September 2013

Russia - are you

contrarian enough?
1
2
Important Information

Every effort has been made to ensure the accuracy of the information in this document but it may be
based on unaudited or unverified figures or sources. The information in this document should not be
used as the sole basis for an investment.
EusL CupILuI`s servIces und InvesLmenL producLs muy noL be uvuIIubIe Lo uII peopIe In uII jurIsdIcLIons.
EusL CupILuI`s servIces und InvesLmenL producLs muy noL be oIIered, soId or dIsLrIbuLed In uny counLry
unless such offer, sale or distribution is made in accordance with local registrations or any applicable
exemptions from any registration requirements provided by the local laws and regulations.
Information about our services, investment products, prospectuses, financial reports, distributors and
where the funds are registered for sale can be obtained at East Capital (www.eastcapital.com).
Investment in funds always involves some kind of risk. Past performance is no guarantee for future
performance. Fund units may go up or down in value and may be affected by changes in exchange
rates. Investors may not get back the amount invested. As East Capital invests in foreign markets,
currency IIucLuuLIons cun uIIecL LIe Iunds` vuIues.

3
East Capital in brief
Leading asset manager dedicated to
Eastern Europe and East Asia, founded in 1997
USD 4.7 billion in AUM in public and private equity
Offices in Stockholm, Moscow, Kyiv,
Hong Kong, Tallinn, Paris, Oslo and Shanghai
35 investment professionals in public
and private equity, in total 140 employees from 25
countries
Broad international client base, from direct retail
investors to leading third party distributors and first tier
institutions
14 year track record, highly awarded funds
Independently owned and managed with founders and
owners active at senior management level

AUM per Segment
All figures as of 31 July 2013
Long term approach with focus on
convergence and domestic themes
Fundamentals matter over time
(valuation and growth)
Active stock-picking without index
LruckIng (Index ugnosLIc)
Strong local presence and in-house
research based on frequent
company visits
Broad portfolio diversification on all
levels (country, sector, company)
Corporate governance (including
social and environmental
responsibility)
Investment Style
4
5
Awards
East Capital Russian
Fund
- Performance since Inception
6
Note: In USD as of 30 June, 2013. RTS Index until 30.06.2010, MSCI Russia Index Total Return (net) from 01.07.2010
Since inception (USD)
Fund 1123,3%
Index 528,2%
0
500
1000
1500
2000
2500
East Capital Russian Fund MSCI Russia TR Net
7
EMs lagging
EMs led by
Brazil and India
have performed
the worst, while
DMs had decent
returns
Reasons may be
fear of lower
growth in EMs,
but also general
risk aversion
and tapering
fears
Source: Bloomberg, East Capital estimates, 2012-12-31 - 2013-08-28
8
Russia - a macro
economic haven?
Government debt at only 11% (and mostly in rubles) and forex reserves at over
$500 bln (27% of GDP)
Current account surplus
Flexible currency absorbs oil price vulnerability, while CBR targets inflation
- Inflation down from 14% in 2008 to less than 6% expected for 2013
Budget balanced thanks to newly introduced fiscal rule
- Even with oil price at $80/bbl fiscal deficit would be less than 3% of GDP
Oil is a more resilient commodity
- Low consumption per capita in China and India
- Half of global oil exports come from the Middle East
- Elevated cost curve (deep-sea oil, oil sands and shale oil all believed to require
medium term prices of over $80/bbl)
- Oligopoly is still strong and powerful unlike on most other commodity markets
GDP growth has slowed (as with other EMs) but should rebound
Current fears for
the effects of
tapering should
be much less of a
problem for
Russia due to
both solid
domestic macro
and relative
currency
resilience in EM
class thanks to
strong linkage to
oil
Source: Sberbank, East Capital estimates
9
Highest discount ever
to oil price-based fair
value
RTS is currently
trading around
1300 points,
while a
regression
analysis of oil
price and
Russian equity
market shows
around 650
points discount
to theoretical fair
value (similar to
the situation in
late 2008/early
2009)
Source: Bloomberg, East Capital estimates
RTS Discount/Premium to oil price-based fair value
10
Highest discount ever
to oil price-based fair
vuIue conL`d
GIven Loduy`s
oil price, Russia
should trade
above 1950
points on RTS
while currently
trading around
1300, implying
an oil price of
merely $78
(today at $115)
Source: Bloomberg, East Capital estimates
RTS and oil price, (r=0,88 and r^2=0,78)
11
Post-crisis de-correlation
of performance and
earnings growth
Source: Bloomberg as of 2013-07-28, East Capital estimates
Implied earnings for selected markets since 2003-08-01 Performance for selected markets since 2003-08-01
12
Post-crisis de-correlation
of performance and
earnings growLI conL`d
Source: Bloomberg as of 2013-07-28, East Capital estimates
Performance for selected markets since 2010-01-01 Implied earnings for selected markets since 2010-01-01
13
Large upside to
historical average
Source: Bloomberg, East Capital estimates, 2003-08-30 - 2013-08-27
-8,0%
52,3%
98,6%
24,1%
35,3%
-20%
0%
20%
40%
60%
80%
100%
120%
0,0
2,0
4,0
6,0
8,0
10,0
12,0
14,0
16,0
18,0
20,0
Brazil China Russia India Turkey
U
p
s
i
d
e
/
D
o
w
n
s
i
d
e

