KBC Group Central Europe - Ahlers

Doing business in Russia:
do’s and don’ts
Logistics in Russia
Seminar organized by
Ahlers & Partner Logistics Group
June 11th, 2008
Dirk Mampaey
Senior General Manager
Banking Eastern Europe & Russia KBC Group

Table of content
1
KBC Group venturing into Russia
2
Success Factors for doing business in Russia
3
Experience so far
2

Why did KBC enter the Russian market?
• Russia is a huge market with economic development at a quicker
pace than other CEE countries.
• Investment grade sovereign ratings by major ratings agencies
• Vast natural resources (oil and gas)
• Strong financial discipline (zero net debt position); foreign debts declined
from 90% of GDP in 1998 to 31% in 2006
• Real GDP growth 2002-2007: 4.7 -7.3% p.a.; IMF forecast for 2008: 7.1%
• Banking penetration is low compared to peer countries
• In recent years Russian banks‟ assets grew at an annual rate of 35%
• Retail lending shows the highest growth rates in the banking market
• Comparatively low level of non performing loans
• The banking market is still very fragmented, consolidation is on
its way; competition is rising but margins remain attractive
3
Investment in Russian market is an extension of KBC’s
existing presence in Central and Eastern Europe

How did KBC structure its investment?
• Majority control: 95% (5% held by IFC)
• Alignment with minority shareholder through Shareholders‟ Agreement
• KBC expatriates nominated in senior management positions
• Absolut Bank has been integrated as a separate division into the
business unit of “Central & Eastern Europe”:
• Risks are monitored centrally
• Dedicated financial controlling unit in the head office in Brussels
• KBC risk standards and methodology are being implemented
• Separated financial statements are disclosed on Russia
• Specific know-how transfer from KBC (development of Absolut Bank as
a universal bank)
4

Path to achieve value expected from the acquisition
5
Pre-deal
Phase
December 2006
January 2007
• Fact finding
mission to
Russia
• Strategy for
Russia
approved by
KBC Group
Executive
Committee &
Supervisory
Board
• Contacts with
investment
banks
established
• Targets
identified and
prioritized
Non-binding bid
Deal execution
Phase
February 2007 -
April 2007
• Bidding
process
• Due diligence
• Bid revised =>
binding bid
• Contract
negotiations
• Postacquisition
plan
SPA signed
Pre-closing
Phase
May 2007 –
August 2007
• Strategic
imperative for
integration
delineated
• Regulatory
clearance
process
completed
• Integration
approach
defined
• Preparation of
project
organization
• Organizational
Quick Scan
• Management
assessment
SPA closed
RoI expected to reach 10% in 3-5 years
Integration
Phase
September 2007
April 2008
• High-level
strategy for
AB (WHAT)
approved by
KBC Group
Executive
Committee
• Integration
programme
executed
• TO BE design
• Adoption of
KBC Group
policies &
standards
Integration
roadmaps
Post Integration
Integrate
Transform
May 2008 – 2012
• Detailing of
strategy for AB
(HOW)
• Execution of
integration
projects
• Implementation
of KBC Group
policies &
standards
Integration
completed;
Value achieved

Table of content
1
KBC Group venturing in Russia
2
Success Factors for doing business in Russia
3
Experience so far
6

Success factors for doing business in Russia
Business reality beyond economic data
• Complexity of local market specificity (e.g., unevenly developed market
sectors, regional differences, legislative and procedural framework)
makes it difficult for foreign operators to reap the fruits of the Russian
economic bonanza
• Foreign businessmen‟s expectations of time and expense are
influenced by many factors
• Strong growth dynamics lead to structural changes
• Government goals are evolutionary (see government vision for specific
industries)
• Do extensive market research to identify needs which you can fulfil
• Learn from best practices of other European companies
• Strategize a long term plan
• Carefully choose your consultant and local partner
• Be well prepared for negotiations
7

Success factors for doing business in Russia
Red tape
• Nascent legal system results in changing, sometimes unpredictable
business environment; federal legal regime differs from local regimes
• Regulations tend to be demanding
• Differences between Russian accountancy rules & IFRS complicate
integration
• Reporting requirements to local Regulators for certain sectors (e.g.,
banking sector) require careful monitoring
• Plan enough time for the necessary procedures, as they are
often quite time consuming (e.g., formal registration
requirements, licensing requirements, etc.)
• Hire competent local legal expertise (e.g., accuracy of
contracts, intellectual property rights, etc.)
• Do not try to break the system, try to get along …
• Pay your taxes. Otherwise you attract unnecessary attention.
8

Success factors for doing business in Russia
Personnel search & development
• Retaining strategically valuable resources is a key challenge
• Mobility between jobs is high with salaries constantly rising (by 30 per
cent a year)
• Labour market is characterised by shortage of certain skills
• Living conditions for expatriates are difficult
• Real estate prices for offices & housing are high (not only in the
Moscow region)
• Start searching well in advance, particularly in the regions
• Appoint powerful local integration manager (in case of an
acquisition)
• Show critical resources that your company is committed to Russia
and that there is room for them to advance in the organization
• Focus on training and competence management
• Bonuses linked to performance are very effective!
9

Success factors for doing business in Russia
Set-up of the business structures
• Russia has a rich cultural identity that has been shaped and moulded
by its distinguished history and vast geography
• Business practices are characterised by the transition from a
command economy to market economy
• Business practices are characterised by a hierarchical structure;
hands-off management style is often mistaken for weakness
• Russians are „people oriented‟ and will respond to a more personal
approach
• Build an understanding of diversity and local customs
• Respect local rules but play your own game
• Stand firm on major goals and be flexible on details
• Define clearly the structure and areas of responsibilities within the
company
• Cultivate relationship with government agencies at all levels
10

Table of content
1
KBC Group venturing in Russia
2
Success Factors for doing business in Russia
3
Experience so far
11

Some findings
• The local management of Absolut Bank has strong merits and KBC is
strengthening the team with KBC management and experience
• Russians display a tremendous spirit of entrepreneurship and strong
drive
• Russians are well-educated people and quick learners
• Conceptual thinking has to be enhanced but once a buy-in has been
obtained, a quick implementation follows
• Good integration results: staff members were adept at changing their
working style to fit with what KBC expects
• Integration conducted simultaneously with a successful execution of the
business plans for 2008 (a.o. ambitious network expansion project)
• Issues:
• Human resources & logistics (real estate)
• High rate of change (both internally/ externally)
• But many business opportunities: prioritization is needed!
12

13
Any questions?