Annual Report Jsco «RZD» 2007 Annual Report Jsco «RZD» 2007 Copyright 2006-2008, Anton Lange, Jsco "Russian Railways"

Table of Contents Annual Report 3 JSC «RZD» 2007

Table of Contents 2-5

Disclosures and Projections 6-11 Welcoming Speech by A.D. Zhukov, Chairman of the Board of JSCo «Russian Railways» 8-9 Welcoming Speech by V.I. Yakunin, President of JSCo «Russian Railways» 10-11

General Information on JSCo «Russian Railways» 12-17 General legal information 13-15 Structure of the holding company 15-17

Activities of the Management and Control Bodies of JSCo 18-37 «Russian Railways» General Shareholders’ Meeting 19 Board of Directors 19-32 President of JSCo «Russian Railways» 32 Management Board 33-36 Audit Committee 37

The Company's Strategy and Mission 38-39

Overview of the Main Corporate Events in 2007 40-41

The Company's current position in the industry 42-53 Share of JSCo «Russian Railways» of the transportation services market 43 Freight transportation services 43-46 Passenger service 46-48 Maintenance and repair 48-49 Description of the Company’s infrastructure 49-50 Description of rolling stock 50-52 Summary performance information on railways 52-53 4 Оглавление

Business Priorities 54-83 Principal results of investment activities 55-61 Innovation-based development of JSCo «Russian Railways» 61-64 International operations 64-67 Reform and Participation in Subsidiaries and Affiliates 67-73 Human Resources 73-74 Social sphere 74-78 Transportation Safety 78-79 Safety in operation 79-80 Labor Safety 80-81 Environmental Protection 81-83

Financial and economic results 84-105 (Board of Directors report) The Company's financial and economic achievements 85 Financial results 86 Key macroeconomic factors 86-90 Revenue from all types of activity 90-91 Expenses related to all types of activity 91-94 Other types of activity 94-95 Other income and expenses 95 Assets and liabilities 96-97 Changes in fixed assets 97 Financial investments 98 Working capital management 98-103 Leasing 104 Ratings 104 Financial Risk Management 104-105 Mortgage 105

Information about Interested party transactions 106-109

Information about Large Transactions 110-111

Statement on Dividends Paid 112-113 Annual Report 5 JSC «RZD» 2007

Draft Distribution of the Company's Net Profits Earned 114-117 in 2007

Description of the Main Risk Factors Associated 118-119 with Company's Operations

Information about pending judicial procedures whereby the Company is a respondent 119 to debt collection claims with the specification of aggregate claimed amounts Information about pending judicial procedures whereby the Company is a claimant in 119 debt collection claims with the specification of aggregate claimed amounts

Development Prospects 120-125 Development subject to accessing the promising markets 121 Possible Development Directions, subject to Market Trends and Company’s Potential 121-122 Planned Investment Projects 122-125

Reference 126

Disclosures and Projections Annual Report 7 JSC «RZD» 2007

The Annual Report of Russian Railways for 2007 discloses Due to the characteristics of projections risks and uncer- information to provide the shareholders represented by tainties both of the general and specific nature are inherent the Government of the Russian Federation, government to them. In this context there is always a risk that the pre- agencies, potential and actual investors, shippers, pas- liminary estimates, projections, plans and other forecasts sengers, miscellaneous stakeholders and information users will not come true. It should be remembered that under the with comprehensive and relevant data about JSCo «Russian influence of a broad range of material circumstances the Railways»' operations in 2007 and the trends of Company's actual results may significantly differ from targets, bench- development. marks, expected results, the estimates and intents included into projections by a significant margin. The report complies with requirements of the following standards and legal acts: — Federal Law On Joint-stock Companies; — Order No. 228 of Rosimushchestvo, dated July 26, 2005, On Regulation of Operations of the Federal Agency for Federal Property Management in the Sphere of Corpo- rate Governance (with recommendations on forming Russian Federation's position with respect to adoption of the annual report of an open joint-stock company whose shares are held by the Russian Federation); — Regulation No. 17/ps of the Federal Securities Commis- sion (FSC), dated 31 May 2002, On Adopting the Regula- tions on Additional Requirements to the Procedures for Preparing, Convening and Holding a General Sharehold- ers' Meeting. — Regulation No. 421/r of the FSC, dated 4 April 2002, On Recommendation to Apply the Code of Corporate Con- duct.

This report is a review of the current conditions of Russian Railways and the results of its operations during the years ending on December 31, 2007, December 31, 2006 and, in some cases, December 31, 2005 as well as the major trends which may impact on its future performance. For the purposes of this document the word «Company», the pronoun «we» and its different forms refer to Russian Railways. All amounts are quoted in billion rubles unless specified other- wise.

This report contains statements which have the same nature as projections. Such verbs as «consider», «expect», «seek», «plan» and their synonyms signify the current projections and opinion of Company's management with respect to future results. Welcoming Speech by A.D. Zhukov, Chairman of the Board of JSCo «Russian Railways» Annual Report 9 JSC «RZD» 2007

sector’s work is not reduced. Such conditions include the at- Ladies and Gentlemen, traction of considerable investments in the railway industry; they should go to all the segments of railway transportation Our state’s strategic issues concerning the economic and and be used mainly to develop the public-private partner- social spheres may be resolved if Russian railways develop at ship. a rapid rate. The Target Model of the Railway Transportation Service Taking into account the current GDP growth rates and the Market by the End of the Third Reform Stage, adopted in population’s migration activity, the requirements for railway 2007, is of great importance. It was worked out with the services will increase in the next five years, not to men- direct participation of the executives and experts from JSCo tion the long term: new mineral and raw material deposits «Russian Railways». This model offers clear-cut guidelines cannot be developed without developing the railways. In this for planning work and business by all the market partici- respect, JSCo «Russian Railways» plays an important role. pants, namely, transportation companies, service users and potential investors. Therefore, the previous year has become The growth rates of freight turnover, an increase in freight an important landmark of development of JSCo «Russian traffic, investment growth and the financial indicators of Railways» for many years to come. JSCo «Russian Railways» shows that the year 2007 was quite successful for the Company. I wish all the employees of JSCo «Russian Railways» success in their work for the Company’s benefit. Conditions have been created for promoting competition in the most diverse spheres of the railway market; operations on the railway freight car market are rapidly growing, and transportation costs are decreasing due to the introduction Chairman of the Board of JSCo «Russian Railways» of innovative technologies. Over 179 billion rubles have been A.D. Zhukov paid by the Company into the budgets of all levels, and in many regions the Company remains a system-forming enterprise and the largest taxpayer and employer, proving without fail that “roads are a source of life in Russia”.

The Company continues to bear a heavy social burden by ensuring that the public fully enjoys the constitutional right to freely travel across the country’s territory; it uses the revenue from other types of activities to cover the losses incurred by passenger transportation. Herewith, the Company is making a considerable effort to improve the services offered to passengers. By decision of the Board of JSCo «Rus- sian Railways», the Company is providing the usual benefits to students and schoolchildren at its own expense.

Last year’s results have shown that the Company is becom- ing one of the European leaders in railway transportation and railway infrastructure development. Today, railway transportation is playing an important role in forming Rus- sia's geo-economic and geopolitical position. Our task is to make the utmost use of our geographic advantages and the transit potential so as to receive dividends from international traffic and create a new instrument of Russian influence on world economic processes.

Many important events have occurred in the railway industry in 2007, being initiated and actively promoted by JSCo «Russian Railways». Certainly, we believe that the formation of the “Strategy of Development of Railway Transportation in Russia up to 2030”, supported by the country’s leadership, was the most notable event of the year. The Strategy of Development of Railway Transportation in Russia up to 2030 clearly shows the extent of state support and the limits to state regulation, whereby competitive conditions are created while the stability and effectiveness of the state railway Welcoming Speech by V.I. Yakunin, President of JSCo «Russian Railways» Annual Report 11 JSC «RZD» 2007

Railways» are strictly maintaining the economically substan- Dear Shareholders, tiated relationship between the growth of real wages and Partners and Colleagues, labor productivity. In 2007, JSCo «Russian Railways» used 75 billion rubles to Today, we are summing up the results of the anniversary fulfill the obligations under the Collective Agreement. In year of Russian railways, which are now 170 years old. November of that year, a new Collective Agreement was Symbolically, the anniversary year 2007 has become the signed for 2008-2010. The new document strengthens the beginning of the new position of JSCo «Russian Railways» in employees’ social protection and fully corresponds to the the world transportation market, i.e. re-branding, which in current requirements for transforming social outlays into an the next few years will apply to the Company's visual image instrument for enhancing the Company’s effectiveness. and to the gist of building and managing a business. We are showing the changes in JSCo «Russian Railways» to the Last year, we sped up structural transformations. world and at the same time are confirming the principles of work that remain unchanged for us. A new project called “Building a System of Management of JSCo «Russian Railways» under Conditions of Reform” was The results of 2007 show, for instance, that JSCo «Russian launched. Its purpose is to work out and introduce new ef- Railways» are developing in full conformity with the tasks fective principles of management in the Company that meet set by the President and the Government of the country, and the new requirements as JSCo «Russian Railways» are trans- with the program for structurally reforming railway transformed into a holding company. The Board of JSCo «Russian portation. Our activity fully conforms to the strategic tasks Railways» approved the establishment of 15 subsidiaries of Russia’s socio-economic development and its interests. In and joint ventures. A major operator subsidiary called "First this respect, the fact that the Company’s plans, set out in Freight Company" was established for the purpose of renew- the “Strategy of Development of Railway Transportation up ing the rolling stock and consolidating the market positions to 2030”, were fully supported by the participants in the 1st of JSCo «Russian Railways». Railway Congress: V.V. Putin - the President of Russia – and by the leading officials of the Russian Government and the Much is being done by the Company for passengers: new regional governments, Russian industrial leaders, and our routes, including international ones, are being opened; our associates in the transportation market, is of great impor- trains now go to Paris, Amsterdam, Basel and Munich. Rus- tance to us. sian passengers can choose a man’s or a woman’s compartment, purchase train tickets via the Internet, and enjoy Last year our work was targeted at creating conditions for other services offered today. actively developing and upgrading railways. In 2007, JSCo «Russian Railways» considerably strengthened The Company is now using all types of resources far more its positions in the international transportation market. efficiently. In this respect, the influence of railway tariffs We entered into a few very important agreements with our on the level of inflation has been more than halved. Under foreign partners in order to integrate the Company further the conditions of high market prices of the resources used in the international transportation system and use our coun- by the Company, we managed to reduce the growing cost of try’s transit opportunities more effectively. transportation below the inflation level by taking steps to save resources and increase labor productivity. Thereby we Certainly, we do not intend to “rest on our laurels”. Last confirmed our underlying principle in maintaining business, year’s indicators are merely a launching pad for subsequent namely, success is to be achieved by actually increasing ef- development. Our objective is not simply to maintain the fectiveness. current development rates, but to make a qualitative leap forward. We are saying once more that people are the Company’s main resources; owing to their everyday work, JSCo «Rus- We are changing. And changing for your sake! sian Railways» attained a new production, financial and economic level in 2007. This is especially true of intensively growing freight transportation, where we broke a few re- cords. Last year we transported 1,344.2 million tons, which President of JSCo «Russian Railways» is 2.6% more than in the previous year. Freight turnover V.I. Yakunin exceeded 2,312.6 billion t/km, growing by 7.7%; in addition, 1,281,946,000 passengers were transported.

As the Company’s financial position improved, it introduced a new system of labor payment and substantially increased salaries and wages, which grew by almost 18% for employees engaged in carriages. In this respect, JSCo «Russian Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

General Information on JSCo «Russian Railways» Annual Report 13 JSC «RZD» 2007

General legal information The monetary amounts in this section are given in kRUB Full name of the open joint-stock company (in Russian): открытое акционерное общество «Российские железные дороги» (abbreviated ОАО «РЖД»)

Name in English: Open Joint Stock Company «Russian Railways» (JSCo «Russian Railways»)

State registration certificate: series 77 No. 007105126 issued on September 23, 2003 Constituency of the Russian Federation: city of Moscow Registered address: Ul. Novaya Basmannaya 2, Moscow 107174 Postal address: Ul. Novaya Basmannaya 2, Moscow 107174

Types of activity — freight transport; — long-distance passenger transport; — suburban passenger transport; — provision of infrastructure services; — provision of locomotive propulsion services; — repair and maintenance of rolling stock; — building infrastructure; — science & research and experimental & constructional work; — maintaining the social sphere; — other types of activities

Information on inclusion in the list of strategic joint stock companies: pursuant to Edict No. 1009 of the President of the Russian Federation of August 4, 2004 “Concern- ing Approval of the List of Strategic Enterprises and Strategic Joint Stock Companies”, JSCo «Russian Railways» has been included in the list of open joint stock companies whose shares are owned by the Russian Federation, and the participation of the Russian Federation in the management of which is in the state’s strategic interests, promotes its defense capability and security, and protects its citizens’ morality, health, rights and legal interests.

Full name and address of the register holder: Open Joint Stock Company «Russian Railways». The Company itself keeps the shareholders’ register; a decision to transfer the functions of keeping the shareholders’ register to the registrar was not made. уб.: General Information 14 on JSCo «Russian Railways»

Size of equity, kRUB: There are no preference shares 1 541 697 819 The Company’s principal shareholders: Number of ordinary shares: the Russian Federation 1 541 697 819 Amount of contribution by the Russian Nominal value of ordinary shares, kRUB: Federation, kRUB: 1 541 697 819 1 541 697 819 State registration number of the issue of ordi- Share of the Russian Federation in charter nary shares and the state registration date: capital,% 1-01-65045-D dated 100 December 2, 2003 Share of the Russian Federation, ordinary shares, % State registration number of the additional issue of ordinary shares and the state registra- 100 tion date: 1-01-65045-D-001D dated December 13, 2007

Full name and address of the company’s auditor: Closed joint stock company BDO Unicon (using statutory financial statements) Address: Varshavskoye Shosse 125, Bldg. 1, Sector 11, Moscow 117545, Russian Federation Ernst & Young Limited Liability Company (IFRS financial statements) Address: Sadovnicheskaya Nab. 77, Bldg. 1, Moscow 115035, Russia

Changes in statutory activities in 2007: — By Decree No. 483 of the Government of the Russian Federation of July 26, 2007 “Concerning Amendments to the Charter of the Open Joint Stock Company «Russian Railways», greater powers have been given to the president of JSCo «Russian Railways» (e.g. entering into transactions worth more than 3 billion rubles, appointing chief executives of non-state institutions, and approving the issuer’s quarterly reports). — By Decree No. 811 of the Government of the Russian Federation of November 26, 2007 "Concern- ing Amendments to the Charter Capital of the Open Joint Stock Company «Russian Railways»", JSCo «Russian Railways» has received the right to issue, in addition to the placed shares, 5,997,819 ordinary registered shares with a nominal value of 1,000 rubles each for the total amount of 5,997,819,000 rubles, which after their placement give the same rights as ordinary registered shares floated upon the company's incorporation. — As of January 1, 2007, the size of the Company’s charter capital was 1,535,700,000 kRUB. By Reso- lution No. 1686r of the Government of the Russian Federation of November 26, 2007 “Concerning an Increase in the Charter Capital of JSCo «Russian Railways», the charter capital of JSCo «Russian Railways» was enlarged by 5,997,819,000 (five billion nine hundred ninety-seven million eight hundred nineteen thousand) rubles by issuing 5,997,819 (five million nine hundred ninety-seven thousand eight hundred nineteen) additional shares, including those at the expense of the 50% paid-in shares of JSCo AK Zheleznye Dorogi Yakutii, 75% of the shares of JSCo TransCreditBank, 100% - 1 share of the shares of JSCo Gazeta Gudok, and 87.4% of the shares VSM. The draft amendments to the Company’s charter are being agreed on by the ministries concerned. Annual Report 15 JSC «RZD» 2007

List of related parties The Company’s related parties are the following: — members of the Board of Directors (see subsection “Members of the Board of Directors” of section IV); — the Company’s president (see the subsection “President of JSCo «Russian Railways» ” of section IV); — members of the Company’s Management Board (see the subsection “Management Board” of section IV); — legal entities in which the Company has more than 20% stock power of the voting shares or of the contributions and/or the equitable interest of the Company’s charter capital or equity capital (see the subsection “Reform and Participation in Subsidiaries and Affiliates” of section VIII). Structure of the holding company The holding company is structurally composed of the parent company JSCo «Russian Railways» and its subsidiaries and affiliates.

(I) As of January 1, 2007, the Company was structurally composed of branches engaged in certain types of activity:

Branch offices – railways: Functional branch offices: — Oktyabrskaya; — branch offices engaged in transportation (4) — Kaliningradskaya; — branch offices providing technical, economic — Moskovskaya; and financial support (6) — Gorkovskaya; — branch offices engaged in capital construction — Severnaya; (45) — Severo-Kavkazskaya; — branch offices engaged in rolling stock repair — Yugo-Vostochnaya; and maintenance (30) — Privolzhskaya; — branch offices operating track facilities (15) — Kuibyshevskaya; — branch offices which are electro-technical — Sverdlovskaya; plants (8) — Yuzhno-Uralskaya; — branch offices engaged in IT development and — Zapadno-Sibirskaya; telecommunications (3) — Krasnoyarskaya; — branch offices engaged in the social sphere — Vostochno-Sibirskaya; (20) — Zabaikalskaya; — R&D branch offices (10) — Dalnevostochnaya; — other branch offices (2) — Sakhalinskaya. General Information 16 on JSCo «Russian Railways»

The Company’s representative offices are located in Pyongyang, Beijing, Warsaw, Prague 6, Helsinki, Berlin, Budapest VI, Tallinn, Kiev and Teheran.

A representative office has been established in the Republic of Armenia in accordance with the decision of the Board of Directors of JSCo «Russian Railways» (Minutes No. 18 of November 19, 2007).

In the reporting year, in accordance with the decisions of the Board of Directors, the branch offices of JSCo «Russian Railways», on the basis of the assets of which subsidiaries were set up, have been liquidated: — capital construction branches – 41 (Minutes No. 9 of May 2, 2007); — electro-technical plants – 8 (Minutes No. 11 of May 28, 2007); — in the sphere of capital repairs of freight cars and the production of spare parts for them - 3 (Min- utes No. 14 of August 31, 2007).

The following branch offices of JSCo «Russian Railways» were established: а) design engineering bureau for IT systems development (Minutes No. 19 of November 16, 2006); b) central management office for railway track repair (Minutes dated April 20, 2007); c) In the Management Office for the Comprehensive Reconstruction of Railways and the Construction of Railway Units - a branch office of JSCo «Russian Railways» –the following autonomous structural subdivisions were created: the customer's Khabarovsk group for building railway units (the Manage- ment Office for the Construction of Railway Units of the City of Khabarovsk) and the customer’s Ros- tov group for building railway units (the Management Office for the Construction of Railway Units in the south of Russia); d) Company’s new branch office, namely, the Management Office for Railway Stations, started working in 2007.

(II) As of December 31, 2007, JSCo «Russian Railways» owned shares in 131 companies. The Company’s investments include investments in the charter capital of 115 subsidiaries and affiliates (including those for which a provision has been created), of which 59 companies are subsidiaries (with an equitable interest of 50% and more), while the remaining 56 companies are affiliates (with an equitable interest of 20% to 50%). The contributions to the charter capital of subsidiaries and affiliates amount to 9.88% of the size of the charter capital of JSCo «Russian Railways». Annual Report 17 JSC «RZD» 2007

In 2007, 15 subsidiaries of JSCo «Russian Railways» were established in the context of the structural railway reform:

№ Name of Subsidiary Amount, kRUB Date of meeting of Date of state registration founding members of the company

1 CJSCo CHOP RZD OKhRANA 21,834 January 15, 2007 January 31, 2007

2 JSCo ReilTransAvto 1,665,233 January 17, 2007 February 2, 2007

3 JSCo Port Ust-Luga Transportation Company 50,000 March 21, 2007 March 29, 2007

4 JSCo Alatyrsky Mechanical Plant 104,657 March 15, 2007 March 30, 2007

5 JSCo Vladicaucasus Train Car Repair Plant named by S.M.Kirov 1,172,955 March 15, 2007 April 10, 2007

6 JSCo Vologda Train Car Repair Plant 727,051 March 15, 2007 April 11, 2007

7 JSCo Krasnoyarsk Train Car Repair Plant 1,430,483 March 15, 2007 April 6, 2007

8 JSCo Moscow Locomotive Repair Plant 946,585 March 15, 2007 March 28, 2007

9 JSCo Moscow Mechanical Plant Krasny Put 562,512 March 15, 2007 April 5, 2007

10 JSCo Petukhov casting and mechanical plant 285,457 March 15, 2007 April 3, 2007

11 JSCo Railway Trade Company 8,077,296 May 15, 2007 June 4, 2007

12 JSCo Don-Suburbs 74 June 7, 2007 June 22, 2007

13 JSCo First Freight Company 85,652,434 July 18, 2007 July 26, 2007

14 JSCo Russia-wide Research Institute of Rail Transportation 3,191,502 July 18, 2007 August 9, 2007

15 JSCo State Research Institute of Automated Systems 561,733 July 18, 2007 August 8, 2007 As was mentioned above, the federally owned 50% of the shares of charter capital of JSCo Aktsionerna- ya Kompaniya Zheleznye Dorogi Yakutii (JSCo Railways of Yakutia), 75% of the shares of JSCo Transkred- itbank, 100% minus 1 share of the shares of JSCo Newspaper Gudok, and 87.4% of the shares of RJSCo VSM (Vysokoskorostnye Magistrali) (High-speed Lines) were contributed by the Russian Federation to the charter capital of JSCo «Russian Railways» in 2007.

In 2007, JSCo «Russian Railways» terminated its participation in JSCo Sankt-Peterburgskaya Torgovaya Kompaniya (ORC) (100%), CJSCo Transkreditkart (40%), JSCo Elgaugol (29.49%), and JSCo LLMZ-KAMAKh (49%). CJSCo Izhvelokom, LLC Alnashskiy Spirtzavod, LLC Asan-spirt and LLC Brat i Sestra (writing off the provision) also withdrew from the companies, whose shares and equitable interests are owned by JSCo «Russian Railways».

The participation of JSCo «Russian Railways» in subsidiaries and affiliates is analyzed in the subsection “Reform and Participation in Subsidiaries and Affiliates" of the section “Priority Directions of Activity”. Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Activities of the Management and Control Bodies of JSCo "Russian Railways" Annual Report 19 JSC «RZD» 2007

In accordance with the сharter of JSCo «Russian Railways», the following regulatory bodies were established in JSCo «Russian Railways»: — General Shareholders’ Meeting; — Board of Directors; — President; — Management Board.

The Audit Committee is the control body responsible for monitoring the Company’s financial and economic activities. General Shareholders’ Meeting The Company’s supreme governing body is the General Shareholders’ Meeting. The Company’s sole shareholder is the Russian Federation. Inasmuch as the Russian Federation is the Company’s sole shareholder, and the Russian Government exercises powers on behalf of the Russian Federation, pursuant to Article 47 of the Federal Law “Concerning Joint Stock Companies”, decisions on the composition of the Board of Directors of JSCo «Russian Railways» are adopted by the Russian Government alone and drawn up in writing.

Shareholder decisions are officially made out in the form of an instruction of the Government of the Russian Federation.

The decisions of the annual general shareholders’ meeting in 2007 were approved by Instruction No. 864-r of the Government of the Russian Federation of June 30, 2007.

The decisions of the extraordinary general shareholders’ meeting in 2007 were approved by Instruc- tion No. 1686-r of the Government of the Russian Federation of November 26, 2007 “On an Increase in the Charter Capital of JSCo «Russian Railways» and Decree No. 811 of the Government of the Russian Federation of November 26, 2007 “Concerning the Introduction of Amendments to the Charter of JSCo «Russian Railways». Board of Directors The Board of Directors of JSCo «Russian Railways» is responsible for general management of the Com- pany’s activities and acts on the basis of norms stipulated by the laws of the Russian Federation; the Charter of JSCo «Russian Railways», approved by Decree No. 585 of the Government of the Russian Federation of September 18, 2003, and the Statute on the Board of Directors of JSCo «Russian Rail- ways», approved by Instruction No. 265-r of the Government of the Russian Federation of February 25. Activities of the Management and Control Bodies 20 of JSCo «Russian Railways»

Members of the Board of Directors The Board of Directors of JSCo «Russian Railways», elected in accordance with Instruction No. 930-r of the Government of the Russian Federation of June 30, 2006, was approved in the number of 11 members (positions at the time of election):

Full name Position

V. N. Ampilogov Deputy Director of the Department for Industry Development of the Government of the Russian Federation

A. D. Zhukov Deputy Prime Minister of the Russian Federation

I. E. Levitin Minister of Transport of the Russian Federation

A. S. Misharin Deputy Minister of Transport of the Russian Federation

V. L. Nazarov Head of the Federal Agency for Federal Property Management

G. M. Fadeyev Aide to the Prime Minister of the Russian Federation

V. B. Khristenko Minister of Industry and Power of the Russian Federation

A. V. Sharonov State Secretary, Deputy Minister of Economic Development and Trade of the Russian Federation

K. P. Shenfeld Acting Head of the Federal Rail Transport Agency of the Ministry of Transport of the Russian Federation

I. I. Shuvalov Aide to the President of the Russian Federation

V. I. Yakunin President of JSCo «Russian Railways»

The Board of Directors of JSCo «Russian Railways», elected in accordance with Instruction No. 864-r of the Government of the Russian Federation of June 30, 2007, was approved in the number of 12 members (positions at the time of election):

Full name Position

V. N. Ampilogov Deputy Director of a department of the Government of the Russian Federation

V.S. Belov Director of a department of the Ministry of Finance of the Russian Federation

A.V. Dementyev Deputy Minister of Industry and Power of the Russian Federation

A. D. Zhukov Deputy Prime Minister of the Russian Federation

A.L. Kostin President and chairman of the management board of the open joint stock company Foreign Trade Bank

I. E. Levitin Minister of Transport of the Russian Federation

A. S. Misharin Deputy Minister of Transport of the Russian Federation

V. L. Nazarov Head of the Federal Agency for Federal Property Management

A. V. Popova Director of a department of the Ministry for Economic Development and Trade of the Russian Federation

G. M. Fadeyev Aide to the Prime Minister of the Russian Federation

I. I. Shuvalov Aide to the President of the Russian Federation

V. I. Yakunin President of JSCo «Russian Railways»

A. D. Zhukov, Deputy Prime Minister of the Russian Federation, was elected Chairman of the Board of Directors of JSCo «Russian Railways».

The members of the Board of Directors of JSCo «Russian Railways» receive no remuneration for performing their functions as members of the Board of JSCo «Russian Railways». Annual Report 21 JSC «RZD» 2007

Data on participation in meetings of the Board of Directors of JSCo «Russian Railways» From January 1, 2007 to June 30, 2007

№1 №2 №3 №4 №5 №6 №7 №8 №9 №10 №11 №12

V. N. Ampilogov + + + + + + + + + + + +

A. D. Zhukov + + + + + + + + + + + +

I. E. Levitin + + + + + + + + — + + +

A. S. Misharin + + + + + + + + + + + +

V. L. Nazarov + + + + + + + + + + + +

G. M. Fadeyev + + + + + + + + + + + +

V. B. Khristenko + — + + + + + + — + + +

A. V. Sharonov + + + + + + + + + + + +

K. P. Shenfeld + + + + + + + + + + + +

I. I. Shuvalov + + + + + + + + + + + +

V. I. Yakunin + + + + + + + + + + + +

From July 1, 2007 to December 31, 2007

№13 №14 №15 №16 №17 №18 №19 №20 №21 №22 №23

V. N. Ampilogov + + + — + + + + + + +

V.S. Belov + + + + — — + + + + +

A.V. Dementyev + + + + + + + + + + +

A. D. Zhukov + — + + + + + + + + +

A.L. Kostin + + + + + + + — + + +

I.E. Levitin I.E. + — + + + + + + + + +

A. S. Misharin + + + + + + + + + + +

V. L. Nazarov + — + + + — — — + — —

A. V. Popova + + + + + + + — + + +

G. M. Fadeyev + + + + + + + + + + +

I. I. Shuvalov — + — — + + + + + + +

V. I. Yakunin + + + + + + + + + + +

Meetings of the Board of Directors of JSCo «Russian Railways» In the reporting period, the Board of Directors of JSCo «Russian Railways» held 23 meetings at which 169 issues were considered. All decisions of the Board of Directors were fulfilled, or the time limits for their fulfillment were carried over by decision of the Board to the first half of 2008. Activities of the Management and Control Bodies 22 of JSCo «Russian Railways»

Issues considered at the meetings of the Board of Directors of JSCo «Russian Railways» in 2007

No. 1 dated January 22, 2007 No. 3 dated February 16, 2007

1. On the position of JSCo «Russian Railways» (its represen- 1. On the approval of a set of documents for the establish- tatives) on the issue "Approval of the Report on the ОАО ment of subsidiaries for capital repairs and maintenance of Yamal Railway Company Budget administration for 2005" on passenger train cars and the rolling stock and the produc- the Agenda of the Meeting of the Board of Directors of the tion of spare parts for them, and on the time limits for ОАО Yamal Railway Company. and the ways of selling the shares of these subsidiaries (on the basis of the Vologda Train Car Repair Plant, the Alatyr 2. On the position of JSCo «Russian Railways» (its represen- Machine-building Plant, the Vladicaucasus Train Car Repair tatives) on the issue "Approval of the Report on the CJSCo Plant, the Krasny Put Moscow Machine-building Plant, the Zheldoripoteka Budget administration for 2005" on the Moscow Locomotive Repair Plant, Petukhov Foundry, and Agenda of the Meeting of the Board of Directors of CJSCo the Krasnoyarsk Train Car Repair Plant. Zheldoripoteka. 2. On the establishment of a joint venture by JSCo «Russian 3. On the position of JSCo «Russian Railways» (its represen- Railways» and JSCo Ust-Luga Company. tatives) on the issue "Approval of the Report on the JSCo Omsk-Suburban Railways Budget for 2005" on the Agenda of 3. On granting railway fare discounts to students of higher the Meeting of the Board of Directors of JSCo Omsk-Subur- and secondary educational institutions in 2007. ban Railways. 4. On the approval of the list of subsidiaries and affiliates in 4. On the position of JSCo «Russian Railways» (its represen- relation to which the Board of Directors of JSCo «Russian tatives) on the issue "Approval of the Report on the CJSCo Railways» adopts a decision in accordance with the Charter TransTeleCom Company Budget administration for 2005" of JSCo «Russian Railways». on the Agenda of the Meeting of the Board of Directors of CJSCo TransTeleCom Company. 5. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the Fulfill- 5. On the position of JSCo «Russian Railways» (its represen- ment of the CJSCo FK Lokomotiv Budget for 2005" on the tatives) on the issue "Approval of the Report on the JSCo Agenda of the Meeting of the Board of Directors of CJSCo FK Altai-Suburban Railways Budget administration for 2005" on Lokomotiv. the Agenda of the Meeting of the Board of Directors of JSCo Altai-Suburban Railways. 6. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the JSCo Arena-2000 6. On the position of JSCo «Russian Railways» (its represen- Budget for 2005" on the Agenda of the Meeting of the Board tatives) on the issue "Approval of the Report on the CJSCo of Directors of JSCo Arena-2000. TRANSKAT Budget administration for 2005" on the Agenda of the Meeting of the Board of Directors of CJSCo TRAN- 7. On the position of JSCo «Russian Railways» (its repre- SKAT. sentatives) on the issue “Approval of the JSCo Arena-2000 Budget for 2007" on the Agenda of the Meeting of the Board 7. On the Adoption of the Decision to Approve a Supplemen- of Directors of JSCo Arena-2000. tary Agreement to the State Contract for Military Railway Shipments and Transportation Services for 2006. 8. On the position of JSCo «Russian Railways» (its representatives) on the issue of the adoption of a decision on the participation of JSCo Roszheldorproekt in other organizations at the meeting of the Board of Directors of Roszheldor- No. 2 dated February 12, 2007 proekt.

1. On the approval of the JSCo «Russian Railways» Report 9. On the position of JSCo «Russian Railways» (its represen- for Q4 2006. tatives) on the issue “Approval of the JSCo Roszheldorproekt Budget for 2007" on the Agenda of the Meeting of the Board 2. On the transfer of the special-purpose train car stock of of Directors of JSCo Roszheldorproekt. JSCo «Russian Railways» into federal ownership without consideration. 10. On the position of JSCo «Russian Railways» (its repre- Annual Report 23 JSC «RZD» 2007

sentatives) on the issue “Approval of the ОАО Yamal Railway tatives) on the issue "Approval of the JSCo Barnaulskiy Train Company Budget for 2007" on the Agenda of the Meeting of Car Repair Plant Budget for 2007" on the Agenda of the the Board of Directors of JSCo Yamal Railway Company. Meeting of the Board of Directors of the JSCo Barnaulskiy Train Car Repair Plant. On the time limits for and the methods of selling the shares of JSCo ELTEZA and JSCo Roslavl Train Car Repair Plant. 6. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the JSCo Kaluzhsky Plant Remput'mash Budget for 2007" on the Agenda of the Meeting of the Board of Directors of JSCo Kaluzhsky Plant No. 4 dated March 5, 2007 "Remput'mash".

1. On the Appointment of a Member of the Management 7. On the position of JSCo «Russian Railways» (its represen- Board of JSCo «Russian Railways». tatives) on the items of the Agenda of the Meeting of the Board of Directors of JSCo Kaluzhsky Plant Remput’mash, included in the list of subsidiaries and affiliates, on which the Board of Directors of JSCo «Russian Railways» adopts No. 5 dated March 5, 2007 decisions in accordance with the first paragraph of Article 71.23 of the JSCo «Russian Railways» Charter: "On the Sale 1. On partially paying in the Charter Capital of JSCo Trans- of Shares, the Title to Which Has Been Acquired by the Container in cash. Company" and "On the Approval of a Deal in the Execution of Which Interest Is Taken by a Member of the Management 2. On the approval of related deals for transforming the Board of JSCo «Russian Railways»". region of the Izvestkovaya-Chegdomyn Railway Line that is in the area of influence of the Bureiskaya Hydroelectric Plant, 8. On the position of JSCo «Russian Railways» (its represen- Khabarovsk Territory. tatives) on the items of the Agenda of the Meeting of the Board of Directors of JSCo United Electro-technical Plants, 3. On the approval of executing related deals for attracting included in the list of subsidiaries and affiliates, on which loans by entering into agreements with Deutsche Bank AG to the Board of Directors of JSCo «Russian Railways» adopts finance work under a service contract for developing, manu- decisions in accordance with the first paragraph of Article facturing and delivering high-speed electric trains with the 71.23 of the JSCo «Russian Railways» Charter: "On the Sale company Siemens AG and on fixing the price of those deals. of Shares, the Title to Which Has Been Acquired by the Company" and "On the Approval of a Deal in the Execution 4. On the position of JSCo «Russian Railways» (its represen- of Which Interest Is Taken by a Member of the Management tatives) on the issue of the Agenda of the Meeting of the Board of JSCo «Russian Railways»". Board of Directors of JSCo ELTEZA. 9. On the approval of a transaction in the sale/purchase of shares of the Yugo-Vostok Inter-Regional Joint-Stock Bank (open joint-stock company) that belong to JSCo «Russian No. 6 dated March 23, 2007 Railways».

1. On the approval of investment and financial programs of 10. On the approval of a transaction in the sale/purchase of JSCo «Russian Railways» for the year 2007 and up to 2009. CJSCo TransCreditCard shares which belong to JSCo «Rus- sian Railways». 2. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the CJSCo TransTeleCom Company Budget for 2007" on the Agenda of the Meeting of the Board of Directors of CJSCo TransTeleCom Company. No. 7 dated March 26, 2007

3. On the position of JSCo «Russian Railways» (its represen- 1. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the CJSCo Russkaya Troika tatives) on the items of the agenda of the general sharehold- Budget for 2007" on the Agenda of the Meeting of the Board ers’ meetings and the meetings of the boards of directors of Directors of CJSCo Russkaya Troika. of the companies included in the list of subsidiaries and affiliates in relation to which the Board of Directors of JSCo 4. On the position of JSCo «Russian Railways» (its represen- «Russian Railways» adopts decisions in accordance with tatives) on the issue "Approval of the JSCo Roslavlskiy VRZ Article 71.23 of the Charter of JSCo «Russian Railways». Budget for 2007" on the Agenda of the Meeting of the Board of Directors of JSCo Roslavlskiy VRZ. 2. On awarding a premium to the President of JSCo «Russian Railways» and assessing his performance according to the 5. On the position of JSCo «Russian Railways» (its represen- results of Q4 2006. Activities of the Management and Control Bodies 24 of JSCo «Russian Railways»

No. 8 dated April 20, 2007 No. 9 dated May 2, 2007

1. On the election of the chairperson at a BoD meeting. 1. On awarding a premium to the President of JSCo «Rus- sian Railways» and assessing his performance for Q1 2007. 2. On the concept of reforming the repair railway facilities of JSCo «Russian Railways». 2. On the liquidation of the branch offices of JSCo «Russian Railways», on the basis of the assets of which the subsid- 3. On the establishment of a subsidiary of JSCo «Russian iaries JSCo Roszheldorstroy and JSCo Roszheldorproyekt Railways» for providing catering services and on the time were established. limits for and the ways of selling the subsidiary’s shares.

4. On the establishment of the joint venture CJSCo Eurasia Rail Logistics. No. 10 dated May 25, 2007

5. On the establishment of the suburban passenger com- 1. On the audit report on the financial statements of JSCo pany JSCo Don Suburbs, a subsidiary of JSCo «Russian «Russian Railways» for 2006. Railways», with the participation of the Administration of the Rostov Region. 2. On the Audit Committeereport on the financial and economic performance of JSCo «Russian Railways» for 2006. 6. On the establishment of the Russia-wide railway employers’ association. 3. On the Results of the Auditor Tender for an Annual Audit of the Financial and Economic Performance of JSCo 7. On the position of JSCo «Russian Railways» (its repre- «Russian Railways» and the Fee for the Auditor's Services. sentatives) on the issue “Approval of the JSCo TransCon- tainer Budget for 2007” on the Agenda of the Meeting of 4. On the primary approval by the board of directors of the the Board of Directors of JSCo TransContainer. annual report of JSCo «Russian Railways» for 2006.

8. On the position of JSCo «Russian Railways» (its repre- 5. On the approval of the annual financial statements of sentatives) on the issue “Approval of the JSCo Refservis JSCo «Russian Railways» for 2006, including the profits Budget for 2007” on the Agenda of the Meeting of the and losses statement. Board of Directors of JSCo Refservis. 6. On recommendations concerning the maximum amount 9. On the principles of provision of sponsor support and of dividends on shares and their payment procedure for charity aid by JSCo «Russian Railways» and the JSCo the annual general shareholders’ meeting of JSCo «Rus- «Russian Railways»’ oversight of the purposeful use of the sian Railways» on the results of the company’s perfor- allocations. mance for 2006.

