2007 Annual Report MDM Bank Annual Report 2007

Annual Report 2007

Annual Report 2007 Contents 3 8 9 11 14 20 22 26 36 45 48 60 62 63 64 68 70 71 77 186 187 189 190 Chairman and CEO Statement MDM Bank Mission, Vision and Values MDM Bank in Figures Legal and Ownership Structure Operating Environment Our Strategy Regional Expansion and Network Management Discussion and Analysis Review of Business Units Information Technology Corporate Governance and Management Internal Control Risk Management Anti-Money Laundering Controls Internal Audit Human Resources Corporate Communications Corporate Social Responsibility Consolidated Financial Statements Contact Details Principal Correspondent Accounts Licenses Memberships

OLEG VIYUGIN MICHEL PERHIRIN

Chairman and CEO Statement 1 All dollar amounts for YE 2007 figures in this report are stated at an exchange rate of 24.5462 RUB per 1 US dollar, figures using the average rate for 2007 are stated at an exchange rate of 25.5770 RUB per 1 US dollar. Dear shareholders, clients and partners: MDM Bank in 2007, like many other Russian financial institutions, took advantage of the opportunities presented by the rapidly-growing national banking services market and by the favorable international debt market conditions in the earlier part of the year. Consequently, the Bank s results were in line with the generally outstanding growth witnessed by the domestic banking market. Profit grew by 66.1 percent in 2007 to RUB 5.5 bln, while return on equity was 17.8 percent, which demonstrates confident growth in the Bank s value for its shareholders. In 2007, global financial markets and the Russian banking sector witnessed significant developments. The Bank continued to grow its business in the second half of 2007 after global financial market conditions worsened. Continued growth, despite the global liquidity crisis, was possible as a result of measures adopted to diversify liabilities. The Bank achieved impressive growth in deposits, as customer accounts increased by 33.8 percent last year to RUB 124,132 mln. The growth in liabilities was also supported by MDM Bank s continued ability to access capital market instruments available only to borrowers with the high ratings that our Bank enjoys. The Corporate Banking unit remained the largest contributor to revenue growth, increasing its loan portfolio to RUB 120,460 mln, while further diversifying its assets and liabilities. The Bank remained a leader in debt market transactions, arranging 11 issues totaling RUB 27.4 bln for medium- and large-sized Russian companies. MDM Bank also began to focus on the small business and retail banking segments during 2007, though the results and market share (with the exception of car loans) in these strategically important business areas represent only our first steps. Just over a year ago, the Bank began to develop its asset management and private banking services. As a sign of a successful start to the new business, the MDM Bank mutual fund for fixed income instruments ( World of Bonds ) quickly became one of the market leaders. MDM Bank continued to focus on organic business growth and diversification during 2007. The Bank invested significant funds into network development, opening 41 new offices and launching preparatory work for 31 planned offices. Investment in the new core banking IT system will enable the Bank to integrate the main elements of this system into retail banking operations in 2008. The Bank has withstood the liquidity crisis thanks to sizable liquidity reserves established immediately after the first signs of serious market difficulties were detected in late summer of 2007. As of year-end 2007, these reserves totaled approximately USD 1.6 bln, thus ensuring that the Bank is well insulated from the ongoing liquidity challenges faced by international markets. In addition to the Bank s successful growth, 2007 also saw important changes to corporate governance and the shareholder structure. Olivant Limited, which has extensive experience in the universal banking business, and the International Finance Corporation (IFC), both joined the Bank s shareholder structure. This increased diversity in the Bank s ownership has helped to bring the operations of the Board of Directors in line with global corporate governance best practices, while optimizing the Bank s management structure and the quality of strategic planning.

4 MDM Bank Annual Report 2007 The Board of Directors, elected in May 2007, initiated revisions to MDM Bank s 2006-2010 Strategy, which were approved in October of last year with a new outlook for 2008-2012. The updated Strategy, prepared in close collaboration with Management, benefited from the expertise of the shareholders as well as important contributions from the Bank s most successful and talented employees. The main goal of the updated strategy is to transform MDM Bank from a product-oriented bank to a clientfocused one. The Strategy identifies shareholder value added (SVA) and return on equity (ROE) as the key criteria for each of the business units. One of the first steps taken toward implementing the updated Strategy was to combine the Corporate Banking and the Investment Banking units into a single Corporate and Investment Banking unit. This combined unit will benefit from internal synergies and focus on providing clients with a comprehensive set of products and services that meet their needs at every stage of their development. The Bank approved a regional development plan to open new offices offering high-quality small business and retail banking services in most of the country s regions. These investments will support the Bank s position in those segments of the financial services market that are expected to grow fastest in the longer term. Our employees are the key to continued success, and we made it our priority to create optimal career opportunities for the Bank s staff. We approved new human resources policies aimed at encouraging internal recruitment and promotion for the Bank s most talented employees. The effect of this new approach has already been seen in recent organizational and staff changes. The Board of Directors also approved professional development tools based on training, education and horizontal and vertical mobility within the Bank. In 2007, the Bank approved a new incentive plan, which is currently being implemented. While encouraging all business divisions to achieve the Bank s overall goals, it motivates each employee to achieve his or her personal best. While this will require significant efforts with the Bank s personnel, we are confident that this new plan will help to establish a One Bank culture, while strengthening our focus on providing services and products that best meet our clients continually-evolving needs. The Bank has always paid close attention to corporate governance best practices, viewing this as an essential element of successful long-term development. The Bank s corporate governance system has demonstrated that it is both reliable and adaptable. The Bank remains the leader among Russian financial institutions in terms of corporate governance, which Standard & Poor s confirmed in February of 2008 with a score of CGS-6+. The Bank s core values are expertise, client focus, integrity and confidentiality, transparency and a clear understanding of our social responsibility. The Bank strives to deliver the highest-quality financial services and adheres to the philosophy of partnership as the basis of its client relations. The Bank acts with honesty and integrity with its employees, clients and competitors. All of these provisions are specified in the mission, vision and values of the Bank as approved by the Board of Directors in 2007. MDM Bank is a socially-responsible financial institution. The Bank s shareholders, managers and employees all believe that their work should benefit society as a whole. This approach is applied first and foremost in the Bank s accountability before clients and attention to their needs. Moreover, the Bank s Corporate Social Responsibility Strategy, as approved by the Board of Directors, came into ef-

5 fect in 2007. This Strategy outlines the implementation of specific educational and cultural projects. The Bank is already financing student grants and educational programs in regional educational centers, as well as sponsoring special musical events and programs throughout Russia. The Bank allocates at least one percent of its annual net profit to support such educational and cultural programs. We remain optimistic about the mid-term growth prospects of the Russian banking sector, and confident in the Bank s ability to play a significant role in the market s development. The global liquidity crisis is a temporary phenomenon, and a number of debt instruments remain available for Russian borrowers with high ratings, despite the low-risk appetite of leading global financial institutions. Accordingly, we shall focus on developing and introducing the efficient management systems necessitated by the rapid expansion in MDM Bank s network. This includes implementation of a new Core Banking System, as well as new personnel motivation and training plans, improvement in the quality of services and the strengthening of our regional business teams in the Bank s strategic business areas. The Bank will strive in 2008 to increase the return on average equity up to 20 percent in its key business areas, while maintaining a capital adequacy ratio of at least 14 percent. We fully understand the challenges that await MDM Bank in evolving from a product-oriented bank to a client-focused one; however, we anticipate tangible results for our shareholders and clients in 2008. Respectfully yours, OLEG VIYUGIN, Chairman of the Board of Directors MDM Bank MICHEL PERHIRIN, Chief Executive Officer MDM Bank

MDM Bank Mission, Vision and Values Mission MDM Bank s Mission is to be a respected and successful universal financial institution, achieving market leadership by adhering to globally accepted standards of banking services and principles of corporate ethics. Vision MDM Bank strives to ensure consistent high returns on equity capital by pursuing the following goals: Provide the highest quality and cost effective services to all our corporate and retail clients; Offer products and services that support our clients at each stage of their development, helping them grow their business and prosperity; Extend and deepen our nationwide franchise by developing our business with small and mediumsize companies and establishing a strong regional presence; Ensure exceptional career opportunities to our employees and maintain the highest standards of corporate governance. Values Expertise. We are guided by the highest professional standards and thorough market analysis; we continuously augment our capabilities by fostering initiative and professional development of our staff. Client focus. A partnership philosophy forms the basis of our client relations. We strive to be a model of reliability and efficiency for all our counterparties. Integrity and confidentiality. We act with honesty and integrity with regard to our employees, clients and competitors. We comply with both the spirit and the letter of the law. Transparency. We support productive communications within the Bank and open relationships with our external stakeholders. Social responsibility. We contribute to the wellbeing of society by offering first-class economic opportunities to our clients and implementing environmental programs, as well as supporting educational and cultural projects.

MDM Bank in Figures Revenue RUB bln Segment Revenue RUB bln 20 17.8 20 15 13.0 15 10 10 5 5 0 0 2006 2007 2006 2007 Corporate Retail Small Business IB, PB and AM ROAE Segment Results (before tax and central overheads) % RUB bln 20 15 13.0 17.8 12 10 8 10 6 5 0 2006 2007 Net Profit RUB bln 4 2 0 2006 2007 Corporate Small Business Retail IB, PB and AM 6 5 5.5 4 3 3.3 2 1 2006 2007

10 MDM Bank Annual Report 2007 2007 2006 Change MDM Bank, consolidated (IFRS) RUB mln RUB mln % Total assets 321,482 243,122 32.2 Shareholders equity 38,898 27,324 42.4 Risk weighted assets 246,799 233,516 5.7 Loan portfolio provisions 6,194 4,499 37.7 Non-performing assets 3,784 2,277 66.2 Long-term credit ratings: Standard & Poor s BB / (stable) BB / (stable) Moody s Ba1 / (stable) Ba2 / (stable) Fitch Ratings BB/ (stable) BB / (positive) Corporate Governance Score (S&P) 6+ 6+

Legal and Ownership Structure MDM Bank s subsidiaries include leasing and asset management companies in Russia, the Riga-based Latvian Trade Bank, and securities brokerage and investment companies in Cyprus. MDM Bank 100% Latvian Trade Bank MDM Asset Management 100% 100% MDM Investments Ltd (Cyprus) LeasingPromHolding 100% MDM Bank s real estate arm MVK Nedvizhimost was merged into MDM Bank in 2007. 100% MCM Russian Investments (Cyprus) Shareholder Structure Since December 2006, there have been a number of changes to MDM Bank s shareholder structure designed to bring strategic investors with global banking expertise and knowledge of, and experience with, international best practices into MDM Bank. These new shareholders are providing strategic and operational advice to assist MDM Bank implement its mission. The major owners of MDM Bank are now as follows: Mr. Sergey Popov is the majority beneficial shareholder with approximately 77 percent beneficial interest, Olivant Limited has a 9.5 percent beneficial interest; Mr. Martin Andersson has an 8.5 percent beneficial interest and the IFC holds a 5 percent direct interest in MDM Bank. In addition, Olivant Limited has an option to purchase a further 4.75 percent interest.

Operating Environment The Russian Economy GDP growth 1600 1400 1200 1000 800 600 400 200 0 01 02 03 04 05 06 07 08F Nominal GDP, USD bln Real GDP growth Budget surplus / GDP Capital inf l ow USD bln 100 80 60 40 20 0 8% 7% 6% 5% 4% 3% 2% 1% 0% 12.5%. Higher commodity prices supported Russia s strongly positive trade balance, despite rising imports. One of the macroeconomic highlights of 2007 was the doubling of foreign capital inflow to USD 82 bln. Core flows arrived in the first half of the year and were related, among other factors, to multiple equity deals including multi-billion dollar SPOs/IPOs by Russia s two largest banks Sberbank and VTB. Foreign investors also made significant investments in the power generation sector. Even in the second half of 2007, when the US sub-prime crisis prompted a global wave of risk aversion, Russia managed to avoid a capital outflow. Global investors maintain a high level of confidence in Russia s macroeconomic and political stability, which is first and foremost supported by its prudent fiscal position and high level of creditworthiness. Russia s FX reserves are the third largest in the world. In 2007, foreign currency reserves reached USD 476.4 bln, up from USD 289 bln at the end of 2006. At the same time, Russia continued early redemptions of its foreign-currency government debt, which is now below USD 40 bln. The country still runs a budget surplus, which reached 6% of GDP in 2007. 01 02 03 04 05 06 07 08F Key Developments in 2007 In 2007, the Russian economy once again demonstrated attractive levels of growth. Real GDP grew by 8.1%, which is a new record high. Growth was driven by such sectors as construction, trade, and banking services. Investment in production capacity increased by 20%, while real income rose by In 2007, Russia s Central Bank continued its policy of pegging the ruble to a bi-currency basket of the US dollar and euro. At the beginning of the year, the basket was somewhat rebalanced. The pace of ruble appreciation against the basket declined from around 4% in 2006 to 1.5% in 2007. The major material disappointment in Russia s 2007 macroeconomic picture was inflation, which surged to 12.0% from 9.0% in 2006. This Sources: Central Bank of Russia, MDM Bank estimates, Bloomberg, Cbonds.

15 Export / Import USD bln 450 400 350 300 250 200 150 100 50 0 01 02 03 04 05 06 07 08F FX reserves and foreign debt USD bln 500 450 400 350 300 250 200 150 100 50 0 00 01 02 03 04 05 06 07 Export Import FX reserves Non-government debt Government debt increase was due to a combination of factors, including a massive growth of the money supply resulting from capital inflow, tightening of regulations regarding retail markets in Russia, and global growth in prices for wheat, sunflower oil and milk. On the political side, in December 2007, Russia successfully held parliamentary elections, with the pro-government United Russia party winning almost two thirds of seats in the State Duma. Outlook for 2008 In 2008, Russia elected a new president. Dmitry Medvedev, Vladimir Putin s chosen successor, won the 2 March presidential election with just over 70% of the vote. Vladimir Putin is widely expected to become Prime Minister after he steps down as President, and has publicly confirmed his intent to accept this position. It is the consensus among economists and political commentators that the new President will not bring any dramatic changes in Russia s political or economic landscape. We believe that in 2008 the economy is likely to grow by another 6.5-6.7%, fuelled by high commodity prices and growing consumption from both households and the state sector. The Russian government predicts GDP growth of 7.1%. Apart from inflation, which continues to be high on the government s agenda, the main challenge to the economy stems from the likely slowdown of the US economy, turbulence in the global financial sector and related risk aversion. As a result of increased global risk aversion, since mid-2007, Russian corporates and Inf lation (CPI) % 20 18 16 14 12 10 8 2001 2002 2003 2004 2005 2006 2007 2008F FX reserves (data as of 01.01.08) USD bln 1600 1400 1200 1000 800 600 400 200 0 China Japan Russia South India Mexico Korea Real disposable income growth % 20 15 10 5 0 03 04 05 06 07 08F

16 MDM Bank Annual Report 2007 Total assets of Russian banks, end of period USD bln 1000 800 +55% 600 +57% 400 +32% +35% 200 +46% 0 02 03 04 05 06 07 08F Loan portfolio of Russian banks, end of period USD bln 800 600 +20% 2.4% 1.8% financial institutions have been experiencing difficulties in accessing international debt and equity markets. In previous years this source of funding was quite important in supporting the growth of the Russian economy. Reduced access to funding in the international markets may somewhat curtail local banks appetites to lend, as well as the spending plans of both households and corporates. The Russian government and the Central Bank of Russia have already taken measures to insulate the local financial sector and corporates from the global liquidity crunch. Those measures include intensified liquidity injections from both the budget and the so-called development institutions, as well as more flexible refinancing terms for banks. 400 200 0 02 03 04 05 06 07 08F Loan portfolio, end of period NPL ratio Russian banks redemption schedule on eurobonds and syndicated loans USD bln 15 12 9 6 3 0 Deposit growth % y-o-y 100 80 60 40 20 0 14.9 07 08 09 10 11 12 13 14 15 16 17 02 03 04 05 06 07 08F Personal deposit growth 11.7 12.4 5.3 2.9 3.3 1.7 1.2 0.7 1.2% 0.6% 0.0% 1.3 Corporate term deposit growth We think that these measures will allow the economy to largely, but not fully, escape external threats, hence we project a slight deceleration of economic growth over 2008. The Banking Sector Key Developments in 2007 Despite the challenges related to global credit and liquidity turmoil, the Russian banking sector continued to grow at a very impressive rate. Aggregate sector assets in USD terms increased by almost 50%, to approximately USD 800 bln. The banking assets to GDP ratio has reached 61.4%, up from 52.2% in 2006. Still, in terms of penetration of the banking system into the economy, Russia lags behind such peers as Ukraine (Assets/ GDP ratio estimated at 70%), Poland (80%), Kazakhstan (almost 100%) and the Czech Republic (100%). This suggests that there is still substantial room for growth and development of financial institutions in Russia. Increasing consolidation has seen the total number of banks decline by 52, to 1,135 licensed entities. This consolidation has come through both M&A activity and Central Bank regulatory actions related to money laundering. In 2007, Russian banks managed to close a large number of equity and debt deals, not only in the favourable period of January-June, but also in the second half of the year. Those deals included several IPOs, M&A and private equity transactions, plain vanilla and structured bond placements as well as syndicated loans. Sources: Central Bank of Russia, MDM Bank estimates, Bloomberg, Cbonds.

17 On the asset side, retail loans are growing at a faster pace than corporate loans, reflecting the shift of many Russian banks to the lucrative business of consumer finance. In this regard it is worth mentioning that Russia tightened regulations for this business, forcing banks to improve the transparency of loan terms and stop usurious practices such as charging extra commissions. In response to tightened global liquidity conditions and increased funding costs, Russian banks have increased their focus on the domestic household and corporate deposit bases and tightened their lending policies. Liquidity support measures undertaken by the Central Bank and the government have also helped Russian banks to ride out the storm. In September-October 2007, Standard & Poor s, Moody s and Fitch published moderately positive analyses of the Russian banking system, highlighting improvements in balance sheets and management, as well as noting sufficient ability to withstand the global liquidity challenges. Outlook for 2008 We expect the Russian banking sector to continue growing in 2008, although at a slower pace primarily due to reduced access to wholesale funding. Otherwise, sector trends are likely to be maintained. We expect to see more equity deals (both IPOs and M&A activity) as growth and intensifying competition require a stronger capital base and consolidation. We also expect the foreign banking presence in Russia to further increase, as we see a strong appetite for the lucrative Russian credit market from international financial institutions. We think that Russian banks will maintain their focus on small business and retail lending, as this is a more profitable and sustainable business for local institutions. To date small business in Russia accounts for as little as 12-13% of national GDP, while in developed countries, small businesses comprise over half of the economy. In the coming years Russia s small business sector is due to strongly outperform the rest of the economy. Finally, we believe that the sustainability of Russian banks should not be questioned, even if the global liquidity and credit turmoil continues well into 2008. In our view, the government and the Central Bank will provide strong support to the banks since they are the lifeblood of the economy. Failure of any sizable bank could trigger systemic problems and impair economic growth. The government has the resources and tools to support the financial system, and will not allow this to happen. However, support measures will not be excessive as they add to inflationary pressure and inflation is also extremely high on the agenda of both the government and the Central Bank. Bank shareholders also have the incentive and ability to help their institutions in any negative scenario. Moreover, banks themselves are in good shape, with a relatively benign foreign debt repayment schedule and surprisingly short-term asset structure.

Our Strategy The Acceleration Program: Since MDM Bank s core strategy was approved in June of 2006, the Bank has successfully developed across business lines, investing in products, infrastructure, people and technology. While the Bank s results reflect successful implementation of our 2006-2010 strategy during 2007, the Russian banking sector continued to grow aggressively in all segments on the back of strong economic growth; along with new growth opportunities, competition is increasing. This was a signal to re-visit our strategy, seek new opportunities and set new challenges for the years ahead. Management and the Board of Directors launched the Acceleration Program in May of 2007 to update the Bank s strategy and increase the pace of implementation. During the ensuing five months, the Board, together with management, worked to expand the strategic outlook through 2012. The Acceleration Program s key objectives included improving efficiency and raising the bar for the Bank s long-term goals. The resulting much more aggressive 2008-2012 strategy was approved by the Board of Directors in October 2007. In the updated strategy, our objective of growing the Bank s value through developing its universal banking business model was reaffirmed. While MDM Bank will continue to focus on its significant base of Russian corporate clients, it seeks to diversify and develop its client base by expanding into the fast-growing small business (up to RUB 600 mln / approx. USD 24 mln annual sales 2 ) and retail segments. Through its retail network, MDM Bank will target middle-class consumers, as well as small businesses with clear potential to become fullscale corporate clients over the medium term. This growing client segment also illustrates the potential for the Retail Banking and Corporate and Investment Banking units to work together in servicing clients as they grow and their banking needs evolve. The strategy will also emphasize mid-tier corporates (up to RUB 12,500 mln / USD 500 mln annual sales) and smaller customers, for whom we will continue to refine the Bank s line of highly competitive products (i.e. cash management, payments, standard quick loans and standard term deposits). One of the primary areas of focus in the updated 2008-2012 strategy was on empowering the Bank s businesses while maintaining effective and efficient controls by a lean but strong corporate center. The updated strategy also places a strong emphasis on service quality underpinned by operational excellence and highly trained and motivated staff. Some of the key changes driving service quality and efficiency are a comprehensive HR strategy to help MDM Bank attract and retain the best talent available, implementation of a new Core Banking System, an efficient regional network management model and a streamlined business structure that will help the Bank capitalize on internal synergies. These changes are discussed in more detail in their respective sections of this Annual Report. The 2008-2012 strategy sets significantly more aggressive targets for the Bank s development and focuses on building value, shifting from static P&L-based KPIs to value and risk-based measures of performance such as SVA (Shareholder Value Added) and RAROC (Risk-Adjusted Return on Capital). The Bank s management have focused on efficient balance sheet usage and a capital allocation concept based on distribution of risk. Successful achievement of the Bank s strategic goals will make MDM Bank a first-class financial institution by international standards. By 2012, we intend to achieve a ROE (Return on Equity) of 30% and RORWA (Return on Risk-Weighted Assets) of 3%; our target is to double the value of the Bank every three years. 2 During 2007, MDM Bank categorized companies with annual sales of up to RUB 300 mln/approx. USD 12 mln as small business clients. In 2008, the Bank began to include companies with annual sales of up to RUB 600 mln/approx. USD 24 mln in the small business category.

21 Key Targets Cost / Income % 60 ROAE (excluding one-off items) % 40 50 40 30 51.5 48.3 35.0 30 20 16.6 30.0 20 10 10 13.1 0 0 2006 2007 2012 Target 2006 2007 2012 Target Deposits / Gross Loans* % Net Comission Income / Net Interest Income % 100 40 80 80.0 30 35.0 60 40 47.1 51.7 20 13.8 16.6 20 10 0 0 2006 2007 2012 Target 2006 2007 2012 Target * not including client deposits in Latvian Trade Bank Note: Data for MDM Bank according to IFRS

Regional Expansion and Network MDM Bank s Network unit is, and will continue to be, the backbone of the retail and small business banking franchises, managing the distribution channels that make it possible for the Bank to reach the broadest range of customers from businesses of all sizes to retail customers and private clients throughout Russia. As the Bank seeks to further develop the regional segment of its Corporate and Investment Banking (CIB) business, elements of the regional network will also play an increasingly important role in developing relationships and providing CIB services for clients. In order to strengthen and optimize network management, the Bank has grouped regional branches under seven Regional Hubs (Federal Directorates) designed to streamline network administration as well as centralize back- and mid-office processes. The Heads of Federal Hubs now report directly to the management of the Network unit, which reports to the CEO. MDM Bank has put in place a matrix management structure whereby administrative aspects of the Bank s operations are overseen at a regional level, while functional reporting lines go to the heads of business units at the Head Office. Federal Hub managers were appointed and assumed administrative responsibility for achieving the Bank s strategic objectives within their respective Federal Districts in 2007. Local business unit managers were also recently appointed and MDM Bank s Head Office will gradually delegate more specific business development responsibilities to these local representatives. Under the seven Regional Hubs, local/area offices are responsible for implementing managerial decisions regionally and ensuring efficient delivery of the Bank s products and services. Budget and operations management mainly goes through vertical links, and the same applies to business support functions such as human resources, legal, internal audit, corporate communications and others. At the same time, as in any matrix structure, our network management system relies on close cooperation between functional and regional managers. A high-level breakdown of responsibilities is provided below: Head office Regional Hub Local/Area Office POS Core management and control functions Strategy and planning, Risks, ALM, Reporting, Methodology Centralized back-office and underwriting Call center Administrative control and supervision Business coordination Branch-level HR, reporting and network development Supervision and control Retail and small over sales in respective POS business sales Mid-office Transactions Corporate, retail and small business sales

23 Moving some of the operational decision-making closer to the ground will allow management to make the sales network more responsive to specific conditions that impact each line of business regionally, while centralizing mid- and back-office functions. This centralization is also intended to improve the quality of client operations and increase efficiency, while reducing costs by allowing the Bank to benefit from economies of scale. Key Developments in 2007 In addition to restructuring the Bank s network and establishing the matrix management structure, MDM opened 41 new outlets across Russia in 2007; of those, 15 new operating offices (Bank branches with no administrative or oversight functions) were in the Moscow Region; the bank also opened a full-fledged branch in Lipetsk, and offices in such new cities as: Mezhdurechensk, Pyatigorsk, Stavropol, Magnitogorsk, Severodvinsk, Ufa, Ulyanovsk, Krasnodar, and Novosibirsk. As of year-end, MDM s regional network included 35 branches, 56 operating offices, and 30 other smaller-format points of sale outside Moscow and the Moscow region. In total, at the end of 2007, MDM Bank had 164 points of sale throughout Russia. Outlook for 2008 As part of the Bank s overall strategy to increase the value added from business activities, the Network unit will continue to strengthen the Bank s regional presence. In addition to increasing density in regions where the Bank is already active, management intends to move into new areas with high growth potential for financial services. The heads of regional hubs are responsible for choosing the sites for new offices, in close coordination with the Network Development management in the Head Office. The choice of city and location for new offices is based on a set of criteria that the Bank has developed to analyze the potential for a given region and city. Kovdor Murmansk Monchegorsk Ugolnye Kopi Anadyr St. Petersburg Severodvinsk Cherepovets Smolensk Tver Arkhangelsk Dubna Syktyvkar Bryansk Khimki Yaroslavl Obninsk MOSCOW Nizhniy Novgorod Orel Ivanovo Kursk Ryazan Vladimir Zheleznogorsk Lipetsk Tambov Ioshkar-Ola Voronezh Penza Kazan Taganrog Saratov Ulyanovsk Togliatti Perm Volgograd Rostov-na-Donu Samara Ufa Krasnodar Yekaterinburg Tuapse Stavropol Astrakhan Volzhsky Chelyabinsk Tyumen Nevinnomyssk Magnitogorsk Pyatigorsk Existing offices Planned offices Regional Hubs Noyabrsk Surgut Nizhnevartosk Achinsk Kansk Omsk Ust-Ilimsk Kemerovo Krasnoyarsk Novosibirsk Zheleznogorsk Bratsk Barnaul Belovo Zelenogorsk Cheremkhovo Abakan Tulun Novokuznetsk Sayanogorsk Angarsk Chita Mezhdurechensk Irkutsk Chernogorsk Pevek Bilibino Khabarovsk Vladivostok

Management Discussion and Analysis Consolidated Performance The Bank s consolidated net profit for 2007 totaled RUB 5,516 mln (USD 215.7 mln), an increase of 66.1% over the RUB 3,320 mln (USD 122.3 mln) reported in 2006. Net profit prior to a one-time capital gain on the sale of real estate assets stood at RUB 5,138 mln (USD 200.9 mln), a 53.7% increase over 2006. Return on average equity was also higher in 2007, reaching 17.8% (16.6% prior to the one-time capital gain) 3, versus 13.0% in 2006. The main factors that influenced the Bank s performance in 2007 were as follows: 1. Emphasis on liquidity over growth in a period of increased global market volatility. 2007 was marked by a sharp divergence between operating environment conditions in the first and second halves of the year. In July 2007, the imbalances in the US subprime mortgage market reached a tipping point, causing serious disruptions in the functioning of global capital markets, particularly in the structured credit area. As a result, financial institutions worldwide incurred severe losses that are likely to continue to grow in 2008. Credit and liquidity conditions in capital markets have deteriorated markedly, as banks worldwide reduced their appetite to provide credit to each other and to the capital markets in particular. The ability of financial institutions and corporates to refinance has deteriorated, and credit spreads increased dramatically. The impact of this market dislocation on the Russian banking sector and MDM Bank in particular was that international borrowing opportunities have become more sparse and expensive. In this environment, liquidity management has become a priority over growth. From August 2007, MDM Bank moved rapidly to secure its liquidity position by accelerating deposit gathering domestically and actively managing its corporate loan portfolio. These efforts have enabled the Bank to build a sizeable excess liquidity cushion while maintaining solid profitability. 2. Organizational changes and changes in strategic emphasis. Following a comprehensive business analysis within the framework of the Acceleration Program, the Bank s strategy was upgraded to incorporate all aspects of its business and operations. As a result, Corporate and Investment Banking were merged to provide a single point of access to corporate clients for all their financial needs, and a business model that emphasizes cross-selling and value-added, commission-based products was put in place. In the retail banking business, ambitious plans were formulated in the small business segment, where the Bank intends to grow more rapidly over the next five years in relative terms. Network roll-out plans aimed at reaching a new level in the small business segment and deposit gathering capability, particularly in the retail deposit market, were established. A comprehensive five-year IT development plan was put in place to support the ambitious business growth targets, with Core Banking System implementation being the main aspect of this effort. The Bank expects to see the first positive results from these strategic initiatives already in 2008. 3. Relatively stable asset quality and lower, albeit rising toward the end of the year, margins against the backdrop of global volatility. While net interest margin declined in the first half of the year, it recovered somewhat in the second half on re-pricing of assets as domestic interest rates rose. The global liquidity squeeze has impacted some of the more over-leveraged borrowers, but the overall asset quality in the corporate portfolio remained stable. Retail portfolio quality 3 Average equity calculation excludes revaluation of premises as at 31 December 2007.

27 also remained stable throughout the year. This is evidenced by the reduction in the cost of risk ratio, which relates provisioning expense for the period to the average loan portfolio for the period, from 1.4% to 1.1%. In management s view, cost of risk is a better measure of loan portfolio quality trends than the non-performing loans ratio since the latter fails to take into account effects of problem asset write-offs and sales. A summary of the Bank s main strategic indicators is presented in the table below. 2007 2006 change Revenues (RUB mln) 17,832 13,047 4,785 Net profit (RUB mln) 5,516 3,320 2,196 Net interest margin 5.2% 6.1% 0.9 pp ROAE (including one-off items) 17.8% 13.0% 4.8 pp ROAA 1.9% 1.8% 0.1 pp Cost / income 48.3% 51.5% 3.2 pp Cost of risk (provisioning expense on loans to average loans 1.1% 1.4% 0.3 pp for the year) NPLs to total portfolio (Non-performing loans / Gross loans) 2.0% 1.3% 0.7 pp Coverage of NPLs (Provisions / NPLs) 163.7% 198.0% 34.3 pp Total capital ratio 17.2% 13.7% 3.5 pp Employees (end of period) 5,775 4,421 1,354 Network (branches, additional offices and operating offices). 164 123 41 A list of metrics reflecting the Bank s principal strategic objectives is presented below. The list of indicators reflects, directly and indirectly, the following objectives, which will facilitate maximum growth of the Bank s business value if achieved in a balanced way: effective use of capital, financial stability and high quality of revenues high level of customer service productive, competent and loyal staff efficient internal processes 2007 2006 change ROAE before investments (excluding one-off items) 16.6% 13.1% 3.5 pp Operating expenses (before investments) / Revenue before result from trading in securities 49.2% 52.9% 3.7 pp Deposits (excluding customer accounts at Latvian Trade Bank) / Loans 51.7% 47.1% 4.6 pp Share of net fees and commissions in revenue before result from trading in securities 13.4% 10.9% 2.5 pp Revenue before result from trading in securities / Average staff (RUB 000) 3,393 2,921 472 Shareholder value added (RUB mln) 880 Market share in: small business lending 2.5% 2.09% 0.41 pp individual deposits 0.38% 0.29% 0.09 pp

28 MDM Bank Annual Report 2007 Total Revenue RUB mln 20 000 36.7% 15 000 39.3% 10 000 5 000 0 2005 2006 2007 Net Interest Margin Annual Data % 11 10 9 8 7 6 5 4 2006 2007 Yield on assets Cost of funds Net interest margin Quarterly data % 11 10 9 Review of the Income Statement Revenues Excluding the impact of a one-time gain (RUB 498 mln before tax), the Bank increased its consolidated revenue by 36.7% to RUB 17,832 mln (USD 697.2 mln), thus almost doubling the Bank s revenue base in two years. Net interest income accounted for 79.3% of total revenue, growing by 40.5% during 2007 to RUB 14,132 mln (USD 552.5 mln), while net interest margin decreased to 5.2% from around 6.1% in 2006. Net interest margins came down in early 2007, predominantly reflecting a slight decline in asset yields across all asset classes on buoyant market liquidity at the time and the growing share of term deposits in the overall structure of the Bank s customer accounts. Asset yields improved in the second half of the year as credit became scarce. Relative to 2006, the overall cost of funds increased by more than the asset yields, which resulted in an overall decline of the net interest margin. Q4 margins, however, were in line with the first half, as may be seen from the charts to the left. Net fees and commissions increased by 68.9% in 2007 to RUB 2,344 mln (USD 91.6 mln), representing the fastest-growing element of the Bank s revenues, and in line with the Bank s strategy to increase the quality of its revenues. This growth was lead by commissions from payment transfer, foreign exchange, as well as investment banking. Net result from trading, including trading in securities, foreign exchange and precious metals, decreased by 18.4% in 2007 to RUB 1,133 mln (USD 44.3 mln). The result was impacted by turbulence in the capital markets in the third quarter, when the Bank recorded a loss from securities trading of RUB 320 mln (USD 12.4 mln). Income from foreign exchange, the bulk of which consists of the bid-offer spread on corporate customer foreign exchange flow, rose by a healthy 25.9% to RUB 1,364 mln (USD 53.3 mln). 8 7 6 5 4 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Yield on assets Cost of funds Net interest margin Operating expenses Growth in operating expenses in 2007 was contained to 28.4%, which compares favorably both to 2006 (42.7%) and the rate of revenue growth in 2007 (36.7%). This resulted in the overall cost / income ratio declining from 51.5% to 48.3%. A ratio more indicative of efficiency levels, which relates operating costs to revenues before trading results in securities, also improved from 52.9% to 49.2%.

