Updated September 22, 2008

   Oleg Deripaska's first large foreign developer project

will become the most scale among the other foreign construction projects of Russia' s market player

s. As it came out, the businessman and his partners take part in the construction of the resort with yacht berths in southern Montenegro.

The area covers 2 million sq.m, and investments attain €8,3 billion. The sum is enormous on the background of the world liquidity crisis.

   The chief executive of TriGranit's representative office in Russia Sergey Gogolev told that Basic Element's shareholder (BasEl) Oleg Deripaska and the core owner of the Hungarian company TriGranit Shandor Demjan take part in the project on the construction of the resort area in southern Montenegro (Ulejn seaport, Budva). According to him, there is the third large investor in the project – the Canadian businessman Peter Munk, the founder and head of Barrick Gold Corporation.

Mr. Gogolev refused to announce the partners' stakes, but marked that the total volume of investments in the project equals €8,3 billion.

   In BasEl reminded that since 2006, the holding owned the aluminum works, Kombinat Aluminijuma Podgorica (KAR), and the bauxite mine in Montenegro, but refused to comment

the developer project.

However, Arpad Sekey, Hungary's ambassador to Russia (from October, 1, will head TriGranit's representative office in Russia) and Maxim Temnikov, the member of Mirax Group Corporation directors' board and owner of the project in Montenegro, aware of Oleg Deripaska's participation in the Montenegrin project.

   One of the market participants aware of the project explained that the owners of the area in Montenegro, who attracted the pool of investors to develop this scale

area, take part in the project also.

According to the European mass media, the Rothschild family invests in the project as well.

   The partners intend to construct the yacht infrastructure, hotels, apartment estates and villas, Sergey Gogolev said. However, he didn't specify the total area of the developed territory.

At the moment, the project conception is being designed.

The construction is planned to start in 2010, and the implementation of the project will take about ten years to finalize.

"This construction will resemble the projects directed to the complex development of Dubai's area", he explained. According to Knight Frank's partner Ekaterina Teyn, it goes about the territory that can be compared to the area of Monaco (1,9 sq. km or about 200 ha).

   The Montenegrin project exceeds n-fold by the investments volume other construction projects with the participation of Russia's developers in the foreign countries.

Sergey Polonskiy's Mirax Group completes the construction of Astra Montenegro recreation complex in Montenegro with the total area of 94 000 sq. m. The company owns some projects in the USA, Switzerland, Vietnam and in London, including the construction of Mirax-Beetham Tower skyscraper coupled with Great Britain's Beetham Company (investments reach about ?500 million). As it came out in July, Inteco Company intends to allocate €325 million to construct the resort estate in Monaco with the total area of 2 million sq.m., and it is engaged in the hotel construction in Karlovy Vary (the Czech Republic). This year, Metropol Group will start the construction of the residential and office real estate in Hanoi (Vietnam) with the total area of 1 million sq.m., and the company and its Vietnamese partners will invest $800 million in this project.

   Lately, Montenegro's market demonstrated high growth rates, Maxim Temnikov from Mirax Group explained the investors' interest in the country.

"One and a half year ago, when we were joining Astra Montenegro project, we expected to get the sales price of €3 200 per 1 sq.m. Now, we sell at €6 000", he says. Within the last couple of years, the prices for real estate in Montenegro doubled, Ekaterina Teyn agrees.

"Now, despite the financial crisis, the prices don't fall there, as well as in the Western Europe, where, for instance, in Great Britain, the prices fell by 10% on average within the year", he supposes. However, the advisor to Leader Managing Company's chief executive Aleksey Chalenko forecasts that in the light of the continuing financial crisis, the sales of Montenegro's real estate will recover.

"The resort real estate is not a purchase of the main apartment, but of the second or even of the third, and it is not so important", he supposes. "However, in the nearest one or two years, the financial situation will rebound, and the sales will recover. Since the realization of the areas will not start earlier, the investors shouldn't face any problems".

Updated September 12, 2008

   World's largest producer and marketer of wine, the US Constellation Brands (such brands as Hardy's, Robert Mondavi and Paul Masson), establishes its subsidiary in Russia.

The company intends to spend more than $2,4 million annually, or nearly 10% from annual sales for the promotion of its brands at the Russian market.

The experts say that the specific feature of the wine market is the absence of any brands, and Constellation has to promote the wine for the Russians as a category.

   The president of Constellation Europe (the European division of Constellation Brands, Inc.

) Troy Christensen told about the opening of the Russian representative office.

"The corresponding legal body is being incorporated now, and, obviously, it will be named Constellation Russia JSC with the 100%-participation of Constellation Europe", the future head of JSC Andrey Grumondz added.

