#1用 Bank of Russia The Central Bank of the Russian Federation BANK POCCU RUSSIAN FINANCIAL SECTOR Investor presentation July 2019#2Bank of Russia The Central Bank of the Russian Federation CONTENTS Evolution - 4 Reforms - 7 Compliance with international standards - 8 International cooperation - 9 Financial market development strategy - 10 Newsletter - 11 Bank of Russia: Overview Key indicators - 14 Macrofinance - 15 Inflation - 16 Inflation expectations - 17 Economic forecasts - 18 Monetary policy - 20 Russian Macro Update Russian Financial Sector Banking sector - 22 Financial stability - 34 Securities market - 35 Corporate governance - 44 Countering malpractice - 45 Investment funds - 46 Non-state pension funds - 47 - Insurance 48 Commodities - 49 Microfinance - 50 Fintech - 51 Market place - 53 Payment infrastructure - 54 Consumer protection - 57 Financial inclusion - 58 AML/CFT - 59 Cybersecurity-60 2#3Bank of Russia The Central Bank of the Russian Federation BANK OF RUSSIA: OVERVIEW#4Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation EVOLUTION (1) 4 Central Bank of Russia (CBR): founded in 1990 1990 Law on banks and banking activities - Law on Central bank of RSFSR 1992 Russia becomes an IMF member 1995 Law on Central bank of RSFSR: amendments 1996 CBR becomes a BIS member 2001 Law on AML/CFT 2002 Law on the Central Bank of the Russian Federation 2003 Russia becomes a FATF member - Start of the IFRS reporting project - Law on deposit insurance 2005 Introduction of corridor for USD&EUR basket within the exchange rate policy framework 2009 CBR becomes a BCBS member - CBR becomes a CPMI member 2010 Introduction of floating exchange rate corridor 2011 Law on National Payment System 2013 CBR becomes an IAIS member as well as IOSCO member 2014-Inflation targeting regime with 4% medium-term target rate - Introduction of a floating exchange rate regime 2015 - Approval of a new corporate governance code - National Card Payment System Joint-Stock Company (AO NSPK) established Signing of the IOSCO Multilateral Memorandum of Understanding - National payment system "Mir" established and "Mir" card issue started - 2016 Banking regulation in Russia assessed as compliant with Basel II, Basel 2.5 and Basel III (RCAP) 2017 - Introduction of proportional regulation in banking sector - Introduction of new financial rehabilitation mechanism 2018 Bank of Russia joins MMOU IAIS 1990 1995 2000 2005 2010 2015 Focus on Russian financial market development 1992 MICEX established - Law on insurance business 1995 - RTS exchange established 1996 Law on securities market 1996-Law on joint-stock companies 1999 Law on protection of rights of securities market investors Federal Financial Markets 2002 - First edition of the Russian corporate conduct code 2003 - Law on mortgage-backed securities 2011-Law on insider trading - MICEX and RTS merge into the Moscow Exchange - FISS joins FFMS and the latter becomes insurance market regulator 2012- National Settlement Depository obtains status of the Central Securities Depository (CSD) of Russia 2013 National Clearing Center obtains status of the first qualified Central Counterparty (CCP) in Russia 2013 CBR becomes the megaregulator of the Russian financial sector Service (FFMS): founded in 1993 2020#5Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation EVOLUTION (2) Monetary policy framework development 2006 Inflation targeting announced Inflation targeting is represented as a midterm goal in the "Monetary Policy Guidelines" 1998 - 2008 Narrow band 2008 2009 Active inflation targeting Liquidity communications 2012 Transition deadline set "Floating rate and inflation targeting management Instruments are developed, the interest rate corridor is narrowed by 2015" Monetary policy framework development Exchange rate regime development 2013 2014 Key rate introduced Floating exchange rate introduced 5 Dec. 2017 Inflation below 4% Dec. 2018 Inflation 4.3% - (2.5% all-time low in July 2018) 2008 - 2014 Flexible band 2015 Transition to the inflation targeting regime is completed Medium-term inflation target is around 4% Since Nov. 2014 Free floating Ruble#6Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation EVOLUTION (3) Bank of Russia supervises the following key segments Banking sector Market infrastructure, including fair pricing Payment infrastructure Non-state pension funds Asset managers Securities market, including securities market professionals Microfinance Credit rating agencies Insurance sector 6#7Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation 7 REFORMS Promoting price and financial stability, fair competition, newest technologies and best practices Monetary policy Inflation targeting regime adopted with a 4% 宀 medium-term target rate pursued using conventional monetary policy instruments Banking regulation and supervision - - Banking sector rehabilitation in progress, new bank resolution mechanism introduced Proportional regulation introduced and an advanced IRB approach for the largest banks gradually phased in Banking regulation compliant with the Basel II, Basel 2.5 and Basel III standards, maintaining AML/CFT supervision of credit and non-credit financial institutions (according to the Regulatory Consistency Assessment Program (RCAP) 2016) New macroprudential regulation mechanism in force add-ons to risk ratios are introduced and - set by the Bank of Russia Board of Directors Setting up a national rating industry - only credit ratings of Russian national agencies may be used for regulatory purposes Market infrastructure Benefits from infrastructure put in place, tax and regulatory reforms (T+2, CSD and access of ICSDs, up- to-date CCP, Individual Investment Accounts) Marketplace project infrastructure is developed launch of the platform is planned for 2019 Corporate governance JS companies segregation into public and non-public, corporate actions reform, new corporate governance code adopted in 2014, listing rules based on the new corporate governance code, listing committees established Payment infrastructure Russian payment system infrastructure developed and currently in use by all leading international payment systems Payment infrastructure monitoring and supervision System for transfer of financial messages (SPFS) has been developed The Faster Payments System launched in January 2019 Pension system Guarantee fund mechanism introduced Investment horizon for non-state pension funds extended to 5 years Individual pension capital (IPC) accounts legislation is under development#8Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation COMPLIANCE WITH INTERNATIONAL STANDARDS Russia complies with or implements key international standards and best practices 8 FATF Russia's Anti-Money Laundering system is compliant with FATF Recommendations BANK FOR INTERNATIONAL SETTLEMENTS MONEY MONE TARY FUND High FSAP grades in all surveyed segments, including securities market, insurance and payment infrastructure THE WORLD BANK BRD -IDA Russia ranks #31 in DOING BUSINESS-2019 Ratings (#35 in 2018) LINOW TARY FUND OICU-IOSCO Banking regulation is compliant with Basel II, 2.5 and Basel III (RCAP 2016) Bank for International Settlements, IAIS and IOSCO Principles for financial market infrastructures (PFMI) are being implemented Upon monitoring the implementation of the PFMI, the CPMI gave Russia the highest-possible '4' rating National Settlement Depository is eligible for custody arrangements under Rule 17f-7 of the US Investment Company Act of 1940 Russia is a party to the Articles of Agreement of the IMF and upholds free movement of capital Insurance sector has started implementing Solvency II European principles#9Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation 6 INTERNATIONAL COOPERATION Bank of Russia cooperates with international financial institutions, regulators and associations BANK FOR INTERNATIONAL SETTLEMENTS WORLD ECONOMIC FORUM IOPS G20 INTERNATIONAL ORGANISATION OF PENSION SUPERVISORS FSB EAG FINANCIAL STABILITY BOARD MAS ERNATION NI MONET AL 1 + FUN ORGANIZATION THE WORLD BANK WORLD TRADE IBRD-IDA OICU-IOSCO Monetary Authority of Singapore E.A.S.T EAEU Eurasian Economic Union BRICS COUNCIL CONSEIL OF EUROPE DE L'EUROPE COMMITTEE OF EXPERTS ON THE EVALUATION OF ANTI-MONEY LAUNDERING MEASURES AND THE FINANCING OF TERRORISM (MONEYVAL) FIRST ISDA Improving Security Together Safe, Efficient Markets European Securities and esma Markets Authority FATF International Capital Market Association AAI IAA INTERNATIONAL ACTUARIAL ASSOCIATION ASSOCIATION ACTUARIELLE INTERNATIONALE ICMA IAIS INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS OECD BETTER POLICIES FOR BETTER LIVES#10Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation 10 FINANCIAL MARKET DEVELOPMENT STRATEGY Guidelines for the Development of the Russian Financial Market in 2019 - 2021 The Bank of Russia Guidelines for the Development of the Russian Financial Market in 2019-2021 cover the following key areas and activities: Building reliable financial environment Involvement of financial consumer ombudsmen in • • disputes resolution • Increase of personal responsibility of management . • Limited employment sector for malicious (unscrupulous) people • opportunities in financial investor institute Development of qualified Increase of responsibility for substandard sale of financial Unified financial transactions register products . • • • . . Improving financial inclusion and availability of capital Introduction of individual pension capital accounts Introduction of "green" bonds Crowdfunding Introduction of new rules for crediting private-public partnerships Development of concession projects Marketplace project launch Introduction of financial services access points map Development of remote identification and unified biometric system Development of electronic insurance services distribution channels Improving insurance services inclusion in Russian regions ALD • . • • Developing market