount of crude oil by truck to Turkey last week, where it can be refined into various products before being taken back to northern Iraq, the official said. However, the central government in Baghdad insists that it reserves the sole right to export oil, which accounts for the lion's share of the country's income. The Iraqi government said crude-oil exports from northern Iraq to Turkey were "illegal" and threatened to take "appropriate action," in a continuation of recent tensions between the two. "This is an illegal and unconstitutional business that we will take the right decision on," said Faisal Abdullah, spokesman for Iraq's Deputy Prime Minister for Energy Hussein al-Shahristani. "The Oil Ministry [in Baghdad] solely reserves the right to export crude oil, gas or oil products to other countries," Mr. Abdullah said. A dispute over oil between Baghdad and the Kurdish government in Arbil has worsened recently, with Iraqi Kurds having stepped up oil production and export capabilities, and also cutting off oil exports to Iraq in a payment row. The Kurdish Regional Government has signed dozens of contracts with foreign oil firms, despite the central government saying that all oil contracts must go through Baghdad. 141. Hyundai amongst first to benefit from Turkish investment incentives Hurriyet Daily News July 10, 2012

Hyundai has become one of the first firms to take advantage of a new Turkish incentive scheme and plans to invest 1.1 billion Turkish Liras to increase the capacity of its _zmit factory from 100,000 to 200,000 vehicles within 18 months. "By August we will complete 20 percent [200 million liras] of the investment and import vehicles without having to pay the customs tax," said Hyundai Assan's general manager, Ümit Karaarslan. By not having to pay the 10 percent customs tax, Hyundai Assan will have an annual advantage of 40 million lira. "The investment we will make according to the new incentive scheme requires that we make 20 percent of the total investment in order to qualify. Therefore, by August we plan to complete 20 percent of the 1.1 billion-lira investment and take advantage of the incentive scheme," said Karaarslan. Karaarslan said they did not pay a customs tax on many of the vehicles imported from Europe but added that the real benefit of the new incentive scheme would be for the Accent Blue model, which Hyundai will import from Korea given that Hyundai Assan will not have to pay any additional customs tax. With the 1.1 billion-lira investment, the South Korean automotive giant plans to increase its manufacturing of small model cars; the _zmit facility is duly slated to become a "small automobile center by the end of 2013," Karaarslan said. "This model will take the place of i10 A class model. We haven't decided on the name yet. Either it will remain i10 or the model will receive a new name," said Karaarslan. The investment will also create employment for an additional 2,389 people, said Karaarslan. 142. Istanbul water project refuels transformation row Hurriyet Daily News July 12, 2012 The connection of Istanbul's Golden Horn (Haliç) to the Bosphorus via a four-kilometer long tunnel project has reignited a row over urban transformation between the municipality and residents around the Golden Horn. Fatih district Mayor Mustafa Demir said the Golden Horn would be suitable for swimming within five years with this project. However, locals from Balat on the southern side of the Golden Horn, have said they fear possible relocation due to the urban transformation project. "Locals have the right to have such fears, but 30 percent of buildings in that area are abandoned. They built their houses on the city walls, to such an extent that the city walls cannot even be seen from outside. We care intensely about the human factor in urban transformation projects," Demir told the Hürriyet Daily News yesterday in a phone interview. Demir repeatedly said their plan was not to remove people from their homes, but to provide a better environment. "Mutual understanding is crucial here. Those areas are not peaceful places. We want to transform their neighborhood into a peaceful area with their help."

On the other hand, locals say the project was finished after an Istanbul court canceled an urban transformation project around the Golden Horn's Balat area. "We knew that this pipe project was finished before, but they kept it waiting until the Balat urban transformation project was brought to trial. When the court canceled their project, the aim to sell our possessions to rich people failed as well. Now they have revealed the project, as their advertising material renovating the Haliç for the rich is in vain," Selahattin Güçlü, a Febayder (Fener Balat Ayvansaray) Association board member, told the Daily News yesterday. A transformation project in Istanbul's historical and predominantly Roma and Kurdish neighborhood of Balat was recently canceled by Istanbul's Fifth Administrative Court on the grounds of "harming the cultural pattern in the region." After a five-year struggle with the Fatih Municipality, the case was resolved in favor of the locals. The Istanbul Water and Sewage Administration's (_SK_) project, which was kicked off three years ago, ended on July 10 and the water channel was turned on. With this project, the seawater coming from Cendere will reach the Golden Horn through Ka_ıthane Creek, providing circulation for the Golden Horn which already hosts many water sports like rowing and sailing. The Golden Horn is also one of Turkey's few watercraft-landing areas. . The official opening of the tunnel is expected to be held soon, and Prime Minister Recep Tayyip Erdo_an is reportedly scheduled to attend the opening ceremony. 143. Kurdistan Region selling oil to Turkey, advisor says Hurriyet Daily News July 9, 2012 The Kurdistan Regional Government (KRG) has begun sending oil produced in its three-province autonomous region out of the country without the express permission of the central government, an official said yesterday. The central government in Baghdad, meanwhile, insisted that it reserved the sole right to export oil, which accounts for the lion's share of the country's income and is at the centre of a dispute between the capital and the KRG. "We started exporting limited quantities of crude oil to Turkey a few days ago," Seerwan Abubaqr, an adviser to the KRG's natural resources ministry, told AFP. He said the crude was being exported to Turkey so it could be refined into various products before being brought back to northern Iraq. "If we need to, we will export oil to Iran," Abubaqr added. "We will continue exports of oil until the central government provides the region with oil products." "The central government has pushed us to do this." Kurdish officials say the central government has barred the dispatch of petroleum products to the northern region, but Baghdad has denied those allegations. "Nobody has the right to export oil, gas, or oil products to foreign countries," said Faisal Abdullah, spokesman for Hussein al-Shahristani, deputy premier responsible

