Ivan Tchakarov of Renaissance Capital -

The inauguration of the incoming president will be held on May 7, which is a public holiday, and the following day, May 8, will be the president's formal nomination of the new PM's candidacy to the Duma. Vladimir Putin has officially announced and reiterated his firm intention to nominate Dmitry Medvedev as the prime minister, so we do not expect a surprise there. The PM's nomination has to be approved by the Duma - a majority (226 votes minimum) will be needed for the approval of the nomination, but with 238 votes held by United Russia, this will hardly be a hurdle.

The new organisational structure of the government will likely be announced within two to three days of the formal appointment of Medvedev as PM. Ministerial appointments, according to Vedomosti, will happen in steps in the subsequent 2 weeks, so do not expect a one-shot type of event.

That said, the key appointments are likely to follow shortly after Medvedev's appointment (again according to Vedomosti half the ministers would be announced within 2-3 days). All said and done, we will probably have full clarity on the composition of the new cabinet towards the end of May.

From an equity investors point of view, most crucial ministries to watch are the Ministry of Finance, Ministry of Economic Development, Ministry of Energy. The appointment at the Ministry of Justice will be indicative as to the seriousness in any intention of the new government to tackle corruption and the rule of law.

Most talked about personalities to be likely included in the new government include: Anton Siluanov, Elvira Nabiullina, Dmitry Rogozin, Sergey Ivanov, Tatiana Golikova, Anatoly Serdyukov, Dmitry Kozak, Igor Shuvalov, Igor Sechin, Arkady Dvorkovich, Vladimir Pligin, Mikhail Abyzov, Natalya Komarova (see table below for details).

Most controversial/uncertain future appointment(s): Igor Sechin

Who may be leaving the government?

Viktor Zubkov (incumbent: First VPM); Tatyna Golikova (Incumbent: Minster of Heath and Social Affairs); Igor Levitin (Minister of Transport); Rashid Nurgaliev (Minister of Internal Affairs); Anatoly Serdyukov (Minister of Defense); Andrey Fursenko (Minister of Education and Science); Yury Trutnev (Minister for Natural Resources and Environmental Protection), Vitaliy Mutko (Minister for Sport, Tourism and Youth); Yelena Skrynnik (Minister of Agriculture); Sergey Shoigu (Minister of Emergency Situations); Viktor Basargin (Minister for Regional Development) and Sergey Shmatko (Minister of Energy).

ANTON SILUANOV (INCUMBENT: MINISTER OF FINANCE)

Possible role in new government: Minister of Finance

Anton Siluanov has gradually transitioned from a temporary replacement for the ousted Kudrin to a leading candidate for assuming the role of Finance Minister in the new government (the names of Dvorkovich and Gref were originally also mentioned, but they have largely disappeared from the public discourse).

Very early on he was perceived as only an able technocrat and a veteran of the Ministry of Finance (MF), and confidante of Kudrin. However, he has been able to build up his reputation and show an independent streak on a number of important occasions, which has come as a surprise to some observers. For example, the recently proposed amendment to the federal budget based on an increased oil price forecast of 115 (vs 110 previously) involved no increase in expenditures to match the higher projected oil-related revenues (the 2012 deficit is to fall from -1.5% of GDP to -0.3% of GDP). In addition, Siluanov has expressed strong support for the timely implementation of the OFZ Euroclearability in the face of rising opposition from local players.

Still, doubts remain whether he would be able to resist rising social and military spending pressures. We suspect that that the policy of the MinFin would be to rather address recognized medium-term fiscal vulnerabilities not via the expenditure route, but via the revenue (higher VAT, higher sin taxes, higher property taxes, luxury consumption tax etc) and deficit financing route (making it easier to finance the deficit via making OFZ Euroclearable).

ELVIRA NABIULINA (INCUMBENT: MINISTER OF ECONOMIC DEVELOPMENT)

Possible role in new government: Minister of Economic development or Deputy Prime Minister (focus on social affairs)

According to some federal officials, Elvira Nabiullina is most likely to leave Ministry of Economical Development to become a Deputy Premier with a focus on social matters. If she were to leave the Ministry of Economic Development, one potential candidate being mentioned to replace her is Andrey Beloussov, who worked in the ministry under German Gref.

