March 5, 2012

March 5, 2012 This is bne's weekly newsletter covering FDI and investment plans in Eastern Europe. You can receive the list as a plain text or html email or as a pdf file. To manage your delivery options: http://businessneweurope.eu/users/subs.php

TOP STORY INVESTMENT 1. Commercial customers co-opted into Lithuania's fight for energy independence 2. Russia’s demographic trends better than expected 3. FDI into Russia reaches $18.4bn in 2011 4. Gazprom launches legal challenge to Lithuanian unbundling 5. Japanese venture fund invests in Teamo.ru, Russian dating site 6. MinEconomy drafts legislation demanding disclosures on beneifical owners by vendors participating in public sector procurement — 7. PepsiCo net revenue soars to $4.95bn in 2011 8. Polish train collision provokes questions on infrastructure investment 9. Putin promises to almost double average wages by 2020 to $1333 10. Putin says UK government could become co-investors into Nord Stream gas pipeline 11. Russia adopts tighter competition rules 12. Sistema claims that its Indian investment is protected by a treaty 13. Slovakia and Estonia handed final warning on implementing Third Energy Package 14. Take off! Mongolia’s growth accelerates to 17.3% 15. Ukraine appeals WTO to end cheese war with Russia 16. €99 per passenger in Pecs NEWS INVESTMENT 17. AFK Sistema, MTS: Evtushenkov commits to development of Indian business 18. Brussels to discuss Baltic power networks with Moscow 19. Foreign investment in Russia’s Krasnoyarsk Region soars in 2011 by 72% 20. Slovak regulator cuts gas tariffs following SPP price cut from Gazprom OTHER NEWS INVESTMENT 21. MMK could face railroad issues at its potential Australian project; capex risks on the upside 22. Russia XXL SECTOR Gas 23. Slovenia agrees to build a 25 bcm capacity section of South Stream 24. Gazprom reaches agreement with Eni on amending gas supply contracts 25. Gazprom to reform Lithuanian gas sector by 2014 26. Management reshuffling at Gazprom may have been put on pause; January exports take a hit on Ukraine 27. Rosneft might create a joint venture with Itera to develop gas assets in Russia together 28. Ukraine offers to supply Central Asian gas to Europe SECTOR Oil 29. Bashneft is to invest about USD 120mn to rebrand fuelling stations in 2012-15 --- positive 30. EIA Iran report 31. Gazprom Neft: Sharp increase in refinery capex from 2013 is unlikely

32. High viscosity crude oil to receive tax breaks 33. TNK-BP Holding: New reserves added in 2011 SECTOR Metals and Natural Resources 34. EuroChem Fertilizers to Invest $2 Bln in Kazakh Deposits 35. Mechel suspends production at New-Olzherassk mine 36. Severstal Releases Some Details Of Its 2012 Capex Program SECTOR Power 37. DPM pricing mechanism may be amended 38. Electric Utilities: Putin speaks about eliminating corruption in the power sector 39. Electricity Grids: Update to the RAB methodology 40. Electricity Grids: Update to the RAB methodology - new formula sets risk premium to OFZ bonds at 2% 41. Federal Grid Company - Proposed tariffs for 2013-14 are above our estimates 42. Generation Sector - Capacity supply contracts may be revised 43. MRSK Holding and ErDF set the final point into moving Tomsk Disco in operating management 44. MRSK Holding finally passes Tomsk DisCo to management of France’s ErDF 45. MRSK Holding to Cut its Investment Programme for 2012 46. Putin speaks about eliminating corruption in the power sector 47. Utilities - Return on capital to reach 11% by 2016-17 SECTOR Retail, FMCG 48. FUNDS: Buying into the Russian consumer SECTOR Telecom, Internet 49. Rostelecom and MTS sign agreement to jointly develop infrastructure 50. Runet recorded 4.39bn search queries in February 51. Sistema claims that its Indian investment is protected by a treaty between Russia and India 52. Yandex Tops List of Russia’s Largest Internet Firms - Forbes 53. Yandex develops new data storage service 54. Yandex.Money partners with Opera Mobile Store SECTOR Transport 55. Transportation, construction and infrastructure – Trends in November-December 2011 SECTOR Agriculture 56. Agro in Kursk Region up 40% in 2011 57. Creating the "Far-East grain corridor" for exports to Asia-Pacific 58. Grain export estimate raised from 25mt to 27-28mt on updated harvest data 59. Russia ups grain export estimate by 10% 60. Siberian Agro to build pig farm SECTOR Automotive 61. Fiat to build jeeps in Petersburg SECTOR Aviation, shipbuilding and defence 62. Largest Arms Sales List Includes 11 Russian Firms SECTOR Engineering 63. Ural Engineering Center to build RUB250m hydro equipment plant SECTOR Media 64. Vladimir Putin recommends avoiding advertising on state TV channels SECTOR Coal 65. Coal Sector - Coking coal price set to decline in 2Q12 SECTOR Chemicals, Fertliser 66. EuroChem Fertilizers to Invest $2 Bln in Kazakh Deposits GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 67. Finance Minister mulls taxing away up to 80% of domestic gas tariff indexation

68. Incremental gas MET hike supports our investment case for Russian gas companies 69. WTO Entry a Business Lobby Tool for Russia – Putin UKRAINE INVESTMENT 70. FERREXPO: Cast-Iron Way to Success 71. Fixed capital investment in Ukraine up 20% in 2011 72. Milkiland considers investment worth EUR 50m 73. Milkiland — Earmarks EUR 15m for CAPEX and up to EUR 50m for M&A in 2012 74. Parliament approves reform of Ukrzaliznytsya 75. Real wages in January continue growth acceleration 76. Remittances surge 21% in 2011 77. Russia expands list of banned Ukrainian cheese plants 78. Ukraine to start producing shale gas in 2018-2019 79. Ukraine: Government to contribute UAH 6bn into Naftogaz charter KAZAKH INVESTMENT 80. Condor to purchase oil terminal 81. Kazakhstan talks of building Kashagan refinery 82. Kazakhstan: NC KMG to receive US$4bn from National Fund for Kashagan and Rompetrol 83. National Innovation Fund to invest in Aksai Industrial Park 84. Samruk-Energo plans $541m investment programme 85. Solar power station to be built in Zhambyl region CENTRAL ASIA INVESTMENT 86. Hungary faces a partial freezing of the money from the Cohesion Fund 87. Tajikistan: UAE’s Zayed Foundation to build hydropower plant 88. Turkmenistan: Berdymukhamedov approves five-year development programme 89. Uzbekistan: Uzpharmsanoat plans to double exports in 2012 EURASIA INVESTMENT 90. Azerbaijan IPI index decreases sharply 91. Azerbaijan: Baku-Novorossiysk pipeline to transport oil to third countries too 92. Azerbaijan: Capital expenditures for Shahdeniz gas field to be doubled this year 93. ˇ˛A�z�e�r�b�a�i�j�a�n�:� �� T�r�a�n�s�p�o�r�t�a�t�i�o�n� �o�f� �n�a�t�u�r�a�l� �A�z�e�r�i� �g�a�s� �t�o� �E�u�r�o�p�e� �w�i�l�l� �b�e� �r�e�a�l�i�z�e�d� �e�a�r�l�i�e�r� �t�h�a�n� �t�h�e� �l�i�q�u�e�f�i�e�d� �g�a�s�� �-� �M�i�n�i�s�t�e�r� 94. Azerbaijan’s Arms Deal with Israel SOUTHEAST INVESTMENT 95. Bosnia has chance to join EU, but depends on reforms, EU rep says 96. Lots of crying over spilt milk in Croatia 97. No winner in tender for Albaniaís third 3G license 98. Slovenia accused of self interest as it blocks Belarus sanctions 99. Sofia needs BGN 100m for energy infrastructure, experts say 100. Two Moldovan water utilities open procurement tenders CENTRAL EUROPE INVESTMENT 101. Apranga signs a franchise agreement with "Burberry Limited" 102. BNK Petroleum Announces Spudding of Miszewo T-1 Well in Poland 103. Erste Group ready to make cuts in Hungary and Romania 104. Lithuania set to call first shale gas tender 105. Nordecon announces new public works contract in Estonia 106. PGNiG eyes new USD 1.6bn debt programme for investment 107. Polish geologists consider cutting shale gas estimates 108. Polish mums headed to Iceland?

109. Richter receives European Commission approval to market Esmya in the EU 110. Richter reports positive results of Phase III trials of Cariprazine for schizophrenia treatment 111. Richter's Esmya approved for the EU 112. Siemens To Build A Network Control System For Prague's Power Grid 113. Sweco wins hydropower contract in Latvia 114. Tesco and Vodafone to launch Hungary's fourth mobile operator OTHER COUNTRIES 115. Mongolia seeks tie-ups with Japan in nuclear energy, rare earths 116. Mongolia: Undur Tolgoi Announces Commencement of Winter Work Program Over Mongolia Property

TOP STORY INVESTMENT 1. Commercial customers co-opted into Lithuania's fight for energy independence bne February 28, 2012 Commercial gas consumers are being co-opted into Lithuania's accelerating drive to reduce its dependence on Russian energy imports, with the government set to introduce draft legislation requiring them to purchase at least 25% of their consumption from the country's planned LNG terminal. With the office of President Dalia Grybauskaite having labeled reform of the energy sector, and in particular the planned LNG terminal, the country's top priority for the spring parliamentary session, all commercial customers will be obliged to buy one quarter of their gas from the new facility. In January, state-controlled Klaipedos Nafta announced it had picked Norway's Hoegh LNG to supply and maintain an offshore platform for imports of LNG starting in 2014. Meanwhile, the country also plans to build a link to the Polish gas transit network starting in 2016, which would finally plug the Baltic region into the EU gas network, offering another alternative to Lithuania's current total dependence on Russian imports. Lithuanian officials claim it will be able to supply the whole country during the winter heating season. Whilst initial agreements with US company Cheniere Energy have been reached to import LNG produced from shale gas starting in 2015, a full supply plan for the 170,000 cubic metre terminal is yet to be announced. However, despite the lack of details, the government announced on February 28 that it intends to oblige all Lithuanian companies to buy at least 25% of the gas they consume from the country's new projects, reports Leta. "First of all, it was agreed on how exactly the LNG terminal is to function and secure an alternative supply of natural gas, complying with the EU's N-1 standard for supply infrastructure. Secondly, by March 20 the Ministry of Energy will submit a draft law on the LNG to the Government, which subsequently will be sent to parliament," Minister of Energy Arvydas Sekmokas told reporters. "At least 25% of natural gas will have to be supplied [to commercial customers] through both gas pipelines and the LNG terminal," the minister said.

The same day, the president's office stressed that the energy independence drive is the top priority for the government, despite the threat posed by the crisis in the Eurozone, and the demands of a consistent fight with corruption, the need to break up monopolies and oligopolies, and improvement of the judicial system. "The LNG terminal is a vital and strategic project for Lithuania, it should become a gas supply alternative for us. It should also secure better competition in the energy sector which in turn would lead to lower prices and a reliable and uninterrupted energy supply. Therefore, it is necessary that the Government, different institutions and the Seimas acted hand in hand. Only under such conditions we will be able to hold talks on LNG purchase contracts this spring or summer," Chief Presidential Adviser on Legal Affairs Solveiga Cirtautiene said. 2. Russia’s demographic trends better than expected Troika Dialog 1 March 2012 Domestic demand remains main economic growth driver. Retail sales expanded 6.8% y_o_y in January, while investment increased 15.6% y_o_y, a rapid acceleration from the 6.2% rise seen in 2011. This acceleration appears to be more statistical in nature than based on economics. We believe the official figures understated investment activity in 1H11, so the double_digit y_o_y growth in January can be regarded as merely a result of the understated base. Weekly inflation around 0.1% in January and February. The CPI rose only 0.8% between January 1 and February 20 – a stark contrast to the 3.1% inflation in the same period last year. In y_o_y terms, inflation has slowed from 6.1% at end 2011 to 3.8% and will likely remain close to this level for the near future. Demographic situation improving. The Russian population has started growing, while the average life expectancy is increasing. Russia is running a positive migration balance not only with CIS countries, but also with other countries. Russia might not be an ideal place to live, but the fact that people are generally moving in is a good sign.

3. FDI into Russia reaches $18.4bn in 2011 Rencap February 29, 2012 According to data released yesterday (28 February) by Rosstat, gross foreign investment in Russia expanded to $190.6bn in 2011, 1.7x the amount reported in 2010. Meanwhile, foreign direct investment (FDI) was fairly strong in 2011, at $18.4bn, 33% higher than in 2010. In 4Q11 FDI amounted to $6.7bn, 19% higher than in 4Q10, with most of the funds distributed to manufacturing ($1.6bn), construction ($1.3bn) and real estate ($1.4bn). On the other hand, gross investment outflows from Russia also increased, reaching $151.7bn in 2011, which is 1.6x higher than in 2010. There is no breakdown by flow, but we would expect increased outflows of FDI. Before the 2008-2009 financial crisis, FDI inflows were around $7bn per quarter, but this figure fell to around $3bn per quarter in 2009. Despite inflows of around $4.6bn per quarter in 2011, we expect FDI inflows to drop to around $2.5-3bn in 1Q12.

4. Gazprom launches legal challenge to Lithuanian unbundling bne March 1, 2012 Lithuania's fight to reduce its dependence on Russian energy hotted up on March 1 when Gazprom announced that it has appealed to an international arbitration tribunal against Vilnius' unbundling plan for gas utility Lietuvos Dujos. The statement drew a sharp response from Lithuania, which is playing the EU card to back the move. Gazprom announced its decision to appeal to the UN Commission on International Trade Law (UNCTRAL) during a Lietuvos dujos board meeting as it was due to vote on breaking up the company's business in compliance with Lithuania's new legislation and the EU's Third Energy Package (TEP). Lithuania, which has been accelerating its bid for greater energy independence in recent months, secured an agreement with German energy giant E.ON late last year to push through the toughest option under the EU policy for separating the ownership of the sales and transmission assets of its gas industry. Lithuania holds 17.7% of Lietuvos Dujos, with E.ON having a 38.9% stake. Gazprom, which holds 37.1% in the company, claims that the Baltic energy markets are isolated from the EU and therefore the EU's policy grants them a delay in implementation until they create open market conditions. At a meeting on February 27, Gazprom, the Lithuanian government and the European Commission agreed to continue talks on the issue. Vilnius is reported to have agreed

to delay the deadline for preparation of the unbundling programme by two months, but also claimed that Gazprom agreed to drop its resistance. CEE is increasingly becoming the battlefield on which Moscow's opposition to TEP is being played out. On the one side stands Russia's large financial resources and its huge share of the gas markets from the Baltics to the Balkans. On the other side, CEE states are keen to reduce their dependence on Russian imports. This sees many caught in the middle of Moscow and Brussels. In late February, the European Commission issued a final warning to a handful of member states that have yet to reveal how they intend to implement TEP, including Slovakia and Estonia. Like Poland, however, Lithuania has enthusiastically embraced the momentum TEP offers to help it shale off Russian dominance, and Vilnius reacted with anger against Gazprom's move. "We're puzzled," Kestutis Jauniskis, a spokesman for Energy Minister Arvydas Sekmokas told Baltic News Service. "These steps don't help maintain the dialog achieved in the February 27 meeting." Lithuanian Prime Minister Andrius Kubilius was more straightforward, insisting unbundling "will go ahead as planned." according to Bloomberg. "The end of 2014 is for us when unbundling has to be implemented according to our law," he stated, also reiterating that Gazprom Export chief Alexander Medvedev had agreed at the February 27 meeting that Gazprom will no longer question the unbundling plan. Vilnius and Moscow have been at odds over the issue for over a year. Vilnius approved amendments to legislation in February 2011 to force the unbundling through, just a month after it asked the European Commission to investigate possible market abuse by Gazprom following the company's statement that it would not offer Lithuania the same pricing conditions as its Baltic neighbours due to the issue. 5. Japanese venture fund invests in Teamo.ru, Russian dating site Press release 1 March 2012 Teamo.ru, an online dating website for Russians designed for serious relationship seekers, has attracted a new round of investment. The company’s investment partner is UMJ Russia Fund, the venture fund managed by United Managers Japan, Inc. (Japan). UMJ Russia Fund’s portfolio is currently comprised ofnine early stage companies in the Russian TMT sector. Taking into account its original investment, the total investment amount into Teamo.ru now stands at more than $2 million. ?Teamo.ru is an internet startup launched by Fast Lane Ventures, the leading Russian company developing innovative internet businesses. The new investment is planned to finance further enhancement of the service and will support a new marketing campaign to win more users and raise the brand awareness. ?The website has been live since December 2010, becoming the first dating service created with the purpose of helping users looking for a serious relationship on the Russian internet. At present, the website has about 1 million customers; thousands of which have found their long-term partners and others have already got married. The main source of income for the website comes from its monthly subscription fee. ?What makes Teamo.ru unique is the scientific algorithms it uses, matching singles by 17 characteristics once they have undertaken a personality test developed by leading Russian psychologists and approved by The British Psychology Society. After

the test each user can browse through their list of matches and decide who they would like to make contact with. ?Yusuke Otsubo, Managing Partner of UMJ Russia Fund commented: ?“Our interest in Teamo.ru is fueled due to two main reasons: First, is the huge potential of Russia’s online market for serious dating services and second isTeamo.ru’s leadership in the segment. We have always been attracted to companies that have first-mover advantage in a new business segments and Teamo.ru fits the bill.” ?The online dating market in Russia is fundamentally based on two drivers: the demographic conditions and the fast growth of the internet audience. According to the national statistics more than 600,000 couples divorce each year, more than 3.5 million single men and women live in Russia’s million-plus cities. There are nearly 5 million single parents in Russia (about 600,000 are single fathers). The target audience of the website are men and women aged 25+ based in large cities; mature people who think it is fine to look for a partner on the Internet; businessmen with little free time to organize their private life; divorced people often with negative experience of relationships and who know the kind of person they are looking for and single parents not only searching for their other half but for a person ready to help bring up their children. ?Yuri Boyko, Venture Partner at Fast Lane Ventures, said that this investment, in addition to bringing international expertise of the market to Teamo.ru, makes it possible to expand the access to strategic partners. ?Vladimir Shmidt, Managing Director of Teamo.ru commented: ?“Our secret weapon is our sincere belief that our business can make people’s lives better. Teamo.ru’s objective is to provide a quality service to its users who look for a serious relationship and help them build strong and harmonious relationships. Not only is that a business, it is also a mission. We are very keen to do our best here.” According to investigations led by Harris Interactive, 5% of all couples in the US who get married found their partners on one of the leading dating websites, also based on psychological compatibility.” ?If we achieve the same result with Teamo.ru, we can proudly say that our duty for humanity is fulfilled,” added Shmidt. 6. MinEconomy drafts legislation demanding disclosures on beneifical owners by vendors participating in public sector procurement — VTB Capital 2 March 2012 institutionalisation of December initiatives — efforts deserve more credit than assigned by consensus News: Vedomosti reports that the Ministry for Economic Development is working on a law which will oblige those companies involved in public sector procurements to provide notification if their beneficial owners include officials (for state agencies), or management (for state-owned companies), or members of their families (parents, children, spouses, siblings). The law encompasses both government agencies and corporations in which the state owns over 25% of the charter capital. Any vendors

refusing to provide the requested disclosures will be excluded from future tenders. According to the paper, the draft law is to be ready by mid-March. Our View: Inserting the provisions in question into the legislation governing public sector procurement means that the anti-corruption drive kicked off by Russia’s top leadership in late 2011 is graduating from rhetoric and ad hoc actions by the government to the ‘institutionalisation’ phase. This lends greater credence to our out-of-consensus thesis that the current round of policy talk on combating corruption has more substance to it than most observers think. Our 30,000-foot view is that the underlying factor behind this policy push is the tightened fiscal constraints on the Russian government. As with the tight fiscal constraint in 1999-2000, which triggered a major campaign to improve tax compliance and corporate governance in the private sector during Putin’s first presidential term, we assign a high probability to this latest move driving a turnaround in public sector governance at this juncture in Russia’s history. Of course, legislation by itself is toothless if circumvented in a systemic way and, ultimately, we shall only be able to judge how effective it has been in 6-12 months. However, dismissing it outright would be unfair. Alexey Zabotkin 7. PepsiCo net revenue soars to $4.95bn in 2011 bne 1 March 2012 American food manufacture PepsiCo saw revenues soar to $4.95bn in 2011, the first year it was operating the assets that it bought from Wimm-Bill-Dann in December 2010 that made it the biggest food processor in Russia at the stroke of a pen. The company’s net revenue have more than doubled over 2010 following the acquisition the company's report seen by Prime. Russia now accounts for 7.4% of the company's world wide net revenue, and 15.1% of its total long-term assets. 8. Polish train collision provokes questions on infrastructure investment bne March 4, 2012 Poland suffered its worst train accident in over two decades on the evening of March 3, when two trains on the mainline between Warsaw and Krakow collided head on killing at least 16 and injuring 58. The tragedy also raises unfortunate questions over the quality of the country's transport infrastructure just over three months ahead of the Euro 2012 football championship. One of the locomotives - an express train running from Warsaw to Krakow - was on the wrong track when it hit another express running to the capital from Przemysl at around 21.15 near the southern town of Szczekociny, Andrzej Pawlowski, a member of the board of the state railway company PKP, told TVN24. Reports say that scheduled engineering works were taking place on one of the tracks at Szczekociny's station at the time of the accident. Prime Minister Donald Tusk arrived at the scene early on the morning of March 4,

with three other cabinet ministers, and called the accident Poland's "most tragic train catastrophe... in many years," reports the BBC. The disaster couldn't have come at a worse time for Warsaw, which is battling criticism over the pace of its preparations for Euro 2012. Thousands of football fans are expected to travel by Polish rail between host cities, which include both Warsaw and Krakow. Many of them will need to take the train due to a number of new roads that will not be ready, despite the promises of the government. In February, Warsaw said it would adapt legislation to allow it to open some new roads to traffic during the tournament despite their not having the finishing touches complete - e.g. service stations and some safety barriers. President Bronislaw Komorowski has said he will announce a period of national mourning once emergency teams have completed their work to remove the wreckage from the track. "The scope of this disaster is sufficiently large to warrant national mourning," he said. In the build up to the European football championship, Poland has vastly improved its transport infrastructure in the last decade, although the roads in some areas of remain notoriously bad. LIke many other former communist countries, the country was bequeathed a significant rail infrastructure, but it is taking some time to upgrade it all after many years of under investment. With 20,000km of rail, according to the Wall Street Journal, the country is still only working on upgrading some of the lines. New high speed lines were planned for the upcoming football championship, but that plan was abandoned due to cost by a government that has pledged to quash the deficit and rein in state debt.