competitiveness Implementation of integrated road map for developing competition in various sectors of Russian economy approved by the Government Building biometric database Credit history bureau reform Marketplace project launch Faster payment system in force Testing of digital identification platform "Regulatory sandbox" project development Bank of Russia's withdrawal from the capital of banks undergoing resolution after their financial rehabilitation Ensuring financial stability • Control for the population indebtedness and prevention excessive risk accumulation in the segment Risk-based approach to insurance market participants Widening the list of financial non-credit institutions subject to stress testing Improving the toolkit for macroprudential stress testing •#11Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation 11 NEWSLETTER (1) Key news from the Russian financial market 11 June 2019 31 May 2019 Starting from 1 October 2019, banks will be required to calculate customers' PTI (payment-to-income) ratio. Add-ons to the risk ratios applied to consumer loans will be then set by the Bank of Russia depending on both the PTI and the effective interest rate. The Bank of Russia decided to raise required reserve ratios on liabilities to individuals in foreign currency for credit institutions by 1 percentage point to 8.0%, effective from 1 July 2019. Daily amount of regular foreign currency purchases in the domestic market under the fiscal rule is: RUB 16.3 bn from 7 June until 4 July 2019 5 June 2019 28 January 2019 25 January 2019 1 January 2019 RUB 16.7 bn from 14 May until 6 June 2019 RUB 11.6 bn from 5 April until 13 May 2019 RUB 15.5 bn from 7 March until 4 April 2019 RUB 9.7 bn from 7 February until 6 March 2019 RUB 15.6 bn from 15 January until 6 February The Faster Payments System launched and is set to enable individuals to make instant transfers to each other 24/7/365 using a mobile phone number - regardless of in which banks the sender and recipient have their accounts. The Bank of Russia decided to commence from 1 February 2019 deferred foreign currency purchases in the domestic market under the fiscal rule to compensate for the regular purchases suspended in 2018. These purchases will be carried out gradually in the 36 months since the launch date with the daily amount of RUB 2.8 bn. ✓ Capital conservation buffer will be raised in accordance with the schedule approved by the Bank of Russia - it will stand at 1.875% from 1 January 2019, 2.0% from 1 April 2019, 2.125% from 1 July 2019, 2.25% from 1 October 2019, and 2.5% from 1 January 2020. ✓ The SIFI capital buffer (applied to 11 systemically important Russian banks) will remain at 0.65% throughout 2019. The minimum LCR requirements for SIFI raised from 90% to 100% in accordance with the Basel III standards. ✓ The deposit insurance system will cover small enterprises' funds up RUB to 1.4 mln deposited with Russian banks that have joined the deposit insurance system. ✓ Systemically important banks start to calculate the ratio of maximum concentration of exposure per borrower or group of related borrowers and report it to the Bank of Russia. Based of the results of monitoring this indicator, the Bank of Russia will make a decision on the terms and specifics for setting it as a required ratio.#12Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation 12 NEWSLETTER (2) Key news from the Russian financial market 28 December 2018 21 December 2018 21 December 2018 14 December 2018 1 October 2018 25 July 2018 24 July 2018 23 May 2018 The Bank of Russia has permitted Raiffeisenbank to use internal ratings-based (IRB) approach for the purpose of calculating regulatory capital (effective 1 Feb 2019). Introduction of individual investment advisor as a new class of market players. Investment advisory services are subject to regulation. Services shall be provided on the basis of a contract and customer investment profile, taking into account the customer's investment experience, targets and risk appetite. The Bank of Russia raises risk weights on unsecured consumer loans extended after 1 April 2019 with the effective interest rate of 10% to 30%. The Bank of Russia decided to resume regular foreign currency purchases in the domestic market under the fiscal rule that were suspended in 2018, starting 15 January 2019. The Bank of Russia completed transition to the new macroprudential regulation mechanism by introducing risk weight add-ons for capital adequacy calculation by credit institutions while bringing standard risk weights on assets in line with Basel III requirements (effective 8 Oct). Risk weight add-ons for mortgage loans and loans for construction co-funding with LTV > 80% were set at 100%, i.e. 200% risk-weight will be applied to such loans extended after 1 January 2019. The buffer will only be effective as long as the loan-to-value ratio exceeds 80%. ✓ The countercyclical capital buffer for Russian credit institutions is retained at 0% of risk-weighted assets. The Bank of Russia introduces 16 criteria of economic relations between related party-borrowers to calculate N6. Higher requirements introduced to the minimum authorized capital for insurers: RUB 450 mln for life insurers, RUB 300 mln for personal and property insurers and RUB 600 mln for reinsurers. The Bank of Russia raises risk weights on FX loans and securities, effective from July 1, 2018 to: 110% (from 100%) for exporters, 150% (from 130%) for real estate purchase, 130% (from 110%) for other FX corporate loans.#13Bank of Russia The Central Bank of the Russian Federation RUSSIAN MACRO UPDATE#14RUB per 1 USD 80 70 62.5 60 50 40 30 03.15 Source: Bank of Russia, Rosstat Bank of Russia RUSSIAN MACRO UPDATE The Central Bank of the Russian Federation Figure 1: Real GDP growth started to recover in 2016 (YoY, %) 8 KEY INDICATORS Clear signs of macro stabilization across the board Figure 2: Private consumption and investment dynamics (YoY, %) Private consumption Investments 15 6 4.3 9.1 7.9 3.7 10 5.2 5.5 4 2.3 1.8 5 2.0 2.3 2.0 1.5 6.8 1.6 2 0.7 0.7 1.5 0.3 5.0 2.9 0 3 1.0 1.0 1.3 0 1.9 1.0 -5 -1.8 -2 - 9.4 - 2.5 -10 - 11.2 -4 -15 2011 2012 2013 2014 2015 2016 2017 2018 2019E 2011 2012 2013 2014 2015 2016 2017 2018 2019E Figure 3: Russian Ruble volatility remains low while in free-floating 90 Figure 4: Retail sales and real wages dynamics (YoY, %) Real wages Retail sales 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 06.19 15 10 64.3 5 0 -4.4 -5 -10 -8.4 -15 -20 12.14 04.15 08.15 12.15 04.16 08.16 12.16 04.17 08.17 12.17 04.18 08.18 12.18 04.19 1.2 1.6 14#15Bank of Russia RUSSIAN MACRO UPDATE The Central Bank of the Russian Federation MACROFINANCE Solid fiscal and external positions 15 Figure 5: Current account surplus amounted to USD 114 bn in 2018 Figure 6: Strong fiscal position: budget consolidation and fiscal rule I Russian Federal Budget Balance, % of GDP, Ihs Urals, $/bbl, rhs 120 114 12 120 100 8 80 72 60 40 20 ilalı 5.4 4.1 4 100 2.7 80 0.4 -0.7 0 -0.2 -0.8 60 -1.3 -4 -8 -3.9 -6.0 -2.8 -3.9 40 0 -12 20 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Figure 7: Significant international reserves assuring financial stability Figure 8: Sovereign debt to GDP lowest in both EM and DM spaces Developed countries Emerging countries External debt, $bn Reserves, $bn 120% 800 691.7 700 600 500 527.7 400 300 200 External debt/GDP 2018 = 28.6% Reserves/GDP 2018 = 30.5% Reserves cover 16 months of import Import in 2018 = USD 344 bn Russia 109% 98% 100% 495.2 80% 60% 51% 468.8 38% 40% 20% 14% 8% 02.13 05.13 08.13 11.13 02.14 05.14 08.14 11.14 02.15 05.15 08.15 11.15 02.16 05.16 08.16 11.16 02.17 05.17 08.17 11.17 02.18 05.18 08.18 11 18 11.18 02.19 05.19 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of Russia, Bloomberg, Ministry of Finance#16Bank of Russia RUSSIAN MACRO UPDATE The Central Bank of the Russian Federation INFLATION Medium-term inflation target successfully met in 2017-2018 Figure 9: Inflation (YoY, %) 24% 20% 16% 12% 8% 4% 0% CPI ...Non-food products ....Food .....Services Key rate January 2016: Oil prices reach their lowest level in a decade Medium-term inflation target 16 5.1%* -4% 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 Source: Bank of Russia, Rosstat *As of May 31, 2019#17Bank of Russia RUSSIAN MACRO UPDATE The Central Bank of the Russian Federation INFLATION EXPECTATIONS Households and businesses inflation expectations remain elevated Horizon Inflation expectations (absolute numbers), % Households || 2017 III 17 17 2018 2019 IV Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May FOM Next 12 months 11.2 10.3 9.6 8.7 8.9 8.4 8.5 7.8 8.6 9.8 9.7 9.9 10.1 9.3 9.8 10.2 10.4 FOM (observed inflation) Prev. 12 months 14.0 12.4 11.2 10.0 9.9 9.4 9.2 8.3 9.2 10.6 10.3 10.4 10.2 10.1 10.1 10.2 10.1 10.1 9.1 10.6 10.0 FOM (Bank of Russia calculations) Next 12 months 4.0 4.0 2.8 2.5 2.1 2.1 2.2 2.2 2.2 2.6 2.8 3.5 3.8 3.8 4.4 5.4 6.2 5.9 5.7 5.5 9.4 9.3 10.5 10.4 5.4 Professional analysts Bloomberg 2019 Interfax 2019 Reuters 2019 4.0 4.0 4.2 4.4 4.7 4.5 4.6 4.5 4.7 4.6 4.7 4.5 4.5 3.6 3.7 3.8 4.1 4.0 4.1 4.3 4.4 4.3 4.2 4.4 4.7 4.8 4.7 4.6 4.5 4.5 3.9 3.9 4.0 4.3 4.5 4.5 4.5 4.7 5.0 4.8 4.8 4.8 4.8 4.6 Financial markets OFZ IN (option not subtracted) 2023 OFZ IN (option not subtracted) 2028 Inflation expectations (balanced index*) Households 4.9 4.6 4.2 5.1 4.0 3.9 3.8 4.1 4.2 4.5 4.6 5.2 5.3 5.1 5.1 5.1 5.1 5.0 4.9 4.6 4.3 4.3 4.6 4.6 5.0 5.4 5.2 5.2 5.1 4.9 4.9 4.8 4.7 4.3 FOM Next 12 months Next month 0.0 -12.2 -1.3 -5.5 -12.3 -16.1 -5.3 -5.6 -0.5 -0.4 1.0 3.7 10.3 8.2 10.2 6.3 8.9 11.6 14.8 -16.1 -23.0 -18.0 -14.6 -16.5 -11.7 -3.4 -8.4 -4.9 -4.8 -5.5 -5.9 -3.3 14.5 11.9 9.2 1.6 -6.6 13.0 -7.9 13.3 -6.7 -8.9 FOM Businesses Bank of Russia monitoring Next 3 months 7.9 8.6 7.5 7.3 6.8 6.3 7.0 PMI input prices Next month 7.8 9.0 12.2 10.6 9.2 11.4 12.2 PMI output prices Next month 1.0 3.4 6.8 3.0 2.8 2.8 4.0 13.6 6.4 8.8 10.1 10.3 27.4 27.2 28.4 6.6 11.0 