Elvira Nabiulina is virtually without competition for the role of a Minister of the Economy. Policy insiders argue that her diminutive figure and mild expression belie a very strong and determined personality that commands wide respect among cabinet members and ministry workers.

The Ministry of Economic Development (ME) has traditionally been in strong favor of higher expenditures as a means to boost the productive capacity of the economy and we expect no change in this policy course. For example, the ME argues that, in the so-called innovative scenario for the development of the Russian economy, education expenses should rise from 5.2% of GDP in 2010 to 7% of GDP by 2025/30 (5.9% in the so-called muddle-through (oil) scenario) and health expenses should increase from 4.6% of GDP in 2010 to 7% of GDP by 2025/30 (5.9% in the oil scenario).

While Nabiulina is admittedly a very able administrator and smooth operator in the corridors of power, the real brain power in the ME is thought to be her Deputy Andrey Klepach. He has not been shy from arguing that Russia should be running a permanent 2% of GDP fiscal deficit to achieve a sustainable medium-term growth, and that Russia needs a weaker currency to help external competitiveness.

On a broader level, we think the traditional philosophical debate between the ME and MF about whether Russia needs higher spending to foster economic development may lose some of the acuteness that was associated with the fiscally conservative policy stance of the former Finance Minister Kudrin. However, in our view, it would be a mistake to flatly assume that the perceived advantage that the ME might have acquired in this debate with the removal of Kudrin will be that pronounced, in particular in light of Siluanov's latest budget amendment and policy statements.

IGOR SECHIN (DEPUTY PRIME MINISTER)

Possible role in new government [highly controversial though]: First Deputy Prime Minister (macroeconomic affairs supervisory) or Minister of Energy; or Secretary of the Security Council of the Russian federation*, or Head of internal/external security forces (that could be police, military, FSB) or a yet to be established anticorruption structure

Sechin is known to oppose privatization program. He seems to be oriented towards the idea that government should accumulate and control strategic sectors (oil & gas, utilities), which therefore puts him on the opposite side to pro-privatization politicians. Being pro-government control he is known to have had diagreements with Medvedev (who favors modernization and liberalization), which was outlined by an unknown state informant. The same source also notes that Medvedev as a Prime Minster would not want Sechin to be a part of his team, therefore it is expected that Sechin will move to another position. Sergey Shmatko (current Minister of Energy) is viewed as a Sechin's protégé, which puts him in a weak position too - views are that he will leave his position too. There is speculation that Sechin is "too big for a second role", so if he stays in politics, we would most likely see him aiming for top positions in energy-related roles. Those positions seem to be either Minister of Energy or replacing Igor Shuvalov as a First Prime Minister supervising macroeconomic affairs (which would give Sechin significant power too).

Sechin is thought to be very close to Putin and due to this his power lies far beyond his official authorities. Mikhail Khodorkovsky accuses Sechin of being the mastermind behind falsely putting Khodorkovsky to prison and stripping his company YUKOS (one of the most powerful oil & gas companies at the time) of its assets to be nationalized mostly. At least the asset-stripping part seems reasonable, since most of the assets were acquired by Rosneft during questionable auctions and at large discounts on the way to become Russia's largest oil & gas company. Sechin became CEO of Rosneft shortly after YUKOS was bankrupted.

* The Security Council of the Russian Federation is a consultative body of the Russian President that works out the President's decisions on national security affairs. Composed of key ministers and agency heads and chaired by the President of Russia, the SCRF was established to be a forum for coordinating and integrating national security policy.

ARKADY DVORKOVICH (PRESIDENT'S ASSISTANT FOR ECONOMIC ISSUES)

Possible role in new government: First Deputy Prime Minister (macroeconomic affairs supervisory) or Minister of Education and Science

Dvorkovich joined the government together with German Gref. He was an advisor to Gref, who went on to become the Minister of Economic Development and Trade in 2000. Then through various roles within the government Dvorkovich became advisor to Medvedev during his presidency. He is seen as a pro-Medvedev politician, even publicly expressing (via Twitter) his frustration with Putin being officially announced as presidential candidate. Dvorkovich is a supporter of modernization (sit on the board of Skolkovo Innovation Center) and privatization program, so could be seen as a liberal political figure for investors. On the other hand, he has made a few controversial statements, which resulted in mixed-to-negative feedback from media. One topic was education, where Dvorkovich proposed that the government should cancel student scholarships (given for outstanding academic performance) and students "should work to make their living". He also proposed that Russia should introduce sales tax, instead of current VAT. He was also opposed changes proposed by the Ministry of Finance to the insurance contribution base of calculations paid by companies on their employees' wages.

