Annual Report

E A S T C A P I T A L E X P L O R E R A B

Annual Report

2008

East Capit al Explor er AB Annual Report 200 8

Contact

Investor Relations- and media contact:

Louise Hedberg

Head of Communications/IR +46 8 505 97 720

louise.hedberg@eastcapitalexplorer.com Visiting address:

Kungsgatan 30, Stockholm Postal address:

Box 7214

SE-103 88 Stockholm Sweden

www.eastcapitalexplorer.com

Your opinion is very welcome

How can we improve our financial reports, investor service and website? Please email your suggestions or ideas to us at

ir@eastcapitalexplorer.com.

Change of address

Changes of address of physical persons who are registered as Swedish residents are made automatically by Euroclear Swe- den AB (formerly VPC). Please note that shareholders who have chosen not to have their addresses updated automati- cally must, themselves, notify their account- operating institute.

Shareholders whose holdings are reg- istered in the name of a trustee, should notify the trustee as soon as possible of any changes in their name, address or account number. Other shareholders must notify changes of address and changes of account number to Euroclear Sweden AB (formerly VPC), phone: +46 8 402 90 00, e-mail: info@euroclear.eu.

More information about our investment region

Do you want to know more about what happens in our investment region? Please visit our Investment Manager East Capital’s website www.eastcapital.com for news, analyses and market comments.

Financial information and calender

 Monthly Net Asset Value report on the fifth working day after the end of each month

 Annual General Meeting in Stockholm on 27 April 2009

 Interim report 1 January – 31 March 2009 on 14 May 2009

 Interim report 1 January – 30 June 2009 on 20 August 2009

 Interim report 1 January – 30 Septem- ber 2009 on 12 November 2009

The annual report, other financial reports and information as well as press releases, are available on www.eastcapitalexplorer.com.

Shareholders and other interested persons may sign-up on the website for a subscrip- tion to East Capital Explorer’s reports and press releases to be sent directly to their e-mail address. The printed annual report is sent to shareholders who have notified East Capital Explorer that they wish to receive printed financial information from the Com- pany.

AGM 2009

The Annual General Meeting of East Capital Explorer AB (publ) will be held at 4.00 p.m.

CET on Monday 27 April 2009 in Grüne- waldsalen at Konserthuset in Stockholm, Sweden. Entrance from Kungsgatan 43.

Programme

 1.30 Registration opens

 2.00 Seminar on Eastern Europe with representatives from East Capital

 3.00 Guest presentation with explorer Ola Skinnarmo about his upcoming adventure through the North East Pas- sage 2009, sponsored by East Capital

 3.30 Coffee break

 4.00 Annual General Meeting begins

Participation

To be entitled to participate in the Annual General Meeting, shareholders must:

 Be recorded in the register of sharehold- ers maintained by Euroclear Sweden AB (formerly VPC) as per Tuesday, 21 April 2009

 Have notified the company of their attendance no later than 4.00 p.m. CET on Tuesday, 21 April 2009

Notification of attendance may be made:

 On the web:

www.eastcapitalexplorer.com/agm

 By e-mail:

agm@eastcapitalexplorer.com

 In writing to:

East Capital Explorer AB (publ) Att: Sandra Mårtensson Box 7214

SE-103 88 Stockholm Sweden

 By telephone to:

Sandra Mårtensson, +46 8 505 977 27 When notifying attendance please state name, personal/company registration number, address, daytime telephone number, e-mail, number of shares as well as any assistants attending (maximum two).

Please note that shareholders whose

shares are not registered in the name of a

nominee, must temporarily re-register their

shares in their own name. Such registration

must be in effect with Euroclear Sweden

AB (formerly VPC) no later than Tuesday,

21 April 2009. Shareholders are requested

to inform their nominees well in advance of

this date.

This is East Capit al Explor er How we invest Our portfolio Corporate Governance St atements THIS IS EAST CAPITAL EXPLORER

This is East Capital Explorer 2

Comment from the CEO 4

The East Capital Explorer share 6

HOW WE INVEST

Eastern Europe during 2008 8

Our investment region 10

Key sectors targeting long-term growth 14

How we invest 16

Our Investment Manager: East Capital 17

Q&A with the Chairman of East Capital 18

OUR PORTFOLIO

Our portfolio on 31 December 2008 20

East Capital Bering Russia Fund 22

East Capital Bering Ukraine Fund 24

East Capital Bering Balkan Fund 26

East Capital Bering Central Asia Fund 28

East Capital Bering New Europe Fund 30

East Capital Power Utilities Fund 32

East Capital Russian Property Fund 34

Melon Fashion Group (MFG) 36

CORPORATE GOVERNANCE

Corporate Governance Report 38

Q&A with the Chairman of the Board of Directors 39

The Board of Directors 40

Management 47

Internal control 48

Managing our risks 50

Corporate responsibility 53

Fees 54

FINANCIAL STATEMENTS

Administration Report 58

Financial statements 60

Notes to the financial statements 65

Audit Report 80

KARA SEA

LAPTEV SEA

EAST SIBERIAN

SEA

SEA OF OKHOTSK

BLACK SEA BALTIC SEA

Gulf of Yana

Bering Strait

CAS PIAN S

EA

Sakhalin

New Z

eml ya

Komsomolets Island

Bol'shevik Island October Revolution Island

Kotel'nyy Island

Novaya Sibir' Island Lyakhov Islands

New Siberian Islands

Wrangel Island

Commander Islands

Kuril Islands Anjou Islands Pioner I.

Danube

Irtysh Ishim

Aldan Lena

Lena

Amur Lower Tunguska

Ob Ob

Irtysh Kama

Kolyma

Yenisey Yenisey

Volga

BalkhashLake AralSea

Lake Zaysan

Lake Baikal (1637 m) LakeTaymyr

LakeLadoga LakeOnega

Tigris Euphrates

4750 Kronotskaya Sopka

5642 Elbrus

1895

7439 Pik Pobedy

4506 Belukha

Kol yma R an ge Verkhoy

an

s k R an ge

Dzhugdzhur Range C e n t r a l S i b e r i a n

P l a t e a u W e s t

S i b e r i a n P l a i n

Ural

M ountains

Koryak Range T a y m y r P e n i n s u l a

N o r t h S i be r i a n L o w l a nd

TASHKENT DUSHANBE ASHGABAT

BISHKEK ASTANA MOSCOW

VILNIUS RIGA

TALLINN

MINSK WARSAW KIEV PRAGUE

BRATISLAVA BUDAPEST

SARAJEVO TIRANA

SOFIA SKOPJE PODGORICA

BUCHAREST BELGRADE LJUBLJANA ZAGREB

CHISINAU (KISHINEV)

ANKARA BAKU TBILISI YEREVAN

Khabarovsk

Vladivostok

Istanbul Izmir

Arkhangel'sk

Almaty (Alma-Ata)

Irkutsk Krasnoyarsk Tomsk Novosibirsk Barnaul Omsk Chelyabinsk Yekaterinburg Perm' Kazan'

Samara Orenburg

Ufa Nizhniy Novgorod

Saratov

Volgograd Astrakhan' Ryazan'

Penza

Rostov-na-Donu Voronezh Tula Yaroslavl' St Petersburg

TURKEY GEORGIA HUNGARY

MOLDOVA CZECH REP. SLOVAKIA

POLAND

ROMANIA SLOV.