29 2007 2006 Change 2005 Change RUB mln RUB mln % RUB mln % Commission on settlement and trade finance 1,417 1,115 27.1 925 20.5 Commission on foreign exchange transactions 364 344 5.8 182 89.0 Commission on cash transactions 370 263 40.7 252 4.4 Brokerage and investment banking commissions 504 211 138.9 124 70.2 Commission for business referral 275 79 248.1 0 Commission for trust and fiduciary assets 41 7 485.7 19 63.2 Other 7 3 133.3 24 87.5 Total fee and commission income: 2,978 2,022 47.3 1,526 32.5 Commission on settlement transactions (297) (258) 15.1 (486) 46.9 Commission on cash transactions (185) (73) 153.4 (70) 4.3 Commission on foreign currency transactions (73) (126) 42.1 (105) 20.0 Other (79) (177) 55.4 (329) 46.2 Total fee and commission expense (634) (634) 0.0 (990) 36.0 Net fee and commission income 2,344 1,388 68.9 536 159.0 Staff costs, representing approximately two thirds of the Bank s overall cost base, grew by 25.7% to RUB 5,746 mln (USD 224.7 mln), and were driven mainly by merit-based adjustments and new staff hires in the network (41 new outlets were opened in 2007) and the retail businesses. Average cost per employee increased slightly by 8.0% to RUB 1.67 mln (USD 65,293) per year, while staff productivity, evidenced by the revenue per staff, rose by 15.0%, from RUB 3.0 mln (USD 110,640) to RUB 3.5 mln (USD 135,004). Non-staff operating expenses grew by 34.2% to RUB 2,876 mln, a rate of growth similar to that in 2006. Almost 60% of the increase in non-staff expenses was attributed to rental costs, which almost tripled on the branch expansion (all new outlets opened by the Bank are being rented), as well as to advertising and marketing expenses, which grew by 49.6%, broadly in line with the volume growth of the Bank s retail business. Details of non-staff costs are presented in the table on the next page. Provisions and asset quality In 2007, the Bank maintained its conservative provisioning policy across all asset classes. While the significant tightening in global credit markets has not yet significantly affected Russian corporate and retail borrowers, who continue to Net Result From Trading RUB mln Staff Costs RUB thsd 1400 1200 1000 800 600 400 200 0 200 2005 2006 2007 3600 3200 2800 2400 2000 1600 1200 800 400 2005 2006 2007 Gains / (losses) from securities Gains / (losses) from precious metals Gains / (losses) from foreign exchange Staff costs per average staff Revenue before result from trading in securities per average staff

30 MDM Bank Annual Report 2007 2007 2006 Change 2005 Change RUB mln RUB mln % RUB mln % Depreciation 345 279 23.7 241 15.8 Rent expenses 486 177 174.6 181 2.2 Other expenses related to premises and 350 281 24.6 248 13.3 equipment Taxes other than on income 485 389 24.7 142 173.9 Professional services 416 377 10.3 232 62.5 Advertising and marketing 365 244 49.6 193 26.4 Telecommunications 102 81 25.9 76 6.6 Software 134 106 26.4 98 8.2 Security 164 157 4.5 94 67.0 Other 29 52 44.2 83 37.3 Total non-staff costs: 2,876 2,143 34.2 1,588 34.9 Cost of Risk % 6 5 4 3 2 1 0 2006 2007 Corporate loans Consumer loans Small business loans Total loan portfolio enjoy relatively low levels of financial leverage and a healthy economy, certain corporate players have felt liquidity pressures and deterioration in credit standing due to over-extended borrowing and imprudent financial management. The Bank s total provisioning expense, including provision for losses on credit related commitments, was RUB 2,081 mln in 2007 (USD 81.4 mln), up 20.3% from 2006. In general, cost of risk, or the provisioning expense over average risk exposure, declined compared to 2006 levels for the overall loan portfolio, as well as for the corporate and consumer loans, while it grew for small business loans due to the seasoning effect of the portfolio. Coverage of NPLs % 400 NPLs (as % of loans) % 6 300 200 4 100 2 0 0 2006 2007 2006 2007 Consumer loans Corporate loans Consumer loans Corporate loans Small business loans Total loan portfolio Small business loans Total loan portfolio

31 As a result of provisioning, non-performing loans 4 were comfortably covered by provisions at the end of 2007 across all portfolio segments. A slight decrease in the NPL coverage in the retail portfolio is attributed to the growing importance of residential mortgages, which at the end of 2007 accounted for 21.6% of total consumer loans (2006: 8.9%). As a result of the slowdown in loan growth in corporate and consumer loan portfolios, the latter partially being caused by the discontinuation of autoexpress-loans following a risk-reward analysis of the product, the share of non-performing loans increased somewhat during 2007. Management believes, however, that the ratio of non-performing loans to total loans as a gauge of asset quality has serious limitations as it is significantly influenced by write-off and asset sale regulations, and that the cost of risk ratios presented earlier represent asset quality trends more accurately. Loan Portfolio RUB bln 250 200 150 100 50 0 2006 Q1 2007 Q2 2007 Q3 2007 2007 Consumer loans Corporate loans Small business loans Total loan portfolio The Bank plans to maintain its conservative stance on liquidity, at the expense of profitability and growth, until more visibility on international borrowing is achieved. For a more detailed discussion Total Assets RUB mln Taxation Tax expense in 2007 amounted to RUB 2,111 mln (USD 82.5 mln), up 69.8% from 2006. The effective tax rate in 2007 stood at 27.7% (2006: 27.2%; 2005: 25.3%). 350 000 300 000 8.6% 4.6% 3.0% Balance Sheet Review 250 000 4 Non-performing loans comprise loans with principal and / or interest overdue by more than 90 days and other loans classified as non-performing by Management. A loan is classified as non-performing by Management if it is not probable that it will be recovered through means other than repossession and subsequent realization of collateral. The Bank s total assets increased by 32.2% to RUB 321,482 mln (USD 13,097.0 mln) in 2007, following 75.2% growth in 2005. Growth slowed significantly in the second half of the year, reflecting a shift in priorities from growth to liquidity. Liquidity Starting from the third quarter, the Bank moved to bolster its liquidity position to a level that would be adequate in response to the unprecedented deterioration in global credit markets. This was achieved mainly through accelerated depositgathering and active management of the corporate loan portfolio. As a result of these efforts, a sizeable excess liquidity cushion was built up and a substantial positive liquidity gap was achieved for maturity of up to 12 months, as shown in the table to the right. 200 000 Q1 07 Q2 07 Q3 07 Q4 07 Cumulative Liquidity Gap RUB mln 50 000 40 000 30 000 20 000 10 000 0 10 000 20 000 2006 2007 < 1 month up to 1 year

32 MDM Bank Annual Report 2007 2007 2006 RUB mln RUB mln Commercial loans 120,460 113,330 Small business loans 8,214 4,416 Net investment in finance lease 3,727 2,095 Retail loans 37,974 28,001 Investment banking loans 16,130 23,532 Total gross loans 186,505 171,374 Credit-related commitments (off-bs) 62,035 41,805 of liquidity risk management, please refer to note 26 of the Financial Statements. Lending The Bank s overall gross loan portfolio reached RUB 186,505 mln (USD 7,598.1 mln) at the end of 2007, up 8.8% over the previous year. While the dynamics of the corporate loan portfolio were affected by market turbulence in the second half of 2007, consumer and small business loans continued to grow. The overall composition of the loan portfolio is shown in the table at the top of the page. The Bank has continued to make progress on increasing the granularity and diversification of its corporate loan portfolio. Total exposures to the top 20 corporate borrowers represented 18.9% of the total portfolio (including off-balance sheet and excluding reverse repurchase agreements and margin loans), down from 23.7% in 2006 and 34.4% in 2005. Significant efforts have been made to preserve industry diversification in the Bank s loan portfolio. The Bank s largest industry exposures continued to be in trade, individuals, real estate, construction, and manufacturing. The charts at the lower left of the page show risk concentrations by economic sector within the customer loan portfolio (excluding margin loans, reverse repos and other loans of an investment banking nature). For a discussion of asset quality and provisioning, please refer to the Provisions and Asset Quality section of the Income Statement Review above, and to note 11 of the Financial Statements. 2006 2007 Trade, 20% Individuals, 19% Construction, 17% Manufacturing, 13% Real estate, 9% Other, 22% Trade, 24% Individuals, 22% Real estate, 14% Construction, 13% Manufacturing, 10% Other, 17% Trading securities The Bank s exposure to trading securities decreased in 2007 by 19.1% to RUB 13,862 mln (USD 564.7 mln). The Bank s securities portfolio consists predominantly of corporate fixed income instruments, with the share of equities at 14.6% at year-end 2007 (2006: 12.7%). At the end of 2007, total estimated 10-day VAR with a 99% confidence level for trading securities stood at RUB 737 mln (USD 30.0 mln), or 1.9% of the Bank s year-end shareholders equity. Customer accounts Customer accounts at the end of 2007 totaled RUB 124,132 mln (USD 5,057.1 mln), up by 33.8% from RUB 92,805 mln (USD 3,524.5 mln) in 2006. Customer account balances grew in all business lines and was most pronounced in private banking. The share of current account balances in total customer accounts has decreased from 41.3% to 29.2%. According to the updated strategy, the Bank seeks to increase the share of deposits predominantly in

33 Trading Securirties 2007 2006 2005 2007/2006 2006/2005 % of share- % of share- % of share- RUB holders RUB holders RUB holders Change, Change mln equity mln equity mln equity % % Fixed income portfolio: - government and municipal bonds 332 0.9 1,498 5.5 402 1.6 77.8 272.6 - corporate bonds 11,507 29.6 13,458 49.3 9,265 37.8 14.5 45.3 and promissory notes Total fixed income: 11,839 30.5 14,956 54.8 9,667 39.5 20.8 54.7 VAR (10 days, 99% confidence) 326 0.8 159 0.6 310 1.3 Equities: - long positions 2,023 5.2 2,178 8.0 197 0.8 7.1 1,005.6 - short positions 229 0.8 VAR (10 days, 99% confidence) 411 1.1 497 1.8 29 0.1 Customer Accouns 2007 2006 2005 2007/2006 2006/2005 RUB mln RUB mln RUB mln Change, % Change, % Corporate banking 90,523 67,369 37,473 34.4 79.8 Small business banking 4,371 2,526 73.0 Retail banking 10,298 8,282 5,404 24.3 53.3 Private banking 9,353 2,578 3,002 262.8 14.1 Total customer accounts by business line 114,545 80,755 45,879 41.8 76.0 Other customer accounts 9,587 12,050 10,094 20.4 19.4 Total customer accounts 124,132 92,805 55,973 33.8 65.8 the retail segment in its total liabilities, paying particular attention to diversification and granularity of the deposit base. International borrowing In first half of 2007, the Bank made significant progress on improving the stability and diversification of its international borrowings. Highlights of that period include: USD 425 mln 3-year Regulation S Senior Unsecured Loan Participation Notes (January 2007); USD 300 mln EBRD-led two-tranche syndicated term loan for 3 and 5 years for small business development (February 2007); USD 100 mln loan for 8 years from IFC, for the development of lending to small businesses and residential mortgages (May 2007); USD 350 mln DPR securitization (May 2007); USD 550 mln Dual Tranche syndicated term loan for 1 and 3 years (June 2007). In the second half of the year, market conditions substantially deteriorated. Ongoing significant turbulence in the global credit markets has made international borrowing opportunities more scarce and expensive. Nevertheless, the Bank closed the following deals in the second half of 2007, including a syndicated loan in December 2007, at an attractive pricing of LIBOR/EUROIBOR plus 0.6%. 3 year (plus 2 year extension option) USD 60 mln amortizing pre-export finance syndicated loan (September 2007); 1-year USD 250 mln equivalent dual currency syndicated term loan (December 2007).

34 MDM Bank Annual Report 2007 2007 2006 Change RUB mln RUB mln % Included in due to other banks: Syndicated loans 43,084 13,166 227.2 Trade finance borrowings 29,379 13,465 118.2 Loans from international financial institutions 11,611 1,317 781.6 Included in debt securities in issue: Unsecured loan participation notes 11,043 14,569 24.2 Loan participation notes secured by diversified payment rights ( DPR ) 14,133 13,042 8.4 Loan participation notes secured by a pool of car loans 4,153 9,828 57.7 Subordinated loan participation notes 5,066 5,452 7.1 Total international borrowings 118,469 70,839 67.2 2007 2006 2005 Tier I capital 35,891 25,382 22,219 Tier II capital 6,494 6,709 1,944 Total capital 42,385 32,091 24,163 Total risk-weighted assets 246,799 233,516 127,705 Tier I capital ratio 14.5% 10.9% 17.4% Total capital ratio 17.2% 13.7% 18.9% In terms of international funding, the Bank remains largely opportunistic in 2008, with all plans on syndications and capital market transactions subject to market conditions. None of the deals are critical for the Bank to maintain an above-average level of liquidity through the end of 2008, due to the significant level of accumulated liquidity and the shortterm nature of the Bank s corporate loan portfolio. The table at the top of the page shows MDM s international borrowings as of 31 December 2006 and 2007. Capital Following a capital increase completed in the third quarter of 2007 for RUB 4,668 mln (USD 184 mln) in favor of the International Financial Corporation (IFC), which has become a 5% shareholder in the Bank, the Bank s total capital ratio on a consolidated basis rose to 17.2% from 13.7% at the end of 2006. While management believes that the Bank s minimum total capital ratio consistent with its objective to reach an investment-grade credit rating by 2010 is around 12%, it is likely that the ratio will remain significantly above this level in 2008. This is mainly due to the restricted ability to increase leverage by international borrowing due to the ongoing volatility in the global capital markets. Dividends As in 2006, no dividends on ordinary and preferred shares will be paid out of 2007 earnings. Segments A detailed discussion of the Bank s business segments is presented in the section Review of Business Units below, as well as in note 25 of the Financial Statements. The table on the following page presents the Bank s results by legal entity.

35 ASSETS REVENUE PROFIT BEFORE TAX 2007 2006 change, % 2007 2006 change, % 2007 2006 change, % MDM Bank (Russia) 283,542 210,199 34.9 16,246 11,922 36.3 6,574 3,909 68.2 LeasingPromHold (Russia) 4,795 2,955 62.3 247 144 71.5 51 (9) MDM Asset Management (Russia) 329 57 477.2 55 9 511.1 38 3 1,166.7 Latvian Trade Bank (Latvia) 29,484 14,143 108.5 542 424 27.8 454 344 32.0 MDM Investment Ltd (Cyprus) 3,019 1,281 135.7 207 71 191.5 177 62 185.5 MCM Russian Investments Ltd (Cyprus) 14,179 16,447 13.8 324 349 7.2 293 287 2.1 Other 6,180 15,111 59.1 324 445 27.2 40 42 4.8 Consolidation adjustments (20,046) (17,071) 17.4 (113) (317) 64.4 (75) TOTAL: 321,482 243,122 32.2 17,832 13,047 36.7 7,627 4,563 67.1

Review of Business Units CORPORATE AND INVESTMENT BANKING MDM s Corporate and Investment Banking (CIB) unit services corporate clients with annual revenues exceeding RUB 600 mln / approx. USD 24 mln, and offers a comprehensive array of commercial banking products and services, including loans and deposit products, various credit products, leasing, factoring as well as investment banking services such as advisory, M&A, debt and equity issuance and underwriting. It also offers brokerage services, private banking and asset management. New Approach New Structure MDM Bank s management and Board took the decision in 2007 to merge Corporate Banking, Investment Banking, Asset Management and Private Banking into a single Corporate and Investment Banking unit that will facilitate holistic client management and ultimately increase return on equity and the revenue generated from each client. As a result of the internal merger, MDM Bank will be able to service its clients in the best possible way, identifying a client s needs at each stage and providing the optimal range of products and services to support the client s growth. Clients also benefit from having a single point of access for all their banking needs. Under the new structure, product specialists from each business segment and client relationship managers have begun to efficiently work together to introduce clients to the full range of the Bank s product and service offerings. Such a partnership ensures that the Bank s product line remains one of the most competitive and comprehensive in the market, and that the products offered change and grow together with each client. In order to further improve this cooperation, client relationship management (CRM) technology was introduced across all of the Corporate and Investment Banking business lines. The CIB unit is run by a management committee charged with exploring ways to leverage existing client relationships across different lines of business and expand cross-selling opportunities. For most of 2007, the business units that constitute the CIB unit operated separately, thus we present their results in four separate sections. Beginning in 2008, MDM Bank will report on the CIB unit as a single entity. Corporate Banking Corporate banking activities include deposit and lending services for corporate clients, leasing, factoring, settlements, cash management, cash collection, trade finance, a forfait financing, leasing and export credit agency financing. The corporate banking business is focused primarily on midto large-cap Russian companies. Clients include market leaders and promising mid-size companies in industries such as: IT and telecommunications, insurance, construction and real estate, retail chains, ferrous metals, non-ferrous metals, mining, nuclear energy, transportation, manufacturing and food processing. MDM Bank also has a number of important public sector clients. Key Developments in 2007 As in past years, corporate banking made the greatest contribution to both revenue and net profit compared to other business segments, accounting for 56.4% of revenue and 73.0% of MDM Bank s result before central overhead. The Bank s corporate client base also continued to expand, growing by 17% y-o-y to over 7,000, including around 2,500 regional clients. Regional

37 business now accounts for 48% of outstanding loans, and 38% of total revenue. Lending Gross loans to corporate customers of MDM Bank increased by 6.3% to RUB 120,460 mln (USD 4,907.5 mln) as of 31 December 2007 from RUB 113,330 mln (USD 4,304.0 mln) as of 31 December 2006. MDM Bank s corporate lending operations rely on a diversified client base, a wide distribution network, a comprehensive knowledge of the industries in which its clients operate, effective risk pricing and maintenance of the quality of its loan book. MDM Bank is increasing the amount of corporate lending to mid-sized Russian corporations with annual sales in the RUB 600-2,500 mln (USD 24-100 mln) range as this segment presents greater potential for growth and higher margins. Customer Relationship Manager Corporate and Investment Banking Unit Management Committee Corporate Banking Services Financing and Advisory Capital Markets and Research Leasing Private Wealth Management As of 31 December 2007, exposure to the 20 largest borrowers (or groups of borrowers), including off-balance sheet and excluding claims under reverse repurchase agreements fully secured by traded securities, totaled RUB 40,887 mln (USD 1,665.7 mln) or 18.9% of the Bank s gross loan portfolio, down from 23.1% a year earlier. Most corporate loans extended by MDM Bank are secured, and currently have low overdue levels. Deposit Taking MDM Bank offers a range of short-term deposit products to its corporate clients. As of 31 December 2007, the Bank held RUB 104,626 mln (USD 4,258.7 mln) in non-retail customer accounts. The 20 largest depositors accounted for 51.3% of total customer accounts at the end of 2007, vs. 57.4% on 31 December 2006. The Bank has expanded the range of cash management products available to its corporate customers, offering promissory notes, deposit certificates, deposit agreements (allowing for the placement of a number of tranches under the provisions of framework documentation) and foreign currency-denominated notes sold and paid in RUB. Trade and Project Finance MDM Bank offers a broad range of trade finance products to its corporate customers engaged in international trade activities. The volume of outstanding letters of credit of the Bank as of 31 December 2007 was RUB 28,125 mln (USD 1,145.8 mln), out of which RUB 62 mln (USD 2.5 mln) were issued by the retail unit. MDM Bank is among the leaders in the a forfait financing market in Russia. Forfait transactions provide financing to Russian companies for specific international trade transactions. Corporate Banking 2007 2006 Change RUB mln RUB mln % Net revenues 10,059 6,481 55.2 Operating expenses (before central overhead) (1,418) (1,276) 11.1 Impairment and provisions losses (509) (451) 12.9 Segment result before central overhead 8,132 4,754 71.1 Assets 148,675 115,843 28.3 Credit-related сommitments 51,854 40,414 28.3 Liabilities 128,972 88,510 45.7

38 MDM Bank Annual Report 2007 A boom in capital investments in Russia has led MDM Bank to vastly expand its long-term project and investment finance activities in 2007. The investment and project finance portfolio (excluding real estate) grew from RUB 2,896 mln (USD 110 mln) on 31 December 2006 to RUB 7,365 mln (USD 300 mln) as of 31 December 2007. The high growth rates for the project finance portfolio are expected to continue in 2008 (taking into account deals in pipeline and signed mandates). MDM Bank s project finance business is focused on midsized, mostly regional companies with projects in underdeveloped sectors like infrastructure, construction materials production, food-processing, agriculture, etc. The project finance portfolio is well diversified with average exposure on a single project between RUB 500 and 600 mln (USD 20 and 25 mln). Long-term exposures are funded through export credit agency (ECA)-backed and commercial facilities provided by leading foreign banks. International funding allows MDM Bank to match maturities on the long-term portfolio and provide relatively low interest rates to customers. MDM Bank has also established itself as one of Russia s leading privately owned banks in arranging ECA-backed transactions. Russian corporations remain in need of significant infrastructure and other capital investments, and ECA-backed finance represents one of the few sources of medium-term to long-term financing available to these companies. Leasing MDM Bank, primarily through its subsidiary LeasingPromHold, engages in corporate leasing services, principally the leasing of heavy equipment, vehicles and other machinery to its clients. Net investment in finance leases of MDM Bank, as of 31 December 2007, totaled RUB 3,727 mln (USD 151.8 mln). Investment Banking and Financial Markets The Investment Banking and Financial Markets Business is a traditionally important component of MDM Bank s business. The Bank offers investment banking services including corporate finance from structuring complex M&A transactions to equity capital markets and debt capital markets, where the Bank is among the top-3 in Russia, and advisory services, which was officially launched in 2007. In 2007, Global Finance magazine named MDM Bank s auto loan securitization by Taganka Car Loan Finance as the Best Structured Finance Deal in Eastern Europe. The Bank s financial markets services include fixed income sales and trading and equity brokerage, as well as repurchase (repo) transactions, foreign exchange, hedging, money markets, banknotes, bullion trading, derivatives and proprietary securities trading. Research primarily supports sales & trading. Key Developments in 2007 Corporate Finance MDM remained among the leading Russian financial institutions on the debt capital markets in 2007, placing 11 issues totaling RUB 27.4 bln, including the Mirax CLN issue for USD 80 mln. The Bank played a prominent role in the Russian equity capital markets as well. In March and July of 2007, MDM Bank participated as a broker in two additional share issues by Far Eastern Shipping Company totaling USD 416.5 mln, and was a joint bookrunner for a USD 190.4 mln IPO by Sinergia, one of Russia s largest alcoholic beverage producers. MDM Bank is also a major player among Russian financial intermediaries in M&A transactions. Investment Banking and Financial Markets 2007 2006 Change RUB mln RUB mln % Net revenues 3,204 3,222 0.6 Operating expenses (before central overhead) (1,068) (1,035) 3.2 Impairment and provisions losses (5) (18) 72.2 Segment result before central overhead 2,131 2,169 1.8 Assets 59,020 75,464 21.8 Liabilities 35,736 41,933 14.8

39 In June, the Bank acted as the exclusive organizer of the sale of a 92% stake in the Gurevskiy Metalworks to a strategic investor. In 2007, MDM Bank also advised on the structuring of a merger between Siberian retail chains Holiday and Kora. The Kora-Holiday deal represents MDM Bank s target client for future growth growing regional players that will require a full array of banking services as they continue to expand. Advisory Since 2005 MDM Bank has been servicing its clients in rating advisory, and in 2007 this activity was separated into a new advisory unit dedicated to building on the Bank s previous success in this field. The unit also offers strategic consulting, an entirely new and exciting business area for the Bank in which the unit plans to advise companies seeking to enhance their business profiles for attracting investment. The Strategic Consulting and Rating Advisory (SCRA) unit is growing rapidly in terms of both new clients and projects, and is ambitiously looking forward to expanding its business in 2008. Interbank Lending For the past five years, MDM has been one of the market leaders in interbank lending, and today works with over 700 banks. MDM Bank has a daily volume of RUB 10 bln on the Russian Interbank market (a 5-7% market share). Precious Metals MDM Bank was also a major player on the interbank precious metals market, occupying 3rd place in silver trading with a 20% market share in 2007. Also a leader in gold trading, the Bank commands an 8% share of the market. MDM Bank won third place in the category Best Russian Bank for 2007 at the Third Annual Precious Metals Market Professionals Competition organized by the Interbank Association of Precious Metals Dealers with the support of the RTS stock exchange. Foreign Exchange MDM Bank runs one of the largest 24-hour currency exchange in Russia, and saw very successful results in 2007 with a market share of 40-50% and average daily turnover of USD 4.0 bln. The Bank launched a new proprietary internet trading platform in 2007, which has made operations more convenient for customers and increased operational efficiency. Global Finance Magazine recognized MDM Bank as the Best Foreign Exchange Bank in its 2007 Best Banks in Russia Awards. Research In 2007, the Bank continued to strengthen its research team, offering clients one of the best fixed income research products on the market. The bond research team earned second place in the 2007 CBonds Awards, with nominations for Best Analyst on the Ruble Bond Market and Best Analyst on the Eurobond Market. The equity research team has concentrated on Russian mid-tier stocks and on a number of key sectors including retail, utilities, oil & gas and telecoms. Outlook for 2008 Corporate and Investment Banking will remain one of the Bank s core activities going forward. MDM Bank aims to maintain its leading market positions in these areas, even as it expands into the fast-growing retail and small business banking segments. Management expects to maintain strong growth in the corporate business over 2008, with particular emphasis on increasing regional volume. MDM Bank will focus on maintaining its strong market position in the areas where it enjoys the strongest competitive advantage, including M&A, debt capital markets, private placements, leveraged buyouts and second-tier equities. The Bank plans to capitalize on the Russian market s high growth potential in these segments by leveraging its principal advantages of knowledge of and proximity to corporate customers. Asset Management The Asset Management unit, created in the second half of 2006 as a wholly owned subsidiary of MDM Bank, is engaged in the development, distribution, administration and management of the Bank s asset management products, including discretionary portfolios and mutual funds. The Bank plans to continue developing this unit through products such as an expanded array of mutual funds and by offering these services in all of its Moscow offices as well as in key regional branches and offices. Asset Management offers two investment options to clients: mutual funds managed by MDM

40 MDM Bank Annual Report 2007 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 12.2006 03.2007 06.2007 09.2007 12.2007 RUIX Cbonds MDM World of Bonds 18 12 6 0 6 12 12.2006 03.2007 06.2007 09.2007 12.2007 MICEX MDM World of Equities 15% 10% 5% 0% 5% 10% 02.2007 05.2007 08.2007 11.2007 50% RUIX + 50% MICEX MDM Balanced Fund Management Company, or individual portfolio management (for clients with minimum annual investments of RUB 5 mln / USD 200,000). Funds are invested in the Russian securities market. Key Developments in 2007 The asset management business exhibited exceptional growth in 2007, with assets under management (AUM) increasing by a factor of 14, from RUB 349 mln (USD 13.3 mln) to RUB 4,809 mln (USD 195.9 mln). The number of accounts also increased by a large margin, growing from 10 last year to a total of 87 at the end of 2007. MDM mutual funds outperformed many other local Russian funds, with the MDM World of Bonds Fund producing an annual return of 15.1% as of 31 December 2007. The World of Equities Fund generated a 13.3% return and the Balanced Fund returned 10.3% over the same 12-month period. Outlook for 2008 Over the coming year, increased cross-selling efforts should benefit asset management. Performance will continue to be the highest priority, and the Bank will seek not only to outperform benchmarks but also competing mutual funds as well. The Bank will continue to emphasize client service to ensure that our performance is accompanied by individualized attention to every client s specific needs. Private Banking As with Asset Management, private wealth management fits naturally into the Bank s universal banking strategy. Relationships with corporate clients, in both the corporate and investment banking segments, generate and are expected to continue generating, a number of private wealth management opportunities. MDM s Private Banking unit offers a comprehensive array of products and services, including active advisory, discretionary portfolio management and financial planning services to individuals with investable assets of RUB 5 mln (USD 200,000) or more. In addition to internally-developed investment products, the Bank cooperates with a number of the world s leading financial institutions to offer a broader array of solutions to high net worth clients. While the Private Banking unit provides a broad range of investment products

41 based on an open architecture platform, sales of MDM Bank s own asset management, deposit and brokerage products and services account for the lion s share of the unit s total sales to clients. Our dedicated private bankers work one-on-one with clients to create highly customized solutions that satisfy every need. Significant Growth in 2007 In its second year of operation, the Private Banking unit experienced impressive growth in AUM. At the end of 2006, AUM (including mutual funds, asset management and third party products) totaled RUB 349 mln (USD 13.3 mln), and by the end of 2007 had reached RUB 2,978 mln (USD 121.3 mln), an increase of more than 9 times (out of which RUB 2,618 mln / USD 106.6 mln were managed by MDM Asset Management and included in AUM in the previous section). Deposits, including current accounts, increased from RUB 2,731 mln (USD 103.7 mln) at the end of 2006 to RUB 8,960 mln (USD 365.0 mln) on 31 December 2007, a 240% increase. Brokerage accounts, a new offering in 2007, ended the year with RUB 7,249 mln (USD 295.3 mln). Such impressive growth can be attributed to several factors, in particular an expanded product line and the increased opportunities for cross-selling from other divisions of the Bank. Structured derivative products from leading global investment houses including UBS, Credit Suisse, Socie te Ge ne rale, Dresdner Kleinwort, BNP Paribas and Calyon were also added to the lineup in 2007. MDM Bank sells these to private banking clients as an agent, with no exposure of its own. Outlook for 2008 Continuing enhancements to the Bank s strategy, including the decision to merge Corporate Banking and Investment Banking into a single business unit, will yield increasing opportunities for Private Banking cross-selling and a more comprehensive approach to customer service. Further products from global providers will be added to the open architecture platform, and a revised pricing structure should increase income from the existing client base. With a continued focus on client acquisition and new business development, the Bank has a 2008 year-end target of RUB 19,000 mln (approx. USD 770 mln) for investment assets under management and RUB 13,500 mln (approx. USD 560 mln) mln in deposits. RETAIL AND SMALL BUSINESS BANKING MDM s Retail Banking unit provides a comprehensive range of traditional banking products and services to small businesses and individuals throughout Russia. The Bank offers current accounts, deposit products, salary card programs, debit cards, consumer loans, credit cards, car loans, mortgages and funds transfer services. The continuing rapid expansion of Russia s retail banking sector suggests that the impact of retail operations on the Bank s results will grow. Given this trend, the Bank s strategy places a strong emphasis on developing the retail business. In particular, the focus remains on serving small businesses and Russia s emerging middle class, with a target market consisting of households with monthly disposable income of more than USD 350 per person. The Bank has sought to maximize income from its retail business by expanding the network of distribution channels and expanding product lines, in particular, deposit accounts and mortgages. In addition to increasing the number of Moscow and regional full-service branches, the Bank has expanded direct sales channels to car dealerships and real estate companies, as well as popular shopping malls. New Approach New Structure The Retail Banking unit, as reorganized in September 2007, combines consumer and small business banking. This combination streamlines decision-making, introducing scoring systems and developing product packages that combine small business and retail products to deliver a more comprehensive client solution. Over time, small business owners will be able to receive a range of banking services with the same speed and convenience as retail customers. The product catalogue will be optimized to provide clear and simple answers to the core needs of targeted client segments. In some cases, such as with the MDM Energy lending program (for a discussion of which, see the CSR section on page 71), MDM Bank employees have received special training that enables them to consult small business clients, providing additional value-added services. For most of 2007, Retail and Small Business Banking worked as separate units, thus we present their

42 MDM Bank Annual Report 2007 Assets Portfolio 01.01.2007 results separately. Beginning in 2008, MDM Bank will report on Retail and Small Business Banking as a single entity. Liabilities Portfolio 01.01.2007 Assets Portfolio 01.01.2008 Liabilities Portfolio 01.01.2008 Car loans, 75% Mortgage, 8% Credit Cards, 3% Assets SB, 14% Deposits RB, 31% Current Accounts RB, 48% Current Accounts SB, 21% Car loans, 59% Mortgage, 18% Consumer Loans, 1% Credit Cards, 3% Assets SB, 19% Deposits RB, 38% Deposits SB, 2% Current Accounts RB, 31% Current Accounts SB, 29% Retail Banking Key Developments in 2007 Over the year MDM Bank made a number of strides forward, introducing new products and services to meet the needs of an increasingly sophisticated Russian consumer and maintain a competitive edge in the burgeoning market for financial services. The Bank continued to expand its credit offerings, with two new products launched in 2007 credit cards offering a grace period and unsecured personal loans. The Bank also began issuing MasterCard electronic cards. At the same time, following a riskreward analysis of auto-express loans, we discontinued this product in the fourth quarter of 2007. Deposits grew in 2007 from RUB 3,141 mln (USD 119.3 mln) to RUB 5,634 mln (USD 229.5 mln), a 79.4% increase, while aggregate retail loans rose by 35.6%, to a total of RUB 37,974 mln (USD 1,547.0 mln). The Bank retained its position as one of Russia s top five providers of auto loans, with outstanding loans increasing by 18.3% to a total of RUB 25,854 mln (USD 1,053.3 mln), or about 6% of the overall market. The Bank achieved this growth by not only increasing the number of participating auto dealerships, but developing new sales channels including brokers and insurance companies. The Bank s mortgage portfolio more than tripled in size over 2007, growing from an aggregate RUB 2,484 mln (USD 94.3 mln) at the beginning of 2007 to RUB 8,220 mln (USD 334.9 mln), a 230.9% increase. MDM moved from 26th place among Russian mortgage lenders in 2006 to 15th at the end of 2007. An improved credit scoring methodology allowed the Bank to expand the availability of mortgage loans to a wider variety of customers while simultaneously reducing risk. New partnerships with a number of leading developers and real estate agencies, including MIAN, MITs, MIEL, City 21 Century, Arsenal- Holding and others, made a significant contribution to broadening the lending base. MDM continued to emphasize improving customer service, introducing a range of new serv-

43 Retail Banking Unit 2007 2006 Change RUB mln RUB mln % Net revenues 2,863 2,087 37.2 Operating expenses (before central overhead) (1,547) (865) 78.8 Impairment and provisions losses (1,199) (1,164) 3.0 Segment result before central overhead 117 58 101.7 Assets 37,377 26,867 39.1 Liabilities 11,384 9,073 25.5 ice standards for every department within the Retail Banking unit. A monitoring system was introduced in the Call Center, and significantly enhanced training programs were implemented in all client-facing areas to improve the level of service. Another major step forward in customer service was the introduction of MDM Client, an internet-based system allowing customers in Moscow and St. Petersburg to complete a number of transactions online. Through MDM Client, customers can check balances, transfer funds between accounts, receive statements and transaction histories, and conveniently make payments to mobile phone, internet and cable providers. Small Business Banking One of MDM Bank s top priorities is to lead the rapidly expanding market segment of small business banking. The Bank offers a range of credit, deposit and leasing products to small businesses and individual entrepreneurs with annual revenues up to RUB 600 mln (USD 24 mln) 5. Emphasizing the flexibility that smaller businesses need, MDM has developed an extensive product line featuring credit, deposit and leasing solutions with competitive rates and a range of tenors. Since many of our small business customers are located outside of the Moscow Region, regional branches also incorporate small business departments that have a dotted line reporting relationship to the small business banking unit management at the head office. Key Developments in 2007 The small business banking unit continued to grow at an impressive rate in 2007, with the loan portfolio increasing by 86.0% to an aggregate RUB 8,214 mln (USD 334.6 mln) at the end of the year. The number of small business customers doubled to reach approximately 5,500, while deposits totaled RUB 4,468 mln (USD 182.0 mln) by year end. MDM Bank estimates that in 2006, it had a 1.67% share of the small business banking market, which grew to 2.7% over the course of 2007. The Bank was ranked 9 th among Russian institutions offering small business loans, according to an RBC rating conducted at the end of 1H07. An emphasis on truly understanding the customer s needs allowed MDM to develop a line of credit products offered at affordable rates and 5 During 2007, MDM Bank categorized companies with annual sales of up to RUB 300 mln/approx. USD 12 mln as small business clients. In 2008, the Bank began to include companies with annual sales of up to RUB 600 mln/approx. USD 24 mln in the small business category. Small Business Banking Unit 2007 2006 Change RUB mln RUB mln % Net revenues 901 348 158.9 Operating expenses (before central overhead) (354) (123) 187.8 Impairment and provisions losses (365) (97) 276.3 Segment result before central overhead 182 128 42.2 Assets 8,521 4,545 87.5 Liabilities 4,407 2,556 72.4

44 MDM Bank Annual Report 2007 with flexible terms. Over 2007, the Bank began offering uncollateralized loans up to RUB 1 mln (USD 40,000) with a tenor of up to 3 years, as well as expanded trade financing terms. MDM Income and MDM Comfort, the Bank s latest deposit products, offer more flexible terms, including the possibility for early withdrawal without penalty, at competitive rates. Outlook for 2008 In 2008, MDM will continue to focus on maintaining its current attractive level of growth in the retail segment, while significantly enhancing the quality of customer service and expanding the consumer product line. In terms of consumer lending, the Bank plans to introduce a range of insurance products for credit card holders and other borrowers. Bundling products will entail a new pricing structure and support cross-selling, which in turn should have a beneficial effect on the revenue generated per customer. Finally, the Bank will continue to increase distribution via remote channels such as the Internet, Mobile POS, ATMs and the Call Center. In small business banking, MDM Bank will continue to emphasize customer service as the basis for continued business grouth. The Bank plans to grow the small business loan portfolio even faster than in 2007. Continuing expansion, both in terms of the number of branches and the regions served, will bring new customers into the fold. To improve the level of customer service, the Bank plans to add dedicated staff and automate the loan application process. This should considerably shorten the period required for loan approval. Several changes involving other Bank divisions will contribute to the development of the Retail Banking unit in 2008 and beyond. The implementation of a new Core Banking System, a new loan underwriting system, updated network structure and network rollout will all be key factors in decreasing the cost of products for the Bank while increasing our distribution base and income per client.

Information Technology Throughout 2007, the Bank took steps to improve and upgrade its existing IT systems, while laying the groundwork for an entirely new Core Banking System, the first elements of which will be put in place in 2008. This new system will support the fundamental reorganization of the Bank s operational model, which is intended to achieve the new strategic goal of ensuring the highest possible quality of services while improving efficiency. Core Banking System Implementation Traditionally, individual business units have developed IT systems to meet their own technology needs. As a result, the Bank today uses modern information systems to serve its Corporate, IB and Retail clients, but these systems sometimes work in isolation from each other. The Bank s 2008-2012 strategy calls for the Bank to create a fundamentally new IT landscape that will speed transaction processing and integrate data handling to facilitate better client sharing and cross-selling, as well as improve efficiency. The Core Banking System implementation project was formalized in October 2007 with the creation of a separate management structure dedicated to implementing the new systems. The main goals of this new system are to: Create a centralized Customer Information File in the Core Banking System and integrated legacy systems; Increase operating efficiency, from opening accounts to risk analysis to customer relationship management; Support a new, client-oriented retail business model with minimal mid- and back-office procedures required at the point of sale; Significantly reduce risks with the help of improved technologies in areas like loan application processing, underwriting and a new integrated trading system; Improve efficiency and create economies of scale by streamlining and centralizing mid- and back-office processes. The Bank plans to put in place the core elements of the new system over the course of 2008, while add-on modules will be introduced in the following two years. Systems Security The security of the Bank s IT systems is critical for MDM Bank and its clients. In 2007, the Bank made substantial upgrades to the hardware, software and system architecture that protect the Bank s corporate network and client data from unauthorized access, while still allowing partners and clients the convenience of performing remote and/or online banking transactions. Loan Origination System In the first half of 2008, the Bank will re-launch the credit card and consumer loan retail products on a new loan origination system from banking information system provider CRIF. This new system will help to streamline and centralize the process of managing new sales. Other products for retail and small business banking will be reimplemented on the new system further in 2008 and 2009. Electronic Document Processing A new enterprise document management system was chosen as the new IT platform for automation of the business documents workflow. In the first half of 2008, the system will support paperless processes for points of sale. Further, the Bank plans to launch all business document workflow processes together with electronic archiving features.