9. Putin promises to almost double average wages by 2020 to $1333 bne

1 March 2012 Prime Minister Vladimir Putin promised he would almost double Russia’s average monthly wage from the current RUB24,000 ($800) to RUB40,000 by 2020 as part of his campaign to win back the presidency. "This is significant growth, however it is realistic… especially if we look at the dynamics in the growth of real disposable income for the last 10 years. This will be possible if we continue with this trend," Putin said reports RIA Novosti. Even if Putin achieves this goal, it will still be less of a climb than he has already deliever: when he took over in 2000 average wages in Russia were $50, and have risen 16-fold on his watch. Current Russian average wages are already equivalent of those in Portugal on a price purchasing parity basis. 10. Putin says UK government could become co-investors into Nord Stream gas pipeline bne 3 March 2012 The Russian government is in talks with the UK government over the possible participation in the Nord Stream gas pipeline that will deliver gas from Russia’s north west to western Europe, Russian Prime Minister Vladimir Putin said. "We have begun talks over the possibility of the UK joining Nord Stream and gradually becoming our gas importer. We also have other projects, very serious ones, and I hope that our trade and economic ties and others elements of other cooperation will expand," Putin said at a meeting with foreign media editors-in-chief. Russia has poor business ties with the UK where trade turnover is a mere $16bn against the $72bn of trade Russia enjoys with Germany. 11. Russia adopts tighter competition rules Bank of Finland 2 March 2012 The third “antimonopoly” package of law amendments, which substantial reforms the competition law, entered into force in January. The reforms ease the work of competition authorities by e.g. defining more clearly the characteristics of cartels and behaviour that restricts competition, as well as criteria for monopoly pricing. The new legislation is prepared according to WTO standards and is consistent with international practice. The lack of competition and the dominant market posi- tion of monopolies in many markets have become major obstacles to development of the Russian economy. Large firms with dominant market positions are typically state- or region-owned, or have close relationship with them. The Federal Antitrust Service FAS (Federalnaya anti- monopolnaya sluzhba) works actively to increase competi- tion. Among other things, FAS chief Igor Artemyev sug- gested in February that Gazprom be divided into two com- panies using the same

reform approach as applied to the electrical power industry and the national railways. The division would create a state-owned company that would operate the pipeline grid and let commercial firms take over natural gas production. At the moment, Gazprom produces about 80 % of Russian natural gas and owns the gas pipe- line grid. This gives Gazprom the power to decide on transmission of gas from other producers or even refuse to ship their gas. The fight against cartels is one of the biggest tasks fac- ing the FAS. Artemyev says that this year he hopes to deal with chemical industry, in particular, as well as the petro- leum products and pharmaceutical industries. In 2008 and 2009, FAS took oil giants Rosneft, LUKOIL, Gazpromneft and TNK-BP to court for unjustified hikes in prices of oil products and artificial manipulation of supply. After lengthy litigation, the FAS won its cases and the oil compa- nies paid significant fines to the state. A new feature of Russian antitrust law is the possibility for the FAS to put companies on notice for their abuses of dominant market position. If a firm fails to correct the prob- lem within 30 days, the FAS will take the matter to court. Earlier such abuses went straight to court and involved a long legal process. Putting companies on notice can be done in cases when the matter involves a monopoly’s re- fusal to provide a good or service under normal conditions. This phenomenon is most common in the energy market. A favourite scam involves requiring bribes or e.g. expensive construction work when firms want to hook up to the dis- trict heating or electrical power grid. Such instances ac- count for half of all the abuse of dominant market position cases dealt by the FAS. The FAS hopes the new approach with improve the ability of regular firms to buy services from monopolies and free up FAS resources for other mat- ters. 12. Sistema claims that its Indian investment is protected by a treaty VTB Capital 1 March 2012 between Russia and India News: Sistema said yesterday that it had sent a formal notice to The Republic of India notifying it of a dispute under the Bilateral Investment Treaty (BIT) between the Government of the Russian Federation and the Government of the Republic of India arising from the decision of the Supreme Court of India issued on 2 February 2012 regarding the cancellation of 122 telecom licences, including 21 licences belonging to Sistema Shyam TeleServices Ltd (SSTL), in which Sistema owns a 56.68% share. Sistema believes that the cancellation of SSTL's licences following Sistema's investment of billions of dollars into the Indian cellular sector is contrary to India’s obligations under the BIT, including obligations to provide investments with full protection and security and obligations not to expropriate investments. The formal notice requests The Republic of India to settle the dispute relating to the revocation of SSTL's 21 telecom licences in an amicable way within six months. If the dispute is not amicably resolved by 28 August 2012, Sistema reserves the right to commence proceedings against The Republic of India as provided for in the BIT. Our View: The fact that Sistema's SSTL suffered from the action of the Indian court, not the government, might preclude the company from being compensated for the damage. At this stage, it is difficult to quantify the monetary effect of the licence being re-auctioned as uncertainty remains over the pricing of the new licences and compensation to SSTL/Sistema (if any).

Earlier this week, Vedomosti quoted Sistema's principal shareholder Vladimir Evtushenkov as saying that Sistema does not intend to withdraw from India, which suggests that a capitulation scenario is not a base case for now (that would have resulted in NAV loss for Sistema of some USD 1bn, according to our estimates). Back to top Mikhail Galkin 13. Slovakia and Estonia handed final warning on implementing Third Energy Package bne February 27, 2012 Slovakia and Estonia are amongst eight EU states that have been sent final warnings by the European Commission over their failure to inform it of their progress in implementing the EU's third energy package directives. "As to date Bulgaria, Cyprus, Spain, Luxembourg, the Netherlands, Romania and Slovakia have not informed the Commission of any transposition measures for the two directives and Estonia has not done so as regards the gas directive," the Commission said in a press release. The Electricity and Gas Directives of the Third Energy Package were meant to be transposed by member states by March 3, 2011. According to the statement, "the Third Energy Package includes key provisions for a proper functioning of the energy markets,." The trickiest of these provisions in many CEE countries is the demand to unbundle of supply and distribution networks, due to pressure from Russia, which dominates energy supply. Whilst Slovakia's gas pipeline operator SPP does not currently feature Russia's Gazprom amongst its shareholders, speculation suggests that the Russian company could buy out the 49% stake held by Germany's E.ON and France's GDF Suez. SPP and GDF Suez were amongst a select group of major European customers granted price discounts by Gazprom in February. At the same time, E.ON and GDF are also both involved in the Nord Stream pipeline, which carries Russian gas under the Baltic to Germany. Moscow has particularly criticized the Third Energy Package in the context of the billions it has invested in building Nord Stream - and the billions it plans to spend on South Stream - claiming it equates to highway robbery. Meanwhile, E.ON also holds a stake in Estonia's Eesti Gaas. Gazprom is the largest shareholder in the Estonian company, and has been aided by E.ON in resisting efforts by the government in Tallinn to introduce legislation to separate ownership of gas sales and transmission by 2015. Prime Minister Andrus Ansip has even suggested that the country could re-nationalize Eesti Gaas in order to push the legislation through. Lithuania, where the shareholder structure of pipeline operator Lietuvos Dujos also includes the Russian and German companies, has pushed through legislation implementing the most far-reaching unbundling option after a fight with the private shareholders. Vilnius has accelerated its efforts to break its almost total dependence on Russian energy in recent months. Other elements of the Third Energy Package include rules strengthening the independence and powers of national regulators and rules on the improvement of the functioning of retail markets to the benefit of consumers. The Commission now reports that it has sent reasoned opinions - essentially a second and final written warning - to the national governments involved. They have two months to respond. Should they continue to fail to comply, the Commission said it may refer the cases to the EU Court of Justice. The Commission added that some other states have only notified partial transposition of the directives, and that it is analyzing those measures. However, it "will decide in the coming months on appropriate further steps." 14. Take off! Mongolia’s growth accelerates to 17.3% Frontier Securities, Dale Choi, Chief Investment Strategist, 2 March 2012

According to World Bank on February 28,2011 GDP growth in Mongolia accelerated to an unprecedented 17.3 percent in 2011 from 6.4 percent in 2010 and the unemployment rate fell from 13 percent in 2010 to 9 percent in 2011. However, real wages for unskilled workers in the urban informal sector are starting to fall as the inflation rate reached 11.1 percent yoy in December. Sharply rising government spending is the root cause of overheating: government spending rose by 56 percent in 2011 and is budgeted to rise by a further 32 percent this year, fueled by sharply rising resource revenues. This pro-cyclical fiscal policy could result in another “boom-and-bust” cycle Mongolia experienced before, particularly as the global economy could face a substantial slowdown in growth due to the continuing European sovereign debt crisis, and which could result in a sharp drop in mineral prices and subsequently government revenues. According to Bank of Mongolia on February 7,2012 IMF Representative to Mongolia Steven Barnett commented on Mongolian economy’s key short-term challenges and risks Overheating. The economy is overheating or, put more simply, is growing too fast. It may sound funny to say an economy is growing too fast, but more is not always better when it comes to growth. Growing too fast in the short run leads to significant problems, such as high inflation, exchange rate volatility, wage pressures, Dutch disease, and the list goes on. These could also heighten fears about “hard landing” especially if external shocks hit the economy. This macroeconomic instability, in turn, has substantial long run costs that include making it more expensive to do business in Mongolia, discouraging investment, and making Mongolian firms less competitive globally. The inflation, moreover, has a particularly hard impact on the poor. So in sum, the overheating today leads to higher poverty and lower growth in the future. This is a bad tradeoff. Inflation. Inflation has been stubbornly high in Mongolia, which is not surprising given the phenomenal growth in government spending. Headline inflation is often volatile in Mongolia, due mainly to food price shocks. It is helpful, therefore, to look at a measure of underlying inflation that removes the impact of changes in food and administered prices. This measure has been much more steady and has hovered around 15 percent most of last year and was running at over 16 percent in December. This is also too high and, moreover, is above the policy interest rate. So while the nominal level of the interest rate may seem high—12 ? percent—it is actually extraordinarily low in an economic sense. Specifically, adjusted for inflation, the policy interest rate has been negative for much of last year and is still negative today—on the order of -4 percent. A further hike in the policy rate, therefore, is warranted and would help contain inflation. It does so through two complementary channels. First, it slows credit growth by making it more expensive for firms to borrow, thereby reducing demand as a partial offset to the demand impact of surging government spending. Second, it will also help ease the depreciation pressure on the togrog by making it more attractive to hold togrog deposits. And, clearly depreciation of the currency is contributing to inflation by raising the price of imports. Although raising interest rates to contain inflation works, in part, by strengthening the currency, this is fundamentally different and should not be confused with targeting the exchange rate. The exchange rate would remain flexible and evolve in line with

market conditions, it is just that the interest rate hike itself alters the market conditions. According to Bank of Mongolia on 11/3/2011, Governor of Bank of Mongolia L. Purevdorj has said in a speech in Parliament session · Economic growth in first 3 quarters of 2011 is record 16.7% • Foundation for this growth is rigorous growth of total demand. Capital inflow into Mongolia has increased by start of major mining projects. Funding for banks has increased dramatically, loans are rapidly increasing and feeding growth of the private sector • Although of course there is influence of budget expansion, on the other hand there is rapid increase in personal consumption and imports, there is more demand than the supply and this incites inflation. Credit growth is influencing consumer prices. Price of capital is increasing too. • Limiting inflation at single digits is a maximum limit for economy to grow in stable manner, sustain investment , keep confidence in tugrug and not to lose confidence of foreign investors • When inflation goes above 10 per cent it creates uncertainty in making consumption, investment, loan and savings decisions. Even at 10 percent it is clear that it would be significant challenge to keep living standards of the citizens and reduce poverty • On the other hand, such level of inflation has become a main obstacle to reducing loan interest • Therefore, keeping inflation at single digit is maximum allowable high limit • In another words, it is proper to make aim that total impact of budget and monetary policy on consumer price growth should be within single digits. · Bank of Mongolia’s monetary policy is aimed at having economic growth sustainable and stable in medium and long term. This is expressed by a requirement not to have current short term ultra-high economic growth as a premise for medium term depression. Significance of such policy is even more amplified in 2012. FISCAL Further, according to World Bank, government spending in 2011 was almost double that in 2009 in real terms, and mainly reflects pre-election year pressures, efforts to make good on earlier political promises for large cash transfers and large increases in capital expenditures. Because of high revenues, the government budget deficit is still modest: the 2011 deficit amounted to 3.6 percent. However, the structural deficit (based on long run commodity prices as defined under the Fiscal Stability Law) is much higher at 8.5 per cent The IMF Representative commented on fiscal policy · The main cause of the overheating and economic volatility is fiscal policy. Specifically, the large and risky increases in government spending. Government spending increased 60 percent last year and is set to rise a further 30 percent this year. This is staggering growth and implies a doubling of government spending in just 2 years. This is simply too much demand and leads directly to higher inflation, a substantial increase in imports, exchange rate volatility, and a squeezing-out of the private sector. So first and foremost, what the Mongolian economy needs is for an immediate scaling back of government spending to a much more prudent rate of growth.

The Governor of Bank of Mongolia has said · there is no choice but to admit that it is improper that in recent years our country is implementing pro-cyclical policy · budget is expanding too fast, we are faced with real economic overheating, state participation is increasing in composition of GDP which is becoming main channel for spread of Dutch disease. Because of high inflation and tugrug appreciation, real exchange rate for tugrug is appreciating. · state is increasing and pushing away private sector growth · on top of this, high salaries are entering mining sector and sudden hike in salaries of public servants is causing weakening of competitiveness of our private sector and non-mining sectors · although the economy is growing, growth of sustainable and stable income of citizens is insufficient · we are faced with a necessity to make more wider distribution of growth, increase in productivity and jobs, priority development for private sector including processing industries At the same time, according to World Bank, there have been major legislative developments in 2011 and early 2012 aimed at strengthening policy institutions and frameworks. The Integrated Budget Law (IBL) was passed in December 2011: this organic budget law contains measures to support fiscal sustainability and the successful implementation of the Fiscal Stability Law. It also strengthens the public investment framework by requiring feasibility studies and alignment with national priorities for projects to be included in the Public Investment Program and the budget. This will help permanently lock in prudent fiscal policies and mechanisms in the future alongside the FSL. The Social Welfare Law was passed in early January. This mandates the provision of a targeted poverty benefit replacing the existing system of universal cash transfers. This represents a major step towards setting up a fiscally sustainable social protection system while supporting Mongolia’s poor- it is expected to reach about 130,000 poorest households, or one-fifth of all households in Mongolia. MONETARY Further according to World Bank, on the monetary front, the Bank of Mongolia (BoM) took significant action to curb inflation and lending growth in 2011. But with inflation still high, the real policy interest rate negative and bank lending expanding at a staggering pace (73 percent yoy), more tightening is needed. Liquidity risks are also rising and a large amount of NPLs remains on the loan books. Given the easy convertibility between dollar and local currency accounts the banking system remains vulnerable to capital flight, if macro-prudential action is not taken to strengthen it. Such action could include, in addition to the recently introduced additional capital buffers for systematically important banks, the use of additional provisioning requirements for highly volatile sectors such as construction, mortgage and consumer loans. The IMF Representative commented on policy mix · The loose fiscal and tight monetary policy is not a good mix. In effect, it results in a bigger government and a smaller private sector. So yes, monetary policy works by squeezing the private sector to offset the excessive expansion in the government

sector. A much better mix, therefore, is to significantly reduce government spending and create more space for the private sector. Fiscal policy therefore must take the lead and start by lowering spending in 2012 budget. At the end of the day, Mongolia will need a much more prudent fiscal policy to succeed in converting its coal and copper resources into an inclusive growth path that spreads prosperity to all Mongolians. The Governor of Bank of Mongolia has said • In order to combat inflation which is caused by continuously increasing demand, Bank of Mongolia has been tightening its monetary policy. Also there was additional reason stemming from rise of certain products with state regulation and fuel in May-June and rise in price of other goods through increasing transportation costs · Bank of Mongolia is enforcing on regular updated basis prudential ratios of the banks in countercyclical manner and this work will be intensified in correlation with future developments • Capital funding for banking sector has increased and capacity to sustain private sector investment and development has dramatically increased. In Q3 2011 YTD, banking assets have increased by 26.7% to 8.1 trillion MNT, loans have increased 48.2% and reached 4.9 trillion MNT. • State policy should be aimed at as full as possible exploitation of increasing capacity of finance sector. Above all, macro condition will play decisive role in this. Specifically, starting from 2013 by latest it would be critical to keep budget expansion at proper level, stabilize inflation at low level and soften monetary policy. Without this it is impossible to support growth of private sector, create stable and sustainable source for income and jobs and substantially reduce poverty EXHANGE RATE Further, according to World Bank, the togrog depreciated by 11 percent during 2011 reflecting high domestic inflation and declining commodity prices towards the end of last year, factors that similarly impacted the currencies of other emerging mineral-rich economies. Going forward, exchange rate flexibility remains crucial. It will reduce the risk of one-way speculative bets on the currency and allow the economy to better absorb external shocks such as commodity price shocks without transmitting these directly to budgetary and export revenues as in the previous bust in 2008. More significantly, it will help the economy adjust through movements in the nominal exchange rate rather than through sharp cuts in domestic wages, employment and prices that hurt the real incomes and profits of workers and businesses. Finally, exchange rate flexibility is desirable in that it will reduce incentives for the private sector or banks for taking on unhedged risk. The IMF Representative commented on exchange rate · the flexible exchange rate regime is working and must be maintained. Indeed, the flexible exchange rate is the single most important policy difference between today and the last crisis. Going back to targeting or controlling the exchange rate, as was the case in 2008, would be a big mistake and make conditions even riper for a repeat of the last crisis. Exchange rate volatility is unpleasant, so the public and political concern in this area is understandable. The central bank can continue to intervene to smooth excessive volatility. What it should not do, however, is target a specific level of the exchange rate. It simply does not work, and the main effect is a loss of international reserves. While reserves buffers are much higher than in 2008

and even higher if we factor in the welcome swap line with the People’s Bank of China), they are not enough to defend an exchange rate target. While such a policy may seem to work for a short-period, as reserves are run-down the speculative attack would accelerate and the end-result is a large, abrupt, and painful jump in the exchange rate as was seen firsthand in the 2008-9 period. That mistake should not be repeated The Governor of Bank of Mongolia has said • Although nominal exchange rate of of tugrug has been stable YTD, imports with consumer features are rising fast, deficit of balance of payments has dramatically increased, and almost total dependence of export from mining revenues is further weakening immunity of the economy from the external shocks • Risk of economic crisis is not declining in case of negative changes such as decline in commodity prices, slowdown in foreign exchange inflows or increase in outflows EXTERNAL Further according to World Bank, the trade deficit reached record levels (US$ 1.7 bn in December 2011) as imports of mining-related equipment and fuel imports have surged. But exports also grew strongly, reaching US$ 4.8 bn in December from US$ 2.9 bn a year ago supported almost entirely by coal shipments to China. The current account deficit widened to 35 percent of GDP from 14 percent in 2010, but was fully funded by record FDI inflows of US$ 5.3 bn or almost 62 percent of GDP on a four-quarter rolling sum basis. OUTLOOK Further, according to World Bank , to ensure macroeconomic stability and to prevent a hard landing for the economy in case of an adverse external shock, Mongolia needs to adhere strictly to prudent fiscal policies as set out in the FSL and IBL and tightening both fiscal and monetary policy to reduce inflation, take macro-prudential action to reduce systemic risks in the banking sector and maintain a flexible exchange rate that will act as the first buffer in any external shock materializes These are uncertain times for Mongolia. The economy faces growing headwinds from the global economic environment, while the looming elections increase domestic uncertainty. Until a substantial amount of savings has accumulated in the stabilization fund, Mongolia remains strongly exposed to volatility in commodity prices. With global economic prospects diminishing, and with any potential stimulus package from China unlikely to be focused on infrastructure as during the last global financial crisis in 2008-09, extra caution is warranted. “Be prepared” sums up the appropriate policy advice at this point in time. Mongolia’s policy-makers realized the importance of “being prepared” when they passed the landmark FSL in June 2010. It is now critical to adhere to the principles contained in this law, in order to ensure that the country’s vast coal and copper resources are converted into sustainable growth that improves the welfare of all current and future Mongolian citizens. The IMF Representative commented on global risks

· The global economy is at a particularly dangerous point, and there is a real risk of a substantial slowdown in world growth similar to what happened in 2008. While the biggest concern is the European Sovereign Debt Crisis, no part of the world would be immune from the fallout. For Mongolia, the biggest implication would be from a significant drop in copper and coal prices, just like 2008, which would hit the economy extremely hard. In fact, Mongolian policymakers are repeating the very same mistakes that led to the 2008-9 economic crisis at the worst possible time. The return of boom-bust policies at this dangerous juncture in the global economy makes the Mongolian economy vulnerable to another crisis. The upcoming elections in Mongolia are another source of uncertainty and could lead to a political accident that triggers an abrupt loss of confidence. Fortunately, the economy is not at that point yet but urgent policy action is needed to put the economy on safer footing. The Governor of Bank of Mongolia has said • World economic uncertainty is prolonging. IMF and World Bank are warning that world economy is going to next economic crisis • Growth has stagnated in developed economies , depression has started and growth in China might decline • As a negative result of this, there is a risk of decline our exports revenues especially copper, increase in foreign trade deficit and loss in budget revenues in a short time • Therefore probability is rising of repeat of economic crisis of 2008-2009 • That’s why measures to overcome possible external shocks should be installed in the budget and monetary policy as wide as possible • Our country that has high capital inflow and rapid economic expansion has no choice but to urgently implement proper countercyclical macro policy of reducing vulnerability to economic difficulties and capacity to overcome challenges • main criteria of proper macro policy is not fixing negative effects of wrong policy with another policy but in having integrated policy aimed at creating condition for sustainable and stable development Frontier Securities Conclusion: It appears that there is multilateral consensus on Mongolian economy’s key short-term challenges and risks as communications from World Bank and IMF echo each other and the keyword is prudence. Mongolia has no shortage of prudent fiscal policies framework as set out in the FSL and IBL. The question is implementation. Non-implementation of FSL and IBL , not sticking to promise of ending cash handouts and failure to control inflation would be early indicators of resource curse and Dutch Disease further spreading in Mongolia. 15. Ukraine appeals WTO to end cheese war with Russia bne 1 March 2012 Ukraine is the first country to make use to Russia’s recent accession to the WTO by appealing to the international trade body to adjudicate in a cheese war that has broken out between the two countries.

While trade between Russia and Ukraine has flourished, rising to a 20 year high in February, Moscow has been turning the screws on Kyiv as it attempt to renegotiate its gas contract and win control of at least part of Ukraine’s gas pipeline transit network. As a way of increasing the pressure Russia banned the imports from several Ukrainian cheese factories earlier this year, an important Ukrainian export item. Ukraine plans to appeal to the norms of the to the WTO, Ukrainian Agriculture Minister Nikolai Prisyazhnyuk told RIA Novosti. Russia's Federal Service for Veterinary and Phytosanitary Oversight banned cheese from Ukraine's Prometei, Piryatinsky Cheese Factory, and Gadyachsyr due to excessive levels of vegetable fat. Last Monday, added Bashtansky, Lozovsky plants, Bel Shostka Ukraina and Khmelnitskaya butter and cheese base to the list of companies whose production is banned on the Russian territory. 16. €99 per passenger in Pecs bne February 29,2012 The Hungarian city of Pecs has until the end of the year to deicide whether to continue to subsidize its struggling airport, Magyar Nemzet reported on February 28. However, as realdeal.hu points out, should Pogany Airport close, we would be losing a perfect illustration of "the madness" that so often lurks in municipal project financing. Deputy mayor of Pecs Peter Csizi announced that the city and majority owner spends HUF200m (€695,000) each year to subsidize the airport, which was opened in 2006 after a HUF3bn development project. Half of the subsidies go towards repayment of loans incurred in building the airport, whilst the remainder is spent on simply keeping it running. That's not surprising given the chasm that sits between the figures in the business plan and in the real world. Of the 100,000 passengers that the airport assumed it would serve in 2011, no more than 7,000 turned up, according to MTI. That represents a drop of 15% in business year on year - or just over 1,000 passengers. realdeal.hu suggests it may have spotted one potential weak link, pointing to the airport's route plan map on its website, which details the two routes - to Corfu and Bourgas in Bulgaria - served by the charter airline that uses Pogany. "So there you have it," the news service sums up. "Pecs is spending HUF200m per year so that a few thousand relatively well-heeled people from the surrounding area don't have to drive to Budapest in order to fly to their choice of two beach resorts. As one wag suggests in response, HUF200m could be considered a fairly cheap bill for subsidizing an airport, unless you look at it on a per-customer basis. Then it works out at HUF28,571, or €99, for each passenger. Csizi said experts would assess this year whether the operational costs of the airport could be reduced while its services are expanded. However, if all fails, the airport may need to be closed by the end of the year, he added. The airport operator has already reduced costs by several tens of million forints in recent years as a result of staff cuts and introducing seasonal opening times.

