GAZPROMBANK GROUP Consolidated Financial Statements

Transcription

1 Consolidated Financial Statements Year Ended 2014

2 Shareholding of the Bank (based on voting rights) Non-State Pension Fund Gazfond * 49.65% 49.65% OAO Gazprom 35.54% 35.54% State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank) 10.19% 10.19% Treasury stock ** 4.40% 4.22% Individuals 0.22% 0.40% % % * - 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 Directors Chairman of Gazprombank Management Board Mikhail L. Sereda Deputy Chairman of the Board of Directors Deputy Chairman of OAO Gazprom Management Board Yury N. Shamalov Deputy Chairman of the Board of Directors President of Non-State Pension Fund Gazfond Kirill A. Dmitriev Member of the Board of Directors Chief Executive Officer of Russian Direct Investment Fund Iliya V. Eliseev Member of the Board of Directors Deputy Chairman of Gazprombank Management Board Anatoliy A. Gavrilenko Member of the Board of Directors Chief Executive Officer of ZAO Leader 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 Kirill G. Selesnev Member of the Board of Directors Member of OAO Gazprom Management Board Elena A. Vasilieva Member of the Board of Directors Deputy Chairman of OAO Gazprom Management Board, Chief Accountant of OAO Gazprom The composition of the Board of Directors is presented as of 21 April

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 Merchant banking, M&A advisory, Direct investments in resource-based industries Nikolay G. Korenev Deputy Chairman of the Board Corporate governance Svetlana E. Maluseva Deputy Chairman of the Board Chief Accountant Aleksey A. Matveev Deputy Chairman of the Board Direct investments, Project and structured finance, Capital markets, Trading activities, Brokerage, Asset management Alexander Y. Muranov Deputy Chairman of the Board Corporate clients relations, Corporate lending policy, Precious metals, Real estate development business Famil K. Sadygov Deputy Chairman of the Board Strategy, Liquidity management, 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 Dmitriy V. Zauers Deputy Chairman of the Board Chief of Administration Yan V. Center First Vice-President Regional network Andrey A. Pimenov First Vice-President Procurement Igor V. Rusanov First Vice-President Assets & liabilities management, Wholesale funding and investor relations, Financial institutions Valeriy A. Seregin First Vice-President Retail business, Custody services Ekaterina V. Trofimova First Vice-President Chief Analytical Officer, Public relations Vladimir N. Vinokurov First Vice-President Corporate security Alexander M. Stepanov First Vice-President Strategic industrial assets The composition of the Management Board is presented as of 21 April Auditors JSC KPMG 3

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

5 JSC KPMG 10 Presnenskaya Naberezhnaya Moscow, Russia Telephone +7 (495) Fax +7 (495) /99 Internet Auditors Report To the Shareholdes and Board of Directors of Gazprombank (Joint-stock Company) We have audited the accompanying consolidated financial statements of Gazprombank (Jointstock Company) (the Bank ) (and its subsidiaries (the Group )), which comprise the consolidated statement of financial position as at 2014, and the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for 2014, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Сonsolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on the fair presentation of these consolidated financial statements based on our audit. We conducted our audit in accordance with Russian Federal Auditing Standards and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to express an opinion on the fair presentation of these consolidated financial statements. Audited entity: Gazprombank (Joint-stock Company). Registered by the State Bank of the USSR on 31 July 1990, Registration No Registered by the Central Bank of the Russian Federation on 23 January 1992, Registration No Entered in the Unified State Register of Legal Entities on 28 August 2002 by Moscow Division of the Ministry of taxes and duties of the Russian Federation, Registration No , Certificate series 77 No Address of the audited entity: 16, Nametkina street, bldging 1, Moscow, Independent auditor: JSC KPMG, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. Registered by the Moscow Registration Chamber on 25 May 1992, Registration No Entered in the Unified State Register of Legal Entities on 13 August 2002 by the Moscow Inter-Regional Tax Inspectorate No.39 of the Ministry for Taxes and Duties of the Russian Federation, Registration No , Certificate series 77 No Member of the Non-commercial Partnership Chamber of Auditors of Russia. The Principal Registration Number of the Entry in the State Register of Auditors and Audit Organisations: No

6 Auditors Report to the Shareholdes and Board of Directors of Gazprombank (Joint-stock Company) Page 2 Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 2014, and its financial performance and its cash flows for 2014 in accordance with International Financial Reporting Standards. Report of findings from procedures performed in accordance with the requirements of Article 42 of the Federal Law dated 2 December 1990 No On Banks and Banking Activity Management is responsible for the Group s compliance with mandatory ratios and for maintaining internal control and organising risk management systems in accordance with requirements established by the Bank of Russia. In accordance with Article 42 of the Federal Law dated 2 December 1990 No On Banks and Banking Activity (the Federal Law ), we have performed procedures to examine: the Group s compliance with mandatory ratios as at 1 January 2015 as established by the Bank of Russia; and compliance of elements of the Group s internal control and organization of its risk management systems with requirements established by the Bank of Russia. These procedures were selected based on our judgment and were limited to enquiries, analyses, inspections of documents, comparisons of the Bank s internal policies, procedures and methodologies to applicable requirements established by the Bank of Russia, as well as recalculations, comparisons and reconciliations of numerical data and other information. Our findings from the procedures performed are reported below. Based on our procedures with respect to the Group s compliance with mandatory ratios as established by the Bank of Russia, we found that the Group s mandatory ratios as at 1 January 2015 were within the limits established by the Bank of Russia. We have not performed any procedures on the accounting records maintained by the Group other than those which we considered necessary to enable us to express an opinion as to whether the Group s consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 2014, and its financial performance and its cash flows for 2014 in accordance with International Financial Reporting Standards. Based on our procedures with respect to compliance of the Group s internal control and organization of its risk management systems with requirements established by the Bank of Russia, we found that: - as at 2014, the Bank s Internal Audit Department was subordinated to, and reported to, the Board of Directors, and the risk management function was not subordinated to, and did not report to, divisions accepting relevant risks in accordance with regulations and recommendations issued by the Bank of Russia; - the Bank s internal documentation, effective on 2014, establishing the procedures and methodologies for identifying and managing the Group s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and for stress-testing was approved by the authorized management bodies of the Bank in accordance with regulations and recommendations issued by the Bank of Russia; -

7 Auditors Report to the Shareholdes and Board of Directors of Gazprombank (Joint-stock Company) Page 3 - as at 2014, the Bank maintained a system for reporting on the Group s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and on the Group s capital; - the frequency and consistency of reports prepared by the Bank s risk management function and the Internal Audit Department during 2014, which cover the Group s credit, operational, market, interest rate, legal, liquidity and reputational risk management, was in compliance with the Bank s internal documentation. The reports included observations made by the Bank s risk management function and the Internal Audit Department as to their assessment of the effectiveness of the Group s procedures and methodologies, and recommendations for improvement; - as at 2014, the Board of Directors and Executive Management of the Bank had responsibility for monitoring the Group s compliance with risk limits and capital adequacy ratios as established by the Bank s internal documentation. With the objective of monitoring effectiveness of the Group s risk management procedures and their consistent application during 2014 the Board of Directors and Executive Management of the Bank periodically discussed reports prepared by the risk management function and the Internal Audit Department, and considered proposed corrective actions. Our procedures with respect to elements of the Group s internal control and organization of its risk management systems were performed solely for the purpose of examining whether these elements, as prescribed in Federal Law and described above, are in compliance with the requirements establish ed by the Bank of Russia. Malyutina M.S. Director, power of attorney dated 16 March 2015 No. 16/15 JSC KPMG 21 April 2015 Moscow, Russian Federation

8 Consolidated Statement of Profit or Loss and Other Сomprehensive Income for the Year Ended 2014 Notes Interest income Interest expense ( ) ( ) Net interest income Impairment of interest earning assets 6 (54 152) (12 370) Net interest income after impairment of interest earning assets Fees and commissions income Fees and commissions expense 7 (8 129) (6 317) Non-interest loss from financial assets and liabilities at fair value through profit or loss, net 8 (25 335) (4 380) Gain from investments available-for-sale and investments in associates, net Gain from trading in foreign currencies, operations with foreign currency derivatives and foreign exchange translation, net Other operating income Non-interest income Non-banking operating revenues Non-banking operating expenses ( ) ( ) Non-banking operating profits Banking salaries and employment benefits 10 (30 043) (34 687) Banking administrative expenses 10 (28 162) (24 920) Impairment of assets and provisions for other risks 6 (12 990) (8 510) Impairment of goodwill 6,21 (2 035) (290) Non-interest expense (73 230) (68 407) (Loss) profit before profit tax (3 792) Profit tax expense 11 (9 906) (10 539) (Loss) profit for the year (13 698) Other comprehensive (loss) income Items that are or may be reclassified to profit or loss in subsequent periods: Investments available-for-sale: Net change in fair value of investments available-for-sale Net change in fair value transferred to profit or loss (142) (10 398) Net impairment of available-for-sale investments transferred to profit or loss Net change in cash flow hedge reserve 29 - Exchange differences on translation of foreign operations Movements in other comprehensive income of associates (450) - Total other comprehensive income, net of tax Total comprehensive (loss) income for the year (1 187) (Loss) profit for the year attributable to: Group s shareholders (16 546) Non-controlling interests (13 698) Total comprehensive (loss) income attributable to: Group s shareholders (8 184) Non-controlling interests (1 187) Signed on behalf of the Management Board: Andrey I. Akimov Chairman of the Board 21 April 2015 Alexander I. Sobol Deputy Chairman of the Board.

9 Consolidated Statement of Financial Position as of 2014 Notes Assets Cash and cash equivalents Obligatory reserve with the Central Bank of the Russian Federation Due from credit institutions Financial assets at fair value through profit or loss 13, of which pledged under sale and repurchase agreements Loans to customers Investments available-for-sale of which pledged under sale and repurchase agreements Investments in associates Receivables and prepayments Investments held-to-maturity of which pledged under sale and repurchase agreements Inventories Deferred tax assets Property, plant and equipment Intangibles Goodwill Other assets Total assets Liabilities Financial liabilities at fair value through profit or loss 13, Amounts owed to credit institutions Amounts owed to customers Bonds issued Deferred tax liabilities Subordinated debts Other liabilities Total liabilities Equity Share capital Additional paid-in capital Treasury shares 27 (9 020) (8 060) Perpetual debt issued Foreign currency translation reserve Fair value reserve for securities available-for sale and cash flow hedge reserve 911 (503) Retained earnings Total equity attributable to the Group s shareholders Non-controlling interests Total equity Total liabilities and equity Signed on behalf of the Management Board: Andrey I. Akimov Chairman of the Board 21 April 2015 Alexander I. Sobol Deputy Chairman of the Board The accompanying notes are an integral part of these consolidated financial statements. 9

10 Consolidated Statement of Changes in Equity for the Year Ended 2014 Share capital Additional paid-in capital Treasury shares Perpetual debt Foreign currency translation reserve Fair value reserve for securities available-forsale and cash flow hedge reserve Retained earnings Equity attributable to Group s shareholders Noncontrolling interests (11 163) Total equity Profit for the year Items that are or may be reclassified to profit or loss in subsequent periods: Net change in fair value of investments available-for-sale Net change in fair value of investments available-for-sale transferred to profit or loss (10 398) - (10 398) - (10 398) Net impairment of investments availablefor-sale transferred to profit or loss Exchange differences on translating foreign operations Total items that are or may be reclassified to profit or loss in subsequent periods (1 049) Total comprehensive income (1 049) Coupon paid on perpetual debt issued (2 483) (2 483) - (2 483) Foreign exchange translation of perpetual debt issued (2 356) Transaction costs on perpetual debt issued (Note 28) (2 146) (2 146) - (2 146) Tax effect on perpetual debt issued Acquisition and disposal of non-controlling interests in subsidiaries Dividends paid (5 791) (5 791) (134) (5 925) Acquisition and sale of treasury shares Transfer of putable instruments to liability - (675) (675) - (675) Other movements (8 060) (503) The accompanying notes are an integral part of these consolidated financial statements. 10

11 Consolidated Statement of Changes in Equity for the Year Ended 2014 Share capital Additional paid-in capital Treasury shares Perpetual debt Foreign currency translation reserve Fair value reserve for securities available-for-sale and cash flow hedge reserve Retained earnings Equity attributable to Group s shareholders Noncontrolling interests (8 060) (503) Total equity Loss for the year (16 546) (16 546) (13 698) Items that are or may be reclassified to profit or loss in subsequent periods: Net change in fair value of investments available-for-sale Net change in fair value of investments available-for-sale transferred to profit or loss (142) - (142) - (142) Net impairment of investments availablefor-sale transferred to profit or loss Net change in cash flow hedge reserve Exchange differences on translating foreign operations Movements in other comprehensive income of associates (450) (450) - (450) Total items that are or may be reclassified to profit or loss in subsequent periods (450) Total comprehensive income (16 996) (8 184) (1 187) Preference share issue (Note 27) Coupon paid on perpetual debt issued (2 808) (2 808) - (2 808) Foreign exchange translation of perpetual debt issued (23 529) Tax effect on perpetual debt issued Acquisition and disposal of non-controlling interests in subsidiaries (537) (537) Acquisition of subsidiaries Dividends paid (6 334) (6 334) (85) (6 419) Acquisition and sale of treasury shares (960) Transfer of putable instruments to liability - (214) (214) - (214) Other movements (9 020) Signed on behalf of the Management Board: Andrey I. Akimov Chairman of the Board 21 April 2015 Alexander I. Sobol Deputy Chairman of the Board

12 Consolidated Statement of Cash Flows for the Year Ended 2014 Notes Cash flows from operating activities Interest received Fees and commissions received Interest paid ( ) ( ) Fees and commissions paid (8 229) (6 139) Non-interest (payments) receipts from financial assets and liabilities held for trading (6 549) (3 260) Payments from derivative contracts with foreign currency (2 490) Foreign exchange receipts (payments) (16 093) Media business operating receipts Media business operating payments (35 276) (21 496) Machinery business operating receipts Machinery business operating payments (48 312) (58 640) Other segment operating receipts Other segment operating payments (46 767) (38 242) Other operating receipts Banking salaries and employment benefit payments (36 712) (35 847) Banking administrative expenses and other operating payments (24 304) (20 458) Cash flows from operating activities before changes in operating assets and liabilities (Increase) decrease in operating assets Obligatory reserve with the Central Bank of the Russian Federation (6 436) Due from credit institutions (335) Financial assets held for trading (53 119) Loans to customers ( ) ( ) Other operating assets (20 084) 908 Increase (decrease) in operating liabilities Amounts owed to credit institutions Amounts owed to customers Other operating liabilities (2 817) Net cash flows from (used in) operating activities before profit taxes Profit taxes paid (11 433) (17 183) Net cash flows from (used in) operating activities Cash flows from investing activities Property, equipment and intangibles purchased (61 913) (47 011) Property, equipment and intangibles sold Acquisition of subsidiaries, net of cash acquired (22 357) - Investments available-for-sale and associates purchased and sold (3 507) Investments held-to-maturity purchased (41 288) (19 964) Dividends received Net cash flows used in investing activities ( ) (61 961) The accompanying notes are an integral part of these consolidated financial statements. 12

