Global Global Strategy Challenges Executable Solutions

Russia 2020: What Russia will Look Like in the Future

The Worlds Largest Country: How Multinational Companies are Seizing its Opportunities

France Houdard Managing Director

france.houdard@exolus.com March 2011

Preface: What Does Worlds Largest Country Look Like from Space?
Why?

Copyright 2011 Exolus. All rights reserved..

Source: NASA (United States National Aeronautics and Space Administration)

INTRODUCTION: Russia Structural Framework and Forward Trends . . .

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Framework: Structural Determinants of Russias Economic Geography

80% Population in West East Largely Uninhabitable
Russia Map

People

Permafrost & Plains

17,075,400 km2
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1/8th Worlds Land Area

10 time Zones
3

Economy: Growth in Russias Economy

Economy Doubled in 7 Years (01 08) IMF Forecasts Rapid Growth to 2015
Russia GDP (USD trillion, PPP-adjusted))
Will host Olympic games

3.0
2.8 2.6 2.4 2.2 USD trillion 2.0 1.8 1.6 1.4 1.2 1.0

Global Financial Crisis

2x

2005

2000

2001

2002

2003

2004

2006

2007

2008

2009

2010 f

2011 f

2012 f

2013 f

2014 f

Copyright 2011 Exolus. All rights reserved..

Source: IMF

2015 f

Actual
4

IMF Forecast

Wealth: Russia to have Highest GDP per Capita among BRIC Countries
Russia GDP per Capita: USD 6,200 (2009) USD10,000 (2020)
2020 $10,000

Russia GDP per Capita

2009

$8,000

$6,000

$4,000

$2,000

$0

Russia
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Brazil

China

India
Source: ERSUSDA 5

Income: Russia leads BRICs in Per Capita Disposable Income

Per Capita Disposable Income Growing at Average 6% Per Annum
Russia

Disposable Income Per Capita (USD per annum)

80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

Brazil China India

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Source: GS Global ECS Research

Resources: Worlds Leading Energy Superpower Oil and Gas

Worlds Largest (#1) Oil Producer
OIL

Worlds Largest (#1) Gas Producer

World Oil Producers (12.9% share, 2009)
Russia Saudi Arabia USA Iran China

Worlds
Largest (#1) oil producer 2nd largest oil exporter 8th largest oil reserves

12.9%

Canada Mexico Venezuela Iraq Kuwait UAE Norway Other

GAS

World Gas Reserves (23.7% share, 2009)

Russia Iran Qatar Saudi Arabia Turkmenistan USA UAE Venezuela Nigeria Algeria Indonesia Iraq Other

Worlds
Largest (#1) gas producer

23.7%

Leading (#1) natural gas exporter

Largest (#1) natural gas reserves

Copyright 2011 Exolus. All rights reserved..

Source: BP Statistical Review of World Energy 2010 7

Resources: Worlds Leading Energy Superpower Mineral Fuels

Worlds 2nd Largest Coal Reserves
COAL

3rd Largest Uranium Reserves

World Coal Reserves (19% share, 2009)

Worlds
5th coal producer 3rd coal exporter

USA Russia China Australia India Ukraine Kazakhstan

2nd largest coal reserves

19%
URANIUM

South Africa Other

Australia Kazakhstan Russia

World Uranium Reserves (10% share, 2008)

Worlds
4th uranium producer

South Africa Canada USA Brazil

3rd largest uranium reserves

Namibia Niger Ukraine Jordan

10%
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Uzbekistan Other

Source: BP Statistical Review of World Energy 2010, British Geological Survey 8

Resources: Worlds Leading Mineral Industry Iron and Steel

Worlds Largest (#1) Iron Reserves
IRON

4th Largest Steel Producer

World Iron Reserves (18% share, 2009)
Russia Australia Ukraine Brazil

Worlds

18 %
3rd pig iron producer Largest (#1) iron reserves

China

India
Kazakhstan Venezuela Sweden USA Iran Canada Other

RAW STEEL

World Raw Steel Production (5.5% share, 2009)

