MNI Russia Business Report June Insight and data for better decisions

MNI Russia Business Report June 2014 Insight and data for better decisions

2 MNI Russia Business Report - June 2014 About MNI Indicators Insight and data for better decisions MNI Indicators offers unique macro-economic data and insight to businesses and the investment community. We produce data and intelligence that is unbiased, pertinent and responsive. Our data moves markets. MNI Indicators specialises in business and consumer focused macro-economic reports that give our customers the ability to make timely and relevant decisions. We strive to provide up-to-date information on business and consumer confidence on the economy. MNI Indicators publishes data on a monthly basis. Our indicators are based on a unique and proprietary methodology and are designed to present an advance picture of the economic landscape as perceived by businesses and consumers every month. Written and researched by Philip Uglow, Chief Economist Shaily Mittal, Economist Release Time Embargoed until 9:45 a.m. Moscow time June 25, 2014 MNI Indicators Deutsche Börse Group Westferry House 11 Westferry Circus London E14 4HE Tel: +44 (0)20 7862 7444 Email: info@mni-indicators.com www.mni-indicators.com @MNIIndicators Our monthly reports explore attitudes, perspectives and confidence across different countries and regions. They deliver in-depth analysis, highlight changing patterns and how these can affect potential developments in business and consumer activities. MNI Indicators is part of MNI, a leading provider of news and intelligence. MNI is a wholly owned subsidiary of Deutsche Börse Group, one of the largest worldwide exchange organisations. Copyright 2014 MNI Indicators Deutsche Börse Group. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved.

MNI Russia Business Report - June 2014 3 MNI Russia Business Report - June 2014 Contents 4 Editorial 6 Executive Summary 30 Data Tables 34 Methodology 10 Economic Landscape 14 Indicators 15 MNI Russia Business Indicator 16 Production 17 New Orders 18 Export Orders 19 Productive Capacity 20 Order Backlogs 21 Employment 22 Inventories 23 Input Prices 24 Prices Received 25 Financial Position 26 Interest Rates Paid 27 Effect of Rouble Exchange Rate 28 Supplier Delivery Times 29 Availability of Credit

4 Spitzzeile Titel Out of the Club Russia s suspension from the G8 club in March has left it side lined on the world stage, hurt its political standing and damaged its prospects for growth.

MNI Russia Business Report - June 2014 5 Russia s suspension from the G8 club in March has left it side lined on the world stage, hurt its political standing and damaged its prospects for growth. Russia enjoyed its membership of the G8 group of countries for 17 years, but was frozen out after Moscow annexed Crimea, a move that threatened international stability and security. Adding insult to injury, the G8 had been due to meet in Sochi in early June, where President Putin could showcase Russia s Olympic achievements. Instead it was held in Brussels, and although Putin was physically absent from the meeting, he was the main topic of conversation. Russia has tried to downplay the importance of it being barred from the G8 pointing to other supranational bodies as being more significant. If our Western partners believe that such format is no longer needed, let it be so, Russia s foreign minister Sergei Lavrov said earlier this year. We aren t clinging for that format, and we won t see a big problem if there are no such meetings for a year, or a year-and-half, he added. President Putin, having seen the negative impact of the Ukraine crisis on domestic growth, has already started to adopt a slightly more conciliatory tone. Sanctions from the EU and US may be reasonably limited, but our business survey shows the negative impact they re having. The Russian President s historic deal with the Chinese to supply gas is supposed to show the West that Russia has friends and growth prospects in the East, but it remains very reliant on Europe. What Russia needs is more trade and business links with both the East and West, but a continued standoff over Ukraine will do nothing but hurt its growth prospects further. Russia may not be too concerned about not being part of the G8, but from an economic point of view, it would certainly help if it came in from the cold. Shaily Mittal Philip Uglow MNI Indicators Russia still remains part of the G20, a group that has grown in importance having effectively taken over the role from the G7 of ensuring international financial stability. Its members make up two-thirds of the world s population and account for 85% of global GDP. As emerging markets continue to strengthen then so too will the G20, especially if China chooses to take a greater role. But, in spite of the growing importance of the G20, the political power of the G7 remains a force to be reckoned with. And, in spite of Russia s public antipathy to being left out in the cold, being forced out of the G8 represents loss of power and influence on the world stage.

6 Spitzzeile Titel Executive Summary Russian business sentiment recovered marginally in June, although it was still considerably down since the start of 2014 as business confidence has been affected by the sanctions from the west.

MNI Russia Business Report - June 2014 7 Russian business sentiment recovered slightly in June following its sharp decline in May to the lowest level in five months. It was still considerably down from the start of 2014 as business confidence has been affected by the sanctions from the US and EU and amid a sharp slowdown in economic growth. The MNI Russia Business Indicator rose to 50.5 in June from 49.2 in May, although was 12.6% below the level seen in June 2013. Current conditions for Production remained broadly stable after declining to the lowest level in two months in May. The Production Indicator stood at 55.5 in June compared with 55.3 in the previous month, although it was significantly below the 60.8 outturn seen in the same period a year ago. Companies export orders rose for two consecutive months in June, although were still in contraction, following a record low level in April when tensions with the EU and US over the situation in Ukraine were at their height. Given the current weak demand backdrop, Order Backlogs have contracted for four months in a row to 45.4 in June from 42.3 previously. The Effect of Rouble Exchange Rate Indicator, which measures whether the exchange rate is helping or hurting businesses, declined to 50.3 in June, offsetting the gain recorded in the previous month to 53.3. Fewer companies had better access to credit in June as compared with the previous month. The Availability of Credit Indicator decreased by 3.7% to 57.7 from 59.9 in the previous month, the first fall in four months. MNI Russia Business Indicator 75 70 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 The Employment Indicator declined for the first time in five months to 50.5 in June from 52.8 in the previous month. Current Conditions Future Expectations The current weak economic conditions, coupled with the tensions in Ukraine, have created a highly uncertain business environment for many companies who have chosen to run down stocks. In Q2 2014, the level of inventories averaged the lowest since the start of the survey. In spite of a slight decline in input prices, companies decided to raise the prices charged for their goods and services for the first time in five months. The Prices Received Indicator rose to 51.3 in June compared with 50.0 in May.