13 Consolidated Statement of Cash Flows for the Year Ended 2014 Notes Cash flows from financing activities 1 (43 895) Proceeds from issuance of share capital Treasury shares sold and acquired (868) Bonds issued Bonds redeemed or repurchased (75 490) (39 271) Coupon and transactions costs on perpetual debt paid (3 038) (4 629) Syndicated loans received Syndicated loans redeemed (43 499) (15 972) Subordinated debts received Subordinated debts repaid (40 405) (1 667) Acquisition of non-controlling interests - (240) Disposal of non-controlling interests Financing of non-banking activities received Financing of non-banking activities redeemed (7 367) (2 546) Dividends paid (6 419) (5 925) Net cash flows from financing activities Effect of change in exchange rates on cash and cash equivalents Change in cash and cash equivalents Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year Signed on behalf of the Management Board: Andrey I. Akimov Chairman of the Board 21 April 2015 Alexander I. Sobol Deputy Chairman of the Board The accompanying notes are an integral part of these consolidated financial statements. 13

14 NOTE 1 PRINCIPAL ACTIVITIES AND ORGANIZATION The Gazprombank Group (the Group) primarily consists of: Gazprombank (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 (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), 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 2014, OAO Gazprom owns 35.54% of the outstanding ordinary 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 33). These consolidated financial statements are published on a Bank's website These consolidated financial statements were authorized for issue by the Management Board of the Bank on 21 April

15 NOTE 2 BASIS OF PRESENTATION a) General These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS). 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. 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 31). 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. Management of the Group believes that it takes all the necessary efforts to support the economic stability of the Group in the current environment. Since September 2014 a drop of oil prices led to significant devaluation of the Russian Rouble against major foreign currencies which in turn accelerated inflation. The political and economic instability witnessed in Ukraine has had and may continue to have a negative impact on the Russian economy. In 2014 the United States OFAC and the European Council implemented coordinated sectoral sanctions against some of the Russian banks and corporations, including the Bank, and some of the Russian officials and businessmen. The sanctions prohibit the U.S. and EU citizens or entities operating on the territory of the U.S. and EU transacting in, providing financing for, or otherwise dealing in the debt instruments of the Group with a maturity of longer than 30 days issued after the date of the sanctions announcement. 15

16 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. The Group is not exposed to significant seasonal or cyclical variations in operating income during the financial year. 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. 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. Some of the Group's principal subsidiaries have functional currency different from the Russian Rouble: Name GPB Global Resources B.V Gazprombank Latin America Ventures B.V. ZAO Areximbank Gazprombank Switzerland Ltd GPB International SA ŠKODA JS a.s. Centrex Europe Energy & Gas AG Functional currency US dollar US dollar Armenian dram Swiss franc Euro Czech crown Euro The consolidated financial statements are presented in millions of RUB, unless otherwise stated. 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 noncontrolling 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. 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 16

17 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 non-controlling 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. (vii) Consolidation of limited liability companies domiciled in the Russian Federation In substance the partners' equity of certain limited liability companies domiciled in the Russian Federation meets the definition of a liability according to the statutory legislation. Stakeholder 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 subject to approval by 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 recognises its share of losses until the carrying amount of the investment is reduced to nil. Recognition of further losses is discontinued. 17

18 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 realised 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 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. 18

19 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 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. 19

20 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. 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. 20

21 (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 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 availablefor-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. 21

22 (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. The realised trading profits from derivatives and unrealised 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. Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets and liabilities. Derivatives held for risk management purposes are measured at fair value in the statement of financial position. The group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships. On initial designation of the hedge, the Group formally documents the relationships between the hedging instruments and hedged items, including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at inception of the hedge relationship and on an ongoing basis, of whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of %. (viii) Cash flow hedge When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented 22

23 in the hedging reserve within equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount recognised in other comprehensive income is reclassified to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of profit or loss and other comprehensive income. If the hedging derivative expires or is sold, terminated or exercised, or the hedge is no longer meets the criteria for cash flow hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. (ix) 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. (x) 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 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. (xi) 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. (xii) 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. (xiii) 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. (xiv) 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. 23

24 f) Impairment (i) Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans to customers, investments held-to-maturity 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. 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. 24

25 (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. 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 25

26 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. Amortization rate for 1 airing is 100%. If the limitation to the number of airings is higher than two or there is no such limitation for a product, amortization is calculated agreed to category of broadcasting of films and TV programs and appropriate amortization rate. 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. 26

27 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. 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-in-use 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 27

28 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. 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 realised 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. 28

29 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. 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 credit lines, 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. 29

30 (iii) Preference shares Non-cumulative preference shares that do not include fixed or determinable dividends are classified as equity. w) Perpetual instruments Perpetual non-redeemable debt instruments issued by the Group which carry no mandatory interest payments are classified as equity. x) 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. y) 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. z) 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. 30

31 aa) Changes in accounting policies Impairment of interest earning assets denominated in foreign currencies Following the devaluation of the Russian Rouble in the 4th quarter of 2014 (Note 2) the Group decided that the users of financial statements would benefit from the separate analysis of the following movements in the allowances for impairment losses on interest earning assets: movement arising from the changes in foreign currency exchange rates during the period, and movement arising from the changes in the risk of financial losses occurring due to the default by a borrower or counterparty on their obligation to the Group (credit risk). As a result, the Group has changed its accounting policy regarding the presentation of foreign currency exchange differences arising on impairment allowance for interest earning assets denominated in foreign currencies. Such foreign exchange differences are presented as a part of Gains/losses from foreign exchange translation in the consolidated statement of profit or loss and other comprehensive income. Previously such foreign exchange differences were included in Impairment of interest earning assets. For the year ended 2014 the effect of such differences was RUB million. The change of accounting policy has been applied retrospectively, thus the comparative amounts for 2013 were also changed. Adjustment of As previously reported prior period amount As adjusted Impairment of interest earning assets (14 474) (12 370) Gains (losses) from trading in foreign currencies, operations with foreign currency derivatives and foreign exchange translation (2 104) The change has no effect on consolidated statement of financial position or net profit for New standards adopted The Group has adopted the following amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2014: 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 Group does not expect that these amendments will have an impact on its consolidated financial statements. New standards and interpretations not yet adopted A number of new standards and amendments to standards are effective for annual periods beginning after 1 January However, the Group decided not to apply the following new or amended standards early in preparing these consolidated financial statements. IFRS 9 Financial Instruments IFRS 9 published in July 2014 replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets and new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS

32 IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018 with early adoption permitted. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2017 with early adoption permitted. The Group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 15. The following new or amended standards are not expected to have a significant impact on the Group s consolidated financial statements after they become effective: Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) IFRS 14 Regulatory Deferral Accounts Accounting for Acquisitions of Interests in Joint Operations (Amendments to IFRS 11) Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41) Equity method in Separate Financial Statements (Amendments to IAS 27) Sale of Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28). 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 32. 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. 32

33 Segment information for operating segments as of 2014 and 2013 and for the years then ended is as follows: Banking Media Machinery Other Eliminations Consolidated Profit and loss information Year ended 2014 Interest income External Interest income Intersegment (9 425) - Interest expense External ( ) (1 455) (104) (58) - ( ) Interest expense Intersegment (805) (1 722) (4 247) (2 651) Net interest income (2 530) (4 091) (1 757) (Impairment) recovery of impairment of interest earning assets (53 501) - 95 (746) - (54 152) Net interest income (expense) after impairment of interest earning assets (2 530) (3 996) (2 503) Fees and commissions income External Fees and commissions income Inter-segment (159) - Fees and commissions expense External (8 092) - - (37) - (8 129) Fees and commissions expense Inter-segment - (23) (69) (67) Non-interest loss from financial assets and liabilities held for trading, net External (25 334) - - (1) - (25 335) Gain (loss) from investments available-for-sale and investments in associates, net External (25) (195) (431) Gain (loss) from trading in foreign currencies, operations with foreign currency derivatives and foreign exchange translation, net External (1 448) (101) (1 771) Other operating income External Other operating income* Inter-segment (1 244) - Non-interest income (expense) (1 220) (363) (1 000) (1 244) Non-banking operating revenues External Non-banking operating revenues Inter-segment (34) - Non-banking operating expenses External - (64 953) (51 646) (47 530) - ( ) Non-banking operating expenses Inter-segment - (22) (2) (10) 34 - Non-banking operating profits (losses) (1 777) Banking salaries and employment benefits External (30 043) (30 043) Banking administrative expenses External (28 162) (28 162) Impairment of assets and provisions for other risks External (11 874) (307) - (809) - (12 990) Impairment of goodwill External - (2 035) (2 035) Non-interest expense (70 079) (2 342) - (809) - (73 230) Profit (loss) before profit tax (6 136) (1 322) (1 244) (3 792) Profit tax expense (6 428) (3 098) (152) (228) - (9 906) Loss for the year (2 522) (2 094) (6 288) (1 550) (1 244) (13 698) 33

34 Banking Media Machinery Other Eliminations Consolidated Loss for the year attributable to: Group s shareholders (7 244) (2 136) (4 863) (1 059) (1 244) (16 546) Non-controlling interests (1 425) (491) Loss for the year (2 522) (2 094) (6 288) (1 550) (1 244) (13 698) *Included in intersegment Other operating income for the year 2014 is RUB million which represents dividends paid by OAO Gazprom Media Holding (2013: nill). 34

35 Banking Media Machinery Other Eliminations Consolidated Profit and loss information Year ended 2013 Interest income External Interest income Inter-segment (8 028) - Interest expense External ( ) (758) (111) ( ) Interest expense Inter-segment (1 054) - (4 677) (2 297) Net interest income (4 662) (1 220) Impairment of interest earning assets (12 161) (33) (93) (83) - (12 370) 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 (loss) 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)

36 Banking Media Machinery Other Eliminations Consolidated Statement of financial position 2014 Cash and due from the CBR and credit institutions (18 640) Financial assets held for trading (351) Loans to customers ( ) Investments available-for-sale and investments in associates ( ) Receivables and prepayments (6 470) Investments held-to-maturity Inventories Property, plant and equipment and intangibles Goodwill All other assets (17) Total assets ( ) Financial liabilities held for trading Amounts owed to credit institutions ( ) Amounts owed to customers (32 157) Bonds issued Subordinated debts All other liabilities (1 393) Total liabilities ( ) 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 ( )

37 (b) Geographical areas The Group primarily operates in the Russian Federation. The effect of operations of the Group's subsidiaries in other countries is presented below: Russian Federation Other countries Adjustments Total Russian Other consolidated Federation countries Adjustments Total consolidated Net interest income (361) Noninterest income (73) (518) Nonbanking operating profit, net (91) 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 2014 and 2013 comprise: Interest income Interest income on financial assets at amortized cost: Loans to customers: Loans to legal entities Loans to individuals Financial leasing Investments held-to-maturity Due from credit institutions Due from the Central Bank of the Russian Federation Interest income on financial assets at fair value through profit or loss and investments available-for-sale: Debt securities Interest expense Interest expense on financial liabilities at amortized cost: Amounts owed to customers: Amounts owed to legal entities (86 139) (64 589) Amounts owed to individuals (14 850) (16 407) Promissory notes and certificates of deposit issued (5 289) (10 606) Ministry of Finance of the Russian Federation (3 192) (1 197) Bonds issued (27 978) (20 466) Amounts owed to the Central Bank of the Russian Federation (19 484) (3 659) Subordinated debts (8 662) (5 100) Amounts owed to credit institutions (5 283) (4 122) Other interest expense (2 127) (2 330) ( ) ( ) Net interest income

38 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. The movements in the allowances for impairment losses on interest earning assets during the years ended 2014 and 2013 were as follows: Due from credit institutions Loans to customers Investments held-tomaturity Total allowance for impairment Impairment losses Foreign exchange translation differences (Note 3(aa)) Effect of translation to presentation currency Amounts written off - (1 275) - (1 275) Impairment losses Foreign exchange translation differences (Note 3(aa)) Effect of translation to presentation currency Amounts written off - (11 912) (118) (12 030) The movements in the allowances for impairment of other assets and provisions for other risks during the years ended 2014 and 2013 were as follows: Receivables Inventories Other assets Other risks Total allowance for impairment/ provisions Impairment losses Amounts written off (138) (10) (211) (6) (365) Impairment losses Effect of translation to presentation currency (28) Amounts written off (657) (77) (76) - (810) 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 2014 and 2013 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 investments (991) (760) - (1 751) Impairment losses Disposal of investments (562) - - (562) Effect of consolidation of subsidiaries - (825) - (825)

39 As of 2014 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 2014 (2013: RUB million) (Note 9). Also, as of 2014 the Group impaired goodwill previously recognised on acquisition of subsidiaries by RUB million, which was recognised as impairment loss in the consolidated statement of profit or loss and other comprehensive income for the year ended 2014 (2013: RUB 290 million) (Note 21). NOTE 7 FEES AND COMMISSIONS INCOME AND EXPENSE Fees and commissions income for the years ended 2014 and 2013 comprise: Debit and credit cards Trade finance Arrangement fees and other financial services Cash related services Credit related commitments and settlements Asset management Brokerage Depository and custodian Other Fees and commissions income Commissions from debit and credit cards represent commissions received from clients for issuance and processing of debit and credit cards and from other financial institutions for acquiring 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 2014 and 2013 comprise: Debit and credit cards (4 935) (3 785) Settlements (782) (438) Brokerage (761) (361) Cash related services (512) (338) Arrangement fees and other financial services (453) (717) Depository and custodian (233) (152) Other (453) (526) Fees and commissions expense (8 129) (6 317) NOTE 8 NON-INTEREST LOSS FROM FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS, NET Net loss from financial assets and liabilities at fair value through profit or loss for the years ended 2014 and 2013 comprise: Financial assets held for trading Corporate shares (48) Corporate bonds (13 642) (2 321) Sovereign and municipal bonds (10 527) (4 429) Loss on financial assets held for trading (24 217) (5 248) Financial assets designated as at fair value through profit or loss Credit linked notes (3 066) - Corporate shares (797) - Loss on financial assets designated as at fair value through profit or loss (3 863) - 39

40 Derivative contracts - Interest swaps Commodity swaps Securities Bullion (247) 44 Gain on derivative contracts other than with foreign currency Non-interest loss from financial assets and liabilities at fair value through profit or loss, net (25 335) (4 380) Interest income from debt securities at fair value through profit or loss in amount of RUB million is reported as part of interest income (2013: RUB million). NOTE 9 NON-BANKING OPERATING PROFITS The composition of non-banking operating profit for the years ended 2014 and 2013 is presented below. For more information on non-banking segments see Notes 1 and Media business operating profit Machinery business operating loss (1 784) (813) Other businesses operating profit (loss), net (3 976) Non-banking operating profit, net The composition of non-banking revenues and expenses is as follows: Advertising Programming rights Broadcasting Publishing activities Gain on bargain purchase (Note 37) Other Media business operating revenues Depreciation and amortization Salaries and other employment benefits Broadcasting services Other costs to sell Administrative expenses Impairment of property, plant and equipment and intangible assets Publishing Cost of goods sold Other Media business operating expenses Media business operating profit, net Nuclear power plant equipment Gas compressor units Speciality steels Machinery for chemical production Mining equipment Engineering revenue Machinery equipment manufacturing Equipment for cryogen products Electrical equipment Thermal and other equipment Other equipment Machinery business operating revenues