10. On the adoption of the decision to approve the agree- 7. On the allocation of profit of JSCo «Russian Railways» ment for the sale/purchase of realty of JSCo «Russian Rail- according to the results of the fiscal year. ways» with the non-commercial organization Non-state Pen- sion Fund Wellbeing as a deal, in which there is interest, in accordance with Article 83 of Federal Law No. 208-FZ of December 26, 1995 “Concerning Joint Stock Companies”. No. 11 dated May 28, 2007

11. On the approval of the agreement for issuing work- 1. On the release from duties of a member of the Manage- related and one-time transportation requirements of JSCo ment Board of JSCo «Russian Railways». «Russian Railways» to formalize the non-cash transportation documents (tickets) for the employees of JSCo 2. On the liquidation of the branch offices of JSCo «Rus- Roszheldorproekt to go by train on long-distance trips. sian Railways», on the basis of the assets of which the joint stock company United Electro-technical Plants was 12. On the appointment of the representatives of JSCo established. «Russian Railways» for participation in the general meetings of shareholders of subsidiaries and affiliates. 3. On the approval of the JSCo «Russian Railways» Report for Q1 2007. 13. Miscellaneous 4. On the adoption of the decision approving the loan 13.1. On the time limits for and the ways of selling shares agreement between JSCo «Russian Railways» and JSCo of JSCo TransContainer. High-speed Lines as a transaction in which there is interest Annual Report 25 JSC «RZD» 2007

in accordance with Article 83 of the Federal Law “Concern- on the Agenda of the Meeting of the Board of Directors of ing Joint Stock Companies”. JSCo RailTransAuto.

5. On the approval of Agreement No. 22/08/2 for Passen- 11. On the approval of the JSCo RailTransAuto budget for ger Transport Services for Discount Category Passengers 2007. Traveling Free of Charge on Suburban Trains dated Febru- ary 7, 2007. 12. On the schedule of the Board of Directors of JSCo «Russian Railways» for H2 2007.

13. On the release from duty and appointment of a mem- No. 12 dated June 28, 2007 ber of the Management Board of JSCo «Russian Railways» (Instruction No. 2508p-P13 of the Government of the Rus- 1. On the approval of the concept of reform and the sian Federation of June 27, 2007). establishment of subsidiaries of JSCo «Russian Railways», on the establishment of the subsidiaries of JSCo «Russian 14. On the approval of the key indicators of the effective Railways», Russia-wide Research Institute of Rail Transpor- performance of the Vice President for corporate gover- tation and of the Research Institute of Automated Sys- nance of JSCo «Russian Railways». tems, and on the time limits for and the ways of selling the shares of these subsidiaries. 15. On giving an annual premium to the members of the Management Board of JSCo «Russian Railways» 2. On the approval of a set of documents for establishing and making a summarized qualitative assessment of the the open joint-stock company First Freight Company, a sub- performance of the Management Board of JSCo «Russian sidiary of JSCo «Russian Railways», and on the time limits Railways» as a whole for 2006. for and the ways of selling the subsidiary’s shares. 16. On the approval of assessing the fulfillment of the key 3. On the concept of reforming plants for the repair of indicators of the effective performance of the President of locomotives and the production of spare parts for them. JSCo «Russian Railways» for 2006.

4. On the position of the representatives of JSCo «Russian 17. On the approval of the amount of a provision for the Railways» on the Board of Directors of JSCo Roszheldor- purpose of determining the amount of premiums given in stroy on the issue “Participation of JSCo Roszheldorstroy the long term to the chief executives of JSCo «Russian in the establishment of the new organization Zarybezh- Railways» in 2004 – 2006 stroytekhnologiya".

5. On the participation of JSCo «Russian Railways» in establishing the non-commercial partnership Railway Equip- No. 13 dated August 9, 2007 ment Manufacturers’ Association. 1. On the election of the Chairman of the Board of Direc- 6. On the approval of entry into a loan agreement by tors of JSCo «Russian Railways». JSCo «Russian Railways» and JSCo High-speed Lines, as a transaction in which there is interest, in accordance with 2. On the position of JSCo «Russian Railways» (its rep- Article 83 of the Federal Law “Concerning Joint Stock resentatives) on the issue “Sale of Shares, the Title to Companies”. Which Was Transferred to the Company” on the agenda of the meeting of the Board of Directors of JSCo Ref- 7. On the approval of the agreement for the technical servis included in the list of subsidiaries and affiliates on maintenance and repair of 8 (eight) high-speed trains with which the Board of Directors of JSCo «Russian Railways» the company Siemens Actiengesellschaft and the determi- adopts a decision in accordance with the first paragraph nation of its price. of Article 71.23 of the Charter of JSCo «Russian Rail- ways». 8. On the position of JSCo «Russian Railways» (its representatives) on the issue "Flotation by JSCo TransContainer 3. On the position of JSCo «Russian Railways» (its repre- of Bonds and the Approval of the Relevant Issuance Docu- sentatives) on the issue “Sale of Shares, the Title to Which ments” at the meeting of the Board of Directors of JSCo Was Transferred to the Company” on the agenda of the TransContainer. meeting of the Board of Directors of JSCo Barnaul Train Car Repair Plant included in the list of subsidiaries and 9. On the approval of the JSCo ELTEZA budget for 2007. affiliates on which the Board of Directors of JSCo «Russian Railways» adopts a decision in accordance with the first 10. On the position of JSCo «Russian Railways» (its repre- paragraph of Article 71.23 of the Charter of JSCo «Russian sentatives) on the issue “Approval of a Major Transaction” Railways». Activities of the Management and Control Bodies 26 of JSCo «Russian Railways»

4. On the position of JSCo «Russian Railways» (its repre- 8. On the position of the company (its representatives) sentatives) on the issue “Sale of Shares, the Title to Which when the management bodies of CJSCo Russkaya Troika Was Transferred to the Company” on the agenda of the consider the issues of the agenda of the general sharehold- meeting of the Board of Directors of JSCo Roslavl Train ers’ meeting and the BoD meeting. Car Repair Plant included in the list of subsidiaries and affiliates on which the Board of Directors of JSCo «Russian 9. On the terms and procedure of sale of 15% of the shares Railways» adopts a decision in accordance with the first of JSCo TransContainer to a limited number of investors paragraph of Article 71.23 of the Charter of JSCo «Russian according to the tender results. Railways». 10. On the approval of the agreement on surety by JSCo 5. On awarding a premium to the President of JSCo «Rus- «Russian Railways» in favor of OKO VAMK in relation to the sian Railways» and assessing his performance according to credit agreement for Ou KageNap Tratz Ih! the results of Q2 2007. 11. Agreement on the sale/purchase of the shares of 6. On the introduction of additions to the system of key CJSCo TsNIITEI-IS that belong to JSCo «Russian Railways». indices of the performance of members of the Management Board of JSCo «Russian Railways». 12. On the position of JSCo «Russian Railways» (its representatives) on the issue “Approval of the Report on the 7. On the position of JSCo «Russian Railways» (its rep- Fulfillment of the JSCo Kaluzhsky Plant Remput'mash Bud- resentatives) on the items of the agenda of the general get for 2006" on the Agenda of the Meeting of the Board shareholders’ meeting of JSCo First Freight Company of Directors of JSCo Kaluzhsky Plant Remput'mash. included in the list of subsidiaries and affiliates on which the Board of Directors of JSCo «Russian Railways» adopts 13. On the position of JSCo «Russian Railways» (its rep- decisions in accordance with the first paragraph of Article resentatives) on the issue “Approval of the Report on the 71.23 of the Charter of JSCo «Russian Railways». Fulfillment of the JSCo Roszheldorproekt Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo Roszheldorproekt.

No. 14 dated August 31, 2007 14. On the approval of contractor agreements and the supplementary agreements to them as deals, in which there is 1. On electing the chairperson at a BoD meeting. interest, in accordance with Article 83 of the Federal Law “Concerning Joint Stock Companies”. 2. On adjusting the investment and financial programs of JSCo «Russian Railways». 15. On the adoption of the decision to approve the agreements for the lease of realty of JSCo «Russian Railways» 3. On the monetary evaluation of assets contributed as with JSCo Roszheldorproekt and JSCo Roszheldorstroy as payment for the additional shares of JSCo «Russian Rail- deals, in which there is interest, in accordance with Article ways» and the determination of the cost of flotation of 83 of the Federal Law “Concerning Joint Stock Companies”. additional shares of JSCo «Russian Railways». 16. On the liquidation of the branch offices of JSCo «Rus- 4. On the release from duty and appointment of the sian Railways», on the basis of the assets of which subsid- members of the Management Board of JSCo «Russian iary joint stock companies were established in the sphere Railways». of capital repairs of freight railway cars and the production of spare parts for them. 5. On giving railway fare discounts from September 1 to December 31, 2007 to students of institutions of higher and general learning. No. 15 dated October 1, 2007 6. On providing financial and economic information to the tax authority at the place of registration, except for infor- 1. On the approval of the loan agreement between JSCo mation which is a state or military secret and is provided «Russian Railways» and JSCo Elgaugol as a transaction in on paper. which there is interest.

7. On providing documents to the tax authority at the 2. On the position of JSCo «Russian Railways» (its repre- place of registration whereby the tax authority is permit- sentatives) on the issue "Approval of the Report on the ted to give financial and economic information to govern- Fulfillment of the JSCo Barnaul Train Car Repair Plant Bud- ment authorities in compliance with Article 102.1.1 of the get for 2006" on the Agenda of the Meeting of the Board Tax Code of the Russian Federation. of Directors of JSCo Barnaul Train Car Repair Plant. Annual Report 27 JSC «RZD» 2007

3. On the position of JSCo «Russian Railways» (its repre- 8. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the sentatives) on the issue “Approval of the JSCo Roszheldor- Fulfillment of the JSCo Roslavl Train Car Repair Plant Bud- stroy Budget for 2007" on the Agenda of the Meeting of get for 2006" on the Agenda of the Meeting of the Board the Board of Directors of JSCo Roszheldorstroy. of Directors of JSCo Roslavl Train Car Repair Plant. 9. On the position of JSCo «Russian Railways» (its repre- 4. On the position of JSCo «Russian Railways» (its representatives) on the issue "Approval of the Report on the sentatives) on the issue “Approval of the CJSCo TransTele- Fulfillment of the JSCo ELTEZA Budget for 2006" on the Com Budget for 2006” of the Agenda of the Meeting of the Agenda of the Meeting of the Board of Directors of JSCo Board of Directors of CJSCo TransTeleCom. ELTEZA.

5. On the position of JSCo «Russian Railways» (its repre- 10. On the position of JSCo «Russian Railways» (its rep- sentatives) on the issue "Approval of the CJSCo Russkaya resentatives) on the issue "Approval of the Report on the Troika Budget for 2006" on the Agenda of the Meeting of Fulfillment of the JSCo Refservis Budget for 2006 (May – the Board of Directors of CJSCo Russkaya Troika December)" on the Agenda of the Meeting of the Board of Directors of JSCo Refservis.

11. On the position of JSCo «Russian Railways» (its repre- No. 16 dated October 5, 2007 sentatives) on the issue “Approval of the JSCo Arena-2000 Budget for 2006" on the Agenda of the Meeting of the 1. Principal undertakings in strategically developing the Board of Directors of JSCo Arena-2000. rail transportation system in Russia by 2030. 12. Miscellaneous 2. On the investment and financial programs of JSCo «Rus- sian Railways» for the year 2008 and until 2010. 12.1. On the release from duties of the Vice President of JSCo «Russian Railways». 3. On the approval of the agreement for the possession and use of freight cars, entered into by JSCo «Russian Rail- 12.2. On the announcement of gratitude to S.M. Babayev. ways» and JSCo First Freight Company, as a transaction in which there is interest, and the position of the representa- 12.3. On the transition to a unified system for numerically tives of JSCo «Russian Railways» on the Board of Directors registering train cars and containers owned by JSCo «Rus- of JSCo First Freight Company. sian Railways», their subsidiaries, and outside rolling stock operators. 4. On the participation of JSCo «Russian Railways» in the joint venture Trans-Eurasia Logistics GmbH and on the 12.4. On the committees and commissions of the Board of position of JSCo «Russian Railways» on the issue “Par- Directors of JSCo «Russian Railways». ticipation of JSCo TransContainer in the Establishment of the Joint Venture Trans-Eurasia Logistics GmbH” on the Agenda of the Meeting of the Board of Directors of JSCo TransContainer. No. 17 dated October 30, 2007

5. On the approval of the supply contract for electric loco- 1. On the course of undertakings by JSCo «Russian Rail- motives of the EP1P type. ways» in 2007 concerning the third phase of the structural railway reform. 6. On the approval of the service contract with JSCo High- speed Lines. 2. On the policy pursued in providing social guarantees to the public with regard to long-distance passenger trans- 7. On the position of JSCo «Russian Railways» (its repre- portation and the solvency and requirements of the public. sentatives) on the issue "Sale of Shares, the Title to Which Has Been Acquired by the Company" on the Agenda of the 3. On the approval of transactions with the interested Meeting of the Board of Directors of JSCo Roszheldorproekt, party JSCo TD RZD. included in the list of subsidiaries and affiliates, on which the Board of Directors of JSCo «Russian Railways» adopts a deci- 3.1. On the approval of the agreement for the delivery of sion in accordance with the first paragraph of Article 71.23 EP2K locomotives. of the JSCo «Russian Railways» Charter, and on the approval of the transaction in which interest is taken by a member of 3.2. On the approval of the agreement for the delivery of the Management Board of JSCo «Russian Railways». E5K locomotives. Activities of the Management and Control Bodies 28 of JSCo «Russian Railways»

3.3. On the approval of Supplementary Agreement No. 2 to ments B.V. entered into by The Breakers Investments B.V. Agreement No. 100 for the Delivery of EP1M Locomotives and JSCo «Russian Railways». dated March 13, 2007. 1.3. On the approval of the entry of JSCo «Russian Rail- 3.4. On the approval of Supplementary agreement No. 3 to ways» into the agreement of the sale/purchase of shares Agreement No. 47 for the Delivery of ZES5K Locomotives of The Breakers Investments B.V. dated February 16, 2007. 2. On the results of the management of realty of JSCo «Russian Railways» in 2006 and H1 2007.

No. 18 dated November 19, 2007 3. On the position of JSCo «Russian Railways» (its representatives) at the meeting of the Board of Directors of 1. On establishing a representative office of JSCo «Russian CJSCo TransTeleCom Company on the following items of Railways» in the Republic of Armenia. the agenda: “Termination of the Company’s Participation in CJSCo TransCreditCard”, “Determination of the Market 2. Under a deed of gift, the alienation of the building of Value of Assets”, and “Approval of the Agreement for the the waiting room (of the station) and the railway platform Sale/Purchase of Shares of CJSCo TransCreditCard as a with the overhanging arch, which are part of the produc- Transaction in Which There Is Interest”. tion and technological unit of the Train Car Section of the Central Direction of the Management Office for Providing 4. On the time limits for and the ways of selling the shares Services to Passengers, as well as special work-related of JSCo Roslavl Train Car Repair Plant. Primary approval of train cars by putting them into the ownership of the Rus- a deal in selling the shares of JSCo Roslavl Train Car Repair sian Federation. Plant, which constitute 49% of charter capital after its increase as a result of the flotation of shares of an addi- 3. On the introduction of amendments to the decision of tional issue, to the tender winner by private subscription. the Board of Directors of JSCo «Russian Railways» of Au- gust 18, 2004 (Minutes No. 11) on the issue “Secretariat of 5. On the time limits for and the ways of selling the shares the Board of Directors of JSCo «Russian Railways». of JSCo Saransk Train Car Repair Plant. Primary approval of a deal in selling the shares of JSCo Saransk Train Car 4. On awarding a premium to the President of JSCo «Rus- Repair Plant, which constitute 49% of charter capital after sian Railways» and assessing his performance according to its increase as a result of the flotation of shares of an ad- the results of work for Q3 2007. ditional issue, to the tender winner by private subscription.

5. On the position of the representatives of JSCo «Rus- 6. Primary approval of a deal in selling the JSCo Refservis sian Railways» on the issue "Approval of the Agenda of the shares owned by JSCo «Russian Railways», which consti- General Shareholders' Meeting" of the Agenda of Meetings tute 25% of charter capital, at a trade session. of the Board of Directors of subsidiaries and affiliates that are included in the list approved by the Board of Directors 7. Primary approval of a deal in selling the shares of the annually. Vereschagin Plant for the Repair of Railway Machinery Remput’mash, which are owned by JSCo «Russian Rail- 6. On the approval of the agreements for the lease of ways» and constitute 25% of charter capital plus 1 share, realty of JSCo «Russian Railways» with JSCo Roszheldor- at a trade session. proekt as deals, in which there is interest, in accordance with Article 83 of the Federal Law “Concerning Joint Stock 8. Primary approval of a deal in selling the JSCo Roszhel- Companies”. dorproekt shares owned by JSCo «Russian Railways», which constitute 50% of charter capital minus 1 share, at a trade session.

No. 19 dated November 28, 2007 9. Primary approval of a deal in selling the shares of the Abdulin Plant for the Repair of Railway Machinery 1. On the approval of the transaction involving the acquisi- Remput’mash, which are owned by JSCo «Russian Rail- tion by JSCo «Russian Railways» of 25% + 1 share of the ways» and constitute 25% of charter capital plus 1 share, company The Breakers Investments B.V. at a trade session.

1.1. On the approval of the participation of JSCo «Russian 10. Primary approval of a deal in selling the shares of Railways» in The Breakers Investments B.V. the Orenburg Plant for the Repair of Railway Machinery Remput’mash, which are owned by JSCo «Russian Rail- 1.2. On the price of assets acquired under the agreement ways» and constitute 25% of charter capital plus 1 share, for the sale/purchase of shares of The Breakers Invest- at a trade session. Annual Report 29 JSC «RZD» 2007

11. On the time limits for and the ways of selling the shares 2. On the price of assets acquired under the agreement for of JSCo Barnaul Train Car Repair Plant. Primary approval the sale/purchase of shares of The Breakers Investments of a deal in selling the shares of JSCo Barnaul Train Car B.V. entered into by The Breakers Investments B.V. and Repair Plant, which constitute 49% of charter capital after JSCo «Russian Railways». its increase as a result of the flotation of shares of an additional issue, to the tender winner by private subscription. 3. On the approval of the entry of JSCo «Russian Railways» into the agreement of the sale/purchase of shares of The 12. Primary approval of a deal in selling the shares of the Breakers Investments B.V. Research Institute for the Technology, Control and Diag- nosis of Railway Transportation, which are owned by JSCo 4. On the establishment of a competitive transnational «Russian Railways» and constitute 25% of charter capital company for producing rolling stock with the participation plus 1 share, at a trade session. of The Breakers Investments B.V. and a strategic foreign partner who is among the global leaders in this sphere. 13. Miscellaneous

13.1. On the approval of the decision additionally to issue registered book-entry shares of JSCo «Russian Railways» No. 22 dated December 21, 2007 in the amount of 5,997,819 (five million nine hundred ninety-seven thousand eight hundred nineteen) units 1. On granting railway fare discounts to students of higher with a face value of 1,000 rubles each, offered by private and secondary educational institutions in 2008. subscription to the sole shareholder, namely, the Russian Federation represented by the Government of the Russian 2. On the position of JSCo «Russian Railways» (its repre- Federation. sentatives) on the item of the Agenda of the Meeting of the Board of Directors of JSCo Roszheldorstroy. 13.2. On the release from duties of a member of the Man- agement Board of JSCo «Russian Railways». 3. On the approval of the agreements for a social and technical order for catering services entered into by JSCo «Russian Railways» and JSCo ZTK, in relation to which there is interest, in accordance with Article 83 of Federal No. 20 dated November 29, 2007 Law No. 208-FZ of December 26, 1995 "Concerning Joint Stock Companies". 1. On the approval of Supplementary Agreement No. 1 to Agreement No. 54 dated February 26, 2007. 4. On the position of JSCo «Russian Railways» (its representatives) at the extraordinary general meeting of 2. On the position of JSCo «Russian Railways» (its represen- shareholders of JSCo ELTEZA on the issue "Adoption of the tatives) at the extraordinary general meeting of sharehold- Decision on the Participation of JSCo ELTEZA in the Non- ers of JSCo TransContainer on the agenda item “Partici- commercial Organization Russian Association of Commod- pation of JSCo TransContainer in Associations and Other ity Producers (Employers)”. Unions of Commercial Organizations” and on the issue "Adoption of a Decision on the Participation of JSCo Trans- 5. On the approval of the entry by JSCo «Russian Rail- Container in Other Organizations” on the Agenda of the ways» and CJSCo Zheldoripoteka into an agreement on the Meeting of the Board of Directors of JSCo TransContainer. sale/purchase of realty located at Nizhniy Novgorod, Ul. Vitebskaya 45 as a transaction in which there is interest in 3. On the position of JSCo «Russian Railways» (its repre- accordance with Article 83 of the Federal Law “Concerning sentatives) on the issue "Approval of the Report on the Joint Stock Companies”. Fulfillment of the JSCo TransContainer Budget for 2006" on the Agenda of the Meeting of the Board of Directors of JSCo TransContainer. No. 23 dated December 21, 2007

1. On the approval of a set of documents for establishing No. 21 dated December 7, 2007 the joint stock company South Caucasus Railway in the Republic of Armenia. On the approval of the transaction involving the acquisition by JSCo «Russian Railways» of 25% + 1 share of the 2. On the approval of the participation of JSCo «Russian company The Breakers Investments B.V. Railways» in establishing the management company Mur- mansk Transport Junction. 1. On the approval of the participation of JSCo «Russian Railways» in The Breakers Investments B.V. 3. On the approval of the transaction involving the acquisi- Activities of the Management and Control Bodies 30 of JSCo «Russian Railways»

tion by JSCo «Russian Railways» of a 50% equitable inter- Brief autobiographical est in the charter capital of LLC Aeroexpress. information on members 4. On the approval of the loan agreement between JSCo «Russian Railways» and JSCo High-speed Lines as a trans- of the Board of Directors action in which there is interest. of JSCo «Russian

5. On the approval of the timetable of the Board of Direc- Railways» tors of JSCo «Russian Railways» for H1 2007.

6. On working out the mechanisms of financing the con- Alexander Dmitriyevich Zhukov, struction of the railway between Yaiva and Solikamsk, Chairman of the Board of Directors bypassing the technogenic disaster area. Born in 1956. In 1978, graduated from the Moscow State 7. On the approval of transactions in selling the shares of University as a mathematical economist. In 2000-2003, JSCo TransContainer Deputy of the Russian State Duma (third convocation), Chairman of the Budget and Tax Committee, member of the Commission on State Debt and Foreign Assets of the Russian Federation, co-chairman of the Commission on Federal Budget Expenses for Defense and State Security. In 2003-2004, Deputy of the Russian State Duma (fourth convocation), First Deputy Chairman of the State Duma. Since 2004, Deputy Prime Minister of the Russian Federa- tion, member and chairman of the Board of Directors of JSCo «Russian Railways».

Vladimir Ivanovich Yakunin, President of JSCo «Russian Railways»

Born in 1948. In 1972, graduated from the Leningrad Insti- tute of Mechanics. Since October 2000, Deputy Minister of Transport of the Russian Federation. Since February 2002, First Deputy Minister of Railways. On October 24, 2003, the Board of Directors of JSCo «Russian Railways» unanimously approved Vladimir Yakunin’s appointment as First Vice President of JSCo «Russian Railways». By Instruction No. 786-r of the Government of the Russian Federation of June 14, 2005, appointed President of JSCo «Russian Railways». Vladimir Yakunin is Chairman of the Board of Trustees of the National Achievement Center and the St. Andrew Foundation. Since 2006, research supervi- sor and Chairman of the Board of Trustees of the Center for Problem Analysis and State Managerial Project Plan- ning of the Social Science Division of the Russian Academy of Science.

Vladimir Nikolayevich Ampilogov

Born in 1950. In 1976 graduated from Ryazan Radio Engi- neering Institute, specializing in engineering. Since 1997, Head of Department, Deputy Director of the Staff Depart- ment of the Government of the Russian Federation. Since 2005, member of the Board of Directors of JSCo «Russian Railways». Annual Report 31 JSC «RZD» 2007

Vladimir Sergeyevich Belov Alexander Sergeyevich Misharin

Born in 1951. In 1974, graduated from the Leningrad Wa- Born in 1959. In 1981, graduated from the Urals Electro- ter Transport Institute. In 1992 – 1995, deputy director of mechanical Institute of Railway Engineering, specializing a department of the Ministry of Transport of the Russian in engineering, and in 1997 graduated from Urals State Federation, in 1995 – 2004, head of a department of the University of Railway Transport, specializing in economics. Ministry of Finance of the Russian Federation, and in 2004 In 1998-2000, Deputy Minister of Railways of the Russian – 2007, Director of the Department for Budgetary Policy Federation. In 2000-2002, First Deputy Minister of Rail- in Economic Sectors of the Ministry of Finance of the Rus- ways of the Russian Federation, and then Deputy Minister sian Federation. Since October 27, 2007, Deputy Minister of Railways of the Russian Federation. In 2002-2003, head of Health Care and Social Development of the Russian of the federal unitary enterprise Sverdlovsk Railways. In Federation. PhD in economics. Distinguished Economist of 2003-2004, head of Sverdlovskaya Railways (a branch of the Russian Federation. JSCo «Russian Railways»), then for a year Director of the Department of Comprehensive Infrastructure development of the Ministry of Transport and Communications of the Russian Federation. Since 2004, Deputy Minister of Andrey Vladimirovich Dementyev Transport of the Russian Federation. Since 2005, member of the Boards of Directors of JSCo «Russian Railways» and Born in 1967. Graduated from the Chelyabinsk Polytechnic the Sheremetyevo International Airport. Institute and Academy of National Economy affiliated to the Government of the Russian Federation in 1991 and 1996, respectively. In 1996 – 1997, First Deputy Chairman of the Chelyabinsk Regional Committee for the Manage- Andrey Leonidovich Kostin ment of State-owned Property, in 1997 – 1998, Chairman of the Chelyabinsk Regional Department of the Federal Born in 1956. In 1979, graduated with honors from the Securities Market Commission of the Russian Federation, Moscow State University (economic department), special- in 1998, advisor to the Deputy Prime Minister of the Rus- izing as an international economist. PhD in economics. On sian Federation, in 1999, Deputy Head of the Financial and October 14, 1999, the President issued an Edict to extend Economic Department of the Administration for Managing the powers of A.L. Kostin, Chairman of the Bank for the Affairs of the President of the Russian Federation, in Development and Foreign Economic Affairs, for 3 years. 1999 – 2004, Deputy Head of the Secretariat of the First On June 10, 2002, appointed to the positions of Presi- Deputy Prime Minister of the Russian Federation, and in dent and Management Board Chairman of the VTB Bank. 2004 – 2005, Director of the Department for Structural On April 4, 2007, the supervisory board of the VTB Bank and Investment Policies in Industry and Power of the Min- adopted the decision to extend the powers of A.L. Kostin istry of Industry and Energy of the Russian Federation. On as the President and Management Board Chairman of VTB December 8, 2005, appointed Deputy Minister of Industry Bank up to 2012. Member of the Board of Directors of and Energy of the Russian Federation by Instruction No. the oil company Rosneft, member of the Board of Direc- 2143-r of the Government of the Russian Federation. tors of JSCo «Russian Railways», the Board of Directors of Sovkomflot and the Board of Directors of the United Aircraft Construction Corporation, and President of the Sport Gymnastics Federation of Russia. Igor Yevgenyevich Levitin

Born in 1952. In 1983, graduated from the Military Academy of Logistics and Transport, specializing in railway Valery Lvovich Nazarov engineering. In 1996-2004, Deputy General Director of Severstaltrans. Since 2004, Minister of Transport of the Born in 1955. In 1985, graduated from The Bonch- Russian Federation, member of the Board of Directors Bruevich Saint-Petersburg State University of Telecom- of JSCo «Russian Railways». Since 2005, member of the munications as an engineer. In 1993, graduated from the Boards of Directors of Aeroflot–Russian Airlines and the State Service Institute under the auspices of the Russian Sheremetyevo International Airport. Government, specializing in state municipal management. Activities of the Management and Control Bodies 32 of JSCo «Russian Railways»

In 1999-2004, Chairman of the St. Petersburg Committee for Municipal Property Management. In 2004, concur- Management Board rently Deputy Chief of Administration and Head of the Chairman of the Management Board Main Control Department of the President of the Russian of JSCo «Russian Railways» Federation. Since 2004, member of the Board of Direc- tors of JSCo «Russian Railways» and Head of the Federal V.I. Yakunin, President of JSCo «Russian Railways» Agency for Federal Property Management of the Russian Federation. Members of the Management Board of JSCo «Russian Railways» as of December 31, 2007:

V. N. Morozov – First Vice President Anna Vladislavovna Popova F. B. Andreyev – Senior Vice President Born in 1964. In 1986, graduated from the Leningrad Financial and Economic Institute of the Order of the Red B. M. Lapidus – Senior Vice President Labor Banner, specializing in industrial planning. PhD in economics. Since 1999, reader at the St. Petersburg State G. V. Kraft – Chief Accountant University. Since 2004, Director of the Corporate Gover- nance Department of the Ministry for Economic Develop- M. P. Akulov – Vice President ment and Trade of the Russian Federation. Since 2007, Deputy Minister of Economic Development and Trade of O. Y. Atkov – Vice President the Russian Federation, and member of the Board of Di- rectors of JSCo «Russian Railways». A. S. Bobreshov – Vice President

V. B. Vorobyov – Vice President

Gennady Matveyevich Fadeyev V. A. Gapanovich – Vice President

Born in 1937. In 1999-2003, Head of the Moscow Railway G. V. Kornilov – Vice President of the Ministry of Railways of the Russian Federation. In 2002 – 2003, Minister of Railways of the Russian Federa- V.G. Lemeshko – Vice President tion. In 2003 – 2005, President and Management Board Chairman of JSCo «Russian Railways». Since 2003, mem- A. A. Mersiyanov – Vice President ber of the Board of Directors of JSCo «Russian Railways», and since 2005, an aide to the Prime Minister of the V.I. Reshetnikov – Vice President Russian Federation. Since November 2005, Acting Direc- tor of the Federal Railway Agency. Since September 2006, O. V. Toni – Vice President Deputy Director of the All-Russian Railway Research Insti- tute. Since June 2006, member of the Board of Directors V.I. Bynkov - Secretary of State and Head of the Legal De- of JSCo «Russian Railways». partment

O. E. Gnedkova – Head of Corporate Finance

Igor Ivanovich Shuvalov A. G. Ivashkin – Head of Administration

Born in 1967. In 1992, graduated from the Moscow State S. V. Mikhailov – Head of Corporate Communications University, specializing in jurisprudence. In 2000 – 2003, Chief of Staff of the Government of the Russian Federa- A. Y. Semechkin - Advisor to the President, Director of the tion. Since 2003, an aide to the President of the Russian federal state-owned unitary enterprise Russian Railway Federation. Since 2004, an aide to the President of the Research Institute Russian Federation and member of the Boards of Direc- tors of JSCo «Russian Railways», Sovkomflot and Gazprom. V. I. Starostenko – Director of the Moscow Railway

A. V. Tselko – Director of the West Siberian Railway Annual Report 33 JSC «RZD» 2007

Brief autobiographical Galina Vasilyevna Kraft information on members Chief Accountant of JSCo «Russian Railways» of the Management Born in 1950. Graduated from St. Petersburg State Uni- Board of JSCo «Russian versity of Railway Transport., specializations: “Railway Automation, Remote Control and Telecommunications” and Railways» “Economics and Organization of Rail Transport”. Railway electrical engineer and engineer-economist, PhD in economics. In 2000-2002, Professor, head of the accounting and au- Vadim Nikolayevich Morozov dit department of St. Petersburg State University of Railway First Vice President of JSCo «Russian Railways» Transport. In 2002-2003, Deputy Director of the Finance Department of the Ministry of Railways of Russia, head of Born in 1954. In 1977, graduated from St. Petersburg State the Investment Management Department of the federal University of Railway Transport. Railway engineer special- state unitary enterprise Directorate of Railways of the Min- izing in railway operations, PhD in technology. In May 1999 istry of Railways of the Russian Federation. In 2003, Head of - May 2000, Deputy Minister of Railways, in 2002 – 2003, the Investment Department of JSCo «Russian Railways». In First Deputy Minister, and in November 2003 – June 2004, 2003-2005, Vice President of JSCo «Russian Railways», Head Minister of Railways of the Russian Federation. Since July of the Investment Department of JSCo «Russian Railways». 2004, Executive Director of Wellbeing, a non-state pension In August 2005 – December 2005, Vice President of JSCo fund. On August 17, 2005, appointed First Vice President of «Russian Railways». On December 23, 2005, appointed Chief JSCo «Russian Railways». Accountant of JSCo «Russian Railways».

Fyodor Borisovich Andreyev Mikhail Pavlovich Akulov Senior Vice President of JSCo «Russian Railways». Vice President of JSCo «Russian Railways»

Born in 1966. In 1989, graduated from Leningrad State Uni- Born in 1960. In 1982, graduated from Moscow State university, specializing in political economy. Economist, lecturer versity of Railway Engineering as a railway engineer, and in of political economy. In 1999-2001, Chairman of the Board 1998 graduated from the Economic Academy under the aus- of BaltoneximBank, St. Petersburg. In 2002-2003, First Vice pices of the Government of the Russian Federation. In 2000- President for the Economy and Finance of ALROSA, Moscow. 2002, head of the West Siberian Railway. In 2002-2003, In 2003, Vice President of JSCo «Russian Railways». In 2005, Deputy Minister of Railways of the Russian Federation. In Senior Vice President of JSCo «Russian Railways». 2003-2004, First Deputy Minister of Railways of the Russian Federation. In March 2004 – November 2005, Director of the Federal Railway Agency of the Ministry of Transport of the Russian Federation. In November 2005, appointed Vice Boris Moiseyevich Lapidus President of JSCo «Russian Railways». Senior Vice President of JSCo «Russian Railways».

Born in 1947. Graduate of the All-Union Extramural Railway Engineering Institute. Specializations: railway electrification, Oleg Yurevich Atkov economics and organization of rail transport. Professor, Vice President of JSCo «Russian Railways» PhD in economics. In 1994-2003, Head of the Economic and Development Administration of the Russian Ministry of Rail- Born in 1949. PhD in Medicine, Professor, Hero of the Soviet ways, General Director of the Center for High-Comfort Rail Union, honored with the Lenin Komsomol Award (1978) Service of the Ministry of Railways, Head of the Economic and the State Award of the USSR (1989). Graduated from Department of the Ministry of Railways, Director of the the Moscow Medical Academy named after I.M. Sechenov Economic Department of the Ministry of Railways, member (1975) and completed postgraduate courses (1978). In 2002, of a collective body. In 2003, Head of the Economic Forecast- Director of the Health Care Department of the Ministry of ing and Strategic Development Department of JSCo «Russian Railways of the Russian Federation, and since 2003 head of Railways». In 2003, Vice President of JSCo «Russian Rail- the Medical Security Department of JSCo «Russian Rail- ways», and in 2005, Senior Vice President of JSCo «Russian ways». On August 17, 2005, appointed Vice President of Railways». JSCo «Russian Railways». Since 1991, concurrently Head of the Department of Instrumental Diagnostic Methods of Rus- sian State Medical University. Activities of the Management and Control Bodies 34 of JSCo «Russian Railways»

Alexander Sergeyevich Bobreshov Vyacheslav Grigoryevich Lemeshko Vice President of JSCo «Russian Railways» Vice President of JSCo «Russian Railways»

Born in 1965. Higher education, in 1988 graduated from Born in 1946. In 1970, graduated from the Moscow State Leningrad Shipbuilding Institute, electrical engineer. After university of Railway Engineering , specializing in railway graduating from the institute, worked as an engineer at the operations. Since 2003, performed the duties of head of laboratory of the Central Research Institute named after Kuibyshev Railway. On August 18, 2003, appointed head of Academician A.N. Krylov. In 2004, invited to work at JSCo Kuibyshev Railway. On September 27, 2003, appointed head «Russian Railways» as deputy head of the Security Depart- of Kuibyshev Railway as a branch office of JSCo «Russian ment. Since July 2004, head of the Security Department of Railways». Since July 2007, Vice President of JSCo «Russian JSCo «Russian Railways». On August 17, 2005, appointed Railways». Vice President of JSCo «Russian Railways».

Alexey Anvyarovich Mersiyanov Vladimir Borisovich Vorobyov Vice President of JSCo «Russian Railways» Vice President of JSCo «Russian Railways» Born in 1969. In 1991, graduated from the Mozhaisky Mili- Born in 1949. In 1978, graduated from the Moscow State tary Space Engineering Institute, radio electronics engineer, university of Railway Engineering . In 1999 – 2002, Deputy PhD in Economics. In 1999, an aide to the First Vice Gover- Director of the Moscow Railway for Track Facilities. In 2002, nor of St. Petersburg, then Deputy Chairman of the Commit- appointed Director of the North Caucasus Railway; member tee of Economic and Industrial Policy of the St. Petersburg of the Management Board of JSCo Railways since 2005. In Administration, advisor to the Department of Seaport December 2006, appointed Vice President of JSCo «Russian Production Regulation of the Russian Ministry of Trans- Railways». port. Since 2002, Deputy, First Deputy, General Director of Roszheldorsnab (state-owned enterprise for the material and technical maintenance of rail transportation) of the Rus- sian Ministry of Railways. In 2003, appointed Vice President Valentin Alexandrovich Gaponovich and Director of Roszheldorsnab as a branch office of JSCo Vice President of JSCo «Russian Railways» «Russian Railways». Since 2005, Director of Roszheldorsnab as a branch office of JSCo «Russian Railways». In November Born in 1955. In 1992, graduated from Novosibirsk State 2006, appointed Vice President of JSCo «Russian Railways». university of Railway Engineering , and in 1998, from the Economic Academy under the auspices of the Government of the Russian Federation. Specialization: rail transport management, railway engineering relating to rail transport Valery Ilyich Reshetnikov management. In 2000-2003, Chief Engineer of Oktyabrsky Vice President of JSCo «Russian Railways» Railway. In 2003, Vice President of JSCo «Russian Railways». Born in 1952. In 1975, graduated from Leningrad Electronic Engineering Institute, specializing in system maintenance engineering. In 2002, appointed head of the Directorate for Georgiy Viktorovich Kornilov Economic Protection of the Ministry of Railways of Russia, Vice President of JSCo «Russian Railways» and since October 2003, head of the Security Department of JSCo «Russian Railways». Since 2005, advisor to the Presi- Born in 1953. In 1976, graduated from Odessa Naval Engi- dent of JSCo «Russian Railways». In March 2007, appointed neering Institute (shipboard machines and devices, mechani- Vice President and member of the Management Board. cal engineer), and in 1981 passed the KGB Higher Training Course. In 1981 - 2004, held operational and managing positions in the KGB of the USSR and in the Federal Counterintel- ligence Service and the Federal Security Service of Russia, and since 2004, Vice President of JSCo «Russian Railways». Annual Report 35 JSC «RZD» 2007

Oleg Vilyamsovich Toni Alexei Georgiyevich Ivashkin Vice President of JSCo «Russian Railways» Head of Administration of JSCo «Russian Railways»

Born in 1964. Graduated from the Voronezh Institute of Born in 1956. In 1978, graduated from the Tashkent Poly- Civil Engineering. Civil engineer. In March 2004 appointed technic Institute as a mechanical engineer. In 1995 – 2001, First Deputy Director and in September 2004 - Director deputy head of Administration of the Chilanzar District of of the Capital Construction Department of JSCo «Russian Tashkent. In 2001 – 2003, deputy head of Sochi City. In 2003 Railways». Since August 2005, member of the Management – 2005, First Deputy Head of Sochi City. Since 2005, Head Board of JSCo «Russian Railways». In April 2006, appointed of Administration and member of the Management Board of Vice President of JSCo «Russian Railways». JSCo «Russian Railways».