ALBANIA MONTENEGRO

MACEDONIA BOSNIA& H.

BULGARIA

KYRGYZSTAN KAZAKHSTAN ESTONIA

LATVIA LITHUANIA

BELARUS UKRAINE

SERBIA

R U S S I A N F E D E R A T I O N

TAJIKISTAN UZBEKISTAN

TURKMENISTAN ARMENIA

AZERB.

CROATIA

AR CTI C CI R CLE AR CTI C CI R CLE

KARA SEA

LAPTEV SEA

EAST SIBERIAN

SEA

SEA OF OKHOTSK

BLACK SEA BA LT IC S EA

Gulf of Yana

B er in g S tra it

C AS PIA N

S EA

Sakhalin

N e w Z

e m l y a

Komsomolets Island

Bol'shevik Island October Revolution Island

Kotel'nyy Island

Novaya Sibir' Island Lyakhov Islands

New S iberia n Islan ds

Wrangel Island

Commander Islands

Ku ril Isl an ds Anjou Islan ds

Pioner I.

Danube

Irtys h Ish im

Ald an Lena

Lena

Amur Low er Tun guska

Ob Ob

Irty sh Kam a

Ko lym a

Yen isey Yen ise y

Volg a

Balkhash Lake

Aral Sea

Lake Zaysan

Lake Baikal (1637 m)

Lake Taymyr

Lake Ladoga Lake Onega

Tigris Euphrates

Kronotskaya4750 Sopka

5642Elbrus

1895

7439 Pik Pobedy

Belukha4506

K o l y m a R a n g e

h o r k e V

y a n s k

R a n g e

Dz hu gd zh ur R an ge

C e n t r a l S i b e r i a n P l a t e a u

W e s t

S i b e r i a n

P l a i n

U r a l

M

o u n t a i n s

Ko rya k R ange T a y m y r P e n i n s u l a

N o r t h S i b e r i a n L o w l a n d

TASHKENT DUSHANBE ASHGABAT

BISHKEK ASTANA MOSCOW

VILNIUS RIGA

TALLINN

MINSK

WARSAW KIEV

PRAGUE BRATISLAVA

BUDAPEST

SARAJEVO TIRANA

SOFIA SKOPJE PODGORICA

BUCHAREST

BELGRADE LJUBLJANA ZAGREB

CHISINAU (KISHINEV)

ANKARA

BAKU TBILISI YEREVAN

Khabarovsk

Vladivostok

Istanbul Izmir

Arkhangel'sk

Almaty (Alma-Ata)

Irkutsk Krasnoyarsk Tomsk

Novosibirsk Barnaul Omsk Chelyabinsk

Yekaterinburg Perm'

Kazan'

Samara Orenburg

Ufa Nizhniy

Novgorod

Saratov

Volgograd Astrakhan' Ryazan'

Penza

Rostov-na-Donu Voronezh Tula Yaroslavl' St Petersburg

TURKEY

GEORGIA HUNGARY

MOLDOVA CZECH REP. SLOVAKIA

POLAND

ROMANIA

SLOV.

ALBANIA MONTENEGRO

MACEDONIA BOSNIA& H.

BULGARIA

KYRGYZSTAN

KAZAKHSTAN

ESTONIA LATVIA LITHUANIA

BELARUS

UKRAINE

SERBIA

R U S S I A N F E D E R A T I O N

TAJIKISTAN UZBEKISTAN

TURKMENISTAN

ARMENIA AZERB.

CROATIA

AR CTI C CI R CLE AR CTI C CI R CLE

This is East Capital Explorer

In November 2007, we opened a new door to investing in Eastern Europe by launching East Capital Explorer on the Stockholm Stock Exchange, making hard-to-reach investments in our investment region easi- ly accessible to all investors.

Our business concept is to offer our share- holders investment exposure to unlisted and listed

companies in otherwise hard-to-reach parts of the Eastern European markets. This is primarily accomplished through invest- ing in East Capital’s special fund products, such as the East Capital Bering funds and East Capital’s private equity funds. We also have the possibility to make direct investments in specific companies.

Our objective is to achieve long-term capital appreciation for our shareholders. Investing in emerging markets is often related with significant risks, therefore all investments in these markets should be made assuming a long-term perspective.

Our strategy is primarily to invest in sectors that have the most to gain from the long-term development trends of the region, in this context, but not limited to, the catch-up process and EU conver- gence. Examples of some of our key sectors providing interesting investment opportunities over the long-term are the power utili- ties, retail and consumer goods, real estate and finance sectors.

Read more about our current view on our key sectors on pages 14–15.

Dividend policy

East Capital Explorer does not intend to pay any dividends, although the Board of Directors retains the flexibility to propose to do so. Any returns will, instead, be reinvested in accordance with the investment policy. This dividend policy reflects the judg- ment that the continuous reinvestment of the capital will best allow us to build a strong investment base and to generate long- term value for our shareholders.

The East Capital Explorer share offers access to:

 A dynamic region: Eastern Europe is one of the most dynamic regions in the world - including almost 30 countries and 450 mil- lion people across 12 time zones

 An experienced Investment Manager: the investment activi- ties of East Capital Explorer are managed by East Capital who is one of the largest investors dedicated to the region, having an on-the-ground presence, a wide network and a 11 year track- record

 A well-diversified portfolio: we primarily invest in East Capi- tal’s Private Equity and Semi-public Equity funds which other- wise require high minimum investments and long investment periods, many of which are currently closed to new investors. At the end of December 2008, our portfolio included exposure to approximately 400 companies

 Attractive sectors: East Capital Explorer invests broadly

across a number of sectors, all of which stand to gain from the

long-term growth prospects and development in the region

KARA SEA

LAPTEV SEA

EAST SIBERIAN

SEA

SEA OF OKHOTSK

BLACK SEA BA LT IC S EA

Gulf of Yana

B er in g S tra it

C AS PIA N

S EA

Sakhalin

N e w Z

e m l y a

Komsomolets Island

Bol'shevik Island October Revolution Island

Kotel'nyy Island

Novaya Sibir' Island Lyakhov Islands

New S iberia n Islan ds

Wrangel Island

Commander Islands

Ku ril Isl an ds Anjou Islan ds

Pioner I.