for energy affairs. "Only the oil ministry of the government in Baghdad has the right to export oil or oil products." 144. Richest 40% responsible for over 80% of Turkish car sales Hurriyet Daily News July 9, 2012 The richest 20 percent of the Turkish population buy 55.6 percent of the total vehicle sales in Turkey, according to a report issued yesterday by the Automotive Distributers Association (ODD). Added to the next richest 20 percent of the population, the ratio hits 81.5 percent. The ODD report highlights the effects of pricing, income per capita and loan volumes on the local automobile market's growth. Although the imbalance of vehicle ownership in between income brackets has improved during the last years, Turkey falls behind developed Western countries and Europe in terms of average vehicle ownership rate. The number of passenger cars per 1000 people is 965 in the United States, 318 in Eastern European countries, 641 in Europe, and 340 in South Korea. The figure rose to a mere 141 in Turkey thanks to improvement in recent years. The share of Turkish youth in the total population that can potentially drive passenger cars, which is much higher than Europe, lags significantly behind the local automotive market's potential, according to the report. One of the main obstacles to the local automobile market growing is the exorbitant Special Consumption Tax (SCT). If the SCT was at 18 percent, automobile sales would exceed 1 million in 2016, whereas if the tax was at 27 percent, the sales figure would surpass 930,000 in the same year. The SCT increased in October 2011 to 80 percent from 60 percent for cars with engines between 1,600 and 2,000 cc, and to 130 percent from 84 percent for cars with engines larger than 2,000 cc. Car sales was down about 17 percent and light commercial vehicle sales were down 29.2 in the first five months of the year, according to a separate ODD report issued last month. The total number of vehicles registered in Turkey exceeds 12 million, half of which are twelve years old or more, as of the end of 2011, the report said. The rate of vehicles older than 16 years is 34 percent, and the rate of vehicles older than 20 years is 20 percent. 145. Sisli mayor blamed over allowing skyscraper Hurriyet Daily News July 10, 2012 A member of the Republican People's Party (CHP) has filed a criminal complaint against Istanbul's Sisli district's independent mayor Mustafa Sarıgül for "changing zoning plans for a hotel chain's construction." A city councilor, Dursun Caltı, blamed Sisli's independent Mayor Mustafa Sarıgül for abusing his authority by letting a building be constructed which demolishes a mosque's silhouette.

A hotel chain in Sisli built a 45 story building behind the district's landmark mosque. Caltı said "the construction was a knife stabbed in Sisli's heart." Story limits Only six story buildings were allowed in the neighborhood, Caltı said, adding that Mayor Sarıgül illegally approved the 45 story building by overriding his authority. Caltı demanded Mayor Sarıgül be dismissed from his post in his complaint. "Construction plans were changed for this building which is nearly 100-meters long," Caltı said. The building is designed to be a hotel, according to reports. "The highest building in the area can be up to 18.5 meters. However, this building is 45 meters. It not only disrupts the silhouette of the Sisli mosque, which is right above it, but also that of the city," he said. 146. The number of tourists visiting Istanbul peaks Hurriyet Daily News July 13, 2012 The number of tourists visiting Istanbul significantly increased in the first half of 2012. According to the latest figures released by Istanbul Culture and Tourism Directorate, the number of tourists visiting Turkey reached a peak of 4.2 million, increasing 18 percent, compared to the same period of 2011. Tourists visiting Istanbul were mostly from Germany, Russia, U.S., France and Britain. The number of visitors from North Africa also considerably increased during the period. Meanwhile, the number of tourist from Israel registered a decline. More than 4 million visitors came to Istanbul by plane. This figure is expected to continue its upward trend in the second half of the year, stated Prof. Dr. Ahmet Emre Bilgili, manager of the Istanbul Culture and Tourism Directorate. "It was a vintage year for us. We want to complete the year with 9.5 million visitors," said Bilgili. 147. Total set to establish 70 new petrol stations in Turkey Hurriyet Daily News July 11, 2012 Total, the French oil firm, has launched a new campaign for the Middle East and African regions starting with Turkey, where it sees large potential. As a part of the roadmap, the company will increase the number of its stations from 430 to 500, owning some 15 percent of the facilities directly. This will not negatively affect their ties with local dealers, according to Momar Nguer, the Africa and Middle East director at Total Supply & Marketing. "The dealers will remain as our essential partners," Nguer said during a press meeting in Istanbul yesterday, adding that owning stations would show the company's commitment to the country. It will show that we are here to stay."

Sales targets Total's newly appointed General Manager in Turkey Antoine Tournand said at the meeting the company planned to increase sales in Turkey 50 percent as of 2018. Total is ranked the sixth largest oil retailer in the country, according to officials. Commenting on the high fuel prices in Turkey, Nguer said gas in the country was cheaper than in a number of European countries, including France and Italy, if taxes are excluded. Global oil prices will keep increasing, he said, addressing the growing demand particularly from emerging markets. Total, an active player in the Libyan market, has already returned to the pre-war business volume there, Nguer said, although he did not mention any figures for the sales volume. 148. Trucks start carrying crude to Turkey from Kurdistan bne July 13, 2012 With reports circulating that its struggling to maintain crude shipments from Iran, Turkey has begun importing road tankers of oil from northern Iraq Energy Minister Taner Yildiz announced on July 13, potentially widening a spat over the issue with Baghdad. The official said Turkey is currently operating up to 10 rigs across the border per day, but that it could boost the volume to as many as 200. Under growing international pressure to reduce its purchases of Iranian crude, Ankara has been courting the autonomous Kurdistan region on its south-eastern border for some time. That has angered the Iraqi capital, which claims it should control all hydrocarbons in the country. However, Turkey is also hoping to strike a deal with Baghdad separately. A Kurdistan regional government source said earlier this week that it had sent a small amount of oil to Turkey by trucks in exchange for diesel, adding it needed the refined product to run power stations. Yildiz confirmed that the trade is taking baby steps, telling reporters: "Crude purchases from northern Iraq have begun with a volume of 5-10 road tankers. This may rise to 100-200 tankers a day," according to Reuters. 149. Turkey aims for $17bn investment in twin industrial zones Hurriyet Daily News July 10, 2012 The Ministry of Industry plans to establish two industrial zones, one in the Filyos district of Zonguldak, a province along Turkey's western Black Sea coast, and another in the Karapınar district of Konya, a central Anatolian province. It is estimated that the two zones will attract a total investment of nearly 17 billion euros. The integrated industrial zone to be established in Zonguldak's Filyos district will focus primarily on iron and steel, cement, shipyards and power stations. In Konya's Karapınar a "specialized energy zone" will be built. The Karapınar Specialized Energy Industrial Zone is slated to be a pioneering step for solar power investments. Industry Minister Nihat Ergün has said that the estimated potential investment at each of the Kilyos and Karapınar industrial zones is 8.5 billion euros. Noting that 21 mega-watts of solar power investment on 1.95 million square meters of land in Spain cost 300 million euros, Ergün said: "[The area of] the Karapınar Industrial Zone is nearly 59 million square meters, so the total investment cost for