f
r
o
m

a
v
e
r
a
g
e
,

%

P
/
E

Average P/E Current P/E Upside/Downside to average P/E, RHS
Current vs. average P/E (LHS) and upside/downside (RHS)
Toduy`s vuIuuLIons
are mainly caused
by low global
allocations to
Russia (as foreign
investors control
free float)
For example,
current ETF assets
for Brazil are about
five times the size
of ETF assets for
Russia
This implies that
downside should
be limited at these
levels
14
Reasons behind the
earnings growth
Structurally high ROEs
- Due to large entry barriers, a lack of capital and
low cost structures, prices and margins are and has
been high for many companies, especially in
unregulated, domestic sectors
Low penetration
- Due to early stage capitalism, large businesses can
grow organically as penetration is starting from a
low base
High-quality labor force
- Unlike many other petro states, Russia has a large
and highly educated population (140m people)
Magnit, today
the leading food
retailer by sales
in Russia, with
over 7 400
stores and
operating in
more than 1 700
locations,
opened its first
sLore In 1qqq.
Source: Sberbank, East Capital estimates
Consumption growing faster than
overall economy
Supportive long term
fundamentals for
domestic growth
Source:Federal State Statistic Service (RosStat)
Unemployment at record low
15
Source:Federal State Statistic Service (RosStat)
Supportive long term
fundamentals for
domestic growLI conL`d
Source: Sberbank, East Capital estimates
Improving demographics
Thousand people
-1000
-800
-600
-400
-200
0
200
400
Balance of migration
Natural population growth
Total population growth
16
Source: RosStat
Inflation at historically low levels
17
How to play the
domestic theme
Russia has a
large middle
class that
demands more
financial
services as well
as better
infrastructure,
housing, health
care and
transport

Source: Bloomberg, East Capital estimates
RussIu`s peneLruLIon curve (% oI EU uveruge)
East Capital Russian
Fund
-Relative Sector Allocation vs.
Index
18 All data as per 2013-07-31
1
-20.5%
-3.6%
-1.8%
0.8%
2.7%
3.6%
7.3%
9.2%
-25% -20% -15% -10% -5% 0% 5% 10% 15%
Energy
Materials
Financials
Consumer Staples
Telecommunication Services
Utilities
Industrials
Consumer Discretionary
Relative
Domestic sectors
19
Most sectors cheaper
than other EMs
Source: Sberbank, East Capital estimates, August 2013
RussIu Is onIy cIeup becuuse oI ILs
energy secLor - not true anymore
A wide set of domestic sectors,
preferred by East Capital, are trading at
significant discounts to other EMs, in
particular
- Banks
- Air transport
- Utilities
- Automotive
- Consumer electronics
- Real estate

20
Reasons behind
RussIu`s weuk equILy
market performance
Free-float controlled by foreign investors
(due to absence of local savings base)
Inefficient stock market trading practices
Fear that cash flow is not shared with
minority investors
Low standards of corporate governance
compared to other emerging markets
High and persistent corruption
Political protests