   At the moment, Whitehall is the unique importer and distributor of Constellation's wines. Whitehall's chief executive Evgeny Polischuk is aware of Constellation's plans to operate in Russia, but he doesn't see any triggers for the concern, since his company will continue to execute unique import and sales contracts of such brands as Hardy's (Australia), Robert Mondavi (California, the USA), and as well as Nobilo (New Zeland). Other alternative distributors will be attracted for other brands, Mr.

Christensen promises.

   Earlier this year, the chief executive of AST-International distribution company Leonid Rafailov was negotiating with Constellation's representatives within Pro-Wine exhibition, but they didn't come to any agreement then.

"Only niche brands were left for Russia in their portfolio then".

   Along with wines, Constellation Brands, Inc. is engaged in the production and marketing of spirits (the 3rd place at the US market) – Black Velvet whisky and Svedka vodka.

In 2008 fiscal year (ended on February, 29), the company's gross sales reached $4,9 billion, the net loss – $613 million. Its capitalization is $4,04 billion.

   According to the calculations of Business Analytica Company, in 2007, the New World's w ines

took approximately 5% of the Russian wine market with the total capacity of 313 million liters.

Constellation Europe estimates the segment of wines of the New World in Russia at 9-18 million liters.

   "We pay much attention to our key and already developed markets – the USA, Great Britain, Canada, Australia, and it is the right time to think about those countries that can provide us with the interesting opportunities for growth", Mr. Christensen explains. He named Constellation's activity in Great Britain, where it managed to "stabilize the market" within two years after the company's office had been opened there.

Now, the American company owns five from ten of the top wine brands in England and sells 25 million of nine-liter cases per year. The company announced that in 2008 it would spend ?12 million for the promotion of Hardy's.

   The core task of the Russian office is the marketing support of the company's brands, trade marketing, activity with distributors and retail etc.

Constellation is ready to spend "two-digit sums in percentage of sales" to promote its wines in Russia.

The average price of one bottle (0,75 liter) of Constellation's wine in Russia attaints RUR 250, the sales forecasts in 2008 – 200 000 of nine-liter cases (2,4 million bottles), or RUR 600 million.

Thus, the minimum budget directed to promote wines (10% from sales) will reach $2,4 million. According to the forecast of Mr. Polischuk, Constellation Whitehall can double the sales of its brands within the first three or four years with the marketing assistance. Leonid Rafailov considers that $2-3 million is a sufficient budget for the wine company, since the market lacks brands. The wine producers spend mainly on the trade marketing, unlike, for instance, Martini, Hennessy, Martel that make "quite another" investments in the image, he adds.

Updated September 10, 2008

   Recently, Standard & Poor's published the report, where the rating agency assessed Russia's bank system saying that "it became more stable, however, we should make a range of stipulations to state th is

fact". Though, despite its "youth", the Russian bank sector has experienced already three crises, in 1995, 1998 and 2004, and the agency warns that it is too early to speak about the significant changes within the sector.

However, this statement doesn't impede the Russian banks to solve successfully the problems, caused by the world liquidity crisis, due to the support of Russia' s government and the

stockholders.

   Within less than 20 years of the existence of Russia's bank industry, it faced several crises and periods of destabilization, as the analysts of S&P remind. Thus, they mark also that the tendency to the growing lending rating average of the Russian banks from CCC to B+, though this index remains one of the world's lowest, indicates the recovery of Russia's bank system.

   Though it has experienced several crises, Russia's bank system "is still subjected to the risk of the liquidity reduction under the influence of panic moods and the danger of mass withdrawals of the customers' deposits, like in summer, 2004", the analysts of S&P mark. In their opinion, "the major part of the growing Russian banks' business is funded by the external borrowings that have the high risk of refunding, liquidity and the currency risk in the bank system".

   In Standard & Poor's consider that the liquidity slumps, though recoverable, will continue, and the cooldown in the relations with the West, as well as the continuing world loan crisis, will contribute to this.

"However, Russia's banks are dealing successfully with their problems, caused by the world liquidity crisis, due to the changes in the development strategies, creation of the internal liquidity reserves, and the government and stockholders' support as well", as the agency marks.

   The director of the Department of the Scientific Research, the Moscow University of Industry and Finance Sergey Moiseev marks that the fifth part of the Russian banks' liabilities is formed using the foreign facilities, thus, this is mainly the money of the foreign banks' subsidiaries. "If the growth of these banks is suspended because of the unstable foreign receipts, the growth of the overall market will be suspended as well", as Mr. Moiseev considers.

   "The capital outflow in the bank area resulted in the liquidity deficiency that, in its turn, resulted in the growth of the funding cost.

One and a half months ago, there was the liquidity surplus in the industry that prevented the growth of expenses for the funding", as the analyst of Deutsche Bank Bob Comers marks.

"The situation would hardly improve as compared to the present one.