11.2 12.5 21.6 22.8 24.2 13.0 23.4 13.7 16.1 18.1 12.7 11.0 9.9 9.5 22.6 22.0 35.0 26.8 23.6 19.8 14.2 8.2 6.6 5.8 7.6 7.6 Retail prices (Rosstat) Next quarter 27 24 24 22 20 20 20 Tariffs (Rosstat) Next quarter 4 3 0 0 5 5 0 5.6 20.4 14.4 10.0 8.8 19 21 1 5.6 Change: - Inflation expectations become better (more than 1 standard deviation) - Inflation expectations become better (less than 1 standard deviation) - Inflation expectations unchanged (±0,2 standard deviations) - Inflation expectations become worse (less than 1 standard deviation) - Inflation expectations become worse (more than 1 standard deviation) *Balanced index is the difference between the shares of those who expect prices to rise and to fall Source: FOM, Rosstat, Bloomberg, Interfax, Thompson Reuters, Bank of Russia#18Bank of Russia RUSSIAN MACRO UPDATE The Central Bank of the Russian Federation 18 ECONOMIC FORECASTS (1) Medium-term outlook for the Russian economy Key parameters of the Bank of Russia's forecast scenarios (growth as % of previous year, if not indicated otherwise) Urals price, average for the year, US dollars per barrel Inflation, as % in December year-on-year 2018 BASELINE HIGH OIL PRICES (actual) 2019 2020 2021 2019 2020 2021 69.8 65 60 55 70 75 75 4.3 4.2-4.7 4.0 4.0 4.2-4.7 4.0 4.0 Gross domestic product Inflation, average for the year, as % year-on-year Final consumption expenditure 2.9 4.7-4.9 4.0 4.0 4.7-4.9 4.0 4.0 2.3 1.0-1.5 1.8-2.3 2.0-3.0 1.0-1.5 2.0-2.5 2.0-3.0 1.8 1.0-1.5 1.8-2.3 2.0-2.5 1.0-1.5 2.0-2.5 2.0-2.5 - households Gross capital formation 2.3 1.0-1.5 1.8-2.3 2.5-3.0 1.0-1.5 2.3-2.8 2.5-3.0 0.8 0.5-1.5 3.5-4.5 3.5-4.5 0.5-1.5 3.5-4.5 3.5-4.5 - gross fixed capital formation 2.9 1.0-2.0 3.5-4.5 3.5-4.5 1,0-2,0 3.5-4.5 3.5-4.5 Exports 5.5 0.8-1.3 2.7-3.2 2.7-3.2 0.8-1.3 2.7-3.2 2.7-3.2 Imports 2.7 1.0-1.5 3.8-4.2 4.5-5.0 1.0-1.5 4.0-4.5 4.5-5.0 Money supply in national definition 11.0 8-12 7-12 7-12 9-13 8-13 8-13 Claims on organisations and households in rubles and foreign currency¹ 11.5 8-12 7-12 7-12 9-13 7-12 7-12 - claims on non-financial and financial organisations in 8.4 7-10 6-10 6-10 8-11 6-10 6-10 rubles and foreign currency, growth as % over year - claims on households in rubles and foreign currency, growth as % over year 22.0 15-20 11-16 10-15 16-21 12-17 10-15 1Banking sector claims on organisations and households means all of the banking sector's claims on non-financial and financial institutions and households in the currency of the Russian Federation, a foreign currency and precious metals, including loans issued (including overdue loans), overdue interest on loans, credit institutions' investment in debt and equity securities and promissory notes, as well as other forms of equity interest in non-financial and financial institutions, and other accounts receivable from settlement operations involving non-financial and financial institutions and households. Source: Bank of Russia#19Bank of Russia RUSSIAN MACRO UPDATE The Central Bank of the Russian Federation ECONOMIC FORECASTS (2) Medium-term outlook for the Russian economy Russia's balance of payments indicators¹ 19 2018 BASELINE (billions of US dollars) (actual) 2019 2020 2021 2019 HIGH OIL PRICES 2020 2021 Current account Balance of trade Exports 114 98 72 50 106 112 103 194 184 160 139 190 203 199 443 434 424 415 443 475 493 Imports 249 250 264 276 253 272 294 Balance of services -30 -33 -37 -37 -31 -35 -40 Exports 55 65 62 62 63 99 66 99 66 70 73 Imports 95 95 100 103 97 105 113 Balance of primary and secondary income -51 -53 -51 -52 Current and capital account balance 113 98 72 50 Financial account (excluding reserve assets) 77 32 16 267 -53 -56 -56 106 112 103 32 ☐ 29 24 Government and the central bank 9 -18 -6 -6 -18 -6 -6 Private sector 68 89 50 22 13 50 35 30 Net errors and omissions 3 0 0 0 0 0 0 Change in reserve assets ('+' - increase, 38 66 56 43 74 83 79 decrease) 1 Using the methodology of the 6th edition of "Balance of Payments and International Investment Position Manual" (BPM6). In the Financial account "+" stands for net lending, ""-for net borrowing. Due to rounding total results may differ from the sum of respective values. Source: Bank of Russia#20Bank of Russia RUSSIAN MACRO UPDATE The Central Bank of the Russian Federation 20 MONETARY POLICY Short-term proinflationary risks have abated compared to March Inflation and inflation expectations • • • • • Annual inflation slowdown is continuing. CPI declined in May to 5.1% YoY and stood at 5.0% YoY as of 10 June. Starting in February, MoM SA consumer price growth has remained close to 4% (annualised). In May, households' and business inflation expectations did not materially change and remain elevated. The Bank of Russia has lowered its end-of-year annual inflation forecast for 2019 from 4.7-5.2% to 4.2-4.7%. The revised forecast takes into account the completion of the VAT increase pass-through to prices (including the influence of secondary effects) and the preservation of relatively favourable external conditions and moderate dynamics of domestic demand. Moving on, according to the Bank of Russia's forecast, annual inflation will stay close to 4%. Monetary conditions: • • Monetary conditions have somewhat eased since the last Board meeting. OFZ yields and deposit rates have declined. The potential for lending rates growth has mostly exhausted. The Bank of Russia's decision to cut the key rate and the year-to-date decline in OFZ yields create conditions for the decline of deposit and lending rates in the future. Economic activity • • • Economic growth in 1H 2019 is lower than the Bank of Russia's expectations. During the first four months of 2019, the growth in general government income outperformed the growth in expenses, which, in part, is due to the shift to 2H 2019 of the implementation of a number of national projects. Taking into account GDP growth statistics for 2018 - 2019 Q1 published by Rosstat, the Bank of Russia lowered its GDP growth forecast for 2019 from 1.2-1.7% to 1.0-1.5%. Internal risks • · The effects of the VAT hike have fully materialised (↓) Elevated and unanchored inflation expectations Medium-term fiscal policy parameters Moderate risks - estimates are mostly unchanged: • Wage movements • Prices of individual food products • Possible changes in consumer behavior External risks • Risks of persistent capital outflows from emerging markets (↓) . Slowdown in global economic growth • Geopolitical factors The volatility of global oil prices Decision as of June 14, 2019 The Bank of Russia cuts the key rate by 25 bp to 7.50% p.a. Signal "...If the situation develops in line with the baseline forecast, the Bank of Russia admits the possibility of further key rate reduction at one of the upcoming Board of Directors' meetings and a transition to neutral monetary policy until mid-2020. In its key rate decision-making, the Bank of Russia will take into account actual and expected inflation dynamics relative to the target and economic developments over the forecast horizon, as well as risks posed by domestic and external conditions and the reaction of financial markets..."#21Bank of Russia The Central Bank of the Russian Federation FINANCIAL SECTOR OVERVIEW#22Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation BANKING SECTOR: CURRENT AGENDA Shaping a favourable operating environment and supporting market competition Proportional banking regulation: differentiating regulatory burden for banks based on their size and simplifying requirements for smaller banks focused on retail and SME lending Risk-oriented supervision: aiming to remedy problematic situations in banks at an early stage New resolution mechanism: reducing financial costs and execution period of the resolution procedure Development of macroprudential regulation: streamlining the regulation, introducing countercyclical approach 22 22 Imminent introduction of PTI ratio in order to affect the consumer lending market more efficiently New regulations to the credit bureaus: authorising several strategic credit bureaus with the function of aggregating information on debt payments Development of banking supervision: introduction of the Basel Committee on Banking Supervision (BCBS) standard on capital requirements for banks' equity investment in funds (since December 16, 2017) Basel II and III in force: Leverage ratio (except for banks with basic license), NSFR - for Domestic- SIBS#23Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation BANKING SECTOR: PROPORTIONAL REGULATION Differentiating regulatory burden for banks depending on their size Regulatory burden depending on license type . • . Minimum size of capital (own funds) - RUB 300 mln Only 5 mandatory requirements, including H1.0, H1.2, H3, H6, H25 ratios • Limitations on international operations Simplified disclosure rules - not required to disclose information on accepted risks, their assessment or management procedures, or any information on financial instruments included in the calculation of their own funds (capital) Technically complicated international standards are non applicable Minimum size of capital (own funds) - RUB 1 bln May carry out all banking operations set forth by the law All mandatory requirements set by the Bank of Russia must be met Must be compliant with all international standards Financial reporting fully compliant with RAS and IFRS 866 Systemically important financial institutions (SIFI) are subject to: Higher capital adequacy requirements • Advanced risk management approach BASIC LICENSE UNIVERSAL LICENSE On 1 June 2017, Federal Law No. 92-FZ dated 1 May 2017 came into force. It envisages the introduction of proportional regulation designed to set up a regulatory balance for banks differing in scale and in the nature of operations. 149 banks hold basic license, as of December 2018. 