Annual Report 2008 • ANNUAL REPORT REPORT ANNUAL • JSCo «Russian Railways» JSCo «RUSSIAN RAILWAYS» JSCo «RUSSIAN RAILWAYS» 2008 2003–2008 Annual Report 2008 Table of Contents Welcoming speech by V.I. Yakunin, President of JSCo «Russian Railways» 6 Welcoming speech by A.D. Zhukov, Chairman of the Board of JSCo «Russian Railways» 7 Disclosures and forecasts 8 I. General Information on Open Joint Stock Company Russian Railways 10 General legal information 10 Changes in statutory activities in 2008 11 List of related parties 11 Structure of the holding company 11 II. Activity of the Management and Control Bodies of JSCo «Russian Railways» 14 General Shareholders’ Meeting 14 Board of Directors 14 Members of the Board of Directors 14 Data on participation in meetings of the Board of Directors of JSCo «Russian Railways» 15 Meetings of the Board of Directors of JSCo «Russian Railways» 16 Issues considered at the meetings of the Board of Directors of JSCo «Russian Railways» in 2008 16 Committees of the Board of Directors of JSCo «Russian Railways» 21 Resumes of members of the Board of Directors of JSCo «Russian Railways» 22 President of JSCo «Russian Railways» 24 Management Board 25 Resumes of members of the Management Board of JSCo «Russian Railways» 25 Inspection Commission 28 III. The Company's strategy and mission 30 Development strategy for rail transport in the Russian Federation through 2030 30 Functional strategies 31 IV. Summary of operating results 34 Impact of the global financial crisis 34 Operational achievements and key indicators 34 Government support and compensations 36 Improving management system 37 V. Overview of the main corporate events 40 Overview of the main corporate events for the period from 2003 40 Overview of the main corporate events in 2008 42 Overview of JSCo «Russian Railways» international activities since 2003 43 Main international activities and projects in 2008 46 4 Annual Report JSCo «RZD» 2008 VI. The Company's current position in the industry 50 The major markets of the Company 50 Freight operations 52 Improvement of the freight transportation services distribution and marketing system 57 Enhancement of operating efficiency 58 Reform of the corporate freight transportation services system, and the system of distribution and marketing 60 Passenger operations 60 Independent passenger carriers 61 Improvement of transportation quality, rolling stock modernization, and the development of passenger transportation infrastructure 62 Description of the Company’s infrastructure 64 Railway track structure 64 Electrification 66 Automation and remote control 66 Description of rolling stock 67 Locomotives 67 Freight cars 69 Multiple unit stock and passenger railway cars 69 VII. Business priorities 72 Principal results of investment activities 72 Locomotives 74 Freight cars 74 Passenger cars 74 Supply of multiple unit stock 75 Effectiveness of the investment program of JSCo «Russian Railways» 75 Construction-in-progress 77 Innovation-based development of JSCo «Russian Railways» 77 Track facilities 78 High-speed rail operations 79 Resource efficiency 80 Scientific and technical development 81 Quality management 81 Technical regulation 81 Foreign economic activities 82 Participation of JSCo «Russian Railways» in international projects for the construction of rail infrastructure 82 Provision of international transportation services to foreign railways 83 Reform and participation of JSCo «Russian Railways» in subsidiaries and affiliates 84 Results of the railway transport reform in 2008 84 Acquisition of shares 85 Liquidation of subsidiaries and affiliates 86 Withdrawal from subsidiaries and affiliates 86 Analysis of the operations of subsidiaries and affiliates 86 The Company's asset management 91 Personnel performance management 93 Human resources 93 Personnel management 94 Improving motivation and remuneration 95 Awards, medals and other commemorative badges 96 Social responsibility 96 Housing program 97 Health care 98 Youth policy 99 Table of Contents 5 Veterans and the corporate pension system 99 Sponsorship, charity, culture and sports 100 Safety of transportation 101 Safety of operations 102 Occupational safety 103 Environmental safety 104 VIII. Financial and Economic Results 108 The Company's financial and economic achievements 108 Financial management 109 Financial results 110 Key macroeconomic factors 110 Revenue from all types of activities 111 Tariff policy 111 Other types of activities (OTA) 113 Expenses related to all types of activities 114 Cost management system of JSCo «Russian Railways» 114 Transportation expenses 115 Other income and expenses 118 Working capital management 118 Inventory management 119 Key trends in managing liquidity and establishing a cash management system in 