GAZPROMBANK GROUP Consolidated Financial Statements

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1 Consolidated Financial Statements Year Ended 2013

2 Shareholding of the Bank Non-State Pension Fund Gazfond * 49.65% 47.38% OAO Gazprom 35.54% 35.54% State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank) 10.19% 10.19% Treasury stock** 4.22% 6.33% Individuals 0.40% 0.56% % % * - including 43.57% managed by ZAO Leader (an asset management company) on behalf of Non-State Pension Fund Gazfond ** - shares held by OOO New Financial Technologies (NFT), a subsidiary of the Bank; of them 0.35% managed by ZAO Leader on behalf of NFT. Board of Directors Alexey B. Miller Chairman of the Board of Directors Chairman of ОАО Gazprom Management Board Andrey I. Akimov Deputy Chairman of the Board of Chairman of Gazprombank Management Board Directors Mikhail L. Sereda Deputy Chairman of the Board of Deputy Chairman of OAO Gazprom Management Board Directors Yury N. Shamalov Deputy Chairman of the Board of President of Non-State Pension Fund Gazfond Directors Elena A. Vasilieva Member of the Board of Directors Deputy Chairman of OAO Gazprom Management Board, Chief Accountant of OAO Gazprom Anatoliy A. Member of the Board of Directors Chief Executive Officer of ZAO Leader Gavrilenko Iliya V. Eliseev Member of the Board of Directors Deputy Chairman of Gazprombank Management Board Sergey S. Ivanov Member of the Board of Directors Chairman of ОАО Sogaz Management Board Yuliya S. Karpova Member of the Board of Directors Deputy Chairman of Vnesheconombank Management Board Andrey V. Kruglov Member of the Board of Directors Deputy Chairman of OAO Gazprom Management Board, Head of Finance Department of OAO Gazprom Kirill G. Selesnev Member of the Board of Directors Member of OAO Gazprom Management Board, Head of Department of marketing, gas and liquid hydrocarbon processing Nikolay Y. Senkevich Member of the Board of Directors First Vice-President of Gazprombank The composition of the Board of Directors is presented as of 28 March

3 Management Board Andrey I. Akimov Chairman of the Board Natalia A. Deputy Chairman of the Board Corporate lending, Trade finance Chervonenko Iliya V. Eliseev Deputy Chairman of the Board Compliance, Media assets Viktor A. Komanov Deputy Chairman of the Board Nikolay G. Korenev Deputy Chairman of the Board Svetlana E. Deputy Chairman of the Board Maluseva Aleksey A. Matveev Deputy Chairman of the Board Merchant banking, M&A advisory, Direct investments in resource-based industries Corporate governance Chief Accountant Direct investments, Project and structured finance, Capital markets, Brokerage, Asset management Corporate clients relations, Corporate lending policy, Precious metals, Real estate development business Alexander Y. Deputy Chairman of the Board Muranov Famil K. Sadygov Deputy Chairman of the Board Strategy, Treasury and Financial Institutions, Heavy machinery assets Alexander I. Sobol Deputy Chairman of the Board Chief Financial Officer Oleg M. Vaksman Deputy Chairman of the Board Chief Risk Officer Yan V. Center First Vice-President Regional network Andrey B. Knyazev First Vice-President Andrey A. Pimenov First Vice-President Treasury Procurement Igor V. Rusanov First Vice-President Assets & liabilities management, Wholesale funding and investor relations Valeriy A. Seregin First Vice-President Retail business, Custody services Ekaterina V. First Vice-President Chief Analytical Officer, Public relations Trofimova Vladimir N. First Vice-President Corporate security Vinokurov Dmitriy V. Zauers First Vice-President Chief of Administration The composition of the Management Board is presented as of 28 March Auditors ZAO KPMG 3

4 TABLE OF CONTENTS AUDITORS REPORT CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF CHANGES IN EQUITY....9 CONSOLIDATED STATEMENT OF CASH FLOWS...11 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: NOTE 1 PRINCIPAL ACTIVITIES AND ORGANIZATION...13 NOTE 2 BASIS OF PRESENTATION...13 NOTE 3 PRINCIPAL ACCOUNTING POLICIES...16 NOTE 4 SEGMENT REPORTING...32 NOTE 5 NET INTEREST INCOME...36 NOTE 6 PROVISIONS AND IMPAIRMENT LOSSES...36 NOTE 7 FEES AND COMMISSIONS INCOME AND EXPENSE...38 NOTE 8 NON-INTEREST (LOSS) INCOME FROM FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING, NET...38 NOTE 9 NON-BANKING OPERATING PROFITS...39 NOTE 10 BANKING SALARIES, EMPLOYMENT BENEFITS AND ADMINISTRATIVE EXPENSES...40 NOTE 11 PROFIT TAX...41 NOTE 12 CASH AND CASH EQUIVALENTS, OBLIGATORY RESERVE WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION AND DUE FROM CREDIT INSTITUTIONS...43 NOTE 13 FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING...44 NOTE 14 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES...46 NOTE 15 LOANS TO CUSTOMERS...47 NOTE 16 INVESTMENTS AVAILABLE-FOR-SALE AND INVESTMENTS IN ASSOCIATES...52 NOTE 17 RECEIVABLES AND PREPAYMENTS...58 NOTE 18 PLANT, PROPERTY AND EQUIPMENT...59 NOTE 19 INTANGIBLES...60 NOTE 20 GOODWILL...60 NOTE 21 AMOUNTS OWED TO CREDIT INSTITUTIONS...61 NOTE 22 AMOUNTS OWED TO CUSTOMERS...62 NOTE 23 BONDS ISSUED...63 NOTE 24 SUBORDINATED DEBTS...63 NOTE 25 OTHER LIABILITIES...64 NOTE 26 SHAREHOLDERS EQUITY...64 NOTE 27 PERPETUAL DEBT ISSUED...66 NOTE 28 FINANCIAL COMMITMENTS AND CONTINGENCIES...66 NOTE 29 CORPORATE GOVERNANCE AND INTERNAL CONTROLS...69 NOTE 30 RISK MANAGEMENT...71 NOTE 31 PRINCIPAL SUBSIDIARIES OF THE GROUP...89 NOTE 32 RELATED PARTIES...92 NOTE 33 CAPITAL ADEQUACY...96 NOTE 34 FAIR VALUE OF FINANCIAL INSTRUMENTS...99 NOTE 35 ANALYSIS BY MEASUREMENT CATEGORY NOTE 36 ACQUISITIONS OF ASSOCIATES NOTE 37 SUBSEQUENT EVENTS

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7 ConsoJidaJed StaJement 0/РгоfЦ ог Loss and Other Comprehensive Iпсоmе/ог the Уеаг Ended 20/3 (in mi!lion.'i 01 Russian RoubIes unless o/herwise s/a/ed) Notes Interest income Interest expense Net interest income (128476) (114575) Impairment of interest earning assets Net interest income after impairment ос interest earning assets 6 (\4474) (\ 0327) Fees and commissions income Fees and commissions expense Non-interest (loss) income uот financia1 assets and 1iabi1ities he1d for trading, пе! Gain uот investments avai1able-for-sa1e and investments in associates, пе! Gain!Тот trading in foreign currencies, operations with foreign сипепсу derivatives and foreign exchange translation, пе! Other operating income Non-interest income (6317) (4380) (5 005) Non-banking operating revenues Non-banking operating expenses Non-banking operating profits (\46425) (133676) Banking sa1aries and employment benefits Banking administrative expenses Impairment of assets and provisions for other risks Impairment of goodwill Non-interest expense ,20 (34 687) (24 920) (8 51 О) (290) (68407) (32729) (21 955) (5275) (3 267) (63226) Profit ЬеСоге profit tax Profit tax expense Profit for the уеаг 11 (10539) (\2146) Other comprehensive income (loss) I/ems /ha/ ш е or mау Ье reclassified /0 profi/ or loss in subsequen/ periods: ]nvestments avai1able-for-sa1e: Net change in fair уа1ие of investments avai1ab1e-for-sa1e Net change in fair value transferred to profit ог loss Net impairment ос avai1able-for-sa1e investments transferred to profit ог 10ss Exchange differences оп trans1ation ос foreign operations TotaJ other comprehensive iocome (loss), net of tax Tota\ comprehensive income for the уеаг 7964 (\0398) (55) (3 542) (3597) РгоШ Сог the уеаг attributabie to: Group's shareho1ders Non-controlling interests TotaJ comprehensive income attributabie to: Group's shareho1ders Non-control1ing interests (448) (398) Signed оп behalf of the Management Board: Alexander 1. Sobol Deputy Chairman ofthe Board 7

8 Consolidated Statement 0/Financial Position as 0/3/ December 20/3 (in millions 0/Russian RoubIes unless olhenvise slaled) Notes 31DесеmЬег 31DесеmЬег Assets Cash and cash equi valents ObIigatory reserve \vith the Central Bank ofthe Russian Federation Due from credit institutions Financial assets held for trading 13, /which pledged under sale and repurchase agreemenls Loans to customers / ~yhich pledged under borrowing agreemenls Investments avai labie-fог-sаlе J o/which pledged under sale and repurchase agreemenls Investments in associates ReceivabIes and prepayments Investments held-to-maturity ЗЗ /which pledged under sale and repurchase agreemen/s 4080 Inventories Deferred tax assets I Ргорепу, plant and equipment lntangibies Goodwill Other assets Total assets Liabilities Financial liabilities held for trading 13, Amounts owed to credit institutions Amounts o\ved to customers Bonds issued Deferred tax liabilities Subordinated debts Other liabilities Totalliabilities Equity Share capital Additional paid-in capital Treasury shares (8 060) (11 163) Perpetual debt issued Foreign сuпепсу translation reserve Fair value reserve (503) 546 Retained earnings Tota\ equity attributable to the Group's shareholders Non-controlling interests Tota\ equity Totalliabilities and equity Signed оп behalf of the Management Board: Alexander 1. Sobol Deputy Chairman ollhe Board 8

9 Consolidated Statement in the Уеаг Ended 31 ОесеmЬег 2013 (in millions Roubles unless orherwise Share Addi!ional Treasury Perpetual Foreign Fair value Retained Equity Non- Total capital paid- in shares debt еиггепсу reserve earnings attributabie сопtгошпg equity сарнаl translation 'О interests reserve Group's shareholders 3l ОесетЬег Ргоfit [ог the уеаг (448) Ilems Iha/ аге ОГ mау Ье reclassified /0 ОТ loss in subsequent periods. Net change in fair уаlие о f invеstшепts available- [ог- sale (55) (55) (55) Net change in fair value transterred 10 ог 1055 (3 542) (3 542) (3 542) Exchange difference оп translating foreign operatiol1s (50) (50) 50 TOlal ilеm:; /ho/ аге ог mау Ье,.eclassified 10 pro/it оу loss in subsequel1l periods (3647 Total comprchensive incoine Additional sl1are issue (34) Perpetual debt isslied (Note 27) Forelgl1 ехсllзпgе tfal1s1аtюп ofperpetual deb! issued (931) 931 Transac!ion costs оп perpetual debt issued (430) (430) (430) Тах ессес! оп perpenlal debt Issued (100) (100) (100) and ofnon- сопtгоlling intcrcsts in (604) (604) (10) Acquisilio!1 ofsllhsidiaries 542 Dividcl1ds paid (5 707) (5 707) (82) Acquisitio!1 and sale oftreasury shares ) Tra!1sfer ofplltabie шstгuшепls 10 liability (1 045) (1045) Othcr distributio!1 4465) 31 ОесетЬег The accomvanvinfl noles аге аn cqnsolidatedflnancial statements. 9

10 Consolidated Statement ojchanges in Equity jor the Уеаг Ended 2013 (in millions о!russian RoubIes unless olherwise slaled) 31 ОесеmЬег 2012 Ргоб! Сос the уеас Ilems Ihal аге ог тау Ье /'eclossified 10 profil ог loss in subsequenl periods: Net change in fair value о f investments availabie- Гог- 5ale Net change in fair value tran5ferred to profit ог 1055 lmpairrnent ог investrnent5 availabie- Гог- sale transferred to рroб! ог loss Exchange difference 011 trallslating foreign operatiolls TOlal ileт.s Ihal аге ог то)' Ье /'eclassified 10 profit ог loss in subsequenl periods Total comprehensive income COUPOII paid 011 perperual debt issued Foreigll exchallge trall51atioll ofperperual debt issued Transactioll costs 011 perperual debt issued (Note 27) Тах effect оп perperual debt issued Acquisition and disposal ОГIlОIl- controlling interests in subsidiaries Dividends paid Acquisition and sale oftreasury shares Transfer ofputtabie instruments (о liability Other movement5 31 ОесеmЬег 2013 Share capital Additional paid- in capital (675) Treasury shares О1 163) (8060) Perpetual Foreign Fair value Retained debt currency reserve earnings translation reserve (1 О 398) (1 049) (l 049) (2483) (2 356) - (2 146) (5791 ) (503) Equity attributabie (о Group's shareholders (10398) (2483) - (2 146) (5791) (675) Noncontrolling interests Total equity (10398) (2483) - - (2 146) (134) (5925) (675) Signed оп behalf of the Мапаgешепt Board: Alexander 1. Sobol Deputy Chairman 01 the Board с;;# 10

11 Consolidated Stateтent ofcash Flowsfor the Уеаг Ended 31 песетьег 2013 mi/lions RoubIes unless olher,vise Cash Поws (rom operating activities Interest received Fees and commissions received Il1terest paid Fees апd commissiol1s NOI1-interest receipts from fiпапсiаl assets and liabilities held for Media business МасЫпегу business receipts Machinery business operating раутеп!" Other segmel1t operating receipts Other segment operating раутеп!" Other Ьеl1е fit paymel1ts adminislrative expenses апd other paymel1ts Cash jlowsfroт activities changes in operating assets and liаьшtiеs Notes ( ) (6 1 (3260) (2490) ) (38 242) ) (2689) (1 329) ( ) (32613) 4072 (30 145) decrease in assets reserve with the Central Вапk ofthe Russian Federation Dие from credit instilutions Financial assets held for Loans 10 customers Other assets (9) 871) 908 Increase (decrease) in liаьшtiеs Amounts owed 10 credit institulions Amounls owed [о customers OI!1er operaling liabilities Net cash jlows froт (used in) operating activities before profit taxes Profit (ахе" Net cashjlowsfroт (used 'n) activitie,~ (17183) 230] (16232) Cash Поws from investing activities "",,,pr''', equipment and intangibles purchased equipment and intangibles sold ll1vestments available-for-sale апd associates purchased and sold Il1vestmel1ts held-to-maturity Dividends received Net cash jlows used in investing activities (47011) 5442 (3 507) (19964) 3079 ( (80) 2220 The accompanying noles аге аn 0/these consolidaled financia! stalemen!s,

12 Consolidated Stateтent о/ Cash Flows /о, the Уеа, Ended 31 Deceтber 2013 (in mil/ions о/russian RoubIes un!ess olherwise s/a/ed) Cash flo\vs from financing activities Proceeds from issuance of share capital Treasury shares sold and acquired Bonds issued Bonds redeemed ог repurchased Perpetual debt issued Coupon and transactions costs оп perpetual debt paid Syndicated loans received Syndicated loans redeemed Subordinated debts received Subordinated debts repaid Acquisition of non-controlling interests Disposal ofnon-controlling interests Financing of non-banking activities received Financing of non-banking activities redeemed Dividends paid Other distributions Nel cash jlows /roт jinancing activities Effect of change in exchange rates оп cash and cash equivalents Change in cash and cash equivalents Cash and cash equiva\ents, beginning of the уеаг Cash and cash equivalents, end of the уеаг Notes \0005 (734) \35574 (39271) (307\7) (4 629) (430) \ \ (15 972) \4732 (\ 667) (9\ 286) (240) (790) \ 384 (2 546) (14102) (5 925) (5 789) { (23 \97) (61 622) Signed оп behalf of the Management Board: Alexander 1. Sobol Deputy Chairman ofthe Board Тщ accompanying no/es ше аn in/egra! parl o/ihese conso!idaledjinancia! s/alemenls. \2