23#24Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation BANKING SECTOR: NEW RESOLUTION MECHANISM Under new mechanism both costs of resolution and time required have been reduced significantly 24 24 RUB 2.6 tn have been provided to three banking groups (Otkritie, B&N, Promsvyazbank) RUB 758.3 bn for additional capitalization RUB 1.86 tn List of banks under financial rehabilitation procedure 1 Bank FC Otkritie (merged with B&N Bank) 2 Promsvyazbank 4 National Bank TRUST (with ROST Bank and AVB Bank) Asian-Pacific Bank (APB) 5 for liquidity (deposits) * Moscow Industrial Bank (MIB) 6 Volga-Oka Bank (VOCBANK) + Additional RUB 379.1 bn RUB 156.1 bn for the establishment of BNA** RUB 42.7 bn for additional capitalization of Otkritie Bank RUB 9.0 bn for additional c apitalization of APB RUB 128.7 bn for additional capitalization for MIB and RUB 39.9 bn for liquidity (deposits) RUB 2.7 bn for additional capitalization for VOCBANK * Have been fully repaid by the end of 2018 **BNA - Bank of non-core assets based on NB TRUST, ROST BANK and Bank AVB On July 2, 2019, the Bank of Russia's Board of Directors has decided to complete the implementation of bankruptcy prevention measures for Bank FC Otkritie. Currently, the Bank complies with all Bank of Russia's statutory requirements for financial resilience and creditworthiness. Promsvyazbank complies with all capital adequacy and liquidity requirements and operates its business in its usual way. The bank fully repaid CBR deposits placed in the bank during resolution process. As a result of the financial resolution measures and implementation of a new business model in the Asian-Pacific Bank, its financial standing has been stabilised, new capital has been formed, outflow of its clients' funds has been stopped, its solvency has been restored and the Bank's profitability has become stable. The Bank is supposed to be sold in 2020 after it discloses information about its 2019 performance to the public, including potential investors. On 12 July 2019, the Bank of Russia approved amendments to the plan of its participation in bankruptcy prevention measures for the Moscow Industrial bank (MIB). These amendments provide for the Bank of Russia to allocate 128.7 billion rubles for recapitalisation purposes.#25Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation BANKING SECTOR: KEY FIGURES Active supervision and tighter regulation allowed to strengthen the health of the banking sector Figure 10: In 2013-2018 more than 400 licenses were revoked causing almost no impact on the banking sector's total assets Figure 11: Banking sector profitability restored to record high levels Corporate and retail loans, lhs Loans YoY growth*, % rhs 60 10.3% 55 སྤྱ༗⪜བཻgāg 43.0 35 30 50 46.4 45 40 2.6% 1.12.15 1.03.16 I Profit, bln RUB, Ihs ROA, rhs Number of credit institutions, Ihs Banking sector assets, RUB tn, rhs ROE, rhs 16.8 1 400 15.2 1200 978 1000 800 600 400 41.6 200 0 2011 Т 2012 2013 2014 2015 2016 2017 2018 5m19 *423 banks and 44 non-banking credit organisations Figure 12: Loans and deposits volume (RUB tn) and growth rates 112 92.9 1 200 96 994 80 1 000 867 64 800 8 467* 48 600 1.9 32 400 1.9 2 16 200 = = = ∞ 5 2 1 17 14 11 -1 0 0 -4 2013 2014 2015 2016 2017 2018 5m2019 1.06.16 1.09.16 1.12.16 1.03.17 1.06.17 1.09.17 1.12.17 1.03.18 1.06.18 *YoY, ccy adj. by credit institutions operating as of the reporting date Source: Bank of Russia 1.09.18 1.12.18 1.03.19 1.06.19 I Corporate and retail deposits, lhs Deposits YoY growth*, % rhs Figure 13: Banks hold an acceptable level of capital under Basel III Capital adequacy ratio, N1.0, % 11.7% 7.1% 14 15 14.2* 14.5* 14.5* 11 13.5 13.7 14 56.2 13.1 49.7 8 5 2 12.7 13 12 11 -1 10 -4 9 3 2 12.5 12.1 12.2 12.1 2012 2013 2014 2015 2016 2017 *excluding credit institutions under financial rehabilitation procedure 2018 1.05.19 25#263222222 30 27.1 28 26 24 3.8% 20 18 The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW BANKING SECTOR: FUNDING The funding of the banking sector mostly comes from corporate and retail deposits Figure 14: In May 2019 corporate deposits grew by 6.4% YoY to RUB 27.3 tn I Corporate deposits, RUB tn, Ihs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs Figure 15: In May 2019 retail deposits demonstrated growth of 7.8% YoY, reaching RUB 28.8 tn I Retail deposits, RUB tn, Ihs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs 1.01.16 1.04.16 1.07.16 1.10.16 1.01.17 1.04.17 Figure 16: Operations with the Bank of Russia, tn RUB Borrowings from the Bank of Russia (with minus sign) I Claims to the Bank of Russia Net claims to the Bank of Russia, rhs 6.5 4.5 2.5 0.5 -1.5 -3.5 -2.90 -5.5 1.01.16 Source: Bank of Russia 1.04.16 1.07.16 1.10.16 1.01.17 1.04.17 1.07.17 1.10.17 1.01.18 1.04.18 1.07.17 1.10.17 1.01.18 1.04.18 1.07.18 1.10.18 1.01.19 1.04.19 1.06.19 1.07.18 1.10.18 1.01.19 1.04.19 1.06.19 3.03 20% 30 27.3 15% 28 19.2% 6.4% 10% 26 5% 24 23.2 0% 22 -5% 20 -10% 18 1.01.16 1.04.16 1.07.16 1.10.16 1.01.17 1.04.17 1.07.17 1.10.17 1.01.18 1.04.18 1.07.18 Figure 17: Sources of funding, % of total liabilities ■Retail deposits ■Central bank funding As of 1.01.2015 ■ Corporate deposits Other sources As of 1.06.2019 34.0% 23.8% 36.77% 31.01% 12.0% 30.2% 29.43% 2.79% 1.10.18 1.01.19 1.04.19 1.06.19 28.8 30% 25% 20% 15% 7.8% 10% 5% 0% 26#271.01.16 1.04.16 1.07.16 1.10.16 1.01.17 1.04.17 1.07.17 1.10.17 1.01.18 1.04.18 1.07.18 35.5 34.0 32.3 32.5 31.0 5.8% 29.5 28.0 26.5 1.12.15 1.03.16 1.06.16 1.09.16 1.12.16 1.03.17 1.10.18 1.01.19 1.04.19 1.06.17 1.09.17 1.12.17 1.03.18 1.06.18 The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW BANKING SECTOR: LENDING Retail loans remain the key driver of credit growth Figure 18: Corporate lending has stabilized around 6.7% YoY I Corporate loans, RUB tn, lhs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs Figure 19: Retail lending increased 23.7% YoY in May 2019 I Retail loans, RUB tn, lhs YoY (by credit institutions operating as of the reporting date), rhs 1.09.18 1.12.18 1.03.19 1.06.19 30% 16.5 33.6 20% 15.5 14.5 10% 13.5 0% 6.7% 12.5 -10% 11.5 10.7 -20% 10.5 -30% 9.5 -5.4% Figure 20: Share of bad corporate loans* reached 12.4%, while the loan loss reserves to bad loans ratio amounted to 82.9% Share of bad loans, lhs 14.0% 92.3% 12.0% 9.1% 10.0% 8.0% 6.0% 4.0% 2.0% Loan loss reserves to bad loans ratio, rhs Figure 21: Retail loans portfolio demonstrates improved quality: the share of bad loans* reached 7.5% Share of bad loans, Ihs 13.5% 12.9% 12.4% 95.0% 92.5% 12.5% 11.5% 90.0% 10.5% 87.5% 9.5% 95.6% 82.9% 85.0% 8.5% 82.5% 7.5% 80.0% 6.5% Loan loss reserves to bad loans ratio, rhs 111.3% 114.0% 110.0% 106.0% 102.0% 98.0% 7.5% 94.0% 90.0% 1.05.19 * Loans classified into quality category of IV and V according to the requirements of Regulation No.590-P2. Quality category IV - high credit risk (probability of financial losses due to non-performance or improper performance of obligations by the borrower requires its depreciation by 51 to 100 per cent); Quality category V - no possibility of loan repayment due to the borrower's inability or refusal to meet loan commitments, which requires complete (100 per cent) depreciation of the loan. Source: Bank of Russia 1.01.16 1.04.16 1.07.16 1.10.16 1.01.17 1.04.17 1.07.17 1.10.17 1.01.18 1.12.15 1.03.16 1.06.16 1.09.16 1.12.16 1.03.17 1.06.17 1.09.17 1.12.17 1.03.18 1.06.18 1.09.18 1.12.18 1.03.19 1.06.19 1.04.18 1.07.18 1.10.18 1.01.19 1.04.19 1.05.19 16.1 -25% 20% 23.7% 15% 10% 5% 0% -5% -10% 27 27#288.0 7.5 7.0 6.5 6.0 5.6 5.5 -11.4% 5.0 4.5 Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation BANKING SECTOR: UNSECURED CONSUMER LENDING The unsecured lending market is at an ascending stage of the credit cycle Figure 22: Accelerated growth of the unsecured consumer lending continues Unsecured consumer loans, RUB tn, Ihs YoY (by credit institutions operating as of the reporting date), rhs 7.9 30% Against the background of advancing growth in unsecured consumer lending relative to households' income, The Bank of Russia revised the scale of risk weights for such loans in 2017-2018 in order to prevent excessive risk-taking in this segment Figure 24: Risk weights applied to unsecured consumer loans, % 1.01.16 1.03.16 1.05.16 1.07.16 1.09.16 1.11.16 1.01.17 1.03.17 1.05.17 1.07.17 1.09.17 1.11.17 1.01.18 1.03.18 1.05.18 1.07.18 1.09.18 1.11.18 1.01.19 1.03.19 1.05.19 Figure 23: Share of NPLs decreased to 8.6% 20% INPL ratio, lhs 18% 16.9% 16% 14% 12% 103.6% 10% 8% Loan loss reserves to bad loans ratio, rhs 1.01.16 1.03.16 1.05.16 1.07.16 1.09.16 1.11.16 Source: Bank of Russia 1.01.17 1.03.17 1.05.17 1.07.17 1.09.17 1.11.17 1.01.18 1.03.18 1.05.18 1.07.18 1.09.18 1.11.18 1.01.19 1.03.19 1.05.19 ☑24% 25.3% 18% 12% ■March 1, 2017 May 1, 2018 September 1, 2018 April 1, 2019 6% 0% 600% -6% 600 -12% 500 400 300% 127.0% 130% 300 125% 230% 200% 120% 170% +30 200 150% +30 115% +60 +30 +50 +30 +30 +10 110% +20 100 +10 8.6% 105% 140 100 100 110 100% 0 10-15% 15-20% 20-25% 25-30% 30-35% 35%+ Effective interest rate 28#2932L 1 765 4 4.1 12.0% 1.01.16 1.03.16 1.05.16 Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation BANKING SECTOR: MORTGAGE SEGMENT Mortgage lending is characterised by high growth rates and decent asset quality Figure 25: Mortgage loans keep growing fast I Mortgage loans, RUB tn, Ihs YoY (ccy adj., by credit institutions operating as of the reporting date), rhs Figure 26: Share of NPLs remains at historically low levels NPL ratio, lhs 1.07.16 1.09.16 1.11.16 1.01.17 1.03.17 1.05.17 1.07.17 1.09.17 1.11.17 Figure 27: Distribution of mortgage borrowers by LTV 1.01.18 7.0 30% 4.0% 25% 3.5% 3.0% 20% 3.0% 23.3% 15% 2.5% 10% 2.0% 5% 1.5% 113.0% 0% 1.0% 1.03.18 1.05.18 1.07.18 1.09.18 1.11.18 1.01.19 1.03.19 1.05.19 42% ■4Q2017 ■3Q2018 1Q2018 2Q2018 4Q2019 ■1Q2019 35% 28% 21% 14% 11.9% 9.7% 7.1% 7% 4.1% 2.1% 0.6% 0% 10-20% 20-30% 30-40% 40-50% 50-60% 60-70% 70-80% 80-90% >90% LTV interval 1.01.16 1.03.16 1.05.16 1.07.16 1.09.16 1.11.16 1.01.17 1.03.17 1.05.17 Loan loss reserves to bad loans ratio, rhs 141.8% 142% 137% 132% 127% 122% 1.5% 117% Figure 28: Risk