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  1. Russian IT Market: Big Picture, Segments & Case Studies US-Russia Technology Symposium at Stanford January 29-30, 2004

  2. Contents • Russian Macroeconomic Overview • Russian IT Market Overview • Review of Selected Russian Software Players

  3. The economy keeps growing faster than expected… • Devaluation and investment catalyzed growth surge in 1999-2001 • High oil prices support continued growth • Domestic consumption surge, as seen in retail and other sectors Russia GDP Year-on-Year Change Russia GDP Nominal & PPP (US$ ‘000 per capita) Source: EIU, December 2003

  4. …and is already the 10th largest economy in PPP terms Russia’s peer group (nominal GDP) Russia’s peer group (PPP GDP) Russia expected to overtake Brazil by 2008 and become 4th largest emerging economy On PPP basis, Russia is already the 10th largest global economy Source: EIU, Oct 03; EY Analysis

  5. The debt capital markets have “reopened” for Russia… FDI and Cross-Border Financing • Access to financing has improved. After Russian rating was raised to investment grade (Baa3) by Moody’s, this should continue. • Ruble bond market develops with placements expected to exceed $3 billion in 2003. • Eurobond volumes are booming. Gross Proceeds from Eurobonds (US$ b) Note: cross-border financing includes Eurobonds, syndicated loans & IPOs Source: E&Y research and analysis

  6. .and the equity capital markets are up, but don’t (yet) fuel new substantial financing RTS • RTS index now above the pre-crisis peak. • Yet oil companies and Gazprom account for over 80% of market capitalization… • …and equity financing is not really an important source of new capital, particularly for tech companies Russian Equity Offerings Source: EY Analysis; RTS

  7. The Putin era has ushered in improving stability… • Putin is almost certain to be re-elected in March 2004. Duma elections in Dec. 2003 resulted in Duma with “agreeable” working relationship with the president. • YUKOS (Menatep) case brought negative publicity, but since then RTS has recovered, Central Bank reserves and the ruble (vs. USD) are up, and reforms seem to be on track. President’s approval rating above 80% *EIU estimates, 2001 Source: VCIOM

  8. … with key structural reforms…lowering risks • Tax reform: launched in 1999 (13% flat for individuals and 24% for businesses) has led to a larger, more diversified tax base. Starting January 2003, VAT has been reduced to 18%. • Land Reform:new federal law will permit buying and selling of agricultural land plots, with restrictions, as of end of January 2004. • Natural Monopoly Reforms:Russia has started to reform monopolies in the energy sector. This pace of reform will have a significant positive impact on economy. • Banking System:can view weakness as strength – economy not over-leveraged like China, and system improving. While not perfect, a new law on private bank deposits took effect on December 27, 2003. “The tax and legal systems offer acceptable risks for us,” says Sir John Brown, Chairman of BP, prior to placing $6bn into Russia. (EIU)

  9. So what does the macro picture mean for Russian IT? • Increasing stability and improving environment for business in general • Growing corporate market, with maturing focus on productivity. • Much larger consumer market than it may appear. • Access to financing improving (cost and terms of debt), but better for larger companies.

  10. Russian ICT Market –November ‘02 study estimated growth to US$ 20 bln by ‘05. New study indicates higher potential. 2001 Revenue 2005 Revenue (Figures in US $ Millions) Key 2003 Statistics: • Mobile Subs. / Penetration: ~ 36 million / 25% • Internet Subs. / Penetration: ~ 12 million / 8.3% • PCs / Penetration: ~ 16 million / 11% Segment ICT HW Software IT Services Data comm. services Voice telecom CAGR (2002-2005) 16% 22% 21% 20% 5% • IT Growth: • > 20% in 2003 • 15%-20% p.a. expected ’04-’07 Sources: IDC, EITO, ACM, EY estimates

  11. Russia – ICT hardware: growth across all segments • Corporate clients lead demand, and regions and retail will also drive future growth. • E-Russia is promising and undergoing a refocus. • 4.5 million mobile handsets sold in 3Q03, comparing to 2.5 million in 2Q03 Hardware Market ‘00-’05E (US $ billions) 10 9 . 8 7 6 5 4 3 2 1 0 2000 2001 2002E 2003E 2004E 2005E End-user telecom equipment Peripherals Other (incl. PDAs) hardware Servers PC Sources: IDC, EITO, EY estimates

