Moscow, February 3–5, 2010

What is The Russia Forum?

• A meeting place for exceptional people impacting the future of Russia and the world ­
  
• A new format of economic dialogue – interactive panel discussions on the most relevant topics ­
  
• A chance to hear a variety of ideas and opinions on various issues of global development
  
• A unique opportunity for first-hand communication with political leaders, directors of Russian and international corporations, asset managers handling billions of dollars of assets, media figures and show business stars
  
• A busy entertainment program representing the diversity and wealth of Russian and world culture

The Russia Forum 2010

Russia is attracting more and more attention from investors with its enormous internal market, rapid economic growth and low degree of asset capitalization. Bringing these investors to the Russian market is our strategic task. The Russia Forum is more than just an investment conference. Discussions focus on not only the stock and financial markets but social-political, industry, and regional problems as well as private-state partnerships, infrastructure, and business practices. The open discussion format involving active participation from the hall allows us to present the widest range of opinions and ideas. Participation by leading economists, politicians, ranking officials, heads of Russian and international corporations, representatives of financial institutes and famous businessmen leads to outstanding sessions, sharp polemics, and meaningful discussions.

The results are in for all three days of work at The Russia Forum 2009, which took place in Moscow between February 4^th and 6^th at the initiative of the Troika Dialog Group. The event was attended by approximately 900 guests and delegates representing 35 countries, as well as by more than 120 speakers – high ranking government officials, members of the investment and business communities, political scientists, economists and industry experts. The Forum comprised 20 panel discussions and plenary sessions, as well as more than 800 meetings in 1:1 format between companies and investors. The Forum was reported on by more than 300 journalists representing leading Russian and foreign media.

The success of The Russia Forum 2009 can be attributed to two factors: its “star lineup” and the unique format in which it took place. Only The Russia Forum 2009 managed to bring together on a single stage such respected names as Nouriel Roubini, Professor of Economics at NYU’s Stern School of Business, Raghuram Rajan, Professor of Finances at the University of Chicago Booth School of Business, Nassim Taleb, Distinguished Professor, New York University Polytechnic Institute, Hernando de Soto, President, Institute for Liberty and Democracy; Paul Wolfowitz, Ambassador, Visiting Scholar at the American Enterprise Institute, previously President of the World Bank and U.S. Deputy Secretary of Defense, Sir Tony Brenton, Former British Ambassador to Russia, UK Foreign Office, Sergei Karaganov, Chairman, Council of Foreign Defense Policy, as well as many other noteworthy guests.

More importantly, these renowned experts not only gave presentations, but exchanged opinions with fellow speakers and members of the auditorium. This is because the event organizers decided upon the panel discussion format, which allows business representatives, government officials, and professional investors to conduct equal and open discussion on the most pressing and divisive issues. According to the organizers, this kind of open discussion and intellectual exchange “without favoritism” is the quickest and most effective way to find lasting solutions.

The first day of The Russia Forum 2009 was devoted to major trends in macroeconomics and global politics, as well as to Russia’s role in these processes. The main panel discussions on the first day of the Forum – “Towards a New Financial Architecture: Beyond Blowing Bubbles,” “Challenges Facing Russia: Executive Perspectives,” and “Foreign Policy: Towards a New Security Architecture” – allowed participants to address problems in global economics and politics as well as suggest possible solutions.

The second day of the Forum was built around a more “applied” discussion program, with emphasis on problems and outlooks in Russia’s economy. The liveliest discussions took place in the sessions “Liquidity, Leverage, and Access to capital,” and “Ruble and Global Currencies: One Year Forward,” where attention was turned to bank bailouts and the Russian government’s monetary policy, as well as the increasing role of the government in solutions to financial sector problems.

The second day also included “industry” sessions, where discussions focused on the current situation and development outlooks in key segments of Russia’s economy – the oil and gas sector and the banking sector, electric power, retail, telecommunications, and others.

The third day of The Russia Forum 2009 was devoted to meetings in 1:1 format between companies and investors. Over 800 meetings took place on February 6th, and the event organizers received over 900 meeting requests.

“Crisis of trust” – this was the consensus description of the situation in the world today as well as the words heard most often during the sessions and in private conversations. The lack of trust has “frozen” the financial market, creating stagnation in the real economy followed by recession, not to mention all the recent skepticism regarding capitalism as a system. Former bedrocks of confidence – the biggest banks and international financial institutions, ratings agencies, analysts’ predictions, major reserve currencies and commodities – have been considerably undermined. In developing countries, the economic and social problems might lead to a crisis of trust in the political system, the discussion participants said.

The experts shared the opinion that confidence can be reinstated in the global economy by returning to the fundamental values of capitalism. The missing “tie with reality” in the global economy must be restored, and control over the financial system needs to become stricter and more centralized. In this context, participants in the Forum sessions spoke about the need for “collective leadership” and “less national egoism.” If these needs go unmet, the world can look forward to financial chaos, collapse in the global economic system, and a breakup between isolated regional markets.

As for Russia’s anti-crisis recipe, experts spoke about maintaining macroeconomic stability and structural reforms in the economic and political spheres. Even though Russia efficiently handled high commodity prices in recent years, the country “forgot” about structural reforms, the Forum participants said. Russia has a number of options to get out of the crisis, for example – developing infrastructure, perfecting legislature, and building an independent, effective court structure. Furthermore, diversifying the economy and developing the domestic market are the prerequisites to stability in the future.

The Russia Forum 2009, which Troika Dialog organized for the second consecutive year, confirmed the event’s elite standing as a meeting place for politicians and businessmen, directors of government establishments, representatives of leading Russian and international companies, as well as prominent investors and wealth managers. According to participants, further proof of The Russia Forum’s significance is the progress that was made in locating the sources of current problems and vectors of future action, which likely will shape the development of not only the financial system, but the entire economy in 2009.

