November 27, 2009

September 12, 2011 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. Kyiv and Moscow dig in over gas 2. Alfa Bank Investor Confidence Index 3. FAS starts investigations against UC Rusal 4. How to spend it in Poland 5. Institutions and banks drag on Russian competitiveness while EMs thrive 6. Kazakhstan simmers as striking oil workers sacked 7. Nord Stream starts carrying Russian gas towards Europe 8. Ozon scores record Russian e-commerce investment 9. Thoughts from a Renaissance man - The failure of Western political leadership NEWS INVESTMENT 10. Deloitte's CE Top 500 survey shows firms grew revenues average 17% 11. KYIV BLOG: Kyiv and Moscow open school year with a scrap 12. New round of discussions regarding tariffs for Russian monopolies; NEGATIVE for grid companies, POSITIVE for GenCos 13. Ukraine to sign five gas extraction deals 14. Russian Railways could gain control of private operators' fleets 15. Ukraine cites $230 as 'fair' price for Russian gas 16. Ukraine claims Nord Stream will only "slightly" cut Russian gas transit 17. Ukraine govt gets mixed signals on Association Agreement from EU 18. Ukraine president calls on forming CIS free trade zone 19. Ukraine Throws Down Challenge 20. Ukraine to "overpay" $60 billion on gas contract with Russia - Yanukovych SECTOR Gas 21. EDF, Wintershall to each get 15% in South Stream - Gazprom head 22. Gazprom stalls in August, NOVATEK production continues to rocket 23. Gazprom to invest $101 mln in Kyrgyz oil, gas prospecting 24. Gazprom to launch Sakhalin-Khabarovsk-Vladivostok pipeline; details on South stream alliance participation 25. One in, one out: Total to quit Shtokman? 26. Putin launches Nord Stream pipeline 27. Russia to start producing gas at Shtokman field from 2016 28. Ukraine threatens to lure away Gazprom's European clients 29. Ukraine reports rising transit of Russian gas to Europe SECTOR Oil 30. Libyan oil status 31. Oil overview: EIA Short-Term Energy Outlook 32. 60-66: The Road Downstream Is Paved with Good Intentions 33. Bashneft: MET relief discussed; new plans for gas production 34. FAS proposed new antimonopoly rules for the Oil product market 35. Jet fuel prices rose

36. Ministry of Energy might decrease gasoline export duties and it is not ruling out amendments to the tax regime in case of growing oil prices. 37. Oil production rises but exports decline 38. Russian government plans new industrial clusters 39. Rosneft acquiring assets in the Arctic 40. Russian oil output expands to new high of 10.27 mln bpd SECTOR Metals and Natural Resources 41. Evraz plans to enhance iron ore integration 42. FAS starts investigations against UC Rusal 43. Russian miners face transport bottlenecks again SECTOR Power 44. Accounts Chamber finds history of lax capex discipline at FSK 45. Electricity consumption up 1.4% y/y in 8M11 46. FAS: GEH__IES merger would prompt price caps in Center and Urals FCFZs 47. Federal Grid starts connecting Far East and Siberian power markets SECTOR Retail, FMCG 48. Lev Khasis appointed as Senior Vice-President of Wal-Mart Stores 49. Moscow Arbitration Court rejects Auchan's counter-claim to FAS; NEGATIVE for retailers 50. M.Video to rebrand and build new stores in 2012-2014 51. X5 Retail Group's property deal implies more focus on store ownership SECTOR Telecom, Internet 52. Auctions for 4G licenses to take place in 1Q12 53. CapMan invests in Siberian Networks 54. CEE Telecom sector: seasonality and upswing in mobile data to offset weak H1 55. Mail.ru Group's trip notes: Russian internet traffic monetisation is at embryonic stage and is to steepen SECTOR Transport 56. Aeroflot increases number of passengers 25% y/y in August with the year's peak behind us 57. Concerns Grow over Frequency of Deadly Accidents in Russia After Plane Crash 58. Gazprom Neft, LUKOIL, Rosneft and TNK-BP face problems with jet fuel delivery to the Moscow aviation hub 59. Globaltrans Update: Steaming Ahead 60. Medvedev calls for more foreign planes 61. Russia grounds eight planes after deadly crash SECTOR Agriculture 62. Russia's agriculture Ministry joins the line for budget funds with $230bn strategy 63. Russia on course to significantly increase its grain harvest by 2020 64. Rusagro announces results of harvest campaign 65. Rusagro - Sugar prices decoupling 66. Rusagro: 2011 Losses Are 2012 Gains SECTOR Aviation, shipbuilding and defence 67. CORRUPTION WATCH: Whistleblower major jailed for beating soldiers 68. RBC posts solid 2Q11 trading update, announces additional share issue 69. Sukhoi Civil Aircraft to increase Superjet production 70. Russia to sign deal for 2 more French warships by yearend SECTOR Engineering 71. HMS Group continuing to build up backlog SECTOR Media 72. CTC Media: Latest audience share data SECTOR Infrastructure, Construction & Real Estate 73. AFI Development - Takeaways from meeting with CEO

74. East-West split in European office markets as rents stall in Q2 75. Hyatt Announces Plans for Two New Hotels in Vladivostok, Russia 76. Medvedev appoints officials to oversee New Moscow project 77. Q2 saw the largest ever quarterly investment volume in Russia 78. Russia outlines $270bn raod construction plan 79. Transportation, construction and infrastructure - Trends in May-June 2011 SECTOR Chemicals, Fertliser 80. Belarus Economic & Political Instability Bad for Potash Oligopoly 81. PhosChem raises contract price with India for 2H11 82. Uralkali: When the Music Stops - Who'll Find a Seat? GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 83. Medvedev says Russia interested in economic ties with North Korea UKRAINE INVESTMENT 84. Ukrainian-Russian gas dispute 85. Alchevsk Coke to up output by 16.3% MoM in Sep 86. Astarta Holding starts annual sugar production 87. Azarov: Petrol price not to rise in Ukraine 88. Azovmash boosts 8M11 output in value terms by 90% y-o-y 89. Azovmash certified new solebar in Russia 90. Bogdan Corporation becomes official distributor of Great Wall in Ukraine 91. Bogdan increases automobile output by 26% in 8M11 92. Car sector and Bogdan Motors increased car output by 26% YoY in Jan-Aug 2011 93. Bogdan Motors cuts bus production 94. Cabinet increases budget for Burshtin upgrade for Zakhidenergo 95. European Parliament recommends EU Council sign association agreement by yearend 96. Former Naftogaz manager gets three years probation for role in 2009 gas deal 97. Gazprom continues playing hardball over Ukrainian gas contract 98. IMC wheat harvest up 68% 99. Interior Minister outlines fight against police corruption 100. Kryukiv Carriage lines up orders for hoppers 101. KVBZ increases production by 18% 102. Luhanskteplovoz doubles its 8M11 output Y-o-Y 103. Naftogaz Ukrainy pays for August gas imports 104. Naftogaz' underground storage of 19.2 bln m3 is sufficient for heating season 105. Naftogaz' underground storage of 19.2 bln m3 is sufficient for heating season 106. ZAZ ups car output by 67% in 8M11 107. Pivnichniy GOK raises iron ore output by 9% m-o-m in August 108. Russia threatens to break the 2010 Kharkiv Accords with Ukraine 109. State land agency planning to issue 100,000 land deeds by end of 2011 110. Steel output rises 9% m-o-m to 3.0 Mt in August 111. Ukraine considers oil product quotas for Russian Customs Union 112. Ukraine govt plans to submit request to review WTO duties 113. Ukraine grain export duties to stay through end-2011 114. Ukraine moves up seven spots in World Economic Forum competitiveness ranking 115. Ukraine to increase 2011 sugar beet harvest by 20% y-o-y 116. Ukraine to open renovated Olympic Stadium on October 8 117. Ukraine's Bogdan increases automobile output by 26% in 8M11 118. Ukraine's parliament to open fall session on Sept. 6 119. Ukraine's Steel output accelerates in July; 8M11 up 8% y/y 120. UkrAvto beneficiary Tariel Vasadze joins Party of Regions 121. UkrLandFarming to export grain to Saudi Arabia in 2012

122. Ukrnafta launches new multilingual corporate website 123. Ukrnafta restarts Leliakivske field 124. Ukrnafta to expand liquefied gas retail network by 3.5x by end-2012 125. Ukrtelecom plans $400m CAPEX for 2011-13 126. Ukrzaliznytsya raises freight transportation by 8.5% y-o-y in 8M11 127. WTO membership no obstacle for joining customs union - Kyrgyz premier 128. ZAZ boosts production 65% y/y in 8M KAZAKH INVESTMENT 129. Kazakhstan: $163m to be invested in science in 2012 130. Central bank to buy up entire Kazakh gold output until 2014-15 131. Karachaganak dispute could be solved within a month - Kulibayev 132. Kashagan production to begin by 2012 - Eni 133. Kazakh section of Western Europe - Western China highway to be completed in 2012, 2013 134. Kazakhstan to boost railway equipment manufacturing to KZT300 billion by 2015 135. Kazakhstan’s tax regime could attract international companies - official 136. KazMunaiGas launches construction of Beyneu-Shymkent pipeline 137. TCO to resume drilling at Tengiz in 2012 CENTRAL ASIA INVESTMENT 138. Tajikistan one of top reformers on WEF Global Competitiveness Index 139. Gazprom to invest $101 mln in Kyrgyz oil, gas prospecting 140. Kyrgyz government plans to establish development bank 141. TAPI pipeline project members welcome Russia's participation 142. Uzbekistan: GM Uzbekistan upgrades Chevrolet Captiva production 143. WTO membership no obstacle for joining customs union - Kyrgyz premier EURASIA INVESTMENT 144. Armenia: FDI reaches $349.5m in January-June 2011 145. Azerbaijan and EU plan to create common aviation area 146. Azerbaijan and Russia prepare to make changes in agreement on oil transportation 147. Azerbaijan starts preparation of Wind Cadastre 148. Azerbaijan to open Solar Cell Manufacturing Plant at year-end 149. Azerbaijan: Baku airport to be repaired before Eurovision-2012 150. Azerbaijan: New metro station to be launched in main square of Azerbaijan after 5 years 151. Azerbaijan: Small airdromes in regions to be reconstructed in Azerbaijan due to development of business-aviation 152. GM Uzbekistan starts producing of Chevrolet Captiva SOUTHEAST INVESTMENT 153. Albania: Ministry of Economy Suspends Licenses for 55 Mining Companies 154. Aselsan, Turkey's leading defense company introduces new product 155. Bosnia announces Public Tender for selection of the beneficiaries of the grant funds 156. Bosnia: BMI calculates that the Bosnian mobile market grew by 0.9% q-o-q during Q111 157. Bulgaria and Romania are still not ready to join the Schengen Agreement, says German minister 158. Bulgaria mining company Asarel Medet a new gold and copper mining concession 159. Bulgaria's export-oriented companies recorded robust sales and strong profits in the first half of 2011 160. Export of Agricultural Products in Albania Grew 40% in 2011

161. Macedonia: 20m Euros to be invested by Jonson Controls 162. Malta-based IT solutions provider 6pm will open next week a unit in FYR Macedonia 163. Romania could import uranium for Cernavoda 164. Romania has 38 names in top 500 largest companies in the Central 165. Romania: MedLife plans to open the largest occupational health clinic in Romania 166. Romania plans to replace the car pollution tax with annual fees based on the amount of emissions 167. Romania: The EBRD is considering providing a loan of up to €210 million to Romania's hypermarket chain, Louis Delhaize Group 168. Romania: The furniture production grew in Romania by 3.8%in the first 5 months 169. Swedish H&M is opening its first store in Bulgaria in March, 2012 170. Turkish-Israeli ties formally downgraded CENTRAL EUROPE INVESTMENT 171. Gazprom controlling stake in Czech gas seller RSP Energy OTHER COUNTRIES 172. Mongolia: CNPC and Mongolia sign memo for expanding petroleum co-operation in Ulan Bator 173. Mongolia: Meritus Prepares To Drill Untested Targets At Gutain Davaa, Mongolia 174. Mongolia’s First Private Equity Fund Plans Debut Investment in October

TOP STORY INVESTMENT 1. Kyiv and Moscow dig in over gas bne September 5, 2011 Kyiv and Moscow dug into their trenches at this weekend's CIS summit, despite claiming that there is no gas war on the horizon. Whilst things remained civil at least, the hardline statements leave little room for manoevuer, making it hard to see a route that will allow both to retreat with honour. After Kyiv said on Friday that it is to break up Naftogaz, and that will mean new companies which will need to negotiate new contracts, Gazprom CEO Alexei Miller responded by mimicking Ukriane's Prime Minister Mykola Azarov. Reports later the same day suggested that President Viktor Ynaukovych hoped to meet with counterpart Dmitry Medvedev on the sidelines of the summit in Dushanbe in Tajikistan. However, the Kremlin dismissed the idea, leaving the debate to continue to be held via the media. Moscow is offering no leeway, insisting that the current gas contract - which makes Ukraine Gazprom's most profitable export market - must be respected, unless Kyiv agrees to either join the customs union or merge Naftogaz with Gazprom, thus handing over control of its gas transportation system (GTS). A spokeswoman for President Dmitry Medvedev said the current contract must be realized and cannot be revised in a "sole direction," reports RIA Novosti. "Russia is ready to defend its stance on the agreement in any court authority and will act strictly in accordance with this document."

Yanukovych however stated Ukraine's determination, and confirmed that the country will take the issue to international arbitration if needs be. "We have faced a situation in which Ukraine is losing big money ... If Russia does not agree with it, certainly, we will have to go to the International Court," he told reporters, before adding: "I hope we will have enough wisdom to find a common solution, without the court. I consider the court to be the last resort." However, the president also spoke of Kyiv's rising anger, which last week also saw Medvedev call Ukraine's position "sad" and said it is trying to "sponge" from Russia. "We will not allow [them] to talk to us in such way," said Yanukovych. "They pushed us in the corner, at first, and then started to dictate terms. Today it humiliates not only me, but it humiliates the state, and I cannot allow it," As it moves into final talks on taking possession of the gas transit system in Belarus in return for a discount on exports, Moscow is hoping the economic and political pressure in Ukraine will force a similar conclusion, and, with gas prices likely to close on $500 per 1,000 cubic metres in the fourth quarter of the year, is happy to wait it out. Kyiv needs to break this vicious circle, which pits its macro-economic situation and the IMF against parliamentary elections next year. However, the GTS is seen as a guarantor of sovereignty, whilst joining the customs union would disrupt Kyiv's progress towards EU integration. Ukraine has never showed any hint that it would agree to either, and Yanukovych was just as definite at the weekend. "It will not happen," he told reporters unequivocally. Something has to give, and the intransigence of their positions clearly suggests that the pair risk another gas war, such as cut off European customers of Russian gas in 2006 and 2009. However, Azarov said in a TV interview at the weekend that Ukraine is going to play it by the book. "No one will ever live to see any war, including a gas [war] with our strategic partner - Russia," he said according to RIA Novosti. Instead, he claimed, Ukraine will continue to fulfill the valid contract until there is an agreement on a new price. With its bid to cement closer ties with the EU and an eventual membership, Kyiv's position is that it will play by Western rules this time. One difference this time around is that it can afford to do that for the meantime, given that it currently has record high international reserves. However, it suggests that the legal move to annul the contract could come sooner rather than later. The trial of former Prime Minister Yulia Tymoshenko or the unbundling of Naftogaz - which, not by coincidence, will satisfy the European bloc's third energy package which Moscow is fighting so hard against via Gazprom - are likely to be the triggers then. Given the advantageous conditions under the current contract however, it's no surprise that Gazprom is loathe to give up on the current contract, points out Dmitry Loukashov of VTB Capital. "Ukraine is supposed to buy 52bcm of gas annually. This amount could be decreased 20% (to 41.6bcm) by a two-party agreement, and Ukraine ultimately has to pay for 80% under current take-or-pay contracts, or 33bcm. Current prices for Ukraine are very close to those for Europe (including USD 100 discount) – approximately USD 350mcm for Ukraine against USD 340 for Europe. Ukraine might consider this approach as unfair due to the difference in transportation." "The

current scheme is very profitable for Gazprom as the company does not pay custom duties for deliveries to Ukraine (while getting European prices). So if Ukraine achieved its goal of a contract revision, it might negatively affect Gazprom’s financial results. Revision of the current agreement may also affect the company in the longer term as Ukraine is the largest Russian gas consumer among CIS countries." 2. Alfa Bank Investor Confidence Index Alfa Bank September 5, 2011 AB-ICI reflects the dynamics of confidence in the Russian economy: In 2003, we launched the Alfa Bank Investor Confidence Index to predict investors' sentiment towards Russia. AB-ICI performance appears to be in line with the deceleration in GDP growth from the 7.2% 2000-2007 average to the current 4%. This month, we take a closer look at its three components: economic, market and foreign confidence. The first two have driven AB-ICI in the past, with foreign confidence lagging behind. Economic confidence losing momentum: The increase in local confidence through strong deposit growth and dedollarization of savings were key pillars of the AB-ICI in past. The expected slowdown in income growth and risks of higher taxation suggest that the role of this indicator is unlikely to increase, even if the preference for ruble savings will be relatively strong thanks to instability in global currencies. Market confidence likely to remain strong: In the last decade, Russian markets have experienced significant improvement with an increasing number of IPOs, higher diversification of the bond market and an increase in average maturity. Low debt still makes Russia very attractive and will support the market confidence indicator. In the best-case scenario, the low debt will be coupled with continuing IPOs and expanding market diversification. Foreign confidence has huge potential, unclear perspectives: The foreign confidence indicator has substantially underperformed the economic and market components of the index. Despite strong upside potential related to Russia's need to modernize its productive capacities, we believe that the low investment growth will prevent this component from supporting the AB-ICI. The AB-ICI may be seen as guidance for the pattern of the RTS: Starting from 2010, the AB-ICI remained virtually flat and has lagged behind the RTS trend, repeating the 2007-2008 pattern. This suggests that promoting investment-driven economic growth is crucial not only for the Russian GDP outlook, but also for providing fundamental support to equity market dynamics.

3. FAS starts investigations against UC Rusal Alfa Bank September 7, 2011 bne: An interesting piece of news in the face of the protracted struggle over Norilsk. Does it suggest Deripaska is losing his clout in certain circles? ENDS The Federal Antimonopoly Service (FAS) has started investigations against UC Rusal's trading subsidiary. According to press reports, the plaintiff is a small aluminum powder producer that consumes ~$35m of aluminum annually. The FAS is accusing Rusal of refusing to supply aluminum from the Volgogradsky plant, which is the closest to the plaintiff. Instead, Rusal was supplying aluminum from its Krasnoyarsky plant and making the client bear the additional transportation expenses. Potential penalties may be 1-15% of total revenue earned from this type of aluminum in Russia, or ~$20-300m, which is 1-11% of our forecast FY11 EBITDA. It should be noted, however, that the FAS rarely applies a maximum percentage fine. For example, Mechel was penalized 5% of its revenues in 2008. The potential fine may also affect the interest rate Rusal will pay on a $4.75bn syndicated loan facility from a consortium of foreign banks. Rusal is arranging the facility and has not disclosed the covenant details, saying that at the current net debt/EBITDA, the applicable margin is LIBOR +2.35%. Increasing the margin to 3% would mean Rusal would pay an additional $31m in interest on this loan facility annually. The investigation adds additional risk for investors, so the news is NEGATIVE and may be one of the reasons for the stock's underperformance in Hong Kong today. We reiterate our E/W rating on the stock. 4. How to spend it in Poland bne September 8, 2011 With Polish consumers developing a taste for luxury goods, a growing number of premium brands are eyeing an expansion into this rapidly growing market.

Between 2005 and 2010, Poland's luxury goods market grew by 50% to PLN3.5bn (€833m), exceeding the growth rate not only of all the major EU member states, but also of Russia, Turkey and the US, according to a recent report from Euromonitor International. And the nation's appetite for luxury is only set to grow; Citibank forecasts Poland's GDP will rise by 3.8% in 2011, far higher than the desultory growth expected in Western Europe and the US. Presently, there are about 620,000 potential luxury brands customers in Poland. This category includes individuals whose monthly income averaged €3,750 in 2010, according to data from KPMG consultancy. "Poland's luxury goods market is expanding at a steady pace," says Tomasz Wisniewski, a partner at KPMG Poland. "It's an important indicator of the improving quality of life of Poles who often begin to enjoy their life to the fullest and taste luxury after... years of hard work." And there is an increasing number of tastes to choose from. Last year, 61% of world-renowned luxury brands were available to Polish consumers, a rise of eight points over 2009, as shown by figures from KPMG. But there is still room for growth, as many major players are still absent from the local market. This includes LVMH, the global leader in luxury goods, which is rumoured to be planning to open up a flagship Louis Vuitton store in Warsaw. However, some analysts warn that the Polish market may not be ready yet for such heavyweight players, as most Poles still prefer to shop at malls that are generally avoided by premium brands, and the country has few luxury shopping streets. "Most luxury brands are not interested in opening their stores at shopping centres," says Anna Bartoszewicz-Wnuk, director of market research and public relations department at Jones Lang LaSalle Poland. "The fact that Poland's shopping landscape is dominated by malls is a major handicap to the development of the luxury goods market." Compared to other regional capitals, such as Prague or Budapest, Warsaw's luxury retail offer is still quite meagre, Bartoszewicz-Wnuk notes. LVMH's main competitor on the global luxury goods scene, Pinault-Printemps-Redoute, has decided to take the plunge though, announcing plans to launch Warsaw's version of London's Harrod's department store, Wolf Bracka, which will open this year. The group is the world's second-largest player in the luxury market, owning Gucci, Alexander McQueen and Yves Saint Laurent in its brand portfolio. Poland's Paradise Group, which franchises Burberry, Emporio Armani, Hugo Boss, Ermenegildo Zegna and Church's stores, is also continuing its expansion in the luxury goods market and plans to open new stores. The group's owner Jerzy Mazgaj is also a major player in the gourmet food market. Along with the country's growing appetite for Parma ham and creamy Camembert cheese, his Alma delicatessen chain dominates Poland's food sales. In 2010, Alma reported revenues of PLN1.245bn (€296.5m), up 23.3% over 2009, and a net profit of PLN26.5m (€6.3m), a big turnaround from the PLN49.4m loss posted a year earlier. Driven to luxury Besides fashion and food, cars are the other major luxury item. "Over the past few years, we have been witnessing a steady growth of luxury vehicle sales in Poland,"

says Dariusz Balcerzyk, an analyst for the automotive market research institute Samar. In 2010, luxury passenger cars represented only 2.7% of the Polish vehicle market, according to data from Samar. This means that only slightly over 9,000 of the total of 333,539 sold cars fell into that category. However, almost every luxury brand managed to improve its sales last year. Jaguar sold 137 vehicles, up 26.9% over 2009, Infinti sales were up 87.2% to 264 units, and Porsche sold 567 cars, up 76.6%. Data from the Polish Automotive Industry Association (PZPM) showed Land Rover growing its sales 38.5%. Other established brands, such as Mercedes, BMW and Audi, are eager to grab a share of this growing luxury car market, but they target most of their models to higher middle-class customers, according to Balcerzyk. "There is a sub-segment within the luxury segment, super-luxury car brands, which has been developing even faster. This includes Ferrari, Porsche or Bentley," Balcerzyk says. Ferrari opened its first Polish sales outlet, located in the former headquarters of the communist-era Polish Unified Workers' Party, in October 2010. Granturismo Italia, which represents the brand in Poland, is unwilling to provide exact figures on how many cars have rolled out of its Warsaw store since its opening, but said it sells several units per month - not bad, given that the most affordable model costs €211,000. "Ferrari's rising sales indicate that more and more luxury brands will be expanding to Poland. Their sales will always represent a niche, but a very profitable one," Balcerzyk says. 5. Institutions and banks drag on Russian competitiveness while EMs thrive bne September 8, 2011 Russia has seen it's ranking in the World Economic Forum's Global Competitiveness Report for 2011-2012 sag, weighed down by its weak institutions and banking sector, even whilst other BRICS and emerging economies gained on developed markets. Russia dropped three places to 66th position in the report, with an improvement in macroeconomic stability outweighed by 'deterioration in other areas, notably the quality of institutions, labor market efficiency, business sophistication, and innovation.' The lack of progress with respect to the institutional framework is of particular concern, the report says, suggesting that the country's weak institutions are one of the biggest drags on competitiveness. It also claims that the rule of law and the protection of property rights are other major points of concern, as are the judiciary and security levels across the country. Competition is also stifled by 'stifled by market structures dominated by a few large firms, inefficient anti-monopoly policies, and restrictions on trade and foreign ownership.' Meanwhile, one of the most worrying points for the Kremlin will be the drag constituted by the countries unstable financial markets and a banking sector which

was particularly poor in the WEF's assessment, ranking it 129th in the world. This is dispute the huge efforts of the authorities to develop the Russian financial markets in order to promote Moscow as an international financial centre. It wasn't entirely bad news, with Russia scoring highly for its 'high innovation potential (38th for capacity for innovation), its large and growing market size (8th), and its solid performance in higher education and training (27th for the quantity of education).' However, the ranking is even greater a worry given that other emerging economies are racing ahead, with Russia stuck firmly at the bottom of the BRICS mini-league. As the report states: 'while competitiveness in advanced economies has stagnated over the past seven years, in many emerging markets it has improved, placing their growth on a more stable footing and mirroring the shift in economic activity from advanced to emerging economies.' 'China (26th) continues to lead the way among large developing economies, improving by one more place and solidifying its position among the top 30. Among the four other BRICS economies, South Africa (50th) and Brazil (53rd) move upwards while India (56th) and Russia (66th) experience small declines. Several Asian economies perform strongly, with Japan (9th) and Hong Kong SAR (11th) also in the top 20.' Still, the top ten is dominated by Europe, with Switzerland landing top spot, although France managed to drop three places to 18th, and beleaguered Greece plummeted to 90th. 6. Kazakhstan simmers as striking oil workers sacked bne September 9, 2011 Angry protestors gather every day in the main square in the Kazakh town of Zhanaozen in a rare display of popular dissent. Many were workers at Uzen, one of Kazakhstan's largest oilfields, but more than 1,000 staff were fired in August by the London-listed subsidiary of state-owned KazMunaiGas in an attempt to stop the four-month strike and they want their jobs back. Labour disputes are not uncommon in this oil-rich Central Asian republic, but this one has got both political and ugly. Efforts to silence the strikers has led to journalists being blocked from reporting the story, Sting cancelling a concert in Astana, and the daughter of one of the strike leaders and a young trade union member were killed by unidentified assailants. While it's unlikely any of these incidents on their own could spark another so-called "coloured revolution" in Kazakhstan, the protest is symptomatic of an emerging middle class starting to flex its political muscles. KazMunaiGas Exploration Production (KMG EP) announced on August 26 that it had sacked around 900 striking workers, and that production at Uzen had stabilised. Most of the workers have now been replaced with new recruits from Zhanaozen and nearby settlements. Karazhanbasmunai, a joint venture between KMG EP and China's Citic, also sacked around 500 workers. Most of the 120,000 people in Zhanaozen are directly or indirectly dependent on the Uzen field for their livelihoods, so tempers in the remote desert town are running high. What started as a dispute over pay quickly

became politicised, with a mixture of clan rivalries and the personal ambitions of regional politicians. Further, KMG EP's London-listing has also given the dispute an international dimension, as international shareholders wonder how the strike will affect production and are watching the events closely - far more closely than if the fracas had involved a purely domestically owned company. Fear of contagion Oil and gas are the backbone of Kazakhstan's economy, and account for the lion's share of the country's exports, so the production losses at Uzen are bad news for the government. KMG EP, which is 58% owned by the state-owned oil and gas firm KazMunaiGas, said it had experienced production losses of around 600,000 tonnes of oil, while Karazhanbasmunai's losses amounted to 17,578 tonnes between May 17 and July 31. So far, the disruptions aren't impacting too hard on the bottom line. On September 5, KMG EP said its first-half net profits rose by 14% year on year to KZT114bn ($783m) as high oil prices offset production losses "due to the illegal strike, increase in operating taxes, production costs and selling, general and administrative expenses," it said. A bigger fear than the industry's losses within ruling circles, however, is that the strike could spark wider anti-government action. While relatively small run-ins have led to revolutions in places like Georgia, Kyrgyzstan and Ukraine, experts don't believe social tensions are high enough in Kazakhstan to spark a major popular uprising. Even so, it's certain the leadership is watching the events closely. Large-scale political action is still rare in Kazakhstan, and at the few demonstrations that have been allowed to take place in recent years protesters are sometimes outnumberd by police. Reasons for the lack of political activism in Kazakhstan include government actions to stifle media freedom and political debate, and a fear of civil unrest. But behind this has been the government's success at improving the general standard of living - especially in comparison to the other 'Stans - which has tempered politics and subdued the people who are largely happy with their leaders. Economically, Kazakhstan has drawn far ahead of its Central Asian neighbours, and at the same time the Kazakh government has cleverly played on the population's fear of political instability. This has helped to ensure that President Nursultan Nazarbayev's 20-year rule has continued uninterrupted. The 2011 presidential election, when Nazarbayev was re-elected with an unbelievable 95.5% of the vote in a poll that international observers including the Organisation for Security and Cooperation in Europe (OSCE) said was rigged and fraudulent, failed to result in any popular protest. Still, the strike is significant, as it highlights the awakening of the country's growing middle class, whose lives have improved to the point where they are demanding their share of the country's wealth - as has been apparent in other countries in Emerging Europe. With Kazakhstan's average per-capita income approaching the middle-income bracket, this may happen more often, as governments across North Africa found to their cost this year. So far, some wealth is trickling down from Kazakhstan's fabulously wealthy oligarchy to the middle classes, but the process is slow. Salaries for an operator at the Uzen

field average KZT240,000-290,000 a month ($1,600-$2,000), according to KMG EP, which is above the Kazakhstan average. However, conditions at the field, where temperatures soar to to 60° Celsius in summer, are tough, and the costs of living in Zhanaozen are high due to its isolated location. Workers have been angered by attempts to adjust their pay, and this was exacerbated by the disparity between pay for local workers and expatriates, especially Chinese workers. The authorities have cracked down hard on the strikers. On August 8, Natalya Sokolova, the lawyer representing the striking oil workers, was sentenced to six years in prison on charges of inciting social discord, which has outraged human rights groups. "It is clear that the kind of things Sokolova was accused of doing are no grounds for criminal charges. It is 100% clear that she was simply doing her job," Rachel Denber, deputy director of Human Rights Watch's Europe and Central Asia division, tells bne. Local and international NGOs are supporting the preparations for Sokolova's appeal against the sentence, which is likely to take place in mid-September, and are prepared to take the case to Kazakhstan's High Court if necessary. Kazakh journalists also say they have been pressured into staying away from the oilfield. "Only a small group of journalists from the opposition media has been covering the situation at Uzen," says Vyacheslav Abramov, deputy director of Freedom House in Kazakhstan. "It's really tough for journalists, as they have come under a lot of pressure, and are not able to get a clear and objective picture of the situation in Mangystau." As a result, the strikes and civil unrest in Mangystau have been relatively under-reported within Kazakhstan. Fears that the unrest could gain momentum and spread across the country haven't been realised, but there have been some small demonstrations outside the Almaty offices of the ruling Nur Otan party. In a more sinister development, there have been several violent attacks on the strikers and people connected to them. On August 24, Zhansaule Karabalayeva, the 18-year-old daughter of one of the strike leaders, was found dead with multiple injuries in the countryside outside Zhanaozen. The cause of her death has not yet been determined. On August 2, Zhaksylyk Turbaev, a trade union member working for an oilfield service company in Zhanaozen, was also killed. The previous day, two members of the opposition Popular Front movement said they were attacked in Aktau; both received head injuries, RFE/RL reported. This has become sufficiently serious to attract international attention. Not only did Sting pull out of a gig due to be held in July, but now a string of international politicians are weighing in to condemn the heavy-handed tactics being employed. Irish Socialist MEP Paul Murphy tells bne that he plans to bring up the issue at the next sitting of the European parliament. "I visited Kazakhstan this summer and talked with many of the strikers and workers. I understand the intimidation is severe," he said. "I promised to raise the issue in the parliament." Swedish trade unions have raised around €15,000 for the workers at KMG EP and its JV partner Karazhanbasmunai; trade unions from Ireland, the UK and other European countries are also showing their support. Swedish trade unions have raised around €15,000 for the workers at KMG EP and its JV partner Karazhanbasmunai; trade unions from Ireland, the UK and other European countries are also showing