21
Russian equities: low
free-float, few local
institutional investors
Less than 30% of Russian equity capital is a free
float, and only 2% of the latter is owned by
pension funds

The outlook on
Russian equities
has historically
been established
mainly by
foreign investors
in the absence of
a local investor
base
Only 2% of local
stock market free
float is funded by
pension savings,
but one can
expect this share
to increase
Source: Sberbank CIB, Goldman Sachs, EC Estimates
30%
15%
14%
5%
9%
55%
2%
13%
30%
27%
State
Oligarch
Businessmen
Foreign strategic
investors
Others
Free float:
foreigners
Free float: pension
funds
Free float: banks
Free float: others
Ownership structure of
Russian equities:
Free-float detailed:
22
But pension savings
are on impressive
growth path
Mandatory accumulated pensions savings
(Pillar II) will increase from current 3.8% of
GDP up to at least 6.7% of GDP in 2020
Pillar II pension
assets will grow
by 15-25%
annually till
2020 depending
on actual
allocation
between public
(2% of payroll
contributed) and
private (6%) PFs
On top of that
Pillar III assets
will amount to
1.8% of GDP in
2020 (1.2% now)
Source: EC estimates, SocGen, RenCap, Ministry of Economic Development, investfunds.ru
3,8
6,7
9.1
0
1
2
3
4
5
6
7
8
9
10
Optimistic scenario
Conservative scenario
23
Pension Funds (PFs) may
become important players
on Russian equity market
I RussIu cIoses LIe gup vs. OECD uveruge In Ps`
equity holdings, the latter may increase up to 67
bln USD in 2020 (Pillars II and III)
Why we expect
PFs to allocate
more AUM into
equity?
Because of
recent changes
in regulation (no
restrictions on
yearly negative
returns) and
more active
inflows into
private (more
risky) PFs
compared to
public manager
VEB
Source: EC estimates, SocGen, RenCap
3%
18%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Russia OECD Average
RISHQVLRQIXQGV$80
invested in equities
3,0
66,5
0
10
20
30
40
50
60
70
Equity holdings
now
Potential equity
holdings
3HQVLRQIXQGVHTXLW\
investments, bln USD
24
Local stock exchange
adopting Western
standards
Russia's two main stock exchanges, MICEX and RTS, merged in
late 2011 as part of a Kremlin-backed strategy to promote Moscow
as an international financial center
A mandatory central securities depository (the National Settlement
Depository) was created in 2012
- Meeting the requirements of Rule 17f-7 of the United States Investment
Company Act of 1940, allowing US funds to invest directly in Russian
securities
- Both Clearstream and Euroclear were admitted to the market, starting
with settlement of local debt instruments to be followed by local equities
Settlement for bonds and equities in in process of moving from
settled on execution (pre-payment) to T+2 (the norm in US and
Germany for example)
Removal of the limit for international circulation of Russian shares
expected in 2014
- Current regulations limit depositary receipts conversions, creating
spreads between local shares and ADRs
Trading local
securities in
Russia has been
famous for its
inefficiency, high
costs and
complexity,
especially for
international
investors
Lower trading
costs and higher
post-trade
transparency will
bring more
liquidity onto the
local market
Source: Citi, East Capital
25
nLroducIng Novo
Mercudo In RussIun
The Moscow Exchange is planning to launch the Novy
Rynok (New MurkeL) ndex wILIIn 1z monLIs
- A premium segment for companies adhering to higher
corporate governance standards
- oIIowIng LIe success oI BruzII`s Novo Mercudo wIere %
of Brazilian firms trading on Bovespa nowadays are listed
(initially no Brazilian companies complied with the rules)
A recent case study analyzing the largest 25 companies
in Russia, India, China, South Africa and Turkey to see
how many would qualify to enter the Novo Mercado
Index in their current state shows that:
- zo% oI RussIu`s und Turkey`s Lop z compunIes would
quuIIIy Loduy.
- .wIIIe onIy 8% oI SouLI AIrIcu`s, q% oI ndIu`s und q% oI
CIInu`s Lop z compunIes wouId muke IL


