Thinkpiece 5 Outlook For 2008

Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 1

RUSSIA IN 2007

Outlook for 2008Thinkpiece 5, December 2007


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


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.


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.


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.


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’.


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!).


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’.


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!


PART ONE: The Consumer


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.


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.


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


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


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.


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.).


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.


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.


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


Sales

� Large retail network sales make up 60% of the market.

The four leading retailers control 48% of the market.

Source: RATEC


Sales in the Regions

Source: Technosila


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


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


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


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.


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


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


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


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


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


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)


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


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


� 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)


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…?


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.


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:


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.


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


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


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


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.


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).


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,


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.


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.


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


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.


� 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.


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


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


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


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.”


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


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.


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


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


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


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”


PART TWO: The State


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


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


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.


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.

Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved 65Prepared by Mmd Corporate, Public Affairs & Public Relations Consultants , all rights reserved

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.


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%


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


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


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


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


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


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


� 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


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.


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.


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.


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”.


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.


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


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


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


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’.


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


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%).


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.


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.


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


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


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


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.


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.


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


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.


Appendix 1:

Top Tips for Western firms looking to do PR in

Russia


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.


� 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.


� 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!


� 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.


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.


Appendix 2: About Mmd


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


Government Relations

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PUBLIC

RELATIONS

DIVISION

EURASIA

STRATEGIES

GROUP

Our Services in Russia

Financial PR

Investor Relations

Western Clients Eurasian Clients


� 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


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]

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