Danube

Irtys h Ish im

Ald an Lena

Lena

Amur Low er Tun guska

Ob Ob

Irty sh Kam a

Ko lym a

Yen isey Yen ise y

Volg a

Balkhash Lake

Aral Sea

Lake Zaysan

Lake Baikal (1637 m)

Lake Taymyr

Lake Ladoga Lake Onega

Tigris Euphrates

Kronotskaya4750 Sopka

5642Elbrus

1895

7439 Pik Pobedy

Belukha4506

K o l y m a R a n g e

h o k r e V

y a n s k

R a n g e

Dz hu gd zh ur R an ge

C e n t r a l S i b e r i a n P l a t e a u

W e s t

S i b e r i a n

P l a i n

U r a l

M

o u n t a i n s

Ko rya k R ange T a y m y r P e n i n s u l a

N o r t h S i b e r i a n L o w l a n d

TASHKENT DUSHANBE ASHGABAT

BISHKEK ASTANA MOSCOW

VILNIUS RIGA

TALLINN

MINSK

WARSAW KIEV

PRAGUE BRATISLAVA

BUDAPEST

SARAJEVO TIRANA

SOFIA SKOPJE PODGORICA

BUCHAREST

BELGRADE LJUBLJANA ZAGREB

CHISINAU (KISHINEV)

ANKARA

BAKU TBILISI YEREVAN

Khabarovsk

Vladivostok

Istanbul Izmir

Arkhangel'sk

Almaty (Alma-Ata)

Irkutsk Krasnoyarsk Tomsk

Novosibirsk Barnaul Omsk Chelyabinsk

Yekaterinburg Perm'

Kazan'

Samara Orenburg

Ufa Nizhniy

Novgorod

Saratov

Volgograd Astrakhan' Ryazan'

Penza

Rostov-na-Donu Voronezh Tula Yaroslavl' St Petersburg

TURKEY

GEORGIA HUNGARY

MOLDOVA CZECH REP. SLOVAKIA

POLAND

ROMANIA

SLOV.

ALBANIA MONTENEGRO

MACEDONIA BOSNIA& H.

BULGARIA

KYRGYZSTAN

KAZAKHSTAN

ESTONIA LATVIA LITHUANIA

BELARUS

UKRAINE

SERBIA

R U S S I A N F E D E R A T I O N

TAJIKISTAN UZBEKISTAN

TURKMENISTAN

ARMENIA AZERB.

CROATIA

AR CTI C CI R CLE AR CTI C CI R CLE

Per 31 December (EUR) Total Per share

Net Asset Value 265m

(SEK 2,883m)

7.31 (SEK 79.53)

Three new investments and one commitment totalling EUR 70m:

21 April: EUR 10m invested in new East Capital Bering New Europe Fund 27 May: EUR 40m committed to new East Capital Russian Property Fund 28 October: First direct investment: EUR 10m invested in unlisted Russian fashion retailer MFG

13 November: Additional EUR 10m invested in newly issued shares in the East Capital Bering Balkan Fund

Market capitalisation 134m (SEK 1,458m)

3.69 (SEK 40.20)

Total cash and deposits 176m 4.85

• Committed capital 39m 1.08

• Available capital 137m 3.78

This is East Capit al Explor er

70.8% Cash

Listed 20.1%

Unlisted 9.1%

Type of company, % Sector breakdown, %

70.8% Cash

8.5 Power Utilities 5.0 Retail

4.2 Banking & Finance 1.6 Consumer Goods 1.5 Oil & Gas 1.3 Real Estate

1.0 Constr. & Constr. Mtrl.

0.9 Media 0.7 Electronics 4.5 Other sectors

Country breakdown, %

70.8% Cash

14.3 Russia 2.9 Ukraine 1.9 Kazakhstan 1.8 Serbia 1.3 Turkey 1.0 Romania 1.0 Slovenia 0.8 Georgia 0.7 Baltics 3.5 Other countries

2008 IN FIGURES

Cash includes both EUR 176m in cash and deposits as well as any cash in the underlying funds on 31 December 2008.

2008 was a stark reminder of just how dynamic and fast-changing our world is.

The year began with economic growth in much of the world booming and inflation running out of control. Policymakers wor- ried about overheating and record high commodity prices. By year end, those concerns had disappeared and attention shifted to the aftermath of the financial crisis and addressing its effect on the real economy.

It became obvious that the world economy is truly global. Decoupling, the theory that emerging markets could keep on powering ahead despite problems in the west, was quickly debunked. It turned out that whether Americans or Russians, we live on the same planet, and the global financial system is very interdependent indeed.

We were also reminded what a fragile thing confidence is. While the positive sen- timent lasted, confidence was so high that political risks, economic imbalances and unsustainable business models fuelled by excessive debt were often overlooked as the rising tide lifted nearly all boats. Once confidence disappeared, the sentiment changed so completely that markets and companies were punished by equal meas- ure, no matter the fundamentals or inher- ent values. The shift from overly optimistic to totally pessimistic, especially regarding Eastern Europe, has been quick and total.

Is it rational?

As befits turbulent times and periods of high uncertainty, there has been lots of speculation about “paradigm shifts”.

Do the events of 2008 signal the end of free market economic systems? Will the role of the financial sector be fundamen- tally changed? Was investing in emerg- ing markets simply a fad that is now over?

Well, the truth is that things are not black or white and it is wise not to get carried away by dramatic prophesies, in any direction. The current environment makes

it even more important to be patient and long-term and to see through all the noise and data out there in order to discover the valuable pieces of information. Having experts one can trust is therefore of even greater value.

So, how did we do in 2008? Our investments that were made in 2007 and early 2008, according to what we had promised at the time of our IPO in Novem- ber 2007, were down by about 60 percent during the year. As market uncertainty spread and turbulence increased, we held off investing, and focused on preserving our cash, which at the year end stood at at

EUR 176m, contributing to almost 70 per- cent of our net asset value. This is obvi- ously a great strength in today’s environ- ment, where access to external financing is limited and investors are receiving cash calls from many companies.

