thinkpiece 5 outlook for 2008
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Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 1
RUSSIA IN 2007
Outlook for 2008Thinkpiece 5, December 2007
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 2
Contents
� Introductory Essay 3
� Part One: The Consumer
� Online 11
� Consumer Electronics 18
� The Media Market 26
� Banking and Financial Services 36
� The Automotive Industry 42
� Housing 48
� Part Two: The State
� The Economy 61
� Oil and Gas 65
� The Political Year Ahead 74
� Education 80
� Russian Demography 85
� The Olympics 90
� Appendix 1: Russian PR Tips for a Large Company 94
� Appendix 2: About Mmd 100
� Contact Details 104
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Introductory Essay
I am delighted to introduce you to Mmd’s fifth thinkpiece of 2007: Russia in 2007,
Outlook for 2008. It adds to those we have done on the Russian blogosphere; PPPs in
Russia; the Priority National Projects and Strategic Issues for Western Investors. While
we don’t pretend that this latest addition to Mmd’s thinkpiece family is a fully
comprehensive survey of all the issues and economic sectors, it is our largest yet. In
this, my colleagues summarize some areas of particularly interesting development.
In line with its policy of sovereign democracy, the Russian government has shepherded
a new era of State Capitalism, where key state industrial or financial groups (or Russian,
private sector groups close to the state) have taken up key strategic positions.
Stephen Lock is Mmd’s Regional Director for Russia and the former
Soviet states and is President of its Eurasia Strategies Group, which
provides investor relations services for Russian firms; government
relations services for western firms and also hub’s Mmd’s specialist
banking and finance team.
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Some have referred to this as ‘velvet re-privatization’. For foreign firms which had key
oil and gas holdings acquired in the 1990s, 2007 was a stressful year. But, just as
President Putin achieved political order, from chaos in his first term, so his Russia First
policy has dominated his second term. In practice, Russia First has both pulled back
oligarch excess and ‘super power’ status within the country and has ensured that key
economic assets have stayed in Russian hands. President Putin did not want to see a neo-
super power like Russia lose control over its unique natural resources for them to be
exploited only by foreigners, for foreigners.
Foreign investors are still welcome in these sectors (and those foreign oil firms were all
offered lucrative JV projects to replace the assets they lost). Bright future profits beckon
but, predominantly, as junior partners to more confident Russian industrial leaders. This is
consistent with a program of economic rejuvenation which aims to give Russian industrial
groups a ‘helping hand’ form the State, not just to protect Russian assets from overnight
plundering by the West, but also to let Russian firms play ‘catch up’ from 70 years of
Soviet economic sludge and become, in their own right, global business leaders.
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Secondly, what we have witnessed in 2007 is a growing divergence of those western firms
which ‘get’ Russia and those which, whether they have just arrived in Russia or have been
here over a decade, do not. If the reader will allow, here are my three principals for
successful foreign direct investment, or market entry, in Russia:
Understand state priorities – for inward investors – especially in the strategically
important sectors of energy, oil and gas, minerals and metallurgy – the success of your
business in Russia will stand or fall by your ability to walk in the footsteps of the State
and be its (junior) partner. 2008, in particular, will be the year the West learns that Public
Private Partnerships (PPPs) will be central to how the state wishes to handle infrastructure
investment across healthcare, energy, transport and, of course, the Sochi Olympiad. The
opportunities here for Western firms will be huge. Indeed, we say 2008-2012 will
represent an historically unique commercial opportunity for firms geared up to operate in
PPP environments.
Russia First – politically, economically and as consumers, the focus is on Russia, for
Russia, by Russians, tailored for Russian needs. Anyone planning a marketing campaign
or a consumer push in Russia needs this to be front and centre in their thinking.
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Think of a budget and double it – particularly in consumer markets, some key western
firms are failing to make the impact in Russia that they usually expect. In part this is
because they are constrained by unrealistic investment caps and marketing budgets. This
particularly hampers US firms who are tied to the US dollar, which fell 15% against the
Ruble in 2007 and, since the start of 2004, is down some 25%, exacerbated by Russian
inflation which remains stubborn at around 10% a year.
In practical terms this first impacts HR. Staff which looked quite good value in 2004 at
about $40,000 a year (including social taxes) now look frighteningly expensive at $70,000
for the same level of hire, just 4 years later. Undoubtedly HR productivity has not kept
pace with this cost increase, which does pose a significant longer-term threat to Russian
economic progress, although other productivity gains and efficiencies hide this problem in
the manufacturing sector. In Big Picture terms, Russian firms focused on consumer
markets are both out-thinking and out-spending their western counterparts in trying to
reach the Russian consumer; so amongst all the economic good news, we would make this
‘big prediction’. Towards the end of 2008, stand by for stories about western B2C firms
which ‘got Russia wrong’.
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The Big Politics
It didn’t take long for the western media to coin the phrase that for Dmitri Medvedev “his
weakness is his greatest strength” and point to how Vladimir Putin, as Prime Minister, will
remain firmly in power. We see the macro-political outlook for Russia as ‘steady as she
goes’.
As my colleague, Vladimir Melnikov writes, with much insight: “President Putin cares
more for the stability of the system than his own place in it”. We see over the next four
years a decisive shift from executive Presidency towards Parliamentary Democracy and
government by a committee of the elected house. President Putin now has the mandate and
the space to achieve this. Nonetheless, we do see political risks increasing after 2008.
While not wanting to be like Ukraine – politically, ‘the Italy of Central Europe’ – President
Putin works towards a system of government which is socially conservative (to keep the
diverse peoples of the Federation together), economically progressive, if tied to state
structures, and unable ever again to host another Stalin (or a Yeltsin!).
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Russia in 2007, Outlook for 2008
In this thinkpiece, we first look at the Russian consumer. My colleagues look at the rise
of New Media in Russia; we chart the extraordinary growth of the automotive sector and
we look at the tremendous changes in housing. The rapid rise in consumers’ sophistication
and expectations (as well as volume growth) have been some of the most interesting
developments in Russia in 2007 and we witness it here through three prisms: the banking
and financial sector; how media markets are changing in Russia, the booming consumer
electronics sector.
Secondly we look at the role of the state; with short overviews of Russia’s demographic
picture; where this year Mmd has shifted its assessment. We are no longer bears
(population below 100,000,000 by 2040), but relative bulls. Russia’s current population
decline is not illusory, it is real. But it may be temporary. 2010-2020 is a crucial time to
determine if high death rates and low birth rates can be reversed. If they can, a population
decline of only to 130 million can be achieved around 2020; and the population may even
start to grow again in the period 2020-2040 (all other factors being equal). But the
government’s initiatives in this area are, literally, a ‘race against time’.
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We also look at the education sector; the economy and, of course, oil and gas. So much of
Russia’s future depends on the hydrocarbon revenues that can pump-prime social and
economic reform and progress: how’s that sector doing? We end by looking at the
infrastructure and PFI-fest that will be the Sochi 2014 Olympics: where will the money go?
For Russia, 2007 was the year when stability and prosperity arose from the dovetailing
popular aspiration and state policy. In 2008, as we enter a new Presidency, we will see bold
and successful steps towards social reform, to ensure the benefits of oil and gas wealth are
shared by the many. It is in this light that we should interpret President Putin’s benchmark
announcement that the Stabilization Fund, which washes all those oil revenues, will be
partially deployed on pension increases and investments in innovation.
For foreign investors and firms Russia will still remain one of the most important growth
markets in the world, but one now of scale and depth; with stable and benign politics.
Russia will not be completely isolated from choppy global markets, but we believe there is a
good case to make for it being a safe-harbor for global firms’ profits.
Пусть 2008 будет для Вас годом успеха и процветания, так же как он будет годом
успеха и процветания для России!