Corporate Governance and Management MDM Bank continued its full-scale adoption of best international corporate governance standards in 2007. The major developments during the year were changes to the Bank s shareholder structure and the composition of the Board of Directors, a significant revision of the Bank s 5-year strategy and improvements to internal audit processes. The Board of Directors The Board of Directors principal goal has always been to represent the interests of the Bank s shareholders and other stakeholders. It achieves this objective primarily by maintaining responsibility for the Bank s overall strategy and overseeing mechanisms for supervision and control. The agenda of every Board of Directors meeting and key decisions thereof are communicated to employees via various channels, ranging from Intranet announcements regarding operational decisions to face-to-face meetings and presentations about strategic decisions. The Board of Directors formally assesses management performance on an annual basis, but also provides feedback throughout the year while taking into account the intermediate results of the Bank s operations. Highlighted activities in 2007 included: The Board continued to improve its high standards of corporate governance and brought its responsibilities according to the Bank s charter into line with the global best practices it has already adhered to de facto; The Board initiated the Acceleration Program and worked with management to develop an updated set of strategic targets for 2008-2012; The Board approved a new organizational structure for the Bank and appointed a new senior management team; The Board approved a new long-term CSR Strategy; The Board approved a new long-term HR Strategy; The Board monitored budget and financial model targets on an ongoing basis; The Board of Directors also conducted a selfassessment of its effectiveness. Biographies & Recent Changes As of 31 December 2007, MDM Bank s Board of Directors included the following members: The Board in 2007 In 2007, the composition of the Board of Directors changed significantly as representatives of the Bank s new shareholders, as well as three new independent directors, joined (and a fourth independent director joined the Board in December 2007). The new Directors bring significant experience from both international and Russian banking and financial markets, which has already been demonstrated in the guidance the Board has provided for the Bank s future development.

49 Name First appointed Other relevant positions and Bio Oleg Viyugin 2007 Chairman of the Board of Directors Member of the Audit and Risk Management Committee Member of the Strategy Committee From March 2004 to May 2007, Mr. Viyugin headed the Federal Financial Markets Service of the Russian Federation. During 1999 2002, Mr. Viyugin worked at the Troika Dialog investment company as Executive Vice President. Additionally, during various periods in his career, Mr. Viyugin has served as First Deputy Minister of Finance of the Russian Federation, First Deputy Chairman of the Central Bank of the Russian Federation, as well as Extraordinary Advisor to the Chairman of the Government of the Russian Federation. Sergei Popov 2002 Deputy Chairman of the Board of Directors Mr. Popov has been a member of the Board of Directors of MDM Bank since 2002 and has played a leading role in shaping the strategic development of the bank. He is also on the Board of SUEK. Mr. Popov has also served on the Boards of Directors of RAO UES, Piping Metallurgy Company (TMK), MDM Industrial Group and Eurochem. From 1997 to 1999 Mr. Popov was a partner and commercial director of OOO Prodkontrakt. In 1996 he co-founded the Trading and Industrial Company MDM and in 2000 he co-founded MDM Industrial Group. Martin Andersson 2007 Member of the Board of Directors Member of the Strategy Committee Member of the Nominations and Remuneration Committee Mr. Andersson also sits on the Board of Directors of SUEK, Brunswick Leasing Ltd and Cabo Delgado Investments Ltd. Mr. Andersson chaired the Boards of Directors of Brunswick Capital Limited (2002-2007) and Brunswick Rail Leasing (2005-2007). In August 1993 he became one of the co-founders of Brunswick Group and was appointed CEO of Brunswick Brokerage in November 1993. He subsequently became Chairman of Brunswick UBS Warburg in 1999 From 1990-1992 Mr. Andersson worked as a consultant at Booz Allen Hamilton in Mergers & Acquisitions. From 1992-1993 he served as an advisor to the Privatization Committee at the Government of the Russian Federation.

50 MDM Bank Annual Report 2007 Name First appointed Other relevant positions and Bio Luqman Arnold 2007 Member of the Board of Directors Chairman of the Strategy Committee Luqman Arnold is currently Chairman of Olivant Limited, an investment company that provides strategic and operational expertise alongside investment capital to financial services companies in Europe, the Middle East and Asia-Pacific. Mr. Arnold is a former President and Chairman of the Management Board of UBS AG, former CEO of Abbey National PLC and has also worked at Paribas and Credit Suisse First Boston. Mr. Arnold s 35-year career has spanned commercial, investment and retail banking, insurance and asset and wealth management. Olga Selivanova 2007 Member of the Board of Directors Chairman of the Nominations and Remuneration Committee Ms. Selivanova is currently managing director at recruitment consultants Morgan Hunt, and is responsible for the firm s business in Russia. Prior to moving to London in 2004, she led the Moscow office of Morgan Hunt from its inception in 1995. Previously, Ms. Selivanova worked as a management consultant at PricewaterhouseCoopers, taught at various universities in the United States and worked at the Central Economics and Mathematics Institute of the Russian Academy of Sciences. Sergei Shapiguzov 2007 Member of the Board of Directors Chairman of the Audit and Risk Management Committee Mr. Shapiguzov has headed FBK, one of the first private auditing firms in Russia, since 1990 and is currently a Managing Partner. Under Mr. Shapiguzov s management, FBK has diversified its business and become one of the main players on the Russian consulting market. From 1992-1994, he was the director of the Russian office of KPMG. In addition to his professional duties, Mr. Shapiguzov has written nearly 100 academic papers and other works, including the well-known textbook Audit, co-authored with several colleagues. Mr. Shapiguzov taught for a number of years in the Economics Department at Moscow State University.

51 Name First appointed Other relevant positions and Bio Edward Nassim 2007 Member of the Board of Directors Mr. Nassim served as IFC Vice President for Europe, Africa and the Middle East until his recent retirement. In his previous role as IFC Director of Operations in Europe from 1991 to 2006, Mr. Nassim helped pioneer investments in many sectors of the Russian economy. In 1989, Mr. Nassim was appointed as IFC s first Director of Corporate Finance Services. He was involved in several transactions worldwide, including the restructuring and privatization of some of the first large state-owned companies in Czechoslovakia and Poland. Mr. Nassim was also involved in several advisory services initiatives, including corporate governance, improving the business climate in the small and medium business sector, leasing, energy efficiency and housing finance. None of the seven Directors occupies any executive position at MDM Bank. As of 31 December 2007, four Board members have the status of independent directors (as defined in Paragraph 6 of the Provisions on the Board of Directors of MDM Bank (http://www.mdmbank.com/about/administration/directors), which corresponds to the independence criteria applied in international practice. The new Corporate Secretary, Victor Naboichenko, joined MDM Bank in September 2007, and had previously headed the Corporate Secretary Department at TNK-BP. Mr. Naboichenko has nearly 10 years of experience as a Russian corporate legal counsel. Board Committees The three Board Committees, re-formed in June 2007 and then in December 2007 following election of new members to the Board of Directors, are: Strategy Committee Audit and Risk Management Committee Nominations and Remuneration Committee In 2007, the committees continued to play an important role as a forum for detailed analysis as well as for developing grounded, independent and professional recommendations to the Board of Directors on specific issues. Working in close contact with management, the Committees ensure efficient communication between executive management and the Board of Directors. The majority of issues presented to the Board of Directors by management are subject to preliminary discussion at committee meetings. The Board of Directors receives reports from the committees chairmen and the Chairman of the Management Board at every meeting. The Chairman of the Management Board, the CFO and Head of Internal Audit each have a standing invitation to all committee meetings. Other managers as well as representatives of the Bank s external auditor, ZAO KPMG, are also frequently invited to participate for relevant agenda items. Strategy Committee Luqman Arnold Committee Chairman Since June 2007 Martin Andersson Committee member Since May 2006 Oleg Viyugin Committee member (independent director) Since June 2007 Alan Morgan External expert Since February 2007 The Strategy Committee is responsible for reviewing all strategy recommendations, and any major projects that will involve a significant commitment of management time or the Bank s financial resources. The Committee also reviews the annual budget to ensure that it is consistent with long-

52 MDM Bank Annual Report 2007 term strategic goals. Moreover, the Committee monitors and enforces the positions taken by the Board of Directors on strategic issues. Strategy Committee meetings are frequently attended by the Chairman of the Management Board, the CFO, other Management Board members and top managers of the Bank. However, these invitees do not have voting rights. Key Developments in 2007 In 2007, the Committee reviewed MDM Bank s strategy for 2008 2012 and the strategic plans for each business unit presented by management after several months of blueprinting within the framework of the Acceleration Program. As a result, the detailed update to the Bank s strategic plan was approved by the Board of Directors in October 2007. Since then, the Committee has closely monitored implementation. The long-term strategy also served as a guideline in preparing the 2008 budget. The Strategy Committee has thoroughly assessed the Bank s operational model and regional strategy. In line with management s proposal, a decision was made to expand substantially the Bank s regional network in order to increase the efficiency and effectiveness of the retail and small business banking units. The new operational model that will accompany this regional expansion will involve implementation of state-of-the-art solutions based on a combination of IT and organizational solutions that the Strategy Committee thoroughly studied before making its decisions and recommendations to the Board of Directors. The Committee has been closely involved with adopting the Bank s social responsibility strategy and the policy for sponsorship and charity. Audit and Risk Management Committee Sergey Shapiguzov Committee Chairman (independent director) Since June 2007 Oleg Viyugin Committee member (independent director) Since June 2007 Kirk Stephenson Committee member (external expert) Consultant to Committee Until October 2007 After October 2007 On 14 February 2008, the Board of Directors assigned new responsibilities to the Committee and renamed it as the Audit and Risk Management Committee. The description below outlines the responsibilities of the Audit and Risk Management Committee, while Key Developments in 2007 discusses the activities of the Audit Committee. The Audit and Risk Management Committee reviews the financial reporting process and ensures the publication of comparable, transparent and accurate financial information. It reviews the effectiveness of the internal financial control and risk management systems as well as the internal and external audit functions, including appointing the Bank s independent auditors and reviewing their performance. The Committee also evaluates the procedures for enforcing the Bank s compliance with legislative and regulatory requirements in financial reporting. It provides control over banking risks, sets the Bank s risk profiles, assesses the effectiveness of risk level evaluation systems, risk analysis and, if necessary, reviews major transactions. Key Developments in 2007 In 2007, the Audit Committee initiated regular review of external auditor recommendations to provide more efficient results in addressing those recommendations. The Audit Committee also regularly reviewed management reports and Internal Audit Department reports. MDM Bank was among the first Russian banks to report IFRS audited 2006 annual results, and reviewed IFRS 3M, 6M and 9M results throughout 2007. The Committee worked to strengthen MDM Bank s compliance function and introduced changes to a range of internal processes and documents. The upgrades begun in 2006 to the Internal Audit Department (IAD) were recognized by S&P in the rating agency s 2007 annual Corporate Governance Score review. S&P praised the strength and professionalism of the Bank s IAD. The Audit Committee chose a new external auditor for 2008 based on a tender among top international audit firms.

53 In 2008, the Audit and Risk Management Committee will continue to work with management to strengthen and optimize financial and other reporting systems at the Bank. The committee will continue to seek ways to upgrade internal control and audit, compliance and transparency procedures during the coming year. Nominations and Remuneration Committee Olga Selevanova Committee Chairman (independent director) Since June 2007 Martin Andersson Committee member Since January 2007 Kirk Stephenson Committee member (external expert) Since February 2007 The role of the Committee combines providing recommendations and assistance to the Board of Directors and top management in building a sustainable, highly professional and motivated executive team through encouraging and guiding the maintenance of the Bank s identity as an employer of choice. Key Developments in 2007 One of the committee s main tasks in 2007 was to work with HR to overhaul MDM Bank s employee motivation system in connection with the new HR Strategy. The resulting system is based on a careful analysis of the labor market and takes an approach to compensation and bonuses based on a comprehensive and balanced set of KPIs. Another priority for the Committee was to continue helping the Board of Directors and the Chairman of the Management Board in replacing key staff, including the majority of positions in the Management Board, while ensuring continuity in changing senior managers. The Committee worked with members of the Board of Directors and the Head of the HR Department to develop the Bank s new organizational structure, and solve compensation issues that stemmed from combining several business units into one. The Committee hired a consultant to conduct professional development programs for the Bank s senior management, and reviewed professional development plans for top management. The Committee was instrumental in evaluating the Board s effectiveness as well as that of the Chairman of the Management Board. It also analyzed the alignment of incentive schemes for heads of key business units with the Bank s long-term business objectives, and the potential impact of incentive schemes on the Bank s total value. In 2008, the Committee will supervise the implementation of the new full-scale HR Strategy as well as the practical application of policies and procedures introduced in 2007. Statistics on Corporate Events General Shareholders Meetings: - Annual (1) 25 May 2007 - Extraordinary (4) 25 July 2007 22 October 2007 24 November 2007 3 December 2007 Revision Commission Meetings: - Physical meetings: 6 Board of Directors Meetings: - Physical meetings 10 - By correspondence/phone 7

54 MDM Bank Annual Report 2007 Board Committee Meetings: - Strategy Committee 12 - Audit Committee 13 - Nominations & Remuneration Committee 12 Management Board Meetings: - Physical meetings 19 - By correspondence 46 The Management Board Changes to the Management Board s composition and size in 2007 reflect changes in the structure of the Bank s businesses and the desire to expand the Management Board to ensure that key areas of the Bank s operations such as Network Management are also included in the management process. In 2007, the Board of Directors ruled to form the Management Board as follows: Name Position with MDM Bank Bio Michel Perhirin Chairman of the Management Board Mr. Perhirin was appointed Chairman of the Management Board of MDM Bank in April 2006. In 1996, Mr. Perhirin helped set up ZAO Raiffeisenbank Austria in Moscow and was the bank s CEO until the end of 2005. In 1993, he opened Banque Société Générale Vostok (BSGV) in Moscow and ran the office from 1993 through 1996. From 1970 to 1996, Mr. Perhirin worked for Société Générale in France, the United Kingdom, Australia, Japan and Spain. Andrey Ilyin Deputy Chairman of the Management Board Chief Financial Officer Mr. Ilyin was appointed Chief Financial Officer (CFO) of MDM Bank in April 2005. From 2004 2005, Mr. Ilyin was Head of International Business Development of the Bank. Mr. Ilyin s experience includes several years at the London-based investment bank Sindicatum Ltd, five years at the London office of Nomura International, where he was responsible for EMEA and West European banking equity research, as well as four years with PricewaterhouseCoopers in Moscow, where he became a CPA. Oleg Mashtalyar Deputy Chairman of the Management Board Chief Operating Officer Mr. Mashtalyar was appointed Deputy Chairman of the Management Board and Chief Operating Officer (COO) in October 2007. From 2005 to 2007, Mr. Mashtalyar was Head of Credit, and from January 1997, he served as Head of Corporate Lending. He joined MDM Bank in 1996. Prior to joining MDM Bank, Mr. Mashtalyar held several positions at JSCB Nadezhny Bank in 1995.

55 Name Position with MDM Bank Bio Natalia Blatova Head of Retail Banking Ms. Blatova was appointed Head of Retail Banking in October 2007, and, in December 2007, she became a member of the Bank s Management Board. Ms. Blatova joined MDM Bank in October 2001. From January 2005, she was Head of Business Development for Corporate Banking and chaired the Bank s Tariff Committee. From July 1995 to October 2001, Ms. Blatova worked in several positions ranging from Account Manager to Deputy Chief of Services Management and Banking Standards Implementation at Alfa Bank. Alexey Drobot Head of Corporate and Investment Banking Mr. Drobot was appointed Head of the Corporate and Investment Banking unit in October 2007, and in November 2007, he became a member of the Management Board. In 2006, Mr. Drobot was appointed Head of the Moscow Network Development Department. Previous appointments included Deputy Head of the Client Department of the Sukharevsky office as well as Head of the Central District Client Department. Mr. Drobot joined MDM Bank in 2001 as Head of the Credit Department of the Novoarbatsky office. Prior to joining MDM Bank, Mr. Drobot worked as Commercial Director and Deputy General Director of Finance at various companies. In 1999, he started his career in banking as a senior credit expert at KMB Bank. Sergey Babayan Deputy Head of Corporate and Investment Banking Mr. Babayan was appointed Deputy Head of the Corporate Investment unit in October 2007. Beginning in July 2006, he headed the Debt Sales & Trading Division. From 2001 2006, Mr. Babayan worked in the Global Markets Division of Deutsche Bank, heading the Securities Trading Department, later setting up and heading the Department for Financial Instruments. In 1996, he joined ABN AMRO Bank, where he was responsible for fixedincome trading. From 1997 2001, Mr. Babayan headed the Bond Trading Department at Troika Dialog. From 1992-1996, Mr. Babayan worked as a financial specialist at Tereza Inter and then as Assistant to the Chairman of the Management Board of Promstroybank in Armenia, and later worked in the Investment Department of Technobank. Konstantin Leonov Head of Network Management Mr. Leonov was appointed to MDM Bank s Management Board in January 2008. He was appointed Head of the Network Management unit in October 2007. From November 2001 to October 2007, Mr. Leonov was Head of the MDM Bank Branch in Rostov-on-Don. Prior to 2001, Mr. Leonov held several positions at the Rostov-on-Don branches of Vneshtorgbank and INKOMBANK.

56 MDM Bank Annual Report 2007 Invited to Management Board on a Permanent Basis Name Position with MDM Bank Bio Julia Kochetygova Director of Corporate Relations Ms. Kochetygova was appointed Director of Corporate Relations of MDM Bank in June 2007. Prior to joining MDM Bank, Ms. Kochetygova was Director of Governance Services at the international rating agency Standard & Poor s (S&P), responsible for the company s business development in Russia and the CIS. Before joining S&P in 2000, Ms. Kochetygova held a number of senior executive and analytical positions at SKATE Information and Consulting Agency (1995 1999) as well as taught and conducted research at the Higher School of Economics and the Institute of Economics at the Russian Academy of Sciences. Mikhail Egorov Head of Risks Mr. Egorov was appointed Head of the MDM Bank Risk unit in March 2007. Prior to this appointment, he headed the Credit Products Division and the Credit Risks Division. Mr. Egorov began his career with the Bank in 1997 and has held a number of positions with responsibility for credit control and market and operational risks. Departures New Members 6 September 2007 T. Avdeenko April 2007 O. Mashtalyar October 2007 E. Tutkevich November 2007 A. Drobot October 2007 A. Sazonov December 2007 N. Blatova January 2008 K. Leonov February 2008 S. Babayan Board of Directors and Management Board Compensation Total payments to Board members related to the performance of their duties, as well as reimbursement of expenses incurred by them while performing these duties in the financial year 2007, amounted to RUB 86 mln. The total amount of remuneration (including expenses incurred) to the Management Board, heads of core business units and the cheif accountant in 2007 amounted to RUB 848 mln. Dividends Pursuant to a Resolution of the 25 May 2007 Annual General Shareholders Meeting, dividends on ordinary shares and on preferred registered shares for 2006 were neither accrued nor paid. The Bank s 2006 profits were reinvested in the Bank s development. MDM Bank s Corporate Governance Awards in 2007 In 2007, Global Finance magazine gave MDM Bank the Corporate Governance Editors Award. In October 2007, Standard & Poor s named MDM Bank the leader for the second year in a row in its Transparency and Disclosure of Russian Banks Survey, which reviews transparency and information disclosure practices among the 30 largest Russian banks. In February 2008, Standard & Poor s Corporate Governance Rating Service affirmed our Corporate Governance Score at the level of CGS-6+ (CGS-6.7 on the Russian Scale). We are pleased that based on our commitment to promoting the highest corporate governance standards, we have maintained our position as the recognized leader in corporate governance and transparency among Russian financial institutions. 6 Date that the Management Board Member s appointment was approved by the RF Central Bank.

57 MDM Bank Management Structure Board of Directors Committees: Audit and Risk Management, Strategy, Nominations and Remuneration General Shareholders Meeting Board of Directors Management Board Committees: Credit, ALCO, Tariffs, Counteragents and Financial Instruments Other Management Structures: Change Management Committee, Main Management Council, Extended Management Council Management Board, Chief Execuitive Officer M. Perhirin Internal Audit J. Molotkovskaya Group Strategic Business Units Group Corporate Services Centre Corporate and Investment Banking A. Drobot (Head of CIB), S. Babayan (Deputy Head of CIB) Retail Banking N. Blatova Consumer J. Krasnorutskaya CFO A. Ilyin Risks M. Egorov COO O. Mashtalyar Legal V. Norenko Corporate Banking Services A. Afonin Small Business Banking A. Kuznetsov Treasury K. Rogov IT A. Trifonov Leasing M. Karasev Network K. Leonov Operations I. Strukova Financing and Advisory N. Riauzov Corporate Relations J. Kochetygova Human Resourses M. Mazzarelli Capital Markets and Research S. Babayan Internal Affairs, Asset Recovery and Collections I. Smirnov Private Banking and Asset Management V. Lewis, P. Natalich

Internal Control The Bank s Internal Control System encompasses all levels of management within the Bank and its subsidiaries. The System involves all internal processes and interactions and is not restricted to specialized units such as the Internal Audit Department, Compliance Department or Risk Management. The Bank s Internal Control System aims to achieve the following key objectives: Efficient and effective operations; Reliable financial statements; and Compliance with relevant laws and regulations. The Internal Control System is built on the following five elements: Control environment The qualitative characteristics of the Bank s management and its Corporate Governance system are defining factors of a control environ- Audit Committee Board of Directors ALM Committee Internal Audit Chief Executive Officer Credit Committee Chief Financial Officer Chief Operations Officer Head of Risk Management Head of Treasury Head of Compliance Department Credit Risk Management Liquidity Management AML / CTF Portfolio Risk Management Asset and Liability Management Investment compliance Risk Methodology Operational Risk Management Market Risk Management

61 ment. In 2007, the Bank continued to refine its corporate governance system, as discussed in the Corporate Governance and Management section on page 48. Risk identification and assessment The Bank has implemented a robust risk management system that covers all potential business and financial risks. This system is discussed in detail in the Risk Management section on page 62. Control activities Control activities relate to the day-to-day functioning of internal policies and procedures designed to ensure, among other things, proper segregation of duties to avoid conflicts of interest, proper authorization of transactions, accounting reconciliations, and analysis of deviations between actual and expected results. The activities also include safeguarding assets and other controls. In 2007, the Bank began implementing a core banking system that will require a complete re-thinking of the Bank s operating model, particularly in the retail banking area. This work is expected to continue well into 2008, and should result in higher-quality processes with more effective built-in controls. in particular implementation of the Core Banking System that was started last year. Monitoring Constant monitoring and evaluation, with subsequent incorporation of feedback, are required to ensure an effective Internal Control System. While monitoring of controls is part of the overall Risk Management and day-to-day operations of the Bank, Internal Audit plays an important role in identification of potential control weaknesses (see the Internal Audit section on page 64). Information and communication A robust management information and communication system is required for the Internal Control System to function effectively. In 2007, the Bank made important strides toward improving the relevance, timing and reliability of its management information, as well as further strengthened controls over confidential information. An internal communications system was implemented during 2007 (discussed in the Corporate Communications section on page 70). Further enhancements to the Bank s information and communication systems stem from IT upgrades,

Risk Management MDM Bank s risk management system is aimed at identifying, analyzing and managing the Bank s risk exposure. All of the Bank s operations that involve risk are conducted within established limits and restrictions, and risk compliance is constantly monitored. MDM Bank s risk management is based on three main principles: (1) limiting potential losses, (2) evaluating risks in a timely fashion, and (3) maintaining clear and effective risk governance. MDM Bank has established an efficient and reliable risk management system, combining the latest global standards with procedures developed by the Bank. The system encompasses the full range of risks involved in financial operations, including: credit risk and market risks, including stock market, currency and interest-rate risks, as well as liquidity, operating, legal, reputational and other risks. Key Developments in 2007 Upgraded Risk Management Methods During the year, MDM Bank approved an operational risk mapping methodology, which was used as a basis to map the operational risks of the Bank s main business processes. As a result, the Bank can identify and control the highest-risk areas of its operations. Several methods were developed and implemented for evaluating market risk, including risk assessment methods for non-market bonds and structured CLLNs as well as a methodology for determining fair prices for non-market equity instruments. The Bank also revised and improved the methodology for industry credit risk analysis, including an algorithm for calculating industry credit risk limits. Underwriting With a view to creating a highly diversified loan portfolio, the Bank reformed and revised its procedure for accepting credit risk and introduced an underwriting system in late 2007. As a result, procedures for rendering credit decisions coupled with simultaneous personalized responsibility for decision making will be simplified and expedited. Early Warning Indicators for Liquidity Risk As a part of improving liquidity risk management, the Bank introduced early-warning indicators in 2007. Based on daily monitoring of a number of external and internal indicators, the system identifies the likelihood of escalating liquidity risk at an early stage, thus giving the Asset and Liabilities Management Committee and the Treasury sufficient time to take the relevant preemptive steps. Outlook for 2008 As of 2008, the Bank has implemented a system for allocating risk capital, which will be integrated within the risk management system. Two of the key indicators for business unit activities in 2008 will be Risk Adjusted Return on Capital (RAROC) as well as Shareholder Value Added (SVA). The Bank will implement a new operational model in 2008. This model will provide a necessary division of powers (both at the process level and at the IT level) and subsequent monitoring and verification, as well as a detailed reporting system, thus assuring more thorough control over all the process stages. Additionally in 2008, a Social and Environmental Management System based on IFC and EBRD standards will be incorporated into the lending process. Note 26 Financial Risk Management of the attached audited financial statements provides a detailed description of the key risks faced by the Bank and discusses how they are managed. See also Note 11 Loans and Advances to Customers for an extensive list of credit risk-related disclosures.

Anti-Money Laundering Controls MDM Bank s Financial Monitoring Division is responsible for compliance with international and domestic laws on combating money laundering and the financing of terrorism (AML/ CFT). Responsible for developing internal AML policies, the unit supervises observance of all regulatory requirements and procedures to detect and prevent activities related to money laundering and financing of terrorism. Without exception, every client and counterparty is subject to AML controls, as MDM places the strongest possible emphasis on compliance with national and international norms, which is a significant component in the Bank s risk management program. Consistent with the Bank s AML/CFT regulations, the unit reports its activity on a quarterly basis to the Chairman of the Management Board. In 2007, the unit was successful at managing and minimizing the Bank s reputational risks to reduce losses and maintain the Bank s strong reputation in this area. Outlook for 2008 The Financial Monitoring Division will continue to focus on evaluation and analysis of risks related to money laundering and the financing of terrorism. The division will develop and implement rules and procedures for minimizing known risks, monitor implementation of the rules and procedures, as well as train personnel on issues related to AML/CFT.

Internal Audit Evaluating the effectiveness of the Internal Control System is a function of the Internal Audit Department (IAD). IAD employees are part of the Head Office, while the IAD is an autonomous unit, functionally subordinate and accountable to the Board of Directors Audit and Risk Management Committee. In addition, the IAD also is an administrative subordinate of the Chairman Management Board, which facilitates of the flow of information regarding the internal control system to the Bank s upper management. The IAD s main task is to directly assist management in ensuring effective operations through conducting audits and presenting independent and objective recommendations intended to improve the efficiency of internal control, risk management and corporate governance systems. The IAD maintains close contact with the Bank s external auditor, providing information about significant events that may be relevant. The head of the IAD reports monthly to the Audit and Risk Management Committee and twice a year prepares a report for the Board of Directors. The head of the IAD participates in weekly management meetings and is a member of the Bank s Main Management Council. Structure Internal Audit Department (IAD) Head Office Audit Division Network Units Audit Division Computer Audit Division Investment Audit Unit Methodology and Planning Sector Computer Audit Unit Corporate Business Audit Unit Retail Business Audit Unit Audit Technical Assistance Sector Accounting, Taxation and Reporting Unit Distribution Network Audit Unit Local Regional Audit Unit

65 Key Developments in 2007 Currently, 36 employees work in the IAD, including four IT audit specialists. The Department employs qualified personnel with experience in leading international audit companies as well as those with similar experience from other major banks. Three employees are Certified Information System Auditors (CISA), and one is a Certified Financial Services Auditor (CFSA). An IAD employee chairs the Bank s Revision Committee. One of the IAD s particularly important functions is auditing the Bank s regional branches. In order to conduct more timely and regular audits of branches, as well as to strengthen control in implementing audit recommendations, a Distribution Network Audit unit and a Local Regional Audit unit were added into the structure of the Department. Currently, the Local Regional Audit units are already functioning in three regions. Employees working in regions report to the Head of the IAD, ensuring independence and objectivity in audits. In 2007, the IAD introduced an automated format for audit reporting, which feeds into a unified database that maintains all IAD recommendations. The database includes all audit related comments and recommendations, annotated by level of importance, responsible Bank employees and implementation terms. The IAD database provides a record of any problems, allows IAD staff to monitor implementation of recommendations, and analyzes and prioritizes risk exposure. The automated reporting format optimizes the audit function by reducing the amount of manual labor and expense required, and is one of the most effective tools in evaluating the effectiveness of the IAD function. In 2007, the IAD created a risk assessment methodology to be used as part of the department s annual oversight process. This methodology includes selection of potential audit areas, assessment of inherent risks performed by IAD staff and assessment of control risks by employees in key units of the internal control system. The calculated results of risk rates for each audit area are presented in a diagram format and are used for planning audits and staff allocation. The 2008 IAD review plan was developed using this risk-oriented approach. Bank activities incurring major risks are subject to annual audits. The plan was created with the intention of maintaining immediate response capability to meet requests for guidance from the Bank s management if ad hoc audits are necessary. Outlook for 2008 In 2008, work is scheduled to transfer the consolidated IAD database to an industrial platform database, with multi-user utilization. There are also plans to introduce an electronic document program to automate internal audit processes and further integrate these processes into the database, which will establish a common information system for internal audit.

Human Resources Growth in Number of Emloyees in 2007 3500 3000 2500 2000 1500 1000 500 0 2006 2007 Head office Branches A new, comprehensive HR strategy will offer employees meaningful career development through planning, assessments and training opportunities. MDM Bank s compensation and benefits strategy, together with an evolving corporate culture that encourages cooperation and professional development, will make MDM even more competitive when vying for talent in the marketplace. Throughout 2007, the HR Department has put in place the structures and procedures to address the challenges of rapid expansion of operations in an increasingly competitive job market. Key Developments in 2007 During 2007, the number of employees at MDM Bank s Head Office grew by 20% and by 40% in the Bank s branches. As of year 2007, there are 5,775 people working at MDM Bank. Motivation and Remuneration The HR Department conducted a detailed competitive analysis of the Bank s compensation packages in the regions where the Bank is active. The Bank will monitor the market on an ongoing basis to ensure that it remains an attractive employer both for candidates and current employees. The Bank also modified its bonus system to include a more comprehensive set of KPIs that better take into account individual employees contribution to increasing the Bank s value. Each KPI assigned to an employee reflects both everyday business activities and the Bank s strategic plans in such a way that every employee understands his/her own impact on the development of the Bank. The motivation system is transparent and helps to encourage both the individual performance of staff as well as team results. Training and Development In 2007, MDM Bank continued to invest in the training and development of its personnel:

69 in the Head Office, 450 people participated in various training programs, including programs geared toward professional qualifications and certificates. The Bank began conducting an introductory course for new personnel that acquaints them with the mission, vision and values of the Bank, its strategy, as well as the principles of its corporate culture. MDM Bank Employees 500 400 300 200 100 In 2007, a management development program was also initiated. This program will allow the Bank s managers to become acquainted with the best global bank management practices and will provide a strong stimulus for more effective and ambitious business development. Outlook for 2008 The Board of Directors approved MDM Bank s comprehensive HR strategy in February 2008. This document will guide the HR Department in 2008 and the following years. The Strategy focuses on integrating a system of KPIs that is consistent with the Bank s business strategy, developing skills within the Bank and ensuring that the most talented staff are retained, creating an efficient process for selection and training MDM Bank staff throughout Russia. 0 Under Under Under Under Under Under Above 18 25 30 40 50 60 60 Male Female

Corporate Communications One of our key values is Transparency both to the external world and within the Bank. To ensure an effective internal information exchange, we are developing a system of internal communications that allows employees to be involved in implementing business strategy at all levels. In July 2007, MDM Bank began actively improving the Bank s internal communications through its newly created Corporate Relations unit, and in December the Bank established a dedicated Internal Communications Division. One of the principal objectives is to create a fully inclusive culture of support that will underpin the successful implementation of MDM Bank s development strategy. We believe that the Bank will achieve this goal by: Ensuring productive information exchange between departments, different levels of management and different regions; Promptly and effectively communicating strategic and operating decisions ; Encouraging and facilitating employee feedback; Developing a strong corporate culture and fostering a One Bank philosophy based on MDM s stated mission, vision and values. Two new consultative bodies within the Bank, the Main Management Council (MMC) and the Extended Management Council (EMC), have been established. They include managers of key departments within the Bank that play an important role in the communications process. The MMC meets on a weekly basis to discuss operating issues, while the EMC meets on a quarterly basis (or more frequently if necessary) to discuss significant events and major decisions at the Bank. Plans for 2008 In 2008, the Bank will continue to develop internal communication policies and improve its communications tools. We plan to upgrade communication channels: we have installed new conference call equipment to enable regional managers to participate in MMC and EMC meetings remotely and work is underway to re-launch a more sophisticated corporate Intranet portal. The Bank plans to improve the effectiveness of internal communication campaigns by identifying the optimal formats, agendas and presentation toolkits. Key managers will be offered professional training aimed at improving communication skills for this purpose. Finally, we plan to introduce a Code of Corporate Ethics. The Bank will communicate the Code and its key elements, including corporate values, policies preventing conflict of interest, and behavioral standards, using various means of communications from face-to-face induction courses to online training tools.

Corporate Social Responsibility Doing Business Responsibly In July 2007, MDM Bank s Board of Directors approved the Bank s Corporate Social Responsibility Strategy. The document combined various functions existing within the Bank into a coherent range of activities intended to raise the Bank s profile as a responsible corporate citizen. In order to develop and oversee implementation of the new CSR Strategy, the Bank established the Corporate Social Responsibility Division as part of the new Corporate Relations unit. MDM Bank recognizes that, as one of Russia s leading financial institutions, it bears considerable responsibility for contributing to Russia s prosperity and the development of business, both large and small. First and foremost, we must ensure that the Bank offers services that not only help to preserve client assets, but fulfill the ultimate objective of wealth creation, and thus contribute to the well-being of people throughout the country. We achieve this goal by supporting growth opportunities for small businesses, helping clients to assess their financial needs and structure their financing activities in the most effective way. We believe that growth in the small business segment is an enormous benefit to the economy, as the diversification of growth opportunities ensures increased stability. Small business development is a stated priority for the Russian government and will help to ensure stable, longterm economic growth for Russia. MDM Bank s participation in the banking sector is not only a profitable business, but a socially important activity that makes a significant contribution to the nation s future development. In November 2007, MDM Bank, jointly with International Finance Corporation (IFC), launched a new loan product MDM Energy. MDM Energy encourages investment in energy efficiency. The IFC provided a USD 20 mln line of credit for the joint program, which MDM Bank is implementing throughout Russia. MDM Energy offers small businesses both long-term, targeted financing, as well as independent consultations with technical experts working with the Bank. The consultants help estimate the potential for, and impact of, energy efficiency in a given company, recommend technical solutions (if required) and conduct energy audits.

72 MDM Bank Annual Report 2007 IFC and MDM Bank track the estimated environmental impact of each of the loans. The table below provides data based on the MDM Energy loans approved in November-December 2007: Project description Energy consumption reduction per unit ROI based on energy savings Energy reduction, MWh Life time CO 2 reduction, t Annual CO 2 reduction, t Deal size, USD Installing new wood processing equipment 43% 7% 312 556 56 178,133 Printing machine 45% 28% 4,834 8,618 862 614,251 Beverage producing equipment 58% 9% 468 835 84 178,952 Construction of a new boiler house 26% 13% 2,807 8,707 580 377,592 Construction of a new boiler house 23% 10% 6,355 20,113 1,341 813,959 Laundry modernization 34% 8% 104 186 19 29,220 Total 14,880 39,015 2,942 2,192,106 Sponsorship and Charity Programs MDM Bank is dedicated to actively contributing to the communities in which it works, fulfilling its social responsibility through dedicating a portion of the Bank s annual profit to sponsorship and charity activities in the regions. In 2007, the Bank s Board of Directors approved the Sponsorship and Charity Policy. This public document, available on the Bank s website in Russian and English, clearly defines the Bank s principles, priorities and policies for charitable giving and sponsorship. In 2007, the Corporate Social Responsibility Division developed three major long-term programs to support classical music and education. The World of Divine Melodies (Melodii Divnikh Mir) is intended to preserve and promote Russian and international classical music traditions, as well as to bring world masterpieces and the finest global musical heritage to local Russian communities. The program also assists in developing regional cultural institutions, such as musical and philharmonic theaters, through charitable donations. The Bank sponsored the XXVII Annual Sviatoslav Richter s December Nights at the Crossroads

73 of the Earth Festival, which took place in December 2007 in Moscow. In 2008, as part of the World of Divine Melodies program, 16 concerts featuring leading classical musicians are planned throughout Russia. The first concert took place on 17 February 2008, in the southern Russian city of Rostov-on-Don. The concert was held in honor of the birthday of the world-renowned conductor and violist Yuri Bashmet a native of Rostov-on-Don and laureate of numerous prestigious international awards and competitions, including a Grammy for Best Small Ensemble Performance, 2007 with the participation of the Moscow Soloists chamber ensemble. Another important cultural contribution is the Bank s sponsorship of the Mariinsky Theater in St. Petersburg. We are exceptionally pleased to contribute to the development of the theater through its rise to international acclaim under the leadership of the outstanding artistic and general conductor, Maestro Valery Gergiev. The World of Business Youth (Mir Delovoy Molodezhy) program is intended to support financial and banking curricula at major Russian universities. The program will help Russian institutions offer a level of financial and business education comparable to that of the world s leading universities. The program will provide support for professional development of the faculty, obtain new course materials and textbooks, as well as support talented students. In 2008, as part of the World of Business Youth program, 15 finance and banking faculty members from leading regional higher educational institutions in Russia will be offered internships at the Stockholm School of Business. After the internships, a number of courses will be developed, including Finance and Credit, Accounting Analysis and Audit, Banking, and Financial Management. In addition, a scholarship program is planned for students from selected higher learning institutions who show special interest and aptitude in the newly-developed courses. The Financial Literacy program strives to strengthen the financial culture for both individuals and small business proprietors in regions where the Bank has a presence. In 2008, as part of the Financial Literacy program, at least 10 seminars to improve financial literacy for small business owners and the general public will be held in Russian cities. Also, the Bank will support regular regional television programs on financial literacy. In addition, seven schools in various regions of Russia have been selected for the Financial Literacy in Schools pilot project.