China Japan USA Russia Korea Germany Ukraine Brazil Italy

Worlds
4th raw steel producer 4th raw steel exporter

5.5%

France UK Other
Source: U.S. Geological Survey 9

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Resources: Worlds Leading Mineral Industry Nickel, Copper

Worlds Largest (#1) Nickel Producer
NICKEL

7th Copper Producers

Russia Indonesia Australia

World Nickel Production (19% share, 2009)

Worlds
Largest (#1) nickel producer Largest (#1) nickel exporter 3rd nickel reserves

19%

Canada
Philippines New Caledonia China Colombia Cuba Brazil

South Africa
Botswana Venezuela Other

COPPER

World Copper Production (4% share, 2009)

Chile Peru USA Indonesia China

Worlds
7th copper producer
5th copper exporter 9th largest copper reserves

Australia Russia Zambia

Canada

5%

Poland Kazakhstan Mexico Other

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Source: U.S. Geological Survey 10

The Future: 1 of 5 Countries with Highest Combined - GDP, Population, Resources

> USD3 trillion GDP 100+ million people > 3 million sq km

Over 3 million sq km
Indonesia Philippines Canada Australia Bangladesh Pakistan

Over 100 million People

Russia
Brazil US India China Mexico Japan

Nigeria Ethiopia

Germany

France

Italy

United Kingdom

Over US$3 trillion GDP (PPP)

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11

Corporate Trends: Structural Optimization Markets, Resources, Innovation

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12

Corporate Burning Platforms: Markets, Resources, Innovation

Market Access/Revenue Growth Global Structural Cost Reduction

Knowledge
R&D Sales

Markets

Engineering

IT

HR

Service

Efficiency
F&A Distribution Production /Assembly Procure Sourcing

Efficiency/ Shared Services Innovation/ Knowledge Resources/ Cost Reduction

COST

Markets / Revenues

Resources
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Shareholder Value

DRIVING

13

1. Production/Resources: Where are Leading Direct Investment Nodes?

Top Foreign Investment Destinations in Western Part of Russia
Foreign Investment Concentration
Population (million) 10.3 6.6 4.7

A-Cities Highest Population and FDI S-Cities Mid-High Population and FDI

City
Moscow City Moscow Region St Petersburg

Cumulative FDI (1999 2009) USD 45.8 bn USD 11.9 bn USD 5.0 bn

1.7
1.1
St. Petersburg Moscow Nizhny Novgorod Kazan Rostov Tolyatti Ufa Yekaterinburg

Leningrad Region
Omsk Krasnodar Chelyabinsk Kazan Tolyatti

USD 2.8 bn
USD 3.6 bn USD 3.3 bn USD 2.6 bn USD 1.7 bn USD 1.1 bn

0.6 1.1 1.1 0.7

Krasnodar

Chelyabinsk

Omsk Novosibirsk

1.3
1.3 1.1 1.4 1.0

Yekaterinburg
Nizhny Novgorod Rostov-on-Don Novosibirsk Ufa

USD 1.1 bn
USD 0.9 bn USD 0.9 bn USD 0.6 bn USD 0.5 bn

Copyright 2011 Exolus. All rights reserved..

Source: Rosstat

14

1. Production/Resources: Car Production Proxy for Production Nodes?

Russia Already 5th Largest Consumer of Cars in Europe
A-Cities S-Cities
Isuzu Hyundai Nissan Ford Chevrolet GAZ

Russia Automotive Production

GM
Toyota Volvo KIA Moscow BMW Renault ZIL VW Rostov Krasnodar Tolyatti Kazan Ufa Yekaterinburg St. Petersburg

FIAT

Sollers
Great Wall ZMA KIA Lada Tata Motors Chelyabinsk Geely IVECO Paz Hyundai Tata Motors GM AVTOVAZ LADA