NEWS INVESTMENT 17. AFK Sistema, MTS: Evtushenkov commits to development of Indian business UralSib February 26, 2012 SSTL to participate in auction for the redistribution of mobile licenses. Vladimir Evtushenkov, AFK Sistema’s (SSA LI – Buy) control- ling shareholder, has claimed that Sistema is committed to the devel- opment of its Indian mobile subsidiary SSTL during a meeting with SSTL employees, Vedomosti reported today. Sistema’s representatives redistribute mobile licenses, which were cancelled recently by India’s supreme court. In contrast, two foreign players have already decided to quit the Indian mobile market. Business unsustainable. In early February 2012, India’s supreme court ruled to cancel 122 mobile licenses held by seven operators (in- cluding 21 licenses belonging to SSTL) and required that the Telecom Regulatory Authority decide on the redistribution of licenses. In the meantime, these operators could continue to operate under old li- censes for four months. SSTL acquired 21 mobile licenses in 2008 for about $630 mln and has been rolling out a pan-Indian network. However, the company has failed to build a sustainable business, con- trolling only 2% of the market by the end of 2011, and generating a $278 mln EBITDA loss in 9M11. The company needs to invest further in its development and, given its $1.4 bln in debt, its total value could be estimated as negative, while any costs to acquire licenses could further undermine SSTL’s business. Risk may ultimately affect MTS. Sistema’s decision to carry on with?its Indian mobile business is in our view value dilutive for Sistema, but?the risks of this decision will most likely to be transferred to MTS (MBT?US – Buy), which is being considered to become the ultimate owner?of SSTL (see our report Indian Gambit released 2 February). MTS remains fundamentally undervalued offering 14% upside to our $21/ADR target price, and we reiterate our Buy recommendation for the stock. However, as risks increase for MTS, we will in- creasingly prefer VimpelCom (VIP US – Buy), which appears to have reduced risks given the recent resolution of the conflict be- tween Telenor and Altimo and expectations that the nationalization of its subsidiary in Algeria will likely be made on fair terms. Sistema offers 32% upside to

our target price of $28/GDR based on SOTP and also could be a more attractive alternative to MTS. 18. Brussels to discuss Baltic power networks with Moscow bne March 1, 2012 A meeting of European Union foreign ministers has given the European Commission a mandate to negotiate a new agreement with Russia and Belarus on the Baltic power network, reports Platts. As with their other energy systems, Estonia, Latvia and Lithuania's power systems are currently isolated from the rest of the EU, linking instead into the networks of fellow former Soviet states Belarus and Russia. "The Council adopted a decision authorizing the Commission to negotiate an agreement with Russia and Belarus," the EU Council said late on February 28. The Commission said in September 2011 it was looking to finalize an agreement between the EU, Russia and Belarus in the coming months, as part of a broader external relations drive to bolster the EU's energy security. However, EU power industry association Eurelectric says closer integration between the EU power grid and the Russian system is not possible in the short term, with the pair not currently compatible. Even cross border power trade would be difficult because Russia has no means of auctioning interconnector capacity, while the EU uses implicit auctions. As such, the EU says agreements with Russia and Belarus are likely to focus on the implementation of the EU's Third ENergy Package. That's unlikely to go down well in Moscow, with Russia already fighting demands to allow third parties access to its gas pipelines into Europe. Separately, the EU is supporting a "Baltic Energy Market Integration Plan," which aims to link energy infrastructure between Finland, Estonia, Latvia, Lithuania, Poland, Germany, Denmark and Sweden. There are also plans for a North-South Interconnector linking the Baltic states with central and southeastern Europe. 19. Foreign investment in Russia’s Krasnoyarsk Region soars in 2011 by 72% bne 2 March 2012 Foreign investment in Russia’s Krasnoyarsk Region soared by 72% in 2011 to RUB1.3bn, the Federal State Statistics Service reported. The biggest investor was the UK accounting for just over half or $755.2m of the total, with Sweden second with $150.2m, Germany third with $150m, and then France with $125.1m. The favourite sector was the processing industry with $1.2bn in 2011, up from $240.8m a year earlier. 20. Slovak regulator cuts gas tariffs following SPP price cut from Gazprom bne March 1, 2012 Slovakia's state energy regulator is set to slash domestic gas tariffs on the back of the price discount handed to importer SPP by Russia's Gazprom. URSO approved a 5.5% rise in regulated prices for retail customers effective in December, but announced on February 29 that prices will fall by 5.2% in the near future, reports

Reuters. The regulator cited amendments to the contract between SPP and Gazprom as the key reason. SPP was amongst a select group of European customers to be handed a price cut by the Russian exporter, as part of a strategy to increase market share in the EU. Most major customers however continue to demand a reduction in pricing on their long term contracts.

OTHER NEWS INVESTMENT 21. MMK could face railroad issues at its potential Australian project; capex risks on the upside VTB Capital February 27, 2012 News: RBC-Daily reports that MMK might face obstacles transporting iron ore from Pilbara Iron Ore Project (PIOP), the main iron ore asset of Flinders Mines, which the company is to acquire for USD 539mn (as announced in late 2011). PIOP is scheduled to commence operations in 2015, with estimated annual volumes of 15mn tonnes of saleable product. According to the paper, MMK could construct 20km of railroad for USD 1.17bn to connect to the existing infrastructure of Rio Tinto. A second scenario would imply capex of USD 1.4bn for the connection to the Fortesque railroad infrastructure, or USD 1.9bn for a 135km line which would connect it to the Australian Premium Iron (API) proposed railways. Our View: MMK had previously planned to spend about USD 1.1bn on acquiring and developing Flinders Mines. The additional capex burden would significantly slow down the project’s development, and question MMK’s ability to develop such a capex-intensive project. The company’s 3Q11 LTM leverage stands at 2.7x net debt/EBITDA, with the first cash flows from the project only coming after 2015. Nevertheless, we do not exclude MMK being able to handle the issue by that time (i.e. it is a minority stakeholder in Fortescue, which is itself developing a railroad construction project), and so treat the news as neutral at this point. 22. Russia XXL Ben Aris and Anna Krachenko in Moscow February 29, 2012 If there existed an annual European Consumer Olympiad, then from this year forward Russia would be winning gold medals (or perhaps golden toasters would be more appropriate) for having the largest markets on the continent. Russian incomes have risen 14-fold over the last decade and sales in virtually all consumer categories have followed suit. As the economy recovers, Russia is now the 11th largest consumer market in the world, according to Euromonitor International, and is already the second or third largest in Europe in most categories. "Russia has become a middle-class country," Citigroup's chief Russian strategist, Kingsmill Bond, says confidently. "Rising wealth levels over the last decade have turned Russia into a middle-class country for arguably the first time in its history. We expect this fact increasingly to be reflected in its politics, and see the current [democracy] protests as the start of a long process of change."

Bond estimates Russia's middle class is now over 60% of the population. Other surveys put that number a bit lower, but the consensus is still around the 50% mark and half of Russia's population see themselves as middle class, according to a recent survey. Key to this is that income per capita now stands at $900 per month (in purchasing power parity), which is about half the Western European average, but more evenly distributed than in many other countries – the top three deciles all have incomes of over $1,000 per month. Over the past decade, retail trade in Russia has grown at a blistering pace, increasing six-fold to reach a total value of $621bn in 2011, according to the Federal Statistics Service, and creating 5m new jobs in the process. And retail sales are still growing strongly, rising 7.2% in 2011 versus 6.3% in 2010. That compares favourably with retail sales in Germany, Europe's biggest consumer market, which grew by just 1.1% and 1.3% in 2010 and 2011. Of food and phones Food retailers contributed about half to Russia's $621bn total turnover, but the launch of modern retail formats has been a catalyst for the transformation of other segments of the consumer market. The mobile phone market is one of the great successes of the Russian reform story and the country became the largest mobile market in Europe way back in 2004. But from this year on, Russia is expected to start conquering consumer category after consumer category. In 2011, Russia became the largest market for milk and children's goods, and this year it is due to become the biggest dairy market. In 2013, the country will take the top spot for advertising and apparel. No wonder, then, that Russia has seen a spate of mega-acquisitions by multinationals from 2010. And experts predict there will be more as international companies wake up to the shopping power of the Russian consumer. By the time Prime Minister Vladimir Putin finally quits politics in 2020 (assuming two more stints as president), Russia should be the biggest consumer market in Europe full stop. The reasons for the frenetic growth are simple. The paucity of goods available during communism means that demand in every product category – from jeans, to phones, to cars, and so on – is still nowhere near being met. Most consumer products simply didn't exist before 1991 and Russians haven't yet finished acquiring them after imports began in the 1990s: a survey by ACNielsen last year found that 71% of Russians would spend any spare cash against 3% who said they would save or invest it. Second, with the banking market still relatively underdeveloped, Russians have almost no debt to speak of. This makes some 70% of their income disposable against an average of 40% in Europe, according to German market research company GFK. Combine high disposable incomes with rising salaries, and over the last few years the average Russian shopper enjoys almost the same shopping power as the average Western European: the disposable share of Russia's $15,000 per-capita income (on a Phoenix Capital basis) is $10,500, compared with Europe's per-capita income of $32,700, of which $13,080 is disposable. Back in 1999 on the eve of his first stint as president, the then-prime minister Vladimir Putin said Russia's economy could overtake that of Portugal by 2015 if it grew at an average rate of 8% a year. Today, Putin is again prime minister and

again on the verge of becoming president, and Russia's economy has long since overhauled Portugal to become the fifth largest in Europe, and is now fast closing the gap on Germany, Europe's largest. CONSUMER SEGMENTS Mobile mania Mobile phones: biggest since 2004, worth annual $30bn Telecommunications reform is the great unsung success of the Putin administration. Shortly after he took office for the first time at the turn of the millennium, Putin sponsored the so-called Gref plan, supervised by the then-economy minister German Gref, and the first set-piece reform was a makeover of Russia's pathetic telecom sector. The regional companies were broken up and redistributed into seven "super-regions", or okrugi , and the mobile phone sector full liberalised. As the fixed-line system was still a shambles, mobile phone companies launched into a market of ravenous demand and VimpelCom (which operates the Beeline brand) went into profit in its first year of commercial operation in 1994. Since then, the growth of the sector has been exponential. VimpelCom has been joined by two more national players, MTS and Megafon, and customers have gone from a few well-heeled Mafioso willing to pay the $5,000 a month subscription fee at the start, to pretty much everyone in the country today. Mobile phone penetration was 215% at the end of 2011 (equivalent to over 300m phones), making Russia's mobile market nearly four times bigger than that of Italy. Actually, investment bank Troika Dialog and research firm ITU say Russia overtook Germany to become the largest mobile market back in 2004, when the number of subscribers doubled from 36.5m to 74.4m. By 2011, total revenue had topped $30bn and profits continue to grow strongly as the various operators add more valueadded services like mobile TV and email. Conversely, the biggest Western European mobile markets are all reaching saturation, analysts say. Smoking Cigarettes: biggest from 2015, worth $20bn Nothing epitomises Russia's rapid transformation to a free market better than the red packs of Marlboro stacked in the kiosks on nearly every street corner throughout the country. The immediate pleasure of a quality smoke and the relatively low price of cigarettes meant Russians almost universally abandoned the bitter Soviet products like the Belamorskaya papirosa (an unfiltered, smelly black tobacco cigarette) or more upmarket brands like Apollo from the word go. Today, Russia is the second largest tobacco market in the world after China in terms of the number of smokers. Russians are the heaviest smokers in Europe: 60% of men say they smoke on a daily basis, putting Russia far ahead of the Greeks where 40% of men say they smoke, according to the World Health Organization. Sales grew exponentially following the fall of the Iron Curtain and rose by 31.6% over the last decade to 382bn sticks by 2009, according to Euromonitor International. However, Russia is still not the most valuable tobacco market in Europe and at $14.3bn in 2010, according to MarketResearch.com, it still lags the UK where the total value of the tobacco market was $19.7bn in 2010. The reason for this discrepancy is the huge difference in prices: a pack of smokes in Moscow costs about $1 whereas the same pack in London is about $9.50. Russian sales probably peaked in 2008 and could start falling, although revenues should continue to rise. Despite their famous disrespect for a healthy lifestyle, Russia acceded to the WHO Convention on Tobacco in 2008 and has started to introduce restrictions and higher duties on tobacco.

Milking it Milk: biggest since 2011, worth $14.6bn In December 2010, PepsiCo announced it would pay $3.8bn for control of dairy products and juice maker Wimm-Bill-Dann and in one stroke became the biggest food-and-beverage business in Russia. It was a savvy move, as whatever else happens to the economy, people will always drink milk. Russia became the biggest milk market in Europe last year in terms of both volume and value, or 31.8m tonnes and $14.6bn respectively, according to the US Food and Drug Administration. The next biggest market is now Germany with 29.8m tonnes worth $10.4bn. And there is still a lot of room to grow: demand for milk currently exceeds supply and Russia imported 7m tonnes of milk in 2011 and is forecast to have to import 10m tonnes in 2012, according to 3A Business Consulting. Big cheese Dairy (ex milk): biggest from 2015, worth $12.1bn Food is still king when it comes to shopping in Russia, making up a much larger share of the checkout bill than in the West. "Food retail is the biggest and the fastest growing segment in Russian retail," says PMR retail analyst Katarzyna Twardzik. "And on this score Russia can already compete with the leading countries of Western Europe." Russians are slowly going upmarket, swapping the traditional kolbasa (sausage) for prosciutto on the kitchen table. Despite the progress, basic foodstuffs still dominate the business and dairy is the most important product group, prompting leading US food manufacturer PepsiCo to spend $3.8bn to acquire Wimm-Bill-Dann in 2011 to become the biggest food-and-beverage business in Russia. Russian dairy retail is already the third biggest market in Europe, but is also the fastest growing at 8% a year. The total volume of sales is expected to reach 4.7m tonnes worth about $9.3bn by the end of 2012. The number of cows restricts the tonnage of raw milk production, but the value of sales should continue to rise as consumers buy more puddings, yogurts and digestion- aiding drinks, according to KPMG. By 2015, these segments will make Russia the biggest dairy market in Europe worth $12.1bn-$13.4bn, according to KPMG. Chocoholics Chocolate: biggest from 2022, worth $15.1bn After dairy, chocolate is the second fastest growing food and beverage item and Russia is already the fourth biggest chocolate market in Europe after Switzerland, Norway and Germany. Sales are expected to rise 11% in terms of value this year from $4.9bn in 2010, and by 2015 hit $7.4bn, or about 12% of global sales. The biggest danger to this growth is from competition from the sale of crisps and other nonchocolate snack alternatives, according to Euromonitor. This is one product group title Russia will struggle to capture: the 4.1 kilograms of chocolate per person that Russians eat a year is still way behind market leader Germany, which consumes a massive 11.1 kg per person a year worth about $16.8bn, although sales are expected to fall by 2% a year over the next five years, according to Euromonitor. If these trends continue, then it would take until 2022 for Russia to overtake Germany when the market would be worth $15.1bn, according to bne estimates. XXL Clothes, footwear and accessories: biggest from 2013, worth $72.3bn

Clothes were among the very first arrivals after the collapse of communism; the queues at Rifle, Russia's first dedicated jeans shop just round the corner from the Bolshoi Theatre in Moscow, used to be several hours long when it opened its doors at the start of the 1990s. Unsurprisingly, with an almost non-existent clothes, footwear and accessories (CFA) sector, Russia imports most of these products to meet the voracious demand and the branded stores that line Tverskaya, Moscow's main thoroughfare, are amongst the highest earning in the world on a square-metre basis. Today, CFA is big business – it's second to food retail, but twice the size of beer and mobile phones, as Russians love to look smart if they can afford it. And CFA will only grow as the share of food in the average shopping basket is expected to continue falling from 29% in 2011 to 26% by 2015, leaving Russians with more to spend on clothes. The fastest growth is in the mid-value range of goods (sports and casual wear) and if the market maintains its current growth rate, Russia will overtake Germany, the biggest market in Europe, in two years' time, reckons the consultancy PMR. The value of this segment was RUB1.704 trillion ($56.8bn) in 2010 and is expected to continue growing at about 10% a year to reach RUB2.263 trillion ($72.3bn) by the end of 2013. Child's play Children's goods: biggest since 2011, worth $11.3bn In one subset of CFA, children's wear, Russia already overtook the rest of Europe last year. While the overall size of the population continues to shrink (albeit more slowly than in the 1990s), the fertility rate has recovered and began to rise in 2009, according to the state statistics agency Rosstat. Putin's economic and political stability has provided Russians with a future and couples that put off the decision for a decade are taking the plunge and starting families. A wave of post-Soviet babies has fed through to the children's good sector and sales of baby clothes, baby food, toys and accessories have exploded as chains like Detski Mir (Children's World) stepped in to fill the niche. The toys sub-sector is probably the most promising in terms of business development, with the market expanding by 76% over the last five years, driven by French and German products. Last year, Moscow took a 25% share of sales catering to the country's 22m children under the age of 14, says PMR's Twardzik. The value of the children's goods market should have overtaken that of Germany, formerly the biggest market, last year to reach $11.3bn, according to the RBC Market Research consultancy. By contrast, Germany posted $10.5bn of sales in 2009, but is only growing by a compound annual growth rate (CAGR) of 1.5%, while the UK market grew by 2.5% in the same period, and both Italy and Spain are in decline, with -0.5% and -4.2% respectively. Made up Cosmetics: biggest from 2019, worth $14.7bn Russia is the fourth fastest growing cosmetics and toiletries market in the world, with sales of $11.9bn in 2011 and forecasted sales of $13bn for 2012, against Germany, Europe's largest market, with sales of $16.3 in 2011. "Consumer spending on cosmetics in Russia is growing more rapidly than in Western Europe. This has created a booming cosmetics and beauty industry, with salons featuring in most areas of Moscow. There are 52m Russian women between the age of 15 and 64 who are spending three-times as much on perfumery and cosmetics as they did in 1995," say analysts from Euromonitor. The biggest sub-sector is make-up, which is already a $1.6bn a year business. Russian women spend an average of 12% of their income

on make-up, which is twice as much as their peers in the US or Western Europe, says research firm Comcon. According to the Russian perfumery and cosmetic association, the market is due to grow at an average 6% a year in 2012-2017, while Germany is expected to grow by about 1.5%. This means Russia should become the largest European market in about 2019 with $14.7bn of sales, according to bne estimates. Madmen Advertising: biggest from 2013, worth $4.5bn All this mass market shopping has naturally fed through to the advertising business, which is dominated by the multinationals flogging food, soaps and shampoos like anywhere else on the continent. Russia's total adverting spend in 2010 was $4.2bn – about half of that in Western Europe in terms of share of GDP – and has been growing by 25-30% a year in the last few years. The crisis took the edge off the ballistic expansion; the total ad spend in Russia fell 18% in ruble terms in 2008 and by more than 40% in dollar terms, but it had recovered all the ground lost by the end of 2011, says Anton Kudryashov, former CEO of CTC, Russia's biggest commercial broadcaster. TV advertising typically accounts for a third of the total ad spend in the West, but in Russia half of every ruble spent on advertising goes on TV ads. "In terms of ad spend, Russia is already the ninth biggest market in the world, the fifth largest in Europe, and if current growth continues, it will be the largest in Europe as soon as 2013," predicts Kudryashov, who estimates the market's value will be worth $4.5bn by then. Big beer Beer: biggest from 2014, worth $30.3bn Beer is another well-developed sector with heavy foreign investment and Russia is already the second largest market in Europe: Danish beer-maker Carlsberg already relies on Russia for 40% of its revenue. Russians are not Europe's biggest beer drinkers per head, a distinction claimed by the Czechs, who consume a whopping 158.6 litres per person a year, according to Euromonitor. Still, as living standards improve, Russians are drinking less vodka and switching to less potent tipples like beer. (Beer is already the most popular drink in the more progressive northern capital of St Petersburg at 95 litres a year per person). Overall, Russia ranks well down the beer drinkers' list at number 28 in the world, consuming a mere 58.9 litres a year per person. It will be a few years before Russia overtakes Germany as Europe's largest beer market. The crisis hit the sector hard and production fell in 2010 by 5.1%, according to official data, although in terms of value it still managed to put in a gain of 16% to RUB598bn ($19.9bn) that year. That still leaves a biggish gap with Germany where beer sales were worth $25.4bn in 2011, according to Euromonitor, but Germany's market is only growing at a CAGR of 3%. If beer drinking in Russia continues to gain popularity at its current rate, then the country should overtake Germany to become the biggest beer market in Europe as soon as 2014, when it's worth $30.3bn. Little water, big market Vodka: biggest from the ninth century, worth $18bn in 2011 Unsurprisingly, Russia has been the biggest market in the world for vodka for over a thousand years since they invented the stuff in the ninth century. Today, the market is worth $18bn a year against the US' $12bn of sales in 2011, the second largest

market. Unlike most of Russia's other retail products, vodka is one of the few that is actually seeing its sales shrink as the government finally introduces western-style duty. Vodka consumption has already tumbled from an astronomical 27 litres per head in 2005 to 11.9 litres in 2011, and is expected to fall further to 8 litres in 2015, according to Renaissance Capital's Natasha Zagvozdina. "We expect a 10% year-on-year vodka consumption decline driven by a 30% excise tax hike. This is a downgrade from our previous forecast of a 5.6% consumption decline in 2012," says Zagvozdina. "However, we forecast the market's value, net of tax, to grow 3.6% on year in ruble terms, and to provide higher margins for producers, which should transfer excise tax to consumers and add some additional price increase on top of it." The amount of vodka that Russians drink will fall, but the market's value will continue to rise as drinkers switch to the "good stuff": total sales are expected to reach $21bn in 2013 and $23bn in 2015, or a CAGR of 6.6%. iStuff Consumer electronics: biggest from 2015, worth $85.7bn iPads and iPhones are everywhere in Moscow. They have become a status symbol for a post-Soviet generation that is now moving into management and taking over the running of the country from their Soviet-educated parents. Germany remains the largest Western European market for consumer electronics and had a good year in 2011 after sales rose 8% to top ?47bn ($60.2bn). But Russia is already in second place, even if it suffered a bad few years during the crisis: according to data published by GFK-Russia, the size of the combined consumer electronics and household appliances markets in Russia was $40.6bn in 2008, but that halved to $21.5bn in 2010, largely due to a freeze on consumer credit by the banks. However, in 2011 the market was recovering rapidly and sales should return to their pre-crisis highs by the end of this year. If Russia returns to its previous pace of growth and the rest of the world maintains its average of 5%, then Russia will become the biggest consumer electronics market in Europe by 2015, worth $85.7bn, according to bne estimates. Very driven Cars: biggest from 2015, worth $80.3bn Nothing says prosperity like having a luxury car and most Russians are desperate to exchange their domestically produced jalopies for a foreign brand. Since the advent of consumer credit in 2001, car sales have boomed and Russia briefly became the biggest car market in Europe in the middle of 2008 when it put its nose in front of market leader Germany by selling 1.65m cars against Germany's 1.6m in the first six months of the year. But the crisis killed the business (the freeze on credit by banks made new cars unaffordable) and sales contracted to 1.4m units for the whole of 2009 worth $28.1bn. As the recovery gathers momentum, Russian car sales have bounced back strongly, up 39% in 2011, according to the Association of European Businesses. There is still clearly plenty of growing room: in Russia there were 244 cars per 1,000 people in 2010, against Germany's 515, France's 497 and the UK's 494. As a result, sales in Russia are expected to grow at 8-14% through to 2020, according to Boston Consulting Group Forecasts for the size of the market and the speed of its development vary, but within a fairly narrow band. The director of the Economic Development Ministry, Dmitry Levchenkov, forecasts Russia will sell 3.5m units a year by 2018, while the Association of European Business and director of the automotive and agricultural machinery department at Russia's Ministry of Industry and Trade, who is in charge of investment into the automotive sector, both reckon