their support. Protests are planned at Esso petrol stations (the Esso brand is owned by ExxonMobil, one of the partners of KMG EP's parent firm, KazMunaiGas, in the TengizChevroil joint venture) across the UK later in September. The decision by the Kazakh authorities and KMG EP to go on the attack - sacking hundreds of workers and attempting to stifle the protests - rather than persevering with early efforts to find a compromise, could have longer-term consequences, warn analysts. Kazakhstan remains a low-income country, but will join the ranks of middle-income countries soon; Nazarbayev's stated aim is to raise average per-capita income to $15,000 by 2016. While the current protest shows little sign of achieving revolutionary momentum, memories of the state's refusal to listen will remain and resentment will fester. In a few years time, the final outcome could be very different. 7. Nord Stream starts carrying Russian gas towards Europe bne September 6, 2011 With impeccable timing, Prime Minister Vladimir Putin announced on Monday that the Nord Stream pipeline will start pumping gas today, with the fuel to be available to European customers by November at the latest, reports Reuters. The announcement comes as Europe worries that rising tensions between Russian and Ukraine could see them cut off from gas supplies once more this winter. Putin has been conspicuous by his absence from the increasingly bad tempered arguments between Kyiv and Moscow last week over gas prices, but clearly couldn't resist pointing out that deliveries from the $10bn pipeline - which runs beneath the Baltic Sea to connect directly to Germany - are set to start. Ukraine's point of leverage is that it currently transports 80% of Russian gas exports to Europe, and that route was disrupted in 2006 and 2009 when Kyiv and Moscow fought over prices. With a full scale fight in full swing, the worry is that another cut off could come. However, this is exactly the sort of situation that Nord Stream - which will eventually carry 55 bcd of gas to European hubs - is designed to circumvent. "Gradually, in a calm manner, we are departing from the diktat of transit states," Putin said in televised remarks. With Moscow in final discussions with Belarus over taking 100% ownership in its pipeline operator Beltranzgas, the country has routes to the north of Europe sewn up. The southern route - which is by far the largest - is clearly much less under control, although Moscow still says it plans to circumvent the awkward Ukrainian route by building South Stream - which will carry gas to southern European hubs. At the same time, should Europe get cut off again, the EU is likely to rapidly accelerate moth-balled plans to build rival pipeline Nabucco to tap Central Asian supplies. Meanwhile Ukraine faces losing a chunk of the $4bn or so it earns each year from transit fees to Nord Stream, as well as what little leverage it has. Gazprom says the pipeline will eventually take 20 bcm of the Russian gas currently transiting Ukraine. 8. Ozon scores record Russian e-commerce investment bne September 9, 2011 Investments into Russian e-commerce continue to grow, with internet retailer announcing it has attracted $100m from a consortium of private investors via an additional share issue. The deal is almost double the size of the previous biggest private investment in the segment - the $55m raised by KupiVIP in April. Existing investors Index Ventures and ru-net are joined by new investors including Japanese e-tailer Rakuten and Swiss equity fund Alpha Associates, reports WSJ. What they're chasing is a segment bursting with opportunity. Marina Treshchova - CEO of Fast Lane Ventures, which is part owner of KupiVIP - telling bne last week that whilst the current market

is around $8bn it has the potential right now to be at $80bn. Ozon CEO Maelle Gavet told Vedomosti that over $95m of the funds was raised via the new shares and will used by the company to invest in that old bug bear of retailers in the world's biggest country: logistics. "We have had to build our own courier network," she said, adding that two-thirds of the company's 1,100 workforce is in fulfillment. The new funds will help increase the company's number of pick-up points from 1,000 to 3,000. "We have a network of places where consumers can go to pick up their goods," explained Gavet. "Unlike in the west, couriers are not common in Russia. Instead people are used to going to their local collection point. It is more convenient for them as they know the goods will be there and they don't have to wait at home for the delivery." Gave says Ozon will use the funds to construct logistics centers and equipment, as well as increasing its inventory and expanding the range of items is sells. The remaining 5% of the investment went to minority shareholders, reports Vedomosti, whilst majority owner Baring Vostok Private Equity - around 60% ahead of the deal - did not sell any shares, according to senior partner Yelena Ivashentseva. "The company's valuation was higher than we expected," Gave said, without specifying just how much of the company was sold. According to analysts quoted by the Russian newspaper, the company is worth $400m - $564m. 9. Thoughts from a Renaissance man - The failure of Western political leadership Renaissance Capital, Russia Wednesday, September 7, 2011 Yesterday (6 September), we released Thoughts from a Renaissance man - The failure of Western political leadership. • We outline the impact of a mild DM recession on markets, and looking at seven big market falls since 1980, we find that the market fall since early July 2011 is 13% against a historical average of 12% after 42 working days. Using the 1990 US recession as a base, we can see that the S&P500 decline since early July is very similar and implies roughly sideways trading between 1,100-1,230 will follow over the next four-to-five months, before a recovery to July levels early in 2012. This assumes no more than two quarters of negative GDP, a helpful Barack Obama speech on 8 September, Fed action on 21 September and temporarily weaker energy prices in coming months. Failure to get Congressional approval for a new stimulus package, a weak Fed response (such as Operation Twist) and higher oil price due to supply constraints are risk-case scenarios. On the positive side, despite all the leading indicators we noted last week, and the negative GDP already out of Hong Kong and Singapore in 2Q11, a recession is not yet certain. But our base case is that weakness in US markets is largely complete. • The failure of Western political leadership threatens our mild recession scenario in the US, and is causing market despair with Europe. We see this failure as historically normal. It is easy to remember strong political leaders of the 1950s and 1960s (French General Charles De Gaulle, US President John F Kennedy and German Chancellor Konrad Adenauer) and also the 1980s (UK Prime Minister Margaret Thatcher, US President Ronald Reagan, German Chancellor Helmut Kohl and French President Francois Mitterand). Those were decades of underlying economic success. But in the economic mess that was the 1970s, with high unemployment, stagflation, ideologically driven terrorists and market disorder, we struggle to remember great

leaders. US presidents Gerald Ford and Jimmy Carter, UK Prime Minister James Callaghan, one-term French President Giscard D'Estaing and German Chancellor Helmut Schmidt may have all been good men, but very few would cite them as their political heroes. Or to take the Great Depression, how many can name even one strong British or French political leader from 1930-1939? While that decade did produce one 20th century giant, President Franklin D Roosevelt, this was offset by the many terrible leaders produced in other countries. When the economic challenges are as great as they are now, we should assume political weakness as the norm. • The eurozone's current mess reflects the scale of its economic problems. We reiterate our four core scenarios: 1) radical reform in southern Europe; 2) no growth for a decade in southern Europe; 3) fiscal union; and 4) countries leaving the eurozone, and see none of them as wholly convincing. • Nonetheless, fiscal union is becoming more plausible. Recent reports out of Germany suggest that the country is prepared to consider a new treaty, building upon the Maastricht Treaty which created the euro, and the less successful Lisbon Treaty, which will lead to closer ties and a shift towards fiscal transfers to the south. It would see the eurozone become more separate from exiting EU member states, perhaps with its own corporate tax rate, balanced budget constitutions and according to one suggestion even a Tobin tax. In a best-case scenario, this would reassure the markets about the long-term survival of the euro and would be combined with other short-term measures. These might include further ECB pressure for structural reform in return for continued ECB purchases of southern European bonds, perhaps the acceptance of bigger sovereign defaults and ideally a big realignment of the euro against EM currencies, particularly Asian currencies. We are very aware that this is a best-case scenario, and we do accept the risk of many other alternatives. • Taking a mild DM recession and a eurozone muddle through as a base case, we highlight the decreasing EM dependency on direct trade ties with advanced economies as one trend that may advance even more quickly in coming quarters. Falling trade dependency between 2000-2007 did not prevent EM countries suffering in the global financial crisis of 2008, but that was when the global banking system seized up. Assuming the ECB and Fed prevent any recurrence of this, then EM countries, apart from the Czech Republic and Hungary, may manage decent outperformance at least in GDP terms in coming quarters. Interestingly those with the least dependence on advanced economies include many of the countries that have been overheating in the past year - including Brazil, India, Turkey and Kenya. The reduction in global growth should considerably reduce risks for these economies and justify the loosening already seen in Brazil and Turkey, and indeed, more loosening to come. • If this scenario pans out, and EM countries are able to manage relatively decent growth even in a mild DM recession, then again economics will have influenced our judgement on who are the truly successful political leaders of the 21st century. It will be President Luiz Inácio Lula da Silva of Brazil or perhaps Prime Minister Recep Tayyip Erdogan of Turkey, and at least internally President Goodluck Jonathan of Nigeria or Prime Minister Vladimir Putin of Russia who make the history books. To view the full report click here.

Charles Robertson

NEWS INVESTMENT 10. Deloitte's CE Top 500 survey shows firms grew revenues average 17% bne September 9, 2011 78.8% of companies included in the Top 500 increased their annual revenues. Companies across Central Europe saw median revenue growth of 17% since the first quarter of 2010, said Deloitte. Only in two countries (Croatia and Bulgaria) did the total revenues of their Top 500 companies slip, while those in Slovenia and Slovakia saw the total revenues rise by an impressive 32% and 33% respectively. Poland's entries comprised a dominant 35% of the ranking with 173 companies. The Czech Republic accounted for 16%, or 80 companies in the ranking. This represented an increase over 2010, when 73 Czech companies made the top 500 ranking. Another country to show an increased representation in the ranking was Romania, whose companies' share of the top 500 rose from 6% to 8% (a rise from 32 to 38 companies), reflecting the ongoing pace of economic development, particularly in industries such as consumer business and transportation and energy and resources. Manufacturing experienced the greatest increase in the number of companies represented in the ranking. Not only did the number of manufacturers increase by 16 to a total of 117 companies, their median growth in euros over the year (23%) was also substantially ahead of the next best industry energy & resources (13%). We can also observe the increase in the state ownership in the growing manufacturing sector, rising substantially from 6% in 2009 to 10% in 2010. 11. KYIV BLOG: Kyiv and Moscow open school year with a scrap bne September 2, 2011 Kids can be so cruel. As soon as the school year opened across the former Soviet Union on September 1, a cacophony of bickering, name-calling and mimicry erupted between Russia and Ukraine. The worry is that it will snowball into a full-scale fight - and Europe will end up carrying the can. These particular kids should know better. After all, they all wear long trousers and are meant to run major countries and corporations. They've also had at least two major scraps over the same issue in the last five years. Yet in first week of Sepetmber, the leaders of Russia and Ukraine have resorted to the kind of behaviour that might shame some children - and all in public as well.

Kyiv has been pushing to get Moscow to renegotiate the gas pricing formula in the current contract all year, but Russia - playing a waiting game as economic and political pressure builds in Ukraine - has played hardball since day one. Ukrainian President Viktor Yanukovych and his government have grown ever more frustrated, and after talks broke down this summer, they accelerated policy to reduce reliance on Russian gas. They've also grown increasingly combative, flatly refusing Russia's offer of a discount in return for control of Ukraine's gas transit system or agreement to join the Moscow-led Customs Union with Belarus and Kazakhstan, and in the last month frequently hinting they may take legal action to force a revision of the contract That has seen relations between the two countries nosedive. In 2010, after Yanukovych came to power, meetings with Russian President Dmitry Medvedev were numerous. So far in 2011, the pair have met just twice, with reports from the summits claiming total stalemate on all items. Fight, Fight, Fight ... In a worrying sign for gas customers in Europe, in the absence of face-to-face meetings, "negotiations" moved into the media this summer, and as the school year opened, the barrage began. Stuck between stalled talks with the International Monetary Fund over its demands to raise domestic gas tariffs to plug in the hole in the budget caused by the near-bankrupt gas monopoly Naftogaz and dwindling approval ratings ahead of parliamentary elections next year, Ukrainian Prime Minister Mykola Azarov appeared to make it a point of honour during the last week of August to not a miss the opportunity to threaten to run to the Stockholm International Arbitration panel. On August 29, he claimed Russia is forcing Ukraine, "into a corner, from which we have only one exit: contract termination." Dmitry Peskov, spokesman for Russian Prime Minister Vladimir Putin, shot back: "We have no information as to whether a decision has been finally reached or what could serve as grounds for such a decision." The following day, Kyiv announced it would cut imports to 27bn cubic metres (cm) in 2012, compared with the 40bn cm or so it is expected to buy this year. Gazprom CEO Alexei Miller was on the newswires hours later to claim that Ukraine can take no gas if it wants, but it's contracted to pay for at least 33bn cm. So there. However, Medvedev - apparently still trying to toughen up his image in hope that he will get another crack at being in the Kremlin next year - really let rip on the last day before term, calling Kyiv's position "sad" and accusing Ukraine of "sponging" from Russia. After taking a whole day to cool off, Kyiv played a trump card on September 2, announcing out of the blue that it plans to dismantle Naftogaz into production and transportation companies, thereby giving a cursory nod to the EU's third energy package into the bargain. The leading edge however, was a statement from Azarov explaining that naturally, as the move will see entirely new companies created, they will need to negotiate new contracts with everyone. "Naftogaz as a company will cease to exist. There will be a liquidation period. Some time later, after all necessary

formalities become valid, totally new companies will operate on the market. This is why all existing agreements will be revised," Azarov said. Miller reached for this PR department instantly, mimicking the Ukrainian PM's statement almost word for word. "Of course after Gazprom merges with Naftogaz, [the latter] will cease to exist, there will be a liquidation period and then some time later, after all the necessary formalities become valid, a completely new company will be operating on the market. This is why all existing agreements will be revised," the Gazprom chief said. Miller's statement is particularly startling. No matter the state of relations, it's not usual for business executives to so blatantly disrespect the prime minister of another state, a point quickly made by Azarov's spokesman in reply, which essentially translated as: "who the hell does he think he is?" "Ukraine has not raised the question of relations between Naftogaz and Gazprom. Naftogaz's restructuring is our internal affair. The premier did not address Miller today. He addressed the Russian government. What does Gazprom have to do with it?" Vitaliy Lukyanenko complained. Growing up quickly? Even at the start of the week, despite the deterioration in relations, it was hard to see another gas war that would threaten to cut off European supplies such as we saw in 2006 and 2009 actually happening. However, since Monday the whole affair has rapidly descended into a battle of egos. Whilst Kyiv has the means to pay its gas bills thanks to record international reserves currently, there's too much been said now for it to accept Russian demands to keep to the contract or give in. When the insults are flying and communication has practically closed down, the fists usually come out. Yanukovych and Medvedev will both attend a regional summit on September 3 in the Tajik capital Dushanbe, and AFP reports that Azarov says the Ukrainian president will try to discuss the issue with his counterpart on the sidelines. However, an unnamed Kremlin source says that no such meeting is being planned. It may be the last chance for the pair to sit down and act like adults before we get to a point of no return. 12. New round of discussions regarding tariffs for Russian monopolies; NEGATIVE for grid companies, POSITIVE for GenCos Alfa Bank September 9, 2011 The Ministry of Economic Development has made a new proposal regarding tariffs for Russian monopolies to be formally considered by the government by September 22. This proposal involves two scenarios for tariff growth rates: a "differentiated" scenario involving two tariff increases per year (in January and July) and an "inflationary" scenario for 2012-2014. Both scenarios are summarized in the figure below. Although this is only another government tariff proposal and has yet to be discussed (we expect full clarity on this issue no earlier than the beginning of December), the hike in the gas tariff is above what we currently incorporate into our GenCo models

(+8.3% in 2012). Since the gas price is a key driving force behind electricity prices in the European pricing zone, the higher gas price would be mainly POSITIVE for GenCos operating in European Russia and the Urals. Nevertheless, we are reluctant to revise our models, as these proposals are very preliminary. However, as with previous proposals, the new differentiated scenario also suggests negative implications across the board for MRSKs. In the event that the 2012 end-user electricity tariff increases even by 11.0% (the high end of the range), the gas price is expected to go up by 10.2-15.0%, thus indicating that the MRSK component - contributing up to 30-35% of the end-user price - would be expected to rise to a lesser extent than the end-user electricity price. MRSKs would thus continue to be under pressure in 2012 in order to restrain end-user electricity tariff hikes. We hence reiterate our cautious stance on MRSKs. Alexander Kornilov 13. Ukraine to sign five gas extraction deals bne September 12, 2011 Ukraine is belatedly getting its act together to exploit its limited gas deposits to reduce its dependence on Russian imports. In the latest move the government signed deals to start exploitation of five gas fields following on from a $800m deal with Shell earlier this year. The new deals with unnamed companies are expected to be signed in the next two months, Ukraine's Energy and Coal Minister Yuriy Boiko said at a press conference in Kyiv last week reports Interfax. Among the companies bidding are: Exxon Mobil Corporation, ENI, Halliburton, and Chevron Corporation he said. "This will give us additional billion of cubic meters (bcm) [of natural gas] next year, and two billion cubic meters in subsequent years. We will extract 25 bcm instead of 20 bcm on January 1, 2015," Boiko said. In other news Boiko also said that Ukraine is in talks to build a LNG termnal on the Black Sea by 2012 that will allow it to buy gas from countries other than Russia like Azerbaijan. "And our commitments to purchase gas from our partners will come into force in this period. We have been in talks on oil and gas with Azerbaijan since last summer. We have signed a memorandum. We are pumping Azeri oil through the Odesa-Brody oil pipeline, and we have to buy about five billion cubic meters of gas from Azerbaijan," said the minister. 14. Russian Railways could gain control of private operators' fleets Renaissance Capital September 6, 2011 Event: Yesterday (5 September), the president of Russian Railways (RZD), Vladimir Yakunin, reported that the Ministry of Transport is considering requiring private freight railcar companies to provide part of their fleets to RZD to transport cargoes.

According to Yakunin's statement, RZD needs at least 250,000 railcars to satisfy market demand. Another option being considered is to oblige private freight operators to carry certain goods if their railcars are situated close to cargo that needs to be transported. Action: Potentially negative for Globaltrans, TransContainer and FESCO, in our view. Rationale: There has been a possibility of regulatory changes associated with the market's shortage of open wagons since last autumn, when RZD transferred more than 150,000 railcars to a subsidiary, Second Freight Company. These new restrictions would have a negative impact on the private freight rail transportation industry, in our view, reducing the profitability of private railcar operators if they are forced to carry RZD loads instead of more profitable cargo. In addition, regulatory uncertainty could adversely affect plans for the privatisation of First Freight Company (an auction is expected on 28 October). Dmitry Kontorshchikov 15. Ukraine cites $230 as 'fair' price for Russian gas RIA Novosti September 5, 2011 Ukraine, which is looking to review gas contracts with Russia, would accept a price of $230 per 1,000 cubic meters, Naftogaz Ukraine head Yevhen Bakulin said on Monday. Ukraine earlier said the gas price of $354 per 1,000 cubic meters as set for the third quarter of 2011 is too high and should be reduced to $200. The price of $230 would be "good, and quite fair," Bakulin said in an interview with the Channel 5 TV station. Ukrainian Foreign Minister Kostyantyn Hryshchenko said earlier in the day that Kiev would not join the Moscow-led Customs Union of Russia, Belarus and Kazakhstan, a condition for discounts on Russian gas prices. But he said that Ukraine would try to solve its long-standing gas price dispute with Russia out of court, a week after Ukrainian President Viktor Yanukovych said that Kiev would seek arbitration in Stockholm if Russia did not offer a better deal on gas supplies. Last week, Russian President Dmitry Medvedev said Ukraine might get discounts for gas if it joined the Customs Union. 16. Ukraine claims Nord Stream will only "slightly" cut Russian gas transit bne September 8, 2011 The launch of the Nord Stream pipeline by Russia on Tuesday will only "slightly" reduce transit volumes of Russian gas across Ukraine to Europe, Energy and Coal Minister Yuriy Boyko claimed yesterday, reports Interfax. "Today we transit more than last year, [and] considering the increase in gas consumption in Europe we expect that gas transit [across Ukraine] will decrease only slightly," Boyko told a press conference in Kyiv on Wednesday. However, it was notable he did not offer any figures to back up his claim. The launch of Nord Stream

comes amidst growing antagonism between Kyiv and Moscow over the current gas contract between the pair. Ukraine's main leverage over the relationship is its strategic role transporting 80% of Russian gas exports to Europe. Nord Stream, which runs beneath the Baltic Sea thus bypassing Ukraine, is set to start delivering gas to a hub in Germany by the end of October, and the rapid speed with which it has been built illustrates just how determined Russia is to break away from transit states Ukraine and Belarus. However, the first phase of the pipeline will deliver no more than 27.5 bcm once it gets up to full capacity, and with Gazprom expecting to export 158 bcm to Europe this year, Ukraine will retain its leverage for the meantime. That said, Moscow is also on the verge of taking control of Belarus' gas transit system by leveraging the economic meltdown plaguing Minsk. The same tactic in its dealings with Kyiv are proving more difficult as Ukraine has far more options. However, the bigger picture is that because of those options, Ukraine can ill-afford to disrupt Russian gas to Europe. During the first 'gas war' in 2006, Europe assumed Moscow was the culprit behind the loss of heating in several countries in the midst of winter. The second instance in 2008/09 saw a far more balanced view of the situation. Ukraine dare not disrupt its progress towards closer cooperation with the EU - which it is mobilizing as a counterweight to Russian pressure to retake greater influence over its neighbor, whilst another cut off would is also likely to reinvigorate the EU's determination to diversify by building the Nabucco pipeline to tap Central Asian gas, thus cutting its exposure to the constant bickering between Kyiv and Moscow. 17. Ukraine govt gets mixed signals on Association Agreement from EU Phoenix Capital September 5, 2011 Event: French Foreign Minister Alain Juppe said on Sept. 3 the view of the majority of EU officials is that a Ukraine-EU Association Agreement won't take effect until the Ukrainian government drops all criminal charges against former Prime Minister of Ukraine Yulia Tymoshenko, news reports said. On the same day at an informal summit of EU foreign ministers in Poland, the EU High Representative for Foreign Affairs and Security Policy Catherine Ashton and Polish Foreign Minister Radoslaw Sikorski confirmed that the criminal prosecution of Tymoshenko won't disrupt the negotiations to create the Deep and Comprehensive Free Trade Area (FTA) and subsequently the Association Agreement. Sikorski pointed out leaders of the Ukrainian opposition, including Tymoshenko, stated they don't want the negotiations to become hostage to the nation's political conflict. Impact: The statements are neutral for Ukrainian politics. Rationale: In recent weeks, EU leaders have offered mixed signals on the effect the Tymoshenko prosecution will have on the Ukraine-EU Association Agreement. Former EU Commission President Carl Bildt warned of derailment, while current EU President Jose Manuel Barroso said the Association Agreement is on track. This is an intentional strategy of encouraging the Ukrainian government to proceed with its EU integration efforts while at the same time reprimanding its violation of democratic principles. We're confident the prosecution won't affect the FTA, which officials aim to complete by December so that it takes effect next year. All it needs is approval by the EU and Ukrainian parliaments. Instead, trade disputes have a bigger chance of undermining the FTA's completion. The Association Agreement is more complicated, requiring parliamentary approval of all 27 EU member states, and its possible approval is several years down the road.

Zenon Zawada 18. Ukraine president calls on forming CIS free trade zone Phoenix Capital September 5, 2011 Event: Ukrainian President Viktor Yanukovych called upon creating a free trade zone between the nations of the Commonwealth of Independent States (CIS) in the nearest future, Interfax reported on Sept. 3, stating he didn't see the basis for why its creation is being delayed. He called upon forming the free trade zone based on the principles of the World Trade Organization (WTO) when meeting with CIS leaders in Tajikistan on Sept. 3. Impact: The statements are neutral for the Ukrainian economy. Rationale: The Ukrainian government has long supported and proposed a free trade zone with the CIS nations, which the Russian government isn't interested in because of limited economic gains, including possible flooding by imports. A few trade pacts have been tried in the CIS without success, with the functioning agreements being the Eurasian Economic Community and Moscow- led Customs Union (CU). Moreover, Russia and other CIS nations are already integrating their economies with the WTO, regardless of Yanukovych's suggestions. Among the motives of the comments was to boost the president's image in the CIS, which has suffered after his administration resisted joining the CU and conflicted with the Kremlin on natural gas prices. Zenon Zawada 19. Ukraine Throws Down Challenge Lilit Gevorgyan, IHS Global Insight and Jane's Information Group September 7, 2011 In an interview published on 6 September in leading Russian daily Kommersant, Ukrainian president Viktor Yanukovych stated in a defiant tone that his country is not Russia's "poor relation" and is not asking for favours. He repeated that the deal concluded in 2009 by the Russian state-owned gas monopoly Gazprom and Ukraine's state-owned energy production and supply company Naftogaz was unfair. He was quoted as saying that "the price is not fair for Ukraine. The conditions have been set out as if for an enemy." Yanukovych was quoted as saying that the Russian government's refusal to renegotiate the contract is unacceptable and that his government has all the materials ready to go to court unless Russia decides to change its mind. He took the opportunity to put the record straight with Russian president Dmitry Medvedev, slamming the latter's comments on the Ukrainian government's 18-month-long efforts to renegotiate the gas agreement. On separate occasions, Medvedev has characterised Ukraine's efforts as "sad" and called the government a "sponge" which is used to discounted Russian gas supplies. Furthermore, during the summit of the heads of Commonwealth of Independent States (CIS) on 3 September, Medvedev shunned Yanukovych who was hoping to hold talks on the sidelines of the summit. In this interview with Kommersant, in an uncharacteristic tone for the Ukrainian president who is widely perceived as pro-Russian, Yanukovych criticised Medvedev's statements as unacceptable while he told Russian media that the Russian government is trying to corner Ukraine and humiliate his country, which he will not allow to happen.

Russia has responded in kind. Medvedev's spokesperson, Natalia Timakova, told the press that the contract cannot be revised unilaterally, adding that "Russia is ready to defend its stance on the agreement in any court authority and will act strictly in accordance with this document." The Maths Behind the Spat Under the terms of the deal, Ukraine agreed to pay USD450 per 1,000 cubic metres of gas. Ukraine is supposed to import 52 billion cubic metres (bcm) of gas which can be lowered to 41.6 bcm but no less than 33.3 bcm. The Ukrainian state-owned giant agreed to the "take-or-pay" terms, whereby Ukraine cannot pay for less than 80% (or 33.3 bcm) of the total volume regardless of how much it uses. On 31 August, when Ukrainian energy and coal industry minister Yuriy Boiko formally asked Gazprom to supply only 27 bcm gas to Ukraine in 2012, Gazprom CEO Alexei Miller stated that "Gazprom may supply Ukraine with 26, 27 or 29 bcm of gas in 2012 or supply nothing if Ukraine wants". But he added that, "In any case Naftogaz of Ukraine will pay for supplies on the basis of no less than 33 bcm. These are take-or-pay terms under the current contract and they will be used this year and for the duration of the contract". In April 2010 Ukraine did manage to get a discount, thanks to a political barter. Under the "fleet-for-gas" agreement Russia would give a USD100 per 1,000 cm discount to Ukraine in return for the extension of the Russian navy's lease at the Ukrainian Black Sea port from 2017 until 2045. Incidentally, the discount of 30% was equivalent to the Russian export duty on gas. Ukraine maintains that USD354 per 1000 bcm it is paying a much higher price than some of Gazprom's EU customers, including Germany, with the average price standing at USD340. It argues that the price is too high even after the discount as well as the smaller transportation costs given the proximity of Ukraine to Russia compared with its EU gas importers. Yanukovych stated that his country is overpaying USD5-6 billion annually, which in ten years will total to USD60 billion, or 20% of the budget annually. If Ukraine manages to lower the price of gas imports this will help the government to achieve to goals with one move - it will avoid increasing the current domestic gas prices by 50% and also re-open talks with the International Monetary Fund (IMF). The on-going cooperation with the Washington-based lender has been stalling since February this year. IMF has conditioned its cooperation with Ukraine to its pension reform and gas price liberalisation. Back in August 2010 the government increased domestic gas prices by 50% and pledged another 50% hike this August. It is to help to cover Naftogaz's budget deficit reached to record high USD30 billion hryvna (USD3.7 billion) in 2010. But this is a very unpopular and politically costly measure that can cost the current government votes in the next elections. Hence, any concession from Gazprom will be extremely helpful for the Ukrainian government both from economic and political perspective. No to "Belarusian Model" Russia has not been completely unreceptive towards the Ukrainian pleas. But instead of offering a brotherly discount, Moscow is seeking solid benefits in return. Gazprom's confidence has been bolstered recently after the Belarusian government softened its position on the Russian gas giant's ambitions to have full ownership of 50%-state-owned Belarusian energy transport company Beltransgaz (the remaining 50% is already owned by Gazprom). However, the Russian energy giant has been long trying to gain a foothold in Naftogaz. As part of a possible discount deal, Gazprom has suggested a merger with Naftogaz. This will give Gazprom effective control over Ukraine's gas transporting system (GTS) which transits up to 80% of

the Russian gas to EU. However, the Ukrainian government has flatly rejected the idea, as it sees Naftogaz as the backbone of its economic sovereignty. Furthermore, to stop Russian advances on Naftogaz, on 2 September the Ukrainian government announced that it will split the company into two separate production and supply entities. Known as unbundling, the move is in compliance with the EU Third Energy Package, which is seeking de-monopolisation of the energy market through breaking up energy companies, a policy strongly opposed by Gazprom. Also, the Ukrainian government is hoping that such a move could trigger a new round of talks with Gazprom. However, judging by the Russian giant's reaction, the forced negotiations are not likely to bring the desired outcome for Ukraine. Not to mention that legally, it could give Gazprom the right to seek compensation for termination of the 2009 agreement. Meanwhile the gas price crisis has given hope to Russia's prime minister Vladimir Putin that he could use the opportunity to get Ukraine to join his political brainchild, the troika Customs Union with Belarus and Kazakhstan. In August Putin and Medvedev offered Ukraine the option of following the "Belarusian model"-join the Customs bloc and in return get a discount in gas prices for the membership. This too was flatly rejected by Ukraine, which is hoping to conclude a new Association Agreement with the EU, part of which could be a free-trade agreement. Any economic integration with the Russian-led troika could jeopardise the already difficult EU integration process. Outlook and Implications It is unclear what legal arguments Naftogaz is going to use if it decides to go to court. It could try and argue that the 2009 deal was made under duress when Ukraine was short of cash to pay its gas bills to Russia but also owing to harsh winter season was desperate to resume the supply of Russian gas. Another angle could be the on-going trial of the former PM Yulia Tymoshenko who negotiated the deal. She is charged for abuse of power and one of three accusations against her is that she has put her own political goals over Ukraine's national interests by agreeing to sign the unfavourable deal with Russia. Yanukovych hopes that by convicted her he will not only get rid of his key political opponent but also have a card to use against Russia arguing that the contract was a result of Tymoshenko's sole decision which was not backed by then president Viktor Yushchenko. However, Yanukovych's plan to hold the politician accountable in court for her political decisions is very controversial. Unsurprisingly, it has caused negative reaction in the West, the "Timoshenko card" is unlikely to be used, further weakening the legal case against Gazprom. On the other hand, Russia's tactics to treat Ukraine the same way as Belarus has backfired. This is because both economically and politically Belarus and Ukraine are very different countries. Kiev remains more independent in its foreign policy as opposed to Belarus. It is a member of the World Trade Organisation unlike Belarus, Russia and Kazakhstan and it has better relations with the European Union (EU) compared to Belarus which is severed its relations with the West. Economically, Ukraine's foreign reserves position is rather strong at the moment unlike Belarus that is suffering from acute liquidity crisis and had nowhere to turn but to Russia for financial bailout. Whereas Ukraine has more and better choices and is in a position to refuse Russia's offers of emulating the "Belarusian model" which it deems as a challenge to its sovereign pride. Judging by the comments of the Ukrainian government leaders the dispute is likely to linger until mid- October when the official season for heating starts. However, given the geopolitics and economics of the issue it is unlikely that the parties to the dispute soften their positions. Even if the issue enters an international arbitration it can do little to change Russia's position. On a wider scale, the dispute revealed that

Yanukovych, often deemed by the opposition and many observers in the West as the Kremlin's man, is not a political ideologue but a politician driven by economic interests of his country and the business circles that supported his election campaign. If anything, the outcome of this confrontation will be Ukraine revisiting its own political and economic goals, perhaps agreeing to much needed energy sector price liberalization and seeking an integration with the EU in earnest. 20. Ukraine to "overpay" $60 billion on gas contract with Russia - Yanukovych RIA Novosti September 6, 2011 Ukraine overpays up to $6 billion annually due to the terms its current gas contract with Russia, which means $60 billion for ten years, Ukrainian President Viktor Yanukovych told the Kommersant daily. Kiev is seeking to review the gas contract with Moscow signed by then prime minister Yulia Tymoshenko and Russian premier Vladimir Putin in 2009, saying the gas price it pays is unfair. Tymoshenko is now charged with abuse of office over the contract signing. "The overpayment for us totals $5-6 billion, or some 20% of the country's annual budget," Yanukovych said in the interview. Ukrainian Foreign Minister Kostyantyn Hryshchenko said on Monday that Kiev would not join the Moscow-led Customs Union of Russia, Belarus and Kazakhstan, a condition for discounts on Russian gas prices. Ukraine has also ruled out a merger between Russian energy giant Gazprom and Ukraine's Naftogaz, which could also reduce prices for Kiev. Yanukovych reiterated in the interview that Kiev would seek international arbitration if Russia did not offer a better deal on gas supplies.