Skoda
Peugeot Citroen Mitsubishi

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Sources: All Publically Available Information, Company Websites

15

1. Production/Resources: Moscow Region Immense, as Large as Countries

Moscow Region (45,900 km sq) larger than entire Switzerland (41,285 km sq)

Moscow Region
(45,900 km sq)

Switzerland (Country)
(41,285 km sq)

Moscow City Moscow Region

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Sources: Publically Available Information

16

1. Production/Resources: Management Sourced in Moscow City, Labor Local

Management-Labor Skill/Cost Drivers 70 100 km from Moscow City Moscow Region
(45,900 km sq)

Klinskiy

Dmitrovskiy Solnechnoaorskiy Mitishchinskiy

SergievoPosadskiy

Istrinskiy Ryzskiy

Balashikhinskiy

Odintsovskiy

Moscow City
Lenininskiy Ramenskiy

OrekhovoZuevskiy

Naro-Fominskiy
Eqorevskiy Chekhovskiy Stupinskiy Serpukhovskiy Kolomenskiy

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Sources: Company Websites, All Publically Available Information

17

1. Production/Resources: Leningrad Region even Larger, Size of Hungary

Leningrad Region (84,500 km sq) roughly same size as Hungary (93,030 km)

Leningrad Region
(84,500 km sq)

Hungary (Country)
(93,030 km sq)

St Petersburg City Leningrad Region

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Sources: Publically Available Information

18

1. Production/Resources: Management from St. Petersburg, Labor Local

Management-Labor Skill/Cost Drivers 30 60 km from St Petersburg City Leningrad Region
(84,500 km sq)

Vsevolzhsky
Viyborgskiy Primorskiy

Krasnoselskaya Lomonosov Pushkinsky

Koldinskiy Kirovski

Gatchina Tosnenski

Copyright 2011 Exolus. All rights reserved..

Sources: All Publically Available Information, Company Websites

19

2. Cost/Revenue: Where are Pareto-Optimal Market/Resource Envelopes?

Intersection of People (West)
Per Capita GDP (USD, PPP-Adjusted) > 20,000 15,000 - 20,000

A/S Cities

Natural Resources (East)

Per Capita GDP / A/S-City Overlay

10,000- 15,000
5,000 - 10,000 0 - 5,000 Arkhangelsk

Chukotka

A-Cities S-Cities
7
23 24

Murmansk
Magadan Karelia
21 Leningrad

Kamchatka

Arkhangelsk Sakha Komi Krasnoyarsk Sakhalin

Tver
15

Vologda
20

Yamalia 8 10 6 4 19 16 39 Kirov 17 12 14 42 41 40 Khantia-Mansia 34 Perm 18 2 37 5 38 36 Sverdlovsk 35 Rostov 33

3
31 25 27 28 29 26 30 32 Volgograd 43 22

Tyumen

11

Tomsk Irkutsk
9 45

Amur Buryatia
Zabaykalsk

Khabarovsk
46

Omsk Novosibirsk

Primorsky Tuva

44

Altai
Altai
7. Kaliningrad 8. Kaluga 9. Kemerovo 10. Kostroma 11. Kurgan 12. Kursk 13. Leningrad 14. Lipetsk 15. Moscow 16. Oryol 17. Ryazan 18 Tambov 19. Tula 20. Yaroslavl 21. Novgorod 22. Chelyabinsk 23. Pskov 24. Smolensk

1. Astrakhan 2. Belgorod 3. Bryansk 4. Vladimir 5. Voronezh 6. Ivanovo

25. Adygeya 26. Ingushetia 27. Karachay-Cherkessia 28 Kabardino-Balkaria 29 North Ossetia-Alania 30. Chechnya

31. Krasnodar 32. Stavropol 33. Bashkortostan 34. Udmurtia 35. Samara 36. Tatarstan

37. Penza 38. Ulyanovsk 39. Nizhny Novgorod 40. Mari El 41. Chuvashia 42. Mordovia

43. Kalmykia 44. Dagestan 45. Khakassia 46. Jewish AD

Copyright 2011 Exolus. All rights reserved..