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PART ONE: The Consumer
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OnlineBy Arseniy Rastorguev
Aresniy Rastorguev is a senior analyst in the Eurasia
Strategies Group. He specialises in Public Affairs and New
Media and his clients include Google.
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Internet & Technology Penetration
� Affordable broadband is essential for ‘live web’ development – many of the services
can only thrive when their users have affordable permanent internet access. While
flat-rate subscription plans are a de facto standard in Moscow and St.Petersburg, pay-
per-traffic plans are still very common in the regions. Content and service providers
have to address this issue: Yandex promotes the flat-rate plans and has been signing
deals with regional ISPs to charge traffic from Yandex services at 0 rate.
� Even though there are about 60 mln. XHTML-enabled handsets in Russia, mobile
internet remains a pretty underdeveloped area. Some ‘easy web access’ services have
failed because of a poor business model (I-Mode) and others are only starting their
‘career’ in Russia (BlackBerry). In the past year Russian cell operators have made
certain steps to make setting up web access on a handset simpler, but mobile internet
is still seen as quite ‘geeky’ by the majority of users, and the complicated billing of
mobile internet access only makes it worse.
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Internet & Technology Penetration
� By the end of 2007 the daily audience
– those who actually shape the face of
the web services and generate traffic
will grow by 16% compared to 2006 to
reach 11.8 million people. By 2010
this category should reach 21 mln
people with another 16 mln. using
internet on a less frequent basis. This
will encourage rapid development of
the ‘live web’.
� By the end of 2007 virtually all
schools in Russia were provided with
broadband internet access. 6-months’ audience
Daily audience
% of daily audience in 6-months’ audience
Internet Audience in Russia,
2003-2010
mln people %
© MForum Analytics, 2007
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Active blogs
Abandoned blogs
Blogs
� The number of blogs was estimated by the Yandex research at 3.1 mln. (about 30% of
them active) in October 2007 – 2.6 times up from a year ago. We can expect the
Russian blogosphere to double next year. Blogs will keep gaining audience, but the
segmentation will become more defined and more evident – the gap between blogging
as pastime/networking and blogging as media activity will be widening.
Number of Russian blogs
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Blogs: Balancing Trust and ‘Monetization’
� The global platform, Livejournal.com, having been acquired by the Russian firm, SUP
Fabric, will need to find a new way to position itself in Russian market. Apart from
the advantage of being a pioneer Livejournal has strongly relied on its ‘independent’
status and the feeling of security offered by its US hosting and jurisdiction. Concerns
will inevitably arise with regards to SUP’s independence from the Russian political
environment, impartiality on politically-charged abuse disputes, SUP’s own
PR/advertisement business. Livejournal is, by far, the dominant blogging platform for
Russian bloggers.
� The ‘Monetization’ of blogs has been the buzzword in 2007 and will be the issue in
2008. Many of the top bloggers have high aspirations regarding revenue-generating
capacity of their blogs, but so far the ways to monetize a blog’s popularity have proven
to be either not really impressive in terms of numbers or pretty dubious in terms of
ethics and, effectively, reputation. The ‘Platypus case’ – an awkward hidden ad
campaign for the ‘Utkonos’ retail chain in the top Russian blogs came in December as
a perfect ‘summary’ of the year’s mood in the Russian blogosphere.
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Social Networks: Stealing Audiences
� But despite all the growth in the blogosphere, social networks like Odnoklassniki.ru and
Vkontakte.ru have stolen the title of the ‘web’s hottest thing’ from the blogs in 2007
� Vkontakte.ru, 4,000,000 users
� Odnoklassniki.ru, over 6,000,000 users
(Moikrug.ru boasts a far smaller audience but with stronger focus on professionals, while
Facebook and Linkedin are virtually restricted to the audience of professionals and
students exposed to work or study in Western companies and colleges).
� We expect these services to build up their functionality and start the fight for being the
personal hubs of individual’s online activity in 2008. Facebook’s example is way too
obvious to miss it. Currently only Moikrug.ru offers such tools (integrating blog feeds,
discussions).
� They will also have to find business models to sustain them – Odnoklassniki.ru places ad
banners, but Vkontakte.ru is currently a commercial enigma (causing rumours about its
affiliation with FSB, United Russia, Presidential Administration etc.).
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Social Networks
Diary blogs,
general social
networks, dating
services
Content-rich,
creative,
corporate &
standalone blogs,
professional and
international
social networks
Social media
audience:professionals youth
+‘housewives’
� The trend we expect to develop is migration of younger audience towards social
networks as ‘less demanding’ in terms of creativity and more intensive in terms of
socializing.
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Consumer ElectronicsBy Artur Trapizonyan
Artur Trapizonyan is an Account Manager in the
Technology team of the PR Division. He specialises in
Telecoms and Industrial PR and his clients include GE
Energy, Lenovo and IBM.
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Executive Summary
� The consumer electronics market in Russian is the seventh largest market in the world.
� Russians spend 5.4% of their income on electronic devices – that is a greater percentage of their income than in western countries, but a lower amount in absolute figures.
� Growth rates are slowing, and are expected to continue to do so, except for:
� portable digital devices
� navigation devices
� High Definition video
technologies.
� Increased and more widespread
use of the Internet is expected
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Sales
� Large retail network sales make up 60% of the market.
The four leading retailers control 48% of the market.
Source: RATEC
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Sales in the Regions
Source: Technosila
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The Computer Market
� Leading suppliers are increasingly interested in the Russian market:
� Computer imports grew by 15%
� PC penetration in Russia is nearly 100% in almost all regions
� The desktop market increased by 5.4%, but laptops are increasingly popular:
� sales up 46.4%.
� now 2-3 laptops to 1 desktop (IT monitoring).
� Design and status are driving consumers’decisions over which PC
Source: IDC
Desktop Market
Laptop Market
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Mobile Phone Market
� Was expected to stagnate, but in Q3 market grew
23%: nevertheless, future growth predicted at
below 5% a year.
� Average price of a handset reached $220
� Driving factors – design and status. Leading
suppliers collaborate with famous fashion
designers
� 89% of purchases replace the old phones
� 70% of households have at least one mobile
phone. In Moscow – 84%, in the Urals – 54%.
� Operators attracting Average Revenue Per User
(ARPU) and loyalty through new services: � Wi-Fi
� stimulating sms and mms traffic
� tariffs for children
Source: Mobile Research Group
Suppliers
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The Television Market
� Digital TV is rapidly becoming more popular in Russia,
although penetration is still only 1% across Russia, and
5% in Moscow. Both tradition and alternative operators
are offering the service
� Cable TV penetration is nearly 20% in regions, 28% in
Saint-Petersburg.
� Broadband Internet, Blue Ray technology, availability of
digital TV will cause demand for FullHD TV
� OLED technology may change market situation
Source: GFK Rus, Digital Search, iSuppli
Leading suppliers are increasingly interested in the Russian market; the market is
expected to double next year
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Television Sets
LCD SuppliersPlasma Suppliers
� Both LCD and Plasma demonstrate growth, with Plasma becoming a niche product
and LCDs more widespread
� Decreasing costs of the products shift competition to the 42 inches segment.
� More than 60% of TV in Russia are still electron-beam.
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The Media MarketBy Inessa Pogorzhelskaya
Inessa Pogorzhelskaya is Senior Account Manager in the
Technology team of the PR Division. She specializes in
Corporate and B2B Communications and her clients include
SAP, 3M, NXP and Acision
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General Trends
� The Russian media market is split between large-scale financial-industrial groups.