SECTOR Gas 21. EDF, Wintershall to each get 15% in South Stream - Gazprom head RIA Novosti September 6, 2011 Electricite de France (EDF) and Germany's Wintershall will each get 15 percent and Italy's Eni will obtain 20 percent in Russia's $21.5-billion South Stream project, intended to deliver Central Asian and Russian natural gas to Europe under the Black Sea, Gazprom CEO Alexei Miller said on Tuesday. He told Prime Minister Vladimir Putin, who presided over the filling of the Nord Stream pipeline with technical gas earlier in the day, that the companies would sign a shareholder agreement on September 16 in the Russian Black Sea resort city of Sochi. Russia plans to launch the South Stream pipeline in 2015. The pipeline will transport up to 63 billion cubic meters of gas under the Black Sea to central and southern

Europe, bypassing traditional transit countries such as Ukraine, which currently is in a row with Russia over gas prices. The Nord Stream will start pumping 27.5 bcm of gas to Germany, Britain, the Netherlands, France, Denmark and other European states at the start of October also bypassing Ukraine. Bitter disputes over the price for Russian gas have many times left Europe without Russian imports of gas in the middle of the winter, with the latest cut happening in 2009 due to disputes with Ukraine. The EU, which is trying to diversify its energy sources and lessen its dependence on Russia, also sponsors the rival Nabucco gas pipeline project which is supposed to pump gas from Turkmenistan. 22. Gazprom stalls in August, NOVATEK production continues to rocket Troika Dialog September 5, 2011 Russian gas production expanded 4.9% y-o-y in August, which was in contrast to the trends among the biggest producers. Gazprom's production completely stalled last month, falling 0.1% y-o-y, even against last year's fairly low base. We are now entering a seasonally high period for gas, but also a period of rather high gas prices in Europe, which broke $400/mcm on an oil-linked contract for Gazprom, on our estimates. Storage in Europe (especially Germany) remains at high levels and while imports show rather positive dynamics, underlying gas consumption is contracting in nearly all of Gazprom's markets. The base to outperform 2010's production figures has become rather high for the balance of the year, and it is far from certain that the company will post growth against 2010 in the remaining four months of 2011. However, even if Gazprom somehow manages to not decline for the rest of the year, we estimate its production in 2011 will be about 517 bcm, up 1.7% y-o-y, which probably represents the best case scenario for the gas giant. NOVATEK's growth is clearly accelerating with production (including the share of Sibneftegaz), which climbed 56% y-o-y last month. Stripping Sibneftegaz, we estimate that NOVATEK's organic growth in August totaled 41% y-o-y. We are very encouraged to see that such growth is driven not only on the back of the highly prolific Yurkharovskoye field, but also on the legacy East Tarkosalinskoye, which is showing a turnaround in output. We now forecast NOVATEK's legacy production at 46 bcm (up 24% y-o-y), which the company could still beat, and total gas output at 51.2 bcm (the company's latest guidance is 50-51 bcm).

23. Gazprom to invest $101 mln in Kyrgyz oil, gas prospecting RIA Novosti September 7, 2011 Russian energy giant Gazprom plans to invest over three billion rubles ($101.32 million) in initial geological prospecting for oil and gas in Kyrgyzstan, Gazprom CEO Alexei Miller said on Wednesday. "We plan that the investment volume in geological exploration will total no less than three billion rubles in the first phase," Miller told reporters after talks with Kyrgyz Prime Minister Almazbek Atambayev. Gazprom received licenses to explore the Kugart and Mailuu-Suu-4 deposits in 2008 but their development was suspended due to last year's unrest in Kyrgyzstan. Gazprom also planned to acquire 75 percent plus one share in gas company Kyrgyzgaz in 2009. In addition, Gazprom is interested in buying a stake in oil company Kyrgyzmunaizat, Miller said. Kyrgyzstan's gas reserves are estimated at 5.7 billion cubic meters as of the end of 2008, according to the U.S. Oil & Gas Journal. Atambayev also proposed that Gazprom build electricity power lines and a hydropower plant in the country. 24. Gazprom to launch Sakhalin-Khabarovsk-Vladivostok pipeline; details on South stream alliance participation VTB Capital September 7, 2011 News: Gazprom CEO Alexey Miller announced that the company would make the first gas deliveries through the Sakhalin-Khabarovsk-Vladivostok pipeline on 8 September. The length of pipeline is 1350 kilometres and annual throughput is 6bcm. The pipeline capacity is to be used to supply gas received form Sakhalin-2 under royalty conditions. Miller also provided more details on the South Stream alliance, where EDF's and BASF's shares were said to be 15% each, while Eni decreased its stake to 20%. Our View: The launch of Sakhalin-Khabarovsk-Vladivostok pipeline was widely expected due to the date stipulated in the development programme. And since the announcement of companies' stakes in South stream implies simple share reallocations between three Gazprom's allies, we are not expecting any short- term implications for the stock. 25. One in, one out: Total to quit Shtokman? bne September 8, 2011 No sooner has Russia sealed a deal to get help from ExxonMobil to develop one of its most challenging oil & gas deposits on the Arctic shelf than it looks like it may lose another international major as a partner on mega-project in

the same part of the world. Unnamed industry sources told Itar-Tass on Wednesday that French major Total is looking to sell its stake in the giant Shtokman project. The deposit off Russia's north-west coast in the Barents Sea is thought to hold 3.8 tcm of gas and 53m tonnes of crude, but the challenge of extracting and transporting that energy was postponed last year in the face of a glut of gas arriving in Europe from the likes of Qatar. Sources offered no reason for the potential loss of the French partner, but noted that Total is already working with Novatek on the Yamal Pennisular. Gazprom will retain its 51% stake in Shtokman, according to the report, whilst Norway's StatOil, which currently holds a 24% stake could buy out the French group's 25%. A final decision on the Total stake is expected by the end of the year. 26. Putin launches Nord Stream pipeline RIA Novosti September 6, 2011 Russian Prime Minister Vladimir Putin launched on Tuesday the Nord Stream pipeline, designed to bring Russian natural gas to Germany via the bed of the Baltic Sea and to avoid shipments through central Europe. After gas fills the pipeline, Russia will start gas shipments in Europe. The first pipeline -with an annual capacity of 27.5 billion cubic metres - will be ready for shipments by the beginning of October. The $11 billion Nord Stream project, owned 51 percent by Russia's Gazprom gas export monopoly and 15.5 percent each by Germany's E.ON Ruhrgas and BASF-Wintershall, includes two roughly parallel pipelines with an overall annual capacity of 55 billion cubic meters. The pipeline, which would bypass Ukraine, Belarus, Poland and other transit energy states, is expected to be completed in 2012. The launch of Nord Stream will deprive Ukraine, which currently in a row with Russia over the gas price, of its exclusive transit rights, Putin said. "Ukraine is our old and traditional partner. As any transit country it has the temptation to benefit from its transit position. Now this exclusive right disappears. Our relations will become more civilized," Putin told journalists. 27. Russia to start producing gas at Shtokman field from 2016 RIA Novosti September 5, 2011 Russia may start producing gas at the giant Shtokman offshore gas field in the Arctic from the fourth quarter of 2016, Prime Minister Vladimir Putin said on Monday. "I hope that in the fourth quarter of 2016 we could produce gas from there and start the gasification of energy objects and commercial firms," Putin told a meeting of the ruling United Russia party in the Central Russian city of Cherepovets.

The partners in the Shtokman project - Norway's Statoil, France's Total and Russian gas export monopoly Gazprom - have delayed pipeline gas production from Shtokman until 2016 instead of the originally planned 2013. Shtokman, located in the stormy Barents Sea and one of the world's largest gas fields, is expected to require $15 billion of investment in its first phase alone. The field, which contains 3.9 trillion cubic metres of gas and 56 million tonnes of condensate, is 550 km offshore at a depth of 340 metres, was discovered by the Soviet Union in 1988 and its start-up has been repeatedly delayed due to problems with financing and the lack of transport infrastructure in place. 28. Ukraine threatens to lure away Gazprom's European clients RIA Novosti - Vedomosti September 8, 2011 Ukraine said it will start selling gas to Europe if Russian energy giant Gazprom continues to demand payment for gas that Ukraine does not need. For over a year, Ukraine has been insisting on a review of the 11-year contract former Prime Minister Yulia Tymoshenko signed with Gazprom in 2009. Gazprom demands payment for 33.3 billion cubic meters (1.18 trillion cu f) of gas although Ukraine will need only 27 billion in 2012, Ukrainian Energy Minister Yuriy Boyko said Wednesday. "If our Russian partners insist that we buy more gas than our economy needs, we will take it and then sell locally produced gas [to Europe] on the spot market," Boyko said. This is the first such statement since Ukraine's last conflict with Gazprom in 2006. It is unclear if Ukraine has buyers for the surplus 6.3 billion cubic meters of gas; Ukraine's Energy Ministry and Gazprom declined to comment yesterday. But if Kiev sells gas to Gazprom's European clients, the Russian company will lose $2.4 to $2.7 billion of potential revenue, or 4% of its gas exports. Poland, Hungary and Slovakia bought 22.63 billion cubic meters of gas from Gazprom in 2010. Ukraine has a contract to sell Poland's PGNiG 200 million cubic meters of gas a year. It has changed its legislation in July to allow the export of locally produced gas and is currently negotiating the price with PGNiG, Deputy Energy Minister Volodymyr Makuha said last summer. PGNiG could buy up to 1 billion cubic metes of gas from Ukraine's Naftogaz at an acceptable price, said Tomasz Kasowicz, an analyst with Erste Securities Polska. PGNiG has a take-or-pay contract with Gazprom to buy 10.24 billion cubic meters of gas annually in 2012-2022, with obligatory payment for 85% of the amount. Kasowicz said Gazprom's average price for PGNiG will be over $500 in 2012, if oil prices, on which gas prices depend, do not plunge. Poland could be interested in buying Ukrainian gas for $450, he added. If Kiev pays $400-$420 for Gazprom's gas in 2012, it would earn $20 per 1,000 cubic meters by selling gas to Poland, East European Gas Analysis Director Mikhail Korchemkin said. "That is better than nothing." A PGNiG representative declined to

comment, but a source with close ties in the company said they are skeptical about Ukraine's offer. We would rather pay more for stable deliveries, he said. SPP spokesman Ondrej Sebesta said the Slovak company is not considering buying Ukrainian gas. Hungary's MOL and E.On Foldgaz Trade declined to comment. Ukraine can also sell gas at Austria's Baumgarten exchange, where the price will likely be higher than Gazprom's selling price by the next heating season, or negotiate swap contracts with traders, Korchemkin said. Gazprom's partner in Swiss gas trader Rosukrenergo Dmitry Firtash could be involved in the scheme. A representative of Firtash's Group DF declined to comment. But Ukraine will most likely come to an agreement with Gazprom, Korchemkin added. 29. Ukraine reports rising transit of Russian gas to Europe bne September 7, 2011 The volume of Russian gas shipped to Europe via Ukraine rose 7% YoY in August, state-run pipeline operator Ukrtransgaz announced on Tuesday, reports Bloomberg. Transit flows climbed to 6.15 bcm from 5.75 bcm in August 2010. Year to date, Ukraine has pumped 14% more Russian gas across its territory to Europe than in the first eight months of 2010, with total volume reaching 70 bcm.

SECTOR Oil 30. Libyan oil status VTB Capital September 6, 2011 Interviews reported in the technical press (MEES, PIW) with unnamed officials at Libya's state National Oil Corporation (NOC) and one of its subsidiaries, Arabian Gulf Oil Company (AGOCO), as well as Shokri Ghanem, the Gaddafi regime's former oil minister the before his resignation in May, shed some light on the potential restart of oil production in Libya. According to the unnamed officials, early production could restart from the southern Murzuq basin fields (360mbd). Quick restarts were also anticipated at Sarir and Mesla (100-120mbd anticipated by October), from Elephant (150mbd), from the NC-96/97 fields (80mbd) and from the offshore al-Jurf field (45mbd). Ghanem thought Libyan production of 200-300mbd within two months was feasible. He identified the offshore fields as likely being the earliest to come back online as they had not been damaged by hostilities, were offshore and had been shut-in properly, unlike some of the onshore facilities. All sources indicated that the provision of security was an issue, with Ghanem suggesting that it could take the Transitional National Council (TNC) months to restore proper security at the fields where the former regime had a dedicated, organized force of 3,000-4,000 people for oil field protection. Although most oil sites were not directly damaged by hostilities, there is some concern about the possible mining of some facilities, and Ghanem indicated that

there had been significant looting which would hamper a recovery in production. In addition, there is the logistics of getting personnel back to work, both because of security and because of the general chaos in the country. Ghanem thought that production of 400-700mbd might be feasible within a few months but that it could take 18 months to fully restore Libya's production, which was running at 1.6mmbd before hostilities broke out. Separately, Nouri Bourrien who has been appointed by the TNC as the new head of the NOC, said full pre-war capacity could be achievable in less than 15 months. These comments suggest minor production volumes could start very soon and reach perhaps 300-500mbd by year-end, broadly in line with current consensus, with estimates ranging up to 500mbd or so by year-end, in line with our own expectations. Not surprisingly, the range of expectations regarding the re- establishment of full production is broader and, perhaps, generally more conservative than the 15-18 months indicated above, with a number of forecasters pencilling in up to three years for full recovery. Our own estimates are on the more aggressive side; we anticipate that production averages 1mmbd more in 2012 than for 2011 and is back to 1.7mmbd capacity from 2013 (see Brent Upgraded to USD 112/bbl for 2011, of 28 July). Colin Smith

31. Oil overview: EIA Short-Term Energy Outlook VTB Capital September 8, 2011 The US Energy Information Administration (EIA) published its monthly Short- Term Energy Outlook yesterday. For oil, the main change is a cut in the 2012 demand estimate of 0.24mmbd to 89.6mmbd (Figure 1) driven by a reduction in global economic growth estimates. The EIA's demand estimate for 2011 has been left unchanged at 88.2mmbd, up 1.4mmbd (+1.6%) over 2010.

The EIA slashed its estimate for US GDP growth to 1.5% for 2011 and to 1.9% for 2012, from 2.4% and 2.6%, respectively. For global GDP growth, the EIA revised down each of its estimates for 2011 and 2012 by 0.3%, to 3.1% and to 3.8%, respectively. Despite the reduction in global growth forecasts, oil demand is still expected to show reasonable YoY demand growth in both 2011 (+1.6%) and 2012 (+1.6%) as a result of robust non-OECD oil demand growth more than offsetting declining OECD demand. This is a further confirmation of our view that for demand to be a threat to current Brent oil price levels, concerns over non-OECD GDP growth prospects would have to be much higher than they currently are. Non-OPEC and OPEC NGL supply estimates were essentially unchanged. However, the EIA trimmed its estimates for OPEC crude supply by 100mbd for both 2011 and 2012 (neither the IEA nor OPEC forecast OPEC crude output). Using the EIA's estimate for OPEC crude production, global oil markets would be undersupplied in 2011 and 2012, further tightening global inventories. In fact, on the EIA's projections, the near term supply deficit for 3Q11 would be 0.7mmbd and rise to 1.4mmbd for 4Q11. We believe that the EIA's new Short-Term Energy Outlook supports our view that oil prices are likely to remain robust, despite the financial turmoil. OPEC and the IEA update their forecasts on 12 and 13 September.

32. 60-66: The Road Downstream Is Paved with Good Intentions Alfa Bank September 7, 2011 The adoption of 60-66-100 is the single largest reform to downstream's rules of the game since the government granted export duty subsidies to the downstream

segment in 2004. The message is simple - modernize or leave. With the upstream marginal export duty down to 60%, upstream's cash flow will likely see a healthy boost. The unification of light and dark duties (66%) should stimulate accelerated modernization before fuel oil and crude oil duties are unified in 2015, making exports loss-making under the current product mix but also greatly increasing the rationale for modernization. We like upstream-heavy majors that will receive immediate benefits from 60-66-100, i.e. Rosneft, Surgutneftegaz, Tatneft and LUKoil. Bashneft and Alliance will need to speed up modernization to avoid potential major losses in 2015E. Investment Case 60-66 and strong oil prices supported O&G outperformance YTD, with further reform upside: The MICEX O&G index posted a 5.3% return this year vs. -0.4% for the MICEX, helped by Brent's 17.6% rally YTD. While further upside from crude prices seems limited now, the 60-66 tax reform, which may turn out to be only the first step of a wider regulatory overhaul, will remain supportive for the sector despite the challenging global backdrop of slowing growth and high volatility.. New target prices after incorporating 60-66 into our models: Additionally, we bring our 2011E crude oil forecast closer to the market and increase the ERP in our models to take increased volatility into account. We raise our target prices 0.6%-6.0% for the companies most positively affected by the reform, with the effect somewhat muted by a 1% ERP increase across the board. Based on the effect of the reform and compensation potential, we upgrade Tatneft to O/W from E/W with 30% upside. We lower our target prices but maintain our recommendations for Gazprom Neft, Bashneft and Alliance Oil by 2.9-22.6% on the factors mentioned above. 60-66-100 creates a mid-term incentive for modernization investment: The 60-66 reform brings downstream export EBITDA down to $7.4/bbl, with the 100 element pushing the figure into the red at -$1.6/bbl under the current export mix. Modernization, assuming oil companies will export the target mix of 80% light and 20% dark, could lift the figure back to $16/bbl, making downstream once again the most attractive segment. We estimate the IRR of a hydrocracker at 32% under the 60-66-100 rules, vs. 0% under the current regime. Domestic exposure allows oil companies to secure additional cash flow and hedge themselves to a certain degree against export market fluctuations. We estimate revised domestic EBITDA at $18.7/bbl, hardly affected by the 60-66-100 rules. Valuation and Risks Valuation: Our coverage universe has an average weighted 2011E EV/EBITDA multiple of 3.3x, down from 5.2x before the oil price revision. Its 2011E P/E is 5.2x vs. 9.3x before. Risks include further narrowing of the differential between product and crude duties; tax hikes; difficulties with marketing additional light products; cost inflation; and domestic price regulation. 33. Bashneft: MET relief discussed; new plans for gas production UralSib September 9, 2011

News from 2Q11 conference call. Bashneft (BANE - Hold) is in active negotiations with the government for lower or zero MET rates for heavy or high sulfur oil and hopes to receives them within the next few months. The company also plans to develop gas fields in Bashkortostan, estimating its reserves at 50-60 bcm with potential 2 bcm/year production in the long run. Bashneft does not expect export duty tax relief for the Trebs and Titov fields and sees a positive NPV for the project. Also, according to Bashneft, a potential merger with Russneft as unlikely in the medium-term, due to Russneft's high net debt. MET breaks could add 4-5% to 2012E EBITDA. The potential MET relief could apply to nearly 10% of projected 2012 oil pro- duction of 15 mln tons and add about 4-5% of our 2012 EBITDA estimate of $3.2 bln, canceling out the negative impact of the 60/66 duties. Bashneft sees this scenario as likely, as it has already modernized its refinery assets and does not need the new tax regime's incentives, but will suffer the most in the sector from the introduction of the 60/66 duty regime on 1 October. In terms of gas development plans, the company's project in Bashkiria could add nearly 3-4% to our forecasted 2016-18 EBITDA. We are not as optimistic on MET breaks as the company. We do not share Bashneft's optimism on the MET breaks, as the government should be reluctant to give additional tax relief to the upstream segment after lowering the crude export duty. We see more downside rather than upside risks for dividends (see yesterday's note on Bashneft's 2Q11 IFRS review). The gas plan is good news, in our view, but too long-term to make a big difference for the target price. We retain our Hold recommendation for Bashneft with target price of $52/share. Alexei Kokin 34. FAS proposed new antimonopoly rules for the Oil product market VTB Capital September 8, 2011 News: According to Kommersant, FAS proposed two new draft laws to the government. First of them would restrict any expansion for Oil companies in regions where they posses more than 35% of the market share in the retail market and 20% in the wholesale market. The second one would set three measures for assessing oil product prices: export netback, exchange index and the OTC market index. Kommersant also speculates that the proposed draft laws have not been coordinated with the Ministry of Energy. Our View: The restriction on development in regions where the companies possess more than 35% is nothing new, since for a long time Russian oil companies were limited in market share on the retail market and, in fact, were building their growth strategies within this framework. FAS has also long been referring to netbacks and other price indicators in its discussions on oil product market prices with oil companies. However, the legislatively set 'market' prices is a new proposal and might negatively affect market proper functioning. We also note that FAS promised a new wave of litigation with higher penalties for Russian oil majors. The news is obviously negative for the Russian oil stocks in short and mid-term. In the long term, however, we believe that FAS is not able to fight growth in international petroleum prices with anti-monopoly legislation. 35. Jet fuel prices rose VTB Capital

September 7, 2011 News: The lack of jet fuel in airports has affected the pricing. Yesterday, at the St Petersburg International Mercantile Exchange the price of jet fuel increased by 12% to USD 1,013/tonne. Our View: The price increase can be explained by the shortage of jet fuel combined with the requirement to increase jet fuel reserves from three to ten days. This news supports our view on the high profitability of oil companies supplementary activities. It is positive for Gazprom Neft and Lukoil, as both have relatively higher exposure to jet operations. Dmitry Loukashov 36. Ministry of Energy might decrease gasoline export duties and it is not ruling out amendments to the tax regime in case of growing oil prices. VTB Capital September 5, 2011 News: Kommersant reports that Minenergo is considering a 90% export duty for gasoline (currently set) as a temporary measure, with plans to shift it to 66% when the peak consumption season is over this year. Also, according to Interfax, government officials commented on potential amendments to the recently approved '60-66' tax regime in the case of growing oil prices. Ministry of Energy was previously reported to have suggested a switch from '60-66' to '55-86' if the oil price exceeds USD 100-110/bbl. Our View: We believe that an export duty decrease for gasoline would definitely be positive for Russian oil companies, and we welcome the government's attempts to stick to its promises. At the same time, we think that any manual regulation would not be supportive for the sector, as it needs a clear regulatory environment for its longer-term development. Dmitry Loukashov 37. Oil production rises but exports decline Bank of Finland September 9, 2011 Russian crude oil production has increased on average about 1.5 % a year since 2005. Rosstat reports that in January-July this year, production was up nearly 1 % y-o-y. Russian oil production today slightly exceeds that of Saudi Arabia, which is the second largest producer. Russia exports about half of its crude oil production. Despite the increase in production, however, export volumes have remained roughly the same since 2005 at about 250 million tons a year. Exports of oil products, in contrast, have risen strongly in recent years. In particular, there has been an increase in exports of lightly taxed heavy fuel oil. Last year, Russia exported about 72 million tons of heavy fuel oil and about 41 million tons of diesel oil. Total exports of oil products amounted to about 133 million tons. Crude oil exports shrank 5 % y-o-y and exports of oil products fell 7 % y-o-y in the January-June period. The contraction in exports largely reflected robust growth in domestic demand. Refining of heavy fuel oil and diesel oil in Russia increased about 7 %, but export volumes con-tracted sharply (down 8 % and 6 % y-o-y,

respectively). The upcoming change in export duties next month (see BOFIT Weekly 35/2011) should show up in the second half figures as a slight drop in the volume of heavy fuel oil ex-ports and a corresponding increase in the volume of crude oil exports. 38. Russian government plans new industrial clusters bne September 12, 2011 Russia wants to create a petrochemical cluster in the Northwest federal district that surrounds St Petersburg, Russian Prime Minister Vladimir Putin said last week reports RIA Novosti. "(We) should increase the capacity of oil processing facilities, set up a powerful petrochemical cluster in the Northwest (district)," Putin said. Putin did not provide estimated investments into the project. At the same time new chemical engineering, pharmaceutical, and cultural clusters are planned for the Moscow Region, Vyacheslav Krymov, the regional economy minister, said last week. Krymov did not provide any financial details or timelines for these projects, but added that a chemical engineering cluster is to be built in the regional Sergiyevo-Posadsky District, the pharmaceutical cluster in the regional Volokolamsky District, and the cultural cluster in the regional city of Kolomna. The PM added that total investment into the federal districts would be RUB7 trillion for more than 200 projects that will be approved by the end of this year. 39. Rosneft acquiring assets in the Arctic Alfa, Russia Thursday, September 8, 2011 Rosneft is beginning to consolidate assets on the Arctic Shelf. Yesterday the FAS approved the acquisition of 100% voting shares of Chernomorneftegas, Sintezneftegaz and Artikprominvest by Rosneft's subsidiary, according to a Kommersant report citing sources close to the negotiations. The details of the acquisition are not available, as company representatives refused to comment. Sintezneftegaz was created in 2001 for prospect evaluation and exploration of the Barents Sea, with main assets being exploration licenses at the Pakhtusovsky and Admiralteysk fields. The exact resources of the acquired assets are unknown, but experts estimate them to be comparable to the reserves at the giant Shtokman field. We treat this news as mildly POSITIVE for the company, as the assets seem to be attractive in terms of resource base. With the strategic partnership with Exxon, this may add even more positive sentiment around the stock. Pavel Sorokin 40. Russian oil output expands to new high of 10.27 mln bpd Troika Dialog

September 5, 2011 Russia's oil output has hit another post-Soviet high of 10.27 mln bpd, driven by greenfield expansion and solid brownfield performances at Rosneft and Gazprom Neft, as well as higher condensate output from Gazprom's wet gas layers. Rosneft continues to deliver with output growth of 3.4% y-o-y, albeit relatively flat m-o-m. Vankor is now producing 316 kbpd, while all other subsidiaries showed 1.2% y-o-y growth in August, even though this came against a slump and hence a low base in 2010. TNK-BP has surprised us very pleasantly on the greenfield side. East Siberian Verkhnechonskneftegaz made a sudden jump last month to 112 kbpd (13% m-o-m), nearly doubling y-o-y production. This, together with the Uvat project, was the reason for growth, as the legacy subsidiaries were declining at a worrying 4.7% y-o-y. LUKoil's performance was rather interesting this time. The good news is that the now "famous" South Khylchuya field in Timan Pechora rose m-o-m for the first time in the last fourteen consecutive months. Output stood at 85 kbpd. While it may be a bit early to call for the bottom for this field, which is effectively responsible for over 70% of LUKoil's decline, it should not be that far. The bad news is that we saw a deterioration in legacy production, where the brownfield decline hit 3.9% y-o-y in August, a significant worsening against the 2.0% decline so far this year. Surgutneftegaz' growth sits on the back of Talakan, while legacy output was down 1.8% y-o-y. We liked Gazprom's performance on the liquids side, with 8.4% y-o-y growth against a small decline in underlying gas output, which clearly suggests the share of wet gas is rising (the Zapolyarnoye field's Neocomian layers). Finally, Bashneft continues to surprise on the upside with another production record at 306 kbpd (up 6% y-o-y) in August.