2003–2008 119 Optimizing settlement terms and business sources 121 Accounts receivable in 2008 121 Accounts payable in 2008 123 Loans and borrowings management («Borrowing Program») 124 Placement of temporarily available funds 126 Leasing 127 Ratings 128 Financial Risk Management 128 Insurance 129 Tax burden 129 IX. Information on interested-party transactions 132 X. Information on major transactions 134 XI. Statement on dividends paid 136 XII. Draft distribution of the Company's net profit earned in 2008 140 XIII. Description of major risk factors associated with the company's operations 144 Information about pending legal proceedings whereby the Company is a respondent to a debt collection claim with the specification of the aggregate claimed amounts 144 Information about pending legal proceedings whereby the Company is a claimant in a debt collection claim with the specification of the aggregate claimed amounts 144 XIV. Development prospects 146 Major development directions 146 Prospects of economic development 147 Anticrisis measures 147 Possible development directions taking into account market trends and organization's potential 148 Investment projects planned for realization 150 XV. Reference 154 XVI. Audit report 156 XVII. Appendices 162 Welcoming speech V.I. Yakunin, President of JSCo «Russian Dear shareholders, partners and colleagues, The year 2008 was a year of notable and important Certain improvements were appreciated by our passen- events for JSCo «Russian Railways». gers. The modern style reconstruction of Kursky railway We successfully began the year by achieving record high station in Moscow, whose reconstruction was completed margins in the past 15 years. In the second half of the in 2008, excellently demonstrates our work on the re- year, we saw a sharp drop in demand for shipment serv- construction of station complexes. Reconstruction of ices due to the global financial crisis, bringing forth new regional stations is also in progress. The «Concept of challenges for the Company. the effective use and development of railway stations Although affected by the global recession, the Company till 2015» was approved in 2008. ensured stability and profitability of its operations and We witnessed a breakthrough in the Russian high-speed improved its key production and financial performance passenger service. A new generation train, Sapsan, indicators. For the first time in the Company's history, reaching a speed of 250km/h was presented in St. Pe- its year-end income from core activities exceeded one tersburg. trillion rubles. The Company is actively engaged in international projects. Unlike other companies which cut their employment An increasing number of foreign partners engage us costs in the current downturn, JSCo «Russian Railways» as reliable builders of the railway infrastructure. The discharged its liabilities under the collective bargaining projects are in Libya, Iran, Algeria, and the Democratic agreement in full in 2008. Moreover, the Company con- People's Republic of Korea. tinued to index salaries, demonstrating its strong com- In 2008, JSCo «Russian Railways» was a winning bidder mitment to social responsibility. in a tender for concession management of the Armenian In 2008, the Company continued to intensively restruc- Railway. The Company signed a cooperation agreement ture the railway industry. Over the past five years, with the Ulan-Bator railway. JSCo «Russian Railways» has established 57 subsidiar- Moreover, JSCo «Russian Railways» effectively cooper- ies, 10 of which were established in 2008. ates with members of Strategic Partnership 1520 oper- By listing its subsidiaries on the stock market, the Com- ating under the unified 1520-gauge standard. pany achieved a significant financial effect of current It is our priority to take effective recovery measures, reforms providing an additional source of investments. including ongoing financial monitoring and continued This was also used as a financial source to renovate our cooperation with governments and regulatory agencies, rolling stock – over 21,000 freight cars were purchased and to maintain high growth rates. in 2008 alone. President of JSCo «Russian Railways» V. I. Yakunin Welcoming speech by A.D. Zhukov, Chairman of the Board of JSCo «Russian Railways» Ladies and gentlemen, In 2008, we summed up the results of the 10-year re- tion of the Oune-Vysokogornaya section involving the form in the railway industry. During this relatively short construction of the new Kuznetsovsky Tunnel on the period of time the railway transport industry with its Komsomolsk-on-Amur–Sovetskaya Gavan section» by innovative development strategy and socially focused using the resources of the Investment Fund of the Rus- economic approach has obviously become