Media assets, in recent years, have demonstrated a strong trend for consolidation and
rotation from hand to hand
� Many media holding companies, having strengthened their positions in the regions,
are diversifying their businesses, buying out assets or acquiring local media in the
CIS and preparing to go public
� Funds for developing the Russian media market are allocated from Federal budget: in
2006 $531 million were allocated, in 2007 this figure is expected to increase by 64%
� According to the Association of Russian Communication Agencies the mass media
market is expected to be worth $1 billion by 2010
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79%
21%
14%
7%
Trust in the Media
Percentage of the Russian
population that gains the main part
of their information from the
media
44%
8%5%
3% 3% 2% 2%
TV Internet Central RegionalTV Central
Radio Stations
Internet Regional
TVRegional
Radio
Central
PressRegional
Press
44%
8%5%
3% 3% 2% 2%
TV Internet Central RegionalCentral
Radio Stations
Internet
Percentages of the Russian
population that trust in the
media: state TV dominates
TVCentral
Radio StationsRegional
TV Internet
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Major Media Events
Print Online
� The private equity fund, Russia New Growth Fund
(headed by Troika Capital Partners), became co-
owner of the Gameland Publishing House, as a result
of which Gameland has attracted $12 million for its
multimedia projects development
� The Norwegian company A-pressen sold 25,05 % of
its shares in Komsomolskaya Pravda Publishing
House to ESN Group
� Rambler Media recently became part of Prof-Media;
its internet strategy is to become far more streamlined
and aggressive
� Rambler media acquired the context advertising
system, Begun
� The South African media holding company, Naspers
Ltd, acquired 2.6% of Mail.ru for $26 million
Broadcast Regional
� The launch of 2 TV channels for children: Telenyanya
and Bibigon
� The First business radio station, Business FM, was
launched in Moscow and St.-Petersburg
� The BBC, which had hoped to provide contents for
Business FM, was effectually locked out and BBC
Russia service lost its FM license
� The Ekaterinburg publishing house, ABAK-PRESS,
expanded into the Moscow region. Launch of free
magazine Ya Pokupau
� At the end of March 2006, the Norwegian media
holding company, Schibsted, acquired 66.7% of the
shares in Regional Independent Papers, based in St.
Petersburg
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Print media
Key indicators:
� In Jan 2007 there were 59,184 print publications registered in Russia
� The Russian market for periodical press (advertising and distribution) in 2006 was
worth more than $4.06 billion – a 13.7% increase against 2006
� The volume of advertising in print media amounts to $1,4 million (1st 9 months of
2007)
Trends:
� Around 100 new magazines launched in 2007
� Market expansion: more and more local market players
Forecasts:
� By 2014 print media market is expected to be worth $15 billion
� In 2009 the first IPO amongst media holding companies will take place: Prof Media
Sources: Russian Federal Surveillance for Compliance with the Law in Mass Communications and Cultural heritage Protection, Federal Agency for Press and Mass Communications, Association of Public Relations Consultants, Print Media Distributors Association, Prof-media management announcements
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 31
Online Media
Key indicators:
� The volume of advertising in the Internet – excluding context advertising – was worth
$110 million on the first 9 months of 2007
� As of July 2007, 25% of the Russian population are Internet users
� Around 27,00 news articles are published online on work days and around 6,000 on
weekends and holidays. Around 20% of the articles are reprints from other media types
Trends:
� 13% of the Russian population regularly read news online, 3% more than last year. The
dynamic market expansion of online media is putting print media in jeopardy
Forecasts:
� By 2010 the Internet advertising volume will exceed $1 billion
Sources: Russian Association of Public Relations Consultants, Public Opinion Fund, All-Russia Public Opinion Research Centre (2006)
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Broadcast Media
Key indicators:
� The volume of television advertising amounted to $74.5 billion, on radio, $8.8 billion,
in the first 9 months of 2007
� In terms of audience share, government owned TV channels have 54%
� 98% of households own TV sets, while only 5% use paid-for digital channels (2006)
Trends:
� By the end of July 2007, there were 13,5 million cable network users. More than
55% of the Russian cable TV market is supervised by six large holdings: Nafta, Mass
Media System, Svyazinvest, ER-Telecom, Multiregion, and Renova-Media
Forecasts:
� CTC Media will acquire producing company Kinocontanta for $40 million
� The volume of paid-for TV in Russia by the end of 2007 will be $650 million
� The conversion of the radio-frequency spectrum for new radio stations to be enabled
� Complete shift to digital TV by 2015
Sources: Russian Association of Public Relations Consultants, TNS Gallup Media, iKS-Consulting data, ITAR-TASS, Kommersant, Ministry of Cultural Affairs
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Regional Media
Key indicators:
� Regional media accumulates 25% of overall advertising volumes
Trends:
� The leaders in terms of advertising revenues in the regional media market as of Q1 2007
were Ekaterinburg, Novosibirsk and Samara
� Regional publishers are beginning expansion into the Moscow region
� Regional markets’ potential is demonstrated by the continuous expansion of federal
publishing networks into the regions (Intermediagroup, Provintia, Pronto-Moscow and
others)
Forecasts:
� Increase in the level of trust in regional media, their growing independence and authority
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� More people start to watch TV for
entertainment purposes (48%),
59% use it as background – this
trend started in 2005
� Audience of 139 million, strong decline in young audience
� The number of available federal channels – 17 in 2007, up to
50 expected in 2011
� 91% of Russian population watch TV every day
TV:
Declining
� 1/3 of the audience listened to the
radio as much as 5-7 years ago
� 21% - started to listen to the radio
more, the same percentage – less
� Audience of 94.5 million
� In the past 10 years the number of commercial radio stations
doubled, while their share in the media market overall
remained the same – 29%
� Younger audience: 18-34 category increased in the past years
Radio:
Stable
� The most read newspapers are
local ones (42%)
� Circulation of newspapers declining: 2007 – 7.8 billion
copies, in 2005 – 8.05 billion copies
� Every 5th Russian adult doesn’t read newspapers at all; but
this is still a higher reading proportion than in the West
Newspapers:
Declining
� In 2011 average number of visits
will become 1.5
� In the course of 6 years (2001-
2006) the number of loyal cinema
visitors increased by 2.5%
� Audience of 91,8 million
� Average number of visits per annum is 0.5 (3-5 European
countries; 2.6 worldwide )
� Annual audience growth 20-30%
� Audience: 51,3% - under 25, 39% - 26 – 40
� Audience: 60% - monthly income below $400
� Increase in the number of cinema halls – 40%
Cinema:
Growing
TrendAudience Medium
Sources: Smart money (2005), Delovoy Petersburg, Mediaatlas (2006, 2007), Novosti SMI, All-Russia Public Opinion Research Center (2005), Comcon (2007), Ogonek)
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TV
Radio
Newspapers,
magazines
Internet
Every day
Once in 2-3 weeks
3-4 times per week
Once in several
months Don’t know
Don’t use it
1-2 times per week
Source: All-Russia Public Opinion Research Center, 2007
How Often Do You Use…?
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Banking and Financial ServicesBy Eugenia Skobeleva
Eugenia Skobeleva is the Director of Financial & Corporate
Affairs in the Eurasia Strategies Group. She specialises in
media relations, strategic communications and crisis media
training. Her clients include Visa; HSBC; Saxo Bank; and
private equity group, TPG.
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Russian Banking Sector Overview, 2007 (1)
� 2007 was a challenging year for the Russian banking system:
� The global liquidity crisis had its positive impact on the Russian banking system – it
stimulated the Ministry of Finance, the Central Bank and other banks to explore new
solutions for financial problems. Banks clearly understood that diversification and higher
standards of risk management were a step forward. The Central Bank actively financed
the financial sector in order to prevent further development of the liquidity crisis – a
record high was set with $11 billion being lent on one day in August on the security of
tier one bonds. Although the liquidity situation is still a concern for midsized and small-
sized banks, Russia was much less affected by the global crisis than many observers
expected.