SECTOR Metals and Natural Resources 41. Evraz plans to enhance iron ore integration Renaissance Capital September 7, 2011 Event: According to Prime-TASS, the minister of industry of the Sverdlovsk region, Alexander Petrov, has confirmed that Evraz is planning to enhance raw iron ore production capacity at its Kachkanarsky GOK (KGOK) subsidiary to 63mn tpa, from 40mn tpa, for an estimated capex of RUB40bn ($1.36bn). Konstantin Lagutin, Evraz's iron ore division head, confirmed the plan to enhance KGOK's capacity by 50%. Evraz has also announced the creation of a new business unit focusing on coal and iron ore exploration projects. This unit will be led by Marat Atnashev, who joined Evraz from Gazprom neft, where he was a director of major projects. Action: Positive for Evraz, in our view. Rationale: We noted Evraz's high-cost mining operations as a weakness of its business model. By our estimates, Vysokogorsky GOK (VGOK) carries a cash cost above $80/t. KGOK's increased capacity could help to replace VGOK's high-cost volumes. We are aware that KGOK's production has a relatively low iron ore content

(about 16% Fe), but the iron ore has a high vanadium content. Evraz can process KGOK's iron ore using its blast furnace/blast oxygen furnace (BF/BOF) facilities at the NTMK site, enabling the production of high-strength steel grades. Evraz previously revealed a potential plan to enhance NTMK's BF/BOF capacity, after idling 2mn tpa of open-hearth capacity in 2008-2009. We think this would support the KGOK development. This kind of efficient upstream vertical integration is currently a key success factor for steelmakers. We think the markets may react positively to Evraz's focus on its mining division projects. Boris Krasnojenov 42. FAS starts investigations against UC Rusal Alfa, Russia Wednesday, September 7, 2011 The Federal Antimonopoly Service (FAS) has started investigations against UC Rusal's trading subsidiary. According to press reports, the plaintiff is a small aluminum powder producer that consumes ~$35m of aluminum annually. The FAS is accusing Rusal of refusing to supply aluminum from the Volgogradsky plant, which is the closest to the plaintiff. Instead, Rusal was supplying aluminum from its Krasnoyarsky plant and making the client bear the additional transportation expenses. Potential penalties may be 1-15% of total revenue earned from this type of aluminum in Russia, or ~$20-300m, which is 1-11% of our forecast FY11 EBITDA. It should be noted, however, that the FAS rarely applies a maximum percentage fine. For example, Mechel was penalized 5% of its revenues in 2008. The potential fine may also affect the interest rate Rusal will pay on a $4.75bn syndicated loan facility from a consortium of foreign banks. Rusal is arranging the facility and has not disclosed the covenant details, saying that at the current net debt/EBITDA, the applicable margin is LIBOR +2.35%. Increasing the margin to 3% would mean Rusal would pay an additional $31m in interest on this loan facility annually. The investigation adds additional risk for investors, so the news is NEGATIVE and may be one of the reasons for the stock's underperformance in Hong Kong today. We reiterate our E/W rating on the stock. 43. Russian miners face transport bottlenecks again VTB Capital September 5, 2011 News: Today, Vedomosti is reporting that Russian coal miners are currently facing a transport bottleneck at Russian Railways due to the inability of the latter to satisfy the companies' current logistics requests. Our view: Infrastructure problems are the main limiting factor for coal and iron ore production growth in Russia, with the current situation becoming a recurring one. The problem now largely lies with the railway car park being located mostly beyond the mining regions at the moment. An inability to meet the needs of the companies leads to significant accumulation of finished goods stocks, which is boosting working

capital needs. However, the scale is still limited. We do not expect any significant consequences for the sector due to the inability to supply the contracted volumes in a timely manner. Overall, we expect the situation to improve over the next several weeks as most companies are now entering a seasonally weaker 4Q, hence we consider the news to be moderately negative for the sector. Alexander Pukhaev

SECTOR Power 44. Accounts Chamber finds history of lax capex discipline at FSK Renaissance Capital September 5, 2011 Event: On Friday (2 September), Interfax reported that an Accounts Chamber audit of the Federal Grid Company (FSK) found that capex funds raised over the period 2007-2009 were significantly less than planned and, despite the shortfalls, not all available funds were actually spent. Thus in 2007 FSK raised only 83% of planned capex funds and disbursed only 60%. In 2010, 98% of planned capex was carried out and the figure reached "almost 100%" during 1H11. FSK blamed the shortfalls and other technical infringements noted during the audit on the numerous changes and far-reaching reorganisation that accompanied the liquidation of state holding company RAO UES in 2008. Action: Positive for FSK, in our view. Rationale: In our view, FSK's performance against capex plans should be seen in the context of the Russian power sector's 20-year history of inefficiency, financial imprudence and under-investment. Far from providing any cause for formal censure, we believe the huge progress noted by the Accounts Chamber since 2007 should - and will - be welcomed by the authorities. Vladimir Sklyar 45. Electricity consumption up 1.4% y/y in 8M11 Alfa Bank September 6, 2011 The aggregate YTD power consumption in Russia was up 1.4% y/y while in August it was up 0.3% y/y, according to System Operator. The tables below sum up the key numbers: Geographically speaking, top gainers still remain Urals, Far East and Northwest. Siberia also managed to show a positive y/y change in consumption. Still, the thermal power plants covered the demand increase - their production was up 3.4% y/y YTD. Meanwhile, the hydropower capacities generated 3.7% less electricity than in 8M10. Overall, we believe the published figures support our FY11 electricity demand forecast, and, as a result, consider the data NEUTRAL for the sector. Alexander Kornilov

46. FAS: GEH__IES merger would prompt price caps in Center and Urals FCFZs Troika Dialog September 8, 2011 Anatoly Golomolzin, the deputy head of the Federal Anti-Monopoly Service (FAS), told Interfax yesterday that the merger of Gazprom's and IES Holding's power assets would lead to the introduction of price caps for capacity prices in free-capacity-flow zones (FCFZ) with free pricing. Should the deal take place, the electricity market would become highly concentrated and the merged company would occupy a dominant position in 12 out of the 20 FCFZs in the Europe and Urals price zone, Golomolzin said. The competitive capacity market would be "closed", which would be unacceptable, he added. Troika's view: According to an earlier announcement, price caps will not be introduced in three FCFZs - Center, Urals and Siberia FCFZs - in 2012. These FCFZs jointly account for around 50% of Russia's total capacity and electricity volumes, according to Golomolzin. The introduction of price caps for existing capacity in the Center and Urals FCFZs would be slightly negative but should not have a material impact on our genco valuations. The 2011 free prices for capacity in the Center and Urals FCFZs are only 4% above the price cap introduced in the Europe and Urals price zone (R123,000/MW per month versus R118,125/MW per month). As for the Siberia FCFZ, we currently model a price cap for 2011 and assume that this will remain in place going forward. Hence the retention of the price cap in this FCFZ would not affect our valuations. Regarding the deal itself, the merger is undesirable from an anti-monopoly standpoint, and the regulator is initially likely to wary, FAS Chairman Igor Artemyev told Interfax in July. At the same time, Renova Group BoD Chairman Viktor Vekselberg was quoted as saying that all of the FAS' instructions will be carried out, and that if everything is successful, the deal could be completed by year end. We believe the deal is likely to take place. Alexander Kotikov 47. Federal Grid starts connecting Far East and Siberian power markets VTB Capital September 5, 2011 News: According to Kommersant Federal Grid Company started construction of grid equipment to connect currently isolated Far East Region with Siberian power market. The first stage of the project worth RUB 2.6bn would be completed in 2012 and will allow 200MW flows between regions. Later the capacity could be increased to 400MW. Our View: Connection of the two regions could allow UES of Far East increase utilisation of its capacities by supplying more electricity to Siberian power market. In particular first stage of the project when implemented would create more competition in the regions that are currently dominated by Gusinoozerskaya and Kharanorskaya GRESes, controlled by OGK 3/ Inter RAO. In the long run, connection of the two regions (when throughput capacity of the connection is increased) would make Far East power market more attractive. In that sense acquisition of UES of Far East by RusHydro would make even greater sense.

Mikhail Rasstrigin

SECTOR Retail, FMCG 48. Lev Khasis appointed as Senior Vice-President of Wal-Mart Stores VTB Capital September 9, 2011 News: Lev Khasis has been appointed as a Senior Vice-President of Wal-Mart Stores responsible for the company's development in the Russian market and will be based in Bentonville, Arkansas USA. Our View: We think that this is an indicator that Wal-Mart is serious about the Russian market and plans to enter it in the near future. Lev Khasis' deep knowledge of the Russian market, both political and administrative, would support the company entering the Russian market by i) acquiring a market leader to cement its presence in Russia or ii) purchasing one of the second-tier companies with a major focus on further organic growth by leveraging its global operational knowledge, best in class IT, purchasing contracts with global players and cheap financial resources. If this happens, we might see a strengthening of market competition and potential rebalance of the landscape that would impact both market leaders and other players. 49. Moscow Arbitration Court rejects Auchan's counter-claim to FAS; NEGATIVE for retailers Alfa Bank September 8, 2011 According to RBC Daily, the Moscow Arbitration Court rejected Auchan's counter-claim against the Federal Antimonopoly Service. The antimonopoly watchdog previously claimed the retailer was in the violation of retail law. The court took FAS' side and decided that retailers cannot abuse their influence over suppliers, including using unified agreements, taking upfront bonuses for signing supply contracts with chains, demanding payments for additional services such as advertising and promotions, and discriminating against suppliers. In our view, that creates a precedent for other retailers and signals that the Russian government is supporting suppliers in their confrontation with retailers. Alexandra Melnikova 50. M.Video to rebrand and build new stores in 2012-2014 bne September 12, 2011 Leading Russian white good retailer M.Video says it will spend RUB9bn on rebranding and opening new stores in 2012-2014, reports Prime. The company plans to open 40 stores and redesign 20 stores in 2012.

51. X5 Retail Group's property deal implies more focus on store ownership Troika, Russia Thursday, September 8, 2011 X5 Retail Group has received approval from the Federal Antimonopoly Service (FAS) to acquire 85 real estate objects from MosOblPharmacy (a pharmacy chain that was privatized in June 2011), according to various media sources. The company will reportedly obtain ownership rights to 90,000 m2 of property in Moscow Region at a price of around $110m. Troika's view: We consider the deal's terms to be value accretive for X5 Retail Group, as the implied price of around $1,200/m2 is below the market average. Furthermore, the company will receive a scalable portfolio of real estate assets fitting its requirements. The assets should add around 45,000 m2 to the retailer's selling space this year, helping it achieve its annual rollout guidance of 540 stores (or 208,000 m2 of selling space, we estimate). More importantly, the deal also implies a shift in store ownership structure toward owned premises, which should mean potentially higher profitability. The company reportedly plans to spend up to $1,200m to open 540 stores in 2011. This is excessively high, in our view, as the retailer organically opened 438 stores in 2010 and spent just $468m. Given that the hypermarket roll out program is not very ambitious (just eight to 10 stores this year) and there is no longer a focus on large scale acquisitions, the only opportunity to realize such a scalable capital investment program is by massively stepping up real estate acquisitions. In this case, we should expect material savings on rent expenses. For example, the current acquisition implies that 2012 lease costs should be $20 25m lower compared with a scenario in which these premises are leased. Taking this into account, we conclude that the company may surprise on the upside, reporting lower than expected capex this year or lower rent expenses next year. We already reflect this in our forecasts, assuming 2011 capex of $868m (well below the company's guidance), while the Bloomberg consensus is still conservative, showing a current year investment outlook of $1,257m and a next year EBITDA margin projection of 7.5%. Mikhail Krasnoperov

SECTOR Telecom, Internet 52. Auctions for 4G licenses to take place in 1Q12 Troika Dialog September 9, 2011 Interfax cites Deputy Communications and Media Minister Naum Marder as saying that the Russian State Commission on Radio Frequencies has decided to hold the 4G license auction in 1Q12. Spectrum in the 791-862 MHz band will be auctioned, but auction winners will later also get spectrum in the 2.5-2.7 GHz band and potentially in the 720-791 MHz band as well, without an additional auction. In order to roll out the network in the most cost-effective manner, carriers require both high and low-spectrum bands. Lower bands can cover a broader area with fewer base stations, while the higher bands can deliver greater capacity, so a mix of high and low-spectrum bands is optimal.

Those carriers that win licenses will be required to refarm (reallocate) the spectrum, as the necessary bands are currently used by military systems. Refarming is estimated to take more than two years and the LTE consortium (MTS, VimpelCom, MegaFon and Rostelecom) estimates conversion investment at R52 bln ($1.8 bln). The consortium also estimates that under the assumption that four operators participate in construction of the LTE network and operators receive licenses for spectrums in the 700-900 MHz and 2.5-2.7 GHz bands, total investment (capex plus conversion investment) per operator will be R85.7 bln ($2.9 bln) with a payback period of 7.7 years. Troika's view: We welcome the decision to allocate both low and high spectrum bands, as it will apparently enable operators to construct the LTE network in the most efficient way. Refarming costs are likely to be split between the operators that win licenses at the auction. If we assume that all four operators win spectrum at the auction and the required investments are split equally, each operator would need to invest roughly R13 bln (around $440 mln) over 2012-13 in refarming of the 700-900 MHz bank. This is around 2-3% of our EBITDA forecast for MTS over the period and would be around 2% for the enlarged VimpelCom Ltd. Anna Lepetukhina 53. CapMan invests in Siberian Networks Press release September 6, 2011 CapMan Russia, a fund managed by CapMan, has invested in Siberian Networks. The company is a fast growing Internet Service Provider (ISP) operating in the Siberian Federal District (SFD) of Russia. Siberian Networks aims to further expand its operations in its primary market area with considerable growth opportunities. CapMan will support the company in achieving its targets. Established in 2004, Siberian Networks is one of the leading Internet Service Providers operating in the Siberian Federal District of Russia. The company provides triple-play services including high-speed Internet and IPTV for both commercial and retail customers. Siberian Networks is the third largest player in Novosibirsk and the leader in Novokuznetsk. The company is expected to generate a turnover of approx. €15 million in 2011 and it currently employs approx. 660 people. Siberian Networks has more than 100,000 subscribers. "Siberian Networks is a significant player in the telecom market of SFD. Since its foundation, the company has grown at a very fast pace and has currently approx. 20% market share in Novosibirsk. In 2007 we also expanded to Novokuznetsk, where we have today a market share of approx. 25%. We are currently providing services in Novosibirsk region, Altai and Kemerovo region and our target is to continue to grow the business across the SFD", says Oleg Kus', CEO of Siberian Networks. "The broadband market in the SFD offers significant potential as the penetration in the area continues to be relatively low. Siberian Networks is a strong regional player in Novosibirsk and Novokuznetsk and is seeking to further expand its operations in the SFD. In co-operation with the management, CapMan will support the company in executing its growth strategy. I am confident that Siberian Networks is very well

placed to partake in the future consolidation of the market", says Maxim Popov, Investment Director at CapMan. Following the investment, CapMan Russia fund now owns approx. 20% of the shares in Siberian Networks, while the remaining is held by the management team. CapMan Russia fund will increase its ownership to approx. 25% during the following months. CapMan Plc is a major investor in CapMan Russia fund. 54. CEE Telecom sector: seasonality and upswing in mobile data to offset weak H1 Erste September 8, 2011 CEE telecom sector continues to struggle due to slow consumer and public spending - stabilisation to be expected in 201 Low mobile and fixed-line voice revenues to be compensated by mobile broadband Internet, smartphones, pay TV and fixed broadband Internet Turk Telekom remains top pick, Telekom Slovenije unchanged on Accumulate, Magyar Telekom down to Hold, Telekom Austria unchanged on Sell, Turkcell up to Hold, Telefonica O2 CR remains on Hold and TPSA up to Reduce Telefónica O2 CR - We maintain our Hold recommendation, while lowering the target price from CZK 450 to CZK 410. The reduction in target price is mainly due to our lower earnings estimates, partially compensated for by a lower risk-free rate and equity risk premiums. The recent sovereign rating upgrade of the Czech Republic by S&P leads to lower equity risk premiums in our DCF valuation. - We lower our2012 earnings estimate by12.3%, after taking the competitive pressure in themobile market and slow recovery in consumer spending into account. Intense competition has led to lower average prices, while the 30% y/y reduction in the mobile termination rate (MTR) led to lower interconnection revenues. We expect MTR to be reduced significantly in 2012, as its current level of 4.5 eurocents is still far above the EU recommendation of 1.5-3 eurocents. - We see no immediate catalyst for the share price.We expect the company to provide an update of its shareholder remuneration only next year, during the FY11 earnings release. Dividends are legally capped by the parent company's retained earnings, which we estimate at a maximum of CZK 30/share. In order to keep the shareholder remuneration stable (as in 2010) at CZK 40/share, Telefónica CR might consider a combination of dividend, share buyback and direct distribution of share capital to shareholders. Outlook "The recent results for 2Q11 confirmed that the sector continued to struggle with the slow consumer and public sector spending, and with corporate clients renegotiating their contracts or trying to reduce their communication costs. We expect the sector to start stabilizing in 2012, when the revenue and EBITDA declines will be no longer accelerating. This would be driven largely by improvements in consumer and public sector spending", says Sutedja. The economic recovery in CEE was essentially based on foreign trade. The next step on the road to a full recovery would be stronger growth of private consumption. The labor markets in the area have hardly rebounded at all and the consolidation of public sector budgets also eats into the propensity to consume. Erste Group analysts expect this area to improve significantly next year.

Regulatory pressure remains an issue. The EU Commission recommends an MTR decline to 1.5-3 eurocents/minute by the end of 2012. Hungary, Croatia and the Czech Republic are facing a steep MTR reduction this/next year. The competitive pressure remains as intense as before. Only the focus of the promotions has shifted towards mobile data. 55. Mail.ru Group's trip notes: Russian internet traffic monetisation is at embryonic stage and is to steepen VTB Capital September 5, 2011 News: We took Mail.ru's management on a road show to meet investors in London last week. Our View: Managing Director Matthew Hammond's comments underpin our bullish view on Russian internet fundamentals and highlight the upside risks to our Mail.ru valuation model. Mail.ru management re-iterated its estimate from last week that the company's FY11 revenue growth could reach 50% YoY (vs. 37% YoY incorporated in our current IFRS model) with Russian internet ads and IVAS remaining the key revenue drivers. Management continues to sound bullish on both the company's specific and overall Russian internet traffic trends, confirming that the company's daily internet usage pick-up seen in 1H11 is continuing (+20% YoY in June.)Also, the internet usage of the average Mail.ru user is almost twice that of Facebook users in Russia: 10.5 hours vs. 4-4.5. The monetisation of Russian internet users is at a nascent stage. Management sees the internet audiences of both its flagship Mail.ru, the third most visited web-site in Russia for the daily audience, and its SNSs (Odnoklassniki and MyWorld) as being highly under-monetised, while it views the monetisation ability of China's Tencent (the company's closest peer) as a long-term benchmark. Finally, management sounded fairly regarding its ability to sustain high-40th margins for FY11, saying that all major cost items (labour, hosting and rental expense) are expanding below revenues, thus cushioning margins at 45-50% over the next couple of years.

SECTOR Transport 56. Aeroflot increases number of passengers 25% y/y in August with the year's peak behind us Alfa Bank September 8, 2011 Aeroflot released standalone operating numbers for August yesterday. Passenger traffic increased 25% y/y and reached 1.468m passengers. The numbers are very strong, with August being the second best month this year after April in terms of growth rate. In 8M11, Aeroflot carried 9.177m passengers, posting 23% growth y/y for the period. However, we can now say that the year's maximum is behind us, as in

August, Aeroflot carried slightly less passengers than in July - 1.468m vs. 1.469m, respectively. July is traditionally the peak month for Aeroflot, but this year the monthly decline in August was less pronounced than a year ago. We expect the group's results to be published soon and believe they will be weaker than for Aeroflot alone because of the poor performance of Aeroflot's subsidiary Donavia, which posted almost a 50% y/y drop in passenger numbers in 7M11 due to the removal of old Soviet planes from its fleet. Iouli Matevossov 57. Concerns Grow over Frequency of Deadly Accidents in Russia After Plane Crash IHS Global Insight September 8, 2011 Russian president Dmitry Medvedev slammed poor safety standards and vowed to conduct a thorough investigation into the plane crash on 7 September that killed 43 people, including all but one member of the top hockey teams in Russia. Today (8 September) Russian president Dmitry Medvedev visiting the site of yesterday's crash near Tunoshna airport in the central Russian city of Yaroslavl, vowed that a proper investigation will be carried out into the reasons behind the deadly incident. The crash happened moments after a Russian-made Yak-42 plane took off from Yaroslavl airport, 300 km north-east of capital Moscow. The plane, bound for Belarusian capital Minsk and carrying mainly the members of the three-time Russian hockey champions Lokomotiv Yaroslavl, quickly listed and crashed, parts of the plane falling into the nearby Volga River. Only one member of the hockey team and a member of the plane's crew survived, although they are reported to be in critical condition. Lokomotiv Yaroslavl was flying out to Minsk for the opening match of the season. The news of the deadly crash reverberated around the world hockey community. The head of the International Ice Hockey Federation, Rene Fasel, said that "this is not only a Russian tragedy. It's a terrible tragedy for the global ice hockey community." Medvedev, speaking at the site of the tragedy, slammed poor air travel safety standards. He repeated the concern of many Russians that far too many deadly incidents have happened in the country in recent months. He said that there is an urgent need to create modern companies which will help to replace the ageing air carriers. Medvedev said that if domestic companies are not able to produce reliable aircraft then air transport companies must buy foreign-made planes. "We Cannot Go on Like This" In the past months there have been far too many deadly accidents in Russia to be coincidence. The recent tragedy follows two other crashes involving Russian-made Tu-134 and An-24 planes which have killed a total of 50 people. The Russian authorities reacted by calling to phase out these elderly aircraft models by the end of the year. However, it is not just air-travel accidents that cause deep concern, but also the two tragedies involving river boats. One of them, the sinking of pleasure boat Bulgaria on the Volga River on 10 July was particularly disturbing, when 122 people including over 30 young children died because of what appeared to be gross violations of safety standards. The boat had been operating with a faulty engine, with expired licence and took on board far too many people than its capacity allowed.

Medvedev said that Russia cannot go on like this. However, this sort of speech has become traditional in Russia. Following a deadly accident the president and his prime minister Vladimir Putin visit the site of the tragedy, make speeches promising to punish those responsible for the oversight, and pledge to make wider changes to improve safety. However, their attention span is normally rather short and the investigations, once out of the media limelight, are often forgotten. Meanwhile, local state officials return to their old practices in the absence of real checks and balances. On some occasions a low-level state official is fired, only to be reappointed in another post. The Root of the Problem There are number of reasons behind the increased number of lethal incidents. § Ageing infrastructure is the most obvious one. Apart the major transport companies, most Russian enterprises in this sector rely heavily on old Soviet infrastructure, which has had little or no investment since the collapse of the Soviet Union in 1991. The vehicles, boat and planes used on domestic lines are generally of Soviet make and give the most reasons for concern. Russia is a vast country and it will take a huge effort and long time to overhaul its infrastructure. Part of the problem is that the business environment in Russia remains unattractive and many foreign companies that could bring capital and new technologies are not venturing into Russia, especially in the regions. § Corruption and weak law enforcement are to blame for the frequency of the lethal accidents as well. After all, some of the most deadly accidents have involved foreign-made Boeing and Airbus planes. Weak law enforcement, nepotism and corruption are real problems that not only stifle the business development and modernisation prospects of the transport sector but also cost lives. Weak supervision of safety standards, nepotistic hiring practices and corruption involving overlooking expired or unjustified operational licences are at the heart of the problem. § Lack of accountability among local officials is another reason for the growing number of deadly accidents. In the past decade Russia's government system has become more and more centralised. Especially after the 2006 constitutional changes which were spearheaded by Medvedev when he was first deputy PM, the Kremlin abolished the elections of regional governors. Instead they are now appointed by the central government. Often governors get their posts not because they are the best suited for the position but because they are loyal to the central government. This means that there are few checks and balances to ensure they are not corrupt and they are performing well. Given that the political loyalty is what matters, the regional governors have little incentive to perform better. § Lack of Popular Pressure on the government is enabling both central and regional authorities to get away with their poor performance. Russian political opposition remains suppressed by the authorities and is essentially pushed out from mainstream politics hence their power to bring changes is very small. But in general, the society remains apathetic towards politics. There is general mistrust toward all types of politicians and in politics general. Civil society is rather underdeveloped and there are not many civic groups that can, for example, ensure that probes into these deadly crashes are conducted thoroughly and everyone responsible is held accountable. The average voter would prefer to sort out his or her own problems and does not believe in public action. In fact, rather large number of Russians would prefer a system where there is a strong leader on top of the power pyramid - much

like Putin during his early years of presidency- who would instill fear in public officials and make them work properly. Outlook and Implications Despite the tough talk by the Russian leaders, positive change in transport sector is going to be in short supply. The overhaul of transport, including aircraft, sector is a difficult and long-term project. Also it is not an isolated issue and is not immune to the faults of the malfunctioning bureaucratic state apparatus. This system is increasingly difficult to manage but neither Medvedev nor Putin, the two most likely contenders for the presidential seat in the March 2012 elections, are planning any serious decentralisation of power. While the system is not working for the people, it seems that is it working for the central government. The Kremlin prefers to have loyal centrally appointed governors instead of locally elected potential political rebels. In the case of tragedies such as this one, the central government switched to "manual control", meaning the top leaders descend on the scene to take control of the situation. However, when they leave the scene, the situation falls into default mode, where the local officials, outside the spotlight of the top managers' attention, return to their old practices. This reactive management style of the Kremlin is proving to be less and less effective. Lilit Gevorgyan 58. Gazprom Neft, LUKOIL, Rosneft and TNK-BP face problems with jet fuel delivery to the Moscow aviation hub VTB Capital September 5, 2011 News: According to Interfax, Moscow aviation hub airports are experiencing a critical lack of jet fuel stock. Problems with railroad transportation, a decrease in production and an attempt to build up a stockpile had been mentioned as a key reason for the shortage. The main suppliers of jet fuel for the Moscow aviation hub, namely Gazprom Neft, LUKOIL, Rosneft and TNK-BP, have guaranteed to solve the problem. Our View: Even though this situation could potentially inconvenience passengers if not resolved on time, we do not see any negative impact on stock prices for Moscow aviation hub main suppliers in the long term. 59. Globaltrans Update: Steaming Ahead VTB Capital September 9, 2011 Favourite stock in the transportation universe. We are upgrading our 12-month Target Price for Globaltrans to USD 21.7 (implying 39% upside) following the release of its upbeat 1H11 IFRS results. The stock trades at 4.9x EV/EBITDA'12, which is 20-27% below global peers. We are reiterating our Buy recommendation. Outperforming the industry. While the industry continues its struggle to return volumes back to 2008 peaks (8mo11 volumes were 9% below 2008), Globaltrans got back to pre-crisis levels already in 2009, and it has been constantly working on improving its market share. It transported 27% more cargo YoY in 1H11 vs. the 4.0% YoY growth for the industry, thus lifting its market share to 6.0% from 5.3% in 2010.

Strong set of financials. Operating achievements and tariff increases (yields are up 11%) helped to deliver buoyant 1H11 results. Adjusted revenues surged 48% to USD 604 mn, while EBITDA bounced up 44% to USD 258mn, beating our forecasts and forcing us to increase our revenue and EBITDA numbers 8% and 6%, respectively. Balanced business model. During times like this, when fears of a global slowdown are decreasing appetite for risk, Globaltrans's balanced business model should help it remain on the investors' radar screen. Almost 40% of the business is comprised of stable oil transfers, while growth in the remaining cargos was mainly attributable to leased railcars, which can be returned in case of a worsening environment so as to minimise losses from a dormant fleet. Freight One - forbidden fruit? The acquisition of Freight One would make Globaltrans the undisputed leader of railway operations in Russia. Still, we view any acquisition that leverages the company (3.4x debt/EBITDA) as dangerous in the current environment. Our view that Globaltrans is not the favoured bidder at the Freight One auction supports, rather than undermines, our investment case. 60. Medvedev calls for more foreign planes Aton September 9, 2011 Vedomosti reports today (9 Sep) that following the recent crash of a YAK-42, President Dmitry Medvedev has ordered the government to consider developing a programme aimed at renovating the Russian passenger aircraft fleet and reducing the number of domestic airlines. He noted that since production is slow at Russian aircraft companies, foreign aircraft should be purchased instead. In our view, these statements should support larger passenger airlines, especially those specialising in domestic flights, such as UTair. We believe UTair is the only domestic airline that can effectively service passenger traffic on local routes as it has a large fleet of modern regional aircraft. Additionally, the company already focuses on buying foreign regional jets, so the introduction of any government benefits for such purchases would clearly benefit the airline. 61. Russia grounds eight planes after deadly crash RIA Novosti September 11, 2011 Flights of eight planes were suspended after a deadly air crash that virtually wiped out one of Russia's most successful hockey teams, Lokomotiv Yaroslavl, the Russian transport watchdog said on Friday. Russian transport safety regulator Rostransnadzor ordered to inspect all airlines that operate Yak-42s over the next three days. Sixteen Russian airlines currently operate 57 planes. Yak Service, the owner of the crashed plane, has a fleet of 10 aircraft and five of them were grounded after the inspection. The company was instructed "to carry out a set of measures to decrease safety risks in Yak-42 operations," Rostransnadzor said in a statement.

Inspectors also suspended flights of aircraft owned by Grozny Avia, Gazprom Avia and KrasAvia. A Yak-42 plane fell to earth shortly after take-off from an airport near Yaroslavl, some 250km north of Moscow, killing 43 people, most of them players and coaches of the Lokomotiv Yaroslavl ice hockey team. Two survivors remain in critical condition. A technical breakdown or a pilot error are seen as the most likely causes of the tragedy. Russian President Dmitry Medvedev, who visited the crash site on Thursday morning, said on Friday he would discuss the club's future with officials from the Kontinental Hockey League (KHL), the Sports Ministry, the Lokomotiv club and Yaroslavl Region governor Sergei Vakhrukov on Monday.