Russia is on course to sell 4m units by 2015, which would make Russia the largest car market in Europe. Online, on fire e-commerce: biggest from 2019, worth $103.2bn Russia overtook Germany as having the greatest number of those surfing the web in Europe in 2011 and the explosion in internet usage is driving e-commerce. Russia is well suited to online shopping, as websites are the simplest and cheapest way for retailers based in Moscow to reach the far corners of the world's biggest country. Catalogue sales were already booming based on the same principle. In 2009, Russia was already the second largest e-commerce market in Europe with $19bn in sales, but it still has some catching up to do with Germany, the European leader, which saw $27.5bn of sales in 2011, according to e-commercefacts.com. Germany's e-commerce market is growing at 17% a year, while Russia's has been growing by around 22-30% a year. If, as expected, the growth of Russia's market accelerates to 30% as things like credit cards become more widely available, then Russia will overtake Germany as soon as 2019 when the market will be worth $103.2bn, according to bne estimates. Home buyers Mortgages: worth $47.5bn in 2011 Most of Russia's consumer sectors are developing fast and in some cases are already mature, however, financial services are still in their infancy. The introduction of express and unsecured consumer loans by Russky Standart got the ball rolling in 2001 and such credit was used to pay for a third of all retail sales during the boom year of 2008. Since then, retail credit has dipped, but still accounted for 16% of all sales in 2010. In the last few years, a new financial product has come onto the market and, thanks to the state's support, is growing exponentially: mortgages. With an 80% owner/occupier ratio, Russia has more homeowners than any other country in Europe by a long chalk, thanks to the giveaway of property following the collapse of the Soviet Union. Today, that real estate is worth some $3 trillion, according to bne estimates, or a bit less than twice the entire value of the economy. But without a functioning mortgage market, this money is stuck in concrete. Russia's mortgage sector first appeared in 2003, but since the summer of 2010 it has been doubling in size every 12 months or so. The number of outstanding mortgage contracts grew 80% to 449,210 between January and November 2011, according to the state mortgage agency (AIZhK). This year, banks are expected to sign contracts to take the total up to between 550,000 and 680,000. And AIZhK predicts the size of the market will continue to climb to reach 741,000 contracts by 2015 and then 868,000 by 2020, which makes Russia among the fastest growing mortgage markets in Europe. Still, home buying is in its infancy: the total Russian mortgage portfolio is estimated to be $47.5bn as of December 1, according to the Central Bank of Russia, compared with the UK with $1.871 trillion as of the third quarter of 2011, according to the UK's Financial Services Authority. China's mortgage business is already four times bigger than Russia's and growing just as fast. Despite the fast growth, it will be another generation before Russia starts catching up with the rest of Europe on this score.

SECTOR Gas

23. Slovenia agrees to build a 25 bcm capacity section of South Stream bne 2 March 2012 The Slovenian government has agreed to build a section of the South Stream gas pipeline that will have capacity to pump 8bn cubic meters (bcm) of gas per year initially, rising to 25 bcm in time, the local Delo newspaper said The construction work will cost €1bn and start at Kidricevo on the border with Hungary and end at Ratece on the border with Italy. Russia's Gazprom and Slovenian gas pipeline operator Plinovodi on February 27 signed a supplement to the agreement of participants in South Stream Slovenia LLC. 24. Gazprom reaches agreement with Eni on amending gas supply contracts VTB Capital 2 March 2012 — no details on new prices or volumes — negative implications likely priced in News: At a working meeting yesterday, Gazprom and Eni agreed on amendments to the contract under which Russian gas is supplied to Italy. The companies also discussed putting into action the detailed plan to start constructing the South Stream pipeline by December 2012. Our View: As there are no details about the price discount or volume flexibility, we cannot calculate the impact on Gazprom’s financials from this revision to the contract. However, we believe that Gazprom’s flexibility of late in revising its long-term European gas contracts represents a negative tendency overall. At the same time, this step will help the company to support its market share in the region. We believe that the news has already been acknowledged and, therefore, priced in by the market. For more details, see our Gazprom –Further Downside Risk for European Prices, of 20 February. 25. Gazprom to reform Lithuanian gas sector by 2014 bne 2 March 2012 Russia’s state-owned gas behemoth Gazprom says it has agreed to help Lithuania reform its gas sector to meet the European Union's third energy package requirements by the end of 2014, Lithuania's Prime Minister Andrius Kubilius said in an interview with the domestic radio station Lietuvos radijas. The main thrust of the changes is the production, transportation, and sale of energy must be separated, in 2011. "We talked about the same things - reorganization of the gas sector and the implementation in Lithuatnia, a so called property separation directive. Lithuania decided that the decision should be implemented by the end of 2014… Gazprom representatives agree with that," Kubilis said in a meeting with Gazprom Deputy CEO Alexander Medvedev.

26. Management reshuffling at Gazprom may have been put on pause; January exports take a hit on Ukraine Alfa February 26, 2012 It appears that we are seeing a pause in management reshuffling at Gazprom following the widely discussed dismissal of three top managers, including Deputy Chairman Alexander Ananenkov. The removal of Ananenkov has bred a significant number of rumors about further potential changes to the company’s management structure. By contrast, two other key board members, Yaroslav Golko and Igor Fedorov, just saw their contracts extended by five years, Vedomosti reports. It is possible that we will see the dawn of a new period of managerial stability within the company. On the one hand, while this development is positive, it also minimizes hopes for changes to the company’s policy and approach. In separate news, RBC Daily has returned to the topic of Gazprom’s January export volumes, reporting that they contracted 9% y/y to 18.4bcm at the same time as sales to the FSU took a 37.3% y/y hit on the back of lower Ukrainian purchases. European sales increased 18.1% on cold weather. As we see colder temperatures recede, it appears that European sales in March will be an important indicator of demand for Gazprom’s gas. 27. Rosneft might create a joint venture with Itera to develop gas assets in Russia together VTB Capital February 29, 2012 – additional acquisitions not ruled out – no final decision so far – positive for sentiment News: According to a Rosneft press release, the company has concluded an agreement on a strategic partnership with Itera to create a joint venture based on the gas assets of both companies. Itera might contribute 49% in OAO Sibneftegaz, 49% in ZAO Purgaz (with estimated total reserves of 345 bcm) and 67% in ZAO Uralsevergas-NGK (a gas distributor in the Sverdlovsk region). Rosneft, in turn, might contribute gas fields of the Kynsko-Chaselskoy group (with estimated reserves of 284 bcm). Some additional fields might be acquired/contributed in the future. Kommersant and Vedomosti speculate that Rosneft is to get 51% in the JV, with Itera having an operator function. Our View: There are a lot of uncertainties left in this deal. There is no clarity on when (if at all) the deal is to be closed. On the one side, it looks attractive for Rosneft as the company contributes its second-tier assets while getting access to producing gas fields with combined production of 12bcm (net share of Itera). On the other side, Itera contributes minority stakes in the JV with the controlling shareholders being not the easiest of partners: Gazprom and NOVATEK (even if partially defended by shareholder agreements with Gazprom and NOVATEK). Also, Itera recently complained about the increased MET rate for the ZAO Purgas fields. To recap, ZAO Purgas is jointly owned by Itera (49%) and Gazprom (51%), which is the reason why there is an increased MET rate (USD 16/kcm for Gazprom versus USD 8/kcm for independent producers). Itera might indeed provide some assistance to Rosneft in getting gas access to the final customer, but its leverage in respect of Gazprom’s

relation does not look particularly helpful for Rosneft. All in all, given the information provided, the deal lacks logic for both sides, although at first glance it does look more value accretive for Rosneft. We expect the news to be positive for Rosneft’s stock in the short term. 28. Ukraine offers to supply Central Asian gas to Europe bne February 28, 2012 Ukraine has the ability to pump natural gas from Central Asia and Azerbaijan to Europe if Russia cuts of supplies, according to a spokesman for Ukrainian Prime Minister Mykola Azarov. "We assume that the pipe is being freed [from Russian gas]. It means that it will be possible to pump Central Asian and Azerbaijani gas through it, and it will be possible to work on such projects," press secretary Vitaly Lukyanenko told Interfax. Azarov had said earlier that if Russia gas exports to Europe via Ukraine's gas-transport system, Ukraine will find a way out of the situation.

SECTOR Oil 29. Bashneft is to invest about USD 120mn to rebrand fuelling stations in 2012-15 --- positive VTB Capital February 29, 2012 News: According to its website, Bashneft is to invest about USD 120mn (RUB 3.7bn) on rebranding fuelling stations in 2012-15. Our View: We forecast Bashneft’s fuel sales through its retail network to increase some 46% over 2012-15 and estimate the company’s retail capex at about USD 223mn. The USD 120mn capex guided by the company represents only rebranding expenses, which amounts to 54% of our forecast. However, it does not include the acquisition and construction of new sites. The high profitability of the companies with large exposure to retail demonstrates that such spending might be justified. As a result of rebranding and other efficiency measures, the average throughput at its retail sites grew from 10.1t in 2010 to 14.2t in 2011. The news is positive for Bashneft, as we see any improvement in complementary activities as value creative and positive for the company’s investment case. 30. EIA Iran report VTB Capital 2 March 2012 The EIA has published its first report to Congress on its review of the price and availability of petroleum and petroleum products produced outside Iran. The report is a precursor to President Barack Obama making a determination that the price and supply of petroleum products outside Iran is sufficient to allow current purchasers of

Iranian petroleum to reduce their purchases of Iranian petroleum ‘significantly’. If this test is not met, then sanctions would not apply. The report itself does not make a determination but merely provides commentary and data about the status of price and supply. The key findings of the report are that: § the world oil market has become increasingly tight over the first two months of the year; § oil prices have risen and are high; § global liquids consumption is at historically high levels and is expected to rise, despite some economic uncertainty, especially for Europe; § unusually cold weather in Europe (which should cease to be a factor prospectively) impacted demand, particularly in February. In addition, the EIA finds that spare crude production capacity is modest, especially given current oil production levels and the geopolitical situation. As Iran is a significant net exporter, the EIA data implies, not surprisingly, that the market would have been even tighter without Iran’s net supply to global markets. The EIA stresses the backward looking nature of its analysis and the fact that the supply data is largely estimated while the price data is real time. Under the legislation, Obama is required to make his determination on price and supply based on this EIA report. In our judgement, the report tends to suggest the price and supply test might not be met. However, we believe it is likely that subsequent developments in oil markets to the end of March would influence that decision. While the domestic political situation in the US regarding Iran probably makes a determination that the price and supply test is not met unlikely, we expect that it might temper the administration’s enthusiasm to interpret ‘significant’ too aggressively. Moreover, rising fuel prices are again becoming a political issue that could influence the decision. In the event that Obama does in fact determine that the price and supply test is not met, the imposition of sanctions would be delayed at least until after 26 September and possibly until after Christmas. Colin Smith 31. Gazprom Neft: Sharp increase in refinery capex from 2013 is unlikely UralSib February 29, 2012 4Q11 EBITDA slightly below our expectations, but above con- sensus. Gazprom Neft (SIBN RX – Buy) published its full audited 4Q11 US GAAP results yesterday and held a conference call. Key fig- ures (revenue, net income and capex) had already been disclosed by the company in early February. From the full report, 4Q11 EBITDA came out 1.5% below our expectations and 2.2% above consensus at $2.2 bln. During the conference call management announced capex plans for?modernizing the company’s refineries, which amounts to around $2?bln for 2012-15, including $1.1 bln for the Omsk refinery and $0.9?bln for the Moscow refinery. For 2012, Gazprom Neft expects refin-?ery capex to total $1 bln, focusing on hydro-treater facilities at

the?Omsk refinery. On the back of this news, we do not expect refinery capex to increase from 2013. Capex hike unlikely, stable cash flow expected. Our main concern for oil majors is the risk of overinvestment, especially in downstream. The announced capex plans support our view that Gazprom Neft is unlikely to increase downstream capex in later years, as we saw with Rosneft and Lukoil, and will continue to generate decent free cash flows. We prefer Gazprom Neft over Lukoil and Rosneft, and we reiterate our Buy recommendation with a target price of $5.8/share.

32. High viscosity crude oil to receive tax breaks Alfa February 29, 2012 mildly POSITIVE for Tatneft, LUKoil and Alliance Oil The government has agreed to grant export duty breaks for producers of high viscosity crude oil as part of the 10-10-10 reform. The government plans to lower the export duty for high viscosity crude exports to 10% of the normal export duty for 10 years. According to the Ministry of Energy’s projections, around 600ktpa of crude oil production qualifies as highly viscous, which means a loss of around $110m per year for the budget, with production potential in this product group of as much as 3.5mmt by 2021E. We treat this news as mildly POSITIVE for LUKoil, Tatneft and Alliance Oil, though it is too early to know how much they will be able to boost production as highly viscous oil is a rather challenging product to export. 33. TNK-BP Holding: New reserves added in 2011 UralSib February 29, 2012 3.6% 1P reserve growth ... TNK-BP International yesterday pub- lished the results of DeGolyer & MacNaughton’s audit of its reserves as of the end of 2011. Total 1P reserves were up 3.6% YoY to 9.115 bln boe by SEC standards and up 5.4% YoY to 13.77 bln boe by PRMS standards. ... with 145% replacement ratio. The main contributions to the re- serve addition were active development of the Rospan gas project, the Verkhnechonskoye field in East Siberia, the Orenburg fields, and ac- quisitions of new licenses. The company’s reserve replacement ratio was 145% in 2011 by SEC standards and 203% by PRMS standards. Good upstream team; focus on 2012 capex, hoping no hike. We like the company for its highly qualified upstream team, which helps it to replace reserves at one of the

lowest costs among Russian majors. TNK-BP International (TNK-BP Holding’s (TNBP RX – Buy) parent company) is to publish its 4Q11 US GAAP numbers today, followed by a conference call and analyst meeting. We look forwards to guid- ance on capex for 2012 and beyond, and hope that the company will avoid a capex hike (as there was at Rosneft and Lukoil) thanks to good corporate governance and limited state control. We like the name, and reiterate our Buy recommendation and $3.9/share target price.

SECTOR Metals and Natural Resources 34. EuroChem Fertilizers to Invest $2 Bln in Kazakh Deposits RIA Novosti February 29, 2012 Russia's largest mineral fertilizer producer EuroChem will invest $2 billion to develop phosphorus deposits of the Karatau basin in the south of Kazakhstan over the next few years, company spokesman Vladimir Torin said late on Tuesday. "[The company] will build a mining and processing plant in the town of Zhanatas to produce phosphorus and in Karatau town to produce nitrogen fertilizers," Torin told the Prime news agency. The processing plant will be built on the basis of Sary-Tas enterprise suspended 18 years ago. Designed capacity of the fully renovated enterprise may amount to over one million ton of fertilizers per year. "EuroChem plans to sell the produce from the new plants not only in Kazakhstan but also export them to Russia and Belarus," Torin added. 35. Mechel suspends production at New-Olzherassk mine Alfa February 28, 2012 Mechel suspended coal mining at Southern Kuzbass’s New-Olzherassk Underground Mine due to coal self-heating. High levels of carbon monoxide were registered in New-Olzherassk mine’s long wall face #21-1-7, which indicated coal self-heating. No guidance was provided as to when production would resume. Mechel continues to experience problems with the New-Olzherassk mine. In August 2010, the mine was closed for the same reason and production was resumed only in November 2011 (production was idled for over a year). In February this year, Mechel announced the suspension of production at the mine for six days caused by an order of the Mezhdurechinsk City Court following a check conducted by the Federal Agency for Ecological, Technological and Nuclear Monitoring. The news is NEGATIVE for Mechel. Previous experience with coal self-heating issues at New-Olzherassk indicate that the problem may be long-term and the mine could be idle for at least several months. The mine has produced over 250kt of coal in 2012 (mostly PCI) and its annual capacity is estimated at approximately 1.5mt. The mined face contains approximately 2.5mt of coal.

It is impossible to estimate the duration of the mine closure, but if production will be suspended until the end of the year, Mechel’s raw coal production could be reduced by 1mt this year or by approximately 3%. PCI coal has a lower selling price than coking coal (average realized price in 3Q11 was $98/t vs. $206/t for coking coal) and the potential EBITDA loss this year could total ~$50m (2% of FY12 consensus). 36. Severstal Releases Some Details Of Its 2012 Capex Program Troika February 28, 2012 Severstal yesterday released an update on its 2012 investment program. This year, the company plans to invest around $1.67 bln, which is in line with the previous guidance. The bulk of the capex will be invested in Russia, including $0.9 bln on expansion and maintenance of Russian steel assets and around $0.5 bln on local mining operations. The rest will be spent abroad, with around $0.1 bln going to develop greenfield mining projects in Brazil and Liberia, and another $0.1 bln toward maintenance and development at the company's North American operations. Overall, Severstal's investment program is nearing its end. The only large project left in the steel segment is the mini-mill in Balakovo, which should be launched in 2013, increasing the company's capacity in long products by 1 mln tpy. In North America, large development projects at both Columbus and Dearborn were finished in 2011, and the further upgrade of these mills is currently under consideration. As for the mining division, the company plans to focus on preserving production volumes at Olcon, commissioning a new coal mining face at Vorkutaugol and expanding production at North American PBS Coals. We assume that around $400 mln in total will be spent on the maintenance capex of mining assets, which is in line with our previous estimates. Troika's view: Overall, with total capex falling from $1.7 bln in 2012 to around $1.2 bln mid-cycle, we note that Severstal's maintenance expenditures should remain pretty high, acting as a drag on the company's free cash flow, which could be just around $1.0 bln starting from this year. We think that all the positives of the company are mostly priced in and maintain a neutral stance on the stock. In the current pricing environment (with steel prices performing better than raw materials), we would prefer non-vertically integrated producers (such as MMK) relative to vertically integrated steelmakers with high-cost mining assets (such as Severstal), as their margins now are likely to converge.

SECTOR Power 37. DPM pricing mechanism may be amended Troika Dialog 1 March 2012 The pricing mechanism for new generating capacity (Russian abbreviation: DPM) may be amended, today’s Vedomosti reports, citing a draft Energy Ministry decree. The electricity sales adjustment coefficient is planned to be variable and recalculated on an annual basis, and would depend on fuel and electricity prices in a specific price zone. The current level used in capacity price calculation for new blocks (e.g. for gas_fired blocks in the first price zone) ranges from 0.71_0.79 and may be decreased to 0.47_0.68, according to Vedomosti’s source. As a result, capacity prices

could slide by 10_40% and the gencos’ missed profits for 2013_15 could reach $1 bln over the period. Troika’s view: The news is negative for sentiment toward the entire utilities universe and slightly negative for gencos valuation_wise. The estimated missed profits comprise 1.1% of total revenues for 2013E_15E and 4.6% of overall EBITDA for the gencos under our coverage. The less affected companies should be those that are efficient and whose investment programs are fully or mostly completed (Enel OGK_5 and E.ON Russia). In the worst case, whereby the electricity adjustment ratio is set at 0.47, total EBITDA for 2013E_15E would decrease by 12% and the target price would drop 15% for our top pick E.ON Russia (down 3% for both 2013E_15E EBITDA and the target price if the ratio is 0.68). However, we believe that the generators will try to oppose any amendments to the previous methodology, as they have done in the past. Alexander_Kotikov 38. Electric Utilities: Putin speaks about eliminating corruption in the power sector VTB Capital 1 March 2012 – important development – would lead to better efficiency and corporate governance - improve investors' perception of companies News: Prime Minister Vladimir Putin was quoted by Interfax as saying that the government had initiated its anti-corruption work and was incorporating measures to limit ‘grey’ schemes. Putin added that similar measures would be applied to regional companies (including electricity companies). Our View: During his speech to the government commission for the development of the utilities sector on 19 December, Putin highlighted the results of the Ministry of Energy’s probe into corruption in the power sector. He stressed that 169 of 352 top level executives were affiliated with 385 commercial entities, providing for possible conflicts of interest and leading to grey schemes, underpaid taxes and missing money that threatened the completion of investment programmes and implied unfair additions to tariffs. We believe that the corruption has a significant effect on the electricity bill. Eliminating it would be a positive development that would allow companies to focus on efficiency and increasing the level of corporate governance, thereby improving investors’ perception of them. 39. Electricity Grids: Update to the RAB methodology VTB Capital February 29, 2012 News: The Federal Tariff Service has published the draft decree that stipulates the RAB reload methodology on its website. The document is based on government decree #1172 on the RAB reload. The key new part is the rate of return formula: Rate of Return (new investments) = 0.3*[Cost of Debt for MRSK] + 0.7*[Russia 4 to 6 year Bonds + 2%].