� the world liquidity crisis
� state regulations tightening
Capitalisation on the growth
of credit organisations and the
‘narodny’ IPOs of Sberbank and VTB
=
Interest from the professional investor
community and private investors
Meanwhile, a backdrop of stumbling blocks:
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Russian Banking Sector Overview, 2007 (2)
� The sector showed rapid growth, especially in the first half of the year –� assets in the Russian bank system amounted to 56% of GDP (as by September 2007), many
of the large banks showed 20-30% annual growth and some smaller ones showed even 40-
50%.
� The country’s macroeconomic performance secured an increase in both corporate and
personal earnings providing further demand for banking products. The corporate
banking segment remained very competitive, but the retail segment showed rapid
growth – total retail loans by value grew more than twice as fast as total corporate.
� The development of more sophisticated products:� derivatives as a tool to manage credit risk
� securitisation to increase banks’ funding sources
� etc
� Banks acknowledging that regions are a huge growth potential; starting to develop
regional networks and providing banking products.
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M&A
� In terms of M&A it was also a fruitful year for the foreign financial institutions
coming to Russia. With major players already existing in the Russian banking arena,
several key deals took place:
However, the presence of foreign banks is still low as compared to other countries of
Eastern Europe – only 12.3% of total banking sector assets.
Belgian KBC acquired 92,5%
stake of Absolut Bank
Assicurazioni Generali SpA
has bought 31,7% stake of
insurer, Ingosstrakh
Potential acquisition of 30% of
Rosbank by Societe Generale
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Payment Cards
Since 2001 the number of payment cards in Russia has increased 7 times. In Q1 2007 there were
more than 74 mln of payment cards, with annual growth of 37%.
� The leader in the payment card issue volume is Sberbank. In 2006 the number of cards issued by
Sberbank exceeded the number of cards issued by Russia’s second largest retail bank, Alfa-Bank,
3.5 times.
� From the regional perspective the leading regions by payment card issuance are St.Petersburg,
Tymen and Khabarovsky regions. Most of the cards are concentrated in Moscow and Moscow
region – more than 42% of the overall Russian issuance.
� Most Russians continue to use bank cards for the cash withdrawal purposes and not as a payment
tool. In 2006 3.97 trln of roubles were withdrawn – 93.5% from the total amount of transactions
volume of bank cards.
� Debit cards constitute in average 84% of the total market (most of the cards are salary cards).
However the credit card market was growing faster (in 2006 85% growth of credit cards and 32%
growth oа debit cards). Visa is the leading payment system in terms of the card issue volume in
Russia
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 41
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
The Top Ten Leaders in Payment Card Volume
Number of
cards in
millions
10
5
15
20
25
Bank
Number of cards by 1 July 2007
Number of cards by 1 July 2006
Source: RBC Rating, Central Bank Statistics
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 42
The Automotive IndustryBy Pavel Melnikov
Pavel Melnikov is Associate director of Corporate and
Financial Affairs in the Eurasia Strategies Group. He
specializes in public and government relations and his clients
include GE Money bank, HSBC and Visa. However, Pavel
joined Mmd from Pirelli and knows the Russian automotive
industry well.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 43
Characteristics of the Automotive Market, 2007
� By the beginning of 2008, there will be between 29.6 and 29.7 million cars in Russia –
78% of them Russian – meaning an increase of between 4 and 5% on last year.
� The sale of 2.2 – 2.3 million cars this year is a 10-15 % market increase, placing Russia
second in Europe in terms of car sales – it was fourth in 2006 (nevertheless, today in
Russia there are 180 cars for one thousand people, while in Europe more than 500).
� In money terms, the market is expected to have grown by about 30% over 2007, and be
worth $41.5 billion ($32 billion in 2006).
Sources: Vedomosti, Autostatistics, Autoreview, Za rylyom, Vesti.ru, GIBDD, experts
62,956,2 53,3
13,214,3 15,5
10,712 13,1
3,44,4 4,9
3,2 4,6 4,6
6,6 8,5 8,6
0%
20%
40%
60%
80%
100%
2005 6 mnths 2006 2006
30.000+25-30.00020-25.000$15-20.000$10-15.000> $10.000
� The average price for a
car bought in Russia is
about $17,000 ($15, 500
in 2006), and those
buying in the $10-
15,000 range and the
$15-20,000 range is
continuing to increase
(see table).
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 44
Characteristics of the Automotive Market, 2007
� More than half of all cars are more than 10 years old, and only 20% of them are less
older than 5 years
� Dealers are gaining more access to local markets:� The annual growth of dealer networks varies from 30 to 35%. 90% of this increase is due to
the growth in regional markets networks and in many cases this includes cities with
population of fewer than 500, 000.
� Traffic infrastructure is underdeveloped. � Since the 90s, car volume has increased several times while infrastructure has developed
only by a few percent, thus causing traffic problems in all big cities. Laws and regulations
concerning toll roads are in review.
Sources: Vedomosti, Autoreview, Za rylyom,
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 45
Price Characteristics of the Automotive Market, 2007
� Nearly 40-45% of new cars are bought on credit at the moment.
� The number of banks owned by car manufacturers is increasing in Russia, and,
following the example of Toyota bank, DaimlerChrysler bank has started working in
Russia. BMW, Renault, Nissan and VW banks are also planning to enter the Russian
market.
� The price of new cars has grown because of –� increased demand
� inflation
� the price increase of raw materials and electric power
� the use of increasingly expensive technology
� Introduction of Euro-2 standard from the 1st of June 2007 increased the price for each
car made in Russia by $600-720 (15,000 – 18,000 roubles).
� Insurance legislation will be toughened according to a supreme court decision.
Insurance companies will be obliged to compensate the loss of a vehicle’s commodity
value as a result of traffic accident, which will lead to the increase in the cost of
insurance.
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Foreign Cars in Russia
� Foreign car production in Russia during the first 9 months of 2007 grew 73.3 %, to
321,100; imported car sales 63,8%, to 837,000. Within three years time, foreign cars
imported to Russia are expected to account for a half of the country’s car market,
while the remainder will be covered by foreign cars of Russian assembly.
� The 12 most popular foreign cars models have a waiting list of 3 months to one year,
which in itself helps to stimulate the sales of the Russian cars. Autovaz expects to
close 2007 with total sales of up to 660,000 cars, although its market share steadily
decreases to 25-28% (32% in 2006).
� The Ministry of Economic Development and Trade has signed agreements that provide
favourable tax conditions on production assembling for car manufacturers in 2007.
Among the 15 contracts signed were:
� This November, Volkswagen opened an engineering plant that will produce 115,000
cars a year, while Toyota is opening a factory in December.
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Expectations for the Automotive Market
� The market will continue to grow: up to 2.7 million cars are expected to be sold in 2008.
� With the increasing prosperity of the Russian population:� Russian cars are becoming less and less popular.
Domestic manufacturers will tend to reduce production (by 2010 it will have fallen by 50%).
The low-cost car sector is also slowing in growth, against the background of overall economic
growth.
� There will be a slump in import of second-hand cars (the reduction is 8-10% a year): Russians
are buying new foreign cars, not secondhand ones
� New car plants of foreign producers will be built in Russia (up to 10 by 2010). Chinese
manufacturers will significantly increase the number of cars produced and sold owing to
their low price. By 2010 the share of their market will be nearly 6%.
� The introduction of the Euro-3 standard from the 1st of June 2008 will increase the price
for each car made in Russia by $400-800 (10,000 – 20,000 roubles). There will also be a
tendency to tighten environmental requirements.