41 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, net (1 784) (813) 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 Depreciation and amortization Impairment of property, plant and equipment and intangible assets and other impairment Other Other businesses operating expenses Other businesses operating profit (loss), net (3 976) NOTE 10 BANKING SALARIES, EMPLOYMENT BENEFITS AND ADMINISTRATIVE EXPENSES Banking salaries and administrative expenses for the years ended 2014 and 2013 comprise: Salaries Social security costs Defined contribution pension plan Annual remuneration of the Board of Directors Share-option plans expenses (recovery of expenses) (134) 112 Banking salaries and employment benefits Depreciation and amortization Taxes other than on income Repairs and maintenance Operating lease expenses Professional services Charges to the State Deposit Insurance System Charity and sponsorship Advertising and marketing Security expenses Business development Telecommunication and information services Other Banking administrative expenses Bonus payments to the Bank's managers and remuneration of the Board of Directors are linked to the Group's performance according to IFRS financial statements. No accrued bonus to the members of the Management Board of the Bank was recognised for the year ended 2014 (2013: RUB 750 million). The service period that is the basis for remuneration of the Board of Directors represents the annual period starting from the election (re-election) by the Annual Shareholders meeting. The amount recognised as annual remuneration of the Board of Directors in 2014 relates to the service period from July 2013 to June

42 A part of annual employees bonuses that exceeds a specified amount is settled in own shares. In the year ended 2014 the payment to the Management Board and other employees of RUB 214 million for the year ended 2013 services was settled in own shares based on their fair value on the date of the bonus announcement (2013: RUB 675 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. 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 729 million as an expense for the defined contribution plan attributable to services provided by employees in 2014 (2013: RUB 665 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 2014 and 2013 comprises: Current tax expense Deferred tax benefit Profit tax expense (29) (3 836) In 2014 the applicable income tax rate for current and deferred tax in the Russian Federation is 20% (2013: 20%). The income tax rates in foreign countries where some of the Group's subsidiaries operate differ from the income tax rate in the Russian Federation. Also, each of the Group's subsidiaries is an independent income tax payer which manage its tax duties individually. 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: (Loss) profit before taxation (3 792) Statutory profit tax rate 20% 20% Theoretical profit tax charge at statutory rate (758) Tax effect of permanent differences Tax paid on intragroup sale of an interest in a subsidiary Income and expenses taxed at different rates (2 134) (243) Unrecognized deferred tax asset Profit tax expense As of 2014 and 2013 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 are usually realised either by offsetting with profit tax liabilities in subsequent periods or by reimbursement 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. 42

43 The Group has not recognised deferred taxes in respect of investments in subsidiaries arising from the differencies between the Group's share of the net assets of subsidiaries and the tax base of the investments as of 2014 in the amount of deferred tax liability of RUB million and deferred tax asset of RUB million (2013: deferred tax liability of RUB million and deferred tax asset of RUB million), because the Group is able to control the timing of reversal of such temporary differences, and it is probable that they will not reverse in the forseeble future. However, a current pofit tax expense of RUB million was recognised for the year ended 2014 from an intragroup sale of an interest in one of the Group's subsidiries giving rise to taxable income for the selling company. As of 2014 tax assets in respect of the carry forward of unused tax losses of RUB million were recognised as management considered it probable that future taxable profits will be available against which they can be utilised ( 2013: RUB million). As of 2014 and 2013 profit tax liabilities comprise: Current tax liabilities Deferred tax liabilities Profit tax liabilities 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 2014 and 2013: Tax loss carried forward Tax effect of deductible temporary differences: Amounts owed to customers Financial liabilities held for trading Financial assets at fair value through profit or loss Loans to customers Property, plant and equipment Inventories Receivables and prepayments All other assets Investments available-for-sale and investments in associates Intangible assets Due from credit institutions Amounts owed to credit institutions All other liabilities Total tax effect of deductible temporary differences Deferred tax assets Off-set with deferred tax liabilities (32 613) (12 796) Deferred tax assets, net

44 Tax effect of taxable temporary differences Financial assets at fair value through profit or loss (12 824) (1 362) Loans to customers (8 707) (1 634) All other assets (4 190) (1 380) Property, plant and equipment (3 532) (4 071) Intangible assets (2 909) (349) Inventories (1 741) (1 924) Investments available-for-sale and investments in associates (1 662) (4 029) Receivables and prepayments (1 262) (2 356) Amounts owed to credit institutions (753) (363) Amounts owed to customers (18) (18) Subordinated debts (74) (94) Bonds issued (6) (72) Due from credit institutions (5) (6) All other liabilities (3 721) (1 766) Deferred tax liabilities (41 404) (19 424) Off-set with deferred tax assets Deferred tax liabilities, net (8 791) (6 628) Net deferred tax position A reconciliation of changes in the net deferred tax position during the years ended 2014 and 2013 follows: Deferred tax position as of Recognised in profit or loss from continuing operations Effect of acquisition of subsidiaries 372 Recognised in other comprehensive income 83 Translation into presentation currency (4) Deferred tax position as of Perpetual debt issued Recognised in other comprehensive income (241) Effect of acquisition and disposal of subsidiaries 198 Recognised in profit or loss from continuing operations 29 Translation into presentation currency (771) Deferred tax position as of Income tax recognised directly in equity for the year 2014 in amount of RUB million relates to unutilised tax loss carried forward on perpetual debt issued. The tax effects relating to components of other comprehensive income comprise: Amount before tax Tax Amount Amount (expense) net of tax before benefit tax Tax benefit Amount net of tax Net change in the fair value reserve and cash flow hedge reserve (354) (1 132) 83 (1 049) Movements in other comprehensive income of associates (563) 113 (450) Total (241) 964 (1 132) 83 (1 049) 44

45 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 2014 and 2013 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 maturities 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 2014 the Group maintained RUB million of obligatory reserve with the Central Bank of the Russian Federation ( 2013: RUB million). Due from credit institutions comprise: Term deposit agreements with maturities of more than three months when originated Less allowance for impairment (1 465) (939) Due from credit institutions As of 2014 RUB million of current and term deposits due from credit institutions was placed with five credit institutions which are large Russian and international banks ( 2013: RUB million). Also, as of 2014 RUB million included in top five current deposits due from credit institutions were placed with Russian AKB Natsionalniy Clearingoviy Center ( 2013: RUB million). As of 2014 and 2013 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 securities received securities received received under reverse under reverse repo under reverse repo repo agreement repledged agreement re-pledged agreement Corporate shares Corporate bonds Sovereign and municipal bonds

46 NOTE 13 FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets at fair value through profit or loss comprise: Note Trading securities Not pledged Corporate bonds Sovereign and municipal bonds Corporate shares Promissory notes Pledged under sale and repurchase agreements Corporate bonds Sovereign and municipal bonds Corporate shares Total trading securities Financial assets designated as at fair value through profit or loss Credit linked notes Corporate shares Total financial assets designated as at fair value through profit or loss Derivative financial assets - foreign exchange contracts securities contracts bullion contracts interest rate contracts commodity contracts Derivative financial assets held as cash flow hedge - foreign exchange contracts Total derivative financial assets Total financial assets at fair value through profit or loss Sovereign and municipal 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. Analysis by credit quality of debt securities at fair value through profit or loss as of 2014 is as follows: Investment Non-investment Not rated Total rating rating Corporate bonds Sovereign and municipal bonds Promissory notes Credit linked notes Total trading securities Credit linked notes are tied to underlying assets which have investment grade ratings. Analysis by credit quality of debt securities at fair value through profit or loss as at 2013 is as follows: 46

47 Investment Non-investment Not rated Total rating rating Corporate bonds Sovereign and municipal bonds Promissory notes 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 at fair value through profit or loss comprise: Note Derivative financial liabilities held for trading - foreign exchange contracts bullion contracts interest rate contracts securities contracts commodity contracts Total derivative financial liabilities held for trading Derivative financial liabilities held as cash flow hedge - foreign exchange contracts Total financial liabilities held as cash flow hedge Total financial liabilities at fair value trough profit or loss Reclassification of financial instruments The Group determined that a significant increase of the key rate by the Central Bank of the Russian Federation from 10.5% to 17.0% on 16 December 2014 constituted a rare circumstance that permited the Group to reassess the intention of holding certain financial instruments held for trading. As a result, the Group reclassified certain securities out of held for trading category into investments held-to-maturity and investments available-for-sale. The table below sets out fair value losses recognised before reclassification, actual amount of impairment loss recognised in profit or loss after reclassification, as well as fair value losses that would have been recognised in the reporting period had the reclassification not been made: 2014 Fair value as at the date of reclassification Carrying value Fair value Тrading securities reclassified into investments held-to-maturity Тrading securities reclassified into investments available-for-sale

48 The table below sets out fair value gains and losses recognised before the reclassification, actual amounts of gain, loss, income and expense recognised in profit or loss after reclassification, as well as the amounts that would have been recognised in the period following the reclassification had the reclassifications not been made: Non-interest loss recognised prior to the reclassification Non-interest loss that would have been recognised had the reclassifications not been made Impairment recognised for reclassified assets following the date of reclassification Тrading securities reclassified into investments held-to-maturity (4 863) (5 493) (191) Тrading securities reclassified into investments available-for-sale (314) (457) - (5 177) (5 950) (191) The amount of interest income recognised on the reclassified securities is not affected by the reclassification. At the date of reclassification the effective interest rates on trading securities reclassified to held-to-maturity investments range from 5.02% to 21.76%. The present value of the estimated cash flows, which the Group expects to recover, equals the fair value of the reclassified financial assets at the date of reclassification. NOTE 14 DERIVATIVE FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING The exposure to market risks on derivative positions and fair value of derivative financial assets and liabilities outstanding as of 2014 and 2013 is as follows: Notional amount equivalent Derivative assets Fair value of derivative contracts Notional amount equivalent 2014 Derivative liabilities Fair value of derivative contracts Foreign exchange contracts Option contracts (3 766) (1 699) Forward contracts (10 852) (2 971) Swap contracts (76 581) (17 607) Interest rate contracts Swap contracts (57 727) (1 100) Bullion contracts Forward contracts (1 418) (13) Swap contracts - - (1 464) (24) Commodity contracts Option contracts (1 296) (425) Securities contracts Option contracts (12 513) - Forward contracts Total derivative assets (liabilities) (23 839) 48

49 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) 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 prices 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 2014 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Loans to legal entities ( ) Loans to individuals (6 626) Total loans to customers ( ) Loans to customers as of 2013 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Loans to legal entities (73 241) Loans to individuals (5 453) Total loans to customers (78 694) As of 2014 total amount of pledged loans to legal entities amounted RUB million ( 2013: RUB million). The loans were pledged against the funds obtained from the Central Bank of the Russian Federation, which are presented as part of the Amounts owed to credit institutions. 49

50 As of 2014 loan exposures to the Gazprom Group accounted for 2.2% (RUB million) of the gross loan portfolio ( 2013: 1.8% or RUB million). Interests rates on loans to Gazprom Group by maturity and currency as of 2014 and 2013 were as follows: Currency Original maturity Range of interest rates Original maturity Range of interest rates RUB 1 month - 8 years 9.8% % 2 months - 8 years 8.2% % Foreign currency 1 year - 10 years 4.3% - 9.5% 2 months - 10 years 1.7% - 9.0% As of 2014 the ten largest loan exposures accounted for RUB million or 22% of the gross loan portfolio ( 2013: RUB million or 20%). As of 2014, RUB million of gross loans to customers were non-performing loans (default or past due for more than 90 days) ( 2013: RUB million). a) Loans to legal entities Loans to legal entities by types of portfolios as of 2014 comprise: Loans to customers, gross Allowance for impairment Loans to customers, net Commercial lending (86 224) Specialised lending (61 724) Total 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 (46 400) Specialised lending (26 841) Total loans to legal entities (73 241) The breakdown of loans to legal entities by industries of the borrowers as of 2014 and 2013 is as follows: % % Metal manufacture Chemical and petrochemical industry Gas extraction, transportation and sale enterprises Construction and production of construction materials Mining Electric power industry Oil extraction, transportation and sale enterprises Trading enterprises Food industry Transport Finance and insurance companies Agriculture Mass media and telecommunications Shipbuilding Machine building Aerospace industry Timber industry Nuclear industry Other Less allowance for impairment ( ) (73 241) Loans to legal entities, net

51 Loans were issued to the following types of borrowers: Private companies, gross Less allowance for impairment losses ( ) (71 470) Private companies, net State controlled companies, gross Less allowance for impairment losses (4 153) (1 771) State controlled companies, net Loans to legal entities, net Included in gross loans to legal entities as of 2014 is RUB million ( 2013: RUB 610 million) of interest accrued on impaired loans. The ageing analysis of gross loans to legal entities as of 2014 and 2013 is presented below: Gross loans Impairment allowance 2014 Net loans Impairment to gross loans, % Loans without individual signs of impairment (46 349) Impaired loans: - Not overdue (73 461) Overdue less than 30 days 631 (625) Overdue days (1 157) Overdue days (3 027) Overdue more than 180 days (23 329) Total impaired loans ( ) Total loans to legal entities ( ) Gross loans Impairment allowance 2013 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) Included in gross loans to legal entities as of 2014 is RUB million ( 2013: RUB 610 million) of interest accrued on impaired but performing 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 on portfolios of loans for which no indications of individual impairment have 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 of 2014 would be RUB million lower/higher ( 2013: 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 guarantee from a party with a sound credit standing. The value of the property or the amount of the guarantee should be sufficient to cover the principal amount of the loan and, in most cases, fees 51

52 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 (Note 31 (a)). An analysis of net loans to legal entities secured by collateral or guarantees as of 2014 and 2013 is as follows: 2014 Commercial Specialised Total lending lending Financial guarantees Securities Real estate Cash Other collateral No collateral Total Commercial Specialised Total lending lending Financial guarantees Securities Real estate Cash 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 specialised lending. The components of net investment in finance lease included in loans to customers as of 2014 and 2013 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 (5 753) (5 850) - from 1 to 5 years (14 068) (13 694) - over 5 years (5 570) (4 451) 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 (1 796) (1 180) Net investment in finance lease after allowance for impairment losses

53 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 (6 626) (5 453) Loans to individuals, net The ageing analysis of loans to individuals as of 2014 and 2013 is presented below: Mortgage loans Consumer loans Car purchase loans Credit cards and overdrafts 2014 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 (2 901) (1 396) (1 689) (640) (6 626) Loans to individuals, net Allowance for impairment to gross loans (%) 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 (%) 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 2014 would be RUB million lower/higher ( 2013: 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). 53

54 Mortgage loans are secured by underlying housing real estate. Car purchase loans are secured by underlying vehicles. 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 Group estimates that the fair value of the collateral for overdue or impaired mortgage loans is at least equal to 60% 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 31. 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 shares and GDRs Corporate and municipal bonds Investments available-for-sale accounted for at fair value In December 2014 certain securities held for trading were reclassified to the available-for-sale category (Note 13). As of 2014 investments available-for-sale accounted for at fair value are shown net of accumulated impairment of RUB million ( 2013: RUB million) (Note 6). As of 2014 corporate shares and GDRs include RUB million of shares of Russian electric power and utility companies ( 2013: RUB million). Reclassification of financial instruments In December 2014 the Group changed its intention to hold certain securities as available-for-sale investments. As a result of a changed intention and due to the ability to hold investments till maturity, the Group reclassified these securities from available-for-sale category into held-to-maturity category. The fair value of reclassified securities as at the date of reclassification was RUB million. 54

