Prepared by Valeriy Gontarev Chairman of the Board of Directors of the group of companies ICU (“Investment Capital Ukraine”) Outlook for development of.

Prepared by Valeriy Gontarev Chairman of the Board of Directors of the group of companies ICU (“Investment Capital Ukraine”)

Outlook for development of the financial and capital markets in Ukraine

June 17, 2010.

Kiev, hotel Intercontinental

EUROPEANFINANCIAL CRISIS

The nature of crisis in the Eurozone

• “All as one”, this is how investors estimated the risk of debt instruments of the Eurozone countries before the crisis

• Now “all are different”, but the EUR currency remains “one for all”…

Profitability of 10 year sovereign bonds

Источник: Reuters, «Инвестиционный Капитал Украина»

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

дек-05 мар-06 июн-06 сен-06 дек-06 мар-07 июн-07 сен-07 дек-07 мар-08 июн-08 сен-08 дек-08 мар-09 июн-09 сен-09 дек-09 мар-10 июн-10

(%)

Германия Греция Италия Ирландия Испания ПортугалияGermany Greece Italy Ireland PortugalSpain

Source: Reuters, the Investment Capital Ukraine

dec-05 mar-06 dec-06 dec-07 dec-08 dec-09mar-07 mar-08 mar-09jun-06 jun-07 jun-08 jun-09sep-06 sep-07 sep-08 sep-09 mar-10 jun-10

Overall common budget deficit of the EC countries

• According to the Maastricht criteria, the budget deficit must not exceed 3% of GDP

• However, not once have a number of countries in the Eurozone violated this requirement

State budget deficit (% of GDP)

Источник: Eurostat

-16.0-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.0

Греция Ирландия Испания Италия Португалия Германия Евро зона (16 стран)

(% от ВВП)

2004 2005 2006 2007 2008 2009

GermanyGreece ItalyIreland PortugalSpain Eurozone (6 countries)

Source: Eurostat

% of GDP

Excessive debt load in some countries of the Eurozone

• “Life beyond their means” -- before the 2008-09 global crisisthe markets allowed some countries to live on credit (often foreign one)

• The decrease in budget deficits and, correspondingly, in debt load is the basic thesis of economic policy

The consolidated state debt by the end of the period (% of GDP)

Источник: Eurostat.

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Греция Ирландия Испания Италия Португалия Германия Страны евро зоны

(% от ВВП)

2004 2005 2006 2007 2008 2009

GermanyGreece ItalyIreland PortugalSpain Eurozone (6 countries)

% of GDP

Source: Eurostat

The reason for weakening of EUR is the flight of capital out of the EurozoneExchange rate of USD against EUR CDS for 5 year sovereign debts of “problem” countries in Europe

Источник: Bloomberg Источник: Bloomberg

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

окт-09 ноя-09 дек-09 янв-10 фев-10мар-10 апр-10 май-10 июн-100.0

2.0

4.0

6.0

8.0

10.0

12.0

янв-09 мар-09 май-09 июл-09 сен-09 ноя-09 янв-10 мар-10 май-10

(%)

Греция Ирландия ИспанияИталия Португалия

Greece

Italy

Ireland

Portugal

Spain

Source: Bloomberg Source: Bloomberg

dec-05 mar-06

apr-10

jan-10may-10

jun-06

feb-10 jun-10mar-10oct-09nov-09

dec-09jan-10jul - 09 mar-10sep-09

may-10

nov-09jan-09mar-09

may-09

The main current problems of the Eurozone: debt, growth of GDP and deflation

The actual GDP growth rate (%) The consumer prices inflation rate (%)

Источник: МВФ, World Economic Outlook Источник: МВФ, World Economic Outlook

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2004 2005 2006 2007 2008 2009 2010П 2011П 2015П

(%г/г)

Греция ИрландияИспания ИталияПортугалия ГерманияЕвро зона (16 стран)

Прогноз

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2004 2005 2006 2007 2008 2009 2010П 2011П 2015П

(%г/г)

Греция ИрландияИспания ИталияПортугалия ГерманияЕвро зона (16 стран)

Прогноз

Greece

Italy

Ireland

PortugalSpain

Germany

Eurozone (6 countries)

Greece

Italy

Ireland

PortugalSpain

Germany

Eurozone (6 countries)

Source: IMF, World Economic Outlook Source: IMF, World Economic Outlook

OutlookOutlook

The deficit/proficit of the current account of the EC countries payment balanceThe fundamental problem is that the countries suffering from debt problems are not capable of competing with their products in the foreign markets, which is why they constantly have deficits of their trade balances

Источник: OECD

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

Q2-2007 Q3-2007 Q4-2007 Q1-2008 Q2-2008 Q3-2008 Q4-2008 Q1-2009 Q2-2009 Q3-2009 Q4-2009

(% от ВВП)

Греция Ирландия Италия Испания Португалия Германия ЕврозонаGermanyGreece ItalyIreland PortugalSpain Eurozone (6 countries)

Source: OECD

% of GDP

MACRO ECONOMIC SITUATION IN UKRAINE

Ukraine: the budget deficit and state debt

State debt of Ukraine, % GDP

Источник: Министерство финансов Украины, отчет Кабинета министров Украины

Источник: Министерство финансов Украины

Deficit: official and covert

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

июл-04 мар-05 ноя-05 июл-06 мар-07 ноя-07 июл-08 мар-09 ноя-09

(% от ВВП)

