Diversification: Diversification: Key to Economic Key to Economic
DevelopmentDevelopment
1. ECONOMY
2. INVESTMENT
3. STRATEGY OF ECONOMIC GROWTH
4. SISTEMA CASE STUDY
5. Q&A
April 2004Russian Economic Forum
London
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1. ECONOMIC CONTEXT• Strong economy: 7.3% GDP growth for 2003
• High oil prices
• Strong domestic demand
• Large FX (>$61 bn) and fiscal (>$7 bn) reserves
• Budget surplus since 2000 (2% of GDP in 2003)
• Strong rouble and declining inflation
• Widespread corporate restructuring and growing labour productivity
• Progress of structural reforms in key areas (tax, natural monopolies, land and administration)
• Moody’s upgrade to investment grade (“Baa3” rating) as an evidence of economical and political progress recognition
0
1
2
3
4
5
6
7
8
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
Rat
e, %
10
12
14
16
18
20
22
24
26
1Q01
2Q01
3Q01
4Q01
1Q02
2Q02
3Q02
4Q02
1Q03
2Q03
Rat
e, %
GDP / Industrial Production Growth, %YOY
CPI, %YOY
RUSSIA HAS DEMONSTRATED STRONG MACROECONOMIC PERFORMANCE OVER THE PAST TWO YEARS
Source: Goskomstat
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1.1 GROWTH DYNAMICS
ARE HIGH COMMODITY PRICES THE ONLY SOURCE OF ECONOMIC GROWTH?
????????RUSSIAN ECONOMY’S GROWTH RATES RAISE QUESTIONS ON THEIR UNDERLYING REASONS
Source: Goskomstat
Oil Price (US$/barrel)
1999 2000 2001 2002 2003 2004
Growth Rates (%)
0
2
4
6
8
10
12
1999 2000 2001 2002 2003
GDP Industrial Production
4
87,0%
44,6%
19,8%
14,0%
13,0%
10,4%
9,3%
8,8%
0% 20% 40% 60% 80% 100%
MTS
ROSNO
Engineering
Construction
Consumer Services
Retail
Fuel
Iron Industry
1.2 SOURCES OF ECONOMIC GROWTH
SERVICES, MANUFACTURING AND
CONSTRUCTION ARE BECOMING THE NEW GROWTH LEADERS
THE NEW TREND
• Commodity factor still vital• However, growth rates in the raw materials sector are beginning to lag behind those in manufacturing, construction and services
MANUFACTURING INDUSTRIES, CONSTRUCTION AND SERVICES ARE BECOMING SIGNIFICANT SOURCES OF ECONOMIC GROWTH
Source: Goskomstat, IMF, IRG
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1.3 PRODUCTION BREAKDOWN
MANUFACTURING INDUSTRIES STILL CONSTITUTE ONLY ABOUT 40% OF TOTAL INDUSTRIAL PRODUCTION, BUT THEIR SHARE WILL GROW
Engineering and Metalworking20,1%
Food Processing14,2%
Chemical and Petrochemical5,7%
Construction Materials3,1%
Light Industry1,4%
Fuel20,1%
Energy11,1%
Nonferrous Metallurgy7,7%
Iron Industry8,4%
Timber, Cellulose and Paper4,1%
Other Sectors4,0%
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Metals and Metal Goods 14%
Machines, Equipment and Vehicles 9%
Chemical Products 7%
Timber, Cellulose and Paper 4%
Fuel and Energy 58%
Other Goods 6%
Textiles, Textile Products and Shoes 1%
Food and Agricultural Materials 2%
1.4 EXPORTS BREAKDOWN
EXPORTS ARE DOMINATED BY COMMODITIES (>70%), HOWEVER, THE SHARE OF PROCESSED GOODS IS ALSO INCREASING
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Telecom Sector Revenues
$6,7
$4,1$5,2
$6,7
$8,7
$12,6
0
3
6
9
12
15
1998 1999 2000 2001 2002 2003Е
USD bn.
Incumbent Operators
Alternative Operators
Telecom Investment
$1,5
$1,1
$1,8$2,0 $2,1
$3,2
0
1
2
3
4
1998 1999 2000 2001 2002 2003Е
USD bn.