Sources: Vedomosti, Autoreview, Za rylyom, experts
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HousingBy Inna Semenyuk
Inna Semenyuk is Director of Lifestyle & Consumer Affairs
in the PR division. She specializes in Consumer PR strategy
development, customisation and implementation and her
clients include Starbucks, Visa, IFA Hotels & Resorts, Turner
Broadcasting (CN and Boomerang) and Diageo.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 49
� Federation Tower (right): 93 stories,
soon will be Europe’s tallest building
� European Trade Center: 160 stores, a
nine-screen cinema, swimming pool
� Triumph Palace, Sokol: 54-stories,
luxury residences
On the Spot
A few years ago Moscow’s skyline consisted of Kremlin domes and the Gothic spires of
the Stalin-era buildings known as the Seven Sisters. But today, all across Moscow, new
office towers and apartment blocks are transforming Russia’s capital:
Booming business and rising personal wealth mean that
demand is up for all types of property.
Office space in Moscow now rents for an average of $95
a square foot—two-thirds higher than in Midtown
Manhattan.
Annual real returns that top 10%, vs. 4% to 5% in
Western Europe and the U.S.
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Housing Supply
� 8.7% of all households are on a waiting list for improved living conditions. Their homes
have been classed as unlivable and are intended for demolition. Meanwhile,
householders wait to be transferred into new, modern homes provided by the
Government. Over the last year only 230,000 households (5.2% of the waiting list) have
had their living conditions improved. At such a rate, it will take 20 years to get through
the waiting list.
There is about 2.85 billion m2 of housing stock in the Russian Federation.
The average dwelling space per inhabitant about 20 m²
About 27% of housing stock is in rural areas
About 73% of
housing is in
urban areas
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Quality of Existing Housing
� About 60 % of all housing has been constructed
before 1960
� About 20% of homes in cities are without
running water, waste disposal, etc.
� Approx.150,000 residences become
uninhabitable every year due to municipal
Government failing to maintain building due to
lack of funds
� 87.8 million m2 (3.2% of the total volume) of
homes in 2005 were deemed to be in a rundown
and/or damaged state, compared to 37.7 million
(1.4 %) in 1995
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Funding the Buying of a New Home
Financial funds for property purchase
32%
22%18%
17%
11%
Their own funds
Mortgage loan
Sell existing apartment
Financial aid from relatives,
friends, etcConsumer creditConsumer credit
The share of consumers intending to buy their own home is increasing because:
� Consumers are finding themselves with more spare cash
� The reduction in the proportion of speculative capital on the market
� An investment in property is still considered safer than other kinds of investment
Residential property prices growing at a much slower rate than the commercial sector
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 53
Between January and September 2007 the average price of construction materials
particularly (especially cement) grew by 21.94%. The construction prime cost growth has
reached 24.14%.
The price growth of the primary housing market has reached 12.2% on average. The
Russian Association of builders (RAB) comment:
Growth in Construction Prices
“Due to high construction prices in
big cities the cheaper, lower-quality panel housing is
moving into the suburbs, while in big cities business and
premium class housing increases are being built.
Premium housing today is the most profitable sector for
developers and attractive in quality to wealthy residents
of the cities.”
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 54
During the third quarter of 2007 the total volume of new elite buildings available in central
Moscow comprised of more than 163 000 sq. m., worth around $2.6 billion.
Elite Residential Real Estate
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Elite Property Pricing Forecast
Although the rate of price increase slowed during the third quarter of 2007, the average
price per square meter in the elite city real estate market rose by 10-12% since the
beginning of the year. According to Mayfair Properties experts, by the end of 2007 the
cost of the real estate will have increased by 14-16%.
No market stagnation is expected.
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Housing Laws and Programmes
� The Fundamentals of Federal Housing Policy, December 1992
� The federal targeted programmes “Dwelling for 2002-2010” and its two subprograms
� on reforming and upgrading housing and utilities
� on relocating residents from slums and derelict dwellings
� The New Housing Code (2005) + 27 new Federal laws
� The National Housing Project, “Affordable and Comfortable Housing for Russian Citizens”, focusing mainly on:
� Doubling the housing market
� Developing the mortgage market by government-financed programs and mortgage insurance
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In the pipeline: “Affordable Housing” prospects
� Housing construction is projected to double
from 40 million square meters in 2004 to 80
million square meters by 2010
� Mortgages are expected to increase 20-fold from
46,000 mortgages in 2004 to 1 million in 2010
� Loans will be more available for Russians (in
2010, the interest rate on mortgage loans is to be
lowered from the current 15% to 8%)
� The waiting list for state housing will drop from
twenty to seven years
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Housing’s Future in Russia
Opinions differ over the future of the Russian market, however, there is agreement over
a few core features:
� In 2008 the Russian housing market will grow probably by 1-1.5% per month or 12-
18% over the whole year. Costs for primary properties will exceed inflation level
and will increase by about 15-18% over the year. Secondary market development
will depend on the offers available in the market.
� With the development of regional property markets, the Moscow market is expected
to even out due in respect to the rest of the country, and, as a consequence of the
unsold existing properties, prices should cool down
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The Housing Debate
Since the beginning of 2007, the Government has been insisting that the resident-owners of the flats must choose what system of management they want for their buildings:
� Model 1: create a Home-Owners’ Association as management company
� Model 2. Invite a management company (municipal or private)
� Model 3. Each resident to have personal contracts with maintenance and utilities companies
Russian residents say:
“Housing reforms greatly increase
rents with no tangible benefits or
solutions to the problems of housing
shortage, overcrowding, poor facilities
and disrepair”
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PART TWO: The State
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The EconomyBy Mikhail Kouriatchev
Mikhail Kouriatchev is Chairman of Mmd in Eurasia
and runs our Government relations practice. He is
advisor to the President of the Russian Association of
Regional Banks and the financial institutions committee
of the State Duma
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World Bank’s Assessment of the Russian Economy:
� Robust growth supported by high energy prices, large capital inflows, rising domestic demand and prudent macroeconomic management.
� Having grown by 7.9 % in 1H-2007, Russia is likely to post full year GDP growth of over 7 %
� The aggregated fixed capital investment grew by 21.2 % in 1st 9M of 2007
� Sectors servicing domestic demand continued to boom in 2007: construction – 23.5% and retail trade – 15 %
� Manufacturing also grew at healthy 10% in 1st 9M of 2007
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Nevertheless…
� Inflation is rising, driven by food prices and monetary factors
� Inflation will have increased to 9.3% over 10M-2007
� Most likely, end-of-year inflation will reach 11%. Keeping inflation in check is
becoming increasingly difficult with large capital inflows
� Domestic and foreign investment went to few sectors: resources, metal and food
� While still strong, manufacturing growth is decelerating.
� Growth might slow down if the challenges are not addressed: control inflation, limit
rapid real exchange rate appreciation, sustain productivity growth, promote economic
diversification, boost private investment, shrinking and rapid aging population.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 64
Although…
� Stabilization Fund is $140 bn
� Central Bank reserves of $420 bn
� Budget surplus of 4%
� Total debt is 8% of GDP
� Government is planning one trillion dollars investment into infrastructure projects,
including preparation of the Olympics-2014.
� Russia is already the 6th largest economy of the world, and as Economist Intelligence
Unit puts it – the most macro-economically stable country in Europe.
For so long as hydrocarbon prices stay high – really, in the case of oil, north of $40/barrel
– Russia’s economy will continue to enjoy robust real growth. The challenge now for the
Government is to use this financial windfall to achieve social reforms, raising people out
of poverty and to invest in infrastructure and economic diversification. Achieve that and
the period 2000-2020 will be one historic achievement.