Consolidated Financial Statements For the Year Ended 31 December 2007

79 80 81 83 83 Independent Auditor s Report Consolidated Balance Sheet Consolidated Statement of Income Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity N otes to the Consolidated Financial Statements 84 85 85 86 102 103 104 107 111 112 112 125 126 129 130 131 133 133 134 135 136 136 137 137 140 144 172 175 176 183 184 185 1. Organisation of the Group and its Principal Activities 2. Operating Environment of the Group 3. Basis of Preparation 4. Significant Accounting Policies 5. Cash and Cash Equivalents 6. Due from Other Banks 7. Trading Securities 8. Derivative Financial Instruments 9. Other Financial Instruments at Fair Value through Profit or Loss 10. Available-for-Sale Assets 11. Loans and Advances to Customers 12. Other Assets 13. Premises and Equipment 14. Due to Other Banks 15. Customer Accounts 16. Debt Securities in Issue 17. Subordinated Debt 18. Other Liabilities 19. Share Capital 20. Interest Income and Expense 21. Gains less Losses from Foreign Exchange 22. Fee and Commission Income and Expense 23. Operating Expenses 24. Income Taxes 25. Analysis by Segment 26. Financial Risk Management 27. Contingent Liabilities and Commitments 28. Fair Value of Financial Instruments 29. Related Party Transactions 30. Principal Subsidiaries 31. Changes in the Composition of the Group Supplementary Consolidated Financial Information

ZAO KPMG Naberezhnaya Tower Complex, Block C 18 Krasnopresnenskaya Naberezhnaya Moscow 123317 Russia Telephone +7 (495) 937 4477 Fax +7 (495) 937 4400/99 Internet www.kpmg.ru 79 Independent Auditor s Report To the Shareholders Joint-Stock Commercial Bank Moscow Business World (joint-stock company) (MDM Bank) Report on the Consolidated Financial Statements We have audited the accompanying consolidated financial statements of MDM Bank and its subsidiaries (the Group ), which comprise the consolidated balance sheet as at 31 December 2007, and the consolidated statement of income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the 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 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 principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2007, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. ZAO KPMG 21 March 2008 ZAO KPMG, a company incorporated under the Laws of the Russian Federation and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

80 MDM Bank Consolidated Balance Sheet as at 31 December 2007 Note 31 December 2007 31 December 2006 Assets Cash and cash equivalents 5 83 434 32 642 Mandatory cash balances with central banks 5 538 4 030 Due from other banks 6 27 834 13 201 Trading securities: owned by the Group 7 10 875 13 510 pledged under sale and repurchase agreements 7 2 987 3 624 Derivative financial instruments 8 260 255 Other financial instruments at fair value through profit or loss 9 226 1 404 Available-for-sale assets 10 290 - Loans and advances to customers 11 180 311 166 875 Current income tax prepayments 48 377 Other assets 12 3 723 2 761 Premises and equipment 13 5 956 4 443 Total assets 321 482 243 122 Liabilities Due to other banks 14 102 362 60 872 Trading liabilities 229 Derivative financial instruments 8 874 667 Customer accounts 15 124 132 92 805 Debt securities in issue 16 46 631 52 870 Subordinated debt 17 5 066 5 452 Current income tax payable 112 27 Other liabilities 18 2 637 2 224 Deferred tax liability 24 770 652 Total liabilities 282 584 215 798 Equity Share capital 19 1 794 1 736 Share premium 14 198 9 588 Revaluation reserve for premises and equipment 2 986 1 942 Revaluation reserve for available-for-sale assets 21 - Cumulative translation reserve 24 (21) Retained earnings 19 875 14 079 Total equity 38 898 27 324 Total liabilities and equity 321 482 243 122 The consolidated financial statements are approved for issue by the Management Board of MDM Bank and signed on its behalf on 21 March 2008. Michel Perhirin Chairman of the Management Board Andrey Ilyin Deputy Chairman of the Management Board The notes on pages 84 to 184 form an integral part of these consolidated financial statements.

MDM Bank Consolidated Statement of Income for the Year Ended 31 December 2007 81 Note 2007 2006 Interest income 20 28 345 17 326 Interest expense 20 (14 213) (7 269) Net interest income 14 132 10 057 Loan impairment losses 11 (2 083) (1 741) Net interest income after loan impairment losses 12 049 8 316 Gains less losses from trading in securities 309 457 Gains less losses from trading in precious metals (22) 50 Gains less losses from foreign exchange 21 1 364 1 083 Other trading losses (520) (100) Fee and commission income 22 2 978 2 022 Fee and commission expense 22 (634) (634) Gains less losses from other financial instruments at fair value through profit or loss 9 2 (102) Reversal of provision for losses on credit related commitments 27 5 13 Other assets impairment losses 12 (3) (2) Other operating income 223 214 Operating income 15 751 11 317 Operating expenses 23 (8 622) (6 715) Result on disposal of premises 13 498 (39) Profit before taxation 7 627 4 563 Income tax expense 24 (2 111) (1 243) Profit for the period 5 516 3 320 Attributable to Equity holders of the parent 5 516 3 313 Minority interest - 7 In addition to these consolidated financial statements, supplementary consolidated financial information, comprising the consolidated statement of income of MDM Financial Group for the year ended 31 December 2006, is presented for the convenience of users of the financial statements. Refer to page 185. The supplementary consolidated financial information does not form part of these consolidated financial statements. The notes on pages 84 to 184 form an integral part of these consolidated financial statements.

82 MDM Bank Consolidated Statement of Cash Flows for the Year Ended 31 December 2007 Note 2007 2006 Cash flows from operating activities Interest received 28 357 17 125 Interest paid (13 701) (6 350) Gains from trading in securities 767 344 Other trading losses (310) - (Losses)/gains from trading in foreign currencies (768) 151 (Losses)/gains from trading in precious metals (26) 46 Dividends received 23 28 Commissions received 2 953 1 920 Commissions paid (635) (631) Other operating income received 223 292 Operating expenses paid (8 572) (5 911) Income tax paid (2 003) (1 458) Cash flows from operating activities before changes in operating assets and liabilities 6 308 5 556 Changes in operating assets and liabilities Net increase in mandatory cash balances with central banks (1 481) (1 966) Net increase in due from other banks (15 114) (6 995) Net decrease/(increase) in trading securities 2 489 (4 421) Net decrease in other financial instruments at fair value through profit or loss 9 1 063 690 Net increase in available-for-sale assets (263) - Net increase in loans and advances to customers (20 255) (90 230) Net increase in due to other banks 45 550 25 924 Net increase in other customer accounts 35 088 40 714 Net increase in promissory notes issued and deposit certificates 2 210 1 288 Net increase in other assets less other liabilities (423) (3 629) Net cash from/(used in) operating activities 55 172 (33 069) Cash flows from investing activities Acquisition of subsidiaries - (743) Purchase of premises and equipment 13 (797) (247) Proceeds from sale of premises and equipment 1 156 143 Net cash from/(used in) investing activities 359 (847) Cash flows from financing activities Subordinated debt issued - 5 258 Loan participation notes and bonds issued 21 813 39 210 Loan participation notes repaid (28 378) (8 024) Share capital issued 4 668 - Net cash (used in)/from financing activities (1 897) 36 444 Effect of exchange rate changes on cash and cash equivalents (2 842) (1 232) Net increase in cash and cash equivalents 50 792 1 296 Cash and cash equivalents at the beginning of the period 5 32 642 31 346 Cash and cash equivalents at the end of the period 5 83 434 32 642 The notes on pages 84 to 184 form an integral part of these consolidated financial statements.

MDM Bank Consolidated Statement of Changes in Equity for the Year Ended 31 December 2007 83 Attributable to equity holders of the parent Minority Total Share Share Revaluation Revaluation Cumulative Retained Total interest equity capital premium reserve for reserve for translation earnings premises and available reserve equipment for-sale assets Balance as at 1 January 2006 1 736 9 588 1 944 - (41) 10 936 24 163 336 24 499 Profit for the year - - - - - 3 313 3 313 7 3 320 Revaluation of premises, net (Note 13) - - 79 - - - 79-79 Currency translation differences - - - - 20-20 (3) 17 Total income and expense for the year - - 79-20 3 313 3 412 4 3 416 Acquisitions of minority interest of subsidiaries (Note 31) - - - - - (280) (280) (340) (620) Acquisition of subsidiaries (Note 31) - - - - - 29 29-29 Disposal of premises (Note 13) - (81) - - 81 - - - Balance as at 31 December 2006 1 736 9 588 1 942 - (21) 14 079 27 324-27 324 Balance as at 1 January 2007 1 736 9 588 1 942 - (21) 14 079 27 324-27 324 Profit for the year - - - - - 5 516 5 516-5 516 Revaluation of premises, net (Note 13) - - 1 324 - - - 1 324-1 324 Revaluation of available-for-sale assets, net (Note 10) - - - 21 - - 21-21 Currency translation differences - - - - 45-45 - 45 Total income and expense for the year - - 1 324 21 45 5 516 6 906-6 906 Share capital issued 58 4 610 - - - - 4 668-4 668 Disposal of premises (Note 13) - - (280) - - 280 - - - Balance as at 31 December 2007 1 794 14 198 2 986 21 24 19 875 38 898-38 898 The notes on pages 84 to 184 form an integral part of these consolidated financial statements.

84 MDM Bank 1. Organisation of the Group and its Principal Activities These consolidated financial statements include the financial statements of Joint-Stock Commercial Bank Moscow Business World (joint-stock company) (the Bank, or MDM Bank ) and its subsidiaries. MDM Bank and its subsidiaries are hereinafter, collectively, referred to as the Group. As at 31 December 2007, the Group operated two banks, one in the Russian Federation and one in Latvia, securities trading and asset management companies and a leasing company. MDM Bank, the parent company and the lead operating entity of the Group, is registered in the Russian Federation to carry out banking and foreign exchange activities since 1993. The Bank operates under a general banking license issued by the Central Bank of the Russian Federation. The Bank also has broker and dealer licenses issued by the Russian Federal Financial Markets Service. MDM Bank is a member of the state deposit insurance scheme in the Russian Federation. The Group operates in five business areas: Corporate banking, Small business banking, Retail banking, Investment banking and financial markets, and Private banking and asset management. The Group also has a Central treasury, which undertakes the Group s funding and centralised risk management activities. Refer to Note 25. The activities of the Group are conducted principally in Russia, although the Group also conducts operations on international markets. The table below summarises information about the banking branch network of the Group and the number of employees. 31 December 2007 31 December 2006 Name of the bank Registered office Number of Number of Number of Number of branches employees branches employees MDM Bank Kotelnicheskaya nab., 33, Moscow, Russia 35 5 713 34 4 359 Latvian Trade Bank Grecinieku iela, 4, Riga, LV-1048, Latvia - 62-62 Total 35 5 775 34 4 421 All branches are located within the Russian Federation. The Group also operates a network of subbranches, additional offices, cash exchange offices and other points of sale in the Russian Federation. As at 31 December 2007, the total number of points of sale of MDM Bank s network was 164 (31 December 2006: 123). Changes in the composition of the Group during the years ended 31 December 2007 and 31 December 2006 are presented in Note 31. As at 31 December 2007 and 31 December 2006, the Bank s immediate parent company was ZAO Banking Holding MDM (Russia). ZAO Banking Holding MDM is a 100% subsidiary of MDM Holding SE, an European company based in Austria. As at 31 December 2006, MDM Holding SE was owned 50% each by two companies, the ultimate beneficiaries of which were, respectively, Messrs. Andrey Melnichenko and Sergey Popov. During the year ended 31 December 2007 there have been a number of changes to MDM Bank s shareholder structure, which has resulted in the following holdings: Mr. Sergey Popov remains the majority beneficial shareholder with approximately 77% beneficial interest, Olivant Limited has a 9.5% beneficial interest, Mr. Martin Andersson has an 8.5% beneficial interest and the International Financial

MDM Bank 85 Corporation (the IFC ) has a 5.0% direct interest (the beneficiaries ). In addition, Olivant Limited has an option to purchase a further 4.75% interest. Refer to Note 29 for information on related party transactions. For the purposes of these consolidated financial statements, the management of the Group, collectively, is referred to as Management. 2. Operating Environment of the Group The Russian Federation displays certain characteristics of an emerging market, including the existence of a currency that is in practice not convertible in most countries outside of the Russian Federation, relatively high inflation and strong economic growth. The banking sector in the Russian Federation is sensitive to adverse fluctuations in confidence and economic conditions and may occasionally experience reductions in liquidity. Management is unable to predict all developments which could have an impact on the banking sector and consequently what effect, if any, they could have on the financial position of the Group. The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations, and changes, which can occur frequently. Furthermore, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the difficulties experienced by banks currently operating in the Russian Federation. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. 3. Basis of Preparation (a) Statement of compliance These consolidated financial statements have been prepared in accordance with the requirements of International Financial Reporting Standards ( IFRS ). (b) Basis of measurement These consolidated financial statements are prepared on the historical cost basis except that financial instruments held for trading, other financial instruments held at fair value through profit or loss and available-for-sale financial instruments are stated at fair value, and certain classes of premises and equipment are stated at revalued amounts. (c) Presentation currency These consolidated financial statements are presented in Russian Roubles ( RUB ), which is the functional currency of the Bank and the majority of the Group s subsidiaries. Except as indicated, financial information presented has been rounded to the nearest million. (d) Use of estimates and judgements The preparation of financial statements in accordance with IFRS requires Management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expense. The estimates and associated assumptions are based on historical experience and various other factors, that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Although these estimates are based on Management s best knowledge of current events and actions, actual results ultimately may differ from these estimates.

86 MDM Bank The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Information about significant areas of estimation uncertainty and critical judgments made by Management in the application of IFRSs that have a significant effect on the amounts recognised in these consolidated financial statements are described in the following notes: Note 4 (l) Significant accounting policies and Note 11 (a) Loans and advances to customers in respect of loan impairment allowance. Note 8 Derivative financial instruments and Note 9 Other financial instruments at fair value through profit or loss in respect of valuation of complex derivative products. Note 13 Premises and equipment in respect of valuation of premises. Note 27 (b) Contingent liabilities and commitments in respect of tax contingencies. 4. Significant Accounting Policies The following significant accounting policies have been applied in the preparation of these financial statements. The accounting policies have been consistently applied and they are consistent with those used in the consolidated financial statements for the year ended 31 December 2006. Changes in accounting policies as a result of revised accounting standards which have been applied retrospectively are described at the end of this Note. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the parent company of the Group. Control exists when the parent company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the parent company controls another entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which that control commences until the date it ceases. Special purpose entities ( SPEs ) are entities which are created to accomplish a narrow and welldefined objective, such as the securitisation of particular assets, or the execution of a specific borrowing transaction. The financial statements of SPEs are included in the consolidated financial statements when the substance of relationship between the Group and the SPE indicates that the SPE is controlled by the Group, even if the Group does not have any direct or indirect shareholdings in the entity. Intra-group transactions, balances and unrealised gains on transactions between the Group companies are eliminated. Unrealised losses are also eliminated, but only to the extent that there is no evidence of impairment. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency with the policies adopted by the Group. (ii) Minority interest Minority interest is the part of the profit or loss and net assets of a subsidiary attributable to interests which are not owned, directly or indirectly through subsidiaries, by the parent company.

MDM Bank 87 Minority interest is presented in the consolidated balance sheet within equity, separately from the equity attributable to equity holders of the parent. Minority interest in the profit or loss of the Group is separately disclosed in the consolidated statement of income as an allocation of profit or loss for the period attributable to minority interest. If losses applicable to the minority in a consolidated subsidiary exceed the minority interest in the subsidiary s equity, the excess, and any further losses applicable to the minority, are allocated against the majority interest except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses. If the subsidiary subsequently reports profits, such profits are allocated to the majority interest until the minority s share of losses previously absorbed by the majority has been recovered. (iii) Business combinations The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured at the fair value of the assets given, equity instruments issued or liabilities incurred or assumed at the date of acquisition, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised immediately in the consolidated statement of income. (iv) Acquisitions from entities under common control The assets and liabilities acquired as a result of acquisition of controlling interest in the entity that is under common control with the Group are recognised at their carrying amounts, as recognised in the individual financial statements of the subsidiary acquired. The difference between the consideration paid for the acquisition and the carrying value of net assets acquired is recognised directly in equity attributable to equity holders of the parent. (v) Acquisition and disposal of minority interests Any difference between the consideration paid to acquire a minority interest, and the carrying amount of that minority interest, is recognised directly in equity attributable to equity holders of the parent. Any difference between the consideration received upon disposal of minority interest, and the carrying amount of that portion of the Group s interest in the subsidiary is recognised directly in equity attributable to equity holders of the parent. (vi) Associates Associates are entities over which the Group has significant influence, but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The consolidated financial statements include the Group s share of the total recognised gains and losses of associates, from the date that significant influence effectively commences until the date that significant influence effectively ceases. The Group s share of post-acquisition profits or losses of associates is recognised in the consolidated statement of income, and the Group s share of changes recognised directly in the associates equity is recognised directly in the Group s equity and is disclosed in the statement of changes in equity. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group s share of losses in an associate equals or exceeds its interest in the associate, the Group s carrying amount is reduced to nil and the Group does not recognise further losses unless the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

88 MDM Bank Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of impairment. (b) Functional currency Functional currency for each group company has been determined as the currency of the primary economic environment in which the company operates. The Russian Rouble ( RUB ) has been selected as the functional currency for the parent company, group companies domiciled in the Russian Federation and group companies domiciled outside of the Russian Federation, where it reflects the economic substance of the underlying events and circumstances. For other group companies the currencies of the respective countries in which these companies are domiciled have been selected as their functional currencies. The assets and liabilities of foreign operations are translated to RUB at foreign exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated to RUB at foreign exchange rates ruling at the dates of the transactions. Foreign exchange differences arising on translation of foreign group companies are recognised directly in a separate component of equity as cumulative translation reserve. They are released into the consolidated statement of income upon disposal. (c) Foreign currency translation Transactions in foreign currencies are translated to the functional currency of the relevant group entity at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the functional currency at the foreign exchange rate at that date. The foreign currency gain or loss on monetary assets or liabilities is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for interest accrued using the effective interest rate and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to the functional currency at the foreign exchange rate at the date of the transaction. Foreign exchange differences arising on translation are recognised in the consolidated statement of income, except for differences arising on translation on available-for-sale equity instruments, which are recognised directly in equity. Foreign exchange rates, as at 31 December 2007, were RUB 24.5462 to USD 1 and RUB 35.9332 to EUR 1 for US Dollars and Euros, respectively (31 December 2006: RUB 26.3311 to USD 1 and RUB 34.6965 to 1 EUR for US Dollars and Euros, respectively). (d) Accounting for the effects of hyperinflation In periods prior to 1 January 2003 the Russian Federation experienced relatively high levels of inflation and was considered to be a hyperinflationary economy as defined by International Financial Reporting Standard IAS 29 Financial Reporting in Hyperinflationary Economies. As from 1 January 2003, the Russian Federation is no longer considered to be a hyperinflationary economy, and therefore from this date the consolidated financial statements have not been adjusted for inflation. The carrying amounts of the Group s assets, liabilities and equity items at 1 January 2003 form the basis for subsequent accounting. (e) Financial assets and liabilities (i) Classification of financial instruments Financial instruments at fair value through profit or loss include financial assets or liabilities held for trading and financial instruments designated at fair value through profit or loss at initial recognition.

MDM Bank 89 A financial instrument is classified as held for trading if it is acquired principally for the purpose of selling it in the near term or it is a part of a portfolio for which there is evidence of a recent actual pattern of short-term profit-taking, or it is a derivative. The Group designates financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed and evaluated 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. Financial assets and liabilities at fair value through profit or loss are not reclassified subsequent to initial recognition. Financial instruments at fair value through profit or loss include trading securities, other financial instruments at fair value through profit or loss, derivative financial instruments and trading 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, which are classified as held for trading, or those which the Group designates at initial recognition as at fair value through profit or loss or available-for-sale. Loans and receivables include due from other banks, including central banks, loans and advances to customers, and other receivables. Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group s management has the positive intention and ability to hold to maturity. Available-for-sale financial assets are non-derivative financial assets that are not classified as loans and receivables, held to maturity investments or financial instruments at fair value through profit or loss. Available-for-sale financial assets may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Promissory notes purchased are included in trading securities or in loans and advances to customers or in due from other banks, depending on their substance and are subsequently remeasured and accounted for in accordance with the accounting policies applicable for these classes of assets. Financial liabilities, which are not financial liabilities at fair value through profit or loss or financial guarantee liabilities, include debt securities in issue, due to other banks, customer accounts, other borrowed funds, subordinated debt and other payables. Debt securities in issue include promissory notes, certificates of deposit, loan participation notes and bonds issued by the Group. Management determines the appropriate classification of financial instruments at the time of the initial recognition. The Group does not present a separate disclosure of the carrying values of financial instruments by categories as financial instruments are presented by categories on the face of the balance sheet. (ii) Recognition The Group initially recognises loans and advances, deposits, and debt securities issued on the date they are originated. All other financial assets and liabilities are initially recognised on trade date at which time the Group becomes a party to the contractual provisions of the instrument.

90 MDM Bank (iii) Amortised cost measurement principles The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, minus any reduction for impairment. The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts (excluding future credit losses) through the expected life of the financial asset or liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or liability, except that future credit losses are not considered when estimating those cash receipts. The effective interest rate is established on initial recognition of the financial asset and liability and is not subsequently revised. The calculation of the effective interest rate includes all fees paid or received, transaction costs, and discounts or premiums that are an integral part of the effective interest rate. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or liability. An incremental cost is one that would not have been incurred if the transaction had not taken place. Transaction costs include fees and commissions paid to agents (including employees acting as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. (iv) Fair value measurement principles Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. Fair values are, wherever possible, determined by reference to an active market bid price (for financial assets) or offer price (for financial liabilities). Where an active market price is not available, fair value is determined using valuation techniques that make maximum use of market inputs. Such valuation techniques include reference to recent arm s length market transactions, current market prices of substantially similar instruments, discounted cash flow and option pricing models and other techniques commonly used by market participants to price the instrument. 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 balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. The fair value of a financial liability with a demand feature, such as a demand deposit, is not less than the amount payable on demand, discounted from the first date that the amount could be required to be paid. (v) Measurement of financial instruments 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. 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 the consolidated statement of income. 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. Subsequent to initial recognition, financial assets are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for:

MDM Bank 91 loans and receivables which are measured at amortised cost using the effective interest method; held to maturity investments which are measured at amortised cost using the effective interest method; and investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured which are measured at cost. Financial liabilities at fair value through profit or loss are measured at their fair value. Financial liabilities, other than financial liabilities 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 subsequent to initial recognition at amortised cost using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and are recognised in the consolidated statement of income over the period of the instrument using the effective interest method. Financial assets or liabilities originated at interest rates different from market rates are re-measured at origination to their fair value, being future interest payments and principal repayment(s) discounted at market interest rates for similar instruments. The difference between the fair value and the nominal value at origination is credited or charged to the consolidated statement of income as gains or losses on origination of financial instruments at rates different from market rates. Subsequently, the carrying amount of such assets or liabilities is adjusted for amortization of the gains/losses on origination and the related income/expense is recorded in interest income/expense within the consolidated statement of income using the effective interest method. (vi) Gains and losses on subsequent measurement All gains and losses arising from changes in the fair value of financial assets and liabilities at fair value through profit or loss are included in the consolidated statement of income in the period in which they arise. Interest income in relation to an available-for-sale financial asset is recognised as earned in the consolidated statement of income using the effective interest method. Dividend income in relation to an available-for-sale financial asset is recognised in the consolidated statement of income on the date when the dividend is declared. Foreign exchange gains or losses on available-for-sale debt security investments are recognised in the consolidated statement of income. Other changes in fair value of available-for-sale financial assets are recognised directly in equity until the asset is sold or impaired. When the financial asset is derecognised the cumulative gain or loss previously recognised in equity is recognised in the consolidated statement of income. For financial assets and liabilities carried at amortised cost, a gain or loss is recognised in the income statement when the financial asset or liability is derecognised or impaired, and through the amortisation process. (vii) Derecognition 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 on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.

92 MDM Bank If the Group purchases its own debt, it is removed from the consolidated balance sheet 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 on its balance sheet, 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 from the balance sheet. 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 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 certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. (viii) Offsetting Financial assets and liabilities are set off and the net amount reported in the consolidated balance sheet only when there is a legally enforceable right to set off the amounts, and there is an intention either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Income and expenses are presented on a net basis only where either the Group has set off the related assets and liabilities as described above, or for gains and losses arising from a group of similar transactions such as the Group s trading activity. (ix) Sale and repurchase agreements Where the Group sells/purchases financial asset and simultaneously enters into an agreement to repurchase/resell the asset at a fixed price on a future date, the arrangement is accounted for as a secured financing transaction. Assets sold subject to sale and repurchase ( repo ) agreements are continued to be recognised in the financial statements. They are reclassified as pledged assets when the transferee has the right by contract or custom to sell or repledge the collateral. The counterparty liability is included in amounts due to other banks or to customers, as appropriate. Assets purchased under agreements to resell ( reverse repo ) are not recognised in the Group s financial statements, and corresponding amounts are recorded as due from banks or loans and advances to customers as appropriate. The differences between the sale and repurchase prices are treated as interest and accrued over the life of the repo/reverse repo agreement using the effective interest method. If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. (x) Securities lending and borrowings Securities lent to counterparties are retained in the financial statements. Securities borrowed are not recognised in the financial statements, unless these are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in trading income. The obligation to return them is recorded at fair value as a trading liability.

MDM Bank 93 (xi) Derivative financial instruments 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. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately in the consolidated statement of income. Derivatives may be embedded in another contractual arrangement (a host contract ). An embedded derivative is separated from the host contract and it 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 the consolidated statement of income. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated. Although the Group trades in derivative instruments for risk hedging purposes, these instruments do not qualify for hedge accounting. (f) Cash and cash equivalents Cash and cash equivalents are items, which can be converted into cash within a day. All short-term interbank placements, excluding overnight deposits, are included in due from banks. Amounts which relate to funds that are of restricted nature are excluded from cash and cash equivalents. Cash and cash equivalents are carried at amortised cost in the balance sheet. Mandatory balances with central banks represent mandatory reserve deposits that are not available to finance the Group s day-to-day operations and hence are not considered as part of cash and cash equivalents in the consolidated balance sheet and consolidated statement of cash flows. (g) Precious metals Precious metals are stated at lower of net realizable value and cost. The net realizable value of precious metals is estimated based on quoted market prices. The cost of precious metals is assigned using the firstin, first-out cost formula. Precious metals are recorded within other assets. Precious metals lent to counterparties are retained in the consolidated financial statements. Precious metals borrowed are recognised in the consolidated financial statements. If the borrowed precious metals are held by the Group, the obligation to return them is recorded in the balance sheet at the carrying value of the precious metals borrowed and related accrued interest. If the borrowed precious metals are sold to third parties, the obligation to return the borrowed precious metals is recorded in the balance sheet at its fair value. (h) Premises and equipment Premises and equipment are stated at cost, restated to the equivalent purchasing power of the Russian Rouble at 31 December 2002 for assets acquired prior to 1 January 2003, or revalued amounts, as described below, less accumulated depreciation and impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the assets. Where an item of premises and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Subsequent expenditure incurred to

94 MDM Bank replace a component of an item of premises and equipment that is accounted for separately, is capitalised with the carrying amount of the component being written off. Other subsequent expenditure is capitalised if future economic benefits will arise from the expenditure. All other expenditure, including repairs and maintenance expenditure, is recognised in the consolidated statement of income as an expense as incurred. Premises of the Group are subject to revaluation on a regular basis. The frequency of revaluation depends upon the movements in the fair values of the premises being revalued. A revaluation increase for an item of premises is recognised directly in equity except to the extent that it reverses a previous revaluation decrease recognised in the consolidated statement of income, in which case it is recognised in the consolidated statement of income. A revaluation decrease for an item of premises is recognised in the consolidated statement of income except to the extent that it reverses a previous revaluation increase recognised directly in equity, in which case it is recognised directly in equity. The revaluation reserve for premises and equipment included in equity is transferred directly to retained earnings on the retirement or disposal of the asset. Construction in progress is carried at cost less impairment losses. Upon completion, assets are transferred to premises and equipment at their carrying value. Construction in progress is not depreciated until the asset is available for use. Gains and losses on disposal of premises and equipment are determined by reference to their carrying amount and are recorded in the consolidated statement of income within other operating income. (i) Intangible assets Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Development costs that are directly associated with the production of identifiable and unique software products controlled by the Group are capitalised and an internally generated intangible asset is recognised only if it is probable that it will generate economic benefits exceeding costs beyond one year and the development costs can be measured reliably. An internally generated intangible asset is recognised only if the Group has the technical feasibility, resources and intention to complete the development and to use the product. Direct costs include software development employee costs and an appropriate portion of relevant overheads. Expenditure on research activities is recognised as an expense in the period in which it is incurred. Subsequent expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred. Intangible assets, which have finite useful lives, are stated at cost less accumulated amortisation and impairment losses.

MDM Bank 95 (j) Depreciation and amortisation Depreciation/amortisation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Depreciation/amortisation is applied on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives are as follows: years Premises 40 Fixtures and fittings 6-10 Office, computer and other equipment 4-6 Intangible assets 3-5 Land is not depreciated. The assets residual values and useful lives are reviewed annually, and adjusted if appropriate. (k) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary/associated undertaking at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. In respect of associates, the carrying amount of goodwill is included in the carrying amount of the investment in the associate. Goodwill is allocated to cash-generating units and is stated at cost less impairment losses. Goodwill is tested for impairment annually 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. Negative goodwill arising on an acquisition is recognised immediately in the consolidated statement of income. (l) Impairment The carrying amounts of the Group s assets, other than deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets recoverable amounts are estimated. For goodwill and intangible assets that are not yet available for use, the recoverable amount is estimated at each annual balance sheet date. The Group reviews its loan portfolio to assess impairment at least on a quarterly basis. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the consolidated statement of income unless the asset is recorded at a revalued amount in which case it is treated as a revaluation decrease. When a decline in the fair value of an available-for-sale financial asset has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss that had been recognised directly in equity is recognised in the consolidated statement of income even though the financial asset has not been derecognised. The amount of the cumulative loss that is recognised in the consolidated statement of income is the difference between the amortised acquisition cost and current fair value, less any impairment loss on that financial asset previously recognised in the consolidated statement of income.

96 MDM Bank (i) Recoverable amount The recoverable amount of financial instruments at fair value through profit or loss and financial assets available-for-sale is their fair value. The recoverable amount of the Group s investments in held-tomaturity securities and loans and receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate that is the effective interest rate computed at initial recognition of these financial assets (refer to Impairment of financial assets section below). The recoverable amount of other 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 largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. (ii) Impairment of financial assets A financial asset (or a group of assets) 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 financial asset and that such loss event (or events) has an impact on the estimated future cash flows of the asset (or the group of assets) that can be reliably estimated. The Group first assesses whether objective evidence of impairment exists individually for loans and other financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Collectively assessed impairment allowances are provided for portfolios of homogenous assets that are individually below materiality thresholds and losses that have been incurred but have not yet been identified. Financial assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in the collective assessment of impairment. 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. In assessing collective impairment the Group uses statistical modelling of historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they remain appropriate. The amount of the impairment loss on a financial asset measured at amortised cost is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral (excluding future losses that have not been incurred) discounted at the asset s original effective interest rate. Each asset individually assessed for impairment is assessed on its merits, and the workout strategy and estimate of cash flows considered recoverable are independently approved by the Risk Department. 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.

MDM Bank 97 The accuracy of the allowances depends on how accurately future cash flows are estimated for specific counterparty allowances and how accurately the model assumptions and parameters used in determining collective allowances predict future cash flows from loans collectively assessed for impairment. In some cases the observable data required to estimate the amount of an impairment loss on a loan 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 limited available historical data relating to similar borrowers. In such cases, the Group uses its experience and judgement to estimate the amount of any impairment loss. The assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. The estimated period between a loss occurring and its identification is determined by Management for each identified portfolio. In general, the periods used vary between three months and 12 months. Impairment losses are recognised in the consolidated statement of income and reflected in an allowance account against financial assets. Changes in impairment provisions attributable to time value are reflected as a component of interest income. When a loan is uncollectable, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are credited to the provision for loan impairment in the consolidated statement of income. (iii) Reversals of impairment An impairment loss in respect of a held-to-maturity security, a loan or a receivable carried at amortised cost is reversed if the subsequent increase in the recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. An impairment loss in respect of an investment in an equity instrument classified as available-for-sale is not reversed through the consolidated statement of income. Any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised directly in equity. If the fair value of a debt instrument classified as available-for-sale increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in the consolidated statement of income, then the impairment loss is reversed, with the amount of the reversal recognised in the consolidated statement of income. An impairment loss in respect of goodwill is not reversed. In respect of other assets, an impairment loss is reversed 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. (m) Provisions Provisions are recognised if, as a result of past events, the Group has a present legal or constructive obligation, that can be estimated reliably, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. 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. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.

98 MDM Bank 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. A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from the contract are lower than the unavoidable costs of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. (n) Credit related commitments In the normal course of business, the Group enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the 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 commitments are included within other liabilities. (o) Income taxes Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in the consolidated statement of income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Taxation has been provided for in the consolidated financial statements in accordance with applicable legislation currently in force in the respective countries in which the Group operates. Current tax expense is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Taxes, other than on income, are recorded within operating expenses. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill, the initial recognition of assets or liabilities that affects neither accounting nor taxable profit; and differences relating to investments in subsidiaries where the parent company 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. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset 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. The tax effects of income tax losses

MDM Bank 99 available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred tax assets and liabilities are netted only within the individual entities of the Group. (p) Income and expense recognition (i) Interest income and expense With the exception of financial assets held for trading and other financial instruments at fair value through profit or loss, interest income and expense are recognised in the consolidated statement of income using the effective interest method. Interest income on financial assets held for trading and on other financial instruments at fair value through profit or loss comprises coupon interest only. Accrued discounts and premiums on financial assets held for trading and on other financial instruments at fair value through profit or loss are recognised in gains less losses from trading in securities and gains less losses from other financial instruments at fair value through profit or loss, respectively. (ii) Fee and commission Fees and commission income that are integral to the effective interest rate on a financial asset or liability are included in the measurement of the effective interest rate. Other fees, commissions and other income and expense items are generally recognised on an accrual basis when the service has been provided. Loan origination fees for loans which are probable of being drawn down (and are not expected to be sold shortly after recognition), are deferred (together with related incremental costs) and recorded as an adjustment to the effective interest rate on the loan. Where a loan commitment is not expected to result in the draw-down of a loan, loan commitment fees are recognised on a straight-line basis over the commitment period. Fees for provision of credit related commitments and other forms of financial insurance are recognised over the term of the related contract. Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, which are earned on execution of the underlying transaction are recorded on its completion. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts, usually on a time-proportion basis. Asset management fees related to investment funds are recorded rateably over the period the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously provided over an extended period of time. Performance linked fees are recognised when the performance criteria are fulfilled. (iii) Other gains less losses from financial instruments Gains less losses from trading in securities include all realised and unrealised changes in fair value of trading securities, except for coupon interest and foreign exchange differences. Gains less losses from other financial instruments at fair value through profit or loss include all realised and unrealised changes in fair value of financial instruments designated at fair value through profit or loss, except for coupon interest and foreign exchange differences. Gains and losses from derivative financial instruments are included in gains less losses from trading in foreign currency, gains less losses from trading in securities or gains less losses from trading in precious metals depending on the nature of the contracts. Gains and losses from cross currency interest rate swaps and forward rate agreements are included in other trading result. Dividend income is recognised in the consolidated statement of income on the date that the dividend is declared.

