OREANDA-NEWS. August 25, 2011. This report marks the launch of our quarterly product dedicated to the Russian transportation industry. In each issue we will focus on fundamental developments in the industry and the way Russian transport companies react to the changes. In this issue we analyse 1H11 results and provide a graphical description of the main trends - industry growth contraction and consequent changes in market share, which we believe are fundamentally linked to sluggish growth in the economy.

Economic growth slows and transport turnover hits the brakes…In 1H11, total cargo turnover (in tonne-kilometres) rose only 7% YoY (in this report we exclude pipeline results), while in 1H10 turnover grew 14% YoY after a hugely disappointing 22% YoY slump in 1H09. These results are not surprising given that 1H11 Russian economic growth was sluggish at best: GDP rose only 4.1% YoY in 1Q11 and 3.4% in 2Q11. Growth in the mining industry, which produces the largest cargo volumes in Russia, was near zero in 1H11. This means that companies operating in the bulk and liquid cargo transport markets can only grow via a redistribution of market share, suggesting that previous 'growth' stories are likely to be revisited by investors.

… with market consolidation the likely result. We expect market consolidation to liven up in all market segments and are already seeing the first signs of this. In railway bulk transportation the biggest privatisation story is Freight One, which controls about a quarter of total Russian railway cargo loads. Globaltrans and other major players are preparing to bid for the company in 2H11. Aeroflot is in the process of acquiring Rosavia airlines, which will create an international airline champion with a market share of 40% of total Russian passenger turnover. The anticipated privatisation of an additional 25% stake in TransContainer (which controls about 50% of total rail-based container traffic) could have big impact on the container industry and FESCO in particular.