Vadim Ivanovich Bynkov Sergey Vladimirovich Mikhailov Secretary of State and Head of the Legal Department Head of the Corporate Communications Department of JSCo «Russian Railways» Born in 1962. In 1985, graduated from the Kalinin State Uni- versity, specializing in jurisprudence. In 1998 - 1999, head of Born in 1971. Graduated from Moscow State Institute the Legal Department of Komitek, Moscow. In 1999 – 2000, of International Relations (Department of International head of the Legal Department of CJSCo Evroseverneft, Mos- Journalism) under the auspices of the Ministry of Foreign cow. In 2000 – 2001, head of the Legal Department of ESN Affairs of the Russian Federation, Public Relations Division. Energo. In 2001 – 2002, director for law-governed work and Member of the Journalists’ Union of the Russian Federation. corporate policy of the Management Company of the MDM In 2000 – 2001, President of the Russian Division of ICCO, Group. In 2002 - 2004, head of the Legal Department of JSCo the Association of Public Relations Consulting Companies. IG Alrosa. In 2004 – 2005, chief attorney of JSCo Russian In 2004 – 2005, an advisor to the President, member of the Utility Systems. Since August 2007, head of the Legal Depart- Management Board of JSCo «Russian Railways». In 2005 – ment of JSCo «Russian Railways», member of the Manage- 2006, head of the Public Relations Department and member ment Board of JSCo «Russian Railways». Since December 18, of the Management Board of JSCo «Russian Railways». Since 2007, Secretary of State and Head of the Legal Department 2006, head of the Corporate Communications Department of JSCo «Russian Railways», member of the Management and member of the Management Board of JSCo «Russian Board of JSCo «Russian Railways». Railways».

Olga Eduardovna Gnedkova Andrey Evgenyevich Semechkin Head of the Corporate Finance Department of JSCo «Russian Advisor to the President, Director of the federal state-owned Railways» unitary enterprise All-Russian Railway Research Institute

Born in 1960. In 1981, graduated from Novosibirsk State Born in 1959. PhD in Science (Technology), Professor, As- university of Railway Engineering, specializing in account- sociate Member of the Russian Academy of Science. Since ing. PhD in economics. In 2000 – 2002, Head of the Financial 2002, Deputy Director for Research of the Institute of Service of the West Siberian Railway, Russian Ministry of Systemic Analysis of the Russian Academy of Science. On Railways. In 2002 – 2003, Head of the Financial Service August 17, 2005, appointed Vice President of JSCo «Russian of Moscow Railway (federal unitary enterprise). In 2003 Railways». Since September 4, 2006, director of the federal – 2004, Deputy Director of the Moscow Railway and Head state-owned unitary enterprise Russian Railway Research of the Financial Service, Deputy Director of the Moscow Institute. Member of the Management Board of JSCo «Rus- Railway for Economy and Finance. In 2004 – 2005, Head sian Railways». of the Financial Management Department of JSCo «Rus- sian Railways». Since 2005, Head of the Corporate Finance Department and member of the Management Board of JSCo «Russian Railways». Activities of the Management and Control Bodies 36 of JSCo «Russian Railways»

Vladimir Ivanovich Starostenko Alexander Vitalyevich Tselko Director of the Moscow Railway Director of the West Siberian Railway

Born in 1948. In 1975, graduated from Novosibirsk State Born in 1956. In 1978, graduated from the Novosibirsk Rail- university of Railway Engineering as an engineer in operat- way Engineering Institute, specializing in railway operations. ing railways. In February 2002, appointed Director of the In May 2000, appointed Deputy Minister of Railways of the Moscow Railway by an instruction issued by the Russian Russian Federation, and on August 17 of the same year, First Government. Since 2003, member of the Management Deputy Minister of Railways of the Russian Federation. On Board of JSCo «Russian Railways». February 8, 2002, appointed Director of the Zapadno-Sibirs- kaya Railway. Since 2003, member of the Management Board of JSCo «Russian Railways». Annual Report 37 JSC «RZD» 2007

Audit Committee Under Instruction No. 930-r of the Government of the Russian Federation, dated June 30, 2006, the following membership of the Audit Committee of JSCo «Russian Railways» in the number of 9 persons (their positions at the time of their election) has been determined:

Full name Position

A. V. Kazutin Head of section of the Department of the Ministry of Transport of the Russian Federation Deputy Director of the Department of the Ministry for Economic Development and Trade of the Russian V.M. Kravchenko Federation Deputy director of a Department of the Ministry for Economic Development and Trade of the Russian E.F. Mikhailov Federation G.S. Nikitin Head of the Administration of the Federal Agency for the Management of Federal Property

E.N. Polyakov Head of the Administration of the Federal Agency for the Management of Federal Property

A.N.Sinev Deputy Head of the Administration of the Federal Tariff Service of Russia

T.I. Stebunova Deputy Head of the Administration of the Federal Tariff Service of Russia

S.L. Tugarinov Deputy Director of the Department of the Ministry of Transport of the Russian Federation

V.I. Cherkashin Deputy Head of the Administration of Roszheldor.

Under Instruction No. 864-r of the Government of the Russian Federation, dated June 30, 2007, the following membership of the Audit Committee of JSCo «Russian Railways» in the number of 9 persons (their positions at the time of their election) has been determined:

Full name Position

M.P. Vinter Head of the Administration of Roszheldor

A. V. Kazutin Head of section of the Department of the Ministry of Transport of the Russian Federation Deputy Director of the Department of the Ministry for Economic Development and Trade of the Russian E.F. Mikhailov Federation Head of section of the Department of the Ministry for Economic Development and Trade of the Russian S.V. Nesvetailova Federation G.S. Nikitin Head of the Administration of the Federal Agency for the Management of Federal Property

V.V. Oseledko Head of section of the Department of the Ministry of Industry and Energy of Russia

E.N. Polyakov Head of the Administration of the Federal Agency for the Management of Federal Property

S.L. Tugarinov Deputy Director of the Department of the Ministry of Transport of the Russian Federation

The Company's Strategy and Mission Annual Report 39 JSC «RZD» 2007

JSCo «Russian Railways», a major national transportation 1. Improving the financial and economic indices of JSCo company, intends to create infrastructural conditions so as «Russian Railways» by sharply promoting the manage- to promote innovatory economic development, the country’s ment of the quality of operations. transportation unity and global competitiveness of Russia’s 2. Rapidly upgrading the infrastructure and the rolling transportation system, and qualitatively satisfy the demand stock. of the state and the public for transportation services. 3. Expanding the transportation business and strengthening competitive positions on the domestic and global JSCo «Russian Railways»' operating philosophy is to ensure markets. that its corporate goals conform to long-term national inter- 4. Radically improving the labor stimulation system and in- ests. JSCo «Russian Railways» pursues a policy of common creasing the involvement of employees, thereby ensuring destiny, being a combination of state, consumer and own the growth of human capital, greater labor productivity interests. High development rates, shareholders’ profit, the and the efficiency of JSCo «Russian Railways» as a whole. profitability of own activity, the employees’ social and eco- 5. Developing the mechanism of the real cost of labor esti- nomic security, quality satisfaction of customer needs and mation of JSCo «Russian Railways» employees. mutually beneficial cooperation with partners and suppliers are equally important to JSCo «Russian Railways».

JSCo «Russian Railways», a dynamic vertically integrated national transportation company, believes its mission is to meet effectively the market demand for transportation services, increase its global competitiveness, achieve financial stability and ensure social responsibility of the business.

According to the decisions adopted at the meeting of the final Management Board of JSCo «Russian Railways» in December 2007, the following goals are the most important for 2008 – 2010: Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Overview of the Main Corporate Events in 2007 Annual Report 41 JSC «RZD» 2007

September 6: In 2007, JSCo Russian the Russian Government approved the draft “Strategy of Development of Railway Transportation in Russia up Railways celebrated its to 2030”. According to the Strategy, investments in rail 170th anniversary! transportation in the Russian Federation until 2030 will total 13.7 trillion rubles. The share of investments from the federal budget is 20%, from the constituencies of the Russian May 24 - 26: Federation, 5%, and from private investors, 75%, including the second international railway business forum “Strategic JSCo «Russian Railways», 42%. Partnership 1520” was held in Sochi.

September 19: May 24: JSCo «Russian Railways» and the federal state unitary the presentation of the new corporate style of JSCo enterprise Uralwagonzavod signed a three-year contract «Russian Railways» was held in Sochi. for the delivery of 40,000 railway freight cars until 2010 at the International Exhibition of Railway Equipment and May 25: Technologies of EXPO 1520 in Sherbinka. JSCo «Russian Railways» and CJSCo Transmashholding signed a contract for developing and delivering 806 October 24-25: locomotives of four fundamentally new modifications until the first railway congress was held in Moscow under the 2015. name “Development 2030”. Railway executives, government officials and businesspeople discussed the development of June 18: the railway industry until 2030. V.V. Putin, President of the the statement of the establishment of the joint venture Russian Federation, attended the forum. CJSCo Eurasia Rail Logistics (CJSCo ERL) with the participation of the railways of Russia, Germany, Poland and November 30: the Belarus Republic was signed in Moscow. the production of the first high-speed train PENDOLINO which is to carry passengers between St. Petersburg and June 18 – 20: Helsinki (Finland) was started in Italy (city of Saviliano). 70th Session of the General Assembly of the International Railway Union was held in Moscow. December 7: the first passenger trains left Belorussky Station in Moscow June 21: on their way to Amsterdam and Munich, and on December the Agreement on the Establishment of a Joint Venture in 11, to Paris (this route was renewed after a lapse of 13 Transportation and Logistics was signed by JSCo «Russian years). Railways» and Deutsche Bahn AG (Germany) in Moscow. December 27: June 28: Express, a new luxury train of JSCo «Russian Railways», the Board of Directors of JSCo «Russian Railways» approved started to run between Moscow and St. Petersburg. the set of documents concerning the establishment of JSCo First Freight Company (Pervaya Gruzovaya Companya).

The Company's current position in the industry Annual Report 43 JSC «RZD» 2007

Share of JSCo «Russian Railways» of the transportation services market

The share of rail transport in the total cargo turnover of share in the passenger turnover (excluding internal water the country’s transportation network (including pipelines) and sea transport), vice versa, fell from 43.8% in 2006 to increased to 42.5% in 2007 from to 40.8% in 2006, while the 40.3% in 2007.

Changes in the structure of cargo and passenger turnover, by types of transport, 2006-2007

1. Freight turnover, by types of transport

Name 2006 2007 Change in share, p.p.

Railway 40.8 42.5 +1.7

Motor vehicles 4.1 4.2 +0.1

Sea 1.2 1.3 +0.1

Internal water 1.5 1.7 +0.2

Air (transport aviation) 0.1 0.1 -

Pipelines 52.3 50.2 -2.1

2. Passenger turnover, by types of transport

Name 2006 2007 Change in share, p.p.

Railway 43.8 40.3 -3.5

Mechanical transport 33.2 34.1 +0.9

Air (transport aviation) 23.0 25.6 +2.6

Freight transportation services

In 2007, the Company fully met the freight handling plan: the In 2007, the seasonality of the submission of cargo for trans- total tonnage handled amounted to 1,344.2 mln tons, a 2.6% portation typical for railroad transport remained. However, rise from the 2006 level. In total, for the last four years the as compared to 2006, the degree of irregularity was reduced volume of freight handled grew by 15.8%. (see Fig.1).

The positive dynamics in freight handling tonnage secured a While in 2006 the maximum monthly freight handling volume stable growth in freight turnover. In 2007, the overall freight deviation was around 12% against the average annual, in turnover reported by the Company was 2,312.6 bln tkm (in- 2007 the gap was reduced almost twice to reach 6% only. cluding the backrun of empty private and leased track cars), The deviation during the traditional peak load months (Octo- a 7.7% increase as compared to 2006. Tariff frieght turnover ber, November) did not exceed 3% from the average level. In reached 2,090.3 bln tkm (+7.1%). 2007, the average tonnage handled daily reached 3,683,000 tons. The Company's current position 44 in the industry

3900

3 791 3800 3 788 3 759 3 746 +2.6% 2007 3 701 3 698 3700 3 686 3 663 3 746 3 726 3 619 3 648 3 636 3 649 3 622 3 682 3 661 3 662 +3.0% 3600 3 646 2006 3 538 3 627 3 617 3 618 3 519 3 500 3500 3 491 3 484 3 459 3 446 3 448 3 448 +4.3% 3 411 3 482 2005 3 466 3400 3 454 3 377 3 385 3 332 3 353 3 390 3 316 3300 3 288 +5.2% 3 325 2004 3 216

3200 3 175

3100 3 140

3000 3 041 January March May July September November Fig.1. Dynamics of average tonnage handled daily within 2004-2007, in thousands of tons

The share of the highly profitable cargo segment remained ucts -- 4.7 mln tons (+2.1%), grain – 4.5 mln tons (+24.7%), stable (32.4%), while the medium profitable cargo share grew imports – 3.4 mln tons (+30.7%), ferrous metals – 3.3 mln by 0.36 p.p. to 8.4% (see Fig. 2). Share of the low profitable tons (+4.1%), cement – 3.2 mln tons (+8.4%). cargo segment fell down to 58.1% (-0.58 p.p.). The transportation market is characterized by a rapid In 2007 an accelerated freight handling growth was secured development of competition. The volume of cargo carried in in the medium profitable cargo segment (107.0%) with a private or leased railcars in 2007 was for 38.5% of the total moderate growth in the highly profitable and low profitable rail cargo traffic in Russia. For comparison: this indicator cargo sectors (102.6% and 101.5%, respectively). equaled 36.0% in 2006, 34 % in 2005, and 31.5% in 2004.

In comparison to 2006, the maximum increase was reported As compared with the previous year, the volume of highly for the following types of cargo: industrial commodities and profitable and low profitable cargo transportation using molding materials – 4.7 mln tons (+13.5%), oil and oil prod- the publicly-owned freight stock decreased in 2007 (by 5.2% and 0.2%, respectively). Considering an insufficient rate of growth in medium profitable cargo transportation volume 32.4% 8.4% 58.1% (+1.0%), the overall volume of transportation in publicly- 2007 owned freight stock decreased by 1.7%. +0.3% +0.36% –0.58% Share of the general purpose freight stock of JSCo «Russian 32.4% 8.0% 58.7% Railways» in the transportation of highly profitable cargo

2006 is decreasing in 2007 the share of oil products fell down to 31.4% (35.8% in 2006), and that of ferrous metals – to 60% Highly profitable Medium profitable Low profitable (63.2%). Consequently, expansion of private operators into cargo cargo cargo the highly profitable freight market continues. Рис. 2. Структура погрузки в 2006-2007 гг., % Annual Report 45 JSC «RZD» 2007

100% 4.7 4.6 4.5 4.7 Private Private Private Private 90% railcars railcars railcars railcars 27.5% 31.0% 33.2% 36.4% 22.8 80% 26.4 28.7 31.7

70% 4.0 3.0 5.2 1.8 60% 3.6 3.3 2.1 4.0

50%

General General General General purpose purpose purpose purpose 40% freight stock freight stock freight stock freight stock 68.5% 66.0% 65.0% 61.5% 30% 63.3 62.4 61.7 57.5

20%

10%

2004 2005 2006 2007

Foreign private and leased stock Private (belonging to owners in Russia) Russian Railways freight stock leased out

Publicly-owned freight stock owned by railway administrations of the CIS and Baltic countries Freight stock of JSCo «Russian Railways»

Fig. 3. Changes in freight traffic structure by rolling stock owners in 2004-2007

Due to the differentiated indexation of freight tariffs, and in- The stock of cars contributed to the charter capital of JSCo crease in the "wagon component” of the tariff for transpor- FFC comprised 177,000 items, the major part of which have tation of cargo in gondola cars in particular, private-owned been transfered for use (management) by JSCo «Russian transportation companies increased the volume of low- Railways». One of the key elements in the development profitable freight handled – share of private freight stock in strategy of the operating company is the gradual transition the transportation of coal grew by 3 % points (p.p) to reach of the car stock from the use by the parent company into 20.9%, while transportation of mineral and building cargoes independent operation. At present, the subsidiary manages went up by 3.9 p.p. (reaching 24.5%). the stock of about 30,000 cars and its share in the overall freight handling volume of JSCo «Russian Railways» has A key driver for JSCo «Russian Railways» transportation reached 1.5%. Thus, JSCo FFC earned a place among railway activities amidst the growing competition on the cargo transportation leaders. transportation market is the performance of subsidiary operating companies, and, mainly, JSCo First Freight Company Cooperation between JSCo «Russian Railways» and JSCo FFC (Pervaya Gruzovaya Companya) starting its operating activi- is performed on a contractual basis with the parent com- ties in November 2007 (see also "Reform and Participation pany JSCo «Russian Railways» rendering fully compensated in Subsidiaries and Affiliates") services subject to the level of profitability The Company's current position 46 in the industry

Rail freight transportation growth rates by freight stock owners in 2007 (% to 2006)

Freight group General pur- of which: Russian Rail- Privately- of which: Total pose freight Russian Rail- Freight stock ways stock owned freight privately- Private and stock ways stock owned by leased out stock owned (Rus- leased stock railway admin- sian owners) of other coun- istrations of tries CIS and Baltic countries Highly profitable 94.8 93.7 111.9 112.6 112.7 112.6 114.0 103.9

Medium profitable 101.0 96.9 156.1 155.2 126.6 127.4 113.9 108.3

Low profitable 99.8 98.6 124.9 98.5 114.5 116.9 102.6 103.8

Total railways 98.7 97.3 125.3 120.8 114.1 115.1 107.2 104.2

21.8% Passenger service Branded 33.9% trains Passanger trains Key performance indicators

The year 2007 showed a stable growth in the volumes of long-distance passenger transportation services.

As compared to the previous year, the long-distance passenger turnover increased by 2.5%, while for suburban transportation the passenger turnover reduced by 13% due to the changes in the process of granting the right for free of charge transportation services to passengers entitled to reduced tariffs under federal law. 44.3% High-speed The number of passengers carried equaled to 1,281,946,000, trains including 136,650,000 long-distance passengers (100.5% as compared to 2006), and 1,145,296,000 suburban passengers (94.6% as compared to 2006). Standart and sitting Open-plan Compartment and Luxury cars cars cars ﬁrst-class cars 83

For revenues from passenger transportation please refer to 281 587 540 771

Section "Financial and economic results”. 1 226

Long-distance passenger service 5 723 Long-distance passenger car occupancy reached 74.1% 6 268 (+1.6% as compared to the previous year). During peak periods the occupancy of open-plan cars in direct trains would exceed 85% for the entire itinerary of travel, which means 8 741 90-100% occupancy at the departure. 10 623

For long-distance transportation the Company uses branded trains, socially significant and high-speed trains.

The diagram below illustrates the share of passenger turnover depending on type of train. 18 057

It should be noted, however, that the branded train passen- Passanger trains ger turnover share decreased, as compared to 2006, by 4.6 21 942 High-speed trains p.p. due to an increase in the high and ordinary speed passenger trains turnover by 3.8 and 0.8 p.p., respectively. Branded trains Annual Report 47 JSC «RZD» 2007

Analysis revealed that, as compared to the previous year, the thousand, passenger turnover – 11,158.7 mln passenger-km. decrease in the branded trains share mostly occurred due to a 10% decrease in the number of open-plan car passengers, and a 13.1% decrease in the number of passengers using Improving transportation quality compartment cars. Measures continue to be taken for the purpose of improving At the same time, the share of passenger turnover on high- the quality of service to passengers at railway stations and speed trains increased. on trains.

This demonstrates a shift in demands of the population to- The Company applies a flexible tariff regulation system. Pas- wards faster and more comfortable travel service. sengers may plan their traveling for the periods when the lowest tariffs apply, thus reducing expenses. Passenger turnover of high-speed and rapid trains equaled to 2 mln people increasing against 2006 by 4%. A number of new and more technologically advanced railway stations have recently been set for operation, passenger car depots and passenger facilities have been repaired and Suburban passenger transportation reconstructed. The new Svetlogorsk-2 and Cheliabinsk railway stations opened this year on the Kaliningradskaya and In 2007 the total number of passengers that used suburban Yuzhno-Uralskaya Railways, respectively. transportation services reached 1,145.3 mln, which is 5.4% (or 10.9 mln passengers) less as compared to the previ- Starting May 2007, railway transport users were offered a ous year. The number stated above comprises 227.4 mln new service – electronic ticketing for long-distance passen- privileged passengers entitled to federal benefits (19.9% ger trains with an option to pay using a bank card via the of the total number of passengers carried), and 130.4 mln corporate JSCo «Russian Railways» web-portal. privileged passengers entitled to regional benefits (11.4% correspondingly). Every year the Company acquires new comfortable and up- to-date passenger cars and expands the range of services. This includes arrangement of children’s rooms, libraries, taxi Independent carriers call services, hotel reservation services, reservation and selling of railway tickets, video-programs, etc. For long-distance transportation, a Moscow-Saint Peters- burg service was launched by the following three indepen- For passenger security purposes all cars are equipped with dent carriers: ZAO TC Grand Service Express, OOO Passazhir- video surveillance systems enabling the train steward to stay skie Perevozki, and OOO Tverskoy Express. aware of the situation in the car from the service compartment. On 29 February 2008 an agreement was reached with OOO Yuzhny Transit for passenger transportation services on A new service has been introduced for the summer travel the Volgograd-Derbent, State border-Volgograd route, and period, i.e. choice of a compartment for ladies, gentlemen, further to Baku. or a mixed one.

In total, private carriers transported 492,700 passengers, Positive changes, relating to investments into the passenger which is equal to 0.4% of the total number of passengers complex development have been achieved in the recent years traveling long-distance. allowing for a significant decrease in the depreciation of – OAO St. Petersburg – Vitebsk Suburban Passenger Com- fixed assets, optimization of technological business process- pany on the Oktyabrskaya Railway; es thus taking passenger transportation services to the next – OAO Krasprigorod on the Krasnoyarsk Railway. level, including increase in the level of comfort and greater speed of passenger trains. Seven subsidiaries of JSCo «Russian Railways» are already rendering suburban transport services on the territory of Work is in progress to introduce additional luxury sleeping Russia: cars whose state-of-the-art design and equipment provide – JSCo Central Suburban Passenger Company on the Mos- the maximum level of service and comfort on the way. cow Railway; – JSCo Express-Suburban on the West Siberian Railway; – JSCo Omsk-Suburban on the West Siberian Railway; International transportation – JSCo Kuzbass-Suburban on the West Siberian Railway; – JSCo Altay-Suburban on the West Siberian Railway; One of the major goals for passenger complex this year is the expansion of the service direction range on the interna- The transportation companies showed the following perfor- tional railway passenger transportation market. Today JSCo mance results: number of passengers carried – 285,486.4 «Russian Railways» offers passenger transportation services The Company's current position 48 in the industry

to the following 19 countries in Europe and Asia: Germany, Maintenance and repair Switzerland, the Netherlands, France, Poland, Austria, Slova- kia, Czech Republic, Hungary, Romania, Bulgaria, Greece, Italy, Beside transportation services, the most significant activity Croatia, Serbia, Finland, China, Mongolia, and North Korea for JSCo «Russian Railways» is other owners’ rolling stock via 61 international routes, as well as to eight CIS states: repair and maintenance. Structure of the rolling stock main- Ukraine, Belarus, Moldova, Kazakhstan, Kyrgyzstan, Uzbeki- tenance market to a large extent depends on the structure stan, Azerbaijan, and Tajikistan. of the railway transportation market. The largest share of locomotives (98%) is owned by JSCo «Russian Railways» which In 2007, the volume of international passenger traffic determines the overwhelming share (91.7%) of JSCo «Russian amounted to 25.7 mln, passengers, including Railways» in the structure of both the demand and supply at – to and from CIS and Baltic states – 24.9 mln passen- the traction rolling stock repair and maintenance services gers; market. – to and from non-FSU states – 0.8 mln passengers. Demand at the freight car repair and maintenance market As compared to 2006, the transportation volume has grown almost corresponds to the structure of privately-owned by: stock – more than a third of the freight cars in Russia are – 101% regarding the CIS and Baltic states; owned by private companies thus determining their 22.4% – 112% regarding non-FSU states. share in the consumption at this repair and maintenance market segment. The private car-maintenance sector of the In 2007 JSCo «Russian Railways» started operating new repair and maintenance market in Russia is composed of no routes to far-abroad countries, i.e. to France, Switzerland, less than 30 specialized enterprises together holding a 6% and the Netherlands. A railway link with Slovakia started op- share, while the major volume of services is rendered by the erating via transit through the Ukrainian Chop border-cross- maintenance base of JSCo «Russian Railways». ing point. There has been an increase in traffic to Austria. JSCo «Russian Railways» owns the most part of the passen- Increase in the running periodicity of the Saratov-Berlin train ger rolling stock occupying the dominant position at the pas- as well as the direct Moscow-Thessaloniki (Greece) passenger senger car and multiple-unit stock repair and maintenance car route through the Chop border-crossing point was agreed market. The share of demand from other owners is slightly upon. The latter will allow for the establishment of a new link over 3%, while the share of the privately-owned maintenance with Macedonia and Montenegro. enterprises in the passenger rolling-stock segment equals about 6%. In 2010, high speed passenger service between St. Petersburg and Helsinki is planned for launch. The tables below disclose the repair and maintenance market in Russia (including technical provision of wheel pairs with a replacement of element.

The tables below disclose the repair and maintenance market in Russia (including technical provision of wheel pairs with a replacement of element:

1. The Russian rolling stock repair and maintenance market in 2007(locomotives, freight cars, passenger cars, and multiple-unit stock) Suppliers/Consumers Market including: Third-party Total re- Market including: Third-party Total re- rolling stock repair and capacity JSCo Subsid- rolling pair and structure, JSCo Subsid- rolling stock pair and maintenance services (Bln RUR) «Russian iaries stock own- mainte- % «Russian iaries owners mainte- Rail- and as- ers nance Rail- and as- nance ways» sociates volume ways» sociates volume of JSCo of JSCo «Russian «Russian Rail- Rail- ways» ways» JSCo «Russian Railways» 55.6 53.5 2.1 8.2 63.8 72.7 70.0 2.7 10.7 83.4 Subsidiaries and associates 7.8 7.7 0.1 0.44 8.24 10.2 10.1 0.1 0.6 10.8 of JSCo «Russian Railways» Private enterprises 1.2 1.15 0.05 3.2 4.4 1.6 1.5 0.1 4.2 5.8 Total capacity of the Rus- sian repair and mainte- 64.6 62.35 2.25 11.84 76.44 84.5 81.6 2.9 15.5 100.0 nance market Annual Report 49 JSC «RZD» 2007

2. The Russian locomotives repair and maintenance market in 2007 Suppliers/Consumers Market including: Third- Total re- Market including: Third- Total re- rolling stock repair and capacity party roll- pair and struc- party roll- pair and maintenance services (Bln RUR) JSCo Subsidiaries ing stock mainte- ture, % JSCo Subsidiaries ing stock mainte- «Russian and associ- owners nance «Russian and associ- owners nance Rail- ates of JSCo volume Rail- ates of JSCo volume ways» «Russian ways» «Russian Railways» Railways» JSCo «Russian Railways» 20.8 20.8 0.5 21.3 90.4 90.4 2.2 92.6

Subsidiaries and associates

Private enterprises 0.3 0.3 1.4 1.7 1.3 1.3 6.1 7.4 Total capacity of the Rus- sian repair and mainte- 21.1 21.1 1.9 23.0 91.7 91.7 8.3 100.0 nance market 3. The Russian freight stock repair and maintenance market in 2007 Suppliers/Consumers Market including: Third- Total re- Market including: Third- Total re- rolling stock repair and capacity party roll- pair and struc- party roll- pair and JSCo Subsidiaries JSCo Subsidiaries maintenance services (Bln RUR) ing stock mainte- ture, % ing stock mainte- «Russian and associ- «Russian and associ- owners nance owners nance Rail- ates of JSCo Rail- ates of JSCo volume volume ways» «Russian ways» «Russian Railways» Railways» JSCo «Russian Railways» 27.0 25.1 1.9 7.4 34.4 62.9 58.5 4.4 17.3 80.2

Subsidiaries and associates 6.1 6.0 0.1 0.4 6.5 14.2 14.0 0.2 0.9 15.1

Private enterprises 0.2 0.15 0.05 1.8 2.0 0.5 0.4 0.1 4.2 4.7 Total capacity of the Rus- sian repair and mainte- 33.3 31.25 2.05 9.6 42.9 77.6 72.9 4.7 22.4 100.0 nance market 4. The Russian passenger and multiple-unit stock repair and maintenance market in 2007 Suppliers/Consumers Market including: Third- Total re- Market including: Third- Total re- rolling stock repair and capacity party roll- pair and struc- party roll- pair and JSCo Subsidiaries JSCo Subsidiaries maintenance services (Bln RUR) ing stock mainte- ture, % ing stock mainte- «Russian and associ- «Russian and associ- owners nance owners nance Rail- ates of JSCo Rail- ates of JSCo volume volume ways» «Russian ways» «Russian Railways» Railways» JSCo «Russian Railways» 7.8 7.6 0.2 0.3 8.1 74.0 72.1 1.9 2.8 76.8

Subsidiaries and associates 1.7 1.7 0.04 1.74 16.2 16.2 0.4 16.6

Private enterprises 0.7 0.7 0.7 6.6 6.6 6.6 Total capacity of the Rus- sian repair and mainte- 10.2 10.0 0.2 0.34 10.54 96.8 94.9 1.9 3.2 100.0 nance market

Description of the The length of railways equipped with automatic block signaling and central traffic control is 62,082 km (a 44-km Company’s infrastructure increase during 2007), or 72.9% of the total length. As of 1 January 2008 the spread of the railway network (length of railways in use) reached 85,155 km and is shorten- The electrified mileage reaching 42,911 km (50.4%) remaining due to disassembly of low-intensity sections. During 2007 ing the same as in 2006. the length of the railways in use was reduced by 61 km. The bulk of freight turnover (more than 80%) still falls on Of the entire railways length the broad gauge line (1,520 electric haulage sections. mm) constitutes 84,320 km, 805 km of the Sakhalin Railroad have a 1,067 mm wide gauge, and 30 km of the The total length of main tracks is equal to 123,880 km, the Gorkovskaya Railroad have a narrow gage of 750 mm. length of station tracks is 50,488 km. The key indicators Double- and multi-track sections have a length of 37,075 relating to equipment facilities of the railways in Russia km (43.5%) with the remaining 48,080 km related to single- (updated information) as of 31 December 2007 are provided track sections (56.5%). in the table below. The Company's current position 50 in the industry

Key indicators of equipment status of the Railways in Russia as of 1 January 2008 (km)

Indicators 2007 2008 2008 in % to 2007 Length of railways in use 85216 85155 99.9 including sections: double- and multi-track 36940 37075 100.4 same in % 43.3 43.5 0.2 with automatic block signaling and central traffic control 62038 62082 100.1 same in % 72.8 72.9 0.1 of which equipped with central traffic control 38194 38959 102.0 with semi-automatic block signaling 20555 20565 100.0 same in % 24.1 24.2 0.1 with intra-train radio communication 83976 83945 100.0 same in % 98.5 98.6 0.1 electrified 42911 42911 100.0 same in % 50.4 50.4 0 The total length of main tracks 123789 123880 100.1 including: P-75 1233 1142 92.6 same in % 1.0 0.9 -0.1 P-65 117564 118094 100.5 same in % 95.0 95.3 0.3 P-50 and weight-similar 3989 3770 94.5 same in % 3.2 3.0 -0.2 on crashed natural stone, graded gravel, and asbestos 120155 122602 102.0 same as % of the length of ballasted track 97.4 99.3 1.9 length of continuously welded railroad track 63311 67108 106.0 same in % 51.1 54.2 3.1 length of rails on reinforced concrete sleepers - 68059 72040 105.8 same in % 55.0 58.2 3.2 length of track with thermally reinforced rails 108694 109647 100.9 same in % 87.8 88.5 0.7 Total length of station tracks 50680 50488 99.6 same as % of the length of railways in use 59.5 59.3 -0.2

353 AC locomotives (9.1%), 219 mainline diesel locomo- Description of rolling tives (5.8%) and 1,735 diesel-locomotive shunters have stock an expired service life but are still being used in freight transport (For Supply of Locomotives refer to Section Principal Results of Investment Activities, The Locomo- Locomotives tives sub-section).

The recorded fleet of JSCo «Russian Railways» is com- The following infrastructure is maintained within JSCo posed of 19,878 locomotives, including 2,222 passenger «Russian Railways» for the provision of freight and pas- electric locomotives, 524 passenger diesel locomotives, senger railway transport services via railways: 7,308 electric locomotives, 3,853 diesel locomotives, and – locomotive depots – 201, of which 24 are electric and 5,971 diesel-locomotive shunters. The service life of 632 89 are diesel locomotive depots; passenger electric locomotives has expired, of which 429 – locomotive maintenance points – 322, of which 82 are are DC locomotives (44.7%) and 203 are AC locomotives designed for electric locomotives, 149 for diesel loco- (16.2%). Annual Report 51 JSC «RZD» 2007

motives and 91 represent combined-type maintenance Freight cars points; – servicing points – 460, of which 96 are for electric As of 31 December 2007 the recorded fleet of JSCo «Rus- locomotives, 250 for diesel locomotives and 114 are sian Railways» comprised 568,300 freight cars (see the combined-type servicing points; table). However, this number includes 151,800 cars that – rest facilities for locomotive crews – 384 (278 rest were transferred to the balance sheet of JSCo First Freight homes and 106 rest rooms); the total number of rooms Company (Pervaya Gruzovaya Companya) but are still used is equal to 6,597 with sleeping accommodation for by JSCo «Russian Railways», as well as 23,200 cars to be 15,290 persons. contributed to the share capital of JSCo FFC but not yet transferred as of 31 December 2007.

The freight stock of the Russian Federation railway transport as of 31 December 2007 Car type/Owner JSCo Owned by JSCo FFC JSCo Trans- JSCo Refser- JSCo Rail- Other own- Total for «Russian JSCo FFC but Conteyner vice TransAvto ers the Russian Railways» used by JSCo Federation «Russian Railways» Covered 59,068 11,749 2,377 0 0 0 14,360 87,554

Platforms 4,8523 1,988 4,471 0 0 0 11,657 66,639

Gondola cars 217,845 43,906 3,072 0 0 0 79,460 344,283

Tank cars 7,006 64,180 4,473 0 0 0 15,8682 234,341

Refrigerator cars 2,664 0 0 0 2738 0 3,599 9,001

Other 79,930 30,019 10,765 21435 4102 980 85,040 232,271 including: Cement cars 3,688 8,794 7,949 0 0 0 9,874 30,305

Pellet cars 160 1,613 0 0 0 0 4,619 6,392

Grain cars 24,558 6,915 1,081 0 0 0 499 33,053

Mineral wagons 5,222 12,664 1,735 0 0 0 20,926 40,547

Other 46,302 33 0 21,435 4,102 980 49,122 121,974

Transporter wagons 1,432 0 0 0 0 0 0 1,432

TOTAL: 416,468 151,842 25,158 21,435 6,840 980 352,798 975,521 Car type/Owner JSCo «Russian Rail- % of stock Other owners % of stock Total for the Russian ways» system Federation Covered 73,194 83.6 14,360 16.4 87,554

Platforms 54,982 82.5 11,657 17.5 66,639

Gondola cars 264,823 76.9 79,460 23.1 344,283

Tank cars 75,659 32.3 158,682 67.7 234,341

Refrigerator cars 5,402 60.0 3,599 39.7 9,001

Other 147,231 63.4 85,040 36.6 232,271 including: Cement cars 20,431 67.4 9,874 32.5 30,305

Pellet cars 1,773 27.7 4,619 71.9 6,392

Grain cars 32,554 98.5 499 1.5 33,053

Mineral wagons 19,621 48.4 20,926 51.5 40,547

Other 72,852 59.7 49,122 40.3 121,974

Transporter wagons 1,432 100.0 0 0.0 1,432

TOTAL: 622,723 63.8 352,798 36.2 975,521 The Company's current position 52 in the industry

In 2007, the recorded fleet of JSCo «Russian Railways» were derecognized. On the whole, the freight car fleet be- decreased by 49,900 units. Starting Q1 of 2007, the cars longing to the member-entities of Russian Railways Holding transferred to the subsidiaries of JSCo «Russian Railways» increased by 4,500 items.

Quantitative change in the recorded freight car fleet of JSCo «Russian Railways» during 2005-2007 Type of car By year-end, in thousands of items Fleet change in Fleet change in 2007* 2007** 2005 2006 2007* 2007** Covered 78.6 74.0 70.8 73.2 -3.2 -0.8 Platforms 62.5 57.9 50.5 55.0 -7.4 -2.9 Tank cars 79.6 76.3 71.2 75.7 -5.1 -0.6 Gondola cars 255.4 259.6 261.7 264.8 2.1 5.2 Other 142.6 142.1 110.0 147.2 -32.1 5.1 Refrigerator cars 8.3 6.9 2.7 5.4 -4.2 -1.5 Transporter wagons 1.4 1.4 1.4 1.4 0 0 Total 628.4 618.2 568.3 622.7 -49.9 4.5

Passenger cars Total freight turnover

Long-distance passenger fleet The freight turnover (including the empty-run of private- owned and leased rolling stock) grew by 7.7% as compared Group types 31.12.2006 31.12.2007 with the 2006 level. A high dynamics of freight turnover was reached at the Privolzhskaya (+15.5%), Kuibyshevs- First class 1,258 1,202 kaya (+13.3%), Yuzhno-Uralskaya (+12.6%), and Vostochno- Compartment 10,966 10,542 Sibirskaya (+10.6%) Railways. Open 10,304 10,103 Interregional 588 523 Dining car 890 876 Total passenger turnover Luggage car 774 785 In 2007 the turnover of passengers using the JSCo Service car 70 70 «Russian Railways» infrastructure reached 174.1 bln of Total 24,850 24,101 passenger-km falling below the last year's level by 2.1%. An increase in passenger turnover was reached by the fol- Motor-car stock lowing nine Railways: Severo-Kavkazskaya, Privolzhskaya, Zabaikalskaya, Vostochno-Sibirskaya, Yugo-Vostochnaya, The total multiple unit stock used on the railway network Zapadno-Sibirskaya, Sahalinskaya, Dalnevostochnaya and is composed of 15,616 cars, which is 260 cars less from Kuibyshevskaya Railways. the last year level. Total fulfillment of freight service Summary performance schedule information on railways The fulfillment of freight service schedule has improved on the following 10 Railways: Oktyabrskaya, Sevarnaya, The detailed description of the railway branches of JSCo Severo-Kavkazskaya, Yuzhno-Uralskaya, Vostochno-Sibirs- «Russian Railways» with a specification of their fields of ac- kaya, Krasnoyarskaya, Zabaikalskaya, Dalnevostochnaya, tivity may be found on the Company's web-site (www.rzd.ru). Sverdlovskaya and Yugo-Vostochnaya, while Sakhalinskaya Railway boasts a 100% schedule fulfillment. Handling, total Total fulfillment of passenger service In 2007 the total tonnage handled grew by 2.6% to exceed schedule 1,344.2 mln tons. There was a noticeably high dynamics in freight handling volumes at Severo-Kavkazskaya (+11%), In 2007 nine Railways improved the fulfillment of pas- Yuzhno-Uralskaya (+9.7%), Dalnevostochnaya (+8.0%), and senger train schedule, with the most dynamic results Kaliningradskaya (+6.7%) Railways. achieved by the Oktyabrskaya (from 98.5% in 2006 to Annual Report 53 JSC «RZD» 2007

99.1% in 2007), Severnaya(from 98.9% in 2006 to 99.2% in Total freight car turnover 2007), and Privolzhskaya (from 98.6% in 2006 to 99.1% in 2007) Railways. At the same time, 13 Railways reached a The overall freight car turnover has been accelerated by level of the passenger service schedule fulfillment exceed- 0.4%. A number of railways achieved an exceedingly high ing 99%. dynamics of growth: 18% by the Oktyabrskaya Railway, +7.2% by the Severnaya Railway, +6.6% by the Severo- Total fulfillment of suburban service Kavkazskaya Railway, 5.2% by the Sakhalinskaya Railway, and +4.9% by the Yugo-Zapadnaya Railways. schedule

The fulfillment of suburban service schedule remained ap- Total security level proximately equal to the last year's level. With reference to the majority of Railways the indicator almost approach- In the context of significant increase in the transporta- es the 100% level with the following four Railways provid- tion volume, the relative number of faulty operations per ing for its further growth: Gorkovskaya (from 99.4% in 1 billion ton-km operations was reduced by 7.8% from 2006 to 99.7% in 2007), Severnaya (from 99.4% to 99.5%), the 2006 level. The traffic security level increased on 12 Krasnoyarskaya (from 99.7% to 99.8%), and Delnevostoch- out of 17 Railways. The most significant reduction in the naya (from 99.7% to 99.8%) Railways. number of faulty operations as compared with the 2006 level has been achieved by the Krasnoyarskaya (-22.3%), Vostochno-Sibirskaya (-18.4%), Dalnevostochnaya (-17.5%), Total locomotive productivity and Moscovskaya (-17.1%) Railways.