100 MDM Bank (iv) Other income and expenses Non-interest expenses are recognised at the time the products are received or the services are provided, unless the expenses result from a constructive obligation, against which a liability and related expense are recognised in the consolidated financial statements. (q) Pension costs Companies within the Group which operate in the Russian Federation contribute to the Russian Federation state pension schemes, social insurance and employment funds in respect of their employees. The contributions to these funds are expensed as incurred and included within staff costs in the consolidated statement of income. The Group has no further payment obligation once the contribution has been paid. (r) Leases (i) Finance leases The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the parties to the principal provisions of the lease. At the inception of the lease the amounts to be recognised at the commencement of the lease term are determined. The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset. The commencement of a lease is considered to be the date of the lease agreement, or commitment if earlier. For purposes of this definition, a commitment should be in writing, signed by the parties with interest in the transaction, and should specifically set forth the principal terms of the transaction. However, if the property covered by the lease has yet to be constructed, installed or has not been acquired by the Group at the date of the lease agreement or commitment, the commencement of the lease is deemed to be the date when construction and installation of the property is completed or the property is acquired by the Group. On commencement of the lease term, when the Group enters into a finance lease as a lessor, the present value of the lease payments ( net investment in leases ) is recorded as part of loans and advances to customers. The difference between the gross receivable and the present value of the receivable is unearned finance income. Finance income is recognised over the term of the lease using the effective interest method, which reflects a constant periodic rate of return. Any advance payments made by the lessee prior to commencement of the lease are recorded as a reduction in the net investment in the lease. Finance income from leases is recognised as part of interest income on loans and advances to customers. (ii) Operating leases Where the Group is the lessee in a lease agreement where the lessor does not transfer substantially all of the risks and rewards incidental to ownership of the asset, the arrangement is accounted for as an operating lease. The leased asset is not recognised in the Group s financial statements, and lease payments are recognised in the consolidated statement of income on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. Where the Group is the lessor in a lease agreement where it does not transfer substantially all of the risks and rewards incidental to ownership of the asset, the arrangement is accounted for as an operating lease. The leased asset is recognised in the Group s financial statements, and depreciation and lease income are recognised in the consolidated statement of income on a straight-line basis over the period of the lease.

MDM Bank 101 (s) Distributions to/contributions from beneficiaries Distributions to/contributions from beneficiaries are recorded in equity in the period in which they are declared/received. Distributions to beneficiaries declared after the balance sheet date are disclosed as a subsequent event. (t) Fiduciary assets The Group provides custody, trustee, asset management and other fiduciary services that result in holding or placing of assets on behalf of third parties. These assets and income arising thereon are excluded from these consolidated financial statements as they are not assets of the Group. Commissions received from such business are shown as fees and commissions received in the consolidated statement of income. (u) Segment reporting The Group s format for reporting segment information is by business segments. As the majority of operations, credit related commitments, capital expenditure, and revenues of the Group relate to residents of the Russian Federation, the Group does not have a secondary format for reporting segment information by geographical segments. A segment is a distinguishable component of the Group that is engaged in providing products or services, which is subject to risks and rewards that are different from those of other segments. Segments whose revenue, results or assets are ten per cent or more of all the combined segments are reported separately. (v) Changes in accounting policies As at 1 January 2007, the Group adopted the IFRS 7 Financial Instruments: Disclosures and the amendment to International Financial Reporting Standard IAS 1 Presentation of Financial Statements Capital Disclosures. The application of the Standard and the amendment resulted in increased disclosure in respect of Group s financial instruments and the nature and extent of risks arising from such financial instruments and increased disclosure in respect of the Group s objectives, policies and processes for managing capital. (w) Comparative information Certain comparative information has been reclassified to conform to changes in presentation in the current year, as follows. Commissions for business referral of RUB 79 million, for the year ended 31 December 2006, were presented within other operating income in the consolidated financial statements of the Group for the year ended 31 December 2006. These balances were included within fee and commission income in these consolidated financial statements. In prior periods, the Group presented information for Corporate banking, Retail banking, Investment banking and financial markets and Central treasury segments as reportable business segments. Due to the growth of its Small business banking and Private banking and assets management business, starting 1 April 2007, the Group has separated Small business banking segment from the Corporate banking segment and Private banking and assets management segment from Investment banking and financial markets segment as reportable business segments. In addition, the Group has redefined the segment allocation of certain assets and liabilities and income and expenses. Corresponding figures shown in these consolidated financial statements have been restated. (x) New Standards and Interpretations not yet adopted International Financial Reporting Standard IAS 1 Presentation of Financial Statements (Revised), which is effective for annual periods beginning on or after 1 January 2009, specifies how an entity should present changes in equity not resulting from transactions with owners and other changes in equity in its financial statements, and introduces certain other requirements in respect of presentation of information in the financial statements.

102 MDM Bank IFRS 8 Operating Segments, which is effective for annual periods beginning on or after 1 January 2009, specifies how an entity should report information about its operating segments and sets out requirements for related disclosures about products and services, geographical areas and major customers. Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Financial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. IFRS 8 Operating Segments will replace International Financial Reporting Standard IAS 14 Segment Reporting. These standards have not been applied in preparing of these consolidated financial statements. The Group plans to adopt these standards when they become effective. The Group has not yet fully analysed the likely impact of the standards on its consolidated financial statements. 5. Cash and Cash Equivalents 31 December 2007 31 December 2006 Cash on hand 5 326 3 418 Correspondent accounts with central banks 11 289 3 749 Correspondent accounts and overnight deposits with other banks 66 819 25 475 Total cash and cash equivalents 83 434 32 642 Correspondent accounts and overnight deposits with other banks comprise: 31 December 2007 31 December 2006 Large international banks 59 721 19 170 Russian subsidiaries of large international banks 2 581 125 Large Russian banks 1 621 3 753 Other Russian banks 2 896 2 427 Total corresponding accounts and overnight deposits 66 819 25 475 As at 31 December 2007, the Group had two counterparties with aggregated balances on correspondent accounts and overnight deposits greater than 10% of equity (31 December 2006: one counterparty). The total aggregate amount of these balances was RUB 56 816 million or 68% of total cash and cash equivalents, as at 31 December 2007 (31 December 2006: RUB 8 010 million or 25% of total cash and cash equivalents). As at 31 December 2007 and 31 December 2006 the Group had obligations under its loan participation notes, secured by the Group s diversified payment rights ( DPR ), i.e. its rights to funds being transferred to the Group s USD and EUR correspondent accounts. As at 31 December 2007, the carrying amount of these notes was RUB 14 133 million (31 December 2006: RUB 13 042 million). Refer to Note 16. Geographical and currency analysis of cash and cash equivalents is disclosed in Note 26.

MDM Bank 103 6. Due from Other Banks 31 December 2007 31 December 2006 Current interbank loans Large international banks 4 944 1 699 Russian subsidiaries of large international banks 5 510 1 141 Large Russian banks 1 467 597 Other Russian banks 6 773 4 024 Total current interbank loans 18 694 7 461 Reverse sale and repurchase agreements Large international banks 7 046 4 316 Large Russian banks 1 549 175 Other Russian banks 545 1 249 Total reverse sale and repurchase agreements 9 140 5 740 Due from other banks 27 834 13 201 As at 31 December 2007, the Group had one counterparty with aggregated balances greater than 10% of equity (31 December 2006: one counterparty). The total aggregate amount of these balances was RUB 7 046 million or 25% of due from other banks balances, as at 31 December 2007 (31 December 2006: RUB 4 072 million or 31% of due from other banks balances). As at 31 December 2007, these balances comprised receivables from a large international bank due under a reverse sale and repurchase agreement, which were pledged as collateral for term deposits of RUB 7 042 million (31 December 2006: RUB 4 072 million) received by one of the Group s subsidiaries from the same bank. Refer to Note 14. Included in due from other banks balances as at 31 December 2007 were loans to an international bank of RUB 1 093 million pledged as collateral for interest and principal repayments in respect of loan participation notes secured by diversified payment rights (31 December 2006: RUB 951 million). Refer to Note 16. Securities received as collateral under reverse sale and repurchase agreements are marketable corporate bonds and equity securities. The following table presents information about the fair value of these securities: 31 December 2007 31 December 2006 Held by the Group 9 735 5 752 Pledged under sale and repurchase agreements (Notes 11, 14 and 15) 129 369 Securities received as collateral under reverse sale and repurchase agreements 9 864 6 121 Geographical and currency analysis, effective interest rates and maturity structure of due from other banks are disclosed in Note 26. Information on related party transactions is disclosed in Note 29.

104 MDM Bank 7. Trading Securities 31 December 2007 31 December 2006 Owned by the Group Government bonds Municipal bonds issued by Russian municipalities 2 138 Russian Federal loan bonds (OFZ) 1 9 Russian Federation Eurobonds - 191 VneshEconomBank (VEB) 3% coupon bonds ( MinFin bonds ) - 1 Corporate debt and equity securities Corporate bonds 9 067 9 242 Promissory notes 317 1 751 Corporate shares 1 488 2 178 Total trading securities owned by the Group 10 875 13 510 Pledged under sale and repurchase agreements Government bonds Russian Federal loan bonds (OFZ) 249 1 159 Municipal bonds issued by Russian municipalities 80 - Corporate debt and equity securities Corporate bonds 2 123 2 465 Corporate shares 535 - Total trading securities pledged under sale and repurchase agreements 2 987 3 624 Total trading securities 13 862 17 134 Municipal bonds are securities issued by Russian municipalities denominated in Russian Roubles. Russian Federal loan bonds (OFZ) are securities issued by the Government of the Russian Federation denominated in Russian Roubles. Russian Federation Eurobonds are securities issued by the Government of the Russian Federation denominated in US Dollars. VEB bonds are US Dollar denominated bearer securities, which carry the guarantee of the Ministry of Finance of the Russian Federation, and are commonly referred to as MinFin bonds. Corporate bonds are interest-bearing securities, issued by Russian companies. The majority of corporate bonds are freely tradable in the Russian and foreign securities markets. Promissory notes are discounted debt securities of Russian companies denominated in Russian Roubles. The majority of corporate shares are shares of Russian companies traded in the Moscow Interbank Currency Exchange (MICEX) or the Russian Trading System (RTS).

MDM Bank 105 The following table provides details of the Group s debt trading securities as at 31 December 2007: Maturity Coupon rate Yield to maturity per annum per annum Minimum Maximum Minimum Maximum Minimum Maximum Municipal bonds issued by October October Russian municipalities 2011 2011 9.2% 9.2% 8.5% 8.5% Russian Federal loan November November bonds (OFZ) 2021 2021 9.0% 9.0% 6.5% 6.5% Corporate bonds denominated April November in Russian Roubles 2008 2018 6.3% 14.1% 6.8% 21.0% Corporate bonds denominated April December in USD 2009 2015 7.5% 11.0% 7.9% 14.9% Promissory notes March 2008 July 2008 - - 9.8% 13.5% The following table provides details of the Group s debt trading securities as at 31 December 2006: Maturity Coupon rate Yield to maturity per annum per annum Minimum Maximum Minimum Maximum Minimum Maximum Municipal bonds issued by May June Russian municipalities 2007 2015 7.6% 10.0% 6.1% 7.5% Russian Federal loan bonds January February (OFZ) 2011 2036 6.1% 9.0% 6.3% 6.8% Russian Federation Eurobonds June 2028 June 2028 12.8% 12.8% 6.1% 6.1% VneshEconomBank (VEB) 3% November November coupon bonds ( MinFin bonds ) 2007 2007 3.0% 3.0% 5.6% 5.6% Corporate bonds denominated February June in Russian Roubles 2007 2018 6.2% 15.5% 5.7% 13.7% Corporate bonds denominated January December in USD 2007 2015 7.1% 12.0% 5.4% 10.9% Promissory January November notes 2007 2007 - - 3.0% 11.7%

106 MDM Bank The following table provides information on the credit quality of the Group s corporate debt securities as at 31 December 2007 and 31 December 2006: 31 December 2007 31 December 2006 Corporate bonds owned by the Group Credit rating between BB+ and BBB++ - 63 Credit rating BB and below 620 464 Not rated 8 447 8 715 Total corporate bonds owned by the Group 9 067 9 242 Promissory notes owned by the Group Credit rating between BB+ and BBB++ - 248 Credit rating BB and below 109 601 Not rated 208 902 Total promissory notes owned by the Group 317 1 751 Corporate bonds pledged under sale and repurchase agreements Credit rating between BB+ and BBB++ 253 328 Credit rating BB and below 647 832 Not rated 1 223 1 305 Total corporate bonds pledged under sale and repurchase agreements 2 123 2 465 Included in corporate bonds, as at 31 December 2006, were credit-linked leveraged notes issued by a major international bank of RUB 27 million, the repayment amount of which was linked to the market price of a certain bond issued by a Russian entity (Refer to Note 8). The maximum losses of the Group under these credit-linked leveraged notes were limited to the amount of the Group s investments in the notes. Geographical and currency analysis, effective interest rates and maturity structure of trading securities are disclosed in Note 26. Information on related party transactions is disclosed in Note 29.

MDM Bank 107 8. Derivative Financial Instruments The fair values of derivative instruments held are set out in the following table: 31 December 2007 31 December 2006 Contract/ Fair values Contract/ Fair values notional notional amount Assets Liabilities amount Assets Liabilities Foreign exchange derivative contracts currency spot transactions 19 832 24 (5) 20 385 6 (20) currency forwards 47 914 221 (416) 21 847 31 (352) currency futures 7 478 - - 6 106 - - Precious metals derivative contracts precious metals forwards 1 175 15 (6) 123 4 - Securities derivative contracts securities forwards 754 - (25) 1 551 155 (27) written securities put options 245 - - 527 - - Other derivative contracts cross currency interest rate swaps 2 272 - (70) 2 375 59 - balance guaranteed cross currency interest rate swaps 5 008 - (352) 10 262 - (268) forward rate agreements - - - 790 - - Total recognised derivative assets/(liabilities) 260 (874) 255 (667) All derivatives are recognised at fair value, with changes in fair value being immediately recognised in the statement of income. Derivatives with positive fair values are recorded within assets, while derivatives with negative fair values are included in liabilities. Derivative financial instruments are generally traded in an over-the-counter market with professional market counterparties on standardised contractual terms and conditions or exchange traded. The notional amounts of certain types of financial instruments provide a basis for comparison with instruments recognised on the balance sheet 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 Group s exposure to credit or price risks. The derivative instruments become favourable (positive fair value) or unfavourable (negative fair value) as a result of fluctuations in market rates relative to their terms. The aggregate contractual or notional amount of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable and, thus, the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly over time. Currency spot transactions are regular way foreign exchange contracts, which are settled within two working days after the trade date. Currency, precious metal and securities forwards are over-the-counter contracts which establish terms and conditions of a deal which is settled at a future date. Currency futures are exchange traded contracts which establish terms and conditions of a deal which is settled at a future date. Written securities put options, as at 31 December 2007, are put options expiring in March 2008 written by the Group to a major international bank in respect of bonds issued by Russian entity with a total nominal amount of USD 10 million, or RUB 245 million (31 December 2006: RUB 527 million). As at 31 December 2007, the market price of the underlying bonds was significantly above the exercise price.

108 MDM Bank Further, the Group has the right to terminate the options before maturity under certain conditions. Based on these facts, Management of the Group estimates that, as at 31 December 2007, the fair value of the related liability was nil (31 December 2006: nil). Cross currency interest rate swaps are over-the-counter contracts whereby one party swaps principal and interest payments in one currency determined using a fixed or floating interest rate for principal and interest payments in other currency determined using a floating or fixed interest rate. Balance guaranteed cross currency interest rate swaps are swap agreements with major international banks, in which the Group entered as a part of its car loans securitisation transaction. Under the terms of the swap agreements all RUB or USD denominated fixed rate amounts received by the Group from car loans pledged as collateral under its loan participation notes are swapped for USD floating rate amounts which are then used for repayment of the loan participation notes. Refer to Note 16. Forward rate agreements are over-the-counter contracts whereby parties agree on the level of the interest rate to be used at a future date to determine interest payments to be paid or received. Derivatives which are embedded in financial instruments measured at fair value through profit or loss are not included in the above table. As at 31 December 2007, these derivatives comprised derivatives embedded into credit-linked leveraged notes of RUB 226 million included within other financial instruments through profit or loss (Refer to Note 9). As at 31 December 2006, these derivatives comprised credit derivatives embedded into first to default credit-linked notes of RUB 1 404 million included within other financial instruments through profit or loss (Refer to Note 9) and credit derivatives embedded into credit-linked leveraged notes of RUB 27 million included within trading securities (Refer to Note 7). The maximum losses of the Group in respect of these embedded derivatives were limited to the carrying value of the related financial instruments.

MDM Bank 109 Maturity, fair value and weighted average exchange rate breakdowns for forward and future currency contracts as at 31 December 2007 are set out in the following table: Contract/ Weighted notional average amount contracted exchange Fair values rates Assets Liabilities Forwards Buy USD sell RUB Less than three months 10 956 24.85 13 (127) Between three months and one year 1 242 25.09 4 (16) Buy RUB sell USD Less than three months 11 477 24.74 85 (21) Between three months and one year 1 122 24.93 5 (5) Buy USD sell EUR Less than three months 4 546 1.44 5 (24) Buy EUR sell USD Less than three months 754 1.44 1 - Buy EUR sell RUB Less than three months 1 407 35.5 - (13) Buy USD sell CHF Less than three months 1 366 1.15 - (35) Buy CHF sell USD Less than three months 1 380 1.15 27 - Buy USD sell JPY Less than three months 6 110 114.2 - (95) Buy JPY sell USD Less than three months 6 170 113.9 79 - Buy EUR sell LVL Less than three months 823 1.32 - (78) Other Less than three months 398-2 - Between three months and one year 163 - - (2) Futures Buy USD sell RUB Less than three months 2 946 25.41 - - Between three months and one year 982 25.55 - - Buy RUB sell USD Less than three months 3 044 25.37 - - Between three months and one year 506 25.30 - - Total 55 392 221 (416)

110 MDM Bank Maturity, fair value and weighted average exchange rate breakdowns for forward and future currency contracts as at 31 December 2006 are set out in the following table: Contract/ Weighted notional average amount contracted exchange Fair values rates Assets Liabilities Forwards Buy USD sell RUB Less than three months 11 249 27.08 8 (322) Buy RUB sell USD Less than three months 4 304 26.40 13 (3) Buy EUR sell USD Less than three months 789 1.32 1 - Buy USD sell EUR Less than three months 1 091 1.31 - (5) Buy GBP sell USD Less than three months 797 1.96 2 - Buy USD sell GBP Less than three months 567 1.96 - (3) Buy USD sell JPY Less than three months 610 118.41 2 - Buy USD sell CAD Less than three months 470 1.16 2 - Buy CAD sell USD Less than three months 472 1.16 - (2) Buy USD sell LVL Between three months and one year 325 1.82 - (12) Buy EUR sell LVL Between three months and one year 537 1.42 1 - Buy GBP sell JPY Less than three months 259 232.34 2 - Other Less than three months 377 - - (5) Futures Buy USD sell RUB Less than three months 1 976 26.79 - - Between three months and one year 1 054 26.53 - - Buy RUB sell USD Less than three months 2 015 26.86 - - Between three months and one year 1 061 26.53 - - Total 27 953 31 (352) Geographical, currency analysis and maturity structure of derivative financial instruments are disclosed in Note 26. Information on related party transactions is disclosed in Note 29.

MDM Bank 111 9. Other Financial Instruments at Fair Value through Profit or Loss 31 December 2007 31 December 2006 Credit-linked leveraged notes 226 - First to default credit-linked notes - 1 404 Total other financial instruments at fair value through profit or loss 226 1 404 Credit-linked leveraged notes, as at 31 December 2007, were notes issued by a major international bank, the repayment amount of which was linked to the market price of a certain bond issued by a Russian entity. Credit-linked leveraged notes, as at 31 December 2007, comprised notes with a nominal amount of USD 9 million or RUB 221 million, a coupon rate of 17.24% and a maturity date of 20 February 2008. First to default credit-linked notes, as at 31 December 2006, were USD denominated fixed coupon notes issued by a major international bank, repayment of which was dependent on certain government, municipal and corporate bonds being repaid by their issuers in full (the reference bonds ). In case of default of any of the reference bonds, the major international bank had the right to transfer defaulted bonds to the Group with a nominal amount equal to the nominal amount of first to default credit-linked notes held by the Group without any further payments to the Group under these notes (Refer to Note 8). Included in first to default credit-linked notes, as at 31 December 2006, were first to default credit-linked notes with a nominal amount of USD 50 million, or RUB 1 317 million, a coupon rate of 15.5% per annum and a maturity date of 6 May 2008. The movements in other financial instruments at fair value through profit or loss for the years ended 31 December 2007 and 31 December 2006 were as follows: 2007 2006 Other financial instruments at fair value through profit or loss as at 1 January 1 404 2 484 Interest income accrued (Note 20) 21 291 Interest coupon received (150) (385) Acquisition of instruments 219 - Disposal of instruments (1 282) (690) Gains less losses from changes in fair value 2 (102) Effect of foreign currency translation 12 (194) Other financial instruments at fair value through profit or loss as at 31 December 226 1 404 Geographical and currency analysis, effective interest rates and maturity structure of other financial instruments at fair value through profit or loss are disclosed in Note 26.

112 MDM Bank 10. Available-for-Sale Assets 31 December 2007 31 December 2006 Investment in mutual funds 290 - Total available-for-sale assets 290 - As at 31 December 2007, investment in mutual funds comprised the Group s share in a closed mutual investment fund aimed at investment projects in the South of Russia. The movement in available-for-sale assets for the year ended 31 December 2007 was as follows: 2007 2006 Available-for-sale assets as at 1 January - - Acquisition of assets 263 - Revaluation of available-for-sale assets 27 - Available-for-sale assets as at 31 December 290 - Geographical and currency analysis and maturity structure of available-for-sale assets are disclosed in Note 26. 11. Loans and Advances to Customers 31 December 2007 31 December 2006 Commercial loans 120 460 113 330 Retail loans 37 974 28 001 Investment banking loans 16 130 23 532 Small business loans 8 214 4 416 Net investment in finance leases 3 727 2 095 Gross loans and advances to customers 186 505 171 374 Less: loan impairment (6 194) (4 499) Net loans and advances to customers 180 311 166 875

MDM Bank 113 (a) Loan impairment Movements in loan impairment are as follows: 2007 2006 Loan impairment as at 1 January 4 499 2 849 Loans written off during the period as uncollectible (88) (7) Loan impairment losses during the period 2 083 1 741 Loans sold during the period (201) - Effect of foreign currency translation (99) (84) Loan impairment as at 31 December 6 194 4 499 Loans sold during the year ended 31 December 2007 comprised commercial loans with a gross book value of RUB 52 million against which an impairment allowance of RUB 38 million was recognised, which were sold for RUB 26 million, and retail loans with a gross book value of RUB 172 million against which an impairment allowance of RUB 163 million was recognised, which were sold for RUB 9 million. Included in loans and advances to customers, as at 31 December 2007, was interest accrued on loans individually assessed for impairment of RUB 22 million (31 December 2006: RUB 2 million). The loan portfolio, as at 31 December 2007, included overdue loans totalling RUB 5 306 million, (31 December 2006: RUB 4 245 million). As described in Note 4(l), the Group uses its experience and judgement to estimate the amount of impairment loss for loans and advances to customers. As retail and small business lending is relatively new to Russia, the Group and the industry have limited historical experience in this type of lending on which to base the assessment of impairment. Should actual repayments be less than Group s Management estimates, the Group would be required to record additional loan impairment losses.

114 MDM Bank The Group has reviewed its loan portfolio as at 31 December 2007 and recognised loan impairment as follows: Gross loans Impairment Net loans Impairment to Gross loans (%) Commercial loans Collectively assessed for impairment Standard loans not past due 84 057 (1 344) 82 713 1.6 Watch list loans not past due 34 012 (527) 33 485 1.5 Total collectively assessed for impairment 118 069 (1 871) 116 198 1.6 Individually assessed for impairment Watch list loans not past due 1 362 (248) 1 114 18.2 Overdue loans 15 (1) 14 6.7 Non-recoverable loans 1 014 (1 014) - 100.0 Total individually assessed for impairment 2 391 (1 263) 1 128 52.8 Total commercial loans 120 460 (3 134) 117 326 2.6 Retail loans Retail loans collectively assessed for impairment Standard loans to finance purchase of cars 19 422 (1 081) 18 341 5.6 Express loans to finance purchase of cars 6 432 (973) 5 459 15.1 Mortgage loans 8 220 (193) 8 027 2.3 Credit card overdrafts 1 363 (145) 1 218 10.6 Other loans to individuals 2 537 (69) 2 468 2.7 Total retail loans 37 974 (2 461) 35 513 6.5 Investment banking loans Collectively assessed for impairment Margin loans fully secured by traded securities 2 098-2 098 - Reverse sale and repurchase agreements 12 090-12 090 - Other standard loans 1 942 (23) 1 919 1.2 Total investment banking loans 16 130 (23) 16 107 0.1 Small business loans Collectively assessed for impairment Standard loans to legal entities not past due 6 220 (205) 6 015 3.3 Watch list loans to legal entities not past due 510 (15) 495 2.9 Loans to individual entrepreneurs 1 187 (11) 1 176 0.9 Total collectively assessed for impairment 7 917 (231) 7 686 2.9 Individually assessed for impairment Overdue loans 137 (62) 75 45.3 Non-recoverable loans 160 (160) - 100.0 Total individually assessed for impairment 297 (222) 75 74.7 Total small business loans 8 214 (453) 7 761 5.5 Net investment in finance leases Collectively assessed for impairment 2 315 (32) 2 283 1.4 Individually assessed for impairment 1 412 (91) 1 321 6.4 Total net investment in finance leases 3 727 (123) 3 604 3.3 Total loans and advances to customers 186 505 (6 194) 180 311 3.3

MDM Bank 115 Management of the Group believes that receivables under reverse repurchase agreements and margin loans, which are fully collateralised by pledge of liquid traded securities, are not impaired. During the year ended 31 December 2007 the Group renegotiated commercial loans to corporate entities that would otherwise be past due or impaired of RUB 3 589 million (31 December 2006: RUB 315 million). Such restructuring activity is aimed at managing customer relationships and maximising collection opportunities. Express loans to finance purchase of cars are loans for which simplified credit approval procedures are used.

116 MDM Bank The following table shows gross loans and advances to customers and related loan impairment, as at 31 December 2006: Gross loans Impairment Net loans Impairment to Gross loans (%) Commercial loans Collectively assessed for impairment Standard loans not past due 110 503 (1 770) 108 733 1.6 Watch list loans not past due 1 641 (26) 1 615 1.6 Total collectively assessed for impairment 112 144 (1 796) 110 348 1.6 Individually assessed for impairment Overdue loans 89 (3) 86 3.4 Non-recoverable loans 1 097 (1 097) - 100.0 Total individually assessed for impairment 1 186 (1 100) 86 92.7 Total commercial loans 113 330 (2 896) 110 434 2.6 Retail loans Retail loans collectively assessed for impairment Standard loans to finance purchase of cars 14 351 (470) 13 881 3.3 Express loans to finance purchase of cars 7 508 (790) 6 718 10.5 Mortgage loans 2 484 (12) 2 472 0.5 Credit card overdrafts 934 (101) 833 10.8 Other loans to individuals 2 724 (80) 2 644 2.9 Total retail loans 28 001 (1 453) 26 548 5.2 Investment banking loans Collectively assessed for impairment Margin loans fully secured by traded securities 1 893-1 893 0.0 Reverse sale and repurchase agreements 20 062-20 062 0.0 Other standard loans 1 577 (18) 1 559 1.2 Total investment banking loans 23 532 (18) 23 514 0.1 Small business loans Collectively assessed for impairment Standard loans to legal entities not past due 3 667 (43) 3 624 1.2 Watch list loans to legal entities not past due 4-4 1.1 Loans to individual entrepreneurs 698 (10) 688 1.4 Total collectively assessed for impairment 4 369 (53) 4 316 1.2 Individually assessed for impairment Overdue loans 4-4 3.8 Non-recoverable loans 43 (43) - 100.0 Total individually assessed for impairment 47 (43) 4 91.5 Total small business loans 4 416 (96) 4 320 2.2 Net investment in finance leases collectively assessed for impairment 2 095 (36) 2 059 1.7 Total loans and advances to customers 171 374 (4 499) 166 875 2.6

MDM Bank 117 The following table shows the ageing analysis of retail loans as at 31 December 2007: Gross loans Impairment Net loans Impairment to Gross loans (%) Standard loans to finance purchase of cars Not past due 17 762 (70) 17 692 0.4 Overdue less than 30 days 519 (44) 475 8.5 Overdue 30-89 days 207 (87) 120 42.0 Overdue 90-179 days 156 (120) 36 76.9 Overdue 180-360 days 276 (258) 18 93.5 Overdue more than 360 days 502 (502) - 100.0 Total loans to finance purchase of cars 19 422 (1 081) 18 341 5.6 Express loans to finance purchase of cars Not past due 5 048 (39) 5 009 0.8 Overdue less than 30 days 301 (29) 272 9.6 Overdue 30-89 days 167 (70) 97 41.9 Overdue 90-179 days 147 (104) 43 70.7 Overdue 180-360 days 301 (263) 38 87.4 Overdue more than 360 days 468 (468) - 100.0 Total express loans to finance purchase of cars 6 432 (973) 5 459 15.1 Mortgage loans Not past due 7 847 (31) 7 816 0.4 Overdue less than 30 days 161 (19) 142 11.8 Overdue 30-89 days 67 (29) 38 43.3 Overdue 90-179 days 82 (57) 25 69.5 Overdue 180-360 days 53 (47) 6 88.7 Overdue more than 360 days 10 (10) - 100 Total mortgage loans 8 220 (193) 8 027 2.3 Credit card overdrafts Not past due 1 138 (6) 1 132 0.5 Overdue less than 30 days 52 (6) 46 11.5 Overdue 30-89 days 42 (14) 28 33.3 verdue 90-179 days 23 (15) 8 65.2 Overdue 180-360 days 34 (30) 4 88.2 Overdue more than 360 days 74 (74) - 100.0 Total credit card overdrafts 1 363 (145) 1 218 10.6 Other loans to individuals Not past due 2 438 (10) 2 428 0.4 Overdue less than 30 days 26 (2) 24 7.7 Overdue 30-89 days 13 (3) 10 23.1 Overdue 90-179 days 8 (4) 4 50.0 Overdue 180-360 days 12 (10) 2 83.3 Overdue more than 360 days 40 (40) - 100.0 Total other loans to individuals 2 537 (69) 2 468 2. 7 Total retail loans 37 974 (2 461) 35 513 6. 5

118 MDM Bank The following table shows the ageing analysis of retail loans as at 31 December 2006: Gross loans Impairment Net loans Impairment to Gross loans (%) Standard loans to finance purchase of cars Not past due 12 957 (23) 12 934 0.2 Overdue less than 30 days 644 (28) 616 4.3 Overdue 30-89 days 320 (79) 241 24.7 Overdue 90-179 days 205 (128) 77 62.4 Overdue 180-360 days 141 (128) 13 90.8 Overdue more than 360 days 84 (84) - 100.0 Total loans to finance purchase of cars 14 351 (470) 13 881 3.3 Express loans to finance purchase of cars Not past due 6 218 (67) 6 151 1.1 Overdue less than 30 days 513 (92) 421 17.9 Overdue 30-89 days 274 (161) 113 58.8 Overdue 90-179 days 203 (177) 26 87.2 Overdue 180-360 days 241 (234) 7 97.1 Overdue more than 360 days 59 (59) - 100.0 Total express loans to finance purchase of cars 7 508 (790) 6 718 10.5 Mortgage loans Not past due 2 412 (1) 2 411 0.0 Overdue less than 30 days 47 (1) 46 2.1 Overdue 30-89 days 10 (2) 8 20.0 Overdue 90-179 days 11 (5) 6 45.5 Overdue 180-360 days 4 (3) 1 75.0 Total mortgage loans 2 484 (12) 2 472 0.5 Credit card overdrafts Not past due 785 (18) 767 2.3 Overdue less than 30 days 36 (4) 32 11.1 Overdue 30-89 days 32 (11) 21 34.4 Overdue 90-179 days 25 (15) 10 60.0 Overdue 180-360 days 16 (13) 3 81.3 Overdue more than 360 days 40 (40) - 100.0 Total credit card overdrafts 934 (101) 833 10.8 Other loans to individuals Not past due 2 632 (47) 2 585 1.8 Overdue less than 30 days 37 (4) 33 10.8 Overdue 30-89 days 28 (2) 26 7.1 Overdue 90-179 days 3 (3) - 85.3 Overdue 180-360 days 5 (5) - 89.1 Overdue more than 360 days 19 (19) - 100.0 Total other loans to individuals 2 724 (80) 2 644 2.9 Total retail loans 28 001 (1 453) 26 548 5.2

MDM Bank 119 Movements in loan impairment by classes of loans to customers for the year ended 31 December 2007 are as follows: Commercial Retail Invest- Small Net Total loans loans ment busi- investbanking ness ment in loans loans finance leases Loan impairment as at 1 January 2007 2 896 1 453 18 96 36 4 499 Loans written off during the period as uncollectible (81) (7) - - - (88) Loan impairment losses during the period 425 1 199 5 365 89 2 083 Loans sold during the period (38) (163) - - - (201) Effect of foreign currency translation (68) (21) - (8) (2) (99) Loan impairment as at 31 December 2007 3 134 2 461 23 453 123 6 194 Movements in loan impairment by classes of loans to customers for the year ended 31 December 2006 are as follows: Commercial Retail Invest- Small Net Total loans loans ment busi- investbanking ness ment in loans loans finance leases Loan impairment as at 1 January 2006 2 524 298 - - 27 2 849 Loans written off during the period as uncollectible (2) (5) - - - (7) Loan impairment losses during the period 453 1 164 18 97 9 1 741 Effect of foreign currency translation (79) (4) - (1) - (84) Loan impairment as at 31 December 2006 2 896 1 453 18 96 36 4 499 Non-performing loans comprise loans with principal or/and interest overdue by more than 90 days and other loans classified as non-performing by Management. A loan is classified as non-performing by Management if it is not probable that it will be recovered through means other than repossession and subsequent realization of collateral. The amounts of non-performing loans as at 31 December 2007 and 31 December 2006 are as follows: 31 December 2007 31 December 2006 Commercial loans 1 014 1 178 Retail loans 2 186 1 056 Small business loans 227 43 Net investment in finance leases 357 - Total non-performing loans 3 784 2 277

120 MDM Bank (b) Collateral The following table provides an analysis of the loan portfolio, net of impairment, by types of collateral as at 31 December 2007: Securities Real Motor Other Other No Total estate vehicles realizable collateral collateral collateral Commercial loans 7 721 22 926 89 27 753 53 888 4 949 117 326 Retail loans - 8 027 23 800-1 3 685 35 513 Investment banking loans 14 188 - - 1 919 - - 16 107 Small business loans - 292 44 94 6 776 555 7 761 Net investment in finance leases - - 813 2 791 - - 3 604 Total 21 909 31 245 24 746 32 557 60 665 9 189 180 311 The following table provides an analysis of the loan portfolio, net of impairment, by types of collateral as at 31 December 2006: Securities Real Motor Other Other No Total estate vehicles realizable collateral collateral collateral Commercial loans 6 238 16 103 184 12 931 63 310 11 668 110 434 Retail loans - 2 472 20 599-323 3 154 26 548 Investment banking loans 21 955 - - - - 1 559 23 514 Small business loans - 794 147 810 763 1 806 4 320 Net investment in finance leases - - 667 1 392 - - 2 059 Total 28 193 19 369 21 597 15 133 64 396 18 187 166 875 The amounts shown in the tables above represent the carrying value of the loans, and do not necessarily represent the fair value of the collateral. Other realizable collateral is collateral, which, in the opinion of the Group s management, the Group will be able to sell to reduce losses in case of loan default. Other collateral is collateral which the Group may not be able to sell easily in the market in order to recover the loan. Such collateral may include goods in turnover, corporate or personal guarantees and it is used by the Group as a tool in the process of negotiations with the borrower in case of loan default. Loans issued to finance purchase of cars are secured by underlying cars. The majority of credit card overdrafts are not secured. Mortgage loans are secured by underlying real estate. Commercial loans individually assessed for impairment with a gross value of RUB 71 million were secured by collateral with a fair value of RUB 99 million, as at 31 December 2007 (31 December 2006: loans individually assessed for impairment with gross value of RUB 122 million were secured by collateral with a fair value of RUB 109 million). There was no collateral or it is impracticable to determine fair value of collateral for other overdue or impaired loans. During the year ended 31 December 2007 the Group obtained assets by taking control of collateral accepted as security with a fair value of RUB 129 million, of which assets totalling RUB 49 million were sold by the Group in the same period. During the year ended 31 December 2006 the Group did not obtain any assets by taking control of collateral accepted as security.