SECTOR Agriculture 62. Russia's agriculture Ministry joins the line for budget funds with $230bn strategy bne September 7, 2011 The Agriculture Ministry has released a draft plan calling for RUB6.8 trillion ($230 billion) of investment by 2020 to help boost Russian exports of grain, pork and poultry, reports Reuters. The strategy paper is just one of several from various ministries calling for huge state investment currently being submitted ahead of elections. The draft of a state program for agricultural development for 2013-20 expects two-thirds of the investment to come from federal and regional budgets. However, it will have to compete with plans such as that for innovation revealed last week by the Economic Development Ministry which calls for $500bn. Under the Agricultural Ministry plan, grain output should hit 125m tonnes by 2020, compared with the 90m tonnes or so expected this year. Exports could then rise to 41.5m tonnes from 20m currently. Those targets would require an increase of 6m hectares of sown land to 50m, and a half tonne expansion of average yield to 2.5 tonnes per hectare. New grain storage capacity and deep-sea export terminals on the Azov, Black and Baltic seas and on the country's Pacific coast are also planned. "Exports should be increased to countries of Asia-Pacific, Africa, Latin America and Europe," the draft says. The program also calls for drastically cutting dependence on imported raw sugar. The country should produce 5.4 million tons of beet sugar in 2020, covering 91.2 percent of its needs. Russia produces more than half of the sugar it consumes from domestic beets and the remainder from imported raw sugar. The draft also calls for meat production to double to 14.1m tonnes, with poultry and pork the main areas of increase. "By 2020, exports of poultry meat may be 400,000 tonnes and of pork 200,000 tonnes," it said. Currently domestic production covers 73% of domestic consumption with the rest covered by imports. Moscow has regularly banned meat imports in recent years, claiming health concerns over production quality in exporting countries, but many suggest that protectionism is as much in mind as health in many cases. The draft plan suggests switching to import tariffs from tariff quotas after domestic products reach "sufficient competitiveness." 63. Russia on course to significantly increase its grain harvest by 2020

bne September 12, 2011 Russia's Agriculture Ministry says that by 2020 the annual grain harvest could reach as much as 125m tonnes in 2020 allowing Russia to export as much as 41.5m tonnes a year, making Russia a global agricultural power. Russia had a bumper harvest in 2008, producing some 110m tonnes of grain, but that was flowed by a poor harvest in 2009 of around 65m - just enough to cover the country's domestic demand. However, this year the outlook for the harvest has been improving and current is on course for 90m tonnes. The high forecast for 2020 is part of the government agriculture development program for 2013-2020 that was compiled by the Agriculture Ministry. The growth will come from stabilization of the grain crop area at 50m hectares and increasing cereal crops to 2.14m hectares and legumes to 2.54m. In addition, the ministry hopes to increase grain crop yield to at least 2.5 tonnes per hectares, the cereals yield 1.8 tonnes per hectares and legumes - 2.7 tonnes per hectare. However, all these yields are at least half those in western Europe. The cost of the programme is on the order of RUB3.5 trillion, including direct subsidies and loan interest rate subsidies. 64. Rusagro announces results of harvest campaign Alfa Bank September 7, 2011 Rusagro has reportedly collected 502,000t of grain, including 268t of winter wheat, 175t of barley and 59t of peas. Given that some of the above will be used for seeds, rent payment and fodder, about 405,000t will be made available for sale. The grain harvest results are in line with our expectations (~513,000t). We are still waiting for Rusagro's results in the most profitable and important sugar beet segment, where the harvest is just starting to be collected, before drawing any final conclusions about the results for the agriculture business in 2011. Alexandra Melnikova 65. Rusagro - Sugar prices decoupling Renaissance Capital September 5, 2011 We reinstate our BUY rating, but cut our target price for Rusagro to $16.9/share (from Under Review and $19.3 previously) on the back of a lower forecast for FY11 financial results from the sugar division, as an exceptionally high beet harvest in Russia translates into low domestic white sugar prices in 2H11 and delayed sugar sales. We cut our 2011 EBITDA forecast by 30%, while our 2012 EBITDA forecast is up 11%. The new target price also reflects a reduction of our forecast pork volumes for 2015, because the company has not yet started construction of its Chelyabinsk

project due to uncertainty over pork quotas related to Russia's accession to the WTO. Other new pork projects are under way, according to the company's original plans. Domestic sugar price below 'replacement' price for first time in 12 years. Weather permitting, Russia could produce 4.3-4.6mnt of beet sugar this season - about 80% of annual domestic consumption of 5.6mnt. Given that 2.6mnt of raw sugar were already imported in 1H11 (+18% YoY), the huge sugar production from beet has created an oversupply and pushed the domestic sugar price down to RUB22.6/kg ($779/t, with VAT). The domestic price is currently below the RUB31-34/kg replacement price ($1,035/t, including current global raw sugar price of $645/t, $140/t seasonal import duty, and $250/t in processing, transportation costs and processor's margin). Shift in sales, but 5% higher 2011E sugar output forecast. The shift in sugar sales from 2H11 to 2012 indicates risks that relate to any cyclical agriculture business, but does not affect our longer-term view on Rusagro. Its decision to delay sugar sales to get higher margins in 2012 reflects its focus on profitability rather than sales volume. The company benefits from low production costs and strong yields in its agro segment; its pork division is showing improvements in margins and its financial position is stable. Rusagro shares lost 37% since IPO and 13% in August. On 2012E P/E of 5.4x, Rusagro is valued 56% below its international sugar peers; on EV/EBITDA of 3.8x it is trading 42% below. 66. Rusagro: 2011 Losses Are 2012 Gains Alfa Bank September 8, 2011 Overreaction to 1H11 results and a weak outlook for domestic sugar prices creates a Rusagro buying opportunity for long-term investors that are prepared to wait for 1H12 sugar sales, an increase in the contribution of the company's meat business (2013), and potential M&A announcements. Strategy changes and recent market trends result in a decrease of our TP by 25% to $14.4 with 52% upside, supported by a 19% discount to peers based on 2012F EV/EBITDA. Having placed the stock under review on August 31 as we analyzed the recent results, we now reissue our O/W rating. Investment Case The market has overreacted to the seasonally weak 1H11 results. The 1H11 results were taken as a disappointment by the market, affected by the weak performance of the oil & fat segment (which has struggled to restore its mayonnaise sales volumes and load the company's new sunflower oil production factory with seeds) and the agriculture segment (in which gains are likely in 2H11). At the same time, the unrealized loss on derivatives of RUB508m and the RUB360m loss on share-based remuneration for the CEO affected the bottom line, with the former being likely to close after the end of the sugar cane season and the latter being non-cash. The main risk for our 2H11 forecasts comes from low domestic sugar prices and volume reallocation. Low domestic sugar prices, a result of the record high sugar beet harvest as well as unanticipated supply in the market due to what the company describes as "undisciplined behavior of some market players," might make Rusagro delay most of its beet sugar sales to 4Q11 or even 1Q12.

This is partly compensated by lower sugar beet prices and stable profitability in the meat segment. Stable profitability in the pork segment and a potential improvement in sugar beet profitability due to the decrease in domestic prices for the feedstock is positive news and should compensate for the sugar segment's volume losses in 2H11. Valuation and Risks Rusagro looks undervalued, but investors should be patient. The stock is trading down 10% from the results release and down 36% from the IPO. Rusagro's disappointing results are partly explained by seasonality and the pricing in of the delay (or potential cancellation) of the Ural Bekon project. Trading at 5.0x 2012 EV/EBITDA, Rusagro is priced at a discount to international peers, while its fundamental DCF-based upside stands at an even more impressive 40.3% discount. Upside drivers for the stock, including an increase in this year's sugar sales or an increase in domestic sugar prices, is likely to come only in 4Q11. Risks: Downside risks include unfavorable movements in soft commodity and meat prices, a decrease in yields in the agriculture segment, and macro and regulatory risks.

SECTOR Aviation, shipbuilding and defence 67. CORRUPTION WATCH: Whistleblower major jailed for beating soldiers RIA Novosti September 9, 2011 An army major in the Russian Far East has been sentenced to four years in prison for beating a warrant officer and a soldier. A military court in Vladivostok also stripped Maj. Igor Matveyev of his rank. Matveyev, who has a previous criminal record, said he would appeal the conviction. The ex-major gained notoriety on the web in recent months after exposing corruption at an army base near Vladivostok in a video posted on YouTube. In it, he accused the base chief of overseeing illegal activities and forcing servicemen to eat dog food. 68. RBC posts solid 2Q11 trading update, announces additional share issue Troika, Russia Friday, September 9, 2011 RBC yesterday published a 2Q11 trading update, posting aggregate revenue growth of 36% y o y in ruble terms to R1,106m, driven by a 75% increase in internet advertising. This brought 1H11 revenues to R1,959m (up 34% y o y), or $68.6m. The company reiterated its full year guidance of 30% revenue growth, which is in line with our forecast. RBC also reported EBITDA of R107m, which brought 1H11 into positive territory, and reiterated its 2011 EBITDA guidance of R500m. The company also announced plans to sell 51,109,375 newly issued shares via public offering to finance its purchase of the leading Russian domain name registrar and hosting provider Ru Center, and other acquisitions. This will increase the number of shares outstanding 16% to 370,000,000. Shareholders will vote on increasing the

share capital at an EGM scheduled for October 10. RBC's major shareholder, Onexim Group, which owns 51%, has announced its intention to exercise its preemptive right to buy 51% of the additional issue. Whether other shareholders exercise preemptive rights is uncertain, but if we assume that Polyus Gold and the management, which hold a respective 6% and 11%, do not exercise their rights, around 25m shares will be sold on the open market, raising the free float by 24.5% to 127m shares. Troika's view: The results were solid and in line with our projections, so RBC is on track to meet our full year forecasts. However, the company issuing shares to finance the acquisition of Ru Center implies dilution risk, especially since the parameters of the deal have not been disclosed. 69. Sukhoi Civil Aircraft to increase Superjet production bne September 12, 2011 Russian aircraft maker of the Superjet, Sukhoi Civil Aircraft, says it will increase its production capacity, the company's First Vice President Igor Vinogradov told reporters last week. The production capacity of the Superjet's parts will begin at the Kazan Aviation Production Association, in Tatarstan, and at facilities in the Khabarovsk Region city of Komsomolsk-on-Amur, among others. Sukhoi Civil Aircraft plans to manufacture 28 Superjet 100s in 2012. 70. Russia to sign deal for 2 more French warships by yearend RIA Novosti September 7, 2011 Russia will sign a contract with France for the third and fourth Mistral-class amphibious assault ships before the end of this year, Russian Defense Minister Anatoly Serdyukov said on Wednesday. "I believe we should complete the negotiating process and have these contracts signed before the end of the year," he said. The two new warships will be built in Russia, he added. Russia is also buying related technology and has two crews being trained in France, the minister said. Russia and France signed a $1.7 billion (1.2 bln euro) contract in June on two French-built Mistral class amphibious assault ships for the Russian Navy, which includes the transfer of sensitive technologies. The helicopter carriers are due to enter service with the Northern and the Pacific fleets in 2014 and 2015. A Mistral-class ship is capable of carrying 16 helicopters, four landing vessels, 70 armored vehicles, and 450 personnel.

SECTOR Engineering 71. HMS Group continuing to build up backlog Renaissance Capital September 7, 2011 Event: HMS Group has signed several new contracts totalling approximately RUB153mn (over $5mn) to design and produce modular equipment - in particular, oil-pumping booster stations, cluster pumping stations and automatic group metering units - for several oil and gas fields in Western Siberia. Action: The news is positive for HMS Group, in our view. Rationale: At first glance, the size of the signed contracts does not look significant, taking into account FY11E revenue of RUB28-30bn. However, last week HMS Group announced that it had signed a contract worth more than RUB1bn (over $34mn) to construct six well clusters and infrastructure facilities at a gas field in the Yamalo-Nenets region (Western Siberia). HMS is continuing to strengthen its FY12E backlog. The company has been unable to secure new contracts comparable with the RUB12bn Transneft ESPO contract, but we expect more activity in the oil and gas sector in 4Q11-1Q12, including new oil and gas field development projects and the construction of hydrocarbon transportation infrastructure. The major Russian pipe producers expect an increase in large-diameter pipe sales to Gazprom and Transneft next year. In addition, we think acceleration of the presidential election campaign may trigger greater activity in the hydrocarbon sector. In our view, HMS Group has a fair chance to strengthen its FY12E backlog by year-end, utilising its leading market position in the CIS flow solutions sector. HMS Group currently trades at 42% and 36% respective discounts to international peers on FY11E and FY12E EV/EBITDA. Boris Krasnojenov

SECTOR Media 72. CTC Media: Latest audience share data Renaissance Capital September 7, 2011 Event: Yesterday (6 September) TNS issued its latest audience share data (4+ demographic) for the week of 22-28 August. The all-day audience shares of the CTC, DTV and Domashny channels were 7.1%, 1.6% and 2.5%, respectively. Action: We reiterate our BUY rating and $31.2/share TP on CTC Media. Rationale: The CTC channel's audience share increased during the week; however, its four-week average audience share of 6.6% was below the average of 7.5% for the same period in 2010. Domashny's four-week average of 2.6% is in line with the average for the same period in 2010, and DTV's four-week average of 1.8% is down vs the same period in 2010 (2.0%). The summer is seasonally quiet and CTC's full-year financial outcome will be contingent upon the success of its autumn programming schedule, which is just starting to be rolled out. CTC Media's shares are trading on 2011E and 2012E EV/EBITDA multiples of 6.8x and 5.6x, respectively, below the lower end of the stock's 8-15x historical trading range, which points to value. However, we do not expect its shares to re-rate until there is more clarity on

how the autumn programming schedule is performing, combined with some indication of the strength of the inflation of television advertising prices in 2012, which is unlikely before late September at the earliest. In the medium term, we also think the company could decide to scale up investment in its programming schedule, raising the possibility of further margin erosion.

SECTOR Infrastructure, Construction & Real Estate 73. AFI Development - Takeaways from meeting with CEO Renaissance Capital September 8, 2011 We hosted an investor meeting with AFI Development CEO Mark Groysman and Head of IR Alexander Adadurov. Below we discuss the key takeaways: Update on AFIMall: Currently signed agreements are in place for 81% of the Mall's gross lettable area (GLA) and the development is 70% occupied. Average footfall is around 18k people per day and the company aims to increase this to 40-50k people per day by end 2011-1Q12. Current cash collections amount to $8-9mn a month. In the medium term, AFI expects occupancy levels to reach 97%, with a stabilised NOI of $138mn. The challenge for AFI is to significantly increase footfall - as a comparison, Europeyskiy, one of the most successful shopping centres in Moscow, has a footfall of 130k people a day. AFI is planning an advertising campaign for autumn and there should be more clarity around the success of this campaign closer to Christmas season. Update on Ozerkovskaya and Tverskaya Zastava: AFI's Ozerkovskaya class A office centre is on track to be completed in 4Q11 and the company is planning to sell it upon completion. At the end of 1H11 Jones Lang LaSalle's value for AFI's 50% stake in the completed project was $200mn with around $37mn (AFI's share) Sberbank debt to be repaid and $50mn debt against the partner in the project also to be amortised. Negotiations with Moscow authorities regarding compensation for its Tverskaya Zastava project are ongoing and the company aims the issue to be resolved before the year-end. Update on new projects: AFI plans to receive a renewed construction permit for its Otradnoe (Odintsovo) 450k m2 residential project in spring 2012 and could seek a co-developer to proceed with the project's construction. Active development of AFI's other important projects, Bolshaya Pochtovaya (250k m2 residential space) and Tverskaya Plaza (331k m2 commercial space), is progressing with the design, but the start of construction will not happen earlier than 12-18 months from now. Trading at a 64% discount to NAV: In our view the sale of Ozerkovskaya should be positive for AFI shares. However for the discount on which its shares trade to narrow, we think AFI needs to demonstrate it is able to improve the operating performance of AFIMall and to start active development of its land banks. We believe there should be more clarity around this towards the end of the year. 74. East-West split in European office markets as rents stall in Q2 CBRE September 7, 2011

Renewed caution from occupiers had led to reduced activity across Europe's main office markets, with the notable exception of Moscow, according to the latest EMEA Offices report from CB Richard Ellis (CBRE). The report finds that uncertainty generated by the sovereign debt crisis and broader economic climate is affecting occupier behaviour, with many choosing to roll over existing leases or take short-term expansion space as opposed to relocating, at least until clearer signs of recovery are evident. As a result take up across European office markets for the first half of the year is down 6% compared to the same period last year, and 12% compared with the second half of 2010. However, CBRE's analysis shows that there was an increase in take-up in the second quarter (Q2) of this year (+7%), which reflects stronger demand in a small number of cities, notably Moscow where 295,000 sq m was taken in Q2, a 34% increase on the first quarter. There were also q-o-q increases in take-up in Munich, Amsterdam and Frankfurt, where take-up increased by 86% in Q2. The CB Richard Ellis EU-27 Office Rent Index was unchanged in Q2 as prime rents stalled across most Western European markets. Where increases did occur, they were concentrated in the faster-growing economies in Central and Eastern Europe (CEE) and Scandinavia. Again, one notable bright spot is Moscow, where the office market continues to perform well and prime rents have increased by 10% in Q2. In Oslo prime rents also jumped 10% q-o-q. In a handful of markets prime rents continue to decrease. In Athens rents were down 15.5% y-o-y as the Greek economic crisis continues, and rents in Dublin (-6.4%), Madrid (-1.9%) have dipped further in Q2 2011 although the rate of decline has eased considerably. Across virtually all European markets vacancy rates continue to decline as the availability of prime space is squeezed. CBRE's report highlights that development completions will remain low for at least two years, with only a handful of cities, London among them, having a significant development pipeline. Vacancy has reduced significantly in Moscow, Prague, Frankfurt and Barcelona, where vacancy remains high in absolute terms. Peter Damesick, EMEA Chief Economist, CBRE said: "Growing economic uncertainty linked to the eurozone debt crisis was reflected in slower occupier activity across leading office markets in Western Europe before the August storms broke in the financial markets. In contrast a number of markets in Central and Eastern Europe kept up stronger momentum in the second quarter of 2011, notably Prague, Warsaw and Moscow. Markets are also polarising between difference qualities of office space. Office demand generally is focused on prime quality space which is in increasingly short supply as development completions sink to cyclical lows. Secondary space is rising as a proportion of overall available supply." Christopher Peters, Director of Research, CB Richard Ellis in Russia, said: "As in Europe, so in Moscow, where the focus of investors and many occupiers is on quality. This focus is more intense than before the crisis, as the vacancy rate is higher and there is a wider range of options available to potential occupiers. Nevertheless, this demand is creating downward pressure on the vacancy and thus driving up the rental rates for the high-quality segment, in turn making these objects much more

attractive to investors. Given Moscow's low overall supply of quality buildings, this rise in rental rates is particularly pronounced." 75. Hyatt Announces Plans for Two New Hotels in Vladivostok, Russia Press release September 9, 2011 Hyatt Hotels Corporation announced today that a Hyatt affiliate has entered into management agreements with OJSC Nash Dom-Primorye for two new Hyatt hotels in Russia. Hyatt Regency Vladivostok, Golden Horn and Hyatt Vladivostok, Burny, which will be the third and fourth Hyatt-branded hotels in Russia, are under construction and expected to open in advance of the Asia-Pacific Economic Cooperation (APEC) Summit in the fall 2012. Hyatt Regency Vladivostok, Golden Horn will feature 217 guest rooms and suites, food and beverage outlets, a spa and health club and banqueting and meeting facilities. Located at the Korabelnaya Embankment in the city's central business district, the property will be situated along Svetlanskaya Street -- the city's "High Street" -- with the back of the hotel directly facing the Golden Horn Bay. Guests will be within walking distance of the city's main government and business buildings as well as its exclusive shore line. Visitors attending the 2012 APEC Summit will have easy accessibility to Russky Island, the event's main venue. Hyatt Vladivostok, Burny will boast 218 guest rooms and suites, as well as food and beverage outlets, banquet and meeting facilities, and a spa and fitness annex. The property, which will have a direct view of the Amursky Gulf, will be situated at Cape Burny on the western side of the city and will have quick access to the city's main thoroughfares. "Hyatt is thrilled to be a part of the incredible growth of Vladivostok in advance of the 2012 APEC Summit, when government leaders will join together here to discuss economic growth, cooperation, trade and investment in the Asia-Pacific region," said Peter Norman, Senior Vice President - Acquisitions and Development for Hyatt International (Europe, Africa, Middle East) LLC. "We are delighted to add to our growing portfolio in Russia by becoming the first international hotel brand in Vladivostok." Prior to 1992, Vladivostok, home to the Russian Pacific Fleet, was only accessible to Russian nationals. The city, which serves as the political, economic and cultural center of the Primorye Territory, is emerging as a pivotal player in Russia's deepening economic ties with Asia Pacific counties -- with many national and international companies in or nearby the city. Surrounded by the Sea of Japan, Vladivostok is one of the main harbors and trading getaways of Russia's Far East, and serves as the start and end point on the Trans-Siberian Railway. "A year from now, APEC Summit 2012 delegations will be staying in world class hotels in Vladivostok," said OJSC Nash Dom -- Primorye General Director, Mrs. M.A. Lomakina. "The decision to build these world-class hotels was made in 2009 and OJSC Nash Dom -- Primorye has responsibility for this important project. The Hyatt Regency Vladivostok, Golden Horn complex will become a business centre and Hyatt Vladivostok, Burny will become a destination for leisure and relaxation. The Hotels will provide about 700 new jobs for Primorye citizens." The two properties in Vladivostok represent the ongoing expansion of Hyatt-branded hotels around the world. Hyatt Regency is an upscale brand of full-service hotels specializing in large meetings and conventions and Hyatt hotels are full-service, upscale hotels designed

with the individual traveler in mind. Currently, there are more than 140 Hyatt Regency hotels in operation globally, with more than 25 hotels under development in the China, India, Latin America, the United States, Saudi Arabia, and Vietnam. Hyatt-branded hotels in Russia include Ararat Park Hyatt Moscow and Hyatt Regency Ekaterinburg, with Hyatt Regency Sochi under development and slated to open in 2013. 76. Medvedev appoints officials to oversee New Moscow project Renaissance Capital September 5, 2011 Event: Yesterday (4 September), President Dmitry Medvedev appointed officials responsible for overseeing development of the New Moscow project and for the transfer of state agencies' headquarters to the area. The appointees include the head of the presidential administration, Sergey Narishkin; Moscow Mayor Sergey Sobyanin; and Moscow Region Mayor Boris Gromov. At the end of June, Medvedev proposed the annexation of 144k ha of land to Moscow. On 18 August, Sobyanin announced that 160k ha of land around the Varshavskoe and Kievskoe highways and parts of the Leninsky, Podolsky and Naro-Fominsky districts will be linked to Moscow. A total of 60k ha of residential and 45k ha of commercial real estate are expected to be built in these areas. It might take a year to develop the general plan and transport and infrastructure plans. PIK has a 1mn-m2 residential project in Kommunarka, and LSR has a 285k-m2 project in Bolshoye Domodedovo, which are likely to be annexed to Moscow under the New Moscow plan. Etalon does not currently have any exposure to the designated area, but remains our preferred play in the sector, due to the combination of a track record of delivery, a strong balance sheet and its valuation. Etalon is now trading at 2011E and 2012E EV/EBITDA multiples of 5.3x and 4.6x, respectively, while LSR is trading at 2011E and 2012E EV/EBITDA multiples of 6.5x and 5.1x, respectively; both trade at discounts to PIK Group's respective multiples of 12.2x and 8.3x. 77. Q2 saw the largest ever quarterly investment volume in Russia CBRE - press release September 5, 2011 The overall investment volume was robust, offering the potential for 2011 to match the record levels of investment seen in 2007 and 2008, according to the latest data from CB Richard Ellis (CBRE). The total volume of deals transacted in 1H 2011 was Euro1.77 billion, in 13 deals. The second quarter of 2011 saw the largest ever quarterly volume of deals in Russia: over Euro1.6 billion was transacted in 11 deals. Even during the high-growth years of 2005-2008, the largest amount in any one quarter (Q3 2008) was Euro1.3 billion (20 deals). The largest deal in H1 2011 was the purchase of the 334-room Ritz-Carlton Hotel in central Moscow for approximately Euro424 million by Verny Capital of Kazakhstan from Capital Partners. The hotel sector has hitherto been a niche investment sector in Russia, due mainly to the lack of investment-grade supply. Other notable investment deals in H1 2011 were signed in office sector, accounting for 42% by

volume in six deals. Retail was the next most popular, accounting for 31% in five deals. Moscow remained the destination for the large majority of investment in H1 2011. There were just two deals outside Moscow: Aeroplaza business centre in St. Petersburg (33,000 sq m); and SanMart shopping centre in Kaluga (47,000 sq m). As in recent years, domestic investors continued to pre-dominate. According to the data from CB Richard Ellis, despite the fact that there are still relatively few deals on the market, investor demand has nevertheless clearly strengthened, and thus we have applied a substantial compression in the estimated prime yield level in Q2. As it is marked in the report by CB Richard Ellis it is highly possible that the full-year total will exceed the volumes seen in the 2006-2008 growth years. However, we forecast that this will not be by a large margin, as there are two key impediments to investor action: internally there is still no clarity over the 2012 Russian presidential election, and externally the global economic situation remains uncertain, with the threat of a "double dip" recession in the US and Europe now greater in many investors' perceptions. This acts as a deterrent to investment in markets viewed as risky. Jos Tromp, Head of CEE Research and Consulting, CBRE, commented: "Poland and especially Russia remain the engines of growth to property investment volumes in Central & Eastern Europe (CEE). Over 70% of the CEE volume was registered in these two markets up to mid-August, with Russia alone counting for 30%. High quality product in Moscow is highly sought after. On the back of improving economic growth, relatively high oil prices and considerably higher yields than in the rest of Europe, core Moscow property is coming back on to international investors' agendas." Christopher Peters, Director of Research, CB Richard Ellis in Russia, said: "The record volume of deals seen in the second quarter give rise to cautious optimism over Russia's real estate investment market. Investors continue to focus on their twin favourites of office and retail real estate objects, although the largest deal was in the hotel sector. The main constraint of investment, particularly from international investors, is the lack of high-quality supply across all segments - this has been thrown into sharper focus by the crisis: with higher vacancy rates and lower rental rates than up to 2008, it is only the very best buildings that can show high profits, and only these that will attract international capital." 78. Russia outlines $270bn raod construction plan bne September 6, 2011 As the country prepares to host the 2014 Winter Olympics and 2018 World Cup, Russia is to spend more than RUB8 trillion ($271bn) on road construction in 2012-2020, Prime Minister Vladimir Putin said on Monday, reports Prime. "We concentrate resources for a full-scale upgrade of Russia's entire road network," Putin said, pointing out that only RUB2.7 trillion was spent on new or upgraded roads in 2002-2010. As ever in Russia, much depends on how much of the new budget actually goes towards building the roads, and how much is 'lost' along the way.

79. Transportation, construction and infrastructure - Trends in May-June 2011 Renaissance Capital September 9, 2011 _ Beaten-up stocks. Concerns over the impact of a global slowdown on economies and currencies led to a quick sell-off in transport names. The best performer was Global Ports, partially due to its fairly low liquidity and the recent IPO with a likely sticky investor base, the shares hardly moved in August. The company is due to report its first post-IPO results (1H11) on 12 September. Given the strength of container transhipments we believe the numbers will be strong. Its sister company (owned by the same majority shareholder) Globaltrans reported strong results, which saw analysts increasing their estimates and it is the second-best performing stock after the current 'crisis' started. We think it continues to offer the best value in the sector at current levels. The company has been increasing its market share steadily, despite Russian Railways (RZhD) reducing its forecast for cargo loadings to 3.3% in 2012 from 5%, we believe this reflects RZhD's own subsidiaries' unfocused approach (First Freight will be auctioned off in the next three months). Transcontainer's performance also looks overdone to us at these levels. _ Avoid cyclicals now. As expected the worst-performing stocks are those with small margins, revenue models prone to changes in GDP and high debt levels. Hence we would continue to avoid Autos and Airlines until there is more clarity on the scope of the economic slowdown and currency moves. At the same time, we don't think there will be a liquidity crisis as in 2008 and thus Soller's share price weakness with its background of strong sales looks somewhat overdone to us. _ Construction revival continues. Data suggest a revival in the construction market, which started in summer 2010, is continuing. First, prices of construction materials started to show positive dynamics (the first time after the 2008-crisis) in February-March 2011, it continued to show YoY growth in June-July with a stronger growth in cement prices. Second, domestic consumption of steel products (especially flat steel) strengthened in June-July and producer utilisation rates remained high at 80-100%. July also saw one of the stronger completions in residential dwellings. Nevertheless we believe main demand for construction is coming from infrastructure activities especially with the approaching presidential elections and several events including the summit on Russky island off Vladivostok (2012), university games in Kazan (2013) and the Winter Olympics in 2014. _ Oil weak, coal strong. Oil production was up only 2% YoY in January-August but exports fell 1% due to lower demand from the Far East. This was also the main reason liquid cargo going through Russian rail and ports showed declines in June-August. Dry cargo transhipments jumped 21% in August following the lifting of the grain embargo. Far Eastern ports have shown the best dynamics in June-July among the ports mostly due to a higher share of coal in their overall exports, which continued to show strong dynamics for sales especially to Japan (July was double the March 2011 level) and Korea. Turkey and European destinations have shown a decline in consumption and hence coal exports through other basins have been weaker. While export prices for coal were unchanged in June-August, the domestic prices continued to grow and given the 2% growth in electricity consumption in Russia over the same period, we believe there will be strong domestic demand for coal over the coming months.

_ Buy bulk and maybe some container stocks. We believe infrastructure spending will continue over the next few months (in fact, few years), and demand for construction material cargo, steel products and coal will remain strong. Nevertheless growing prices for buying and renting new railcars even in June-July, suggest there is no slowdown in business activity that best-in-class companies (for example Globaltrans) are likely to see in the next few months. Another area which saw strong growth through August was container transsipments via ports and rail. Of course it is cyclical but unless Russia sees a fall in GDP (not only a decline) and a more than 25% easing of the currency, we doubt there will be a meaningful slowdown in container shipments. If we were to take a more cautious view on which stocks to pick, Global Ports, having revenues largely in dollars, is more immune to currency moves than Transcontainer, all else being equal.

SECTOR Chemicals, Fertliser 80. Belarus Economic & Political Instability Bad for Potash Oligopoly Citi September 7, 2011 Economic Situation in Belarus is Getting Worse Our CEEMEA economics team has taken a more bearish (from already bearish) view on the economic situation in Belarus. Citi's current view is that a move to a free-floating exchange rate without supporting measures will lead to a devaluation/inflation spiral. President Lukashenko announced on 30 August that Belarus will allow the ruble to become free-floating in mid-September. Political Pressure is Mounting ... on President Lukashenko who assumed office in 1994. So-called "silent protests" are already taking place in Belarus. The number of participants is currently small and most of the opposition leaders are in exile or under house arrest. However, we believe that that if the economic situation worsens further, social unrest may escalate. ... Potentially Leading to Belaruskali Being Used as Collateral ... Belaruskali (12.5% of global potash capacity) is the crown jewel in the portfolio of assets that Belarus can rely on to raise financing. However, Belarus has rejected a US$2bn loan from Russia's Sberbank and Germany's Deutsche Bank which was expected to be secured by a 35% stake in the share capital of Belaruskali. ... For a Loan from India According to FMB and Fertecon reports India is prepared to lend US$6bn (11% of Belarus GDP) secured by a 20% stake in Belaruskali and contract commitment for potash at discounted prices through BPC. Belaruskali is Key to Potash Oligopoly Belaruskali controls 12.5% of global potash supply, but more importantly it is a 45% shareholder in BPC (trading alliance between Uralkali and Belaruskali) with 5% being controlled by the Belarus government through Belarusian Railways. It is not yet clear how a potential contract agreement with India may be structured given that all volumes produced by Belaruskali are marketed by BPC. Indian Potash Contract Also Key

India remains the only large contract market globally which is 100% reliant on imported potash (China, the other contract market, is 48% self-sufficient). If India is successful in securing potash contract at discounted prices under a long-term agreement with Belaruskali, we believe this would undermine the power of the 'potash oligopoly' (Uralkali, Potash Corp, Mosaic, ICL, K+S and Arab Potash). 81. PhosChem raises contract price with India for 2H11 Troika Dialog September 5, 2011 PhosChem, the trader of Mosaic and PotashCorp, has struck an agreement with India for deliveries of DAP from September 2011 through March 2012, as reported on Friday by FMB, the leading fertilizer industry publication. India is the only market that has term contracts for half a year on the market - all other destinations are spot based. The price of the previous contract for DAP was $612/tonne CFR, while the new price is $677/tonne CFR (up $65/tonne). This implies a netback of $625/tonne FOB Tampa, compared with the prevailing market price of $650-655/tonne FOB Tampa, or only a 4% discount. All other producers, including PhosAgro, should follow PhosChem and conclude the contracts for deliveries on the same terms. PhosAgro delivered little to India in 1H11 and we expect the volumes to pick up strongly in the latter part of the year. The phosphate market remains reasonably tight - Ma'aden is still in a ramp-up stage following its commissioning in mid-2011 and there is little material available despite the low tax season for exports from China. Prices have held up at $650-655/tonne FOB Tampa for over a month now. There are rumors that export restrictions imposed on DAP in China will also be applied to other NP (nitrogen and phosphate) fertilizers, which amplifies the nervousness among buyers. Overall, we see positive signs from the market; we would prefer PhosAgro to Uralkali at this stage, though our top pick in the sector is still Acron. PhosAgro is due to report its maiden 2Q11 IFRS figures on Wednesday. Mikhail Stiskin 82. Uralkali: When the Music Stops - Who'll Find a Seat? Aton September 7, 2011 In this note we revisit Uralkali's investment case after incorporating an updated potash price outlook as well as certain corporate developments. In addition, we attempt to compare Uralkali with foreign peers to see if it is better positioned to capture the investor's eye. The game changer After its blockbuster merger with Silvinit, Uralkali became a true force to be reckoned with. Through its trading arm Belorussian Potash Company and the former Silvinit's trader International Potash Company, Uralkali now controls over 40% of the global potash export market. What is more revealing is that in 2010 the company was the leading potash exporter to Asia - the region we believe is set to drive global economic growth going forward. A compelling investment case among potash names?