13 NOTE 1 PRINCIPAL ACTIVITIES AND ORGANIZATION The Gazprombank Group (the Group) primarily consists of: Gazprombank (Open Joint-stock Company), which is the parent company, subsidiary banks, including GPB-Mortgage, CreditUralBank, Gazprombank (Switzerland) Ltd., Gazprombank International S.A. and Areximbank, and a number of smaller financial companies, which support the banking business, several significant non-banking companies. Gazprombank (Open Joint-stock Company) (the Bank) was established in The Bank has a general banking license and a license for operations with precious metals from the Central Bank of the Russian Federation (the CBR), and licenses for securities operations and custody services from the Federal Financial Markets Service of Russia, which in 2013 became a part of the CBR. Its subsidiary banks and companies also have general banking licenses for operations in Switzerland, Luxembourg and Armenia and investment, brokerage and asset management licenses for operations in Cyprus, Luxembourg and Hong Kong. The Bank is the third largest bank in the Russian Federation in terms of assets and equity, and it provides a broad range of commercial and investment banking services to many of Russia s leading corporations, including, among others, OAO Gazprom and its related parties (the Gazprom Group). The principal corporate banking services include: commercial lending, project and acquisition finance, trade finance, financial and operating leasing, deposit taking, settlements and cash management, capital markets transactions, asset management, brokerage, corporate finance and mergers & acquisitions advisory, depositary and custodian services. The Bank is also involved in private equity transactions, foreign exchange and securities trading, and operations with precious metals. The Bank provides a range of services to private individuals, including employees of its corporate clients, high net worth individuals and the general public. Retail services include: lending, deposit taking, debit and credit card services, brokerage, asset management and a range of other services. The Bank has controlling stakes in several non-banking investments, which are consolidated in these financial statements and are presented as separate segments (see Note 4), including: OAO Gazprom-Media Holding and its subsidiaries (the Media segment) is a Russian media group of companies, the principal activities of which are TV and radio broadcasting, advertising, publishing, film production and distribution primarily undertaken in the Russian Federation OAO OMZ and its subsidiaries (the OMZ Group) and a number of other industrial assets (together - the Machinery segment). OMZ Group produces nuclear power plant equipment, specialty steels, machinery equipment, manufacturing and mining equipment. The OMZ Group manufacturing facilities are based in the Russian Federation and the Czech Republic. The legal address of the Bank is: Bld.1, 16, Nametkina Str., Moscow, , Russian Federation. As of 2013, OAO Gazprom owns 35.54% of the outstanding shares of the Group. A substantial portion of the Group s funding is from the Gazprom Group. As such the Group is economically dependent on the Gazprom Group (Note 32). These consolidated financial statements were authorized for issue by the Management Board of the Bank on 28 March NOTE 2 BASIS OF PRESENTATION a) General These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). 13

14 Management is responsible for the preparation of the consolidated financial statements in accordance with IFRS. The preparation of consolidated financial statements in accordance with IFRS requires management to make judgments and key estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial information and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Key areas of judgments and key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, include: estimation of allowance for impairment losses for financial assets measured at amortized cost. These include mainly loans to customers, amounts due from credit institutions, receivables and other assets. The estimation of allowance for impairment losses involves the exercise of judgment and is based on internal credit risk rating systems and statistical data valuation of complex and illiquid financial instruments. Valuation of complex and illiquid financial instruments involves the exercise of judgment and use of valuation models. In the absence of an active market management has to make assumptions in respect of appropriate inputs used in valuation models, some of which may not be based on observable market data estimation of fair values of identifiable assets and liabilities acquired in business combinations. Estimation of fair values of identifiable assets and liabilities acquired in business combinations involves the exercise of judgment and use of valuation models, which among others include assumptions about future business performance and cash flows and appropriate discount rates estimation of impairment losses for non-financial assets (including goodwill). Estimation of impairment losses for non-financial assets involves the exercise of judgment and use of valuation models, which among others include assumptions about future business performance, estimation of cash flows from assets assessed for impairment and estimation of appropriate discount rates assessment of whether the Group has control or significant influence for investments where control or significant influence is determined by contractual arrangements or other factors other than voting rights held by the Group. In particular, in 2013 the Group determined that it obtained significant influence over OAO Sogaz (Note 16) recognition of income from investments, including equity-accounted investees, and estimation of allowance for impairment losses for exposures to counterparties that are located in regions with social unrest and unstable political situation, such as Venezuela (Note 16) and Ukraine (Note 30). b) Russian economic environment The Group s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and financial markets of the Russian Federation which display characteristics of a developing market. The legal, tax and regulatory frameworks continue development, but are subject to varying interpretations and frequent changes which together with other legal and fiscal impediments contribute to the challenges faced by entities operating in the Russian Federation. The political and economic instability witnessed in Ukraine has had and may continue to have a negative impact on the Russian economy. Certain sanctions were implemented by EU and USA against Russian officials and businessmen. So far, these events have not had a significant impact on the Group s operations and financial position. However the impact on consolidated financial statements of future instability in Ukraine, should it continue, and/or additional sanctions against Russia, if they were to be implemented, is at this stage difficult to determine. These consolidated financial statements reflect management s assessment of the impact of the Russian business environment on the operations and the financial position of the Group. The future business environment may differ from management s assessment. c) Basis of measurement These consolidated financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale financial assets are stated at fair value. 14

15 d) Functional and presentation currency The functional currency of the Bank and the majority of its subsidiaries is the Russian Rouble (RUB) as, being the national currency of the Russian Federation, it reflects the economic conditions of the majority of underlying events and circumstances relevant to them. The consolidated financial statements are presented in millions of RUB, unless otherwise stated. e) Changes in accounting policies The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January IFRS 10 Consolidated Financial statements (see (i)) IFRS 11 Joint Arrangements (see (ii)) IFRS 12 Disclosure of Interests in Other Entities (see (iii)) IFRS 13 Fair Value Measurements (see (iv)) Presentation of Items of Other Comprehensive Income (Amendments to IAS 1) (see (v)) Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7) (see (vi)). (i) Subsidiaries, including structured entities As a result of adoption of IFRS 10 the Group changed its accounting policy with respect to determining whether it has control over and consequently whether it consolidates its investees. IFRS 10 introduces a new control model that is applicable to all investees, including structured entities. See notes 3 (a) (ii) and (iii). In accordance with the transitional provisions of IFRS 10 the Group reassessed the control conclusion for its investees as at 1 January As a consequence, the Group has changed its control conclusion for certain companies resulting in additional investees consolidated. However the overall effect of these additional investees was not material and comparative information in these consolidated financial statements was not restated. (ii) Joint arrangements As a result of adoption of IFRS 11 the Group changed its accounting policy for its interest in joint arrangements. Under IFRS 11 the Group classifies its interests in joint arrangements as either joint operations or joint ventures depending on the Group s rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, the Group considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements and other facts and circumstances. Previously, the structure of the arrangement was the sole focus of classification. The Group reassessed its involvement in particular investments and reclassified these investments from jointly controlled entities to associates. However the overall effect of these reclassification was not material. Therefore comparative information in these consolidated financial statements was not restated. (iii) Disclosure of Interests in Other Entities The new standard contains disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. Interests are widely defined as contractual and non-contractual involvement that exposes an entity to variability of returns from the performance of the other entity. The expanded and new disclosure requirements aim to provide information to enable the users to evaluate the nature of risks associated with an entity s interests in other entities and the effects of those interests on the entity s financial position, financial performance and cash flows. 15

16 As a result of adoption of IFRS 12 the Group included new disclosures in the consolidated financial statements that are required under IFRS 12. (iv) Fair value measurement IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. In particular, it unifies the definition of fair value as the prices at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date. It also replaces and expands the disclosure requirements about fair value measurements in other IFRSs, including IFRS 7 Financial Instruments: Disclosures (Note 34). As a result, the Group adopted a new definition of fair value, as set out in Note 34. The change had no significant impact on the measurements of assets and liabilities. However, the Group included new disclosures in the consolidated financial statements that are required under IFRS 13. (v) Presentation of items of other comprehensive income As a result of the amendments to IAS 1, the Group modified the presentation of items of other comprehensive income in its consolidated statement of profit or loss and other comprehensive income, to present separately items that would be reclassified to profit or loss in the future from those that would never be reclassified. Comparative information is also re-presented accordingly. The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities or comprehensive income. (vi) Financial instruments: Disclosures Offsetting financial assets and financial liabilities Amendments to IFRS 7 Financial Instruments: Disclosures - Offsetting Financial Assets and Financial Liabilities introduced new disclosure requirements for financial assets and liabilities that are offset in the statement of financial position or subject to master netting arrangements or similar agreements. The Group included new disclosures in the consolidated financial statements that are required under amendments to IFRS 7. NOTE 3 PRINCIPAL ACCOUNTING POLICIES a) Principles of consolidation and accounting for associates (i) Business combinations and Goodwill For acquisitions on or after 1 January 2010 the Group measures goodwill at the acquisition date as the fair value of the consideration transferred (including the fair value of any previously-held equity interest in the acquiree if the business combination is achieved in stages) and the recognised amount of any non-controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as at the acquisition date. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The Group elects on a transaction-by-transaction basis whether to measure non-controlling interests at fair value, or at their proportionate share of the recognised amount of the identifiable net assets of the acquiree. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred. 16

17 For acquisitions before 1 January 2010 goodwill represents the excess of the cost of the acquisition over the Group s interest in the recognised amount (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree. When the excess was negative, a bargain purchase gain was recognised immediately in profit or loss. Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurred in connection with business combinations were capitalised as part of the cost of the acquisitions. The loss of control is, among other factors, evidenced by an arrangement that principally transfers to a third party the power to govern and the economic benefits related to activities of the subsidiary. In certain cases the exercise of judgment is required to determine whether an arrangement between a Group and a third party results in a loss of control over a subsidiary before the Group legally transfers the ownership rights to third party, in particular, where such transfers are subject to further regulatory approval. (ii) Subsidiaries Subsidiaries are investees controlled by the Group. The Group controls an investee when it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In particular the Group consolidates investees that it controls on the basis of de facto circumstances. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. (iii) Structured entities A structured entity is an entity designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. In assessing whether the Group has power over such investees in which it has an interest, the Group considers factors such as the purpose and design of the investee; its practical ability to direct the relevant activities of the investee; the nature of its relationship with the investee; and the size of its exposure to the variability of returns of the investee. (iv) Funds management The Group manages and administers assets held in unit trusts and other investment vehicles on behalf of investors. The financial statements of these entities are not included in these consolidated financial statements except when the Group controls the entity. (v) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with associates are eliminated to the extent of the Group s interest in the enterprise. Unrealised gains resulting from transactions with associates are eliminated against the investment in the associate. Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence of impairment. (vi) Non-controlling interests The portion of the net assets and the post acquisition profit or loss of a subsidiary attributable to equity interests that are not owned, directly or indirectly, by the Group is presented as non-controlling interests in the consolidated financial statements. The difference, if any, between the consideration paid to acquire the noncontrolling interests and its carrying amount is recorded in equity. Dividends paid to non-controlling shareholders decrease the carrying amount of non-controlling interests recorded in equity. 17

18 (vii) Consolidation of Limited liability companies domiciled in the Russian Federation In substance the equity of certain limited liability companies domiciled in the Russian Federation meets the definition of a liability according to the statutory legislation. Stakeholders, should they decide to exit the limited liability company, are entitled to a payout equal to their share in net assets of the company as of the latest reporting date. The buy-back payout performed by the limited liability company is not the subject to any approval from the other stakeholders. Therefore the Group s non-controlling interests in such limited liability companies consolidated in the Group s financial statements are accounted for as liabilities. (viii) Associates Investments in associated companies where the Group exercises significant influence are accounted for using the equity method. Goodwill arising on the acquisition is included in the carrying value of the investment (net of any accumulated impairment loss). When the investee incurs losses the Group recognizes its share of losses until the carrying amount of the investment is reduced to nil. Recognition of further losses is discontinued. b) Acquisition of subsidiaries from a parent or entities under common control Acquisitions of subsidiaries from a parent or entities under common control are accounted for using the predecessor cost accounting method. The assets and liabilities of a subsidiary purchased from a parent or entities under common control are consolidated into the financial statements using their carrying amounts in the IFRS financial statements of the predecessor company, i.e. using their predecessor cost starting from the date of obtaining control over the subsidiary purchased. As a result, when the Group purchases a group of entities, the goodwill arising from the original acquisitions of entities that are parts of the purchased group is included in the consolidated financial statements as an asset. Any difference between the fair value of consideration paid by the Group and the predecessor cost of the Group s share of net assets purchased (including the predecessor entity s goodwill) is accounted as an adjustment of equity. c) Foreign currency translation Income and expenses, and non-monetary items included in the consolidated statement of financial position at period-end, denominated in currencies other than the functional currency, are recorded by applying the exchange rate prevailing at the date of the transaction. Foreign currency denominated monetary items included in the period end consolidated statement of financial position are translated at the exchange rate prevailing at the period end. Foreign currency differences arising on retranslation are recognised in the profit or loss as gain or loss from foreign exchange, except for differences arising on the retranslation of available-for-sale equity instruments, which are recognised in other comprehensive income, and differences arising from perpetual debt issued, which are recorded in retained earnings. Net gain from foreign exchange dealing includes both the currency spread realized in the transaction and the built-in foreign exchange trading commission. If foreign subsidiaries or foreign associates have functional currencies that are different from the functional currency of the Bank (the Russian Rouble), the resulting exchange differences arising from translation to Russian Roubles of their financial statements (in the case of a subsidiary) or of their net assets (in the case of an associate) are included in other comprehensive income as a part of the foreign currency translation reserve. The official USD/RUB exchange rates of the Central Bank of the Russian Federation were as follows (Roubles per 1 USD): Exchange rate as at Average rate for the year ended

19 The Russian Rouble is not a readily convertible currency outside of the Russian Federation and, accordingly, any conversion of Rouble to USD should not be construed as a representation that the Rouble amounts have been, could be, or will be in the future, convertible into USD at the exchange rates disclosed, or at any other exchange rates. d) Income and expense recognition Interest income and expense are recognised on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or the financial liability. All borrowing costs are recognised in profit or loss using the effective interest method, except for borrowing costs related to qualifying assets, which are recognised as part of the cost of such assets. Transaction costs and interest payments related to perpetual debt issued included in equity are recorded in retained earnings. The Group capitalises borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interest earned on assets at fair value is classified within interest income. Loan origination fees are deferred, together with the related direct costs, and recognised as an adjustment to the effective interest rate of the loan. Loan servicing fees and all other commissions are recognised as revenue as the services are provided. The Group recognizes advertising revenue net of value added tax (VAT) and discounts when broadcasting or publishing of the related advertisement occurs. Revenue from selling of programming rights is recognised net of VAT and discounts when all of the following conditions are met: sale of the related rights can be confirmed; programs are complete and delivered to clients or ready for delivering; license agreement period has started and clients may use the airtime; and revenue can be reliably measured. Revenues from sales of goods in the machinery segment are recognised at the point of transfer of risks and rewards of ownership of the goods, normally when the goods are shipped. If the Group agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. Sales of services in the machinery segment are recognised in the accounting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT and discounts. Revenues are measured at the fair value of the consideration received or receivable. When the fair value of goods received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up. e) Financial instruments (i) Classification Financial assets or liabilities at fair value through profit or loss are financial assets or liabilities held for trading that are: acquired or incurred principally for the purpose of selling or repurchasing in the near term part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking 19

20 derivative financial instruments (except for derivative financial instruments that are effective hedging instruments) or upon initial recognition, designated as at fair value through profit or loss. The Group may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed, evaluated and reported internally on a fair value basis the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Group: intends to sell immediately or in the near term upon initial recognition designates as at fair value through profit or loss upon initial recognition designates as available-for-sale or may not recover substantially all of its initial investment, other than because of credit deterioration. As part of its acquisition and equity-backed finance business the Group purchases or keeps certain assets, including equity investments, and simultaneously enters into derivative contracts linked to these assets that effectively transfer the risks and economic benefits associated with the assets to the counterparty of the derivative contract. The pricing of derivatives is usually designed in a way that the Group is earning a return representing compensation for the time value of money and the credit risk of the counterparty. To the extent that the substance of the transactions is that the Group provides the acquisition financing to the counterparty with the underlying assets used as collateral, the Group classifies such transactions as loans and receivables. Investments held-to-maturity are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Group has the positive intention and ability to hold to maturity, other than those that: the Group upon initial recognition designates as at fair value through profit or loss the Group designates as available-for-sale or, meet the definition of loans and receivables. Investments available-for-sale are those financial assets that are designated as available-for-sale or are not classified as loans and receivables, investments held-to-maturity or financial instruments at fair value through profit or loss. Management determines the appropriate classification of financial instruments at the time of the initial recognition. Derivative financial instruments are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loan and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the entity has an intention and ability to hold it for the foreseeable future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to reoccur in the near term. (ii) Recognition and de-recognition of financial instruments Financial assets and liabilities are recognised in the consolidated statement of financial position when the Group becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. 20

21 The Group derecognises a financial asset when the contractual rights to receive cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows from the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. If the Group purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of the liability and the consideration paid is included in gains or losses arising from early retirement of debt. The Group enters into transactions whereby it transfers assets recognised in its consolidated statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. In transactions where the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost. The rights and obligations created or retained in the transfer are recognised separately as assets and liabilities as appropriate. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets. The Group also derecognises and writes off assets which are deemed to be uncollectible. (iii) Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: loans and receivables which are measured at amortized cost using the effective interest method investments held-to-maturity that are measured at amortized cost using the effective interest method equity instruments that do not have a quoted market price in an active market and whose fair value can not be reliably measured which are measured at cost. All financial liabilities, other than those at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in profit or loss. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or on disposal of the asset or liability. (iv) Gain and loss on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognised as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in profit or loss 21