MDM Bank 121 Securities received as collateral under reverse sale and repurchase agreements are marketable corporate bonds and equity securities. The following table presents information about the fair value of these securities: 31 December 2007 31 December 2006 Held by the Group 7 273 19 668 Pledged under sale and repurchase agreements (Notes 6, 14 and 15) 8 370 8 231 Securities received as collateral under reverse sale and repurchase agreements 15 643 27 899 (c) Finance leases Loans and advances to customers include finance lease receivables, which are analysed as follows: 31 December 2007 31 December 2006 Gross investment in finance leases, receivable: - Not later than 1 year 2 189 1 409 - Later than 1 year and not later than 5 years 2 390 1 231 - Later than 5 years 37 63 Less: Unearned finance income (889) (608) Net investment in finance leases 3 727 2 095 Net investment in finance leases are analysed as follows: 31 December 2007 31 December 2006 Net investment in finance leases, receivable: - Not later than 1 year 1 767 1 092 - Later than 1 year and not later than 5 years 1 930 954 - Later than 5 years 30 49 Net investment in finance leases 3 727 2 095 (d) Pledged loans and asset securitisation The Group has transferred a pool of loans to individuals to finance the purchase of cars to Taganka Car Loan Finance plc, an entity which is, in substance, controlled by the Group. Accordingly, the financial statements of Taganka Car Loan Finance plc are consolidated into these consolidated financial statements and the loans are included in the consolidated balance sheet. These loans are pledged by the Group under secured loan participation notes issued by the Group as collateral. As at 31 December 2007, the amount of loans pledged was RUB 4 745 million (31 December 2006: RUB 10 262 million). As at 31 December 2007, the carrying amount of the notes was RUB 4 153 million (31 December 2006: RUB 9 828 million). Refer to Note 16. Included in the loan portfolio, as at 31 December 2006, were gross loans to corporate entities of RUB 685 million pledged under term deposits placed with the Group by an international bank. (e) Concentration analysis As at 31 December 2007, credit exposure to the ten largest borrowers (or groups of borrowers), excluding claims under reverse repurchase agreements fully secured by traded securities, totalled RUB 20 778 million

122 MDM Bank or 11% of the gross loan portfolio of the Group (31 December 2006: RUB 23 381 million or 14% of the gross loan portfolio). As at 31 December 2007, the Group had no borrowers with aggregated loan amounts, excluding claims under reverse repurchase agreements fully secured by traded securities, greater than 10% of equity (31 December 2006: one borrower). The total aggregate amount of these loans was RUB 4 652 million or 3% of the gross loan portfolio as at 31 December 2006. Economic sector risk concentrations within the customer loan portfolio are as follows: 31 December 2007 31 December 2006 Amount % Amount % Trade 40 035 22 29 626 17 Individuals 37 974 20 28 001 17 Real estate 24 128 13 13 994 8 Construction 22 247 12 24 381 14 Finance 18 706 10 26 923 16 Manufacturing 16 959 9 18 463 11 Transport 3 981 2 7 399 4 Ore 3 661 2 1 901 1 Metallurgy 3 553 2 3 840 2 Oil and gas 2 836 2 3 511 2 Chemicals 2 744 1 3 059 2 Communication 1 750 1 1 301 1 Food and agriculture 1 289 1 874 1 Energy and atomic power 1 036 1 2 603 2 Coal 867-803 - Resorts and restaurants 730-1 138 1 Information technology 524-653 - Gaming 45-640 - Other 3 440 2 2 264 1 Gross loans and advances to customers 186 505 100 171 374 100

MDM Bank 123 The table below shows the ageing analysis of commercial loans which were individually assessed for impairment, as at 31 December 2007: Gross loans Impairment Net loans Impairment to Gross loans (%) Watch list loans not past due 1 362 (248) 1 114 18.2 Overdue loans Overdue less than 30 days 15 (1) 14 6.7 Total overdue loans 15 (1) 14 6.7 Non-recoverable loans Overdue less than 360 days 113 (113) - 100.0 Overdue more than 360 days 901 (901) - 100.0 Total non-recoverable loans 1 014 (1 014) - 100.0 Total commercial loans individually assessed for impairment 2 391 (1 263) 1 128 52.8 The table below shows the ageing analysis of commercial loans which were individually assessed for impairment, as at 31 December 2006: Gross loans Impairment Net loans Impairment to Gross loans (%) Overdue loans Overdue 30-89 days 8 (1) 7 10.2 Overdue more than 360 days 81 (2) 79 2.5 Total overdue loans 89 (3) 86 3.4 Non-recoverable loans Overdue less than 360 days 165 (165) - 100.0 Overdue more than 360 days 932 (932) - 100.0 Total non-recoverable loans 1 097 (1 097) - 100.0 Total commercial loans individually assessed for impairment 1 186 (1 100) 86 92.7

124 MDM Bank The table below shows the ageing analysis of small business loans which were individually assessed for impairment, as at 31 December 2007: Gross loans Impairment Net loans Impairment to Gross loans (%) Overdue loans Overdue less than 30 days 54 (4) 50 7.4 Overdue 30-89 days 16 (9) 7 56.3 Overdue 90-180 days 35 (21) 14 60.0 Overdue 180-360 days 32 (28) 4 87.5 Total overdue loans 137 (62) 75 45.3 Non-recoverable loans Overdue less than 360 days 128 (128) - 100.0 Overdue more than 360 days 32 (32) - 100.0 Total non-recoverable loans 160 (160) - 100.0 Total small business loans individually assessed for impairment 297 (222) 75 74.7 The table below shows the ageing analysis of small business loans which were individually assessed for impairment, as at 31 December 2006: Gross loans Impairment Net loans Impairment to Gross loans (%) Overdue loans Overdue less than 30 days 2-2 2.2 Overdue 30-89 days 2-2 5.5 Total overdue loans 4-4 3.8 Non-recoverable loans Overdue less than 360 days 43 (43) - 100.0 Total non-recoverable loans 43 (43) - 100.0 Total small business loans individually assessed for Impairment 47 (43) 4 91.5 Geographical and currency analysis, effective interest rates and maturity structure of loans and advances to customers are disclosed in Note 26. Information on related party transactions is disclosed in Note 29.

MDM Bank 125 12. Other Assets 31 December 2007 31 December 2006 Trade debtors and prepayments 1 071 788 Precious metals 856 122 Net amounts in course of settlement 708 642 Prepaid taxes 592 439 Settlements on securities transactions 280 543 Other 221 229 Gross other assets 3 728 2 763 Less: other assets impairment (5) (2) Net other assets 3 723 2 761 Movements in other assets impairment are as follows: 2007 2006 Other assets impairment as at 1 January 2 - Net charge to other assets impairment during the period 3 2 Other assets impairment as at 31 December 5 2 Geographical and currency analysis and maturity structure of other assets are disclosed in Note 26.

126 MDM Bank 13. Premises and Equipment The reconciliation of the carrying amount of premises and equipment as at 31 December 2007 and as at 31 December 2006 is presented below: Premises Office, Fixtures Intangible Total computer and assets and other fittings equipment Net book amount as at 1 January 2007 3 855 525 60 3 4 443 Cost or valuation Opening balance 3 879 1 046 97 11 5 033 Additions (Note 25) 62 486 246 3 797 Disposals (654) (34) (44) - (732) Elimination of accumulated depreciation of revalued assets (101) - - - (101) Effect of foreign currency translation - 1 - - 1 Revaluation 1 742 - - - 1 742 Closing balance 4 928 1 499 299 14 6 740 Accumulated depreciation and Impairment Opening balance 24 521 37 8 590 Depreciation charge (Note 25) 96 203 46 2 347 Disposals (19) (26) (8) - (53) Effect of foreign currency translation - 1 - - 1 Elimination of accumulated depreciation of revalued assets (101) - - - (101) Closing balance - 699 75 10 784 Net book amount as at 31 December 2007 4 928 800 224 4 5 956

MDM Bank 127 The reconciliation of the carrying amount of premises and equipment as at 31 December 2006 and as at 31 December 2005 is presented below: Premises Office, Fixtures Intangible Total computer and assets and other fittings equipment Net book amount as at 1 January 2006 3 922 502 92 4 4 520 Cost or valuation Opening balance 3 922 886 122 10 4 940 Additions (Note 25) 45 196 5 1 247 Disposals (120) (37) (30) - (187) Effect of foreign currency translation - 1 - - 1 Elimination of accumulated depreciation of revalued assets (72) - - - (72) Revaluation 104 - - - 104 Closing balance 3 879 1 046 97 11 5 033 Accumulated depreciation and Impairment Opening balance - 384 30 6 420 Depreciation charge (Note 25) 97 158 21 2 278 Disposals (1) (21) (14) - (36) Elimination of accumulated depreciation of revalued assets (72) - - - (72) Closing balance 24 521 37 8 590 Net book amount as at 31 December 2006 3 855 525 60 3 4 443 As at 31 December 2007 premises of the Group were revalued by Management based on the results of independent appraisals performed by an independent firm of appraisers, which resulted in a revaluation increase of RUB 1 742 million. The primary basis used for the appraisal was the income capitalization approach. The income capitalization approach considers income and expense data relating to the property being valued and estimates fair value through a capitalization process. The market approach was used to assess the reasonableness of the results of the income capitalization approach. The market approach was based upon an analysis of the results of comparable sales of similar premises. The following key assumptions were used in applying the income capitalization approach: annual cash flows were projected based on estimated rental income net of operating and maintenance expenses based on current market rental rates and actual average operating and maintenance expenses; vacancy and collection losses were estimated as 3% to 10% from potential gross rent income; discount rates of 9.5% to 10% and 12% to 20% were applied to capitalise annual cash flows for Moscow premises and premises located in other regions, respectively.

128 MDM Bank Included in the net book value of premises as at 31 December 2007 was RUB 3 929 million (31 December 2006: RUB 2 555 million) representing the revaluation surplus. The reconciliation of the revaluation amount of premises as at 31 December 2007 and as at 31 December 2006 is presented below: Revaluation Deferred Revaluation surplus tax on reserve for revaluation premises and equipment Balance as at 1 January 2007 2 555 (613) 1 942 Disposals (368) 88 (280) Revaluation 1 742 (418) 1 324 Balance as at 31 December 2007 3 929 (943) 2 986 The reconciliation of the revaluation amount of premises as at 31 December 2006 and as at 31 December 2005 is presented below: Revaluation Deferred Revaluation surplus tax on reserve for revaluation premises and equipment Balance as at 1 January 2006 2 558 (614) 1 944 Disposals (107) 26 (81) Revaluation 104 (25) 79 Balance as at 31 December 2006 2 555 (613) 1 942 The net book value of premises that would have been recognised under the historic cost method was RUB 1 186 million, as at 31 December 2007 (31 December 2006: RUB 1 437 million). The gross book value of fully depreciated premises and equipment that was still in use was RUB 229 million, as at 31 December 2007 (31 December 2006: RUB 152 million). As at 31 December 2007 and 31 December 2006, the Group did not have internally developed intangible assets. During the years ended 31 December 2007 and 31 December 2006 the Group disposed of certain premises. The result on disposal of these premises for the year ended 31 December 2007 was a gain of RUB 498 million (31 December 2006: a loss of RUB 39 million).

MDM Bank 129 14. Due to Other Banks 31 December 2007 31 December 2006 Correspondent accounts and overnight deposits of other banks 6 039 10 030 Term deposits from other banks 88 160 41 411 Sale and repurchase agreements 8 163 9 431 Total due to other banks 102 362 60 872 As at 31 December 2007, the Group had six counterparties with aggregate balances greater than 10% of equity (31 December 2006: three counterparties). The total aggregate amount of these balances was RUB 38 928 million or 38% of due to other banks balances (31 December 2006: RUB 15 237 million or 25% of due to other banks balances). Included in due to other banks balances, as at 31 December 2007, were term deposits received from a large international bank of RUB 7 042 million (31 December 2006: RUB 4 072 million), in respect of which the Group pledged its receivable under a reverse sale and repurchase agreement from the same bank of RUB 7 046 million (31 December 2006: RUB 4 072 million) as collateral. Refer to Note 6. The following table presents information about assets sold under sale and repurchase agreements with other banks: 31 December 2007 31 December 2006 Securities received as collateral under sale and repurchase agreements, fair value (Notes 6, 11 and 15) 7 425 8 521 Trading securities, carrying value (Note 7 and 15) 2 674 3 624 Total assets sold under sale and repurchase agreements with other banks 10 099 12 145 Geographical and currency analysis, effective interest rates and maturity structure of due to other banks are disclosed in Note 26. Information on related party transactions is disclosed in Note 29.

130 MDM Bank 15. Customer Accounts 31 December 2007 31 December 2006 State organisations Current/settlement accounts 1 8 806 Term deposits 4 016 1 000 Other legal entities Current/settlement accounts 30 867 24 336 Term deposits 68 426 47 414 Sale and repurchase agreements 1 316 77 Retail customers Current/demand accounts 5 412 5 202 Term deposits 14 094 5 970 Total customer accounts 124 132 92 805 The following table presents information about assets sold under sale and repurchase agreements with customers: 31 December 2007 31 December 2006 Securities received as collateral under sale and repurchase agreements, fair value (Notes 6, 11 and 14) 1 074 79 Trading securities, carrying value (Note 7 and 14) 313 - Total assets sold under sale and repurchase agreements with customers 1 387 79 Economic sector concentrations within customer accounts are as follows: 31 December 2007 31 December 2006 Amount % Amount % Trade 41 194 33 35 920 39 Financial 32 706 26 20 259 22 Retail 19 506 16 11 172 12 Mining and oil 13 143 11 8 736 9 Manufacturing 11 655 9 4 595 5 State 4 017 3 9 806 10 Intergovernmental 1 142 1 1 768 2 Other 769 1 549 1 Total customer accounts 124 132 100 92 805 100 As at 31 December 2007, aggregate balances of the ten largest customers (or groups of customers) totalled RUB 53 852 million or 43% of total customer accounts (31 December 2006: RUB 44 336 million or 48% of total customer accounts). As at 31 December 2007, the Group had four customers with aggregated accounts greater than 10% of equity (31 December 2006: five customers). The total aggregate amount of these accounts was RUB

MDM Bank 131 39 216 million or 32% of the total customer accounts (31 December 2006: RUB 35 643 million or 38% of the total customer accounts). Included in customer accounts, as at 31 December 2007, was RUB 17 561 million held as collateral for irrevocable commitments under import letters of credit (31 December 2006: RUB 15 914 million). Geographical and currency analysis, effective interest rates and maturity structure of customer accounts are disclosed in Note 26. Information on related party transactions is disclosed in Note 29. 16. Debt Securities in Issue 31 December 2007 31 December 2006 Loan participation notes secured by diversified payment rights ( DPR ) 14 133 13 042 Unsecured loan participation notes 11 043 14 569 Promissory notes 9 771 9 311 Bonds 6 007 6 090 Loan participation notes secured by a pool of car loans 4 153 9 828 Deposit certificates 1 524 30 Total debt securities in issue 46 631 52 870 Loan participation notes, bonds issued, promissory notes and deposit certificates are unconditional debt instruments issued by the Group. As at 31 December 2007 loan participation notes and bonds comprised the following issues: Carrying Issue Maturity Coupon Effective amount date rate rate Russian bonds denominated in RUB 6 007 9 October 1 October 8.5% 11.5% 2007 2009 Loan participation notes secured by a pool of car loans: tranche A (senior) 957 23 October 14 November Libor + 1% 8.1% 2006 2013 tranche B (sub-senior) 1 879 23 October 14 November Libor + 1.6% 9.0% 2006 2013 tranche C (junior) 1 317 23 October 14 November Libor + 3.3% 10.9% 2006 2013 Loan participation notes secured by diversified 6 440 21 November 15 December Euribor + 2% 7.5% payment rights denominated in EUR 2006 2011 Loan participation notes secured by diversified 7 693 21 May 15 June Libor + 2% 7.6% payment rights denominated in USD 2007 2012 Unsecured loan participation notes 10 547 25 January 25 January 7.8% 8.0% denominated in USD 2007 2010 Unsecured loan participation notes 496 23 October 21 October 11.0% 11.3% denominated in USD 2007 2008 As at 31 December 2006 loan participation notes and bonds comprise the following issues:

132 MDM Bank Carrying Issue Maturity Coupon Effective amount date rate rate Russian bonds denominated in RUB 6 090 5 October 1 October 7.6% 7.8% 2006 2009 Loan participation notes secured by a pool of car loans: tranche A (senior) 6 443 23 October 14 November Libor + 1% 8.5% 2006 2013 tranche B (sub-senior) 1 989 23 October 14 November Libor + 1.6% 9.2% 2006 2013 tranche C (junior) 1 396 23 October 14 November Libor + 3.3% 11.1% 2006 2013 Loan participation notes secured by diversified 7 783 21 November 15 December Euribor + 2% 6.5% payment rights denominated in EUR 2006 2011 Loan participation notes secured by diversified 5 259 21 November 17 November Libor + 2% 8.1% payment rights denominated in USD 2006 2011 Unsecured loan participation notes 6 553 7 December 7 December 7.5% 8.0% denominated in USD 2005 2007 Unsecured loan participation notes 8 016 15 February 15 February 6.8% 7.3% denominated in USD 2006 2007 Maturity dates in the tables above represent latest contractual dates when the last payment under the notes are due. Loan participation notes secured by diversified payment rights and loan participation notes secured by a pool of car loans have quarterly and monthly repayments, respectively. Loan participation notes secured by a pool of car loans may be repaid before contractual repayment dates in case of earlier repayment of underlying car loans. As at 31 December 2007, the expected repayment dates of loan participation notes secured by a pool of car loans were 15 March 2008, 15 November 2008 and 15 August 2009 for tranches A, B and C respectively (31 December 2006: 15 June 2008, 15 February 2009 and 15 September 2009 for tranches A, B and C respectively). In October 2007, the Group repurchased its own fixed rate RUB denominated bonds with an aggregate nominal amount of RUB 6 000 million issued in October 2006 from investors at par value under the early redemption option. The bonds were reissued by the Group in October 2007 with a discount of 2.4% to par value, and a coupon rate of 8.5%. The bonds have a maturity date in October 2009. The next early repayment option is in October 2008. In October 2007, the Group issued fixed rate loan participation notes with an aggregate nominal amount of RUB 498 million. The issue proceeds net of transaction costs amounted to RUB 482 million. In January 2007, the Group issued fixed rate loan participation notes with an aggregate nominal amount of USD 425 million. The issue proceeds net of transaction costs amounted to USD 423 million. In October 2006, the Group issued three tranches of loan participation notes totaling USD 403.1 million secured by a pool of car loans with a carrying value of RUB 4 745 million, as at 31 December 2007 (31 December 2006: RUB 10 262 million). Total amounts of tranche A, tranche B and tranche C notes on the issue date were USD 270.9 million, USD 77.4 million, and USD 54.8 million, respectively. The issue proceeds net of transaction costs amounted to USD 395 million. The notes have monthly repayments. Under the conditions of the notes, more senior tranches are repaid first. As a part of this transaction, the Group entered into balance guaranteed cross currency interest rate swap agreements with major international banks. Under conditions of the swap agreements, all RUB or USD denominated fixed rate amounts received by the Group from car loans pledged as collateral under its loan participation notes are swapped for USD floating rate amounts which are then used for repayment of the loan participation notes. Refer to Notes 8 and 11.

MDM Bank 133 In November 2006, the Group issued floating rate loan participation notes of USD 200 million and EUR 225 million secured by the Group s diversified payment rights, i.e. its rights to funds being transferred to the Group s USD and EUR correspondent accounts. The issue proceeds net of transaction costs amounted to USD 198 million and EUR 223 million. The principal of the notes is repaid quarterly by equal installments with a final maturity on 15 December 2011. In May 2007, the Group issued additional loan participation notes of USD 350 million secured by the Group s diversified payment rights while loan participation loans of USD 200 million issued in November 2006 were repaid. The issue proceeds net of transaction costs amounted to USD 345 million. The principal of the notes is repaid quarterly by equal installments with a final maturity on 15 June 2012. Included in due from other banks balances, as at 31 December 2007 are loans to a large international bank of RUB 1 093 million (31 December 2006: RUB 951 million) pledged as collateral for interest and principal repayments in respect of these notes. Refer to Note 6. Geographical and currency analysis, effective interest rates and maturity structure of debt securities in issue are disclosed in Note 26. Information on related party transactions is disclosed in Note 29. 17. Subordinated Debt 31 December 2007 31 December 2006 Subordinated loan participation notes 5 066 5 452 Total subordinated debt 5 066 5 452 In July 2006, the Group issued USD 200 million fixed rate subordinated unsecured notes maturing in July 2011 with a coupon rate of 9.75% per annum and an effective rate of 10.0% per annum. The issue proceeds net of transaction costs were USD 199 million. In case of bankruptcy, the repayment of the subordinated loan participation notes shall be made after repayment in full of all other liabilities of the Bank. Geographical and currency analysis, effective interest rates and maturity structure of subordinated debt are disclosed in Note 26. 18. Other Liabilities 31 December 2007 31 December 2006 Trade creditors 940 744 Settlements on conversion operations 801 186 Accrued compensation expenses 710 860 Liabilities from credit related commitments 101 309 Taxes other than income tax payable 46 66 Other 39 59 Total other liabilities 2 637 2 224 Included in liabilities from credit related commitments as at 31 December 2007 was a provision for losses in respect of credit related commitments of RUB 44 million (31 December 2006: RUB 50 million). Refer to Note 27. Geographical and currency analysis, maturity structure of other liabilities are disclosed in Note 26.

134 MDM Bank 19. Share Capital The share capital of the Bank has been contributed by shareholders in Russian Roubles. Shareholders are entitled to dividends and any capital distribution in Russian Roubles. As at 31 December 2007, share capital of the Bank consisted of 2 265 738 authorized, issued and fully paid ordinary shares with a fixed nominal value of 500 Russian Roubles (31 December 2006: 2 149 950 ordinary shares) and 50 050 authorized, issued and fully paid preference shares with a fixed nominal value of 500 Russian Roubles (31 December 2006: 50 050 preference shares). In July 2007 MDM Bank s shareholders approved the issue of 115 788 additional ordinary shares of MDM Bank at a nominal value of 500 Russian Roubles per share to the IFC for USD 184 million. The share placement was completed in September 2007 by way of a closed subscription. As a result, the IFC has acquired a 5.0% interest in the total share capital of MDM Bank. Ordinary shares carry the right to vote at annual and general meetings, to receive dividends and a residual interest in the assets of the Bank after deducting all its liabilities on liquidation. All ordinary shares provide equal rights to their owners. Preference shares have no right of conversion or redemption. Preference shares carry the right to vote at annual and general meetings in respect of issues that influence the interests of preference shareholders, including reorganisation and liquidation. Preference shares are entitled to receive the same dividends as dividends attributable to ordinary shareholders. If the dividend is not paid, preference shares carry the right to vote at annual and general meetings until dividends are paid. Dividends are not cumulative. In the event of liquidation preference shareholders are entitled to receive declared unpaid dividends and the par value of the preference shares ( liquidation value ). Dividends payable to Bank s shareholders are restricted to the maximum retained earnings of the Bank, which are determined according to legislation in the Russian Federation. As at 31 December 2007, the Bank s reserves available for distribution amounted to RUB 21 428 million (31 December 2006: RUB 14 893 million). No dividends on ordinary or preference shares have been declared during the years ended 31 December 2007 and 31 December 2006. The share capital of the Bank, as at 31 December 2007 and 31 December 2006, comprises the following:

MDM Bank 135 31 December 2007 31 December 2006 Nominal Inflation Total Nominal Inflation Total value adjustment share value adjustment share capital capital Ordinary shares 1 133 534 1 667 1 075 534 1 609 Preference shares 25 102 127 25 102 127 Total share capital 1 158 636 1 794 1 100 636 1 736 20. Interest Income and Expense 2007 2006 Interest income Loans and advances to customers 23 865 14 747 Overnight deposits and due from other banks 3 098 1 496 Trading securities 1 361 792 Other financial instruments at fair value through profit or loss 21 291 Total interest income 28 345 17 326 Interest expense Due to other banks (4 966) (2 390) Customer accounts (4 446) (2 167) Debt securities in issue (4 267) (2 483) Subordinated debt (534) (229) Total interest expense (14 213) (7 269) Net interest income 14 132 10 057 Included in interest income for the year ended 31 December 2007 was RUB 604 million in respect of interest income from finance leases (31 December 2006: RUB 334 million). Information on related party transactions is disclosed in Note 29.

136 MDM Bank 21. Gains less Losses from Foreign Exchange 2007 2006 Gains less losses from trading in foreign currencies (609) (199) Foreign exchange translation gains less losses 1 973 1 282 Total gains less losses from foreign exchange 1 364 1 083 Information on related party transactions is disclosed in Note 29. 22. Fee and Commission Income and Expense 2007 2006 Commission on settlement and trade finance transactions 1 417 1 115 Commission for brokerage and other services of an investment banking nature 504 211 Commission on cash transactions 370 263 Commission on foreign currency transactions 364 344 Commission for business referral 275 79 Commission for trust and fiduciary services 41 7 Other 7 3 Total fee and commission income 2 978 2 022 Commission on settlement transactions (297) (258) Commission on cash transactions (185) (73) Commission on foreign currency transactions (73) (126) Other (79) (177) Total fee and commission expense (634) (634) Net fee and commission income 2 344 1 388 Information on related party transactions is disclosed in Note 29.

MDM Bank 137 23. Operating Expenses 2007 2006 Staff costs 5 746 4 572 Depreciation, rent and other expenses related to premises and equipment 1 181 737 Taxes other than on income 485 389 Professional services 416 377 Advertising and marketing 365 244 Security 164 157 Software 134 106 Telecommunications 102 81 Other 29 52 Total operating expenses 8 622 6 715 ZAO KPMG and other KPMG firms (together KPMG ) are auditors of MDM Bank and certain subsidiaries within the Group. Audit fees paid by the Group to KPMG for the year ended 31 December 2007 are RUB 23 million (31 December 2006: RUB 21 million). During the year ended 31 December 2007 RUB 7 million was paid by the Group to KPMG for audit-related services, comprising mainly provision of comfort letters in respect of debt issues of the Group (31 December 2006: RUB 4 million). During the years ended 31 December 2007 and 2006, the Group s principal auditor, KPMG, did not provide any significant non-audit services to the Group. Included in professional services expenses for the year ended 31 December 2007 were fees of RUB 1 million paid to professional firms for services rendered to the Board of Directors of MDM Bank (31 December 2006: RUB 9 million). Information on related party transactions is disclosed in Note 29. 24. Income Taxes Income tax expense comprises the following: 2007 2006 Current tax charge 2 417 1 660 Deferred taxation movement due to origination and reversal of temporary differences and movement in valuation allowance 118 (392) Deferred tax charge in respect of revaluation of premises recorded directly in equity (418) (25) Deferred tax charge in respect of revaluation of available-for-sale assets recorded directly in equity (6) - Income tax expense 2 111 1 243 As at 31 December 2007, the income tax rate applicable to the majority of the Russian entities of the Group s income was 24% (31 December 2006: 24%). As at 31 December 2007, the income tax rate applicable to income of non-russian entities of the Group ranged from 0% to 15% (31 December 2006: from 0% to 15%).

138 MDM Bank The reconciliation between the expected and the actual income tax expense is provided below: 2007 % 2006 % Profit before taxation 7 627 100.0 4 563 100.0 Theoretical income tax expense at the applicable statutory rate 1 830 24.0 1 095 24.0 Tax effect of items taxed at different tax rates (164) (2.2) (136) (3.0) Tax effect of items which are not deductible or assessable for taxation purposes, and other items of a non-temporary nature 466 6.1 277 6.1 Unrecognised net deferred tax asset movement (21) (0.2) 7 0.1 Income tax expense 2 111 27.7 1 243 27.2 Movements in temporary differences for the year ended 31 December 2007: 1 January 2007 Movements 31 December 2007 Tax effect of deductible temporary differences Impairment allowances and provisions 30 (30) - Accruals 435 128 563 Premises and equipment 31 (31) - Securities 53 (49) 4 Other 28 20 48 Gross deferred tax asset 577 38 615 Less unrecognised deferred tax asset (23) 21 (2) Net deferred tax asset 554 59 613 Tax effect of taxable temporary differences Impairment allowances and provisions (426) 298 (128) Accruals (42) 42 - Premises and equipment (730) (289) (1 019) Securities - (6) (6) Other (8) (222) (230) Gross deferred tax liability (1 206) (177) (1 383) Total net deferred tax liability (652) (118) (770)

MDM Bank 139 Movements in temporary differences for the year ended 31 December 2006: 1 January 2006 Movements 31 December 2006 Tax effect of deductible temporary differences Impairment allowances and provisions 6 24 30 Accruals 198 237 435 Premises and equipment - 31 31 Securities - 53 53 Other 10 18 28 Gross deferred tax asset 214 363 577 Less unrecognised deferred tax asset (16) (7) (23) Net deferred tax asset 198 356 554 Tax effect of taxable temporary differences Impairment allowances and provisions (315) (111) (426) Accruals (3) (39) (42) Premises and equipment (760) 30 (730) Securities (133) 133 - Other (31) 23 (8) Gross deferred tax liability (1 242) 36 (1 206) Total net deferred tax liability (1 044) 392 (652) Deferred income taxes are calculated on all temporary differences under the liability method using the income tax rates applicable to entities of the Group. As at 31 December 2007, the Group did not recognise a deferred tax liability in respect of its investments in subsidiaries as the Group was able to control the timing of the reversal of the temporary differences and it was not probable that the temporary differences will reverse in the foreseeable future. In the context of the Group s current structure, tax losses and current tax assets of different companies may not be offset against current tax liabilities and taxable profits of other companies and, accordingly, taxes may accrue even where there is a net consolidated tax loss. Therefore, a deferred tax asset of one company of the Group may not be offset against a deferred tax liability of another company. As at 31 December 2007, a net deferred tax asset in respect of net deductible temporary differences of RUB 2 million (31 December 2006: RUB 23 million) has not been recorded as it was not probable that the relevant entity of the Group will have sufficient taxable profit that will allow the Group to benefit from the deferred tax asset.

140 MDM Bank 25. Analysis by Segment The Group is organised into six main reportable business segments: Corporate banking includes deposit taking and lending to corporate clients, leasing, factoring, settlements, cash management, cash collection, trade finance, syndications and export credit agency financing. Small business banking includes deposit taking and lending to small and medium enterprises, settlements, cash management, and cash collection. Retail banking includes deposit taking and lending to individuals, money transfer and foreign exchange services, and a range of banking card products provided to individual customers. Investment banking and financial markets includes corporate finance, debt and equity capital markets, money markets, trading and brokerage in securities, foreign exchange and precious metals, repo transactions, banknote trading, and trading in derivatives. Private banking and asset management includes active advisory, discretionary portfolio management, and financial planning services to high wealth individuals, and administration and management of the Group s asset management products, including discretionary portfolios and mutual funds. Central treasury includes treasury, which undertakes the Group s funding and centralized risk management activities through borrowings, issue of debt securities, use of derivatives for risk management and investing in liquid assets such as short-term placements. Funds are allocated to segments through the Central treasury, which results in internal funding charges. Such charges are calculated using internal rates, which are based on current market borrowing rates. Funding allocated to segments is adjusted for funding provided by an allocation of capital. Capital is allocated to each business segment based on the level of its risk weighted assets. The result of this adjustment is presented as an allowance for capital benefit for each segment. The Group also has a central administrative function that manages its premises and certain corporate costs. Cost sharing agreements are used to allocate central costs to business segments on a reasonable basis.

MDM Bank 141 Segment breakdown of assets and liabilities of the Group is set out below: 31 December 2007 31 December 2006 Assets Corporate banking 148 675 115 843 Retail banking 37 377 26 867 Small business banking 8 521 4 545 Investment banking and financial markets 59 020 75 464 Private banking and asset management 20 30 Central treasury 66 985 19 176 Unallocated assets 884 1 197 Total assets 321 482 243 122 Liabilities Corporate banking 128 972 88 510 Retail banking 11 384 9 073 Small business banking 4 407 2 556 Investment banking and financial markets 35 736 41 933 Private banking and asset management 9 417 2 582 Central treasury 83 896 62 443 Unallocated liabilities 8 772 8 701 Total liabilities 282 584 215 798

142 MDM Bank Segment information for the main reportable business segments of the Group for the year ended 31 December 2007 is set out below: Corporate Retail Small Invest- Private Central Unallo- Consolibanking Banking business ment banking treasury cated dated banking banking and Group and asset financial managemarkets ment External interest income 17 366 4 431 1 036 4 492 1 1 019-28 345 External interest expense (5 310) (287) (25) (1 658) (342) (6 000) (591) (14 213) Internal funding charge (4 581) (2 333) (368) (1 409) 364 5 419 2 908 - Allowance for capital benefit 1 349 260 55 462-38 (2 164) - Net interest income 8 824 2 071 698 1 887 23 476 153 14 132 Fee and commission income 969 917 224 820 42 6-2 978 Fee and commission expense (167) (204) (21) (234) - (8) - (634) Trading and foreign exchange results 318 71-661 2 81-1 133 Other operating income 115 8-70 - 1 29 223 Total operating income before impairment losses and provisions 10 059 2 863 901 3 204 67 556 182 17 832 Direct operating expenses (1 418) (1 547) (354) (1 068) (149) (73) - (4 609) Impairment losses and provisions (509) (1 199) (365) (5) - - (3) (2 081) Segment result before central overhead 8 132 117 182 2 131 (82) 483 179 11 142 Allocation of central overheads (1 212) (1 598) (480) (721) (1) (1) - (4 013) Result on disposal of premises - - - - - - 498 498 Profit before taxation 6 920 (1 481) (298) 1 410 (83) 482 677 7 627 Income tax (2 111) Profit for the period 5 516

MDM Bank 143 Segment information for the main reportable business segments of the Group for the year ended 31 December 2006 is set out below: Corporate Retail Small Invest- Private Central Unallo- Consolibanking Banking business ment banking treasury cated dated banking banking and Group and asset financial managemarkets ment External interest income 10 482 2 994 345 3 259 4 242-17 326 External interest expense (2 767) (235) (1) (1 170) (180) (2 888) (28) (7 269) Internal funding charge (3 001) (1 315) (171) (727) 202 3 067 1 945 - Allowance for capital benefit 1 002 181 20 396-12 (1 611) - Net interest income 5 716 1 625 193 1 758 26 433 306 10 057 Fee and commission income 740 552 155 566 6-3 2 022 Fee and commission expense (262) (170) - (197) - (3) (2) (634) Trading and foreign exchange results 231 73-1 084 - - - 1 388 Other operating income 56 7-11 - 5 135 214 Total operating income before impairment losses and provisions 6 481 2 087 348 3 222 32 435 442 13 047 Direct operating expenses (1 276) (865) (123) (1 035) (52) (34) - (3 385) Impairment losses and provisions (451) (1 164) (97) (18) - - - (1 730) Segment result before central overhead 4 754 58 128 2 169 (20) 401 442 7 932 Allocation of central overheads (1 121) (1 264) (242) (689) (7) (7) - (3 330) Result on disposal of premises - - - - - - (39) (39) Profit before taxation 3 633 (1 206) (114) 1 480 (27) 394 403 4 563 Income tax (1 243) Profit for the period 3 320 Capital expenditures for the main reportable business segments of the Group for the year ended 31 December 2007 is set out below: 2007 2006 Corporate banking 223 84 Retail banking 356 98 Small business banking 85 16 Investment banking and financial markets 133 49 Private banking and asset management - - Central treasury - - Unallocated - - Total capital expenditures (Note 13) 797 247

144 MDM Bank Depreciation charge for the main reportable business segments of the Group for the year ended 31 December 2007 is set out below: 2007 2006 Corporate banking 97 95 Retail banking 155 110 Small business banking 37 18 Investment banking and financial markets 58 55 Private banking and asset management - - Central treasury - - Unallocated - - Total depreciation charge (Note 13) 347 278 Outstanding credit related commitments for the main reportable business segments of the Group as at 31 December 2007 and 31 December 2006 are set out below: 31 December 2007 31 December 2006 Corporate banking 51 854 40 414 Retail banking 10 181 1 391 Total credit related commitments (Note 27) 62 035 41 805 26. Financial Risk Management Taking risk is core to the financial business. The Group s aim is to achieve an appropriate balance between risk and return and minimize potential adverse effect on the Group s financial performance. The Group has exposure to risks, which include credit, market, liquidity, operational risks and other risks. (a) Risk management framework The Group s risk management policies aim to identify, analyze and manage the risks faced by the Group. Risk management in the Group is based on the following main principles: Limitation of potential losses the Group s transactions associated with risks are performed within a system of limits/restrictions on certain types of risk. Timeliness of risk assessment all new products and transactions of the Group are analyzed for associated risks. Based on the results of the risk analysis, a system of limits/restrictions and appropriate controls are implemented for this product/transaction. Risk management based on the assessment of changes in the external and internal risk factors, appropriate steps are taken to either accept, avoid, mitigate or pass on the risks, in order to achieve optimal risk-reward balance for the Group. Clear segregation of duties between corporate management structures and business-units ensures effective risk management and should eliminate conflicts of interests. Risk management functions are allocated in the Group in the following way. The Board of Directors of MDM Bank has overall responsibility for the oversight of risk management, the management of key risks and approving its risk management policies and procedures.