Nevertheless, Deutsche Bank's key scenario predicts that the tension in the political sector keeps at least by the end of this year. The revival of the capital inflow is unlikely in the nearest future within the framework of this scenario". "The level of the external borrowings is high, but not huge", as the analyst of Troika Dialog IC Olga Veselova considers.

"If the borrowings are suspended, it will result in the growth deceleration of the bank sector and in the more expensive money.

This will affect negatively Russia's bank system, but will not be disastrous".

   "The measures to support the liquidity can be assessed as positive.

If earlier the banks were taking loans reluctantly at the auctions of the Ministry of Finance, so, when the banks were provided with the new ways of borrowings, for instance, the facilities placement of the fund for housing and utilities development, they became interested in this kind of money attraction", as Olga Veselova considers.

   "High economy rates predetermine favorable terms for the development of Russia's national bank sector", as the analysts conclude.

"The rise of Russia's credit worthiness minimizes the recurrence of the disastrous scenario". S&P's analysts mark that the country risks are still high, since the weakness of the legal and supervisory systems, low transparency of the banks and companies' incorporated structures, as well as the high-level concentration of the bank loan portfolios and the sources of funding and income influence on them.

   "I think that it goes about the provision of the activity norms and the shortage of laws, for instance, about the bank mortgage, securitization, and syndicated lending", as Sergey Moiseev marks. "Russia' banks, on the contrary, pay much attention to their extra reporting". In the opinion of the president of the Association of Regional Banks of Russia Anatoly Aksakov, everything is relative.

"I don't think that the supervision is low, rather ineffective. The banks' load is too heavy, and its efficiency is low". "Our supervision is effective because we don't have banks that went bankrupt due to the losses", as Sergey Moiseev considers. In Anatoly Aksakov's opinion, the supervisory bodies "should raise the responsibility of owners and the banks' top-management, including criminal one, and on the other hand, provide them with the independence". As for the transparency of the lending organizations, "it is the false information, at least, concerning those banks that are listed in the Agency for Deposit Insurance, and in the Central Bank are aware of all actual owners", as Anatoly Aksakov states.

   Among the mentioned risks of Russia's bank market, S&P emphasizes the Bank of Russia's activity that "has tackled effectively the problems of liquidity caused by the world loan crisis in summer, 2007"; as well as the activities of Russia's government on the support of private banks that "reflects the aims of Russia' political authorities and regulatory bodies to provide the bank sector with stability". "When the crises started, the Central Bank acted as an experienced and professional organization, therefore, Russia's bank system is stable. Russia's government, in its turn, was placing temporary available facilities on deposits", as Anatoly Aksakov marks. However, the Russian bank sector has been requiring a major reform for a long time that would urge the development of banks and would accelerate the increase of their ratings. However, the reform is progressing slowly, and it is explained by "the opposition of the vested interests, whose interests it affects", as S&P summarizes.

   "We don't require such reform as the deep revision of relations between regulation, supervision and money policy", as the president of the Russian Banks' Association Garegin Tosunyan considers.

"This is not the reform for the bank system, it is the revision of the system to manage it. The bank system requires some development". "Despite the aggravation of the situation in the bank industry in the nearest prospect, we are still assessing the investment attraction of Russia's banks as high in the mid-term prospect", as Bob Comers adds.

Updated September 3, 2008<

/p>

   Russia's Prime Minister Vladimir Putin declared that in 2008,

the Russian government wouldn't increase the stake of the capital inflow to the economy, since "it poses the additional problems" with the inflation and

the volume of money supply.

Russia's Central Bank (CB) and the government can afford such strategy for a year or two, but no later than 2011, though, from the end of 2009 the level of the capital inflow will determine both the inflation and the ruble rate.

   "We will not have such capital inflow like in the previous year, but it is not related to the events in Georgia", Russia's PM Vladimir Putin declared in Tashkent on September, 2. "We don't require such high inflow, since it poses the additional problems both with the volume of money supply and the inflation growth". He used the CB' data as a reference and gave the forecast of the net capital inflow of $30-40 billion in 2008. In 2007 this index was $83,2 billion, in 2006 – $41,8 billion, and in 1Q 2008 – $12,3 billion. The preliminary calculations based on the CB' data on the volume of the international reserves show that since the beginning of 2008 up to August, 22, there could be the net capital outflow.

   Except for the influence assessment of the events in Georgia, Mr. Putin's logic coincides with the current argumentations of Russia's CB, the Ministry of Finance and the independent economists.

In 2006-2007, Russia's money offer was formed mainly due to the capital inflow, and the foreign investments' growth as a backside of GDP and the industrial production' s growth imply the acceleration of inflation and ruble strengthening. The latter leads to the import growth and to

the competition drop of the Russian producers. The CB' project, "The key directions of the CB' monetary policy" that was introduced to the State Duma on August, 28, is covering exactly this fact.