22 a gain or loss on an investments available-for-sale is recognised as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. Interest in relation to investments available-for-sale is recognised as earned in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognised in profit or loss when the financial asset or liability is derecognised or impaired, and through the amortization process. (v) Repurchase and reverse repurchase (repo) agreements The Group, as an element of its treasury management and trading business, utilizes repo agreements and reverse repo agreements with securities. Repo agreements are accounted for as financing transactions. The related payable is included as amounts owed to credit institutions or amounts owed to customers, as appropriate. Any related expense arising from the pricing spreads for the underlying securities is recognised as interest expense and accrued over the period that the related transactions are open using the effective interest method. Securities pledged as collateral under repo agreements are also included in the consolidated financial statements. Reverse repo agreements are accounted for as due from credit institutions or loans to customers, as appropriate. Any related income arising from the pricing spreads for the underlying securities is recognised as interest income over the period that the related transactions are open using the effective interest method. Securities received as collateral under reverse repo agreements are not recognised in the consolidated financial statements. If assets purchased under an agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. (vi) Securitisation and transfer of assets For securitised financial assets, the Group considers both the degree of transfer of risks and rewards on assets transferred to another entity and the degree of control exercised by the Group over the other entity. When the Group, in substance, controls the entity to which financial assets have been transferred, the entity is included in these consolidated financial statements and the transferred assets are recognised in the consolidated statement of financial position. When the Group has transferred financial assets to another entity, but has retained substantially all the risks and rewards relating to the transferred assets, the transferred assets are recognised in the consolidated statement of financial position. When the Group transfers substantially all the risks and rewards relating to the transferred assets to an entity that it does not control, the assets are derecognised from the consolidated statement of financial position. If the Group neither transfers nor retains substantially all the risks and rewards relating to the transferred assets, the assets are derecognised if the Group has not retained control over the assets. (vii) Derivative financial instruments The Group enters into derivative contracts for trading purposes. Derivative financial instruments include swap, forward, futures, spot transactions and options in interest rate, foreign exchange, precious metals and stock markets, and any combinations of these instruments. The Group classifies these financial instruments as financial assets or liabilities held for trading. Derivatives are initially recognised at fair value, which is normally the transaction price (i.e. the fair value of the consideration given or received for them), and subsequently are measured at their fair value. Fair values are obtained from quoted market prices (if available) or are estimated using appropriate valuation models and available market prices. 22

23 The realized trading profits from derivatives and unrealized changes in the fair value of derivative contracts are recognised immediately in profit or loss. Derivatives may be embedded in another contractual arrangement (a host contract). An embedded derivative is separated from the host contract and is accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated. Although the Group trades in derivative instruments for risk hedging purposes, these transactions do not qualify for hedge accounting. (viii) Due from credit institutions In the normal course of business, the Group lends or deposits funds for various periods with other credit institutions. Such amounts are categorized as loans originated by the Group and are carried at amortized cost. As these placements of funds are typically unsecured extensions of credit, some of the assets may be impaired. The principles used to create allowance for loan impairment on amounts due from credit institutions are described below for financial assets carried at amortized cost. (ix) Promissory notes In the normal course of business the Group acquires promissory notes of third parties. These notes generally have short-term to medium-term maturity. Promissory notes are categorized as securities at fair value through profit or loss, investments available-for-sale or held-to-maturity or amounts due from credit institutions or loans to customers depending on their economic substance. Promissory notes are measured by the Group according to the appropriate accounting policies for the respective assets. (x) Trade receivables (payables) Trade receivables (payables) are initially recognised at fair value, which is the fair value of the consideration given (received), and are subsequently measured at amortized cost. An allowance for impairment of trade receivables is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the allowance is determined using the principles described below for financial assets carried at amortized cost. (xi) Amounts owed to credit institutions and to customers and subordinated debts Amounts owed to credit institutions and to customers and subordinated debts are initially recognised at fair value less transaction costs that are directly attributable to the acquisition or issue of the financial liability. Subsequently amounts due are stated at amortized cost and any difference between the carrying amount and the redemption value is recognised in profit or loss over the period of the borrowings using the effective interest method. If the Group purchases its own debt, it is removed from the consolidated statement of financial position and the difference between the carrying amount of a liability and the consideration paid is included in net interest income. (xii) Bonds issued Bonds issued represent bonds issued by the Group to domestic customers and eurobonds. Eurobonds represent mainly internationally traded Euro Medium Term Notes and Loan Participation Notes issued by the Group. Bonds issued are accounted for according to the same principles used for amounts owed to credit institutions and to customers. 23

24 (xiii) Offsetting Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. f) Impairment (i) Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans to customers, investments held-tomaturity and other receivables. The Group reviews its loans, investments held-to-maturity and receivables to assess impairment on a regular basis. A loan or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan or receivable and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance by the Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. The Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Group uses its experience and judgment to estimate the amount of any impairment loss. The allowance for impairment losses covers losses where there is objective evidence that incurred losses are present in the loan portfolio at the reporting date. These have been estimated based upon historical patterns of losses in each component of the loan portfolio, the credit ratings allocated to borrowers and reflecting the current economic conditions in which the borrowers operate. All impairment losses in respect of loans and receivables are recognised in profit or loss and are only reversed if a subsequent increase in the recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Group writes off a loan balance (and any related allowance for impairment losses) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. 24

25 Loans are regarded as non-performing if the loan has been in default as to payment of principal or interest for 90 days or more. Loans are considered contractually overdue when a borrower fails to make a scheduled payment of principal or interest for more than five days from the date stated in the loan agreement. If the amount of the impairment losses subsequently decreases due to an event occurring after the write-down, the recovery of the impairment is credited to the provision for impairment losses in profit or loss. (ii) Available-for-sale Impairment losses on available-for-sale financial assets are recognised by transferring the cumulative loss that is recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss For an investment in an equity security available-for-sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. (iii) Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in investments available-for-sale that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognised in profit or loss and can not be reversed. (iv) Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. If any such indication exists, then the asset s recoverable amount is estimated. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value-in-use. In assessing value-in-use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds its estimated recoverable amount. All impairment losses in respect of non financial assets are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss is reversed only if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 25

26 g) Assets held for sale A non-current asset is classified as held for sale if it is highly probable that the asset s carrying amount will be recovered through a sale transaction rather than through continuing use. Such sale transactions should be principally completed within one year from the date of classification of an asset as held for sale. Immediately before classification as held for sale, the assets are remeasured in accordance with the Group s accounting policies. Thereafter generally the assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell. If the fair value less costs to sell of an asset held for sale is lower than its carrying amount, an impairment loss is recognised in profit or loss. Any subsequent increase in an asset s fair value less costs to sell is recognised to the extent of the cumulative impairment loss that was previously recognised in relation to that specific asset. h) Goodwill Goodwill on acquisitions of subsidiaries is separately presented in the consolidated statement of financial position. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. Goodwill is tested for impairment annually on the reporting date or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. i) Property, plant, equipment and intangibles Property, plant and equipment and intangibles are recorded at historical cost less accumulated depreciation (amortization) and any accumulated impairment losses. Furthermore, the historical cost of property, plant and equipment and intangibles of the subsidiaries that used the Russian Rouble as the functional currency of their financial statements during the period when the Russian Federation met the criteria of a hyperinflationary economy, is restated to the equivalent purchasing power of the Russian Rouble at 2002 for assets acquired prior to that date. Depreciation (amortization) is provided to write off the cost on a straight-line basis over the estimated useful economic life of the asset. The economic lives are as follows: Years Buildings Office equipment 3-20 Leasehold improvements Over expected life of the lease Software and other intangible assets 3-10 Programming rights include licenses for broadcasting of films and TV programs owned by the Group. Programming rights are amortized depending on the number of contracted airings as follows. Number of airings Amortization rate 1 airing 100% 2 airings 65% at the first; 35% at the second 50% at the first; 30% at the second; 20% 3 airings at the third If the limitation to the number of airings is higher than three or there is no such limitation for a product, amortization is calculated based on three airings as substantially all of the economic benefit associated with content is derived from the initial airings. 26

27 Assets under construction are not depreciated. Depreciation of these assets will begin when the related assets are ready to be placed in service. Repairs and maintenance are charged to profit or loss at the date the services are provided. j) Construction contracts The Group also enters into construction contracts, which generally represent long-term contracts to manufacture design-build equipment, including nuclear power plant equipment, continuous casting machines, handling machinery and equipment for cryogen products. Contract costs are recognised when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognised only to the extent of contract costs incurred that are probable of recovery. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognised over the period of the contract. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately. The Group uses the percentage of completion method to determine the appropriate amount of revenues to be recognised in a given period. The stage of completion is measured by reference to the contract costs incurred up to the reporting date as a percentage of total estimated costs for each contract. Costs incurred in the year in connection with future activity on a contract are excluded from contract costs in determining the stage of completion. They are presented as inventories, prepayments or other assets, depending on their nature. The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which costs incurred plus recognised profits (less recognised losses) exceeds progress billings. Progress billings not yet paid by customers are included within trade and other receivables. The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed costs incurred plus recognised profits (less recognised losses). k) Inventories The Group regards non financial assets (property) that are held for sale in the ordinary course of business as inventories. Inventories are measured at the lower of cost and net realizable value. The cost of inventories held by the Group comprises all costs of purchase including purchase price, duties and other taxes, transportation and other costs directly attributable to acquisition. The Group recognizes the amount of any write-down of inventories to net realizable value and all losses of inventories as an expense in the period the write-down or loss occurs. l) Exploration and evaluation assets The Group recognizes the following expenditures associated with finding of specific mineral resources (e.g. oil and gas) as exploration and evaluation assets: (a) acquisition of rights to explore; (b) topographical, geological, geochemical and geophysical studies; (c) exploratory drilling; (d) trenching; (e) sampling; and (f) activities in relation to evaluating the technical feasibility and commercial viability of extracting a mineral resource. Expenditures related to the development of mineral resources are not recognised by the Group as exploration and evaluation assets. Exploration and evaluation assets are capitalized and measured at cost. The Group distinguishes between tangible or intangible exploration and evaluation assets. To the extent that a tangible asset is consumed in developing an intangible asset, the amount reflecting that consumption is part of the cost of the intangible asset. Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. Any impairment losses is recognised immediately in profit or loss. 27

28 m) Investment property Investment property is property held by the Group to earn rentals or for capital appreciation, or both, rather than for use for administrative purposes or sale in the ordinary course of business. Investment properties are stated at cost, less accumulated depreciation and allowance for impairment. If any indication exists that investment properties may be impaired, the Group estimates the recoverable amount as the higher of value-inuse and fair value less cost to sell. n) Operating and finance leases The Group enters into operating lease agreements as a lessee. The total payments made under operating leases are charged to profit or loss on a straight-line basis over the period of the lease. The Group also enters into finance lease agreements as a lessor. Assets held under finance lease in the consolidated statement of financial position are presented as a receivable at an amount equal to the net investment in the lease. Under a finance lease substantially all the risks and rewards incidental to legal ownership are transferred by the lessor, and thus the lease payment receivable is treated by the lessor as repayment of principal and finance income to reimburse and reward the lessor for its investments and services. The recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the lessor s net investment in the finance lease. Lease payments relating to the period, excluding costs for services, are applied against the gross investment in the lease to reduce both the principal and unearned finance income. o) Fiduciary activities The Group provides trustee services to its customers. Also the Group provides depositary services to its customers, which include transactions with securities on their depo accounts. Assets and liabilities incurred under the trustee and depository activities are not included in the consolidated financial statements. The Group accepts the operational risk on these activities, and the customers bear the credit and market risks associated with such operations. p) Dividends, treasury shares and additional paid-in capital Dividends on ordinary shares are reflected as an appropriation of retained earnings in the period in which they are declared. Dividends for the year, which are declared after the reporting date, are treated as a subsequent event under IAS 10 Events After the Reporting Period. The Bank s shares that are reacquired by the Bank or its subsidiaries are referred to as treasury shares and are shown as a deduction from total equity. Gains and losses on sales of own shares are charged or credited to equity. The amounts received on the issuance of the Bank s shares exceeding their par value are referred to as additional paid-in capital and are accounted as a part of equity. q) Provisions Provisions are recognised in the consolidated statement of financial position when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 28

29 A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. r) Taxation Profit tax comprises current and deferred tax. Profit tax is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity, in which case it is recognised within other comprehensive income or directly in equity. The current taxation charge is calculated in accordance with the regulations of the Russian Federation and other jurisdictions in which the Bank has offices and branches or where its subsidiaries are located and is based on the results reported in the statements of profit or loss of the Bank and its subsidiaries prepared under statutory tax legislation. Deferred profit taxes are provided on temporary differences between the tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Deferred profit tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries and associates where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are offset if the Group has a legally enforceable right to offset current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may not be set off against taxable profits and current tax liabilities of other Group companies. In addition, the tax base is determined separately for each of the Group s main activities and, therefore, tax losses and taxable profits related to different activities cannot be offset. The Russian Federation also has various other taxes that are relevant to the Group s activities. These taxes (except recoverable value added tax) are included as a component of administrative expenses in profit or loss. s) Value added tax VAT related to sales of products and services is payable to tax authorities at the earlier of (a) receipt of advances from customers or (b) delivery of the goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases, which have not been settled at the reporting date (VAT recoverable and deferred VAT payable), is recognised on a gross basis and disclosed separately as other assets and other liabilities. Where an allowance has been made for impairment of receivables, the impairment loss is recorded for the gross amount of the debtor, including VAT. The related VAT deferred liability is maintained until the receivable is written off for tax purposes. 29

30 t) Cash and cash equivalents Cash and cash equivalents comprise cash balances, current accounts with the Central Bank of the Russian Federation and amounts due from credit institutions with maturity of three months or less when originated that are subject to insignificant risk of changes in their fair value. Cash balances with contractual limitations on immediate disposal and overdue amounts are excluded from cash and cash equivalents. u) Credit related commitments In the normal course of business, the Group enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees issued by the Group represent an obligation to pay a certain amount to a beneficiary as a compensation of loss, incurred as a result of the debtor s failure to make payment when due in accordance with the original or modified terms of the financial instrument. Such guarantees are initially recognised at fair value. Subsequently they are measured at the higher of created provision and initial cost less, where applicable, accumulated amortization of commission income, received under the financial guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. Financial guarantee liabilities and provisions for other credit related commitment are included within other liabilities. v) Share capital (i) Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. (ii) Repurchase of share capital When share capital recognised as equity is repurchased, the amount of the consideration paid, including directly attributable costs, is recognised as a decrease in equity. (iii) Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Russian legislation. (iv) Perpetual instruments Perpetual non-redeemable debt instruments issued by the Group which carry no mandatory interest payments are classified as equity. w) Transactions with shareholders Transactions with the Group's shareholders may include various contributions by and distributions to shareholders other than investment in share capital or dividend payout. Such transactions are accounted for in equity and are presented separately from other changes in equity in the consolidated statement of changes in equity for the year. 30

31 x) Share-based payments As a part of its remuneration policy the Group uses share-based payments (including share options) for services of its employees and directors. The fair value of services received is measured indirectly, i.e. by reference to the fair value of the share-based instruments granted. The fair value of the instruments is measured (i) by use of a market quotation for the instruments that are traded on an active market or (ii) by use of valuation techniques that are commonly used for valuation of such instruments if the share-based instrument is not actively traded. Expenses related to the options are accrued starting from the grant date through to the vesting date regardless of the service period covered. Equity-settled share-based payments are measured at the fair value of the equity instrument at the grant date. The fair value determined at the grant date is expensed on a straight-line basis over the vesting period, based on the Group s estimate of the number of shares that will eventually vest. For cash-settled share-based payments (share appreciation rights), a liability equal to the portion of the services received is recognised at the current fair value determined at each reporting date. Share-based payment transactions with a cash alternative are structured so that the employee has the right to choose whether the transaction is settled in equity instruments or in cash-settled share appreciation rights and at the day of settlement the fair value of one settlement alternative is the same as the other. As a result, such transactions are accounted for in the same way as cash-settled share-based payments. At the date of settlement the liability is re-measured to its fair value. If the employee chooses settlement in equity instruments, the liability is transferred directly to equity. y) Segment reporting An operating segment is a component of a group that: (i) engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same group); (ii) whose operating results are regularly reviewed by the group s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (iii) for which discrete financial information is available. Internal reports which are regularly reviewed by the chief operating decision maker are based on financial information prepared in accordance with IFRS as management believes that such information is the most relevant in evaluating the segment results. Intersegment balances and transactions are eliminated in the segment reporting reviewed by the chief operating decision maker. z) Reclassifications and adjustments As of 2013 the Group made the following reclassifications in the consolidated statement of financial position as of 2012 due to changes in the presentation and classification of liabilities: Euro Commercial Papers issued of RUB million presented as Bonds issued as of 2012 are included in Amounts owed to customers. aa) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are not yet effective as at 31 December 2013, and are not applied in preparing these consolidated financial statements. Of these pronouncements, potentially the following will have an impact on the financial position and performance. The Group plans to adopt these pronouncements when they become effective. 31