Through a top-down approach and comparison with its peers we argue that Uralkali offers a unique combination of stable cash flows, outstanding profitability levels and enviable growth prospects. Adding a stable dividend payout and low debt burden, we believe Uralkali's fundamental case looks too good to ignore. But stellar share price performance... Over the past 12 months Uralkali's share price has been exceptionally strong, nearly doubling over the period during which the MSCI Russia Index gained less than 10%. Uralkali's global potash mining peers averaged a 17% increase over the same period. ...has turned Uralkali into an expensive ticket to the potash industry If compared to its global peers, Uralkali's forward P/E and EV/EBITDA ratios imply a whopping premium of 40-60% limiting any significant upside potential in the name. Lack of triggers could encourage a corrective mood China and India have already signed potash supply contracts for 3Q11-1Q12 and the company's weighting in the MSCI family of indices has been increased, so the lack of potential triggers may result in Uralkali underperforming the market in the mid-term perspective. Target priced increased but HOLD rating reiterated We maintain our HOLD rating on the stock, but raise our 12-month target price from $8.3/share ($41.5/GDR) to $10.5/share ($52.5/GDR). Where could we be wrong? From a devil's advocate perspective we might be underestimating investors' desire (and the price tag they are willing to accept) to dive into high-quality assets in the run-up to potentially turbulent times. We sought to compare Uralkali to its peers to see how it is positioned to weather any potential market downturns. One of our revelations was not very comforting: despite a compelling fundamental investment case we note that Uralkali's share price performance during market turbulence can be very volatile, as witnessed during 2008-09.

GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 83. Medvedev says Russia interested in economic ties with North Korea RIA Novosti September 11, 2011 Russia is interested in developing mutually beneficial economic ties with Pyongyang, President Dmitry Medvedev said in a letter to North Korean leader Kim Jong-il. In a letter to congratulate the Democratic People's Republic of Korea (DPRK) on the 63rd anniversary of statehood, Medvedev said Russia and Korea share not only a common border, but also traditions of friendship and cooperation. "I confirm that Russia is interested in developing mutually beneficial ties with North Korea and in joint efforts to promote peace and stability on the Korean Peninsula and Northeast Asia in general," Medvedev said in a letter of congratulations to Kim.

During Kim Jong-il's recent visit to Russia, the two leaders agreed to set up a commission to study a project to build an export gas pipeline from Russia through North Korea to South Korea.

UKRAINE INVESTMENT 84. Ukrainian-Russian gas dispute OSW September 9, 2011 In recent weeks, Ukraine made yet another attempt to renegotiate the unfavourable gas contracts with Russia which were signed by Yulia Tymoshenko in 2009. The chances of success appear to be illusory, because without far-reaching concessions from Ukraine (for which it is not ready at present), Russia will not change the conditions which favour Moscow. If the talks collapse, it is to be expected that Ukraine will submit an appeal to the Court of Arbitration in Stockholm. At the same time, options leading to confrontation with Russia, including a 'gas war', seem unlikely, as long as Ukraine does not find itself in a critical economic situation. On the other hand, Ukraine's desire to renegotiate its contract with Russia could encourage it to accelerate the transformation of Naftohaz, Ukrainian state-owned gas monopoly, in accordance with EU regulations._ _ _ The 2009 gas contracts and their consequences_ _In January 2009, as a result of the 'gas war', Ukraine's Naftohaz and Russia's Gazprom signed an agreement on gas supplies until the end of 2019. It established a formula specifying the price of gas for every quarter - US$450 per 1000m_, multiplied by a factor dependent on the price of fuel oil and diesel fuel (or indirectly on oil prices). According to the contract, Ukraine was obliged to buy at least 33 billion m_ of gas annually, according to the 'take or pay' clause. In addition, it was forbidden to re-export the imported gas._After the adoption of this pricing formula, it soon became clear that Ukraine was paying some of the highest prices for gas in Europe. The increase in the oil price, which at the time of signing the contract was low, led to a systematic increase in gas prices. This became a major stimulus for Kiev to sign the 'fleet for gas' agreement in April 2010, by which Ukraine obtained a discount of 30% on the gas it received (but not more than US$100 per 1000m_) in exchange for the extension of the lease to station Russia's Black Sea Fleet in Sevastopol. However, this agreement did not resolve the two main problems, from Kyiv's standpoint, with the contracts with Russia: the unfavourable pricing formula and the 'take or pay' principle. In 2011, the price of gas for Ukraine has continued to rise significantly; and despite reductions, it was higher in the third quarter than it was when the 'fleet for gas' contract was signed (see Appendix 2)._If there is an economic slowdown in the future, Ukraine will have serious problems using the contracted gas. In addition, the 'take or pay' clause blocks Ukraine's diversification projects (the construction of a gas terminal) and their plans to increase their own production (natural gas on a shelf in Ukrainian territory, methane, etc.). It also lowers incentives to implement energy-saving policies._ _ _ Why the dispute has worsened, and Russia's position_ _Multiple meetings between Ukrainian and Russian representatives on gas issues over the past year have not had any effects. The negotiations so far have taken place behind closed doors, with no details of the proposal being revealed. But in recent weeks, the talks have been publicised by Kiev. The main impetus for this is the need for Naftohaz to purchase

more than 11 billion m_ of gas in the fourth quarter of this year, which would mean an expense of over US$4 billion._Russia will allow a change to the contracts, although this has been accompanied by far-reaching demands. First, Moscow wants Naftohaz and Gazprom to merge, which would mean Russia's de facto takeover of Ukraine's entire gas sector. However, the present market conditions (greater demand for gas) appear to mean that the Ukrainian government - even though it sees the unfavourable gas contract with Russia as a major economic problem - is not in such a bad situation that it will be forced to accept Moscow's demands._In addition, another emerging demand by Russia is that Ukraine should join the Customs Union of Russia, Belarus and Kazakhstan. Not only would that undermine Ukraine's negotiations on an Association Agreement with the EU, which are now in the final stage; but such a move would also be incompatible with Ukraine's membership of the WTO. Ukraine joining the Russian-created Customs Union should therefore be seen as Moscow's ultimate goal._ _ _ What will Ukraine do?_ _If the talks fail, it is very likely that Ukraine will appeal to the Court of Arbitration in Stockholm, in accordance with the procedure laid down in the contracts. Impetus for such a decision may be provided by similar cases which energy companies in Italy and Germany have referred to arbitration. In July this year, Gazprom decided to reach a settlement with Italian Edison, without waiting for a ruling. The Ukrainian government wants to prove that the aforementioned contracts were concluded in violation of established procedures. This was one of the reasons (along with questions of internal politics) why Yulia Tymoshenko has been prosecuted on charges of signing gas contracts which were in violation of Ukrainian law._Prime Minister Mykola Azarov announced that the contracts' obligations will be met until a new agreement with Russia has been reached. On the other hand, the Ukrainian authorities have suggested the possibility of challenging the contracts, and have also presented a plan to reform Naftohaz, which might in their view lead to a change in the contracts with Gazprom. The Ukrainian Prime Minister has announced that as part of restructuring Naftohaz (which is provided for in the memorandum agreed with the IMF, and which results from Ukraine's membership of the Energy Community), the company would cease to exist as an economic entity. In fact, the elimination of Naftohaz itself would not lead to the cancellation of the contract, as its obligations would be assumed by whichever company takes its place._ _ _ Conclusions_ _1. Ukraine's announcement that it will revise the contracts should be seen as an attempt to strengthen its negotiating position at the present time in its talks with the Russians. If these talks fail, Ukraine will probably appeal to the tribunal in Stockholm. It is difficult to assess what Ukraine's chances of a favourable ruling are, but the process would take several months at least (the average waiting time for a decision is two years)._ _2. Despite media speculation, there is no basis to the possibility of a 'gas war' in the coming months. The pretext for the conflict in late 2008 and 2009 was the lack of a fixed price for gas. The current contracts regulate all issues related to supply, and it is doubtful that Ukraine will decide to violate or breach the gas contract as long as it remains able to meet its conditions, and Kyiv has not exhausted all other possibilities to resolve the dispute. The price of gas should start to fall next year, in anticipation of the reduction in oil prices. Although these contracts represent a serious burden on the budget, Ukraine will still be able to cope, unless there is a sharp deterioration in economic conditions._ _3. Russia is only likely to agree to amend the contract in exchange for far-reaching concessions from Ukraine, such as giving up its control over the gas pipeline system. However, unlike in 2010, Ukraine is not in such a critical situation, and it seems unlikely that the government in Kyiv will decide to make another agreement like the 'fleet for gas'

one._ _4. The current Ukrainian-Russian dispute may accelerate the process of restructuring and dividing up Naftohaz in accordance with Ukraine's obligations to the Energy Community. We may imagine that Ukraine will agree to Russia's entry into one of these successor companies, while Kyiv retains control over the rest of its energy sector._ _Slawomir Matuszak, co-operation: Marta Jaroszewicz_ _ _ Appendix 1 The interdependence of Russia and Ukraine in the gas sector_ _- Gas plays the most important role in Ukraine's energy balance (40%), and the Ukrainian economy is one of the world's most energy-intensive._- In recent years Ukraine has consumed 55-70 billion m_ of gas annually, of which about 20 billion m_ comes from its own production, and the rest is imported from Russia._- In turn, Russia is dependent on gas transit through Ukrainian territory to European countries (approximately 75%)._- Activating the Nord Stream pipeline could cause a drop in transit through Ukraine of about 20%, but Russia's dependence on Ukraine will continue._ _

85. Alchevsk Coke to up output by 16.3% MoM in Sep Art Capital September 6, 2011 In September, Alchevsk Coke [ALKZ, BUY, $0.07] will increase output of coke by 16.3% MoM to 292kt due to an upturn in supplies to Dzerzhinsky Steel [DMKD, N/R], reported Metal Courier. Dmitriy Lenda: The news is POSITIVE for the company. The company intends to raise production in spite of negative macroeconomic expectations. Although ISD-controlled enterprises have a tendency to overstate their production plans, we believe the plans are partially justified this time. Alchevsk Coke has increased production in August by 6.4% MoM, and Dzerzhinsky Steel by 11.8% MoM. We confirm our BUY recommendation on the company stock 86. Astarta Holding starts annual sugar production Dragon Capital September 7, 2011 News: WSE-listed Astarta Holding, the largest sugar producer in Ukraine, has started annual sugar production at three out of its seven sugar processing plants. The company plans to start sugar processing at all plants by September 10.

Astarta's average weight of sugar beet root is 10% higher y-o-y, with weight and sugar content growth significantly exceeding last year's levels. These growth statistics confirm the validity of management guidance, which forecasts sugar production of 350 kt in 2011. (Company) Dragon view: We find this news positive and expect Astarta to produce 345 kt of sugar (+72% y-o-y) this year thanks to improved sugar beet yields and sugar content, which comes in line with management forecasts. We currently have the stock under review to factor in recent changes in market conditions and the company's strong 1H11 results. 87. Azarov: Petrol price not to rise in Ukraine Kyiv Post September 5, 2011 The price situation on the petrol market will not change after the termination of privileged excises, Ukrainian Premier Mykola Azarov has said. "In the next two or three weeks we will attentively watch the development of the situation on the oil market, and we will make conclusions," the premier said in an interview with the Inter television channel aired on Sunday, September 4. "We will take the necessary measures, if we need to. Moreover, a decision was taken to import considerable amounts of oil products to Ukraine. None of this will influence the price policy on the market." Read more: http://www.kyivpost.com/news/business/bus_general/detail/112180/#ixzz1X3u1crB7 88. Azovmash boosts 8M11 output in value terms by 90% y-o-y Dragon Capital September 5, 2011 News: The Azovmash group, owner of freight car producers Azovzahalmash [Buy; PT $5.12] and MZVM [Not Rated], reported a 90% y-o-y surge in output in value terms in 8M11, to $725m, with railcars accounting for more than 98% of the total production value. Exports contributed 92% of total revenues for the group over the period. Azovmash's 8M11 production in volume terms reached 10,100 railcars (+40% y-o-y). (Interfax) Dragon view: Azovmash's 8M11 output volume is in line with our updated full-year production forecast of 15,000 railcars (+21% y-o-y). The news supports our positive view on domestic railcar producers, which continue to benefit from firm demand and stable prices. Although strong production announcements from Azovmash are generally positive for the underlying stocks, we remain skeptical about the group's strong operating performance producing any noticeable impact on the financials of its traded subsidiaries given no visible improvement in their reporting standards. 89. Azovmash certified new solebar in Russia Art Capital September 7, 2011

Azovelectrostal, a railcar casting production unit of Azovmash, certified an improved solebar in Russia. The new version of the solebar was necessitated by an investigation by Russian Railways into the quality of gondolas made by Azovzagalmash and Mariupol Heavy Machinery, which was launched after a railcar crash in March 2011. Following the investigation, Russian Railways ceased cooperation with Azovmash because of found defects. Azovmash is getting ready to launch a serial production of the new solebar and will use it in its new gondolas. Oleksiy Andriychenko: The news is MODERATELY POSITIVE for Azovzagalmash. Due to existing contracts with private operators and high demand for gondola cars in 1H2011, the problems with a defective solebar did not impact the company's output. In 2Q2011, following the investigation by Russian Railways, the company managed to increase production of gondolas by 21% QoQ. The certification of an improved solebar confirms our view of the problem as a temporary impediment, which is not going to cause a major disruption in the company's fully loaded production line. We reiterate our BUY rating on AZGM stock with a $3.6 target. 90. Bogdan Corporation becomes official distributor of Great Wall in Ukraine Astrum September 9, 2011 On September 8, Bogdan Industry, which is affiliated with the Bogdan Corporation, has be- come the new official distributor of Great Wall vehicles in Ukraine, upon signing a contract with the Chinese manufacturer. According to the Vice-president of the Great Wall Motor Com- pany, Sin Wenlin, Ukraine is a key element in achieving the company's strategic goals of win- ning European markets. He said that, in the near future, the company plans to begin selling models of the Great Wall line in Ukraine in three different auto segments: HAVAL SUVs, WINGLE pickups, and Voleex cars. Igor Bilyk 91. Bogdan increases automobile output by 26% in 8M11 Concorde Capital September 7, 2011 Bogdan Motors (UX: LUAZ UK, U/R) made 13,551 automobiles in 8M11, up 25.9% y-o-y, Interfax reported yesterday. The automaker's August 2011 output was 2,053 automobiles, up 18.8% y-o-y and up 10.7% m-o-m. Vitaly Gorovoy: The company's 8M11 output is below our production forecast of 30,000 automobiles in 2011E. We place our recommendation and target price for the stock Under Review. 92. Car sector and Bogdan Motors increased car output by 26% YoY in Jan-Aug 2011 Art Capital September 7, 2011 Car sales surged in August adding 54% YoY and 4.8% MoM following already record-breaking sales in July. The boom in sales is fueled by speculations around a potential

increase in duties on imported cars. A joint committee delayed the ruling on the matter, taking time to examine the arguments of the association of car importers. Oleksiy Andriychenko: The news is POSITIVE for Ukrainian car manufacturers and distributors, such as Bogdan Motors and Ukravto, which are riding the wave of uncertainty around the duties. Imported cars, such as VAZ and Renault gained most from the suspense, taking first and fourth spots, respectively. Nonetheless, Hyundai and ZAZ, produced in part or fully in Ukraine, maintained their second and third spots. In particular, Bogdan Motors sold around 2.3 ths Hyundai cars, nearly a 10th of which are typically assembled locally. We are currently reviewing our rating on AVTO and maintain our BUY rating on LUAZ stock with a $0.051. Bogdan Motors, Ukraine's second largest car manufacturer, increased output by 26% YoY in Jan-Aug, bringing the total to 13,551 units. In August the company outputted 2053 cars, or 10.7% more than in July. Oleksiy Andriychenko: The news is NEGATIVE for Bogdan Motors, which is underperforming its annual target despite a moderate production increase in August. The company planned to produce almost 30 ths cars in 2011 due to higher credit sales and exports to Russia. So far the export segment has underperformed expectations as monthly Bogdan sales in Russia have fallen by 40% YoY. In light of continued underperformance in 2011, we reduced our car forecast for the year by 19% to 22 ths units, which implies a 15% increase YoY. At the same time, we remain relatively optimistic in the midterm due to persistent indications of rising credit sales and Bogdan's success in the rivalry with LAZ in city transport renewal programs. We reiterate our BUY rating on LUAZ stock with a $0.051 target.

93. Bogdan Motors cuts bus production Art Capital September 8, 2011

Bogdan Motors (LUAZ, Buy), the country's second-largest car maker reported a 93.3% y/y decline in the production of buses thus far this year, Ukrainian News reported. In January-August, the car maker produced only 41 buses. Our view: The decline has been expected as last year the company made buses at Cherkasy Bus Plant and later sold this facility. Moreover, LUAZ has won several tenders for over 200 trolleys, which means production in this segment will increase by the year end. Moreover, the company is working on a new product for the market, which will be cheaper than the previous buses in the medium segment built by the company before. This should make its buses more competitive locally and, possibly, outside the country, which will help the company increase its market share in the future as its capacities allow making 6,000 buses annually. Alex Nekrasa 94. Cabinet increases budget for Burshtin upgrade for Zakhidenergo Concorde Capital September 6, 2011 The Cabinet of Ministers, in a decree issued on August 31, increased the budgeted value for renovating power unit #7 at Zakhidenergo's (UX: ZAEN UK, HOLD) Burshtin Thermal Power Plant from UAH 157.1 mln to UAH 420.8 mln, Interfax reported yesterday. After modernization, the unit's total capacity will reach 206 MWt, fuel consumption will decrease by 3-7 g/kW and electricity output will reach 1.019 TW per annum. Yegor Samusenko: The revised budget will allow Zakhidenergo to claim an additional USD 22-26 mln in reimbursements from the electricity sector regulator over five years (~4x of 2011E net income and ~1x of 2012E), as 70%-80% of the approved investment project should be paid back through the investment surcharge mechanism. 95. European Parliament recommends EU Council sign association agreement by yearend Concorde Capital September 8, 2011 The European Parliament is recommending the European Council sign an association agreement with Ukraine by the end of this year and ratify it by the end of 2012, according to a draft report cited by Interfax yesterday. Brad Wells: The recommendation is another positive signal of the EU's intentions to swiftly conclude this key agreement. As we have written before, Ukraine has high expectations of concluding an association agreement and free trade pact with the European Union at the annual EU-Ukraine summit in Kyiv this December, particular since Ukraine's biggest EU champion, Poland, is now holding the presidency of the council of the EU until January 1. We view conclusion of these agreements this winter as likely, but expect a lengthy-adoption scenario by EU members over concern for Ukraine's democratic record - with true benefits of the agreements for Ukraine delayed for the mid-term.

96. Former Naftogaz manager gets three years probation for role in 2009 gas deal Concorde Capital September 6, 2011 Former First Deputy Chairman of Naftogaz of Ukraine Ihor Didenko was sentenced to three years probation yesterday, Interfax reported. Didenko was arrested in July 2010 for his role in signing Ukraine's 2009 gas contracts with Russia, which were negotiated by former Prime Minister Yulia Tymoshenko, who is also on trial at the same district court in Kyiv. On August 30, prosecutors changed the charges against Didenko for milder ones. After the sentence was read by Judge Oksana Tsarevych, Didenko was released from custody. Brad Wells: The Didenko verdict is the first of several cases to reach sentencing for alleged crimes related to the 2009 gas contracts with Russia, and could be something of a preview of the treatment Tymoshenko could get; sentencing in her case could come as soon as this week. In our view, despite the steady chorus of backlash from the opposition and abroad (most recently this weekend from EU Foreign Ministers at an informal summit), government prosecutors have already invested too much of their reputation on this case and Tymoshenko is unlikely to be released without at least similar conviction and probation, which should keep her from running for public office. 97. Gazprom continues playing hardball over Ukrainian gas contract bne September 7, 2011 Gazprom CEO Alexei Miller went on the attack once more on Tuesday against Ukraine's bid to renegotiate the contract on Russian gas exports, claiming that Ukraine pays far less for its gas than other CEE and SEE countries. Picking up where he left off last week, he also used the opportunity to make vague but veiled threats against Kyiv - an approach that did little last week to soothe worries that a new gas war could break out. Amongst Russian officials, Miller appears particularly outraged by Kyiv's persistence in calling for the 2009 gas contract to be revised, despite Gazprom having spent months fighting off similar claims from major European consumers, including the likes of Germany's E.On, which has launched a legal case in a bid to get Gazprom to include a greater element of spot pricing in its pricing format. Ukraine's contract, the signing of which currently sees former PM Yulia Tymoshenko in a Kyiv prison, links the price of gas to oil prices, and has seen Ukraine's gas bill rise to around $450 per 1,000 cubic metres (before the $100 discount granted by the Black Sea Accords) according to VTB, with the time lag on the oil price set to boost it past $500 in the fourth quarter, according to some. Naftogaz CEO Yevgeny Bakulin said on Monday that he considers $230 to be "fair", according to Prime. However, Miller claimed to reporters yesterday that Ukraine gets gas at an equivalent price to Germany, even though Gazprom jointly owns trunk gas pipelines on German territory, among other assets, reports Interfax. "There's nothing like that in Ukraine," Miller said. "The Ukrainian government is misled about prices of Russian gas supplies for Ukrainian consumers and transit tax," he then told reporters, according to RIA Novosti. "The fee for transit through Ukraine is considerably higher than in Germany, Poland and Slovakia; the tax is tied to the gas price, which is considerably lower for Ukrainian consumers than in Poland, Hungary, Turkey and Romania," he added. However, Russian analysts tend to tell a different story on the price Ukraine pays, suggesting that it is by far Gazprom's most profitable market and that the current contract is clearly unsustainable for Kyiv. "Current prices for Ukraine are very close to those for Europe (including USD 100

discount) - approximately USD 350mcm for Ukraine against USD 340 for Europe," says Dmitry Loukashov at VTB. "Ukraine might consider this approach as unfair due to the difference in transportation. The current scheme is very profitable for Gazprom as the company does not pay custom duties for deliveries to Ukraine (while getting European prices). So if Ukraine achieved its goal of a contract revision, it might negatively affect Gazprom's financial results. Revision of the current agreement may also affect the company in the longer term as Ukraine is the largest Russian gas consumer among CIS countries." Miller then moved on to attempt his best Putin impression, claiming: "One gets the impression that Ukraine took a train called "cheap Russian gas" and does not know on what station to make a stop. Such a way may lead to a dead end," he added without elaborating, exhibiting only the same hardline stance that Russia has kept throughout the months of the debate when asked about plans to break up Naftogaz in a bid to force the renegotiation of its contracts. "Ukraine can do what it likes with it," he spat, "but it is obliged to provide a successor, in keeping with the contract. And all that is in the contract has to be fulfilled right until the end of 2019." However, the Gazprom chief did off a glimmer of hope that Russia could be open to finding some compromise. In response to an offer from Kyiv to buy shares in the eventual production successor to be spun off from Naftogaz, Miller said: "We always look at gas producing assets with great interest." However, Russia still insists it will not renegotiate prices unless Ukraine hands over control of it transit infrastructure or joins the customs union. 98. IMC wheat harvest up 68% BG Capital September 6, 2011 IMC's (IMC PW) wheat harvest spiked 68% y/y to over 31,000t on 34% y/y harvested area growth and a 27% y/y increase in yields. Early yield numbers suggest 70% y/y yield growth for potatoes. The company expects that favourable weather conditions will also boost yields for corn and oilseeds. Dmytro Ushenko: With one of the highest harvested area growth rates in our agro universe (+29% y/y) and strong yields growth IMC is on track to become the sector's top performer in 2011. We expect corn yields (the key crop in terms of harvested area) should rebound at least 24% y/y, to levels seen in 2009. Together with the harvested area expansion (+17% y/y) we expect IMC's total corn harvest will jump at least 45% y/y. 99. Interior Minister outlines fight against police corruption bne September 5, 2011 Ukraine's police force remains riddled with corruption, Interior Minister Anatoliy Mohyliov admitted in an interview with RFE late last week, although reforms are easing the situation, he claimed. He also insisted that, despite claims that the government is waging a campaign of political persecution, he has not received any "orders from above" to single out opposition figures for prosecution and vowed that "all are equal before the law." Mohyliov said that despite the recent celebration of 20 years of independence, reform of the police has yet to make serious headway and that the Interior Ministry continues to function according to its old Soviet model. "During the Soviet period the job of the police was to protect the interests of the state," he said. "I want the police to stop being a punishment organ. The police should help people." Mohyliov said that

the police's poor treatment of suspects is the result of "Soviet thinking," in which the end justifies the means. He admitted that in an effort to solve many cases and elicit confessions, some police officers resorted to abuse of detainees. However, the official said such behavior is strictly forbidden, and that several hundred police officers are being prosecuted for human rights violations."Solving a crime does not justify committing the smallest violation of human rights," he insisted. Turning to less immediately dangerous forms of corruption, Mohyliov said he plans to remove the infamous DAI from Ukrainian roads. "They will no longer hide behind trees and bushes, but only man existing stationary posts," he said. Traffic violations such as speeding will be registered by speed cameras and local officials will be responsible for collecting the fines, he said. Mohyliov claimed that reform of the traffic police has already made the roads safer, pointing out an August report that said the traffic accident rate has fallen by 9%, and fatalities by 25%. Mohyliov went on to point out that corruption begins before recruits even make it to academy level, and outlined plans to revamp the entire police education and training system. "We get kids into our academies straight out of school, where they have paid bribes for good grades and for exams," he said. "This kind of corruption continues in the police academy. [The graduate then] becomes a police officer where far too many temptations present themselves." 100. Kryukiv Carriage lines up orders for hoppers Foyil Securities September 6, 2011 Kryukiv Carriage (KVBZ, Buy), a large Ukrainian maker of freight cars and passenger coaches, this year has delivered 66 grain hopers of the 19-7016 model to TekhnoTrans, a large Russian shipping company. By the end of the year, TekhnoTrans plans to order 504 more hoppers of this type and approximately 1,000 such hopers next year, PG-Online.ru reported. Our view: Even though in January-July 2011 Russian and Ukrainian railcar makers sold only 258 grain hoppers (with KVBZ accounting for 88 of them) compared to 2,392 hoppers over the same period last year, the demand will increase in the future as increasing global consumption of grain and greater production by Russia and Ukraine will require more specialized freight cars. Lower demand for grain hoppers in 2011 has been caused largely by the embargo on the sale of Russian grain overseas. After the ban was lifted at the end of June, transportation of grain by rail increased 21.5 times in July m/m. As KVBZ is one of the main players on the market of grain hoppers, we believe it is in good position to capitalize on such demand, so we maintain our Buy rating for the stock. Alex Nekrasa 101. KVBZ increases production by 18% Foyil Securities September 9, 2011 Kryukiv Carriage (KVBZ, Buy), a large Ukrainian maker of rolling stock, increased production by 18% y/y to 7,213 railcars in January-August, Interfax-Ukraine reported, citing the company's press office. In 2010, KVBZ produced 9,090 railcars and plans to maintain production at around 9,000 in 2011.

Our view: In our estimation, the company's revenues in 2011 will increase 40.6% y/y to UAH 6.14bn (USD 881.96m) due to higher prices of freight cars as well as a contract for modernization of Kyiv metro trains and for two electric passenger trains for Ukrzaliznytsia, which will load its passenger car division. Alex Nekrasa 102. Luhanskteplovoz doubles its 8M11 output Y-o-Y Phoenix Capital September 7, 2011 Luhanskteplovoz (LTPL), one of the largest locomotive producers in the CIS, raised its 8M11 production almost 2x Y-o-Y (in money terms) to about UAH 1 bln ($130 mln). During January- August 2011, Luhanskteplovoz produced 64 diesel locomotive sections and eight electric locomotive sections. In August 2011, the company has almost tripled its output to UAH 238 mln ($30 mln) Y-o-Y. The main customers of Luhanksteplovoz remain Mongolian, Russian and Ukrainian state railways. Roman Topolyuk 103. Naftogaz Ukrainy pays for August gas imports Dragon Capital September 7, 2011 News: Ukrainian state oil and gas monopoly Naftogaz Ukrainy has paid Russia's Gazprom for August gas purchases, transferring $487m (+2% m-o-m and -31% y-o-y). In volume terms, gas imports last month totaled 1.4 bcm (+2% m-o-m, -52% y-o-y). This brought the average price of imported gas in 8M11 to $283.2/tcm (+8% y-o-y). (Company) Dragon view: Naftogaz's relatively low gas import volumes for the second month in a row suggest the Ukrainian government is still hoping to negotiate a more favorable gas supply contract with Russia in the near future. Naftogaz currently has some 19 bcm of gas in its underground reservoirs and will need to accumulate another 3-4 bcm before the start of the heating season in mid-October, and 15 bcm before the end of the year. These volumes suggest an overall gas import bill of $6bn under the existing contract with Gazprom. 104. Naftogaz' underground storage of 19.2 bln m3 is sufficient for heating season Concorde Capital, Ukraine September 7, 2011 Naftogaz of Ukraine accumulated 19.2 bln m3 (down 4.5% y-o-y) of gas in its underground gas storage network, Interfax reported on Tuesday, citing Naftogaz CEO Yevhen Bakulin This amount is sufficient to cover Ukraine's domestic consumption for the 2011/2012 heating season. Naftogaz controls 13 storage facilities with the capacity to hold up to 31 bln m3.

