INSIGHTS IDEAS RESULTS Crisis 3.0 October 22 nd 2014.

I N S I G H T S • I D E A S • R E S U LT S

Crisis 3.0

October 22nd 2014

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

GDP per Capita (Current $)

Source: World Bank

Russian GDP

+1.6%

-1.7%

-9.7%

-5.4%

-9.1%

+0.2%

-1.0%

+3.5%

-33.0%

-27.5%

+33.1%

+18.6%

+13.0%

+25.3%

+38.1%

+29.9%

+30.1%

+31.6%

+27.9%

-26.4%

+24.3%

+24.4%

+3.7%

+5.8%

• GDP per Capita in 1999 was 51% below 1997 levels.

• GDP per Capita in 2009 was 26% below 2010 levels.

• GDP per capita at the lowest point of Crisis 2.0 (2009) was 6.5 times higher than during the depths of Crisis 1.0 (1999).

• In 2013 GDP per capita was 11 times higher than during the depths of Crisis 1.0 (1999).

Crisis 1.0

Crisis 2.0

Crisis 1.0• Declining productivity, an artificially high fixed exchange

rate between the ruble and foreign currencies, and a chronic fiscal deficit were the reasons that led to the crisis.The cost of the first war in Chechnya also contributed.

• Two external shocks, the Asian financial crisis that had begun in 1997 and declines in demand for crude oil and nonferrous metals, hit Russian foreign exchange reserves.

• On 29 July, the Duma refused the crisis program and the government was forced to rule via Presidential decrees. Yeltsin replaced FSB Chief Nikolay Kovalyov with Vladimir Putin.

• By 1 August 1998 there was approximately $12.5 billion in debt owed to Russian workers.

• On 14 August 1998 the exchange rate of the Russian ruble to the US dollar was still 6.29.

• On 17 August 1998, the Russian government devalued the ruble, defaulted on domestic debt, and declared a moratorium on payment to foreign creditors.

• Russian inflation in 1998 reached 84 percent and welfare costs grew considerably. Many banks were closed down as a result of the crisis.

• $5 billion of World Bank and IMF aid was estimated to have been stolen. The Russian Federation was reckoned by the IMF to have been collecting only a tiny proportion of its tax receipts. Nonetheless, in early 1999 the Duma increased income tax to 45%.

• It was devastating.

Crisis 2.0• The first global financial crisis since 1929.

• The U.S. Senate's Levin–Coburn Report concluded that thecrisis was the result of "high risk, complex financialproducts; undisclosed conflicts of interest; the failure ofregulators, the credit rating agencies, and the marketitself to rein in the excesses of Wall Street."

• Largely caused by the US financial services industry – and other developed economies.

• Effects were felt by all economies.

• It was (and remains) difficult.

Crisis 3.0?• IMF predicting only 0.2% economic growth for Russia in 2014.

• Oil prices have fallen by $10+ a barrel in the last month.

• Inflation in September at the highest level for 3 years.

• Capital flight in 2014 likely to exceed $100 billion.

• Ruble has lost 20% of value versus $ since the beginning of the year.

• Huge state bailouts are needed by Russian companies who are denied access to western capital by sanctions.

• Sanctions may be damaging the German economy – further reducing demand for Russian energy products.

• Unlike 1998/9, the Russian economy has run a surplus for the last 14 years.

• Unlike 1998/9, GDP per capita in Russia starts from a much higher base.

• Crisis 3.0 is likely to happen and is unpredictable but will probably be more like 2009 than 1998/9.

• The future of sanctions is unpredictable, based on political decisions.

BUT

BUT

Two Questions• What will happen to different Russian markets segments during the forthcoming

crisis?

• What will happen to demand – and pricing – for advertising time and space?

• Investigate what DID happen in 2009

• Monitor consumer attitudes during crisis period

• N=550, pre-existing internet panel

• 4 waves

SO

March2009

April2009

May2009

September2009

Growing overall optimism during the period

Crisis just started. Worse

times are ahead

We are at the height of the cri-sis and it will not

get worse

Crisis has been overcome and

economic situa-tion has started to

improve

0% 10% 20% 30% 40% 50% 60% 70% 80%

66%

0

0

57%

26%

17%

44%

31%

26%

37%

34%

29% Sept 09

May 09

April 09

March 09

1.Q: What is your opinion on the level of crisis in the Russian economy?