8 MNI Russia Business Report - June 2014 Overview Apr-14 May-14 Jun-14 Highest Since Lowest Since 3-Month Average Monthly Change Monthly % Change MNI Russia Business Indicator Current Conditions 55.6 49.2 50.5 Apr-14-51.8 1.3 2.6% Future Expectations 54.3 52.5 52.5 May-14-53.1 0.0 0.0% Production Current Conditions 57.3 55.3 55.5 Apr-14-56.0 0.2 0.4% Future Expectations 52.0 51.7 51.1 - Mar-14 51.6-0.6-1.2% New Orders Current Conditions 58.8 54.8 56.0 Apr-14-56.5 1.2 2.2% Future Expectations 52.2 52.7 51.9 - Mar-14 52.3-0.8-1.5% Export Orders Current Conditions 44.4 46.9 49.0 Feb-14-46.8 2.1 4.5% Future Expectations 43.5 43.0 44.3 Feb-14-43.6 1.3 3.0% Productive Capacity Current Conditions 50.0 51.5 50.5 - Apr-14 50.7-1.0-1.9% Future Expectations 49.7 50.3 50.0 - Apr-14 50.0-0.3-0.6% Order Backlogs Current Conditions 39.5 42.3 45.4 Mar-14-42.4 3.1 7.3% Future Expectations 42.5 43.3 44.4 Aug-13-43.4 1.1 2.5% Employment Current Conditions 50.8 52.8 50.5 - Mar-14 51.4-2.3-4.4% Future Expectations 50.0 50.5 50.0 - Feb-14 50.2-0.5-1.0% Inventories Current Conditions 32.2 39.2 48.0 Oct-13-39.8 8.8 22.4% Future Expectations 41.2 43.4 46.5 Oct-13-43.7 3.1 7.1% Input Prices Current Conditions 51.8 51.0 50.5 - series low 51.1-0.5-1.0% Future Expectations 50.3 50.0 50.0 May-14-50.1 0.0 0.0% Prices Received Current Conditions 50.5 50.0 51.3 Mar-14-50.6 1.3 2.6% Future Expectations 51.3 51.0 50.3 - Feb-14 50.9-0.7-1.4% Financial Position Current Conditions 59.8 56.3 54.3 - Aug-13 56.8-2.0-3.6% Future Expectations 54.4 53.6 52.7 - series low 53.6-0.9-1.7% Interest Rates Paid Current Conditions 49.7 49.7 49.7 May-14-49.7 0.0 0.0% Future Expectations 49.4 49.7 49.7 May-14-49.6 0.0 0.0% Effect of Rouble Exchange Rate Current Conditions 50.9 53.3 50.3 - Aug-13 51.5-3.0-5.6% Future Expectations 50.0 50.0 50.0 May-14-50.0 0.0 0.0% Supplier Delivery Times Current Conditions 49.5 51.8 50.3 - Apr-14 50.5-1.5-2.9% Future Expectations 49.7 49.7 49.7 May-14-49.7 0.0 0.0% Availability of Credit Current Conditions 53.9 59.9 57.7 - Apr-14 57.2-2.2-3.7% Future Expectations 51.5 50.6 50.8 Apr-14-51.0 0.2 0.4%

Russian business sentiment recovered slightly in June following its sharp decline in May. However, most companies did not expect their overall business conditions to change much in the following three months as the Expectations Indicator was flat at 52.5 in June.

10 Spitzzeile Titel Economic Landscape The stand-off with the west over the situation in Ukraine continues to dominate the news. Tensions escalated further when Russian energy producer Gazprom cut off natural gas supplies to Ukraine following non-payment of a $2 billion bill.

