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Index-linked Bond Russia

Basic and Extra

Why invest in Index-linked Bond Russia?

Firstly, Russia does not suffer from sovereign over-indebtedness as do many Western countries. Public finances are in surplus and debt totals less than 10% of GDP. What is more, the stability fund accrued mainly from oil revenues covers most of the existing debt. Compared with many European countries, Russia's public finances are on a very sound basis. Secondly, expected economic growth is about five per cent in 2011 and 2012, which means that the Russian economy is exceptionally strong.

Thirdly, considering the growth potential of the economy, the Russian equity market can be regarded as very inexpensive. The P/E ratio of the RDX Index, ie price of shares in relation to earnings, reflecting the price performance of the most traded Russian shares, is low at only 6. Valuations remain low due to the higher risks than in the Western markets and the high proportion of energy companies in the index.

Index-linked Bond Russia offers an interesting channel to invest in a market with great opportunities. Yet, investors should bear in mind that the flip side of the healthy return potential is the higher-than-average risk relating to the Russian equity market. Consequently, an index-linked bond is a wise choice because the nominal capital of the investment is repaid at maturity irrespective of the share price performance.

Index-linked Bond Russia

Index-linked Bond Russia is a bond issued by Nordea Bank Finland Plc. The maturity is approximately five years and the yield is based on the performance of the RDX equity index.

The bond comes with two alternatives: Basic and Extra. The alternative Basic is suitable for a cautious investor. Its yield at maturity is 60% of the increase in the value of the equity index in accordance with the terms of issue. The alternative Extra suits risk-tolerant investors who seek a higher return. Its yield at maturity is 125% of the rise in the value of the equity index in accordance with the terms of issue. Regardless of the equity index performance, Nordea repays the nominal capital of the bond at maturity.

The rise in the value of the reference asset is calculated as the difference between its initial price and final price. The initial price is the closing price of the reference asset on 4 October 2011. The final price is the average of the semi-annual closing values of the reference asset from 15 March 2012 to 15 September 2016. If the value of the equity index falls or remains unchanged, no yield is paid.

Risks of the investment

The index-linked bond involves a risk of the issuer Nordea Bank Finland Plc’s repayment ability. The risk relating to the issuer's repayment ability means the risk that the issuer becomes insolvent and cannot fulfil its commitments, for example, in the event of the issuer's bankruptcy. The investor can lose the invested capital and the possible yield partially or in full in the event of the issuer's insolvency. Nordea has a credit rating Aa2 by Moody's and AA- by Standard & Poor's. The bond is unsecured.

The premium (in Extra bond about 10%), ie the proportion of the subscription price exceeding the nominal value of the bond, is not returned and it is not included in the capital protection. The size of the loss caused to the investor by the premium depends on how much lower the yield on the bond is than the premium paid. If the yield is zero, the investor's loss equals the premium paid. The investor can also sell Index-linked Bond Russia on the secondary market before maturity. In such a case the repurchase price may be above or below the bond’s nominal value. In normal market conditions Nordea quotes a secondary market price for the bond on all banking days when banks are generally open in Finland.

Reference asset

The reference asset of the index-linked bond is an equity index.

Russian Depository Index (RDX)
The RDX index (Russian Depository Index) is a capitalisation-weighted equity index, which consists of the most traded depository receipts on the London Stock Exchange entitling to Russian shares. At present the reference index includes 15 companies. The largest sector is energy. Further information on the index is available on the Internet at www.en.indices.cc.

10 largest companies in the index in August 2011

Company	Indusry	Index weight (%)
Gazprom	Energy	19.5
Sberbank	Finance	16.9
Lukoil	Energy	14.0
Norilsk Nickel	Metall	8.6
Rosneft	Energy	7.5
Novatek	Energy	6.0
Uralkaly	Mining	4.3
VTB Bank	Finance	4.0
Tatneft	Energy	3.6
Surgutneftegaz	Energy	3.0

The presented figures describe previous yield or performance, and no reliable assumptions on future yield or value can be made based on them.

Yield table: Index-linked Bond Russia

Change of the reference asset according to the terms of the issue	Russia Basic		Russia Extra
	Issue price ca.	100%	Issue price ca.	110%
	Participation rate	60%	Participation rate	125%
	Value at maturity	Return p.a.	Value at maturity	Return p.a.*
100%	160%	9.9%	225%	15.4%
75%	145%	7.7%	194%	12.0%
50%	130%	5.4%	163%	8.1%
25%	115%	2.8%	131%	3.6%
0%	100%	0%	100%	-1.9%
-25%	100%	0%	100%	-1.9%
-50%	100%	0%	100%	-1.9%

* 10% premium included in the yield calculation.

Simulated performance history

The graph shows the historical value of the investment at maturity, had the investment been made in accordance with the issue terms in January 1998–August 2006, and the yield on a direct investment in the index. The investment would have matured in January 2003–August 2011 (weekly observations). The yield on a direct investment has been calculated using one initial and closing value without averaging the final value.