Level of optimism about Russian economy among population continued to grow into September:

People who thought the worst was already over continued increasing and reached 63%

• +6% vs May and +29% vs March

Share of “true” optimists who were confident that the crisis had finished more than doubled between March and September to approach 30%

It resulted from the ruble continuing to strengthen together with oil price rises and dollar weakness

%

Target group: all 18-45 y.o.; Field work: March’09, April’09, May’09, Sept’09

Data source: OMD Snapshot, 550, on-line, Moscow

But still there was a high level of uncertainty

19%

27%

7%

24%

23%

0% 5% 10% 15% 20% 25% 30%

it will happen at theend of 2009

It will happen in thebeginning of 2010

It will be at the endof 2010

2nd wave will nothappen

Hard to answer 1.Q: What is your opinion on the 2nd wave of the crisis in Russia?

There was a high level of uncertainty regarding the likelihood of a 2nd wave of the crisis:Around half of respondents thought that it would happen in autumn 2009 (19%) or at the beginning of 2010 (27%)

But almost a quarter of people were confident that there would be no 2nd wave

Among people confident that crisis was over, more than half were sure that there would be no 2nd wave.

And vice versa, among people thinking that worse times were still ahead, about 70% were expecting a 2nd wave of the crisis in the near future

Target group: all 18-45 y.o.; Field work: Sept’09

Data source: OMD Snapshot, 550, on-line, Moscow

Crisis just started

We are in the height of the crisis

Crisis has been overcome

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

27%

22%

4%

45%

22%

10%

11%

8%

3%

3%

22%

53%

15%

27%

29%

it will happen at the end of 2009 It will happen in the beginning of 2010

It will be at the end of 2010 2nd wave will not happen

Hard to answer

More confident in their financial future

Confidence in their financial future also continued to grow in September, correlated with increases in overall optimism

The number of people who expected an improvement in their financial status increased to over 40% by SeptemberRespectively “pessimists”, people who expect worsening of their financial status, reduced to 24%

Mar 09

April 09

May 09

Sept 09

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

5%

6%

6%

10%

21%

23%

24%

32%

29%

34%

33%

35%

38%

33%

30%

22%

8%

4%

7%

2%

Q: Please, evaluate your expectations of your financial situation in 2009

Significantly improve Slightly improve Do not changewill be slightly worse Significantly worse

Data source: OMD Snapshot, 550, on-line, Moscow

Target group: all 18-45 y.o.; Field work: March’09, April’09, May’09, Sept’09

How did this growth of optimism affect expenditure patterns and

purchase behavior?

Russians were very careful with their expenditure

14

2

14

7

3

11

28

7

44

5

14

32

6

6

21

7

14

51

5

47

4

30

32

45

51

0 5 10 15 20 25 30 35 40 45 50 55

I try to spent moneymore carefully

I try to spent allmoney to avoid

devaluation

I try to invest money,to gain more

Nothing changed

n/a

%

Sept 09

May 09

April 09

Mar 09

Nov 08

1.Q: How does the financial crisis in Russia influence your attitude to money?

Spending money more carefully stayed high at 44%, twice the pre-crisis level in November 2008

There were few changes in attitudes to expenditure by September compared to spring

Data source: OMD Snapshot, 550, on-line, Moscow

Target group: all 18-45 y.o.; Field work: March’09, April’09, May’09, Sept’09

Prices increases were the biggest crisis issue

Price increases

Salary reduction

Difficulty in finding a new job

Reduction of bonuses

Delay of salary payment

Sales decrease in the company where I work

Firing

Problems with credit payments

Reduction of social package

Difficulty to obtain credit

Unpaid holidays

0% 20% 40% 60% 80% 100%

1

0

0

0

0

0

0

0

0

0

Sept 09

May 09

April 09

Mar 09

People were gradually adapting to the crisis:

Prices increases were the most widespread problem though there was some reduction over time.

All other issues did not demonstrate significant changes.

Data source: OMD Snapshot, 550, on-line, Moscow

Target group: all 18-45 y.o.; Field work: March’09, April’09, May’09, Sept’09

Question: Which negative crisis consequences have you or members of your family faced lately?