   However, according to the CB's document, the Russian government's negligence for the capital inflow ends soon.

As it was stated in the document, even in the mid-term prospect (2009-2011), the tendencies of the ruble rate "will be predetermined by the facilities movements within the framework of the foreign economic activity". Since the oil price is $90-95 per barrel, the current accounts' surplus of balance of payments will be replaced with its deficit in 2010, and at $66 per barrel – in 2009 already. "Under such terms, the primary role will have the cross-border capital movements that will determine the ruble rate change", as it is said in the CB's document.

   The Bank of Russia's assessment may be too optimistic: "the zeroing" of the current account (the balance amount of trades in commodities, services, investment profits and payments for labor) can take place even earlier.

Russia's CB takes to account the calculations of the import growth rates by 15-21% for 2009, and for 2010 – by 10-17% depending on a scenario. Within the last couple of years, the import growth rates ranged from 30 to 40%, and even higher sometimes. The calculations based on such import growth rates show that all scenarios, except for the most optimistic (oil – $115 per barrel in 2009), point to the "zeroing" of the current account in 2009, and in 2010 it can be even more negative (to $115-350 billion).

   So, in 2009, the regular strengthening of the ruble rate can be replaced with its weakening. Thus, the devaluation rates will be determined by the attraction level of Russia's economy for the foreign investors.

It seems as in the CB understand this – "The key directions" don't give any forecasts of the rate dynamics, unlike the previous years.

Updated August 29, 2008

   The stockholders of the Russian RosEvroGroup have found the buyer for its bank asset.

The largest bank of China – Industrial and Commercial Bank of China – will purchase 100% of RosEvroBank (former joint-stock bank Loubyanka). The investment of the Chinese bank becomes the first purchase in Russia made by the investors from the Asia-Pacific region.

   Three independent sources of the bank market told that the sale of 100% of RosEvroBank's stocks to the largest China's bank, Industrial and Commercial Bank of China (ICBC), is almost completed. "The parties have come to the understanding, and the required documents will be signed in the nearest future, and the calculations will be made at the end of this year or at the beginning of the next year", as the source close to

the stockholders of the Russian bank said. In RosEvroBank refused to confirm this information. In ICBC's Moscow office refused to comment as well saying that the negotiations are confidential.

   However, the Federal Antimonopoly Service (FAS) knows about the future deal with RosEvroBank.

"ICBC's representatives have already visited us and have learned the rules of submitting the application for the purchase of RosEvroBank's stocks", as in the FAS's press-service reported, but they didn't specify the stockholding size.

   RosEvroBank was established in 1994 (former name Loubyanka), and as of April, 1, 2008 the bank occupies the 53rd place by the net assets sum (RUR 46,8 billion) and the 62nd place by the capital size (RUR 5,5 billion). RosEvroGroup Managing Company owns 84% of the bank's stocks, the DEG fund owns 6%, and Renfin1 and Renfin2 funds own 10% of stocks. RosEvroGroup's stockholders are the chairman of RosEvroGroup directors' board Sergey Grishin (59,1% of stocks), the bank's chairman of the management board and the member of the directors' board Ilya Brodsky (14,5%), the members of the directors' board Andrey Suzdaltscev (14,7%) and Ernest Bisaev (9,7%), and the first bank's deputy chairman Dmitry Suzdaltscev and Oleg Vershinin own in 1%.

   Industrial and Commercial Bank of China is the largest state commercial bank of China.

It occupies the world's top position by the capitalization (over $225 billion). Almost 17 000 of the bank's branches in Ch

ina and in the other countries of the world offer services to 170 million private and 2,72 million corporate clients.

In October, 2006 ICBC held the largest IPO in the world and attracted $21,9 billion.

   RosEvroBank's stockholders started the bank's sale in 2006. Last summer they were holding talks with the Israel Hapoalim, but the parties didn't reach the agreement because of the discords in the price. According to the information of the source aware of the terms of the deal, the Chinese bank will pay about $800-850 million, and this sum is RosEvroBank' s quadrupled capital.

If this information is true, the coefficient of this deal will be one

of the highest at the market. The British Barclays purchased Expobank with the coefficient of about 4, Bank of Cyprus purchased 80% of Uiastrum Bank with the coefficient of 3,1, the sum Hapoalim paid for the control over SDM Bank equals the double capital of the latter. Moreover, ICBC's investment will be the first large investment made by the investors from the Asia-Pacific region in the bank sector of the Russian Federation.

    Lately, the eastern investors are actively using the price drop of the financial assets in the USA and Europe.

The Swiss bank UBS declared that it would sell 9% of its stocks for $9,7 billion to Singapore Investment Corporation, and Citigroup declared that it would sale 4% of its stocks to GIC for $6,9 billion. The US Merrill Lynch reported that it had received $6,6 billion from investors, among which were the state investment funds from South Korea and Kuwait.