facilities of 590 mega-watts of annual installed capacity [should] amount to 8.5 billion euros." The Filyos Industrial Zone is planned to be established on four million square meters of land, Ergün said. "It takes $1.6 million of fixed investment for one mega-watt of installed capacity. The cost of establishing an iron and steel plant on 500,000 square meters of land amounts to nearly $1.5 billion. If all investments in this zone are in the iron and steel industries, the total investment cost is calculated at $10.5 billion of fixed investment on a total of 3.5 million square meters of land." The minister said additional incentives may be put in place on the back of the recently announced new incentive system. Nationalization and infrastructure costs will be covered by the budget of the Ministry of Industry. The ministry has pledged to complete all the legal procedures, including obtaining the authorization and environmental impact statements, in just three months. 150. Turkey climbs FDI rankings Balkans.com July 9, 2012 Turkey's ranking as a global foreign direct investment (FDI) destination jumped 6 spots to the 23rd place up from the 29th with the surge of foreign investments into the country last year. Prepared by the United Nations Conference on Trade and Development's (UNCTAD) , the report entitled 'World Investment Report 2012: Towards a New Generation of Investment Policies' states that Turkey stood as an exception to regional trends, referring to the political and social upheaval in its region, and registered an admirable increase in FDI inflow. Turkey attracted USD 15.9 billion of FDI in 2011, a 76 percent hike from a year earlier. The remarkable increase in FDI inflow lifted the country to the 23rd spot in the report surveying a total of 211 countries, underpinning a strong tendency to return to the pre-crisis levels. Turkey had attracted USD 22 billion in 2007, the year before the global financial crisis broke out. The report disclosed by the International Investors Association of Turkey (YASED), also shows a strong performing Turkey in terms of FDI attraction in the developing nations category. Turkey climbed to the 12th place among developing nations, up from 16th place in 2010. "Turkey's 76 percent increase is among the highest levels observed among developing nations.., " said YASED's Secretary General Ozlem Ozyigit, presenting the report yesterday. "Primarily, we wish Turkey to reach the pre-crisis FDI levels and attain a sustained growth in FDI flow in line with the country's increasing regional and global potential..", she commented. Turkey drew USD 110 billion of FDI in the last 9 years and aims to attract at least USD 20 billion in 2012. 151. Turkey to send team to Iraq to study oil pipeline plans Stratfor July 12, 2012

Unnamed Turkish Energy Ministry officials confirmed Wednesday that Ankara is preparing to send a technical delegation to Iraq, supposedly at Baghdad's request, to discuss building an oil pipeline linking southern Iraq and Turkey. This comes after Turkey has reportedly begun construction on a new oil pipeline connecting Kurdish energy fields to Turkish ports. Even though Iraq's central government has responded negatively to the Kurdish Regional Government's (KRG's) increased reliance on Turkish support in its ongoing dispute with the government of Iraqi Prime Minister Nouri al-Maliki, Ankara's approach of offering concessions and projects to both Baghdad and Arbil seems to be gaining ground. Wednesday's announcement represents an important leap forward for Turkey's ambitions in Iraq and, if successful, will make Turkey the premier enabler of foreign investment and development plans for both northern and southern Iraq. Stratfor has long anticipated Turkey's regional rise, and Wednesday's decision is an important indicator that Ankara is ready to make strategic energy moves to deepen its influence in the region. Any external ambitions required Turkey to first address its internal Kurdish issue. Ankara has therefore worked to develop a closer relationship with the KRG in hopes of reining in Kurdish separatist militancy. Turkey is making progress in reorienting the Kurdish region's economic and energy focus northward, keeping Arbil critically dependent on Ankara and linking their continued mutual success to the containment of Kurdish militancy. But Turkey is not stopping at northern Iraq. It appears that Turkey is preparing to extend its influence to Baghdad and oil-rich southern Iraq, bringing Ankara in even closer competition with Iran. The proposed Kirkuk-Basra pipeline would link the burgeoning crude oil production of Iraq's southern oil fields with northern export pipelines. The extension would allow Baghdad to transport nearly 80 percent of current exports north through Turkey, bypassing the Strait of Hormuz. The central government and its foreign investors have been dissatisfied with the performance of recently built terminals along Iraq's coast, and Baghdad will likely find Turkey's offer difficult to refuse. But Turkey has bigger plans in play than laying pipes south of Kirkuk. Turkish energy consumption and power generation needs are expected to increase dramatically in coming years, and Iraq is in a particularly good position to meet those needs. By working to solidify its position as an East-West energy transportation hub, Turkey can use stable crude oil and gas deliveries from Iraq to incentivize positive negotiations with Europe by helping Europeans break their dependence on Gulf oil shipped through the Strait of Hormuz. While still undeveloped and lacking necessary infrastructure, Iraq's proven natural reserves hold more than three trillion cubic meters, much of it in the Kurdish region. The volume of Kurdish natural reserves could replaceTurkey's current imports from Russia for the next 50 years. As Turkey begins to present a more meaningful challenge to Iranian influence, Tehran will have to expend more effort to maintain the gains it has made thus far before trying to extend itself further in the region. Iraq will become Iran's priority. Keeping Tehran preoccupied closer to home could take some of the pressure off Turkey as it seeks to build stronger relationships with former Ottoman territories in the Levant. Key Arab stakeholders in the region, such as the Gulf Cooperation Council states, are indeed wary of Turkey's expanded influence, but these states are