32 IFRS 9 Financial Instruments is to be issued in phases and is intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding the classification and measurement of financial liabilities was published in October The third phase of IFRS 9 was issued in November 2013 and relates general hedge accounting. The standard is expected to be finalized in 2014 and will be effective for annual periods begining on or after 1 January The Group recognises that the new standard introduces many changes to accounting for financial instruments and is likely to have a significant impact on the consolidated financial statements. The impact of these changes will be analysed during the course of the project, as further phases of the standard are issued. The Group does not intend to adopt this standard early. Amendments to IAS 32 Financial Instruments: Presentation - Offsetting Financial Assets and Financial Liabilities do not introduce new rules for offsetting financial assets and liabilities; rather they clarify the offsetting criteria to address inconsistencies in their application. The Amendments specify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event; and enforceable both in the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The amendments are effective for annual periods beginning on or after 1 January 2014, and are to be applied retrospectively. The Group has not yet analysed the likely impact of the new standard on its financial position or performance. Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January The Group has not yet analysed the likely impact of the improvements on its financial position or performance. NOTE 4 SEGMENT REPORTING (a) Operating segments Management determined that the Group operates in the following operating segments according to IFRS 8 Operating Segments: Banking, Media and Machinery, which are described in Note 1. Other operations include: real estate development, natural gas trading and project engineering in the power sector (the other segment). For additional disclosures on types of products and services included in non-banking operating segments refer to Note 9. For additional information about companies forming each of the operating segments refer to Note 31. Assets of the banking segment include investments in subsidiaries representing other segments which are eliminated on consolidation. Information regarding the results of each operating segment is disclosed below. Performance is measured based on segment profit from operations after profit tax as included in the internal management reports that are reviewed by the Management Board. Segment information for operating segments as of 2013 and 2012 and for the years then ended is as follows. 32

33 Banking Media Machinery Other Eliminations Consolidated Profit and loss information Year ended 2013 Interest income External Interest income Intersegment (8 028) - Interest expense External ( ) (758) (111) ( ) Interest expense Intersegment (1 054) - (4 677) (2 297) Net interest income (4 662) (1 220) Impairment of interest earning assets (14 265) (33) (93) (83) - (14 474) Net interest income (expense) after impairment of interest earning assets (4 755) (1 303) Fees and commissions income External Fees and commissions income Inter-segment (110) - Fees and commissions expense External (6 293) - - (24) - (6 317) Fees and commissions expense Inter-segment - (14) (70) (26) Non-interest loss from financial assets and liabilities held for trading, net External (4 211) - - (169) - (4 380) Gain (loss) from investments available-for-sale and investments in associates, net External (25) (73) (191) Gain (loss) from trading in foreign currencies, operations with foreign currency derivatives and foreign exchange translation, net External (114) (161) (511) Other operating income External Other operating income Inter-segment (288) (63) 369 (18) - - Non-interest income (expense) (216) 65 (392) Non-banking operating revenues External Non-banking operating expenses External - (43 260) (62 441) (40 724) - ( ) Non-banking operating profits (losses) (813) (3 976) Banking salaries and employment benefits External (34 687) (34 687) Banking administrative expenses External (24 920) (24 920) Impairment of assets and provisions for other risks External (4 753) (310) (387) (3 060) - (8 510) Impairment of goodwill External (258) (32) (290) Non-interest expense (64 618) (342) (387) (3 060) - (68 407) Profit (loss) before profit tax (5 890) (8 731) Profit tax (expense) benefit (8 981) (3 752) (10 539) Profit (loss) for the year (4 614) (7 813) Profit for the year attributable to: Group s shareholders (4 726) (7 801) Non-controlling interests (256) 112 (12) Profit (loss) for the year (4 614) (7 813)

34 Banking Media Machinery Other Eliminations Consolidated Profit and loss information Year ended 2012 Interest income External Interest income Inter-segment (6 382) - Interest expense External ( ) (630) (364) (508) - ( ) Interest expense Inter-segment (971) - (3 511) (1 900) Net interest income (3 729) (1 906) (Impairment) recovery of impairment of interest earning assets (9 980) 10 (348) (9) - (10 327) Net interest income (expense) after impairment of interest earning assets (4 077) (1 915) Fees and commissions income External Fees and commissions income Inter-segment (110) - Fees and commissions expense External (4 965) - (2) (38) - (5 005) Fees and commissions expense Inter-segment - (65) (38) (7) Non-interest income from financial assets and liabilities held for trading, net External Gain (loss) from investments available-for-sale and investments in associates, net External (24) (106) Gain (loss) from trading in foreign currencies, operations with foreign currency derivatives and foreign exchange translation, net External (76) Other operating income External Other operating income Inter-segment (27) (426) - - Non-interest income (expense) (245) Non-banking operating revenues External Non-banking operating expenses External - (39 872) (60 851) (32 953) - ( ) Non-banking operating profits (losses) (417) Banking salaries and employment benefits External (32 729) (32 729) Banking administrative expenses External (21 955) (21 955) Impairment of assets and provisions for other risks External (2 854) (34) (1 804) (583) - (5 275) Impairment of goodwill External - (1 721) (1 546) - - (3 267) Non-interest expense (57 538) (1 755) (3 350) (583) - (63 226) Profit (loss) before profit tax (3 220) (471) Profit tax (expense) benefit (9 674) (3 126) (527) - (12 146) Profit (loss) for the year (2 039) (998) Profit for the year attributable to: Group s shareholders (983) (1 645) Non-controlling interests (22) (17) (1 056) (448) Profit (loss) for the year (2 039) (998)

35 Banking Media Machinery Other Eliminations Consolidated Statement of financial position 2013 Cash and due from the CBR and credit institutions (18 827) Financial assets held for trading (309) Loans to customers (80 588) Investments available-for-sale and investments in associates ( ) Receivables and prepayments (2 532) Investments held-to-maturity Inventories Property, plant and equipment and intangibles Goodwill All other assets (47) Total assets ( ) Financial liabilities held for trading Amounts owed to credit institutions (74 100) Amounts owed to customers (27 283) Bonds issued Subordinated debts All other liabilities (920) Total liabilities ( ) Banking Media Machinery Other Eliminations Consolidated Statement of financial position 2012 Cash and due from the CBR and credit institutions (21 507) Financial assets held for trading (58) Loans to customers (78 984) Investments available-for-sale and investments in associates (90 516) Receivables and prepayments (1 732) Investments held-to-maturity Inventories Property, plant and equipment and intangibles Goodwill All other assets Total assets ( ) Financial liabilities held for trading Amounts owed to credit institutions (69 674) Amounts owed to customers (30 880) Bonds issued Subordinated debts All other liabilities (1 700) Total liabilities ( )

36 (b) Geographical areas The Group primarily operates in the Russian Federation. Operations of subsidiaries with business in other countries are presented below: Russian Federation Other Adjustments Total Russian Other Adjustments countries consolidated Federation countries Total consolidated Net interest income (361) Non-interest income (518) Non-banking operating profit, net (91) (231) (191) Property, plant and equipment and intangibles The total amount of revenues from each single external customer or group of connected customers does not exceed 10 per cent of revenues. Substantially all of non-current assets are located in the Russian Federation. NOTE 5 NET INTEREST INCOME Net interest income for the years ended 2013 and 2012 comprise: Interest income Interest income on financial assets at amortized cost: Loans to customers: Loans to legal entities Loans to individuals Financial leasing Due from credit institutions Investments held-to-maturity Interest income on financial assets held for trading and investments available-forsale: Debt securities Interest expense Interest expense on financial liabilities at amortized cost: Amounts owed to customers: Amounts owed to legal entities (64 589) (55 472) Amounts owed to individuals (16 407) (13 139) Promissory notes and certificates of deposit issued (10 606) (9 593) Ministry of Finance of the Russian Federation (1 197) (1 380) Bonds issued (20 466) (15 626) Amounts owed to credit institutions (7 781) (10 959) Subordinated debts (5 100) (6 910) Other interest expense (2 330) (1 496) ( ) ( ) Net interest income NOTE 6 PROVISIONS AND IMPAIRMENT LOSSES The allowance for impairment losses in the consolidated statement of profit or loss and other comprehensive income represents the charge required in the current period to establish the total allowance for losses carried forward in accordance with IFRS. 36

37 The movements in the allowances for impairment losses on interest earning assets during the years ended 2013 and 2012 were as follows. Due from credit institutions Loans to customers Investments held-tomaturity Total allowance for impairment (Recovery of impairment) impairment losses (134) Amounts written off (28) (2 218) (7) (2 253) Effect of translation to presentation currency (5) (189) - (194) Impairment losses Amounts written off - (1 275) - (1 275) Effect of translation to presentation currency The movements in the allowances for impairment of other assets and provisions for other risks during the years ended 2013 and 2012 were as follows. Receivables Inventories Other assets Other risks Total allowance for impairment/ provisions Impairment losses (recovery of impairment) (1 064) Amounts written off - (54) (67) (2) (123) Effect of translation to presentation currency - - (3) (14) (17) Impairment losses Amounts written off (138) (10) (211) (6) (365) The allowance for impairment on assets is deducted from the related assets. Provisions for other risks are recorded in other liabilities. The movements in the allowances for impairment for investments available-for-sale recognised for the years ended 2013 and 2012 were as follows. Investments available-forsale accounted for at fair value Investments available-forsale accounted for at cost Investments accounted for under the equity method Total impairment Impairment losses Disposal of subsidiary - (12) - (12) Impairment losses Amounts written off (991) (760) - (1 751) As of 2013 the Group estimated recoverable amounts of its property, plant and equipment and intangible assets. As a result, their carrying values were impaired by RUB million, which was recognised as part of non-banking operating profits in the consolidated statement of profit or loss and other comprehensive income for the year ended 2013 (2012: RUB 505 million) (Note 9). 37

38 Also, as of 2013 the Group impaired goodwill previously recognised on acquisition of subsidiaries by RUB 290 million, which was recognised as impairment loss in the consolidated statement of profit or loss and other comprehensive income for the year ended 2013 (2012: RUB million) (Note 20). NOTE 7 FEES AND COMMISSIONS INCOME AND EXPENSE Fees and commissions income for the years ended 2013 and 2012 comprise: Debit/credit cards Trade finance Depository and custodian Cash operations Credit and settlements commissions Asset management Arrangement fees and other financial services Other Fees and commissions income Commissions from debit/credit cards represent commissions received from clients to issue and process of debit/credit cards and from other financial institutions for services. Settlements commissions represent commissions received for transfer of customer funds and from other transactions with clients. Fees and commissions expense for the years ended 2013 and 2012 comprise: Debit/credit cards (3 785) (2 872) Arrangement fees and other financial services (717) (188) Settlements operations (438) (356) Brokerage operations (361) (314) Cash related services (338) (330) Depository and custodian services (152) (241) Other (526) (704) Fees and commissions expense (6 317) (5 005) NOTE 8 NON-INTEREST (LOSS) INCOME FROM FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING, NET Net income (loss) from financial assets and liabilities held for trading for the years ended 2013 and 2012 comprise: Corporate shares Corporate bonds (2 321) Russian and Moscow government bonds (4 429) (Loss) gain on securities held for trading (5 248) Derivative contracts: - Interest swaps Commodity swaps Securities 312 (1 782) - Bullion 44 (259) Gain (loss) on derivative contracts other than with foreign currency 868 (1 203) Non-interest (loss) income from financial assets and liabilities held for trading, net (4 380) Interest income from debt securities in amount of RUB million is reported as part of interest income (2012: RUB million). 38

39 NOTE 9 NON-BANKING OPERATING PROFITS The composition of non-banking operating profit for the years ended 2013 and 2012 is as follows. For more information on non-banking segments see Notes 1 and Media business operating profit Machinery business operating (loss) profit (813) Other businesses operating loss (3 976) (417) Non-banking operating profit, net The composition of non-banking revenues and expenses is as follows Advertising Broadcasting Programming rights Publishing activities Other Media business operating revenues Depreciation and amortization Salaries and other employment benefits Broadcasting services Other costs to sell Administrative expenses Publishing Cost of goods sold Impairment of property, plant and equipment and intangible assets Other Media business operating expenses Media business operating profit Nuclear power plant equipment Machinery for chemical production Mining equipment Speciality steels Gascompressor units Machinery equipment manufacturing Equipment for cryogen products Thermal and other equipment Engineering revenue Electrical equipment Other equipment Machinery business operating revenues Materials Salaries and other employment benefits Production services received Depreciation and amortization Other production expenses Engineering expense Distribution costs Impairment of property, plant and equipment and intangible assets Other Machinery business operating expenses Machinery business operating (loss) profit (813)

40 Revenue from sale of natural gas Engineering revenue Revenue from sale of projects and premises Other Other businesses operating revenues Cost of natural gas sold Engineering expenses Cost of projects and premises sold Impairment of property, plant and equipment and intangible assets and other impairment Depreciation and amortization Other Other businesses operating expenses Other businesses operating loss (3 976) (417) NOTE 10 BANKING SALARIES, EMPLOYMENT BENEFITS AND ADMINISTRATIVE EXPENSES Banking salaries and administrative expenses for the years ended 2013 and 2012 comprise: Salaries Social security costs Defined contribution pension plan Annual remuneration of the Board of Directors Share-option plans (expenses) recovery of expenses 112 (161) Banking salaries and employment benefits Operating lease expenses Repairs and maintenance Depreciation and amortization Professional services Taxes other than on income Advertising and marketing Charges to the State Deposit Insurance System Security expenses Business development Charity and sponsorship Telecommunication and information services Other Banking administrative expenses Included in banking salaries for the year ended 2013 is RUB 750 million of accrued bonus to the members of the Management Board of the Bank based on the financial performance of the Group in 2013 and RUB 34 million representing the difference between RUB 784 million of bonus paid in 2013 for 2012 and accruals recognised in A part of annual employees bonuses that exceeds a specified amount is settled in own shares. In the year ended 2013 the payment to the Management Board and other employees of RUB 675 million was settled in own shares based on their fair value on the date of the bonus announcement (2012: RUB million). The shares transferred to employees are puttable at the discretion of employees in two years, and the corresponding amount is recognised as a part of payable to employees in other liabilities. 40

41 The Group has pension arrangements under the State pension system of the Russian Federation. The Russian Federation state pension system requires current contributions by the employer calculated as a percentage of current gross salary payments; such expense, included in social security costs, is charged to profit or loss in the period the related compensation is earned by each employee. Also, in 2005 the Bank set up a defined contribution pension plan for its employees. The Bank recognised RUB 665 million as an expense for the defined contribution plan attributable to services provided by employees in 2013 (2012: RUB 687 million). The liabilities under the defined contribution plan are included in other liabilities. Taxes other than on income include property tax, VAT, transport tax and other minor taxes paid according to Russian tax legislation. NOTE 11 PROFIT TAX The provision for profit tax for the years ended 2013 and 2012 comprises: Current tax expense Deferred tax benefit (3 836) (5 231) Profit tax expense In 2013 the applicable tax rate for current and deferred tax is 20% (2012: 20%). The effective profit tax rate differs from the statutory profit tax rate. A reconciliation of the profit tax provision based on the statutory rate with the actual profit tax provision is as follows: Profit before taxation Statutory profit tax rate 20% 20% Theoretical profit tax charge at statutory rate Tax effect of permanent differences Income and expenses taxed at different rates (243) 194 Profit tax expense As of 2013 and 2012 profit tax assets comprise: Current tax assets Deferred tax assets Profit tax assets The current profit tax assets arise from advance payments of profit tax and is usually realized either by offsetting with profit tax liabilities in subsequent periods or by repayment by the tax authorities. Deferred tax assets are the amounts of profit taxes recoverable in future periods in respect of: (i) deductible temporary differences; (ii) the carry forward of unused tax losses; and (iii) the carry forward of unused tax credits. The Group has not recognised deferred taxes in respect of investments in subsidiaries. As of 2013 tax losses carried forward of RUB million were recognised as management considered it probable that future taxable profits will be available against which they can be utilised ( 2012: RUB million). As of 2013 and 2012 profit tax liabilities comprise: Current tax liabilities Deferred tax liabilities Profit tax liabilities

42 Deferred tax liabilities are the amounts of profit taxes payable in future periods in respect of taxable temporary differences. The following represents an analysis of the deferred tax position as of 2013 and 2012: Tax effect of deductible temporary differences Due from credit institutions Financial assets held for trading Loans to customers Investments available-for-sale and investments in associates Receivables and prepayments Inventories Property, plant and equipment Intangible assets All other assets Amounts owed to credit institutions Amounts owed to customers Financial liabilities held for trading Bonds issued Tax loss carried forward All other liabilities Deferred tax assets Off-set with deferred tax liabilities (12 796) (7 580) Deferred tax assets, net Tax effect of taxable temporary differences Due from credit institutions (6) (3) Financial assets held for trading (1 362) (991) Loans to customers (1 634) (1 070) Investments available-for-sale and investments in associates (4 029) (762) Receivables and prepayments (2 356) (1 295) Inventories (1 924) (1 169) Property, plant and equipment (4 071) (3 898) Intangible assets (349) (488) All other assets (1 380) (340) Amounts owed to credit institutions (363) (44) Amounts owed to customers (18) (1 339) Subordinated debts (94) (41) Bonds issued (72) - All other liabilities (1 766) (1 660) Deferred tax liabilities (19 424) (13 100) Off-set with deferred tax assets Deferred tax liabilities, net (6 628) (5 520) Net deferred tax position A reconciliation of changes in the net deferred tax position during the years ended 2013 and 2012 follows: Deferred tax position as of Recognised in profit or loss from continuing operations Effect of acquisition of subsidiaries 24 Recognised in other comprehensive income Recognised in retained earnings (100) Translation into presentation currency 36 Deferred tax position as of Recognised in profit or loss from continuing operations Recognised in other comprehensive income 83 Effect of acquisition and disposal of subsidiaries 372 Translation into presentation currency (4) Deferred tax position as of