55 b) Unconsolidated subsidiaries accounted for at cost As of 2014 and 2013, the Group had investments in the following unconsolidated subsidiaries: Name Principal activity Country of business ZAO "Raschetno- Depositarnaya Kompanya" OOO "Kriogaz-Vysotsk" Goodrock Industrial Assets Fund Ltd Clearing & custody Gas extraction, transportation and sale enterprises Finance and investment Russia Russia Cyprus Group s holding, % Cost of investment 2014 Impairment Carrying allowance value of investment 100.0% (17) % companies 100.0% 306 (47) 259 Cryoenergy Limited Other Cyprus 100.0% 244 (1) 243 Other (297) Total unconsolidated subsidiaries accounted for at cost (362) Name Principal activity Country of business Group s holding, % Cost of investment Impairment allowance 2013 Carrying value of investment OAO Morion Manufacturing Russia 92.2% (585) 470 ZAO Raschetno- Depositarnaya Kompanya Clearing & custody Russia 70.3% (17) OOO GPB Energoeffekt Power efficiency projects Russia 100.0% 763 (240) 523 GPB International S.A. Banking Luxembourg 100.0% Goodrock Industrial Assets Fund Ltd Finance and investment companies Cyprus 100.0% 306 (8) 298 Other 641 (83) 558 Total unconsolidated subsidiaries accounted for at cost (933) In 2014 the Group initiated consolidation of several subsidiary companies as their results and financial position became material for the Group: OAO Morion - starting from January 2014; GPB International S.A. - from April 2014; OOO "GPB - Energoeffekt" - from October c) Associates accounted for at cost As of 2014 and 2013 the Group has investments in the following associates accounted for at cost: Name Principal activity Country of business Group s holding, % Cost of investment 2014 Impairment Carrying allowance value of investment ZAO FC Zenit Sport Russia 51.0% (1 658) - ZAO Optikovolokonnye sistemy Telecommunications Russia 47.7% Polygon Gold Inc. Mining Russia 25.8% OOO Nevskaya Oil extraction, Russia Truboprovodnaya Kompaniya transportation and sale enterprises 24.0% 364 (66) 298 OOO Kongress-centr Telecommunications Russia Konstantinovskiy 45.2% Other 89 (36) 53 Total associates accounted for at cost (1 760)

56 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 sistemy Telecommunications Russia 47.7% Aeacus Holding Ltd. Telecommunications Russia 35.0% (465) 662 Polygon Gold Inc. Mining Russia 25.8% OOO Nevskaya Oil extraction, Russia Truboprovodnaya Kompaniya transportation and sale enterprises 24.0% 364 (5) 359 OOO Kongress-centr Telecommunications Russia Konstantinovskiy 20.0% OOO Aprel Telecommunications Russia 21.6% ООО Internet Gipermarket Other Russia 21.1% Other Total associates accounted for at cost (2 128) In 2014 the Group obtained control over OOO "Aprel" and ООО "Internet Gipermarket" by increasing its share in the companies (Note 37). In 2014 the Group lost significant influence over Aeacus Holding Ltd. and wrote off the carrying value of the investment. 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 2014 and 2013 nor the results of its operations or cash flows for the years ended 2014 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 2014 other investments accounted for at cost are shown net of accumulated impairment of RUB million ( 2013: RUB million). 56

57 e) Investments in associates accounted for under the equity method As of 2014 and 2013 investments in associates accounted for under the equity method comprise: Name Principal activity Country of business Carrying Group s Carrying value holding, value Group s holding, % % 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, Uzbekistan, Bangladesh 46.0% % ZAO Sovremennie Shipbuilding Russia Technologii Sudostroeniya 50.0% IGS Investments Ltd Oil-field services Russia 40.0% % ООО Gazprom gazomotornoye toplivo Oil extraction, transportation and sale Russia enterprises 50.0% % Ysmer Ltd Other Russia 41.5% % OAO AKB Eurofinance Banking Russia Mosnarbank 25.0% % Newtech Services Holding Ltd Oil-field services Russia 49.7% % MIR Capital S.C.A., SICAR Investment fund Luxembourg 50.0% % 995 OOO Penoplex SPb Polystirol insulating Russia materials 36.0% % Yugorosgaz a.d. Beograd Gas trading Serbia 25.0% % Vemex s.r.o. Gas trading Czech Republic 33.0% % 336 OOO Siemens Electroprivod Machine building Russia 34.0% % 382 Inverton Enterprises Ltd Real estate Russia development % 584 Other Total investments in associates accounted for under the equity method The Group owns 19.04% voting shares of OAO SOGAZ, an insurance company operating in Russia. Additionaly, 1.2% voting shares of OAO SOGAZ is managed by the Group on behalf of one of Gazprom Group's subsidiaries under a trust management agreement. The Group also has representation in the Board of Directors of OAO SOGAZ. As a result, management determined that the Group has significant influence over OAO SOGAZ. Following certain governmental decisions on development of shipbuilding industry in Far Eastern region of the Russian Federation the Group has created a joint venture with OAO NK Rosneft - ZAO Sovremennie Technologii Sudostroeniya (STS). The Group owns 50% shares of the company at par value of RUB million. STS will be developing as a shipbuilding company specializing in construction of oil sea rigs and high capacity sea vessels for the needs of OAO NK Rosneft. As of the date of these consolidated financial statements STS has not started operations yet. In 2014 the Group made several contributions to share capital of Newtech Services Holding Ltd (Newtech) and in addition converted part of equity loan to ordinary shares. Total amount of contributions to equity equals to RUB 989 million and as a result Group's ownership in Newtech increased to 49.7%. In 2nd quarter of 2014, a new shareholder of OOO Penoplex SPb made a contribution to its share capital, which resulted in dilution of the Group's share from 40% to 36%. As a result, the Group recognised income from deemed disposal of 4% in the amount of RUB 162 million in gains from investments in associates. In 2014 the Group and the controlling shareholder increased share capital and additional paid-in capital of ООО Gazprom gazomotornoye toplivo by making a cash contribution of RUB 1.3 million each. The holding and voting shares did not change. 57

58 Summarised financial information As of 2014 summarized financial information on significant investments in associates accounted for under the equity method is as follows: Name Total liabilities and noncontrolling interests of associates Total assets Operating income Net profit (loss) Comprehensive income (loss) Petrozamora S.A (78 734) ОАО "Sogaz" ( ) OAO "Belgazprombank" (72 536) Eriell Group International Ltd (65 970) (647) ZAO "Sovremennie Technologii Sudostroeniya" IGS Investments Ltd (15 690) ООО "Gazprom gazomotornoye toplivo" (615) (998) (788) (788) Ysmer Ltd (56 109) OAO AKB "Eurofinance Mosnarbank" (36 049) (1 913) Newtech Services Holding Ltd (3 908) MIR Capital S.C.A., SICAR (158) (133) OOO "Penoplex SPb" (5 143) Yugorosgaz a.d. Beograd (9 707) 482 (1 012) (1 361) Vemex s.r.o (6 023) (314) (457) (614) OOO "Siemens Electroprivod" (3 458) (688) (617) (617) Inverton Enterprises Ltd (1 005)

59 Name Net assets Share % Group's share in net assets Goodwill Intragroup transactions Impairment Carrying value Group's share in net profit (loss) Petrozamora S.A % ОАО "Sogaz" % OAO "Belgazprombank" % Eriell Group International Ltd % ZAO "Sovremennie Technologii Sudostroeniya" % IGS Investments Ltd % ООО "Gazprom gazomotornoye toplivo" % (394) Ysmer Ltd % (1 476) OAO AKB "Eurofinance Mosnarbank" % (2 180) Newtech Services Holding Ltd % MIR Capital S.C.A., SICAR % OOO "Penoplex SPb" % (320) Yugorosgaz a.d. Beograd % (253) Vemex s.r.o % (151) OOO "Siemens Electroprivod" % (210) Other (43) Total investments in associates accounted for under the equity method Net profit (loss) is disclosed for the year ended 2014 or from the date of acquisition or reclassification until 2014 (if acquired or reclassified in 2014). 59

60 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 and non-controlling interests of associates Operating income Net profit (loss) Comprehensive income (loss) Petrozamora S.A (79 335) ОАО "Sogaz" ( ) OAO "Belgazprombank" (43 061) Eriell Group International Ltd (42 980) (321) (252) IGS Investments Ltd (14 146) (290) 820 ООО "Gazprom gazomotornoye toplivo" (37) Ysmer Ltd (37 132) OAO AKB "Eurofinance Mosnarbank" (40 638) (239) Newtech Services Holding Ltd (2 381) MIR Capital S.C.A., SICAR (38) OOO "Penoplex SPb" (5 587) Yugorosgaz a.d. Beograd (2 017) 359 (860) (900) Vemex s.r.o (3 503) 490 (159) (169) OOO "Siemens Electroprivod" (1 909) (146) (172) (172) Name Net assets Share % Group's share in net assets Goodwill Intragroup transactions Impairment Carrying value Group's share in net profit (loss) Petrozamora S.A % ОАО "Sogaz" % OAO "Belgazprombank" % Eriell Group International Ltd % (148) IGS Investments Ltd % (116) ООО "Gazprom gazomotornoye toplivo" % Ysmer Ltd % (1 047) OAO AKB "Eurofinance Mosnarbank" % (2 180) Newtech Services Holding Ltd % MIR Capital S.C.A., SICAR % OOO "Penoplex SPb" % Yugorosgaz a.d. Beograd % (215) Vemex s.r.o % (52) OOO "Siemens Electroprivod" % (58) Inverton Enterprises Ltd % Other (79) Total investments in associates accounted for under the equity method

61 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). 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. 61

62 NOTE 17 RECEIVABLES AND PREPAYMENTS As of 2014 and 2013 receivables and prepayments comprise the following: Trade receivables Accounts due from customers for contract work Prepayments and advances Settlements with budget for other taxes Claims on letters of credit Receivable on securities operations Other receivables Allowance for impairment (4 112) (2 989) Receivables and prepayments Trade receivables and prepayments primarily consist of prepayments for raw materials and short- and mediumterm receivables for industrial products marketed and processing services rendered by non-banking business segments of the Group. NOTE 18 INVESTMENTS HELD-TO-MATURITY Investments held-to-maturity comprise: Not pledged Corporate bonds Sovereign and municipal bonds Promissory notes Deposit certificates Pledged under sale and repurchase agreements Corporate bonds Sovereign and municipal bonds Total investments held-to-maturity, gross Allowance for impairment (1 160) (516) Total investments held-to-maturity, net As of 16 December 2014 certain trading securities and investments available-for-sale were reclassified into heldto-maturity investments (Note 13 and Note 16). 62

63 NOTE 19 PROPERTY, PLANT AND EQUIPMENT Land, buildings and facilities Used in banking business Machinery and vehicles Office, computer equipment and other Assets under construction Land, buildings and facilities Used in non-banking business Office and Machinery computer and vehicles equipments Assets under construction Other Total Cost of acquisition 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 Reclassifications/Transfers (535) (2 943) - Effect of acquisition of subsidiaries Additions Disposals (524) (830) (709) (682) (71) (1 013) (72) (22) (1 510) (5 433) Impairment (16) (16) Translation differences Accumulated depreciation Reclassifications/Transfers (641) Charge for the period Disposals (8) (138) (451) - (300) (1 043) (173) - - (2 113) Translation differences Reclassifications/Transfers (20) (992) - (150) 157 (1) (6) - - Charge for the period Disposals (57) (669) (183) - (45) (617) (56) (21) - (1 648) Translation differences Net book value

64 NOTE 20 INTANGIBLES Intangible assets used in banking business Used in non-banking business Rights for audio-visual products Other Total Cost of acquisition Reclassifications/Transfers - (254) Effect of acquisition of subsidiaries Additions Disposals (306) (7 858) (396) (8 560) Impairment - (106) (2 670) (2 776) Translation differences Additions acquired through acquisition of subsidiaries (Note 37) Additions Disposals (684) (9 183) (967) (10 834) Impairment - (2 356) - (2 356) Translation differences Accumulated amortisation Reclassifications/Transfers - (224) Charge for the period Disposals (174) (7 738) (381) (8 293) Translation differences Charge for the period Disposals (438) (8 783) (612) (9 833) Translation differences Net book value NOTE 21 GOODWILL The movement of goodwill for the years ended 2014 and 2013 is as follows: Gross amount Accumulated impairment Net (17 009) Impairment loss for the period - (290) (290) (17 299) Business combination Impairment loss for the period - (2 035) (2 035) Disposal of subsidiaries (382) (18 952)

65 Goodwill is allocated to cash-generating units (CGU). An operating segment-level summary of the goodwill allocation is presented below: CGU Activity ZAO "REP Holding" Energy-conserving, turbocompressoring and gascompressoring production ZAO PO "Uralenergomontazh" Installation of engineering equipment OAO "Giprokislorod" Research and development projects OOO "Technopark Promzona 2" Providing temporary use of property 7 7 Mashinery ОАО "TNT-Teleset" TV channel broadcasting OAO "Telecompania NTV" TV channel broadcasting OOO "Telekompania Pyatnitsa" TV channel broadcasting OOO "Telekanal TV3" TV channel broadcasting OOO "Central Partnership" Film distribution and production OOO "Telekompania 2X2" TV channel broadcasting ОАО "VebTV" Internet project OOO "Internet Gipermarket" Internet project OOO "Aprel" Internet project ZАО "Izdatelstvo SEM DNEY" Publishing ZAO "Echo Moskvi" Radio broadcasting ZAO "Media-Press" Media Press Publishing - 80 Media OAO "CreditUralBank" Banking services Banking ОАО "ENEKS" Energy construction and engineering Other Total goodwill 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 non-banking cash-generating units (CGUs) 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 CGU. 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 segment CGUs % 13.30% Media segment CGUs % 13.20% Machinery segment CGUs % 10-16% Other segment CGUs 12-34% % 65

66 NOTE 22 AMOUNTS OWED TO CREDIT INSTITUTIONS Amounts owed to credit institutions as of 2014 and 2013 comprise: Amounts due to the Central Bank of the Russian Federation (CBR): - repo agreements term deposits Credit institutions other than the CBR: - current accounts term deposits syndicated loans repo agreements Amounts owed to credit institutions As of 2014 the five largest exposures to credit institutions other than the Central Bank of the Russian Federation (including sale and repurchase agreements) comprise RUB million or 30% of amounts owed to credit institutions ( 2013: RUB million or 26%). Included in syndicated loans as of 2014 and 2013 is a USD 500 million three-year term loan facility agreement with a syndicate of banks that bears an interest of 3 months LIBOR+1.4%. In August 2011 the Group entered into a USD million three-year term loan facility agreement with a syndicate of banks that bears an interest of 3 months LIBOR+1.5%, that was repaid as of Term deposits due to the CBR in the amount of RUB million were received by the Group with loans to legal entities placed as the collateral ( 2013: RUB million) (Note 15). Repo agreements represent short-term funding received by the Group with securities pledged as collateral to credit institutions. 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-to-maturity) Securities received as collateral under sale and repurchase agreements that are re-pledged, 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. 66