Recently, the fifth large South Korean bank, Korea Development Bank, reported that it didn't eliminate the investments into Lehman Bro

thers.

   There is less risks at the Russian market, since the world crisis has affected the Russian banks only to a certain degree. The investors are ready to pay more for smaller risks, as KIT Finance investment bank's analyst Maria Kalvarskaya explains. Moreover, RosEvroBank owns the widespread chain of divisions – 12 branches in Moscow, as well as 26 regional branches. "The high price is explained by the high interest the Chinese investors take in our market and the reluctance of the Russian stockholders to sell assets at low price", as Mrs. Kalvarskaya says. "Moreover, our banking system is growing quicker than the Chinese one. If the overall assets of the Russian banks grew by 54% last year, in China the growth totaled only 16%", as S&P's analyst Evgeny Tarzimanov adds

   When RosEvroGroup's stockholders sell the bank asset, they will concentrate on the development of the developer business that has higher potential for growth and profitability, as the Interfax CEA's chief executive Mikhail Matovnikov considers.

The owners of Absolute Group did the same, when in spring of the previous year they sold Absolute Bank to the Belgian KBC Group, he adds. RosEvroDevelopment invests into the construction of shopping malls and in the warehouse, office and residential real estate.

Updated August 27, 2008

   The German auto concern Volkswagen is planning to expand its production in Russia. The corresponding statement was made during the opening of the International Moscow Auto Salon 2008.

   Though VW' s a

ssembly in Kaluga hasn't reached the maximum capacity yet, it doesn't impede the company to make plans of the further increase

of the cars output.

   Within the nearest two years, Kaluga's assembly should reach the mark of 150 000 cars a year. The company management is convinced that it

is not enough, since the demand for the new cars in Russia accelerates, therefore VW is already preparing the additional capacities to increase the annual volume of sales in Russia to 200 000 cars by 2009-2010.

   The aim of the largest Europe's automaker is the top position at

the Russian market. At the moment, the German concern managed to occupy 4% of the market.

If VW wants to become the leader, it has to expand its presence at the market to at least 10%. The company is planning to expand the chain of sales and to enter the Russian regions.

   In December of the previous year, the auto concern Volkswagen launched its assembly in Russia. The new enterprise is located in the suburb of Kaluga, in the so-called Grabtscevo technical park.

Then, Kaluga's assembly started the production of two makes – Volkswagen Passat and Skoda Octavia.

66 000 of cars are planned to produce within 2008. Later, the more compact Volkswagen Jetta, Skoda Fabia and, finally, the sedan of C class developed on the basis of Volkswagen Polo will join this range of cars.

Expert comments

Konstantin Romanov, Finam Investment Company analyst

The key issue is a desire to invest facilities in the development of the Russian production. The available lending is enough on the background of the growing market, and since VW's cars have the certain image and

their quality meets the technical requirements, the company has all chances to realize the plans it has announced.

The core r isk

is the competition growth as other western auto concerns launch their new production capacities.

If VW wants to have some advantages, the company has either to construct a new trading floor or to expand the already existing ones. Moreover, the price factor is also important, as

the company has to solve the issues of localization, because, for instance, the latest statements of Russia about WTO may lead

to the troubles with the import of components.

Updated August 25, 2008

   According to the results of 1H 2008, the vodka segment with more than RUR 100 a bottle, where the majority of the federal brands are presented, became for the first time larger than the "people's" segment with less than RUR 100 a bottle, and the stake

of the Top 10 of the vodka companies approached the mark of 50%, as calculated the agency Business Analytica. The regional producers have also faced the pressure of the federal companies: the investment bankers and market participants fix the growth of offers about the sale of the regional distilleries.

   The company controlling more than 10% appeared at the Russian vodka market for the first time. According to the data of Business Analytica (BA) for 1H, Russian Alcohol Holding occupies 10,9% of the market in value terms and heads

the rating. The indices of the ex-leader – Veda Holding – dropped from the former 9,1 to the current 7,5%, and Synergy Holding entered the market for the first time and took the 3^rd place in the rating with 5,2% (2,6% in 1H 2007). In 1H only ten largest companies were controlling 48,9% of the spirit market. Previous year, their stake was only 44%, and as per the results of 2007 – 46,3%, according to the data of BA. In the end, the Top 10 will cross the market mark of 50%, head of Ad hoc department for management with BA' s client

s Snezhana Ravlyuk is convinced.

   The stake of the federal companies is growing foremost due to the stake reduction of the smaller regional market players, Parliament Groups co-owner Sergey Kupriyanov is convinced.

The companies spend many facilities on the promotion of the federal brands: Synergy is planning to allocate $70 million in the forthcoming season; experts estimate Russian Alcohol's investments

at $50 million annually; and JSC Omskvinprom has announced the sum of more than $20 million.