MNI Russia Business Report - June 2014 11 The stand-off with the west over the situation in Ukraine continues to dominate the news. Tensions escalated further when Russian energy producer Gazprom cut off natural gas supplies to Ukraine following non-payment of a $2 billion bill. The EU has urged Russia to calm the tensions, warning that they would otherwise introduce fresh restrictions on trade with Russia, possibly including sector-wide sanctions. The Russian economy faces numerous issues ranging from the weakening of the rouble, spiralling prices and stalled growth. Consumer price inflation rose in May at the fastest pace since August 2011, leaving the central bank little option to maintain a tightening bias with a risk of a further hike in rates should inflation continue to increase. More positively, industrial production picked up in May and manufacturing output posted the highest growth in six months. The rouble has gained slightly from the previous month, but is still 5% down on the year. Low economic growth Economic growth remained extremely weak at the beginning of 2014, slowing to 0.9% in Q1 compared with a year earlier, down from growth of 2% in Q4 2013 and 1.3% in Q1 2013. Capital investment contracted by 4.8% in Q1 compared with a year earlier. Consumption remained relatively firm, but it reflected a one-off public sector pay increase and so is unlikely to be sustained. Russian ministers had predicted GDP growth of 2.5% this year before the Ukrainian turmoil. However, this has been dramatically reduced to just 0.5%, following paltry growth of 1.3% in 2013. Central Bank governor Elvira Nabiullina also revised the growth rate for 2014 to 0.4%, below the government s forecast, though expected a slight acceleration in the second half of the year. The International Monetary Fund thinks that Russia is already in recession, amid warnings from US and EU Economic Growth 15% 10% 5% 0% -5% -10% -15% 2007 2008 2009 2010 2011 2012 2013 GDP Growth y/y % Source: Federal State Statistics Service of Russia leaders that they are ready to take further action against Russia if there isn t a de-escalation in the situation with Ukraine. Industrial production expands in May Industrial production accelerated by 2.8% on the year in May, up from 2.4% in April due to a rise in manufacturing output. Manufacturing expanded by 4.4% on the year in May, the highest in six months, and up from growth of 3.9% growth in April. Mining and quarrying, slowed to 0.9% on the year in May compared with growth of 1.1% in the previous month. Utilities output continued to contract for the seventh consecutive month, although the pace of decline slowed to 0.5% on the year from a decline of 1.9% in the previous month. In the first five months of 2014, industrial production grew 1.7% on the year after contracting 0.6% in the same period a year ago. The economy ministry

12 MNI Russia Business Report - June 2014 expects industrial output to increase by about 1% this year after it failed to grow in 2013. Car sales decelerate in May In May, 201,487 cars were sold, 12.2% below the level in the same month a year earlier, according to the Association of European Businesses (AEB). Higher inflation and a weaker rouble have negatively impacted consumer spending. The pace of the decline in car sales had eased until March when sales declined by just 0.4%, but the market is showing signs of distress again. The five months to May saw a decline of 5.6% in car sales compared with the same period a year earlier. The AEB remains cautious about the outlook and has forecast that car sales will decline by 1.6% in 2014, following a drop of 5.5% in the previous year. However, the June data will provide clues about where the market is headed into the second half of the year which may prompt the AEB to revise their forecast. Inflation surges in May Consumer price inflation rose to 7.6% in May from 7.3% in April, the fastest rate of growth since August 2011. The cost of food products rose by 9.5% on the year, up from 9% in the previous month. A ban on pork imports from the European Union, due to an outbreak of swine fever, has affected the cost of meat products. Even after stripping out the prices of food and fuel, core inflation accelerated to 7% from 6.5% in the previous month, the highest since October 2011. The latest rise leaves the inflation rate even further above the central bank s target for a 5% for 2014. Russia imports a large amount of consumer goods and food items, and the depreciation of the currency has pushed up prices in recent months, forcing the central bank to tighten its monetary policy further at the end of April. Inflation and Interest Rate 16% 12% Car Sales 14% 12% 10% 10% 8% 150% 8% 6% 100% 50% 6% 4% 2% 4% 2% 0% 0% 2007 2008 2009 2010 2011 2012 2013 2014 0% -50% CPI y/y% -100% 2007 2008 2009 2010 2011 2012 2013 2014 7-day repo rate (RHS)* Source: Federal State Statistics Service of Russia, *Central Bank of Russia Car and Light Commercial Vehicles Sales y/y % Source: Federal State Statistics Service of Russia Key policy rate unchanged On June 16, the Russian central bank left its benchmark interest rate at 7.5% as expected. The

MNI Russia Business Report - June 2014 13 bank cited continued concerns about the high rate of inflation, and cautioned that further rate hikes were possible if inflation remained above the target. The central bank last hiked rates in April by 50 basis points to 7.5% due to the greater than expected impact of the rouble devaluation on inflation. The recent rate hikes are yet to have an impact on inflation and the Central Bank is open to further rate hikes. Depreciation in the rouble The rouble has been one of the most volatile emerging market currencies in 2014 due to the alarming levels of capital flowing out of the country following Russia s annexation of Crimea. In June, the rouble was 4.9% below the level seen in the same period a year ago. However, the rouble has strengthened somewhat over the past two months as international tensions have eased slightly. presently stretches from 36.40 to 43.40 against the basket, with no central bank interventions at all in a broad range in the middle of this corridor. The move is part of the bank s aim to adopt inflation targeting from the start of next year. It was forced to pause the shift towards inflation targeting in early March in order to halt the rouble s decline after Russia annexed Crimea. Trade surplus widens in April Russia s trade surplus widened to $19.8 billion in April, from $14.2 billion a year earlier and only slightly above $19.7 billion recorded a month earlier. Exports increased to $47.5 billion in April, 6.7% above the same period a year ago and slightly up from March s $46.9 billion. Imports declined for the fourth consecutive month to $27.6 billion, down by 8.7% on the year, although slightly up from $27.1 billion recorded in March. Foreign exchange reserves in Russia decreased to $467.2 billion in May from $472.3 billion in April as the country has tried to protect the rouble from capital flight. Capital outflows from Russia s private sector stood at $63.7 billion in Q1 2014 owing to the financial instability. This compared with an outflow of $59.7 billion during the whole of 2013. About $7.4 billion left Russia in May, down from $8.8 billion in the previous month. The bank expects $90 billion in net outflows this year, which seems to be overly optimistic. The central bank reduced the intervention threshold for moving the rouble s floating corridor against a dollar-euro basket to $1 billion from $1.5 billion. It also reduced the amount of daily interventions by $100 million, and widened the range in the middle of the corridor where it carries out no interventions to 5.1 roubles from 3.1 roubles. This makes the rouble more flexible within its floating corridor, which

14 Spitzzeile Titel Indicators Russian business sentiment recovered slightly in June following a sharp decline in May to the lowest level in five months.