67 NOTE 23 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 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 breakdowns of these notes by ownership. As of 2014 current accounts and term deposits of the Gazprom Group comprised 24% (RUB million) of the total amounts owed to customers ( 2013: 18% or RUB million). Current accounts and term deposits of the Gazprom Group bear interest from 0.15% to 20.00% 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 2014 is RUB million of minimum balances that customers are required to maintain during contractually specified periods of time ( 2013: RUB million). 67

68 NOTE 24 BONDS ISSUED Bonds issued comprise: Eurobonds Rouble domestic bonds Bonds issued As of 2014 and 2013 eurobonds comprise: Issue % as of 2014 Final maturity date USD 1 billion Eurobonds 6.25% December CHF 500 million Eurobonds 3.38% August USD 1 billion Eurobonds 6.50% September RUB 15 billion Eurobonds 8.62% December CNY 500 million Eurobonds 4.00% February USD 120 million Eurobonds 7.35% May RUB 20 billion Eurobonds 7.88% July RUB 20 billion Eurobonds 9.90% November CHF 200 million Bonds 2.38% December CNY 1 billion Eurobonds 4.25% January USD 1 billion Eurobonds 5.63% May EUR 1 billion Eurobonds 3.98% October EUR 1 billion Eurobonds 4.00% July USD 750 million Eurobonds 4.96% September Eurobonds As of 2014 and 2013 Rouble domestic bonds comprise: Issue % as of 2014 Final maturity date RUB 10 billion domestic bonds 7.65% July RUB 10 billion domestic bonds 8.50% December RUB 10 billion domestic bonds 7.70% February RUB 10 billion domestic bonds 9.70% July RUB 10 billion domestic bonds 7.85% August RUB 10 billion domestic bonds 7.90% September RUB 10 billion domestic bonds 8.50% October RUB 10 billion domestic bonds 7.70% October RUB 10 billion domestic bonds 9.75% May RUB 10 billion domestic bonds 9.60% June RUB 10 billion domestic bonds 10.80% September RUB 10 billion domestic bonds 8.50% October RUB 10 billion domestic bonds 8.50% October RUB 10 billion domestic bonds 8.50% October RUB 4.7 billion Mortgage Covered Bonds Class A 9.00% April RUB 2.3 billion Mortgage Covered Bonds Class B 3.00% April Rouble domestic bonds In December 2014, the Group issued Mortgage Covered Bonds in the total nominal amount of RUB million. The bonds have quarterly amortisation in the amount equal to the mortgages redeemed during the previous quarter. 68

69 NOTE 25 SUBORDINATED DEBTS As of 2014 and 2013 subordinated debts comprise: Subordinated eurobonds Deposits from Gazprom Group Deposits from Vnesheconombank Other subordinated deposits Subordinated debts As of 2014 and 2013 subordinated eurobonds comprise: Issue % as of 2014 Final maturity date USD 62.6 million subordinated Eurobonds 5.75% November USD 500 million subordinated Eurobonds 7.25% May USD 400 million subordinated Eurobonds 6.50% July USD 750 million subordinated Eurobonds 7.50% December CHF 350 million subordinated Eurobonds 5.13% May RUR 13.5 billion subordinated Eurobonds 8.75% June Subordinated eurobonds As of 2013 included in subordinated debts is an amount of RUB million that represented a deposit from State corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank). This deposit bore an interest of 7.5% per annum and was redeemed before contractual marutity in December 2014 (Note 32). NOTE 26 OTHER LIABILITIES Other liabilities comprise: Settlements with suppliers Trade payables Option premium payable to Vnesheconombank (Note 27) Payables for transactions with securities Liabilities on letters of credit Operating taxes payable Provision for other risks Payable to employees Deferred income Amounts due to customers under contract work Current tax liabilities Payable under employee share-option plan and puttable instruments Other Other liabilities As of 2014 and 2013, settlements with suppliers primarily represent amounts payable for materials and products delivered and services rendered to non-banking business segments of the Group. 69

70 NOTE 27 SHAREHOLDERS EQUITY (a) Share capital Authorized share capital of the Bank comprises ordinary shares and preference shares. Issued share capital as of 2014 and 2013 comprises: Number of Par value, Nominal Number of Par value, Nominal amount, shares RUB amount, RUB shares RUB RUB Ordinary shares Preference shares Total share capital All issued shares are fully paid. Ordinary shares 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. As of 2014, ordinary shares were held by the Group as treasury shares ( 2013: ordinary shares). Movements in the outstanding ordinary shares are presented below: Opening balance as at 1 January Shares purchased (56 127) (76 709) Shares sold to employees Shares sold to investor with significant influence Closing balance as at 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 2014 (2013: RUB million). In case the option is exercised or otherwise cancelled before maturity the remaining portion of the liability is extinguished. Preference shares Following the adoption of amendments to the Federal Law dated 13 October 2008 #173-FZ "On additional measures to support the financial system of the Russian Federation" (the Law ), in December 2014 the Ministry of Finance of the Russian Federation acquired non-cumulative preference shares with the nominal value of RUB 1 000, which were issued by the Bank under the closed subscription, for RUB million. According to the Law, the acquisition of shares was executed using the proceeds from early redemption of a subordinated deposit provided by the State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank) to the Bank in The terms of the preference shares (called Type A in the Bank s charter) do not include a fixed or determinable dividend and set no fixed share in liquidation value of the Bank. A dividend payout (if any) is to be approved annually by the general shareholders meeting of the Bank. Holders of Type A preference shares do not have voting rights. The preference shares are not included in determining of the quorum at general shareholders meetings. 70

71 (b) 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 2014, the statutory financial statements of the Bank disclosed distributable reserves of RUB million and non-distributable reserves of RUB million ( 2013: distributable reserves of RUB million and non-distributable reserves of RUB million). In June 2014 the General shareholders meeting of the Bank approved a dividend payout for the year 2013 of RUB 270 per one ordinary share (dividends declared in 2013 for the year 2012 were RUB 252 per one ordinary share). NOTE 28 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. 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 the Bank (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 the Bank (according to the Federal Law No 175-FZ). 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, if and when dividends are paid or declared, the following coupon payment is accrued and recorded as a liability. NOTE 29 FINANCIAL COMMITMENTS AND CONTINGENCIES a) Credit related financial commitments The credit related financial commitments as of 2014 and 2013 comprise: Undrawn credit lines Guarantees given Letters of credit Management evaluated the likelihood of probable losses arising from credit related commitments and concluded that a provision of RUB million was necessary as of 2014 ( 2013: RUB million). As of 2014 RUB 917 million of letters of credit were secured by customer funds ( 2013: RUB 754 million). 71

72 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 unrealised gain (loss) on the positions. As of 2014 the total amount of funds accepted by the Group on behalf of its clients does not exceed RUB million ( 2013: RUB million). As of 2014 the total amount of securities accepted by the Group on behalf of its clients does not exceed RUB million ( 2013: 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 2014 and 2013 the future contracted liabilities with respect to these contracts 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. f) 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. 72

73 g) 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. h) 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. 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. 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. NOTE 30 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 73

74 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 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 Audit Department. The Internal Audit Department is independent from management and reports directly to the Board of Directors. The results of Internal Audit 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. 74

75 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 Audit 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 (compliance service) 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. In 2014 new requirements for the organisation of internal control system in credit organisations came into force. The new version of the Regulations of the Central Bank of the Russian Federation dated 16 December 2003 No 242-P On the organisation of internal control in credit organisations and banking groups sets out the specific requirements for the internal audit service and the internal control service (the compliance service). The main functions of the Internal Audit Department include the following: audit and efficiency assessment of the system of internal control as a whole, fulfillment of the decisions of key management structures audit of efficiency of methodology of assessment of banking risks and risk management procedures, regulated by internal documents in credit organisation (methods, programmes, rules and procedures for banking operations and transactions, and for the management of banking risks) audit of reliability of internal control system over automated information systems audit and testing of fairness, completeness and timeliness of accounting and reporting function and the reliability (including the trustworthiness, fullness and objectivity) of the collection and submission of financial information audit of applicable methods of safekeeping the credit organisation's property assessment of economic reasonability and efficiency of operations and other deals audit of internal control processes and procedures audit of internal control (compliance) service and risk management function. Internal control (compliance) service conducts compliance activities focused primarily on regulatory risks faced by the Group. The main functions of the internal control (compliance) service include the following: identification of compliance risks and regulatory risks monitoring of events related to regulatory risk, including probability of occurrence and quantitative assessment of its consequences monitoring of regulatory risk preparation of recommendations on regulatory risk management coordination and participation of design of measures to decrease regulatory risk monitoring of efficiency of regulatory risk management 75

76 participation in preparation of internal documents on regulatory risk management, anti-corruption, compliance with corporate behaviour rules, code of professional ethics and minimisation of conflicts of interest analysis of dynamics of clients complaints analysis of economic reasonableness of agreements with suppliers participation in interaction with authorities, self-organized organisations, associations and financial market participants. Russian legislation, including the Federal Law dated 2 December 1990 No On banks and banking activity, Direction of the CBR dated 1 April 2014 No 3223-U On requirement to head of risk management service, head of internal control service, head of internal audit service of the credit organisation establish the professional qualifications, business reputation and other requirements for members of the Board of Directors, Management Board, Heads of Internal Audit Department, internal control (compliance) service and risk management function and other key management personnel. All members of the Bank s governing and management bodies meet with these requirements. 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 31 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 the Group 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 business lines. 76

77 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 subsidiaries (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 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 and priorities of risk management; monitors the Group s compliance with risk limits and capital adequacy ratios; reviews risk management systems and policies on an annual basis and approves the Bank risk management policies application and conflict of interest prevention. 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 regular basis including risk limits and capital adequacy ratios and periodically reviews risk management approaches. Internal documentation establishing the procedures and methodologies for identifying and managing the Group s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and for stresstesting is approved by the authorized management bodies of the Bank in accordance with regulations and recommendations issued by the CBR. The Bank maintaines a system for reporting on the Group s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and on the Bank and Group s capital. 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 reports on credit, operational, market, interest rate, legal, liquidity and reputational risk prepared by the Bank s risk management and Internal Audit Department on a frequency and consistency stipulated by internal documentation include observations as to assessment of the effectiveness of the Group s 77

78 procedures and methodologies, and recommendations for improvement. With the objective of monitoring effectiveness of the Group s risk management procedures and their consistent application The Board of Directors and Executive Management of the Bank periodically discuss the reports and consider proposed corrective actions 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. Decision making on the management and risk control issues is a function of authorized bodies, such as The Credit Committee, The Investment Committee, Assets and Liabilities Management Committee, The Risk Committee. 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 Strategy Committee reviews results of the strategic business analysis, forecasts and conditions for strategic development of the Group; produces recommendations to the Management Board on the strategy of the Group with regard to the Bank of Russia regulatory restrictions; reviews implementation plans for the main strategic initiatives and strategies for specific lines of busineses; assesses the results of implementation of the Group's development strategy and strategies of specific lines of businesses. The Risk Committee makes decisions on matters of day-to-day management of market and operational risks. The commission is also responsible for operational risk management methodology development, market risk limiting, control and monitoring; oversees implementation of systems, models and procedures ensuring compliance with the regulatory requirements connected with the implementation of Basel II and III standards in the Russian Federation. 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. 78

79 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: use 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; unified approach to credit risk assessment applied in the loan decision-making process, administration, credit risk monitoring and loan loss provisioning; minimization of credit risk through the transactions structuring and receiving collateral; loan loss provisioning and estimation of expected losses; forecasting the level of credit risk. 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 an ongoing basis. All transactions which are considered by the Credit Committee or the Investment Committee are subject to an independent expert assesment by the Risk Management Division. Qualitative assessment of credit risk involves the analysis of 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. Qualitative assessment focuses on debt capacity, profitability, liquidity, cash flows and asset quality. Qualitative 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. Quantitative assessment of credit risk allows to quantify the credit risk of separate borrowers and loan portfolio in total. Quantitative assessment of credit risk is carried out in accordance with models for estimating the probability of default (PD-models) developed by the Group for different types of counterparties: corporate clients (the largest, large, middle and other corporate clients, project finance); financial institutions (commercial banks, non-banking financial institutions, brokers, dealers and investment banks, management companies, hedge funds, mutual funds); retail banking rating models for auto, consumer and mortgage loans); sovereign and municipal bodies. The quantitative credit risk assessment framework is being developed according to recommendations issued by the Basel Committee on Banking Supervision, recommendations issued by the Bank of Russia on 29 December T and leading international banking practices. 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 approved PD-models. For rating purposes all clients are divided into categories, for each of which a dedicated assessment methodology is applied. The assignment of internal ratings of counterparties and transactions is conducted using the Group s Rating system which is an industrial IT-solution. Internal credit ratings are used for setting of credit risk limits, calculations of expected losses, risk analysis of the loan portfolio and financial planning. Also within the quantitative framework, the Group regularly performs stress tests of the loan portfolio which includes assessment of the potential deterioration of the loan portfolio s quality in case of negative changes in the economy. 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 79

80 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 further control and monitoring. 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). (i) 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, sale and repurchase agreements and reverse sale and repurchase agreements. Financial instruments such as loans and deposits are not disclosed 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 agreements 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 transactions upon the counterparty s failure to post collateral. 80

81 As of 2014 and 2013 the Group did not offset financial assets and financial liabilities in the consolidated statement of finansial position. The table below presents financial assets and financial liabilities subject to enforceable master netting arrangements and similar arrangements as of 2014 and 2013: Gross amounts of recognised financial asset/liability Related amounts subject to offset in the event of default or bankruptcy Related amounts Gross subject to amounts of offset in the recognised event of financial default or Net amount asset/liability bankruptcy Net amount Types of financial assets/liabilities Derivative trading assets (1 212) (276) - Reverse sale and repurchase agreements (49 557) (55 302) - Total financial assets (50 769) (55 578) - Derivative trading liabilities (1 212) (276) 15 Sale and repurchase agreements ( ) ( ) - Total financial liabilities ( ) ( ) 15 (ii) Geographical concentration of credit risk Below is a breakdown of the Group's assets and liabilities by geographical concentration of credit risk as of 2014 and 2013: Russia OECD Other non- OECD 2014 Total 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 subsidiaries (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 ( )

82 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 available-for-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 subsidiaries (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 (6 356) As of 2014 included in loans to customers is USD million, EUR 91 million (equivalent to RUB million) of loans granted to corporate entities operating in Ukraine ( 2013: USD million, EUR 101 million equivalent to RUB million). Due to the structure of some of these transactions, the credit exposure in the amount of USD million (equivalent to RUB million) in substance represents non-payment risk on OAO "Gazprom" ( 2013: USD million equivalent to RUB million). (iii) 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 Group would have to pay if the guarantee was called on or (in the case of commitments), if the loan amount was called on (Note 29). 82