   The investments in the marketing are quite useful.

According to the data of BA, in 1H 2008 the average price segment of vodka (RUR 100-130 for 0,5 L), where the majority of the federal brands are presented, has exceeded the "people's" one (RUR 70-100 for 0,5 L) by capacity for the first time: 39,3% against 38,3% respectively. "The margin on the "budgetary" vodka is minimal, and you can't reach considerable volumes and increase the market stake selling

the premium one.

It is obvious that more than a half of the large companies' sales falls to this segment", the head of Rosspirtprom State Unitary Enterprise management of foreign relations Dmitry Dobrov explains. However, the rise of the average retail price for vodka is conditioned by the range of the external factors – excise rate growth, growth of production costs and purchase prices for grain, as he adds.

   The organic growth of the largest Russian vodka companies and the last public M&A deals – the sale of such companies as Parliament Groups, Russian Alcohol, and the sale of such brands as Myagkov and Beluga – resulted in the growth of offers among the regional players, as Sergey Kupriyanov marks.

The managing director and the head of Renaissance Capital's Spirits division Piter Vankhenke marks that lately he almost once in a week gets offers about the sales from the regional distilleries. However, the expert marks that it will be quite difficult for the majority of the regional companies to reach the attractive terms within the sale: they don't have the up-to-date production technologies, prospective and profitable brands and the substantial market stake. Under these conditions, those producers that can be interesting for the investors have to assess their business realistically.

So, the co-owner of the Russian vodka company heard that Samara region's largest vodka distillery Rodnik would be sold, and the stockholders of another company started talks about the purchase of this production.

"The deal fell through", complains the source.

"The owners of the company with the only prospective and interesting brand asked more than $100 million, when the distillery's real price is no more than $60 million". Rodnik owners refused to comment.

Top 10 of the largest vodka producers in Russia

Source: Business Analytica, the price data of the cities with more than 100 000 people.

Stakes of price segments at Russia's vodka market

Source: Business Analytica, the price data of the cities with more than 100 000 people.

Updated August 21, 2008

Recently several statements about intensification of the Chinese automakers' projects in Russia were announced at once.

Despite the severe obstacles in the way of China's companies in Russia, the prospect of settling at the growing market is of primary importance for the players from the most densely populated country in the world.

The Taganrog Automobile Plant (TagAZ) reported that it concluded certifying such cars as Vortex Estina (former Chery Fora) and Chery Tiggo of its own production. Welding and assembling of these makes will be performed in the present TagAZ's lines in the active production departments. So, it means that the quality of the welding and assembling will equal the level of cars produced in Taganrog. The technological upgrades made by the plant's specialists resulted in the significant increase of ruggedness and safety of car's body, since this was proved by the results of frontal and side crash tests.

As for the other rules, the produced cars meet Russia's safety requirements. This factor is of essential importance for the promotion of products at the Russian market, as analysts consider. Still, the Chinese cars' quality and safety raise some doubts. In the nearest future, TagAZ plans to receive "Vehicle type approval" to the indicted cars and by August-end the plant starts shipping the trade cars to dealers.

As it came out recently, the Cherkessk auto plant, Derways, produced the pilot batch of Lifan Breez cars with the hatchback body. The release of this make takes place on Lifan's booth within the framework of the International Moscow Auto Salon 2008 in August, 26-September, 7, and in autumn this new development comes to the market. The car is equipped with 1,3L or 1,6L engine, and its configuration comprises power steering, air conditioner, all of the wiring systems, front airbags, ABS and EBD.

Automir Company, the unique distributor of Lifan cars in Russia, will offer to the Russian consumers a Breez hatchback for RUR 290 000-330 000 (without the delivery to Russia's regions).

According to the information of the analytical agency Avtostat (Tolyatti), in July the second Derways's plant launched

a new assembly line, w here

Lifan Breez cars are assembled now (SUVs' production remains in the former departments, but will be stopped in the nearest future). In 2008 the Cherkessk plant is planning to assemble nearly 8 000 of Lifan Breez (of which about 75% are sedans) and nearly 200 000 of Derways's SUVs. In 1Q 2009 Lifan Breez cars will be produced at the full capacity after

the welding and painting departments will be launched. The new enterprise's capacities will total 50 000 of cars per year

with the two-shift operation that will permit to increase the production to 75 000 of units. Moreover, now Derways is designing the third plant with the capacity of 150 000 cars per year, where the company plans to produce the cars coupled with the Chinese and European automakers, with which Derways is holding talks about the cooperation.

The AMUR plant, where the production of the Chinese SUVs has been stopped, launches another project. In Incom-Auto Company, the unique distributor of Geely and ZX in Russia, reported about the temporal closing of the Novouralsk conveyor line. Their production was suspended

at the beginning of the year because of the introduction of Euro 3 toxicity regulations in Russia.