sure to appreciate any move that might curtail Iran's influence in Iraq and beyond. Decreased energy dependence on Russia will also be crucial as Turkey seeks to reassert its former position in the Balkans and Eastern Europe. Iran will likely balk at the idea of greater Turkish influence in Iraq, but Tehran lacks the capital and technology to counter Turkey's offers in a meaningful way. Beyond the technical specifics of hydrocarbon redistribution, Ankara is revealing itself to be a more capable partner for Baghdad's long-term success than Tehran. Turkey can provide the infrastructure and stable export routes that Iran cannot, a fact international oil companies will not overlook. Greater leverage in southern Iraq, the Shiite-dominated bastion of Iranian influence in Mesopotamia, would be a significant boon for Turkey's regional ambitions. Iran will staunchly resist any Turkish encroachment, however, and Baghdad is unlikely to abandon Tehran overnight. While Turkey's economic levers are impressive, Iran has several tools at its disposal to challenge Turkish ambitions --namely Shiite militant proxies, intra-Kurdish rivalries and strong sectarian links to southern Iraq. Unlike its very public and combative statements on Syria, Turkey's stealthy maneuvering in Iraq via energy channels reveals the country's ongoing transformation into a significant regional power. 152. Turkey's auto production keeps its foot on the brakes in June bne July 13, 2012 Turkish vehicle production fell 13% year-on-year to 95,351 units in June, the Automotive Manufacturers Association (OSD) said on July 13, according to Reuters. The industry lobbyist said that the sector is feeling the impact both of a shrinking export market in Europe and weaker domestic demand. In the first half as a whole, output fell 9% to 564,716 units, the OSD said in a statement. 153. Turkey's electricity consumption hits new peak Hurriyet Daily News July 12, 2012 Turkey recorded its highest daily electricity consumption record since the inception of the Turkish Republic in 1923 on July 10, with 744.7 million kilowatts of electricity consumed, according to data released by the Energy and Natural Resources Ministry. In the first days of July daily electricity consumption averaged 725-730 kilowatts, but it hit 744 million on July 10. According to the ministry, electricity usage for agricultural irrigation in southeastern Anatolia, industrial production, and the current heat wave, which has spurred the use of air conditioning, are the reasons behind the record. Ministry officials also expect the level of use to continue increasing in the coming days, but stressed that there will be no disruptions in electricity. Turkey turned to neighboring Georgia and Bulgaria to help make up shortages of electricity on July 10. Electricity consumption in June was up 11.3 percent compared to the same month last year, reaching 20.4 billion kilowatts. In the first half of 2012, electricity consumption was also up 8.1 percent year-on-year, hitting 119.3 billion kilowatts. Energy trading hub

Turkey is likely to overtake the U.K. as Europe's third-largest electricity consumer within a decade, and is seeking to become an energy trading hub, capitalizing on its booming population and economy as well as its proximity to cheap natural gas resources, according to Reuters. At 75 million and growing, Turkey's population is set to overtake Germany's, currently the EU's largest at 82 million, by 2025. Its economy has been booming for years, although the crisis in Europe has slowed its rate of growth. The government is keen to develop Turkey into the benchmark electricity market for trading in spot and derivatives contracts for southeastern Europe and much of Central Asia. "As a bridge between Asia and Europe, Turkey has the potential to develop a reference price for this region," said Turkish Energy Ministry Undersecretary Metin Kilci. Analysts say the liberalization of Turkey's power markets has made them attractive to foreign investors. "The Turkish electricity market has taken a lot of steps towards liberalization and reorganization," said Richard Sarsfield-Hall, a principal at the energy consultancy Poyry, who has advised energy companies on entering the Turkish market. A number of major utilities have begun eyeing Turkey for expansion. Turkey plans to finalize the privatization of electricity distribution by the end of this year, Energy Minister Taner Yıldız said at an Ankara meeting yesterday. Addressing journalists at a meeting with electricity sector representatives, Yıldız said the privatization board and the ministry are currently working on the issue. 154. Turkish drug maker to enter European market Hurriyet Daily News July 9, 2012 Toksöz Holding's Sanovel, a drug manufacturing firm, has begun producing breathing apparatuses for patients suffering from chronic lung disease and asthma. Sanovel plans to export the apparatuses to Europe, according to daily Hürriyet. There are about 8 million patients suffering from chronic lung disease and asthma, Ahmet Toksöz, a board member of the holding, said. "There are potential patients both in Turkey and around the world. We have conducted six years of research and development work, with a total investment of 10 million euro." Sanovel is the first domestic firm to produce products in this field, Toksöz said, adding that the firm's goal was to be the market leader within three years. Sanovel has founded a firm in the Netherlands to export its products across Europe. The firm has liaison offices in France and Germany. "Apart from that, exports will commence toward Georgia, Azerbaijan, Kazakhstan, Ukraine, Uzbekistan, Kosovo and Macedonia," Toksöz said. "Takeover offers from foreign firms give us a headache," Toksöz said, adding that the holding has no plans to sell off Sanovel. "But we may take a foreign partner on board to help us grow abroad and enter the world pharmaceutical league." 155. Turkish energy dependency - Sounding like a broken record...