Looking ahead to 2009, we are quite optimistic about our potential to con- tinue building an attractive portfolio for our shareholders. First, East Capital, our Investment Manager, has in its spine the invaluable experience from 1998-99, the previous time our region was hit by a cri- sis. In fact, East Capital’s reputation was earned very much by sticking to its vision in a time when these markets were out of favor, when it was possible to find great companies at bargain prices as few oth- ers dared to invest.

Our region will clearly experience a growth slow-down and many of the coun- tries will go into recession in 2009. The convergence trend has not reversed, though, just the pace has slowed. Actual-

ly, a crisis always presents opportunities.

For some countries, it is an opportunity to stop being overly reliant on one sector or commodity and diversify their economies, thus building a much more sustainable foundation for future growth. For others, it is an opportunity to correct the imbalanc- es that have been so easy to build up over the last few years due to relatively cheap credit and high capital inflows. For nearly all countries in our region, it is an opportu- nity to improve in terms of transparency, governance, rule of law, so that once mar- kets stabilise and attention returns to fun- damentals, they can once again benefit.

When risk appetite and sentiment recover, we are convinced that more investors will come back to these markets to get better returns as the long-term development out- look of these economies remains good.

We have not substantially revised our list

of favorite sectors due to the events of 2008. It is true that banking is a challeng- ing sector currently as considerable risks remain, but here too opportunities will arise once greater stability has returned.

For now, we focus very much on sectors that are relatively more resilient to chal- lenging economic circumstances, such as basic consumer goods and retail. Within these sectors, we look for companies with low debt and strong management teams, who are likely to be able to turn the tough market conditions to their advan- tage. Also, interesting opportunities have started to appear in real estate, where distressed developers are looking to sell assets to raise cash. We remain ready to take advantage of these opportunities, but we are not in a rush.

Also, our general investment approach remains unchanged. Having a diversified portfolio continues to be an important mechanism to mitigate company-specific risks. Our core focus remains on private

So much has been written about the historic events of 2008, I will only make a few observations. Most importantly, how have the changes in the world affected East Capital Explorer?

Is our business model still valid?

Comment from the CEO

We look for companies with low debt and strong management teams, who are likely to be able to turn the tough market conditions to their advantage.

“ ”

Q&A

wIth CEO Gert Tiivas

equity and illiquid investments, although now that valuations in public markets have come down substantially, we may take advantage of opportunities that arise in listed small- and mid-caps. Finally, our business model continues to be one that does not rely on leverage, and nowadays it need not be explained why this is a clear advantage.

We are not calling a bottom; market timing is not our business. Similarly, we are not looking for a specific trigger that would change investors’ attitudes. We are looking for great companies with sustain- able business models, which need capi- tal to grow and which are ready to invite us in at the right terms. The good news is that “old-fashioned” values and business models are back: hard work, prudence and humility are more important than lofty goals, sophisticated financial engineering and loud self-promotion. Fortunately for us, there are many hard-working entre- preneurs and solid companies out there in our part of the world.

We realize that our strong cash posi- tion now has several times the purchasing power it had just a year ago. But we also realize the responsibility it entails, espe- cially given the discount our share has been trading at compared to our net asset value. As the value of cash has grown sig- nificantly for everyone, we must work even harder now to ensure that our investments deliver attractive returns for our share- holders.

Stockholm, March 2009

Gert Tiivas CEO

The world looks very different from when you launched in November 2007.

How has this affected East Capital Explorer’s business concept and objec- tives?

In short: yes, the world has changed very much, and no, this has not changed our business model. We are confident that the events of 2008 have not fundamental- ly altered the long term attractiveness of investing in Eastern Europe, and that our favorite sectors will continue to offer good investment opportunities. The next few years will surely be more challenging for many of our countries and companies. But we have a well-diversified portfolio, a busi- ness model that does not rely on lever- age, and we still have substantial financial resources. Those key competitive advan- tages will allow us to deliver long term attractive returns for our shareholders.

With the benefit of hindsight, would you have done anything differently during 2008?

Well, I think nearly all investors in the world would wish they had just stayed in cash during 2008. We made an active decision not to invest when markets became turbu- lent and announced during the summer that markets conditions would affect the speed of our investments. This has been appreciated by our investors. Clearly, our substantial financial resources are even more valuable now. I think that is an attractive proposition for both existing and potential shareholders.

How has the harsh economic climate affected your view on the region?

The people in our region have experienced tough times and challenges many times before. Eastern Europe really deserves credit for the great job done in improving the economy in the last 10-15 years. So I am convinced that also this crisis will show that many countries can turn it around into an opportunity to push ahead with much- needed reforms. We will see these econo- mies emerge even stronger and better diversified in a few years time. We should not underestimate our region’s capacity to change – the hunger for a better life is a very powerful driver. And even when the

convergence process will not proceed as quickly as the optimists would wish, what really matters is the trend and motivation to improve, which has not broken.

Why don’t you just invest in some of the large caps now trading at much reduced valuations?

As a small investment company, we must have a clear focus: our niche remains providing easy access to hard-to-reach investments in Eastern Europe. We can be a bit opportunistic in public markets too, as it is now possible to find good small and mid cap companies at quite attractive valuations, but our core focus has not changed.

The turbulence could continue for quite some time. When will you be fully invested?

We made a couple of new investments late in 2008. We are now working on a number of ideas, which look quite inter- esting. Again, we are not participating in any race against a clock, our job is to make good investments that will produce attractive returns for our shareholders. So you can continue to expect us to be very cautious with the shareholders’ money.

We have therefore decided not to set a new date for being fully invested.

This is East Capit al Explor er

The East Capital Explorer share

The East Capital Explorer share was listed on the Stockholm Stock Exchange on 9 Novem- ber 2007. The share is traded on NASDAQ OMX Nordic List, Mid Cap. The closing price on 30 December 2008 was SEK 40.20, giving East Capital Explorer a market capitalisation of SEK 1,458m.