Currently, the AMUR plant completes

the new ecological standard certification of ZX Landmark cars, and in the nearest future, the Chinese SUVs will return to the Novouralsk conveyor line. It is better to remind that their production at the AMUR started in May 2, 2007. The agreement with ZX Auto Company foresees the output of 3 000 Landmark cars per year. Thus, within one and a half year, the AMUR should develop its own production of cars' bodies, and in the nearest 2 or 3 years it should localize no less than 30% of auto components.

In the meantime, Incom-Auto Company temporally imported ZX Landmark cars in 1Q 2008. According to the data of Avtostat, within the indicated period the company sold 694 units of SUVs, as well as ZX Grand Tiger pick-ups.

By the year-end the company plans to sell 1 500 of ZX.

Despite such success, Avtostat's analysts revised the forecasts concerning the growth rates of the Chinese cars' stake at the Russian auto market. "It is almost impossible now to get privileges for the Chinese cars' assembly on the Russian enterprises. Chery's SKD at Avtotor plant with the use of the special economic area's advantages in Kaliningrad is suspended. Geely project at the AMUR plant in Novouralsk goes slow paces. The Cherkessk Derways plant demonstrates very slow assembly rates of the Chinese SUVs as well. Other "Chinese" projects aren't even launched yet. So, the Chinese auto industry doesn't show any powerful penetration to the territory of Russia yet", is said in the company report.

According to the forecast of Avtostat, as per the results of this year the total sales' volume of the Chinese passenger cars totals no more than 70 000 units and only in 2009 it reaches the level of 100 000 cars, though such level has been forecasted for this year. However, one should not forget about the strong pressure of the internal Chinese market that will result not only in the rapid quality and in competitiveness improvement of the Chinese cars, but will compel China's auto industry to look for the entries to the export markets. So, Russia is the most convenient and prospective direction here. Since 2010, the increase of the Chinese cars' sales at the Russian market can reach the 50%-60% level per year, and by 2012 their total volume of realization will attain the mark

of 380 000-400 000 cars per year.

First of all, "the Chinese attack" threatens the Russian economy players, AvtoVAZ in particular. Until recently, the Tolyatti auto giant was almost the monopolist with the price niche of $8 000-10 000. However, China's cars cost less taking to account the relatively equal consumer and operating properties, and this fact favorably differentiates them from the Japanese, Korean, as well the European cars. If the analysts' forecast of the expansion of China's presence at Russia' auto market realize, the cheapest makes of Lada ("the classics" and Samara) will have to fight for a place in the sun. Obviously, the Tolyatti top makes – Lada Kalina and Lada Priora – will compete with such brands as Hyundai, Ford and Kia, as well as

with the cost effective makes of the European and American auto concerns. As for the prospective AvtoVAZ's developments, they will obviously be more expensive and will join the segment of $14 000-18 000, where the competition peaks.

However, as per the last data, the Tolyatti auto giant is preparing the new cost effective development – the plant continues to design Lada Low Cost.

The concept will be accomplished by the year-end. Obviously, this development will replace the out-of-date "classics". If the designers manage to meet the mark of $7 000-8 000 with the appropriate level of the technological, engineering and design solutions, AvtoVAZ will regain its status quo in the lowest price segment of the Russian market.

Updated August 19, 2008

Instead of Eurasia Logistic's IPO planned for 2009, the Kazakh banker Mukhtar Ablyazov decided to take all his developer business

in Russia to a stock exchange. The businessman establishes one company that will comprise such projects as Eurasia Logistic (the chain of warehouses with the area of 9,3 million sq.m.) and Eurasia City (the satellite town in the Moscow region of 9,1 million sq.m.). The established managing company becomes the most expensive Russia's developer company the stocks of which are traded on a stock exchange: its capitalization can reach $23 billion.

One of the investment bankers told about the ongoing consolidation of Mukhtar Ablyazov's developer business. According to him, it goes about the establishment of one company that will manage such projects as Eurasia City (the satellite town construction in Konstantinovo of the Domodedovo region, near Moscow with the total area of 9,1 million sq.m.) and Eurasia Logistic (the chain of warehouse complexes of 9,3 million sq.m.). The developer aware of Mr. Ablyazov's plans said that the investment strategy of the created company was already discussed.

The source assured that the new structure would appear in one and a half month and in the future it would manage the developer projects of Eurasia Investment and Industrial Group.

Eurasia Group constructs the oceanarium on Poklonnaia gora (the Hill of Respectful Salutation) with the total area of 160 000 sq.m; builds Eurasia Tower skyscraper in the Moscow International Business Center Moscow-City (208 000 sq.m) coupled with Pavel Fuks's MCG (Moscow City Group); and constructs the underground shopping mall Paveletsky (120 000 sq.m).

