Russia's Economic Transformation: A Conversation With Ruben Vardanian Monday, April 26, 2010 2:30 PM - 3:45 PM Speaker: Ruben Vardanian, Chairman and CEO, Troika Dialog Group Interviewer: Michael Intriligator, Senior Fellow, Milken Institute; Professor Emeritus of Economics, Political Science and Public Policy, University of California, Los Angeles Despite its abundance of natural gas, oil and precious metals, Russia has always been considered the riskiest of the BRIC countries for foreign investors. Seeking to change this image, Russian President Dmitry Medvedev has laid out an ambitious plan of modernization that includes cleaning up the nation's pervasive corruption. Medvedev insists that Russia must end its overreliance on commodities, and indeed, its economy contracted sharply in 2008 as oil prices fell. Can Russia diversify and prosper by creating a more knowledge-based economy? Will the recent uptick in foreign investment gain momentum? As oil prices surge once again, is Russia in for another boom-and-bust cycle? What lies ahead for the ruble? What are the risks for foreign corporations doing business in Russia? Ruben Vardanian, chairman and CEO of Troika Dialog and a key figure in Russia's capital markets, will join us for a one-on-one interview that will shed new light on the changes under way in the Russian economy.
Russia country with a large span Time zone span: UTC+2 to UTC+11 Geography: lowest point -28m, highest point 5,633 m Resources: 1/6 of the world s land mass 33% of the world s proven gas reserves 16% of the world s proven coal reserves 770 mln hectares of forests (Canada - 244 mln ha) 4,312 cubic km of fresh water (Europe - 2,900 cubic km) Temperature: -68 o C in January in Oymyakon, +40 o C in July in steppe areas Diversity: over 130 nationalities and practically all religions represented Lifestyle: primitive communal in remote villages, modern urban in the capital and large cities
Political environment
Map of changes in the political landscape Golden Hundred* (3 pers.) Ex-military/ KGB officials (2 pers.) Medvedev s call (25 pers.) Putin s call (38 pers.) Exregional officials (10 pers.) Ex-federal official i (10 pers.) *Top 100 young leaders [Source: Institute for Regional Policy - Regionalistica] Political heavyweights (20 pers.)
Number of government employees per 1000 people in Russia 14 12 11.8 10 8 6 4 2 0 1857 1913 1928 1950 1992 1996 1999 2004 2007 2009 [Source: Federal State Statistics Service]
Market share of state-owned banks, % of total AuM 55.00 50.00 45.00 40.00 35.00 30.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 [Source: Higher School of Economics]
State bailout, % of GDP 16% 15% 12% 8% 4% 0% 5.80% 1.30% 1.10% 1.10% 0.20% China US India Russia UK Brazil [Source: The Economist]
Macroeconomic environment
GDP 6000 5000 4000 $,Bn 3000 2000 1000 989 1289 1670 1226 1520 1650 0 2006 2007 2008 2009 2010F 2011F [Source: Troika Dialog estimates, IMF, CIA] China Brazil Russia India
GDP per capita, $ 14000 12000 10000 8000 6000 4000 2000 0 11744 10826 11794 9065 8670 6926 2006 2007 2008 2009 2010F 2011F Russia Brazil China India [Source: Troika Dialog estimates, IMF, CIA]
Unemployment rate % 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 India Russia Brazil China 2006 2007 2008 2009 [Source: Troika Dialog estimates, IMF, CIA]
International reserves 2500 2000 $, Bn 1500 1000 500 315 476 427 439 [Source: Troika Dialog estimates, IMF, CIA] 0 2006 2007 2008 2009 China Russia India Brazil
CPI 16.0 % 12.0 8.0 4.0 India Russia Brazil China 0.0 2006 2007 2008 2009 2010F 2011F -4.0 [Source: Troika Dialog estimates, IMF, CIA]
Public debt $, Bn 1000 800 600 400 200 0 2006 2007 2008 2009 China India Brazil Russia [Source: Troika Dialog estimates, IMF, CIA]
External debt $, Bn 600 500 400 300 200 100 0 2006 2007 2008 2009 Russia China India Brazil [Source: Troika Dialog estimates, IMF, CIA]
BRIC trade balance 2006 2007 2008 2009 $, Bn 390 300 210 120 30-60 -150 China Russia Brazil India [Source: Troika Dialog estimates, IMF, CIA]
Capital market environment
Trading volumes, $bn (daily average) China Russia 5,316 Brazil India [Source: Bloomberg, 2009] 0 1000 2000 3000 4000 5000 6000 7000 8000
BRIC stock market growth 1600 % 1200 800 400 0 RTS MSCI Brazil MSCI India MSCI EM MSCI China [Source: Bloomberg]
