OREANDA-NEWS. June 19, 2008. It is my great pleasure to welcome you to this year's Renaissance Capital Annual Investor Conference, which we will dedicate to the change and renewal, which lies ahead of Russia. The timing of this year's conference is particularly interesting. We are living in a period of great opportunity for Russia, and not least for the financial markets.

There are major changes taking place right now in the world's developed financial markets. In fact, I cannot remember such a long period of high volatility in the financial system of the developed economies. The combined loss in value of the world's top banks in the last 18 months is over USD500 bn. At the same time, the oil price is at an all time high, and continues to move higher, despite a concerted effort from the G7 to talk the dollar higher, and commodity prices lower. The US is entering recession, and many of the European economies are attempting to deal with a combination of financial meltdown and a collapse in housing prices.

At the same time, Russia is growing at a faster pace than at any time in the last twenty years. Conceivably Russia could become the fastest growing large economy in the world this year, with GDP potentially reaching double-digit growth.

The US and European financial infrastructure which has always defined global finance is now being forced through a period of considerable change. This will have a bigger impact on their economies than is perhaps currently anticipated. This is presenting both the biggest risk to Russia, and also, I think, the biggest opportunity.

A lot can change in a decade. Ten years ago, it was the Russian financial crisis in August 98 which was causing turmoil in the world markets, leaving a long and sad memory behind.

In 1998 it was theoretically possible to buy the entire Russian stock market for USD40 bn., roughly the value then of Gillette. In 1998 Russia's GDP was less than USD200 bn., and I remember days when the entire equity market turnover was around USD10 m.

Today, daily turnover is USD8-10 bn. GDP this year could reach USD1.7 trn. Russia runs a budget surplus of 5.5% of GDP, one of the highest in the world, and its debt-GDP ratio of 3.6% is one of the lowest in the world. Russia now boasts the world's third-largest reserves at nearly USD600 bn. The stock market today is worth USD1.5 trn. - an increase of 37 times.

In other words, we have been witnesses of, and active participants in, the country's transformation. From a recipient of foreign aid, an "Upper Volta with rockets", to a country with a rapidly developing economy and a net exporter of capital.

Who would have thought then that today, the largest threat to the Russian stock market would be instability in developed markets?

Having remembered the past, lets turn now to the future, to which the majority of today's conference will be devoted.

It's my view that despite recent impressive economic and financial indicators, the opportunities remain enormous. In the last 12 years, GDP in nominal dollar terms has increased 30%, and it's very realistic that this pace will continue in the medium term. In 7-8 years, I think this assessment could prove to be too conservative - Russia's GDP could exceed the USD5 trn mark. The Russian market is trading at a price/earnings ratio of 10. And in my view, Russia represents an incredible investment opportunity in a world where most markets are struggling and in decline.

Let me just give you one example. Since the beginning of 2007, the oil price has increased from USD70/barrel to roughly USD130/barrel. Net earnings for the sector over the same period have increased from USD54 bn in 2006 to USD77 bn projected for 2008. Yet despite the increases, Russia's hydrocarbon sector has gained just 20%, and most of that since Prime Minister Putin's announcement of a decrease in taxation of the sector. The upside to fair value in LUKoil and Gazprom alone is roughly equivalent to the entire market capitalization of the equity market in 2003. And that is using a medium-term oil price forecast of USD70/barrel. If we use the oil prices implied by the futures market, then the upside in the sector is well over 100% from current levels - at fair value, Gazprom becomes the largest company in the world.

What's important to note is that the potential growth is not limited to the oil and gas sector. Commodity companies raised only 14% of 2007 IPO proceeds. In recent years, we have seen the emergence of new sectors, from pharmaceuticals to pipe manufacturing. The growth in most of these sectors is far outpacing GDP. Some of the sectors are becoming regional and sometimes global leaders.

The potential for value creation is enormous, not just in the stock market, but in the economy as a whole.

This year, Russia will have the largest car market in Europe, and next year it could have Europe's largest retail market. As a result, the level of interest from strategic investors continues to increase. Toyota began production last year to join GM, Ford and BMW with plants in Russia. Volkswagen, Peugeot Citroen, Nissan, Mitsubishi, Suzuki and Hyundai have all announced plans to build plants of their own. And there is every reason to expect a similar benign invasion from the world's retail chains.