0.3 – the share of debt (fixed at 0.3 for the first regulatory period). 0.7 – the share of equity (fixed at 0.7 for the first regulatory period). Our View: In the new version, the regulator has fixed the premium to Russia 4-6y Bonds at 2%, whereas before it was a variable to be determined separately (although not in a transparent way). This formula is to be applied to the regulatory period that will start in five years (from 2017). For the first regulatory period (from mid-2012), the regulator has already set the Rate of Return at 11% in a special decree. Current bond yields and the cost of capital for MRSKs put the rate of return from 2017 at 9-9.5%. This proposal could be viewed negatively as at the current bond yield and cost of debt levels it implies a lower return. However, that is still only theoretical as for the first five-year period the rate of return has already been set at 11%. Furthermore, this formula gives long-term predictability. For example, when modelling RAB-regulated companies we used to ask what the rate of return would be after the first regulatory period (as the formula contained a variable and so there was a risk premium that we needed to guess). Now, the variable is fixed at 2% and in that respect the uncertainty decreases. 40. Electricity Grids: Update to the RAB methodology - new formula sets risk premium to OFZ bonds at 2% VTB Capital 1 March 2012 - applied starting from the second regulatory period - gives long-term predictability News: The Federal Tariff Service has published the draft decree that stipulates the RAB reload methodology on its website. The document is based on government decree #1172 on the RAB reload. The key new part is the rate of return formula: Rate of Return (new investments) = 0.3*[Cost of Debt for MRSK] + 0.7*[Russia 4 to 6 year Bonds + 2%]. 0.3 – the share of debt (fixed at 0.3 for the first regulatory period). 0.7 – the share of equity (fixed at 0.7 for the first regulatory period). Our View: In the new version, the regulator has fixed the premium to Russia 4- 6y Bonds at 2%, whereas before it was a variable to be determined separately (although not in a transparent way). This formula is to be applied to the regulatory period that will start in five years (from 2017). For the first regulatory period (from mid-2012), the regulator has already set the Rate of Return at 11% in a special decree. Current bond yields and the cost of capital for MRSKs put the rate of return from 2017 at 9-9.5%. This proposal could be viewed negatively as at the current bond yield and cost of debt levels it implies a lower return. However, that is still only theoretical as for the first five-year period the rate of return has already been set at 11%. Furthermore, this formula gives long-term predictability. For example, when modelling RAB-regulated companies we used to ask what the rate of return would be after the first regulatory period (as the formula contained a variable and so there

was a risk premium that we needed to guess). Now, the variable is fixed at 2% and in that respect the uncertainty decreases. Back to top Mikhail Rasstrigin 41. Federal Grid Company - Proposed tariffs for 2013-14 are above our estimates UralSib 2 March 2012 FTS proposes new tariff targets for 2012-14. The Head of the Federal Tariff Service, Sergey Novikov, proposed a 19.1-19.2% tariff hike for Federal Grid Company (FEES RX– Buy) for the next three years starting 1 July 2012, Vedomosti reported. The newspaper’s sources explained that the tariff numbers exceeded the previous guidance due to a large investment program and the possibility of the company’s debt load exceeding a debt/EBITDA ratio of 3 in 2013. Above our estimate for 2013-14. Proposed tariff growth was close to our estimate of 20% for 2012, but above our estimate of 15% for 2013-14. If the proposal is approved, Federal Grid could receive an additional $556 mln in 2013-14, or 5% of EBITDA. Supportive of our Buy recommendation. We take a positive view on the news, as it creates upwards risks to our valuation. We reiterate our Buy recommendation for Federal Grid with a target price of $0.015/share. Matvey Taits 42. Generation Sector - Capacity supply contracts may be revised UralSib 1 March 2012 Profit calculation from electricity generation to be revised annually. The Energy Ministry plans to revise the methodology for calculating capacity supply contracts (Russian abbreviation, DPM), Vedomosti reported today: the projected profit from supplying electricity is to be changed annually and based on the forecast electricity prices. In contrast, the existing rules fix the share of profit from the provision of electricity at 21-29% of the total profit. Estimates from generators and the state vary. The generation companies see the forthcoming changes as negative. The head of the non-commercial partnership council of energy producers, Andrey Burenin, expects the change in legislation to turn capacity supply contracts into loss-making contracts. However, a source from the ministry disagreed with this opinion and believes that companies will earn their targeted rate of return. Negative sentiment likely. The introduction of the new rules will result in lower profitability on new projects. However, the negative impact on the financials will depend on the figures approved on an annual basis. For example, if the coefficient used for calculating the share of profit from electricity generation is increased by 10%, Mosenergo (MSNG RX – Buy), E.ON Russia (EONR RX – Buy) and Enel OGK-5’s (OGKE RX – Buy) 2013 EBITDA would drop by 1.1-1.6%. We see this news creating downside risk to our financial forecast for generation companies.

Matvey Taits 43. MRSK Holding and ErDF set the final point into moving Tomsk Disco in operating management VTB Capital February 29, 2012 --- positive for sentiment --- should bring best standards in costs efficiency --- achieved results might speed up the privatisation of regional MRSKs News: As Interfax reported yesterday, MRSK Holding and ErDF, a grid subsidiary of the French utilities giant EDF, have signed the final agreement and set the point in moving Tomsk regional distribution company under ErDF's operating management for the next eight years (from 1 March 2012). The trial period is set by the end of 2012. Our View: Given that the process of moving Tomsk Disco under the operating management has taken more than seven months (the initial agreement was signed in June 2011) and was postponed many times, we regard the final resolution of the issue as positive for sentiment on both Tomsk Disco and the entire distributors’ universe. We believe that moving the company under ErDF’s operating management is likely to bring best standards in operating costs efficiency which is vital given the ongoing process of RAB reload and tough limits on the growth in electricity prices set by the government. Moreover, we think that operating costs are likely to be cut and this might be used as a benchmark to access other distributors, inspire the government to speed up the privatisation of the regional MRSKs and provide more incentive for ErDF to participate in that process. 44. MRSK Holding finally passes Tomsk DisCo to management of France’s ErDF Alfa Bank 1 March 2012 MRSK Holding has finally passed Tomsk Distribution Company (the smallest grid subsidiary of MRSK Holding) to the management of France’s ErDF yesterday, different media sources reported. The length of the contract is 8.5 years including the trial period needed for ErDF to become familiarized with the functions of Tomsk DisCo. MRSK Holding has set key indicators for Tomsk DisCo that will determine ErDF’s reimbursement: improving reliability, reducing losses, increasing margins, etc. The contract covers only the grid assets of Tomsk region, excluding the city of Tomsk. Although we welcome the development considering the passage of Russian MRSKs to the management of experienced foreign investors, this information is not new and has already been priced in, we believe. Moreover, the nearterm performance of MRSK stocks will depend on clarification of the 2012 RAB changes expected in April. Alexander Kornilov 45. MRSK Holding to Cut its Investment Programme for 2012 Aton

February 26, 2012 MRSK Holding’s CEO Nikolai Shvets said that the company will reduce its capex for 2012 by 17.6% to about RUB140bn, Interfax reported on Friday (24 Feb). We understand the reduction in the company’s investment programme is attributable to lower distribution tariffs vs previous estimates as a result of government measures aimed at curbing electricity price growth. Bottom line?We consider the move as possibly the most adequate response by the company to the government’s short-sighted policy of tightening tariff growth. Also, since we believe the WACC for MRSKs (15.5-20%) are much higher than the regulatory rate of return (11%), reducing capex should enhance shareholder value for the distribution companies. We therefore view the news as moderately positive for MRSKs and MRSK Holding. 46. Putin speaks about eliminating corruption in the power sector VTB Capital February 29, 2012 News: Prime Minister Vladimir Putin was quoted by Interfax as saying that the government had initiated its anti-corruption work and was incorporating measures to limit ‘grey’ schemes. Putin added that similar measures would be applied to regional companies (including electricity companies). Our View: During his speech to the government commission for the development of the utilities sector on 19 December, Putin highlighted the results of the Ministry of Energy’s probe into corruption in the power sector. He stressed that 169 of 352 top level executives were affiliated with 385 commercial entities, providing for possible conflicts of interest and leading to grey schemes, underpaid taxes and missing money that threatened the completion of investment programmes and implied unfair additions to tariffs. We believe that the corruption has a significant effect on the electricity bill. Eliminating it would be a positive development that would allow companies to focus on efficiency and increasing the level of corporate governance, thereby improving investors’ perception of them. 47. Utilities - Return on capital to reach 11% by 2016-17 UralSib 1 March 2012 Positive update of regulation principles … The Federal Tariff Service has published draft distribution-grid regulation, which contains a proposal to align the return on new and old capital in the second regulatory term, to start in 1H17. A letter to local regulators published at the same time recommended applying an equal 11% rate of return even earlier, by the end of the first regulatory term. The existing decree (number 1,178) from 29 December sets the range of rate of return between 1% and 11% and does not stipulate an increased return during the regulatory term. The letter has another important recommendation, namely cancelling cross-subsidy payments – known as last-mile contracts – from 1 January 2014. … though actual implementation remains uncertain. We believe that the second regulatory term could be more favorable to discos than the first. The government is

clearly planning to return to the initial concept of RAB regulation and treat new and old capital equally. However, it is uncertain how exactly such commitments are to be implemented. Given that regulation will resemble the outdated cost-plus system during the first regulatory term, we focus on possible price-caps rather than the rate of return in four-five years. Mildly positive for segment. We are positive on the government’s intention to increase the regulated rate of return, though implementation could take four-five years. We believe that the recent initiative could ease pressure on the grid segment, which is suffering from the tariff freeze and revisions. We believe that improved regulatory principles will support MRSK Holding (MRKH RX – Not Rated) shares given the company’s size and good market liquidity. Matvey Taits

SECTOR Retail, FMCG 48. FUNDS: Buying into the Russian consumer Nicholas Watson in Prague February 28, 2012 Hybrid crops have long been used by farmers to increase yields, so it's perhaps no surprise that the hybrid markets of Central and Eastern Europe – emerging markets yet with many characteristics of western markets – should prove such fertile ground for private equity. According to the European Bank for Reconstruction and Development (EBRD), private equity in the former Eastern Bloc has outperformed all other markets globally over the last 10 years, yielding returns of between 15% (CEE ex-Russia) and 24% (Russia and the CIS region). The main reason behind this performance is that all the ingredients necessary for an attractive private equity market – structured business environment, a pool of local managers, capital markets, trade sale opportunities, and a private equity "midwife" in the form of the EBRD – already existed 10 years ago when the economies of the region were just about to take off. "If you look at other private equity markets such as the BRIC ones outside of Russia, many didn't have these same ingredients," says Richard Seewald, a partner at Alpha Associates, a Swiss-based private equity fund manager with more than $3bn invested directly in CEE private companies as well as other funds invested in the region. "That doesn't mean going forward they won't, but over the last 10 years the 'infrastructure' for private equity wasn't in place like it was for CEE." The extent to which the CEE private equity market has matured over the past decade was illustrated in February by the twin IPOs from technology companies AVG Technologies and EPAM Systems on the New York Stock Exchange. While neither of these CEE companies enjoyed the smoothest of debuts (AVG fell 19% on the first day of trading, while EPAM priced below its indicative pricing range), their ability to raise a combined $200m in tricky market conditions underlined how global investors are paying more attention to the technology and media businesses that have grown up and proven themselves in Russia and the wider CEE market, and can now

realistically offer a significant IPO exit for investors – something that has traditionally proved a problem. These two companies, together with Russian internet search engine Yandex which went public last year, are not the typical technology start-ups that western investors are used to seeing, ie. potentially great companies in search of a business model and revenues. AVG is one of the world's leading providers of anti-virus software that posted profits in the first nine months of 2011 of $105m on revenues of $198m. "The region has been long recognised for quality engineers and scientists, and over the past decade entrepreneurs have built world-class businesses – these three will pave the way for the next generation of entrepreneurs from CEE and Russia that will have greater access to resources, including experienced investors, management expertise and global capital markets," says Seewald, whose Alpha Associates was an early investor in both AVG and EPAM. "We've certainly seen more international investors look at tech deals in the region." Rush in Alpha and other private equity investors are particularly looking to the new generation of companies that are serving Russia's promising consumer markets, many of which have either become or are set to become Europe's largest over the next few years. The markets in Russia for mobile phones, milk and children's goods are already the biggest in Europe; for cars, clothes, advertising and consumer electronics they are set to be, according to a bne survey. "Russia still has a high-growth environment if you look at the macro trends and that should support an environment where consumer-driven companies are able to grow at a rate that's attractive for private equity investors," says Seewald. This will be driven in large part by Russia recently surpassing Germany as the continent's largest internet market (Russia had 50.8m internet users in September 2011 versus 50.1m users in Germany), implying that its e-commerce market, worth just $20bn-22bn in 2010, will follow suit and top $100bn as soon as 2019. In anticipation of this, Alpha recently invested in Ozon.ru, Russia's Amazon.com, along with several other international investors in a $100m round of financing to further strengthen the company’s position as the country's largest online retailer. Ozon’s revenue in 2010 reached $137m, up 34% on 2009, from 5.2m registered users – and that momentum has continued building. "Ozon is well positioned to consolidate this space in Russia going forward," predicts Seewald. Indeed, in its first acquisition since securing the $100m in financing, Ozon on February 15 announced it had bought Sapato.ru, a Russian online shoe and accessories retailer. "It is our first acquisition," Ozon CEO Maelle Gavet was quoted by the Wall Street Journal as saying, "but it certainly won't be our last."

SECTOR Telecom, Internet 49. Rostelecom and MTS sign agreement to jointly develop infrastructure Troika Dialog 1 March 2012

Rostelecom and MTS have announced that they intend to share existing infrastructure, such as fiber_optic network resources, equipment sites, power supply stations, antenna towers and antenna feeder stations. The two will also jointly develop and maintain a transport network and base_station infrastructure. Troika’s view: We view the news as positive for both companies as it should enable them to cut both operating and capital expenses. However, at this stage the deal looks more of a framework agreement, with terms to be discussed on a case_by_case basis. Hence, we cannot estimate the impact this cooperation might have on both companies’ financials. We see the following potential benefits from the agreement: ? While the two are likely to continue cooperating on a commercial basis, the agreement should simplify the process of gaining access to each others’ infrastructure. Each will continue to construct its own infrastructure, but this could entail less investment than expected as they might opt against rolling out a network in certain regions/spots in favor of utilizing the infrastructure of the other party. ? In terms of network development, the two companies could split investment, e.g. MTS could invest in constructing antenna towers for base stations and Rostelecom could invest in the fiber optic network. This would reduce capex and opex going forward. Anna_Lepetukhina 50. Runet recorded 4.39bn search queries in February VTB Capital 2 March 2012 Yandex’s losses continued in February — although they slowed down — Mail.ru picks up News: Runet recorded a total of 4.39bn search queries in February, up 39% from the 3.17bn in February 2011 and having quadrupled over the past three years, according to liveinternet.ru. We attribute the 1% MoM dilution to weak seasonality, partly offset by the booming internet market and the high activity of key internet players. Our View: Yandex’s search share loss slowed in February: down 0.3pp (from 1pp in January) to 59.3%. Yandex has lost 5.8pp over the past twelve months, compared with the 6.3pp at its worst moment in July 2007-March 2008 (when its share diluted to a record low of 53.5%). We mainly attribute Yandex’s continuing weakness to the increasing competition from global players like Google, which intensified its marketing activity in Russia in 2011 (the Chrome browser improved its share in Russia) as well as to Mail.ru improving its positions through an agreement with Google and its own search engine. Yandex’s search share loss translated into its websites’ context ad market share dropping to 55% in 2011, from 58% in 2010. While the search queries trend is not directly correlated with revenues generated from context advertising, it does indicate the attractiveness of search engines, which are the key tool for customers of the context ad business model.

Google and Mail.ru remain the key beneficiaries of Yandex’s softening search share. They increased their annual incremental contributions in Russia to 35% and 15% in February, up strongly from the respective 21% and 4% in February last year. By the end of February, they had expanded their total search share to 25.3% and 9.4%, respectively, from 21.4% and 7.2% a year ago. We prefer Mail.ru to Yandex, given the former’s diversified assets portfolio. 51. Sistema claims that its Indian investment is protected by a treaty between Russia and India VTB Capital February 29, 2012 News: Sistema said yesterday that it had sent a formal notice to The Republic of India notifying it of a dispute under the Bilateral Investment Treaty (BIT) between the Government of the Russian Federation and the Government of the Republic of India arising from the decision of the Supreme Court of India issued on 2 February 2012 regarding the cancellation of 122 telecom licences, including 21 licences belonging to Sistema Shyam TeleServices Ltd (SSTL), in which Sistema owns a 56.68% share. Sistema believes that the cancellation of SSTL's licences following Sistema's investment of billions of dollars into the Indian cellular sector is contrary to India’s obligations under the BIT, including obligations to provide investments with full protection and security and obligations not to expropriate investments. The formal notice requests The Republic of India to settle the dispute relating to the revocation of SSTL's 21 telecom licences in an amicable way within six months. If the dispute is not amicably resolved by 28 August 2012, Sistema reserves the right to commence proceedings against The Republic of India as provided for in the BIT. Our View: The fact that Sistema's SSTL suffered from the action of the Indian court, not the government, might preclude the company from being compensated for the damage. At this stage, it is difficult to quantify the monetary effect of the licence being re-auctioned as uncertainty remains over the pricing of the new licences and compensation to SSTL/Sistema (if any). Earlier this week, Vedomosti quoted Sistema's principal shareholder Vladimir Evtushenkov as saying that Sistema does not intend to withdraw from India, which suggests that a capitulation scenario is not a base case for now (that would have resulted in NAV loss for Sistema of some USD 1bn, according to our estimates). 52. Yandex Tops List of Russia’s Largest Internet Firms - Forbes RIA Novosti February 28, 2012 Internet search engine Yandex ranks first among Russia’s largest Internet companies, according to a survey posted by the Forbes magazine on its website on Monday. Forbes ranked Russian companies by their annual revenues, which put Yandex in the first place last year with $690 million, far ahead of second-placed Mail.ru with just $515 million. Utkonos, the Internet-based supermarket chain, came third, followed by AnywayAnyday and Ozon online sellers. Avito.ru is ranked as the tenth largest internet firm in Russia.

Russian companies needed to have annual sales of at least $140 million to join the list of the top ten Internet companies and $10 million to be included in the list of Russia’s 30 largest Internet firms. Forbes did not include the subsidiaries of foreign companies like Google in its rating, and also firms that mainly generated revenues offline, like Aeroflot airline, electronic retailer Eldorado, and mobile phone retailer Svyaznoy. The revenues of Russian Internet firms are far behind world Internet giants, with Google’s sales exceeding the revenues of all Russian websites put together, Forbes said. 53. Yandex develops new data storage service Rencap February 27, 2012 Event: Today (27 February), Vedomosti reports that Yandex is developing a new service for the remote storage of files. Users will be able to store and synchronise data from different devices. Yandex is being guided by the similar service offered by Apple, iCloud. Action: We reiterate our HOLD rating and TP of $23.9/share for Yandex. Rationale: According to a company source, Yandex is not going to charge for the service. The purpose of the project is to attract more users, as the company traditionally makes its revenue from advertising. Shares in Yandex are trading at 15.6x 2012E and 12.9x 2013E EV/EBITDA, vs Mail.ru Group’s 13.5x and 10.8x, respectively, on our estimates. Although Yandex’s FY11 results were strong, our preference remains for Mail.ru, which is trading at a discount to Yandex, despite having a broadly similar growth outlook, in our view 54. Yandex.Money partners with Opera Mobile Store Rencap February 29, 2012 YNDX US: HOLD, target price: $23.9, upside/downside: 7.66%?MAIL LI: BUY, target price: $48, upside/downside: 24.7% Event: Yesterday (28 February), Vedomosti reported that Opera has announced a partnership with Yandex.Money. Beginning from March, users will be able to buy applications in the Opera Mobile Store only by using Yandex.Money or the traditional payment via SMS. Opera has eliminated credit card payments from its store. Action: We reiterate our HOLD rating and TP of $23.9/share for Yandex. Rationale: This partnership could be a good sign that the agreement between the two companies, according to which Yandex is the default search engine in the Opera browser, will be prolonged in March. In addition, although Yandex.Money does not materially contribute to the company’s revenue, it will help to strengthen Yandex’s position in mobile internet, since the Opera Mobile Store is present on almost all mobile devices (according to Opera, its

store is the fifth-most popular online store for mobile applications in the world, with more than 50,000 applications available). Our preference remains for Mail.ru Group, shares in which trade at 14.3x 2012E and 11.5x 2013E EV/EBITDA, respectively, at a discount to Yandex, despite having a broadly similar growth outlook, in our view. Shares in Yandex are trading at 15.0x 2012E and 12.5x 2013E EV/EBITDA, respectively.

SECTOR Transport 55. Transportation, construction and infrastructure – Trends in November-December 2011 Rencap February 27, 2012 Today (27 February), we release Russia: Transportation, construction and infrastructure – Trends in November-December 2011. After a dismal 2011, transportation stocks are up strongly in 2012, so far. All the stocks under our coverage, except Novorossiysk Commercial Sea Port (NCSP) and Kenya Airways, are not only in the black but some, such as Sollers, have rebounded nearly 50% YtD. If truth be told, the YtD relative price performance chart is almost the exact opposite of the YtD chart for the same period in 2011 – whoever did badly then is doing well now. We like Sollers, in our view it is a good company and a cheap stock, but we are surprised by the level of interest this fairly illiquid stock has received at this stage of the market rebound. Some trends from earlier in 2011 carried through to December, and have even carried through to 2012 – namely, rail loadings remain robust, not only for bulk materials but also for containers. Container throughput via ports is not as strong though, leaving the question about the health of Russian consumer spending unanswered: January is a seasonally low month for consumer spending, particularly after following the strong YE11 container volumes and airlines’ total number of passengers (PAX) and passenger load factors (PLF); auto sales, however, decelerated in 2H11 and were especially weak for low-end autos. The behaviour of the Russian consumer remains the biggest unknown going into 2012, and if consumer spending remains strong (which is quite possible given the rouble’s stability, high oil prices and loan book growth at the main banks), cyclical companies such as Transcontainer, Aeroflot, the auto makers (we think Sollers is the best of the lot) and, to a lesser degree, Global Ports (26% of revenues from oil product shipments) should benefit and report improved financials. The less consumer-oriented stocks, such as Globaltrans, are benefiting from strong growth in construction cargo (unseasonably strong in our view), with the other main cargos (coal, metals) also posting positive dynamics. While listed railcar prices did not fall, we believe Globaltrans, given the size of its orders, is receiving good discounts and is in a strong position to increase its fleet by 8,000-10,000 railcars in 2012. Meanwhile, private railcar operators are finding little support from the recent developments in the rail market: the establishment of a fairly low lease rate for Second Freight railcars; new proposals (to be reviewed in March) requiring the provision of railcars on request; and the non-differentiation of prices on some routes

and cargoes (essentially price fixing). We hope the Ministry of Transport rejects these proposals, which we think undermine the idea of a liberalised market. Turkish aviation dynamics have been strong since the start of the year, with Turkish Airlines (THY) and TAV both experiencing strong PAX numbers, especially from domestic travellers and via Istanbul Ataturk airport. We continue to favour TAV, with its strong dynamics underpinning its attractiveness, especially as we expect the company to be sold; we note there is little certainty as to how Transcontainer will be sold, but its strong underlying operational dynamics and the high cyclicality of the stock make it attractively placed for increased consumer spending, in our view; Globaltrans remains our core holding.

SECTOR Agriculture 56. Agro in Kursk Region up 40% in 2011 bne 2 March 2012 Agricultural production in Russia’s Kursk Region was up by 40% in 2011 to a value of RUB57bn in 2011, the regional administration reports. Most of the gains came from an increase in crop yield and the construction of animal farms. This year the region hopes to build nine pig farms, six dairies, two meat packing houses and finish the construction of Russia’s largest poultry plant that can produce 120,000 tonnes of poultry. 57. Creating the "Far-East grain corridor" for exports to Asia-Pacific Rencap February 27, 2012 “One of the new and promising directions for Russian grain exports is the Asia-Pacific region,” Andrey Klepach, deputy minister of economic development, said at the recent International Grain Trade Conference in Singapore. Russia plans to export around 20.5mnt of wheat this year, around 14.6% of total world exports, according to USDA estimates. This makes Russia the world’s third-largest wheat exporter, after the US and Australia. Moreover, as outlined in the table below, exports from Russia should increase five-fold, which is the largest increase among top exporters. Exports from the US and EU are expected to decrease this year. Russia had already expanded wheat exports in 3Q11, increasing shipments to Egypt, its largest buyer, at the expense of the US. Exports from Russia to Egypt climbed in 3Q11 to $574mn from zero in 2Q11, while US exports fell to $52mn from $281mn in the same timeframe.

Exports from Russia to the Asia-Pacific region amounted to around 1.5% of total wheat exports in 2008-2009, before the drought. Since that time, imports to Indonesia – the largest importer in the Asia-Pacific region – have increased by 28%, from 5.2mnt in 2008 to 6.7mnt expected by USDA this year. Imports to the Philippines expanded by 42% in four years, reaching 3.2mnt this year. We believe, as Klepach stated at the conference, that Russia will be able to meet strong demand in the region and “has all the chances to gain a foothold.”