First signs of recovery: reduction of delay of purchase across almost all categories

0%

20%

40%

60%

80%

100%

Gro

ceri

es

(a)

So

ft D

rin

ks (

b)

Ho

use

ho

ld p

rod

uct

s (a

)

Co

sme

tics

an

d h

ygie

ne

(a

)

Alc

oh

olic

be

vera

ge

s &

Fa

st F

oo

d r

est

au

ran

ts (

c)

Pe

rfu

me

ry &

ma

ke-u

p (

c)

Clo

thin

g/S

ho

es/

Acc

ess

ori

e

Sa

telli

te T

V s

ub

scri

ptio

n

Sp

ort

ing

go

od

s (c

)

Co

mp

ute

rs/A

cce

sso

rie

s

Fin

an

ce &

In

sura

nce

(d

)

Ho

me

ap

plie

nce

s (d

)

Sit

do

wn

re

sta

ura

nts

Tra

vel/T

ou

rism

(e

)

Jew

elr

y (e

)

Ho

me

fu

rnis

hin

g (

d)

Au

tom

ob

iles

(d)

I am purchasing less expensive brands I am purchasing less

I purchase only the most necessary things I am waiting to purchase

Nothing changed in my purchase behaviour Nothing changed: do not buy

(a) – Low Involvement / Essential Goods(b) - Low Involvement / Feel Good(c) - Mid-level product categories(d) High Involvement / Long-Term Necessities(e) High Involvement LuxuriesData source: OMD Snapshot, 550, on-line, Moscow

Target group: all 18-45 y.o.; Field work: November 08, March’09, May 09, Sept’09

Purchase habits changed by category

0%

20%

40%

60%

80%

100%

Gro

cerie

s (a

)

Sof

t D

rinks

(b)

Hou

seho

ld p

rodu

cts

(a)

Fin

ance

& I

nsur

ance

(d)

Alc

ohol

ic b

ever

ages

& b

eer

(b)

Cos

met

ics

and

hygi

ene

(a)

Per

fum

ery

& m

ake-

up (

c)

Fas

t F

ood

rest

aura

nts

(c)

Clo

thin

g/S

hoes

/Acc

esso

ries

(c)

Tra

vel/T

ouris

m (

e)

Spo

rtin

g go

ods

(c)

Com

pute

rs/A

cces

sorie

s (d

)

Hom

e ap

plie

nces

(d)

Sit

dow

n re

stau

rant

s

Jew

elry

(e)

Hom

e fu

rnis

hing

(d)

Aut

omob

iles

(d)

I am purchasing less expensive brands I am purchasing less

I purchase only the most necessary things I am waiting to purchase

Nothing changed in my purchase behaviour

(a) – Low Involvement / Essential Goods(b) - Low Involvement / Feel Good(c) - Mid-level product categories(d) High Involvement / Long-Term Necessities(e) High Involvement Luxuries

Likelihood to change purchase behavior

Target group: all 18-45 y.o.; Field work: Sept’09

Data source: OMD Snapshot, 550, on-line, Moscow

Purchase behaviour during the crisisSeptember did not demonstrate major changes in purchase behaviour compared to May

2009. Despite a more optimistic view, people still felt constrained and looked for ways to save money

Nevertheless there were some positive signs:• If there was a sharp increase in postponed purchases in all long-term

necessities and luxury categories in the Spring, by September, the number had decreased and returned to the level of 12 months earlier.

• The number of people who did not change their behavior slightly increased. In groceries, this shift occurred in the spring, and by September in all other categories

• Strategy of buying less (volumes/less frequently) was the most popular for drinks (both soft drinks and alcohol & beer) and for eating out categories

• For FMCG (groceries, cosmetics and household products) there was the highest number of people who switched to less expensive brands, compared to other categories (10-15% depending on category)

• The most popular strategy for expensive goods still is to postpone the purchase (Automobiles, Home Appliances & Electronics, Furniture)

Majority of consumers were still looking for ways to spend less

Russian Advertising Expenditure

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

For

ecas

t

2015

For

ecas

t

2016

For

ecas

t0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Cinema/IndoorInternetRadioPrintTV+59%

+29%+28%

+31%

+30%

+32%

+19%

-24%

+17%

+21%

+14%

+10%+9%

+8%+7%

Million Rubles (current)

Source: OPERA

Russian Media Inflation

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

For

ecas

t

2015

For

ecas

t

2016

For

ecas

t-10

0

10

20

30

40

50

Inflation (All Media)

+21% +21%

+25%+27%

+30%

+36%

-5%

+8%

+20%

+11%+13%

+11%

+7% +6%

Year-on-year Price Change (%)

+24%

+47%

Source: OPERA

Conclusions

• Crisis 3.0 will probably occur but with less extreme effects than Crisis 2.0 or, especially, Crisis 1.0

• Indeed, Crisis 3.0 may be seen as a continuation of Crisis 2.0

• The Russian population will be very careful with their expenditure with price increases causing the greatest problem

• Effects will vary by product field

• Durable and luxury items will show the greatest declines owing to deferred purchase

• May be some trading down in necessities

• Advertising expenditure will grow – but only at the same rate as retail price inflation – stability in real terms

• Some hesitancy in conclusions – sanctions will have effects – and these will be unpredictable