MNI Russia Business Report - June 2014 15 MNI Russia Business Indicator Picks Up Slightly in June 50.5 Russian business sentiment recovered slightly in June from a five month low in May, although was still considerably down since the start of 2014 as business confidence has been affected by the sanctions from the US and EU and amid a sharp slowdown in economic growth. The MNI Russia Business Indicator rose to 50.5 in June from 49.2 in May, although it was 12.6% below the level seen in June 2013. Russian business sentiment bottomed out in the final quarter of 2013 and bounced back at the start of the current year boosted by the Sochi Olympics. Confidence in the three months to June was 8.8% below the level of the previous quarter and 15.2% below the corresponding period a year ago. Russian business confidence has already been dented from what have only been limited sanctions imposed by the west. Capital outflows from Russia s private sector have been significant since the Ukraine crisis, averaging $63.7 billion in Q1 2014, compared with an outflow of $59.7 billion during the whole of 2013. The EU has urged Russia to calm tensions in eastern Ukraine, warning they would otherwise introduce fresh restrictions on trade with Russia, possibly including sector-wide sanctions. MNI Russia Business Indicator 75 70 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Most companies did not expect their overall business conditions to change much in the following three months as the Expectations Indicator was flat at 52.5 in June. Manufacturing companies remained pessimistic while construction and services were optimistic about the coming three months. Business confidence improved among manufacturing and services companies, although the indicator remained below the 50 expansion/contraction line for the latter. Construction companies were less optimistic about current business conditions, although the majority reported no change compared with the previous month. MNI Russia Business Indicator Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 57.8 57.9 60.0 52.5 55.6 49.2 50.5 Future Expectations 57.5 53.0 55.3 53.3 54.3 52.5 52.5

16 MNI Russia Business Report - June 2014 Production Expectations Lowest Since March 55.5 Current conditions for Production remained broadly stable after declining to the lowest level in two months in May. The Production Indicator stood at 55.5 in June compared with 55.3 in the previous month, although it was significantly below the 60.8 outturn seen in the same period a year ago. There have been some limited signs of a pick-up in the economy with industrial production growing for the fourth consecutive month in May, by 2.8% on the year, following growth of 2.4% in April. Much of the rise was led by manufacturing output, which grew by 4.4% on the year, up from 3.9% on the year in April. More manufacturing companies raised their production levels, while in contrast, fewer services companies reported an increase. Construction companies did not see any change from the previous month. Production 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Companies were less optimistic about Production in the next three months, with the Future Expectations Indicator falling to the lowest since March, to record 51.1 compared with 51.7 in May, significantly below the level in the same period a year earlier. Production Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 60.8 58.2 59.3 52.5 57.3 55.3 55.5 Future Expectations 58.5 50.5 52.0 50.8 52.0 51.7 51.1

MNI Russia Business Report - June 2014 17 New Orders Highest Since April 56.0 Companies were more optimistic about the level of demand for their products in June as compared with the previous month, but their confidence was significantly below the same period a year ago. The New Orders Indicator increased to 56.0 in June from 54.8 in the previous month, a gain of 2.2% on the month. The rise was led by manufacturing and construction companies, while for the first time in 11 months, New Orders contracted for service companiess. Under the growing threat of more widespread sanctions, expectations of companies for New Orders in three months time remained subdued. The Expectations Indicator declined to 51.9 in June from 52.7 in May, the lowest since March. New Orders 80 75 70 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations New Orders Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 63.3 57.6 62.5 57.5 58.8 54.8 56.0 Future Expectations 54.3 50.3 51.0 51.8 52.2 52.7 51.9

18 MNI Russia Business Report - June 2014 Export Orders Hit Series Low in Q2 49.0 Companies Export Orders rose for the second consecutive month, although they were still in contraction, following a record low level in April when tensions with the EU and US over the situation in Ukraine were at their height. The Export Orders Indicator rose by 4.5% on the month to 49.0 in June from 46.9 in the previous month. Tensions in the region have led to a clear reduction in overseas orders with the indicator hitting the lowest in Q2 2014 and 11.4% below the outturn of June 2013. There was greater optimism for export orders among manufacturing companies, with the indicator rising above the 50 neutral level for the first time in six months while confidence among construction and service companies remained flat, the latter being the most pessimistic among the three sectors. Companies were nervous about the future level of Export Orders, with the indicator remaining in contraction for the tenth consecutive month. The Expectations Indicator rose to 44.3 in June from 43.0 in May. In spite of the gain, companies expectations for Export Orders were significantly below the level seen a year ago. Export Orders 70 65 60 55 50 45 40 35 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Trend in Exports 60 50 40 30 20 10 80% 60% 40% 20% 0% -20% -40% 0-60% 2007 2008 2009 2010 2011 2012 2013 2014 Exports FOB (billion USD) Exports y/y % (RHS) *Source: The Central Bank of the Russian Federation Export Orders Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 55.3 50.8 57.2 48.3 44.4 46.9 49.0 Future Expectations 57.3 46.3 47.1 43.0 43.5 43.0 44.3