Ozgur Altug Chief Economist BGC Partners 13 July 2012 It is the destiny of economists, who cover Turkey. From time to time (at least twice a year!) we have to repeat the analysis on Turkey’s energy dependency, since more than 90% of the petroleum and natural gas we use is imported. Whenever petroleum goes off the roof, investors rightfully start asking questions about the impact of rising oil on Turkey. Whenever it falls like a rock they start questioning the implications of declining oil on Turkey’s current account deficit & inflation. Y-t-d average petroleum price came down to US$114, whereas spot Brent price is now around US$100 per barrel. Our annual average petroleum price forecast for 2012 was US$100 in early 2012 and we revised it up to US$115 in parallel to consensus estimates in May. But as long as the petroleum price remains below/around US$100, we will be forced to revise down our average petroleum price forecast for this year with the reservation that developments about Iran and large central banks’ willingness to pump liquidity into the global financial system could change the whole petroleum outlook in near future. Besides, Brent looks technically oversold, while petroleum price for break-even budget in oil-rich countries increased significantly because of the Arab Spring. Anyway, we think that it is time to present the impact of lower petroleum on Turkey AGAIN. A- What is the relationship between Brent oil price and Turkey’s C/A deficit? The amount of the impact of petroleum on C/A deficit changes from time to time depending on the size of Turkey’s net energy imports. By taking the new level of energy need of Turkey into account, we calculate that every US$10 decline in Brent oil reduces Turkey’s net energy imports by US$5.0 bn (0.6% of forecasted GDP) or vice versa. If Brent oil remains at around US$90 in 2H12, we will be forced to revise back our average Brent oil forecast from US$115 to around US$100 and consequently, we will be cutting down our C/A deficit forecast from US$68.0 bn (8.5% of forecasted GDP) to US$60.5 bn (7.5% of forecasted GDP) for end-2012 against the C/A deficit of US$77.3 bn (10.0% of GDP) in end-2011. B- How does petroleum influence overall economic activity? Our computations point out that oil price increases/decreases do not have an instant impact on Turkey’s GDP growth. We observe that the impact of changing (permanent) oil prices has a meaningful influence on Turkey’s GDP growth after four quarters. We employed two approaches in order to measure the size of the petroleum price impact on Turkey’s GDP growth. And according to the outcome, every US$10 decrease in average Brent oil price increases Turkey’s GDP growth by 0.2-0.5 pp with a lag of four quarters. C- How is Turkey’s CPI inflation influenced by a decline in Brent price? Out of 444 items in the CPI basket, there are six large items, which get affected directly from Brent oil price fluctuations. These items are: Electricity (3.11% weight in the basket), natural gas (1.32% weight), cylinder gas (1.45% weight), gasoline (2.25% weight), LPG (1.49% weight), and diesel (1.17% weight). In total, 11% of the CPI basket is directly linked to Brent oil price. We primarily focused on first round effects of a Brent oil price decline, as the second round effects come with a lag and are affected by other factors. Arithmetically, we could have said that every US$10 decline in Brent oil (roughly 10% decline) reduces Turkey’s annual CPI inflation by 1.1 percentage points directly by looking at the total weight. However, the situation in Turkey is a little bit different because of the energy taxation system and pricing of natural gas & electricity (see details in the note). We calculate that the direct impact of a 10% decline in Brent oil on Turkey’s annual CPI inflation is 0.26 percentage

point. If the Government were in a position to adjust the domestic natural gas and electricity prices in accordance with the change in Brent oil price another 0.45 percentage point decline would have been possible in annual CPI inflation bringing total direct impact of a 10% Brent oil price decline on inflation to 0.71 percentage point. 156. Turkish judicial reform starts with disputed rulings Hurriyet Daily News July 11, 2012 Deputy PM Atalay says 10,000 prisoners will walk free with new reforms, but Kurdish MPs remain in jail even as far-right militants are set to gain their freedom Around 10,000 people currently held in jail although not convicted of crimes will be released, thanks to a recently adopted legal arrangement extending the scope of judicial control measures, Deputy Prime Minister Be_ir Atalay has said. "This is a progressive step for democratization. I consider it important, as it is one of the latest laws of the current legislative year. Specially authorized courts have been abolished. The methodology of the investigation section before a case is opened has particularly changed. Arrests and trials [conducted with the suspect] under arrest have almost become an exceptional practice with this law," Atalay told reporters in Ankara yesterday, referring to the recently adopted third judicial reform package. "A new judicial control mechanism has been installed, so according to our estimates 10,000 people will benefit from the judicial control mechanism and will leave prison. It has also sped up the trial process," Atalay said. The reform also raised hope for the eight jailed deputies, who were elected while in prison in the June 12, 2011 elections. However, hours after Atalay mentioned possible releases, a Diyarbakır court rejected a demand for the release of Peace and Democracy Party (BDP) deputy _brahim Aydın, saying the conditions for judicial control measures were not met. A Diyarbakır court's July 7 ruling rejecting a demand for the release of another BDP deputy, Faysal Sarıyıldız, caused disappointment. With the adoption of the reform, judges will be able to implement judicial control without a maximum limit, rather than relying on detention. While Cabinet ministers have constantly underlined the importance of judicial discretion, particularly in the situation of the arrested deputies, the main opposition Republican People's Party (CHP) criticized the ruling Justice and Development Party (CHP) for such statements. "Judges are required to provide concrete justification for continuation of arrest; detention cannot be arbitrary. If there's no likelihood of flight or destruction of evidence for those who are under arrest now, the courts have to release them under the law. Courts do not have the right to act arbitrarily," CHP deputy Ali Rıza Öztürk said yesterday. According to figures provided by the Justice Ministry and valid as of June 18, there are 34,720 people under arrest in prisons. Dialogue and terror When reminded of calls for peace from Kurdish intellectuals, Atalay referred to a June 30 meeting between Prime Minister Recep Tayyip Erdo_an and independent Diyarbakır deputy Leyla Zana to discuss the Kurdish issue. "We are glad that these issues are being discussed within democratic processes," Atalay said. Voicing support for dialogue between Kurdish intellectuals and politicians, Atalay said, "The only