Source: UNDP, National Human Development Report in the Russian Federation 2010

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2. Market: Car Sales/Production Proxy for Directional Market Sizing?

Car Penetration Highest in Russia among the 4 BRIC Countries
Russia Brazil China India

Car Penetration in BRIC (units per 1,000 people)

250

Car Penetration in Russia (units per 1,000 people)

700

600 200 500 150

400

300

100

200 50 100

0 2010 2020 2030 2040 2050

0 1990 1995 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

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Sources: Association of European Business; Autostat; Rosstat, GS Global ECS Research, Other

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2. Market: Projected to be Worlds 10th Largest Pharma Market by 2015

Russia to be USD30 billion Market (2015) 9th Largest in World

Pharmaceutical Market Size Country Ranking

(2000 2015f - USD billion)

2000
USA Japan Germany France UK Italy 150 58 17 17 11 11 USA Japan

2005
262 65 24 21 16 15 USA Japan

2010
441 75 48 39 34 32

2015F Top 9
USA China Japan Germany Brazil France 524 103 85 55 47 44

Germany France UK Italy

Germany France China UK

China
Brazil Canada Spain

6.8
6.7 6.3 6.2

China
Brazil Canada Spain

13
10 10 9.8

Italy
Brazil Canada Spain

28
24 22 21

UK
Italy Russia India

36
31 30 28

Copyright 2011 Exolus. All rights reserved.. Sources: IMS; GSK, Assessment of Opportunity for Pharmaceutical Manufacturers in Emerging Markets JMCP; Monitor Analysis; Exolus 22

2. Market: High Spending Growth Resumes through Global Financial Crisis

Sales Growing at 21% CAGR

Retail Sales Growth

600

500

400
USD Million

300

200

100

2003

2004

2005

2006

2007

2008

2009

2010

Copyright 2011 Exolus. All rights reserved..

Source: EIU 23

3. Innovation: Modern Focus on Traditional Strength Science & Technology

Skolkovo Innovation Center USD2 billion over Next 3 Years

Signed Partnerships
Cisco Boeing Siemens Microsoft Nokia Intel Tata Nokia Siemens EADS Alstom Lukoil Rosatom

Under Negotiations

Industry Focus
Life Sciences Renewable Energies Aerospace Information Technology Telecommunications Nuclear Technology

ABBYY Novartis Honeywell DuPont Google Kodak Schlumberger Johnson & Johnson IM-TECH DOW Chemicals John Deere

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Sources: All Publically Available Information, Company Websites, i-gorod Website 24

3. Innovation: Strong Science and Engineering Focus in Russian Education

Science & Engineering as % of all Graduates: 25% in Russia 15% in US
Engineering Degrees

Science and Engineering as Percentage of New Degrees

45% 40% 35%

Science Degrees

30%
25% 20% 15% 10% 5% 0%

China

Korea

Germany

Russia

Japan

UK

Italy

USA

Brazil
25

Copyright 2011 Exolus. All rights reserved..

Sources: OECD Science, Technology and Industry outlook, 2010

Russia Economic Outlook

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26

Senior Executives Select Russia as a Top Global Investment Destination

Russia Top 5 Investment Destination in World
Top 14 Most Attractive Destinations for Future Investment (2009 2011)

%
60

50

Percent of Responses

40

30

20

10

0 China United States Indonesia Germany Australia Vietnam Canada Poland

India

Brazil

Russia

U.K.

Copyright 2011 Exolus. All rights reserved..