43 Tax effect recognised in retained earnings relates to perpetual debt issued. The tax effects relating to components of other comprehensive income comprise: Amount before tax Tax Amount Amount benefit net of tax before tax Tax benefit Amount net of tax Change in fair value reserve for investments available-for-sale (1 132) 83 (1 049) (5 886) (3 597) Total (1 132) 83 (1 049) (5 886) (3 597) NOTE 12 CASH AND CASH EQUIVALENTS, OBLIGATORY RESERVE WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION AND DUE FROM CREDIT INSTITUTIONS Cash and cash equivalents as of 2013 and 2012 as shown in the consolidated statement of cash flows comprised: Cash on hand Current account with the Central Bank of the Russian Federation Term deposit with the Central Bank of the Russian Federation Due from credit institutions: Current accounts Term deposits with a maturity of three months or less when originated Reverse sale repurchase agreements Cash and cash equivalents No cash and cash equivalents are impaired or past due. The Central Bank of the Russian Federation requires credit institutions to maintain a non-interest earning cash deposit (obligatory reserve) with the Central Bank of the Russian Federation, the amount of which depends on the level of funds attracted by a credit institution from its customers. The ability to withdraw such deposit is significantly restricted by the statutory legislation. As of 2013 the Group maintained RUB million of obligatory reserve with the Central Bank of the Russian Federation ( 2012: RUB million). Due from credit institutions comprise: Term deposit agreements with a maturity of more than three months when originated Less allowance for impairment (939) (694) Due from credit institutions As of 2013 RUB million of current and term deposits due from credit institutions was placed with five credit institutions which are large international and Russian banks ( 2012: RUB million). 43

44 As of 2013 and 2012 the Group had the following securities received as collateral under reverse repo agreements, which are not recognised as financial assets: Fair value of securities received under reverse repo agreement Fair value of Fair value of Fair value of securities received securities received securities received under reverse repo under reverse repo under reverse repo agreement agreement agreement re-pledged re-pledged Corporate shares Corporate bonds Russian and Moscow government bonds NOTE 13 FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING Financial assets classified as held for trading comprise: Note Trading securities Not pledged Corporate bonds Russian and Moscow government bonds Corporate shares Promissory notes Pledged under sale and repurchase agreements Corporate bonds Russian and Moscow government bonds Corporate shares Total trading securities Derivative financial assets - foreign exchange contracts securities contracts bullion contracts interest rate contracts commodity contracts Total derivative financial assets Financial assets held for trading Russian and Moscow government bonds comprise Rouble and foreign currency denominated government securities issued and guaranteed by the Ministry of Finance of the Russian Federation (OFZ), and municipal bonds issued and guaranteed by the government of the City of Moscow. As of 2013 corporate shares include RUB million of OAO Gazprom ordinary shares ( 2012: RUB million). 44

45 Analysis by credit quality of debt securities at fair value through profit or loss as at 2013 is as follows: Investment Non-investment Not rated Total rating rating Corporate bonds Russian and Moscow government bonds Promissory notes Shares Total trading securities Analysis by credit quality of debt securities at fair value through profit or loss as at 2012 is as follows: Investment Non-investment Not rated Total rating rating Corporate bonds Russian and Moscow government bonds Promissory notes Shares Total trading securities Investment rating includes AAA to BBB Standard & Poor's and Fitch Investor Services rating grades or Aaa to Baa3 Moody's rating grades. If international rating agencies have different ratings for the same security, the securities of the issuer are reported using the higher rating. Financial liabilities classified as held for trading comprise: Note Derivative financial liabilities - foreign exchange contracts bullion contracts interest rate contracts securities contracts commodity contracts Financial liabilities held for trading

46 NOTE 14 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES The exposure to market risks on derivative positions and fair value of derivative financial assets and liabilities outstanding as of 2013 and 2012 is as follows: Notional amount equivalent Derivative assets Fair value of derivative contracts Notional amount equivalent 2013 Derivative liabilities Fair value of derivative contracts Foreign exchange contracts Option contracts (46 373) (642) Forward contracts (20 227) (177) Swap contracts ( ) (2 052) Interest rate contracts Swap contracts (17 701) (44) Bullion contracts Option contracts (33 501) (135) Forward contracts (1 424) (77) Commodity contracts Swap contracts (615) (58) Securities contracts Option contracts (10 779) (29) Forward contracts (20) - Total derivative assets (liabilities) (3 214) Notional amount equivalent Derivative assets Fair value of derivative contracts Notional amount equivalent 2012 Derivative liabilities Fair value of derivative contracts Foreign exchange contracts Option contracts (1 636) (7) Forward contracts (4 556) (101) Swap contracts ( ) (2 591) Interest rate contracts Swap contracts (57) (12) Bullion contracts Option contracts (620) (67) Forward contracts (743) (90) Swap contracts 21 - (996) (90) Commodity contracts Forward contracts (10) (10) Swap contracts (1 177) (61) Securities contracts Forward contracts (318) (86) Total derivative assets (liabilities) (3 115) 46

47 The notional amount equivalents of certain types of financial instruments, e.g. derivative contracts, provide a basis for comparison with instruments recognised on the consolidated statement of financial position, but do not necessarily indicate the amounts of future cash flows involved or the current fair value of the instruments and, therefore, do not indicate the exposure to credit or price risks. The derivative instruments become favorable (positive fair value) or unfavorable (negative fair value) as a result of fluctuations in current market rates relative to their contract terms. The aggregate market exposure of derivative financial instruments on hand, the extent to which instruments are favorable or unfavorable and, thus, the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly over time. NOTE 15 LOANS TO CUSTOMERS Loans to customers as of 2013 and 2012 comprise: Loans not pledged Loans pledged Total loans to customers Total loans to customers Loans to legal entities, gross Allowance for impairment (71 138) (2 103) (73 241) (61 718) Loans to legal entities, net Loans to individuals, gross Allowance for impairment (5 453) - (5 453) (4 078) Loans to individuals, net Total loans to customers, net As of 2012 there were no pledged loans to customers. As of 2013 loan exposures to the Gazprom Group accounted for 1.8% (RUB million) of the gross loan portfolio ( 2012: 2.8% or RUB million). Interests rates by maturity and currency as of 2013 and 2012 comprise: Currency Original maturity Range of interest rates Original maturity Range of interest rates RUB 2 months - 8 years 8.2% % 1 month - 8 years 9.0% % Foreign currency 2 months - 10 years 1.7% - 9.0% 1 month - 10 years 3.0% - 9.0% As of 2013 the ten largest loan exposures accounted for RUB million or 20% of the gross loan portfolio ( 2012: RUB million or 24%). As of 2013 RUB million of gross loans to customers were past due for more than 90 days (non-performing loans) ( 2012: RUB million). Loans pledged represent loans to customers that were pledged by the Group to secure financing from the Central Bank of the Russian Federation (Note 21). 47

48 a) Loans to legal entities Loans to legal entities by types of portfolios as of 2013 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Commercial lending (46 408) Acquisition and equity-backed finance (18 966) Project finance (7 867) Total loans to legal entities (73 241) Loans to legal entities by types of portfolios as of 2012 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Commercial lending (35 574) Acquisition and equity-backed finance (19 223) Project finance (6 921) Total loans to legal entities (61 718) The breakdown of loans to legal entities by industries of the borrowers as of 2013 and 2012 is as follows: % % Metal manufacture % % Gas extraction, transportation and sale enterprises % % Chemical industry % % Oil extraction, transportation, processing and sale enterprises % % Mining % % Real estate construction % % Finance and investment companies % % Electric power industry % % Transport % % Food industry % % Trading enterprises % % Machine building % % Petrochemical industries % % Agriculture % % Shipbuilding % % Telecommunications % % Aerospace industry % % Nuclear industry % % Insurance % % Leasing % % Timber industry % % Other % % % % Less allowance for impairment (73 241) (61 718) Loans to legal entities, net

49 Loans were issued to the following types of borrowers: Private companies, gross Less allowance for impairment losses (71 470) (60 473) Private companies, net State controlled companies, gross Less allowance for impairment losses (1 771) (1 245) State controlled companies, net Loans to legal entities, net The ageing analysis of gross loans to legal entities as at 2013 and 2012 is shown below: 2013 Gross loans Impairment allowance Net loans Impairment to gross loans Loans without individual signs of impairment (43 651) % Impaired loans: -Not overdue (12 852) % -Overdue less than 30 days 743 (743) % -Overdue days 361 (340) % -Overdue days 257 (124) % -Overdue more than 180 days (15 531) % Total impaired loans (29 590) % Total loans to legal entities (73 241) % 2012 Gross loans Impairment allowance Net loans Impairment to gross loans Loans without individual signs of impairment (25 575) % Impaired loans: -Not overdue (20 095) % -Overdue less than 30 days 17 (17) % -Overdue days 137 (137) % -Overdue days 808 (804) % -Overdue more than 180 days (15 090) % Total impaired loans (36 143) % Total loans to legal entities (61 718) % Included in gross loans to legal entities as at 2013 is a total of RUB 610 million ( 2012: RUB million) interest accrued on impaired loans. The Group estimates loan impairment for loans to legal entities based on an analysis of the future cash flows for impaired loans and based on its past loss experience for portfolios of loans for which no indications of individual impairment has been identified. Changes in these estimates could affect the loan impairment provision. For example, to the extent that the net present value of the estimated cash flows differs by plus/minus one percent, the impairment allowance on loans to legal entities as at 2013 would be RUB million lower/higher ( 2012: RUB million). The policy of the Group is to seek collateral for most of its exposures. Preferable collateral is in the form of a pledge of property, or a surety or guarantee from a party with a sound credit standing. The value of the property or the amount of the surety or guarantee should be sufficient to cover the principal amount of the loan and, as a rule, fees and interest for the entire term of the loan and any possible expenses and commissions involved in the foreclosure of the property, unless otherwise provided for by the decision of the relevant committee. 49

50 An analysis of net loans to legal entities secured by collateral or guarantees as of 2013 and 2012 is as follows: 2013 Commercial Project finance Acquisition and Total lending equity-backed finance Securities Cash Real estate Financial guarantees and sureties Other collateral No collateral Total Commercial Project finance Acquisition and Total lending equity-backed finance Securities Real estate Financial guarantees and sureties Other collateral No collateral Total The amounts disclosed in the tables above represent the carrying value of loans to the extent the asset is covered by collateral or other credit enhancements, using the value of collateral determined at inception date, and do not necessarily represent the fair value of the collateral. If a loan is partially covered by collateral, the uncovered portion is disclosed under "No collateral". The recoverability of loans to legal entities that are neither past due nor impaired is primarily dependent on the creditworthiness of the borrowers; the value of the high-quality collateral is also taken into account during impairment assessment. The financial effect of collateral is most significant for impairment assessment of project finance and acquisition and equity-backed finance loans. The components of net investment in finance lease included in loans to customers as of 2013 and 2012 are as follows: Minimum lease payments - not later than 1 year from 1 to 5 years over 5 years Less Unearned finance income - not later than 1 year (5 850) (3 800) - from 1 to 5 years (13 694) (8 768) - over 5 years (4 451) (2 220) Net investment in finance lease Current portion not later than 1 year, net Long-term portion from 1 to 5 years, net Over 5 years, net Net investment in finance lease Less allowance for impairment losses (1 180) (837) Net investment in finance lease after allowance for impairment losses

51 b) Loans to individuals Loans to individuals have been extended within the Russian Federation and comprise the following Mortgage loans originated Mortgage loans acquired Consumer loans Car purchase loans Credit cards and overdrafts Less allowance for impairment (5 453) (4 078) Loans to individuals, net The ageing analysis of loans to individuals as of 2013 and 2012 is shown below. Mortgage loans Consumer loans Car purchase loans Credit cards and overdrafts 2013 Total Loans to individuals - Not overdue Overdue less than 30 days Overdue days Overdue days Overdue more than 180 days Total loans to individuals, gross Allowance for impairment losses (3 524) (737) (929) (263) (5 453) Loans to individuals, net Allowance for impairment to gross loans (%) Mortgage loans Consumer loans Car purchase loans Credit cards and overdrafts 2012 Total Loans to individuals - Not overdue Overdue less than 30 days Overdue days Overdue days Overdue more than 180 days Total loans to individuals, gross Allowance for impairment losses (3 108) (371) (478) (121) (4 078) Loans to individuals, net Allowance for impairment to gross loans (%) The significant assumptions used by management in determining the impairment losses for loans to individuals include the assumption that loss migration rates are constant within one calendar year and can be estimated based on the historic loss migration pattern for one to three years depending on the type of loans. Changes in these estimates could affect the loan impairment allowance. For example, to the extent that the net present value of the estimated cash flows differs by plus/minus one percent, the loan impairment allowance on loans on individuals as of 2013 would be RUB million lower/higher ( 2012: to the extent the net present value of the estimated cash flows differs by plus/minus one percent, the loan impairment allowance would be RUB million lower/higher). 51

52 Mortgage loans are secured by underlying housing real estate. Car purchase loans are secured by underlying vehicles. Consumer loans (exceeding RUB 350 thousand) are usually secured by guarantees of other individuals and pledge of assets. For mortgage and car purchase loans the fair value of collateral was estimated at inception of the loans and was not adjusted for subsequent changes to the reporting date. The Bank estimates that the fair value of the collateral for overdue or impaired mortgage loans is at least equal to 90% of the mortgage balance. Management believes that it is impracticable to estimate fair value of collateral held in respect of other impaired or overdue loans to individuals. For further details on the credit risk profile of the loan portfolio see Note 30. NOTE 16 INVESTMENTS AVAILABLE-FOR-SALE AND INVESTMENTS IN ASSOCIATES Investments available-for-sale and investments in associates comprise: Investments available-for-sale accounted for at fair value Investments available-for-sale accounted for at cost: - unconsolidated subsidiaries associates other investments Investments available-for-sale Investments in associates accounted for under the equity method a) Investments available-for-sale accounted for at fair value Investments accounted for at fair value comprise: Investments available-for-sale accounted for at fair value Not pledged Corporate shares and GDRs Fund participation shares Corporate and municipal bonds Pledged under sale and repurchase agreements Corporate and municipal bonds Investments available-for-sale accounted for at fair value As of 2013 and 2012 corporate bonds had investment ratings of international rating agencies. Investments available-for-sale accounted for at fair value are shown net of accumulated impairment of RUB million ( 2012: RUB 991 million) (Note 6). As of 2013 corporate shares and GDRs include RUB million of shares of Russian electric power and utility companies ( 2012: RUB million). 52

53 b) Unconsolidated subsidiaries accounted for at cost As of 2013 and 2012, the Group had investments in the following unconsolidated subsidiaries: Name Principal activity Country of business Group s holding, % Cost of investment 2013 Impairment Carrying allowance value of investment OAO Morion Manufacturing Russia 92.2% (585) 470 ZAO Raschetno- Clearing & custody Russia 70.3% (17) Depositarnaya Kompanya OOO GPB - Energoeffekt Power efficiency Russia 100.0% 763 (240) 523 (Former OOO Gazpromenergosberezheniye ) projects GPB International S.A. Banking Luxembourg 100.0% Other (91) 856 Total unconsolidated subsidiaries accounted for at cost (933) Name Principal activity Country of business Group s holding, % Cost of investment 2012 Impairment Carrying allowance value of investment OAO Morion Manufacturing Russia 92.2% (585) 470 ZAO Raschetno- Clearing & custody Russia 70.3% (17) Depositarnaya Kompanya OOO "GPB - Energoeffekt" Power efficiency Russia 100.0% (Former OOO Gazpromenergosberezheniye ) projects OOO "Centr Rechevih Telecommunications Russia 67.5% Tehnologiy" (OOO "CRT") Other (102) 713 Total unconsolidated subsidiaries accounted for at cost (704) c) Associates accounted for at cost As of 2013 and 2012 the Group has investments in the following associates accounted for at cost: Name Principal activity Country of business Group s holding, % Cost of investment 2013 Impairment Carrying allowance value of investment ZAO FC Zenit Sport Russia 51.0% (1 658) - ZAO "Optikovolokonnye Telecommunications Russia 47.7% sistemy" Aeacus holding Ltd. Telecommunications Russia 35.0% (465) 662 Polygon Gold Inc. Mining Russia 25.8% OOO "Nevskaya Other Russia 24.0% Truboprovodnaya Kompaniya" Kongress-centr Telecommunications Russia 20.0% Konstantinovskiy OOO "Aprel" Telecommunications Russia 21.6% ООО "Internet Gipermarket" Other Russia 21.1% Other (5) 14 Total associates accounted for at cost (2 128)