TATIANA GOLIKOVA (INCUMBENT: MINISTER OF HEALTH AND SOCIAL SECURITY)

Possible role in new government: Minister for Economic Development or Minister of Finance

Golikova used to work in the Ministry of Finance as a deputy to Alexey Kudrin, where she was instrumental in introducing monetized social benefits. She also became famous in 2006 for supporting the idea that the Stabilization Fund reserves should not be used for other needs of the Ministry of Finance, therefore securing the necessary funds, which helped Russian economy during 2008 crisis. She was named Minister of Health and Social Security in 2007, where she was involved in dealing with a number of issues relating to pensions (pension eligibility age, pension contributions), social benefits, pharmaceuticals and medicine.

VLADIMIR PLIGIN (UNITED RUSSIA DEPUTY)

Possible role in new government: Minster of Justice

Pligin graduated from the same faculty as Medvedev and has been known as a lawyer specializing in foreign investments, civil and arbitrage process, as well as taking part in criminal procedures involving well-known politicians (he served as the attorney to the ex-mayor of St.Petersburg Anatoly Sobchak). He has been a United Russia deputy since 2003. Media often portrays him as having liberal views. Pligin was involved in cancelling elections for governors of regions during Putin's presidency, while during Medvedev's presidency he was in charge of partly allowing elections for governors of regions. Pligin is also notoriously known to common people as the man promoting increases of driving-related fines. He is also the head of a chair of entrepreneurial jurisdictions in St. Petersburg Higher School of Privatisation and Entrepreneurship. Pligin is media-shy and not much else is available in the public domain about him.

MIKHAIL ABYZOV (PRESIDENT'S ADVISOR)

Possible role in new government: Minister of Energy

Mikhail Abyzov, aged 40, is a successful businessman, with a broad-range of energy-sector interests both inside Russia and abroad. Abyzov was previously an Executive Board director of the now-defunct Russian state power holding UES (also involved in Energy reform and RAO UES restructuring) and served as an executive at Kuzbassrazrezugol (coal extracting company). Abyzov is an owner of RU-COM company - entity specializing in investment and management of companies in infrastructure, energy, coal and agriculture. In autumn of 2011, Abyzov suggested creating the Social committee of organizing government under Medvedev and became the head of this committee. Abyzov is a billionaire with $1.2bn according to Forbes.

NATALYA KOMAROVA (GOVERNER OF KHANTI-MANSISK REGION)

Possible role in new government: Minister of Energy

Natalia Komarova, aged 56, qualified as an engineer-economist and is currently Governor of the oil-rich Khanti-Mansisk region. Natalya previously worked in the Committee for Labour and Social Politics, then headed the Committee of Natural Resources and Nature Management. She was named as the mastermind behind introduction of Forest Code in 2006, which decentralized forests' supervision (which became responsibility of regional authorities and lessees) and allowed to use certain types of forest territories for building and construction (the move did not score her points with ecologists). In 2010 Medvedev appointed Komarova Governor of the oil rich Khanti-Mansisk region.

SPECIFIC ISSUES/CHALLENGES FACING SECTORS, WHICH NEW GOVERNMENT WOULD NEED TO ADDRESS

POWER SECTOR TASKS FOR INCOMING GOVERNMENT

Adopt a strategic vision for the sector and implement a plan to achieve the vision. As a result of government decisions and actions taken over the past 5 years, so many of the strands of logic underpinning the reform-orientated 2003 Electricity Act have been broken that there is no longer any prospect of the sector becoming viable as a self-financing industry. If the nation is to avoid the fate of ploughing ever-more billions of dollars from the state budget into an ever-less efficient power sector, the new government must choose one of two options. Either:

1. Develop an entirely new vision and a new plan of how to achieve the vision. or,

2. Take urgent action to address critical issues that are undermining achievement of the 2003 reform vision. The issues include:

§ Approving a 1 July 2012 tariff increase for the Federal Grid that will return the company to the path of rational RAB price regulation and, hence, recover investor confidence. Using figures previously approved by the Federal Tariff Service, we estimate that an increase of around 50% is required (though this means that no increase will be required in 2013).