BRIC market capitalization $, Bn 4000 3500 3000 2500 2000 1500 1000 500 0 Shanghai BOVESPA RTS SENSEX [Source: Bloomberg]
BRIC market capitalization growth 3500% Since 2001 Russian market has grown by 1913% 2800% RTS 2100% Chinese market 1400% SENSEX by 690% 700% 0% Shanghai BOVESPA [Source: Bloomberg]
Total M&A volume 200,000.00 160,000.00 $, mln 120,000.00 80,000.00 40,000.00000 00 0.00 China Brazil India Russia 2000 2002 2004 2006 2008 2010 [Source: Thomson Reuters]
Average M&A deal volume 200 150 Brazil $, mln 100 50 China India [Source: Thomson Reuters] Russia 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total IPO volume ($mln) 160,000.00 120,000.00 China $, mln 80,000.00 40,000.00 0.00 Brazil India Russia [Source: Dealogic]
Average IPO deal volume ($mln) 1200 1000 $, mln 800 600 400 200 0 [Source: Dealogic] Brazil China Russia India 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Financial market sophistication Benchmark: 1 UK Switzerland Luxemburg 10 Brazil Ranking 30 50 70 90 India China Russia [Source: Global Competitiveness Report 2007-2010] 2007 2008 2009
Human capital environment
Population growth % 1.5% 1.0% 0.5% 0.0% -0.5% 2007 2008 2009 2010F 2011F India Brazil China Russia -1.0% [Source: Troika Dialog estimates, IMF, CIA]
Birth and death rates (pro mille) 25 20 15 10 5 Birth rate Death rate 0 [Source: CIA 2009 World Factbook] India Brazil China Russia
Life expectancy China Brazil India Russia 66 62 64 66 68 70 72 74 [Source: CIA 2009 World Factbook]
Education and healthcare expenditures % 5.0 4.5 4.0 3.5 Education Expenditures / GDP Healthcare and sport/gdp 3.0 2006 2007 2008 2009 [Source: Federal State Statistics Service]
Literacy Russia 99.50% China Brazil India [Source: CIA 2009 World Factbook] 0% 20% 40% 60% 80% 100%
Education 1200 1000 800 600 400 200 0 1994 1996 2001 2004 2005 2006 2007 2008 2009 Total Number of Universities (Left Axis) University Students per 10 000 people of population (Left Axis) Number of Students per Professor (Right Axis) 30 25 20 15 10 5 0 [Source: Federal State Statistics Service]
Quality of management schools Benchmark: 1 0 France France Switzerland 20 India Ranking 40 60 80 100 [Source: Global Competitiveness Report 2007-2010] Brazil China Russia 2007 2008 2009
Brain drain Benchmark: 1 US US US Ranking 30 35 40 45 50 55 60 [Source: Global Competitiveness Report 2007-2010] 2007 2008 2009 Brazil China India Russia
Corporate spending on R&D Benchmark: 1 Switzerland 20 25 China 30 Brazil Ranking [Source: Global Competitiveness Report 2007-2010] 35 India 40 45 Russia 50 2007 2008 2009
Government spending on R&D, % of GDP 4.00% 3.00% 2.00% 1.00% 1.10% 0.00% 00% [Source: OECD, 2009]
Innovation Benchmark: 1 Japan US US 25 China 30 India 35 40 45 Brazil Ranking [Source: Global Competitiveness Report 2007-2010] 50 Russia 55 60 2007 2008 2009
Mobile phone subscriptions per 100 People 140 120 100 80 60 40 20 0 Russia, 132 Brazil, 78 China, 47 India, 29 [Source: UNdata]
Investment climate
FDI 100.0 80.0 China 60.0 40.0 20.0 0.0 Russia India Brazil 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 [Source: Troika Dialog estimates, Central Bank of Brazil, IMF]
FDI in Russia by sector Transport and communications 3% Financial 4% Construction 5% Real estate, advertisment, etc. 17% Extraction of raw materials 20% [Source: Federal State Statistics Service, 2009] Agriculture 1% Other 1% Supply and redistribution ib ti of electricity, gas and water 1% Manufacturing 26% Retail 22%
Market share of foreign companies in Russia Banking Power Generation Consumer 25% 11% Over 25% Citibank Raiffeisen Bank Unicredit Enel E.ON Fortum Beer 85% Soft drinks 53% Packaged food 15% [Source: Troika Dialog estimates]
Russian Eurobonds compared to other countries 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Source: Troika Dialog. *Russian USD Sovereign Eurobonds (in euro) NB: All rating are represented in the following order: S&P/Moody s/fitch. Russia* BBB/Baa1e/B BB Spain Govt AA+/Aaa/AAA Italian Government A+/Aa2/AA- Germany Govt AAA/Aaa/AAA 0.00 5.00 10.00 15.00 20.00
Russian Eurobonds compared to other countries 6.40% 5.40% 4.40% Russia BBB/Baa1e/ BBB China A+/A1/A+ Brazil BBB- /Baa3/BBB- 3.40% 2.40% US AAA/Aaa/AAA 1.40% 0.40% 0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 Source: Troika Dialog NB: All rating are represented in the following order: S&P/Moody s/fitch.