Foreign Investment
Domestic Investment
Penetration
21% 22% 23% 24% 25%27%
1% 1% 2%
6%
25%
13%
0%
10%
20%
30%
40%
50%
1998 1999 2000 2001 2002 2003Е
Fixed Line Wireless
Source: Ministry of Telecommunications, Company data
CAGR 1999-2003 – 32%
Share of Telecoms in Russia's GDP
2,5%
2,1% 2,0%2,2%
2,5%
2,9%
0%
1%
2%
3%
4%
1998 1999 2000 2001 2002 2003Е
Global Average (3.6%)
TELECOM SECTOR REVENUES ARE RAPIDLY GROWING WHILE STILL RETAINING HIGH GROWTH POTENTIAL
1.5 CASE STUDY: TELECOMS
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2. SOURCES FOR FUTURE GROWTH
GROWTH OF DOMESTIC CONSTRUCTION AND SERVICES
GROWTH OF EXPORTS IN THE MANUFACTURING SECTOR
I N V E S T M E N T
HI-TECH PROJECTSDEEPER PROCESSING OF RAW MATERIALS
DOMESTIC
ECONOMIC
GROWTH
DOMESTIC ECONOMIC GROWTH SHOULD COME FROM FOUR MAIN SOURCES
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13%
69%
193%
50%
34%
67%
0% 50% 100% 150% 200% 250%
Sistema
Foreign DirectInvestment
MTS
Total ForeignInvestment
MGTS
CAPEX
RUSSIAN AND FOREIGN INVESTORS ARE READY TO INVEST IN THE NON-NATURAL RESOURCES SECTOR
2.1 INVESTMENT
No 25%
No view 6%
Yes 69%
Do you see a move away from dollar denominated export sectors to rouble-heavy domestic sectors?
Source: Goskomstat, company informationSource: Ansdell Report 2004
Investment Growth (%)
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2.2 INVESTMENT GROWTH
FOREIGN INVESTORS PLAN TO INCREASE THEIR EXPOSURE TO RUSSIA, BUT IT DEPENDS ON A NUMBER OF FACTORS
Will you invest more into Russia?
Wait and see 16%
No 8%
No view 8%
Yes 68%
What factors would lead you to increase your exposure to Russia?
Progress on reforms
Resolution of YUKOSsituation
Rise in oil prices
Bettercorporategovernance
More IPOs
Government on sideof minor investors
36%
21%
14%
11%
9%
9%
Source: Ansdell Report 2004
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You might see a shift from export-oriented sectors to more domestic sectors. Russian export sectors will probably be hurt by the currency trend, whilst domestic stocks will benefit from the fact that high oil prices are making Russian people richer which means they have more money to spend on consumer goods. The reliance on oil has over-loaded the Russian economy in some respects. I do think we will see the Russian government make efforts to move the economy away from the oil & gas sectors to other sectors in the future.
Buy-side analyst
We would like to see a signal from local consumers in Russia that they are buying more consumer goods. Most of the listed companies in Russia are oil and telecoms companies. I would increase my exposure if there was an offering from other sectors such as the foods/consumer goods sector.
European emerging markets fund manager
2.3 FUTURE INVESTMENT DIRECTION
FOREIGN INVESTORS BELIEVE IN COMPANIES POISED TO BENEFIT FROM GROWING DOMESTIC CONSUMPTION
Source: Ansdell Report 2004
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3. STRATEGY OF ECONOMIC GROWTH
STATEBUSINESS
1. Legal and infrastructural framework for economic development
2. Industrial policy
1. Implementing investment projects
2. Satisfying the market’s needs
RUSSIA’S ECONOMIC GROWTH
AREA OF
I N T E R A C T I O N
ECONOMIC GROWTH IN RUSSIA IS ONLY ACHIEVABLE WITH EFFICIENT COOPERATION BETWEEN BUSINESS AND THE STATE
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3.1 COMPETITIVE ECONOMY
PROJECTS
Infrastructural Innovative
COMPETITIVE ECONOMY MEANS SUPPORTING PROMISING PROJECTS RATHER THAN STAGNATING SECTORS
SAMPLE PROJECTS:
• Development of microchip exports (Mikron)
• Telecom equipment manufacturing (Strom Telecom)
• Billing software production (Strom Telecom)
• ADSL services (MTU-Intel)
• Development of ‘smart’ offices (Sistema Hals)
Impact on the sector and general business
environmentValue Chains
Competitive Product
1. Objectiveness 2. Transparency
3. Systemic Approach
COMPETITIVEECONOMY