MDM Bank 145 The Audit Committee (the Audit and Risk Committee since 2008) of the Board of Directors of MDM Bank is responsible for overseeing the internal control framework and assessing the adequacy of risk management and compliance policies and procedures (previously assessed by a separate Risk Committee). It meets regularly and provides recommendations to the Board of Directors of MDM Bank on development of the framework, as well as its views on the quality of risk management and compliance. The Executive Management Board of MDM Bank is responsible for monitoring and implementation of risk mitigation measures and making sure that both the Group and the Bank operate within the established risk parameters. Credit, market and liquidity risks at both the portfolio and transactional levels are managed and controlled through a system of Credit Committees, Committees on Counterparties and Financial Instruments and an Asset and Liability Management Committee (ALCO). The Risk Department of MDM Bank is responsible for overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks. The Risk Department develops the methodology for risk measurement and performs independent risk analysis of credit products and programs submitted for approval and limits on specific clients/operations, performs portfolio analysis on current credit products and programs, and develops a number of limits on aggregated risks (i.e. industry/sector limits, limits on insurance of pledges by insurance companies etc.). Additionally, the Risk Department prepares monthly reports on risk management covering all the main risks, including credit, market, liquidity and operational risks, which are reported to the Board of Directors and the Management Board of MDM Bank. The business units of the Group manage risks within their functional duties. The Internal Audit Department of MDM Bank audits the Group s business units to check their compliance with the internal policies of the Group, reports its findings to the Management of the Group and proposes remedial actions for the findings. The main risk management policies and procedures used by the Group and details of major measures aimed at increasing the effectiveness and quality of risk management which are expected in the next year, are provided below. (b) Credit risk Credit risk is the risk of losses as a result of the non-performance, late or partial performance by a debtor of its contractual financial obligations to the Group. Credit risk arises principally from credit transactions, transactions with counterparties on the financial markets, purchase of debt securities and other on and off balance sheet credit exposures. For risk reporting purposes, the Group considers and consolidates all elements of credit risk exposures such as individual debtor default risk, country and industry risk. For risk management purposes, credit risk arising from positions in trading securities and other financial instruments at fair value through profit or loss is managed and reported as a market risk exposure. (i) Credit risk management The Group limits concentrations of exposure to individual customers, counterparties and issuers (for securities), groups of related customers, as well as exposure by industry/sector etc. To limit potential losses arising from credit risk, all transactions involving credit risk (including sale and repurchase agreements and other transactions with collateral) are performed within established limits.

146 MDM Bank The process of developing and setting limits is aimed at minimizing conflicts of interests. The application to establish a limit is originated by the relevant client managers. Credit risk analyses are performed either by the Credit Department or the Risk Department (in respect of limits for financial institutions: banks, funds, investment companies etc.). The Credit Committee, the Committee on Counterparties and Financial Instruments (in respect of limits for financial institutions) or another authorized person (in respect of small limits within standard lending programs established by the Credit Committee) approve credit risk limits. Before being passed on to the Credit Committee or the Committee on Counterparties and Financial Instruments, limit applications are independently reviewed by the Risk Department. The Risk Department assesses risks and provides recommendations to the members of the Credit Committee and the Committee on Counterparties and Financial Instruments on mitigating such risks. The only exceptions are credit limits established within approved (and subsequently reviewed by the Risk Department) standard credit products/programs. In order to facilitate efficient decision-making, the Group has established a hierarchy for the credit committees depending on the type and amount of the exposure to risk. The following credit committees are responsible for approving corporate and retail exposures subject to credit risk. The Senior Credit Committee approves all credit risk management policies and procedures and approves all credit risk limits above USD 5 million. The Senior Credit Committee includes the Chairman of the Executive Management Board and the Chief Financial Officer of MDM Bank, as well as the heads of client, investment and credit units of the Group and the Risk Department. A number of lower level credit committees have been established to approve limits on smaller amounts, including limits within standard credit products/programs established by the Senior Credit Committee. These committees usually include representatives of client and credit units of the Group and the Risk Department. The Executive Credit Committee approves all limits between USD 1.5 and 5 million; The Small Loans Credit Committee approves limits up to USD 1.5 million; The Credit Committee for Standard Credit Products approves limits within the Group s standard credit products established by the Senior Credit Committee (overdrafts, leasing, loans to car dealers, credit products under the small business lending program etc.); The Credit Committee for Standard Credit Products established within the structure of regional branches and the Small business Lending Division have the right to approve limits within the Small business lending program up to USD 200 thousand. The Junior Credit Committee for Retail Lending approves limits for individuals under the retail lending programs established by the Senior Credit Committee; Authority to approve small limits within the retail lending programs established by the Senior Credit Committee is delegated to Junior credit committees for retail lending in branches (for customers of regional branches) and certain employees of the Retail Lending Division (for customers of the Head Office). Such authority varies depending on standard credit products: auto loan, mortgage loan, consumer loan etc.

MDM Bank 147 The following credit committees are responsible for approving credit risk exposures to financial institutions: The Senior Committee on Counterparties and Financial Instruments approves credit exposure limits above USD 25 million; The Junior Committee on Counterparties and Financial Instruments approves credit exposure limits up to USD 25 million. All large exposures are communicated to the Executive Management Board and the Board of Directors as part of the Monthly Risk Management Report. 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 a counterparty to honor 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 settlement obligations. Acceptance of settlement risk on free settlement transactions requires transaction specific and/or counterparty specific settlement limits which form part of the credit risk limits. (ii) Policies for credit risk analysis and setting credit risk limits Credit analysis is performed using approved methodologies. These methodologies include a methodology for analyzing the financial standing of debtors and a methodology for the assessment of collateral. Analysis of debtor financial standing is performed using all the information on the debtor available to the Group in accordance with methodology applied. This analysis includes assessment of current and expected debtor financial standing and the current business of the debtor. Generally, the group of companies of the debtor is considered as a whole, if all members of the group accept responsibility for the loan. Analysis of the expected creditworthiness of individuals within retail lending is performed based on the current income and profile of the customer using scoring models which are based on statistical analysis of defaults by individual lending program. The Group internally assesses collateral using methodologies developed for each type of collateral. The valuation performed by third parties, including independent appraisal firms authorized by the Group, may serve as the data used for such assessment. The principal collateral types are as follows: in the commercial and industrial sector, charges over business assets such as premises, equipment, stock and debtors; in the commercial real estate sector, mortgages and/or charges over the properties being financed; in the financial sector, charges over financial instruments such as debt securities and equities; in the retail sector, mortgages over residential properties, and charges over motor vehicles or other valuables. Collateral is not generally held over loans and advances to banks, except where securities are held as part of reverse repurchase agreements and secured lending lines. Collateral is not held against exposures to securities.

148 MDM Bank The Group usually requires collateral, equipment and products to be insured for any damage by approved insurance companies. The Group also analyzes other risks arising from the business of the debtor or associated transactions. Other risks include the following: Ecological/social risk is the risk that the debtor will face difficulties in servicing the loan because of penalties imposed and/or suspension of business by the regulatory authorities due to non-compliance with the requirements of ecological and social legislation. The assessment of this risk is performed for all large lending limits for corporate clients. Regulation risk is the risk that the debtor will face difficulties in servicing the loan due to claims against the debtor by the regulatory authorities. Reputation risk is the risk from the possible association of the Group with the activities of its customer that do not comply with the requirements of legislation. Generally, to mitigate reputation risk all the Group s customers are subject to a check by the Security Department. Legal risk is the risk of financial losses due to weaknesses in the legal framework or insufficient analysis of legal issues during preparation of credit documentation. The main principles for setting limits include: the financial position of the debtor (current and expected) should allow the debtor to settle on outstanding loans on a timely basis, without forcing the Group to realize collateral (which is an important but secondary factor in limit setting); the intended use of credit products within a limit should be clear and logically follow from the business of the debtor; sources of repayment of credit products should be clearly determined and exist; other risks identified should be acceptable. (iii) Credit risk measurement The quantitative assessment of credit risk is based on the expected loss model, as recommended by the Basel Committee on Banking Regulations and Supervisory Practices (the Basel Committee ). The expected loss model can be contrasted with impairment allowances required under International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement, which are based on losses that have been incurred as at the balance sheet date (the incurred loss model ) rather than expected losses. The expected loss model calculates expected losses for various credit exposures based on the probability of default (PD), exposure at default (EAD) and loss given default (LGD). The Group assesses the probability of default of individual counterparties using internal rating tools tailored to the various categories of debtor, industry/sector and different standard credit products/ programs. They have been developed internally and combine statistical analysis with credit and risk department officer judgment and are validated, where appropriate, by comparison with externally available data. The exposure at default is the expected amount of the exposure at the time of default. Loss given default is estimated based on the historical recovery rate and typically varies by type of counterparty, type and availability of collateral or other credit risk mitigation.

MDM Bank 149 Information on the credit quality of the Group s loan portfolio is presented in Note 11. (iv) Policies for providing credit products within established limits When providing credit products within established limits the Group implements a set of procedures to mitigate the risk of conflict of interests and operating risks: A client unit initiates the issue of a credit product within the established limit. The Credit Department prepares credit documentation and monitors compliance with the terms of the limit. The Operations Department implements a transaction and records it in the Group s systems. (v) Principles for credit risk monitoring Credit risk monitoring comprises two components: Monitoring of established limits The Group regularly monitors the payment discipline of debtors, availability and value of collateral, financial standing of debtors and compliance with other covenants established for the limits. Corporate clients and small business clients are usually monitored by credit and/or client units of the Group. Financial institutions are monitored by the Risk Department. The credit products issued by the Group are assessed based on the monitoring results for any indications of impairment. If necessary, the Group implements steps to mitigate credit risk. These may include revision of limit terms, request for additional collateral etc. In certain cases recovery of the loan is delegated to the special department responsible for recovery of bad debts. Portfolio monitoring Apart from monitoring individual limits, the Risk Department also periodically assesses credit risk for loan portfolios as a whole and for individual standard programs and products. Such analysis includes analysis of the default rates for portfolios, adequacy of impairment losses recognized, level of industry concentration, and geographical risks and portfolio diversification. If negative trends are discovered, the Risk Department analyzes the trends and initiates required changes to the credit policies and methodology of the Group. (vi) Allowance for loan losses The Group establishes an allowance for loan losses that represents its estimate of losses incurred in its loan portfolio. The Group writes off a loan balance (and any related allowances for loan losses) when the Group s Senior Credit Committee determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. For smaller balance standardized loans, write off decisions are generally based on a product specific past due status. Generally, overdue loans are written off when overdue more than one year or if the debtor is declared bankrupt.

150 MDM Bank (vii) Maximum exposure to credit risk The Group s maximum exposure to on balance sheet credit risk is generally reflected in the carrying amounts of financial assets on the balance sheet. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. Credit risk for off balance sheet financial instruments is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Group uses the same procedures and methodologies, as defined by the Group s credit policy, for approving credit related commitments (undrawn loan commitments, letters of credit and guarantees) as it does for on balance sheet credit obligations (loans). The Group s maximum exposure to off balance sheet credit risk is reflected in Note 27 Contingent liabilities and commitments. For the analysis of concentration of credit risk in respect of loans and advances to customers refer to Note 11 Loans and advances to customers. (viii) Changes in the credit risk management process The Group constantly takes steps to improve its risk management system in line with international best practice. From 2008, the Group decided to reorganize the system of limit approval: Authority for setting limits up to USD 25 million (for financial institutions) and up to USD 10 millions (for other customers) will be delegated to the authorized employees of the Risk Department. The level of such authority will depend on the type of debtor (corporate client, financial institution, small business, individual) and the type of the product. Authority for setting limits on large exposures as well as authority to approve documentation for transactions associated with credit risk and standard credit products/programs will be retained by the Senior Credit Committee and the Senior Committee on Counterparties and Financial Instruments (for financial institutions). The new system is aimed to provide a more simple and accelerated procedure of credit/loan applications approval, with a clear allocation of responsibilities in the decision-making process. In addition, from 2008 the Group will apply a system of allocation of capital at risk integrated with the risk management system. Expected and actual RAROC (Risk-Adjusted Return on Capital) for individual transactions and for a portfolio as a whole will be considered as one of the key risk-reward measures. The Group also has an intention to introduce a procedure for ecological risk assessment based on IFC and EBRD standards. (c) Market risk Market risk is the risk that movements in market prices, including foreign exchange rates, interest rates, credit spreads and equity prices will have an adverse affect on the Group s income or the value of its financial instruments. Market risk comprises interest rate risk, currency risk and other price risks. Market risk arises from open positions in interest rate, currency and equity financial instruments, which are subject to general and specific market movements and changes in the level of volatility of market prices. (i) Market risk management The objective of market risk management is to manage and keep market risk exposures within acceptable parameters, whilst optimizing the return on risk. Market risk management is based on proper allocation of risk management functions to limit potential losses.

MDM Bank 151 Market risk is managed primarily through daily mark-to-market procedures, assessment of sensitivity of positions to risk variables and control of limits for various types of financial instruments. The Asset and Liability Committee (ALCO), chaired by the Chairman of the Executive Management Board of MDM Bank, has overall authority for market risk and approved market risk limits. For the purposes of currency risk management the Group applies a system of controls over open foreign exchange positions, and trade positions are monitored in real time. Positions in securities are monitored centrally. The limit structure is similar to the structure of the Group s operations in the financial markets. For new types of transactions, a preliminary analysis of risks is performed. The front-office unit initiates the procedure of setting the market risk limits. The Risk Department performs a detailed analysis of a proposed transaction, develops market risk assessment procedures, establishes appropriate risk limits and develops required control procedures. The Risk Department submits recommendations to the ALCO to reject or approve the transaction and, if necessary, to set market risk limits based on the results of the analysis. (ii) Quantitative assessment of market risk The Group also utilizes the Value-at-Risk (VaR) methodology for its trading positions. VaR 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 level of confidence. The VaR model used by the Group is based upon a 99 percent confidence level and assumes a 10-day holding period. The Group applies a linear VaR model. Potential movements in market prices are determined with reference to market data for at least the last 12 months. Back-testing of the model is performed at least once every six months. A summary of the VaR estimates in respect of foreign currency risk and securities price risk for the Group s portfolio of financial instruments as at 31 December 2007 and 31 December 2006 is as follows: 31 December 2007 31 December 2006 Foreign exchange risk 36 23 Fixed income securities price risk 326 159 Equity securities price risk 411 497 Although VaR is a valuable tool in 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. 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. The use of a 99% confidence level does not take into account losses that may occur beyond this level. There is a one percent probability that the loss could exceed the VaR. As VaR is only calculated on an end-of-day basis, it does not necessarily reflect exposures that may arise on positions during the trading day.

152 MDM Bank The limitations of the VaR methodology are recognized by supplementing VaR limits with limits of open positions for financial instruments and risk exposures and limits of sensitivity to risk factors. In addition, the Group performs scenario stress-testing for trading positions on a monthly basis to model the possible financial impact of exceptional market scenarios on individual trading portfolios and the Group s overall position. (iii) Price risk Price risk is the risk that movements in market prices resulting from factors associated with issuers of financial instruments (specific risk) and general changes in the market prices of financial instruments (general risk) will have an adverse affect on the Group s income or the value of its financial instruments. Price risk for financial instruments held within the Group s trading portfolios is managed by setting limits on investments in financial instruments taking into account their liquidity, stop-loss limits for trading portfolios, and maintaining a diversified structure of portfolios. Price risk is monitored through daily revaluations of open positions to market prices, assessment of the sensitivity of positions to risk variables, and control over compliance with limits for different types of financial instruments. (iv) Currency risk Currency risk is the risk that movements in foreign exchange rates will have an adverse affect on the Group s income or the value of its portfolios of financial instruments. Currency risk mainly results from open foreign currency positions. All transactions with currency risk exposure are performed within limits for open foreign currency positions. Such limits are established taking into consideration expected future movements in foreign exchange rates which are based on historical volatilities, scenario modeling and expert estimates. Traders manage currency risk in respect of the Group s trading foreign currency positions which are opened within the limits established by the ALCO. The Treasury Department manages currency risk in respect of the currency mismatch between nontrading assets and liabilities (structural foreign currency position). The Group s target is to maintain a risk neutral structural foreign currency position. The overall currency risk is managed by the Risk Department. Transactions are generally performed in three major currencies: the Russian rouble, US dollar and Euro. Transactions in other currencies are agreed upfront with the Treasury Department and are usually hedged.

MDM Bank 153 As at 31 December 2007, the Group has the following positions in different currencies: RUB USD EUR Other Total currencies Assets Cash and cash equivalents 21 759 58 298 3 150 227 83 434 Mandatory cash balances with central banks 3 883 - - 1 655 5 538 Due from other banks 9 478 14 751 3 605-27 834 Trading securities - owned by the Group 7 504 3 370 1-10 875 - pledged under sale and repurchase agreements 2 090 897 - - 2 987 Derivative financial instruments 104 44-112 260 Other financial instruments at fair value through profit or loss - 226 - - 226 Available-for-sale assets 290 - - - 290 Loans and advances to customers 98 926 68 036 13 341 8 180 311 Current income tax prepayments 48 - - - 48 Other assets 3 143 477 88 15 3 723 Premises and equipment 5 942 - - 14 5 956 Total assets 153 167 146 099 20 185 2 031 321 482 Liabilities Due to other banks 16 696 76 949 8 714 3 102 362 Derivative financial instruments 29 754 91-874 Customer accounts 71 228 49 969 2 799 136 124 132 Debt securities in issue 13 182 26 205 7 244-46 631 Subordinated debt - 5 066 - - 5 066 Current income tax payable 94 7-11 112 Other liabilities 2 352 179 14 92 2 637 Deferred tax liability 752 18 - - 770 Total liabilities 104 333 159 147 18 862 242 282 584 Net balance sheet position 48 834 (13 048) 1 323 1 789 38 898 Off balance sheet net notional position (9 228) 11 947 (1 721) (998) - Credit related commitments 28 024 26 793 7 140 78 62 035 Currency classification of monetary assets and liabilities is based on the currency in which they are denominated. Investments in equities have been attributed to the currency of the country where the issuer of the equity instrument is resident (predominantly, the Russian Rouble and the Russian Federation, respectively). Currency classification of tangible assets (precious metals, premises and equipment) and prepayments has been based on the functional currency used to record them. The Group has extended loans and advances denominated in foreign currencies. Depending on the revenue stream of the borrower, the possible appreciation of the currencies in which loans and advances have been extended against the Russian Rouble may adversely affect the borrower s repayment ability and therefore increase the likelihood of future loan losses.

154 MDM Bank As at 31 December 2006, the Group had the following positions in different currencies: RUB USD EUR Other Total currencies Assets Cash and cash equivalents 11 216 16 889 4 107 430 32 642 Mandatory cash balances with central banks 3 145 - - 885 4 030 Due from other banks 5 739 6 487 630 345 13 201 Trading securities owned by the Group 10 072 3 437 1-13 510 pledged under sale and repurchase agreements 1 969 1 655 - - 3 624 Derivative financial instruments 19 171 61 4 255 Other financial instruments at fair value through profit or loss - 1 404 - - 1 404 Loans and advances to customers 84 343 71 485 10 931 116 166 875 Current income tax prepayments 377 - - - 377 Other assets 2 074 627 38 22 2 761 Premises and equipment 4 424 5-14 4 443 Total assets 123 378 102 160 15 768 1 816 243 122 Liabilities Due to other banks 16 917 36 710 7 239 6 60 872 Trading liabilities 229 - - - 229 Derivative financial instruments 447 195 5 20 667 Customer accounts 42 695 47 396 2 222 492 92 805 Debt securities in issue 8 864 35 677 8 329-52 870 Subordinated debt - 5 452 - - 5 452 Current income tax payable 7 4-16 27 Other liabilities 1 147 1 019 40 18 2 224 Deferred tax liability 652 - - - 652 Total liabilities 70 958 126 453 17 835 552 215 798 Net balance sheet position 52 420 (24 293) (2 067) 1 264 27 324 Off balance sheet net notional position (24 761) 23 401 2 602 (1 242) - Credit related commitments 17 665 20 582 3 553 5 41 805

MDM Bank 155 (v) Interest rate risk Interest rate risk is the risk that movements in interest rates will have an adverse affect on the Group s income or the value of its portfolios of financial instruments. The Group is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest margins may increase as a result of such changes but may also reduce or create losses in the event that unexpected movements arise. Management of interest rate risk is performed through analysis of the structure of assets and liabilities by repricing dates (gap-analysis). Dynamic modeling of balance sheet structure is performed for different scenarios of movement in interest rates. Apart from gap-analysis the Group assesses the duration of its assets and liabilities. The interest rate risk is measured for the Group as a whole on a consolidated basis. The impact of changes in the interest rates on the Group s interest margin and economic capital is assessed as a key measure of interest rate risk. All new credit products and transactions of the Group are assessed in respect of interest rate risk upfront, prior to starting these transactions. ALCO is responsible for the Group s asset and liability management. ALCO delegates day-today management of the interest rate mismatch to the Treasury Department. The Risk Department independently checks compliance with limits established to control interest rate risk.

156 MDM Bank The table below summarises the effective average interest rate, by major currencies, for major monetary financial instruments. The analysis has been prepared on the basis of weighted average interest rates for the various financial instruments using period-end effective interest rates. 31 December 2007 31 December 2006 % % RUB USD EUR and RUB USD EUR and other other currencies currencies Assets Due from other banks: Current interbank loans 6.4 5.2 3.8 7.1 6.0 3.2 Reverse sale and repurchase agreements 10.0 6.7-9.0 5.9 - Trading securities: Municipal bonds issued by Russian municipalities 8.5 - - 6.8 - - Russian Federal loan bonds (OFZ) 6.5 - - 6.5 - - Russian Federation Eurobonds - - - - 6.1 - VneshEconomBank (VEB) 3% coupon bonds ( MinFin bonds ) - - - - 5.6 - Corporate bonds 10.5 10.3-9.2 9.1 - Promissory notes 12.0 - - 8.5 - - Other financial instruments at fair value through profit or loss - 12.8 - - 18.4 - Loans and advances to customers: Corporate loans 13.9 12.0 10.7 12.2 11.5 9.5 Retail loans 13.5 11.4 9.4 13.7 11.0 8.3 Investment banking loans 9.5 9.7-9.3 8.9 - Small business loans 15.5 13.2 13.0 15.4 13.4 13.6 Net investment in finance lease 31.4 22.4 31.2 28.2 22.1 33.1 Liabilities Due to other banks: Term deposits from other banks 4.5 6.0 5.8 5.5 6.1 4.8 Sale and repurchase agreements 6.3 7.1-6.7 6.7 - Customer accounts: Term deposits 7.8 5.4 5.4 6.6 6.8 4.0 Sale and repurchase agreements 6.3 5.1-2.0 - - Debt securities in issue: Unsecured loan participation notes - 8.2 - - 7.6 - Loan participation notes secured by diversified payments rights - 7.6 7.5-8.1 6.5 Loan participation notes secured by a pool of car loans - 9.4 - - 9.0 - Promissory notes 6.4 6.5 5.6 7.8 6.5 4.9 Bonds 11.5 - - 7.8 - - Deposit certificates 11.7 - - 6.4 - - Subordinated debt - 10.0 - - 10.0 -

MDM Bank 157 The table below summarises the Group s exposure to interest rate risks, as at 31 December 2007. Included in the tables are the assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing or maturity dates. Less than From 1 to From 6 to From 1 to More than Non Total 1 month 6 months 12 months 3 years 3 years interest bearing Assets Cash and cash equivalents 83 434 - - - - - 83 434 Mandatory cash balances with central banks - - - - - 5 538 5 538 Due from other banks 18 773 8 486 303-272 - 27 834 Trading securities owned by the Group - 274 159 4 171 4 783 1 488 10 875 pledged under sale and repurchase agreements - - - 513 1 939 535 2 987 Derivative financial instruments - - - - - 260 260 Other financial instruments at fair value through profit or loss - 226 - - - - 226 Available-for-sale assets - - - - - 290 290 Loans and advances to customers 23 742 55 843 30 481 39 215 31 030-180 311 Current income tax prepayments - - - - - 48 48 Other assets - - - - - 3 723 3 723 Premises and equipment - - - - - 5 956 5 956 Total assets 125 949 64 829 30 943 43 899 38 024 17 838 321 482 Liabilities Due to other banks 43 428 24 228 17 415 11 455 5 836-102 362 Derivative financial instruments - - - - - 874 874 Customer accounts 69 618 29 747 17 975 6 758 34-124 132 Debt securities in issue 6 707 18 000 11 055 10 837 32-46 631 Subordinated debt 211 - - - 4 855-5 066 Current income tax payable - - - - - 112 112 Other liabilities - - - - - 2 637 2 637 Deferred tax liability - - - - - 770 770 Total liabilities 119 964 71 975 46 445 29 050 10 757 4 393 282 584 Interest rate sensitivity gap 5 985 (7 146) (15 502) 14 849 27 267 13 445 38 898

158 MDM Bank The Group s exposure to interest rate risks as at 31 December 2006 is set out below: Less than From 1 to From 6 to From 1 to More than Non Total 1 month 6 months 12 months 3 years 3 years interest bearing Assets Cash and cash equivalents 32 642 - - - - - 32 642 Mandatory cash balances with central banks - - - - - 4 030 4 030 Due from other banks 6 403 6 633 165 - - - 13 201 Trading securities owned by the Group 408 1 074 664 5 349 3 837 2 178 13 510 pledged under sale and repurchase agreements - - - 1 267 2 357-3 624 Derivative financial instruments - - - - - 255 255 Other financial instruments at fair value through profit or loss - - - 1 404 - - 1 404 Loans and advances to customers 19 629 65 482 29 967 37 637 14 160-166 875 Current income tax prepayments - - - - - 377 377 Other assets - - - - - 2 761 2 761 Premises and equipment - - - - - 4 443 4 443 Total assets 59 082 73 189 30 796 45 657 20 354 14 044 243 122 Liabilities Due to other banks 40 875 11 149 5 952 1 777 1 119-60 872 Trading liabilities - - - - - 229 229 Derivative financial Instruments - - - - - 667 667 Customer accounts 47 593 28 160 13 942 1 569 1 541-92 805 Debt securities in issue 12 295 24 484 15 824 267 - - 52 870 Subordinated debt - - - - 5 452-5 452 Current income tax payable - - - - - 27 27 Other liabilities - - - - - 2 224 2 224 Deferred tax liability - - - - - 652 652 Total liabilities 100 763 63 793 35 718 3 613 8 112 3 799 215 798 Interest rate sensitivity gap (41 681) 9 396 (4 922) 42 044 12 242 10 245 27 324 Loan participation notes secured by a pool of car loans have been presented in the above tables based on their expected repayment dates. Refer to Note 16. The management of interest rates risk by monitoring the interest rate gap is supplemented by monitoring the sensitivity of the Group s net interest margin to various interest rate scenarios. An analysis of sensitivity of the Group s projected net interest margin for the year to changes in the market interest rate based on a simplified scenario of a 100 basis point (bp) parallel fall or rise in all yield

MDM Bank 159 curves (assuming no asymmetrical movement in yield curves and a constant balance sheet position) is as follows: 31 December 2007 31 December 2006 100 bp parallel increase 341 21 100 bp parallel decrease (341) (21) (vi) Changes in the market risk management process From 2008 the Group plans to introduce a system of allocation of capital at risk which is integrated with the market risk management system. (d) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial liabilities. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of financial institutions, including MDM Bank. It is unusual for financial institutions ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. (i) Liquidity risk management The Group s approach to management of liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. The Group seeks to actively support a diversified and stable funding base comprising debt securities in issue, long-term and short-term loans from other banks, core corporate and retail customer deposits, accompanied by diversified portfolios of highly liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements. The liquidity management policy of the Group requires: projecting cash flows by major currencies and considering the level of liquid assets necessary in relation thereto; maintaining a diverse range of funding sources; managing the concentration and profile of debts; maintaining debt financing plans; maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any interruption to cash flows; maintaining liquidity and funding contingency plans; monitoring balance sheet liquidity ratios against regulatory requirements.

160 MDM Bank The Treasury Department receives information from business units regarding the liquidity profile of their financial assets and liabilities and details of other projected cash flows arising from projected future business. The Treasury Department then provides for an adequate portfolio of short-term liquid assets to be maintained, largely made up of short-term liquid trading securities, loans to banks and other interbank facilities, to ensure that sufficient liquidity is maintained within the Group as a whole. The daily liquidity position is monitored and regular liquidity stress testing under a variety of scenarios covering both normal and more severe market conditions is performed by the Treasury Department. Under the normal market conditions, liquidity reports covering the liquidity position of the Group are presented to senior management on a weekly basis. Decisions on the Group s liquidity management are made by the ALCO and implemented by the Treasury Department. (ii) Liquidity risk measurement The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates. The two tables which follow show the carrying amounts of assets and liabilities of the Group by their remaining contractual maturity, with the exception of loan participation notes secured by a pool of car loans, which have been presented based on their expected repayment dates (refer to Note 16), and trading securities owned by the Group, which are shown in the category Demand and less than 1 month based on the fact that Management believes that all of these trading securities could be liquidated within one month in the normal course of business.

MDM Bank 161 The position as at 31 December 2007 is set out below: Less than From 1 to From 6 to From 1 to More than No Total 1 month 6 months 12 months 3 years 3 years stated maturity Assets Cash and cash equivalents 83 434 - - - - - 83 434 Mandatory cash balances with central banks 3 010 1 129 747 529 123-5 538 Due from other banks 18 773 8 486 303-272 - 27 834 Trading securities owned by the Group 10 875 - - - - - 10 875 pledged under sale and repurchase agreements 2 865 122 - - - - 2 987 Derivative financial instruments 198 54 8 - - - 260 Other financial instruments at fair value through profit or loss - 226 - - - - 226 Available-for-sale assets 290 - - - - - 290 Loans and advances to customers 22 483 51 657 28 218 44 148 33 805-180 311 Current income tax prepayments 48 - - - - - 48 Other assets 3 723 - - - - - 3 723 Premises and equipment - - - - - 5 956 5 956 Total assets 145 699 61 674 29 276 44 677 34 200 5 956 321 482 Liabilities Due to other banks 29 085 31 381 17 707 18 373 5 816-102 362 Derivative financial instruments 275 235 196 168 - - 874 Customer accounts 69 618 29 747 17 975 6 758 34-124 132 Debt securities in issue 2 564 6 483 12 718 20 702 4 164-46 631 Subordinated debt 211 - - - 4 855-5 066 Current income tax payable 112 - - - - - 112 Other liabilities 2 578 17 4 38 - - 2 637 Deferred tax liability - - - - - 770 770 Total liabilities 104 443 67 863 48 600 46 039 14 869 770 282 584 Net liquidity gap 41 256 (6 189) (19 324) (1 362) 19 331 5 186 38 898 Cumulative liquidity gap 41 256 35 067 15 743 14 381 33 712 38 898 -

162 MDM Bank The position as at 31 December 2006 is set out below: Less than From 1 to From 6 to From 1 to More than No Total 1 month 6 months 12 months 3 years 3 years stated maturity Assets Cash and cash equivalents 32 642 - - - - - 32 642 Mandatory cash balances with central banks 2 289 1 021 497 125 98-4 030 Due from other banks 6 403 6 633 165 - - - 13 201 Trading securities owned by the Group 13 510 - - - - - 13 510 pledged under sale and repurchase agreements 2 506 1 118 - - - - 3 624 Derivative financial instruments 36 162 57 - - - 255 Other financial instruments at fair value through profit or loss - - - 1 404 - - 1 404 Loans and advances to customers 18 592 65 339 30 461 37 728 14 755-166 875 Current income tax prepayments - 207 170 - - - 377 Other assets 2 120 227 179 234 1-2 761 Premises and equipment - - - - - 4 443 4 443 Total assets 78 098 74 707 31 529 39 491 14 854 4 443 243 122 Liabilities Due to other banks 40 875 10 971 6 055 1 852 1 119-60 872 Trading liabilities 229 - - - - - 229 Derivative financial instruments 128 254 17 268 - - 667 Customer accounts 47 593 28 160 13 942 1 569 1 541-92 805 Debt securities in issue 2 923 14 664 13 091 17 056 5 136-52 870 Subordinated debt 226 - - - 5 226-5 452 Current income tax payable 27 - - - - - 27 Other liabilities 1 063 898 40 220 3-2 224 Deferred tax liability - - - - - 652 652 Total liabilities 93 064 54 947 33 145 20 965 13 025 652 215 798 Net liquidity gap (14 966) 19 760 (1 616) 18 526 1 829 3 791 27 324 Cumulative liquidity gap (14 966) 4 794 3 178 21 704 23 533 27 324 -

MDM Bank 163 The following table shows the contractual maturities of trading securities of the Group: 31 December 2007 31 December 2006 Demand and less than 1 month - 408 From 1 to 6 months 274 1 074 From 6 to 12 months 159 664 From 1 to 3 years 4 684 6 804 More than 3 years 6 722 6 006 No stated maturity 2 023 2 178 Total trading securities 13 862 17 134 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 Group, would indicate that these deposits provide a long-term and stable source of funding for the Group. The following table shows the undiscounted cash flows on the Group s financial liabilities and unrecognized loan commitments on the basis of their earliest possible contractual maturity. The Gross nominal (inflow)/outflow disclosed in the table is the contractual, undiscounted cash flow on the financial liability or commitment. Loan participation notes secured by a pool of car loans have been presented based on their expected repayment dates (refer to Note 16). The Group s expected cash flows on these financial liabilities and unrecognized loan commitments vary significantly from this analysis. The position of the Group as at 31 December 2007 was as follows: Demand From From From 1 to More Total gross Carrying and less 1 to 6 6 to 12 3 years than nominal amount than month months 3 years (inflow)/ 1 month Outflow Non-derivative liabilities Due to other banks 29 203 32 038 18 480 20 833 9 266 109 820 102 362 Customer accounts 69 855 29 999 19 213 7 890 45 127 002 124 132 Debt securities in issue 3 143 7 789 15 544 20 958 4 653 52 087 46 631 Subordinated debt 239-239 - 6 345 6 823 5 066 Other liabilities 2 578 17 4 38-2 637 2 637 Derivative financial instruments Inflow (57 680) (10 648) (3 850) (1 750) (168) (74 096) (260) Outflow 57 799 10 743 3 996 1 885 178 74 601 874 Total 105 137 69 938 53 626 49 854 20 319 298 874 281 442 Credit related commitments 42 937 7 063 7 164 4 715 156 62 035 61 991

164 MDM Bank The position of the Group as at 31 December 2006 was as follows: Demand From From From 1 to More Total gross Carrying and less 1 to 6 6 to 12 3 years than nominal amount than month months 3 years (inflow)/ 1 month Outflow Non-derivative liabilities Due to other banks 40 912 11 047 6 319 2 679 1 619 62 576 60 872 Trading liabilities 229 - - - - 229 229 Customer accounts 47 631 28 807 14 672 2 605 2 558 96 273 92 805 Debt securities in issue 3 053 16 262 14 765 18 730 5 641 58 451 52 870 Subordinated debt 257-257 - 7 320 7 834 5 452 Other liabilities 1 063 898 40 220 3 2 224 2 224 Derivative financial instruments Inflow (27 220) (12 118) (6 696) (12 299) - (58 333) (255) Outflow 27 248 12 234 6 901 12 765-59 148 667 Total 93 173 57 130 36 258 24 700 17 141 228 402 214 864 Credit related commitments 17 390 8 882 12 322 2 701 510 41 805 41 755 The Bank also calculates mandatory liquidity ratios on a daily basis in accordance with the requirement of the Central Bank of Russia. These ratios include: Instant liquidity ratio (N2), which is calculated as the ratio of highly-liquid assets to liabilities payable on demand. Current liquidity ratio (N3), which is calculated as the ratio of liquid assets to liabilities maturing within 30 calendar days. Long-term liquidity ratio (N4), which is calculated as the ratio of assets maturing after one year to capital and liabilities maturing after one year. MDM Bank was in compliance with the above ratios during the years ended 31 December 2007 and 31 December 2006. The following table presents the mandatory liquidity ratios for MDM Bank calculated as at 31 December 2007 and 31 December 2006: Requirement 31 December 2007 31 December 2006 Instant liquidity ratio (N2) Minimum 15% 124.8% 21.4% Current liquidity ratio (N3) Minimum 50% 118.9% 54.9% Long-term liquidity ratio (N4) Maximum 120% 71.2% 79.6% (iii) Changes in the liquidity risk management processes To improve the liquidity risk management system, at the end of 2007 the Bank introduced early warning indicators. The system of early warning indicators is aimed at identifying an increase in liquidity risk at the early stages. The system is based on day-to-day monitoring of a number of the Bank s balance sheet ratios, market indicators of financial market conditions as well as other external available data. (e) Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks.

MDM Bank 165 (i) Operational risk management The Group s objective is to manage operational risk so as to balance the risk of financial losses and damage to the Group s reputation with overall cost effectiveness and to avoid control procedures which restrict initiative and creativity. The Group manages operational risk based on the recommendations of the Central Bank of Russia and the Basel Committee on the transition to best practices of operational risk measurement and management. The operational risk management includes identification, monitoring, mitigating and control over operational risks. The Risk Department develops the methodology of operational risk management, coordinates risk management procedures within the Group s business units, suggests appropriate improvements and reports on the level of operational risks of the Group to the Board of Management. The primary responsibility for control over operational risk is assigned to management within each business unit. Overall standards within the Group for operational risk management cover the following areas: requirements of appropriate segregation of duties, including independent authorization, and monitoring of transactions; compliance with regulatory and other legal requirements; documentation of controls and procedures; requirements of periodic assessment of operational risks; establishment of controls and procedures to mitigate operational risks; immediate reporting of operational losses; development of contingency plans; training and professional development; ethical and business standards; risk mitigation, including insurance where this is effective. (ii) Operational risk measurement The process of identification, analysis and monitoring of operational risks includes the following: collection of data on historical operational losses incurred by the Group; analysis of operational risks by products and processes; identification of operational risks for new products, processes and large exposures. Based on the results of operational risk analysis, risk maps are developed. Quantitative assessment (by key risk measures) for specific activities and transactions of the Group are performed.