The high dynamics of freight transportation has been achieved due to an increase in the efficiency of the rolling stock usage. The locomotive productivity increased on the following Railways: Sakhalinskaya (+11.2%), Zabai- kalskaya (+5.1%), Severo-Kavkazskaya (+5.1%), Oktyabrs- kaya (+3.1%), Dalnevostochnaya (+2.1%), Moscow (+1.8%) and other Railways. The sharpest indicator growth was achieved by Krasnoyarskaya Railway – over 2.5 mln tkm (gross) per locomotive.

Total operating speed of freight cars

Due to highly effective operations in 2007, the operating speed of freight trains has seen an overall increase of 0.4%, and by the following 10 Railways in particular: Mos- covskaya, Oktyabrskaya, Severo-Kavkazskaya, Sakhalinska- ya, Zabaikalskaya, Vostochno-Sibirskaya, Krasnoyarskaya, Zapadno-Sibirskaya, and Yugo-Vostochnaya Railways. The Zapadno-Sibirskaya Railway reached the highest operating speed of 57.5 km/h in 2007.

Total service speed of freight cars

Despite the fact that the service speed of freight cars remained the same as in 2006, more than half of the Rail- ways made a significant contribution to the improvement of this important qualitative indicator. They are: Sakhalin- skaya, Severo-Kavkazskaya, Zabaikalskaya, Yugo-Vostoch- naya, Zapadno-Sibirskaya, Severnaya, Krasnoyarskaya, Dalnevostochnaya, and Kaliningradskaya Railways. The most dynamic increase in the service speed was achieved by the Oktyabrskaya (+3.6%) and Moscovskaya (+2.7%) Railways. Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Business Priorities Annual Report 55 JSC «RZD» 2007

Principal results the Company’s investment program. of investment activities In line with the parameters of the Company’s investment program and financial plan for 2007 and the period The investment program of JSCo «Russian Railways» is through 2009, as approved by the board of directors on generally based on the main provisions of the “Strategy March 23, 2007, the Company’s investment budget for of Development of Railway Transportation in Russia up to 2007 was initially set at 210.1 billion rubles. 2030”, in accordance with the Program for the Structural Reform of Rail Transport. Based on the Company’s performance in the first half of 2007, and in view of the need to develop and renew One of the key tasks at the stage of Russian rail industry railway infrastructure and renovate the Company’s rolling reform is to make the Company’s investment activities stock, it was proposed that the board of directors of JSCo more efficient. «Russian Railways» consider increasing the parameters of the Company’s investment budget for 2007 by 51.4 billion In the period under review, the transition – begun in 2003 rubles to a total 261.5 billion rubles. – to project financing as a basis for the Company’s investment programs and investment budgets was essentially It is planned to raise external investments of 3.5 billion completed. rubles.

Efforts continue to improve the system of managing This change in the parameters of the Company’s invest- investment projects and delimit the responsibilities of ment program and financial plan for 2007 was approved the main participants in the investment process (inves- by the board of directors of JSCo «Russian Railways» on tor, project manager, customer, contractor, balance-sheet August 31, 2007. holder). Additionally, at a meeting of the Investment Committee on On November 8, 2005, the board of directors of JSCo November 1, 2007, in view of the projected results of the «Russian Railways» approved the main approaches to Company’s investment program in 2007, and in order to enhancing the Company’s investment process based on the optimize the use of investment resources, it was decided principle of end-to-end planning of investment projects to redistribute the cost limits among certain investment (Minutes No. 14). projects without altering the general parameters of the Company’s investment projects, the investment budget or End-to-end planning of investment projects involves put- the investment program as a whole. ting together a package of the most efficient investment projects in accordance with the Company’s development The investment budget is divided into three main sections: strategy. dedicated investment projects, unit projects and renewal of rolling stock. Funds to be contributed to the charter The costs of investment projects throughout their real- capital of subsidiaries are planned separately. ization are included in the investment program. For the long and middle terms, a forecast investment budget is The section “dedicated investment projects” comprises prepared, based on the beginning and ending dates of projects with planned costs of 119.7 billion rubles, or investment projects as well as on resource limitations. 45.8% of the total, for the development and modernization of infrastructure in the main directions, enabling the For enhanced control over the investment program’s Company to increase its revenues by taking on additional formulation and realization, Regulation No. 1667r of JSCo freight. «Russian Railways» approved a number of documents regulating the Company’s investment process. The following investment projects were implemented in this section: In 2007, major efforts were made to enhance the Com- – Kuzbass–Far East Transport Hub pany’s investment process. Active work was done by the – Kuzbass–Azov–Black Sea Transport Hub Expert Council and Investment Committee, whose chief – Kuzbass–Northwest tasks are: – Oil Transport to China (Phases 1 and 2) – ensuring that investment projects are consistent with – Moving the Izvestkovaya-Chegdomyn Line out of the the Company’s development strategy and scientific- flood zone of Bureisk Hydroelectric Station technical policy; – Berkakit-Tommot-Yakutsk – expert study of the technological and production solu- – Modernization of the rail infrastructure of Sakhalin tions proposed in investment projects; Island – selecting the most technologically efficient and best – Introduction of high-speed service in the Moscow–St. supported options for the realization of investment Petersburg direction projects and recommending projects for inclusion in – Comprehensive reconstruction of the Mga–Gatchina– Business 56 Priorities

Veimarn–Ivangorod section and rail approaches to Taking into account leasing, 313 locomotives were sup- ports on the southern shore of the Gulf of Finland plied in 2007 (277 in 2006), 912 passenger cars (755 in – Introduction of rapid passenger service in the Mos- 2006), over 15,000 freight cars (8,600 in 2006) and 760 cow–Nizhny Novgorod direction and a number of other electric-train and rail-bus cars. 258 (318) locomotives, projects 5,257 (7,300) freight cars and 187 (786) passenger cars were modernized. Dedicated projects also include key projects for the rebuilding of engineering structures, the creation of For unit projects, utilization of the investment budget automated transport-control systems, the implementation came to 79.4 billion rubles, or 101.5 %. The development of resource-saving technologies and automated systems of budget of JSCo «Russian Railways» accounts for most commercial energy accounting and passenger registration over-fulfillment of the plan, in the amount of 1.3 billion and monitoring, further development of regular suburban rubles. traffic, etc. These projects involved measures to rebuild and modernize infrastructure as well as to improve tech- The development budget’s funds are formed and calcu- nology and organize the transport process. lated quarterly, and a branch office may additionally spend such funds (above the amount stipulated in the financial In the section “Renewal of Rolling Stock”, planned invest- and investment budget) in accordance with the method- ments for the acquisition and modernization of all types ology determined in the statement on the development of rolling stock amounted to 49.7 billion rubles, or 19% of budget. total investment-budget costs. Pursuant to the statement on the development budget, The section “Unit Projects” with planned investment costs budget funds are to be spent on capital investments of 78.3 billion rubles, or 29.9% of the total, consists of (except for expenses in connection with construction and projects for the development and renovation of branch assembly work). offices’ structural subdivisions engaged in transport and support activities, broken down by unit, projects to renew With respect to contributions to the charter capital of the fixed assets of railways and functional branch offices, joint stock companies and the acquisition of shares of out- renovation of dangerous sites and sites where environ- side organizations, utilization came to 12.8 billion rubles, mental safety is a factor, anti-terror measures, social- or 92.8%. development projects, etc. External investments totaled 2.0 billion rubles in 2007. It Utilization of own and borrowed investment resources to- was originally planned to raise on the order of 3.5 billion taled 253.5 billion rubles (96.9 % of the plan). Besides 2.0 rubles in investor funds, but for a number of reasons be- billion rubles in investment resources were raised (from yond the Company’s control, a final decision has not been outside investors). The investment budget grew by 48.2% made on some joint projects. These projects, which are as compared with 2006. still at the development stage, include: – a project to connect the private railway infrastructure The mechanism of leasing was used to renew rolling stock of an aluminum plant under construction in Taishet in the amount of 28.8 billion rubles (excluding VAT). – a project to connect the private railway infrastructure of an aluminum plant under construction in Karabul Renewal of rolling stock accounts for most non-fulfillment – a project to connect the private railway infrastructure of planned cost limits. of a railway ore transshipment terminal in Sovetskaya Gavan. As regards the renewal of freight rolling stock, the main reason for non-fulfillment of the investment budget was CJSCo The investment resources raised were used to rebuild Uralvagonzavod’s failure to deliver over 4,700 freight cars, station complexes for suburban and long-distance worth 6.8 billion rubles, as scheduled under contracts. passenger transport, for preventive measures in the framework of a traffic safety program (railway joint stock In the case of traction rolling stock, late certification insurance company) and to link departmental access lines resulted in non-delivery of 19 new-series locomotives (12 to public lines. EP2К electric locomotives, 2 2ES6 electric locomotives and 5 2ТE25К diesel locomotives). The results of the investment program in 2007 may be characterized on the whole as positive, and measures These locomotives are being produced for the first time, taken in the framework of the Company’s investment and many suppliers new to this type of production have projects in 2007 should make it possible to achieve the been engaged to manufacture components. Many new projected volume of traffic, increase the profitability of units are being used in locomotive production. As a result, JSCo «Russian Railways» and substantially contribute to the periods for certification testing and certification itself the socio-economic development of the Russian Federa- have been extended. tion. Annual Report 57 JSC «RZD» 2007

Aggregate data on utilization of the Company’s 2007 investment budget are given in the table below:

Project Planned Actual +/- %

Total (funds of JSCo «Russian Railways» – own and borrowed) 261.5 253.5 - 8.0 96.9 of which: Dedicated investment projects 119.7 119.4 -0.3 99.7

Renewal of rolling stock 49.7 41.9 -7.8 84.2

Unit projects 78.3 79.4 +1.1 101.5 Contributions to the charter capital of joint stock companies, acquisition of shares of outside 13.8 12.8 -1.0 92.8 organizations

Data on utilization of the approved 2007 budget are given in the following table:

Project Planned Actual +/- %

TOTAL-All sources 265,042.2 255,480.7 -9,561.5 96.4

Total - funds of JSCo «Russian Railways» (own and borrowed) 261,542.2 253,538.8 -8,003.4 96.9

Dedicated investment projects 119,727.8 119,413.5 -314.3 99.7

Development of the following transportation routes infrastructure: 60,811.6 60,500.4 -311.2 99.5

Kuzbass–Far East Transport Hub 8,897.7 8,883.1 -14.6 99.8

Kuzbass–Azov–Black Sea Transport Hub 16,144.5 16,014.4 -130.1 99.2

Kuzbass–Northwest 7,055.0 7,294.4 239.4 103.4

Oil transport to China (Phase 1) 2,553.0 2,315.3 -237.7 90.7

Oil transport to China (Phase 2) 1,653.3 1,663.7 10.4 100.6

Moving the Izvestkovaya-Chegdomyn Line out of the flood zone of Bureisk Hydroelectric Station 583.6 583.6 0.0 100.0

Berkakit-Tommot-Yakutsk 1,000.0 1,000.0 0.0 100.0

The Mineralnye Vody-Kislovodsk stretch was transformed to alternating current operation 1,116.3 1,116.1 -0.2 100.0

Introduction of rapid passenger service on the St. Petersburg–Buslovsk section 4,000.0 3,987.1 -12.9 99.7

Modernization of the rail infrastructure of Sakhalin Island 1,241.2 1,240.2 -1.0 99.9

Introduction of high-speed service in the Moscow–St. Petersburg direction 5,040.0 5,042.0 2.0 100.0

Introduction of rapid passenger service in the Moscow–Nizhny Novgorod direction 4,444.9 4,446.2 1.3 100.0 Comprehensive reconstruction of the Mga–Gatchina–Veimarn–Ivangorod section and rail approaches to ports on the southern shore of the Gulf of Finland 5,424.6 5,409.0 -15.6 99.7

Comprehensive reconstruction of the Trubnaya-V.Baskuntchak-Aksarayskaya section 137.6 137.6 0.0 100.0

Acquisition of the Siemens AG high-speed rolling stock 0.0 0.0 0.0 100.0 Increase in the throughput of the railway infrastructure following the construction of new rail lines (design and exploration work) 50.0 50.0 0.0 100.0 Development of the railway infrastructure approaching the Kozmino Bay to allow oil transportation (design and exploration work) 150.0 146.7 -3.3 97.8

Construction of an additional main track on the Moscow–Kriukovo section 160.0 113.1 -46.9 70.7 Reduction in the travel time of passenger trains in the Moscow-Adler direction (design and exploration work) 250.0 248.0 -2.0 99.2 Reconstruction of the Komsomolsk-on-Amur–Sovetskaya Gavan section, involving construction of the new Kuznetsovsky Tunnel (design and exploration work) 50.0 50.0 0.0 100.0 Construction of a broad-gauge railway entrance to Europe via the Chop-Bratislava-Vienna route (design and exploration work) 60.0 60.0 0.0 100.0

Construction of an additional main track on the Moscow–Kuskovo section 700.0 700.0 0.0 100.0 Business 58 Priorities

Construction of a high-speed passenger trunck line between Moscow and St.Petersburg (design and exploration work) 100.0 0.0 -100.0 0.0

Construction and reconstruction of engineering structures 30,274.5 30,275.7 1.2 100.0

Automation of transport control systems 12,199.4 12,312.7 113.2 100.9

Implementation of Resource-Saving Technologies in Rail Transport 3,694.7 3,727.1 32.4 100.9 Development and reconstruction of the communication facilities of the technological segment communications network (Phase II) 1,695.0 1,692.9 -2.1 99.9

Implementation of automated systems of commercial energy accounting 3,027.0 3,019.3 -7.7 99.7

Implementation of automated systems of passenger registration and monitoring 1,641.6 1,669.5 27.9 101.7

Development of regular traffic between Moscow and Sheremetyevo Airport 2,000.0 2,067.5 67.5 103.4

Establishment of a network of warehouses for temporary storage of goods 249.8 242.2 -7.6 97.0

R&D 942.8 779.6 -163.2 82.7 Implementation of automated systems of commercial power accounting for retail energy markets 2,697.4 2,696.8 -0.6 100.0 Introduction of the rapid suburban passenger service between Moscow-Mytishchi-Pushkino- Bolshevo 10.0 9.9 -0.1 99.5 Introduction of intermodal transportation at the Sochi-Adler-Sochi Airport section (design and exploration work) 30.0 30.0 0.0 100.0

Construction of a six-kilometer bypass of the Berezniki Railway Station 454.0 390.0 -64.0 85.9

Renewal of the rolling stock of JSCo «Russian Railways» 49,721.8 41,857.8 -7,863.9 84

Traction rolling stock 20,459.3 18,867.1 -1,592.1 92.2

Freight rolling stock 17,486.1 10,571.1 -6,915.0 60.5

Passenger rolling stock 8,045.8 8,004.1 -41.7 99.5

Motorized rail car rolling stock 3,730.7 4,415.6 684.9 118.4

Unit projects 78,269.6 79,445.7 1,176.1 102

Division of the rails and structures 9,145.5 8,551.9 -593.6 93.5

Transportation division 11,057.3 10,458.6 -598.7 94.6

Increase in traffic safety (without two-sided automatic block signal) 7,220.1 6,960.9 -259.2 96.4

Automation and remote control division 6,750.6 6,738.3 -12.3 99.8

Division of electrification and power supply 6,375.7 6,252.0 -123.7 98.1

Division of commuter passenger transportation 3,839.8 4,015.7 175.9 104.6

Division of long-distance passenger transportation 4,727.9 5,031.5 303.6 106.4

Locomotives division 1,794.1 1,747.1 -47.1 97.4

Rolling stock division 2,218.7 2,488.1 269.4 112.1

Freight and commercial operations division 1,131.1 1,564.0 432.9 138.3

Civil defense facilities 1,382.1 1,365.6 -16.5 98.8 Division of communications and computer technologies (upgrade and technological radio communication) 900.8 901.2 0.4 100.0

Upgrade of hazardous sites 817.5 995.3 177.9 121.8

Anti-terrorist activities 684.0 675.8 -8.2 98.8

Ecological security 610.5 651.5 41.0 106.7

Procurement division 250.8 255.7 4.9 102.0

Renovation of the rolling stock of fire-trains 154.0 138.6 -15.4 90.0

Reconstruction of the railway units in the Chechen Republic 476.3 266.0 -210.3 55.9

Projects for upgrade of the fixed assets of branch offices 13,203.9 14,748.1 1,544.2 111.7 Annual Report 59 JSC «RZD» 2007

Social-development projects 5,528.9 5,639.8 110.9 102.0

Program for the provision of occupational safety conditions 466.8 466.3 -0.4 99.9

Renovation of health-care facilities and educational establishments 3,403.1 3,484.1 81.0 102.4

Construction of corporate residential facilities for technical staff 1,659.1 1,689.4 30.4 101.8 Contributions to the charter capital of joint stock companies, acquisition of shares of outside organizations 13,823.0 12,821.7 -1,001.3 92.8

Funds raised 3,500.0 1,941.9 -1,558.1 55.5

Growth in rolling stock Locomotives (locomotives and freight cars) A growth trend in purchases of new traction rolling stock delivery of freight cars has persisted over the last 5 years. Purchases of new locomotives in 2004-2007 are shown in the following table: delivery of locomotives Year Electric locomo- Diesel locomo- Total tives purchased tives purchased

75 784 2004 55 45 100

1975 657 2005 106 76 182 2006 157 120 277 66 436 2007 159 154 313

1980 885 Total for 2004-2007 477 395 872 65 446 Freight cars 1985 1.109 In 2007, JSCo «Russian Railways» acquired 15,406 freight 52 500 cars (7,591 on terms of financial leasing), including:

1990 848 – 14,231 open boxcars – 585 cement hoppers – 490 covered boxcars 7 598 – 100 grain hoppers 1995 28 At the central office’s railcar repair enterprises and at 1.000 railcar repair plants, 6,120 freight cars were modernized (re-equipped) in 2007, including: 2000 37 – 4,455 open boxcars for intermediate-bulk containers – 837 timber flatcars 8 000 – 726 rail flatcars – 72 mineral cars for inert freight 2005 182 – 30 flatcars for wheel pair. 15 406

2007 313 Passenger cars

The use of cars that fail to ensure comfortable travel conditions, against a background of rising prices for passengers, has a negative impact on the image of the Com- pany’s passenger service. From 1,200 to 1,300 passenger cars need to be renovated each year. The actual supply of railcars fell from 2,096 in 1992 to 293 in 2000. In the last five years, though, the supply of passenger cars has shown a positive growth trend. Business 60 Priorities

Growth in passenger car supply Anapa Station and the approaches to Tuapse Region and to construct a second main track on the Razyezd 9 Km– 655 Kiev section. 2005

735 In the Far East Region, work was begun on reconstruc- 2006 tion of Komsomolsk-on-Amur Station and Khabarovsk-II 912 Station, on second-phase development of Nakhodka-Vost.

2007 Station and rail development of Khmylovsky Branch Line and reconstruction of Ocean Station. Supply of motor railcars Series 2005 2006 2007 Project documentation was prepared for the reconstruction of the Komsomolsk-on-Amur–Sovetskaya Gavan ED4M (MK, E) 169 260 332 section, involving construction of the new Kuznetsovsky ED9M (MK, E) 224 310 244 Tunnel. ET2M (EM) 128 131 132 RA 1 (RA-2) 56 45 52 Construction in progress DT -1 521 701 708 TOTAL 577 746 760 As of December 31, 2007, construction in progress amounted to 220.7 billion rubles—a year-on-year increase of 55.8 billion rubles, or 33.8%. At the beginning of 2008, Integration of port infrastructure construction in progress accounted for 86.4% of investment expenses, as compared with 94.6% at the beginning In 2007 JSCo «Russian Railways» continued efforts to of 2007, which represents a positive trend in commission- develop rail approaches and port infrastructure to accom- ing sites more quickly. modate constantly growing foreign-trade shipments via Russian seaports. The increase in construction in progress has to do with measures initiated for infrastructure development and Funds for the realization of this target in the Company’s renovation which normally take more than one year, i.e.: investment program totaled 18.5 billion rubles, of which: – Comprehensive reconstruction of the Mga–Gatchina– – 7.5 billion rubles for the Northwest Region Veimarn–Ivangorod section and rail approaches to – 7.4 billion rubles for the Azov–Black Sea Region ports on the southern shore of the Gulf of Finland – 3.6 billion rubles for the Far East Region (including construction of Luga Station) – introduction of rapid passenger service on the St. In the Northwest Region, work continued on the develop- Petersburg–Buslovsk section ment of Luga Port Station, comprehensive reconstruction – introduction of rapid passenger service in the Mos- of the Mga–Gatchina–Veimarn–Ivangorod section and cow–Nizhny Novgorod direction reconstruction of Avtovo Station and construction of the – construction of an additional main track on the new Chernyshevskoye Border Station. Reconstruction of Moscow–Kuskovo section Shipovka Station was completed, and design work was – electrification of the Syzran-Sennaya section and con- begun for the development of Kaliningrad–Sort. and Baltic struction of a second main track Forest Stations. – reconstruction of the Bolshoi Novorossiisk Tunnel and Novoginsk Tunnel on the Armavir–Tuapse section, etc. In the Azov–Black Sea Region, second main tracks were laid on congested sections: Kotelnikovo–Meliorativny, In 2007, 630.6 million rubles of costs in connection with Shablievskaya–Salsk in the Volga direction and Saratov– capital construction in progress were written off. 128.0 Volgograd–Kotelnikovo–Krasnodar. Project documentation billion rubles of construction in progress are included in was prepared for 8 sections in this direction, with con- the investment budget for 2008-2010. It is planned to sell struction to begin in 2008, the first startup complex for sites worth 4.7 billion rubles and to finish 5.6 billion rubles the construction of Razyezd 9 Km storage-and-retrieval in construction in progress by bringing in investors. In station was completed, and a feasibility study was pre- 2008 it is planned to mothball 0.3 billion rubles of con- pared for reinforcing the Kotelnikovo–Tikhoretsk-Crimea struction in progress and to consider writing off sites in section, bypassing the Krasnodar hub. the amount of 2.7 billion rubles.

Reconstruction of the existing tunnels on the approaches In view of the measures being taken to reduce construc- to Novorossiisk Seaport was begun. tion in progress and the projected commissioning of fixed assets in 2008, construction in progress should account Preparations were begun to lay second tracks on confor 60.7% of investment costs by the end of 2008. gested sections of the Tuapse–Adler line, to reconstruct Annual Report 61 JSC «RZD» 2007

Innovation-based ing all of the Company’s structural subdivisions with a management body in the Technical Policy Department development of and overseen by a vice president of JSCo «Russian Rail- JSCo «Russian Railways» ways». Association of Railway Equipment White Book Manufacturers With the participation of industry science, Company specialists and institutes of the Russian Academy of Science, To combine the efforts of manufacturers of railway equip- the main directions of the Company’s scientific and techni- ment and its components and ensure that strategic de- cal policy were first formulated in a systematic document velopment programs meet the country’s economic needs, – “Strategic Directions of the Scientific and Technical the Association of Railway Equipment Manufacturers, a Development of JSCo «Russian Railways» through 2015” nonprofit partnership, was formed in June 2007, includ- (the JSCo «Russian Railways» White Book) – which should ing over 70 major railway-related manufacturers, partly in be viewed as the basis for long-term Company innovation. CIS countries. One of the partnership’s top priorities is to In practice, the implementation of this policy document ensure the effective cooperation of domestic manufactur- will make it possible to achieve the conceptual goal of rail- ers in realizing the Development Strategy for Transport transport reform: the formation of a market of high-quali- Machine-Building in the Russian Federation in 2007-2010 ty and competitive transportation services that fully meet and through 2015. This strategy is based on a program of existing needs for freight and passenger transport. measures to overcome technological backwardness and ensure rapid technical upgrading and modernization of the Reform of the scientific and technical machine-building complex. complex The partnership has established business contacts with the Union of the European Railway Industries (UNIFE). The The Company’s scientific and technical complex has been memorandum of cooperation and license agreement signed systematically reformed: in Brussels give the Association of Railway Equipment – based on the All-Russian Railway Research Institute Manufacturers exclusive rights to transmit and distribute and the All-Russian Computerization and Automa- the newest version of the European railway industry stan- tion Research and Design Institute – federal unitary dard IRIS in the Russian Federation and the CIS as well as enterprises and principal institutions of domestic rail to provide in-depth training on this standard to over 100 transport – open joint stock companies of the same domestic managers. Also, beginning in 2015, JSCo «Rus- name were created; sian Railways» has set itself the goal of ending purchases – the Technical Policy Department is charged with coor- from manufacturers whose quality management systems dinating efforts to create new locomotives, freight and and output fail to meet international standards. passenger cars and motor railcars; – to consolidate issues involving the scientific and technical development of Company infrastructure, the High-speed transport infrastructure section of the Technical Policy Depart- ment was strengthened and charged with overseeing Pursuant to Agreement No. 230kt of May 18, 2006 be- a number of key Company innovation projects and tween Siemens AG (Germany) and JSCo «Russian Rail- programs, including a project to create up-to-date ways», a base schedule is being followed to develop and train-dispatching and traffic safety systems; produce eight high-speed electric trains with a design – a Center for Innovation Development was formed as speed of 250 kph. On July 20, 2007, the first car body was a branch of JSCo «Russian Railways» with the fol- prepared, and serial production began. Detail design was lowing main functions: raising off-budget resources completed. for innovation projects and programs, working with venture funds and arranging for independent technical On April 20, 2007, JSCo «Russian Railways» and Sie- and economic expert studies of scientific and technical mens AG signed Agreement No. 232kt for the servicing projects and programs; of high-speed electric trains throughout their life cycle – it was decided to combine the Scientific and Technical (30 years). In the framework of the investment program Information Center (a structural subdivision of JSCo “Introduction of High-Speed Passenger Service in the St. «Russian Railways») and the Central Science and Tech- Petersburg–Moscow–Nizhny Novgorod Direction”, indus- nology Library (a Company branch) into one structure, trial facilities are being rebuilt for the technical servicing freeing up employees and eliminating duplicated func- and use of high-speed electric trains. tions; – in order to achieve the Company’s standardization An international tender was held in 2007 for the supply priorities, a standardization service was formed unit- of four electric trains with a speed of 220 kph in order to Business 62 Priorities

realize a project for rapid passenger service between St. This investment project also includes the fulfillment of Petersburg and Helsinki. On August 27, 2007 the board energy-saving goals set by the Company’s Energy Strategy of directors of Oy Karelian Trains Ltd. approved Alstom through 2010 and 2030. (France) as the supplier. The contract for these electric trains, which are unique in meeting both Russian national standards and European technical requirements, entered Scientific and technical development into force on September 5, 2007. Alstom began design and manufacture. The Company’s Scientific and Technical Development Plan for 2007 was approved by Regulation No. 137r of JSCo Commercial and technical specifications for high-speed «Russian Railways» of January 31, 2007. electric trains with a speed of 160 kph have been developed and agreed with the potential manufacturers Comprehensive scientific and technical projects realized in – CJSCo Transmashholding, Ansaldo Breda (Italy) and the framework of the Company’s investment program are Bombardier (Canada) – in order to realize the Company’s among the most effective forms of research and develop- approved rapid and high-speed transport program through ment. 2020 as well as transport service for the “Sochi 2014” Olympic Games. Specific results were obtained at Rybnoye-Chelyabinsk Testing Ground in 2007 in the framework of the comprehensive scientific and technical project “Optimization of Efficient use of resources Transport Control Based on Economic Criteria”. In the first phase of this project, key procedures for managing the The primary objective of the investment project “Imple- stock of locomotives were developed. mentation of Resource-Saving Technologies in Rail Trans- port” is wholesale conversion to resource-saving technical From the outset, these technologies proved highly effec- methods and technologies that will enable a reduction in tive, allowing a reduction of up to 10% in the stock of loco- the industry’s operating costs by means of: motives. Comprehensive optimization of control processes – reduction in specific fuel and energy consumption for at the testing ground will yield annual savings of some 550 hauling operations million rubles. – optimization of stationary energy consumption – rational use of material resources A full range of advanced technologies was implemented at – effective use of human resources as a result of new the testing ground at the same time, providing a multipli- automated technologies and technologies with low er effect. One significant development is the implementa- servicing requirements. tion of new devices for monitoring the location of self-pro- pelled rolling stock, including special and rail technology. The satellite navigation systems used for these purposes, Composition of the scientific and technical develop- including the Russian Global Navigation Satellite System ment plan for 2007 (GLONASS), make it possible to monitor the location of all units in real time, control their speed and eventually 6% 11% coordinate them per unit of time. Other Labor operations productivity Another important result of implementing the new technologies will be information from satellite systems for 17% earth remote sensing, permitting us to forecast floods, Regulatory 28% sinkholes and landslides with a high degree of accuracy and technical Efficiency and minimum expense. By refining this technology, jointly documentation of the use of technical with the Italian firm Finmeccanica and the Russian space resourses agency Roskosmos, on the Tuapse–Adler section in the reporting year and the year after that, JSCo «Russian Railways» will be able to implement technologies for moni- 5% toring potentially hazardous sections of rail. Labor safety and ecology 5% 7% Satellite navigation systems, along with GSM-R digital tele- Fast and Quality of diagnistics, communication systems, will make it possible to increase high-speed work and materials traffic safety on low-density lines and sections and ensure traffic 11% 5% 5% Saving on fuel and energy that traffic safety requirements are fully met at minimum Traffic New resources safety cost. rolling stock and rail equipment Annual Report 63 JSC «RZD» 2007

Management of quality technical regulations (“Rail Infrastructure Safety”, “Rail- way Rolling Stock Safety” and “Safety of High-Speed Rail Efforts to introduce a quality-management system in 2007 Infrastructure and Rolling Stock”), in the draft Program were made in the following areas: for the Development of Technical Regulations, prepared by – training the Russian Ministry of Industry and Energy and approved – development of internal corporate quality-management by the Government of the Russian Federation. These rules and requirements technical regulations will be based on previously devel- – railway pilot projects oped drafts of nine technical regulations in the area of rail transport. In the framework of a “cascade training” project, the qualifications of executives at the top three levels were upgraded. Cascade participants developed and defended Supply of new rolling stock functional quality-improvement projects. Training materials were developed for the cascade training of employees A concept was developed for the conclusion of long-term at levels 4–6. contracts between JSCo «Russian Railways» and companies manufacturing rolling stock, based on a method of Regulatory documentation was developed to be used in valuing the life cycle of output. The value of the life cycle 2008 as a basis for implementing elements of a corporate thus becomes a key economic feature of the manufactur- integrated system of quality management in structural er’s and potential supplier’s competitiveness. For foreign subdivisions, branch offices and rank-and-file enterprises suppliers, the terms of transfer of advanced technologies of JSCo «Russian Railways». and distribution of products in Russia should also be taken into consideration in preparing contracts. JSCo «Rus- A quality-management system is being implemented at sian Railways» is ready to conclude agreements for the pilot testing grounds of the Kuibyshevskaya, Oktyabrskaya development of new technology, serial production, testing, and Sverdlovskaya railways. certification and subsequent delivery for up to 3 - 5 years. Such an approach is advantageous for both JSCo «Russian Railways» and the manufacturer: Technical regulation – JSCo «Russian Railways» is regularly supplied with new rolling stock in accordance with its strategic needs; In the framework of technical-regulation reform in the – full use is made of technical-audit and quality-control Russian Federation, the Technical Policy Department was mechanisms for acquired production; charged with coordinating efforts to implement the Fed- – the possibilities of applying a flexible price policy, op- eral Law “On Technical Regulation”. timizing costs and minimizing the Company’s financial risks are expanded; Drafts of nine technical regulations – of sixteen stipulated – the manufacturer is able to plan its operations on a by the Concept for a System of Rail Transport Technical long-term basis, develop its manufacturing capabilities Regulation – were prepared in 2006-2007. and obtain soft loans.

The inadequacy of the Federal Law “On Technical Regula- tion” in such complex technical areas as transport, con- International operations struction and energy was demonstrated by the practice of drafting technical regulations for rail transport and by According to the “Strategy of Development of Railway an analysis of the preparation of draft technical regula- Transportation in Russia up to 2030”, approved by the tions in related industries. This federal law has slowed Russian Government, one of the Company’s priorities is the implementation of newly developed technical methods to strengthen the global competitiveness of JSCo «Rus- and technologies as well as the introduction of high-speed sian Railways» Holding Company and its positions on the rail service. In view of these problems, JSCo «Russian Eurasian transport market. Railways» made proposals and, jointly with the Russian Union of Industrialists and Entrepreneurs and the Federal The first step in this direction is to ensure organizational, Agency of Technical Regulation, was successful in getting political, legal and technological conditions that are con- this law amended (Federal Law No. 65-FZ of May 1, 2007 ducive to a qualitatively new level of efficiency of interna- “On Amendments to the Federal Law ‘On Technical Regula- tional freight (especially transit) and passenger transport tion’”). as well as to ensure scientific, technical and technological cooperation and access to foreign markets for leading Under the new version of the law, proposals were made Russian developments and construction services. to correct the Concept for a System of Rail Transport Technical Regulation. These proposals were submitted to In accordance with the strategic line, cooperation with the Russian Government and included, in the form of three railways in the CIS and Baltic countries was further Business 64 Priorities

developed in order to leverage the chief competitive ments concluded during the forum in Sochi. advantage of “1520-gauge space” by operating as a unified rail fleet with unified technologies and standards. In order to resolve issues relating to concession assets of the Armenian Railway, on September 12, 2007 JSCo Jointly with the railway administrations and transpor- «Russian Railways» officially applied to the Armenian tation agencies of Austria, Slovakia and Ukraine, JSCo Ministry of Transport and Communication to take part in «Russian Railways» began developing a project this year pre-qualification for a subsequent tender for a concession to extend the broad-gauge railway from Košice (Slovakia) involving assets of the Armenian Railway. to Bratislava and Vienna. Pursuant to the signed memo- randa of understanding, a four-sided task group agreed on Considerable work has been done with the Chinese rail- a schedule for the development of a preliminary feasibility ways to develop freight. In 2007 a number of meetings study and related marketing research to be used in the with the leadership of the Chinese Ministry of Railways as following year as the basis for a business plan. well as task-group sessions were held, as a result of which an agreement to strengthen cooperation in the area of in- The jubilee Forty-Fifth Session of the Council for Rail ternational oil transport and a memorandum on scientific Transport in Commonwealth Member Countries, held on and technical cooperation were signed, and specific steps February 21-22, 2007 in Moscow, and subsequent sessions were planned to increase freight traffic, including transit. in Astana and Baku confirmed the efficacy of this organiza- In view of the need to handle ever growing freight traffic tion. The Company’s consistent policy in the framework of between China and Russia, special attention is being given the Council for Rail Transport in Commonwealth Member to developing the Zabaikalsk-Manchuria border crossing. Countries has made for significant progress in such areas as improving mutual settlements, reducing the shortage Relations with the German railways have received new of rolling stock, realizing joint projects in the field of logis- impetus. On May 29, 2007 in Sassnitz, Germany, JSCo tics and modernizing infrastructure. «Russian Railways» and Railion Deutschland АG signed fundamental documents regulating freight traffic between At the council’s forty-sixth session, as a result of the Com- Russia and Germany in connection with the Baltiysk– pany’s efforts, it was decided to form a coordinating com- Sassnitz-Mukran railway ferry service. The first step has mittee for improvement of the regulatory legal framework thus been taken toward establishing railway ferry service for international rail-transport settlements. On June 28- between ports in Russia and Germany. On June 18, 2007, 29, 2007, JSCo «Russian Railways» held an organizational the heads of the Russian, Belarusian, Polish and German meeting with railway-administration representatives at railways signed a declaration of intent to form a joint ven- which a statement on the coordinating committee, a draft ture for freight transport by CJSCo Eurasia Rail Logistics. agreement on cooperation in implementing the statement On June 21, 2007, a general agreement on terms of co- and a plan of action for the coordinating committee were operation for the development of transport and logistics agreed. At the council’s forty-seventh session, a state- was signed between Deutsche Bahn AG and JSCo «Russian ment on the coordinating committee was approved. Railways».