We hope that The Russia Forum 2010 will create interest among an even greater number of speakers and top caliber participants, and that the event will touch upon a wider list of topics.

Richard Smyth: Russia is the third largest market for Mars, they will not jeopardize the quality of their product despite the potential slowdown in demand. The company successfully overcame the challenges of 1998, and argues that the current environment is much more benign, as both customers and corporates have a stronger foundation compared with previous years. Two key challenges are uncertainty in demand and ruble depreciation, but new opportunities arise as highly professional staff is becoming more available, and marketing prices are heading south.

Sergei Ivanov: The companies producing staples are in good shape to overcome the crisis, as they have already adjusted their business models to the challenging environment. The historically low-margin nature of their businesses, alongside raw materials inflation in 2007, encouraged companies to shift to a lean cost base and tight cash flow control a year and a half ago. The demand for oil products is not declining, but Solnechnyie Produkty Holding foresees a revenue slowdown. The key problem is financial stability of the distribution chain, encouraging companies to be selective in choosing counteragents.

Andrey Yanovsky: The juice industry, where domestic producers account for 99% of the market and around 60% of raw materials costs are forex-denominated, will see tough times ahead. It may be challenging to pass on the pricing pressures to the customers, especially as juices are considered a non-essential item. Producers need to work with distributors and retailers more closely to overcome the slowdown. Opportunities may arise from the labor market, with demand for qualified personnel easing.

Patricia O’Hayer: The market is not seeing a trading shift yet. In 4Q08, Unilever saw double-digit revenue growth in Russia and it is looking at this country as a research and manufacturing base. It is important to have brands across the entire price spectrum in a time of slowdown. The company is pressing on with its operations in Tula and its investment plan for Russia.

Stefan De Loecker: Consumers are anticipating that things will get worse, as frequency of shopping is increasing but the average ticket falling. Companies need to focus on efficiency to overcome raw material price inflation. Innovation is important, and Nestle Rossiya is considering evolving its products to fit the demand ratio, including changing packaging size.

PANEL:

Richard Smyth, General Manager, Mars LLC
Stefan De Loecker, Chief Executive Officer, Nestle Rossiya LLC
Sergei Ivanov, Chief Executive Officer, Solnechnyie Produkty Holding
Patricia O’Hayer, Vice President Communications and Corporate Relations, Unilever
Andrey Yanovsky, Chief Executive Officer, Nidan

James Barty believes there are reasons to be optimistic about the long-term commodity outlook now that the bubble has burst. The short-term outlook is not so good – there is a massive output gap, and capacity must be adjusted in line with lower demand. Demand should stay strong in emerging markets, especially in fast-growing economies like China and India, but we are likely to see increasing energy and material efficiency in mature economies, which will dampen global demand growth. He also believes that Russia will need a more flexible currency regime to be prepared to deal with the lower commodity prices.

Jim Rogers expressed strong confidence that commodity prices and demand will recover. The world keeps running out of oil, metals and bulk commodities, and there will be little investment in exploration and development until the economic crisis is over. Oil could surpass $200/bbl one day. The timing is the tricky part, though, as the current recession may be lengthy. He thinks that Russia ought to invest in exploration of new mineral reserves, as the country is currently nibbling at investments made in Soviet times.

Paul Robinson is bearish on commodities in the short term, but thinks that good days lie ahead. Demand is weak and producers have not yet done all the work needed to match supply and demand. Copper is under the biggest risk of another big decline – most producers are still making profit and there is no incentive to cut production, because everyone is desperate to keep more cash on hands. Other base metals have probably bottomed out. Development of untapped reserves in Africa and other underexplored places will require massive investments in infrastructure, which will only be justified by much higher commodity prices. This will not happen yet, though – the rest of 2009 is going to be bleak, with maybe some recovery starting next year. Government buying (such as China building strategic metals reserves) will help in the short term but lead to more problems down the road.

Neil Meader believes that gold is in good position to rise above the $1,000/oz level this year as investors stampede into safe assets. It will go lower when the economy starts recovering, but the downside will be limited by a likely spike in inflation, as governments keep pumping money into the economy.

PGMs will have different fortunes – platinum is likely to move in tandem with gold on investment demand, while palladium will keep suffering from higher exposure to industrial demand (which has been hit by the slowing economy), as well as from concerns about the palladium market being the hostage of one dominant producer (Russia).
Silver is going to perform poorly in the short term on slack industrial demand, but will recover exactly when gold starts weakening.

John Campbell said that mining companies have only started reporting losses – there will be much more negative news flow during next two to three months. China is a wildcard, and it may destabilize the markets greatly, especially where it has significant overcapacity (steel and aluminum). Structural cost inflation warrants an optimistic long-term view on commodities, but the recovery is unlikely to come soon.

Sergey Grebenkin noted that the crisis has prompted all producers to review their assets and dispose of the least competitive among them. Large producers have not cut production by much, but have pared down all capex. Small and medium miners are struggling to stay afloat, and some will not be here by the end of the day.

PANEL:

Christof Ruehl, Group Chief Economist and Vice President, BP
James Barty, Global Strategist, Arrowgrass
John Campbell, Partner, Assurance, Consumer Industrial Products, PricewaterhouseCoopers
Sergey Grebenkin, CIS Regional Manager, Trafigura Beheer BV, Moscow representative office
Neil Meader, Research Director, GFMS Limited
Paul Robinson, Group Manager, Non-Ferrous Metals, CRU Group