MNI Russia Business Report - June 2014 19 Productive Capacity Declines Slightly 50.5 The productive capacity of Russian companies has remained broadly stable over the past six months as depicted by the three month trend in the Productive Capacity Indicator. Poor consumer demand and weak economic conditions have resulted in spare capacity for many companies. In June, the Productive Capacity Indicator decreased to 50.5 from 51.5 in May, a decline of almost 2% on the month. The Expectations Indicator declined slightly to the 50 mark, after moving into expansion for the first time in nine months in May. Productive Capacity 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Productive Capacity and Rate of Capacity Utilisation 75 70 65 60 55 50 45 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 MNI Productive Capacity Rate of Capacity Utilisation* *Source: Federal State Statistics Service of Russia Productive Capacity Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 53.3 50.3 50.3 50.3 50.0 51.5 50.5 Future Expectations 54.0 49.7 49.7 49.7 49.7 50.3 50.0

20 MNI Russia Business Report - June 2014 Order Backlogs Continue to Contract 45.4 Given the current weak demand backdrop, Order Backlogs have contracted for four months in a row to 45.4 in June from 42.3 previously. Manufacturing companies backlogs rose significantly although failed to jump above the 50 breakeven level. The slowdown in the economy has resulted in a greater degree of excess capacity, which means companies are better placed to meet any unexpected demand. Future Expectations for backlogs remained firmly in contraction although increased slightly to 44.4 from 43.3 in May. Except for May last year, when the Future Expectations Indicator was exactly 50.0, expectations for Order Backlogs have always been in contraction, although have trended up gradually since October. Order Backlogs 55 50 45 40 35 30 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Order Backlogs Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 45.8 51.4 52.0 47.4 39.5 42.3 45.4 Future Expectations 49.7 42.7 43.3 43.0 42.5 43.3 44.4

MNI Russia Business Report - June 2014 21 Employment Lowest Since March 50.5 The Employment Indicator declined for the first time in five months to 50.5 in June from 52.8 in the previous month. Firms are asked whether they have too few, too many or just the right number of employees. A reading below 50 indicates they have too many, while a reading above means that they have too few, while 50 is seen as neutral. Over the past year, companies hiring has decreased in line with the economy s downturn, as depicted by the Employment Indicator, which was down by 4.7% on the year in June. The majority of construction companies had a stable workforce in June, partially offsetting the gain seen in the previous month. Employment 58 56 54 52 50 48 46 44 42 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations In June, companies in our panel were less optimistic about employment in the next three months as the Expectations Indicator declined to 50.0 from 50.5 in May. After hitting the lowest level in Q4 2013, expectations picked up in 2014 and were broadly the same in Q2 2014 compared with Q1 2014. Employment Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 53.0 48.3 50.0 50.0 50.8 52.8 50.5 Future Expectations 51.8 49.7 49.5 50.5 50.0 50.5 50.0

22 MNI Russia Business Report - June 2014 Inventories Highest Since October 48.0 The Inventories Indicator rose sharply to 48.0 from 39.2 in the previous month, although it was the tenth consecutive month it has been in contraction, indicating a continued decline in stocks of finished goods. The current weak economic conditions, coupled with the tensions in Ukraine, have created a highly uncertain business environment for many companies who have chosen to run down stocks. In Q2 2014, the level of inventories averaged the lowest since the start of the survey. The rise in inventories was led by both manufacturing and construction companies, the latter rising to the 50 expansion/contraction level for the first time in four months. Inventories 55 50 45 40 35 30 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations More companies expected their inventories to rise in three months time, with the Future Expectations Indicator increasing to 46.5 in June from 43.4 in the previous month. Companies began destocking in September a year ago and their expectations for the future turned negative in November and have remained in contraction since then. Inventories Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 50.6 38.2 44.4 40.4 32.2 39.2 48.0 Future Expectations 46.3 43.8 43.8 40.2 41.2 43.4 46.5

MNI Russia Business Report - June 2014 23 Input Prices Series Low 50.5 The Input Prices Indicator declined slightly for the third month in a row to 50.5 in June from 51.0 in May, the lowest since the start of the survey. The decline was mainly led by construction companies where the proportion of those who reported higher input prices declined sharply. The three month trend in Input Prices has declined significantly since the summer of 2013 and has been flat in recent months. It seems the rouble s recent decline has not translated into higher input costs to companies yet as the majority of companies reported they paid the same input prices as compared with the previous month. Companies expected input prices in the next three months to remain the same, with the Expectations Indicator remaining flat at 50.0. Companies were probably hopeful that the central bank s tight monetary policy stance will help in curbing inflation over the coming months. Input Prices 80 75 70 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Input Prices Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 63.1 54.5 51.3 52.1 51.8 51.0 50.5 Future Expectations 58.9 50.0 50.0 52.1 50.3 50.0 50.0

24 MNI Russia Business Report - June 2014 Prices Received Highest Since March 51.3 In spite of a slight decline in input prices, companies decided to raise the prices charged for their goods and services for the first time in five months. The Prices Received Indicator, which measures the prices that companies charge for their goods and services, rose, to 51.3 in June compared with 50.0 in May. Consumer price inflation rose to 7.6% in May, from 7.3% in April, moving further above the central bank s 5% goal for this year. The central bank has raised interest rates two times this year in a bid to counter the recent rise in inflation, and expects it to fall to around 6% by the end of the year. The Indicator for construction companies rose above the breakeven level after remaining at the 50 mark for the past six months. The Indicator for services companies rose to the 50 level after contracting in the previous two months. Prices Received 75 70 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations The Future Expectations indicator declined slightly to 50.3 from 51.0 in May, although the majority of companies reported that they expected their prices would remain the same. Prices Received Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 61.3 57.7 53.8 53.1 50.5 50.0 51.3 Future Expectations 55.8 49.4 48.7 51.3 51.3 51.0 50.3