In view of the need for new approaches to financial co- At our initiative, a joint task force of Russian, Chinese and operation between railways, modern methods of mutual German railways is actively working on issues involved settlement and convergence of European systems in the in organizing Eurasian freight traffic between China and framework of the International Railway Union, the Com- Europe. pany’s specialists prepared drafts of a Statement on the Committee for the Regulation of Mutual Settlements To additionally utilize freight resources and the Trans- between Railways under the Agreement on the Settle- Siberian, the Company concentrated this year on working ment Rules of the Railway Cooperation Organization directly with the leadership of major production compa- and the Rules of Procedure of the Railway Cooperation nies and forwarders in Japan, providing a basis for the Organization’s Compensation Bureau. These drafts were expansion of container transport. considered at meetings between representatives of member countries’ railways in May and October 2007. Efforts Cooperation with the Finnish railways also received new to create a Committee for the Regulation of Mutual Set- impetus. On April 16-17, 2007 a demonstration container tlements and a Compensation Bureau under the auspices train was given a successful trial run between Kouvola of the Railway Cooperation Organization will continue. and Moscow in order to develop the Finnish and Russian railways’ capacity for high-quality service. In the area The business forum Strategic Partnership 1520, held for of passenger service, work continued on a project for the second year in a row at the Company’s initiative and high-speed traffic between Moscow and Helsinki. Further with its support, has become an effective mechanism for to the agreement signed in November 2006 to form the promoting cooperation between railway administrations in joint venture Oy Karelian Trains Ltd, an agreement was the framework of the council and on a bilateral basis, as concluded with Alstom in September 2007 for the supply demonstrated by the large number of contracts and agree- of high-speed rolling stock. Annual Report 65 JSC «RZD» 2007

Technological cooperation was developed with other 2. People’s Democratic Republic of Algeria leading foreign partners as well. A contract worth 300 million euros was signed with Siemens Transportation In late 2007 RSC Russian Railways finished work on a ten- Systems for the servicing of Velaro RUS high-speed elec- der proposal for “Development of Suburban Rail Service tric trains. An agreement was signed with Finmeccanica in Algiers”, and the bid was submitted to the tender com- S.p.А. for cooperation in jointly developing and producing mittee on January 2, 2008. an electric train with a speed of up to 160 kph for the Russian railways and applying satellite technologies to rail The project involves major repairs to some 95 km of rail, transportation and other areas. reconstruction of existing stations and construction of 14 new stations, roadbeds and engineering structures, Having joined the International Railway Union as a full development of signaling and communication systems and member last year, JSCo «Russian Railways» actively coop- electrification of these sections. erated with the union in 2007 and took part in the work of its bodies. The session of the union’s executive council In February 2008, ANESRIF, the organizer, announced and the seventieth anniversary session of its general as- that JSCo «Russian Railways» had won the tender. The sembly that were held in Moscow on June 18, 2007 were Algerian side is currently putting the final touches on the landmark events. Note that JSCo «Russian Railways», contract, and JSCo «Russian Railways» is actively prepar- as the sole rail administration, immediately received full ing for the project. membership in the European and Asian regional assem- blies of the International Railway Union, which deal with Preliminary talks have also been held with representa- European and Eurasian activities and projects. Our Com- tives of the Algerian National Agency for Railway Projects pany was also given responsibility for overseeing such key and Investments (ANESRIF) on involvement in electrifying issues as the development of international transportation a number of rail lines in Algeria with an overall length of corridors and the formulation of quality and certification some 1,000 km. standards. All of this enables us to make an important contribution to the formation of international transpor- 3. Great Socialist People’s Libyan Arab Jamahiriya tation space, taking into account the interests of the Russian railways. In fulfillment of protocols signed in July and August 2007 with the leadership of the Organization for the Manage- Aiming to consolidate its role as a key link in the Eurasian ment and Realization of Libyan Railway Projects, JSCo rail system, JSCo «Russian Railways» made substantial «Russian Railways» prepared a technical and economic headway this year on major international infrastructure proposal on a tight schedule for the construction of 554 projects. km of double tracks between Sirt and Benghazi as part of the Trans-Arab Railway along the Mediterranean coast. Participation 4. Democratic People’s Republic of Korea of JSCo «Russian Railways» in international rail infrastructure JSCo «Russian Railways» has completed its workup of the part subject to approval of the projects “Recon- projects struction of the Rail Section between Hasan and Rajin Stations” and “Establishment of a Container Terminal 1. Islamic Republic of Iran in the Port of Rajin”. All materials have been sent for approval by the Korean side. Working documentation is From February through September 2007, Company spe- still under development. In April-May 2008 the active cialists did comprehensive work to prepare a technical phase of preliminary work and basic construction and and economic proposal for a project to electrify the ap- assembly is to begin. An order was filled for equipment proximately 53 km of rail between Tabriz and Azarshahr. with a lengthy production period for the first stage of the container terminal in the port of Rajin. In September 2007 a draft contract for the development and realization of this project was submitted to the Irani- 5. Kingdom of Bahrain an side. The contract has currently been initialed by both sides. The contract is to be signed on March 29, 2008. Work has been completed to obtain the three principal licenses for operations in Bahrain (road construction, Talks are also being held with the leadership of the Iranian housing construction, structural work and technical Railways on tenders to electrify some 1,000 kilometers of maintenance of buildings and structures). The highest double tracks between Teheran and Meshkhed as well as license category, АА, was granted for structural work on the construction of a Kazvin–Resht–Astara line with a and technical maintenance, allowing the license holder length of approximately 400 km. to erect high-rise buildings of thirty and more floors. Business 66 Priorities

To identify the most promising and profitable business JSCo «Russian Railways» is developing from a railway com- projects, the Company does active work to select con- pany into a leading transport and logistics company that struction projects with both state and private sources provides freight and passenger transport using all the tools of financing. available to modern business.

Among the most promising transport-construction JSCo «Russian Railways» has until now been perceived by projects is a project to build one of the world’s longest many in Russia and abroad as a state structure whose chief highway bridges between Bahrain and Qatar with a task is to promote the state's social functions. JSCo «Rus- length of some 40 km. A tender is planned in the second sian Railways» has been transformed into a holding company, half of 2008. including subsidiaries and affiliates, with a well-developed system of managing its business units. Work is currently being completed to establish and register a representation of JSCo «Russian Railways» in For strategic market positioning in conditions of growing Bahrain, allowing more efficient and better-quality moni- competition, the holding company formed by JSCo «Russian toring of the infrastructure market in Bahrain and other Railways» needs to be more active in applying modern com- economically developed states in the Persian Gulf region. munication tools united by a single ideology.

6. Other projects The Company’s new trademark was developed so that it would be perceived not as an abbreviation but as an indepen- Markets for infrastructure projects in the Balkan coun- dent and complete graphic symbol not requiring translation tries (Bulgaria, Serbia, Croatia) and CIS member states into foreign languages. continue to be studied in order to identify projects that are economically attractive for JSCo «Russian Railways». In October 2007 the management board of JSCo «Russian Railways» approved the corporate (company) trademark, logotype and corporate (company) fonts. Reform and Participation A range of work was done: identification of trademarks in Subsidiaries and registered to JSCo «Russian Railways» (enterprises of the Affiliates former Russian Ministry of Railways, subsidiaries and affiliates of JSCo «Russian Railways»), identification and analysis Company repositioning of third-party violations of rights to the Company’s name. As a result of the program for structural reform of rail transport, JSCo Railways presented its new corporate style Reform in May 2007 at the second international business forum “Strategic Partnership 1520”. The holding company’s structure and principal changes made during 2007 are summarized in Section II (“General The updated brand is designed to position JSCo «Russian Information on the Open Joint Stock Company «Russian Railways» as a successful world provider of comprehensive Railways», subsection: “Holding-Company Structure”). transport and logistics services with the resources and advanced technologies to develop rail infrastructure both in In accordance with the plan of measures to realize the Pro- Russia and abroad. gram for the Structural Reform of Rail Transport in 2006- 2010, a Special-Purpose Model of the Rail Service Market The effort to create a strong market brand is an integral at the Third Stage of Reform was developed and approved part of a modern commercial structure. Brand plays a by the Government Commission for the Development of significant role in enhancing a company’s strategic efforts as Industry, Technology and Transport in May 2007. The model well as its marketing initiatives and measures to develop a clarifies the logic and progress of structural transforma- corporate culture. In addition to enhancing general effective- tions through 2010, describing the market’s structure at ness, a brand is itself an intangible asset that contributes to the end of the third stage, its key players and the basis for a company’s capitalization. cooperation among them as well as the principles of regulation. The need to develop unified packaging and to breathe new life into the JSCo «Russian Railways» brand has to do with A total of 47 subsidiaries and affiliates were established by the following key factors: the beginning of 2008 in the framework of the structural reform program. The creation of subsidiaries makes it pos- The Company lacked a corporate style as the basis for its sible to formulate a clear development strategy for each brand, which is an important element of the Company’s field of activity, create a new system of personnel motiva- development ideology in market conditions. tion and increase the holding company’s transparency. Annual Report 67 JSC «RZD» 2007

In 2007 structural reform of rail transport in Russia was Freight Car Repairs and a Railway Station Directorate have given a favorable assessment by experts of the Organization been set up, and a Central Directorate for Track Repair is for Economic Cooperation and Development, the European being formed. Directorate status gives subdivisions a great- Conference of Ministers of Transport and the President er degree of independence and responsibility for results as and Government of the Russian Federation. well as increasing the financial transparency of operations.

The following subsidiaries were created In 2007 by deci- In order to diversify the Company’s business, enhance in- sions of the board of directors of JSCo «Russian Railways»: teraction with other types of transport, broaden the range – First Freight Company, formed in accordance with the of services provided and generate additional cash flows in Special-Purpose Model of the Market as a rolling stock the course of corporate construction, JSCo «Russian Rail- operator with a charter capital of 85.6 billion rubles in ways» is considering the feasibility and effectiveness of cre- order to strengthen the market positions of JSCo «Rus- ating “initiative” subsidiaries and affiliates as well as buying sian Railways» First Freight Company (Pervaya Gruzovaya into the charter capital of companies already established. Companya) began its operating and financial activities as a rolling stock operator on October 26, 2007, engaging JSCo «Russian Railways» is thus continuing its efforts to in: buy into the charter capital of port complexes in order to 1. delivery of rolling stock for use by JSCo Russian enhance the interaction of rail and sea transport. The Com- Railways pany’s board of directors has approved the formation of a 2. rental of rolling stock to third parties management company to develop the Murmansk transport 3. operation of own rolling stock hub and acquire a 25% share in its charter capital. 4. shipping services – 7 subsidiaries based on assets of the Vagonremmash To develop intermodal passenger traffic, the Company’s directorate’s plants for major repairs and maintenance board of directors has approved the acquisition of a 50% of passenger cars and electric rolling stock with a total block of shares of Aeroexpress (JSCo), operator of a future of 5.2 billion rubles in charter capital investments. line to Sheremetyevo International Airport. – 2 subsidiaries in the sphere of science & research and experimental & constructional work, the All-Russian In 2007 JSCo «Russian Railways» acquired a blocking stake Railway Research Institute (JSCo) and the Automated in Transmashholding (CJSCo), a major Russian transport Systems Research Institute (JSCo), with charter capital machine-building company. This will enable JSCo «Russian of 3.2 billion rubles and 748 million rubles, respectively Railways» to cooperate more effectively with its main sup- (JSCo «Russian Railways» has a 75% interest in the Auto- plier, pave the way for long-term contracts, minimize stra- mated Systems Research Institute) tegic risks, improve opportunities for raising investments – Railway Commercial Company, with capital of over 8 bil- and create conditions for expanding operations and further lion rubles developing services. – Don-Prigorod Company for suburban passenger transport The Program for Structural Reform of Rail Transport and – Ust-Luga Port Transportation Company (JSCo) to provide the Special-Purpose Model of the Rail Service Market at the transportation services on rail approaches to the com- Third Stage of Reform involve raising private investments on mercial seaport of Ust-Luga a large scale by selling shares of Company subsidiaries. – Murmansk Hub Management Company (JSCo) to formulate a development strategy for the Murmansk transport In late 2007 the board of directors of JSCo «Russian hub, realize investment projects and implement modern Railways» approved the sale of shares in ten subsidiaries: logistical systems Transcontainer (JSCo), Remputmash plants in Abdulino, – RailTransAuto (JSCo) to consolidate freight traffic in the Vereschagino and Orenburg, Roszheldorproekt (JSCo), the auto and transport-vehicle sector with a charter capital Research Institute for Rail-Transport Technology, Control of 3.3 billion rubles (JSCo «Russian Railways» has a 51% and Diagnostics, Refservice (JSCo) and railcar repair plants interest). in Barnaul, Saransk and Roslavl. The reforms made it possible to step up efforts to put railway assets and land that In 2007 the board of directors of JSCo «Russian Railways» were unused or used inefficiently into circulation. Thus, in also approved the creation of 3 subsidiaries, including: the second half of 2007, construction is in progress on the – 2 companies involving foreign partners to organize Ulak–Elga section in Yakutia and the Company’s block of international transport: Eurasia Rail Logistics and Trans- shares in Elgaugol (JSCo) were sold for 14.2 billion rubles, Eurasia Logistics GmbH (see “International Operations”) and the development of a major coal deposit was accelerated – South Caucasus Railway to handle rail transport in Arme- as a result. The active utilization of Company real estate in nia development projects involving foreign investors has begun.

To prepare for the subsequent organizational separation In the last year, over 100 billion rubles in Company assets and creation of subsidiaries, a Central Directorate for have been involved in the process of corporate transforma- tion. Business 68 Priorities

Analysis of the operations of subsidiar- Charter capital was not fully formed due to the need to make ies and affiliates property rights official and, in certain cases, disaggregate fixed assets contributed to the Company’s charter capital. An analysis of the financial and business operations of Company subsidiaries in 2007 showed overall growth in The Company’s financial investments in companies in efficiency. which it holds a stake came to 41.8 billion rubles at the end of 2006 and 152.5 billion rubles based on the results In 2007 JSCo «Russian Railways» received 372.7 million of 2007. The growth of the Company’s financial invest- rubles in dividends on its settlement account for 2006. ments in such companies – up 264.8% from 2006 – has to Dividends of 500 million rubles are planned based on the do with the creation of major subsidiaries in 2007 based results of 2007. Planned dividends are calculated and on Company branches (See “Holding Structure”) and the included in the business plans of subsidiaries and affiliates formation of their charter capital. for 2008 based on the approved three-year financial plan of JSCo «Russian Railways». Thus, unconsolidated revenues in respect of subsidiaries and affiliates for 2007 totaled 179.7 billion rubles – up It should be noted, however, that under Russian law, 93.7 billion rubles, or 108%, from 2006. Net unconsolidat- charter capital must be paid in full before dividends can ed profit in 2007 was up 5.5 billion rubles, or 120.9%, from be paid to shareholders. As of March 1, 2008, the charter 2006 at 10.1 billion rubles. capital of the following subsidiaries and affiliates had not been fully formed: Total unconsolidated assets of subsidiaries and affiliates – JSCo Roszheldorstroy – charter capital 99.6% paid in 2007 grew by 434%, or 365.1 billion rubles, to a level of – JSCo Alatyr Mechanical Plant – charter capital 96.3% 449.1 billion rubles as of January 1, 2008. Net assets in paid 2007 increased by 515%, or 252.5 billion rubles, to 301.4 – JSCo Petukhovo Casting and Mechanical Plant – char- billion rubles as of December 31, 2007. Equity capital in ter capital 99.94% paid 2007 grew by 296.3%, or 145.9 billion rubles, to 195.2 bil- – JSCo Railway Commercial Company – charter capital lion rubles as of December 31, 2007. 99.4% paid – JSCo First Freight Company (Pervaya Gruzovaya Com- The significant growth in key financial indicators has to do panya) – charter capital 90.1% paid with the creation of new subsidiaries. Companies that were – JSCo All-Russian Railway Research Institute – charter established and began their business activities in 2007 and capital 97.2% paid companies whose shares were obtained by JSCo «Russian – JSCo Automated Systems Research Institute – char- Railways» in 2007 achieved the following indicators: ter capital 96.7% paid by JSCo «Russian Railways» – total assets – 341.3 billion rubles (JSCo «Russian Railways» has a 75% interest in the – net assets – 246.3 billion rubles Automated Systems Research Institute Management – equity capital – 140.3 billion rubles Company) – total revenues – 54.8 billion rubles – total unconsolidated net profit – 3.8 billion rubles.

List of subsidiaries and affiliates Companies in whose charter capital JSCo «Russian Railways» has an interest of at least 50% (Subsidiaries) No. Company Location Field of activity JSCo RR’s Charter Invested by Received/ Invested by share (%) capital JSCo RR as disposed JSCo RR as (RUR mln.) of January 1, (RUR mln.) of December 2007, (RUR 31, 2007, mln.) (RUR mln.)

1 CJSCo Regio-TeleCom DV Khabarovsk telecommunications 51 0.2 0.1 0.0 0.1

2 JSCo Altay-Prigorod Barnaul transport 51 0.1 0.1 0.0 0.1

3 JSCo Kuzbass-Prigorod Kemerovo transport 51 0.1 0.1 0.0 0.1

4 JSCo Omsk-Prigorod Omsk transport 51 0.1 0.1 0.0 0.1

5 JSCo Express Prigorod Novosibirsk transport 51 261.0 0.1 84.4 84.5

6 Oy Karelian Trans Helsinki transport 50 34.1 17.1 0.0 17.1 Annual Report 69 JSC «RZD» 2007

7 CJSCo Eurasia Intertrans Yuzhnosakhalinsk travel 51 0.2 0.1 0.0 0.1

8 JSCo Volgogradtransprigorod Volgograd transport 51 0.1 0.1 0.0 0.1

9 CJSCo Transkat St. Petersburg manufacturing 57 90.1 51.4 0.0 51.4

10 JSCo KRP-Invest Moscow Rolling stock repairs 100 14.5 14.5 0.0 14.5

11 CJSCo Locomotive Football Club Moscow sport 70 0.1 0.0 0.0 0.0 Finance and invest- 12 JSCo BAM-Invest Moscow ment 83 10.0 8.3 0.0 8.3

13 JSCo Arena-2000 Yaroslavl sport 100 2,101.2 2,100.1 0.0 2,100.1

14 CJSCo Zheldoripoteka Moscow Construction, realty 100 500.0 500.0 -0.1 499.9

15 CJSCo TransTeleCom Moscow telecommunications 100 2.0 434.2 -0.2 434.0 ORS St. Petersburg 16 Trading Company St. Petersburg commerce 100 5.5 5.5 -5.5 0.0

17 ООО Energopromsbyt Moscow manufacturing 51 0.0 0.0 0.0 0.0

18 CJSCo Russian Troika Vladivostok transport 50 472.0 236.0 -236.0 0.0 19 JSCo Sverdlov Suburban Company Yekaterinburg transport 51 0.1 0.1 0.0 0.1

20 JSCo Elteza Moscow manufacturing 100 2,368.9 2,365.3 3.6 2,368.9

21 JSCo Express Primorya Vladivostok transport 51 0.1 0.1 0.0 0.1

22 JSCo Krasprigorod Krasnoyarsk transport 51 0.1 0.1 0.0 0.1 23 JSCo Kaluga Plant (Remputmash) Kaluga manufacturing 100 2,330.6 2,209.3 121.3 2,330.6 24 JSCo Abdulino Plant (Remputmash) Abdulino manufacturing 100 161.7 153.1 8.6 161.7 25 JSCo Vereschagino Plant (Remputmash) Vereschagino manufacturing 100 259.8 233.7 26.1 259.8 26 JSCo Moscow Pilot Track Machine Plant (Remputmash) Moscow manufacturing 100 36.5 12.2 0.0 12.2 27 JSCo Orenburg Track Repair Plant (Remputmash) Orenburg manufacturing 100 48.8 45.5 3.3 48.8 28 JSCo Perm Motor Railcar Repair Plant (Remputmash) Perm manufacturing 100 410.8 401.1 9.7 410.8 29 JSCo Sverdlov Rail Repair and Engineering Plant (Remputmash) Yekaterinburg manufacturing 100 419.1 419.1 0.0 419.1 30 JSCo Меtаlworker-Remputmash Experimental Plant Kaliningrad manufacturing 100 480.8 480.8 0.0 480.8 31 JSCo Yaroslav Railcar Repair Plant (Remputmash) Yaroslavl manufacturing 100 385,3 348.2 37,1 385,3

32 JSCo Roszheldorproekt Moscow scientific production 100 1,366.5 1,366.5 0.0 1,366.5

33 JSCo Roszheldorstroy Moscow construction 100 10,162.7 10,162.7 0.0 10,162.7

34 JSCo Refservice Moscow manufacturing 100 3,491.5 3,491.5 0.0 3,491.5

35 JSCo TransContainer Moscow transport 100 13,894.8 13,894.8 0.0 13,894.8 JSCo Railway Technology, Control 36 and Diagnostics Research Institute Omsk scientific production 100 36.0 36.0 0.0 36.0 JSCo All-Russian Rolling Stock 37 Research and Design Institute Moscow scientific production 100 147.0 147.0 0.0 147.0 38 JSCo Saransk Railcar Repair Plant Saransk manufacturing 100 518.5 518.5 0.0 518.5 Business 70 Priorities

39 JSCo Barnaul Railcar Repair Plant Barnaul manufacturing 100 868.7 868.7 0.0 868.7 40 JSCo Roslavl Railcar Repair Plant Roslavl manufacturing 100 870.8 870.8 0.0 870.8 41 ООО St. Petersburg–Vitebsk PPK St. Petersburg manufacturing 74 0.1 0.1 0.0 0.1

42 JSCo High-Speed Mainlines Moscow transport 75 1.0 0.8 0.0 0.8 CJSCo Okhrana-RZD Private 43 Security Firm Moscow security 100 21.8 0.0 21.8 21.8

44 JSCo RailTransAuto Moscow transport 51 3,265.2 0.0 1,665.2 1,665.2

45 JSCo Vologda VRZ Vologda manufacturing 100 727.1 0.0 727.1 727.1

46 JSCo Vladikavkaz VRZ Vladikavkaz manufacturing 100 1,173.0 0.0 1,173.0 1,173.0

47 JSCo Moscow LRZ Moscow manufacturing 100 946.6 0.0 946.6 946.6

48 JSCo Petukhovo LMZ Petukhovsk manufacturing 100 285.5 0.0 285.5 285.5

49 JSCo Alatyr MZ Alatyr manufacturing 100 104.7 0.0 104.7 104.7

50 JSCo Krasnoyarsk EVRZ Krasnoyarsk manufacturing 100 1,430.5 0.0 1,430.5 1,430.5 JSCo Krasny Put Moscow 51 Machine Plant Moscow manufacturing 100 562.5 0.0 562.5 562.5

52 JSCo Pool Trans Moscow transport 50 100.0 0.0 50.0 50.0 JSCo All-Russian Railway 53 Research Institute Moscow science 100 3,191.5 0.0 3,191.5 3,191.5 JSCo Automated Systems 54 Research Institute Moscow science 75 749.0 0.0 561.7 561.7

55 JSCo First Freight Company Moscow transport 100 85,652.4 0.0 85,652.4 85,652.4 56 JSCo Railway Commercial Company Moscow commerce 100 8,077.3 0.0 8,077.3 8,077.3

57 JSCo TransCreditBank Moscow banking 75 7,930.4 0.0 5,947.8 5,947.8

58 JSCo Gudok Newspaper Moscow social 100 50.0 0.0 50.0 50.0 59 JSCo High-Speed Mainlines Moscow transport 87 0.0 0.0 0.0 0.0 60 JSCo Yakutia Railways Yakutsk transport 50 0.0 0.0 0.0 0.0

61 JSCo Don-Prigorod Rostov transport 74 0.1 0.0 0.1 0.1

Total 156,018.9 41,393.3 110,499.9 151,893.2

The most significant of the above companies are: – JSCo Kaluga Plant (Remputmash) – JSCo First Freight Company (Pervaya Gruzovaya Companya) – JSCo Arena-2000 – JSCo TransContainer – JSCo RailTransAuto – JSCo Roszheldorstroy – JSCo Krasnoyarsk Electric Rail Car Repair Plant – JSCo Railway Commercial Company – JSCo Roszheldorproekt – JSCo TransCreditBank – JSCo Vladikavkaz Railcar Repair Plant – JSCo Refservice – JSCo Moscow Locomotive Repair Plant – JSCo All-Russian Railway Research Institute – JSCo Roslavl Railcar Repair Plant – JSCo ELTEZA – JSCo Barnaul Railcar Repair Plant Annual Report 71 JSC «RZD» 2007

Affiliated companies of JSCo «Russian Railways» (charter-capital interest of from 20% to 50%)

No. Company Line of activity Type of invest- Invested as of De- Capital ment cember 31, 2007 share, % (mln. rubles)

1 CJSCo Railway Implementation Center (Chelyabinsk) manufacturing stocks 0.098 49

2 CJSCo October Railway Implementation Center manufacturing stocks 0.098 49

3 CJSCo Railway Implementation Center (Kaliningrad) manufacturing stocks 0.098 49

4 CJSCo Railway Implementation Center (Nizhny Novgorod) manufacturing stocks 0.098 49

5 CJSCo Railway Implementation Center (Voronezh) manufacturing stocks 0.098 49

6 CJSCo Railway Implementation Center (Samara) manufacturing stocks 0.098 49 CJSCo Railway Center for the Implementation of New Methods 7 and Technologies (Novosibirsk) manufacturing stocks 0.098 49

8 CJSCo Krasnoyarsk Railway Implementation Center manufacturing stocks 0.098 49

9 CJSCo Railway Implementation Center (Chita) manufacturing stocks 0.098 49

10 CJSCo Railway Implementation Center (Khabarovsk) manufacturing stocks 0.098 49 CJSCo Railway Center for the Implementation of New Methods 11 and Technologies (Yaroslavl) manufacturing stocks 0.098 49

12 CJSCo Kaliningrad-TransTeleCom investment stocks 0.999 49,95

13 CJSCo Transport Technologies science stocks 10 49

14 CJSCo TransTeleCom Center manufacturing stocks 0.999 49,95

15 CJSCo TransTeleCom-NN manufacturing stocks 0.999 49,9

16 CJSCo Southeast TransTeleCom manufacturing stocks 0.999 49,95

17 JSCo Central Passenger Company transport stocks 0.148 49,3

18 CJSCo TransTeleCom-Chita manufacturing stocks 0.999 49,95

19 CJSCo Caucasus-TransTeleCom manufacturing stocks 2 47,8

20 CJSCo Apsat Coalmining Company manufacturing stocks 0 48.6

21 CJSCo Rascom manufacturing stocks 7 46

22 CJSCo Oktransvneshterminal manufacturing stocks 0.025 45

23 JSCo Yamal Railway Company manufacturing stocks 5 45

24 CJSCo Industry Center for the Introduction of New Methods and Technologies science stocks 0.391 43.43

25 JSCo Magistral Railcar Design Center manufacturing stocks 0 40.45

26 CJSCo SamaraTransTeleCom manufacturing stocks 0.8 40

27 CJSCo SibTransTeleCom manufacturing stocks 0.122 40.67

28 CJSCo SakhalinTransTeleCom manufacturing stocks 0.798 39.9 Business 72 Priorities

29 CJSCo TransTeleCom-DV manufacturing stocks 0.798 39.9

30 JSCo Baikal Waters manufacturing stocks 0 34.9

31 CJSCo BaikalTransTeleCom manufacturing stocks 0.7 35

32 JSCo Trans-Baikal Mining Company manufacturing stocks 0 34.29

33 CJSCo Uraltrans Joint Venture* manufacturing stocks 0 33.33

34 CJSCo Southern Region TV Television and Radio Corporation social stocks 0 31.36

35 CJSCo Railway Implementation Center (Rostov-on-Don) manufacturing stocks 0.062 31 LLC Industry Center for the Development and Implementation 36 of Information Systems science доля 0.003 26

37 CJSCo Talgorus manufacturing stocks 0.52 26

38 CJSCo Yuzhural-TransTeleCom manufacturing stocks 0.5 25

39 CJSCo Moscow Railway Implementation Center manufacturing stocks 0.05 25

40 CJSCo Railway Implementation Center (Saratov) manufacturing stocks 0.1 25

41 CJSCo Railway Implementation Center (Irkutsk) manufacturing stocks 0.05 25

42 CJSCo Russian Troika transport stocks 236 25

43 CJSCo St. Petersburg Teleport manufacturing stocks 0.25 25.01

44 CJSCo SeverTransTeleCom manufacturing stocks 0.504 25.2

45 CJSCo VolgaTransTeleCom manufacturing stocks 0.15 25

46 CJSCo Ekza manufacturing stocks 0.371 24.73

47 CJSCo Ural Mobile Networks manufacturing stocks 0.144 25.1

48 CJSCo Zap-SibTransTeleCom manufacturing stocks 0.502 25.1

49 JSCo Caucasus Sea Ferry Service* manufacturing stocks 0 25

50 JSCo Zabaikalstalinvest Trans-Baikal Mining and Metallurgy Enterprise manufacturing stocks 100 25.1

51 CJSCo Translease Leasing Company finance stocks 0.375 25

52 CJSCo Central Information and Technical-Economic Research Institute-IS science stocks 0.012 24

53 CJSCo Trans-Baikal Railway Joint Stock Insurance Company* insurance stocks 0 22.19

54 LLC Southeast Express Editorial Office* manufacturing share interest 0 50

55 LLC Bombardier Transportation (Signal) science share interest 1 36

56 JSCo «Russian Railways» Trading House manufacturing stocks 2 19.9

Total ххх ххх 376 ххх Annual Report 73 JSC «RZD» 2007

Human Resources over 4,000 from the replacement reserve for top management positions in structural subdivisions. The Company’s human resource efforts in 2007 centered on realizing the Company’s personnel policy, as set forth in the 46 employees were retrained at the Academy of National functional strategy for the development of human resourc- Economy under the Government of the Russian Federation, es and the functional strategy for quality management. including 15 in the program Modern Problems of Corporate Management in Rail Transport: Building an Efficient Holding The main efforts of the human resources department and Company, 15 in Corporate Management in Rail Transport: human resources services and sections of railways, function- Building a Modern Logistics Company and 16 in Innovation- al branches and structural subdivisions were focused on: Based Development of JSCo «Russian Railways». – providing JSCo «Russian Railways» with professional staff in all lines of activity A group of 30 specialists in the Company’s administration – using employees more efficiently received training in the Company Risk-Management Sys- – motivating employees to work efficiently tem program and 25 managers in the Corporate Director – enhancing the training system for managers, special- program under the auspices of the State University–High- ists and employees in primary occupations er School of Economics. – preparation of a reserve of managerial personnel – working with youth as a primary source of new manag- To study the experience of foreign rail transport compa- ers and specialists nies, some 500 managers and specialists were trained abroad in 2007 (122 managers in 2006) (in the US, Ger- The staffing level for primary occupations in structural many, France, Spain, Sweden, Canada, Finland, the United subdivisions of the railways stood at 98.3% of the plan as Kingdom, China, Japan and South Korea). These included of January 1, 2008 (98.8% in 2006). There were 106,200 managers and specialists in the areas of locomotives, new hires in 2007 (106,600 in 2006), including 29,300 in railcars, labor protection and industrial safety, account- locomotive subdivisions (16,900 assistant engineers) and ing, finance, treasury, tracks, human resources and the 41,700 in track subdivisions, including 27,800 linemen. Federal Passenger Directorate.

Measures were taken to strengthen Company manage- Some 61,000 regular employees were trained (59,300 in ment: 5 railway directors and 3 first deputy directors 2006), and around 159,000 (160,800 in 2006) upgraded were named as well as 5 chief engineers, 30 deputy direc- their qualifications. tors, 80 service heads and 17 division heads. 430 managers and specialists were appointed by Company order. The training of locomotive crews was a major focus of attention. In connection with growing rail traffic, technical Staff turnover on the railways stood at 10.8% in 2007 – up schools, training centers and other educational institu- 2.7% from 2006. Turnover on the Kaliningrad, Moscow, tions trained 6,980 locomotive engineers and 5,139 assis- Northern, North Caucasus, Kuibyshev and Sverdlovsk rail- tant engineers – up 22% from 2006. ways considerably exceeds the network average. To train regular employees, new educational divisions Staff turnover was substantially higher in the railcar, were opened in 2007 on the West Siberian and Sverdlovsk track and transport areas. By primary occupation, turn- railways (a technical school in Omsk and a training center over was up among assistant engineers of electric and in Tyumen). diesel locomotives, linemen and railcar repair workers. To strengthen the material and technical facilities of New directions in 2007 included the following: railway technical schools and training centers, 691.6 – 254 Company managers received training in quality man- million rubles (600.0 million in 2006) in investments were agement (cascade level 1–3), 4,000 employees received utilized in 2007, including 118.6 million rubles to reequip training in corporate management, 3,000 in marketing the training labs of technical schools and training centers and 4,500 in information technologies; with modern equipment. – The Company expanded its cooperation with institutions of higher education: the Company sent 4 employ- By presidential decree, a new state medal “For Railway Devel- ees for training to the Plekhanov Economic Academy, opment" was created to mark the 170th anniversary of Rus- 8 to the State University of Management and 10 to St. sian rail transport and awarded to 325 Company employees. Petersburg State University. A group of 19 students was additionally formed at the Moscow State Institute By order of JSCo «Russian Railways», an anniversary pin for International Relations for training in “International “The Russian Railways Are 170” was created and awarded Transport and Logistics”. to over 4,500 employees.

72,100 managers and specialists (64,800 in 2006) received Over 11,800 Company employees and non-employees retraining and upgraded their qualifications, including (6,800 in 2006) received some sort of award, including: Business 74 Priorities

– 536 (220 in 2006) received state awards; ment regulating the Company’s social and labor relations. – 465 (355 in 2006) received awards from the Russian Ministry of Transport; The agreement plays a key role in ensuring the stable – over 10,800 (6,300 in 2006) received JSCo «Russian work of labor collectives, promotes effective industry Railways» awards, of which 310 (213 in 2006) received development and reform and constitutes the basis for col- the Company’s highest award – Honored Railway Worker lective agreements at Company branches. of JSCo «Russian Railways». In 2007 some 75 billion rubles were utilized in meeting obligations under the agreement (excluding subsidiaries and affiliates that have separated from the Company), includ- Social sphere ing 59.4 billion rubles on the railways.

The creation of favorable social conditions for employees The social package (including recreation in holiday centers is a key objective of the Company’s social development in and sanatoriums, health care and other social guarantees) contemporary conditions. averages 34,900 rubles per employee per year and 6,400 rubles per non-working retiree. In 2007 social services provided by JSCo «Russian Rail- ways» included: Company employees and retirees are provided with medi- – 270 non-state health-care facilities cal care, including a corporate system of voluntary medi- – 323 non-state educational institutions (preschools, cal insurance, sanatorium and resort treatment, preferen- boarding schools, general-education schools); tial prices for household fuel, one-time rail passes for free – 888 social facilities (cultural and sports facilities, chil- travel in passenger compartments and an annual pass for dren’s recreation camps, children’s railways, sanatorium- suburban trains. dispensaries, holiday and tourist centers, public ameni- ties). Pursuant to a decision of the Company’s board of directors, the All-Russian Industry Association of Railway Em- Losses from social services came to 3.2 billion rubles – ployers was formed in June 2007. With the involvement of 3.4% below the level of 2006. the Russian Union of Railworkers, an industry agreement of railway employers was prepared and approved by the To reduce the financial burden on the Company, the possi- Company’s management board. The agreement will make it bility of selling, renting, reorganizing or writing off certain possible to establish general principles for the regulation social facilities or turning them into municipal property is of social and labor relations at railway enterprises, tak- being considered. ing into account the economic potential and specifics of economic relations in constituent entities of the Russian At the same time, it is essential to retain social facilities Federation. in regions where railway companies form the core of the local economy, since the loss of such facilities would lead A number of documents of social nature were signed regu- to an increase in social service costs. lating the operations of subsidiaries and affiliates.

One key objective of the Company’s development strategy Under the collective agreement for 2008-2010, the is the transition from financing individual social facilities Company is to provide employees of subsidiaries and af- to financing industry orders in order to reduce losses, im- filiates that it creates with social guarantees of at least prove cost recovery and stimulate the facilities’ own com- the amount stipulated by the collective agreement for a mercial activities. For these purposes, social income and period of one year after the charter capital is formed. expense budgets for 2008 envisage loss-free operations of Subsequently, each subsidiary’s social payments should be health-care and children’s recreation facilities. made in accordance with its performance.

So that social facilities will be better able to pay for them- selves, it is planned to expand the list and increase the Housing program quantity of paid services provided to outside organizations and individuals and to bring the cost of services into line The Company is promoting a housing policy designed to with the expenses involved in providing them. consolidate personnel and improve housing conditions – above all, for young employees and members of their families. Development of the social sphere In 2007 Company employees were granted subsidized The Company’s collective agreement – first concluded with mortgage loans of 6.6 billion rubles, improving housing the industry trade union in 2005 in connection with the conditions for some 5,800 families of railworkers – up 30% formation of JSCo «Russian Railways» – is a legal docu- from the level of 2006 and 2.5 times higher than in 2005. Annual Report 75 JSC «RZD» 2007

In addition, some 200 young families received approxi- In 2007 over 122,000 Company employees, members of mately 43 million rubles in corporate support for partial their families and non-working retirees vacationed and repayment of mortgage loans in connection with the birth received courses of treatment. of children. In allocating sanatorium and resort vacations, special Ninety families of employees with three or more minor consideration is given to employees directly responsible children were granted non-repayable subsidies of 66 for railway traffic safety. million rubles to cover up to 70% of the cost of housing purchases. Youth policy

Health care The effectiveness of the Company’s operations and management is a factor, above all, of its human potential, JSCo «Russian Railways» has an effective system of health timely reorganization and innovation. International prac- and medical care for employees and their families, offer- tice shows that young employees are the most consistent ing a full range of medical services, including a system of source of initiative in reorganization, retooling and the mandatory and voluntary health insurance. introduction of new methods.

Special attention is given to medical care for employ- In 2006 the Company adopted the JSCo «Russian Rail- ees and retirees living at remote stations and branch ways» Young Employees target program (2006-2010) to lines. For these purposes, three mobile consultation and create conditions in which young employees can achieve diagnostic facilities were created (honored in 2006 with a and benefit from the best traditions of professional special government award) as well as medical railcars that development and patriotic and moral education. The today service over 4 million patients in 63 regions. program's conceptual foundation is a solution involving greater personal competitiveness among young employ- In 2007 automated systems for pre-run medical screening ees. Young employees should account for 25% of Company of locomotive crews were introduced on all railways. The employees by 2010, and they should be 20% more satis- purpose of such systems is to identify crew members who fied with their socioeconomic position in the Company, present a health risk. while maintaining an average 5-7% rate of growth in labor productivity. In cooperation with the administration of Krasnoyarsk Territory, the mobile Doctor Voino-Yasenetsky–St. Luke Company branches do important work in selecting prom- Consultation and Diagnostic Center was set up. A similar ising young people with leadership qualities and con- project is currently being developed with the administra- tributing to their development. In 2007 JSCo «Russian tion of Sverdlovsk Region. Railways» held over 30 major youth events throughout the country. A Center for Cardiac and Arterial Surgery was opened at the North Caucasus Railway Clinical Hospital (Rostov-on-Don). A key event, capping the Company’s work in this direction The center is to handle up to 700 heart operations each for the year, was the Russian Railways Youth Forum, held year. In addition to railworkers, residents of the Southern in Moscow from September 27 through October 1, 2007. Federal District will receive medical treatment there as well. The Moscow forum has become a venue for stimulating young employees. The forum included presentations of At Central Hospital No. 4 in Ruza District, Moscow Region, specific projects specially developed by young employ- a rehabilitation center was opened – a treatment facility ees to be used in achieving the Company’s goals. Forum fundamentally new to Russia. The center is designed to participants saw that the Company’s youth policy is not restore employees’ health by means of physical therapy. just pretty words and long pages of reports, but real work that they can enter into and excel. In 2007, medical facilities were supplied with equipment for medical examination boards, rehabilitation centers, The most popular youth program is Housing for Young psychophysical centers on railways and diagnostic equip- Employees (84.07%) as well as Healthy Lifestyle (83.27%), ment. In addition, such high-tech innovative equipment as Young Family (82.47%), Young Employee Health (78.13%), MR scanners, angiographic complexes and CT scanners Young Employee Professionalism (75.47%) and Enhanced were acquired. Cooperation with Educational Institutions (71.33%).

