Slide 1 | December 2010 | Foreign Debt Growth Outlook

December 2010Anton Stroutchenevski, Senior Economist

Foreign Debt Growth Outlook

Slide 2 | December 2010 | Foreign Debt Growth Outlook

Russia faces mostly institutional constraints to borrow externally

Russia is still among the countries with quite low foreign debt/GDP.

However, capital flows are very volatile: in 1H08, Russia enjoyed a net capital inflow that rapidly turned into a net capital outflow in 2H08.

The potential for export growth acceleration is limited. Thus, there is a threat that the trade balance will start shrinking if oil prices stabilize.

Without institutional changes, the country will not be able to borrow externally.

Slide 3 | December 2010 | Foreign Debt Growth Outlook

0

3,000

6,000

9,000

12,000

15,000

Arm

enia

Aze

rbai

jan

Bela

rus

Esto

nia

Geo

rgia

Kaz

akhs

tan

Kyr

gyzs

tan

Latv

ia

Lith

uani

a

Mol

dova

Russ

ia

Tajik

ista

n

Turk

men

ista

n

Ukr

aine

Uzb

ekis

tan

1991 2009

GDP per capita in the former Soviet republicsin 1991 and 2009, $

Source: IMF

Slide 4 | December 2010 | Foreign Debt Growth Outlook

GDP per capita in the former Soviet republicsin 2009 and external borrowing

Estonia

LatviaLithuania

Russia

Kazakhstan

Ukraine

MoldovaKyrgyzstan

Armenia

TajikistanUzbekistan

GeorgiaTurkmenistan

Belarus

Azerbaijan

0

2

4

6

8

10

12

14

16

0% 20% 40% 60% 80% 100% 120% 140% 160%

External debt/ GDP

GD

P pe

r cap

ita, $

’00

0

Source: IMF, CIA, national banks

Slide 5 | December 2010 | Foreign Debt Growth Outlook

Foreign debt accumulation slowed after the crisis

Source: Central Bank, State Statistics Service, Troika estimates

0

100

200

300

400

500

600

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

1Q06

3Q06

1Q07

3Q07

1Q08

3Q08

1Q09

3Q09

1Q10

3Q10

0%

6%

12%

18%

24%

30%

36%

Public debt Private debt Private debt/GDP (rhs)

Slide 6 | December 2010 | Foreign Debt Growth Outlook

The Central Bank expects capital inflow to finance negative current account in long run, $ bln

Source: Central Bank

2011E 2012E 2013E

Oil price, $/bbl Urals 60 60 60Current account 14.4 -14.5 -39.4

Export of good and services 388.3 389.6 395.8Import of good and services -329.3 -359.2 -389.4Other -44.6 -44.9 -45.8

Capital account -13.0 2.0 7.0Government and monetary authorities 2.0 2.0 2.0Private sector -15.0 0.0 5.0

Changes in gross international reserves -1.4 12.5 32.4

2011E 2012E 2013E

Oil price, $/bbl Urals 75 78 79Current account 46.2 30.3 -5.7

Export of good and services 448.5 471.1 489.6Import of good and services -352.0 -390.3 -443.8Other -50.3 -50.5 -51.5

Capital account 12.0 17.0 22.0Government and monetary authorities 2.0 2.0 2.0Private sector 10.0 15.0 20.0

Changes in gross international reserves -58.2 -47.3 -16.3

2011E 2012E 2013E

Oil price, $/bbl Urals 90 95 95Current account 78.4 60.5 17.6

Export of good and services 495.8 535.9 561.1Import of good and services -364.1 -421.9 -488.8Other -53.3 -53.5 -54.7

Capital account 22.0 27.0 32.0Government and monetary authorities 2.0 2.0 2.0Private sector 20.0 25.0 30.0

Changes in gross international reserves -100.4 -87.5 -49.6

Source: Central Bank Source: Central Bank

Slide 7 | December 2010 | Foreign Debt Growth Outlook

Russia was attractive for investors only when macroeconomic risks were low and oil prices were growing

Source: Central Bank

-150

-100

-50

0

50

100

150

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

E

$ bl

n

Current account

Capital flows

Changes in gross internationalreserves

Slide 8 | December 2010 | Foreign Debt Growth Outlook

After the crisis, economic growth decelerated…

Source: State Statistics Service

-12%

-8%

-4%

0%

4%

8%

12%

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

E

20

11

E

Slide 9 | December 2010 | Foreign Debt Growth Outlook

… external and internal balances deteriorated…

Source: Finance Ministry, Troika estimates

0

20

40

60

80

100

120

2003 2004 2005 2006 2007 2008 2009 2010E 2011E

$/bb

l Ura

ls

-10%

-5%

0%

5%

10%

15%

20%

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

E

2011

E

Current account Federal budget balance

Current account and budget balance, % of GDP

Breakeven oil price for federal budget

Source: Finance Ministry, Troika estimates

Slide 10 | December 2010 | Foreign Debt Growth Outlook

… inflation accelerated…

Source: State Statistics Service

4%

6%

8%

10%

12%

14%

16%

2003 2004 2005 2006 2007 2008 2009 2010

0%

2%

4%

6%

8%

10%

J an Feb Mar Apr May J un J ul Aug Sep Oct Nov Dec

2009 2010

CPI, y-o-y CPI, YTD

Source: State Statistics Service

Slide 11 | December 2010 | Foreign Debt Growth Outlook

… and the ruble depreciated, despite high oil prices

Source: Central Bank

20

22

24

26

28

30

32

34

36

38

20 40 60 80 100 120 140

$/bbl Urals

R/$

29

31

33

35

37

39

41

01/2007 07/2007 01/2008 07/2008 01/2009 07/2009 01/2010 07/2010 01/2011

0%

5%

10%

15%

20%

25%

30%

RUB/EUR-USD 1 1d MIACR (rhs)

Source: Central Bank

Slide 12 | December 2010 | Foreign Debt Growth Outlook

Who will Russia compete with on capital markets?

Source: IMF

Current account deficits, 2009, $ bln

United States, 378

Spain, 81Italy, 67

Other, 168

Australia, 44

India, 36

Brazil, 24

United Kingdom, 24

Portugal, 23Iraq, 17

Turkey, 14

South Africa, 11

Greece, 37Canada, 38

France, 51

Slide 13 | December 2010 | Foreign Debt Growth Outlook

Source: IMF, World Economic Forum

The quality of Russia’s institutions is too low to compete for sufficient inflow

0

1

10

100

1,000

2.50 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50

The quality of institutions

Bor

row

ing,

$ b

ln

Russia (3.22)

Total borrowing at $951 blnTotal borrowing at $14 bln

Slide 14 | December 2010 | Foreign Debt Growth Outlook

Source: Central Bank

Due to poor quality of domestic institutions, capital outflow remains sustainable

Changes in foreign assets of domestic economy

-40

-30

-20

-10

0

10

20

30

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10

$ bl

n

Banks Population Non-financial sector

Slide 15 | December 2010 | Foreign Debt Growth Outlook

Conclusions

Without improvement in macroeconomic policy and the quality of its institutions, Russia will be hardly able to compete successfully on the capital markets and guarantee sustainable capital inflow.

Domestic capital outflow trends will remain an important measure of the country’s appeal to investors.

Slide 16 | December 2010 | Foreign Debt Growth Outlook

Slide 17 | December 2010 | Foreign Debt Growth Outlook

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