105. Naftogaz' underground storage of 19.2 bln m3 is sufficient for heating season Concorde Capital September 7, 2011 Naftogaz of Ukraine accumulated 19.2 bln m3 (down 4.5% y-o-y) of gas in its underground gas storage network, Interfax reported on Tuesday, citing Naftogaz CEO Yevhen Bakulin. This amount is sufficient to cover Ukraine's domestic consumption for the 2011/2012 heating season. Naftogaz controls 13 storage facilities with the capacity to hold up to 31 bln m3. 106. ZAZ ups car output by 67% in 8M11 bne September 12, 2011 Ukraine's Zaporizhia car plant (ZAZ) says that production was up 67% in the first eight months of this year to 39,674 cars, reports Interfax. Over the first eight months of the year the plant manufactured 8,178 Lanos cars, 17,590 CHANCE cars (the export version of the Lanos), 1,964 VAZ cars, 3,813 Sens cars, 678 Lanos-van cars, 1,561 ZAZ Forza cars, 2,523 A13 vehicles, 524 Chevrolet cars, 2,597 KIA cars, seven ZAZ cars, 176 TATA trucks, and 93 buses, reports Interfax. 107. Pivnichniy GOK raises iron ore output by 9% m-o-m in August Dragon Capital September 6, 2011 News: Pivnichniy GOK increased iron ore concentrate output by 9% m-o-m to 1.28 Mt, but pellets production fell by 19% m-o-m to 0.69 Mt in August. In 8M11, its concentrate production was down 1% y-o-y to 9.5 Mt, while pellets output slid 4% y-o-y to 6.7 Mt. (Interfax) Dragon view: Pellets output decreased in August due to maintenance works at one of the company's four pelletizer production facilities, which started in July. Other than that, Pivnichniy GOK continues to operate at full capacity and enjoys strong demand and robust prices. In 3Q11, domestic iron ore concentrate and pellets prices slightly corrected to $129/t (from $132/t in 2Q11) and $142/t (from $147/t), respectively, in line with the pricing system connected to the Platts benchmark. With estimated pellet cash costs of $45/t in 3Q11, Pivnichniy GOK enjoys extremely high margins. We reiterate our Buy recommendation on the stock. 108. Russia threatens to break the 2010 Kharkiv Accords with Ukraine Phoenix Capital September 8, 2011 Event: The Russian government will consider breaking the 2010 Kharkiv Accords it signed with its Ukrainian counterparts in the event that the administration of Ukrainian President Viktor Yanukovych attempts to break the 2009 Ukraine-Russia natural gas agreement with a lawsuit, Russian diplomat in Ukraine Aleksei Urin told reporters on Sept. 7. Breaking those agreements will cost Ukraine the $100 per 1,000 cu m discount on natural gas - an alleged savings of $4 bln annually - it

achieved in exchange for extending the presence of the Russian Black Sea Fleet in Sevastopol for a quarter century. Impact: The comments are negative for Ukrainian politics. Rationale: Urin's threat to break the 2010 Kharkiv Accords marks the escalation between the Russian and Ukrainian governments into a full-blown conflict, which Ukrainian diplomats and top officials failed to avoid. President Yanukovych was elected in 2010 with the expectation that he'd improve relations with the Russian Federation, the first major step being the 2010 Kharkiv Accords. Now the foundation of the renewed Russian-Ukrainian relations is under threat. Besides having a serious conflict with Russia, Yanukovych is also failing to deliver on assurances of improved relations for his Russian-oriented electorate. Zenon Zawada 109. State land agency planning to issue 100,000 land deeds by end of 2011 Kyiv Post September 5, 2011 The State Agency for Land Resources of Ukraine is planning to issue about 100,000 state land deeds by the end of 2011 and by mid-October liquidate 75% of debts for the registration and issue of land deeds to the population. "Some 75% of all debts for the registration and issuing of land acts will be closed within a month-and-a-half all over Ukraine," Head of the State Agency for Land Resources Serhiy Tymchenko said during a ceremony to present the first 200 land deeds to social sphere employees in Vyshneve (Kyiv region) on Friday. Read more: http://www.kyivpost.com/news/business/bus_general/detail/112136/#ixzz1X3vwBdfX 110. Steel output rises 9% m-o-m to 3.0 Mt in August Dragon Capital September 5, 2011 News: Domestic steel output increased by 9% m-o-m to 2.99 Mt in August, bringing 8M11 production to 23.2 Mt (+8% y-o-y). (Interfax) Dragon view: Output was up mostly thanks to the completion of maintenance works and satisfactory resolution of production problems at a blast furnace at ArcelorMittal Kryviy Rih [Not Rated]. The company thus increased production in August by 26% m-o-m. Yenakievo Steel [Under Review] followed with a 21% m-o-m rise, to 234 kt, having repaired one of its three BOF converters. The 17% m-o-m output increase (to 482 kt) at Azovstal [Buy; PT $0.266] was also attributable to completion of maintenance works. Global steel demand remains mixed, with relatively strong demand for billets on the back of shrunken supply from the CIS (after production breakdowns at several mills), while the demand for slabs and flat steel is sluggish. We expect Ukraine's steel production to decrease by 7% m-o-m to 2.8 Mt in September amid weaker markets. In our view, steel prices are likely to correct 15% in the short run (from $680/t to

$580/t for billet, and from $695/t to $630/t for HRC), putting negative pressure on steel stocks. Thus we recommend to cut exposure to the steel sector even despite local steel stocks' 30% correction in August. 111. Ukraine considers oil product quotas for Russian Customs Union Concorde Capital September 7, 2011 Ukraine could implement quotas on oil products from countries in the Russian-led Customs Union: Belarus, Russia, Kazahstan, Interfax reported on Tuesday, citing an undisclosed source. Yesterday Ukraine's Interagency Commission on International Trade met, where imported oil product duties were on the agenda, but decisions from that meeting have yet to be disclosed. Naftogaz CEO Yevhen Bakulin said in a TV interview on Monday he expected duties to come into force in the near future. Antonina Davydenko: Duties, unlike quotas, would affect all countries importing gasoline into Ukraine, were first recommended by the Energy Ministry at the beginning of 2011, but a decision was postponed due to turmoil on global oil markets. Recent statements by Bakulin and the Energy Minister Yuriy Boyko (see our news from August 25) carry negative implications for Galnaftogaz (UX: GLNG UK, U/R). If implemented, duties could significantly impair the fuel retailer's margins; about 100% of Galnaftogaz' supplies are imported, though not from customs union countries. 112. Ukraine govt plans to submit request to review WTO duties Phoenix Capital September 9, 2011 Event: Prime Minister of Ukraine Mykola Azarov plans to submit to the World Trade Organization (WTO) a request to renegotiate tariff duties that Ukraine assumed when joining the organization in 2008, the Kommersant-Ukrayina newspaper reported on Sept. 9, citing a letter it obtained written by Azarov to Anatoliy Kinakh, chair of the Union of Industrialists and Entrepreneurs. Kinakh told the publication the tariffs under consideration could involve producers of food, automobiles and aviation and light industry. Among those requesting the review was the Federation of Employers, which requested higher import duties on pork, raw sugar, phosphorus fertilizers and light automobiles. The requests were reportedly prompted by the approach of a deadline for renegotiation submissions, a three-year term which starts again in early 2012. Impact: The event is neutral for Ukrainian politics. Rationale: The government's consideration of a request to renegotiate tariffs arrives just as it's entering the last laps of negotiations for the Ukraine-EU Deep and Comprehensive Free Trade Area (FTA). The next round of negotiations will occur between Sept. 19 and 26, during which unresolved issues on tariffs, quotas and subsidies in sensitive industries will be discussed, among other topics. Azarov's statements on WTO duties could be used as leverage by Ukrainian negotiators in the FTA talks in gaining the concessions they need. Indeed, the industries mentioned for consideration - machine-building and food production - are among the most sensitive to the FTA and still have unresolved issues, negotiators said this summer. Meanwhile, the lobbyists for industries requesting higher import duties - including pork and light automobiles - have complained WTO accession devastated their

business. Kommersant quoted legal experts stating the Ukrainian government has little time left to submit its request for the WTO deadline and will have difficulty in gaining concessions from WTO members. Zenon Zawada 113. Ukraine grain export duties to stay through end-2011 Citi September 6, 2011 Yesterday according to APK-Inform, the Ukraine government rejected proposals from the Ministry of Agrarian Policy to remove export duties on grain. Export duties were introduced from July to replace the previous system of export quotas. Since the introduction of the duties and the removal of VAT retention rights for grain traders, Ukrainian grain export volumes are falling y-o-y despite a record harvest. This news is negative for Kernel shares. While we believe that farmers will eventually be forced to sell their grain through traders due to lack of market storage capacity, this is likely to imply that Kernel grain trading revenues will be weak in 1H12 (company has a June reporting cycle). 114. Ukraine moves up seven spots in World Economic Forum competitiveness ranking Concorde Capital September 8, 2011 Ukraine rose seven spots to #82 of 142 countries in the annual global competitiveness ranking published by the World Economic Forum, according to results released yesterday. Ukraine had fallen 16 places over the last two years. WEF said that Ukraine continued to demonstrate a number of strengths: well-educated population, flexible and efficient labor markets and a large market size; and that it continued to struggle with a weak institutional framework and highly inefficient markets for goods and services. The Global Competitive Index comprises 12 categories: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation. 115. Ukraine to increase 2011 sugar beet harvest by 20% y-o-y Dragon Capital September 9, 2011 News: The Agriculture Ministry expects Ukraine's 2011 sugar beet harvest to increase by 20% y-o-y to 16.5 Mt. (Interfax) Dragon view: This forecast implies 2.0-2.1 Mt of beet sugar output (+33-40% y-o-y), fully satisfying the country's annual sugar demand estimated at 2.1 Mt. We expect higher supply to push sugar prices down to an estimated $800/t on average in 2012 (-10% vs. 8M11 average). Our financial forecasts for relevant stocks (Astarta Holding [Under Review], Mriya Agro Holding [Buy; PT $15.55] and Kernel Holding [Under Review]) factor in this potential price drop.

116. Ukraine to open renovated Olympic Stadium on October 8 Concorde Capital September 6, 2011 Deputy Prime Minister Borys Kolesnikov said yesterday that Ukraine is planning to open the renovated Olympic Stadium, which is due to host the final match of the UEFA European Football Championships in 2012, in Kyiv on October 8, Interfax reported. The total costs to rebuild the stadium could exceed USD 600 mln, according to the Kyiv Post. Kolesnikov also said Lviv would open its stadium officially on October 28. Kyiv's Olympic Stadium was shuttered in December 2008 for massive repairs that included demolition and rebuilding the lower tier, construction of a 13-story building adjacent to the arena, and addition of a new roof covering the entire seating area. Seating capacity after the rebuild is expected to be over 60,000, which will make it Euro-2012's largest venue. Work on renovating Ukraine's Kyiv and Lviv stadiums had been plagued by scandals and a slow start, at one point prompting warnings from UEFA that it could move matches elsewhere. Ukraine's two other host stadiums in Kharkiv (renovated) and Donetsk (new) both opened in 2009. 117. Ukraine's Bogdan increases automobile output by 26% in 8M11 Concorde Capital, Ukraine September 7, 2011 Bogdan Motors (UX: LUAZ UK, U/R) made 13,551 automobiles in 8M11, up 25.9% y-o-y, Interfax reported yesterday The automaker's August 2011 output was 2,053 automobiles, up 18.8% y-o-y and up 10.7% m-o-m. Vitaly Gorovoy: The company's 8M11 output is below our production forecast of 30,000 automobiles in 2011E. We place our recommendation and target price for the stock Under Review. 118. Ukraine's parliament to open fall session on Sept. 6 Phoenix Capital September 5, 2011 Ukraine's parliament will open its fall session on Tuesday, Sept. 6, when the coalition majority plans to approve legislation to reduce pension spending, said Oleksandr Yefremov, the faction chair of the Party of Regions of Ukraine. Parliament approved the pension legislation in July as a key requirement for an IMF loan tranche of $1.5 bln, however Parliamentary Chair Volodymyr Lytvyn didn't sign the legislation citing inconsistencies and technical issues that needed correcting. Deputies have registered 42 amendments to the legislation since then, Yefremov said. The coalition also plans to review four bills creating Ukraine's first agricultural land market, as well as legislation setting the rules for the Oct. 31, 2012 parliamentary election, which will be the first priority when parliament convenes, he said. Zenon Zawada 119. Ukraine's Steel output accelerates in July; 8M11 up 8% y/y BG Capital, Kyiv September 7, 2011

Ukraine's steel mills increased daily steel production 10% m/m in August to 97,560t, and 8M11 output rose 8% y/y to 23.1mmt, Metallurgprom reported. Eugen Dubogryz: Output acceleration in August was driven primarily by higher global steel demand during Ramadan, when steel traders actively accumulated stockpiles expecting steel consumption growth in autumn. However, the recent capital market turmoil is likely to lower steel consumption in September-October by raising the cost of loans to the construction and machine-building sectors. We expect global steel demand will decrease shortly and Ukrainian steel production will drop 5-6% m/m in September to 93,000t in daily terms. Regarding 8M11 output the latest results are quite weak, in our view, especially given last year's low comparison base, and mostly driven by company-specific issues, including several breakdowns at ArcelorMittal Kryviy Rih (KSTL), Enakievo Steel (ENMZ) and MMK Illicha (MMKI) as well as repair works at Azovstal (AZST). Ukraine's uninspiring 8M10 performance and expected fall in output in the coming months lead us to downgrade our FY11 output projection to 35.0 mmt (from 36.8mmt), or 7% y/y growth vs. the previously projected 10% growth rate. 120. UkrAvto beneficiary Tariel Vasadze joins Party of Regions Concorde Capital September 7, 2011 Ukrainian businessman Tariel Vasadze, key beneficiary of UkrAvto (UX: AVTO UK, N/R) business group, joined the Party of Regions faction in Ukraine's parliament, Interfax reported yesterday. Vasadze had been elected to parliament as a member of the opposition Yulia Tymoshenko bloc. UkrAvto is the largest distributor of automobiles manufactured by ZAZ, Ukraine's largest automaker. 121. UkrLandFarming to export grain to Saudi Arabia in 2012 Concorde Capital September 6, 2011 UkrLandFarming, owned by Avangard (LSE: AVGR LI, N/R) majority shareholder Oleg Bakhmatyuk, plans to start exporting grain to Saudi Arabia in 2012, Interfax reported on Monday. The transaction follows negotiations between Bakhmatyuk and Saudi Arabian Finance Minister Ibrahim Abdulaziz Al-Assaf. Further details of the arrangement were not disclosed. Bakhmatyuk also said UkrLandFarming would participate in a Saudi Arabian investment project for foreign agriculture business development. UkrLandFarming operates about 500 ths ha of land and 18 meat processing plants, controlling 20% of the Ukrainian beef market, according to Interfax. UkrLandFarming acquired Rise and Dakor Agro Holding (UX: DAKOR UK, FSE: 4K1A GR; N/R) in early 2011. 122. Ukrnafta launches new multilingual corporate website Concorde Capital September 9, 2011 Ukrnafta (UX: UNAF UK, SELL) brought online a new corporate website at www.ukrnafta.ua, according to a press release issued yesterday. The new site offers English, Russian and Ukrainian language versions. It has updated investor-relevant information including press releases, historical financial results and IR contacts.

123. Ukrnafta restarts Leliakivske field Phoenix Capital September 5, 2011 Event: Ukrnafta (UNAF), the largest Ukrainian oil producer, announced on Sept. 2 that it started on Aug. 30 taking the technical steps towards recommencing operations at Leliakivske oil and gas field in the Chernihiv Oblast, where work was suspended in October 2010. Preparations could take several more days before extraction begins. The project started after the State Geology and Subsoil Service of Ukraine renewed on Aug. 29 the field's license on behalf of the Kashtan company, in which Ukrnafta owns a 55% stake. The regulatory body confirmed that the problems that led to suspended operations at Leliakivske field were resolved, Ukrnafta reported. Before pausing operations in 2010, Leliakivske produced 113.2 tonnes of oil and condensate and 26,750 cu m of gas per day. Impact: The event is positive for UNAF. Rationale: During an August meeting, Ukraine's Prime Minister Mykola Azarov required from Ukrnafta's CEO Peter Vanhecke that the company ramp up its operations. State authorities offered their support for the outlined task by providing for the renewal of Leliakivske's license, which will allow Ukrnafta to curb the decrease in its production to some extent. We estimate the Leliakivske oil and gas field provides 1.7% of Ukrnafta's annual oil and condensate production and 0.4% of its total annual extracted gas. During 7M11, UNAF's oil extraction declined 4% Y-o-Y to 1.2 MT, while gas output fell 13.7% Y-o-Y to 1.3 bln cu m. Roman Topolyuk 124. Ukrnafta to expand liquefied gas retail network by 3.5x by end-2012 Concorde Capital September 7, 2011 Ukrnafta (UX: UNAF UK, SELL) plans to increase its number of filling stations selling liquefied gas by 3.5x to 139 points-of-sale from 40 currently by the end of 2012, according to an announcement yesterday on the company's website. Ukrnafta owns a total network of 563 gas filling stations. Antonina Davydenko: In 2010, sales of liquefied gas amounted to USD 77 mln, 2% of total revenues. Tripling its LPG network implies a solid addition to the company's 2011E revenues, which we forecasted at USD 3.5 bln. 125. Ukrtelecom plans $400m CAPEX for 2011-13 Dragon Capital September 5, 2011 News: Ukrtelecom plans to invest UAH 3.2bn ($400m) in 2011-13, the company said in an investment memo presenting its UAH 250m 14.5% domestic bond issue intended to finance enlargement and modernization of the company's broadband network. (Interfax) Dragon view: The news supports Ukrtelecom's earlier announcement that it will use proceeds from the planned sale of its mobile subsidiary (sale price has not been

announced yet, but we estimate the subsidiary's fair value at $336m) for broadband network development. In addition, the company is also negotiating a $400m loan (supposedly to finance the aforementioned CAPEX program and partly refinance its existing $387m loan portfolio). We maintain our positive medium-term view on Ukrtelecom and confirm our price target and recommendation on the stock. 126. Ukrzaliznytsya raises freight transportation by 8.5% y-o-y in 8M11 Concorde Capital September 9, 2011 Ukrainian state railway monopoly Ukrzaliznytsya increased freight transportation by 8.5% y-o-y to 304 mln mt in 8M11, RZD Partner, the official publication of Russian Railways, reported yesterday. Ukrzaliznytsya transported 280 mln mt of freight in 8M10. Passenger transportation rose by 0.5% y-o-y to 338.6 mln individuals in 8M11. Vitaly Gorovoy: Growth in Ukrzaliznytsya's profitable freight transportation business can have a positive trickle-down effect on Ukrainian railcars makers by giving it additional cash it could allocate to upgrading its railcar fleet. We view the news as moderately positive for Kryukiv Wagon (UX: KVBZ UK, BUY), Stakhaniv Wagon (UX: SVGZ UK, BUY) and Mariupol Heavy Machinery (UX: MZVM UK, N/R). 127. WTO membership no obstacle for joining customs union - Kyrgyz premier RIA Novosti September 5, 2011 Kyrgyzstan is ready to join the post-Soviet Customs Union while retaining the WTO member status, Prime Minister Almazbek Atambayev said in an interview with the Rossiiskaya Gazeta government daily on Monday. The Kyrgyz government in April approved a plan to join the customs union and common economic space with Russia, Belarus and Kazakhstan. An interagency commission was set up to negotiate on the republic's admission. "We are full of determination to enter the customs union, with Kyrgyzstan remaining the WTO member," the prime minister said. "Regular negotiations within the framework of a working group of the Customs Union member states are currently underway." Atambayev said he had recently discussed the issue with Andrey Belyaninov, the Russian customs chief who is also a co-chairman of the Russian-Kyrgyz intergovernmental commission. The Customs Union is seen by Russia as the first step on the way for the three former Soviet republics to create by 2012 a common economic space, which could be compared to the EU's common market of goods, services, capital and labor. 128. ZAZ boosts production 65% y/y in 8M Art Capital September 8, 2011

Ukraine's largest automobile maker Zaporizhia Automobile Plant (ZAZ) increased production by 64.6% y/y in January-August 2011, Ukrainian News reported. The number of passenger vehicles produced was 39,674. Our view: ZAZ production growth is a positive sign for the Ukrainian Automobile Corporation (AVTO, Buy), the country's largest car dealer, which controls ZAZ. Moreover, AVTO not only sells vehicles made at ZAZ but also imports a wide number of brands in all price segments. Alex Nekrasa

KAZAKH INVESTMENT 129. Kazakhstan: $163m to be invested in science in 2012 bne September 6, 2011 24 billion tenge ($163m) is to be allocated for science funding in 2012, Kazakhstan’s Education and Science Minister Bakhytzhan Zhumagulov said yesterday September 5. Kazakhstan has launched a new science management model, Zhumagulov told a government committee, Kazinform reported. An additional 10 billion tenge will be made available for grant financing in 2012. 130. Central bank to buy up entire Kazakh gold output until 2014-15 SRI September 8, 2011 The National Bank of Kazakhstan said on Wednesday it plans to buy up the country’s entire gold bullion output until at least 2014-15 to ease its exposure to the dollar. “In the next two or three years we will certainly be buying up the entire [gold output] volume,” National Bank Governor Grigoriy Marchenko told a news conference. Last month, the central bank announced it would start buying all refined gold produced in Kazakhstan starting on January 1, 2012 to replenish its gold reserves. In 2010, Kazakhstan was the world’s 20th largest producer with an output of 26.9 tonnes of gold. In the first half of 2011, the country produced 18.832 tonnes of gold. Large gold producer in Kazakhstan include Kazzinc, a subsidiary of Swiss commodity trader Glencore, Russia’s Polyus Gold International, and Kazakhmys, a Kazakh copper and gold miner. Kazzinc is the only company in Kazakhstan producing gold ingots that meet international standards, according to the central bank. Kazakhstan holds roughly 4% of world gold reserves and ranks seventh in the world in terms of reserves.

The gold holdings of the National bank of Kazakhstan were valued at $3.95 billion at the end of last month and have increased by 29.5% since the beginning of the year, according to data released by the central bank. 131. Karachaganak dispute could be solved within a month - Kulibayev SRI September 8, 2011 Timur Kulibayev, head of the state-owned holding and investment company Samruk-Kazyna, said on Wednesday the Karachaganak oil field dispute could be resolved within one month, the Kazakhstan-Novosti news agency reported. “I hope we will solve the issue in the coming month; it is a question of a month,” Kulibayev told a press conference in Astana. Kulibayev, who also chairs the KazEnergy association, an influential oil and gas lobbying group, is widely seen as one of Kazakhstan’s most prominent oilmen. Karachaganak Petroleum Operating (KPO), the Western-led consortium developing the Karachaganak gas condensate field, and the Kazakh government have been engaged in the prolonged dispute since 2009, as Kazakhstan has reportedly tried to wrestle its way into the only major oil and gas project on its territory without the participation of the national oil and gas company KazMunaiGas. Kazakhstan has accused KPO of various violations and the venture faces total claims by the Kazakh government of at least $2.5 billion, including tax and environmental claims, accusation of “illegal earnings” and overstating of costs, and violations of Kazakh immigration laws. KPO meanwhile sued the Kazakh government to recover more than $1 billion in export duties from the state. The dispute has delayed the adoption of Karachaganak’s planned expansion phase, as the Kazakh government refused to sign off on the project, until the row is settled. Last month, Kazakhstan’s Oil and gas Minister Sauat Mynbayev told journalists that the two parties were actively negotiating to reach a settlement. Earlier this year, UK-based BG Group, a partner in consortium, and Kazakh Prime Minister Karim Masimov said separately that resolution of the dispute is likely before the end of the year. KPO is a joint venture between BG Group and Italian Eni, both of which hold a 32.5% stake, U.S.-based Chevron, which owns 20%, and Russian Lukoil, which has the remaining 15%. 132. Kashagan production to begin by 2012 - Eni SRI September 5, 2011 Eni SpA, an Italian oil major, expects production at the Kashagan offshore oil field in Kazakhstan to start by the end of 2012, the company’s chairman, Giuseppe Recchi, said on Sunday, Dow Jones Newswires reported. “Phase one of the Kashagan project has been completed by over 90%,” Dow Jones quoted Recchi as saying.

Recchi’s statement comes on the heels of unconfirmed reports that the Western-led consortium of oil companies developing the oil field has asked the government for an extension of the 2013 first-oil deadline when the first phase of the oil field development was set to start. Production during Kashagan’s first phase is expected to be about 300,000 bpd shortly after launch. It will reach 1 million barrels a day during the second phase of development and will peak at 1.5 million barrels a day during the third phase. Eni is responsible for the first phase of development. Kashagan is the largest oil field discovered in the last 30 years with recoverable oil reserves are estimated at a minimum of 7-9 billion barrels and the total oil in-place at 38 billion barrels. Kashagan is being developed by the North Caspian Operating Company consortium, which is also developing the adjoining Kairan, Aktoty and Kalamkas oil fields. The consortium includes Eni, Royal Dutch Shell Plc, ExxonMobil Corp, Total, KazMunaiGas (all with a 16.81% stake), ConocoPhillips (8.4%) and Inpex Holdings Inc (7.56%). 133. Kazakh section of Western Europe - Western China highway to be completed in 2012, 2013 SRI September 7, 2011 Construction of the Kazakh section of the Western Europe - Western China highway will be completed in 2012-2013, the Ministry of Transport and Communications said in a statement on Tuesday. “The transit corridor will be completed in 2012 in the Kyzyl-Orda and Aktobe regions and in 2013 in South Kazakhstan, Zhambyl and Almaty regions,” the Ministry said. The planned Western Europe - Western China highway will be 8,445 kilometers long, including 2,787 kilometers running through Kazakhstan. 134. Kazakhstan to boost railway equipment manufacturing to KZT300 billion by 2015 SRI September 8, 2011 Kazakhstan’s domestic production of rolling stock including locomotives and railroad cars will reach KZT300 billion ($2.05 billion) by 2015, head of Kazakhstan Temir Zholy Askar Mamin said on Wednesday, the Kazakhstan-Novosti news agency reported. According to Mamin, Kazakhstan produced railway manufacturing goods worth KZT10 billion ($60 million) in 2008. “So we intend to increase this amount 30-fold [by 2015],” Kazakhstan-Novosti quoted Mamin as saying. “A passenger railcar production facility, in partnership with Spanish Talgo, is scheduled to start in December of this year,” Kazakhstan-Novosti quoted Mamin as saying. “And by the end of the year, we should also sign a contract with Alstom to produce electric locomotives in Astana.”

In 2011, domestic manufacturers plan to manufacture 615 gondola-type freight cars, Mamin said. Kazakhstan Temir Zholy, the national railways operator, plans to spend around $37 billion to build a modern rail network and cut traveling times in the large country. Astana, Kazakhstan’s capital, is fast becoming the center of the country’s railroad equipment manufacturing industry as international firms like Alstom, GE and Talgo have or plan to set up production facilities in and around the city. 135. Kazakhstan’s tax regime could attract international companies - official SRI September 5, 2011 The existing tax regime in Kazakhstan could provide incentives to international companies to register in the country, Head of the Tax Committee of the Ministry of Finance Daulet Yergozhin said on Friday. “Taxes keep rising globally, new value-added taxes [are being introduced], the tax burden is growing. We are not introducing any new taxes nor do we raise our taxes,” Yergozhin told journalists. “Why not use this competitive advantage and create conditions for international companies to come and register in Kazakhstan, […] pay taxes here […]” Yergozhin said that the proposition could be attractive to oil and mining companies already operating in Kazakhstan, especially those registered in countries with preferential tax regimes like the Netherlands. The official said that while the issue is at a preliminary stage, the Tax Committee is considering a formal proposal to the government. Currently, corporate income tax rate in Kazakhstan is 20%. International investors often cite unpredictable investment climate as a major obstacle for economic development of the country. The Kazakh government introduced an export duty on oil and mineral resources in May 2008 to boost tax revenues. Amid much uproar it later extended the duty to include foreign oil companies operating under so-called Production Sharing Agreements (PSA) with tax-stability clauses. 136. KazMunaiGas launches construction of Beyneu-Shymkent pipeline SRI September 7, 2011 KazMunaiGas officially started the construction of the Beyneu-Shymkent gas pipeline, which will connect the north and the south of the country and link to the Central Asia - China pipeline, the oil company said in a statement on Tuesday. “On September 6, 2011 ceremonial welding of the first joint of Beyneu-Bozoi-Shymkent” gas pipeline’s lineal part took place in Turkestan, South Kazakhstan,” KazMunaiGas said in the statement. “The 1,457 km-long gas pipeline […] will cross Mangistau, Aktobe, Kyzyl-Orda and South-Kazakhstan regions. The construction

period will see deployment of 3,500 local personnel, commencing of the operation will create 500 new workplaces.” The Beyneu-Shymkent pipeline will join the Central Asia - Kazakhstan pipeline that snakes 1,833 kilometers across Central Asia, connecting gas-rich Turkmenistan to western China. According to earlier reports, the $3.5-billion Beyneu-Shymkent pipeline, jointly financed by KazMunaiGas and China National Petroleum Corp (CNPC), could carry up to 15 billion cubic meters of gas annually. 137. TCO to resume drilling at Tengiz in 2012 bne September 6, 2011 TengizChevroil, the consortium operating the offshore Tengiz oil field, is to resume drilling for new wells next year, state news agency Kazinform reports. TengizChevroil’s general director, Tim Miller, says that the conciliation process of for the drilling program is already underay. Two new drilling rigs will be put into operation, he told Kazinform.