	Redemption amount on average	Annual yield on average
Basic	153 %	8.9 %
Extra	210.4 %	13.8 %*
Direct investment	255.3 %	20.6 %

* 10% premium included in the yield calculation

Issue terms in brief

Issuer	Nordea Bank Finland Plc; credit ratings Aa2 (Moody’s) and AA- (Standard & Poor’s).
ISIN	Russia Basic 4548A FI4000029202 Russia Extra 4548B FI4000029210
Issue date	22 August 2011
Maturity	30 September 2016
Subscription period	22 August –30 September 2011
Places of subscription	Nordea Bank Finland Plc and its branches in the Baltics
Subscription price	Basic 4548A: variable, about 100% Extra 4548B: variable, about 110%
Minimum subscription	1,000 euros
Yield at maturity	Basic 4548A: 60% of the rise of the index value in accordance with the issue terms Extra 4548B: 125% of the rise of the index value in accordance with the issue terms
Reference asset	RDX Index (Bloomberg: RDX Index)
Initial price	The closing values of the reference asset on 4 October 2011
Final price	The average of the semi-annual closing values of the reference asset from 15 March 2011 to 15 September 2016
Repayment of capital	The issuer Nordea Bank Finland Plc repays the nominal capital of the bonds in full at maturity irrespective of the performance of the index. The bonds involve a risk of the issuer’s repayment ability. The premium., if any, is not returned (about 10% in Extra bond)
Security	The bonds are unsecured.
Structuring cost	The subscription price includes a structuring cost of about 0.7% p.a. (see the terms of issue for more details). No separate subscription or management fee is charged on the bonds.
Secondary market	In normal market conditions the issuer Nordea Bank Finland Plc quotes a repurchase price for the bonds, which may be lower or higher than the nominal value.
Taxation	No tax is deducted at source for non-residents in Finland.
Safe custody	Free of charge with Nordea Bank Finland Plc.
Cancellation of the issue	The issuer has the right to cancel the issue based on changes in the economic circumstances or if the total amount of subscriptions is low, or if something should occur that the issuer considers might endanger the issue.
Listing	An application will be made for the bonds to be listed on NASDAQ OMX Helsinki.

Loans 4548A (Index-linked Bond Russia Basic) and 4548B (Index-linked Bond Russia Extra) under the MTN programme (a medium-term note programme reported to the Finnish Financial Supervisory Authority from Sweden in accordance with the Prospectus Directive) of Nordea Bank AB (publ) and Nordea Bank Finland Plc, dated 25 May 2011. The bond-specific terms and the base prospectus are available at the places of subscription. Read the issue terms and the base prospectus before subscription. The Swedish version of the terms is binding and thus applied in possible dispute situations.

Nordea Markets is the name of the Markets departments of Nordea Bank Norge ASA, Nordea Bank AB (publ), Nordea Bank Finland Plc and Nordea Bank Danmark A/S.

The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets on the date of this document and are subject to change without notice. This document is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient.

The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results.

Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction.

This document may not be copied, distributed or published for any purpose without the prior consent in writing of Nordea Markets.

Market review - Stable growth will continue in Russia

The Russian economy has started to grow moderately after the decline in the summer of 2010. Private consumption has expectedly driven the recovery, which has also shown in the retail sales figures for the summer. The improving labour market situation, the brisk wage growth and the healthier loan market support our view of steadily growing domestic demand.

The main risk to household demand is accelerating inflation, which will erode consumer's real purchase power. Real wages have increased by only a few per cent in the past few months. On the other hand, with the economy on a growth track, accelerating inflation and the interest on term deposits remaining lower than inflation on average, the increase in income is mainly routed to consumption instead of saving. Fixed investments have lagged behind expectations. Yet, many factors, such as low interest rates, stronger business confidence and continuously growing industrial production, speak in favour of a pick-up in investment in the next few months.

Inflation has been a cause for concern for the Russian authorities this year as a result of the higher prices of food and energy. Furthermore, several domestic factors, such as growing money supply, a tighter labour market, growing government expenditure ahead of the elections and accelerating credit growth, pose a considerable inflation risk. Consequently, the central bank has already started rate hikes and we expect them to continue in the autumn, supporting the rise in the historically low market rates. Yet, the government's target of lowering inflation to 4–5 per cent by 2014 seems ambitious.

The outlook for Russian public finances is stable. Compared with the other European countries, Russian public finances are on a very healthy basis in respect of sovereign debt as well as the budget. The high oil price will increase state revenues considerably, which, in turn, enables reduction of central government debt and an increase in consumption.

Threats of slower global growth also weigh on the outlook for Russia, but an economic recovery is not crucially dependent on fluctuations in export demand. Even though the soaring oil price underpins the recovery and exports of energy will remain a core element in Russia's economic growth, private consumption is likely to be the engine of growth. As the outlook for the Russian economy is often closely tied to the outlook for the oil market, forecasts tend to vary and the appetite to invest consequently changes following the trend in oil prices. Still, the economic growth outlook for Russia is relatively bright, and we expect growth of about five per cent in the next few years, a figure clearly higher than the growth forecast for Western Europe in particular. However, the pace of growth in an economy sorely in need of reforms is expected to remain weaker than in the years of high growth preceding the financial crisis in 2008–9. It is likely that a more vigorous growth outlook would require substantial reforms. The stable growth outlook is based on expectations of robust growth in private consumption and exports and relatively high oil prices.

Sources: Nordea Economic Research, International Monetary Fund (IMF)