58. Grain export estimate raised from 25mt to 27-28mt on updated harvest data Alfa February 29, 2012 NEUTRAL for domestic meat producers Yesterday, the head of the Ministry of Agriculture Elena Skrynnik announced that the grain export estimate had been raised from 25mt to 27-28mt, Kommersant reported today. Previously, in the beginning of February, First Deputy Prime Minister Victor Zubkov had already said that the estimate for grain exports in the 2011-2012 season had

been raised to 27mt from 24-25mt, in line with updated harvest data. To date, Russia has exported 19.8mt. However, grain exports might slow due to the recent appreciation of the ruble. The limit on grain exports was first implemented in October 2011 to protect local meat producers from a possible price increase. We think the news is NEUTRAL for domestic meat producers (Cherkizovo, Rusagro) as the increase had already been announced. 59. Russia ups grain export estimate by 10% bne 2 March 2012 Russia has increased its estimated grain export forecast this year by 10% to 27m–28m tonnes in the 2011–2012 agricultural year which ends on June 30, the Russian Agriculture Ministry said. Russia exported 19.8m tonnes of grain from July 1, 2011 through the week beginning February 13, the ministry said. 60. Siberian Agro to build pig farm bne 1 March 2012 As the government push to become self sufficient in pork gathers steam Russia’s leading companies are getting into the act as Siberian Agrarian Group company said it was planning to build a RUB5.5bn pig farm in the Krasnoyarsk Region in April. The facility will produce up to 18,200 tonnes of pork and 24,800 tonnes of pigs in live weight when at full capacity. Siberian Agrarian Group already operates two pig farms, three grain farms, three meat processing plants, and one dairy farm in the Siberian and Urals federal districts.

SECTOR Automotive 61. Fiat to build jeeps in Petersburg bne February 28, 2012 Russia's nascent automotive success story continues with Italian car giant Fiat set to build jeeps at plant in St. Petersburg, according to Corriere della Sera and Vedomosti. The official announcement of the agreement is expected later this week. Fiat and Russia's largest bank Sberbank will set up a joint venture to build jeeps, with Fiat to take an 80% stake and Sberbank a 20% stake. Sberbank will finance the deal, which is valued at 850m euros, according to Vedomosti. The plant will produce 120,000 of Fiat's SUV model Jeep. Fiat will also undertake to build production facilities for motors for the vehicles in Russia with investment slated at $1.1bn, Dmitry Levchenkov, an economy ministry official, told Vedomosti. The Italian company will also produce light vehicle such as

the new Fiat Ducato in Moscow at the ZiL car plant, according to Italian media, to produce 50-100,000 vehicles per year. The Fiat-Sberbank tie-up follows the failure of a proposed tie-up between Russian steel oligarch Aleksei Mordashov's car firm Sollers and Fiat, with Sollers finally opting to join forces with Ford. Fiat CEO Sergio Marchionne has said he aims to boost sales in emerging markets in the face of falling sales in Europe. Ford, Volkswagen and General Motors all signed deals with Russian companies in 2011, using a special Russian tax regime encouraging foreign automotive investment. Sales of new cars and light commercial vehicles in Russia may rise to 2.8 million this year, the Association of European Businesses estimated January 2012.

SECTOR Aviation, shipbuilding and defence 62. Largest Arms Sales List Includes 11 Russian Firms RIA Novosti February 28, 2012 Eleven Russian firms are included in a rating of the world's largest arms-producing companies, released by the Stockholm International Peace Research Institute (SIPRI) on Monday. The SIPRI Top 100 rating for 2010 shows the volume of arms and military service sales reached $411.1 billion, while the sales volume of Russian firms amounted to $18.6 billion. The number of Russian arms producers and sellers increased by nine since 2009. Russia's Almaz-Antey air and missile defense systems producer ranked 20th, the highest position any of the country's firms, with sales at $3.95 billion. The United Aircraft Corporation is at 21st place with sales of $3.44 billion, while Russian Helicopters, which designs and manufactures civil and military aircraft, ranked 47th with sales of $1.91 billion. "The data for 2010 demonstrates, once again, the ability of the major players to continue selling arms and military services despite the financial crises currently affecting other industries," SIPRI arms industry expert Dr Susan Jackson was quoted as saying.

SECTOR Engineering 63. Ural Engineering Center to build RUB250m hydro equipment plant bne 2 March 2012 Russia’s engineering company Ural Engineering Center says it will build RUB250m hydro equipment production plant in Chelyabinsk, RIA Novosti reports that will come on line at the end of this year.

SECTOR Media

64. Vladimir Putin recommends avoiding advertising on state TV channels Alfa Bank 1 March 2012 As per RBC Daily, Prime Minister Vladimir Putin recommended state TV channels avoid advertising during air time. Instead of advertising, they should show more meaningful content. We view this news as generally POSITIVE for CTC Media, as it may cause further price increases for advertising inventories remaining on other channels. However, we believe that it is highly unlikely that even state TV channels will avoid advertising completely, as it is the main source of revenue for TV channels. Iouli Matevossov

SECTOR Coal 65. Coal Sector - Coking coal price set to decline in 2Q12 UralSib 1 March 2012 2Q12 HCC contract price could be set at $206/ton. According to a McCloskey report (from 27 February), South Korean steelmaker Posco has settled a contract price for 2Q12 with Canadian Teck to supply hard coking coal (HCC) at $206/ton. The new price is 12% below the benchmark price of $235/ton for 1Q12 and also below the current spot price of $213/ton. In our view, this contract may set the benchmark for HCC price in 2Q12 in negotiations between Australian coal producers and Chinese/ Japanese steelmakers. This also results in an average coal price of $220/ton for 1H12, which creates downside risk to our 2012 projection of $260/ton and the consensus of $250/ton. Domestic prices also under pressure. If we incorporate a 1H12 price of $220/ton and assume that an average price in 2H12 will be in line with the current spot price ($213/ton), the average price for 2012 price could be $215/ton, which is 17% below our projections and 14% below market consensus. This would also result in downside risk for our 2012 financial projections for Russian coking coal producers, Mechel and Raspadskaya. We also note that the domestic coking coal price is also likely to follow the global trend and should be revised down by 15-20%. For instance, the domestic coking coal price in February fell 9% MoM to $143/ton (down 13% in ruble terms) due to the correction on global markets (our current projection for 2012 is $166/ton). 16-28% downside for Mechel and RAPS. If we reduce our 2012 coking coal price for both the domestic and international markets, our EBITDA forecast for Mechel would decline 16% to $2.1 bln, and for Raspadskaya it would decline 28% to $402 mln. Current Bloomberg estimates for Raspadskaya and Mechel are also too high in this scenario (see table below). We view the news as negative for both companies, as the potential downward revision is not priced in. On the other hand, the news is positive for NLMK and MMK, which are not vertically integrated in coking coal.

SECTOR Chemicals, Fertliser 66. EuroChem Fertilizers to Invest $2 Bln in Kazakh Deposits RIA Novosti February 29, 2012 Russia's largest mineral fertilizer producer EuroChem will invest $2 billion to develop phosphorus deposits of the Karatau basin in the south of Kazakhstan over the next few years, company spokesman Vladimir Torin said late on Tuesday. "[The company] will build a mining and processing plant in the town of Zhanatas to produce phosphorus and in Karatau town to produce nitrogen fertilizers," Torin told the Prime news agency. The processing plant will be built on the basis of Sary-Tas enterprise suspended 18 years ago. Designed capacity of the fully renovated enterprise may amount to over one million ton of fertilizers per year. "EuroChem plans to sell the produce from the new plants not only in Kazakhstan but also export them to Russia and Belarus," Torin added.

GOVT REFORMS, REGULATIONS, ECONOMICS, REGIONS 67. Finance Minister mulls taxing away up to 80% of domestic gas tariff indexation Alfa February 28, 2012 Finance Minister Anton Siluanov said that he believes that taxing out as much as 80% of the domestic tariff indexation could enrich the budget by as much as 1% of GDP by 2016E, Interfax reported. There is no discussion about an immediate revamp of the gas MPT indexation plans. Deputy Finance Minister Shatalov said that this question is unlikely to be brought up within the next three years (as the indexation schedule for MPT has already been approved for the next three years). He added that future plans are largely dependent upon domestic tariff indexation and, as we assume, the government’s hunger for cash at that time. We treat the news as negative although not entirely unexpected. In our Politics Considered, Fundamentals Emphasized report from February 3, we outlined possible indexation scenarios (in line with domestic tariff growth, although we have not considered the government taking away as much as 80% of indexation in the form of an additional tax). It seems logical to us that the government strives to redirect additional cash flow generated domestically to its own budget through taxation, rather than paying it out as dividend in Gazprom’s case. This is in spite of the fact that such an approach damages the investment climate. We consider the news NEGATIVE for the gas sector as a whole. However, as long as its potential implementation remains remote, we believe the effect on market valuation to be minimal. 68. Incremental gas MET hike supports our investment case for Russian gas companies VTB Capital February 28, 2012

– seems negative in the short term --- with adverse effect on Gazprom’s and NOVATEK’s EBITDA estimated at 33% and 42%, respectively, in 2015 – positive in the longer term News: According to Interfax, Minister of Finance Anton Siluanov said yesterday that the government might withdraw 80% of companies’ incremental revenue driven by the growth in domestic gas prices. MinFin seesthe additional budget revenues at about 1% of GDP by 2016, which is some USD 28bn, according to our macro team's estimate (see our Russian Economics: Tax Manoeuvre: MinFin's View, published this morning). Siluanov added that MinFin was not considering any gas MET hikes at the moment. Our View: The proposed measure increases the gas MET rate USD 36/kcm (to almost USD 57/kcm for Gazprom and USD 42/kcm for others) in 2015, based on our macro scenario envisaging an average domestic price of USD 96/kcm in 2012. While, previously, the gas tax hike fell mostly on Gazprom, we believe that NOVATEK and other gas producers are also at risk in the future. Earlier this year, MinFin noted that the current gas MET rates would not be revised within the next three years. Therefore, we estimate that any negative effect is not likely to materialise earlier than 2015. We estimate the additional MET spike to cost a substantial 33% and 42% of Gazprom’s and NOVATEK’s 2015F EBITDA, respectively. However, the incremental 2015F MET expense in this case is twice as high as Gazprom’s FCF for the year, so the company would only be able to afford it by making positive structural changes (reflected in a considerable improvement in corporate governance). As a result, while the news might be considered negative for Russian gas companies in the short term, we believe that in the case of Gazprom, the positive development in corporate governance could mitigate the negative fundamental changes. This supports our investment case for the stock as one of the most highly geared plays on the corporate governance turnaround (see our Russian O&G Outlook for 2012, of 26 January). We remain cautious on NOVATEK, and are reiterating our Hold recommendation. 69. WTO Entry a Business Lobby Tool for Russia – Putin RIA Novosti February 27, 2012 Russia will use its freshly gained WTO membership to protect and lobby the interests of its businesses, which are often discriminated against abroad, Prime Minister Vladimir Putin said. “Our economic operators receive significant additional possibilities to enter global markets and protect their interests there in a civilized fashion,” which is the main result of WTO entry for Russia, Putin said in an article for Moskovskie Novosti. Russia spent 18 years trying to enter the World Trade Organization, completing its accession in December. Putin said that the administration of U.S. President Barack Obama and governments of leading European countries significantly contributed to completing the talks.

“Russia will observe WTO rules, same as all its international obligations. I expect our partners to play fair and abide by the same rules,” Putin said. He added that foreign, especially European countries, often hinder entry to its markets for Russian companies and investors.

UKRAINE INVESTMENT 70. FERREXPO: Cast-Iron Way to Success Art Capital February 28, 2012 With this report we initiate coverage of the Ferrexpo stock with a 12m target price of $6.90. Our recommendation is based on the announced capacity expansion plans and auspicious iron ore price forecasts for the next five years. Also, Ferrexpo enjoys a sustained income flow, which it largely spends on modernization. Western corporate governance diminishes the risks for investors. We believe that the Ferrexpo stock has not fully priced in the capacity expansion and an expected period of iron ore deficit. Favorable conditions on global pellet markets will persist until at least 2016. Iron ore prices are now high due to the lack of new iron-ore deposits but will gradually edge down until 2016-2017 as new ore mines go into operation. Afterwards, we expect prices to hit normal levels and start to rise in line with inflation. The iron-ore deficit had been expected to last until 2015 but may persist beyond 2016-2017. We believe that the change in expectations has not been fully priced in. The deficit had initially arisen from the lack of progress in the development of new iron-ore deposits. An ongoing capacity expansion program. The company aims to increase output by a factor of 2 to 20mnt of pellets over an 8-year span, while improving operational efficiency, launching new deposits, and acquiring foreign assets. In order to achieve this goal, Ferrexpo has already approved the first stage of its CAPEX program of $647mn, with the total costs for the said period estimated at $2bn. Ferrexpo’s entire iron ore resources in both the active and undeveloped fields are estimated at 6.8bnt under the JORC code and at 21bnt under the Soviet mining code. The company is preparing to launch the Ferrexpo Yeristovo Mine in 2013, which will increase pellet output to 12mnt a year. The profits that the program entails have not been fully reflected in the stock’s price. Improving efficiency. Ferrexpo is implementing a Business Improvement Program, which should raise its operational efficiency to the level of its major international peers by decreasing the company’s raw material consumption by 1% a year. The program will allow the company to stay competitive after the decline of iron ore prices by partially offsetting the drop in margins. Risks. The situation in the global iron-ore market could worsen. The need for CAPEX to fulfill the plans could exceed expectations. A political risk still exists. Valuation: To calculate the fair price, we used the weighted average value of DCF and relative valuation estimates. We compare Ferrexpo’s multiples to its foreign peers’ median for 2012 and 2013, assigning equal weights to each year. We attach a 20% weight to the EV/S multiple, a 40% weight to the EV/EBITDA multiple and a 40% to the P/E multiple. Compared with historical levels, current prices are

attractive. Currently, the company traded below its historical levels. We believe that after the current slowdown in the stock market the Ferrexpo stock’s price will go up to more justified levels 71. Fixed capital investment in Ukraine up 20% in 2011 bne 2 March 2012 Fixed capital investment in Ukraine was up 20% in 2011 over 2010 to UAH174.5bn, the Ukrainian Regional Development, Construction, Housing and Utilities Ministry has reported. 72. Milkiland considers investment worth EUR 50m Concorde February 28, 2012 Milkiland (MLK PW), a major Ukrainian dairy producer, considers acquisition of a dairy plant and expects the total investment in the new plant to be up to EUR 50m. The Company’s management expects to close the deal by July 2012. The country of acquisition is not disclosed. Previously, the management announced about the Company’s intention to consider acquisition opportunities in the CIS and Polish markets. Our view: The news is moderately POSITIVE for the Company’s stock, as the Company keeps on track with the previously announced expansion of its core dairy business. We also consider the recently obtained long-term loan of USD 100m will help the Company execute its plans for 2012. Moreover, diversifying its operations into neighboring markets will enhance stability of the Company’s operations and boost its growth. The MLK stock is currently traded at 5.9x of 2011 EBITDA compared to the Ukrainian peers average of 6.0x, which implies a fair value of USD 5.9 per share, or about 5% above the current market price. 73. Milkiland — Earmarks EUR 15m for CAPEX and up to EUR 50m for M&A in 2012 Dragon February 27, 2012 News: WSE-listed Milkiland, one of the largest dairy producers in Ukraine and Russia, announced it plans to spend EUR 15m on CAPEX in 2012 as well as allocate up to EUR 50m to acquire additional cheese assets, namely a plant with up to 20 kt p.a. capacity in Poland, Belarus or Russia. Partially for this purpose, Milkiland attracted a $100m loan in December ($35m out of this amount is due to be spent on debt refinancing). The company is currently studying potential acquisition targets, its main criterion being the existence of a stable raw milk supply base, and notes Poland has the advantage of comparatively lower raw milk prices. (Company, Interfax) Dragon view: The EUR 15m CAPEX, being in line with Milkiland’s previously announced estimate, will be distributed among three projects: 1) construction of two new dairy farms for 6,000 milking cows to expand in-house raw milk production beyond the current 2% of Milkiland’s annual demand; 2) modernization of the Okhtyrsky Cheese Plant in Ukraine to increase its cheese-making capacity by 7 kt or 17% p.a.; and 3) modernization of the Ostankino plant in Russia, which produces

whole milk products. The first two projects were slated for completion in 2011 but have been extended. Also, in line with its previous announcements, Milkiland plans to spend up to EUR 50m to acquire new cheese-making capacities, which would increase its total capacity by almost 50% (not accounting for Okhtyrsky Cheese Plant modernization). Previously the company estimated its M&A spending (mostly cheese-focused) at EUR 40-60m, including potential acquisitions in Russia and consolidation opportunities in Ukraine. Currently Milkiland is also looking at Poland as another market to pursue cheese segment M&A, mostly due to lower milk prices there. We estimate the average raw milk price in Poland was 17% below that in Russia last year and as raw milk accounts for approx. 65% of Milkiland’s annual COGS, this implies material cost savings for the company. However, considering an acquisition in Poland, Milkiland will need to account for potential trade barriers, as the trade regime within the customs union of Russia, Belarus and Kazakhstan is more relaxed compared to that in Ukraine and Poland. Milkiland had $98.3m of bank debt and $36.9m of cash as of end-9M11, putting its net debt at $61.4m (these numbers do not account for the $100m loan attracted in December). We view the news as positive to neutral for the stock and think investors have partially priced it in already. 74. Parliament approves reform of Ukrzaliznytsya Astrum February 27, 2012 On February 23, the Verkhovna Rada of Ukraine wholly adopted Bill N9337 “Peculiarities of the formation of a public railway transport company” on second reading, as well as Bill N9377 “On Amendments to the Law “On railway transport”, which effectively allows the beginning of the reform of Ukrzaliznytsya (Ukrainian Railways or UZ). Astrum’s perspective: One of the main objectives in reforming Ukrzaliznytsya is to attract investment in the renewal of fixed assets, including the freight railcar fleet, which is 86% worn -out. The start of reforms and the formation of the company’s structure as one that is transpar- ent and understandable to investors should have a positive impact on attracting investment and on its cost. In particular, yesterday the Director of the EBRD in Ukraine, Andre Kuusvek, stated that the Bank is ready to continue funding the purchase of freight railcars by UZ and allocate USD 62.5m for this purpose in 2012. In addition, the reform of UZ should improve market conditions in the field of railway transport, thereby making private investment in rail- cars more attractive. Thus, we expect that, just as occurred due to railway reforms carried out in Russia, the reform of UZ will contribute to the procurement of new rolling stock in Ukraine. This news is POSITIVE for domestic railcar producers, in particular Kryukiv Railcar (KVBZ: BUY) and Stakhaniv Railcar (SVGZ: BUY). 75. Real wages in January continue growth acceleration ING February 29, 2012

The news is positive for economic growth in 2012. We reiterate our real wage growth forecast of 12.3% for the full year. Average monthly wages continued to accelerate in January both in nominal and real terms (by 18.5% and 14.4%, respectively). Healthy economic growth, the approach of elections and lower inflation affected the figures the most. The news is definitely positive for economic growth in 2012, we believe, because it suggests strong growth in private consumption. Growth of 20.6% in nominal wages in agriculture reflects a good performance in the sector due to an historically high grain harvest in 2011, while a moderate recovery in the construction sector affected the growth in wages in the sector by 19.8%. We attribute the increases in nominal wages in the education and health care sectors (23.5% and 20.3%, respectively) to pre-election spending by the government. A quite low inflation level supports the acceleration in real wage growth. Inflation peaked at 14.4% YoY in January, reaching the maximum over the last 1.5 years. Tight control over prices and tight monetary policy should keep inflation low at least over 1H12, in our view, thus supporting high growth rates in real wages. Additionally, the government is likely to keep its pre-election spending high at least until October. Therefore, we reiterate our year-end forecast for real wage growth of 12.3%, which we believe will support private consumption. We estimate that private consumption will be the core factor in economic growth this year. Investment implications: The dynamics of real wage growth support forecasts of moderate economic growth in 2012. At the same time, the end of elections and delayed inflation are likely to worsen the figure in 1H13.

76. Remittances surge 21% in 2011 bne February 27, 2012 In 2011, remittances from Ukrainian working abroad surged by 21% to total $3.156bn, according to the National Bank of Ukraine. $679m (or 13.25%) of this was transferred to Ukraine illegally, $2.402bn, or 46.9%, was transferred through banks, and $2.045bn (39.9%) through international payment systems.

77. Russia expands list of banned Ukrainian cheese plants Dragon February 28, 2012 News: Russia has added four new names to the list of Ukrainian plants banned from exporting cheese to the country, thereby bringing the total to seven plants, the head of Russia’s Federal Consumer Protection Service (Rospotrebnadzor) said yesterday. Russia added plants owned by Ukrainian dairy market leaders including a plant owned by Molochny Alliance, a plant owned by Gadyachsyr (Almira), Bel Shostka Ukraine and Khmelnytskiy cheese and butter plant were also banned from exporting to the country. (Interfax) Dragon view: As we previously reported (Feb. 7) Russia had already banned three Ukrainian plants from exporting cheese to the country, including Prometey (owned by WSE-listed Milkiland [Under Review]), Pyryatyn Cheese Plant (Molochny Alliance) and Gadyachsyr (Almira) due to non-compliance with Russian food safety standards according to Rospotrebnadzor. We still think that the ban will last for only a few months and our view remains that an outright ban on Ukrainian dairy imports would not be beneficial for Russia, which lacks sufficient production capacities and can satisfy only half of domestic cheese consumption needs. We estimate Ukraine accounted for 20% of Russian cheese imports and 10-11% of the market in volume terms last year. Therefore, we think that the potential negative consequences of a Ukrainian dairy import ban will eventually discourage the Russian government from imposing any broader protectionist measures. We also think that in the meantime Rospotrebnadzor’s sanctions will have negative implications for the domestic Ukrainian cheese market. While large local producers can avoid over-supply in the local market through discontinuation of cheese production (as in the case of Pyryatin Cheese Plant owned by Molochny Alliance) or re-orientation of production towards butter and dry milk (Milkiland) or processed cheese (Bel Shostka Ukraine), they will still need to sell unsold stocks (originally produced for Russia) in the local market thereby creating downward pressure on domestic prices at least in the short term. The news is likely to add to the negative sentiment towards traded dairy producers, especially Milkiland. 78. Ukraine to start producing shale gas in 2018-2019 bne 2 March 2012 Ukraine will start producing shale gas in six or seven years at the Yuzovska (Kharkiv and Donetsk regions) and Oleske (Lviv and Ivano-Frankovsk regions) deposits after a production sharing agreement (PSA) with the winners of the tenders for these fields can be signed says Volodymyr Ihnaschenko, the secretary of the Ukrainian interagency commission for organizing the singing and implementation of PSAs. "With the successful implementation of shale gas projects…trial development should be underway at the end of the fourth or the start of the fifth year. We expect

industrial production of gas to start sometime around the sixth and seventh year," he said at a press conference at Interfax-Ukraine on Monday. The government estimates there is around 2.5 trillion cubic meters (tcm) of gas in the Oleske field and the Yuzovska has between 4 and 10 tcm of gas. Applications for the tenders to developed the deposits will be accepted until 6:00 pm, April 23, 2012. 79. Ukraine: Government to contribute UAH 6bn into Naftogaz charter VTB Capital 1 March 2012 fund — half of FY12 target — possibly to be used to cover February's imports News: The Ukrainian government has decided to infuse UAH 6bn worth of OVDP into Naftogaz's charter fund, according to its decision dated 22 February. Our View: This is half of the total annual amount determined by the State budget as a cap for contributions into Naftogaz’s charter fund in 2012 to cover the difference between the gas import price and domestic gas prices for households and utility companies. The OVDP will subsequently be swapped into UAH to be spent paying Gazprom’s gas import bill (probably even part of the USD 1.3bn bill for February due by 7 March). This year, Naftogaz has a projected deficit of UAH 12bn, well below last year's gap of UAH 20.6bn (including UAH 12.5bn covered through OVDP contributions), but way above the IMF’s targets (hiking domestic gas prices are a precondition for renewing cooperation). However, even increasing domestic prices 30% for households and 58% for utility companies, as required by the IMF, would not return Naftogaz into the black. At the same time, negotiations with Russia about lowering import gas prices (currently at USD 416 per 1,000cm) have stalled for now. Back to top Alexey Moiseev

KAZAKH INVESTMENT 80. Condor to purchase oil terminal Visor Capital March 2, 2012 Impact: NEUTRAL Facts/News. Condor Petroleum yesterday, reported it had signed a letter of intent for the purchase of a 90% interest in an existing oil storage and rail terminal in Kazakhstan. The terminal is located 12km northwest of its Zharkamys block in western Kazakhstan and has An oil storage capacity of 1,200m3 (7,500bbls) and the ability to load four rail cars simultaneously. Analysis. We believe the purchase of the rail terminal is in line with the Company’s plan to increase its production in 2012-2013F. The terminal’s direct tie into the Aktobe and Atyrau main rail would also help in transportation cost saving.