Net Asset Value and share price development 2008 2007*

Net Asset Value per share, EUR 7.31 10.87

Net Asset Value per share, SEK 79.53 102.61

Net Asset Value development during the year, EUR -32.8% 0.7%

Share price on 31 December, SEK 40.20 100

Market capitalisation on 31 December, MSEK 1,458 3,627

Share price development during the year -59.8% 0%

Lowest, SEK 37.30 95.50

Highest, SEK 102 108

Total turnover, shares 15,696,617 6,157,487

Average daily turnover, shares 62,288 186,591

Development of relevant indices

OMXSPI -42.0% -5.3%

RTS 1 -66.9% 1.8%

RTS 2 -75.1% 10.9%

MSCI EM Europe -61.7% 3.4%

Share capital and number of shares

Share capital at 31 December, EUR 3,627,016 3,627,016

Number of shares at 31 December 36,270,160 36,270,160

Average number of shares 36,270,160 35,032,755

Ownership structure

Number of shareholders on 31 December 9,984 11,648

% shares held outside Sweden 35.1% 46.8%

* 9 November – 31 December 2007.

: The East Capital Explorer Share

OMXSPI: includes all share on NASDAQ OMX Nordic Exchange Stockholm.

RTS Index: includes the 50 largest companies traded on the Russian Trading System (RTS).

: The East Capital Explorer NAV

RTS 2 Index: includes 78 companies on the RTS that have limited trading volumes.

MSCI EM Europe Index: includes Russian, Polish, Hungarian, Czech and Turkish equities.

0 20 40 60 80 100 120

SEK Volume (shares) SEK Volume (shares)

0 200 000 400 000 600 000 800 000 1 000 000 1 200 000

Volume East Capital Explorer RTS 2 Index MSCI EM Europe Index RTS Index SAX Index Explorer NAV

18.03.2009 09.11.2007

0 20 40 60 80 100 120

0 200 000 400 000 600 000 800 000 1 000 000 1 200 000

Volume East Capital Explorer RTS 2 Index MSCI EM Europe Index RTS Index SAX Index Explorer NAV

01.01.2008 31.12.2008

Share price development since listing 9 November 2007 Share price development during 2008

Great Britain 9.0%

Norway 6.8%

Luxembourg 5.3%

USA 4.2%

Ireland 1.9%

Netherlands 1.8%

Switzerland 1.7%

Finland 1.1%

Denmark 0.6%

Other 32 countries 2.7%

Sweden 64.9%

20 largest shareholders and custodians

¹

on 31 December 2008 Number of

shares Holding. %

Alecta Pensionsförsäkring 2,400,000 6.6

Morgan Stanley & Co Intl PLC. 2,217,880 6.1 East Capital Eastern European Fund 2,050,000 5.7

SEB-Stiftelsen 1,500,000 4.1

DNB NOR Bank ASA 1,456,200 4.0

East Capital Partners

²

1,425,350 3.9

Apoteket AB Pension Foundations 1,409,828 3.9

Volvo Related Foundations 1,304,800 3.6

Stena Sphere 1,114,400 3.1

Omnibus Account, State Street 981,958 2.7

Avanza Pension 769,173 2.1

SEB Trygg Liv 672,679 1.9

Handelsbanken fonder incl XACT 523,907 1.4

ABN AMRO BANK N.V. 490,860 1.4

Nordnet Pensionsförsäkring AB 483,182 1.3

Skandia 460,000 1.3

Fjärde AP-Fonden 441,000 1.2

JP Morgan Bank 394,930 1.1

Nordea Bank Finland ABP 379,113 1.0

SIX SIS AG 376,770 1.0

Total top 20 shareholders and custodians 20,852,030 57.4 Other 9,964 shareholders and custodians 15,418,130 42.6

Total 36,270,160 100.0

Distribution of ownership by size of holding No. of shares

per holding No. of shareholders

% of share-

holders No.

of shares

% of shares and votes

1-500 7,770 77.8 1,653,220 4.6

501-1,000 918 9.2 811,054 2.2

1,001-5,000 920 9.2 2,390,502 6.6

5,001-10,000 147 1.5 1,160,190 3.2

10,001-15,000 45 0.4 557,669 1.5

15,001-20,000 38 0.4 715,320 2.0

20,001- 146 1.5 28,982,205 79.9

Total 9,984 100.0 36,270,160 100.0

Distribution of ownership by country*

Banks and insurance

companies 14.8%

Other legal entities 13.9%

Mutual funds 11.2%

Pension foundations 11.0%

Private individuals 11.1%

Non-governmental and labour organisa-

tions 2.7%

Swedish state and

municipalities 0.2%

Foreign shareholders

35.1%

Distribution of ownership by type of shareholder

SHARE FACTS

Listing: NASDAQ OMX Nordic, Mid Cap Listed since: 9 November 2007

ISIN-code: SE002158568 GICS-code: 40203010

Ticker: ECEX

Reuters: ECEX.ST

Bloomberg: ECEX SS Equity

Latest share price: See www.eastcapitalexplorer.com

This is East Capit al Explor er

* A majority of the shares registered by foreign shareholders are registered through custodians.

This means that the beneficial shareholders are not officially registered and the actual domicile of the shareholder cannot be verified and may be different from the domicile of the custodian.

Source: Euroclear Sweden AB (formerly VPC).

1

A majority of the shares registered by foreign shareholders are registered through custodians.

This implies that the beneficial shareholders are not officially registered.

2

East Capital’s own investment and investments by Partners in East Capital.

Shares and voting rights

East Capital Explorer has one class of shares, in total 36,270,160 shares. One share entitles the holder to one vote and all shares

have equal rights in the assets and profits of the Group. Own shares

The 2008 Annual General Meeting authorized the Board to

decide on acquiring the company’s own shares. As of 31 Decem-

ber 2008, no shares had been bought back by the company. See

also “Key events after the end of the financial year” on page 58.

JANUARY FEBRUARY MARCH APRIL MAY JUNE

On 1 January Slovenia becomes the first East- ern European country to assume the Presidency of the EU.

Ukraine is welcomed as a WTO member.

Dmitri Medvedev wins the Russian presidential election on 2 March, with 70% of the votes.

The Ukrainian govern- ment approves a list of 406 companies set to sell their state-owned shares during 2008.

Russian RTS index reaches an all-time-high on 19 May, closing at 2,488 and a market capitalization of USD 1,600bn.

Central banks in Russia and Ukraine actively intervene on the issue of increasing inflation.

Increases in banking re- serve requirements are announced in order to suppress the countries’

appetite for foreign currency.

Kosovo declares independence on 17 February. The US and several larger EU members acknowledge the independence while Russia and Serbia do not.

The ownership conflict between Russian TNK and British Petroleum over the joint venture, TNK-BP, turns into a long-drawn out power struggle over differing views on the company’s international expansion.

Serbia signs the Stabi- lisation and Association Agreement (SAA), an important milestone in Serbia’s integration with Europe.

Croatia and Albania are invited to join NATO at the summit in Bucharest.