MNI Russia Business Report - June 2014 25 Financial Position Lowest Since August 2013 54.3 The indicator measuring the financial health of companies declined for the fourth consecutive month in June to the lowest since August 2013 as Russian companies felt the impact from the stand-off with the west. Since March 2013, when the survey started, the financial position of Russian companies has been fairly healthy in spite of the economic slowdown, with the indicator averaging 59.9. The Financial Position Indicator declined by 3.6% to 54.3 in June from 56.3 in May and companies financial heath was significantly below the level of 64.9 seen in the same period a year earlier. Companies remained nervous about the future course of events and the impact on their financial conditions. The Indicator for Future Expectations fell to a new record low of 52.7 in June from 53.6 in the previous month, mainly led by lower expectations of construction sector companies. Financial Position 80 75 70 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Financial Position Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 64.9 62.6 63.8 60.1 59.8 56.3 54.3 Future Expectations 55.4 56.9 58.4 55.6 54.4 53.6 52.7

26 MNI Russia Business Report - June 2014 Interest Rates Paid Remains Flat 49.7 The indicator for Interest Rates Paid remained flat at 49.7 in June, the third month below the 50 expansion/ contraction mark. The effect of the rate hike in late April has seemingly not yet been passed onto businesses, as the majority of companies polled reported no change in their interest costs. The central bank raised its key rate to 7.5% from 7% at the end of April and left it unchanged at its June meeting. The central bank has raised interest rates two times since Russia s annexation of Crimea led to capital flight, causing the rouble to tumble to a record low and inflation to accelerate. The central bank has said that further tightening is possible should inflation continue to remain stubbornly high. The yield on the Russian 10-year government bond declined to 8.6% from 9.47% on June 19, while the three month interbank rate fell to 8.95% from 9.07% previously. Interest Rates Paid 59 57 55 53 51 49 47 45 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations The indicators for manufacturing and construction sector companies were exactly at the 50 neutral level, while for services companies it remained below 50, although the majority said they paid the same interest rates as in the previous month. Companies expected Interest Rates Paid over the coming three months to remain in contraction, at 49.7, the same level as in May. Interest Rates Paid Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 55.8 52.6 54.3 50.0 49.7 49.7 49.7 Future Expectations 51.9 50.0 50.0 49.4 49.4 49.7 49.7

MNI Russia Business Report - June 2014 27 Effect of Rouble Exchange Rate Fewer say Exchange Rate is Helping 50.3 The Effect of Rouble Exchange Rate Indicator, which measures whether the exchange rate is helping or hurting businesses, declined to 50.3 in June, offsetting the gain recorded in the previous month to 53.3. A value above 50 shows more firms reported that the exchange rate was helping, while a reading below 50 shows the exchange rate was hurting. The indicator hit at a series high in February before falling sharply as the rouble depreciated amid large capital outflows following Russia s annexation of Crimea. The rouble has fallen by 7.8% against the US dollar since a year ago and about 5% since the start of the year and the rapid descent has raised fears of economic instability among companies. However, as the situation has eased, the currency has recovered slightly over the past two months. The indicator was at around the 50 level across the three sectors but there was a sharp decline in the proportion of services companies who previously reported that the exchange rate was helping their business. Effect of Rouble Exchange Rate 63 61 59 57 55 53 51 49 47 45 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Depreciation in the Rouble 40 35 30 Expectations for three months time remained at 50.0 for the eighth consecutive month, having stood slightly above the breakeven level in September and October 2013. 25 20 2007 2008 2009 2010 2011 2012 2013 2014 RUB against USD Source: The Central Bank of the Russian Federation Effect of Rouble Exchange Rate Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 50.6 56.9 61.0 53.7 50.9 53.3 50.3 Future Expectations 48.2 50.0 50.0 50.0 50.0 50.0 50.0

28 MNI Russia Business Report - June 2014 Supplier Delivery Times Lowest Since April 50.3 The time taken to deliver supplies to companies shortened in June to 50.3 from 51.8 in the previous month. The decline in the indicator was led by manufacturing companies as there was a sharp fall in the proportion of companies who said supplier delivery times were longer, although the majority said they were the same. Expectations for three months time remained unchanged in June at 49.7 for the sixth consecutive month. Future expectations have remained broadly stable since March last year, when the survey started, with the series averaging 49.7, and only rising above the breakeven level of 50 twice since then. Supplier Delivery Times 54 52 50 48 46 44 42 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Supplier Delivery Times Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 48.0 51.7 50.5 50.0 49.5 51.8 50.3 Future Expectations 49.5 49.7 49.7 49.7 49.7 49.7 49.7