Source: World Investment Prospects 2009 - 2011

Mexico

France

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Russia Economic Outlook: Large Forex Reserves, Positive Fundamentals

Worlds 3rd Largest Forex Reserves Low External Debt Growing Banking System

Russia Holds The Worlds 3rd Largest Foreign Exchange Reserves: USD 485 billion
In 2011 the Central Bank has accumulated over USD 458 billion in foreign reserves, up from USD 12 billion in 1999.

The accumulation of large external surpluses means financial system enjoys abundant liquidity.

Low External Debt/GDP Ratio and Positive Current Account Balance

Healthy external debt to GDP ratio at 21% of GDP in 2010. Current account surplus at 5.1% of GDP in 2010; projected at 4.7% in 2011 and 4.2% in 2012. Federal budget deficit at 3.9 % GDP in 2010; projected to decrease to 2% of GDP in 2011.

Russias Banking System under Rapid Expansion

Total assets projected to double between 2010 and 2015, from EUR 400 billion (2010) to EUR 800+ billion (2015). Between 2010 to 2015, total lending to grow at 14.2 % CAGR; corporate loans at 14.3%; retail loans at 14.7% and mortgages at 15.5%.

Copyright 2011 Exolus. All rights reserved..

Source: IMF; World Bank; Sberbank; UniCredit 28

For a Comparative Perspective with the other BRIC Countries Please Refer to the Following Research Reports

China 2020

India 2020 Found on Slideshare @

Brazil 2020

http://www.slideshare.net/contest/worlds-best-presentation-contest-2010/entries http://www.slideshare.net/Exolus/india-2020-what-india-will-look-like-in-the-future http://www.slideshare.net/Exolus/brazil-2020-what-will-brazil-look-like-in-the-future

Download Reports @
www.exolus.com/en/knowledge/research.html

Global Expansion Strategy & Cross-Border Investment Execution

(Greenfield, M&A, Joint Ventures, Outsourcing)
About Exolus: Exolus is a hybrid management consulting and transaction advisory firm. We work with management teams in the development of their global expansion strategies, across the range of investment formats: Greenfield, M&A, Joint Ventures and Outsourcing. As well, we deploy against global strategies by providing program management across all phases of cross-border investment projects, from candidate searches and evaluation, through investment structuring and negotiations. The founders of Exolus have spent the past two decades in the global service space and have direct experience operating in nearly all of the major investment destinations in the world (40+ countries). The team has served clients of all sizes, both public and private, on projects that ranged in investment size from USD10 million to greater than USD1 billion. We have served clients across all of the following industry segments: Life Sciences, Manufacturing, Automotive, Technology, Retail, Consumer Business, Real Estate, Public Sector.

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Disclaimer
In writing we benefit from standing on the shoulders of others and, in the process, we strive to make our own contributions to the market of ideas. As well, we are always tremendously grateful for the many, often selfless, contributions that are availed in the process.
The opinions represented herein were prepared for information purposes only, at the time of publication. The information represented herein is believed to be reliable, at the time of publication, and was obtained by various public sources also believed to be reliable. The opinions were considered to be accurate at the point of creation, and further, any views, forecasts, or estimates contained herein may be subject to change at anytime without notice. The opinions expressed or implied herein may not be the opinions of the author, also Exolus, or any associated affiliates. This report and the information contained herein collectively, is not offered as, and should not be regarded as, used or relied upon as advice on any matter. It shall not constitute or be construed as a recommendation or solicitation on behalf of the author, and no legal commitment or obligation shall arise by reason of this document. Thus, the reader shall make an independent assessment of opinions stated herein that shall not be considered a substitute for obtaining advise from the readers advisors. The author shall not accept responsibility, express or implied, with regards to the accuracy and completeness of the information herein, and the author shall not be liable whatsoever and howsoever arising in connection to this publication. The author shall not accept, and hereby disclaim, all responsibility and liability to all persons, entities, or organizations for all consequences arising out of any use or reliance on the whole or any part of this publication. This publication should not be reproduced or distributed without the authors consent and is not intended for distribution in any jurisdiction in which this would be prohibited.

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