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Oil and GasBy Vladimir Melnikov
Vladimir Melnikov is Head of Consulting at Mmd. He
specialises in strategic consultancy in Government
Relations and investor communications. His clients have
included GE Money, Rosneft, Telenor, System Capital
Management (Ukraine), TMK and several Russian
electricity firms.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 66Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved
World
ProducedReserves
Source: IHS Energy
North America
358 bln. bbl.
Latin America
197 bln. bbl.
Asia-Pacific Region
131 bln. bbl.Middle East
810 bln. bbl.Africa
190 bln. bbl.
Russia
263 bln. bbl.
Global Initial Recoverable Oil
Reserves: 2102 bln. bbl.
Most regions in the world have either passed or are reaching peak production
The Middle East, Russia and Africa have produced less than half of their reserves
Europe
80 bln. bbl.
80%
46
%
52
%
43%
65%
31%
41%
57%
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 67Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved
Source: BP, EIA, 2006
Russia will increase its oil export potential by 2020
Middle East71
69
85
41
2005 2020
North America
53009965
2005 2020
Imports of Oil and Refined Products, MMbbl.
Exports of Oil and Refined Products MMbbl.
Europe
4782 5767
2005 2020
Russia
2482
2774
2005 2020
Africa
25552738
2005 2020Latin
America
2015 2117
2005 2020
Asia-
Pacific
Region6789
1291
2005 2020
67
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 68
68
Growth of Oil Production
Millions of tonnes $ per barrel
The growth of oil production [red] is still
being recuperated to a level of 1987.
Although there is an apparent correlation of
the growth of production with the growth of
oil prices [black] this is more due to growth
in taxes and the factual correlation is weak
A current depletion of the oil [black] and gas
[red] resources mean that far more efficient
cost management and more investment in
exploration and new production is necessary if
Russia wants not only to grow but even to
maintain its current level of production.
%
Sources: BP, Russian Statistics Bureau
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 69
69
� Relatively “disappointing” Russia oil production growth, yet strong cost increases,
have thrown a spot-light on the efficacy of the Russian oil sector
� For a qualitative increase in cost effectiveness, significant investments are needed in
innovation and technologies which Russian oil companies are struggling to get
despite high oil prices
� Falling production and effectiveness indicators of Gazprom suggested that the
Russian state hydrocarbon sector is still to meet the production effectiveness of
Western firms
� The general trend continues:
� Rosneft becoming “super major” oil firm”
� Luxoil: the global oil firm that just happens to be Russian
Sources: Ministry of Natural Resources, Russian Statistics Bureau, Neftegazovaya Vertikal and Expert
Cost Effectiveness
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 70Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved
Russian Oil Sector does not Benefit from High Oil Price
0
50
100
150
200
250
300
350
400
450
500
2002 2003 2004 2005 2006
0,00%
10,00%
20,00%
30,00%
40,00%
50,00%
60,00%
70,00%
80,00%
90,00%
Oil price
Oil price minus NDPI tax and export duty
Tax burden on profit for a “model company”
Tax burden on revenue for a “model company”
Sources: Development Center, 2005, Lukoil Analyst Handbook, 2007
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2006 Comparison of Tax Expenses per Barrel
0,9 3,1 3,47,5
12,88,1 8
2,6
31,5 28,9 27,1
8,62,9
4,8 3
5,6
0
5
10
15
20
25
30
35
Ros
neft
Tatn
eft
Luko
il
Pet
roChi
na
KM
G E
P
PTT
EP
Apa
che
Dev
on
Corporate Income tax Other taxes
Source: KazMunaiGaz 2007
Taxes per bbl produced
USD/bblHigh hydrocarbon
taxes stymie
production growth
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Dr. Robert Skinner, Oxford Energy Institute ( UK)
“Taxes continue to exert downward pressure on Russian oil production”
Clingendael Institute (NL)
“As the cheaper oil fields are depleting in Russia, oil companies have to focus on more
remote and challenging oil fields, which obviously will increase their production costs. The
current tax regime combined with the cost increase (E & P and transportation) renders the
development of new (more) expensive oil fields unprofitable”.
Neil Duffin, President of ExxonMobil Development Company
“…the existing fiscal regime is apt for traditional regions, like West Siberia, with close
proximity to production, transportation and civil infrastructure. Unfortunately, this fiscal
regime is not well-suited to large, remote resources requiring long lead times”.
Konstantin Cherepanov, KIT Finans
“The present tax regime helps to carry out some social and political projects, and there may
be no shortage of companies willing to work in Russia, given the current high oil prices, but
it is a real possibility that this heavy tax burden may cause a shortage of funding for
development”.
The “Production Drag” effect of Russian Taxes
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� As President Vladimir Putin said in mid-December 2007, he is not going to change
the taх regime for oil companies. Moreover, he indicated that the tax pressure on oil
companies might be increased to replenish the Stabilisation Fund which will be
partly used for financing increase in state pensions and innovation development
across Russian industries.
� Maintained/growing tax pressure will necessitate even more stringent focus on
raising cost effectiveness in the industry which will be the biggest challenge for
Russian oil companies in 2008
Tax Regime 2008 will Remain Intact if not Tightened
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The Political Year AheadBy Vladimir Melnikov
Vladimir Melnikov is Head of Consulting at Mmd. He
specialises in strategic consultancy in Government
Relations and investor communications. His clients have
included GE Money, Rosneft, Telenor, System Capital
Management (Ukraine), TMK and several Russian
electricity firms.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 75Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved
PUTIN’S DILEMMA BEYOND 2008 (I)
In building up a power system with checks and balances, Vladimir Putin is actively
following through a plan which he does not share – in its entirety – even with those who
are talked about as Putin’s Team.
Putin evidently cares for his baby – the new power system – even more, it seems, than for
his place within that system.
Having depoliticized the Russian business elite and atomized the political elite, Putin is
enjoying the suprapower of intra-elite arbitration.
Will he be able to keep up the game beyond 2008?
It’s a horrendous task to manage. Russian realities will demand from the new president,
Dmitry Medvedev, a demonstration not only of his political power but also of the ability
to, even to a limited extent, re-distribute property. If this function remains controlled by
Putin and the new state capitalists (Yakunin, Chemezov, Koval’chuk and others), the elites
will begin to shift and consolidate around not only Putin, but around those who will be
seen in charge of distributing resources (on behalf of Putin). These resource distributors
will inevitably be creating their own verticals of loyalty.
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PUTIN’S DILEMMA BEYOND 2008 (II)
The fundamental question is, therefore, whether Vladimir Putin will transfer the right
of property re-distribution to the new president.
If this right remains solely in Putin’s hands, the new team / the new president will be
lacking authority in Russia, first of all in the eyes of major business elites, who may
become active in “privatising” the new president, and other branches of executive power.
We may also see some situational consolidation of those politicians who have been ‘used’
by Putin in his perpetual political game and now left aside with a firm decision to begin,
discreetly, playing their own games.
For private businesses, especially big Western firms, this will all mean a more
complicated power structure necessitating a more weighed and carefully analyzed
approach to dealing with state structures and government or regulatory bodies. The
Government sector in Russia, despite the outward ‘stability’, is actually going to become
more complicated in 2008; and certainly beyond then.
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EVOLUTION OF ‘CONTINUITY’ CONCEPT
1999-2000
1.Non-public political competition of
elites resulting, through a bargaining
process, in agreeing to a compromise
successor (Putin) prior to the elections
2.Putin’s skilful use of PM’s
administrative resource with his direct
appeal to Russian population and results
of the Parliamentary elections in 1999*
predetermined the choice of the
successor in 2000.
3.The defeated oligarchs and politicians
who used to have their own candidates
for presidency were allowed to fully
integrate into the new power system.