Valuation/Conclusion. We do not expect any share impact from the news. We currently do not have Condor Petroleum under formal research coverage. Zhanar Nazkhanova Dominic Lewenz 81. Kazakhstan talks of building Kashagan refinery Visor Capital March 1, 2012 Refinery likely to be longer-term goal Impact: NEUTRAL Facts/News. Kazakh Prime Minister, Karim Masimov, yesterday said that Kazakhstan was looking into the possibility of building a new refinery close to the Kashagan field, in order to allow the country to fulfil all of its oil products supply internally. Analysis. We believe that the building of a fourth refinery in Kazakhstan unlikely to happen in the near-term, but could remain a long-term aspiration for the country. In the near-term, Kazakhstan has existing surplus capacity at its existing refineries, even before planned upgrades to grow capacity to 350kbopd by 2015. Oil Minister, Sauat Mynbayev, had commented last autumn that a new refinery in Kazakhstan would not be built till 2019-2020. Conclusion. We do not expect any significant share price impact from this news. Maulen Burashev Dominic Lewenz 82. Kazakhstan: NC KMG to receive US$4bn from National Fund for Kashagan and Rompetrol Visor Capital March 1, 2012 Funds earmarked to fund Kashagan cash-calls and Rompetrol Impact: POSITIVE for development of Kashagan and oilfield service sector Facts/News. Kazakhstan’s Government yesterday agreed to lend US$4.0bn to NC KMG from the National Fund. The money was allocated both to support state-owned NC KMG’s cash-calls for Kashagan, and to fund the Rompetrol deal. We understand, the funds will be provided through the National Fund buying a bond issued by NC KMG. Analysis. The move appears to be part of a wider move to use the National Fund to develop large infrastructure projects within Kazakhstan. According to a statement by the President’s office, the National Fund stood at US$47.2bn as at 25th February. Conclusion. We believe the most obvious beneficiary of the news is likely to be the Kashagan project, and service companies supplying it. For NC KMG we would expect the news will be positive, as we would anticipate the bonds unlikely to be terms worse than offered by the market. The impact for NC KMG bondholders is less clear cut, as the specific terms of the bonds versus existing holders has not yet been

announced. The news, alongside comments by the President’s office, and the recent increase in transfers to the budget, means that we would expect the Government may begin to more actively use the National Fund for domestic infrastructure and industrialisation goals. Yuriy Khramtsov Dominic Lewenz 83. National Innovation Fund to invest in Aksai Industrial Park bne February 29, 2012 Kazakhstan’s National Innovation Fund (NIF) has agreed to invest into the Aksai Industrial Park. The NIF signed a memorandum of understanding with Castle Oil and Gas Fields Services on February 24. Under the agreement, the NIF will buy into the authorised capital of the industrial park and support the companies operating there. The park was founded in 2011 with a focus is on the petroleum sector. It is intended to attract investors to Kazakhstan and set up domestic production and transfer of new technologies. 84. Samruk-Energo plans $541m investment programme bne March 2, 2012 Samruk-Energo is planning to launch an 80 billion tenge ($541m) investment programme in 2012, according to CEO Almasadam Satkaliyev. In an interview with Interfax-Kazakhstan, Satkaliyev said the programme would be funded with a combination of debt and equity finance from local and international sources. Samruk-Energo is the energy generation company within Kazakhstan’s state holding company Samruk-Kazyna. 85. Solar power station to be built in Zhambyl region bne March 1, 2012 A solar power station with capacity of 24MW will be constructed in Kazakhstan’s Zhambyl region by the end of 2013. The power station is expected to supply 80% of energy needed in the region, the Zhambyl regional akim (governor), Kanat Bozumbayev, said yesterday February 29, Interfax-Kazakhstan reported. The regional authorities signed a memorandum on construction of the power station with an investor in 2011.

CENTRAL ASIA INVESTMENT 86. Hungary faces a partial freezing of the money from the Cohesion Fund OSW 2 March 2012

On 22 February, the European Commission recommended the Council of the EU to suspend the payment of 495 million euros from the Cohesion Fund to Hungary from the beginning of 2013. This equates to 0.5% of Hungary’s GDP and 29% of the total cohesion funds allocated to this country for 2013. The European Commission found that the measures so far taken by Hungary to reduce its budget deficit have been insufficient. Hungary had a surplus in public finances in 2011 (3.6% of GDP), but this result was achieved in effect of the state’s takeover of money from open pension funds, without which the budget deficit would have exceeded 6% of GDP. The sanction proposed by the European Commission must yet be approved by the EU finance ministers (Ecofin), who will vote on this issue on 13 March. If the Council votes in favour of the recommendation, Hungary will be the first country on which the sanction in the form of freezing cohesion funds will be imposed. However, this sanction could be lifted if Hungary – following the European Commission’s recommendation – takes “effective action” to curb the deficit by the end of this year.? Commentary The European Commission is setting a precedent with this decision in order to manifest its determination in enforcing fiscal discipline now that public finances are in crisis and new fiscal discipline mechanisms are being adopted in the EU. The legal grounds for a possible freezing of subsidies for Hungary are provided by the Council Regulation on the Cohesion Fund of 2006. However, the European Commission is pointing out that it is operating in the spirit of the ‘Six-Pack’, a package of regulations adopted last year to reinforce the Stability and Growth Pact. This is to emphasise that the European Commission is ready to apply strict measures also to countries which do not belong to the eurozone.? The Hungarian government will be trying to convince the other member states not to support the European Commission’s recommendation (Hungary has already been backed by the Czech Republic) and has already announced more cuts in expenditure, including in public transport and restrictions on subsidies on medicines (the scale of the cuts has not been stated, however). It may still be difficult for the council to reject the European Commission’s recommendation. Some countries do want the message to be heard that the fiscal discipline rules must be obeyed. It is true that as many as 23 EU member states at present fail to meet the low deficit and public debt criteria, but they all are acting in line with the European Commission’s recommendations on the gradual reduction of their deficits and debts. Furthermore, according to the schedule of the Excessive Deficit procedure, none of them is currently facing a direct risk of sanctions.? The proposal to impose sanctions is reinforcing anti-EU sentiments in Hungary, which both Fidesz and the opposition radical-right party, Jobbik, are capitalising on. The European Commission’s decision this time is being criticised not only by the Hungarian government but also by those sections of the media which support the left-wing and liberal opposition. The European Commission recommended the imposition of the sanctions at a time when Hungary had formally met the low deficit requirement for the first time since its accession. Furthermore, this recommendation was given after the government led by Orbán had taken a conciliatory stance on EU institutions. Orbán has recently announced that most of the regulations under dispute will be removed from Hungarian laws which the European Commission had deemed contrary to EU law. The Hungarian parliament also adopted the EU fiscal

pact on 20 February. If the payment of the funds is withheld, this will adversely affect economic growth and will be a bad sign for the financial markets. ?Andrzej Sadecki, co-operation: Tomasz D?borowski 87. Tajikistan: UAE’s Zayed Foundation to build hydropower plant bne February 29, 2012 The Zayed Bin Sultan Al Nahayan Charitable and Humanitarian Foundation is planning to finance the construction of a $1.280m hydropower plant in Tajikistan. The HPP will be located in Tajikistan’s Wing district and will have capacity of 800kw, according to reports in the UAE press. It will boost capacity in the region which has seen a growth in population in recent years. 88. Turkmenistan: Berdymukhamedov approves five-year development programme bne February 27, 2012 Turkmenistan’s President Gurbanguly Berdymukhamedov has approved a new five-year socio-economic development programme for the country. Ashagabt plans to modernise the industrial sector, and build new production facilities for the chemicals, textiles, agriculture and transport sectors. Investment into the fuel and energy sector will continue. Several hundred small and medium sized enterprises will be set up, in order to diversify the economy. The programme, which was adopted February 25, will also focus on developing human capital in Turkmenistan, according to local press reports. 89. Uzbekistan: Uzpharmsanoat plans to double exports in 2012 bne March 2, 2012 Uzpharmsanoat, Uzbekistan’s state holding company in the pharmaceuticals sector, plans to double exports of pharmaceuticals products this year. Exports by Uzpharmsanoat enterprises have already increased by 194% in 2011, Uzreport writes. Companies within the group export 226 pharmaceuticals products to 12 countries. In 2011, Uzpharmsanoat companies produced goods worth a total of 265.75 billion soums ($144.5m), including 222.16 billion soums worth of pharmaceuticals and 43.6 billion soums worth of other medical products.

EURASIA INVESTMENT 90. Azerbaijan IPI index decreases sharply

APA-ECONOMICS February 27, 2012 Azerbaijan’s industrial production index (IPI), a measure of real production output, made 90.7% in January, 2012, down 15.4 percentage point compared to December, 2011. This index accounts for the bulk of the variation in national output in value terms over the duration of business cycle, i.e. industrial output for January (AZN 3.065 billion) divided by industrial output for December (AZN 3.380 billion).

91. Azerbaijan: Baku-Novorossiysk pipeline to transport oil to third countries too APA-Economics March 1, 2012 Russia will allow Baku-Novorossiysk pipeline to transport crude oil belonging to the third countries, said the Minister of Industry and Energy Natig Aliyev. Note that, at present, the pipeline transports only SOCAR’s oil. According to outcomes of previous year, this pipeline has exported 1 mln tons of oil, while the capacity of pipeline is 7 mln tons. Azerbaijani side supports the transportation of oil to the third countries. SOCAR intends to achieve decrease of tariffs. 92. Azerbaijan: Capital expenditures for Shahdeniz gas field to be doubled this year APA-Economics March 2, 2012 IN 2011, the operational costs on Shahdeniz gas field made $ 190.7 mln, capital expenditures - $ 674.9 mln, BP-Azerbaijan tod APA.

Company says these figures are expected to increase by 11% and 98.5% to $211.5 mln and $1.340 bln, in 2012. 6.67 bcm of gas and 1.8 mln tons of condensate and daily 18.3 mcm of gas and 38,300 barrels of condensate were extracted in this field. BP-Azerbaijan also said that, 29.902 bcm of gas and 8 mln tons of oil have been exported from Shahdeniz since it was launched: “The highest annual stable level of gas in the first stage is expected to be 9 bcm, daily 50,000 barrels of condensate, in 2012”. 93. ˇ˛A�z�e�r�b�a�i�j�a�n�:� �� T�r�a�n�s�p�o�r�t�a�t�i�o�n� �o�f� �n�a�t�u�r�a�l� �A�z�e�r�i� �g�a�s� �t�o� �E�u�r�o�p�e� �w�i�l�l� �b�e� �r�e�a�l�i�z�e�d� �e�a�r�l�i�e�r� �t�h�a�n� �t�h�e� �l�i�q�u�e�f�i�e�d� �g�a�s�� �-� �M�i�n�i�s�t�e�r� �A�P�A�-�E�c�o�n�o�m�i�c�s� �M�a�r�c�h� �1�,� �2�0�1�2� � � �T�h�e� �l�e�v�e�l� �o�f� �e�f�f�e�c�t�i�v�e�n�e�s�s� �o�f� �A�G�R�I� �p�r�o�j�e�c�t� �f�o�r� �A�z�e�r�b�a�i�j�a�n� �f�r�o�m� �e�c�o�n�o�m�i�c� �s�t�a�n�d�p�o�i�n�t� �s�h�o�u�l�d� �b�e� �d�e�t�e�r�m�i�n�e�d�.� � �A�z�e�r�b�a�i�j�a�n�� s� �M�i�n�i�s�t�e�r� �o�f� �I�n�d�u�s�t�r�y� �a�n�d� �E�n�e�r�g�y� �N�a�t�i�g� �A�l�i�y�e�v� �s�a�y�s� �f�i�n�a�n�c�i�a�l� �i�s�s�u�e�s� �o�f� �t�h�e� �p�r�o�j�e�c�t� �h�a�v�e� �a�l�r�e�a�d�y� �b�e�e�n� �s�o�l�v�e�d� �a�n�d� �a�f�t�e�r� �p�r�e�p�a�r�a�t�i�o�n� �o�f� �f�e�a�s�i�b�i�l�i�t�y� �s�t�u�d�y�,� �t�h�e� �p�r�o�j�e�c�t� �w�i�l�l� �b�e� �i�m�p�l�e�m�e�n�t�e�d�:� �� F�r�o�m� �t�e�c�h�n�i�c�a�l� �v�i�e�w�p�o�i�n�t� �i�t� �i�s� �e�a�s�y� �t�o� �r�e�a�l�i�z�e� �t�h�i�s� �p�r�o�j�e�c�t�.� �T�e�n�d�e�r� �m�u�s�t� �b�e� �h�e�l�d� �f�o�r� �p�r�e�p�a�r�a�t�i�o�n� �o�f� �f�e�a�s�i�b�i�l�i�t�y� �s�t�u�d�y�.� �7� �c�o�m�p�a�n�i�e�s� �h�a�v�e� �s�h�o�w�n� �i�n�t�e�r�e�s�t� �t�o� �i�t�,� �b�u�t� �o�u�r� �p�a�r�t�n�e�r�s� �h�a�d� �r�e�j�e�c�t�e�d� �i�t� �f�o�r� �s�o�m�e� �r�e�a�s�o�n�s�� .� � � �� A�G�R�I� �p�r�o�j�e�c�t� �i�s� �i�m�p�o�r�t�a�n�t� �f�o�r� �A�z�e�r�b�a�i�j�a�n� �f�r�o�m� �p�o�l�i�t�i�c�a�l� �s�t�a�n�d�p�o�i�n�t�.� �T�h�e� �p�r�o�j�e�c�t� �w�i�l�l� �f�o�r� �t�h�e� �f�i�r�s�t� �t�i�m�e� �l�e�t� �t�o� �c�o�n�s�t�r�u�c�t� �l�i�q�u�e�f�i�e�d� �n�a�t�u�r�a�l� �g�a�s� �t�e�r�m�i�n�a�l� �i�n� �t�h�e� �B�l�a�c�k� �S�e�a�;� �l�i�q�u�e�f�i�e�d� �g�a�s� �w�i�l�l� �b�e� �d�e�l�i�v�e�r�e�d� �f�r�o�m� �K�u�l�e�v�i� �o�r� �S�u�p�s�a� �t�o� �a�l�l� �d�i�r�e�c�t�i�o�n�s� ��

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Stratfor February 29, 2012 Azerbaijan's ambassador to Iran was called into the Iranian Foreign Ministry on Tuesday to explain reports of an Azerbaijani arms deal with Israel. According to Iran's Fars News Agency, Tehran warned Azerbaijan against allowing its "territories to be used by Israel for terrorist attacks." The arms sale was reportedly valued at about $1.6 billion and included anti-air systems and unmanned aerial vehicles. The news came as Israeli President Shimon Peres held talks on regional security issues with Georgian Foreign Minister Grigol Vashadze. That meeting is what makes the first story so interesting. After the Russo-Georgian war in 2008, the United States realized it was not in a position to defend Georgia. Washington's preoccupation with the Islamic world prompted Russia to use Georgia to impart a lesson to the rest of the former Soviet states -- in effect announcing Russia's return as a regional power. The United States could have armed the Georgians after the war, but this would have heightened tensions with the Russians, something Washington at the time could not afford. Moreover, the Russians might have resumed war with Georgia before the weapons could be integrated. At the time, the United States and Russia appeared to have reached an understanding: Russia would refrain from further conflict with Georgia if the Americans restricted weapons sales. The United States was not alone in this. Every major weapons seller to Georgia, particularly Israel, broke sales out of fear that the Russians might sell advanced systems to Syria and Iran. The Azerbaijani issue is more complex. Domestic political pressure in the United States, particularly from Armenian-Americans supporting Armenia in its conflict with Azerbaijan over the disputed region of Nagorno-Karabakh, made sending an ambassador to Azerbaijan difficult. Substantial sales of weapons to the country were impossible. This added to the strategic problem the United States faced in the region. As with Georgia, Washington did not want to see Russian or, in this case, Iranian incursions into Azerbaijan, but it did not have available force to deter an incursion at the time. In an odd way, the security of Azerbaijan, like that of Georgia, was better served by avoiding large-scale weapons sales that might have increased Russia's or Iran's insecurity. The Israelis, while maintaining close ties with Azerbaijan, also did not make large-scale weapons sales. That is what makes the Israeli arms sale to Azerbaijan and the related high-level meeting so interesting. It is difficult to believe that the United States and Israel are not coordinating their activities in the Caucasus. The sale to Azerbaijan affects Iran, and Israel is not likely to undercut Washington's position vis-a-vis Tehran. Nor is Israel likely to go against U.S. policy in Moscow's regard, and the Georgian talks and the arms sale to Azerbaijan also affect Russia. It can be assumed that the United States has approved the initiatives. This would mark a change in U.S. regional policy since 2008. There would seem to be two triggers for this. The first is the Russian veto on Syria, which clearly infuriated the United States. The second involves the prior threat to Israel -- that maintaining close military relations with Georgia would result in weapons sales to Syria. The Syrian government is currently in no position to acquire and deploy advanced anti-aircraft systems from Russia, and what weapons it needs it gets from

Iran. With that threat gone, the Israelis -- but not the Americans -- have a freer hand. Recent attempts to assassinate the Israeli ambassador to Azerbaijan and the identification of Iranian terrorist cells operating in Azerbaijan are also factors. The presence of Israeli, American and Iranian intelligence in Azerbaijan is nothing new, but Tehran's increasingly aggressive posture toward Baku (motivated by increased Iranian fears of an attack facilitated by Azerbaijan) creates a sense of insecurity there, and neither the United States nor Israel wants to see Azerbaijan turn to Russia for weapons. The Israeli sale not only provides immediate weapons to Baku, but it also implies that further supplies will be provided as needed. That delivers a message to Iran and reassures Azerbaijan. Whatever private collaboration might exist, public arms sales represent a political commitment on the part of Israel, which Baku will interpret as an implied U.S. obligation. Nothing has been sold to Georgia yet, but the Russians have been put on notice regarding the potential price of their veto on the Syria issue, and the fact that chaos in Syria frees Israel to deepen its relationship with Georgia. In the meantime, Georgians have allowed Russians to enter Georgia without visas, signaling that they are not seeking to increase tensions with Russia again. This maneuvering is important because it shows Israel and the United States re-evaluating their policy toward Russia in the Caucasus. At the same time, it warns Iran that its northern frontier with Azerbaijan could turn from a place Tehran uses to place pressure on Baku, to a place from which the United States and Israel could pressure Iran. With talks of strikes against Iranian nuclear facilities, this capability is not trivial. None of this is spoken, of course. But as we consider the calculations that have led to these moves, this is likely how they are viewed in Moscow and Tehran. For now, the Russians have lost their options in Syria, while the Iranians face an increasingly hostile Azerbaijan potentially backed by Israel -- and eventually, the United States. Washington has not yet joined the game, but the option is now there.

SOUTHEAST INVESTMENT 95. Bosnia has chance to join EU, but depends on reforms, EU rep says bne February 27, 2012 The EU's special representative to Bosnia and Herzegovina said that Bosnia has a chance of joining the EU despite its complicated structure and joining primarily depends on political agreement in the country and readiness to carry out reform, newswires reported. Speaking at a panel, Peter Sorensen added that the EU's 27 members supported BiHs ambition to join and the recent adoption of several important reform laws in the state parliament indicates things would finally start moving in a positive direction. 96. Lots of crying over spilt milk in Croatia bne February 27, 2012

French dairy giant Lactalis has been the main focus of angry protests by Croatian farmers for the past two weeks, which have shone the spotlight on the problems faced by the country's agricultural sector as its prepares to meet the challenges of EU membership. The protests entered their 13th day on February 27, which began after Lactalis's Croatian subsidiary Dukat announced that it was cutting its purchase price for domestically produced milk from HRK2.65 to HRK2.30, the Croatian Association of Milk Producers (HSUPM) urged its members to take to their tractors and blockade major roads across Croatia as well as Dukat's diaries in Zagreb, Bjelovar and Karlovac. The protests have seen thousands of litres of unprocessed milk poured down drains or given away free at local markets. The HSUPM, which claims to represent roughly 80% of milk producers in Croatia, says that Dukat, which buys around 45% of all the milk produced in Croatia, is effectively driving them out of business with its new pricing policy. "It is unacceptable that the Croatian dairies offer Balkan prices and seek European quality milk," Igor Resetar, president of HSUPM told state news agency Hina. The increasingly bitter dispute has served to highlight the competitiveness problems of the Croatian dairy sector where the number of producers has plummeted in the last 10 years. In the course of the last decade, the number of dairy farms has shrunk from 57,000 to just 14,900, with the result that Croatia now imports a third of its market needs. But despite generous state subsidies, which until recently amounted to as much as HRK1.1 per litre, Branko Bobetic, a director at Croatiastocar, the trade association which represents the major dairies in Croatia, says local farmers have failed to keep pace with foreign competitors. While in the EU the annual average milk yield per cow is 6,394 litres, the level in Croatia is a meagre 4,230 litres. "Low productivity is the biggest problem," says Bobetic. "If farmers don't achieve optimal productivity, then no milk price will help them." At an average price of HRK2.66 per litre at the start of 2012, the price of milk in Croatia was 43.9% higher than in 2009 and between 1-13% more expensive than in the EU, says Bobetic. But according to HSUPM's Resetar, that is still well below the cost of production given rising feed, fuel and vet bills. Ultimately, the HSUPM is seeking a price of HRK4.09 per litre ñ far higher than anywhere else in the EU, which Croatia is set to join on July 1, 2013. Milking it For his part, Agriculture Minister Tihomir Jakovina has attacked the farmers' blockades, which have caused traffic chaos nationwide and led to 29 arrests in Zagreb on February 23 after farmers blocked Slavonska Avenija, a main thoroughfare in the Croatian capital. He told Nova TV that he believed that the protests were politically motivated by "those who have lost in the December 4 elections" ñ widely believed to be an oblique reference to the Croatian Peasants Party (HSS), a member of the right-wing coalition which lost power at the end of last year and the traditional lobbyists for the farming industry in Croatia. He has also refused to reverse a recent HRK0.42 cut in subsidies to dairy farmers.