The head of Eurasia Logistic marketing department and GR Nikolay Ditsman says that now is discussed the consolidation possibility of "Eurasia Logistic and Eurasia City's intercrossing functions, such as marketing, finances, and HR". Mr. Ditsman underlined that the possible consolidation would not affect Eurasia Group.

Mukhtar Ablyazov, the co-owner of the Kazakh bank Turanalem, controls Eurasia Group, Eurasia Logistic and Eurasia City. According to the received data, the total area of all projects implemented by three companies attains 19 million sq.m.

The developer business's reorganization is meant for holding IPO of the incorporated company, the sources are convinced.

Mr. Ditsman assures that the ongoing consolidation is "by no means related to the possible IPO of the Group's some businesses". However, previous year Bloomberg agency, with the reference to Mr. Ablyazov, reported that in 2009 Eurasia Logistic could offer investors up to 25% within IPO on the LSE.

Now Eurasia Logistic's capitalization reaches almost $9 billion, as AntantaPioglobal analyst Andrey Verkholantsev calculated.

According to him, if the company consolidating assets of Eurasia Logistic, Eurasia City and Eurasia Group enters the stock exchange, its capitalization can attain $23 billion.

Until recently, the Russian developers didn't manage to break the stock exchange record of Kirill Pisarev and Yury Zhukov's PIK Group.

In May, 2007 the Group placed 25% stocks on the LSE, and its capitalization totaled $12,3 billion. The placement of Lev Leviev and Alexander Khaldey's AFI Development can be named as the other large developers' IPO: in May, 2007 the company sold 19% of stocks to investors, and its capitalization reached $7,3 billion. "Last spring the Russian developers' securities were overheated", Andrey Verkholantsev warns.

According to him, the established company can be estimated at 35% lower of its assets' real cost because of the US mortgage crisis.

Updated August 7, 2008 Rating agency Standard & Poor`s leveled one group down the country risks of Russia's banking system. S&P reacted to support the Bank of Russia had rendered to

the system within financial crisis.

On the other hand, the agency still considers that if recession happens, approximately the half of the Russian banking assets can become troublesome.

As reported the international rating agency Standard & Poor`s, in terms of banking system country risks assessment (BICRA) it shifted Russia from group 8 to group 7. As a result, Russia is the one group with Turkey, Latvia, Romania and Salvador. In the former group, where Russia had been since June, 2007, its neighbors were Kazakhstan and Argentina.

On August, 5 the agency confirmed its assessment concerning Ukraine, and it was placed into the group 10.

The BICRA assessment indicates strong and weak sides of the country banking system as compared to banking systems of other states.

Using the BICRA classification, the agency divides banking systems into 10 groups from the viewpoint of their exposure to the country and branch risks, where the strongest belong to group 1, and the weakest – to group 10.

Also, Standard & Poor`s changed its assessment of the Russian government policy and position in terms of its tendency to provide private banks with support, and shifted it from the group of the countries that "are not binding to provide support", to the group of the countries that "are ready to provide support". According to deputy director of ratings group for financial institutes of the Paris Standard & Poor`s representative office Ekaterina Trofimova, these decisions take account of an effective liquidity management in the Russian banking sector from the Central Bank part in terms of turbulence on the world financial markets since mid-2007.

"What Bank of Russia had undertaken in autumn last year, was above all our core expectations", as Mr. Trofimova marked.

Alfa Bank top-economist Natalia Orlova considers that the rating reassessment is reasonable.

She reminded that one of the first measures the Central Bank had taken last autumn to maintain liquidity in the banking sector was contributions reduction to obligatory provision fund for three months: from 4,5 to 3,5% on external loans and from 4 to 3% – on ruble and retail deposits.

Also, the Central Bank made changes in the refunding instruments list (extended a Lombard list) and started giving direct loans to banks (in particular, URSA Bank and VTB Bank took advantage of it). In spring of the current year the Ministry of Finance started to hold auctions to provide banks with budgetary funds.

However, in Standard & Poor`s suppose that Russia's banking sector is still characterized by "weak institution system and aggressive lending growth that is mainly financed due to external borrowings". Therefore, the agency hasn't changed its level assessment of hypothetical gross problematic assets (GPA) that can arise in terms of realization of reasonable (but not catastrophic) economic recession scenario. As per this assessment, the GPA level (banks do not have guarantees of these assets return) in Russia's banking system totals 35-50%, and it belongs to this level since June, 2007, and earlier it was within 50-75% limits.

"High and rapid lending growth that has been continuing within several years increases the banking sector vulnerability towards the long deceleration or full stop of the economy growth in Russia", as underlines Mrs.

Trofimova. Recently, analysts of UniCredit Aton Company doubted the prospects

of the banking system growth.

They declared about assessment of the overall Russian banking sector towards lowering.