54 Name Principal activity Country of business Group s holding, % Cost of investment 2012 Impairment Carrying allowance value of investment ZAO FC Zenit Sport Russia 51.0% (1 658) - ZAO "Optikovolokonnye Telecommunications Russia 47.7% sistemy" Aeacus holding Ltd. Telecommunications Russia 35.0% Polygon Gold Inc. Mining Russia 30.0% OOO "Nevskaya Oil storage Russia 24.0% Truboprovodnaya Kompaniya" Kongress-centr Telecommunications Russia 20.0% Konstantinovskiy OOO "Aprel" Telecommunications Russia 21.6% Other Total associates accounted for at cost (1 658) Unconsolidated subsidiaries and associates have neither been consolidated with the results of the Group nor accounted for under the equity method as the effect of consolidation or equity accounting would neither materially alter the financial position as of 2013 and 2012 nor the results of its operations or cash flows for the years ended 2013 and d) Other investments accounted for at cost Other investments accounted for at cost include minor stakes in various Russian and foreign companies. The equity instruments available-for-sale are carried at cost as they do not have a quoted market price in an active market and other methods of reasonably estimating fair value are not applicable due to the lack of reliable information for discounted cash flow analysis and the absence of comparable quoted companies. It is also currently impracticable to calculate the range of estimates within which fair value of these equity investments is highly likely to lie. As of 2013 other investments accounted for at cost are shown net of accumulated impairment of RUB million ( 2012: RUB million). e) Investments in associates accounted for under the equity method As of 2013 and 2012 investments in associates accounted for under the equity method comprise: Name Principal activity Country of business Group s Carrying Group s Carrying holding, value holding, value % % Petrozamora S.A. Oil production Venezuela 40.0% % ОАО Sogaz Insurance Russia 19.0% OAO Belgazprombank Banking Belarus 49.7% % Eriell Group International Ltd. Oil-field services Russia 46.0% % OAO AKB Eurofinance Banking Russia 25.0% % Mosnarbank Ysmer Ltd Other Russia 41.5% % - IGS Investments Ltd Oil-field services Russia 40.0% % ООО Gazprom gazomotornoye toplivo Oil extraction, transportation and sale Russia 50.0% enterprises OOO Penoplex SPb Polystirol insulating Russia 40.0% % materials Newtech Services Holding Ltd Oil-field services Russia 40.0% % 995 Yugorosgaz A.D., Serbia Gas trading Serbia 25.0% %

55 Name Principal activity Country of business Group s Carrying Group s Carrying holding, value holding, value % % MIR Capital S.C.A., SICAR Other Luxembourg 50.0% Inverton Enterprises Ltd. Real estate Russia 49.5% % 510 development OOO Siemens Electroprivod Machine building Russia 34.0% % 433 Vemex s.r.o. Gas trading Czech 33.0% % 343 Republic Other Total investments in associates accounted for under the equity method In 2013 the Group issued a loan to Ysmer Ltd in amount of RUB millon. The loan is exposed to equity risk and therefore has been accounted for as an investment. Investment in OAO SOGAZ The Group owns 19.04% voting shares of OAO SOGAZ, an insurance company operating in Russia. The investment was classified as an available for sale upon initial recognition and subsequently accounted at cost, as management believed that its fair value was not reliably determinable due to lack of available relevant information. In 2013 the Group received information, including audited financial statements of OAO SOGAZ and selected additional information provided by OAO SOGAZ management, that enabled the Group to estimate the fair value of the investment. The fair value of the investment has been measured by the Group using a market approach and an income approach. The income approach applied a discounted cash flow technique with the use of the following unobservable inputs: 3.6 % return on investment in the terminal year, 0% growth rate of net written premiums in the terminal year without significant changes in the existing line of insurance products throughout the forecast period. The estimated cost of capital (per CAPM) was 19.64%. If the cost of equity was higher/lower by 1% the fair value of the investment would have decreased/increased by RUB 0.3 billion. The market approach used a multiple of 0.9, which has been derived from similar public companies, and applied to the company s actual insurance premiums for the year ended During % voting shares of OAO SOGAZ was transferred to the Group by one of Gazprom Group's subsidiaries under a trust management agreement. The objective is to increase benefits from the investment in OAO SOGAZ and to achieve synergy in the banking and insurance markets through more active involvement in OAO SOGAZ management using the voting power from own shares and shares received under the trust arrangement with the support from the Gazprom Group. The Group expects to have representation in the Board of Directors of OAO SOGAZ in Management determined that the Group obtained significant influence over OAO SOGAZ in December As a result, the Group de-recognised investment available-for-sale and recognised an investment in associate accounted under the equity method, and the revaluation gain of RUB million from re-measuring of investment to fair value was transferred from other comprehensive income to profit or loss. 55

56 Summarised financial information As of 2013 summarized financial information on significant investments in associates accounted for under the equity method is as follows: Name Total assets Total liabilities Operating income Net profit (loss) Comprehensive income (loss) ОАО Sogaz ( ) Petrozamora S.A (79 335) OAO AKB Eurofinance Mosnarbank (40 638) (239) OAO Belgazprombank (43 061) Ysmer Ltd (37 132) Eriell Group International Ltd (42 980) (321) (252) IGS Investments Ltd (14 146) (290) 820 Yugorosgaz A.D., Serbia (2 017) 359 (860) (900) OOO Penoplex SPb (5 587) ООО Gazprom gazomotornoye toplivo (37) Newtech Services Holding Ltd (2 381) Intragroup transactions (including dividends received) Carrying value of investment at the end of the reporting period Group share in net profit (loss) Name Net assets Share % Group share in net assets Goodwill ОАО Sogaz % Petrozamora S.A % OAO AKB Eurofinance Mosnarbank % OAO Belgazprombank % Ysmer Ltd % (1 047) Yugorosgaz A.D., Serbia % (215) ООО Gazprom gazomotornoye toplivo % IGS Investments Ltd % (116) Eriell Group International Ltd % (148) Newtech Services Holding Ltd % OOO Penoplex SPb % Other (117) Total investments in associates accounted for under the equity method

57 Net profit (loss) is disclosed for the year ended 2013 or from the date of acquisition or reclassification until 2013 (if acquired or reclassified in 2013). As of 2012 summarized financial information on significant investments in associates accounted for under the equity method is as follows: Total assets Total liabilities Operating income Net profit (loss) Comprehensive Name income (loss) OAO AKB Eurofinance Mosnarbank (76 464) Petrozamora S.A (26 201) OAO Belgazprombank (30 555) Eriell Group International Ltd (33 509) IGS Investments Ltd (8 130) Yugorosgaz A.D., Serbia (1 025) (582) (727) (761) OOO Penoplex SPb (5 271) Newtech Services Holding Ltd (738) (24) Intragroup transactions (including dividends received) Carrying value of investment at the end of the reporting period Name Net assets Share % Group share in net assets Goodwill Group share in net profit (loss) Petrozamora S.A % OAO AKB Eurofinance Mosnarbank % (80) OAO Belgazprombank % (63) Yugorosgaz A.D., Serbia % (182) IGS Investments Ltd % Eriell Group International Ltd % Newtech Services Holding Ltd % OOO Penoplex SPb % Other (82) Total investments in associates accounted for under the equity method Net profit (loss) is disclosed for the year ended 2012 or from the date of acquisition or reclassification until 2012 (if acquired or reclassified in 2012). There are no quoted market prices for the Group's investments in associates accounted using the equity method. The Group does not have any significant restrictions on the ability of associates or joint ventures to transfer funds to the Group. There are no unrecognised contingent liabilities relating to its investments in associates. 57

58 f) Gain from investments available-for-sale and investments in associates, net Gains from investments available-for-sale and income from disposal or derecognition of investments in associates for the years ended 2013 and 2012 comprise the following ОАО Sogaz ZAO FB MMVB shares OAO "National Telecommunication Company" Other investments available-for-sale Gain from disposal or derecognition of investments available-for-sale and investments in associates Income from investments in associates accounted for under the equity method for the years ended 2013 was RUB million (2012: RUB million). NOTE 17 RECEIVABLES AND PREPAYMENTS As of 2013 and 2012 receivables and prepayments comprise the following: Trade receivables Prepayments and advances Accounts due from customers for contract work Settlements with budget for other taxes Receivable on securities operations Other receivables Less allowance for impairment losses (2 989) (2 782) Receivables and prepayments Trade receivables and prepayments primarily consist of prepayments for raw materials and short- and medium-term receivables for industrial products marketed and processing services rendered by non-banking business segments of the Group. 58

59 NOTE 18 PLANT, PROPERTY AND EQUIPMENT Land, buildings and facilities Used in banking business Office, computer Machinery equipment and vehicles and other Assets under construction Land, buildings and facilities Used in non-banking business Machinery and vehicles Office and computer equipments Assets under construction Other Total Cost of acquisition Reclassifications/Transfers (996) (26) - (2 607) - Effect of acquisition of subsidiaries Additions Disposals (62) (170) (288) (133) (382) (307) (463) (964) (38) (2 807) Impairment (57) (182) (239) Translation differences (12) (224) (18) (33) (29) (5) (2) - - (323) Reclassifications/Transfers (4 892) (1 491) (3 042) - Effect of acquisition of subsidiaries Additions Disposals (49) (1 790) (553) (1 536) (300) (1 754) (173) (6) (247) (6 408) Impairment (5) (16) - - (259) (280) Translation differences Accumulated depreciation Reclassifications/Transfers - 17 (17) (7) Charge for the period Disposals - - (233) - (147) (307) (41) - - (728) Translation differences (3) (38) (7) (35) Reclassifications/Transfers (641) Charge for the period Disposals (8) (138) (451) - (300) (1 043) (173) - - (2 113) Translation differences Net book value

60 NOTE 19 INTANGIBLES Used in banking business Intangible assets Rights for audio-visual products Used in non-banking business Other Cost of acquisition Effect of acquisition of subsidiaries Additions Disposals (3 621) (8 290) (483) (12 394) Impairment - (266) - (266) Translation differences (11) - (12) (23) Reclassifications/Transfers - (254) Effect of acquisition of subsidiaries Additions Disposals (306) (7 858) (396) (8 560) Impairment - (106) (2 670) (2 776) Translation differences Accumulated amortisation Charge for the period Disposals (133) (5 160) (187) (5 480) Translation differences (3) - (4) (7) Reclassifications/Transfers - (224) Charge for the period Disposals (174) (7 738) (381) (8 293) Translation differences Net book value NOTE 20 GOODWILL The movement of goodwill for the years ended 2013 and 2012 is as follows: Impairment loss for the period (3 267) Impairment loss for the period (290) Goodwill is allocated to cash-generating units (CGU). An operating segment-level summary of the goodwill allocation is presented below Banking Media Machinery Other Total goodwill Total 60

61 The recoverable amounts of each of the cash-generating units are determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on the financial budgets approved by the management for the next five years. The calculation of value-in-use for corporate operating segments is most sensitive to the growth margin and pre-tax discount rates. Management estimated the growth margins based on past performance and its expectations of market conditions relating to the relevant operating segments. Discount rates reflect management s estimate of return on capital employed in each line of business. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. The effective discount rate applied to cash flow projections is based on the cost of equity (for banking business) and weighted average cost of capital or rates attrubutable to investment projects (for other segments) and are as follows Banking 13.3% 12.7% Media 13.2% 13.0% Machinery 10-16% 10-16% Other % 8-31% NOTE 21 AMOUNTS OWED TO CREDIT INSTITUTIONS Amounts owed to credit institutions as of 2013 and 2012 comprise: Current accounts Term deposits Loan from the Central Bank of the Russian Federation Term deposit from Vnesheconombank Syndicated loans Repo agreements Amounts owed to credit institutions As of 2013 the five largest exposures to credit institutions other than Vnesheconombank and the Central Bank of the Russian Federation (including REPO agreements) comprise RUB million or 26% of amounts owed to credit institutions ( 2012: RUB million or 34%). As of 2013 loan from the Central Bank of the Russian Federation represents funding received from the Central Bank of the Russian Federation with loans to customers of RUB million pledged as collateral (Note 15). Included in syndicated loans as of 2013 and 2012 is a USD million three-year term loan facility agreement with a syndicate of banks that bears an interest of 3 months LIBOR+1.5%. In October 2013 the Group entered into a three-year USD 500 million term loan facility agreement wth a syndicate of banks that bears an interest of 3 months LIBOR+1.4%. Also in October 2012 the Group entered into a one-year USD 500 million term agreement facility with a syndicate of banks that bears an interest of 3 months LIBOR+1.2%, that was repaid as of Repo agreements represent short-term funding received by the Group with securities pledged as collateral to credit institutions. Included in repo agreements is RUB million that represents repo agreements with the Central Bank of the Russian Federation ( 2012: RUB million). 61

62 The following table presents information about assets sold under sale and repurchase agreements with credit institutions: Securities pledged under sale and repurchase agreements (including Investments available-for-sale, Financial assets held for trading and Investments held-tomaturity) Securities received as collateral under sale and repurchase agreements that are repledged, fair value (Note 12) Total assets pledged under sale and repurchase agreements with credit institutions The securities pledged or sold under sale and repurchase agreements are transferred to a third party and the Group receives cash in exchange. These financial assets may be repledged or resold by counterparties, but the counterparty has an obligation to return the securities at the maturity of the contract. The Group has determined that it retains substantially all the risks and rewards on these securities and therefore has not derecognised them. Sale and repurchase transactions are conducted under terms that are usual and customary to standard lending, and securities borrowing and lending activities, as well as requirements determined by exchanges where the Group acts as intermediary. NOTE 22 AMOUNTS OWED TO CUSTOMERS Amounts owed to customers comprise: Current accounts Term deposits Promissory notes issued Euro commercial papers issued Certificates of deposit issued 3 3 Amounts owed to customers A breakdown amounts owed to customers by types of depositors is as follows Ministry of Finance of the Russian Federation: - term deposits State controlled companies: - current accounts term deposits Private companies: - current accounts term deposits Individuals: - current accounts term deposits Promissory notes issued Euro commercial papers issued Certificates of deposit issued 3 3 Amounts owed to customers

63 Promissory notes and certificates of deposit issued represent bearer on call or term interest notes. It is impracticable to identify the ultimate holders of these instruments as of the reporting dates as these instruments may be traded in the over-the-counter market or transferred by the initial holders; hence the Group does not disclose a breakdowns of these notes by ownership. As of 2013 current accounts and time deposits of the Gazprom Group comprised 18% (RUB million) of the total amounts owed to customers ( 2012: 11% or RUB million). Current accounts and term deposits of the Gazprom Group bear interest from 0% to 8.95% per annum. The majority of the Gazprom Group s deposits mature from on demand to 2 years. Included in current accounts of state-controlled and private companies as of 2013 is RUB million of minimum balances that customers are required to maintain during contractually specified periods of time ( 2012: RUB million). NOTE 23 BONDS ISSUED Bonds issued comprise: Eurobonds Rouble domestic bonds Bonds issued As of 2013 and 2012 eurobonds comprise: Issue % Final maturity date EUR Loan Participation Notes 3.98% October USD Loan Participation Notes 5.63% May USD Loan Participation Notes 6.25% December USD Loan Participation Notes 6.50% September RUB Loan Participation Notes 7.33% November RUB Loan Participation Notes 7.88% July CHF Loan Participation Notes 3.38% August RUB Loan Participation Notes 8.62% December CHF Senior Bonds 2.38% December USD Guaranteed Notes 7.35% May CNY Loan Participation Notes 4.00% February CHF Loan Participation Notes 4.38% December USD Loan Participation Notes 7.93% June Eurobonds NOTE 24 SUBORDINATED DEBTS As of 2013 and 2012 subordinated debts comprise: Deposits from Vnesheconombank Subordinated eurobonds Deposits from Gazprom Group Other subordinated deposits Subordinated debts

64 As of 2013 and 2012 subordinated eurobonds comprise: Issue % Final maturity date USD 750 million international debt issue 7.50% December USD 500 million international debt issue 7.25% May USD 400 million international debt issue 6.50% July USD 62.6 million international debt issue 5.75% November Subordinated eurobonds The eurobond is subordinated to the claims of other creditors according to the Russian bankruptcy legislation and is senior to the claims of the Groups' shareholders. In February and June 2012 the Bank repaid before contractual maturity RUB million of subordinated debt to Vnesheconombank, NPF Gazfond and Gazprom (Note 26). As of 2013 included in subordinated debts is an amount of RUB million that relates to a deposit from State corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank) (2012: RUB million). This deposit matures in December 2020 and bears an interest of 7.5% per annum. NOTE 25 OTHER LIABILITIES Other liabilities comprise: Settlements with suppliers Option premium payable to Vnesheconombank (Note 26) Payables for transactions with securities Payable to employees Trade payables Accounts payable for acquisition of property, plant and equipment Operating taxes payable Provision for other risks Deferred income Payable under employee share-option plan and puttable instruments Amounts due to customers under contract work Current tax liabilities Other Other liabilities As of 2013 and 2012 settlements with suppliers primarily represent amounts payable for materials and products delivered and services rendered to non-banking business segments of the Group. NOTE 26 SHAREHOLDERS EQUITY (a) Share capital Issued share capital comprises ordinary shares as of 2013 and All ordinary shares have a par value of Roubles. The holders of ordinary shares are entitled to receive dividends as annually declared and are entitled to one vote per share at annual and other general meetings of the Bank s shareholders. 64