weights applied to mortgage loans end 2017 January 1, 2018 January 1, 2019 1.07.17 1.09.17 1.11.17 1.01.18 1.03.18 1.05.18 1.07.18 1.09.18 1.11.18 1.01.19 40.6% 300% 300% 250% 200% 200% +150 200% 22.6% +50 +50 150% +50 +50 100% 150 50% 100 100 1.2% 0% Loans for financing under equity construction agreements with Mortgages with LTV>80% Mortgages with LTV>90% down payment <20% Source: Bank of Russia 1.03.19 1.05.19 112% 29#30Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation BANKING SECTOR: INTRODUCTION OF PTI The Bank of Russia introduces a payment to income ratio for regulation purposes Effective from 1 October 2019, the Bank of Russia intends to set add-ons to the risk coefficients depending on the payment to income ratio (PTI) and the effective interest rate (EIR). EIR interval, % PTI interval, % 0-30 30-40 40-50 50-60 60-70 70-80 80+ 0-10 0.3 0.3 0.3 0.6 0.7 0.9 1.1 10-15 0.5 0.5 0.5 0.7 0.8 1.0 1.2 15-20 0.7 0.7 0.7 1.1 1.3 1.4 1.6 20-25 1.0 1.0 1.0 1.5 1.7 1.8 2.0 25-30 1.3 1.3 1.3 1.8 1.9 2.0 2.2 30-35 2.0 2.0 2.0 2.1 2.2 2.3 2.5 35+ 5.0 5.0 5.0 5.0 5.0 5.0 5.0 EIR interval, % 0-10 10-15 15-20 20-25 25-30 30-35 35+ Value of add-ons 0.6 0.7 1.1 1.5 1.8 2.1 5.0 Source: Bank of Russia Values of add-ons to the risk coefficients applied to unsecured consumer loans subject to calculation of PTI Higher level of add-ons will be applied to loans with PTI exceeding 50%. Banks will calculate PTI in accordance with Appendix 1 to Bank of Russia Ordinance No.4892 U when making a decision on granting a loan in the amount (total credit amount) of P10,000 or more or an increase in the total credit amount on a bank card. Values of add-ons to the risk coefficients applied to unsecured consumer loans for which PTI calculation is not obligatory 30#3152.5% 48.6% 50.0% 47.5% 28.5% 45.0% 42.5% 40.0% 37.5% 35.0% 1.12.15 Source: Bank of Russia 1.12.15 1.03.16 1.06.16 1.09.16 The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW BANKING SECTOR: DEDOLLARISATION Dollarization of the banking sector has notably reduced over the last years Figure 29: Corporate FX lending declined significantly over the 1.12.16 1.03.17 1.06.17 1.09.17 1.12.17 1.03.18 Figure 31: Share of corporate and retail FX deposits in total amount of deposits has fallen Share of FX deposits in total corporate deposits Share of FX deposits in total retail deposits Reserve requirements 1.03.16 1.06.16 1.09.16 1.12.16 Figure 30: Retail FX loan portfolio is insignificant in size past few years I Retail loans, USD bn, lhs Share of FX loans in total amount of loans, rhs I Corporate loans, USD bn, Ihs Share of FX loans in total amount of loans, rhs 4.1 182.5 190 42.5% 4.0 3.5% 180 40.0% 3.5 2.5% 3.0% 170 37.5% 3.0 160 37.4% 2.5% 35.0% 25.8% 2.5 150 2.0% 133.3 32.5% 140 2.0 0.6% 30.0% 1.5% 130 27.5% 1.5 1.0% 120 25.0% 1.0 0.5% 1.06.18 1.09.18 1.12.18 1.03.19 1.06.19 1.12.15 1.03.16 1.06.16 1.09.16 1.12.16 1.03.17 1.06.17 1.09.17 1.12.17 1.03.18 1.06.18 1.09.18 1.12.18 1.03.19 1.06.19 Figure 32: Risk weights applied to the FX assets, % Retail Corporate end 2015 ■May 1, 2016 July 1, 2018 8% 8% 32.5% July 1, 2019 160 150% 150% 1 August 1, 2018 30.0% 2.75 140 130% August 1, 2016 1.75 +20 27.5% end 2015 4.25 4.25 25.0% +50 120 110% +20 +30 22.5% +10 +10 100 21.3% 20.0% 17.5% 80 37.1% 15.0% 100 100 100 100 1.03.17 1.06.17 1.09.17 1.12.17 1.03.18 1.06.18 1.09.18 1.12.18 1.03.19 60 1.06.19 40 FX loans to exporters Other corporate FX loans Commercial FX mortgages Securities of non- resident companies 31#320 2 4 01.16 6 Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation BANKING SECTOR: CAPITAL ADEQUACY High quality capital base and solid capital adequacy levels under Basel III standards 16 Figure 33: Capital adequacy ratio for the banking sector decreased over from 12.9% (1.01.16) to 12.1% (1.05.19) mostly due to the procedures of financial rehabilitation of the large credit institutions Figure 34: Credit organizations with capital exceeding RUB 25 bn have lower buffer vs N1.0 minimum requirement due to the economies of scale 14 9 009 12 10 8 04.16 12,9 2 ∞ 8,9 8,7 07.16 10.16 01.17 04.17 07.17 10.17 01.18 04.18 11 000 10 234 10 000 54 50 43.9 45 9 000 12,1 40 40 8 000 35 9,6 7 000 30 6 000 5 000 RUB bn 25 20 8,9 4 000 15 3 000 2 000 10 1 000 5 0 07.18 10.18 01.19 04.19 Ratio of own funds (capital) to risk-weighted assets (Basel III N1.0 ratio) Tier I capital ratio (N1.2) I Common equity Tier I capital ratio (N1.1) Own funds (Basel III capital), RUB bn, rhs Source: Bank of Russia 0 less than 300 mln rub 300-1 1-10 10-25 25-50 50-100 100- bln rub bln rub bln rub bln rub bln rub 250 bln rub 12.1 13.7 more than 250 bln rub Capital adequacy ratio N1.0 (by capital size) -Capital adequacy ratio N1.0 as of 1.01.2018 (12.1%) 32#33Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation: BANKING SECTOR: SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS The Bank of Russia has approved the list of SIFI and buffers for capital adequacy ratios List of systemically important financial institutions Capital adequacy requirements 33 No Company name 1 Sberbank Assets, RUB tn 26.9 Minimum Bank of Russia requirements for capital adequacy ratios 2 VTB Bank 13.7 Common equity Tier 1 capital ratio (N1.1) Tier 1 capital (N1.2) 4.50% 6.00% 3 Gazprombank 6.3 Total capital adequacy ratio (N1.0) 8.00% 4 Alfa-Bank 3.2 5 Russian Agricultural Bank 3.2 Values of capital buffers 2017 6 Credit Bank of Moscow 2.1 Capital concervation buffer 7 Bank FC Otkritie 1.9 SIFI buffer 8 Promsvyazbank Countercyclical buffer 0% 2018 2019 1.25% 1.875% 2.50%* 0.35% 0.65% 0.65% 0% 0% 1.6 9 UniCredit Bank 1.3 10 Raiffeisenbank 1.1 Minimum capital adequacy ratios for SIFI 2017 2018 2019 11 Rosbank 1.0 N1.1 6.1% 7.0% 7.65% N1.2 7.6% 8.5% 9.15% Systemically important financial institutions account for over 60% of total assets of the Russian banking sector N1.0 9.6% 10.5% 11.15% Source: Bank of Russia *Capital conservation buffer will be raised in accordance with the schedule approved by the Bank of Russia - it will stand at 1.875% from 1 January 2019, 2.0% from 1 April 2019, 2.125% from 1 July 2019, 2.25% from 1 October 2019, and 2.5% from 1 January 2020.#34Bank of Russia RUSSIAN MACRO UPDATE The Central Bank of the Russian Federation FINANCIAL STABILITY Macroprudential policy aimed at Identifying and preventing potential systemic risks Credit activity As the pace of recovery remains inconsistent across lending segments in Russia, credit-to-GDP gap for both corporate and retail lending difference between the actual credit-to-GDP ratio adjusted to currency revaluation, and the long-run trend) is still estimated as negative. This shows that lending remains below the long-term trend. Retail lending risks Unsecured consumer lending continued to grow at a high pace. Outstanding loans increased 25.3% in year-on-year terms in April 2019 to the amount of RUB 7.9tn. The Bank of Russia's Board of Directors has decided to increase add-ons to the risk weights for unsecured consumer loans bearing an effective interest rate of 10-30% by 30bps for loans extended from 1 April 2019. Mortgage loans grow at a steady rate, however, borrowers' debt burden remaining at the same level shows that the current growth does not present any significant risk to the financial stability. The Bank of Russia aims to prevent the build-up of risks related to loans with a high loan-to-value ratio, thus the risk weights for such loans issued after 1 January 2019 were raised from 150% to 200%. These measures are aimed at sustainable development of the mortgage lending segment. Capital adequacy The capital adequacy (Basel III N1.0 ratio) for the banking sector remains at comfortable level of 12.1% as of 1 May, 2019. Decision The Bank of Russia's Board of Directors has decided to keep the countercyclical capital buffer (CCB) rate for Russian credit institutions at 0% of risk weighted assets Rising risk weights for specific credit requirements results in banks increasing their capital reserves to cover potential losses. Therefore considering the uneven recovery of lending, there is no need for a positive countercyclical buffer for credit institutions yet. 34#35Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation 35 SECURITIES MARKET (1) Russia's financial market has been aligned with best international practices [D] Crisis-proven market infrastructure . • • • MICEX and RTS merged into the Moscow Exchange Establishment of a Central Securities Depository and unification of CCP across all asset classes T+2 settlement on equities, T+1 on OFZs, T+0 on corporate bonds Upgraded corporate governance . Creation of a two-tier Quotation List within the stock exchange listing Strong criteria for inclusion in the top-tier Quotation list Streamlined dividend rules for SOES Corporate standards aligned with best international practices Establishing of a Listing Committee at MOEX • • • ៩ ☑ Simplified market access • • Euroclear and Clearstream settlement for equities and bonds Unified collateral pool for equities, bonds and FX markets International clearing system membership; Direct access to FX trading for large corporates Local investor base development (individual investment account system, tax incentives, etc.) Unified license covering both depository and registrar operations. Increased transparency . • Mandatory audited IFRS for all public companies Strengthened regulation to prevent market manipulation and insider trading • Improved disclosure practices . . Report on Corporate Governance Code compliance in the annual report Requirement to have a written description of dividend policy for the top-tier Quotation list Development of basic standards for professional market participants activities#36Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation SECURITIES MARKET (2) Growing a deeper Russian bond market with strong potential Figure 35: Volume of the Russian local bond market, RUB tn Figure 36: Volume of the Russian corporate bond market, RUB tn ■OFZ Corporate Bonds RUB bonds Eurobonds 36 24 24 24 19.8 19.5 20 20 19.1 18.3 20 18.2 17.7 CAGR 16 +20% 12 CAGR 16.0 7.6 7.6 14.7 16 8.0 +16% 8.0 13.1 6.7 11.9 11.3 11.1 11.1 12 9.2 9.2 8.7 7.8 5.2 11.5 11.9 8.1 8 6.7 6.6 8 7.1 10.2 5.9 6.2 9.3 9.7 4.7 5.3 5.4 4.2 4.3 3.5 4 st 3.0 3.6 3.0 2.5 7.2 7.9 4 5.9 2.5 2.2 2.9 3.1 3.5 3.9 4.7 5.0 5.5 4.5 2.9 3.2 3.6 0 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 25 Figure 37: "Bondization" of the Russian financial market | Equity market trading volume, RUB tn Bond market trading volume*, RUB tn 2009 2010 2011 2012 2013 2014 2015 2016 2017 Figure 38: Corporate loans vs corporate bonds in Russia, RUB tn Loans (incl. foreign debt) Corporate bonds (incl. eurobonds) 2018 68 68 70 65 21.2 29% 60 29% 20 16.5 27% 48 15.3 50 15 13.2 10.6 11.2 23% 40 35 10 29 20% 10.8 30 8.7 19% 5 0 HN 20 81% 80% 77% 73% 71% 71% 2013 10 2014 2015 2016 2017 2018 2009 2011 2013 2015 2017 2018 * Except overnight bonds Source: Cbonds, Moscow Exchange#377.6 33.1 7.4 7.2 7.0 6.7 6.8 6.6 6.4 The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW SECURITIES MARKET (3) Russian OFZ market provides relatively high yields amid investment grade reliability Figure 39: Russian OFZ market volume keeps growing I OFZ market volume, RUB tn Figure 40: Zero-coupon OFZ yield curve, % April -18 March-19 1.01.18 1.02.18 1.03.18 1.04.18 1.05.18 1.06.18 1.07.18 1.08.18 1.09.18 1.10.18 Share of non-residents holdings 7.6 40 9.0 35 8.5 26.7 30 8.0 25 7.5 20 7.0 15 6.5 10 6.0 1.11.18 1.12.18 1.01.19 1.02.19 1.03.19 1.04.19 3m 6m 9m 1 2 3 5 7 10 15 20 30 Figure 41: Bond market yields, key rate and RUONIA (% RUB) 23 Cbonds-GBI RU 5Y YTM eff 10.5 Argentina 20 17 14 11 RUONIA Index CBR Key Rate 9.0 Figure 42: EM 10Y bond yields (% USD) on the background of credit ratings Russia's sovereign ratings S&P: BBB- (stable), as of 18 Jan 2019 Moody's: Baa3 (stable), as of 08 Feb 2019 Fitch: BBB- (positive), as of 15 Feb 2019 7.5 Turkey 6.0 Brazit Russia 00 8 5 4.5 Indonesia Mexico SoA Kazakhstan Malaysia Chile 3.0 Hungary Poland China Korea 07.14 11.14 03.15 07.15 11.15 03.16 07.16 11.16 03.17 07.17 11.17 03.18 07.18 11.18 · 03.19 Philippines Peru 1.5 B B+ BB BB BB+ BBB- BBB BBB+ A- A A+ AA- AA AA+ AAA Source: Thomson Reuters, Moscow Exchange, IMF and World Federation of Exchanges 37#38Bank of Russia The Central Bank of the Russian Federation 38 FINANCIAL SECTOR OVERVIEW SECURITIES MARKET (4) Demand for OFZS placements remains sustainably high Figure 43: OFZ placement dynamics in 2018 and 2019 (RUB bn) 90 60 80 Foreign bank subsidiaries 9 16 Non-credit financial institutions Other banks Systemically-important credit institutions Activity ratio/Meet demand ratio*, rhs 8 | Non-residents 10 70 60 60 50 40 30 20 10 0 10.01.2018 24.01.2018 07.02.2018 21.02.2018 07.03.2018 21.03.2018 04.04.2018 25.04.2018 23.05.2018 06.06.2018 20.06.2018 04.07.2018 18.07.2018 01.08.2018 15.08.2018 03.10.2018 17.10.2018 31.10.2018 14.11.2018 28.11.2018 12.12.2018 26.12.2018 16.01.2018 30.01.2019 13.02.2019 27.02.2019 13.03.2019 27.03.2019 *Starting January 1, 2019 the "activity ratio" calculated as the volume of demand for OFZ to the volume of OFZ supply announced by the Ministry of Finance was replaced by the "meet demand" ratio calculated as the volume of the placement to the volume of demand for OFZ Source: Bank of Russia, Ministry of Finance, National Settlement Depository 7 9 5 4 3 2 1#393.0 2.5 2.5 2.0 1.5 1 200 1 000 800 600 400 200 0 The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW SECURITIES MARKET (5) Russian equity market provides growth potential and attractive dividend yields Figure 44: Russian Equity market cap, bln RUB & bln USD Figure 45: Domestic market capitalization to GDP ratio reflects undervalued Russian financial market (of GDP, %) Market cap, bln RUB, rhs ■Market cap, bln USD, Ihs 45 000 180 40 000 150 35 000 120 30 000 90 25 000 60 20 000 30 15 000 1.09.16 1.11.16 1.01.17 1.03.17 1.05.17 1.07.17 1.09.17 1.11.17 1.01.18 1.03.18 1.05.18 1.07.18 1.09.18 1.11.18 1.01.19 1.03.19 0 UK 2016 2017 1.01.16 1.03.16 1.05.16 1.07.16 Figure 46: Russian equities market trading volumes proves stable Trading volumes, RUB tn, lhs US China Russia Euro area Japan Korea Russia's 2018 stock market capitalization to GDP = 39.5% Figure 47: Dividend yield (12M): Russia vs. EM, % Russia Emerging Markets 1.0 0.5 1.664 0.0 03.15 06.15 09.15 12.15 MOEX Index, rhs 2.499 2.500 6.5 2.3 2.350 5.5 2.200 4.5 2.050 3.5 1.900 2.5 1.750 1.5 1.600 0.5 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 Source: Bloomberg, Moscow Exchange, International Monetary Fund and World Federation of Exchanges 1.01.16 1.03.16 1.05.16 1.07.16 1.09.16 1.11.16 1.01.17 1.03.17 1.05.17 1.07.17 1.09.17 1.11.17 1.01.18 1.03.18 1.05.18 1.07.18 1.09.18 1.11.18 1.01.19 1.03.19 48.5% 39.5% 2.8 5.8 39#40The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW SECURITIES MARKET (6) Russian equity market remains undervalued despite strong performance in recent years Figure 48: Russian MSCI index vs EM peers (05.01.15 = 100%) Figure 49: Forward P/E ratio (12m), MSCI Russia vs MSCI EM 175% 150% 125% 100% 75% 50% 25% 12.14 03.15 EM Russia China Brazil India -Turkey MSCI Russia, Ihs MSCI EM, Ihs Russia to EM P/E discount, rhs 14.0 -35% 12.3 12.0 -40% 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 Source: Bloomberg 10.0 8.0 6.0 4.0 2.0 12.14 03.15 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 03.19 -45% -50% -52% 5.8 -55% -60% -65% 40 40#41Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation SECURITIES MARKET (7) Moscow Exchange group offers the best infrastructure in its class TRADING CLEARING SETTLEMENT 41 44 Moscow Exchange listing and electronic trading, including DMA services National Clearing Centre CCP, risk and collateral management, clearing, risk netting National Settlement Depository CSD, settlement, depository, safekeeping, repository ✓ MOEX captures the entire value chain for end- customers, offering a one-stop shop for listing, risk management, market data, multi-asset trading, clearing settlement and custody ✓ MOEX is strategically positioned to benefit from the development of Russia's capital markets in the coming years ✓ Fully vertically integrated infrastructure with regulation and oversight by the Bank of Russia Eligible collateral to trade any asset class ✓ Foreign investors have Direct Market Access (DMA), Sponsored Market Access (SMA) and International Clearing Membership (ICM) services at their disposal Source: Moscow Exchange#42Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation SECURITIES MARKET (8) Russian financial market has necessary infrastructure and regulation for trading OTC 42 42 Robust legal protection in place Enforceability of close-out netting in derivatives and repo markets is confirmed by relevant legal opinions (ISDA, ICMA) ✓ Russian standard documentation developed by SROs and approved by the Bank of Russia Russia adheres to G20 decisions in respect of OTC derivatives reforms ✓ Trade reporting to repositories (two authorized repositories available) ✓ National Clearing Centre provides clearing services for OTC trades Variety of instruments and service providers Non-financial counterparties have access to a broad range of hedging. instruments offered by banks (including structured products) ✓ National Settlement Depository provides collateral management services (repo)#43The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW SECURITIES MARKET (9) Rapidly developing retail market with strong tax incentives and accelerating FinTech ✓ 2.7 million retail investors were registered with the Moscow Exchange at the end of December 2018 ✓ More than 190 000 retail investors were reported as "active" traders Figure 50: Number of active retail client accounts ■Equities market Recent regulatory changes Individual Investment Accounts for private investors since 2015. • RUB 1 mln max sum to invest in a year. - More than 528k accounts opened as of December 2018 Derivatives market FX market 190 235 78 639 74 911 57 946 34 196 28 068 895 8 038 44 860 15 159 109 538 55 476 46 285 25 461 60 651 December 2013 December 2014 December 2015 December 2017 December 2018 Source: Moscow Exchange - max Tax deductions for IIA type A RUB 52 000; for IIA type B - at the rate of investment income Corporate bonds with yield of under 12.75% became tax-exempt on January 1, 2018 Capital gains on securities held for more than 3 years are tax-exempt Retail investors allowed to open brokerage and management accounts online 43 33#44Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation 44 44 CORPORATE GOVERNANCE New corporate governance standards reflect best international practices Corporate governance JSC Law amended July 2018: ✓ Strengthening the role of the Board of Directors in JSC ✓ Mandatory risk-management, internal control in public companies Mandatory audit committees and internal audit functions in public companies (starting July 2020) Disclosure reform Listing reform on Moscow Exchange Simplified listing structure: 2 quotation lists and 1 non- quotation list instead of a 6-tier system Stricter corporate governance criteria for inclusion in the top-tier list Stricter requirements for Directors to be considered independent Next stage 2019 Only ratings by approved Russian rating agencies will be considered valid for listing requirements for Russian issuers' bonds ✓ Corporate actions reform to Information on corporate actions cascaded shareholders from issuer through CSD and nominees E-proxy voting and E-voting platform for shareholders has been developed A number of Russian companies have already implemented an online voting system in 2017 ✓ E-voting for bondholders has been implemented and successfully tested Securities New types of securities - structured bonds, perpetual bonds, priority dividends non-voting preferred shares Blockchain technology NSD used a blockchain-based settlement platform to complete placement of an inaugural a RUB 