83 (iv) 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 АА+ Very high credit quality Very low credit risk AA Very high credit quality Very low credit risk АА- Very high credit quality Very low credit risk A+ High credit quality Low credit risk A High credit quality Low credit risk A- High credit quality Low credit risk BBB+ Good credit quality Adequate credit risk BBB Good credit quality Adequate credit risk BBB- Good credit quality Adequate credit risk BB+ Average credit quality Average credit risk BB Average credit quality Average credit risk BB- Average credit quality Average credit risk B+ Low credit quality Substantial speculative credit risk B Low credit quality Substantial speculative 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 2014 and 2013 is represented below: 2014 AAA-A BBB-B CCC-C D Not rated Total Due from credit institutions, gross Less allowance for impairment - (373) (216) (876) - (1 465) Loans to customers, gross Less allowance for impairment (2 102) (70 111) (43 633) (27 361) (8 997) ( ) Investments held-to-maturity, gross Less allowance for impairment (336) (680) (1 016) Financial guarantees and other commitments Less provisions for losses (437) (3 579) (1 131) (551) (15) (5 713) 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-to-maturity, gross Less allowance for impairment (70) (184) (254) Financial guarantees and other commitments Less provisions for losses (239) (2 343) (138) (183) - (2 903)

84 b) 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. The 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 Group-wide basis, including the head office and regional branches. The liquidity management system consists of two main components: short-term liquidity management is conducted by the Internal Treasury Department on a regular basis medium-term and long-term liquidity management are performed by the ALM Committee and the Internal Treasury Department (ALM unit) as part of the ALM function, ultimately for the purpose of setting an effective risk-return ratio. The liquidity policy is approved by the Management Board in order to clearly articulate the liquidity risk tolerance. On 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 Risk Management Division conducts regular liquidity risk assessments and reports on the liquidity risk status to the Chief Risk Officer weekly, to the ALM Committee quaterly and to the Management Board twice a year. Risk reporting includes qualitative and quantitative risk estimations, stress-testing results, and an evaluation of additional liquidity sources (liquidity buffer). The Internal Treasury Department on a real-time basis executes necessary transactions to regulate liquidity gaps, and performs day-to-day liquidity management. The Internal Treasury Department reports to the ALM Committee on a regular basis. (i) Liquidity risk management methods Liquidity (funding) risk analysis covers the whole range of banking operations and allows to identify possible periods of (and reasons for) potential liquidity shortage. The system of liquidity risk management 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 Group uses a system of Liquidity Risk Indicators and Limits to constrain the liquidity risk exposure, and maintains a liquidity cushion (buffer) to ensure it is able to cover unexpected (stress) fund withdrawals. The Bank performs an assessment of the 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 cash outflows grouped by maturity in each time bucket and in each significant currency as well as totally in all currencies 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 Risk Management Division monitors liquidity reserves and borrowing facilities including the Liquidity Buffer for the case of a liquidity shortage. 84

85 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 the 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 applying restrictions on assets-related banking transactions. 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 -25%, fixed income -8% Current accounts* Realistic (historical simulation based) outflow Stress outflow: -100% of less stable, -20% of stable Corporate and retail term deposits According to the Assets and Liabilities Stress outflow: -25% Plan Long term debt Contractual maturity, excl. Roublenominated Contractual maturity debt 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 -25%, fixed income -8% * 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 on the basis of historical simulation. 85

86 (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 and establishes lines of responsibilities, 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 so-called core deposits. The 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 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 estimates based on the realistic scenario as of 2014 and 2013 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 the 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). The result of the banking segment gap analysis as of 2014 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 (31 208) (62 556) (82 336) ( ) ( ) ( ) Tiers Tiers

87 The following graphs illustrate the liquidity gap analysis as of 2014 and are presented in billions of Russian Rubles: Realistic scenario Stress scenario Based on the results of the above analysis management assessed the liquidity of the Bank as follows. Realistic scenario: current liquidity position is estimated slightly excessive, including readily available stock of liquidity reserves, with no significant probability of future cash shortage. Stress scenario: the Bank is stress tolerant and able to maintain a sufficient liquidity level without implying serious restrictions on new operations within a one year period. The result of the banking 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

88 The following graphs illustrate liquidity gap analysis as of 2013 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 significantly vary from this analysis. Less than 1 month 1 to 3 months 3 months to 1 year 1 to 5 years Over 5 years 2014 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 2013 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 c) Market Risks Market risk arises from exposure to changes in the value of certain market variables, such as interest rates or foreign exchange rates, equity or commodity prices, or the correlations among them and their levels of volatility. The Group is exposed to market risk in both trading and non-trading activities. Market risk arises from taking 88

89 positions in debt, equity, foreign exchange and commodities, as well as in interest rate, equity, foreign exchange and commodity derivatives. The Group s strategy for managing market risk includes the identification, measurement and monitoring of market risks that affect its banking business. The market risk management function is centralised and is run by the Risk Management Division. To estimate currency risk and other price risks the Bank uses a value-at-risk (VaR) methodology. Sensitivity analysis is used for interest rate risk exposure assessment. Value-at-risk is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon and to a given confidence level. The Bank uses 10-day VaR for reporting with 98.8 per cent confidence level. A single factor model based on market quotes is used to calculate VaR for equity. 1-day VaR for equities is calculated by a volatility-weighted historical simulation method with five years of history. To consider volatility clusterisation, volatility-weighted historical returns are used to construct a historical sample and exponential weights are then applied to calculate VaR for equities. To construct a sample of historical returns for equities with a short history of quotes, beta coefficients estimations and market returns are used. A single factor model based on a yield to maturity or to put (offer) is used to calculate VaR for bonds. The modified historical simulation method is applied for calculation the VaR of bonds. Missing quotes are generated using Monte-Carlo simulations. In order to take into account current market circumstances, the relevant historical time series are scaled by the ratio between the current and historical volatility. 10-day VaR for FX positions is calculated based on the EWMA (exponentially weighted moving average) model using volatilities and correlations with one year of history. Derivatives are taken into account in positions by deltas. Although VaR is a valuable tool for measuring market risk exposures, it has a number of limitations, especially in less liquid markets: the use of historical data as a basis for determining future events may not encompass all possible scenarios, particularly those that are of an extreme nature the use of a 10-day holding period assumes that all positions can be liquidated or hedged within that period. This is considered to be a realistic assumption in almost all cases, but may not be the case in situations in which there is severe market illiquidity for a prolonged period VaR is only calculated on the end-of-day balances and does not necessarily reflect exposures that may arise on positions during the trading day the VaR measure is dependent upon the position, correlation and the volatility of market prices. The VaR of an unchanged position reduces if market volatility declines and vice versa the use of a 98.8 per cent confidence level does not take into account losses that may occur beyond this level. There is about a one per cent probability that the loss could exceed the VaR estimate. The Bank recognizes all limitations concerning VaR as described above and takes it into account in its market risk measurement by supplementing VaR limits with other position and sensitivity limits, including limits to address potential concentration risks within each trading portfolio. The verification of the portfolio VaR model is supported by back testing that is based on the Basel standards. Back testing shows a good quality of the Bank's models. In addition to a VaR assessment, the Bank also uses portfolio stress testing to supplement market risk exposure analysis. Stress testing provides senior management with an assessment of the impact of extreme scenarios on market risk exposure. A set of market variables is estimated for a stress scenario of a decrease in the oil price based on a macroeconomic analysis. 89

90 Currently the stress scenario is based on the overall economy recession with a GDP decline, unemployment increase, emerging market currency depreciation and market indexes decline. The final stress exposure assessment takes into account expected management actions (position hedging, changes in the size of positions). (i) Interest rate risk The Bank is exposed to the effects of fluctuations in the levels of market interest rates on its financial position and cash flows. Interest rate risk is measured by the extent to which changes in market interest rates impact the fair value of the debt securities portfolio (bonds and derivatives in the trading book), net present (economic) value of interest related instruments (classified to the banking book), margins and net income and include: the risk of a parallel shift, change in the slope and shape of the yield curve resulting from the maturities (repricing) mismatch of assets and liabilities sensitive to interest rate changes basis risk, which results from a mismatch in the degree of interest rate sensitivity of assets and liabilities with similar maturity (repricing term) and risk of repricing of interest rate sensitive assets and liabilities. Increasing interest rates can drive the cost of borrowed funds up faster and at a higher growth rate than return on investments, thus worsening financial results and interest rate margin. An increase in interest rates will also cause a negative revaluation of the bond portfolio. The objective of managing interest rate risk is to reduce the impact of possible changes in market interest rates on net interest income and potential decreases in security values. Interest rate risk is assessed using scenario analysis for both trading and banking books and the VaR approach for positions in trading bonds. Forecasting of possible changes in interest rates is carried out separately for Russian Rouble positions and positions in foreign currencies. The Bank s interest rate policy is reviewed regularly and approved by the ALM Committee. The Risk Management Division reports on a regular basis to the ALM and Risk Committee on the levels of interest rate gaps, VaR and results of stress testing. The ALM Committee sets limits on all levels of interest rate risk exposure in accordance with the Bank s risk appetite. The limits include: net present value sensitivity limits for all assets and liabilities structural limits (i.e. limits on the gap in assets and liabilities volume for each time bucket) net interest income sensitivity limits for assets and liabilities from the banking book net fair value sensitivity limits for assets and liabilities from the trading book. The Bank also has the following limits for trading bonds and derivatives: net present value sensitivity limits for trading bonds net present value sensitivity limits for derivatives for time buckets limits on total nominal amount. Sensitivity analysis for interest-earning assets and interest-bearing liabilities A sensitivity analysis shows how profit and loss for the reporting periods would have been affected by changes in the relevant interest rates as of 2014 and The table below presents the analysis of net interest income sensitivity to interest rate repricing risk based on a 100 basis points (b.p.) symmetrical fall or rise in all yield curves. The interest rate sensitivity analysis is performed for positions of banking interest-earning assets and interest-bearing liabilities existing as of 2014 and 2013, except for current accounts which are considered to have negligible and stable interest rates, and therefore the analysis is not taking into account the effect such changes may have on the fair values of financial instruments. 90

91 Effect on net interest income Currency Interest rate increase, b.p RUB 100 (1 009) (1 564) USD EUR GBP 100 (58) (3) Other 100 (59) (73) Total (848) (1 175) The table above shows an estimate based on yield curve shift of +100 b.p. A shift of the yield curve of 100 b.p. will have a positive effect on net interest income of approximately the same scale (+RUB 848 million) The decrease in net interest income sensitivity in 2014 was due to gap narrowing between assets and liabilities as liabilities duration increased and assets duration decreased. The interest rate risk methodology was updated in 2014 with a behavioral model for corporate loans repricing. The statistical model estimates real loan portfolio duration including prepayments which occur due to customer behavior or negotiation process to revise the interest rate. Comparative figures for 2013 were also updated following the update of methodology. In the stress scenario the effect on net interest income assuming relevant management actions could be up to RUB million (a 200 b.p. increase in the RUB interest yield curve and a 100/100 b.p. increase in the USD and EUR yield curves). (ii) Currency risk The Bank has assets and liabilities denominated in foreign currencies. The financial positions and cash flows are exposed to the effects of fluctuations in the foreign currency exchange rates and precious metal rates. Currency risk does not arise from financial instruments that are non-monetary items or from financial instruments denominated in the functional currency. The ALM Committee sets limits on the level of currency risk exposure for each foreign currency (including different types of limits on derivatives) and each portfolio (trading, investment, the Group, the Bank, subsidiaries). These limits comply with the minimum requirements of the Central Bank of the Russian Federation. 91

92 The exposure of the Group to foreign currency exchange rate risk as of 2014 and 2013 is as follows: 2014 RUB USD EUR Other Total Monetary items Assets Cash and due from the CBR Due from credit institutions Financial assets held for trading and investments available-for-sale accounted for at fair value Loans to customers Investments held-to-maturity All other monetary assets (excluding derivatives) Total monetary banking segment financial assets Liabilities Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debt All other monetary liabilities (excluding derivatives) Total monetary banking segment financial liabilities Non-monetary items Investments available-for-sale accounted for at cost and investments in associates Net assets of non-banking subsidiaries (including related non-controlling interests) All other non-monetary assets and liabilities, net Net recognised position (excluding derivatives) (26 699) Derivatives position - Forwards Options (3 882) 22 - Swaps (14 472) Spot deals Net derivatives position (2 143) Net foreign currency position

93 2013 RUB USD EUR Other Total Monetary items Assets Cash and due from the CBR Due from credit institutions Financial assets held for trading and investments available-for-sale accounted for at fair value Loans to customers Investments held-to-maturity All other monetary assets (excluding derivatives) Total monetary banking segment financial liabilities Liabilities Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debt All other monetary liabilities (excluding derivatives) Total monetary banking segment financial liabilities Non-monetary items Investments available-for-sale accounted for at cost and investments in associates Net assets of non-banking subsidiaries (including related non-controlling interests) All other non-monetary assets and liabilities, net (210) Net recognised position (excluding derivatives) (13 236) Derivatives position - Forwards Options Swaps (2 977) Spot deals (9 384) 164 Net derivatives position Net foreign currency position (2 629) Total foreign exchange VaR (10 days) The main reason for the increase in the foreign exchange VaR during 2014 was the increase of foreign currency rates volatilities. The Bank also assesses the sensitivity of net profit to foreign exchange rate changes as a part of a systemic stress scenario, where stress levels of USD, EUR and other exchange rates are assumed as follows: 42% rise of USD and precious metals, and 40% rise of EUR. The total loss in the stress scenario was not significant because the FX position was balanced. 93

94 (iii) Price risks The Group has significant investments in quoted securities, which consist of both short-term trading positions and medium or long-term strategic investments. Also, the Group enters into derivatives for trading purposes. Financial positions and cash flows are exposed to the effects of fluctuations in the market prices of the securities. The Risk Committee sets limits on position levels (nominal limits, structure limits, VaR limits, stop-loss limits) and also concentration limits by issuer/instrument. The Bank measures financial instruments at fair value based on positions existing as of 2014 and 2013 for VaR analysis purposes as follows: Position VaR Position VaR Debt instruments Equities Effect of covariance for equities - (1 098) - (905) Because of the expected considerable decrease of the bond market in the year 2014 the Group with the help from Risk Management cut the exposure by selling large part of the bond portfolio. At the same time the HTM positions were increased. But the position reduction did not fully compensate volatility increase, and as a result the VaR of the bonds increased. A part of the equity position was also sold, that led to a stable VaR estimate of the equity portfolio in spite of volatility increase. The VaR methodology is applied only to quoted (Level I) instruments. Non-quoted instruments are excluded from the VaR calculation. Forwards and option positions (delta equivalent) are also included in the VaR calculations. Routine back-testing in 2014 resulted in changing the VaR estimation methodology for debt securities from parametric to historical VaR. VaR is calculated on a portfolio basis and correlation between securities price moves within a portfolio is automatically included into the result VaR. The position of the Group in non-quoted instruments is represented by investments in the non-banking segments (strategic and private equity investments). These instruments are not included into the traditional VaR model and a separate model is used to calculate the economic capital charge for these instruments. These instruments are not liquid and will not be affected by market volatility, thus using VaR is not relevant. The main tool for managing this risk is allocating capital to cover the risk of depreciation over the horizon of financial planning (one year) and strategic planning (five years). Potential risk exposure for non-quoted financial instruments is restrained by the position limits set by the ALM Committee and the Risk Committee. The Group also assesses the sensitivity of its net profit to securities price changes as a part of a systemic stress scenario, where the stress level assumes a 25% decrease in quotes for equities and a 2% increase in YTM for debt securities. The total loss in the stress scenario is estimated at RUB 2.9 billion as of 2014, assuming appropriate management responses. d) Operational risk Operational risk is defined as the risk of a loss resulting from inadequate or ineffective internal processes, personnel and systems or external events. Losses from staff errors, internal or external fraud, computer system failures, settlement errors, model errors or natural disasters, to name a few, are considered as losses due to operational risk. By their nature these risks are difficult to measure or quantify compared to other types of risk and therefore an integrated operational risk management system is vital for effective management of operational risk. 94

95 Today the Bank s operational risk framework consists of the following key elements: risks identification and escalation process qualitative and quantitative risk assessment (including controls efficiency assessment) scenario analysis and stress-testing business continuity and disaster recovery planning (BCP&DRP improvement is in progress) risk monitoring (including the system of key risk indicators) reporting. Together these components provide the advantage of quick detection and correction of deficiencies in the policies, processes and procedures for adequate operational risk management. Promptly detecting, assessing and addressing these deficiencies to risk owners of the corresponding management level can substantially reduce the potential frequency and (or) severity of an operational risk and (or) event. The Bank is focused on implementing a systematic approach to regular monitoring and reporting of its operational risk profiles and material exposures to operational losses. In order to ensure effective operational risk management the Bank uses principles, methods and approaches based on best practices of operational risk governance and control such as follows. A. The Bank develops internal documents regulating: employee's job descriptions banking operations processes business continuity and disaster recovery plans information disclosure policies. B. The Bank implements principles for segregation of duties and conflict of interests policies. C. The Bank implements new products and processes only after proper documentation of relevant procedures and controls. Internal regulatory documents are accepted only after Risk management, Internal audit, Compliance and Security departments' approval. D. The Bank organizes procurement of goods and services on a competitive basis. E. As for legal risk management, as a part of operational risk management, the Bank: provides the legal expertise of internal documents and contracts and other relevant correspondence with counterparties monitors changes in the regulatory base for the timely changes in contracts and the Bank`s processes. Furthermore, in order to reduce the negative effects from specific types of operational risks the Bank has a complex insurance programme which includes: Comprehensive Crime & Professional Indemnity Insurance (Banker s Blanket Bond, Electronic and Computer Crime and Professional Indemnity) voluntary medical insurance of employees property insurance, including ATM insurance. Risk management of non-banking segments Each of the principal non-banking subsidiaries Gazprom Media Group, OMZ Group and other subsidiaries of the machinery segment and other Group subsidiaries independently manage their financial risks, within the requirements and limitations prescribed by applicable corporate procedures. For example, the risk management of Gazprom Media Group is carried out by the central finance function of the company. The company s treasury department identifies, evaluates and hedges market risks in accordance with the policies approved by the governing body of the company. The Treasury Department also manages credit risks in relation to transactions with financial institutions. Credit and liquidity risks in relation to the operating transactions are managed by business units in accordance with relevant risk management policies established by the company. 95

96 NOTE 32 PRINCIPAL SUBSIDIARIES OF THE GROUP Significant entities of the Group as of 2014 and 2013 are as follows: Country of incorporation Ownership interest Type of activity Banking Bank GPB AO Russian Federation Banking services 100.0% 100.0% OAO AB GPB Ipoteka Russian Federation Mortgage lending 90.1% 90.1% ОАО CreditUralBank Russian Federation Banking services 100.0% 100.0% ZAO Areximbank Armenia Banking services 100.0% 100.0% Gazprombank Switzerland Ltd Switzerland Banking services 100.0% 100.0% GPB International SA Luxemburg Banking services 100.0% 100.0% OOO GPB-Factoring Russian Federation Factoring 100.0% 100.0% ZAO Gazprombank Leasing Russian Federation Leasing 100.0% 100.0% GPB-DI Holdings Limited Cyprus Private equity 100.0% 100.0% GPB Global Resources B.V The Netherlands Investment 100.0% 100.0% banking Gazprombank Latin America Ventures The Netherlands Oil and gas 50.6% 50.6% B.V. investment Nagelfar Trade & Invest Limited British Virgin Islands Asset management 100.0% 100.0% ZAO Gazprombank Upravlenie Russian Federation Asset management 100.0% 100.0% aktivami OOO Gazkardservis Russian Federation Card processing 100.0% 100.0% OOO New Financial Technologies Russian Federation Finance 100.0% 100.0% GPB Financial Services Cyprus Cyprus Brokerage 100.0% 100.0% Machinery ZAO Forpost Holding Russian Federation Investment holding OAO OMZ Russian Federation Engineering procurement constructor OAO Izhorskiye Zavody Russian Federation Production of equipment for nuclear power plants and mining equipment OOO OMZ Spetsstal Russian Federation Production of speciality steels OOO IZ-Karteks Russian Federation Production of mining equipment ŠKODA JS a.s. Czech Republic Production of equipment for nuclear power plants OAO Uralmashzavod Russian Federation Production of metallurgy, mining, oil and gas equipment OAO Kriogenmash Russian Federation Production of oil and gas, airseparating equipment OAO Uralhimmash Russian Federation Production of petrochemical equipment ZAO PO Uralenergomontazh Russian Federation Installation of engineering equipment 100.0% 100.0% 100.0% 97.8% 85.8% 83.9% 100.0% 97.8% 88.1% 86.2% 100.0% 97.8% 99.5% 99.5% 98.7% 94.5% 100.0% 100.0% 100.0% 100.0% 96

97 Country of incorporation Type of activity Media OAO Gazprom-Media Holding Russian Federation Investment holding ОАО Telekompaniya NTV Russian Federation TV channel broadcasting OAO NTV-Plus Russian Federation Satellite broadcasting OAO TNT-Teleset Russian Federation TV channel broadcasting Ownership interest % 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ZAO Izdatelstvo Sem Dney Russian Federation Publishing 75.0% 75.0% OOO Teleradiokompaniya 2Х2 Russian Federation TV channel 100.0% - broadcasting ООО Telekompaniya Pyatnitsa Russian Federation TV channel 100.0% - broadcasting ООО Telekanal TV3 Russian Federation TV channel broadcasting 100.0% - Other Centrex Europe Energy & Gas AG Austria Gas trading 100.0% 100.0% OOO GPB Invest Russian Federation Real estate development 100.0% 100.0% Non-controlling interests in subsidiaries The following table summarises the information relating to the Group s subsidiaries that have material noncontrolling interests (NCI), before any intra-group eliminations: OAO Izhorskiye Zavody and its subsidiaries Gazprombank Latin America Ventures B.V. NCI effective ownership interest in holding company 14.2% 49.4% Other entities 2014 Total for category Total assets Total liabilities (17 512) (10 705) Net assets Carrying amount of NCI Non-banking operating revenues Non-banking operating expenses (10 763) - Income from associate Other income (expense), net 531 (1 186) Net profit Other comprehensive income Total comprehensive income Profit (loss) allocated to NCI (1 701) Other comprehensive income (loss) allocated to NCI (241) Dividends paid to NCI - - (85) (85) 97

98 OAO Izhorskiye Zavody and its subsidiaries Gazprombank Latin America Ventures B.V. Cash flows used in operating activities (103) (988) Cash flows (used in) from investment activities (1 773) Cash flows from (used in) financing activities, before dividends to NCI (8 876) Cash flows from financing activities cash dividends to NCI - - Effect of exchange rate changes on cash and cash equivalents - - Net increase in cash and cash equivalents Other entities Total for category OAO OMZ subsidiaries Gazprombank Latin America Ventures B.V. NCI effective ownership interest in holding company 2.2% 49.4% Other entities 2013 Total for category Total assets Total liabilities (27 232) (13 448) Net assets Carrying amount of NCI Non-banking operating revenues Non-banking operating expenses (32 055) - Income from associate Other expense, net (1 222) (891) Net profit Other comprehensive income Total comprehensive income Profit (loss) allocated to NCI (375) 980 Other comprehensive income allocated to NCI Dividends paid to NCI - - (134) (134) Cash flows used in operating activities (5 564) (410) Cash flows used in investment activities (202) (2 472) Cash flows from financing activities, before dividends to NCI Effect of exchange rate changes on cash and cash equivalents 98 - Net decrease in cash and cash equivalents (1 158) (184) NOTE 33 RELATED PARTIES The Group distinguishes between the following categories of related parties: entities with significant influence: (a) OAO Gazprom and its subsidiaries; (b) Non-State Pension Fund Gazfond and ZAO Leader (on behalf of Non-State Pension Fund Gazfond ) and their subsidiaries unconsolidated subsidiaries and associates of the Group key management personnel of the Bank, including members of the Management Board of the Bank and the Board of Directors of the Bank other state controlled companies. 98

99 The Group is under significant influence of OAO Gazprom, a company controlled by the state, and in the ordinary course of business operates with various state controlled companies. A significant volume of transactions with state controlled entities relates to Gazprom Group (see below for details). Other significant transactions with the state include the acquisition of preference shares of the Bank in the total amount of RUB million by the Ministry of Finance of the Russian Federation in December The acquisition of shares was executed using the proceeds from early redemption of subordinated deposit provided by Vnesheconombank to the Bank in 2009 (Note 27). Other deposits placed by state controlled companies are disclosed in Note 23. Balances due from and due to the Central Bank of the Russian Federation are disclosed in Notes 12 and 22. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. 99

100 The Group had the following transactions outstanding with related parties: NPF "Gazfond", ZAO "Leader" and their subsidiaries OAO "Gazprom" and its subsidiaries Unconsolidated subsidiaries and associates Key management personnel 2014 Total Total category as per financial statements caption Cash and cash equivalents Due from credit institutions, gross Allowance for impairment, due from credit institutions - - (230) - (230) (1 465) Financial assets held for trading Loans to customers, gross Allowance for impairment, loans to customers - (606) (6 166) - (6 772) ( ) Investments available-for-sale, investments in unconsolidated subsidiaries and associates Receivables and prepayments, gross Allowance for impairment, receivables and prepayments - - (11) - (11) (4 112) Other assets Amounts owed to credit institutions Amounts owed to customers Subordinated debts Other liabilities Undrawn credit lines Guarantees given Provisions for losses under guarantees given - (29) (261) - (290) (5 586) Letters of credit Provisions for losses under letters of credit - (21) (3) - (24) (127) 100

101 NPF "Gazfond", ZAO "Leader" and their subsidiaries OAO "Gazprom" and its subsidiaries Unconsolidated subsidiaries and associates Key management personnel 2013 Total Total category as per financial statements caption Cash and cash equivalents Due from credit institutions, gross Allowance for impairment due from credit institutions - - (171) - (171) (939) Financial assets held for trading Loans to customers, gross Allowance for impairment loans to customers - (275) (4 638) - (4 913) (78 694) Investments available-for-sale, investments in unconsolidated subsidiaries and associates Receivables and prepayments, gross Allowance for impairment, receivables and prepayments - - (169) - (169) (2 989) Other assets Amounts owed to credit institutions Amounts owed to customers Subordinated debts Other liabilities Undrawn credit lines Guarantees given Provisions for losses under guarantees given - (87) (177) - (264) (2 744) Letters of credit Provisions for losses under letters of credit - (74) (2) - (76) (159) 101

102 NPF "Gazfond", ZAO "Leader" and their subsidiaries OAO "Gazprom" and its subsidiaries Unconsolidated subsidiaries and associates Key management personnel Year ended 2014 Total Total category as per financial statements caption Interest income Fees and commissions income Gain from investments available-for-sale and investments in associates, net Media business operating revenues Machinery manufacturing revenues Other segment operating revenues Other operating income Interest expense (1 711) (25 337) (1 268) - (28 316) ( ) Impairment of interest earning assets - (337) (1 859) - (2 196) (54 152) Other segment operating expenses - (8 710) (5) - (8 715) (47 530) Banking salaries and employment benefits (972) (972) (30 043) NPF "Gazfond", ZAO "Leader" and their subsidiaries OAO "Gazprom" and its subsidiaries Unconsolidated subsidiaries and associates Key management personnel Year ended 2013 Total Total category as per financial statements caption Interest income Fees and commissions income Gain from investments available-for-sale and investments in associates, net Media business operating revenues Machinery manufacturing revenues Other segment operating revenues Other operating income Interest expense (1 094) (14 205) (497) - (15 796) ( ) Impairment of interest earning assets - (24) (113) - (137) (12 370) Other segment operating expenses - (9 553) (1) - (9 554) (40 724) Banking salaries and employment benefits (2 523) (2 523) (34 687) 102

103 The table below shows the details of banking salaries and employment benefits of key management personnel for the years ended 2014 and 2013: Short-term employee benefits Post-employment benefits Share-based expense - 7 Other (reversal) expense - (20) Total banking salaries and employment benefits NOTE 34 CAPITAL ADEQUACY Monitoring of Capital adequacy At the beginning of 2013 the Centre for Monitoring of Capital Adequacy was formed as a separate unit to monitor and forecast economic capital, as well as to manage implementation of Basel II and Basel III recommendations in the Bank. In 2013 a Basel II and Basel III implementation programme was launched in the Bank to manage development of risk management procedures and methodologies in accordance with the Basel Committee on Banking Supervision recommendations. The main objectives of the Centre for Monitoring of Capital Adequacy are (1) managing and monitoring of Basel II & Basel III implementation programme, (2) further development of internal capital adequacy assessment process and models, (3) monitoring of relevant Russian and international legislation, (4) further enhancement of corporate governance procedures for Risk management, (5) management of risk data, and (6) independent validation of the Bank s credit rating models. The Bank calculates capital adequacy ratios in accordance with the Basel III-compliant CBR requirements on a stand-alone basis and for a consolidated group. For the purposes of the statutory capital adequacy ratios calculation, the composition of the group, as well as accounting treatment of certain transactions and methods applied for valuation of assets and liabilities may be different from those applied in these consolidated financial statements. In addition, for the purpose of comparability with other international financial institutions, the Group calculates capital adequacy ratios according to Basel II Framework based on amounts recognized in these consolidated financial statements. As such, the methodology used for capital adequacy ratios calculation according to Basel II Framework and underlying data are different from those used for statutory capital adequacy ratios. The Bank and the Group were in compliance with the statutory ratios, including statutory capital adequacy ratios, as at 2014 and The CBR requirements and the Bank's statutory capital adequacy ratios as of 2014 and 2013 were as follows: CBR minimum requirement Bank's ratios Bank's ratios Common equity Tier 1 (N1.1 ratio) 5.0% 7.8% 7.2% Tier 1 Capital (N1.2 ratio) 5.5% 8.1% 7.6% Total capital (N1.0 ratio) 10.0% 12.3% 11.2% The consolidated CBR requirements and the Group s consolidated capital adequacy ratios as of 2014 were as follows: CBR minimum requirement Group s ratios (unaudited) Common equity (N20.1 ratio) 5.0% 8.7% Tier 1 capital (N20.2 ratio) 5.5% 9.3% Total capital (N20.0 ratio) 10.0% 13.1% 103