Based on Novo
Mercado terms,
the major
corporate
governance issue
in Russia today
is the low free
float
While currently
at 28%, it should
increase toward
40% by 2018 due
to planned
privatizations (in
Brazil free float
is 69% and in
China and India
around 38%)


Source: Sberbank, July 2013
26
Corporate governance
comparison BRICTS
A broader
comparison shows
that another issue
for Russia is the
minority
shareholder
protection (based
on the 2013 World
Economic Forum
score)
Neither that score
or low free float are
direct functions of
actual corporate
governance law, but
rather an effect of
current equity
market structure
and less strong
implementation of
the actual law
Source: Sberbank, World Economic Forum, Bloomberg
Brazil Russia India China
South
Africa Turkey
Independent directors 32% 41% 54% 37% 59% 34%
IFRS/US GAAP 100% 100% 16% 100% 100% 100%
Same CEO/BoD chairman 8% 12% 56% 60% 16% 16%
Government control 16% 30% 30% 46% 14% 18%
Free float 39% 27% 39% 41% 55% 35%
Family, oligarch, other 45% 43% 31% 14% 31% 47%
2013 WEF minority shareholder
protection (US =100%) 83% 67% 87% 96% 95% 88%
Novo Mercado entry 48% 20% 4% 4% 8% 20%
Comparison for 25 largest companies in each country
Weaker than average minority share holder protection shows
the value of an active manager that is able to challenge
inappropriate minority treatment and engage in advancing
better corporate governance practices
27
Understanding corporate
governance in Russia
RussIu Iud Lwo muIn sLuges oI prIvuLIzuLIon In 1qqo`s:
- Voucher privatization (1992-94) und ouns for sIures auctions (1995)
Due to non-transparent privatization rules, low financial literacy of
population and informal unions between business and state
officials most assets were sold very cheap, for instance:
- 51% stake in Norilsk Nickel was sold in 1995 for 170 mln USD, now this
stake is worth 11.5 bln USD (~26% annual USD return)
- 40% stake in Surgutneftegas was sold for 89 mln USD, now this stake is
worth 14 bln USD (~32% annual USD return)
After obtaining control over former state assets cheaply, new
owners often focused on keeping control over that fallen-from-the-
sky wealth rather than investing and developing acquired assets
The crucicl issue oj corporcte oterncnce ct pritctized compcnies ucsn't
taken into account when privatization mechanism was designed. New owner
frequently had neither skills in operational and strategic management of big
ccpitclistic business, nor sujjicient business culture. It didn't cctucll stimulcte
ejjicienc improtements cnd didn't promote structurcl trcnsition oj econom.
Russian State Accounts Chamber, 2004
Privatization in
1qqo`s wus so
cheap that for
new owners it
was optimal to
simply retain
control over
acquired assets
by any means
It guaranteed
enormous
returns per se,
no one cared
about efficiency
and governance
28
Evolution of corporate
governance in Russia
Since the first trades in Russian stocks took place in late
1qqq, POs over LIe yeurs brougIL new secLors Lo LIe
market such as telecom, food retailing and real estate (as
opposed to assets inherited from the Soviet times, mainly
energy and other raw materials)
- These new companies are mostly run by businessmen as opposite to
oligarchs and state, often demonstrating strong management,
healthy cash-flows and good governance
While companies majority-own by the state still tend to be
worse run than private, government is pushing for a change
- In 2011, President Medvedev ordered the removal all high ranking
state officials from boards of directors from state companies
- In November 2012, the government issued a rule to state-controlled
businesses mandating a payout equal to at least 25% of net income
- All Russian companies should publish IFRS accounts starting from
2013
Following the
adoption of the Civil
Code in 1994 and the
Joint Stock Company
law in 1995, the
Russian government
issued a Code of
Corporate Governance
as late as 2002
(ratified in 2004)
Today >60 Russian
companies are listed
on LSE and dozens on
NYSE, NASDAQ,
runkIurL`s XETRA,
Stockholm and Hong
Kong stock exchanges
and hence subject to
stricter accounting an
reporting rules
29
Number of IPOs per
sector since 2000
Out of 64 IPOs
since 2000
covered by
Bloomberg,
only 11 have
been In oId
secLors
If excluding
Rosneft IPO in
2005, more
than 80% of the
total value has
come Irom new
secLors
Source: Bloomberg, East Capital estimates
Consumer Staples;
13
Consumer
Discretionary; 8
Financials; 8
Materials; 7
Industrials; 7
Telecommunication
Services; 6
Health Care; 5
Energy; 4
Utilities; 3
Information
Technology; 3
East Capital Russian
Fund
- Top 20 Relative Positions vs.
Index
30 All data as per 2013-07-31
-13.2%
-7.1%
-5.6%
-3.3%
-2.8%
-1.6%
1.2%
1.3%
1.4%
1.9%
2.0%
2.1%
2.3%
2.4%
2.6%
2.8%
3.4%
3.8%
4.4%
4.5%
-16% -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6%
Gazprom
Sberbank
Lukoil
Magnit
MTS
Rosneft
Surgut Ng
Globaltrans
LSR Group
Kazmunaygaz
Mostotrest
Bank Sankt-Peterburg
Cash
Aeroflot Russian Airlines Jsc
Transneft
Dixy
Sollers
Yandex
Sistema
M.Video
Relative weight, %
Main ownership by businessmen
Electronics retailer
Internet search provider
Auto producer
Food retailer
Bank
Transportation
Real estate
31
Case study M.Video
- Beneficiary of the retail lending
boom under way in Russia
Consumer electronics market leader
Sales CAGR 2011-2014E 14.6% vs. 5.6% for market
Investment rationale
- Strong relationships with founder
- Excellent execution track record
- Best in class corporate governance and sustainable dividend story
- Possible market consolidator (deal with main competitor Eldorado is
currently under discussion)
- Zero debt balance sheet
Attractive valuation
- EVJEBTDA`1 - 4.4x; PJE`1 - 9.5x
East Capital has 6.3% stake in the company and elected one
independent director to the board of directors