  12. International “Piracy League” Russia – Software: healthy growth despite piracy Software Market ‘00-’05E (US $ millions) • Software imports have leapt in recent years… • Local software market also expanding (e.g. 1C, Kaspersky Lab, Parus, Cefei, ABBYY, etc.) 900 800 700 600 500 400 300 200 100 0 2000 2001 2002E 2003E 2004E 2005E Development & Deployment Tools System infrastructure Applications To compete with pirates, Russian consumer software producers are forced into low pricing, apparently cross-subsidized by other segments: sales of domestic business applications and exports. Sources: Business Software Alliance; EY estimates

  13. IT Services Market ‘00-’05E (US $ millions) Russia – IT Services: the key channel still maturing • Service revenues are difficult to measure (rigorous surveys needed) • Revenues are primarily project-based, with annuity work (e.g. outsourcing) rising slowly • Significant revenues from ERP implementations, and otherwise in the telecom industry • Fragmented field, ripe for strategic and financial investment 1600 1400 . 1200 1000 800 600 400 200 0 2000 2001 2002E 2003E 2004E 2005E Consulting ERP implementation Other implementation Sources: IDC, EITO, EY estimates

  14. Russia – IT exports: rising but could be accelerated • Niche packaged software (e.g. BUKA, Egar, ) and technology licensing (e.g. Spirit, Kaspersly Lab) • Offshore programming, leveraging science-intensive strengths, has been growing at a significant pace. For ease of measurement, we include onshore R&D centers of foreign companies (e.g. Intel, Motorola). Russian Exports ‘00-’05E (US $ millions) 500 450 . 400 350 300 250 200 150 100 Buka’s PC game, “Steel Monsters” coming in 4th quarter 2004. 50 0 2000 2001 2002E 2003E 2004E 2005E Customized software development Wholly-owned R&D centers License income Sources: IDC, EITO, EY estimates

  15. Russia competes with West on price, and with China/India by adding value using scientific know-how and creativity Russia can address China’s cost advantageswith its skills advantage… …and bysubcontracting to teams in regions where salaries are 50-70% less than in Moscow. Source: Aberdeen Group (Nov. 2001) and EY estimates; Pettily Rabin Todd & McGrath (2002)

  16. Case Study 1: Buka – software gaming publisher • A leading publisher and distributor of games and multimedia products in Russia/CIS, with international sales of its own gaming products (Battle Mages, Fair Strike, Echelon(Storm), Hard Truck). • Well recognized brand in Russia -- one of 3 major players, controlling ~30% of the market of locally developed products • Licenses its games in 70 countries all over the world, cooperates with 56 partners, including international publishing companies like Capcom, UbiSoft, Data Becker, Acclaim. • Well-positioned to raise venture capital.

  17. Case Study 2: SPIRIT – proprietary SW technology developer • Supplies embedded software products for telecom OEMs (wired and wireless) • Exports to Japan, Korea, US and Europe -- its software is used in over 50 countries • Largest eXpressDSP software house in Europe(TI processor sales data) • Customers include Atmel, Furuno, Hyundai, NEC, Nortel,Panasonic, Philips, Samsung,Siemens, Texas Instruments, Toshiba + 100 other OEMs worldwide • Looking at options as to restructuring and venture capital.

  18. Case Study 3: Kaspersky Lab – exporter of IT security products • International software product & technology development firm • Technological leader in anti-virus industry, with largest virus encyclopedia in the world -- offering products for data security • Its products are available in over 50 countries, and it controls about 80% of the anti-virus market in Russia/CIS. • World-class experts provide 24/7 technical support, updates of anti-virus database every 3 hours, and guaranteed cures within 24 hours against latest viruses • Headquartered in Russia, with offices in Europe (UK, France, Netherlands), US, China and well-established multi-level network of over 300 partners.

  19. Case Study 4: EPAM –offshore software developer • Provides software development and e-commerce/content services to clients in 30+ countries including Fortune 500 and leading software companies (e.g. Merrill Lynch, SAP, Reuters, Compaq). • Secures cost advantage by combining local and offshore capabilitieswith market-facing offices in North American and Europe backed by OSD centers in Moscow and Minsk. • Over 1,000 professionals globally