CENTRAL ASIA INVESTMENT 138. Tajikistan one of top reformers on WEF Global Competitiveness Index bne September 8, 2011 Tajikistan was among the top three reformers on the World Economic Forum’s Global Competitiveness Index for 2011-12. Tajikistan was ranked 105th out of the 142 countries on the index, up 11 places since last year. Only Cambodia and Ethiopia achieved a greater leap on the influential index. Elsewhere in Central Asia, Kazakhstan remained constant in 72nd place, while Kyrgyzstan dropped 5 places to 126th place. Turkmenistan and Uzbekistan were not ranked. All three Caucasian countries saw an increase in their competitivess according to the WEF index. Azerbaijan was up 2 places to 55th place, Georgia up 5 to 88th, and Armenia up 6 to 92nd. Russia dropped three places to 66th place. Despite Russia’s macroeconomic stability, the country saw a deterioration in the quality of institutions, labor market efficiency, business sophistication, and innovation, the report said. Estonia and the Czech Republic remained the best performers within Eastern Europe on this year’s index, coming in at 33rd and 38th place respectively. At the top of the index, Switzerland was again in first place, while Singapore overtook Sweden for second position. The US’s competitiveness fell again, putting

the country in 5th place. Northern and Western European countries continued to dominate the top 10. “The results show that while competitiveness in advanced economies has stagnated over the past seven years, in many emerging markets it has improved, placing their growth on a more stable footing and mirroring the shift in economic activity from advanced to emerging economies.” “After a number of difficult years, a recovery from the economic crisis is tentatively emerging, although it has been very unequally distributed: much of the developing world is still seeing relatively strong growth, despite some risk of overheating, while most advanced economies continue to experience sluggish recovery, persistent unemployment and financial vulnerability, with no clear horizon for improvement,” said the WEF’s founder and executive chairman Klaus Schwab. “Amid re-emerging concerns about the global economic outlook, policy-makers must not lose sight of long-term competitiveness fundamentals,” commented the report’s co-author, Xavier Sala-i-Martin, professor of Economics at Columbia University. “For the recovery to be put on a more stable footing, emerging and developing economies must ensure that growth is based on productivity enhancements.” The Global Competitiveness Index assesses countries according to 12 categories which include institutions, infrastructure, macroeconomic environment, education, labour market efficiency, financial market development and innovation. 139. Gazprom to invest $101 mln in Kyrgyz oil, gas prospecting RIA Novosti September 8, 2011 Russian energy giant Gazprom plans to invest over three billion rubles ($101.32 million) in initial geological prospecting for oil and gas in Kyrgyzstan, Gazprom CEO Alexei Miller said on Wednesday. "We plan that the investment volume in geological exploration will total no less than three billion rubles in the first phase," Miller told reporters after talks with Kyrgyz Prime Minister Almazbek Atambayev. Gazprom received licenses to explore the Kugart and Mailuu-Suu-4 deposits in 2008 but their development was suspended due to last year's unrest in Kyrgyzstan. Gazprom also planned to acquire 75 percent plus one share in gas company Kyrgyzgaz in 2009. In addition, Gazprom is interested in buying a stake in oil company Kyrgyzmunaizat, Miller said. Kyrgyzstan's gas reserves are estimated at 5.7 billion cubic meters as of the end of 2008, according to the U.S. Oil & Gas Journal. Atambayev also proposed that Gazprom build electricity power lines and a hydropower plant in the country. 140. Kyrgyz government plans to establish development bank bne

September 7, 2011 The Kyrgyz government is planning to use its shares in the Centerra Gold Company to help fund creation of a development bank, Minister of Economic Regulation Uchkunbek Tashbayev said yesterday September 6. “We have 33 per cent of the shares [in Centerra Gold] that is $1.7bn,” Tashbayev told a government meeting, 24.kg reported “We can pay under the pledge 7.5 per cent that in money terms will be $350 million.” The development bank will be used to fund infrastructure and social projects. It will start with supporting mortgage lending for affordable social housing, agricultural equipment and soft loans for farmers and entrepreneurs, Tashbayev said. Kyrgyzstan is also planning to carry out 40 large scale infrastructure projects between 2012 and 2014, including the reconstruction of Tamchy airport in Issyk-Kul, road building and the switch to digital television broadcasting. 141. TAPI pipeline project members welcome Russia's participation RIA Novosti September 5, 2011 Russia wants to participate in the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project, members of the project said in a joint statement on Friday. "The parties welcome Russia's interest in participating in implementation of the Turkmenistan-Afghanistan-Pakistan-India gas pipeline project," the heads of Russia, Afghanistan, Pakistan and Tajikistan said in the statement after signing an agreement in the Tajikistan capital of Dushanbe on development of trade and economic relations. The project’s participants signed a final agreement to build the pipeline, intended to carry gas to India from Central Asian states, last December. Construction will start in 2012. The 1,700 kilometer pipeline with a flow capacity of 30 billion cubic meters per year and a rough cost of $4 billion, stalled by the war in Afghanistan, is supported by the Asian Bank for Development. Gas will be supplied from Turkmenistan's Dovletabad deposit which has reserves are estimated at 1.7-4.5 trillion cubic meters. In October 2010 Russian Deputy Prime Minister Igor Sechin said that country's gas giant Gazprom might participate in a consortium to build the pipeline. India suggested Gazprom join the project as one of the suppliers along with Azerbaijan, Kazakhstan and Uzbekistan. 142. Uzbekistan: GM Uzbekistan upgrades Chevrolet Captiva production bne September 8, 2011

US-Uzbek joint venture GM Uzbekistan has started production of upgraded Chevrolet Captiva SUVs. The upgraded cars will have 3.0-litre, 258 horsepower engines. Since 2007, GM Uzbekistan has been producing an earlier model of Capitva were produced with 3.2-litre, 230 horsepower engines. GM Uzbekistan, a joint venture between US carmaker General Motors and Uzbekistan’s state-owned Uzavtoprom, plans to produce 500 of the upgraded vehicles by the end of this year, Prime-Tass reports, quoting an Uzavtoprom spokesman. 143. WTO membership no obstacle for joining customs union - Kyrgyz premier RIA Novosti September 5, 2011 Kyrgyzstan is ready to join the post-Soviet Customs Union while retaining the WTO member status, Prime Minister Almazbek Atambayev said in an interview with the Rossiiskaya Gazeta government daily on Monday. The Kyrgyz government in April approved a plan to join the customs union and common economic space with Russia, Belarus and Kazakhstan. An interagency commission was set up to negotiate on the republic's admission. "We are full of determination to enter the customs union, with Kyrgyzstan remaining the WTO member," the prime minister said. "Regular negotiations within the framework of a working group of the Customs Union member states are currently underway." Atambayev said he had recently discussed the issue with Andrey Belyaninov, the Russian customs chief who is also a co-chairman of the Russian-Kyrgyz intergovernmental commission. The Customs Union is seen by Russia as the first step on the way for the three former Soviet republics to create by 2012 a common economic space, which could be compared to the EU's common market of goods, services, capital and labor.

EURASIA INVESTMENT 144. Armenia: FDI reaches $349.5m in January-June 2011 bne September 5, 2011 Armenia received foreign direct investment of $349.5m in the first half of this year. This was an increase of 58.5% compared to the same period of 2010, according to Armenia's National Statistical Service. Total investments, excluding financial sector investments, amounted to $421.9m - a 28.8% year-on-year increase.

The base metals sector was the largest recipient of FDI, attracting 38.79% of total investments. The communications sector received 20.25% of FDI, and energy 9.88%. Russia remained the largest investor into Armenia’s economy, followed by France, the US, the UK and Canada. 145. Azerbaijan and EU plan to create common aviation area APA September 7, 2011 The European Commission wishes to develop a common aviation area between the EU and Azerbaijan, APA reports quoting Europolitics. This would imply a gradual opening of markets and also that the country gradually implement the EU’s regulations. "The strategic location at the crossroads of Europe and Asia make Azerbaijan an obvious candidate for a common aviation area agreement with the EU. In January 2011, the Azeri authorities expressed their interest in negotiating a common aviation area agreement with the EU," said the Commission in a communication issued on August 30. Priority areas would be market opening, freedom of establishment, equal conditions of competition and common rules in the areas of aviation safety, aviation security, air traffic management, social conditions and environmental protection. According to the Commission, demand for air travel between the EU and Azerbaijan exceeds supply. The result is a market in which fares are held artificially high and leisure travel is suppressed. An increase in competition could lead to a drop in fares and could thus benefit passengers. An impact study carried out by the Commission estimates the economic benefit of such a common aviation area agreement at around €44.2 million during the first five years after liberalization (mainly due to increased connectivity, lower air fares, increased air travel and associated economic activity). An EU-Azerbaijan agreement would create new market opportunities for air carriers in the EU. The Commission notes that some EU air carriers have expressed interest in operating additional services or starting new services to Baku, if the present capacity restrictions would be lifted. Such an agreement could also facilitate the integration of Azeri carriers into existing alliances of EU air carriers. 146. Azerbaijan and Russia prepare to make changes in agreement on oil transportation APA-Economics September 7, 2011 Baku has today hosted a meeting of the working group on cooperation in energy sphere between Azerbaijan and Russia, spokesman for the Ministry of Industry and Energy Azer Mansimli told APA. To him, the working group is headed by Industry and Energy Minister Natig ALiyev on the Azerbaijani side, Deputy Energy Minister of Russia Anatoli Yankovski. The working group also includes representatives of SOCAR, Azerenerji, Russia’s Inter RAO EES, Transneft and TSK EES companies.

“The agreement on transportation of Azerbaijani oil through Russia, which signed in January of 1996, as well as amendments and annexes to agreement on cooperation in energy sphere signed in October of 1995 were discussed at the meeting. The first agreement offers volume, tariffs of oil transported via Baku-Novorossiysk pipe. Azerbaijani side proposes to transport at least 1.5 mln tons of oil via this route”, Mansimli said. He noted that another agreement related to cooperation in energy sphere offers to make amendments and annexes in technical and commercial direction: “No concrete agreement has been reached on two agreements. Thus the working group will continue the discussions for some time. After the sides come to an agreement, the documents will be signed between the governments”. Remind that, transportation of crude oil via Baku-Novorossiysk oil pipe by SOCAR started in 1996. SOCAR’s crude oil mix with oil of Russian exporters in lines system of Transneft company, Russia and is sold under Urals crude oil brand from Novorossiysk port. According to last agreement signed between the sides, Azerbaijani side intends to transport 2 mln tons of oil via Baku-Novorossiysk pipeline in 2011. Note that, during January-August, 2011, 1.249 mln tons of crude oil was transported via Baku-Novorossiysk, 1.759 mln tons – Baku-Supsa, 15.694 mln tons – Baku-Tbilisi-Jeyhan pipe. Compared to July, oil transportation via Baku-Novorossiysk dropped 7%, 29.6% - via Baku-Tbilisi-Jeyhan, while grew by 3.1 times via Baku-Supsa. 147. Azerbaijan starts preparation of Wind Cadastre APA-Economics September 6, 2011 The State Agency on Alternative and Renewable Energy Sources under the Industry Ministry of Azerbaijan has started the preparation of wind cadastre in the country, Deputy Director of the Agency Jamil Malikov said. To him, currently, observatories are set in 21 points of the country in this direction. It purposes to learn the potential of the wind: “Today, in order to study the wind’s potential, it is necessary to determine speed, direction and durability of the wind in 80 m height. Large database is being formed and e-maps, cadastres and etc will be reflected here. Consequently, installation of wind stations will be selected by optimal ways”. Malikov also noted that strong wind in anywhere does not give ground for construction of electric station there. That is, there are some parameters, optimization methods here: “We must try to use scientific and methodological bases of this sphere and investment in this sphere must provide withdraw that funds”. Note that, at present, wind electric stations are started to be constructed in several regions of Azerbaijan, some of them have already been opened. 148. Azerbaijan to open Solar Cell Manufacturing Plant at year-end APA-Economics September 6, 2011

Azerbaijan continues works in direction of development of alternative energy sphere. Deputy Director of the State Agency on Alternative and Renewable Energy Sources under the Industry Ministry of Azerbaijan Jamil Malikov says construction of Solar Cell Manufacturing Plant will be completed in Sumgayit techno park until the end of 2011. “We hope that construction and installation works will be finished till the end of this year. Thus, manufacture of photoelectric solar panels will be organized in Azerbaijan”, said ministry’s official. Malikov noted that standard products would be manufactured at the plant: “Both certification and technological production opportunities of equipments will allow their sale, installation in the whole world”. 149. Azerbaijan: Baku airport to be repaired before Eurovision-2012 APA-Economics September 8, 2011 In connection with Eurovision-2012 to be held in May of next year in Azerbaijan’s capital, soon workover will begin at Heydar Aliyev International Airport, director of SilkWay Travel company Shirzad Efendiyev told APA. To him, at present, new terminal of the airport, which is being constructed in Baku will not commissioned until the contest and that is why, the current airport will be repaired till the contest. Efendiyev said that due to Tourism year-2011 in Azerbaijan, AZAL will carry some loads of passengers free-of-charge. 150. Azerbaijan: New metro station to be launched in main square of Azerbaijan after 5 years APA-Economics September 6, 2011 A new metro station to be will be built near Azadlig Square of Baku, will be commissioned in 2016, deputy chief of Baku Metro Arif Rasulov told APA. Referring to the construction of new metro stations, Rasulov noted that the work is currently underway on schedule at an accelerated rate: “Our main objective - the construction of “Avtovagzal” station and its connection with “Memar Ajami” station, which will create a third line of Baku Metro and “Memar Ajami” station will become into a transition station”. Rasulov noted that the third line will link Baku Metro will join the metro station constructed around the Baku international bus station with Azadlig square. In general, during the initial stage there will be built six stations: “The first station line will be “Avtovagzal”, the second – “Memar Ajami”, the third - on Jeyhun Salimov street (around “Khutorskoy circle”), the fourth - at the bottom of Sport-Concert Complex named after Heydar Aliyev, the fifth - behind the Heydar Aliyev Palace, and the sixth – in Azadlig square. The last station will have at least 6 outputs”.

Rasulov made public also the period of commissioning of the third line stations. Thus, the first two stations are planned to be commissioned in late 2013, the other two - in 2015, and the last two stations - in 2016. Rasulov said that, at the same time stations will be built in direction of “Khatai” – “H.Aslanova-2” – “Yeni Guneshli”, as well as two depots. According to his words, in accordance with the president’s order on “Some measures related to perspective development of Baku Metro”, project on State Program on Baku Metro development has already been started. For the work on the mentioned state program, companies of Korea, Austria, France, Germany, Russia, Czech Republic and Spain have participated in an open tender held BY Baku Metro. Consequently, 3 companies were selected and consortium has been created, which includes French company SYSTRA, English Mott MacDonald and South Korea’s Saman company. A consortium made up of a conceptual scheme of Baku Metro lines, which was approved by the head of state of the country. In accordance with conceptual development scheme it has been considered to build 53 stations until 2030. As a result of it, the number of metro station will hit 76, length of subway lines will reach 119 km. In accordance with the strategy, there will be 5 independent metro lines in the network. 151. Azerbaijan: Small airdromes in regions to be reconstructed in Azerbaijan due to development of business-aviation APA-Economics September 8, 2011 It is planned to open courses for management of small aircrafts in Azerbaijan, director of SilkWay Travel Shirzad Efendiyev said. To him, after graduating these courses the persons will obtain license: “And it in turn will positively impact on our aviation”. Efendiyev said that at present, AZAL has the largest training center in the region. Along with Azerbaijan, the pilots from neighboring countries also study here. He added that former small airdromes in the regions will also be reconstructed in connection with the development of business-aviation. 152. GM Uzbekistan starts producing of Chevrolet Captiva bne September 12, 2011 Uzbek carmaker GM Uzbekistan has launched production of an upgraded version of the Chevrolet Captiva sports utility vehicles, Uzavtoprom's spokesperson told PRIME Wednesday. The upgraded vehicles are to have 3.0-liter, 258 horsepower engines, while these cars were previously equipped with 3.2-liter, 230 horsepower engines.

SOUTHEAST INVESTMENT

153. Albania: Ministry of Economy Suspends Licenses for 55 Mining Companies <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 7, 2011<p> <p>Albania's Ministry of Economy started procedures on Tuesday for the revocation of licenses for 55 companies operating in the mining sector. The decision was taken following several inspections by Albania's National Agency of Natural Resources, which found that a number of subjects in possession of mining licenses failed to fulfill legal obligations, the Ministry of Economy said in a press release.<p> <p>According to the Ministry of Economy, the above-mentioned companies have not been working and have failed to present the annual activity plan for 2011 or for previous years.<p> 154. Aselsan, Turkey's leading defense company introduces new product bne <p>September 6, 2011<p> <p>Turkey's leading defense company, founded in 1975, Aselsan has introduced a new product called the Stabilized Advanced Remote Platform (SARP), reported the Anatolia news agency. SARP is designed to reduce risks during clashes with hostile forces. Aselsan, is set to offer the Turkish Armed Forces their new product.<p> <p>SARP is a remote control weapon and can be controlled from a safe location. SARP can be attached to light armored vehicles. It can also be used for Turkey's first national tank. The weapon comes with either 12.7mm or 7.62 machine guns or 40mm rocket launchers. <p>US-based Defense News Magazine's ranked Aselsan 80th in their top 100 global defense corporations.<p> <p>The product release coincides with the Kurdistan Worker's Party (PKK) intensifying their attacks, and with the Turkish government's preparing to use new tactics to fight the PKK rebels.<p> 155. Bosnia announces Public Tender for selection of the beneficiaries of the grant funds <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 9, 2011<p> <p>Bosnia and Herzegovina's Federal Ministry of Development, Entrepreneurship and Crafts has announced Public Tender for selection of the beneficiaries of the grant funds.<p> <p>Subject of the Public Tender is collection of the applications for selection of the beneficiaries of the grant funds, according Current Transfers.<p> <p>Transfers for year 2011 for eight projects, three of which are aimed at SMEs:<p> <p>1. Project: Building of the innovative enterprise<p>

<p>2. Project: Incentives to the newly established small enterprises<p> <p>3. Project: Subsidizing the interest rates on business loans<p> <p>Share of the foreign capital in the ownership structure of the legal subjects who whish to apply to this Public Tender should not exceed 49%.<p> 156. Bosnia: BMI calculates that the Bosnian mobile market grew by 0.9% q-o-q during Q111 <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 9, 2011<p> <p>BMI calculates that the Bosnian mobile market grew by 0.9% q-o-q during Q111 to 3.412mn subscribers. This is considerably slower than the two previous quarters when growth exceeded 2%. The report believes the slowdown reflects increasing saturation of the mobile market, with the penetration rate pushing towards 100% and the continuous discounting of inactive SIMs by the country's mobile operators. The report expects annual growth to remain above 4% for most part of the forecast period, with mobile penetration reaching 95% in 2011 and 113% in 2015.<p> <p>The BMI Q411 report on the telecoms market in Bosnia & Herzegovina includes analyses of the country's mobile, fixed-line and broadband subscriber markets. Meanwhile, BMI believes higher value services especially mobile data and postpaid subscriptions will be major growth drivers as operators attempt to capitalise on the improved outlook for economic growth. The operators entered distribution agreements with high-end device manufacturers, including Apple, HTC and Research In Motion. This will help offset the impact of competition and promotional activities on ARPUs in the basic voice segment.<p> <p>Bosnia's regulator has taken steps to encourage fair competition between the incumbents and the alternative operators in the fixed voice and broadband sectors. No outstanding progress has been made, as the incumbents seem keen to maintain market dominance. Although wireline competition remains limited, Bosnia's broadband sector continued to grow rapidly, with xDSL technologies being the main growth driver. This is encouraging development of advanced data services, such as IPTV.<p> <p>Meanwhile, the report has revised up the internet penetration forecast to reflect recent regulatory data which showed that internet penetration exceeded 51% by the end of 2010. The report expects internet and broadband penetration rates in Bosnia to reach 68.4% and 17.6% respectively by 2015.<p> 157. Bulgaria and Romania are still not ready to join the Schengen Agreement, says German minister <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 5, 2011<p> <p>Germany's Minister of Interior has no intention whatsoever to reverse its negative opinion on the readiness of Bulgaria and Romania to enter the Schengen area. "At present, Sofia and Bucharest are still not ready to join the Schengen Agreement," stated minister Hans-Peter Friedrich, according to Novinite.com.<p> <p>"We are not enthusiastic and taking into account the rather negative reports on the two countries, we still doubt the purposefulness of such a step." The arguments

against referred not to the two countries degree of fulfilment of Schengen technical requirements, but rather to worries related to the level of corruption and organized crime, which officially are not connected to Schengen membership.<p> 158. Bulgaria mining company Asarel Medet a new gold and copper mining concession <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 8, 2011<p> <p>Bulgaria's Government said on September 7 2011 that it had awarded local copper mining company Asarel Medet a new gold and copper mining concession for a period of 15 years reports Sofia Echo.<p> <p>The concession area spans 1604 hectares, the Government's media office said. <p>Asarel Medet is required to pump at least 38 million leva worth of investments in the first five years of the concession and to secure an average annual production of 2.775 million tons of raw materials.<p> 159. Bulgaria's export-oriented companies recorded robust sales and strong profits in the first half of 2011 <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 5, 2011<p> <p>Bulgaria's export-oriented companies recorded robust sales and strong profits in the first half of 2011, their consolidated reports show.<p> <p>Along with the rise in sales, expenses also saw an increase in the six-month period. The higher costs, however, did not hamper first-half earnings, with some companies' profits growing much higher than in the first half of 2010.<p> <p>Export-oriented firms were the worst affected by the onset of the financial crisis, but in late 2009 and more notably in 2010 their sales started to recover. At the same time, a significant number of companies oriented to local consumers are still suffering stagnation.<p> 160. Export of Agricultural Products in Albania Grew 40% in 2011 <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 5, 2011<p> <p>Albania’s agricultural exports were 40% higher in 2011 compared to last year, according to sources from Albania’s Ministry of Agriculture. <p> <p>The local agricultural production has also contributed to a 10% decrease in the price of fruit and vegetables in Albania, local media reports<p> 161. Macedonia: 20m Euros to be invested by Jonson Controls bne <p>September 6, 2011<p> <p>US based Johnson Controls, an auto interior manufacturer, will invest in Macedonia for the second time. Contracts will be finalized for the 20 million Euro

investment in two to three weeks, reported Ekonom east Media Group. The construction of the plant will start in October, in the Stip Technological and Industrial Zone.<p> <pPM Nikola Gruevski stated "This investment will be a serious contribution to the Macedonian economy." Gruevski is certain that multinational companies will start to notice Macedonia and will seek to invest their. "When a company decides to launch a second investment in the same country it means that it is satisfied with the conditions, communication with authorities as well as with other factors necessary for a good business climate. The plant, despite opening new jobs, is expected to boost Macedonia's export and to improve the living standards of local residents," PM Gruevski stated.<p> <p>The plant will be producing car seat covers, emplying 1,400 people.<p> 162. Malta-based IT solutions provider 6pm will open next week a unit in FYR Macedonia <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 6, 2011<p> <p>As part of its investment and expansion plans, 6pm opened its FYR Macedonian offices yesterday. 6pm Group is ICT specialist operating in the Maltese and UK markets with head offices in Malta.<p> <p>The 6pm Group intends to invest €5 million and hire a workforce of at least 50 ICT specialists. Through this operation, the 6pm Group intends to deliver the Tele Care and Tele Health web based healthcare solutions, as well as other development projects for the healthcare industry.<p> <p>"The Group investigated several investment destinations in Eastern Europe and quickly concluded that FYR Macedonia was the best destination"said Ivan Bartolo, CEO of the Group on today’s press conference. "In FYR Macedonia we found a forward looking culture, an excellent workforce with a true ‘can do’ attitude and great ICT skills. This coupled with the command of the English language made FYR Macedonia a natural choice for us"- he stated.<p> 163. Romania could import uranium for Cernavoda <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 9, 2011<p> <p>Romania's uranium reserves are insufficient to cover the electricity production in reactors 3 and 4 of the nuclear plant in Cernavoda, according to Sorin Gaman, manager within the Economy Ministry.<p> <p>He added the ministry is considering other options for these reactors like importing uranium from other countries like Jordan or Kazakhstan.<p> 164. Romania has 38 names in top 500 largest companies in the Central <a href="http://www.balkans.com/" target="_blank">Balkans.com</a>

<p>September 9, 2011<p> <p>Romania has 38 names in top 500 largest companies in the Central Europe regarding their turnovers in 2010, shows a survey conducted by Deloitte. Romania ranks the fifth regarding the number of companies in this top. However, only 11 companies - Petrom, Rompetrol, Dacia, Pretrotel Lukoil, BAT România, Kaufland, Lukoil Romania, Hidroelectrica, Mol Romania, Mediplus Exim, Alro - managed to rank better than in the previous report. The largest Romanian company is Petrom, ranking the 14th.<p> 165. Romania: MedLife plans to open the largest occupational health clinic in Romania <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 7, 2011<p> <p>Private health care services provider MedLife plans to open the largest occupational health clinic in Romania in the centre of Bucharest.<p> <p>The company has rented a 3,000 sqm area building on Calea Victoriei which used to be the headquarters of oil company Rompetrol. Medlife will pay a rent of about €700,000 per year. The transaction was brokered by CB Richard Ellis.<p> 166. Romania plans to replace the car pollution tax with annual fees based on the amount of emissions <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 7, 2011<p> <p>Romania's Environment Ministry plans to replace the car pollution tax in the second half of 2012 with annual fees based on the amount of emissions, minister Laszlo Borbely said. By 1st January 2013 at most, car owners will have a 'green card' certifying the amount of emissions produced by their vehicles.<p> <p>This means cars will be tested each year and those not following regulations on emissions will no longer be allowed to travel on public roads. This way, 'everyone will have the same status - the polluter pays,' Borbely added.<p> 167. Romania: The EBRD is considering providing a loan of up to €210 million to Romania's hypermarket chain, Louis Delhaize Group <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 9, 2011<p> <p>The EBRD is considering providing a loan of up to €210 million to Louis Delhaize Group. The proceeds will be used to finance new stores of the Cora hypermarket chain in Romania, most of which will be carried out in regional cities. The expansion of the Cora hypermarket chain in Romania (mostly in regional cities) is expected to generate strong linkages with local suppliers, thus providing the latter with new commercial opportunities with a reliable counterparty. The Project will also showcase the successful implementation of advanced sustainable energy solutions in retail building. Louis Delhaize – Compagnie Franco-Belge d’Alimentation is part of the Louis Delhaize Group which acts as a food and other consumer goods retailer and operates mainly in France, Belgium, Luxembourg, the UK, Romania and Hungary. In Romania it operates under the Cora hypermarket brand<p>

168. Romania: The furniture production grew in Romania by 3.8%in the first 5 months <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 8, 2011<p> <p>The furniture production grew in Romania by 3.8%in the first 5 months to 789 million euro and exports grew by 18% to 572.5 million euro, according to data supplied by the Association of Furniture Producers of Romania (APMR). Furniture imports grew by 8.2% to 131.4 million euro.<p> <p>In these conditions, domestic sales (local production and imports minus exports) went down by 12.2% over January-May to 347.9 million euro.<p> 169. Swedish H&M is opening its first store in Bulgaria in March, 2012 <a href="http://www.balkans.com/" target="_blank">Balkans.com</a> <p>September 5, 2011<p> <p>The Swedish brand H&M, Hennes & Mauritz AB, known across the globe for its fashion retail for women, men and teens, is opening its first store in Bulgaria in March, 2012.<p> <p>The store is going to be located in one of the top business hubs in the country - the shopping center The Mall in the Bulgarian capital Sofia. It will offer the entire H&M line and will have two floor levels with a total area of 2 200 square meters.<p> 170. Turkish-Israeli ties formally downgraded <a href="http://www.hurriyetdailynews.com/" target="_blank">Hurriyet Daily News</a> <p>September 8, 2011<p> <p>Turkey’s decision to downgrade ties with Israel formally took effect Thursday after senior diplomats left their respective embassies, as the United States urged the two countries to maintain dialogue.<p> <p>“We understand that they [the Israelis] have departed and the procedure is completed. Our people have also returned,” a senior Turkish Foreign Ministry official said.<p> <p>US Ambassador Francis Ricciardone said Turkish-Israeli ties were “of critical importance” in the region and voiced expectation for speedy normalization. “The door of diplomacy must definitely remain open,” he told reporters.<p> <p>Speaking before her departure Thursday, the Israeli embassy’s number two, Ella Aphek, expressed regret for leaving Turkey.<p> <p>“I’m very sad. Politics is tough. I hope relations will be put back on track,” she said at Istanbul’s Ataturk Airport.<p> <p>Ambassador Gaby Levy, whose term in Ankara was set to expire in mid-September, was already in Israel last week when Turkey announced it was downgrading ties over Israel’s failure to apologize for killing nine Turks in a raid on a Gaza-bound aid flotilla last year.<p>

<p>The Foreign Ministry official signaled that the Israeli military attache, Col. Moshe Levy, may eventually stay, saying that his rank fell below the second-secretary level under Israeli diplomatic protocol. He said however that the attache would have no practical function because of the suspension of military cooperation. Israeli officials have said the attache will stay in a sign that relations between the one-time allies are not totally broken.<p> <p>Late Wednesday, four Turkish diplomats, led by charge d’affairs Ceylan Ozen, returned home, leaving only one low-level colleague at the Turkish Embassy in Tel Aviv. The ambassador had been recalled immediately after the bloodshed on the Mavi Marmara ferry on May 31, 2010.<p> <p>Turkey had previously downgraded ties with Israel to second-secretary level in November 1980 after the Jewish state proclaimed Jerusalem as its capital. The chill continued until December 1991, when progress in Israeli-Palestinian peace talks prompted Ankara to appoint ambassadors to both sides.<p>

CENTRAL EUROPE INVESTMENT 171. Gazprom controlling stake in Czech gas seller RSP Energy bne September 12, 2011 A unit of Russia's state-owned gas giant Gazprom says it has bought a 51% controlling state in the Czech Republic's gas seller RSP Energy, Gazprom said last week. Gazprom brought the stake through its VEMEX subsidiary. The deal takes the Russian gas giant one step close to its goal of owning and "last mile" of gas delieveries to consumers.

OTHER COUNTRIES 172. Mongolia: CNPC and Mongolia sign memo for expanding petroleum co-operation in Ulan Bator Monet/IstockAnalyst September 6, 2011 China National Petroleum Corporation, or CNPC, and Mongolia's Deputy Minister for Mineral Resources and Energy Ariunsan have signed a memo for expanding petroleum co-operation in Ulan Bator. According to the memo, the two sides agreed to expand CNPC's downstream business in Mongolia, secure a sound environment for the upstream cooperation projects, and increase employment and training opportunities to the local people in Mongolia, the company said. China National Petroleum Corporation is an integrated oil and gas company. CNPC has exploration and production projects in China and 30 other countries and is an oilfield services provider. The company also operates some older refineries and an extensive oil and gas pipeline network in China. It has a network of 18,000 gas stations across China.

173. Mongolia: Meritus Prepares To Drill Untested Targets At Gutain Davaa, Mongolia Monet/MarketWatch September 6, 2011 Meritus Minerals Ltd. (MML) (TSX-V - MER) advises that preliminary work on preparing targets for an upcoming diamond drilling program is progressing well. The program will start by testing several of the undrilled gold targets on the Gutain Davaa project that were identified by the previous owner, Troy Resources. 1. Toordogiin Hyar Troy Resources located five very high grade float samples in this area that assayed 542, 417, 402, 334 and 142 g Au/t. These results have been previously reported. The Toordogiin Hyar area is steep and scree covered with very little rock outcropping at surface. Meritus has completed further prospecting and geological mapping and has carried out additional float sampling. Some lines of closely spaced soil sampling have also been run and a road has been constructed to provide access for a drilling program. During the course of this work additional very high grade float samples were located, (416, 231, 125.7, 115.9, 48.26, 6.73, 6.66g Au/t). Examination of the samples suggests that mineralization is identical to the mineralization at Toordogiin Shil some two kilometers to the east. Anomalous gold values in the area are considered to be those that assay 0.05g Au/t and above. Anomalous float has now been found in a band that has been traced for about 600 metres. An unusual feature of the anomalous samples is the high percentage of very high grade samples. A total of 24 anomalous samples have been assayed, 12 (50%) range from 0.05g Au/t to 5.00g Au/t. The other 12 are between 5.0g Au/t and 542g Au/t with seven of them (29%) exceeding 100g Au/t. 174. Mongolia’s First Private Equity Fund Plans Debut Investment in October Monet/Bloomberg September 6, 2011 Mongolia’s first private-equity fund, started by a former Uniqlo executive, plans to make its debut investment by the end of October, betting on growth in the country’s mining industry. The Mongolia Opportunities Fund aims to raise $75 million by June 2012 and has received $25 million from investors including Mitsubishi Corp., Japan’s biggest trading company; International Finance Corp., the World Bank lending arm, and the European Bank for Reconstruction and Development, said co- founder Batsaihan B. Jamichoi, who introduced the line of low- cost cashmere sweaters at Uniqlo, a unit of Fast Retailing Co., Japan’s biggest apparel chain. Mongolia, the world’s most sparsely populated nation, is one of the richest countries in terms of natural resources and has the second-largest reserves of rare earth.

Economic growth may surge to 23 percent in 2013, more than twice the forecast expansion in China, as large mining projects begin production, the International Monetary Fund said. “Mongolia is going to enter a high economic growth era and we wanted to capture the opportunity in becoming the vehicle for companies looking to grow their businesses,” Batsaihan, 37, said in a telephone interview from Ulan Bator, the capital of Mongolia.