Sanatorium and resort treatment, rehabilitation and Children’s railways are the primary facilities used in system- treatment for Company employees, members of their fami- atic occupational work with the adolescent age category. lies and non-working retirees take place at industry health centers, including 16 central sanatoriums and 62 railway Today the JSCo «Russian Railways» system includes 24 sanatorium-dispensaries. children’s railways. Business 76 Priorities

To ensure the efficient operation of children’s railways, a operated in 2007 in accordance with the charity plan ap- draft Concept for the Development of Children’s Railways proved by the Company’s management board. has been developed. A total of over 1,600 requests made by individuals and In 2007, a children’s railway was built and put into opera- organizations for financial assistance were considered at tion in Kazan with the participation of the Republic of committee sessions. Tatarstan. At the initiative of Aman Tuleyev, Governor of Kemerovo Region, construction has begun on a children’s Based on the committees’ decisions, a total of 325 million railway in Kemerovo. rubles in financial assistance was provided in 2007 to over 800 individuals and more than 500 organizations. An international exhibition of the technical achievements of young railworkers, in which graduates of all children’s A key principal of the committees' work is a comprehen- railways took part. Exhibition participants were awarded sive evaluation of requests and the search for optimal diplomas of the President of JSCo «Russian Railways». means of satisfying them.

For the children’s category, a transition is being made When a charitable (sponsored) contribution could enhance to new learning programs involving additional education the Company’s image, the involved subdivisions concluded and the use of up-to-date methods and technologies in agreements with the recipients of charitable (sponsored) organizing children’s recreation. The Rails of the Future assistance for advertising services and publicity. Children’s Camp on Russia’s Black Sea Coast has become the model used in developing standards for corporate The Company’s financing of professional sports teams children’s camps and a methodology of children’s treat- stimulates the development of sport among railworkers ment and recreation to be applied to all of the Company’s and their families as well as promoting a healthy lifestyle. camps. This is the start of a major effort to systematize existing programs and create new programs for educa- The Company’s support for sports enabled it to play an ac- tional and occupational work with children. tive role in governmential social programs on both federal and regional levels. This in turn contributed to a positive Over 97,500 children of Company employees were treated public opinion of the Company’s operations. By financ- this year in the Mother and Child Program, and over 14,000 ing professional athletic clubs in 2007, JSCo «Russian vacationed and recuperated on the Black Sea coast. Railways» also supported children’s sports, inasmuch as these clubs sponsor physical education schools attended by railworkers’ children. Veterans’ benefits Professional clubs financed by JSCo «Russian Railways» Upon retirement, employees are paid a monthly award for have achieved good results in both Russian and interna- conscientious work. tional arenas. Advertising campaigns involving these clubs during Russian, European and world championships enable Over 560,000 veterans receive monthly material assis- JSCo «Russian Railways» to position itself as a socially tance through the Honor Charitable Fund. More than oriented company, enhancing its prestige and image. 147,500 non-working veterans receive non-state pensions averaging 1,803 rubles through the Well-Being Pension According to the approved plan, financing for athletic Fund. In 2007 over 25,000 workers arranged to receive clubs totaled over 2,080.5 million rubles. With the Com- such pensions. pany’s financial support, Lokomotiv Football Club held the Locoball 2007–Russian Railways Children’s Football Fes- Special attention is given to railworkers who are veterans tival, and the basketball club held the Lokomotiv School of the Great Patriotic War and those who labored in the League Competition. rear. Over 180,000 veterans receive additional material assistance each year in honor of Victory Day. In 2007, 45 million rubles went toward the financing of the Lokomotiv Physical Education and Athletic Society. 38.0 million rubles were spent on athletic instruction at Sponsored and charitable activities higher educational institutions and railway technical col- leges. In 2007 JSCo «Russian Railways» continued its charitable activities, further enhancing its image as a socially re- Agreements were signed with athletic clubs allowing JSCo sponsible company. «Russian Railways» to oversee the utilization of funds.

The Company’s committee for requests by social, religious The Company strongly emphasizes physical education and and other organizations and the committee for requests sport. Today, the Company’s sports facilities accommodate for individuals’ personal needs (hereinafter, “committees”) some 45,000 employees and family members, over 2,000 Annual Report 77 JSC «RZD» 2007

athletic groups and 50 different sports. Over 3,000 mass operators’ training and technical documentation. It should sports events were held, involving some 200,000 partici- show the overall extent of the risk for a certain railway pants. In 2007 Russian railworkers took first place in the region, thereby combining the said strategy with risk general ranking of the Railworkers’ International Sports management strategy. Union (USIC). The Strategy envisages the establishment of a situation center as the basic management instrument in the system Transportation Safety of ensuring safety.

Passenger and freight transportation safety is among the Its basic objectives are: most important objectives of JSCo «Russian Railways». – prediction and calculation of risks and the determination of the places of their occurrence on the basis The following occurred in 2007: of the information on the condition of the technical – 4 cases of freight car crashes (when performing shunt- resources and the modeling methods; ing operations); – preparation of recommendations for the timely adop- – 71 cases when trains ran off the rails; tion of preventive control decisions to reduce risks – 21 cases when trains passed the red light signal. arising from safety transportation violations; – effective management when organizing work in elimi- However, the Company’s radical measures substantially nating destabilizing factors as well as the after-effects improved transportation safety, e.g. of crisis situations and accidents. 1) total number of railway defects decreased by 3% in 2007 against the figure for 2006. This strategy of ensuring guaranteed safety and reliability 2) the relative number of defects per billion kilometer tons of transportation corresponds to the indicators of the of work performed and presented was reduced by 12%. general “Strategy of Development of Railway Transporta- tion in Russia up to 2030”, among which is traffic safety. Compared to the 2006 figures, transportation safety violations were reduced by: The Company goes to great lengths to stimulate railway – 43% when automatic rolling-stock couplers burst; employees who directly ensure traffic safety. In 2007, 173 – 26% when trains ran off the tracks during shunting employees who are directly responsible for transportation operations; were awarded the badge “For Traffic Safety” for their big – 23% when cars were disconnected from passenger contribution to the prevention of railway accidents and trains as they were running; for particular vigilance in precluding traffic safety viola- – 11% when the green light signal changed to the red tions which could have led to severe consequences. Last light signal in the course of passage. year, 172,500 employees of the Company were awarded a total amount of 2.0 billion rubles for ensuring the safety To reduce railway traffic safety violations, JSCo «Russian of work in 2006. According to the results of work in 2007, Railways» took radical operational, tactical and strategic 164,600 employees were awarded as much as 3.0 billion steps. rubles for those purposes. These outlays stimulate safety.

The fulfillment of the Plan for Enhancing Transportation Several norms were worked out, including those for Safety in JSCo «Russian Railways» was among the key fac- cooperation between the railways and the branch offices, tors of making transportation safer. In four years, JSCo on the issues of railway traffic safety in connection with «Russian Railways» invested more than 21 billion rubles, in- the structural reforms concerning train car facilities and cluding 7.22 billion rubles in 2007, in implementing the Plan. long-distance passenger trains and the establishment of the Central Management Office for Freight Car Repairs and the In May 2007, the Company approved the functional strat- Federal Passenger Management Office. The steps taken by egy of ensuring the guaranteed safety and reliability of the Company at this stage allow control over these branches transportation, which is among the 16 functional strate- to be maintained and their functional safety to be ensured. gies of JSCo «Russian Railways». This strategy is among the general directions of our Company’s activity that are Certain work is being done in the Company within the determined by the Strategic Program for the Development legislative framework to establish subsidiaries and affili- of JSCo «Russian Railways». ates.

The strategy should be a document on the basis of which The Regulation for Cooperation between JSCo «Russian our Company's policy will be formed and followed in mak- Railways» and Subsidiaries and Affiliates on Train Traf- ing transportation safe. fic Safety was worked out and put into effect in October 2007. It determines the procedure of cooperation, the The functional strategy envisages a comprehensive analy- maintenance of a unified norm-related legal sphere and sis of the current condition of technical resources, the traffic safety, and warnings of transportation accidents Business 78 Priorities

and events at the infrastructural units of JSCo «Russian Safety in operation Railways». The reports of the regional security centers indicate that in On September 3, 2007, JSCo «Russian Railways» and the 2007 there were 1,941 instances of unlawful intervention in Federal Service for Transportation Oversight entered into railway transport operations, being 104 instances (or 5.3%) an agreement on cooperation in making railway traffic more than in 2006, but 246 instances (or 11.2%) less than safety more effective. in 2005. A favorable fact is that the anonymous calls of a threat of a terrorist act and instances of detection of explo- The agreement envisages the development of data ex- sives decreased in 2007. change by using modern information systems, scientific methodological and advisory explanatory work in the However, such unlawful actions as the dismantling of tracks sphere of traffic safety, licensing and certification on rail and placing of foreign objects on them, and unlawful actions transport, participation in developing and considering taken in relation to railway transport workers increased in the drafts of legislative and other norm-related legal and 2007. technical acts, and the organization of joint investigations of railway accidents. The following data describes the operating situation on the railways of Russia: The agreement promoted the elaboration of norm-related acts in the sphere of traffic safety.

Statistical data on unlawful intervention in railway traffic in 2005 - 2007

No. Unlawful actions In 2005 In 2006 In 2007

1. Recorded acts of unlawful intervention, total: 2,187 1,837 1,941

1.1 - explosions 8 2 3

1.1.1 - fatalities/ injured 1/11 - 1/0

1.2 - explosions prevented 7 8 1

1.3 - shooting 2 8 4

1.4 - dismantling tracks 142 88 159

1.5 - placing objects on tracks 623 608 714

1.6 - threat of an explosion of a railway unit 2 1 6

1.7 - detection of suspicious objects 878 595 567

1.8 - detection of radioactive and poisonous substances 2 4 14

1.9 - detection of explosives, arms and ammunition 236 289 261

2.0 - unlawful actions taken in relation to a railway transport worker 31 28 57

2.1 - picketing a railway and stopping trains 2 1 2

2.2 - anonymous calls of a threat of a terrorist act 256 205 153

Labor protection expenses of JSCo «Russian Railways» Labor Safety averaged 6,400 rubles per worker, and that of the whole railway network, 6,600 rubles per worker (in 2006, 5,800 The labor safety management system has been formed rubles per worker). down the years in railway transportation. It is part of the Company’s management system, ensuring a comprehensive Mandatory social insurance against accidents at work approach and a unified procedure for organizing labor and occupational illnesses is an important aspect of the protection at all levels. economic mechanism of making the management of labor protection more effective. In 2007, JSCo «Russian Railways» spent a total of 7.6 billion rubles on labor protection measures, including 2.3 bil- The social insurance fund was used to finance comprehen- lion rubles on special clothing, special footwear and other sive medical examinations of employees in the amount of means of protecting an individual. 223 million rubles. Annual Report 79 JSC «RZD» 2007

The Company also continued to implement the Plan for Im- workplaces with eliminable harmful factors into confor- proving Conditions and Protecting Labor for 2005 – 2007. mity with the requirements of the norms for 2008 – 2010. The Plan has the following sections: 1. Measures to reduce occupational injuries. The effect of hazardous or harmful production factors at 2. Measures to reduce occupational illnesses by improv- the workplaces can be substantially reduced by using the ing working conditions. means for individual protection. In 2007, 2.3 billion rubles 3. Improvement of hygienic conditions. were spent on acquiring special clothing, special footwear and other means for individual protection. The Company In 3 years, 5.1 billion rubles were spent on the measures adheres to its Regulations for providing employees of the envisaged by the Plan, including 1.5 billion rubles from railway office branches of JSCo «Russian Railways» with centralized investments. the means for individual protection at all levels, including the trade unions. In 2007, the new Standard Rules for In 2007, more than 700 WCs were built, reconstructed the Free Provision of Certified Special Clothing, Special and repaired, and 5,800 heated places and dining halls Footwear and Other Means of Individual Protection to were equipped. In addition, 1,100 locomotive drivers’ the Employees of Railways of the Russian Federation were compartments were fitted out with more durable glass, drafted. and roughly a thousand drivers' compartments, with non-vibrating driver's seats. More than 240 air cleaning Professional training and explanatory work concerning la- devices, about 200 sets of thermal screens, 103 indus- bor protection are among the preventive measures intend- trial washing machines and 59 dry-cleaning machines ed to reduce occupational injuries. Last year alone, over for special clothing were supplied, and about 1,200 sets 13,000 executives and specialists from railway offices and of technical Labor Safety devices against electric shock other branch offices underwent labor protection train- and for electrification, electricity provision, automatic ing in training centers. Model Curricula and Programs equipment, telecommunication equipment, communica- for Training the Employees of JSCo «Russian Railways» in tions and computers were acquired. To improve the work Relation to Labor Protection, which establish the require- in training employees on labor protection matters, 69 ments for the level of knowledge of each category of em- automatic training examination sets for labor protection ployees and executives, were developed and approved with and 257 training sets for giving first aid to victims were a view to providing labor protection training. supplied. Currently, roughly 200 norm-related and organizational- Although the Company spends considerable resources on methodological documents concerning labor protection the railway employees’ safety, injuries are unavoidable. are applied in the Company. However, the number of injured persons was reduced by 1% in 2007 against the 2006 figure due to the systematic “Labor Protection Train Cars”, which are supplied with work done by JSCo «Russian Railways». The main types of modern automatic training equipment, play an important fatal accidents were when railway employees were hit by role in training the employees of JSCo «Russian Railways» a running train, received an electric shock, fell off, or got and checking their labor protection knowledge. Currently, into a railway accident. all railways have such cars, which run according to the schedules approved by the chief railway engineers for In the Company, work is being done to reduce the above work at the railway line stations and remote areas. risks. Alarm systems are being established to warn the teams working on railway tracks that a train is coming, The Management Office carries on work in improving and and new know-how is being developed to repair and main- implementing the new forms of training by using data tain the railways and the electric supply devices. The pro- systems, modern training equipment and multimedia ap- jected norms concerning the free supply of the means for plications. protecting an individual include protective suits against the thermal influence of an electric arc, an electric cur- Information on labor protection in the Company is regular- rent, etc. ly published in Russia-wide periodicals and in regional and local publications. An inspection of workplaces to check working conditions is among the most important aspects of the work in improving working conditions and preventing occupational Environmental injuries and occupational illnesses. In 5 years, 520,000 railway workplaces were inspected. To plan the work in Protection inspecting workplaces and in bringing them into conformity with the labor protection requirements, the railway In JSCo «Russian Railways», environmental protection activ- offices and the Management Offices of JSCo «Russian ity is being carried on in accordance with the environmental Railways» approved the schedules for inspecting work- protection legislation of the Russian Federation and the places for 2008 – 2012 and the schedules for bringing the department environmental programs. Business 80 Priorities

The environmental policy of JSCo «Russian Railways» is and constituted 16.1 million cubic meters; aimed at forming a general strategy and principles of ensur- – use of water for technical requirements was cut by 6,300 ing the environmental safety of the commercial activities cubic meters and came to 80.9 million cubic meters; carried on by the branches of JSCo «Russian Railways». – 850,500 tons of waste out of the 2.7 million tons of production and consumer wastes formed were used and The environmental policy of JSCo «Russian Railways» is rendered harmless. based on the following: 1. use of effective resource-saving and environmentally safe Production environmental laboratories on railways are know-how and environmentally safe materials; important in ensuring environmental safety and complying 2. enhancement of environmental safety, the investment with environmental protection legislation concerning the appeal and competitiveness of JSCo «Russian Railways» organization of production environmental control. versus other types of transport vehicles by: – reducing the discharge of noxious One of the main objectives of these laboratories is to inform substances into the atmosphere; the structural subdivisions of railway offices of the actual – reducing the discharge of contaminated sewage effect of their commercial activity on the environment so into surface water expanses; that preventive measures can be taken in time to reduce the – reducing the amount of the production wastes- technogenic burden on the environment. formed; 3. rational use of natural resources; In 2007, discharges of contaminants into the atmosphere 4. reduction of the risk of accidents in technological and water expanses as well as soil contamination were con- production processes and when transporting hazardous trolled by: freight and storing it in warehouses; – stationary units, i.e. 56 environmental laboratories, 5. greater effectiveness when eliminating the environmen- including 8 train car laboratories with a set of analytical tal consequences of accidents; equipment on them and 31 motor car laboratories; 6. stringent environmental demands made on the rolling – mobile units (diesel locomotives), i.e. 121 environnemen- stock, fuel, and the transportation infrastructure; tal control units. After engine repairs, all the diesel 7. taking account of environmental factors when adopting locomotives were necessarily tested at their sites for management decisions; environmental purposes. At the motor vehicle junctions, 8. ensuring production environmental control; the discharges of noxious substances by motor vehicles 9. taking preventive steps to make the operation of the are controlled at the environmental control units. environmental protection equipment more effective, thereby precluding excessive atmospheric pollution; In 2007, the environmental railway laboratories made 10. use of standards of the series GOST (All-Union standard) 309,800 analyses of the air, sewage and soil; 32,000 sources R ISO 14000 in managing environmental-protection ac- of discharges of noxious substances into the atmosphere tivities of JSCo «Russian Railways». were inventoried, 1,116 volumes of norm-related environmental documentation were worked out, and 3,668 permits In recent years, the transportation of freight and passen- for discharges of noxious substances into the atmosphere gers has grown, while the amounts of discharges of pollut- and the placement of wastes were extended at the environ- ants into the atmosphere and the load on the environment mental protection bodies. have been steadily reduced. When contaminant discharges into the atmosphere were in- For instance, the discharge of noxious substances from strumentally measured, it became clear that the discharges stationary units into the atmosphere, the discharge of con- at some units did not conform (being less) to the established taminated sewage into the surface water expanses, and the limits, and therefore, by adjusting the environmental bills use of water for production purposes per unit of transport issued by the territorial bodies of the Federal Service for operations are being reduced by 9-15% annually. Environmental, Technological and Nuclear Oversight, the environmental payments were cut by 110.512 million rubles, That is ensured first and foremost by introducing sectoral and payment for the actual discharges was to be made. environmental programs and projects and by technical re- equipment. In 2007, the following was performed on the basis of the investment project "Ensuring Environmental Safety": The effect of the industry on the environment in 2007 versus – 13 environmental protection units were built, recon- 2006 is described by the following basic parameters: structed and put into operation. 141 units for the – discharges of noxious substances into the atmosphere purification of discharges of noxious substances into the were reduced by 12,500 tons and amounted to 145,100 atmosphere, additional purification of sewage and the tons; rendering of wastes harmless were put into operation. – discharges of contaminated sewage into the surface As a result, the discharge of contaminated sewage will be water expanses were reduced by 2.6 million cubic meters reduced by 0.87 million cubic meters and that of noxious Annual Report 81 JSC «RZD» 2007

substances into the atmosphere, by 1,300 tons, while 31,400 tons of production wastes will be rendered harmless in 2008; – 11 mobile environmental laboratories on the basis of the Gazel motor cars and 2 train car laboratories were supplied to the railways to ensure production environmental control and prompt visits to the places of extraordinary situations. Stationary environmental laboratories received 16 sets of special laboratory furniture and 273 units of analytical devices and measurement instru- ments; – 389 units of equipment (vacuum oil collectors on a motor vehicle or trailer, skimmers, blocking booms and tanks) were supplied to the railways to eliminate the accidental spillages of oil products.

Although the discharges of noxious substances into the environment are being steadily reduced as a result of environmental protection measures, many issues are yet to be resolved: only 31% of the contaminants discharged into the atmosphere are trapped and rendered harmless, 32% of the sewage is purified at installations, and 29% of the wastes are rendered harmless and used in technical processes.

The measures taken are not enough if account is taken of the more stringent demands made by the environmental protection bodies and if the technogenic effect on the environment is to be minimized and excessive environmental payments are to be reduced. It is necessary further to improve and develop the system of managing environmental protection activity in JSCo «Russian Railways» in respect of the structural transformations being made, and to increase the financial amounts used to carry out environmental protection measures. Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Financial and economic results (Board of Directors report) Annual Report 83 JSC «RZD» 2007

The Company's  The Company reconfirmed its credit rating, which is the financial and economic highest attainable in the Russian Federation.  The Board of Directors of JSCo «Russian Railways» ap- achievements proved the establishment of 17 subsidiaries and associates, among them the First Freight Company, which was  Russia's favorable economic environment, which gave incorporated with a charter capital of RUR 85.7 bln. rise to a positive trend in freight transportation volumes, ensured profitability of JSCo «Russian Railways» opera-  In 2007, the net unconsolidated income of subsidiaries tions (profitability in 2007 was 8.7%). and associates grew by RUR 5.5 bln compared to 2006 (more than a two-fold increase) and reached RUR 10.1  In 2007 the railways handled altogether 1,344.2 mln tons bln. of freight – 33.8 mln tons or 2.6% more than in 2006.  Due to systematic efforts aimed at reducing losses from  The positive dynamics in freight forward tonnage secured maintaining the social sphere, such losses decreased in a growth in freight turnover. In 2007, overall freight 2007 by RUR 0.1 bln as compared to 2006. turnover reached 2,312.6 bln ton-km, a 7.7% increase as compared to 2006.  The JSCo «Russian Railways» 2006 Annual Report was acknowledged to be one of the best along with 30 other  In 2007, the volume of passenger traffic was on the level annual reports in Russia. of 174.1 bln passenger-km (97,9% year-on-year), including: long-distance service – 128.1 bln passenger-km (102.5%),  5700 mortgage loans were issued in 2007 under the suburban service - 46.0 bln passenger-km (87.0%). The de- corporate support program. crease in the number of passengers carried in 2007 was due to the change in the procedure of granting reductions on suburban passengers to entitled categories of citizens (see income from passenger transportation).

 The railway tariff growth index (108%) was in general lower than the price growth index (113.9%). Against the background of increasing goods prices, the railways' tariff policy contributed to lowering the transport component for the main categories of cargoes forwarded.

 Revenue from freight transportation in 2007 was 754.9 bln, which is 96.9 bln or 14.7% more than in 2006.

 As a result of optimizing terms of settlement and the cash flow management system, the financial cycle (turnover) was reduced by 4 days.

 Based on instruction of the Government of the Russian Federation No. 640-r of May 21, 2007, the procedure of separate accounting for income, expenses and financial results by activities, tariff components was developed and approved by the Ministry of Transport of the Russian Federation Order No. 124 dated August 17, 2007.

 The concept of separate accounting served as a basis for adopting a decision on the governmental level to compensate losses from long-distance passenger transportation in the amount of 10.9 bln. Financial and economic results 84 (Board of Directors report)

Financial results The Company's net profit for 2007 was RUR 84.5 bln, showing a RUR 58.1 bln growth compared to 2006.

Indicator UOM 2006 Report 2007 % Report of % Report of BoD Plan Report plan 2006 indicator Passenger turnover bln passenger-km 177.8 178.5 174.1 97.5 97.9

Freight turnover bln ton-km 2148.0 2266.1 2312.6 102.1 107.7

Combined turnover bln combined ton-km 2325.8 2444.6 2486.7 101.7 106.9

Total revenue RUR bln 848.9 957.7 975.6 101.9 114.9

Total revenue from transportation RUR bln 772.0 877.1 884.4 100.8 114.6

- Passenger transportation RUR bln 114.0 128.3 129.5 100.9 113.6

of them long-distance RUR bln 92.0 109.9 109.4 99.5 118.9

suburban RUR bln 22.0 18.4 20.1 109.1 91.4

- Freight transportation RUR bln 658.0 748.8 754.9 100.8 114.7

Revenue from other types of activities RUR bln 76.9 80.6 91.2 113.2 118.6

Total expenses RUR bln 778.2 895.1 899.0 100.4 115.5

Transportation expenses RUR bln 709.8 822.7 819.4 99.6 115.4

- Passenger transportation RUR bln 157.1 183.9 180.0 97.9 114.6

of them long-distance RUR bln 113.2 133.8 132.2 98.8 116.8

suburban RUR bln 43.9 50.1 47.8 95.4 108.9

- Freight transportation RUR bln 552.7 638.8 639.4 100.1 115.7

Expenses related to other types of activities RUR bln 68.3 72.5 79.6 109.9 116.5

Total operating profit RUR bln 70.8 62.6 76.6 122.4 108.2

Profit from transportation RUR bln 62.2 54.5 65.0 119.4 104.5

- Passenger transportation RUR bln -43.1 -55.6 -50.5 90.8 117.2

of them long-distance RUR bln -21.2 -23.9 -22.8 95.2 107.5

suburban RUR bln -21.9 -31.7 -27.7 87.5 126.5

- Freight transportation RUR bln 105.3 110.1 115.5 104.9 109.7

Profit from other types of activities RUR bln 8.6 8.1 11.6 142.8 134.9

Transportation cost kop. per 10 km 305.22 336.52 329.50 97.9 108.0

Result from other and extraordinary operations RUR bln -11.6 48.7 52.4 107.6 -451.7

Profit before tax RUR bln 59.2 111.2 129.0 115.9 217.9

Net profit RUR bln 26.4 76.0 84.5 111.2 319.9

Key macroeconomic factors

The following key macroeconomic factors affect the financial chased, services acquired, provision of infrastructure result of the Company: services, repair and maintenance of rolling stock, etc., – Tariffs level for all types of transportation, which deter- which determine the Company's expenses; mine the Company's revenues; – Taxation. – Prices for raw materials and other similar assets pur- Annual Report 85 JSC «RZD» 2007

Tariff system – from third countries to third countries by transit via railways of the CIS member states Tariffs for freight transportation services on domestic and – from (to) CIS member-state(s) and the Estonian Repub- international routes (excluding transit). lic to (from) (a) third country (countries) – in-between rail terminals of the CIS member-states Freight railway transportation is a natural monopolistic type of activity and is subject to government regulation Tariff rates are set on the basis of the International Rail according to the Federal Law "On Natural Monopolies". Transit Tariff (ITT) and Unified Transit Tariff (UTT) denomi- Based on this Law, government bodies in charge of regu- nated in Swiss francs, except for tariffs for transit con- lating natural monopolies determine (fix) prices (tariffs) or tainer freight traffic that are denominated in US dollars. their maximum level. The federal executive body currently in charge of regulating tariffs for freight transportation In coordinating the tariff policy for the next freight year, services on domestic and international routes (excluding amendments related to the following are introduced: transit) is the Federal Tariff Service, whose statute was – changes in international freight tariffs ITT and UTT; adopted by Decree No. 332 of the Russian Government – changes in the regulatory framework; dated June 30, 2004. – changes in the tariff level.

Freight tariffs on Russian railways on domestic and inter- The charges for traffic to/from China, Vietnam, the Demo- national routes (excluding transit) are regulated by Tariff cratic People's Republic of Korea and Mongolia are de- Regulation No. 1 (Statutory Price List No. 10-01) "Tariffs fined in accordance with UTT rules and take into account for Freight Transportation and Infrastructure Services the CIS tariff policy. Provided by JSCo «Russian Railways»", approved by Reso- lution No. 47-t/5 of the Federal Energy Commission (FEC) The charges for traffic to/from other countries are de- of the Russian Federation dated June 17, 2003 and regis- fined in accordance with ITT rules and take into account tered by the Ministry of Justice of the Russian Federation the CIS tariff policy. on July 9, 2003 (Registration No. 4882). Based on Decree of the Federal Tariff Service No. 353-t/4 Tariffs for freight transportation services on domestic and of December 9, 2006, registered by the Ministry of Justice international routes (excluding transit) are set in rubles. on December 18, 2006 (registration No. 8626), from Janu- ary 1, 2007, the ceiling levels of tariffs, payments and fees Since August 1, 2001, export and import (EXIM) rail traffic from Price List No. 10-01 have been indexed by an average via Russian ports has been paid for on the basis of tariffs of 1.08 times. established for freight traffic on domestic routes (according to regulations set forth in Section 2, Price List No. At the same time, pursuant to Decree of the Federal Tariff 10-01). Service No. 356-t/7 of December 9, 2006 "On setting exceptional tariffs for railway freight transportation for One of the main goals of state tariff regulation is achiev- 2007" registered by the Ministry of Justice on December ing conformity of tariffs for different types of transporta- 18, 2006 (registration No. 8628), (as revised in accor- tion and their unification. Since 2005, this goal has been dance with FTS Decrees No. 106-t/12 of May 18, 2007 , achieved by differential indexing in accordance with Sec- No. 114-t/1 of June 05, 2007, No. 221-t/1 of September tions 2 and 3 of Price List No. 10-01. 4, 2007, No. 264-t/2 of October 23, 2007, No. 265-t/3 of October 23, 2007, No. 266-t/4 of October , 2007), the Tariffs for coal transportation have been unified since railway transport provides exceptional tariffs on over 40 January 1, 2006. positions.

Tariffs for transportation of coal coke, peat and slate, At the same time it should be noted that the increase in non-ferrous metals ore and concentrate and their indus- prices for some cargoes exceeded the average 2007 industrial products, automobiles and spare parts have been trial price growth of 13.9% (average for the year). unified since January 1, 2007.

Tariffs for freight transportation services.

The tariff policy of the railways in the CIS countries for international freight transportation (hereinafter – "Tariff policy") is revised and adopted annually at the Tariff Confer- ence of railway administrations – participants of the Tariff Agreement of railway administrations (railways) of CIS states and Estonia and is applied to freight forwarding: Financial and economic results 86 (Board of Directors report)

Volumetric share of cargoes transported under exceptional tariffs

CARGO 2006 2007 Change

Coal 52.9% 53.7% 0.2%

Coke 11.7% 6.3% -40.2%

Crude oil 32.8% 34.7% 3.8%

Petroleum products 2.3% 2.0% -8.5%

Iron ores and iron-ore concentrates 0.0% 0.0% 13.1%

Non-ferrous ores and concentrates 19.4% 20.2% 9.4%

Ferrous metals and rolled products 6.1% 5.2% -9.6%

Non-ferrous metals 28.4% 28.0% 4.9%

Timber 0.4% 0.8% 91.7%

Mineral construction cargoes 0.8% 1.1% 48.0%

Fertilizers 9.7% 13.5% 47.0%

Grains 0.5% 5.4% 1327.0%

Other cargoes 8.3% 11.0% 36.1%

Total volume of cargoes transported under exceptional tariffs, million tons 225.97 236.68 4.7%

2007 marked higher prices in the energy markets and estate, the need to realize the state Affordable Housing the fertilizer market. So, for example, coke prices on the program. export market increased by 2.1 times, whereas for coal concentrate on the domestic market – by 62%. Through- The profitability of oil companies remained on the same out 2007, the railway tariff remained unchanged. At the level, as 2007 saw repeated increases in oil and petroleum same time domestic prices for coke grew by 2.06 times, products duties, which depend on global prices. representing higher profitability for private producers. A similar situation was characteristic for the fertilizers With railway tariffs remaining unchanged throughout market. Price patterns for iron ore on the Russian market 2007, ferrous metal prices rose by 1.21-1.33 times de- in 2007 were stable due to the practice of signing annual pending on the goods. contracts at fixed prices. The railway tariff growth index was in general lower Higher grain prices are due to the fact that global food than the price growth index. Against the background of reserves are currently at the lowest level in the past 15 increasing goods prices, the railways' tariff policy contrib- years. Besides, more grain is now used for the production uted to lowering the transport component for the main of biological fuel. categories of cargoes forwarded.

A steady growth of cement prices is caused by a deficit In 2007, transportation in general purpose freight stock of production capacities, high demand from construc- dropped by 5.3% as compared to 2006. This concerns tion companies, which is related to expanding residential mainly expensive goods: non-ferrous and ferrous metals, construction due to a robust consumer demand for real oil and petroleum products, fertilizers.

Increase of customs duties for certain transported cargoes Cargo Export customs duties increase Export customs duties increase Dec. 2007 to Jan. 2005 Dec. 2007 to Jan. 2007 Coal coke Unchanged (=0) Reduced to 0 Round timber Increased by 4 times Increased by 2.5 times Sawn timber Reduced to 0 Reduced to 0 Crude oil Increased by 4.02 times Increased by 1.85 times Petroleum products Increased by 3.48 times Increased by 1.77 times Grain Wheat Set at 10% in December 2007 Grain Barley Set at 30% in December 2007 Annual Report 87 JSC «RZD» 2007

Share of transportation by general-purpose freight stock. Influence of macroeconomic factors (see also "Transportation expenses").

CARGO 2006 2007 Change

Coal 82.1% 77.0% -7.5%

Coke 86.3% 82.5% 6.0%

Crude oil 18.1% 11.0% -40.5%

Petroleum products 42.7% 29.8% -27.1%

Iron ores and iron-ore concentrates 49.4% 51.6% 8.5%

Non-ferrous ores and concentrates 34.5% 33.9% 3.5%

Ferrous metals and rolled products 67.5% 63.2% -0.1%

Non-ferrous metals 72.0% 64.9% -4.2%

Timber 67.3% 55.0% -15.7%

Mineral construction cargoes 79.1% 72.1% -0.7%

Fertilizers 31.9% 26.0% -13.9%

Grains 97.3% 92.1% 15.2%

Other 59.7% 54.5% -5.9%

Total volume of cargoes, million tons 937.02 887.11 -5.3%

Taxation the Company is allocated for tax payments. A total of RUR 174.4 bln (up 2.4% from 2006) was accrued in 2007 According to its tax accounting policy, JSCo «Russian in taxes and mandatory budget payments. Tax payments Railways» determines income and expenses based on the to budgets of all levels constituted RUR 179.2 bln in accrual method. Practically every fifth rouble earned by cash.

Tax and mandatory cash payments to budgets and social funds of the Russian Federation (RUR bln) Item 2005 2006 2007 (+/-) 2007 (+/-) 2007 % 2007 to % 2007 to to 2005 to 2006 2005 2006

Total taxes and levies 188.0 180.6 179.2 -8.9 1.4 95.3 99.2 including:

Federal budget 78.9 52.7 41.0 -37.9 -11.7 51.9 77.8

of them

Value added tax 72.2 41.9 32.7 -39.6 -9.3 45.2 77.9

Income tax 6.6 10.7 8.3 1.6 -2.5 124.6 77.1

Regional and local budgets 58.8 74.9 75.8 17.0 0.9 129.0 101.2 of them

Corporate income tax 17.7 28.8 22.5 4.8 -6.3 127.2 78.2

Personal income tax 26.3 28.6 32.8 6.5 4.2 124.6 114.8

Property tax 13.4 16.1 18.6 5.2 2.5 138.7 115.3

Land tax 1.0 1.1 1.5 0.5 0.4 148.2 136.2

Mandatory social security funds 50.4 53.0 62.4 12.0 9.4 123.8 117.7 including:

Unified social tax 48.9 51.7 60.9 12.0 9.2 124.6 117.8

Accident insurance fund 1.5 1.3 1.5 0.0 0.2 98.3 113.8 Financial and economic results 88 (Board of Directors report)

The amount of tax cash payments in 2007 decreased by increase in the amount of tax in 2007 was due to the RUR 1.4 bln, or 0.8%, compared to 2006, which was due to a revaluation of fixed assets as of January 1, 2007, commis- RUR 11.7 bln, or 22.2%, drop in tax payments to the federal sioning and modernization of fixed assets. budget. The amount of land tax paid to the budget in 2007 was VAT. A reduction in VAT-related tax payments compared to 48.2% higher than in 2005 and 36.2% higher than in 2006 previous periods was primarily due to a change in Russian due to new land plots recorded on the balance sheet, high- tax legislation. Starting from January 1, 2007, the special er land tax rates imposed by some municipalities, as well procedure of recovering VAT on export operations was as an increase in the value of land plots in some regions. abolished. According to that procedure, a separate VAT declaration at the rate of 0% had to be submitted to the 2007 was marked as well by higher contributions to man- tax authorities, who audited it in house within 3 months datory social security funds – by 23.8% as compared to thereof, and then passed a decision on the recovery of 2005 and by 17.7% as compared to 2006. input VAT on export operations based on the results of the audit. Starting from January 1, 2007, VAT on export Restructured tax liabilities. Pursuant to the Federal Law operations (at the rate of 0%) is recorded together with No.115-FZ dated July 07, 2003, Resolutions of the Govern- domestic VAT (at rates of 10%, 18%) in a single tax declara- ment of the Russian Federation No. 699 dated October 1, tion, and its recovery bears a declarative nature. Besides, 2001, and No. 603 dated September 29, 2003, JSCo «Rus- tax deductions in 2007 were higher due to an increase in sian Railways» is entitled to restructure its tax liabilities fixed assets put into operation, according to the invest- due to being the legal successor of federal railway orga- ment program of JSCo «Russian Railways». nizations, whose property and property complexes have been contributed to the charter capital of JSCo «Russian VAT at 0% relating to 2006 operations was reimbursed in Railways». 2007 from the federal budget in the amount of RUR 15.5 bln. VAT in the amount of RUR 17.1 bln was paid in cash to Early repayment of restructured arrears in 2004, in 2005- the budget. Thus, in 2007 VAT payments were offset for a 2007 enabled JSCo «Russian Railways» to write off RUR total of RUR 32.6 bln. 20.0 bln of restructured interest and penalties accrued in favour of the federal budget, budgets of the constituent Corporate income tax payable to the federal budget and entities of the Russian Federation and local budgets. The to budgets of the constituent entities of the Russian liabilities have been settled in full. Federation amounted in 2007 to RUR 35.0 bln - RUR 4.2 bln, or 13.6%, more than in 2006. Actual payments to the consolidated budget amounted in 2007 to RUR 30.8 Revenue from all types of bln. The decrease in the amount of income tax paid with regard to the reporting period is related to a reduction activity of the income tax base for 2007 because of a RUR 4.3 bln increase in the depreciation premium due to the commis- Total revenue from all types of activity in 2007 was RUR sioning of fixed assets planned for commissioning in 2006. 975.6 bln (14.9% higher than in 2006) with the largest Besides, advance income tax payments made in Q4 2006 share belonging to freight transportation (77.4%). This and totaling RUR 4.7 bln were offset in 2007 against cur- type of activity has remained the most profitable over the rent tax payments. past several years (profitability of freight transportation is 15.3%). While, according to the Tax Code of the Russian Federa- tion, the nominal income tax rate in 2007 was 24%, the effective income tax rate of JSCo «Russian Railways» Revenue from freight transportation constituted 35.5%. Revenue from freight transportation in 2007 was RUR In 2007, RUR 75.8 bln was paid to the budgets of the 754.9 bln, which is RUR 96.9 bln or 14.7% more than in municipal units of the Russian Federation and to local 2006. The main reason for revenue growth was the signifi- budgets. Compared to 2005-2006, the increase in tax pay- cant overfulfillment of handling volumes. ments to regional and local budgets amounted to 29.0% (RUR 58.8 bln paid) and 1.2% (RUR 74.9 bln paid), respec- Results of 2007 show significant structural changes in tively. This increase was due to higher property tax, land freight transportation, as compared to 2006. tax and personal income tax payments. The strongest growth, both in volume and by revenue, was The property tax in 2007 grew by 38.7% and 15.3% demonstrated by domestic transportation and by trans- compared to 2005-2006, respectively. The RUR 252 bln portation of imported goods. Annual Report 89 JSC «RZD» 2007

754.9 1. A fewer number of passengers carried due to the change bln RUR in the procedure of granting reductions on suburban Freight commuters to citizens – beneficiaries of this social transportation service. In 2007, such categories of passengers received single tickets for an unlimited number of rides regard- less of the destination, valid for a period of one month 20.1 – not more than one ticket for each destination. In 2006 bln RUR seasonal tickets were issued for 1,2 or 3 months for an Suburban unlimited number of rides and destinations. passenger 2. Expansion of suburban passenger transportation compa- transportation nies. Losses from suburban transportation amounted to RUR 27.7 bln in 2007 (not taking into account subsidies 109.4 from regional budgets) against RUR 21.9 bln in 2006. bln RUR Subsidies in cash from regional budgets of the munici- 91.2 Long-distance pal units constituent entities of the Russian Federation bln RUR passenger allocated to compensate losses from suburban tariffs Other types transportation amounted to RUR 1.9 bln compared to RUR 1.5 bln in of activities 2006, i.e. grew by 23%.