§ Renew the commitment to rational RAB price formation for the MRSK distribution grids and restart tariff negotiations for each grid on the basis that the disciplines synonymous with RAB regulation are to be rigidly applied. Tariff increases scheduled for 1 July 2012 should be postponed until the increases appropriate for the RAB methodology have been computed and agreed.

§ Develop and implement a market for generator capacity.

§ Over a period of 5 years, phase-out the subsidy on electricity consumption by households, which is funded by other electricity users.

§ Fully privatise the MRSKs, with the emphasis on attracting new owners with proven ability rather than on maximising revenues to the budget. Distressed grids (such as in the North Caucasus) should be renationalised.

§ Fully privatise all fossil-fuel gencos, with the emphasis on attracting new owners with proven ability, rather than on maximising revenues for the budget.

METALS & MINING SECTOR KEY CHALLENGES FOR THE INCOMING GOVERNMENT

We believe the success of Vladimir Putin's upcoming term as president and the new government will largely depend on finding a proper balance between state regulation and economy liberalisation under the existing economic paradigm. We think finding this balance could be an essential driver for Russia's steel sector, and that partial steel-price regulation in strategic sectors of economy is possible. The government may tighten regulation in labour safety, equipment reliability and environmental protection - all of which could require increased capex in some cases. However, we doubt it will implement new taxes/export tariffs, or increase energy tariffs to squeeze margins at the Russian steel majors. The Russian ferrous and carbon sector has been appropriately updated over the past decade, and we think it could become a platform for the development of the Russian economy in the downstream direction.

We have seen a number of articles in local mass media regarding potential state involvement in the Russian ferrous and carbon sector this year. We see the following key risks here:

§ The introduction of new price mechanisms to control domestic steel prices.

§ The implementation of state regulations on capex.

§ The introduction of new taxes and export duties for Russian steel and mining companies.

§ Growth in state companies' energy tariffs (natural gas and electricity) for the Russian ferrous and carbon sector, above the initially planned increases.

Russian steel mills' global dominance in terms of efficiency is a thing of the past, as the non-raw material components of their cost base are increasing. Steel margins, on a standalone basis, are depressed, meaning the Russian steel majors must rely on mining assets and vertical integration. We note that it is an open question as to when iron ore and coking coal markets will enter structural oversupply. We doubt the government will attempt to squeeze steel and mining assets through heavy taxes/export duties or rising energy tariffs on a mid-term horizon.

We certainly do not expect to see a repeat of the Chinese scenario, where steel majors have worked at close to breakeven margins for decades. First, we note that China has highly developed metal-intensive sectors of economy. These prevent inflation in the steel part of the value chain, and squeeze local steel mills, transferring all the value and profitability to downstream sectors. Russia's metal-intensive sectors are in limbo in terms of development. The country has no simple stamping facilities or transformer plants to localise auto production and upgrade the energy system. Russia exports approximately 50% of its steel volumes. If the local steel mills become uncompetitive, they simply cut production, which, in turn, brings about social problems. The key difference between Russia and China is that the steel sector is an upstream industry in China, while it is a downstream sector in Russia. We think the government will have to focus on developing Russia's metal-intensive sectors (autos, machinery, power equipment manufacturing and shipbuilding) before placing any significant tax and/or energy/transportation tariff pressure on the country's ferrous and carbon sector.

Second, the ownership structures of Chinese steel companies have traditionally included the so-called triad of central government, provincial government and private investors. Russia cannot replicate this: its steel mills are privately owned. If new taxes, price mechanisms or energy tariffs turn Russian steel producers into loss-making or near-breakeven business, the owners and their teams may simply quit the game. Who would manage such a complex and diversified base of metals and mining groups in this case? We doubt Gazprom, Vnesheconombank, the State Investment Fund or any other state structure could effectively manage large metals & mining business like Evraz, NLMK, MMK, Mechel or Severstal.