Growth 2013:
16% YoY sales,
20% YoY earnings
Special dividend
with implied yield
of 11.4% (in total
around 14% yield)
2013e EV/EBITDA
at 4.4x

Source: Bloomberg, East Capital estimates
EusL CupILuI`s upproucI
to corporate governance

East Capital is an active member and currently holds the vice
chairmanship of the Russian Investor Protection Association (IPA)
Established in 2000, IPA is currently the largest association of its
kind in Russia: unites approx. 30 members with accumulated
investments in Russia exceeding USD 25bn
PA`s muIn ucLIvILIes:
- Nominating and electing independent directors:
In 2012, IPA nominated directors in a total of 84 issuers, of
which 31 were successfully elected
- Resolve disputes: Coordinates the voice of minority investors
in specific corporate disputes
- Advocate improvements in legislation: Actively cooperates
with governmental authorities and various institutions on
improving corporate governance related legislation

The IPA is the only
corporate
governance
association in
Russia created by
and for investors
13 years of collective
experience in
hands-on
improvements in
corporate
governance at such
companies as RAO
UES, Rostelecom,
IDGC Holding and
many others
33
Dividend pay-out over
time and current yield
Cash flows not shared with minorities -
no longer true
MSCI Russia current yield 3.8% (vs. 2.8%
for MSCI EM)
- Partly function of low valuations, partly due
to increasing pay-outs
Major companies yield 5-6%
- Aeroflot at 5%, Gazprom at 6.5%
Private companies increasing dividends,
despite fast growth
- Sollers at 8% yield for 2013e
- M.Video at around 14% yield for 2013e if
special dividend (at 11.4% yield) repeated

