June 17, 2010

Dear St. Petersburg Economic Forum Attendee:

The centerpiece of this weeks Forum is President Medvedevs launch of an international financial
center in Russia. Yet along with plans to create a Russian Silicon Valley and efforts to reshape the
Russian identity, this latest initiative will only succeed if Mr. Medvedev and his ministers go
beyond rhetoric and takes concrete steps to bolster business confidence. This means rooting out
government corruption, strengthening property and contract rights and guaranteeing that the rule of
law is exercised without political intervention.

Bold action is needed quickly. Indeed, despite its reputation as an emerging market powerhouse on
par with China, India and Brazil, Russia continues to lags in economic development and
investment.

In the latest World Competitiveness Yearbook 20101 from Swiss business school IMD in Lausanne,
for example, Russias ranking continues to decline in comparison to other so-called BRIC
countries despite its natural resources and higher GDP advantages. The Yearbook notes,

Russia is richer than it is competitive. Per capita GDP ranks 38th in the world, but its IMD
ranking has slipped eight positions since 2007 to 51stthe lowest among the so-called
BRIC countries. Among the main reasons: poor productivity and efficiency, weak
management practices, unfavorable prices, and low marks for health/environment.

Russias infrastructure problems are well-known internally and externally, given Moscows
predilection for putting politics ahead of economic concerns. Practical implications for foreign
investors include limited foreign ownership of Russian companies that list in overseas exchanges.
Without input into the management of Russian companies to improve accountability and
transparency through external audits and independent boards of directors, Russian companies
remain chimeras, challenging for Western investors to analyze and value.

The recent spasms caused by the Eurozones response to Greeces potential debt default have
roiled global markets, erased gains for the year and pushed markets back to levels from last fall.
Russias stock market have followed suit and is now trading below its 200-day moving average.
These global economic winds are difficult to manage as institutional investors have taken a pause
and are reassessing their risk appetite. Russian IPOs continue to be delayed such as the $300
million RusAgro offering and the $200 million Strikeforce Mining & Resources (SMR) offering.

1
http://www.businessweek.com/globalbiz/content/may2010/gb20100519_766709.htm

Committee for Russian Economic Freedom

Twitter @RusEconFreedom
www.russianeconomicfreedom.org
However other IPO postponements cant be simply chalked up to poor credit markets and recent
IPOs of Russian companies in foreign exchanges provide a buyer beware warning to future
investors. Uralchems $600 million IPO was pulled after failing to meet ecological standards.

Run by Dmitry Mazepin, Uralchem, one of the worlds largest fertilizer producer, is following the
footsteps of Rusal. Uralchem received backing of a state-run Sberbank and is seeking a London
Stock Exchange listing to offset $1.3 billion in debt. If Mazepin is using Rusal as a blueprint for
printing money from foreign investors, there are probably actions taken by Rusal CEO Deripaska
that Mazepin should choose to not emulate.

Rusal is one of the worlds largest aluminum companies and the first Russian company to IPO on
the Hong Kong Stock Exchange. Since its IPO in January 2010, Rusal has fallen 31% from its IPO
price, which is sowing doubts in foreign investors minds about the long-term profitability of debt-
laden Russian companies. It also doesnt build investor confidence when Rusals Depriska gives
himself a $70 million IPO bonus three months after Rusals IPO even as the stock continued its
slide.

Russia continues to be an extremely dangerous place for outsiders to do business, both physically
and financially. Criminal expropriation of assets and profits by government-related individuals and
entities is viewed as a very real risk. Even President Medvedev himself has acknowledged that
expression Russian law is an oxymoron.

Jailed Russian businessman Mikhail Khodorkovskys recent hunger strike raised awareness to the
fact that the legal reforms signed by President Dmitry Medvedev on April 7, 2010 are being
sabotaged. The law resulted from President Medvedevs efforts to halt abuse and intimidation by
officials and to make criminal law more humane after the death of Sergei Magnitsky. It requires
that the courts can no longer use arrest as a pre-trial measure of restraint in cases involving
allegations of certain economic crimes, including the alleged crimes in Khodorkovskys ongoing
case. Through an intermediary, President Medvedev acknowledged Khodorkovskys plea and so
ended the hunger strike.

As you listen to Russian officials and businessmen discuss potential goldmines in investing in
Russia, be mindful that there are numerous landmines as well. For President Medvedevs
modernization to take place, much more needs to be done than making proclamations of pipe
dream technology and financial centers and exhortations to redefine the national character.

Kind regards,

Pavel Ivlev
Chairman
Committee for Russian Economic Freedom

Committee for Russian Economic Freedom

Twitter @RusEconFreedom
www.russianeconomicfreedom.org