Revenue from passenger transportation In average by regions, revenue from suburban passenger transportation (including subsidies in cash) covered 46% of Revenue from passenger transportation in 2007 was RUR related expenses. 129.5 bln. The target approved by the Board of Directors was fulfilled by 100.9% (revenue exceeded the target level by RUR 1.2 bln). Expenses related to all

Revenue from long-distance transportation was RUR types of activity 109.4 bln, which is 18.9% higher than in 2006; at the same time expenses amounted to RUR 132.2 bln. The Company Total expenses of JSCo «Russian Railways» in 2007 incurred losses in the amount of RUR 22.8 bln, which is amounted to RUR 899.0 bln, up RUR 120.8 bln, or 15.5%, significantly lower than the target loss (by 4.8%) approved from the previous year. by the Company's Board of Directors.

In 2006 a principal decision was made on the govern- Transportation expenses mental level regarding the need to use budget funds to compensate losses from passenger transportation. This Cost of transportation services decision was formalized by Decree of the Government of the Russian Federation No. 207 dated April 7, 2007. In Transportation expenses amounted to RUR 819.4 bln, up line with this governmental Decree, funds in the amount 15.4% from the previous year. of RUR 10.9 bln were allocated from the federal budget to compensate JSCo «Russian Railways» losses from pas- At the same time, Company costs grew by 8.0%, which is senger transportation. This gave JSCo «Russian Railways» lower than the industrial price growth rate (13.9%). access to investment sources for the renewal of its passenger service fixed assets, and first and foremost, its The most significant increase compared to 2006 was re- rolling stock. corded for other material costs (RUR 31.3 bln, or 50.1%), other expenses (RUR 12.8 bln, or 20.4%) and electric ener- In 2007, JSCo «Russian Railways» fully met the assumed gy (RUR 7.9 bln, or 17.3%). The increase in other material obligations to ensure transportation of passengers enti- costs occurred due to higher volumes of capital repairs tled to reduced tariffs, including both federal and regional performed by external contractors, and in other expenses beneficiaries. – primarily due to tax and lease payments.

Revenue from suburban transportation in 2007 was RUR Structural changes brought about a change in the Com- 20.1 bln, with the target exceeded by RUR 1.7 bln (+9.1%). pany's expense structure by cost item. Thus, the share of However, generated revenue is RUR 1.96 bln (8.7%) lower expenses for materials fell from 16.0% in 2004 to 12.6% in than the level achieved in the previous year. Two reasons 2007, whereas other material costs increased from 9.2% underlie the 2007 drop in revenue: to 11.4% respectively. Financial and economic results 90 (Board of Directors report)

Besides, the trend of the recent years, with petroleum Based on 2007 results, labor productivity grew by 8.9% at product prices growing faster than electricity tariffs, JSCo «Russian Railways» in general. The average salary in resulted in energy costs and diesel fuel costs practically the Company increased by 18.4% from the level of 2006 matching each other, whereas 84.0% of the traffic volume and reached RUR 17,506. Salary growth in real terms relies on electric traction. was 8.6%. Thus, the Company secured outstripping labor productivity growth rates. Capital repairs of fixed assets According to the Collective bargain agreement, salaries of Expenses related to the capital repairs of fixed assets in the Company's personnel were indexed in 2007 in line with 2007 exceeded RUR 149 bln, up RUR 22 bln or 17.3% on the consumer price growth. the figure of the preceding year. Over the past few years the Company has been provid- The programs of rolling stock capital maintenance and ing incentives to employees for trouble-free work. In repairs by branches, as well as by enterprises outside 2007, RUR 2 bln were allocated for these purposes, 172.5 the Company structure, were accomplished as targeted. thousand people received bonuses averaging RUR 11.6 21 thousand freight cars, 1,160 electric locomotives and thousand per person. 1,560 diesel locomotive sections, 3,706 passenger cars, and 840 electric train sections were repaired in 2007. Due to the introduction of the corporate labor compensation system for employees of JSCo «Russian Railways» In order to improve the quality of service provided to pas- branches and structural units, starting from April 1, 2007, sengers both in long-distance and in suburban transporta- the payroll fund was increased by 10%. tion, a large volume of capital repairs of passenger service facilities was conducted; over RUR 4.8 bln were spent for The introduction of the corporate labor compensation this purpose (in 2006 - RUR 3.1 bln). system signified the creation of a principally new compensation mechanism based on its differentiation with 11.8 thousand km of tracks were repaired in 2007, up 0.7 due account for individual assessment of professionalism, thousand km from the volume of track repairs in 2006. As performance and labor input of the workers, as well as in previous years, substantial capital repairs had prior- processes taking place on the labor market. ity. This enabled the Company to improve the appraisal by points of the main track compared to the previous year The main goals and purposes pursued in introducing the (network average as of January 1, 2007 - 42 points, as of corporate labor compensation system were realized as December 31, 2007 – 39 points). Engineering structures follows: were submitted to capital repairs for a total value of – the minimum monthly wage in the Company was almost RUR 7.3 bln. (in 2006 – RUR 6.2 bln), the roadbed – significantly raised and brought closer to the legally for RUR 5.0 bln. (RUR 4.5 bln). established minimum subsistence level in the Russian Federation. The wage rate ratio of a first category Human Resources worker at JSCo «Russian Railways» to the subsistence level in the Russian Federation increased from 50% to In 2007, the scope of work was carried out by a work 90%; force of 1,215 thousand people, of whom 1,057 thousand – wage rates and official salaries were raised on aver- were engaged in transportation services. Compared to age by 56%, the guaranteed compensation part was 2006 the work force engaged in all types of activities increased to 60 %; except those engaged in transportation services was – the level of labor compensation was raised for all cat- reduced by 42.1 thousand people (3.2%) and in transporta- egories of the Company's personnel; tion services by 26.4 thousand people (2.4). – conditions were created for providing targeted incentives for the personnel. To cope with the traffic volume the personnel of the core business groups was increased compared to 2006: locomo- Due to the positive financial and economic results of the tive crews (by 2,290 people or by 2.1%) and staff engaged Company's operations, about RUR 3 bln were allocated in in forming trains (by 302 people or by 1.1%). For other December 2007 as bonuses for personnel demonstrating business groups (repairmen engaged in locomotive current high labor productivity. repairs, electricians servicing the signals and interlocking facilities, freight cars maintenance and current repairs Special attention was paid to ensuring the maximum pos- personnel and catenary system electricians) the number sible labor compensation growth for personnel engaged in of personnel was reduced. core business activities. Based on the results of 2007, the Annual Report 91 JSC «RZD» 2007

labor compensation of railway personnel engaged in core However, due to JSCo «Russian Railways» implementing a business activities grew in the range from 15% for cat- program of measures aimed at costs optimization, trans- enary system electricians to 21% for locomotive engineers. portation expenses were RUR 15.4 bln lower than the objective estimated level. Despite the efforts to increase labor compensation, its growth rate in 2007 continued to drop as compared to the 20.7% average dynamics throughout the country – from 58% in Freight trafﬁc indexation 2004 to 29.4% in 2007. Growth rate of transportation On the one hand, such a situation is determined by posi- costs tive processes in Russia's economy, including the development of manufacturing, services, creation of new jobs and as a result higher competition on the labor market. On the other hand, state regulation of railway tariffs limits the 13.9% Company's costs, including payroll costs. 12.7% 12.4% 10.3% 10.0% 9.7% In 2007, the railway transport was 7th among key Russian 9.0% industries by level of labor compensation and 9th by its 8.0% growth rate. 9.3% 7.3% 7.7% In 13 regions out of 76 the level of labor compensation is lagging behind, namely in Moscow, St. Petersburg, the Leningrad, Belgorod, Samara, Tomsk and Sakhalin Regions, Krasnoyarsk Territory, Republics of Komi, Tatarstan, Bash- kortostan, as well as in the Khanty-Mansijsk and Yamalo- Nenets Autonomous Districts. 2005 2006 2007 The labor turnover increased from 8.1% in 2006 to 10.8% in 2007 and for certain core occupations exceeded this level significantly. Industrial output PPI Customer price index In general, the labor turnover in the Russian Federation is determined as a percent of drop outs to the total personnel. According to Rosstat, in 2007 this indicator for Rus- sia in general was 31.3%, whereas for the railway network +15.4 – 14.2%, which is more than two times lower. 834.8 819.4 Thus, the dynamics of the labor turnover in the Company are in line with the processes characteristic for the country's economics in general. +18.8 Price factor change and cost optimization 728.7 709.9 Due to targeted cost savings, in the four years of JSCo «Russian Railways» operations, actual expenses of the Company for each reporting period were lower than the objective expense estimates for that period based on +57.5 675.8 the actual MEDT (Ministry of Economic Development and Trade) social development indices for Russia, previous year expenses and actual transportation volumes. 618.3

2007 was marked by an upward adjustment of the projected indicators for almost all industries, whose products and services are consumed by JSCo «Russian Railways». 2005 2006 2007 According to the actual price indices and inflation rates, the Company's operating expenses in 2007 should have Expenses amounted to RUR 834.8 bln. Right under Russian Ministry of Economic Development and Trade indices Financial and economic results 92 (Board of Directors report)

This program includes such cost saving spheres and mea- The Company is taking consequent measures on reduc- sures as: ing the specific consumption of fuel and energy for train – improving planning and regulation of production pro- traction. cesses; – optimizing the use of human resources and raising labor It should be noted that the increase in traffic volumes productivity; remains steadily ahead of the fuel and energy resources – recycling materials and spare parts; consumption growth, this being an indicator of the ef- – recovering parts and components in the course of repair- fectiveness of the Company's technical and organizational ing and maintaining rolling stock, tracks and infrastruc- energy saving measures. ture; – introducing resource saving technologies (recovery of Thus, with diesel-locomotive traffic volumes up 4.7% on the wheel pair tread surface, wheel pair flanges, axle-box previous year, the consumption of diesel fuel grew only by bodies, bogie side frames, profile polishing of rails and 2.8%. A 1.9% reduction in the specific consumption of die- track switches, build-up welding of track crossings and sel fuel resulted in saving 58.6 thousand tons of this type rail ends, etc.); of fuel for a total value of RUR 769.3 mln. – improving the procedure of placing orders based on tenders; Whereas electric traction traffic volumes increased by – conducting a pricing policy aimed at curbing the growth 6.1%, electricity consumption grew by 5.4%. Energy con- of prices set by the suppliers of material and technical sumption per unit was reduced by 0.7%, thus 274.5 mln resources purchased by the Company. kWh of electricity for the amount of RUR 316.8 mln were saved.

Speciﬁc energy consumption, кWh/10 thousand ton.km gross Other types of activities JSCo «Russian Railways» profit from other types of activities 119.1 (OTA) in 2007 amounted to RUR 11.6 bln. The profitability of cost savings of OTA in 2007 was 14.5%, which is 1.8 percentage points higher –0.3 bln RUR then in 2006.

117.7 The reforming of the industry and the establishment of JSCo 117.2 Transcontainer and JSCo Refservice in 2007, the expansion of operations of suburban companies on the Moscow and Ok- 116.4 tyabrskaya Railways brought about changes to the structure of work and services classified as other activities.

The spin-off of certain types of activities into vertically integrated branches had a positive impact on the growth of 2004 2005 2006 2007 profit from other types of activities. For example, the profit from repair and maintenance of rolling stock was RUR 0.8 bln higher than in 2006.

Due to systematic efforts aimed at reducing losses from main- Speciﬁc diesel fuel consumption, taining the social sphere, such losses decreased in 2007 by 1 kg of fuel equivalent/10000 ton.km gross RUR 0.1 bln in comparison with 2006.

Measures aimed at increasing the efficiency of other types 68.3 of activity will be further pursued in 2008. The introduced cost savings of separate accounting by types of activity will serve as a meth- 67.8 –0.8 bln RUR odological tool for this purpose. It will permit the Company to 67.1 form the complete cost of work and services and as a result to determine the balanced level of prices for railway products, work and services, as well as to enhance the transparency 65.8 and accuracy of accounting, thus in future enabling to adopt promptly economically feasible decisions on all managerial levels of the Company.

2004 2005 2006 2007 Annual Report 93 JSC «RZD» 2007

Other income and The increase of the financial result from other income and expenses of the Company was also influenced by the expenses sale of interest in JSCo Elgaugol and an unfinished access railway to the Elga coal deposit. In 2007 the profit from other income and expenses was RUR 52.4 bln, which is RUR 64.0 bln more than in 2006. In 2007, the Company continued transfering federal housing and utilities to municipalities and constituent entities The increase in the profit from other income and expenses of the Russian Federation, which helped reduce the Com- in 2007 was due to the revaluation of property contributed pany's maintenance expenses by RUR 0.4 bln compared to to the charter capital of JSCo «Russian Railways» subsid- 2006. iary JSCo First Freight Company (Pervaya Gruzovaya Com- panya) established in 2007, as well as other subsidiaries. At the same time, in 2007 there was an increase in the provision for doubtful debts created with respect to the The growth in other income is also determined by the first ever debt of the Federal Agency for Health and Social Develop- compensation of losses in the income of JSCo «Russian Rail- ment for railway transportation of passengers entitled to ways» resulting from state regulation of tariffs in long-distance reduced tariffs. passenger transportation in the amount of RUR 10.9 bln.

Other income and expense key items, RUR bln. 67.3

38.6 Social policy-related costs (social Provision for infrastructure doubtful debts assets, Fund Honor 12.8 and other (Pochet), Non-State operations with Pension Fund 6.8 amounts "Blagosostoyanie", outstanding etc.) Sale of assets

Excess of the Budget ﬁnancing Sale of assets Penalties and monetary value reimbursement of the contribution of losses caused over the book value –10.5 of the property contributed to the charter capital –24.8 of the subsidiaries –35.7

Income Expenses Financial and economic results 94 (Board of Directors report)

Assets and liabilities

ASSETS 01.01.2007 31.12.2007 +/- %

I. Non-current assets Intangible Assets 891.7 1,745.9 854.1 195.8% Research and development expenses 300.3 230.0 -70.3 76.6% Fixed assets 2,296,201.1 2,275,151.0 -21,050.1 99.1% Construction-in-progress 164,863.3 220,657.0 55,793.6 133.8% Income-bearing investments in tangible assets 1,059.9 2,724.4 1,664.5 257.0% Long-term financial investments 53,713.8 162,743.4 109,029.6 303.0% Deferred tax assets 12,105.1 13,795.0 1,689.9 114.0% Other non current assets 30,578.6 35,158.7 4,580.1 115.0% Total for section I 2,559,713.9 2,712,205.2 152,491.3 106.0% II. Current assets Inventories 54,705.1 67,597.4 12,892.4 123.6% Input VAT 25,230.6 10,650.5 -14,580.1 42.2% Long-term accounts receivable 10,866.4 20,307.0 9,440.5 186.9% Short-term accounts receivable 29,589.7 44,277.5 14,687.8 149.6% Short-term financial investments 11,025.5 2,543.0 -8,482.5 23.1% Cash and cash equivalents 7,174.0 3,515.3 -3,658.6 49.0% Other current assets 7,255.6 10,276.0 3,020.3 141.6% Total for section II 145,847.0 159,166.8 13,319.8 109.1% TOTAL ASSETS 2,705,560.8 2,871,372.0 165,811.1 106.1%

LIABILITIES 01.01.2007 31.12.2007 +/- %

III. Capital and reserves Charter capital 1,535,700.0 1,541,697.8 5,997.8 100.4% Additional capital 908,020.9 905,081.6 -2,939.3 99.7%

Retained earnings / loss for the reporting year 50,997.5 136,437.5 85,440.0 267.5% Reserve capital 1,218.7 2,539.2 1,320.5 208.4% Total for section III 2,495,937.1 2,585,756.2 89,819.1 103.6% IV. Non-current liabilities Loans and borrowings 46,129.8 41,382.1 -4,747.7 89.7% Deferred tax liabilities 25,896.5 38,111.3 12,214.8 147.2%

Restructured taxes and levies payable 488.7 50.1 -438.6 10.3%

Restructured payables to extra-budgetary funds 2,278.2 0.0 -2,278.2 0.0% Total for section IV 74,793.3 79,543.5 4,750.3 106.4% V. Current liabilities Loans and borrowings 14,054.6 37,603.8 23,549.2 267.6% Accounts payable 116,219.9 163,219.6 46,999.7 140.4% Deferred income 4,556.0 5,248.9 692.9 115.2% Total for section V 134,830.5 206,072.3 71,241.8 152.8% TOTAL LIABILITIES 2,705,560.8 2,871,372.0 165,811.1 106.1% Annual Report 95 JSC «RZD» 2007

The share of non-current assets in the total balance sheet Changes in fixed assets assets is 94.5% represented principally by fixed assets and construction-in-progress, which demonstrates the Company's strong material potential. The majority of fixed The share of active fixed assets in total fixed assets in- assets is represented by facilities and transfer devices creased during the year by 0.34% demonstrating a positive – 61.2%, transport vehicles – 14.9% and machinery and trend providing for higher labor productivity and traffic equipment – 12.0%, this resulting directly from the specif- volumes. Along with the 3.14% growth of the return on ics of the Company's operations. Construction-in-progress fixed assets ratio compared with the beginning of the is described in the Section Business priorities, Subsection year, this generally indicates a more efficient use of fixed Principal results of investment activities. Besides, 6% of assets. non-current assets are represented by long-term financial investments (see Financial investments). In the reporting year the fixed assets replacement ratio increased by 24.3%. This indicator characterizes invest- Current assets comprise 5.5% of total assets, with their ment efficiency. However, the movement in the ratio of share and absolute value growing throughout the period accumulated depreciation to the replacement cost of under review (see Working capital management). fixed assets, which is called depreciation reserve ratio in financial analysis, indicates the need to invest more in Equity comprises almost 90% of the Company’s liabilities fixed assets. and equity, thus characterizing a high degree of the Com- pany's financial independence.

RUR bln Buildings Facilities Machinery Transport Fixtures and TOTAL: and equip- vehicles other fixed ment assets

Cost (replacement cost) at January 1, 2007 331.0 1,732.6 296.5 431.0 11.3 2,802.4

Acquisition 14.2 97.7 66.3 87.9 2.4 268.5

Disposals 9.2 44.7 12.0 85.0 2.7 153.6

Accumulated depreciation 36.3 312.9 134.4 155.1 3.4 642.1

Net book value at December 31, 2007 299.7 1,472.7 216.4 278.8 7.6 2,275.2

2007 Deviation At beginning of At end of period +/- % period Share of active fixed assets in total fixed assets, х 0.880 0.883 +0.003 +0.34

Depreciation reserve ratio,х 0.181 0.220 +0.039 +21.55

2006 2007 Return on fixed assets, х 0.414 0.427 0.013 +3.14 Fixed assets replacement ratio, х 0.074 0.092 0.018 +24.32 Financial and economic results 96 (Board of Directors report)

Financial investments

Breakdown of total financial investments, RUR bln As of As of Indicator Acquisition Disposals Deviation 01.01.2007 31.12.2007 Long-term financial investments 53.7 118.9 9.9 162.7 109.0 Short-term financial investments 11.0 299.4 307.8 2.5 -8.5 Other long-term financial investments (assets in operational management) 30.6 33.3 28.7 35.2 4.6 Other short-term financial investments (assets in operational management) 1.0 11.5 11.9 0.6 -0.4 Total 96.3 463.0 358.3 201.0 104.7 including a breakdown of short-term financial investments (excluding assets under operational management), RUR thousand As of As of Indicator Acquisition Disposals Deviation 01.01.2007 31.12.2007 Total long-term financial investments: 53.7 118.9 9.9 162.7 109.0 including:

Investments in the equity of other companies, total 41.8 110.9 0.2 152.5 110.7 Including: investments in subsidiaries and associated companies 41.6 110.9 0.2 152.3 110.7 Investments in Government securities 0.0 0.0 0.0 0.0 Corporate securities 0.2 0.2 0.0 Loans granted 5.3 0.2 0.2 5.3 0.0 Deposits 6.1 7.8 9.5 4.4 -1.7 Other investments 0.3 0.3 0.0 Out of RUR 162.7 bln of long-term financial investments, RUR 152.5 bln are investments in the equity of other companies, mainly subsidiaries and associated companies. 1.37

The participation of JSCo «Russian Railways» in subsidiaries and associates is described in the Section Business priorities, Subsection of JSCo «Russian Railways» and its 1.08 participation in subsidiaries and associates.

Working capital management 0.77 The Company conducts an aggressive operating and invest- 0.34 0.37 ment activity, which requires significant financial means. An active cash flow and working capital management 0.24 policy is needed to cope with this. 0.10 0.14 When describing the Company's measures on enhancing 0.03 its net working capital management system, the following components of this system should be mentioned: 1) Inventory management; 2005 2006 2007 2) Receivables collection management; 3) Payables settlement management; 4) Prepayment management; Current liquidity ratio 5) Loans and borrowings management; Quick liquidity ratio 6) Cash balance management; Cash ratio Annual Report 97 JSC «RZD» 2007

In terms of liquidity and ability to pay the Company has to Current assets structure cope with two main tasks: 10.3 – provide the necessary financing to meet the Company's dynamic requirements; 6% Other current – ensure that it is able to meet its liabilities. 67.6 assets 42% The Company follows the principle of maintaining the Inventories working capital on a level sufficient for the development of its business. In 2007, the strategy of managing working capital and its sources was in line with the Company's needs and consisted of a maximum reduction of the financial cycle in order to release cash as soon as possible 64.6 and allocate it for the financing of current and investment 41% activities, this being evidenced by reduced liquidity. Accounts receivable Currently a shorter cash cycle and higher liabilities resulted in lower liquidity ratios (current liquidity ratio, quick liquidity ratio and cash ratio). However, this decrease represents a stage in the strategy of replacing productive 10.7 7% assets, characterized by a significant increase of invest- 3.5 2.5 ment activity on the background of continuing growth Input VAT 2% 2% of operating activity. The surge resulted in a changed Cash Short-term approach to financing, aimed at reducing to the utmost and cash ﬁnancial the use of the Company's own funds, including available equivalents investments balances on current accounts, and resorting to additional borrowings. Inventory management

Thus, a year-on-year increase of the investment program In 2008 we plan to increase the volume of track capital re- by 1.5 times, material costs by 17.6% and revenue by pairs from 11.8 thousand km to 15.6 thousand km (+32.2%), 14.9% resulted in a respective growth of such net working which required forming the necessary inventory stock, espe- capital components, as inventory, settlements with debt- cially of track materials, already in 2007. Overall, the stock ors and creditors and loans and borrowings. of raw materials and supplies grew by RUR 11.7 bln.

Inventory availability and changes, RUR bln Balance at Acquisition in Disposals in 2007 Balance at Deviation (+, -) 01.01.2007 2007 31.12.2007 Inventory, total: 54.71 1,374.38 1,361.48 67.60 12.89 including: raw materials, supplies, other similar assets 44.90 253.36 241.68 56.58 11.68

Rearers and fatteners 0.03 0.01 0.02 0.02 -0.01

Work-in-progress costs 1.54 1,075.33 1,075.57 1.30 -0.25

Finished products and goods for resale 1.50 18.32 19.24 0.57 -0.93

Deferred expenses 6.72 27.36 24.96 9.12 2.40

Other inventories and expenses 0.00 0.01 0.00 0.01 0.01

Accounts receivable nual turnover periods of advances issued and advances received in 2007 constituted 12 days and 17 days respec- 2007 was marked by an improvement of the financial cycle tively. Due to optimizing settlements with debtors and structure, both in terms of inventory management, and creditors, the financial cycle in 2007 was reduced to 38 in terms of settlements. The turnover period of accounts days, which is 4 days less than in 2006. receivable (excluding advances issued) was 10 days, which is 2.8 times lower than the turnover period of accounts Investment activity requires significant prepayments payable (excluding advances received). The average an- in order, among others, to reduce future costs. In case Financial and economic results 98 (Board of Directors report)

Financial cycle of JSC Russian Railways for 2006-2007

2007

Turnover Production cycle – turnover Turnover period of of inventories attributable to production, of accounts advances work in progress and ﬁnished goods receivable issued 12 days 64 days 10 days

Turnover Turnover of account of advances 38 days payable received 31 days 17 days

days 2006 – 4

Turnover Production cycle – turnover Turnover period of of inventories attributable to production, of accounts advances work in progress and ﬁnished goods receivable issued 8 days 59 days 10 days

Turnover Turnover of account of advances 42 days payable received 24 days 14 days

JSCo «Russian Railways» fails to advance the amounts ries in the amount of RUR 3.0 bln and about RUR 3.3 bln required, counterparties (including lessors) will be forced in other advances. under the pressure of the market to attract interest- bearing credit resources, thus significantly raising the On December 28, 2007, according to Sales-Purchase price of work and services for JSCo «Russian Railways». Agreement No. 1038 of December 26, 2007, between JSCo This, in turn, will require JSCo «Russian Railways» to «Russian Railways» and The Breakers Investments B.V., seek additional sources of covering these expenses, one JSCo «Russian Railways» paid for a blocking stake (25% of them being higher transportation tariffs. In order to + 1 share) in CJSCo Transmashholding, which resulted in cut costs, in 2007 the approach to issuing advances to RUR 9.3 bln in receivables. The Company will acquire title certain counterparties was altered. This, along with an to the shares upon fulfilling precedent conditions stipulat- increase in the investment program (150%) and growth of ed in Joint Venture Agreement No. 1040 dated December material costs (117.6%) resulted in a two-fold increase of 26, 2007. advances issued, which at December 31, 2007 amounted to RUR 22.7 bln. Other major debtors include counterparties working under social and federal programs, such as CJSCo Zhel- Higher advances issued resulted in a general increase of doripoteka – RUR 3.4 bln and Federal Railway Agency accounts receivable as of December 31, 2007, by 1.4 times Single Customer Group – RUR 5.7 bln (construction of the to RUR 64.6 bln. Of a total of RUR 22.7 bln advances is- railway Berkakit-Tommot-Yakutsk – RUR 3 bln, Izvestk- sued as of December 31, 2007, RUR 11.9 bln are attribut- ovaya-Chegdomyn – RUR 2.7 bln). The receivables arose able to lease agreements, 3.5 times up on the beginning of due to equity participation of JSCo «Russian Railways» in the year (see also Leasing). Advances also include capital the construction of these assets. Due to the fact that the expenditure advances in the amount of RUR 4.5 bln, in- work conducted is accounted for by the indicated counter- cluding a long-term advance of RUR 2 bln under a contract parties, these receivables will be settled upon full comple- with Siemens, current prepayments for fuel and invento- tion of the construction. Annual Report 99 JSC «RZD» 2007

Accounts Receivable Structure 29.0 Days

0.6 Settlements on claim 23.0 21.0 Other accounts receivable 22.7 Advances 10.0 10.0 issued 64.6 bln RUR 2006 2007

0.1 Turnover period of total accounts receivable 0.3 (net of advances issued), days Wage Notes settlements receivable Turnover period of trade accounts receivable, days 5.2 7.3 For Total trade One of the most significant issues is collecting receivables transportation 7.3 accounts related to the transportation of passengers entitled to Taxes receivable reduced tariffs. Thus, in 2007 the amount of revenue ac- and levies crued for suburban passengers transportation entitled to reduced tariffs under federal law amounted to RUR 7.5 In terms of managing accounts receivable, the following bln, exceeding by RUR 3.2 bln (67.8%) the value of services was achieved in 2007: under the Agreement between the Federal Agency for – Overdue receivables were reduced from RUR 2.4 bln to Health and Social Development (Roszdrav) and JSCo «Rus- RUR 2.0 bln and their share - from 5.8% to 3%; sian Railways», which resulted in a respective increase of – The structure of the financial cycle was improved. accounts receivable.

Claims lodged and measures undertaken by the manage- Besides the receivables which arose in 2007, a provi- ment on collecting trade accounts receivables in cash sion for doubtful debts in the amount of RUR 8.6 bln was resulted in a reduction of the turnover period of this type of receivables to 23.4 days from 29 days in the previous 64.6 year. Total trade receivables amounted to RUR 7.3 bln. Trade receivables include amounts owed for utilities services provided by JSCo «Russian Railways» branches in the amount of RUR 430 mln. These receivables are to a large extent overdue, and are mainly a result of the problem of collecting revenue from providing socially significant 40.5 services (settlements with municipal institutions and individuals for utilities). The debt of municipal enterprises for utilities was reduced by 17% in 2007. However, in accordance with the Federal Law On Accounting stipulating 22.7 that financial reporting should present fairly the financial position of a company, its reduction is due to the creation of a provision for doubtful debts. 11.3 In its financial statements the Company shows accounts 7.0 7.3 receivable less the provision for doubtful debts. According to the Company's accounting policy, accounts receivable that have not been settled within the contractual terms and are not secured by respective guarantees are consid- 01-Jan-2007 01-Jan-2008 ered to be doubtful debts. Total accounts receivable, bln RUR As of the end of 2007, accounts receivable related to Trade accounts receivable, bln RUR transportation amounted to RUR 5.2 bln, RUR 0.6 bln (9.3 %) less than a year before. Advances issued, bln RUR Financial and economic results 100 (Board of Directors report)

created with regard to unsettled receivables of previous Thus, in spite of higher payables in absolute terms, the years (which arose before 2007) based on the Protocol of turnover period of trade accounts payable increased the Stocktaking Commission No. BM-27pr of March 31, compared to the previous year by 4 days only to reach 34 2008, concerning settlements with Roszdrav for suburban days. At the same time overdue trade payables were re- passengers’ transportation entitled to reduced tariffs. duced by 9.7%. Longer turnover of accounts payable on the background of lower overdue liabilities was preplanned Receivables due from regions of the Russian Federation in order to reduce the credit burden related to interest- for railway transportation of regional passengers entitled bearing borrowings. Overdue trade payables amount to to reduced tariffs by JSCo Russian Railway branches in RUR 0.9 bln, or 0.06% of the total amount payable. 2007 amounted to RUR 0.5 bln. In most constituent entities of the Russian Federation this debt is current. Other accounts payable amounted to RUR 15.4, up RUR 5.0 bln on the beginning of the year. The most significant As of December 31, 2007, total receivables due to JSCo item in this category is payables to charter capitals (RUR «Russian Railways» from foreign railways amounts to USD 8.9 bln) due from the founder (JSCo «Russian Railways»). 28.2 mln compared to USD 35.6 mln at the beginning of These payables represent the difference between the reg- the year. istered charter capital of the established subsidiaries and the assets actually contributed to the subsidiaries. The remaining assets have not been contributed yet because Accounts payable of the time-consuming and lengthy process of registering and transferring property. Information regarding subsid- As of December 31, 2007, accounts payable amounted to iaries, whose charter capital has not been fully formed, RUR 163.2 bln, up RUR 47 bln from the beginning of the is provided in the Section Business priorities, Subsection year. Overdue accounts payable comprised 0.06% of the Reform and Participation in Subsidiaries and Affiliates. total amount. The turnover period of accounts payable (excluding advances received) is 31 days compared to 24 days Loans and borrowings management in the previous year. ("Borrowing Program") The growth of accounts payable compared to the beginning of the year was due to a planned increase of trade Taking into account the situation on the capital markets payables by RUR 21.4 bln, RUR 16.3 bln more in advances and the structure of JSCo «Russian Railways» foreign received for transportation and contributions to charter currency revenues in 2007, JSCo «Russian Railways» debt capitals of subsidiaries established in 2007. 34.2 As a result of an almost 1.5-time growth of the investment program and a 17.6% increase of material costs as compared to 2006, trade payables grew by 49% to reach RUR 65.3 bln as of December 31, 2007. 30.0 65.3

Accounts payable structure

55.3 Advances 44.0 received for transportation services 65.3 Total trade accounts payable 163.2 bln RUR

01-Jan-07 01-Jan-08 15.4 Other accounts payable 11.6 Trade accounts payable, bln RUR 3.5 Current Advances 12.0 payables Turnover period of trade accounts payable, days received Current to personnel taxes Annual Report 101 JSC «RZD» 2007

management strategy is based on budget and financial maturities on borrowed resources (to 14 years maximum), plan indicators and is aimed at: as well as development of project financing – delivery 1. Strengthening financial stability; of Siemens trains for the high-speed route Moscow-St. 2. Providing an optimal structure of the Company's work- Petersburg – with the participation of CALYON Bank and ing capital; Deutsche Bank (EURIBOR + 0.09%). 3. Securing required sources of financing for investment activities; As of today, project financing is the cheapest mode of rais- 4. Strengthening relationships with external creditors ing mid-term and long-term funds, which is used to cover and investors. expenses under investment programs and assumes the targeted nature of raised funds – long-term projects with The low level of JSCo «Russian Railways» debt burden (see lengthy payback periods (including borrowings against table) compared to other Russian corporate borrowers, foreign export insurance coverage). along with high credit ratings and their stable forecast, enabled the Company to pursue a more flexible borrowing A shift in the maturity structure of JSCo «Russian Rail- policy, in terms of methods and sources of financing. ways» debt towards short-term financing is temporary and related to the following reasons: Following are JSCo «Russian Railways» debt burden 1) Attracting short-term "bridge" financing (up to 1 year) ratios: with its further replacement by long-term borrowings in the course of 2008 (including attracting a syndi- 01.01.2007 31.12.2007 cated loan in 2008 in the amount of USD 1 bln and an Total debt / EBITDA (x) 0.29 0.27 inaugural issue of Eurobonds); Total debt / Revenue (x) 0.07 0.08 2) Waiting for favorable market conditions, including lower interest rates, for attracting long-term credit It should be noted that these ratios are at a safe distance resources; from the financial covenants stipulated in the Company's 3) Transfer of debentures from the category of long- existing loan agreements. term to short-term (DRESDNER BANK AG – USD 300 mln) due to first tranche under this loan falling due in The pursued policy resulted in a further decrease in the November 2008. cost of raising and servicing borrowings, extension of

Changes in loans and borrowings in 2007:

Indicator 01.01.2007 Received Repaid 31.12.2007 Deviation

Current liabilities 14.1 38.4 14.8 37.6 23.5 Of them: – Short-term loans 0.0 37.6 0.1 37.6 37.6

– Bonds 02 series with a maturity of 3 years 4.0 0.3 4.3 0.0 -4.0

– Bonds 04 series with a maturity of 1.5 years 10.0 0.3 10.3 0.0 -10.0

Non-current liabilities 46.1 8.2 13.0 41.4 -4.7 including: – Long-term loans 16.7 6.1 10.9 11.9 -4.8

– Bonds 03 series with a maturity of 5 years 4.0 0.3 0.3 4.0 0.0

– Bonds 05 series with a maturity of 3 years 10.3 0.7 0.7 10.3 0.0

– Bonds 06 series with a maturity of 5 years 10.1 0.7 0.7 10.1 0.0

– Bonds 07 series with a maturity of 7 years 5.0 0.4 0.4 5.0 0.0

Total 60.2 46.6 27.8 79.0 18.8 Financial and economic results 102 (Board of Directors report)

Leasing selecting leasing companies by holding open tenders. Starting from 2003, the Company actively employs leasing, Since 2003, counterparties under lease contracts are which permits it to accelerate the replacement of rolling annually selected on the basis of competitive bidding. In stock and equipment. 2003-2006, the volume of lease contracts amounted to RUR 73.6 bln. JSCo «Russian Railways» is a major consumer of the products manufactured by domestic transport machine In 2007, JSCo «Russian Railways» held two open tenders building enterprises. By increasing the volume of fixed on selecting leasing companies for leasing rolling stock for assets purchased under lease, JSCo «Russian Railways» is a total amount of RUR 34 bln (VAT included). The winner investing significant funds in the support and development of the 2007 tenders was CJSCo RG Leasing. Since 2003, of manufacturing capacities of domestic producers. Lease JSCo «Russian Railways» managed to reduce the cost of financing is effected in the framework of the Borrowing lease financing from 16% to 7.33% p.a. with lease terms of Program aimed at the complex development of the Compa- 5 to 8 years. In 2007, the weighted average lease financ- ny's financial resource base and the expansion of its pres- ing rate was 7.91% p.a. (similar indicator for 2006 – 9.63% ence on the Russian and international financial markets. p.a.) with the weighted average lease term of 6.5 years (in JSCo «Russian Railways» has an extensive experience of 2006 – 6.6 years).

Key indicators of the lease program in 2006-2007: Type of rolling stock Rolling stock value (RUR bln, VAT included) Number of rolling stock units 2006 2007 2006 2007

Freight cars 8.51 12.25 5,946 7,878

Passenger cars 13.28 11.99 694 602

Traction rolling stock 0 2.92 0 46

Motorized rail car rolling stock 7.84 6.81 619 492

Total 29.63 33.97 7,259 9,018

Ratings Rating as of December 31, 2007

By its technical and financial parameters JSCo «Russian Moody's Baa2 / Stable Railways» is one of the leading transport companies in the Standard & Poor's BBB+ / Stable world. Considering this and taking into account stable fun- Fitch BBB+ / Stable damental indicators of the Company's creditworthiness, Moody's A3 / Stable JSCo «Russian Railways» continues to enjoy high credit ratings assigned by leading international rating agencies Standard & Poor's BBB+ / Stable (Moody’s, Standard & Poor’s and Fitch). Fitch BBB+ / Stable

The investment rating of JSCo «Russian Railways» reflects the Company's close connection with the state, as well as Financial Risk its balanced financial and general strategy. Moreover, the ratings show that the Company is efficiently managed, and Management the Russian railway reform is going in the right direction Within the framework of risk management, a concept for contributing to the dynamic development of this sector. managing financial risks was worked out providing analysis, identification of key indicators, development of a man- At the same time JSCo «Russian Railways» is maintaining agement model and procedure for monitoring credit risks, active contacts with rating agencies, creditors and inves- liquidity risks, operational, property and market risks. tors. Regular annual meetings between the Company's management and representatives of rating agencies took Within the framework of implementing financial risk man- place in December 2007. agement, the following was developed and introduced: Annual Report 103 JSC «RZD» 2007

– financial investment threshold calculation methodology Mortgage – methodology of calculating thresholds for counterparties providing guarantees to JSCo «Russian Railways» 5700 mortgage loans were issued in 2007 under the cor- for complying with tender procedures, as well as for porate support program. due fulfillment of contract obligations. The introduction of the above methodologies will permit the Com- Documents regulating the corporate support program pany to minimize the risk of a counterparty defaulting. were amended, the general list of those seeking corporate support was broken down by categories of employees Implementing liquidity risk management has permitted the (including young specialists); starting from 2008, the total Company to enhance the mechanism of high quality and limit of funds allocated for mortgage subsidies provides flexible cash planning. separate limits for subsidizing different employee categories, as well as other amendments (see Section Business The Company's insurance system established in the previ- Priorities, Subsection Social sphere). ous years received a qualitative boost in the current year – the mechanism from describing insurance risks to settling insurance cases was perfected, a limited list of documents to be presented in case of an insurance event was established, terms of paying out insurance compensation were reduced, and financial liability of the insurance company for untimely settlements was introduced. With the dynamic of insurance events per year remaining unchanged, the amount of insurance compensation increased and exceeded RUR 350 mln for the year. Automation of the Company's insurance system was completed, which will permit to maintain all required databases, interact efficiently with JSCo «Russian Railways» units and organize informative reporting.