President Saakashvili’s ruling party wins the parliamentary elections in Georgia.

Turkey’s stand-by- arrangement with the IMF comes to an end. In November, Turkey and IMF start discussions over a new stand-by arrangement.

Bosnia and Herze- govina signs the SAA agreement, a first step towards membership of the EU.

On 6 June, Russian power utility giant, RAO EES’ shares stop trading on the Russian exchanges ahead of the break up of the power monopoly and unbundling into 23 separate companies on 1 July. This is an important milestone in the ongoing power reform and will attract private investors into the sector to help finance the significant investments needed in coming decades.

Eastern Europe during 2008

Certain important events in the region

How we invest

JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER

On 11 July, oil prices rise to a new record peak at USD 147.27.

On 21 July, Serbian authorities arrest the war criminal Radovan Karadzic. EU leaders hail this as a key step in the Balkan nation’s ac- cession to the Union.

Several Eastern European countries report record harvests.

In Ukraine the grain harvest increased by almost 90%, compared to 2007.

Lehman Brothers declares bankruptcy on 15 September, sending shock waves through global financial markets including Eastern Europe. Moscow stock exchanges, RTS and MICEX, close for sev- eral days following the strict Russian market rules to freeze market activity in turbulent trading.

Heavy leverage among Russian oligarchs be- comes publically known.

Loans from state-owned banks are offered to assist these companies through the crisis.

Turkey improves bilateral relations with Armenia with the first Turkish state visit in Armenia in ten years.

IMF approves a standby arrangement with Ukraine totalling USD 16.4bn and a 17 month stand-by arrangement with Hungary totalling EUR 12bn.

EBRD announces investments of EUR 7bn and additional in- vestments of up to EUR 20bn together with partners during 2009.

Serbia begins nego- tiations with IMF which result in a 15 month EUR 402m stand-by arrangement being approved in mid-January 2009.

On 19 December, the IMF, together with Nordic countries, an- nounces plans to lend USD 2.4bn to Latvia to support the stabiliza- tion of the country’s economy.

On 21 December, oil is trading at a year-low of USD 33.87 per barrel, less than one fourth of the peak price in July.

Turkish Constitutional Court rules against clo- sure of the AKP which had been accused of undermining the coun- try’s secular system.

Uncertainty increases as regards the Russian steel company Mechel.

Prime Minister Putin publicly announces that Mechel has been applying unfair transfer pricing by selling coking coal more expensively to domestic customers than through exports.

International investors draw negative parallels with Yukos in 2004, and the Mechel share plunges more than 60%.

An armed conflict breaks out between Russia and Georgia over the break-away republic of South Ossetia.

Orange coalition in Ukraine breaks down.

Despite this, political progress is made on certain new corporate regulations which will improve the investment climate.

Serbia takes another step on its convergence path by ratifying the SAA with the EU.

For the fifth year in a row, Eastern Europe is the region that has implemented most busi- ness-friendly reforms in the world, according to the World Bank’s yearly report, “The Cost of Doing Business”.

Kazakhstan announces comprehensive financial stimulus package of USD 18bn. The pack- age, equivalent to 20%

of the country’s GDP, includes emergency funding for the bank- ing, property and agricultural sectors and small and medium sized businesses.

Russian Central bank decides to expand the band in which the rouble trades, effec- tively a soft depreciation through a number of mini-devaluations.

The Latvian state takes control of the country’s second largest bank Parex Banka in order to guarantee the stability of the financial system.

Gas conflict between Russia and Ukraine.

The conflict intensifies

in January 2009 with

gas shortages in several

countries in Eastern

Europe.

Our investment region

A new chapter in modern economic history

The abrupt halt in global economic activity witnessed during the second half of 2008 has no precedents in modern economic history in terms of speed and severity. The better-than-expected performance in early 2008 was a sharp contrast to the financial turmoil that followed, with many econo- mies around the world facing recession.

Forecasts for GDP growth and other key indicators have been revised constantly, and only in one direction.

Whilst acute financial shock and sharp economic losses characterised, in partic- ular, the US economy in 2008, it is clear that all economies of the world have been affected. The US economy is set to shrink by closer to 4 percent during 2009 while the GDP in the 16 countries using the Euro will shrink by closer to 3 percent in 2009, and will record modest growth of 0.6 percent in 2010.

As widely confirmed as the difficult economic scenario for 2009 may be; cer- tain countries in the world, those that are better balanced, less reliant on exports and more capital rich are relatively better positioned to be able to withstand this challenging period.

Eastern Europe in the global economy So how have Eastern European econo- mies fared in the general havoc of 2008?

No doubt, 2008 meant the end to the decoupling hypothesis, the theory that emerging economies would be able to remain immune to the events in the rest of the world and to continue to grow. The current crisis, although it may have origi- nated in the US, has had clear and painful repercussions all over the world. With the signs of recession now evident in many countries, including the economies in our investment region, attention has turned from the credit crisis, so predominant dur- ing the last half of 2008, to the impact on the real economies. It goes without saying that there will be a focus on gauging the gradual impact of the tremendous amount of liquidity provided via the wide variety of government and multilateral rescue pack- ages.

2008 saw increased activity from multi- lateral institutions, such as the IMF, World Bank and the European Central Bank (ECB), promising increased support to the countries of Eastern Europe. IMF has come to the help of Ukraine, Latvia, Ser- bia, Belarus, and several other countries are in the negotiation process with the IMF or very close to needing its help. A significant contribution has also come from the European Bank for Reconstruc- tion and Development (EBRD) announc- ing a plan to invest EUR 7bn on its own, and up to EUR 20bn together with com- mercial partners, during 2009. Mean-

while, the European Investment Bank (EIB) has promised a EUR 1bn loan to Romania and EUR 250m to Serbian small and medium-sized enterprises. Apart from the direct supportive effect of these meas- ures in the short-term, long-term effects due to the conditions attached to this sup- port can also be expected. Economically necessary, but politically difficult, reforms and tighter fiscal policies will hopefully be realised, ensuring that these economies will come out stronger in the end. There is also a growing discussion about the extent of help to be provided by the Euro- pean Union, and its various institutions, to the Eastern European states, both those that are members and those that are not.

Major challenges during 2009

Inflation, one of the major concerns in 2008, will come down considerably in 2009 on the back of falling commodity prices and reduced growth. However, it is less clear how interest rates will adjust as many economies have had negative or very low real interest rates. Some of the more advanced economies in East- ern Europe will probably lower rates, but not as much as or as rapidly as in West- ern Europe, and certain countries will be forced to maintain, or even increase, rates to defend their currencies, at least during the first half of the year.