Last year, there was USD40 bn of foreign investment into Russia, nearly 3% of total foreign investment worldwide. And this rapid upward trend will continue. However, foreign investment will likely play only a minor role next to domestic flows. Today we can really say that we are on the verge of a full-fledged investment boom. This is fuelled in part by the influx of Russian capital, both private as well as state, but also by the substantial investment needs in infrastructure.

Let's take a closer look at this. According to official estimates, there has been negative net disinvestment in Russia since 1992. That implies that despite all the value that has been created in the last 15 years, Russia's fixed assets are actually in a worse state today than they were at the break-up of the Soviet Union. Russia is one of the very few countries in the world where the length of usable road is actually decreasing; today Russia has 350 functioning airports, as opposed to 1300 in 1992 (never mind the quality of the airports); about half of the country's railway system needs to be replaced. There are also significant investments needed in the power sector.

To maintain economic growth, Russia needs investment on a vast scale. The rebuilding of the national infrastructure of the largest country in the world will require tremendous resources. In 2006, investment as a percentage of GDP was around 20%, compared to 32% in India or over 40% in China. Numbers in the trillions of dollars have been mentioned. If Russia increases its investment rate from 20% of GDP towards 30% of GDP, those numbers are not unreasonable. I should note that today, it is increasing investment, as opposed to consumption, which is the main driver of Russia's economic growth.

As the provider of public infrastructure, the state will clearly have a role to play. But equally, it will require the resources and the financial discipline of the private sector. One of the biggest projects that we at Renaissance Capital are involved in is the formation of a joint venture with VEB and Macquarie Bank of Australia to invest in Russia's infrastructure.

The outlook today, therefore, is truly exciting, both for the economy and for the markets. This would not be Russia, however, without some risks.

First, there is the usual concern about the speed at which the authorities carry out reforms. The speed of economic growth in Russia today means that the investment boom risks over-heating the economy unless there is renewed focus on reforms; therefore, we can say that time is working against us. Only through structural reform can Russia make up for the loss of its competitive capacity caused by inflation and the real strengthening of the ruble. The reform list is long, from judicial and administrative reform to the reform of tax and pension systems.

Now that elections are behind us, there is a window of opportunity to press on with the reform agenda. The early years of Putin's first term were perhaps the most energetic period of coherent policy implementation in Russia's post-Soviet history. The first signs are that Medvedev will use his honeymoon period to do the same.

But there are also risk factors, which are beyond Russia's control. The global economic situation continues to look fragile, in my opinion. In the last 12 months, the world's confidence in global finance has been badly shaken. The propensity of the world to hold dollars as their sole reserve currency has been weakened perhaps irreparably. It will therefore prove very difficult for the Fed to use the instruments it has in the past to keep the developed world economies out of recession. Banking sector turmoil, the collapse of housing prices and sky-high commodity prices suggest a torrid time ahead for the global economy - far more, perhaps, than global markets are currently anticipating.

Global economic turmoil will present large challenges for all of us. But we are convinced that for countries undergoing sustainable economic growth, of which Russia is one, it will also present enormous opportunities.

I believe that the dynamics of financial and economic relations between new world economies are evolving. The world's traditional financial centers are ceasing to play the role of effective financial intermediaries. The Russian financial sector is in a superb position to take advantage of this. Russia has the economic scale, the natural resources, the savings, the economic growth, the expertise and the willingness to take risk to be at the forefront of international expansion in new markets. There is no reason why Moscow City can't become a regional financial center and, eventually, for the freely-convertible ruble to become one of the world's future reserve currencies.

As the CEO of a Russian investment bank, I am very much enjoying the challenge of taking the expertise that we have developed here and pushing it out into new markets. Renaissance Capital has been at the forefront of the financial change that has taken place in Russia over the last 15 years, and we hope to consolidate and expand that position, supporting and partnering with the largest Russian corporates in other markets where we are present. When Renaissance Capital was formed, most of our business was designed to facilitate the flow of international capital into Russia. Today we spend more and more time and effort supporting the international expansion of Russian business, and I would like to assure our guests here today that we intend to continue to work in this direction - helping Russian companies to build scale.

To conclude, I hope that this conference will help people to better understand the changes which are taking place today in the Russian economy and its financial markets.

Again, it is my sincere honor to welcome you to this year's investor conference.