104 Capital adequacy according to Basel II Framework The Group applies the Basel II Framework for the purpose of capital adequacy calculation using the simplified standardised approach for credit risk measurement, the standartised measurement method for market risk and the basic indicator approach for operational risk measurement. The Basel II Framework prescribes that all banking and other relevant financial activities (both regulated and unregulated) of the Group are captured through consolidation. Since the Group holds significant majority investments in non-banking entities that are consolidated according to IFRS requirements, these investments were de-consolidated and accounted for using the equity method in order to comply with the Basel II Framework. The resulting values of significant investments in non-banking entities which exceed the materiality level determined as 15% of capital for individual investments and 60% of capital for the aggregate of such investments are deducted from capital. As of 2014 and 2013 the carrying values of significant investments in non-banking entities did not exceed these materiality levels. The Group assesses that the USD denominated perpetual debt has loss absorption capacity equal to its historic cost of RUB million. Therefore, the Group adjusts retained earnings for the effect of foreign exchange differences related to perpetual debt in the amount of RUB million (2013: RUB million) for the purpose of Tier 1 applicable reserves calculation. An analysis of risk-weighted asset calculation as of 2014 and 2013 according to Basel II requirements is as follows: Consolidated statement of financial position (IFRS) 2014 Adjustment for investments in nonbanking entities Statement of financial position (Basel II) Riskweighted assets (Basel II) 2013 Risk-weighted assets (Basel II) Cash, obligatory reserve with the CBR and due from banks (5 870) Loans to customers Investments held for trading and investments available-for sale accounted at fair value: - debt equity (150) Investments accounted at cost and under the equity method (5 354) including goodwill Investments in non-banking entities Investments held-to-maturity (3) Goodwill (34 936) All other assets ( ) Total assets (72 417) Total liabilities (70 279) Total equity attributable to Group s shareholders Non-controlling interests (2 138) Total equity (2 138) Total liabilities and equity (72 417) Credit-related financial commitments Foreign exchange risk Operational risk Risk-weighted assets

105 Share capital Additional paid-in capital Treasury shares (9 020) (8 060) Applicable reserves Goodwill (7 991) (7 376) Non-controlling interests Significant investments in financial entities (10 333) (9 374) Tier I Capital Fair value reserve 911 (503) Subordinated debts Hybrid capital instruments Significant investments in financial entities (10 333) (9 374) Tier II Capital Total Capital Risk weighted assets: - credit risk market risk operational risk Risk weighted assets Capital adequacy ratios: Tier I ratio 7.7% 9.9% Total capital ratio 10.7% 13.2% Economic capital adequacy Since 2010 the Group has been using an economic capital allocation framework, which serves the purpose of ensuring sufficient capital adequacy, increased transparency of risk-taking and governance of the internal limits framework, as well as optimizing the balance of risk and return. Economic capital adequacy is one of the elements of the risk appetite statement. The Group regularly monitors its actual risk profile against the risk appetite approved by the Bank's Board of Directors and corrective actions are taken if necessary. The capital allocation framework is used to assess the overall solvency of the Group by relating economic capital requirements to available economic capital (available financial resources). Economic capital requirements are defined as the maximum possible losses over a one-year period at a confidence level relevant for the Bank s credit rating, that the Group could incur on its open risk positions and portfolios as at the reporting date, and relevant risk factors as captured by the internal models. The economic capital requirements model captures all significant quantifiable risks to which the Group is exposed as at the reporting date, as well as diversification of risk across the portfolio types, business lines and risk types. The model is calibrated based on history of risk factor data, long enough for the amount of required capital to be assessed on a through-the-cycle basis, and potential losses to be captured irrespective of the current phase of the business cycle. 105

106 During the reporting period the Group, the Group was adequately capitalized from the economic capital perspective. The risk profile of the Group, as measured by the economic capital requirements as of the reporting date, is shown at the diagram below (unaudited): The structure of required economic capital is consistent with the Bank s risk appetite statement. Investments in non-banking subsidiaries (presented above as a part of direct investments) are a part of the private equity activities of the Group. As a result, management estimates integrated risk on direct investments that includes both the risk that a company may default (credit risk) on its obligation to the Bank and the risk that its market value may deteriorate (market risk). Consequently, for the purposes of risk management analysis nonbanking investments are presented based on their net asset values (including related non-controlling interests). NOTE 35 FAIR VALUE OF FINANCIAL INSTRUMENTS The Group performed an assessment of its financial instruments as required by IFRS 7 Financial Instruments: Disclosures and IFRS 13 Fair Value Measurement. The estimates of fair value are intended to approximate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under the current market conditions. However given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable in an immediate sale of the assets or settlement of liabilities. The estimated fair values of financial assets held for trading, investments available-for-sale and held-to-maturity which are quoted in the active market are based on quoted market prices at the reporting date without any deduction for transaction costs. For securities held for trading, available-for-sale and held-to-maturity and derivative financial instruments not traded in the active market, the fair value is estimated by using valuation techniques, which include the use of recent arm s length transactions, discounted cash flow analysis and other valuation techniques commonly used by market participants. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the reporting date. Risk adjusted spreads for derivative financial instruments are derived from the CDS market (when this information is available) and from historical defaults and prepayment trends adjusted for current conditions. 106

107 The estimated fair values of all other financial assets and liabilities, except as described below, are calculated using discounted cash flow techniques based on estimated future cash flows and discount rates for similar instruments at the reporting date. The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: Level 1: quoted market price (unadjusted) in an active market for an identical instrument. Level 2: inputs other than quotes prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3: inputs that are unobservable. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The Group has a control framework with respect to the measurement of fair values. This framework includes a Product Control function, that is independent from front office management and reports to the Chief Financial Officer, and which has overall responsibility for independent verification of the trading and investment results and all significant fair value measurements. Specific controls include: verification of observable pricing re-performance of model valuations the Risk Management Division is responsible for the derivatives pricing and CVA (credit value adjustment) models and specification of market observable parameters a review and approval of new models and changes to models involving both Product Control and Risk Management Division. The methodology is also approved by the ALM Committee the analysis and investigation of significant daily valuation movements review of significant unobservable inputs, valuation adjustments and significant changes to the fair value measurement of Level 3 instruments compared to a previous month, by a committee of senior Product Control and Group Market Risk personnel. Where third-party information, such as broker quotes or pricing services, are used to measure fair value, Product Control assesses and documents the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS. This includes: verifying that the broker or pricing service is approved by the Group for use in pricing of this financial instrument understanding how fair value has been arrived and the extent to which it represents actual market transactions when prices for similar instruments are used to measure fair value, how these prices have been adjusted to reflect the characteristics of the instrument subject to measurement where a number of quotes for the same financial instrument have been obtained, how fair value has been determined using those quotes. 107

108 The following table shows an analysis as of 2014 and 2013 of financial instruments recorded at fair value, between those whose fair value is based on quoted market prices (Level I) and those whose fair value was calculated using valuation techniques where all the model inputs are observable in the market (Level 2): Level 1 Level 2 Total Level 1 Level 2 Total Financial assets Securities held for trading Derivative financial instruments Investments available-forsale Financial liabilities Financial liabilities held for trading - (23 839) (23 839) - (3 214) (3 214) There were no transfers between Levels 1 and 2 during the period, except that during 2014 there was a reclassification of fund participation shares accounted for in investments available-for-sale at fair value to investment available-for-sale at cost (Note 16). As of 2014 the discount rates used for fair value calculation of Level 2 financial instruments are as follows: RUB USD EUR Financial assets Securities held for trading % % - Derivative financial instruments 9.83% % 0.09% % 0.01% % Financial liabilities Financial liabilities held for trading 9.83% % 0.09% % 0.01% % As of 2013 the discount rates used for fair value calculation of Level 2 financial instruments are as follows: RUB USD EUR Financial assets Securities held for trading 8.41% % - - Derivative financial instruments 6.02% % 0.08% % 0.22% % Investments available-for-sale 7.10% % - - Financial liabilities Financial liabilities held for trading 6.03% % 0.08% % 0.20% % Unquoted investments available-for-sale are stated at cost. As of 2014 unquoted investments available-for-sale amount to RUB million ( 2013: RUB million). There is no market for these investments and there have not been any recent transactions that provide evidence of the current fair value. In addition, discounted cash flow techniques yield a wide range of fair values due to the uncertainty regarding future cash flows in this industry. The following table analyses the fair value of certain financial instruments not measured at fair value, by the level in the fair value hierarchy into which each fair value measurement is categorised as of 2014 and The estimation of Level 2 and Level 3 fair values was made only for the instruments with original maturity of more than 1 year. The estimated fair values of other instruments are deemed to approximate their carrying values. 108

109 2014 Level 1 Level 2 Level 3 Total fair values Total carrying amount Assets Due from credit institutions Loans to customers Investments held-to-maturity Liabilities Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts Level 1 Level 2 Level 3 Total fair values Total carrying amount Assets Due from credit institutions Loans to customers Investments held-to-maturity Liabilities Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts As of 2014 and 2013, the discount rates used for fair value calculation are as follows: 2014 RUB USD EUR Term deposits due from and to credit institutions 16.00% % 0.03% % 0.91% % Loans to customers 19.00% % 8.0% % 8.0% % Term deposits owed to customers 16.00% % 0.03% % 0.91% % Subordinated debts 23.43% 2.35% % RUB USD EUR Term deposits due from and to credit institutions 6.86% - 8.8% 0.13% - 4.8% 0.01% % Loans to customers 7.9% % 1.8% - 6.9% 1.8% - 6.9% Term deposits owed to customers 6.86% % 0.04% % 0.01% % Subordinated debts 7.72%-8.83% 0.26% % - 109

110 NOTE 36 ANALYSIS BY MEASUREMENT CATEGORY The table below sets out the carrying amounts of financial assets and financial liabilities by measurement categories as of 2014: At fair value through profit or loss Loans and receivables Availablefor-sale Other amortised cost Total carrying amount Cash and cash equivalents Obligatory reserve with the CBR Due from credit institutions Financial assets held for trading Loans to customers Investments available-for-sale: - measured at fair value measured at cost Investments held-to-maturity Other financial assets Financial liabilities held for trading Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts Other financial liabilities The table below sets out the carrying amounts and fair values of financial assets and financial liabilities as of 2013: At fair Loans and value receivables through profit or loss Investments held-tomaturity Availablefor-sale Investments held-tomaturity Other amortised cost Total carrying amount Cash and cash equivalents Obligatory reserve with the CBR Due from credit institutions Financial assets held for trading Loans to customers Investments available-for-sale: measured at fair value measured at cost Investments held-to-maturity Other financial assets Financial liabilities held for trading Amounts owed to credit institutions Amounts owed to customers Bonds issued Subordinated debts Other financial liabilities

111 NOTE 37 ACQUISITIONS OF INTERESTS IN SUBSIDIARIES Acquisitions of subsidiaries In 2014, the Group aquired control of the following investments within the Media segment: Prof Media Group Red Media Group ООО Internet Gipermarket OOO Aprel Fair value of consideration given Cash and cash equivalents Intangible assets Accounts receivable Other assets Borrowings (9 903) - (249) (131) Trade and other payables (4 881) (88) - (60) Other liabilities (3 494) (35) (111) (56) Non-controlling interest in subsidiary (39) Fair value of identifiable net assets Share aquired % % % 82.60% Share in net assets aquired Goodwill (gain on bargain purchase) (547) Prof Media In January 2014 the Group acquired 100% of the share capital and obtained control over ProfMedia Limited (Cyprus) and its subsidiaries (ProfMedia Group). The acquired subsidiaries increase the Group s presence in the media market. As at the acquisition date the fair value of the total purchase consideration paid by the Group was RUB million, which consists of cash consideration of USD thousand (RUB million) and an indemnification asset of RUB 261 million. The goodwill of RUB million is primarily attributable to the significant synergies and combined cost saving expected to arise to the Gazprom Media Group as a whole. The goodwill will not be deductible for income tax purposes in future periods. The ProfMedia Group was consolidated in these financial statements from 1 January The acquired Group contributed loss of RUB million to the Group for the period from 1 January to Red Media In May 2014 the Group acquired 100% stake of Broadcasting and Production Union Red Media LLC and obtained control over 12 theme-based channels for cable and satellite broadcasting. The Red Media Group was consolidated in these financial statements from 1 June The acquired Group contributed loss of RUB 88 million to the Group for the period from the date of acquisition to

112 ООО "Internet Gipermarket" In 2014, the Group increased its share in ООО "Internet Gipermarket" to 100% from 21.1% as of 2013 and obtained control over ООО "Internet Gipermarket". The business of the company is substantially an internet-platform delivery service operating in the Russian Federation. The aquired entity contributed loss of RUB 178 million from the date of acquisition to As of 2014 an impairment test was performed in relation to cash-generating unit ООО "Internet Gipermarket". As a result, impairment loss in amount of RUB 776 million was recognised (Note 21). OOO "Aprel" In 2014 the Group has increased its shareholding in ООО "Aprel" to 82.6% from 21.6% as of 2013 and obtained control over the company. OOO "Aprel" is a holding company for various internet businesses including OAO "Web TV", which formed a major part of the holding. The Group has initiated a restructuring of OOO "Aprel Group" after its acquisition. NOTE 38 SUBSEQUENT EVENTS Share capital In March 2015 following the decision of the Bank s General shareholders meeting the Board of Directors has approved an issue of ordinary shares with the par value of RUB 50 each. The new share issue was registered by the Central Bank of the Russian Federation on 27 March The newly issued shares were fully paid by the Bank s existing shareholders through the conversion of previously issued ordinary shares with the par value of RUB each. The holders of newly issued ordinary shares are entitled to receive dividends and are entitled to one vote per share at Annual and other general meetings of the Bank s shareholders. Wholesale borrowings The following wholesale borrowings were made by the Group on domestic debt capital market after 2014: Borrowings Currency Notional in currency units Rate, % Issue Maturity Bond RUB % February 2015 February 2018 Subordinated debts On 15 April 2015 the Government of the Russian Federation has approved a subordinated deposit with the Bank in amount of RUB 38.5 billion. Deposit will be funded by the Ministry of Finance and will be used by the Bank for the purpose of funding of one of the governmental infrastructure projects. Management expects that deposit documentation will be signed by the end of April

113 Capitalisation of subsidiary and affiliated banks Subsequently to the balance sheet date the Group has increased capitalization of some of the subsidiary and affiliated banks either through additional ordinary shares issue acquired by the Bank or through the placement of subordinated debt. Banks Type of capitalization Date of transaction Notional amount Maturity % rate ZAO "Areksimbank" Ordinary shares issue 21 January 2015 USD 20 million - - GPB International S.A. Ordinary shares issue 8 January 2015 EUR 10 million - - OAO "Belgazprombank" Subordinated debt 15 January 2015 USD 75 million 14 January % Also, in 2015 the Group has approved CHF 35 million additional share issue which will increase the share capital of Gazprombank (Switzerland) Ltd. The share issue will be finalised in May Signed on behalf of the Management Board: Andrey I. Akimov Chairman of the Board 21 April 2015 Alexander I. Sobol Deputy Chairman of the Board (end) 113