condition is not tolerating violence and terror." Meanwhile, Atalay said, the date chosen by the BDP for arranging a rally in Diyarbakır had drawn attention. The date coincides with the first anniversary of a deadly attack by the Kurdistan Workers' Party (PKK) and the Kurdistan Communities Union (KCK) in Diyarbakır's Silvan district. It also coincides with the announcement of democratic autonomy last year. 157. Turkish opposition seeks repeal of law opening property sales to foreigners Hurriyet Daily News July 13, 2012 Main opposition Republican People's Party (CHP) has appealed to the Constitutional Court to annul and suspend a recent bill regarding the sale of property and land to foreign nationals, arguing that some provisions in the bill are unconstitutional. "This bill has led to a dangerous process for public interest and the country's indivisible integrity and security. Most of the limitations, including the reciprocity principle, have been removed and our country's lands are being commercialized," CHP deputy Ali Rıza Öztürk said after submitting appeal. The bill that eased restrictions on the sale of land and real estate to foreign citizens and firms was adopted on May 3, despite harsh objections from opposition parties. The bill removes the condition of reciprocity and increases the total amount of real property that a foreigner can own from 25,000 square meters to 300,000 square meters across the whole country. The amount of property owned by foreigners in a given district cannot exceed 10 percent of the privately owned real estate there. The CHP's Öztürk said the sale of property and land to foreigners was a very crucial issue considering Turkey's strategic location. "The centrality on this issue cannot be ignored, while imperialism has changed its name but never given up its aims to control all energy and water resources as well as agricultural areas. The new regulations regarding the excessive sale of land to foreigners are unacceptable and don't consider projects that threaten our country's secular and unitary structure and its territorial integrity," Öztürk said. Öztürk stressed that they were not against "measurable" property and land sale to foreigners, but argued that the given bill breached Turkey's national interests. "Allowing foreigners to own property is a natural consequence of momentum in international political, economic and social relations. We don't have any hesitation on this. But this bill is against Turkey's national interests. The country's lands should not be abalienated for the sake of short-term commercial interests," Öztürk said. 158. Turks refuse GM food, poll reveals Hurriyet Daily News July 9, 2012 Some 83 percent of Turkish people are against consuming food from genetically modified (GM) organisms, according to a survey by Greenpeace. Some 82.3 percent of the population has some knowledge about GMs, said the survey conducted by 4,860 people.

Nejat Dinç, the man in charge of Greenpeace's Mediterranean Agriculture Campaign, told Radikal that Turkish citizens know well about GM food despite a common prejudice suggesting the opposite. Nearly 80 percent of participants said their confidence in a food company would drop if the company used GM products, while 60 percent said they would not buy the products of a company that produces GM food. The questions addressed both directly modified food, which is forbidden in Turkey, and the products of animals fed with GM materials. The Greenpeace survey was conducted in 42 provinces across Turkey. The Agriculture Ministry is working on a labeling system that will mark food from GM-fed animals. Some 60 percent of the participants in the Greenpeace survey said this would increase their outlook on "the government's sincerity on food security." The survey has shown that citizens demand appropriate labeling on meat, milk and eggs from animals fed by GM products, Dinç said. Figures indicate that belief in Food, Agriculture and Livestock Minister Mehdi Eker's sincerity about food security will improve with such labeling. However, 72.8 percent of those surveyed said they were not satisfied with the current inspections on GM food. "The lack of inspections by official institutions is a long-bleeding wound. This applies to the food issue also and the situation is even worse in the sector. Thus, people do not trust that the food, agriculture and livestock minister is implementing enough inspections on the GM issue or is capable of doing so," Dinç said, adding that it is impossible to inspect GM products once they enter the system.

CENTRAL EUROPE INVESTMENT 159. Czech telecom regulator opens frequency auction bne July 13, 2012 Czech telecommunication regulator, CTU, officially launched an auction of new frequencies in the 800 MHz, 1800 MHz, and 2,600 MHz ranges on July 12. Whilst the sale was originally trumpeted as a bid to attract a fourth full operator to the market, all has gone quiet on that front. Bidders for the frequencies - which include the three incumbent players that share the market - Telefonnica O2, T-Mobile and Vodafone - should apply before September 10 and the regulator expects to choose a winner before the end of the year, CTU said in a statement published on its website, reports Bloomberg. The "transparent" auction should speed up development of high-speed mobile broadband services, ensure an effective usage of frequencies and boost competitiveness on the market by an entry of a new provider, CTU's head Pavel Dvorak said in the statement. However, whilst CTU created much fanfare when it launched the process, saying it hoped to find a challenger for the three market players - who have pushed Czech mobile costs for consumers to the highest in

Europe - and stressing that it had sent out pitches to dozens of potential new operators, it has since withdrawn the most suitable frequency for a fourth full operator from the auction. Instead, it says that it now expects a new player to work as a virtual operator, i.e. to offer services using bandwidth bought from one of the current players. 160. EBRD invests in Hines' Russia & Poland Fund EBRD July 12, 2012 Project Description The EBRD has signed an equity investment amounting to the lower of (i) EUR 100 million or (ii) 30% of total capital commitments of Hines Russia & Poland Fund (the "Fund"), a closed-end investment fund established as a Luxembourg fonds commun de placement. The Fund's objective is to seek long-term capital appreciation through investments in institutional quality developments, re-developments, and income-producing real estate projects. The target investments of the Fund will be in office, residential, logistic/warehouses, retail and mixed-use projects in Russia and Poland (the "Region"). The Fund will also target distressed opportunities as they arise on the market. Transition Impact The Project's transition impact will stem from the following: Increasing competition and expanding private real estate equity markets, especially by supporting investments in regional cities and providing liquidity to the Region which should encourage participation of institutional equity investors in these markets and stimulate competition in the economy. Demonstration effect: The role of EBRD as an anchor investor was important in encouraging other investors to participate in the Fund. The successful closing of the Fund is expected to have a positive demonstration effect on other equity investors in emerging markets, by building broader confidence among potential investors to invest in Russia and Poland real estate. Setting standards. Hines is a global leader in sustainable property development and the Fund is therefore expected to introduce to the Region improved environmental standards and especially energy efficiency measures. The Client The Fund is managed by Hines R & P Management Company S.à r. l. (the "Management Company"), a limited liability company organized under the laws of Luxembourg. Hines is a reputable international real estate firm established in 1957. Currently, the firm has a presence in more than 100 cities around the globe and it controls assets valued at approximately USD 22.9 billion. EBRD Finance