Общий госдолг Внутренний госдолг Внешний госдолг

1.4 1.3

3.9

11.3

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2007 2008 2009

(% от ВВП) Дефицит государственного бюджета, официальные данные, % ВВП

Дефицит государственного бюджета, включая скрытый дефицит, % ВВП

The state budget deficit, official data, % GDP

The state budget deficit, including covert deficit, % GDP

Overall debt Internal debt External debt

% of GDP

Source: the Ministry of Finance of Ukraine, the Cabinet of Ministers report

Source: the Ministry of Finance of Ukraine

% of GDP

jul - 08jul - 06 mar-09mar-07 nov-09nov-07jul - 04 mar-05 nov-05

Ukraine: the GDP growth and inflation rates

The yearly inflation rate, %

Источник: Комитет статистики Украины Источник: Комитет статистики Украины

The yearly actual GDP growth rate, %

Source: The State Statistics Committee of Ukraine Source: The State Statistics Committee of Ukraine

jan-06 jan-08 Jan-10jan-00 jan-02 jan-04

The payment balance of Ukraine

The payment balance is gradually leveling off after the crisis decline to negative values

Источник: НБУ

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Jan.

08

Feb.

08

Mar

.08

Apr.0

8

May

.08

Jun.

08

Jul.0

8

Aug.

08

Sep.

08

Oct.0

8

Nov.08

Dec.08

Jan.

09

Feb.

09

Mar

.09

Apr.0

9

May

.09

Jun.

09

Jul.0

9

Aug.

09

Sep.

09

Oct.0

9

Nov.09

Dec.09

Jan.

10

Feb.

10

Mar

.10

2008 2009 2010

(млрд.долл.)

Сальдо счета текущих операций (lhs) Сальдо финансового счета (lhs) Сальдо платежного баланса (lhs)

Source: The National Bank of Ukraine

Current operations account balance

Current operations account balance

Balance of payments

The merchandise trade balance and financial account of Ukraine

Foreign merchandise tradeThe capital transactions account balance and financial

account balance

Источник: НБУ Источник: НБУ

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

янв-

08

мар

-08

май

-08

июл-

08

сен-

08

ноя-

08

янв-

09

мар

-09

май

-09

июл-

09

сен-

09

ноя-

09

янв-

10

мар

-10

(млрд.долл.)

Экспорт (lhs)

Импорт (lhs)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

янв-

08

мар

-08

май

-08

июл-

08

сен-

08

ноя-

08

янв-

09

мар

-09

май

-09

июл-

09

сен-

09

ноя-

09

янв-

10

мар

-10

(млрд.долл.)

Счет операций с капиталом (lhs)

Иной капитал (lhs)

Портфельные инвестиции (акционерный капитал) (lhs)

Кредиты и облигации (сальдо) (lhs)

Прямые инвестиции (сальдо) (lhs)

Source: The National Bank of Ukraine Source: The National Bank of Ukraine

Export (Ihs)

Import (Ihs)

billion, USD

Capital transactions account (Ihs)

Other capital (Ihs)

Portfolio investments (share capital) (Ihs)

Loans and bonds (balance) (Ihs)

Direct Investments (balance) (Ihs)

billion, USD

The nominal exchange rate of UAH against USD and UAH real effective exchange rate

• The devaluation in October 2008 resulted in the sharp REER index decrease, which means that Ukrainian goods have become more competitive in comparison with their main trade partners

• This facilitates a gradual trade balance recovery that is a crucial pre-requisite of financial stability

The REER index (real effective exchange rate of UAH against the basket of currencies)

The nominal exchange rate of UAH against USD (rhs)

oct-06 oct-07 aug-08jan-04 dec-04 nov-05 jul -09

FUTURE: OUTLOOK AND REQUIRED REFORMS

The outlook for 2H 2010: quieter market for shares, the hot ticket is VAT bonds

• The real PFTS index increased by nearly 300% in the period of March 2009 – April 2010. Its correction is still going on, but the volatility is notably decreasing, so a quieter market for shares is expected in 2H 2010.

• Now approximately UAH 5 billion are expected to be invested in the new assets that is VAT bonds. The expected profitability is 22-23%.

• The movement on the market for corporate bonds of Ukrainian issuers can be expected only by the end of 2010.

Реальный* темп прироста рынка акций Украины

* The real growth rate is a change of the PFTS share market index, inflation factored in. Source: PFTS, Investment Capital Ukraine

-150.0-100.0-50.0

0.050.0

100.0150.0200.0250.0300.0350.0

ноя-98 июн-99 янв-00 авг-00 мар-01 окт-01 май-02 дек-02 июл-03фев-04 сен-04 апр-05 ноя-05 июн-06 янв-07 авг-07 мар-08 окт-08 май-09 дек-09

(%г/г)PFTS, UAH CPI-adj. PFTS, USD CPI-adj.

may-02

aug-00

dec-02

mar-01

jul -03oct-01jun-99nov-98

jan-00 feb-04sep-04 apr-05nov -

05jun-06 jan-07 aug-07

mar -08

oct-08may-

09dec-09

The required reforms

• Effective procedures of borrowers’ bankruptcies in case they refuse or cannot repay their debt;

• Refining of the system and procedures for information disclosure when issuing securities and during their circulation;

• The pension reform completion and encouraging Joint Investment Institutions to form a pool of internal institutional investors;

• Enforcing of effective monetary and fiscal policy as to decrease the value of securities in national currency and to stimulate their issue;

• Liberalisation of an outdated currency regulation• Elimination of tax preferences between different instruments of

safekeeping and accumulation of savings (which means no tax on bank deposits earnings)

Investment Capital Ukraine

01030, Kiev, Bogdana Khmenlnitskogo Str, 19-21Business center “Leonardo”, floor 11, office 44

Tel. 044 2200120

www.icu.ua

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