166 MDM Bank (iii) Changes in the operational risk management processes During the year ended 31 December 2007, the Group completed preparation of operational risk maps for all key processes. The quantitative and qualitative assessment of operational risks was performed. The results of this assessment will be used in the model of capital at risk allocation, which will be introduced in the Group in 2008. The purpose of the model is to provide incentive to business units to reduce operational risks associated with transactions they perform. One of the strategic objectives of the Group is to increase its point of sales network coverage. The Group plans to implement a new operational model which will ensure proper segregation of duties at a process level and appropriate IT support. The model will maintain a system of detailed reports to control all stages of the process in detail. (f) Other risks The Group also manages legal, reputation, country and other risks. (i) Legal risks Legal risk is the risk of losses arising from internal and external legal risk factors. Internal factors include: non-compliance with applicable legal requirements; non-compliance of internal documentation with applicable regulations, as well as the Group s failure to bring its activities and documents into compliance with changes in laws; insufficient analysis of legal risks associated with new products, transactions and technologies. External factors include: weaknesses of the legal system; failure by customers and counterparties to perform their contractual obligations; location of the Group s subsidiaries and/or its clients in different jurisdictions. Legal risk is managed to limit or eliminate potential losses, including the obligation to make cash payments based on court decisions. Monitoring of legal risks is performed by the Legal Department. Monitoring of tax risks is performed by the Tax Department. Legal risk management is based on the following key principles: standard contracts are pre-approved by all relevant business units of the Group including the units responsible for control over risks resulting from the transaction; standard contracts are used for the majority of transactions; in exceptional cases transactions are performed using non-standard contracts, which are approved by the Legal Department;

MDM Bank 167 contracts are signed after the authorities of the parties signing the contract on behalf of the counterparty have been checked; when assessing collateral, significant consideration is given to assessment of the legal risk in respect of collateral pledged. The debtor is required to provide a full set of documents to confirm its ownership in respect of the property pledged. (ii) Reputation risk Reputation risk is the risk of losses arising from deterioration of the image of the Group. Reputation risk management is based on the following principles: timely fulfillment by the Group of all its obligations to customers and counterparties, full compliance with applicable legislation, ethics and business standards; obligatory check of counterparties and customers according to Anti Money Laundering regulatory requirements; maintaining a set of controls to prevent manipulation of prices on the securities market; maintaining a system of early warning indicators and a developed action plan based on constant monitoring of external information on the Group by the PR Department of MDM Bank. (iii) Country risks Country risk is the risk of losses as a result of foreign counterparties failing to meet their obligations due to economical, political and social changes in the respective country. The majority of the operations of the Group are located in Russia. The Group accepts other country risk after a special analysis.

168 MDM Bank The majority of the operations of the Group are located in Russia. The geographical analysis of the Group s assets and liabilities as at 31 December 2007 is set out below: Russia OECD Non-OECD Total countries countries Assets Cash and cash equivalents 23 420 58 673 1 341 83 434 Mandatory cash balances with central banks 3 883-1 655 5 538 Due from other banks 15 524 11 870 440 27 834 Trading securities owned by the Group 10 875 - - 10 875 pledged under sale and repurchase agreements 2 987 - - 2 987 Derivative financial instruments 114 50 96 260 Other financial instruments at fair value through profit or loss - 226-226 Available-for-sale assets 290 - - 290 Loans and advances to customers 178 181 1 087 1 043 180 311 Current income tax prepayments 48 - - 48 Other assets 3 507 14 202 3 723 Premises and equipment 5 932-24 5 956 Total assets 244 761 71 920 4 801 321 482 Liabilities Due to other banks 18 691 77 706 5 965 102 362 Derivative financial instruments 539 322 13 874 Customer accounts 74 982 20 699 28 451 124 132 Debt securities in issue 12 804 33 799 28 46 631 Subordinated debt - 5 066-5 066 Current income tax payable 34-78 112 Other liabilities 2 501 4 132 2 637 Deferred tax liability 752 18-770 Total liabilities 110 303 137 614 34 667 282 584

MDM Bank 169 The geographical analysis of the Group s assets and liabilities as at 31 December 2006 is set out below: Russia OECD Non-OECD Total countries countries Assets Cash and cash equivalents 13 230 16 013 3 399 32 642 Mandatory cash balances with central banks 3 145-885 4 030 Due from other banks 7 186 5 273 742 13 201 Trading securities owned by the Group 13 510 - - 13 510 pledged under sale and repurchase agreements 3 624 - - 3 624 Derivative financial instruments 183 70 2 255 Other financial instruments at fair value through profit or loss 1 404 - - 1 404 Loans and advances to customers 166 127 694 54 166 875 Current income tax prepayments 377 - - 377 Other assets 2 390 3 368 2 761 Premises and equipment 4 424-19 4 443 Total assets 215 600 22 053 5 469 243 122 Liabilities Due to other banks 18 476 38 696 3 700 60 872 Trading liabilities - - 229 229 Derivative financial instruments 104 563-667 Customer accounts 53 158 15 690 23 957 92 805 Debt securities in issue 19 056 31 423 2 391 52 870 Subordinated debt - 5 452-5 452 Current income tax payable 7-20 27 Other liabilities 1 973 10 241 2 224 Deferred tax liability 652 - - 652 Total liabilities 93 426 91 834 30 538 215 798 The majority of credit related commitments, as at 31 December 2007 and 31 December 2006, are related to residents of the Russian Federation. The geographical classification of financial assets, liabilities and credit related commitments has been based on the country in which the counterparty is located. The classification of tangible assets (precious metals, premises and equipment) has been based on the country in which they are physically held. First to default credit-linked notes included as at 31 December 2006 within other financial instruments at fair value through profit or loss were presented in the above table as being with Russian counterparties, as the majority of bonds, upon repayment of which repayment of first to default credit-linked notes were dependent, were issued by Russian issuers. As at 31 December 2007, loans and advances to customers of RUB 17 958 million (31 December 2006: RUB 28 060 million), included in the above tables as being with Russian counterparties, have been granted to subsidiaries and affiliates of these Russian counterparties located outside of the Russian Federation.

170 MDM Bank (g) Capital management (i) Capital management policy The Group s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of its business. The Central Bank of Russia sets and monitors capital requirements for MDM Bank, the lead operating entity of the Group. The Central Bank of Latvia sets and monitors capital requirements for Latvian Trade Bank. Under the current capital requirements set by the Central Bank of Russia banks have to maintain a ratio of capital to risk weighted assets ( statutory capital ratio ) above the prescribed minimum level. As at 31 December 2007, this minimum level is 10% (31 December 2006: 10%). MDM Bank was in compliance with the statutory capital ratio during the years ended 31 December 2007 and 31 December 2006. The statutory capital ratio of MDM Bank as at 31 December 2007 was 14.4% (31 December 2006: 12.1%). The Group and the Bank also are subject to minimum capital requirements established by covenants under liabilities incurred by the Bank or the Group, including capital adequacy levels calculated in accordance with the requirements of the Basle Accord, as defined in the International Convergence of Capital Measurement and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market risks (updated November 2005), commonly known as Basel I. As at 31 December 2007, such minimum capital requirements for total capital ratio was 12%.

MDM Bank 171 The following table shows the composition of the Group s capital position calculated in accordance with the requirements of the Basle Accord, as at 31 December 2007 and 31 December 2006: 31 December 2007 31 December 2006 Tier 1 capital Share capital 1 794 1 736 Share premium 14 198 9 588 Cumulative translation reserve 24 (21) Retained earnings 19 875 14 079 Total tier 1 capital 35 891 25 382 Tier 2 capital Asset revaluation reserve 3 007 1 942 Subordinated debt (unamortised portion) 3 487 4 767 Total tier 2 capital 6 494 6 709 Total capital 42 385 32 091 Risk-weighted assets Banking book 225 322 210 322 Trading book 21 477 23 194 Total risk weighted assets 246 799 233 516 Total capital expressed as a percentage of risk-weighted assets ( total capital ratio ) 17.2 13.7 Total tier 1 capital expressed as a percentage of risk-weighted assets ( tier 1 capital ratio ) 14.5 10.9 The risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the nature of and reflecting an estimate of credit, market and other risks associated with each asset and counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential losses. As at 31 December 2006, the Bank calculated the capital adequacy requirement for its investments in first to default credit-linked notes included within other financial instruments at fair value through profit or loss by applying a 100% risk weighting to the carrying amount of the notes recognized within assets, and a 100% risk weighting to the credit related commitment arising from the notes, which was equal to the nominal amount of the notes. There is no specific guidance in the Basle Accord in respect of credit derivative products. The treatment of credit derivatives is specifically addressed in the Revised International Capital Framework, commonly known as Basel II. The application of the methodology outlined in Basel II would have resulted in a lower total capital ratio and tier 1 capital ratio, as at 31 December 2006. The Group and the Bank have complied with all externally imposed capital requirements as at 31 December 2007. The Management of the Group believes that a 10% tier I capital ratio and a 12% total capital ratio, calculated in accordance with the requirements of the Basle Accord, are the appropriate minimum capitalization levels for the Group and MDM Bank.

172 MDM Bank The allocation of capital between specific operations and activities is, to a large extent, driven by optimization of the return achieved on the capital allocated. Although maximization of return on riskadjusted capital is the principal basis used in determining how capital is allocated within the Group to particular operations or activities, it is not the sole basis used for decision making. Account is also taken of synergies with other operations and activities, the availability of management and other resources and the fit of the activity with the Group s longer term strategic objectives. The Group s policies in respect of capital management and allocation are regularly reviewed by the Board of Directors of MDM Bank through approval and review of annual budgets, including those for various business segments of the Group. There have been no material changes in the Group s management of capital during the period. (ii) Changes in the capital management policy In the end of 2007 the Group established a policy of allocation of capital by individual transactions and activities. This policy includes: the methodology of calculation of capital at risk allocated to individual transactions and activities; the methodology of calculation of capital used for each segment of the Group s business; the methodology of calculation of RAROC and shareholders value added (SVA). Target returns on allocated capital and of the SVA amounts were set for the Group and individual business units within the Group in 2008 budgets. 27. Contingent Liabilities and Commitments (a) Legal proceedings 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 condition or the results of future operations of the Group. (b) Tax legislation 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 form in which transactions are documented and the underlying accounting treatment as prescribed by Russian Accounting Rules. 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 rather than 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. 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. During the year ended 31 December 2006, local tax authorities issued a claim against MDM Bank of approximately RUB 88 million, including associated fines and penalty interest, in respect of value added taxes (VAT) on transactions of the Bank with precious metals in 2002. The matter is now under consideration of the Moscow Department of the Federal Tax Service. As at 31 December 2007 there is

MDM Bank 173 no written conclusion of the tax authorities on this issue. Management believes that the Bank is in full compliance with the tax legislation in respect of these transactions and that the claim can be successfully contested and resolved in the Bank s favour. Therefore no provision in respect of this matter has been recorded in the consolidated financial statements of the Group for the years ended 31 December 2007 and 31 December 2006. (c) Capital commitments As at 31 December 2007, the Group had capital commitments mainly in respect of the development of its branch network and system enhancements, totalling approximately RUB 315 million (31 December 2006: RUB 272 million). (d) Operating lease commitments Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows: 31 December 2007 31 December 2006 Not later than 1 year 547 42 Later than 1 year and not later than 5 years 1 483 87 Later than 5 years 552 187 Total operating lease commitments 2 582 316 During the year ended 31 December 2007 RUB 486 million was recognised as an expense in the consolidated statement of income in respect of operating leases (31 December 2006: RUB 191 million). (e) Credit related commitments Credit related commitments comprise letters of credit, guarantees and undrawn loan commitments. The contractual amount of these commitments represents the value at risk should the contract be fully drawn upon, the client defaults, and the value of any existing collateral becomes worthless. Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Group on behalf of a customer authorising a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions are collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than a direct loan. The primary purpose of undrawn loan commitments is to ensure that funds are available to a customer as required. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. Outstanding credit related commitments are as follows: 31 December 2007 31 December 2006 Letters of credit 28 125 19 444 Guarantees issued 15 628 7 605 Undrawn loan commitments 18 282 14 756 Total credit related commitments 62 035 41 805 The Group creates provisions for losses on a collective basis for its credit related commitments.

174 MDM Bank Movements in provision for losses on credit related commitments are as follows: 2007 2006 Provision for losses on credit related commitments as at 1 January 50 64 Effect of foreign currency translation (1) (1) Reversal of provision during the period (5) (13) Provision for losses on credit related commitments as at 31 December 44 50 This provision is recorded within other liabilities. Refer to Note 18. The total outstanding contractual amount of guarantees, letters of credit and undrawn loan commitments does not necessarily represent future cash requirements, as these commitments may expire or terminate without being funded. Currency analysis of credit related commitments is disclosed in Note 26. Information on related party transactions is disclosed in Note 29. (f) Fiduciary assets The Group provides custody services to its customers, whereby it holds securities on behalf of customers and receives fee income for providing these services. These securities are not assets of the Group and are not recognised in the consolidated balance sheet. The Group also provides trust services to individuals, trusts, retirement benefit plans and other institutions, whereby it holds or invests funds received at the discretion of the customer. The Group provides asset management services to its customers, whereby it manages assets or invests funds received in various financial instruments. The Group receives fee income for providing these services. Trust assets and assets for which the Group provide asset management services to its customers are not assets of the Group and are not recognised in the consolidated balance sheet. The Group is not exposed to any credit risk relating to such placements, as it does not guarantee these investments. As at 31 December 2007, total assets for which the Group provide asset management services to its customers were RUB 4 809 million including mutual funds of RUB 304 million and discretionally managed portfolios of RUB 4 505 million (31 December 2006: RUB 349 million including mutual funds of RUB 86 million and discretionally managed portfolios of RUB 263 million).

MDM Bank 175 28. Fair Value of Financial Instruments The Group has performed an assessment of its financial instruments, as required by IFRS 7 Financial Instruments: Disclosures. The estimated fair value of cash, correspondent accounts with central banks, correspondent accounts, overnight deposits with other banks and other floating rate placements is their carrying value. The estimated fair value of fixed rate balances due from other banks, including central banks, is calculated based on discounted expected future principal and interest cash flows. The estimated fair value of quoted trading securities, derivative financial instruments and other financial instruments at fair value through profit or loss and available-for-sale assets is based on quoted market prices at the balance sheet date without any deduction for transaction costs. For securities and derivative financial instruments not traded in an 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. The estimated fair value of loans and advances to customers represents the discounted amount of estimated future cash flows expected to be received. The estimated fair value of due to other banks and customer accounts balances, which are payable on demand, is their carrying value. The estimated fair value of due to other banks and customer accounts balances, which are not payable on demand, and other borrowed funds, which are not quoted in an active market, is calculated based on discounted expected future principal and interest cash flows. The estimated fair value of quoted debt securities in issue and subordinated debt is based on quoted market prices at the balance sheet date without any deduction for transaction costs. The estimated fair value of all other financial instruments represents the discounted amount of estimated future cash flows expected to be received. 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 for a similar instrument at the balance sheet date. The estimates of fair value are intended to approximate the amount for which a financial instrument could be exchanged between knowledgeable, willing parties in an arm s length transaction. 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.

176 MDM Bank The following table summarises the fair values of major financial assets and liabilities which are not presented in the balance sheet at their fair value: 31 December 2007 31 December 2006 Carrying value Fair value Carrying value Fair value Mandatory cash balances with central banks 5 538 5 274 4 030 3 953 Due from other banks 27 834 27 853 13 201 13 214 Loans and advances to customers: Commercial loans 117 326 117 054 110 434 112 176 Retail loans 35 513 35 513 26 548 26 548 Investment banking loans 16 107 16 114 23 514 21 991 Small business loans 7 761 7 676 4 320 4 327 Net investment in finance lease 3 604 3 591 2 059 2 062 Due to other banks (102 362) (102 189) (60 872) (61 008) Customer accounts: State organisations Current/settlement accounts (1) (1) (8 806) (8 806) Term deposits (4 016) (4 021) (1 000) (1 001) Other legal entities Current/settlement accounts (30 867) (30 867) (24 336) (24 336) Term deposits (68 426) (68 416) (47 414) (47 454) Sale and repurchase agreements (1 316) (1 316) (77) (77) Retail customers Current/demand accounts (5 412) (5 412) (5 202) (5 202) Term deposits (14 094) (14 069) (5 970) (5 980) Debt securities in issue: Unsecured loan participation notes (11 043) (10 825) (14 569) (14 590) Loan participation notes secured by diversified payment rights ( DPR ) (14 133) (14 239) (13 042) (13 163) Promissory notes (9 771) (9 708) (9 311) (9 300) Loan participation notes secured by a pool of car loans (4 153) (4 161) (9 828) (9 949) Bonds (6 007) (6 122) (6 090) (6 106) Deposit certificates (1 524) (1 527) (30) (30) Subordinated debt (5 066) (5 099) (5 452) (5 697) 29. Related Party Transactions For the purposes of these consolidated financial statements, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions as defined by International Financial Reporting Standard IAS 24 Related Party Disclosures. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

MDM Bank 177 Related parties comprise parent companies and ultimate beneficiaries of the Group, directors and key management personnel, and other related parties. Other related parties are entities, which are under common control with the Group, and entities, which are significantly influenced by the Group s beneficiaries, directors and key management personnel. As at 31 December 2007, these primarily consisted of Joint Stock Company Siberian Coal Energy Company (SUEK) (coal and energy), holding companies for SUEK, and other fellow subsidiaries. Joint Stock Company Mineral and Chemical Company EuroChem (mineral fertilizers) was a related party until May 2007. TMK (pipes) was a related party until October 2006. Banking transactions are entered into in the normal course of business with the related parties. These include settlements, loans, deposit taking, trade finance, securities and foreign currency transactions. The following table shows exposure of the Group to related parties as at 31 December 2007 and 31 December 2006: 31 December 2007 31 December 2006 Amount % of Total Amount % of Total assets assets Total balance sheet exposure (net of impairment) 205 0.1 1 483 0.6 Total (on and off balance sheet) exposure (net of impairment) 205 0.1 1 490 0.6 The outstanding balances as at 31 December 2007 with related parties are as follows: (a) Beneficiaries (b) Directors (c) Parent (d) Other related parties Total and key companies SUEK Other Total manage- of the Bank ment Assets Trading securities Corporate shares - - - 7-7 7 Loans and advances to customers (gross) - - - 200-200 200 Loan impairment - - - (2) - (2) (2) Total assets - - - 205-205 205 Liabilities Customer accounts Current accounts 13 19 13 702-702 747 Term deposits 951 199-2 462 124 2 586 3 736 Total liabilities 964 218 13 3 164 124 3 288 4 483

178 MDM Bank The results of transactions with related parties for the year ended 31 December 2007 are as follows: (a) Beneficiaries (b) Directors (c) Parent (d) Other related parties Total and key companies EuroChem SUEK Other Total management of the Bank Interest income on loans and advances to Customers - - - - 58-58 58 Interest income received from securities issued by related parties - - - - 13-13 13 Loan impairment reversal - - - - 4-4 4 Interest expense on customer accounts (14) (11) (47) - (2) (244) (246) (318) Net trading gain from trading in securities issued by related parties - - - - 15-15 15 Results from trading in foreign currencies - - (3) - 12-12 9 Net fee and commission income - - - - 7-7 7 Operating expenses - (934) - - (81) - (81) (1 015) The outstanding balances as at 31 December 2006 with related parties are as follows: (a) Beneficiaries (b) Directors (c) Parent (d) Other related parties Total and key companies EuroChem SUEK Other Total management of the Bank Assets Trading securities Corporate bonds - - - - 9-9 9 Corporate shares - - - - 771-771 771 Loans and advances to customers (gross) - 38 - - 522-522 560 Loan impairment - - - - (6) - (6) (6) Derivatives - - - - 149-149 149 Total assets - 38 - - 1 445-1 445 1 483 Liabilities Customer accounts Current accounts 1 196 7 208 50 91 22 163 1 574 Term deposits 310 59 2 388 - - 7 906 7 906 10 663 Derivatives - - - - 5-5 5 Total liabilities 1 506 66 2 596 50 96 7 928 8 074 12 242 Credit related commitments Credit related commitments - - - - 7-7 7

MDM Bank 179 The results of transactions with related parties for the year ended 31 December 2006 are as follows: (a) Benefi- (b) Direc- (d) Other ciaries tors (c) Parent related parties Total and key compa- EuroChem SUEK TMK Other Total manage- nies of ment the Bank and entities controlled by these companies Interest income on due from banks - - 26 - - - - - 26 Interest income on loans and advances to customers - 6 138-71 38 134 243 387 Interest income received from securities issued by related parties - - - - 1 6-7 7 Loan impairment reversal/(losses) - - - - 21 18 (2) 37 37 Interest expense on due to banks - - (21) - - - - - (21) Interest expense on customer accounts (17) (2) (132) - - - (10) (10) (161) Interest expense on debt securities issued to related parties - - - - (1) - - (1) (1) Net trading gain from trading in securities issued by related parties - - - - 1 1-2 2 Results from trading in foreign currencies - - - 3 9 (1) 2 13 13 Net fee and commission income - - (88) 1 6 - - 7 (81) Other operating income - - 2 - - - - - 2 Operating expenses - (736) (5) - (94) - - (94) (835) (a) Transactions with beneficiaries of the Group As at 31 December 2007 and 31 December 2006, term deposits from beneficiaries had remaining maturities less than one year. The table below summarises information about average effective interest rates and outstanding balances of term deposits from beneficiaries: 31 December 2007 31 December 2006 RUB USD EUR Total RUB USD EUR Total Outstanding balances 797 86 68 951-246 64 310 Average effective interest rate, % 11.0 7.2 6.8 10.3-6.7 4.9 6.3

180 MDM Bank The table below summarises information about average balances of term deposits of beneficiaries of the Group: 2007 2006 RUB 21 - USD 123 189 EUR 63 58 (b) Transactions with the members of the board of directors and key management personnel The total remuneration of the members of the Board of Directors of MDM Bank, including discretionary compensation, amounted to RUB 86 million for the year ended 31 December 2007 (31 December 2006: RUB 94 million). MDM Bank s Board of Directors was composed of seven members, as at 31 December 2007 (31 December 2006: six members), all of them non-executive. The Board has elected three Board Committees: audit, strategy, and nomination and remuneration. Boards stand for re-election every year under Russian law. Key management personnel comprise members of the Executive Management Board of MDM Bank, heads of core business units and the Chief accountant of MDM Bank. As at 31 December 2007, key management personnel comprised of 11 persons (31 December 2006: 10 persons). The total remuneration of key management personnel, including discretionary compensation, is as follows: 2007 2006 Salary and bonuses 716 574 Contributions to the Russian Federation State pension fund 1 - Termination benefits 131 68 Total remuneration of key management personnel 848 642 The Group does not provide post-employment, share-based or other long-term benefits to the directors and key management personnel. The table below summarises information about average effective interest rates and outstanding balances of loans to the directors and key management personnel: 31 December 2007 31 December 2006 RUB USD EUR Total RUB USD EUR Total Outstanding balances - - - - 38 - - 38 Average effective interest rate, % - - - - 10.0 - - 10.0 As at 31 December 2006, loans to directors and key management personnel of RUB 38 million made under sale and repurchase agreements maturing within 1 year were collateralised by corporate shares with a fair value of RUB 61 million.

MDM Bank 181 The table below summarises information about average effective interest rates and outstanding balances of term deposits from the directors and key management personnel: 31 December 2007 31 December 2006 RUB USD EUR Total RUB USD EUR Total Outstanding balances 163 15 21 199 33 13 13 59 Average effective interest rate, % 9.5 8.6 5.8 9.0 8.1 6.3 4.4 6.9 The table below summarises information about the remaining maturity of deposits from the directors and key management personnel: 31 December 2007 31 December 2006 Term deposits due to customers Up to one year remaining maturity 172 59 From 1 to 5 years remaining maturity 27 - (c) Transactions with parent companies of the Bank and entities controlled by these companies The table below summarises information about average effective interest rates and outstanding balances of term deposits from the parent companies of the Bank and entities controlled by these companies: 31 December 2007 31 December 2006 RUB USD EUR Total RUB USD EUR Total Outstanding balance - - - - 2 388 - - 2 388 Average effective interest rate, % - - - - 7.7 - - 7.7 The table below summarises information about the remaining maturity of term deposits from the parent companies of the Bank and entities controlled by these companies: 31 December 2007 31 December 2006 Up to one year remaining maturity - 1 113 From 1 to 5 years remaining maturity - 1 275 The table below summarises information about average balances with parent companies of the Bank and entities controlled by these companies: 2007 2006 Current interbank loans due from other banks RUB - 286 USD - 4 EUR - 1 Loans and advances to customers USD - 2 576 Term deposits due to other banks RUB - 107 USD - 268 Term deposits due to customers RUB 618 1 098 USD 1 236 EUR 1 7

182 MDM Bank (d) Transactions with other related parties The table below summarises information about average effective interest rates and outstanding balances with other related parties: 31 December 2007 31 December 2006 RUB USD EUR Total RUB USD EUR Total Corporate bonds Outstanding balance - - - - 2 7-9 Average yield to maturity, % - - - - 7.1 8.6-8.3 Corporate shares Outstanding balance 7 - - 7 771 - - 771 Loans and advances to customers Outstanding balance 200 - - 200 522 - - 522 Average yield to maturity, % 10.8 - - 10.8 13.2 - - 13.2 Term deposits due to customers Outstanding balance 2 462 124-2 586-7 906-7 906 Average effective interest rate, % 8.4 6.0-8.3-8.1-8.1 Credit related commitments Outstanding balance - - - - 7 - - 7 Balances on current accounts of other related parties are on terms similar to those for third parties. The table below summarises information about average balances with other related parties: 2007 2006 Corporate bonds RUB - 190 USD 144 7 Corporate shares RUB 226 164 Loans and advances to customers RUB 412 704 USD - 2 243 Term deposits due to customers RUB 19 - USD 3 052 274 EUR - 21 Promissory notes RUB - 41 Credit related commitments RUB 2 11

MDM Bank 183 The table below summarises information about the remaining maturity of balances with other related parties: 31 December 2007 31 December 2006 Corporate bonds Up to one year remaining maturity - 2 From 1 to 5 years remaining maturity - 7 Loans and advances to customers Up to one year remaining maturity 200 322 From 1 to 5 years remaining maturity - 200 Term deposits Up to one year remaining maturity 2 586 7 906 Credit related commitments Up to one year remaining maturity - 7 30. Principal Subsidiaries Included in the table below is the list of the principal subsidiaries of the Group, as at 31 December 2007 and 31 December 2006. Name Juris- Voting rights/ Voting rights/ diction Equity owned, % Equity owned, % 31 December 2007 31 December 2006 Banking Latvian Trade Bank Latvia 100.0 100.0 Securities trading MDM Investments Limited Cyprus 100.0 100.0 MCM Russian Investments Limited Cyprus 100.0 100.0 Asset management MDM Asset Management Russia 100.0 100.0 Leasing LeasingPromHold Russia 100.0 100.0 Group real estate management MVK Nedvizhimost (merged with MDM Bank in 2007) Russia - 100.0 Special purpose entities for financing transactions MDM International Funding plc Ireland 100.0 100.0 Taganka Car Loan Finance plc Ireland 100.0 100.0 MDM DPR Finance Company S.A. Luxemburg 100.0 100.0 MDM ECP Limited Ireland 100.0 - Latvian Trade Bank is a commercial bank licensed by the Central Bank of Latvia to perform banking operations.

184 MDM Bank MDM Investments Limited is a company licensed by the Cyprus Securities and Exchange Commission specializing in securities brokerage, trading on its own account and asset management. MCM Russian Investments Limited is a company that specializes in trading in securities on its own account and providing margin loans to customers of MDM Investments Limited. MDM Asset Management is a company licensed by the Russian Federal Financial Markets Service to manage third-party assets and collective investment schemes. LeasingPromHold is a company specializing in provision of leasing services to corporate customers of the Group. MVK Nedvizhimost is a real estate management company. In 2007 MVK Nedvizhimost was merged with the Bank. Please refer to Note 31. MDM International Funding plc, Taganka Car Loan Finance plc, MDM DPR Finance Company S.A. and MDM ECP Limited are special purpose entities used for financing transactions in international capital markets such as loan participation note issues, asset securitisations, future flows (DPR) securitisations etc. These SPEs are controlled by the Group through the predetermination of the activities of SPEs, having rights to obtain the majority of benefits of the SPEs, and retaining the majority of the residual risks and rewards related to the SPEs. 31. Changes in the Composition of the Group In July 2007, MVK Nedvizhimost, a 100% subsidiary of MDM Bank, was merged with MDM Bank. During 2006, MDM Financial Group, of which the Group is a part, was restructured. As a result of this restructuring, in February 2006 MDM Bank increased its stake in Latvian Trade Bank from 63.3% to 100% by the acquisition of shares from its parent company. MDM Bank acquired from the same parent company a 100% stake in MDM Investments Limited (Cyprus), a company licensed by the Cyprus Securities and Exchange Commission specializing in securities brokerage, trading on its own account and asset management, in June 2006 and a 100% stake in MCM Russian Investments Limited (Cyprus), a company that specializes in trading in securities on its own account and providing margin loans to customers of MDM Investments Limited, in July 2006. These companies were previously fellow subsidiaries of the Bank within MDM Financial Group. In June 2006, MDM Financial Group disposed of its 85.9% share in MDM Bank St. Petersburg. In November 2006, MDM Financial Group disposed of its 94.2% share in MDM Bank Urals. As a result of the above-described restructurings, as of 31 December 2006, all operating entities of MDM Financial Group were wholly-controlled by MDM Bank. As at 31 December 2006, MDM Financial Group comprised the MDM Bank and its subsidiaries and two holding companies. Consolidated financial statements of MDM Financial Group for the year ended 31 December 2006 are publicly available. MDM Financial Group has discontinued preparation of publicly available consolidated financial statements from 1 January 2007.

MDM Bank Annual Report 2007 185 Supplementary Consolidated Financial Information The table below presents the consolidated statement of income of MDM Bank for the year ended 31 December 2007 and the consolidated statement of income of MDM Financial Group for the year ended 31 December 2006. The Management believes that such information will be useful for analysis of the performance of MDM Bank for the year ended 31 December 2007. Consolidated Statement of Income MDM Bank MDM Financial Group 2007 2006 Interest income 28 345 17 853 Interest expense (14 213) (7 344) Net interest income 14 132 10 509 Loan impairment losses (2 083) (1 552) Net interest income after loan impairment 12 049 8 957 Gains less losses arising from trading in securities 309 568 Gains less losses arising from trading in precious metals (22) 50 Gains less losses from foreign exchange 1 364 1 087 Other trading result (520) (100) Fee and commission income 2 978 2 271 Fee and commission expense (634) (600) Gains less losses from other financial instruments at fair value through profit or loss 2 (102) Reversal of provision for losses on credit related commitments 5 14 Impairment of other assets (3) (4) Other operating results 223 319 Operating income 15 751 12 460 Operating expenses (8 622) (7 191) Result on disposal of subsidiaries and premises 498 1 202 Profit before taxation 7 627 6 471 Income tax expense, excluding income tax expense on disposal of subsidiaries (2 111) (1 336) Income tax expense on disposal of subsidiaries - (684) Profit for the period 5 516 4 451 Attributable to: Equity holders of the parent 5 516 4 429 Minority interest - 22

Contact Details Head Office Address: 33/1 Kotelnicheskaya Embankment, Moscow, 115172, Russia Call Center (24 hours): +7(495) 797-9500 Fax (general): +7(495) 797-9501 Cardholder Support Center (24 hours): +7(495) 795-2500 Small Business Lending: +7(800) 333-0800 Telex: S.W.I.F.T.: Bloomberg: Reuters: X-400: SPRINT: 414121 MDMD RU MOBW RU MM MDMG MBWM, MDMM, MDMB C: USSR, A: SOVMAIL MDMBANK/CUSTOMERS Website: www.mdmbank.ru; www.mdmbank.com Settlements: Ms. Tatyana Berezhnova, Head of Interbank Transactions Tel.: +7(495) 960-2258 E-mail: korr@mdmbank.com Investor Relations: Mr. Sam VanDerlip Head of Investor Relations Tel.: +7(495) 221-3075 Fax: +7(495) 221-3076 E-mail: samuel.vanderlip@mdmbank.com Public Relations: Ms. Victoria Kazakova Head of Public Relations Tel.: +7(495) 363-2741 Fax: +7(495) 363-2742 E-mail: victoria.kazakova@mdmbank.com

Principal Correspondent Accounts RUR Account No. 30101810900000000466 OPERU of Moskovsky GTU of the Bank of Russia USD Account No. 890-0514-841 Bank of New York, One Wall Street, 8th Floor, New York, NY, 10286 USA, S.W.I.F.T: IRVTUS3N EUR Account No. 100947414900 Deutsche Bank AG 12, Taunusanlage 60262 Frankfurt/Main, Germany, S.W.I.F.T: DEUTDEFF CHF GBP Account No. 0230-69226.05Z UBS AG P.O. Box 8098, Zurich, Switzerland, Global Services Financial Institutions, S.W.I.F.T: UBSWCHZH80A Account Nо. 0314319 0000 GBP 000 LDN Deutsche Bank AG Winchester House 1, Great Winchester Street, London, EC2N 2DB U.K., SORT CODE 405081, S.W.I.F.T : DEUTGB2L SEK Account No. 99-40-390-349 Svenska Handelsbanken Blasiehomstorg 11, 106 70 Stockholm, Sweden, S.W.I.F.T: HANDSESS NOK Account No. 7001.02.05954 DNB NOR BANK ASA, (formerly DEN NORSKE BANK ASA) Stranden 21, 0250 Oslo, Norway, S.W.I.F.T: DNBANOKK DKK Account No. 3996052575 Den Danske Bank Holmens kanal 2-12, DK-092, Copenhagen K, Denmark, S.W.I.F.T: DABADKKK JPY Account No. 653-0423130 Bank of Tokyo Mitsubishi 7-1 Marunouchi 2-Chome, Chiyoda-ku, Tokyo, 100, Japan, S.W.I.F.T: BOTKJPJT KZT Account No. 058169309 Halyk Savings Bank of Kazakhstan Almaty, Kazakhstan, MFO 190501601, S.W.I.F.T: HSBKKZKX

188 MDM Bank Annual Report 2007 BYR Account No. 1702795061015 Belvnesheconombank Myasnikov Str., 32, 220050 Minsk, Belarus, МFО 226, S.W.I.F.T: BELBBY2X UAH Account No. LV16LATC0073000430330 Latvijas Tirdzniecibas Banka 4 Trijadibas iela, LV-1048 Riga, Latvia, S.W.I.F.T: LATCLV22

Licenses Activity: General Banking License Issuing body: Central Bank of Russia Number and date: No. 2361 of 31.03.2008 Activity: Precious Metals Operations Issuing body: Central Bank of Russia Number and date: No. 2361 of 31.03.2008 Activity: Gold Export Issuing body: Ministry of Economic Development and Trade of Russia Number and date: No. LG0270705513153 of 12.10.2007 Activity: Exchange Broker Issuing body: Federal Financial Markets Service Number and date: No. 861 of 24.08.2006 Activity: Custody Operations (professional securities market participant) Issuing body: Federal Securities Market Commission of Russia Number and date: No. 177-03942-000100 of 15.12.2000 On 4 April 2008 the Central Bank of the Russian Federation approved a change in the corporate name of MDM Bank. The official full corporate name of MDM Bank is MDM Bank (Open Joint-Stock Company), abbreviated as MDM Bank. In connection with this, all of MDM Bank s licenses are being reissued and the list above is valid as of 11 April 2008. For the most up-to-date information on the bank s licenses, please visit our website: http://www.mdmbank.com/ about/license Activity: Brokerage Operations (professional securities market participant) Issuing body: Federal Securities Market Commission of Russia Number and date: No. 177-02956-100000 of 27.11.2000 Activity: Dealing Operations (professional securities market participant) Issuing body: Federal Securities Market Commission of Russia Number and date: No. 177-03060-010000 of 27.11.2000 Activity: Asset Management Operations (professional securities market participant) Issuing body: Federal Securities Market Commission of Russia Number and date: No. 177-03134-001000 оf 27.11.2000

Memberships Association of Russian Banks, Moscow Moscow Interbank Currency Exchange (MICEX) ZAO, Moscow MICEX Stock Exchange ZAO, Moscow National Association of Stock Market Participants (SRO), Moscow St. Petersburg Stock Exchange ZAO, St. Petersburg Moscow Stock Exchange, Moscow Russian Trading System (RTS), Moscow National Stock Association (SRO), Moscow National Currency Association, Moscow Moscow International Currency Association, Moscow Association of Russian Regional Banks, Moscow ROSSWIFT, Moscow US-Russia Business Council, Washington, DC, U.S.A. National Council for Corporate Governance MDM Bank has been a member of the deposit insurance system since 15 December 2004. The Bank has adopted and fully observes in its operations the principles and norms of professional ethics developed by the associations, exchanges and partnerships of which it is a member.

Annual Report 2007 This Report is available in Russian and English. In the event of any discrepancy between the texts of the Russian and English versions, the text in the Russian version shall prevail. Detailed information on related-party transactions is provided in Annex 1 to this Report, which is available in PDF format on the Bank s website at www.mdmbank.ru. Information on major transactions, as defined by the Russian Law On Joint-Stock Companies and the Bank s charter, is provided in Annex 2, which is available in PDF format on the Bank s website at www.mdmbank.ru. Annexes 1 and 2 shall be viewed as an integral part of this Annual Report.