MNI Russia Business Report - June 2014 29 Availability of Credit Dips Slightly 57.7 Fewer companies had better access to credit in June as compared with the previous month, as the Availability of Credit Indicator decreased by 3.7% to 57.7 from 59.9 in the previous month, the first decline in four months. A lot of US and European banks have reduced their lending to Russian businesses since the annexation of Crimea in March. Sanctions are pushing companies to reduce their dependence on western financial markets while they are preparing to switch contracts to other Asian currencies. Manufacturing companies led the decline in the indicator as the proportion of those who reported better availability of credit almost halved in June as compared with the previous month. Construction companies were also less optimistic about the availability of credit while it was the opposite for service sector companies. Availability of Credit 70 65 60 55 50 45 40 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Current Conditions Future Expectations Businesses expectations about credit availability in the next three months time have trended downwards since September a year ago and they remained broadly stable In June with the Expectations Indicator at 50.8 as compared with 50.6 in the previous month. Availability of Credit Jun-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Current Conditions 54.4 55.0 51.9 53.0 53.9 59.9 57.7 Future Expectations 52.2 50.9 50.9 50.0 51.5 50.6 50.8

30 Spitzzeile Titel Data Tables 31 Historical Summary 32 Historical Records 33 Historical Records - Quarterly

MNI Russia Business Report - June 2014 31 Historical Summary 2013 2014 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun MNI Russia Business Indicator Current Conditions 57.8 51.8 51.3 59.0 56.3 51.5 45.5 57.9 60.0 52.5 55.6 49.2 50.5 Future Expectations 57.5 59.0 61.5 55.0 47.2 45.0 49.5 53.0 55.3 53.3 54.3 52.5 52.5 Production Current Conditions 60.8 51.3 49.3 58.0 58.3 53.5 48.3 58.2 59.3 52.5 57.3 55.3 55.5 Future Expectations 58.5 58.0 58.0 57.0 48.3 45.5 47.5 50.5 52.0 50.8 52.0 51.7 51.1 New Orders Current Conditions 63.3 53.0 51.5 61.5 59.5 53.5 48.8 57.6 62.5 57.5 58.8 54.8 56.0 Future Expectations 54.3 60.3 62.8 57.8 48.8 45.5 46.5 50.3 51.0 51.8 52.2 52.7 51.9 Export Orders Current Conditions 55.3 46.6 44.9 54.3 52.1 48.7 49.2 50.8 57.2 48.3 44.4 46.9 49.0 Future Expectations 57.3 52.1 53.0 43.3 41.6 42.1 41.7 46.3 47.1 43.0 43.5 43.0 44.3 Productive Capacity Current Conditions 53.3 51.0 50.3 52.0 51.8 50.8 50.5 50.3 50.3 50.3 50.0 51.5 50.5 Future Expectations 54.0 53.3 51.8 49.5 48.7 48.5 49.7 49.7 49.7 49.7 49.7 50.3 50.0 Order Backlogs Current Conditions 45.8 45.9 47.1 49.2 50.3 47.4 48.7 51.4 52.0 47.4 39.5 42.3 45.4 Future Expectations 49.7 49.7 49.2 43.8 40.4 40.9 41.5 42.7 43.3 43.0 42.5 43.3 44.4 Employment Current Conditions 53.0 52.0 50.8 51.0 51.3 47.7 49.0 48.3 50.0 50.0 50.8 52.8 50.5 Future Expectations 51.8 51.5 50.8 47.5 46.2 46.2 47.2 49.7 49.5 50.5 50.0 50.5 50.0 Inventories Current Conditions 50.6 50.0 50.0 49.4 48.7 45.7 46.5 38.2 44.4 40.4 32.2 39.2 48.0 Future Expectations 46.3 47.5 47.4 51.9 51.3 42.6 45.7 43.8 43.8 40.2 41.2 43.4 46.5 Input Prices Current Conditions 63.1 55.2 50.5 55.8 54.2 53.4 51.5 54.5 51.3 52.1 51.8 51.0 50.5 Future Expectations 58.9 55.5 56.6 55.3 51.3 51.0 50.5 50.0 50.0 52.1 50.3 50.0 50.0 Prices Received Current Conditions 61.3 51.0 54.0 58.3 58.5 53.5 52.8 57.7 53.8 53.1 50.5 50.0 51.3 Future Expectations 55.8 55.1 54.6 55.3 50.3 50.0 49.2 49.4 48.7 51.3 51.3 51.0 50.3 Financial Position Current Conditions 64.9 51.8 53.6 61.4 61.9 58.6 59.1 62.6 63.8 60.1 59.8 56.3 54.3 Future Expectations 55.4 58.3 65.8 66.9 59.7 56.2 57.8 56.9 58.4 55.6 54.4 53.6 52.7 Interest Rates Paid Current Conditions 55.8 52.5 52.8 50.8 50.8 50.5 52.4 52.6 54.3 50.0 49.7 49.7 49.7 Future Expectations 51.9 51.7 50.3 50.3 50.0 50.6 50.6 50.0 50.0 49.4 49.4 49.7 49.7 Effect of Rouble Exchange Rate Current Conditions 50.6 49.7 49.4 51.0 53.4 54.1 55.4 56.9 61.0 53.7 50.9 53.3 50.3 Future Expectations 48.2 49.1 49.3 50.7 50.7 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 Supplier Delivery Time Current Conditions 48.0 45.9 46.4 51.0 50.3 49.7 49.5 51.7 50.5 50.0 49.5 51.8 50.3 Future Expectations 49.5 49.2 50.3 49.5 49.5 49.2 49.5 49.7 49.7 49.7 49.7 49.7 49.7 Availability of Credit Current Conditions 54.4 51.9 51.1 54.7 54.9 58.0 57.9 55.0 51.9 53.0 53.9 59.9 57.7 Future Expectations 52.2 52.7 53.1 54.9 53.4 52.0 51.1 50.9 50.9 50.0 51.5 50.6 50.8