65 In February and May 2012 the Bank repaid before contractual maturity some of the subordinated deposits received from its shareholders and Vnesheconombank. At the same time these entities used the repaid amounts to purchase the Bank s ordinary shares as follows: Subordinated deposits repaid Ordinary shares purchased OAO Gazprom Non-State Pension Fund Gazfond Vnesheconombank OOO New Financial Technologies (a 100%-owned subsidiary of the Bank) * * treasury shares In June 2012 the Bank purchased from Vnesheconombank an American-style call option on of the Bank s shares that matures in June The option premium is to be paid semi-annually by installments during the life of the option. The Group initially recognised a liability payable to Vnesheconombank for the option premium through 2020 of RUB million. The amortisation of the liability of RUB million is recognised as other interest expense in the statement of profit or loss and other comprehensive income for the year ended 2013 (2012: RUB million). In case the option is exercised or otherwise cancelled before maturity the remaining portion of the liability is extinguished. (b) Treasury shares As of shares were held by the Group as treasury shares ( 2012: shares). Movements in the outstanding shares are presented below: Opening balance as at 1 January Additional share issue Shares purchased (76 709) ( ) Shares sold to employees Shares sold to Gazfond Closing balance as at In November 2013 a subsidiary company of the Group OOO New Financial Technologies sold ordinary shares of the Bank to Non-State Pension Fund Gazfond Group (Gazfond) for total consideration of RUB million, bringing Gazfond s shareholding in the Bank from 47.38% to 49.65%. (c) Dividend payout Dividends payable by the Bank are restricted to the maximum distributable reserves, which are determined by the amount of reserves as disclosed in the financial statements of the Bank prepared in accordance with the statutory legislation. As of 2013, the statutory financial statements of the Bank disclosed distributable reserves (including post reporting date adjustments up to the date these financial statements are authorised for issue) of RUB million and non-distributable reserves of RUB million ( 2012: distributable reserves of RUB million and non-distributable reserves of RUB million). In June 2013 the General shareholders meeting of the Bank approved a dividend payout for the year 2012 of RUB 252 per one ordinary share (dividends declared in 2012 for the year 2011 were RUB per one ordinary share). 65

66 NOTE 27 PERPETUAL DEBT ISSUED In October 2012 the Group issued perpetual Eurobonds of USD 1 billion bearing interest of 7.875% per annum. The Group has the right to call the Eurobond in 2018 and at each interest payment date thereafter. The coupon is paid semi-annually and the coupon rate is fixed until the first call date after which it is reset every 5 years. The coupon payment is not cumulative and may be cancelled at the discretion of the Group. The coupon payment becomes mandatory in case the Group pays or declares dividends in the preceding 6 months. As the Group has discretion in relation to coupon and principal repayment, the Group classified this perpetual Eurobond as equity in the consolidated statement of changes in equity. The USD denominated perpetual Eurobonds are translated to their RUB equivalent at the period-end exchange rate with exchange differences recorded in retained earnings when incurred. Issuance costs are also recorded in retained earnings when incurred. While coupon payments are at the discretion of the Group, the next coupon payment is accrued and recorded as a liability if and when dividends are paid or declared. As of 2013 amounts due on perpetual Eurobonds were RUB million ( 2012: RUB million). In December 2013 the Group amended the terms of the perpetual Eurobonds by introducing a write-down of principal and cancellation of accrued interest if either of the following events occurs: (a) the Common Equity Tier 1 Capital Ratio of Gazprombank (according to the CBR Regulation 395-P) is less than 2% or (b) the Agency on Deposit Insurance implements bankruptcy prevention measures in relation to Gazprombank (according to the Federal Law No 175-FZ). The Group paid a commission of RUB million to the perpetual bond holders to put in force these amendments. This commission is recorded as transaction costs in retained earnings. NOTE 28 FINANCIAL COMMITMENTS AND CONTINGENCIES a) Credit related financial commitments The credit related financial commitments as of 2013 and 2012 comprise: Undrawn loan commitments Guarantees given Letters of credit Management evaluated the likelihood of probable losses arising from credit related commitments guarantees, letters of credit and other commitments - and concluded that a provision of RUB million was necessary as of 2013 ( 2012: RUB million). As of 2013 RUB 754 million of letters of credit were secured by customer funds ( 2012: RUB million). Undrawn loan commitments do not represent irrevocable commitments of the Group. 66

67 b) Operating lease obligations In the normal course of business the Group enters into operating lease agreements for office equipment and branch facilities. Future minimum payments under non-cancellable operating leases are as follows: Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years c) Fiduciary activities In the normal course of its business the Group enters into agreements with clients to manage their assets with certain limited rights on decision making in accordance with specific criteria established by the clients. The Group may be liable for losses or actions aimed at appropriation of the clients funds until such funds or securities are returned to the client. The maximum potential financial risk at any given moment is equal to the amount of the clients funds and securities plus (minus) any unrealized gain (loss) on the positions. As of 2013 the total amount of funds accepted by the Group on behalf of its clients does not exceed RUB million ( 2012: RUB million). As of 2013 the total amount of securities accepted by the Group on behalf of its clients does not exceed RUB million ( 2012: RUB million). Assets accepted and liabilities incurred under the trustee and depository activities are not included in the Group s financial statements. d) Capital commitments In the normal course of business the Group enters into various contracts for purchase of programming rights, property and equipment, construction and repair of buildings, with suppliers of consulting services and other services. As of 2013 and 2012 the future contracted liabilities with respect to these contracts were budgeted by the Group are as follows Programming rights Property, plant and equipment Construction agreements e) Environmental matters The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group companies in the machinery and other business segments periodically evaluate their obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be reasonably estimated. Under the current levels of enforcement of existing legislation, management believes that there are no probable liabilities for environmental damage which would have a materially adverse effect on the financial position or the operating results of the Group. 67

68 f) Social commitments The companies in the machinery and other business segments have social commitments, which require them to contribute to the maintenance and upkeep of the local infrastructure and the welfare of its employees in the areas of its production operations. The commitments include contributions towards the construction, development and maintenance of housing, hospitals, transportation services, recreation and other social needs. Such funding is expensed as incurred. g) Legal In the ordinary course of business the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial position or the operating results of the Group. h) Insurance The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Group does not have full coverage for its premises and equipment, business interruption, or third party liability in respect of property or environmental damage arising from accidents on the Group s property or relating to operations. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on operations and financial position. The Group has obtained an international comprehensive banking risk insurance policy ( BBB Bankers Blanket Bond) covering professional activities and crimes, including electronic and computer crimes. The amount of total insurance indemnity is limited to USD thousand. i) Taxation The Group operates in a number of tax jurisdictions. In the normal course of business, management must interpret and apply existing legislation to transactions with third parties and its own activities. Current Russian tax legislation is principally based on the legal form in which transactions are documented and the underlying accounting treatment is applied as prescribed by Russian tax legislation. The interpretation of Russian tax legislation by the tax authorities and court practice, which are constantly changing, in the future may focus less on the form and more on the substance of a transaction. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation. Tax years remain open to normal audit by the Russian tax authorities for three years; during such time any change in interpretation or practice, even if there is no change in Russian tax legislation, could be applied retroactively. The interpretation and practice in other jurisdictions in which the Group operates are also changing, sometimes with retroactive effect. Such uncertainty could, in particular, be attributed to tax treatment of financial instruments/derivatives and determination of market prices for transactions for transfer pricing purposes. It could also lead to temporary taxable differences occurring due to loan impairment allowance and profit tax liabilities being treated by the tax authorities as understatement of the tax base. Management is confident that applicable taxes have all been accrued and, consequently, creation of respective provisions is not required. In management s opinion, the Group is in substantial compliance with the tax and other laws governing its operations in Russia and in other tax jurisdictions. However, a risk remains that the relevant authorities could take different positions with regard to interpretative issues or that court practice could develop adversely to positions taken by the Group and the effect on the financial position of the Group, should the authorities succeed in asserting their positions, could be significant. 68

69 Starting from 1 January 2012 new transfer pricing rules came into force in Russia. They provide the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controllable transactions if their prices deviate from the market interval or profitability range. According to the provisions of transfer pricing rules, the taxpayer should sequentially apply five methods of market price determination prescribed by the Tax Code. Transactions between individual entities within the Russian Federation are only subject to the transfer pricing legislation if the aggregate activity between two entities (determined on an arm's length basis) exceeds RUB 2 billion. Certain exemptions are available for transactions between two Russian related companies which are located in the same region. Controlled transactions between two individual entities, one within the Russian Federation and one in an overseas jurisdiction are only subject to the transfer pricing legislation if the aggregate activity between the two entities (determined based on arm s length prices) exceeds RUB 80 million. The definition of a foreign entity includes a Russian branch or representative office of a foreign company. Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible with the evolution of the interpretation of the transfer pricing rules in the Russian Federation and the changes in the approach of the Russian tax authorities, that such transfer prices could be challenged. Given the short period since the current Russian transfer pricing rules became effective, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group. NOTE 29 CORPORATE GOVERNANCE AND INTERNAL CONTROLS The principal management bodies of the Bank are the General Shareholders Meeting, the Board of Directors, the Management Board and the Chairman of the Management Board. The Bank complies with corporate governance principles set forth in the September 1999 Basel Committee Recommendations on Enhancing Corporate Governance for Banking Organisations (recommended by the Central Bank of the Russian Federation for use by Russian lending organisations) and the Code of Corporate Governance (approved by the Russian Government in November 2001 and recommended for use by Russian joint-stock companies). In addition, the Bank has established a Corporate Governance and Remuneration Committee that is responsible for the supervision of compliance with international and Russian corporate governance principles, including transparency and management responsibility and accountability. The Bank has the following committees: Corporate Governance and Remuneration Committee Strategy Committee Client Policy Committee Asset and Liability Management Committee Technologies Committee Investment Committee Credit Committee Risk Management Committee. The Board of Directors and the Management Board have responsibility for the development, implementation and maintenance of the Bank s internal control system that is commensurate with the scale and nature of operations. The purpose of internal control system is to ensure: proper and comprehensive risk assessment and management proper business, accounting and financial reporting functions, including proper authorization, processing and recording of transactions completeness, accuracy and timeliness of accounting records, managerial information, regulatory reports, etc. reliability of IT-systems, data and systems integrity and protection prevention of fraudulent or illegal activities, including misappropriation of assets 69

70 compliance with laws and regulations. Management is responsible for identifying and assessing risks, designing controls and monitoring their effectiveness. Management monitors the effectiveness of the Bank s internal controls and periodically implements additional controls or modifies existing controls in accordance with changes in external and internal environment. The Bank developed a system of standards, policies and procedures to ensure effective operations and compliance with relevant legal and regulatory requirements, including the following areas: requirements for appropriate segregation of duties, including the independent authorization of transactions requirements for the recording, reconciliation and monitoring of transactions compliance with regulatory and other legal requirements documentation of controls and procedures requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified requirements for the reporting of operational losses and proposed remedial action development of contingency plans training and professional development ethical and business standards risk mitigation, including insurance where it is effective. There is a hierarchy of requirements for authorization of transactions depending on their size and complexity. A significant portion of operations are automated and the Bank has put in place a system of automated controls. Compliance with the Bank s standards is supported by a program of periodic reviews undertaken by the Internal Control Department. The Internal Control Department is independent from management and reports directly to the Board of Directors. The results of Internal Control Department reviews are discussed with relevant business process managers, with summaries submitted to the Audit Committee, the Board of Directors and senior management of the Bank. Internal control functions are performed by: the Board of Directors and its committees, including the Audit committee the Chairman of the Management Board and the Management Board the Revision Commission the Chief Accountant (and deputies) Heads (and deputies) and Chief Accountants (and deputies) of branches the Internal Control Department the Compliance Control Department other business units and employees responsible for internal control execution in accordance with the established internal standards, policies and procedures, including: the internal control function the risk management function the security function, including IT-security the human resource function the legal function the compliance officer and the compliance function the designated employee and division responsible for compliance with anti-money laundering requirements the control officers of branches professional securities market participant controller other employees/business-units with control responsibilities. Russian legislation, including the Federal Law dated 2 December 1990 No On banks and banking activity, establishes the professional qualifications, business reputation and other requirements for members of the Board of Directors, Management Board, Head of Internal Control Department and other key management personnel. All members of the Bank s governing and management bodies meet these requirements. 70

71 Management believes that the Bank complies with the CBR requirements related to risk and capital management systems and internal control system, including requirements related to the internal control function, and that risk and capital management systems and internal control system are appropriate for the scale, nature and complexity of operations. NOTE 30 RISK MANAGEMENT Management of risk is fundamental to the banking business and is an essential element of the Group s operations. Management considers risk management and risk controls to be vitally important aspects of its business operations and management activities. Establishing and integrating risk management and control functions into corporate organization is a continuous process. The Group sets internal standards of risk transparency as the basis for controlling, limiting and managing risks. The Group s risk management and control system addresses the key banking risks: credit risk liquidity risk market risk operational risk. A risk appetite statement reviewed by the Board of Directors includes both quantitative and qualitative indicators designed to provide high level guidelines on type and amount of risk that the Group is willing to take in pursuit of its strategic goals. This risk appetite is further scaled and operationalized to the level of limits for separate risks and positions. Presented below is the consolidated statement of financial position in the format used for internal risk reporting and management Assets Cash and due from the Central Bank of the Russian Federation Due from credit institutions Financial assets held for trading and investments available-for-sale accounted for at fair value Loans to customers Investments available-for-sale accounted for at cost and investments in associates Investments held-to-maturity All other assets Total banking segment assets Net assets of non-banking investments (including related non-controlling interests) Total assets Liabilities Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts All other liabilities Total banking segment liabilities Total equity attributable to the Group s shareholders Non-controlling interests Total equity Total liabilities and equity Guarantees and letters of credit issued

72 Risk management principles and organization The following key principles guide the approach to risk management: the Board of Directors approves the general risk management policy, as well as applicable levels of risk appetite, strategic objectives, priorities of risk management, and reviews risk management systems and policies on an annual basis the Management Board provides overall risk management oversight for the Group s operations as a whole within the framework set by the Board of Directors. The Management Board monitors actual risk levels on a quarterly basis and periodically reviews risk management policies the Group enforces a clear segregation between the business origination and risk management activities. The Chief Risk Officer (CRO) is a member of the Management Board and reports directly to the Board of Directors the Group manages credit, market, liquidity and operational risks in a coordinated manner at all levels of its operations and in branch operations the Group delegates local decision-making authority to local/decentralised risk management units within the framework of centralised risk management policies. The Group has an integrated risk management system which allows it to unify risk management approaches and enhance control over risk management in separate organisations of the Group, as well as to align the overall Group risk profile with its strategic objectives and to facilitate risk-based decision making on the Group level. The risk management system is based on advanced standards and practices of risk-based management of financial organisations. In determining the risk management policy, the Management Board is supported by four key risk control and management committees and the Risk Management Division. Committees are appointed and monitored by the Management Board. The Credit Committee and the Investment Committee are responsible for approving operations that carry credit risk. The authority and responsibility of each committee in respect of a given transaction is determined by reference to the parameters of the transaction. The Investment Committee is responsible for approving investment transactions above RUB 1.2 billion, and all other transactions are reviewed by the Credit Committee. The primary objective of the Assets and Liabilities Management (ALM) Committee is to satisfy the dual requirements of controlling exposure to liquidity and market risks while maximising profitability through the appropriate structure of assets and liabilities. The Corporate Governance and Remuneration Committee is responsible for the policies and methodology in relation to operational risks and for controlling exposure to high level operational risks. In addition to these committees, the Risk Management Division is responsible for day-to-day management of risks based on standards, models and procedures it develops. The risk management information systems, measurement tools, and practices are adjusted to and support the Group s growth, structure, and risk appetite. Other control functions within the Group use the intelligence on key risks from the risk management function in their planning processes. The Group is constantly developing its risk management system in order to correspond to the best practices and recommendations of regulators. a) Credit risk The Group is exposed to credit risk, which is the risk of financial losses occurring due to the default by a borrower or counterparty on their obligation to the Group. Credit risk is managed in accordance with the Central Bank of the Russian Federation regulations, Basel Committee principles and guidelines, and internal documents developed to incorporate such principles, including credit risk management policies. The main objective of credit risk management is timely credit risk identification, assessment, and mitigation. The Group applies the following key principles of credit risk assessment and management: 72