*Primakov-Luzhkov’s party was defeated by Edinstvo (pre-runner for Edinaya Rossia)
2007-2008
1.Coalitions of business and regional
elites do not have political representation
any longer. During 7 years in power Putin
has consistently been stripping oligarchs
of political aspirations allowing
depoliticized business elites only
2.Resorting directly to the electorate
allowed Putin to have a constitutional
majority in the parliament providing him
with unlimited room for political
maneuver.
3.The greatest Putin’s dilemma will be
not a transfer of political power but, with
time, a transfer of the right for
redistribution of property to his “heir”.
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MAJOR RISKS BEYOND 2008
� To those businessmen grown out of the 1990s (Deripaska, Usmanov, Mordashev and
others), the level of monopolisation of assets by the new state capitalists (Chemezov,
Kovalchuk, Yakunin and others, may no longer be agreeable.
� Coupling the growing dissatisfaction of politicians close to Putin with his plan
constantly putting them under pressure, we can see signs of great shifts in property
distribution and intensification of the struggle between different political and
business clans already in 2008-2009.
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Grown Out of 1990s
� Tamed oligarchs (Deripaska,
Vekselberg, Usmanov and
others)
� Self-made businessmen
originally loyal to Putin, like
Mordashev
� Regional business groups
(Luzhkov’s Group,
Shaimiv’s TAIF and others)
New State Capitalists
� Chemezov’s Group
� Yakunin’s Group
� “Rossia” (Kovalchuks family
and others)
� Kogan Group
� Gazprom Group
RUSSIA’S BUSINESS ELITES
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EducationBy Arseniy Rastorguev
Aresniy Rastorguev is a senior analyst in the ESG. He
specialises in Public Affairs and New Media and his clients
include Google. Earlier in his career he was Secretary to a
Government-backed think-tank reviewing Higher
Education in Russia
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Education Snapshot (1)
� A process of concentrating resources in ‘Federal Universities’ is underway. So far two
Federal Universities have been set up with RUR 6 billion allocated this year:
� Southern – in Rostov-on-Don
� Siberian – in Krasnoyarsk
RUR 13.4 billion to be allocated for new Federal Universities until 2009
Federal Universities are meant to serve as education and research centres, not mere
training facilities as the average university in Russia has come to be
� At least 65% of school leavers go to university the year they graduate (only 25% did in
1985). The Ministry of education believes that 30% would be far more adequate to
actual market needs (which makes the Ministry a target for hatred for those followers
of ‘The Most Educated Country in the World’ motto). For male undergraduates, of
uncertain academic ability, university is still the easier “hedge against conscription”.
Source: Monitoring of Education Sector Economy by the Higher School of Economics
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Education Snapshot (2)
� The Government is trying to reanimate the vocational education sector, which
currently (a) is seen as a kind of drop-out option, that rather keeps kids off the street
than gives them professional training, and (b) very poorly reflects the needs of the
current market in terms of which skills it is teaching for what industries (the service
industry, for example, is very underrepresented)
� 2/3 of Russians receive their tertiary education in the region where they live. Because
of high cost of life in large cities and small scholarships, higher education is still quite
weak as a ‘horizontal social mixer’.
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Education – Who pays?
� Federal budget spending on education is planned to be more than RUR 300 billion in
2008 (11% up from 2007) and is expected to grow further in the following years (this
does not include regional budgets spending)
� Prices for education in Russian universities are getting close to domestic prices for
education in the UK or Germany – with the average of $700 per term. But fees in
world-leading institutions such as MGIMO (the foreign affairs university), the Higher
School for Economics or Moscow State University reach $5,000-6,000
� ‘Commercial’ tertiary education has grown almost 50% in price since 2003 in
Moscow.
� At the stage of entering a university 22% of spending goes to ‘private persons’
services and 41% - to bribes and other illegal payments in Moscow (20% and 21%
outside Moscow). While a Moscow student is in a university (budget sponsored seat)
his parents spend 26% on bribes and illegal payments (9% in regions).
Source: Monitoring of Education, Economy, HSE
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 84
Spending on Education
17100
7800
20700
960014800
122008900 9700
52700
37800
0
10000
20000
30000
40000
50000
60000
Pre-school School Entering
university
Studying in
University
('budget-
sponsored')
Studying in
University
('commercial')Moscow Russia
Family annual spending on education (RUR)
� Muscovites spend 2% of
their income on education
(same as in London or
Hong Kong, close to New
York’s 3%, well above
Berlin’s 0.5% but behind
Tokyo’s 5%).
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 85
Russian DemographyBy Alexey Cherny
Alexey Cherny is a senior analyst in the ESG. He specialises
in financial, technology and healthcare communications
consulting and his clients include Saxo Bank, Google, Camco
International, Business Software Alliance.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 86
Demographic Collapse – The Traditional View
Population, decreasing by a
million a year after 2010
� 2007 – 143 million
� 2040 – <100 million
� Huge drop in birth rate following
collapse of USSR
� Male life expectancy, <60 years, at third
world levels.
� World’s highest suicide rates in males
between 18-30: conscription issues
� Infant mortality increased over the last
15 years.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 87
Population Forecasts – A New View
The most extreme forecasts about the
Russian demographic situation
(“Russia is facing demographic
catastrophe – there will only be 75
million people by 2050” or “Russia’s
thriving, they’ll be 200 million in
Russia by 2050”), tend to be political
rather than statistical. The
demographic situation in Russia did
look bleak after the collapse of the
USSR, but now there is a tendency
for improvement
The UN forecasts that by 2020 the Russian population will decrease to 133 million. The
Russian Ministry on Economiс Develoment and Trade states that the Russian population
will be between 138 and 139 million by that time
TajikistanUzbekistanTurkmenistanKyrgyzstanAzerbaijanMoldaviaKazakhstanArmeniaGeorgiaLatviaEstoniaRussiaByelorussiaLatviaUkraine
Average annual population growth, 1980-2000
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 88
Demographics: The Good and The Bad
Pros
� Male life expectancy has increased
from 58.5 to almost 60.3 between
2003 to 2006
� Russians have become healthier and
live longer, thanks to the decrease in
deaths caused by heart problems and
external causes such as accidents,
crime, etc
� The infant mortality rate has decreased
from 17 in 1999 to 10.8 in 2006
(which is relatively close to the UK
rate in 1983 level, Denmark in 1975
and Poland and Estonia 1997)
Cons
� Russia has the world’s highest suicide
rates in males between 18-30 because of
conscription issues
� Russia is following the overall European
trend and is becoming older. For every
1000 of the working population, in 2005,
there were 591 pensioners/children. By
2020 there will be 785
pensioners/children, with the share of
45plus year olds increasing and the
number of people 29 and less decreasing
� The lowest forecast of the Russian
birthrate is 1.35 by 2050, the same level
of 2006 – which is insufficient for a stable
population
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Modern Healthcare: A Priority National Project
In charge: Ministry of Healthcare and Social
Development, Tatiana Golikova
Key areas: Improve the health of Russia’s population
Make healthcare more accessible
Increase preventative healthcare
Implement modern technologies
Budget: approx. RUR 121 bil. (EURO 3.5 bil.) in 2007
� Restructuring to shift focus from inpatient to outpatient care
� More proactive approach to preventive activities, such as vaccination and regular
medical check-ups
� Major technical upgrade of the healthcare network across the country making the most
modern diagnostic procedures and equipment available to all citizens
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 90
OlympicsBy Irina Proskurnya
Irina Proskurnya is Account Manager for the Lifestyle &
Consumer Affairs team of the PR division. She specializes
in consumer luxury, real estate and retail and her clients
include IFA Hotels & Resorts, SAGA Furs and the
Economist Conferences, Baileys, Visa.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 91
Sochi 2014
� Winning the Games provoked an outbreak of patriotism and national pride among
Russians. According to ROMIR monitoring, 80% of Russians perceived the news
very positively.