32 MNI Russia Business Report - June 2014 Historical Records 2013- Current Minimum Maximum Mean Median MNI Russia Business Indicator Current Conditions 45.5 62.9 55.2 56.0 Future Expectations 45.0 71.3 55.7 54.7 Production Current Conditions 48.3 61.1 55.9 56.4 Future Expectations 45.5 58.8 53.3 52.0 New Orders Current Conditions 48.8 73.8 58.6 58.2 Future Expectations 45.5 62.8 54.2 52.5 Export Orders Current Conditions 44.4 61.1 51.8 50.0 Future Expectations 41.6 66.0 48.9 45.3 Productive Capacity Current Conditions 50.0 57.7 52.0 50.9 Future Expectations 48.5 63.2 52.1 49.9 Order Backlogs Current Conditions 39.5 52.0 46.4 46.5 Future Expectations 37.7 50.0 44.2 43.3 Employment Current Conditions 47.7 56.5 51.6 50.9 Future Expectations 46.2 53.6 49.9 50.3 Inventories Current Conditions 32.2 50.8 45.9 48.4 Future Expectations 37.5 51.9 45.3 46.0 Input Prices Current Conditions 50.5 68.8 54.1 52.0 Future Expectations 50.0 67.9 54.2 51.7 Prices Received Current Conditions 46.3 67.3 54.4 53.3 Future Expectations 48.7 55.8 52.0 51.3 Financial Position Current Conditions 51.8 68.0 59.9 60.0 Future Expectations 52.7 68.5 58.4 57.3 Interest Rates Paid Current Conditions 49.7 57.4 52.4 52.5 Future Expectations 49.4 54.5 50.9 50.3 Effect of Rouble Exchange Rate Current Conditions 49.4 61.0 52.6 51.0 Future Expectations 48.2 50.7 49.8 50.0 Supplier Delivery Time Current Conditions 45.9 51.8 49.5 50.0 Future Expectations 49.1 50.8 49.7 49.7 Availability of Credit Current Conditions 48.1 59.9 53.9 54.2 Future Expectations 50.0 55.6 52.2 52.1

MNI Russia Business Report - June 2014 33 Historical Records - Quarterly Q4 13 Q1 14 Q2 14 Quarterly Change Quarterly % Change Current Conditions 51.1 56.8 51.8-5.0-8.8% Future Expectations 47.2 53.9 53.1-0.8-1.5% Production Current Conditions 53.4 56.7 56.0-0.7-1.2% Future Expectations 47.1 51.1 51.6 0.5 1.0% New Orders Current Conditions 53.9 59.2 56.5-2.7-4.6% Future Expectations 46.9 51.0 52.3 1.3 2.5% Export Orders Current Conditions 50.0 52.1 46.8-5.3-10.2% Future Expectations 41.8 45.5 43.6-1.9-4.2% Productive Capacity Current Conditions 51.0 50.3 50.7 0.4 0.8% Future Expectations 49.0 49.7 50.0 0.3 0.6% Order Backlogs Current Conditions 48.8 50.3 42.4-7.9-15.7% Future Expectations 40.9 43.0 43.4 0.4 0.9% Employment Current Conditions 49.3 49.4 51.4 2.0 4.0% Future Expectations 46.5 49.9 50.2 0.3 0.6% Inventories Current Conditions 47.0 41.0 39.8-1.2-2.9% Future Expectations 46.5 42.6 43.7 1.1 2.6% Input Prices Current Conditions 53.0 52.6 51.1-1.5-2.9% Future Expectations 50.9 50.7 50.1-0.6-1.2% Prices Received Current Conditions 54.9 54.9 50.6-4.3-7.8% Future Expectations 49.8 49.8 50.9 1.1 2.2% Financial Position Current Conditions 59.9 62.2 56.8-5.4-8.7% Future Expectations 57.9 57.0 53.6-3.4-6.0% Interest Rates Paid Current Conditions 51.2 52.3 49.7-2.6-5.0% Future Expectations 50.4 49.8 49.6-0.2-0.4% Effect of Rouble Exchange Rate Current Conditions 54.3 57.2 51.5-5.7-10.0% Future Expectations 50.2 50.0 50.0 0.0 0.0% Supplier Delivery Time Current Conditions 49.8 50.7 50.5-0.2-0.4% Future Expectations 49.4 49.7 49.7 0.0 0.0% Availability of Credit Current Conditions 56.9 53.3 57.2 3.9 7.3% Future Expectations 52.2 50.6 51.0 0.4 0.8%

34 MNI Russia Business Report - June 2014 Methodology MNI Russia Business Sentiment is a monthly poll of Russian business executives at companies listed on the Moscow Exchange. Companies are a mix of manufacturing, service, construction and agricultural firms. Respondents are asked their opinion on whether a particular business activity has increased, decreased or remained the same compared with the previous month as well as their expectations for three months ahead, e.g. Is Production Higher/Same/Lower compared with a month ago? A diffusion indicator is then calculated by adding the percentage share of positive responses to half the percentage of those respondents reporting no change. An indicator reading above 50 shows expansion, below 50 indicates contraction and a result of 50 means no change. Data is collected through computer aided telephone interviews and around 200 companies are surveyed each month.

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