73 usage of a comprehensive methodological approach that includes qualitative (expert) and quantitative (statistical) credit risk assessment application of credit risk assessment to each individual transaction and to portfolio as a whole limiting credit risk by setting limits adherence to unified approach in all aspects of credit process including credit decision-making, administration, credit risk monitoring and assessment of allowance for loan impairment. Decision-making on acceptable credit risk levels is made by several authorized bodies, such as the Investment Committee, the Credit Committee and the Chairman of the Management Board. The Group introduced risk limits for a single borrower or a group of borrowers. Compliance with such limits is monitored on a daily basis. All transactions which are considered by the Credit Committee or the Investment Committee are subject to independent qualitative and quantitative assessments by the Risk Management Division. Qualitative assessment is an important method of credit risk assessment. The Group considers the quality of the counterparty's management and control, its ownership, transparency, counterparty's credit history, business reputation, its size and market share, industry trends, business activities of the counterparty, its geographical location, suppliers and customers. Quantitative assessment focuses on debt capacity, profitability, liquidity, cash flows and asset quality. Credit risk assessment is undertaken in respect of the following business segments: corporates, project finance, retail banking, transactions with financial institutions, sovereign and municipal bodies, and debt market transactions. The result of a credit risk assessment is an expert opinion used in decision making process and risk mitigation steps that are appropriate for a specific transaction. Clients are rated by internal ratings based on a unified internal rating scale that has twenty grades (from AAA to D ). Internal ratings are assigned in accordance with the Bank s internal documents and procedures. For rating purposes all clients are divided into nine general categories, for each of which a dedicated assessment methodology is applied. In addition, there is an internal rating system, where the Group collects, accumulates and analyses both quantitative and qualitative credit risk metrics. To further enhance credit risk management, the Group has developed and started the implementation of models for estimating the probability of default of counterparties and transactions based on leading international risk practices and Basel II recommendations. Internal credit ratings are used for setting of credit risk limits, identification and monitoring of distressed assets, for calculations of probability of default and for assessment of allowance for loan impairment and expected losses. Also within the quantitative framework, the Group regularly performs stress tests of the loan portfolio. Stress testing approach includes assessment of the potential losses under crisis scenarios using macroeconomic statistical models. Future development of the credit risk management framework also includes: segmentation of the banking book assets in accordance with Basel II requirements that is used for risk reporting and economic capital calculations development of additional internal models including standards for management of probability of default and loss given default models implementation of the project for risk-weighted asset calculations in accordance with Basel II requirements and recommendations issued by the Central Bank of the Russian Federation aimed at preparation for future regulatory requirements and internal management purposes. The Credit Policy is approved and periodically reviewed by the Management Board. 73

74 The Group pays attention to the system of credit risk monitoring and control. There is a bank-wide information resource that contains results of monitoring process for all transactions exposed to credit risk to take early risk mitigation actions. In case of identification of any negative trends for a specific transaction as a result of the monitoring process, such a transaction (depending on the degree of the negative trends) is included into one of the Watch List categories with the appropriate approach for control and monitoring. Also the Group has a Default List that includes all exposures at default and is monitored by the Risk Management Division. The credit risk exposure on derivatives is managed as part of the overall credit risk for counterparties, together with potential exposures from market movements. Credit-related commitments ensure that financing is provided as per contractual agreements. Guarantees and standby letters of credit represent irrevocable commitments that the Group will honor customers obligations. Standby letters of credit are usually fully or partially covered by the funds deposited by customers and therefore bear lower credit risk. The Group s activities may give rise to settlement risk at the time of settlement of transactions. Settlement risk is the risk of loss due to the failure of counterparty to execute its obligations to deliver cash, securities or other assets as contractually agreed. For certain types of transactions the Group mitigates this risk by conducting settlements through settlement/clearing agents to ensure that a trade is settled only when both parties have fulfilled their contractual settlements obligations or executing trades on net basis. Acceptance of settlement risk on free of payment trades requires transaction specific and/or counterparty specific settlements limits that form part of credit risk limits. In order to reduce credit risk resulting from OTC derivative transactions, where OTC clearing is not available, the Group regularly seeks the execution of standard master agreements (such as master agreements for derivatives published by the International Swaps and Derivatives Association, Inc. (ISDA)) with its clients. A master agreement allows the netting of rights and obligations arising under derivative transactions that have been entered into under such master agreement upon the counterparty s default, resulting in a single net claim owed by or to the counterparty (close-out netting). Offsetting financial assets and financial liabilities The disclosures set out in the tables below include financial assets and financial liabilities that: are offset in the consolidated statement of financial position or are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. The similar agreements include derivative clearing agreements and global master repurchase agreements. Similar financial instruments include derivatives, sales and repurchase agreements and reverse sale and repurchase agreements. Financial instruments such as loans and deposits are not disclosed in the table below unless they are offset in the consolidated statement of financial position. The Group receives and accepts collateral in the form of marketable securities in respect of sale and repurchase, and reverse sale and repurchase agreements. Such collateral is subject to the standard industry terms of the ISDA Credit Support Annex. This means that securities received/given as collateral can be pledged or sold during the term of the transaction but must be returned on maturity of the transaction. The terms also give each counterparty the right to terminate the related transitions upon the counterparty s failure to post collateral. 74

75 The table below shows financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar arrangements as at 2013: Gross amounts of recognised financial asset/liability Gross amount of recognised financial liability/asset offset in the consolidated statement of financial position Net amount of financial assets/liabilities presented in the consolidated statement of financial position Related amounts subject to offset in the event of default or bankruptcy Types of financial assets/liabilities Net amount Derivatives trading assets (276) - Reverse sale and repurchase agreements (55 302) - Total financial assets (55 578) - Derivatives trading liabilities (276) 15 Sale and repurchase agreements ( ) - Total financial liabilities ( ) 15 The gross amounts of financial assets and financial liabilities and their net amounts as presented in the consolidated statement of financial position that are disclosed in the above tables are measured in the consolidated statement of financial position on the following basis: derivative assets and liabilities fair value assets and liabilities resulting from sale and repurchase agreements and reverse sale and repurchase agreements amortised cost. b) Country risk Country risk is a risk of financial losses due to the default by foreign counterparties on their obligation to the Group for economic, political, social reasons, or as a result of a limited access of the counterparty to the currency of the obligation because of the specific of national legislation (irrespective of the creditworthiness of the counterparty). The Group has Country Risk Policy which stipulates key principles and approaches for assessment of country risks and setting the country limits. Country risk assessment takes into account the economy scale (GDP level) and the sovereign credit risk (probability of default). Risk management monitors utilization of the country limits based on the total volume of risk, taken on in a specific country. 75

76 (i) Geographical concentration of assets and liabilities The geographical concentration of banking assets and liabilities based on the country of incorporation of the Group's external customers as of 2013 and 2012 follows: Russia OECD Other non- OECD 2013 Total Assets Cash and due from the Central Bank of the Russian Federation Due from credit institutions Financial assets held for trading and investments availablefor-sale accounted for at fair value Loans to customers Investments available-for-sale accounted for at cost and investments in associates Investments held-to-maturity All other assets Total banking segment assets Net assets of non-banking investments (including related non-controlling interests) Total assets Liabilities Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts All other liabilities Total banking segment liabilities Net position (7 920) Russia OECD Other non- OECD 2012 Total Assets Cash and due from the Central Bank of the Russian Federation Due from credit institutions Financial assets held for trading and investments availablefor-sale accounted for at fair value Loans to customers Investments available-for-sale accounted for at cost and investments in associates Investment held-to-maturity All other assets Total banking segment assets Net assets of non-banking investments (including related non-controlling interests) Total assets Liabilities Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts All other liabilities Total banking segment liabilities Net position (59 537)

77 As of 2013 included in loans to customers is RUB million of loans granted to corporate entities operating in Ukraine ( 2012: RUB million). Due to the structure of some of these transactions, the credit exposure in the amount of RUB million in substance represents a non-payment risk on OAO Gazprom. (ii) Maximum credit risk exposure for financial instruments For financial assets the maximum exposure to credit risk equals the carrying value of those assets. For financial guarantees and other contingent liabilities the maximum exposure to credit risk is the maximum amount the Bank would have to pay if the guarantee was called on or (in the case of commitments), if the loan amount was called on (Note 28). (iii) Internal credit rating of financial assets Internal rating grades are based on credit quality of the counterparties: Grades Credit quality Risk level AAA Highest credit quality Minimal credit risk AA Very high credit quality Very low credit risk A High credit quality Low credit risk BBB Good credit quality Adequate credit risk BB Average credit quality Average credit risk B Low credit quality Substantial speculative credit risk CCC Speculative High credit risk CC Speculative Very high credit risk C Speculative Exceptionally high credit risk D Default Default The classification of major banking financial assets according to the internal credit rating system as of 2013 and 2012 is represented below AAA-A BBB-B CCC-C D Not rated Total Due from credit institutions, gross Less allowance for impairment (1) (318) (52) (50) (518) (939) Loans to customers, gross Less allowance for impairment (2 278) (29 681) (21 481) (16 451) (7 167) (77 058) Investments held-tomaturity, gross Less allowance for impairment (70) (184) (254) Financial guarantees and other commitments Less provisions for losses (239) (2 343) (138) (183) - (2 903)

78 2012 AAA-A BBB-B CCC-C D Not rated Total Due from credit institutions, gross Less allowance for impairment - (95) (51) (50) (497) (693) Loans to customers, gross Less allowance for impairment (1 885) (12 052) (19 665) (22 361) (8 093) (64 056) Investments held-tomaturity, gross Less allowance for impairment (6) (192) (198) Financial guarantees and other commitments Less provisions for losses (268) (1 363) (628) (24) (1) (2 284) c) Liquidity risk The Group manages its liquidity position to ensure that sufficient liquidity is available to meet its commitments to customers, creditors and note holders, and to meet the demand for new business. Both qualitative and quantitative approaches to liquidity risk assessment are used to identify and measure actual and potential risks. Liquidity management system is an integrated solution of risk identification, evaluation and control across the banking segment level. It is an essential part of the assets and liabilities management (ALM) system and covers operations on a bank-wide basis, including the head office and regional branches. Liquidity management system consists of two main components: short-term liquidity management implemented by the Treasury on a regular basis medium-term and long-term liquidity management performed by the ALM Committee and the Internal Treasury Department (ALM unit) as a part of the ALM function, ultimately for the purpose of setting the effective risk-return ratio. The liquidity policy is approved by the Management Board to clearly articulate liquidity risk tolerance. On the executive level, liquidity risk is managed by the ALM Committee. The ALM Committee determines the policies for asset and liability management, that aim to build up a robust framework for setting maturity profiles for assets and liabilities, to maintain controls over permitted variances, to provide effective diversification of funding sources and availability of sufficient funding in stressed conditions. The Financial Market Risks Department conducts regular liquidity risk assessments and reports on liquidity risk status to the Chief Risk Officer weekly, to the ALM Committee once a month and to the Management Board half-yearly. Risk reporting includes qualitative and quantitative risk estimations, stress-testing results, and evaluation of additional liquidity sources (liquidity buffer). The Treasury on a real-time basis performs necessary transactions to regulate liquidity gaps, and provides dayto-day liquidity management. The Treasury reports to the ALM Committee on a regular basis. The ALM Committee uses a system of Liquidity Risk Indicators and Targets as a part of the ALM Committee function to ensure the Bank is able to cover expected and unexpected fund withdrawals. 78

79 (i) Liquidity risk management methods Liquidity (funding) risk analysis covers the whole range of banking operations and allows to identify possible periods and reasons for potential liquidity shortage. The system of liquidity risk management also includes planning of operations and immediate borrowing facilities, using a wide set of risk evaluation methods: static and dynamic gap analysis, scenario approach, including stress testing, liquidity ratios and liquidity cost estimates. The Bank performs the assessment of adequacy of the applied models (back testing) on a regular basis and revises parameters and methodological approaches to the liquidity risk evaluation if required. (ii) Gap analysis The gap analysis estimates the excess or shortfall of cash inflows over outflows grouped by maturity in each time bucket and thus allows for identifying and managing open liquidity exposures. Hereinafter gap stands for cumulative gap (i.e. sum of inflows net of sum of outflows in the given time bucket and all time buckets before it). The classic gap analysis is enhanced with incorporating subdivision of contractual, planned or probable cash flows into several tiers. These tiers comprise Tier 0 (highly probable cash flows) and Tiers 1-4 which form liquidity reserves. The gap analysis allows estimating the future liquidity position along with readily available sources of extra liquidity needed to cover possible shortages. The Financial Market Risks Department monitors liquidity reserves and borrowing facilities including the Liquidity Buffer for the case of a liquidity shortage. The following table provides information of the liquidity tiers included in the gap analysis: Tier Facilities Description Tier 0 Contractual cash flows, new likely-to-happen operations (rollover, new business, etc.) Tier 1 Committed lending facilities provided by the CBR Borrowing facilities committed by the CBR and considered as the most stable funding sources. Secured funding from the CBR forms a liquidity cushion or Liquidity buffer and is available in stress conditions Tier 2 Market funding facilities Borrowing facilities available in the market in normal conditions, but restricted in case of a stress scenario: money market, client deposits Tiers 3-4 Medium-term funding facilities Additional borrowing facilities restricted by the longer arrangement period, relatively high cost of funding or by negative effect on the business plans realization: market REPO, bond issue, potentially available opportunities of secured borrowing from the CBR where availability confirmation is pending Cumulative tier composition shows an estimate of future liquidity position (for instance, when a liquidity shortage may occur) along with indications of readily available sources of liquidity to cover possible liquidity shortages. (iii) Scenario analysis and stress-testing The gap analysis is supported by the scenario analysis, which includes a realistic scenario (business as usual) and a liquidity stress scenario. The scenario analysis is performed as a part of regular risk evaluation. Realistic scenario: demonstrates the average expected liquidity level Stress scenario: demonstrates stress tolerance and the ability to maintain sufficient liquidity without implying restrictions on assets-related banking transactions. 79

80 All scenario assumptions and parameters are approved by the ALM Committee and are widely used throughout the Bank. Basic scenario assumptions are as follows: Financial instrument/ portfolio Realistic scenario Stress scenario Loan portfolio According to the Assets and Liabilities Plan Normal credit risk According to the Assets and Liabilities Plan for 1 month, lending ceases in later periods, if needed Stressed credit risk Securities No revaluation Stress repricing: equities -22%, fixed income - 10% Current accounts* Realistic (historical simulation based) outflow Stress outflow: -100% of less stable, -20% of stable Corporate and retail term According to the Assets and Stress outflow: -25% deposits Liabilities Plan Long term debt Contractual maturity Contractual maturity Additional funding sources Secured (CBR collateralized debt, REPOs) and unsecured (money market, capital markets) sources Unsecured sources largely unavailable; Secured sources decay because of stress collateral repricing: equities -22%, fixed income -10% * Current accounts have a minimal stable volume that can be accounted for as having maturities: from 1 month to 12 months less stable ; over 12 months stable. This volume is estimated regularly with historical simulation. (iv) Contingency planning In addition to the integrated liquidity risk management system, the Bank has a contingency funding plan (CFP) that sets out the strategies for addressing liquidity shortfalls in emergency situations. The CFP outlines policies to manage a range of stress scenarios, establishes lines of responsibility, including escalation procedures. The CFP is updated on an annual basis. (v) Quantitative liquidity risk analysis The analysis below is presented using the remaining contractual maturities for assets and liabilities except for the following. Management believes that in spite of a substantial portion of deposits from customers being on demand (customer current/settlement accounts), diversification of these deposits by number and type of depositors and the past experience of the Bank would indicate that these deposits provide a long-term and stable source of funding for the Bank. For such deposits remaining expected maturities were used for the analysis. According to the estimates based on the realistic scenario, as of 2013 and 2012 withdrawals from current customer accounts will occur in the following periods: On demand From 1 month to 12 months Over 12 months The following tables show banking segment cash flows cumulative gap, which equals the sum of gross amounts to be received within or before each relevant time period according to maturities/redemptions of financial instruments (assets/claims) less gross amounts to be repaid within or before each time period according to maturities/redemptions of financial instruments (liabilities/obligations). 80

81 The result of the banking segment gap analysis as of 2013 is as follows: Realistic scenario Time bucket, months less than Contractual gap ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tier Tiers Tiers Stress scenario Time bucket, months less than Contractual gap ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tier ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tiers (61 582) Tiers The following graphs illustrate liquidity gap analysis as of 2013 and are presented in billions of Russian Rubles. Realistic scenario Tiers Tier Tier < 1m 1-2 m 2-3 m 3-4 m 4-5 m 5-6 m 6-9 m 9-12m Stress scenario Tiers Tier Tier 0 < 1m 1-2 m 2-3 m 3-4 m 4-5 m 5-6 m 6-9 m 9-12m Based on the results of the above analysis management assessed the liquidity of the Bank as follows. Realistic scenario: current liquidity position is estimated as well-balanced, with no significant probability of future cash shortage and excess of readily available stock of liquidity reserves. Stress scenario: the Bank is stress tolerant and able to maintain sufficient liquidity level without implying heavy restrictions on new operations within a one year period. The result of the banking gap analysis as of 2012 is as follows: Realistic scenario Time bucket, months less than Contractual gap ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tier (11 347) (18 907) (16 205) (26 288) Tiers Tiers

82 Stress scenario Time bucket, months less than Contractual gap ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tier 0 (21 878) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Tiers (32 218) Tiers The following graphs illustrate liquidity gap analysis as of 2012 and are presented in billions of Russian Rubles. Realistic scenario Stress scenario The tables below show the consolidated undiscounted cash flows on the financial liabilities on the basis of their contractual maturity (including financial liabilities of non-banking segment). The total amount of outflows disclosed is the contractual, undiscounted cash flows on financial liabilities, which is therefore different from the carrying amount of the corresponding financial instrument. The expected cash flows on these financial liabilities commitments may vary significantly from this analysis. Less than 1 month 1 to 3 months 3 months to 1 year to 5 years Over 5years Total Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts Other financial liabilities Total liabilities Guarantees and letters of credit issued Less than 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years 2012 Total Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts Other financial liabilities Total liabilities Guarantees and letters of credit issued

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