The lower of (i) EUR 100 million equity or (ii) 30% of total Fund capital commitments. Project Cost The size of the Fund is about EUR 390 million. 161. GRGBanking sites EU subsidiary in Lithuania Press release July 10, 2012 ATM manufacturer GRGBanking has established its Europe subsidiary in Vilnius, the capital city of Lithuania. The office, which opened on March 9, 2012, will serve as GRG's springboard for the further expansion in Europe. "Knowledge of regional languages, markets and culture is important to the success of a sales office, and Lithuania has a great talent pool for this kind of work," said Pranas Griskevia_ius, director of GRG Banking Equipment Europe UAB. The new Lithuania-based subsidiary will provide equipment maintenance and ensure service quality control throughout Europe. The company plans to build a team of 50 members, including sales managers, project managers, engineers and technical support specialists, in a few years. "The cost of deploying a technical support specialist from Vilnius to another European city is quite small, and the entire continent is accessible within two or three hours from Lithuania. In Germany, it can take that long to get from one point to another in the same city," said Griskevia_ius. 162. Hungary's fourth mobile operator substantially delayed Equilor July 10, 2012 A meeting yesterday resulted in further delays of the 4th mobile operator's launch , as the three existing providers and the local authority could not reach a final decision. The telecom companies will meet again after the summer holidays, therefore the next round is due on September 3. Considering the legal, physical and other resources of a network start, it is clearly impossible to start the service in the capital (Budapest) by the end of this year. Furthermore, as the concession contract obligates the 4th operator to do so, they will face another round of legal action. Hence, the network start may be pushed to Q2 2013 from the original Q4 2012 schedule, which is positive for MTEL shares. However, market players have been more or less aware of this fact, price effect could be limited, in our view. 163. Kia joins Slovakia's carmaking bulls as it forecasts another record year bne July 11, 2012 Kia gave the Slovak economy another boost on July 10 when it became the latest of the country's carmakers to offer a bullish outlook for the second half of the year. The South Korean company announc The South Korean company follows Volkswagen in forecasting raising production in Slovakia thanks to better-than-expected demand in

both Europe an demurring markets. The robust performance of the auto sector helped Slovakia record the highest GDP growth in the EU in the fourth quarter of 2011, with the first three months of this year also relatively buoyant. Kia said it expects record production above 285,000 cars at its Slovak plant this year, boosted by a strong first-half performance that saw output rise 10% to 149,000 cars, reports Reuters. CEO of the local unit, Eek-Hee Lee said European and Russian demand for the Sportage sport utility vehicle, the Venga small family saloon and the Cee'd compact is lifting output. Around 20% of Kia's Slovak production is sold in Russia, with 12% headed to Britain and 11% to France. Kia posted a 10% rise in production at its Slovak factory in 2011 to 252,000 vehicles, beating its pre-crisis peak of 201,000 cars in 2008 for a second consecutive year. Kia said it will adjust its Slovak production lines to launch a new model during a scheduled summer break for two weeks at the end of July and beginning of August. 164. Poland reportedly set to maintain state control and high taxes on shale gas bne July 10, 2012 Details emerging from Poland's delayed shale gas bill include a 40% state stake in every concession and 40% tax on output, local media reported on July 10. The conditions appear unlikely to help Warsaw attract crowds of new investors to push its already questionable ambition to turn the country into a major gas producer. Poland's conditions for operators of its unconventional gas and oil have been long awaited by investors, some of whom have already started exploration. However, amidst negative news flow this year - the country's estimated recoverable reserves were dropped by around 90%, whilst disappointing drilling tests saw Exxon Mobil pull out of Poland in June - a legal framework is yet to be presented. A planned unveiling of contains for production licences and a tax regime was cancelled last month. However, Dziennik Gazeta Prawna reports that the state will control 40% of each and every concession. That will do little to calm foreign investors who have complained that they have met rising nationalism amongst officials since the turn of the year when the poor test results started to flow. The 40% tax rate will hardly encourage prospectors either. Rather, the rate appears to support at the government's recent strategy to put state-controlled companies front and centre in the shale gas push. "The question of the state's participation in concessions is taken into account, but the bill is being fine-tuned and it's too early for any further details," Magda Sikorska, spokeswoman for the Environment Ministry, told Reuters. The ministry had earlier said the bill would cover issues related to exploration and extraction of oil and gas from both conventional and unconventional sources, including taxation, licensing and environmental issues. It will also assume the creation of a state operator responsible for supervising oil and gas exploration, as well as a special hydrocarbon fund that will invest part of hydrocarbon tax revenues in education, research and development. The draft bill will later undergo consultations with other ministries, social partners and the industry. 165. Skanska to Construct Road in Poland for PLN 245m Press release July 12, 2012 Skanska has received the construction contract for a road stretch in Silesia, in southwestern Poland. The customer is the Marshal's Office of Silesian Voivodeship.

The contract value amounts to PLN 245 M, about SEK 510 M, which is included in order bookings for Skanska Poland for the third quarter of 2012. Skanska will build a 2.8 kilometer stretch of road along the highway Drogowa Cloth Srednicowa, between Gliwice and Zabrze. The work also includes two road crossings, four viaducts and a bridge over the river Klodnica. The project is expected to be completed within 25 months. Skanska Poland, one of the largest construction companies in Poland, had sales of SEK 10 billion in 2011. The company has about 7,700 employees. Skanska Commercial Development and Skanska Infrastructure Development are also active in Poland. 166. TeliaSonera makes goodwill impairment charges in Norway and Lithuania Press release July 12, 2012 After recent impairment tests, TeliaSonera has decided to make non-cash goodwill impairment charges in in Norway related to NetCom and Lithuania related to Omnitel. For NetCom, the impairment charge will be SEK 2,752 million. The charge primarily relates to the substantial goodwill amount created at the acquisition of the company in 2000, and the current assessment of the achievable long-term return on investment. The goodwill impairment charge in Omnitel of SEK 318 million is based on a decrease of the total value of the Lithuanian mobile market related to competition and price pressure. The total goodwill impairment charge of SEK 3,070 million will be reported in TeliaSonera's second quarter consolidated financial statements, and classified as non-recurring items, with no effect on cash flow. The goodwill charges are based on long-term assessments, and not specifically related to the short-term performance of the respective business unit. 167. airBaltic Signs Letter of Intent for Up to 20 Bombardier CSeries Airliners Press release July 10, 2012 Bombardier Aerospace announced today that Riga, Latvia-based Air Baltic Corp. (airBaltic) has signed a letter of intent (LOI) to acquire 10 CS300 aircraft and take purchase rights on a further 10 CS300 jetliners. Based on the list price of the CS300 airliner, a firm-order contract with the network carrier will be valued at approximately $764 million US, and could increase to $1.57 billion US should the 10 purchase rights be converted to firm orders. "As we look to replace the older aircraft in our fleet, matching the requirements of our business plan, we reviewed the narrowbody platforms from the major airframers and determined that the all-new CS300 aircraft was the best fit. With its advanced