In the meantime, four smaller milk producer associations representing around 18% of Croatian milk production have signed an agreement with dairy industry representatives based on a price of HRK2.43 per litre, the average price of milk in five EU states ó France, Germany, Hungary, Romania and Slovenia. However, the HSUPM refused to accept the offer and has called on Croatian President Ivo Josipovic to help to mediate a new pricing agreement and bring an end to a dispute, which threatens to damage the prospects of much-needed foreign direct investment in Croatia's cash-strapped agribusiness sector. 97. No winner in tender for Albaniaís third 3G license bne February 27, 2012 The tender for the awarding of a third 3G license in Albania failed to produce a winning bid, local media reported. Offers fell below the minimum bid set at EUR 12.5m. Eagle Mobile offered only EUR 3.55m, while Plus Communications offered EUR 2.2m, which led to both offers being rejected by the tender commission. Albania's first 3G license in Albania was awarded in October 2010 for EUR 31.4m, while the second was given last September for EUR 15.1m. 98. Slovenia accused of self interest as it blocks Belarus sanctions bne February 27, 2012 Slovenia has intervened to delay EU sanctions against Belarus because of concerns they could hamper a multi-million deal a Slovenian company has struck with Yuri Chizh - a "bag man" for President Alexander Lukashenko, according to reports. Citing unnamed EU sources, a report by Pop TV says that diplomats in Brussels accuse Slovenia of blocking the sanctions in its own economic interests. EU foreign ministers are expected to decide on sanctions against Lukashenko's regime over its human rights violations on February 27, but Slovenia is reported to have already blocked the move. Ljubljana raised its objections at the 11th hour in talks in Brussels last week, reports EU Observer. However, a spokesman for the Slovene representation in Brussels denied on February 24 that it has vetoed the move and said other countries also expressed reservations. "There is no veto, negotiations are still ongoing. We cannot comment on it at this stage. A decision will be taken on Monday during the foreign affairs ministers' meeting," Uros Mahkovec said. A diplomat from an unnamed pro-sanctions EU country said Slovenia's official line is that blacklisting Chizh would allow Russia to muscle in on public tenders in Belarus, harming free market competition. However, the suspicion in Brussels is that Slovenia is more interested in protecting the interests of Slovenian construction firm Riko Group. The company recently won bids on real estate projects with Chizh's conglomerate Triple On top of a €57m contract with Triple to help build a Kempinski hotel in Minsk, Riko is reported to have another two contracts, worth €54m, with state energy firm Minskenergo for electricity substations. The company has been active in Belarus since 2000, and in 2004 invited Lukashenko himself to spend a few days at a Slovenian ski resort. 99. Sofia needs BGN 100m for energy infrastructure, experts say bne February 28, 2012

Sofia's energy infrastructure needs about a BGN 100m upgrade, according to the executive director of CEZ Distribution Bulgaria. The Stroitelstvo Gradat weekly quoted Stefan Apostolov who was speaking at an energy conference. The weekly added that the bulk of electricity equipment in Sofia is outdated and that incurs a risk of failures and continuous power cuts. 100. Two Moldovan water utilities open procurement tenders bne March 1, 2012 Two Moldovan water utilities have invited bids for the procurement of construction works and equipment in a water system upgrade project co-financed by the European Bank for Reconstruction and Development newswires reported, quoting a statement released by the lender February 29. EBRD has extended a EUR10m loan to support the modernisation of Moldova's water system in six towns. The water utility in the town of Hancesti, Amen-Ver, has invited interested companies to place bids for a 24-month contract for rehabilitation and extension of the water network in Hancesti town and five villages, EBRD said in a procurement notice on its website. The water utility of the town of Floresti, Servicii Comunale Floresti, invited bids for supply of water meters, remote reading equipment and plastic manholes. Interested companies should file their bids by 1000 GMT on April 18, the lender said. The total cost of the upgrade project is 30 million euro. It is co-financed by a 10 million euro loan from the European Investment Bank and a 10 million euro grant from the EUs Neighbourhood Investment Facility.

CENTRAL EUROPE INVESTMENT 101. Apranga signs a franchise agreement with "Burberry Limited" Swedbank March 2, 2012 It was announced that Apranga Group has signed a franchise agreement with Burberry Limited. The company plans to open three stores in the Baltic countries. This year it plans to open new stores in Tallinn and Riga, while in Vilnius a store will be opened next year, according to the CEO's announcement. At the end of 2011 Apranga Group had 16 stores in the luxury segment. According to the 2011 results, this segment's revenues grew the most, up 25.3% compared to 2010. We believe that it was a very calculated decision to expand activity in this segment. Looking at the 2011 results, we see that revenues from the luxury segment account for about 11.7% of total revenues, compared with about 10.6% in 2010. This month Apranga Group will open new "Aldo" stores in Lithuania. Firstly, an Aldo footwear and accessories retail chain store will be opened in Vilnius on 15 March in a shopping and entertainment centre, Akropolis. In other Lithuanian cities, Kaunas and Klaipe_da, stores will be opened on 20 March. Each new store's area will be about 130 sqm. Apranga Group plans to open five Aldo stores this year: three in Lithuania

and two probably in Riga. The aim of the company is to open 15 Aldo stores by 2017. Apranga Group also plans to open two Massimo Dutti stores, one Tom Tailor store and the newly renovated Mango and Aprangos galerija stores in March. During the first two months of 2012 Apranga Group's retail turnover grew in all Baltic countries on a yoy basis (Lithuania +20.6%; Latvia +23.8%; Estonia +15.5%). We do not think that Apranga Group's decision to expand its activity is too aggressive. We believe that a variety of goods will help the company to achieve its 2012 plans for growth and to increase its share in the market. According to our valuation, Apranga Group stocks are undervalued in the market and we reiterate our Strong Buy recommendation and EUR 1.9 target price. 102. BNK Petroleum Announces Spudding of Miszewo T-1 Well in Poland Press release February 29, 2012 BNK Petroleum Inc. (the "Company") CA:BKX +0.56% announced today that on February 28, 2012 the Company's wholly owned subsidiary Indiana Investments Sp. z o.o., began drilling the Miszewo T-1 well on its Trzebielino concession block in Poland. The well is expected to take approximately 40 days to drill. Once the drilling rig has been released from the Miszewo T-1 well, the rig is scheduled to move to the Gapowo location on the Bytow concession block. An objective of these wells is to verify the Company's geological model, which indicates that the target shales on the Trzebielino and Bytow concessions were deposited in a deeper basin environment than encountered by the previously drilled wells. The deeper environment and transgressive nature of the deposit is expected to lead to richer and thicker organic shales than found in the Lebork S-1 well. Schematics of some of this analysis can be found on the Company's website. Saponis Investments Sp. z o.o., in which the Company has a 26% ownership interest, has scheduled further work in April 2012 on its Lebork S-1 well. The work will include recovery of the long term pressure test gauges that were installed in October 2011 to obtain valuable reservoir information. In additional, an injectivity test and long term leakoff test will be performed to confirm injection rates and pressures. The data collected will be used to finalize the re-stimulation program, which will be scheduled once approval is received from the Saponis shareholders. The previously announced 2D seismic program is progressing with approximately 80% of the data already acquired. Approximately sixty percent of the acquired lines are currently being processed and we anticipate receiving data by June 2012 on all the lines. The program consists of about 407 km on the Saponis concessions and 333 km on the Indiana concessions. The objective of the seismic program is to further define basin structure and burial history as well as to aid in the selection of individual well locations. 103. Erste Group ready to make cuts in Hungary and Romania bne March 1, 2012 Erste Group has made provisions for cutting back staff in Hungary and Romania, according to its financial report for 2011. The Austrian bank, a major player in

many CEE markets, returned to profitability in the last three months of the year, but clearly still plans to cut costs in several markets. Whilst a pullback in Hungary - where the banks are fighting a running battle with the government - is no surprise, provisions for reducing staff at Romanian lender BCR is a little surprising, points out Romania Insider, given that Erste only bulked up its personnel last year. Regardless, the financial reports released on February 28 read: "Personnel expenses were up 2.6% to €2.3bn. This increase was partly due to severance payments in the Czech Republic [and] provisions for severance payments in Hungary and Romania." "In the financial year 2011, net profit was up in almost all countries. In Hungary and Romania we have strengthened the top management and taken action to return to a successful development," CEO Andreas Treichl said. Currently the second largest bank in Hungary, Erste announced in December that it will close one quarter of its 184 branches in the first quarter of 2012, and lay off 15% of staff. The bank blamed "limited income opportunities" caused by the economic crisis, an "extremely high" banking tax and "immense losses" from the government's early FX loan repayment scheme. 104. Lithuania set to call first shale gas tender bne March 2, 2012 Lithuania will run its first tender of shale gas licences this month, the head of the State Geological Service said on February 29. That would allow the first exploration results to be issued by 2014 he added, suggesting that a conservative estimate could put recoverable reserves at 50bn cubic metres. "We expect to call the tender to issue new licences by end-March," Juozas Mockevicius told Reuters on the sidelines of the energy conference. Licences would be issued for the exploration of hydrocarbonates in two fields of about 1,400km3 and about 270km3, but there will be a requirement included for exploration of shale gas, he said. Mockevicius said Lithuania's geological formations could potentially hold up to 500bncm, but commercially recoverable reserves would likely be far lower. "Some said it could be 100bncm, but we are more cautious, and starting our estimations from 50bncm, which is still a large amount." The EIA has estimated Lithuania could have reserves of 113bncm. Polish oil group Lotos, which controls top Lithuanian oil company Lotos Geonafta, said it would take part in the tender process. 105. Nordecon announces new public works contract in Estonia Press release February 28, 2012 Nordecon AS with joint partner EG Ehitus AS and AS ELVESO signed a contract for the construction of water-, sewage and heating network in Assaku, Jüri and Vaida hamlets. In total the length of the networks is 10, 6 and 1 kilometers respectively. In addition the waste water treatment plant in Assaku will be demolished and new water treatment center with 3 wells built. The value of the contract (without the reserve for unexpected works) is approximately 4.88 million euros, excluding VAT. The contract revenue between joint partners is divided 90 and 10 per cent respectively.

The works begin in March 2012 and last for 11 months. Nordecon is a group of construction companies whose core business is construction project management and general contracting in the buildings and infrastructures segment. Geographically the Group operates in Estonia, Ukraine and Finland.Nordecon AS, a company registered and located in Tallinn, Estonia. In addition to the parent company, there are more than 10 subsidiaries in the Group. The consolidated revenue (unaudited) of the Group in 2011 was 150 million euros. Currently Nordecon Group employs nearly 700 people. Since 18 May 2006, the company's shares have been quoted in the main list of the NASDAQ OMX Tallinn Stock Exchange. 106. PGNiG eyes new USD 1.6bn debt programme for investment Equilor March 2, 2012 PGNiG plans to launch a PLN 5bn bond programme for domestic investors to raise extra funds for investment, the group's chief financial officer said on Thursday. The group could issue the first PLN 2bn tranche by the end of June 2012. It plans to issue bonds with maturity of up to 10 years. The group already has a PLN 7bn bond programme signed with nine banks, with two-thirds of it used up, and 1.2bn euro for eurobonds it first tapped in February. PGNiG said last year it was planning PLN 27bn in capital expenditure by 2015. 107. Polish geologists consider cutting shale gas estimates bne March 2, 2012 Polish optimism that it can become a major producer of shale gas took another hit on March 1 when the country's geologists said that they could cut reserve estimates after analyzing data from test wells. "Core logs from Polish wells are being analyzed with the help of US technology," Miroslaw Rutkowski, spokesman for the Polish Geological Institute told Bloomberg. "As a result, we're expecting that our estimates will be lower than those of EIA." Whilst Warsaw claims it intends to free itself from any dependence on gas imports from Russia, recent news flow has been disappointing as the first exploration wells report back. That has begun to cast doubt on estimates by the EIA that the country has reserves of up to 5.2 trillion cubic metres of unconventional gas, and that it offers the most commercial viability in Europe. That estimate was based on recovery rates from the US shale industry, which boomed to become a major factor on the global markets over the past decade. Russia has led the doubters that the same can happen in Europe, insisting that population density, environmental concerns and a lack of infrastructure means relocating the US success is unlikely. Poland has been bullish as it pushes towards a target to start commercial production by 2014, but optimism has been dented by the first test wells that that have begun to report their findings from amongst the 100+ licences issued thus far. More than one smaller company has suggested a pessimistic outlook following Exxon Mobil's announcement in January that its first two exploratory wells were not commercially viable. The Polish institute and the US Geological Survey are working together to analyze drilling results and will publish an estimate of technically recoverable resources on March 21. The revised estimate won't be definitive as only about a dozen exploration wells have been drilled in Poland so far, Rutkowski said.

108. Polish mums headed to Iceland? bne February 29, 2012 British retailer Iceland Foods is eyeing the Polish market as the next step in its plans to expand across Central Europe, according to reports, but one commentator suggests Polish mums are likely to turn their noses up at the company's frozen foods. According to Puls Biznesu, the UK retailer is investigating the Polish market after opening its CE test store in Plzen in the Czech Republic. "Throughout the last 18 months we have been examining the Hungarian, Czech and Polish markets. We've decided to launch our first store in the Czech Republic because this is where we first managed to find an appropriate partner," a company spokesperson told reporters, adding that POland could be next. However, Polish frozen food companies are skeptical, the paper reports. "The problem with the Polish sector is that Poles are not big fans of frozen food," said Maciej Niebrzydowski, former owner of frozen food distributor Jago. "The average UK resident eats approximately 10 times more frozen foods per year than the average Pole." 109. Richter receives European Commission approval to market Esmya in the EU Renaissance Capital February 28, 2012 Event: Richter announced yesterday (27 February) that the European Commission has authorised marketing in all EU countries the 5 mg Esmya tablet as a pre-operative treatment for moderate-to-severe symptoms of uterine fibroids (myomas), which are the most common benign, solid tumours of the female genital tract, affecting 20-25% of women of reproductive age. About 300,000 surgical procedures are performed annually in the EU for uterine fibroids. Patients suffering from fibroids across Europe will now have a new targeted approach for medical treatment of these benign tumours. So far, GnRH agonists were the only approved pre-operative treatment for myomas and their use has been relatively limited due to side effects. As recently published in the New England Journal of Medicine, the 12-week once-a-day oral therapy by Esmya (vs injectable GnRH agonists) is effective to stop uterine bleeding, correct anaemia and shrink fibroids. Action: Supportive for Richter shares, in our view, although the announcement is in line with the company's previously planned timing. Rationale: Now it has been approved, Richter can commence Esmya sales in the EU. Based on earlier management guidance, we assume sales of Esmya will start in the UK and Germany in 2Q12, with revenue of EUR2mn for 2012. Sales in other EU countries should start in 2013. Richter management estimates peak sales of Esmya, at EUR100mn, to be reached within three years of its EU launch. If 2012 sales exceed EUR2mn, it could indicate the product has higher-than-expected sales potential, possibly becoming a positive share-price driver for Richter (this will become clear only towards YE12, in our view). Ulyana Lenvalskaya 110. Richter reports positive results of Phase III trials of Cariprazine for schizophrenia treatment

Renaissance Capital February 29, 2012 Event: Richter yesterday (28 February) announced positive results for its Phase III clinical trials on schizophrenia treatment with cariprazine (a new Richter product due to be launched in the US in early 2014 and registered in the EU in 2015). Earlier this month the company reported positive Phase III trials on the treatment of bipolar mania with the same product. Cariprazine is also currently being investigated in clinical studies for patients with bipolar depression and as an adjunct treatment for major depressive disorder. The reported data showed that cariprazine-treated patients experienced a significant symptom improvement compared with placebo-treated patients. All doses showed statistically significant separation from the placebo starting at week two and at each subsequent time point with the higher dose showing separation as early as week one of treatment. Further analyses of the data in each study will be completed in the coming weeks. Action: Positive for Richter fundamentally, in our view, although the results cannot be measured yet in financial terms for the company and its stock valuation. 111. Richter's Esmya approved for the EU Equilor February 27, 2012 EC approved the Esmya drug, in line with market expectations. The approval enables Richter to distribute the drug across the whole EU, and may boost the product launch in the US as well, considering the ongoing Phase III studies there. We expect commercial launch of the product in the second half of 2012, which also matches market consensus. Nevertheless, the stock may attract some buyers if we consider the market whispers of positive results very soon from cariprazine tests. 112. Siemens To Build A Network Control System For Prague's Power Grid Press release March 1, 2012 In early February, Siemens Infrastructure & Cities signed an agreement with the Czech distribution network operator PREdistribuce to build a network control system for Prague's power grid. In order to support all aspects of the operations of the Czech distribution network operator, Siemens will implement the latest software version of the Spectrum Power network control system over the next three years. The contract volume of roughly six million euros will be divided up between Siemens and its consortium partner, the IT services provider Atos, which will integrate, together with Siemens, the network control system into the existing IT systems of the distribution network operator. The new network control system, which will replace the old SCADA (Supervisory Control and Data Acquisition) systems of the Czech grid operator, will manage the voltage levels of 110 kV (kilovolts), 22 kV and 0.4 kV. As part of the installation process, the 200,000 remotely monitored data points from the high-voltage and medium-voltage network will be extended to the 400-Volt level, for a total of 2.5 million data points, all of which will be mapped in the system. Advanced network calculation applications will be employed to protect the high-voltage power grid against overload outages. In the medium-voltage power grid, applications will be

used to localize faults and ensure automatic restoration of the power supply, thereby reducing outage times and considerably improving availability. A modern outage management system will be deployed to support efficient allocation of fault correction resources. In collaboration with the IT services provider Atos, Siemens will integrate the Spectrum Power system into the existing IT structure of the Czech distribution network operator. The existing databases for SAP applications, geo-information systems (GIS) and customer support will be synchronized with the SCADA system by means of automated interfaces. The German energy utility company EnBW owns a 40 percent interest in PREdistribuce, which is one of the three Czech distribution network operators. The Czech grid operator supplied approximately 750,000 customers with more than 5000 gigawatt-hours (GWh) of electrical power last year. Energy-efficient, eco-friendly solutions for setting up intelligent power supply networks (Smart Grids) are part of Siemens' Environmental Portfolio. In fiscal 2011, revenue from the portfolio totaled nearly EUR30 billion, making Siemens one of the world's largest suppliers of eco-friendly technologies. In the same period, the company's products and solutions enabled customers to reduce their carbon dioxide (CO2) emissions by nearly 320 million tons, an amount equal to the total annual CO2 emissions of Berlin, Delhi, Hong Kong, Istanbul, London, New York, Singapore and Tokyo. 113. Sweco wins hydropower contract in Latvia Press release February 27, 2012 Sweco has been chosen to assist in modernising two of Latvia's largest hydroelectric power plants. The contract is worth over EUR 3 million. "We are seeing increased demand for our expertise in the hydropower area from many parts of the world," says Åsa Bergman, President of Sweco Sweden. Sweco has been active in a large number of similar consulting assignments for many years. For example, the company was recently commissioned for a similar project in Romania and completed a project in connection with modernisation of the Aswan High Dam in Egypt. The client in this case is Latvian government's energy and power supply company AS Latvenergo. The project is scheduled for completion at the end of 2018. More facts about the hydroelectric power plants The hydroelectric plants to be modernised, Plavinas and Kegums 2, are located on the Daugava River in central Latvia. Sweco's assignment is to assist the client with procurement of suppliers, project management and technical advice, as well as delivery and implementation control during modernisation of the two plants that were completed in 1966 and 1979. The Plavinas power station contains ten turbines with a total installed output of around 900 MW. The station is located at the head of the Daugava River in central Latvia. The Kegum 2 power station lies directly downstream and contains three turbines with a total installed output of approximately 180 MW.

114. Tesco and Vodafone to launch Hungary's fourth mobile operator bne February 28, 2012 British giants Vodafone and Tesco are clubbing together to launch Hungary's fourth new mobile service on March 1, Dow Jones reported on February 28. Owned 50/50 by the pair, Tesco Mobile Zrt. will enter the market as a virtual provider, leasing bandwidth from Vodafone's existing network to free it from the need to build out infrastructure. "Our business strategy is aimed primarily at the customer base of the Tesco retail chain, which already has 1.5m loyalty cards in circulation in Hungary," Tesco Mobile CEO Peter Reszketo said. The company was established with a core capital of HUF200m ($928,721), but additional investments are planned, Reszketo said without going into details. The service currently only features pre-paid packages and is an adaptation of a model that has already been successfully introduced by Tesco the UK, Ireland and Slovakia, Vodafone Magyarorszag president Gyorgy Beck said. A full service model is planned at a later date.

OTHER COUNTRIES 115. Mongolia seeks tie-ups with Japan in nuclear energy, rare earths Monet/Mainichi February 28, 2012 Mongolian Prime Minister Sukhbaataryn Batbold has called for boosting economic cooperation with Japan in the areas of nuclear energy and development of natural resources such as rare earth minerals. In a recent interview with Kyodo News, Batbold said he plans to visit Japan in March and expressed eagerness to forge cooperation with Japan as Mongolia, which also has rich uranium reserves, plans to build its first nuclear power plant. "Japan possesses high technology in the peaceful use of nuclear power and has lessons from Fukushima," he said, referring to Japan's recovery from a deadly accident at the Fukushima Daiichi nuclear power plant in the wake of a massive earthquake and tsunami in March last year. The two governments are arranging a trip by Batbold to Japan from March 10 to 15, including a meeting with Prime Minister Yoshihiko Noda, as part of events to commemorate the 40th anniversary of the establishment of diplomatic relations between the two countries. Batbold expressed willingness to start negotiations with Japan on an economic partnership agreement, which is broader than a free trade agreement as it covers elimination of tariffs plus liberalization of investment, protection of intellectual property rights and free movement of labor.

Japan and Mongolia had planned to enter EPA talks in spring last year, but the plan was postponed due to the disaster in the Fukushima plant and political impasse that led to the resignation of Noda's predecessor, Naoto Kan. "I would like to make an EPA one of key agenda items" in a meeting with Noda, Batbold said. 116. Mongolia: Undur Tolgoi Announces Commencement of Winter Work Program Over Mongolia Property Monet/MarketWatch February 28, 2012 Undur Tolgoi Minerals Inc. ("UTM" or the "Company") (cnsx:UTM) is pleased to announce the commencement of its winter work program as originally announced by the Company in its January 30, 2012 press release. On February 18, 2012, the exploration team led by our senior geologist arrived on site to initiate the work program. The team expects to deliver in excess of 1,500 soil samples to an accredited laboratory in Ulaanbaatar, Mongolia within the next few weeks. Results from the laboratory's sample analysis are expected by mid May 2012. UTM's Chairman, Mr James Passin stated, "We are delighted with the rapid start on what promises to be a highly informative survey and analysis covering our entire property. This initial exploration phase will provide the Company with valuable information for our ongoing exploration of this large and potentially significant geological asset." UTM is a mineral exploration company entirely focused on Mongolia, owning, through its wholly owned subsidiaries, 100% of the "Undur Tolgoi" mineral exploration license. This license consists of 9,620 hectares of property situated 100 kilometers from the world-scale "Oyu Tolgoi" copper and gold mine. In addition, UTM's management is actively reviewing potential acquisitions and strategic industry alliances.