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• Largest non-natural resource based conglomerate in Russia• Diversified portfolio of assets with high degree of control over its subsidiaries
− Involvement in 13 business sectors− Asset value of $5.5bn as of 1H2003
• Strong growth history and perspectives− Total consolidated asset growth of 306% from 1999 to 1H2003− Substantial market cap growth of MTS (NYSE: MBT)− Strong growth potential in core businesses and ventures
• Strategic partnerships with leading international players− e.g. Deutsche Telekom (MTS), Allianz AG (ROSNO), Volvo, Siemens, Accor
• History of successful management of major projects in Russia − First-hand knowledge of the business environment− Excellent track record of the management team
• Industry leadership − Sistema’s subsidiaries in each core business are industry leaders in their sectors
• Rated B by S&P and Fitch, and B1 by Moody’s
SISTEMA IS A PERFECT EXAMPLE OF SERVICE- AND HIGH-TECH-, RATHER THAN COMMODITY-BASED, GROWTH
4. SISTEMA AS A GROWTH CASE
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SISTEMA
Telecommunications Pharma & Biotech
Travel & Overseas Assets
Children’s Goods Retail
Mass Media
Radio & Space Technology
Banking
Insurance
Real Estate
Mobile Telecom
Fixed Line
CLECs
Internet
SERVICES VENTURESPRODUCTION
Aviation
Venture Fund
Electronics
MicroElectronics
IndustrialElectronics
White andBrownGoods
Softwareand IT
Sistema’s strategic focus
4.1 GROUP STRUCTURE
ALL OF SISTEMA’S BUSINESSES ARE CONCENTRATED OUTSIDE OF THE RAW MATERIALS SECTOR
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4.2 STRATEGIC PRINCIPLES
SISTEMA’S SUCCESS IS BASED ON FIVE CORE STRATEGIC PRINCIPLES
• Building a balanced portfolio of operating companies• Effective portfolio management
Portfolio Diversification
Return-Based Strategy
• Investing into companies with leading competitive positions• Establishing sales and earnings targets for operating companies• Disposing of underperforming assets
Management Capability
• Attracting, developing and motivating professionals, and building an effective management structure
Strategic Partnerships
• Successful development of strategic partnerships• Acquiring know-how, management skills and market knowledge
Focus• Concentration in services and high-tech industries with fast growth• Growing size and value of technology, insurance, real estate and retail
businesses
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4.3 PORTFOLIO COMPOSITION (as of June 30, 2003)
Telecommunications87.1%
Other5.3%
Technology1.7%
Insurance4.9%
Finance and Securities
1.0%
FOUR BUSINESS SECTORS MAKE UP THE CORE OF SISTEMA’S INVESTMENT PORTFOLIO
Sistema Asset Value Breakdown Sistema Sales Breakdown
Total: US$ 5.5 bn Total: US$ 1.6 bn
Telecommunications80.3%
Other7.8%Technology
1.4%
Insurance3.3%
Finance and Securities
7.2%
DUE TO THE SECTOR’S RAPID DEVELOPMENT, TELECOMS CONSTITUTE OVER 80% OF SISTEMA’S PORTFOLIO BOTH IN TERMS OF ASSETS AND REVENUES
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4.4 FINANCIAL SUCCESS
MTS EXAMPLE DEMONSTRATES HUGE POTENTIAL FOR VALUE CREATION IN SISTEMA’S CORE BUSINESSES
Mobile Telesystems (NYSY:MBT) Closing Price and Trading Volumes (April 2001-April 2004)
0
500
1000
1500
2000
2500
3000
Date
03.05.2004
01/28/2004
12/18/2003
11.11.2003
10.06.2003
08/28/2003
07/23/2003
06/16/2003
05.08.2003
04.01.2003
02/24/2003
01/15/2003
12.06.2002
10/30/2002
09/24/2002
08/16/2002
07.11.2002
06.04.2002
04/26/2002
03/20/2002
02.11.2002
01.03.2002
11/26/2001
10/18/2001
09.06.2001
07/31/2001
06/22/2001
05/16/2001
$0
$20
$40
$60
$80
$100
$120
$140
$160
MTS EXAMPLE
• Deutsche Telekom/Sistema strategic partnership
• #1 in the Russian market
• Market Cap exceeds $13 bn (04.2004)
• 3.3 times Market Cap growth over past 12 months
+230%
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5……………………………………………….?THANK YOU FOR YOUR ATTENTION
5. Q&A