� Russian environmentalists raised concerns that Olympic constructions will damage
conservation areas of high value. This prompted several legal proceedings, the result
of which will be a visit from the UNESCO Commitee in Spring 2008 that will
evaluate the harm the Olympics will have on the area.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 92
Sochi 2014: Investments Structure
Federal Target Program
State Corporation
‘Olympstroi’
(headed by Semyon Vainshtok)
Regional Government Private Investments
Winter Olympics 2014 Budget: RUR 327.2 bn ($ 13,47 bn)
37%58 % 5 %
� $580 m telecommunications
� $3.2 bn power infrastructure
�generation $1.3 bn
�distribution $1.9 bn
� $4.7 bn transportation infrastructure
� Subsidies of sports and tourism will absorb much
of the balance of $4.9 bn
� an undisclosed about will be spent on security
Non-state sector funding expected as
follows:
� Tourist infrastructure $2.6bn
� Olympic venues $500m
� Transportation $270m
� Power infrastructure $100m
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 93
Sochi 2014: Federation Island
A breathtakingly ambitious artificial ‘Federation Island’ will be built off the Black Sea coast. The island, a miniature archipelago in the shape of the Russia map, will offer luxury housing, shopping and relaxation for up to 30, 000 people. The construction will start in 2008. The total cost of the project is $ 6,2 billion.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 94
Appendix 1:
Top Tips for Western firms looking to do PR in
Russia
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 95
Russian PR Tips
� Act local and present a senior Russian face: Global companies who want to create the
right impression in Russia should appoint a senior-level, Russian language spokesperson
who is capable of discussing local issues and trends in a detailed and meaningful
way. This job should not fall to your marketing or communications manager but should
be the responsibility of a credible decision-maker in the top management
category. Research; financial results and service or product information used in your PR
programme needs to have Russia-specific references and direct relevance to Russia.
Don’t rely on global press releases to do the job.
Ursula Colgan is Vice President of Russian public relations services; her
division provides PR consultancy and services to western firms in Russia
in the technology, lifestyle and consumer, healthcare and corporate PR
fields. Before her Russian posting with Mmd, she was EMEA PR
Manager for a US Fortune 500 corporate giant, coordinating PR across
14 European countries. Here she tells us some top tips she has learned
about doing PR in Russia.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 96
� Build media loyalty: Large companies occasionally take an arrogant approach to
dealing with Russian journalists – just because you are a Fortune 500 company that has
earmarked Russia for its next investment, doesn’t mean that you will automatically
make front page of Vedomosti. Russian journalists are spoiled for news and you are not
the only one knocking on Russia’s door. The key to success is ongoing informal
relationship building with your target media and clear and timely communication when
it comes to hard news.
� To advertise or not to advertise: Editorial sections of the Russian media are still
heavily influenced by advertising and advertorial – this mechanism is extremely
prevalent within the consumer, lifestyle and trade media. Business and technology
media, however, now operate on a fairly normalized basis. Businesses who use
advertorial as an easy route to positive coverage can find themselves stuck with the
reputation of a company who pays. This is a difficult reputation to reverse and strong
reliance on advertorial will be costly and counterproductive for your business over
time. Western-style PR, creating and shaping news based on strength of content or
creative approach, can work equally well in large parts of the Russian media landscape.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 97
� Millionaire cities: Moscow is no longer your sole target in terms of media
outreach. Most companies are waking up to the business activity and consumer
spending power in the top 10 Russian regional cities with populations over one million
inhabitants: St Petersburg; Ekaterinburg; Novosibirsk; Nizhny Novgorod; Samara;
Kazan; Rostov; Ufa, Chelyabinsk and Omsk. These cities should not be ignored as
they could form a critical part of your PR outreach, as they may your medium-to-long
term business plan.
� Logistics of PR – inside and outside Russia
� Visas: Press trips taking Russian journalists outside of Russia should be planned at
least two months in advance in order to secure necessary paperwork and visas for
traveling journalists – processes can be cumbersome. Equally, getting your visas
to visit Russia is now less easy than it was (especially for US and UK citizens).
� Weather: The Russian climate can be harsh for five months of the year – take
weather conditions into consideration if you plan a road-show or media trip inside
Russia, or even that ‘outside photo-opportunity’. But don’t forget western Russia
has hot, delightful summers too!
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 98
� Geography: Russia is a giant country with 11 different time-zones – PR activity
spanning different parts of the country needs to be timed accordingly – a press trip
to a Moscow HQ from London, then on to an eastern Siberian oilfield and back to
London, is going to take you a minimum of five days!
� Be flexible: Russian journalists are usually scruffy, have an elastic understanding of
the concept of time and are not over-burdened with self discipline. Be prepared for
this and don’t let it make you angry. Remember also, that they are fiercely bright; but
also bright in a way different from western journalists. Russian journalists like ‘the bits
and the bytes’ and are masters of technical detail; they are less focused on ‘big picture’
global change. This can mean your global dialogue is something ‘the more you say the
less they hear’. Mentally, build your messaging ‘from the tiny facts up’; rather than
‘Big Vision, drilled down’, otherwise you’ll find you’ll not land the story you
want. Anglo-Saxon clients find this more challenging than, say, Asian clients, whose
thought patterns are more closely aligned to Russians.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 99
For this reason, sorry!, but only marketing journalists want to talk to marketing people:
even if it is your global head of marketing, you’ll struggle to find a business hack who
will give him or her the time of day, let alone an interview.
� Russia is an expensive PR market: Regional PR departments often lump Russia
together with lower-cost PR markets including Ukraine, Poland, Czech Republic and
Southern Europe: PR programmes in Russia can suffer because of this. Running a good
PR programme in Russia costs almost the same as it does in mature Western European
markets such as France, Germany and the UK and when planning your PR outreach
here, it is important to budget appropriately. The most extreme costs come with
working with consumer and lifestyle media, who are used to free gifts and lavish parties
in Moscow’s elitny clubs and restaurants. Typically, B2C clients finding success in
Russia, find it to be their most budget-intensive market now in all of Europe. You will
need to spend creatively to impress them.
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 100
Appendix 2: About Mmd
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 101
Mmd Network
�Mmd Austria
�Mmd Bosnia
�Mmd Bulgaria
�Mmd Croatia
�Mmd Czech Republic
�Mmd Estonia
�Mmd Hungary
�Mmd Kazakhstan
�Mmd Latvia
�Mmd Lithuania
�Mmd Poland
�Mmd Romania
�Mmd Russia
�Mmd Serbia
�Mmd Slovak Republic
�Mmd Slovenia
�Mmd Turkey
�Mmd Ukraine� 20 offices, 18 countries
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Government Relations
Public Affairs & CSR
PUBLIC
RELATIONS
DIVISION
EURASIA
STRATEGIES
GROUP
Our Services in Russia
Financial PR
Investor Relations
Western Clients Eurasian Clients
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 103
� Eurasia Strategies Group:
‘C-level’ strategic consulting in:
� public affairs
� financial PR
� investor relations; including IPOs and M&A PR
� PR Division:
� Corporate & Business Media Relations
� Telecoms & Technology PR
� Consumer & Lifestyle PR
The Moscow Office
Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 104
Contact Details
Mmd Corporate, Public Affairs &
Public Relations Consultants, Eurasia
1st Kozhevnichesky Lane 6, Bld.6,
115114 Moscow, Russia
www.mmdcee.com
Stephen Lock
Regional Director, Eurasia, & President of the Eurasia Strategies Group
Tel: + 7 495 788-67-84
Fax: + 7 495 788-67-85
Email: [email protected]