Source: Bloomberg, Sberbank, East Capital estimates

Dividend pay-out-ratio for MSCI Russia
0
5
10
15
20
25
30
35
40
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
MSCI Russia
%
34
Russia -from laggard to
leader
Dividend yield
for Russia
(orange line)
compared to
range (light
blue area) of
dividend yields
for Asia ex
Japan, Brazil,
China, GEM,
India, S&P500,
and World
Source: Bloomberg, East Capital estimates, 2009-08-28 -2013-08-28
35
Dividend pay-out in
2013
Major dividend
payers will pay
in total USD
19bn till the
end of August
2013
Out of these,
almost USD
7bn will be paid
out to free float
(partly re-
invested)
Source: VTB Capital, East Capital estimates
Sberbank, ord.; 850
Sberbank pref.; 98
Uralkali; 163
Norilsk Nickel; 448
Gazprom Neft; 54
Severstal; 15
Rosneft; 342
MTS; 416
Bashneft, ord.; 15
Bashneft, pref.; 24
E.On Russia; 140
Lukoil; 801
Gazprom; 2 101
Surgut ord.; 149
Surgut pref.; 317
Tatneft ord.; 370
Tatneft pref.; 39
VTB ; 179
Megafon; 184
Sistema; 65
Dividends to free float shareholders (in total $mn)
36
Continued stable
political environment
Source: Levada Center, Rasmussen Reports
Putin approval index is still impressively
high in a global context, albeit coming
down slightly
`Approtcl Index': oj those uho cpprote person's cctions
minus % of those who disapprove (based on polls results)
Russian society is moving towards more open
and democratic standards and is becoming more
mature
- Partly thanks to development of modern media
and a stronger middle class
- It guarantees more balanced economic and social
policies in the future
- Fight against corruption has become more visible
(Putin publically dismissed minister of defense in
late 2012 in a $100m scandal)
SLreeL proLesLs Iowever don`L necessurIIy meun
significantly higher political risks (as the case
with the Arab spring)
- After a decade of economic prosperity, people
mainly demands higher quality of life (better
road infrastructure, schools, medical services
etc.)
- Opposition is still very weak with few credible
alternatives to current leadership, albeit with
some exceptions (for example Alexei Navalny,
Moscow mayor candidate)


37
Corruption is high
but dynamics matter
Recent anti-corruption policies in Russia gave
clear positive results, while in other BRIC
countries corruption problem aggravated
International
rankings of
corruption
perception place
Russia low, but
unlike other
BRICs Russia is
improving its
positions
Moreover,
'percepLIon oI
corrupLIon`
index per se is a
disputable
measure of
corruption
Source: Transparency International
154
143
133
78
81
84
60
70
80
90
100
110
120
130
140
150
160
2010 2011 2012
Russia
BRIC ex Russia average
Worldwide rank in Corruption Perception Index
38
Capital flight -
declining since 2005
uIr meusure oI 'cupILuI IIIgIL` reveuIs u subsLunLIuIIy und
consistently decreasing trend in contrast to media reporting
The large offshore
ownership of
Russian business
complicates the
picture with loan
refinancing and
overseas M&A
sometimes
erroneously counted
as capital flight
(after 2008, a lot of
foreign loans has
been replaced with
domestic debt)
Also loans by
Russian
subsidiaries of
foreign banks to
their parent banks
in the West, adds to
capital outflows
Source: The Bank of Russia
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
4,5
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I
2005 2006 2007 2008 2009 2010 2011 2012 13
Fictitious transactions* in the BoP financial account, % to GDP
Log-trend
* official category in the analytical representation of the BoP by the Bank of Russia
39
Russia has the least
restrictive capital
controls among BRICs
Comparisons of capital flows with other BRIC
countries are simply incorrect - Russia
abandoned capital controls, others did not
Part of capital
outflows from
Russia is due to
relatively
relaxed capital
controls
One can only
guess how
vulnerable
oLIer EMs`
BoPs would be
if they loosened
their capital
controls as
Russia did
Source: IMF Annual Report of Exchange Arrangements and Exchange Restrictions, 2012
Capital Transactions Brazil Russia India China
Controls on:
Capital market securities * * * *
Money market instruments * * * *
Collective investment securities * * * *
Derivatives and other instruments * * *
Commercial credits * *
Financial credits * * *
Guarantees, sureties, and financial backup facilities * *
Direct investment * * * *
Liquidation of direct investment * *
Real estate transactions * * *
Personal capital transactions * *
Hong Kong
Kiev
Moscow
Oslo
Paris
Shanghai
Stockholm
Tallinn

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