500 mln bond issue in 2017 In 2018 first Russian bonds via smart contracts were issued for a total sum of RUB 750 mln CBR corporate governance report: annual monitoring of corporate governance practice and publication of the report on the CBR official site (only in Russian)#45The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW COUNTERING MALPRACTICE Bank of Russia supervises conduct of financial market participants to promote fair competition • Bank of Russia has implemented an effective system for countering malpractice including market manipulation and insider trading, aimed at ensuring investors' equality and fair pricing. Insider trading and market International cooperation manipulation C • Bank of Russia successfully eliminates competitive advantages of unlicensed firms by decreasing their number. Since 2015 detriment caused by financial pyramids decreased by more than 5x times Unlicensed firms and Pyramid Scheme •In 2015 Bank of Russia became a signatory to the IOSCO MMOU •Intense cooperation with foreign financial market regulators in terms of information exchange, including confidential information •Elaboration on international initiatives Enhanced consolidated market analysis •Bank of Russia improves continuous monitoring of on-exchange trading for the purpose of maintaining financial stability and preventing system shocks caused by misconduct 45 55#4609.16 12.16 1135 1150 1131 03.17 06.17 09.17 Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation and in cash* ■Bank deposits ■Cash ■Insurance and pension assets Securities ■ Other 4.0 12% 13% 12% 23% 6% 3.6 42% 51% 53% 13% 27% 50% 61% 3.2 37% 61% 2.8 2.5 23% 6% 25% 69% 2.4 32% 21% 59% 39% 41% 32% 2.0 3.1% 24% 20% 18% 14% 1.6 USA UK Germany Italy Brazil Mexico China India Russia INVESTMENT FUNDS Local institutional investor base: the potential of investment funds Figure 51: Majority of savings in Russia is held on bank deposits Figure 52: Assets of investments funds in Russia (RUB tn) | Assets, RUB tn, Ihs 1132 1136 1131 1117 1 109 1111 *As of the end of 2017 Source: World Bank, IMF, Bank of Russia, Moscow Exchange 12.17 03.18 Figure 53: Number of investments funds in Russia by the type Closed-end ■Open-end Interval ETF 1534 1553 1402 1500 1504 1497 1485 1464 1456 1440 1 4 46 353 47 43 356 36 332 37 331 39 327 43 325 43 42 40 228 312 303 268 Figure 50: Breakdown of investment funds' assets by the type (as of December 31, 2018) 9% 16% Cash ■ Equities ■ Bonds 20% 06.18 09.18 12.18 18% 1128 03.15 06.15 09.15 12.15 6% 25% 5% .1% 03.16 Assets to GDP, %, rhs 3.7% 3.7 3.6% -3.5% 3.5% 3.4% 3.3% 3.2% 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 ■ Government bonds Foreign securities ■Real estate ■ Authorized capital Other 3.1% 46 46#47Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation 47 17 NON-STATE PENSION FUNDS Local institutional investor base: the potential of non-state pension funds Bank of Russia became a regulator of the pension system in 2013. Since then a number of changes has been adopted to strengthen the non-state pension system: ✓ 'one-year non-loss' rule was extended to 'five- year non-loss' rule ✓ stress-testing mechanism introduced ✓ customers are now encouraged to stay with the same fund for not less than 5 years ✓ since 2014 the Deposit Insurance Agency (DIA) guarantees the nominal value of mandatory savings ✓ non-state pension funds are to bear fiduciary responsibility (since March 18, 2018) ✓ non-state pension funds are to disclose their investment portfolios ✓ corporatisation of non-governmental pension funds (NPFS) completed ✓ work on individual pension accounts reform is in progress Source: Bank of Russia Figure 54: Pension assets in Russia (RUB tn) I Non-state pension funds. Reserves Non-state pension funds. Mandatory savings State pension fund. Mandatory savings 5.67 5.28 5.59 4.76 3.82 3.97 1.11 1.21 1.25 0.99 0.83 0.90 1.71 2.15 2.47 2.64 1.09 1.13 1.90 1.94 2.06 2.02 1.91 1.78 2013 2014 2015 2016 2017 3Q2018 Figure 55: Pension system asset allocation (as of September 31, 2018, %) Cash Equities Corporate bonds Government bonds Other 4% 5% 23% 38% 35% 14% 38% 36% 44% 0% 16% 21% 8% State pension fund NPFs Mandatory savings NPFs Reserves#48The Central Bank of the Russian Federation Bank of Russia FINANCIAL SECTOR OVERVIEW INSURANCE Local institutional investor base: the potential of insurance market Figure 56: Premium volume is gradually growing Figure 57: Assets hit 2.8% of GDP Assets, RUB bn, Ihs Reserves, RUB bn, lhs Assets as % of GDP, rhs 400 350 300 266.4 250 200 1.3 150 100 50 112.9 03.15 06.15 09.15 12.15 Premiums, RUB bn, Ihs Payment of claims, RUB bn, lhs Premiums as % of GDP, rhs 385.7 1.7 3 150 1.6 2 700 1.4 1.5 2 250 1 609.4 1.4 1 800 153.5 1.3 1 350 2.0 1.2 900 1.1 450 943.3 1.0 0 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 2.8 3.0 2.8 2 918.9 2.5 2.3 1 831.1 2.0 03.15 06.15 09.15 12.15 03.16 06.16 09.16 12.16 03.17 06.17 09.17 12.17 03.18 06.18 09.18 12.18 Figure 58: Premium structure in 2018 shows high level of market diversification Figure 59: In 2018 market remained highly competitive with the Herfindahl-Hirschman Index equal to 550.6 ■Capital, % Premiums, % Assets, % Life insurance Corporate property 27% 31% insurance Private medical insurance Motor car insurance 15% 6% ■Compulsory motor TPL insurance 10% Other 11% Source: Bank of Russia Top-20 Top-10 0 10 20 20 30 40 40 50 60 60 69.7 65.4 62.5 10 70 60 80 77.5 80.6 76.7 90 90 1.8 1.5 1.3 48 48#49Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation 49 49 COMMODITIES Urals futures trading launched to set a price benchmark for Russian export oil ✓ Deliverable SPIMEX Urals Crude Futures contract is a new oil pricing mechanism allowing a direct quotation of exported Russian oil without reference to other crude oil grades traded on global energy markets ✓ Transparent pricing process is based on exchange-traded futures contracts reflecting the supply-and-demand equilibrium reached on the back of a large number of trades concluded on the exchange by a wide range of market participants and setting an arm's length price for the relevant commodity ✓ Deliverable SPIMEX Urals Crude Futures contract trading was launched on 29 November 2016 ✓ Access to the SPIMEX futures contract trades is granted to Russian and foreign legal entities as well as to Russian individual entrepreneurs. Only legal entities (both Russian residents and non-residents) are able to conduct physical deliveries of crude oil ✓ The SPIMEX Urals Crude Futures contract is settled by physical delivery upon expiration. Such a futures contract has a direct link with the crude oil spot market and prevents price manipulation. Physical delivery of crude oil under the contract is effected against positions opened as of the relevant contract expiration date#50Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation 50 MICROFINANCE Microfinance is a vital part of financial system complementing banks to provide better financial inclusion MFIS ✓ Microfinance organizations (MFOS) ✓ Consumer credit cooperatives ✓ Credit Housing communities ✓ Pawnbrokers ✓ Agricultural credit cooperatives Microfinance institutions (MFIs) provide financial services for customers with no access to banking products, service regions with an insufficient bank presence, offer financial products missing from bank product lines, boost financial awareness and help clients build their credit histories. CBR keeps a state register of MFIs and supervises MFIs directly and via SROs. Currently there are about 15 600 MFI companies. Roughly 25% of the entire MFO microloan portfolio are microloans to small to medium enterprises (bearing 8% interest rate thanks to state support via MFOs). Payday Loans, i.e. small, short-term unsecured loans (up to RUB 30k for 30 days) at high rates, are not a development priority and account for some 20% of the entire MFO microloan portfolio.#51Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation 51 FINTECH (1) Russia provides a favorable environment for FinTech development Goals of the Bank of Russia as a high-tech regulator Facilitate the competition in the financial market Enhance accessibility, quality and range of financial services Lower risks and costs in the financial market Advance the level of competitiveness of Russian technologies Key areas of development 1. Legal regulation of FinTech, including protection of consumer rights and security of personal data 2. Development of digital technologies in the financial market and development of digital infrastructure 3. Transition to electronic interaction between the Bank of Russia, government, market participants and their clients 4. "Regulatory Sandbox" for experimentation with innovative financial technologies, products and services 5. Cooperation within the Eurasian Economic Union and development of single payment area for member states 6. Ensuring technological safety and sustainability in FinTech implementation 7. Development of human resources in the financial market#52Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation 52 42 FINTECH (2) Russia provides a favorable environment for FinTech development & FINTECH Ф ASSOCIATION Main goals Implementation of new technological solutions for the development of the Russian financial market ✓ Promotion of digitalization of the Russian economy Established on 28 December 2016 by the Bank of Russia with participation of the largest financial institutions Main activities (2017-2018) Digital identification ✓ Distributed ledger technology Faster payment system ✓ Open API ✓ Big Data#53Bank of Russia BANK OF RUSSIA: OVERVIEW The Central Bank of the Russian Federation 53 MARKET PLACE Shaping future of financial services experience in Russia ✓ New system for online sales of financial products ✓ Aimed at replacing traditional sales channels with websites and smartphone apps which will enable customers to compare multiple financial product offers ✓ CBR arranges the regulatory environment