technologies, it is optimized for our market sizes and will be an excellent companion to the eight Bombardier Q400 NextGen turboprops in our fleet," said Martin Gauss, Chief Executive Officer, airBaltic. "The superb economics of the aircraft and the delivery timeframe that is available to us are also key factors in our decision to choose Bombardier's CS300 airliners for our network." "In addition, the travelling experience of our passengers will be further enhanced by the CSeries aircraft's widebody comfort, including the five-abreast seating and wider middle seat," added Mr. Gauss. "The CSeries aircraft program continues to reach new milestones, expanding into new markets with unique applications. As the newest customer to join the CSeries aircraft program, airBaltic _ known for being innovative _ demonstrates the growing demand and need for unmatched technologies and operational flexibility," said Mike Arcamone, President, Bombardier Commercial Aircraft. "We are thrilled that airBaltic will look to the CSeries aircraft to implement its new initiatives and integrate new levels of passenger comfort. The diversity of the CSeries aircraft customers - from national carriers such as airBaltic, major network carriers, low-fare airlines, premium airlines serving city centre airports, and leasing companies - speaks volumes about the flexibility of the aircraft to serve diverse air transport needs worldwide."

OTHER COUNTRIES 168. Mongolia tackles corruption Frontier Securities 12 July 2012 While June elections were inconclusive, the one clear issue driving votes was corruption. While Mongolian legislative elections held on June 28 produced no definitive winner with an outright majority, the polarization of the results reflects widespread popular discontent with the status quo in a country heaved onto the international map by its vast range of natural resources which are coveted by multinational extraction companies. The opposition Democratic Party won 31 seats in the election, ahead of the ruling Mongolian People's Party, with 25 seats in the 76-member body. A coalition government is expected to be formed. The overriding issue was corruption, mostly as a result of mining concessions that appear to have been granted primarily to put money in the pockets of the elite. That can be expected to carry into the next months. Foreign miners and Chinese interests should expect a departure from the laissez-faire approach of the past, and the results could imply a partial revision of old purchasing or equity contracts. It is possible that the price of coal sold to China will be revised upward, or the 66 percent holding by the Ivanhoe-Rio Tinto joint venture in Oyu Tolgoi, one of the world's largest undeveloped copper-gold projects, could be modified. Still, an extreme form of resource nationalism or Chinese discrimination is highly unlikely despite the fact that anti-Chinese and anti-mining sentiments have a long and well-documented history in Mongolia. The results are less reflective of xenophobia than the perceived failings of the previous coalition government, seen as a giant corruption machine that has done little to improve society. Apathy to the

system was reinforced by a low voter turnout of only 65 percent, versus 74 percent in 2008 and 82 percent in 2004. The previous government was a coalition between the Mongolian People’s Party (MPP), the former Communist Party and traditional elite, and the opposition Democratic Party (DP). However, the MPP had the majority and controlled the council of Ulan Bator, the only real city in this country of 3 million. In the capital, the Democrats won a resounding victory, emphatically throwing out the People’s Party, which won no seats in any districts. … 169. Mongolia’s Bid To Dodge The Resource Curse Through Green Power EBRD 12 July 2012 As Mongolia goes to the polls for parliamentary elections the country – remote, still largely unknown, the most sparsely populated on Earth – is enjoying a rapid and well documented boom as it begins to exploit its vast mineral wealth. “We want to be Chile” – this is the mantra of many Mongolians. They are not after the Chilean climate or its wine but rather they aspire to join the ranks of those resource-rich countries that have managed to avoid the “resource curse” and achieve a sustainable, fair and balanced economy. To the west, the Mongolian story so far has been “mine, all mine”. With potential billions at stake, the talk is only about Mongolia’s commodities and the massive infrastructure building opportunities that go with them. At the same time an affinity for nature and respect for the environment are deep-seated elements of Mongolian culture, naturally so given its nomadic roots. It was this spirit that, back in 2004, inspired the Newcom group to start investigating the possibility of windpower. Eight years later, I was proud to sign the financing this March for the construction of Mongolia’s first ever windfarm, having been partners with Newcom in its development since 2009. By the end of this year 31 turbines, each 100 metres high, will be installed at the Salkhit (meaning “windy”) mountain, 70km outside Ulaanbaatar. In 2004, the very idea of windpower in Mongolia seemed extraordinary and many asked why a poor, isolated country should invest in such challenging technology. But the project originated and was sustained throughout its development not just by commercial interests but also by a deep respect for the environment and a vision of a future for Mongolia that is sustainable and diverse. Physically, Mongolia is an extraordinary country – no visitor returns unmoved by its vast, eerie beauty. But it is also fragile and a country of extremes: freezing in winter, baking in summer and dry all year round. Its environment is damaged in many places and Ulaanbaatar is one of the most polluted cities in the world, its air quality degraded by the burning of cheap, dirty coal and similar fuels. The Salkhit windfarm can certainly help with these problems. Its electricity will displace generation that is currently coal-fired, providing about 5 per cent of the nation’s needs from this clean, renewable resource instead. In time other windfarms will follow. As anybody who has ever been blown off their feet by that super-potent Mongolian national resource would testify, it has no shortage of wind and no

shortage of empty spaces for windfarms. But intermittent wind power cannot be relied on completely and Mongolia will always need to burn some fuels to generate heat. …