Investments, which have been one of

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Hungary

G7 US Eurozone UK Czech Rep. Russia Poland Ukraine Kazakhstan

2007 2008F 2009F

GDP growth, %

Source: Deutsche Bank, as of 11 March 2009 (2007 data on GDP and C/A is IMF WEO Oct 2008).

How we invest the key driving forces behind the positive

development in Eastern Europe, have now seen a particularly abrupt decline, reflect- ing the impact of weakening demand, a drop in investor confidence, tighter financ- ing conditions for companies and a lower availability of credit. This cycle is likely to continue during 2009.

Also, capital inflows, both portfolio and foreign direct investment flows, already in 2008 reduced significantly from the highs reached in 2007, and these inflows are expected to fall further in 2009. Many countries in Eastern Europe have ben- efitted from access to capital markets, as well as from bank financing, often through Western banks that have been active in the region. Capital market financing is now less available for all players. Conse- quently, it is quite likely that loan growth, which has been in high double digits in many countries, will now fall substantially, or even turn negative, putting a break on growth for even the healthier companies and countries.

Trade, which has been an important growth driver for certain countries in our region, is also falling. In spite of the deval- uation of real exchange rates throughout many countries in Eastern Europe, it is

much more difficult for a country to export itself out of a negative scenario due to the fact that many of the Western countries are also going into recession and reduc- ing their imports. Another barrier could be growing protectionism; we have recently seen worrying trends in the car indus- try and other sectors under pressure to enact anti-competition and protectionist measures. On the other hand, falling real exchange rates make local production cheaper in relative terms and countries with large domestic markets can, in partic- ular, benefit from import substitution, thus supporting, or even creating, industries that could serve as the base for the next growth phase.

VARIANCES BETWEEN COUNTRIES Taking a closer look at the countries in our investment universe, variances are exaggerated by the rapid developments and heavy volatility of the past six months, making it even more difficult to generalise about the region.

Russia

In Russia, the sharply falling oil prices put major pressure on the rouble, and the Russian Central Bank spent hundreds of billion of dollars to defend the currency.

Russia was particularly hit by an increas- ing aversion to risk during 2008 and the global deleveraging process that fol- lowed, forcing hedge funds and other

international investors and overleveraged oligarchs to aggressively sell off Russian assets.

Specific corporate and political events in Russia during 2008, such as the power struggle in TNK-BP, the dispute in the steel company Mechel and, not least, the conflict between Russia and Georgia over the breakaway republics of South Ossetia and Abkhazia, contributed to deteriorat- ing confidence in Russian markets. These developments also turned the spotlight back onto the political risks of investing in Russia and emerging markets. Internation- al media and investors were quick to draw parallels with the financial crisis Russia experienced in 1998. Arguably, the dra- matic decline of the Russian RTS index of -75 percent in the seven months following its all-time-high on 19 May 2008, jogged investors’ memories of the turbulent 1998 financial markets. However, it is important to remember that the current crisis origi- nated in the US, spreading across the world, and is not primarily a Russian cri- sis as was the case in 1998. It is equally important to grant Russia credit for being a fundamentally very different country today, compared with 1998 (see table to the left: Russia: a comparison with 1998).

The Russian government’s response during the autumn was relatively far- reaching, including a wide variety of measures spanning from tax cuts, such as decreased customs duties, quicker 1998 2008

GDP (USDbn) 271 1,779

FX Reserves (USDbn) 8 427

Gov’t External Debt (% GDP) 50 2.89 GDP/Capita (USD) 1,834 12,579 Market capitalisation (USDbn) 17 265 Average monthly wage (USD) 63 608 Retail sales, yoy growth (%) -15 12.95 Mobile penetration (%) 0.5 119.3

Car sales (mn) 1.2 2.7

Oil price USD/barrel 13 51

Inflation rate (%) 84 14

Interest rate (%) 150 13

Political stability Weak Strong

Valuation (P/E) 3 3

RTS performance

following year (%) 197 ?

Sources: Haver, IMF WEO Oct 2008, Autostat, EBRD, BOFIT, Bloomberg, East Capital.

Russia: a comparison with 1998

13.9

-11.6

-19.7 -20.5

-25.0 -26.2

-29.2 -29.5 -31.6 -38.1 -50%

-40%

-30%

-20%

-10%

0%

10%

20% JPY EUR KZT NOK SEK RON RUB PLN TRY UAH

% change versus USD

Currency devaluation 1 January 2008 – 13 March 2009

Source: Bloomberg.

VAT refunds, reduced tax on profits for businesses, to higher welfare payments and continued commitments to stimu- late housing. Although the package was launched quickly, which was impressive, the government was less efficient in mate- rialising many of these measures, with Russia loosing both valuable time and investor confidence as a consequence.

After a nine-year stretch of strongly pos- itive growth in Russia, 2009 will, accord- ing to the latest forecasts, see negative growth. The severity of the current crisis will hopefully provide sufficient incentive for the country to push ahead with much- needed structural reforms, public infra- structure investments and the instigation of pension reforms that should provide the equity market with the stable long- term capital it is lacking today. In addition, Russia has a well-educated population

with strong capabilities in science and engineering and this advantage has not been fully utilised in the corporate sector.

In other words, the current crisis could accelerate a well-needed move away from commodities dependence towards a more diversified economy.

Kazakhstan

Kazakhstan, also oil price dependent, has significant national reserves amounting to USD 47 billion, greater than the total for- eign debt of the entire banking sector. The country has also been negatively affected by falling commodity prices and significant capital outflows. Here a massive stimulus plan was put into place in 2008, equiva- lent to around 20 percent of GDP, making it the largest rescue package in the world in relation to the size of the economy. Sig- nificant support packages to the banking sector have provided stability to the most important banks in the region, with nation- alization of BTA and Alliance banks in early 2009 as a consequence.

Ukraine

Ukraine, where corporate profitabil- ity had been at a record high in the first half of 2008, suffered significantly dur- ing the second half of 2008. High politi- cal turbulence, weak state finances and

pressure on the currency added to the country’s problems. In November the IMF announced a EUR 16.4bn loan that will provide some liquidity and help drive reforms in the country. For 2009, steel, mining, and machinery sectors are expect- ed to face the steepest declines, while financially healthy companies in consump- tion sectors, such as food and agriculture, will be better positioned in the current economic climate.