necessary for the project Development of competitive environment and financial services optimization Competition Customers Equal access to financial market Technologies Open API and fast payments system#54Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation 54 PAYMENT INFRASTRUCTURE (1) Bank of Russia Payment System ✓ Money transfer services are provided to: ✓ all credit institutions (financial market infrastructure included) ✓ Russia's Federal Treasury and its agencies ✓ other Bank of Russia clients ✓ Average daily figures: 6.4 mln payments, RUB 6.9 tn ✓ 84% of funds are transferred via the real-time service ✓ New liquidity management tools, future value date settlement functionality, cash- pooling services for Federal Treasury and multibranch banks introduced ✓ Transfer timeframe is adapted to Russia's 11 time zones - system operates from 1 a.m. to 9 p.m., Moscow time. ✓ The Faster Payments System (FPS), launched on 28 January 2019, is set to enable instant C2C interbank transfers 24/7/365 using mobile phone number. At the next stage - C2B (customer-to-business) and C2G (customer-to-government) payments to be included#55Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation PAYMENT INFRASTRUCTURE (2) Advancing supervision and oversight to ensure stable development of the payment infrastructure the ✓ Supervision of payment infrastructure: monitoring organisations' compliance with the Russian law. Applies both to banking and non-banking institutions providing payment infrastructure and payment services ✓ Oversight of the payment infrastructure: Figures for early 2019: 36 payment systems and more than 400 institutions supervised within the National Payment System (NPS) NPS supervision is risk-oriented. Proportionate remote supervision approach is being introduced to the NPS improving institutions' operations following the Bank of Russia recommendations based upon Objects supervised for compliance with CPMI/IOSCO Principles for Financial Market Infrastructure (PFMI): 2 systemically important payment systems, 4 socially important payment systems international best practices ✓ Bank of Russia international cooperation in supervision and oversight of the payment infrastructure High PFMI compliance ratings. NPS operators implement approved action plans based on the Bank of Russia recommendations 55#56Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation NATIONAL PAYMENT CARDS SYSTEM Setting the standards for the payment industry to provide convenient and stable services 56 NSPK NATIONAL PAYMENT CARDS SYSTEM MIR ✓ Russian national payment system "Mir" was created on 23 July 2014 ✓ Operator of Mir Card Payment System is National Card Payment System Joint-Stock Company, 100% of its shares belong to the Bank of Russia ✓ More than 53 mln "Mir" payment cards were issued by year end 2018 in Russia ✓ Co-badging projects with international payment systems: Maestro, JCB, AmEx and UnionPay ✓ Support of mobile payment service Samsung Pay ✓ Mobile payments service MirPay is launched ✓ PayPass system has been successfully implemented ✓ Payment system "Mir" launched a loyalty program which allows card holders to receive cashback "Mir" payment cards are accepted in the Republic of Armenia, Kyrgyz Republic, as well as in the infrastructure of VTB Bank in the Republic of Kazakhstan and the Republic of Belarus#57Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation CONSUMER PROTECTION Financial consumer and investor protection as one of priorities for 2016-2018 KEY FINANCIAL CONSUMER PROTECTION WORKSTREAMS ● ● ● ● Consumer and investor complaints handling 3 Differentiation of consumer protection requirements Conduct supervision model Setting requirements for financial organizations in order to improve consumer and investor protection Dispute resolution (ombudsman) ווין Financial awareness improvement Disclosure requirements for consumers and investors Disclosure requirements for information on risks 57#58Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation 58 FINANCIAL INCLUSION Strong international background helps to promote financial inclusion - G20 GLOBAL PARTNERSHIP FOR FINANCIAL INCLUSION (GPFI) Acts as an inclusive platform for G20 countries, non-members and other parties for knowledge and experience sharing, policy advocacy and coordination in promoting financial inclusion - Russia is an original GPFI member since November 2010 Endorsed the 'original' FIAP in 2010 and the 'updated' FIAP in 2014 and 2017 - G20 World Bank · - OECD conference on empowering consumers of financial products and services was hosted in Moscow in June 2013 The third annual GPFI Forum was held in St. Petersburg in 2013 Financial Inclusion Promotion by the Bank of Russia - Improving financial inclusion for people and SMEs is one of financial market development priorities for 2016-2018 - - The Bank of Russia annually publishes financial inclusion indicators and the Report on Financial Inclusion in Russia (with supply-side and demand-side data starting from 2015) The technical note on financial inclusion was prepared in the context of a joint WB / IMF FSAP mission in Russia during February-March 2016; the note was published in May 2016 - Early in 2018 the Bank of Russia launched the Financial Inclusion Strategy in Russia for the period of 2018-2020 - ALLIANCE FOR FINANCIAL INCLUSION (AFI) The global knowledge exchange network empowering policymakers to increase access to quality financial services for the less well-off communities and households · The Bank of Russia became a member of AFI in February 2014 In September 2014 the Bank of Russia joined the Maya Declaration setting up the priorities for AFI members on financial inclusion In September 2015 the Bank of Russia joined the Maputo Accord to improve funding accessibility for SMES The Bank of Russia and AFI co-hosted the 'Financial inclusion and shadow banking: innovation and proportional regulation for balanced growth' conference in November 2015 In June 2016 the Bank of Russia hosted the AFI GSPWG meeting. CBR hosted the 2018 AFI Global Policy Forum#59Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation AML/CFT Bank of Russia maintains AML/CFT supervision of credit and non-credit financial institutions Russian AML/CFT law is based on International Standards on Combating Money Laundering (FATF Recommendations) 59 2008 The FATF placed Russian Federation in the regular follow-up process 2013 The FATF recognized that Russia could be removed from the regular follow-up process Key measures taken in 2008-2013: 2018-2019 4th round of mutual evaluation, joint FATF/MONEYVAL/EAG evaluation of Russia ✓ Enhancing corporate transparency by introducing beneficial ownership requirements to the AML/CFT Law ✓ Prohibiting credit institutions from opening and maintaining anonymous accounts or accounts in fictitious names ✓ Addressing certain shortcomings in the criminalization of terrorist financing ✓ Amending legislation to prevent criminals from becoming major shareholders in financial institutions ✓ Strengthening instruments to freeze terrorist assets domestically or on request of other countries ✓ Abolishing the threshold which decriminalized self-laundering of amounts lower than RUB 6 mln and which was not in compliance with the FATF Recommendations Source: Financial Action Task Force#60Bank of Russia FINANCIAL SECTOR OVERVIEW The Central Bank of the Russian Federation 60 CYBERSECURITY Key initiatives in information security and cybersecurity 010101 001010 $ Countering international and cross- border crime Addressing the rise in money withdrawals via illegal cross-border transactions Compiling a general register of most typical cyber threats and computer attack methods Combatting fraud in financial e- services provided via websites registered in foreign DNS zones Key avenues of cooperation in the sphere of information security ✓ Establishing institutional and technical framework for dynamic cooperation between the common financial market regulators and participants, building upon the Financial Sector Computer Emergency Response Team (FinCERT) of the Bank of Russia ✓ Enabling trusted electronic operations in the increasingly digitalised common financial market Formulating unified standardised approaches to information security, cyber resilience and supervising related risks ✓ Policy coordination and unifying the mechanisms of strong customer authentication for financial transactions and money transfers#61Bank of Russia The Central Bank of the Russian Federation INVESTOR CONTACTS AND REGULAR MEETINGS SCHEDULE FOR 2019 February 1-8 Quiet period July 19-26 Quiet period February 8 March 15-22 Board of Directors meeting on monetary policy Quiet period July 26 August 30 - Board of Directors meeting on monetary policy Quiet period March 22 Board of Directors meeting on monetary policy Release of the Monetary Policy Report September 6 September 6 Board of Directors meeting on monetary policy Release of the Monetary Policy Report March 26 Conference call with institutional investors September 11 Conference call with institutional investors October 11-13* April 10-12* Ad-hoc meetings with investors on the sidelines of the IMF/WB meetings Ad-hoc meetings with investors on the sidelines of the IMF/WB meetings April 19-26 April 26 Quiet period October 18-25 October 25 June 6-8 June 7-14 Board of Directors meeting on monetary policy Saint Petersburg International Economic Forum Quiet period December 6-13 Quiet period Board of Directors meeting on monetary policy Quiet period December 13 Board of Directors meeting on monetary policy Release of the Monetary Policy Report June 14 Board of Directors meeting on monetary policy Release of the Monetary Policy Report December 18 June 19 Conference call with institutional investors Conference call with institutional investors International Cooperation Department Tel.: +7 (495) 771-90-68 Email: [email protected] Web-site: cbr.ru/eng/today/irp/ *tbc 19 61