In terms of market risk management, the Company developed a solid legal, tax and methodological base for managing the interest rate risk arising from borrowings linked to a floating interest rate (Libor, for example), as well as the currency risk arising from the Company's revenues and borrowings in foreign currencies. The work carried out so far will help the Company to perform procedures on hedging its existing risks next year. Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Information about Interested party transactions Annual Report 105 JSC «RZD» 2007

In 2007, the Board of Directors of JSCo «Russian Rail- lines of principal and interest payments the borrower ways» approved transactions which are qualified in accor- will pay the lender penalty at the rate of 0.06 % of the dance with Federal law On Joint-stock Companies as the overdue amount for each day of the delay. (Minutes transactions of interest: No. 12, dated June 28, 2007)

1. Approval of acquisition of the shares in JSCo Kaluzhs- 5. General agreement No. 2668/06, dated April 3, 2006, kiy zavod Remputmash. The parties of the transaction with supplements 1-5 thereto as well as draft supple- are JSCo Kaluzhskiy zavod Remputmash (seller) and ment No. 6 under the title Rehabilitation of Railway JSCo «Russian Railways» (buyer). The subject of the Mga – Gatchina – Weimarn – Ivangorod and the Spur transaction is 121,281 ordinary book-entry shares in Tracks to the Ports on the Southern Shore of the Gulf bearer's name of JSCo Kaluzhskiy zavod Remputmash of Finland. The client is JSCo «Russian Railways» rep- with the par value of RUR 1,000 per share. The trans- resented by the head of DKRS (Directorate for Railway action price is RUR 121,281,000. (Minutes No. 6, dated Rehabilitation), JSCo «Russian Railways» branch. The March 23, 2007) general contractor is SMT 1, branch of JSCo Roszhel- dorstroi. The term set for performance of work is 2. Approval of acquisition of the shares in JSCo from April 2006 till November 30, 2010. In accordance Ob'edinennye elektrotekhnicheskie zavody. The with supplement No. 6, the total cost of work under parties of the transactions are JSCo Ob'edinennye the agreement is RUR 4,237,115,648 (VAT included). elektrotekhnicheskie zavody (seller) and Russian Rail- (Minutes No. 14, dated August 31, 2007) ways (buyer). The subject of the transaction is 3,611 ordinary book-entry shares in bearer's name of JSCo 6. General agreement No. 2664/06-4 with supplements Kaluzhskiy zavod Remputmash with the par value of 1-5 thereto as well as supplement No. 6 under the RUR 1,000 per share. The transaction price is RUR title Organization of High-speed Passenger Transport 3,611,000. (Minutes No. 6, dated March 23, 2007) by Rail from Moscow to Saint Petersburg. The client is Russian Railways represented by the head of DKRS, 3. Adoption of the decision on approval of the loan agree- affiliate of JSCo «Russian Railways». The general con- ment between JSCo «Russian Railways» and JSCo tractor is SMT 1, affiliate of JSCo Roszheldorstroi. The Skorostnye magistrali. The parties of the transactions term set for performance of work is from April 2006 are JSCo Skorostnye magistrali (borrower) and Russian till November 30, 2009. The total cost of work under Railways (lender). The subject of the transaction is the agreement in accordance with supplement No. 6 issuance of a loan at fixed rate in the amount of RUR is RUR 3,050,467,424 (VAT included). (Minutes No. 14, 105,744,000 in accordance with the loan agreement. dated August 31, 2007) The price of the agreement is defined as the amount of RUR 105,744,000 stipulated therein. Miscellaneous 7. Approval of the agreements on lease of real proper- terms and conditions: interest rate – 10.5%, maturity ties owned by JSCo «Russian Railways» with JSCo date – 30 June 2008, transfer of funds to the borrow- Roszheldorproekt and JSCo Roszheldorstroi. The er's current account in accordance with the follow- lessor is JSCo «Russian Railways». The lessees are ing schedule: RUR 68,937,000 – by 2 May 2007, RUR JSCo Roszheldorproekt and JSCo Roszheldorstroi. The 18,404,000 – by July 2, 2007, RUR 18,403,000 – by 1 subject of the agreements is the lease of real proper- October 2007. (Minutes No. 11 of 28 May 2007) ties owned by JSCo «Russian Railways». (Minutes No. 14, dated August 31, 2007) 4. Approval of the borrowing agreement between JSCo «Russian Railways» and JSCo Skorostnye magistrali. 8. Approval of the loan agreement between JSCo «Rus- The parties of the transactions are JSCo Skorostnye sian Railways» and JSCo Elgaurol. The lender is JSCo magistrali (borrower) and Russian Railways (lender). «Russian Railways» and the borrower is JSCo Elgaurol. The subject of the transaction is issuance of an ear- The loan amount is RUR 6,200,000. The maturity date marked loan (for land reclamation, registration of the is July 2, 2008. The interest rate under the agree- rights to use the land plots allocated for construc- ment is 8 %. Penalty at the rate of 0.3 % of the overdue tion of Moscow – Saint Petersburg high-speed railway amount for each day of the delay is charged for miss- in the name of RJSCo VSM as well as the buy-out of ing the deadlines of principal and interest payments. minority interests in RJSCo VSM and financial sup- (Minutes No. 15, dated October 1, 2007) port thereof) by quarterly tranches as the stages of work are completed. Documents attesting to the need 9. Approval of the agreement on supply of electric loco- of receiving the next tranche and the earmarked use motives AP1P. The supplier is JSCo Trade House (Tor- of earlier received funds are to be submitted by the govy Dom) JSCo «Russian Railways». The buyer is JSCo borrower in accordance with the list adopted by the «Russian Railways». The subject of the transaction is lender. The maximal price of the agreement is RUR supply of eight main line electric locomotives AP1P to 485,400,000, the maturity date is June 30, 2010. In- the locomotive shed of Zabaikalskaya railway over the terest rate is 10.5% per annum. For missing the dead- period from October to December 2007. The price of Information about Interested 106 party transactions

the transaction is RUR 417,488,980 (VAT included). The client's orders over the period from October 2007 till agreement is effective from the signing date till 31 De- November 2009. The price of the transaction is RUR cember 2007. (Minutes No. 16, dated October 5, 2007) 4,752,959,840 (VAT included). The effective term of the agreement is from the signing date till December 31, 10. Approval of the service agreement with JSCo Skorost- 2009. (Minutes No. 17, dated October 30, 2007) nye magistrali. The Client is JSCo «Russian Railways» and the contractor is JSCo Skorostnye magistrali. The 14. Approval of supplement No. 2 to agreement No. 100, subject of the transaction is provision of advisory ser- dated 13 March 2007, on supply of electric locomo- vices on technical and economic issues of rolling stock tives AP1M between JSCo «Russian Railways» and acquisition for the extra-high-speed and high-speed JSCo Trade House (Torgovy Dom) JSCo «Russian passenger transport and organization of its mainte- Railways». The supplier is JSCo (Torgovy Dom) JSCo nance and repair. The price of the transaction is RUR «Russian Railways». The client is JSCo «Russian 8,200,000. (Minutes No. 16, dated October 5, 2007) Railways». The subject of the transaction is supply of forty one main line electric locomotives AP1M to the 11. Approval of the agreement between JSCo «Russian locomotive sheds of Severo-Kavkazskaya, Oktiabrskaya, Railways» and JSCo First Freight Company (Pervaya Zabaikalskaya and Yugo-Vostochnaya railways over the Gruzovaya Companya) on possession and use of freight period from April 2007 till December 2007. The price cars. The subject of the agreement is the placement by of the transaction is RUR 2,134,782,807 and 8 kopecks JSCo First Freight Company (Pervaya Gruzovaya Com- (including VAT). The effective term of the agreement is panya) of 161 762 freight cars in JSCo «Russian Rail- from the signing date till 31 December 2007. (Minutes ways» possession for transporting freight by rail. The No. 17, dated October 30, 2007) agreement will remain effective till 31 December 2009 and may be extended by one year. The price of the 15. Approval of supplement No. 3 to agreement № 47, transaction is the payment for the right of JSCo «Rus- dated 16 February 2007, between JSCo «Russian sian Railways» to possess and use the foregoing freight Railways» and JSCo Trade House (Torgovy Dom) JSCo cars, which is not to exceed RUR 46,949,602,295 and «Russian Railways» on supply of electric locomotives 12 kopecks calculated on the basis of the daily rate of 3AS5K. The supplier is JSCo Trade House (Torgovy Dom) RUR 317 and 63 kopecks (excluded VAT) for the JSCo JSCo «Russian Railways». The client is JSCo «Russian «Russian Railways» possession and use of one freight Railways». The subject of the transaction is supply of car. The rates for possession and use of one freight twenty seven main line electric locomotives 3AS5K car are subject to amendment in accordance with to the locomotive sheds of Vostochno-Sibirskaya and the indexation of railway freight tariffs by the aver- Dalnevostochnaya railways over the period from April age indexation parameter as of the effective date of 2007 till December 2007. The price of the transaction is a respective order of Russia's Federal Tariff Service RUR 2,904,501,729 (VAT included). The effective term of on the indexation of tariffs, levies and fees for freight the agreement is from the signing date till 31 December transport by rail in the next period. (Minutes No. 16, 2007. (Minutes No. 17, dated October 30, 2007) dated October 5, 2007) 16. Approval of the agreements on lease of real properties 12. Approval of the agreement on supply of electric between JSCo «Russian Railways» and JSCo Roszhel- locomotives AP2K between JSCo «Russian Railways» dorproekt. The lessor is JSCo «Russian Railways». The and JSCo Trade House (Torgovy Dom) RZD. The sup- lessee is JSCo Roszheldorproekt. The subject of the plier is JSCo Trade House RZD. The Client is JSCo agreements is the lease of real properties owned by «Russian Railways». The subject of the transaction JSCo «Russian Railways». The monthly lease fee is cal- is supply of one hundred and three main line electric culated pursuant to independent appraisers' reports. locomotives to the locomotive shed in accordance with (Minutes No. 18, dated November 19, 2007) client's orders over the period from October 2007 till December 2009. The price of the transaction is 17. Approval of supplement No. 1 to agreement No. 54, RUR 7,771,144,494 (VAT included). The agreement is dated 26 February 2007, on supply of railcars be- effective from the signing date till 31 December 2009. tween JSCo «Russian Railways» and JSCo Trade House (Minutes No. 17, dated October 30, 2007) (Torgovy Dom) JSCo «Russian Railways». The supplier is JSCo Trade House (Torgovy Dom) JSCo «Russian 13. Approval of the agreement on supply of electric Railways». The client is JSCo «Russian Railways». The locomotives A5K between JSCo «Russian Railways» subject of the transaction is supply of thirty sleeping and JSCo Trade House (Torgovy Dom) JSCo «Russian railcars of 61-4174.03 type and thirty eight staff rail- Railways». The supplier is JSCo Trade House (Torgovy cars of 61-4186.03 type. The price of the transaction Dom) JSCo «Russian Railways». The client is JSCo «Rus- is RUR 1,346,020,924 and 82 kopecks (VAT included). sian Railways». The subject of the transaction is supply The effective term of the agreement is from the sign- of one hundred and nine main line electric locomo- ing date till 31 December 2007. (Minutes No. 54, dated tives A52K to the locomotive shed in accordance with November 29, 2007) Annual Report 107 JSC «RZD» 2007

18. Approval of the agreement on social and technologi- The subject of the transaction is issuance of an earmarked cal order in the sphere of catering and retail services loan (for land reclamation, registration of the rights to between JSCo «Russian Railways» and JSCo Railway use the land plots allocated for construction of Moscow – Trading Corporation (Zheleznodorozhnaya Torgovaya Saint Petersburg high-speed railway in the name of RJSCo Compania) . The subject of the transaction is provision VSM) by quarterly tranches as the stages of work are of catering services to employees during the liquida- completed. Documents attesting to the need of receiv- tion of consequences of emergencies, which includes ing the next tranche and the earmarked use of earlier the purchase of necessary foodstuffs, cooking, pack- received funds are to be submitted by the borrower in ac- ing, delivery and distribution of MREs. The effective cordance with the list adopted by the lender. The maximal term of the agreement is from the signing date till price of the agreement is RUR 495,670,000, the maturity December 31, 2008. (Minutes No. 22, dated December date is 30 June 2010. Interest rate is 10% per annum. For 21, 2007) missing the deadlines of principal and interest payments the borrower will pay the lender penalty at the rate of 19. Approval of the agreement on sale of real properties 0.06% of the overdue amount for each day of the delay. between JSCo «Russian Railways» and CJSCo Zheldori- (Minutes No. 23, dated December 21, 2007) poteka. The subject of the transaction is the sale of real properties located at the address of 45, ul. Vitebs- kaya, Nizhniy Novgorod. The price of the transaction is RUR 9,111,000

20. Approval of the loan agreement between JSCo «Rus- sian Railways» and JSCo Skorostnye magistrali. The parties of the transaction are JSCo Skorostnye magistrali (borrower) and JSCo «Russian Railways» (lender). Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Information about Large Transactions Annual Report 109 JSC «RZD» 2007

There were no large transactions (valued at 25 % of the 4. Approval of the guarantee agreement by JSCo «Rus- Company's total assets pursuant to the balance sheet or sian Railways» in favor of ОКО BANK in respect of higher) in the reporting period. In 2007, the Board of Di- the loan agreement for Oy Karelian Trains Ltd. The rectors of JSCo «Russian Railways» approved 6 (six) trans- parties of the transaction are JSCo «Russian Railways» actions, which were within the scope of the procedures (guarantor), ОКО BANK PLC (creditor) and Oy Karelian for approval of large transactions in accordance with the Trains Ltd (debtor). The price of the transaction is € Charter of JSCo «Russian Railways». 80,000,000. (Minutes No. 14, dated August 31, 2007)

1. Approval of the transaction on borrowing in accor- 5. Approval of the supplementary agreement to the state dance with the loan agreement and the loan agree- contract on delivery of military cargo by rail and provi- ment with collateral between JSCo «Russian Railways» sion of transportation services in 2006. The parties and Deutsche Bank AG. The parties of the transaction of the transaction are JSCo «Russian Railways» (head are JSCo «Russian Railways» (borrower) and Deutsche contractor) and the Ministry of Defense of the Rus- Bank AG (lender). The subject of the transaction is mo- sian Federation (government client). The price of the bilization of loans for financing the design, production supplementary agreement is RUR 1,000,000,000. The and delivery of high-speed electric trains pursuant to price of the state contract with the supplementary the agreements with Siemens AG. The principal amount agreement is RUR 12,500,000,000. The state contract is not to exceed € 43,000,000 under the loan agree- is effective from the signing date till December 31, ment and € 255,000,000 under the loan agreement 2006. (Minutes No. 1, dated January 22, 2007) with collateral. The interest rate is up to EURIBOR plus 0.675% per annum under the loan agreement and 6. Approval of the transactions with related parties to up to EURIBOR plus 0.09% per annum under the loan rehabilitate the section of Izvestkovaya – Chegdomyn agreement with collateral. The commission fee is up to railway located in the zone affected by the headwa- 0.2% and 0.2% of the loan agreement amount and up to ters of Bureiskaya hydropower plant in Khabarovskiy 0.15% and 0.06% of the amount of the loan agreement Krai. The parties of the transaction are JSCo «Rus- with collateral. (Minutes No. 5, dated March 5, 2007) sian Railways» (general contractor), Federal Railway Agency (government client) and Unified group (Edinaya 2. Approval of the borrowing under the loan agreement Gruppa) federal state unitary enterprise of the Federal and the loan agreement with collateral between JSCo Railway Agency. The subject of the transaction is to «Russian Railways» and Deutsche Bank AG. The parties rehabilitate the section of Izvestkovaya – Chegdomyn of the transaction are JSCo «Russian Railways» (bor- railway located in the zone affected by the headwaters rower) and Deutsche Bank AG (creditor). The subject of Bureiskaya hydropower plant in Khabarovskiy Krai. of the transaction is mobilization of loans to the total The price of the transaction is RUR 3,475,000,000. amount of € 300,000,000 on the basis of the loan The term is December 26, 2008. (Minutes No. 5, dated agreement with a floating interest rate for the term March 5, 2007) above 7 years and the loan agreement with collateral with a floating interest rate for the term above 14 years. Interest rate is up to EURIBOR plus 0.675 % per annum under the loan agreement and up to EURIBOR plus 0.09 % per annum under the loan agreement with collateral. The commission fee is up to 0.2 % and 0.2 % of the loan amount and up to 0.15 % and 0.06 % of the amount of the loan agreement with collateral. (Min- utes No. 5, dated March 5, 2007)

3. Approval of the agreement with Siemens Aktiengesell- schaft on maintenance and repair of eight high-speed trains. The parties of the transaction are JSCo «Rus- sian Railways» (client) and Siemens Aktiengesellschaft (contractor). The subject of the transaction is a set of obligations for provision of the planned and emergency services ensuring continuous operation and function- ing of four trains with the single-system capability and four trains with the dual-system capability. The price of the agreement is € 354,160,000 for 30 years and 8 trains under the condition that each train has the annual run of 500,000 km. The agreement is effective for 30 years after the agreed-upon acceptance of the final train. (Minutes No. 12, dated June 28, 2007) Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Statement on Dividends Paid Annual Report 111 JSC «RZD» 2007

The Company is increasing the total dividends distributed annually. Thus, the total dividends distributed were RUR 0.88 bln in 2004, RUR 0.98 bln in 2005 and RUR 1.051 bln in 2006.

Dividends in the amount of RUR 1,051,300,000 on ordinary shares (VAT exempt) were paid pursuant to Directive No. 864-r, of the Government of the Russian Federation, dated June 30, 2007, by payment order No. 53, dated July 24, 2007. JSCo «Russian Railways» has no dividend to shareholders

875 000 000 RUR 2004

976 000 000 RUR 2005

Draft Distribution of the Company's Net Profits Earned in 2007 Annual Report 113 JSC «RZD» 2007

Currently, one of the major objectives of the Company is quent reduction by the foregoing amount of the dividends mobilization of virtually any feasible financing source to planned for payment to the Russian Federation as of the support the dynamic investment growth and, in doing so, end of 2007. to maintain the cost of freight and passenger transit at an acceptable level which emphasizes the urgent need of In accordance with Instruction DM-P9-4679B of the Gov- financing investment projects from the Company's equity ernment of the Russian Federation, dated September 27, and reserves. 2007, and taking into account the position of the Ministry of Transportation (letter No. IL-19/6290, dated August 23, The net profit from the Company's operations in 2007 was 2007), JSCo «Russian Railways» also financed construc- RUR 84,495.3 million. tion of a provisional bypass on railway Perm – Solikamsk with a subsequent reduction of dividends by the cost of A significant share of the net profit resulted from excess constructing the bypass of 6 km around Berezniki railway of the value of the assets agreed upon by the founders station in the amount of RUR 454 million. that were contributed to the charter capital of the Com- pany’s subsidiaries, over their book value. The main excess resulted from the establishment of JSCo First Freight Company (Pervaya Gruzovaya Companya) and the transfer of 177 thousand freight cars to JSCo First Freight Com- pany (Pervaya Gruzovaya Companya).

The similar situation exists with the Company's results in recent period. Over the past three years jointly with the Board of Directors of the Company pursued the policy of dividend distribution against the net cash profits without taking from account excess of the appraisal of contributions agreed upon by the founders over the book value of underlying assets contributed to the charter capital of subsidiaries. The mentioned access amount was RUR 17.662,3 million in 2007.

The dividend policy of JSCo «Russian Railways» has been also influenced by the following factor. Resulting from an accident in October 2006 caused by the flooding of Verkh- nikamskiy potassium and magnesium salt mine in the city of Berezniki the nearby railway was under the threat of destruction.

Therefore, in accordance with the decisions adopted at a meeting chaired by Deputy Chairman of the Government of the Russian Federation A. Zhukov (Minutes No. AZh-P9- 52pr, dated 19 December 2007), JSCo «Russian Railways» was authorized to allocate RUR 800 million for construction of 53 km railway Yaiva – Solikamsk with a subse- Draft Distribution of the Company's 114 Net Profits Earned in 2007

Taking the foregoing into account, a draft distribution of the net profit earned by JSCo «Russian Railways» as of the end of 2007 is as follows.

Distribution of the net profit received by JSCo «Russian Railways» in 2007

Indicator Amount (RUR mln) %

Net profit in the reporting period 84,495.3 100

Net profit distributed, including: 4,737.0 6

Reserve capital 4,224.8 5

Distribution of dividends on placed shares 512.2 1

Accumulated profits, including: 79,758.3 94

Compensation for construction of the 6 km bypass (Berezniki) 454.0

Financing of railway Yaiva – Solikamsk, 53 km 800.0

Renovation of passenger cars 23,282.0

Renovation of railcars 13,285.5

Renovation of passenger locomotives 8,776.5

Renovation and development of the facilities used for long-distance haul 4,405.7

Renovation and development of the facilities used for commuter haul 5,469.5 Project for modernization of passenger cars through the installation of a safety control system with diagnostic and communication elements 1,695.0 Project for comprehensive rehabilitation of railway Mga – Gatchina – Weimarn – Ivangorod and the spur tracks to the ports on the Southern shore of the Gulf of Finland, subject to construction of Luzhskaya railway station 13,682.6 Project for comprehensive rehabilitation of railway Kotelnikovo – Tikhoretskaya – Krymskaya and the construction of a bypass of Krasnodar rail junction 5,401.0

Project for comprehensive rehabilitation of railway Trubnaya – V. Baskunchak – Aksaraiskaya 1,978.4

Project for rehabilitation of railway facilities in the Chechen Republic 528.1

Indicator Amount %

(RUR mln) %

Net profit in the reporting period 84,495.3

Including economically justified cash profits 17,662.3

10% of economically justified cash profits 1,766.2 10

compensation for construction of the 6 km bypass (Berezniki) (454.0)

financing of Yaiva – Solikamsk railway, 53 km (800.0)

Description of the Main Risk Factors Associated with Company's Operations Annual Report 117 JSC «RZD» 2007

Information about pending judicial procedures whereby the Company is a respondent to debt collection claims with the specification of aggregate claimed amounts

As of December 31, 2007 there were 3,931 claims issued — There were 282 claims to the total amount of RUR against JSCo RZD in arbitration courts. 1,401,114.4 thousand pending in the arbitration courts of appeal. The total amount of the foregoing claims was RUR — There were 194 claims to the total amount of RUR 4,112,239 4 thousand. 500,144.8 thousand pending in the arbitration courts of review. The foregoing claims mainly resulted from a failure to perform or undue performance of obligations.

Information as of December 31, 2007 on pending judicial procedures whereby JSCo «Russian Railways» was a respondent follows: — There were 3,455 claims to the total amount of RUR 2,210,980.2 thousand pending in the arbitration courts of first instance.

Information about pending judicial procedures whereby the Company is a claimant in debt collection claims with the specification of aggregate claimed amounts

As of December 31, 2007 there were 6,917 claims in which — There are 216 claims to the total amount of RUR JSCo «Russian Railways» was a claimant. 510,589.2 thousand pending in the arbitration courts of appeal. The total amount of the foregoing claims was RUR — There are 112 claims to the total amount of RUR 3,708,417.6 thousand. 153,316.1 thousand pending in the arbitration courts of review. Information as of December 31, 2007 on pending judicial procedures whereby JSCo «Russian Railways» was a claimant follows: — There are 6,589 claims to the total amount of RUR 3,044,512.3 thousand pending in the arbitration courts of first instance. Copyright 2006-2008, Anton Lange, JSCo "Russian Railways"

Development Prospects Annual Report 119 JSC «RZD» 2007

Development subject to have been the segments of international transportation with the highest growth rates while the growth rate of accessing the promising export carriage has been slowing down. Thus, the import carriage increased by 1.5 times to reach 351.3 thousand markets TEU, the transit carriage – by 1.3 times to reach 124.8 Carriage of high-tonnage containers is a promising market thousand TEU, and the export carriage – by 8.8 % to reach segment with high growth rates. 346.2 thousand TEU. International high-tonnage container carriage accounted for 822.3 thousand TEU or 59.1 % of In 2007, JSCo «Russian Railways» carried 1.4 million TEU the total. of high-tonnage containers with the total load of 18.4 million tons which was 17 % higher than in 2006 (see the The dynamic growth of high-tonnage container carriage Table). The significant growth of high-tonnage container has been achieved due to the introduction and wide use carriage by 1.3 times was achieved in the international of the technology of accelerated container trains. 2,426 sector. container trains were made up in 2007, which carried more than 250 thousand TEU or nearly a third of the total Import and transit carriage of high-tonnage containers international high-tonnage container carriage by rail.

Breakdown of the dynamics of high-tonnage container carriage by transportation types in 2006-2007, in TEU

Transportation type Volume, TEU thousand Growth rate, % to the previous year Structure of the carried volume, % 2006 2007 2006 2007 2006 2007 Total 1 190,2 1 392,0 108,1 117,0 100,0 100,0 Including: Domestic carriage 546,2 569,7 105,6 104,3 45,9 40,9 International carriage 644,1 822,3 110,4 127,7 54,1 59,1 Including: Import 229,6 351,3 137,3 153,0 19,3 25,2 Transit 96,3 124,8 70,4 129,6 8,1 9,0 Export 318,2 346,2 114,0 108,8 26,7 24,9

Possible Development the freight transportation market include ensuring its competitiveness in the profitable market segments, provision Directions, subject to of complex transport services, accelerated development of container carriage, ensuring the maximal efficiency of mass Market Trends and freight carriage on the basis of the economy of scale and Company’s Potential further improvement of the foregoing technology, dynamic modernization of technical means and technologies in the In long term development of JSCo «Russian Railways» will sphere of freight transportation, etc. have the objective of setting up a highly efficient holding company, development of its market potential and capital- Taking into account the effective legal base and technologi- ization growth, enhancement of its investment attractive- cal characteristics of the railway industry JSCo «Russian ness and competitive edge at strategic markets. Railways» will remain the sole carrier providing freight transportation on the basis of the full-fledged performance The objectives at the market of infrastructure services of public contract till 2010. include an accelerated modernization of infrastructure facilities, liquidation of bottlenecks in the current railway Logistic operations will develop dynamically. system and raising the efficiency of railway transportation (increase of speed, axle load, cost reduction, etc.), develop- Taking into account the current deficit of high-grade termi- ment of infrastructure in accordance with the projected nals and warehouses in Russia the priority direction will be industrial growth rates, the capacity of other transporta- the construction of logistic centers with railway terminals tion means in the Russian Federation and the neighboring (TLTs) in major transportation centers (the construction of railways, provision of transportation services to new indus- logistic centers with railway terminals in Moscow (Kuntsevo, trial centers, development of new deposits, etc. Kurskaya), Moskovskaya Oblast (Belyi Rast), Leningradskaya Oblast (Shushary), Yekaterinburg, Nizhniy Novgorod, Novosi- The main strategic objectives of JSCo «Russian Railways» at birsk, Irkutsk and other cities will be the highest priority). Development 120 Prospects

The reformed system of compensation from the federal – Construction and rehabilitation of engineering struc- budget for the missed income related to the carriage at tures. administered tariffs will make it possible for the participants of the market of passenger transport to function The process of rolling stock repairs and realization of with a sufficient operating margin. projects for rehabilitation of the fixed assets of JSCo «Russian Railways» companies and branches will continue. It will allow setting up the Federal Passenger Company (Federalnaya Passagirskaya Compania) by 2009 on the There are plans to initiate several new investment proj- basis of the current Federal Passenger Directorate, which ects in 2008. will be an important part of the railway reform. Complex rehabilitation of railway Kotelnikovo – Tikho- Development of the extra-high-speed and high-speed pas- retskaya – Timoshevskaya – Krymskaya with a bypass of senger transport is one of the priorities of the passenger Krasnodar rail junction transport market. Railway Kotelnikovo – Tikhoretskaya – Timoshevskaya – Other plans include further work for the establishment of Krymskaya is essential for the transit of export goods JSCo «Russian Railways»’ subsidiaries providing commuter from the Volga region, Urals and eastern territories to transportation services. the sea ports in Krasnodarskiy Krai. There are plans to increase the export volume of coal, crude oil, ferrous met- The main strategic objective of JSCo «Russian Railways» als, fertilizers, timber, grain and other goods by a signifi- holding on the international market is the provision, on cant margin in long term. The average annual load of the the basis of dynamic cooperation with foreign railway railway in both directions will be 77.8 million tons by 2015 authorities, companies and specialized international and 88.4 million tons by 2020. institutions, of maximally favorable conditions for raising the efficiency of international freight carriage, transit car- Taking into account such significant growth of the freight riage included, passenger transport, cooperation in the traffic it will be essential to build an uninterrupted railway spheres of research & development and technology, access along the route with a double-track electrified bypass of to foreign markets for Russian inventions in the railway the Krasnodar rail junction. sector and construction services. Plans for the current year include preparation of docu- Priority will be given to social policy issues and raising the mentation on the foregoing investment project to be status of employment with railway companies. Enhancing submitted, in accordance with the established order, to the Company’s competitiveness at the labor market is one Ministry of Transport of the Russian Federation and Minis- of the major objectives in this context. The main principle try of Economic Development of the Russian Federation is wage bill formation on the basis of an economically sus- for mobilization of government support from the Invest- tainable ratio between labor productivity and real wages' ment Fund of the Russian Federation. growth in long term. The total project cost is RUR 71.5 bln, including RUR 5.4 bln in 2008. The projected realization period is 2008-2014. Planned Investment Rehabilitation of the permanent way and complex rehabili- Projects tation of the railway track Realization of the ongoing investment projects will be continued in 2008 – 2010 in accordance with the JSCo «Rus- The project has the objective of complete renovation of sian Railways» investment program. The most significant the permanent way combined with strengthening of the projects are: engineering structure, bringing the easement in compli- – Kuzbass – North West, Far East, Azov and Black Sea ance with the established standards and reconstruction of railway junctions whose completion is scheduled to the roadways of railway crossings. 2008; – Oil Transport to China (Phases 1 and 2); There are plans to complete the following work for track – Complex rehabilitation of railway Mga – Gatchina – improvement in accordance with the project for rehabili- Weimarn – Ivangorod and spur tracks to the ports on tation of permanent way and comprehensive rehabilitation the southern shore of the Gulf of Finland; of railway tracks. – Investment projects under the Program for Develop- ment of speed and high-speed Communication at JSCo In 2008 – 4,562 km, including 2,733 km using capital as- «Russian Railways» for the Period till 2020 which sets and 1,829 km using operating expenses. includes Saint Petersburg – Buslovskaya, Moscow – Saint Petersburg and Moscow – Nizhniy Novgorod In 2009 – 4,783 km, including 3,474 km using capital as- railways; sets and 1,309 km using operating expenses. Annual Report 121 JSC «RZD» 2007

In 2010 – 5,249 km, including 3,023 km using capital as- ings through the placement of meters at the lead-ins to sets and 2,226 km using operating expenses. the Russian Railways power grid and the cancellation of offset schemes. The scope of the project includes over 600 The total project cost is RUR 140.7 bln, including RUR substations. 42.2 bln in 2008. The planned period of first stage realization is 2008-2010. The total project cost is RUR 9.8 bln, including RUR 2.4 bln in 2008. The projected realization period is 2008-2010. Organization of passenger traffic at Presnia – Kanatchiko- vo section of Moscow Railway Small Ring Further improvement of hydrometeorological services supporting business activities With a view to organize passenger traffic at the Smaller Ring of Moscow Railway (hereinafter referred to as Small The project objective is the establishment of a special- Ring MZD (Maloe Koltco MZD) Russian Railways, jointly ized automated information and measuring system for with the government of Moscow, plan to complete rehabili- the needs of railway transport that with provide JSCo tation of Presnia – Kanatchikovo section of Small Ring MZD «Russian Railways» and its subsidiaries will the essential (Maloe Koltco MZD) with access to Kolomenskoe railway types of operating information and long-term forecasts station of Paveletskoie direction of Moscow Railway. The for the purposes of raising the safety of railway traffic, rehabilitation will include adaptation to electric traction further improvement of the railway traffic management, and construction of five new passenger stations: City, Kutu- mitigation of risks and losses from natural and technologi- zovo, Potylikha, Luzhniki, Ploschad Gagarina and rehabilita- cal disasters. tion of two goods yards: Kanatchikovo and Presnia. The total project cost is RUR 0.08 bln, including RUR 0.01 The plans for 2008 include completion of the research and bln in 2008. The projected realization period is 2008-2010. development work with a view to make exect design and investment decisions. RUR 210 million was allocated for Modernization of passenger cars through installation of a such work in 2008. safety control system with diagnostic and communication elements Completion of adaptation to electric traction of Syzran – Sennaya railway The program for installation of the Passenger train safety control and communication system with GLONASS/GPS for Completion of adaptation to electric traction of Syzran – JSCo «Russian Railways» in 2008-2010 will provide com- Sennaya railway of Kuibyshevskaya and Privolzhskaya rail- prehensive solution for raising passenger traffic safety ways (branches of Russian Railways) in 2008 will provide and the speed of reaction to emergencies, improving the for enhancing carrying capacity of the foregoing railway as analysis of rolling stock wear and the planning of rehabili- well as streamlining costs on the basis of: tation and repair of the fixed assets. – saving of operating expenses required for supporting the projected volume of passenger and cargo traffic; In accordance with the project, 3,809 passenger cars will – cost savings due to reduction of the delay of passenger be equipped with the foregoing system in 2008, 5,858 pas- and freight trains at Sennaya railway station. senger cars in 2009 and 8,145 passenger cars in 2010.

The total project cost is RUR 11.5 bln. The projected The total project cost is RUR 3.7 bln, including RUR 1.7 completion is in 2008. bln in 2008. The projected realization period is 2008-2010.

Rehabilitation and construction of utilities Acquisition of trucks for freight delivery

The project objective is rehabilitation of facilities for genera- The project objective is the establishment of a reliable tion of heat, water supply and water disposal which will income source through the increase of the scope of guarantee the reliability of services and safety of operation. transport services, provision of the new types of work and services, raising operational efficiency through the The total project cost is RUR 4.3 bln, including, RUR 1.5 replacement of outdated and worn-out equipment. bln in 2008. The projected realization period is 2008-2010. The total project cost is RUR 1.3 bln, including RUR 0.4 Introduction of automated system for commercial ac- bln in 2008. The projected realization period is 2008-2010. counting of power at the incoming lines of JSCo «Russian Railways»' substations Provision of modern calibration equipment to JSCo «Rus- sian Railways» metrological units Realization of the project for introduction of automated system for accounting of power at the incoming lines of The main project objective is to improve the quality of Russian Railways' substations is targeted at cost sav- metrological service of measuring and testing equipment Development 122 Prospects

in structural units of JSCo «Russian Railways» through: Development of the infrastructure of railways for children – renewal and enhancement of the available measuring equipment to ensure the unity of measurement as The objectives of railways for children are as follows: well as the preservation and development of Russian – professional training of the reserve for work at rail- Railways' R&D potential; ways and for entering railway institutes and vocational – establishment of mobile calibration units for metro- training centers; logical service of the measuring equipment located at – social adaptation and professional orientation of teen- facilities remote from the railway centers of standard- agers; ization and metrology. – development and support of a favorable image of railway professions and the Russian Railways as a There are plans to acquire 866 units of calibration equip- socially responsible organization amongst government ment and 11 metrological laboratories in railway cars in and local self-government agencies, NGOs, educational accordance with the project for provision of modern cali- institutions, public at large and Russian Railways' em- bration equipment to JSCo «Russian Railways» metrologi- ployees. cal units. The total project cost is RUR 3.0 bln, including RUR 1.1 The total project cost is RUR 0.8 bln, including RUR 0.2 bln in 2008. The projected realization term is 2008-2010. bln in 2008. The projected realization term is 2008-2010.

Liquidation of consequences of the earthquake in Nevels- kiy District of Sakhalinskaya Oblast (rehabilitation of the infrastructure of Sakhalinskaya railway)

RUR 252.5 million was allocated in 2008 to finance the liquidation of consequences of the earthquake and rehabilitation of the destroyed infrastructure of Sakhalinskaya railway.

Construction of a new railway Yaiva – Solikamsk of 53 km to bypass the zone of technological accident in the vicinity of Berezniki railway station

The investment program of JSCo «Russian Railways» for 2008-2010 includes the financing of construction of a new section of Sverdlovskaya railway from Yaiva to Solikamsk with the total length of 53 km to bypass the zone of technological accident in the vicinity of Berezniki. The total financing is RUR 8.9 bln, including RUR 3.0 bln in 2008, RUR 4.8 bln in 2009 and RUR 1,1 bln in 2010. Pursuant to the plan, the project will be divided into the following stages: – construction of the first main track of a new electrified railway which is to be put into operation in 2009; – construction of the second main track of a new electrified railway which is to be put into operation in 2010. Annual Report 123 JSC «RZD» 2007 Reference

You can always find more detailed on-line information in Russian and English about the Company on its website www.rzd.ru.

There you can also find information about the main directions and results of JSCo «Russian Railways» operations, relevant on-line information about the events related to the Company, all aspects of its activities, learn about its social and environmental policies.

For Investors section provides the Company's financial and operating results as well as presentations for the investment community and Company's statements.

Published statements. The Company's website (www.rzd.ru) presents electronic versions of the following statements: 1. The Company's operating statement; 2. Financial statements; 3. Quarterly financial statements; and 4. Issuer report.

Notions and definitions used in the document The names and words JSCo «Russian Railways», RZD and Company, we used in this annual report are synonymous and refer to JSCo RZD.

Abbreviations USD – US dollars T/km – ton per kilometer P/km – passengers per kilometer RUR – Russian Rubles

Legal address and the head office location: 2, Novaya Basmannaya str., Moscow, 107174, Russia E-mail: [email protected] Information service: +7 (495) 262-99-01

SINGLE TELEPHONE LINE OF JSCo «Russian Railways»: 8-800-200-67-67 (toll free from all regions of the Russian Federation)

Corporate Finance Department of JSCo «Russian Railways» (investor relations) Telephone: +7 (495) 262-56-49 Facsimile: +7 (495) 262-89-41

Corporate Relations Department (Russian Railways press service) Telephone: +7 (495) 262-71-48 Facsimile: +7 (495) 262-84-09

All photos presented in the Annual Report 2007 were taken within the framework of a joined JSCo "Russian Railways" and Anton Lange's project "Russia through a train window". JSCo «RZD» 2, Novaya Basmannaya str., Moscow, 107174, Russia www.rzd.ru