Czech Republic, Slovakia and Slovenia The many smaller economies show major differences, both in terms of the degree of development and in terms of economic status quo. The Czech Republic, Slovakia and Slovenia are well-developed econo- mies with no macro imbalances, but they are also very dependent on export and foreign direct investment. Furthermore,

the exposure to the car industry, with 20 percent of the Czech GDP and 25 per- cent for Slovakia, will be a negative factor.

With recent structural changes, political reforms, and the convergence with the EU, these countries are forecasted to be able to record some degree of growth during 2009.

Romania, Serbia and Croatia

Romania, Serbia and Croatia will also experience a sharp slow-down in growth, but are growing from relatively low levels.

The countries have certain imbalances and currency problems could arise in cer- tain of the Southeastern European econo- mies. Depreciating exchange rate levels could have a negative psychological impact on investors, even if these coun- tries are not facing acute external debt problems. The convergence process with Europe/EU continues to progress, with Serbia, for instance, receiving IMF sup- port in the form of a stand-by agreement and instigating fiscal reform measures, for example, a limit on the 2009 deficit of 1.75 percent.

Georgia

The fighting in Georgia’s breakaway region of South Ossetia in August result- ed, tragically, in many unnecessary deaths

and widespread destruction. Whilst the current situation is more stable, the com- plex issues are far from being completely resolved and many geopolitical analysts have tried to understand the origins of the conflict, going beyond the personalities of the individual leaders involved. Donor aid estimated at USD 4.5bn and the removal of US import duties on 3,500 Georgian products can support some rebuilding of the economy, but the long-term geopo- litical basics indicate uncertain or uneven economic development.

Baltic region

The Baltic region is not one of East Capital Explorer’s key target areas, but we care- fully monitor developments. Similar to Bul- garia and Hungary, the Baltic countries, which are very dependent on exports, have accumulated large imbalances and these countries were hit by recession already in the third quarter 2008. Crisis- hit Latvia succeeded in obtaining medium- term financial aid from the EU, up to EUR 3.1bn, EUR 1.7bn from the IMF, as well as EUR 1.8bn from Sweden, Denmark, Fin- land and Norway. This bailout and other support are provided in exchange for an austerity plan keeping the exchange rate pegged and pushing down real wages and budget spending.

Turkey

Turkey, although a smaller part of East Capital Explorer’s portfolio, could benefit from certain aspects of the current eco- nomic environment, such as a lower oil price. This country went through a finan- cial crisis as late as 2001, which implies that the banking sector is better capital- ised and is subject to stricter rules, and is, consequently, in relatively good shape.

The reform momentum that has served Turkey well since 2001 should be reinvig- orated with another IMF agreement.

Smaller frontier markets

Our investment universe also includes a number of smaller, diverse economies in the Caucasus, Central Asia, Balkans as well as Belarus and Moldavia. These are still frontier markets, which are less dependent on global financial systems, but which are very dependent on the outside world for trade and remittances.

Here, some, but limited growth can per- haps be foreseen.

The current crisis could accelerate a well-needed move away from commodities dependence

towards a more diversified economy.

“ ”

How we invest

History meets the future: Guardsman of the Semen-

ovsky Regiment in front of the modern type business

center that today are a common sight in Moscow.

Key sectors targeting long-term growth

POWER UTILITIES

Rationale: Russia is the fourth largest energy market in the world in terms of installed capacity and electricity output. The powerhouse nature of the Russian economy during the past ten years has resulted in increased domestic energy consumption, with the main limitation being the capacity of the country’s power production facilities. Insufficient investments over the years have left the country with outdated technology, unable to produce suf- ficient power for the fast-growing economy, especially in major centres.

With major investments required in power generation and other important sub-sectors, a restructuring programme for the entire sector was initiated in 2000. In 2006, a five-year plan was adopted for the development of the electricity and gas markets.

The plan stipulates that the electricity market should be fully deregulated by 2011 and that electricity generation, sales and repair companies will be privatized to be able to operate in open and competitive markets with market prices. We believe that the restructuring and price liberalisation will improve the cost struc- ture and efficiency of the Russian power sector, which is current- ly lagging behind Western Europe and, consequently, increase the valuations of Russian power companies.

Current view: 2008 held many important milestones for the sec- tor. 25 percent of the production was set at market prices and the large Russian power monopoly, RAO EES, was unbundled according to plan. A number of foreign and domestic investors entered the sector in the first half of 2008 on the back of the reform process. With the current downturn in manufacturing dampening demand, the production facilities can perhaps focus on improving on the fundamental side in the face of privatisa- tion and consolidation. Most recently, during December 2008, the utilities sector was a favourite among investors reflecting the Russian Ministry of energy’s willingness to support delays in new capacity introductions by generators. Coal and hydro generating companies will benefit from rising gas prices and the determined liberalisation process of the wholesale power market.

Read more about the power utilities sector and our investment in the East Capital Power Utilities Fund on pages 32–33.

REAL ESTATE

Rationale: In recent years, healthy GDP growth and an improved macroeconomic situation have led to a general lack of mod- ern property across Eastern Europe, especially in Russia and other CIS countries. In spite of rapid developments, there have remained significant shortages in supply, not the least as regards retail and office space. Premises usually are of a low standard and are unsuitable for new businesses, such as modern retail concepts.

Current view: Despite recent market developments, the long- term fundamentals and underlying key drivers of the Russian real estate market remain the same. The market is undersupplied in both quantity and quality of retail and office space and regional city development is just beginning. With developers’ problems resulting in fewer completed projects and delays in completion, the undersupply is likely to persist.

Current market corrections should, in a medium to long-term perspective, generally be seen as healthy for real estate markets in Eastern Europe. Following many recent years of exceptional growth, increasing rent levels and hardly any vacancies, these markets have been showing clear signs of overheating.

After at least four years of compressed yields in Moscow and other Russian cities, yields are currently moving upward due to forced selling and liquidity problems. This could result in unique opportunities to acquire properties with good tenants and reaso- nable rental rates at low, or even distressed, prices.

In June East Capital Explorer committed EUR 40m to the newly launched East Capital Russian Property Fund, read more about the fund on page 34.

The selection of East Capital Explorer’s key sectors and preferred investment exposure is

based on the experience and track-record that our Investment Manager has acquired dur-

ing more than ten years of investing in Eastern Europe. Our key sectors are the areas of

the economy that stand the most to gain from the generally strengthened macroeconomic

frameworks and the continuing structural reforms in the region. Our sector focus is likely to

remain the same over time, but market conditions will mean that we, at times, choose to pri-

oritise and focus on certain sectors more than on others.